##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                                                            to
 Commission File No. 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
    
    24212(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
(276) 619-4410
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
  
 PagePART IItem 1. Financial Statements
    
    3Condensed
Consolidated Balance Sheets (Unaudited)
    
    3Condensed Consolidated Statements of Income (Unaudited)
    
    4Condensed
Consolidated Statements of Cash Flows (Unaudited)
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    35Item 4. Controls and Procedures
    
    36PART IIItem 1A. Risk Factors
    
    38Item 4. Submission of Matters to a Vote of Security Holders
    
    38Item 6. Exhibits
    
    38EX-4.1: FIFTH SUPPLEMENTAL INDENTUREEX-31.A: CERTIFICATIONEX-31.B: CERTIFICATIONEX-32.A: CERTIFICATIONEX-32.B: CERTIFICATION
  2




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##### Table of Contents



Item 1. Financial Statements
 ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets (Unaudited)
 (In thousands, except share and per share amounts)
 June 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    4,800
    
    
    
    39,622Trade accounts receivable, net
    
    
    160,117
    
    
    
    147,961Notes and other receivables
    
    
    3,692
    
    
    
    10,330Inventories
    
    
    84,859
    
    
    
    84,885Prepaid expenses and other current assets
    
    
    38,788
    
    
    
    36,117Total current assets
    
    
    292,256
    
    
    
    318,915Property, plant, and equipment, net
    
    
    649,769
    
    
    
    582,750Goodwill
    
    
    18,641
    
    
    
    18,641Other intangibles, net
    
    
    9,193
    
    
    
    11,014Deferred income taxes
    
    
    39,863
    
    
    
    38,967Other assets
    
    
    43,770
    
    
    
    43,371Total assets
    
    $
    1,053,492
    
    
    
    1,013,658Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term debt
    
    $
    3,224
    
    
    
    3,242Notes payable
    
    
    8,783
    
    
    
    59,014Bank overdraft
    
    
    14,416
    
    
    
    17,065Trade accounts payable
    
    
    79,611
    
    
    
    99,746Deferred income taxes
    
    
    12,575
    
    
    
    11,243Accrued expenses and other current liabilities
    
    
    88,500
    
    
    
    93,531Total current liabilities
    
    
    207,109
    
    
    
    283,841Long-term debt, net of current portion
    
    
    452,369
    
    
    
    423,547Workers compensation benefits
    
    
    6,516
    
    
    
    5,901Postretirement medical benefits
    
    
    28,874
    
    
    
    24,461Asset retirement obligation
    
    
    55,389
    
    
    
    46,296Deferred gains on sale of property interests
    
    
    5,274
    
    
    
    5,762Other liabilities
    
    
    24,484
    
    
    
    11,085Total liabilities
    
    
    780,015
    
    
    
    800,893Stockholders 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, 64,995,357 and 64,420,414 shares issued
and outstanding
    
    
    650
    
    
    
    644Additional paid-in capital
    
    
    204,500
    
    
    
    193,608Accumulated other comprehensive (loss)
    
    
    (525
    )
    
    
    Retained earnings
    
    
    68,852
    
    
    
    18,513Total stockholders equity
    
    
    273,477
    
    
    
    212,765Total liabilities and stockholders equity
    
    $
    1,053,492
    
    
    
    1,013,658
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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 ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Coal revenues
    
    $
    436,529
    
    
    $
    364,070
    
    
    $
    860,903
    
    
    $
    637,204Freight and handling revenues
    
    
    50,935
    
    
    
    48,239
    
    
    
    97,327
    
    
    
    79,991Other revenues
    
    
    8,217
    
    
    
    5,327
    
    
    
    19,761
    
    
    
    12,596Total revenues
    
    
    495,681
    
    
    
    417,636
    
    
    
    977,991
    
    
    
    729,791Costs and expenses:Cost of coal sales (exclusive of items shown
separately below)
    
    
    345,505
    
    
    
    293,493
    
    
    
    676,391
    
    
    
    519,777Freight and handling costs
    
    
    50,935
    
    
    
    48,239
    
    
    
    97,327
    
    
    
    79,991Cost of other revenues
    
    
    5,445
    
    
    
    4,319
    
    
    
    13,396
    
    
    
    10,384Depreciation, depletion and amortization
    
    
    34,207
    
    
    
    15,075
    
    
    
    67,841
    
    
    
    29,245Selling, general and administrative expenses
(exclusive of depreciation and amortization shown separately above)
    
    
    18,583
    
    
    
    14,870
    
    
    
    35,392
    
    
    
    62,776Total costs and expenses
    
    
    454,675
    
    
    
    375,996
    
    
    
    890,347
    
    
    
    702,173Income from operations
    
    
    41,006
    
    
    
    41,640
    
    
    
    87,644
    
    
    
    27,618Other income (expense):Interest expense
    
    
    (10,786
    )
    
    
    (6,647
    )
    
    
    (21,063
    )
    
    
    (12,764
    )Interest income
    
    
    171
    
    
    
    191
    
    
    
    358
    
    
    
    478Miscellaneous income (expense), net
    
    
    1,413
    
    
    
    32
    
    
    
    1,696
    
    
    
    (9
    )Total other income (expense), net
    
    
    (9,202
    )
    
    
    (6,424
    )
    
    
    (19,009
    )
    
    
    (12,295
    )Income from continuing operations before income taxes
and minority interest
    
    
    31,804
    
    
    
    35,216
    
    
    
    68,635
    
    
    
    15,323Income tax expense
    
    
    8,676
    
    
    
    9,089
    
    
    
    18,296
    
    
    
    11,599Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,918Income from continuing operations
    
    
    23,128
    
    
    
    26,127
    
    
    
    50,339
    
    
    
    806Discontinued operations:Income (loss) from discontinued operations before income taxes and
minority interest
    
    
    
    
    
    
    359
    
    
    
    
    
    
    
    (379
    )Income tax expense(benefit)
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    (93
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72
    )Income (loss) from discontinued operations
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    (214
    )Net income
    
    $
    23,128
    
    
    $
    26,393
    
    
    $
    50,339
    
    
    $
    592Net income per basic share, as adjusted in 2005Income from continuing operations
    
    $
    0.36
    
    
    
    0.43
    
    
    $
    0.79
    
    
    
    0.01Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income per basic share
    
    $
    0.36
    
    
    $
    0.43
    
    
    $
    0.79
    
    
    $
    0.01Net income per diluted share, as adjusted in 2005Income from continuing operations
    
    $
    0.36
    
    
    $
    0.43
    
    
    $
    0.79
    
    
    $
    0.01Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income per diluted share
    
    $
    0.36
    
    
    $
    0.43
    
    
    $
    0.79
    
    
    $
    0.01
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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (In thousands)
 Six months endedJune 30,2006
    
    
    2005Operating activities:Net income
    
    $
    50,339
    
    
    
    592Adjustments to reconcile net income
to net cash provided by (used in) operating
activities:Depreciation, depletion and amortization
    
    
    67,841
    
    
    
    29,528Amortization of debt issuance costs
    
    
    1,132
    
    
    
    875Accretion of asset retirement obligation
    
    
    2,246
    
    
    
    1,631Virginia tax credit
    
    
    
    
    
    
    (343
    )Stock-based compensation  non-cash
    
    
    9,945
    
    
    
    32,312Amortization of deferred gains on sales
of property interests
    
    
    (488
    )
    
    
    (395
    )Amortization of deferred gain on railroad incentives
    
    
    (154
    )
    
    
    (340
    )Gain on sale of fixed assets, net
    
    
    (134
    )
    
    
    113Gain on sale of discontinued operations
    
    
    
    
    
    
    (704
    )Loss on settlement of asset retirement obligation
    
    
    322
    
    
    
    490Provision for non-recoupable advance royalties
    
    
    469
    
    
    
    Minority interest
    
    
    
    
    
    
    2,846Deferred income taxes
    
    
    5,274
    
    
    
    1,588Other
    
    
    116
    
    
    
    44Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (12,198
    )
    
    
    (55,382
    )Notes and other receivables
    
    
    4,558
    
    
    
    (477
    )Inventories
    
    
    4,349
    
    
    
    (37,953
    )Prepaid expenses and other current
assets
    
    
    (2,583
    )
    
    
    10,261Other assets
    
    
    (1,934
    )
    
    
    (4,065
    )Trade accounts payable
    
    
    (20,891
    )
    
    
    16,275Accrued expenses and other current
liabilities
    
    
    (12,655
    )
    
    
    (1,386
    )Workers compensation benefits
    
    
    (928
    )
    
    
    (266
    )Postretirement medical benefits
    
    
    4,413
    
    
    
    4,503Asset retirement obligation
    
    
    615
    
    
    
    (1,772
    )Other liabilities
    
    
    773
    
    
    
    605Net cash provided by (used in)
operating activities
    
    
    100,427
    
    
    
    (1,420
    )
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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
 Condensed Consolidated Statements of Cash Flows (Unaudited)  (Continued)
 (In thousands)
 Six months endedJune 30,2006
    
    
    2005Investing activities:Capital expenditures
    
    $
    (84,000
    )
    
    
    (66,521
    )Proceeds from disposition of property, plant,
and equipment
    
    
    264
    
    
    
    5,148Purchase of equity investment
    
    
    (107
    )
    
    
    (654
    )Purchase of acquired companies
    
    
    (28,273
    )
    
    
    (389
    )Collections on note receivable from coal supplier
    
    
    3,000
    
    
    
    2,612Payment of additional consideration on prior acquisition
    
    
    
    
    
    
    (5,000
    )Net cash used in investing activities
    
    
    (109,116
    )
    
    
    (64,804
    )Financing activities:Repayments of notes payable
    
    
    (50,232
    )
    
    
    (8,230
    )Proceeds from issuance of long-term debt
    
    
    200,000
    
    
    
    70,000Repayments on long-term debt
    
    
    (171,806
    )
    
    
    (944
    )Increase (decrease) in bank overdraft
    
    
    (2,649
    )
    
    
    8,239Proceeds from initial public offering, net of offering costs
    
    
    
    
    
    
    598,066Repayment of restructuring notes payable
    
    
    
    
    
    
    (517,692
    )Distributions to prior members of ANR Holdings, LLC
subsequent to Internal Restructuring
    
    
    (2,400
    )
    
    
    (72,335
    )Distributions to prior members of ANR Holdings, LLC
prior to Internal Restructuring
    
    
    
    
    
    
    (7,732
    )Debt issuance costs
    
    
    
    
    
    
    (422
    )Proceeds from exercise of stock options
    
    
    954
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    (26,133
    )
    
    
    68,950Net increase (decrease) in cash
and cash equivalents
    
    
    (34,822
    )
    
    
    2,726Cash and cash equivalents at beginning of period
    
    
    39,622
    
    
    
    7,391Cash and cash equivalents at end of period
    
    $
    4,800
    
    
    
    10,117
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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 June 30, 2006
(In thousands, except percentages and share data)
 (1) Business and Basis of Presentation
 Organization and Business
   Basis of Presentation
  7




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Accounting for Derivative Instruments and
Hedging Activities
     (2) Earnings Per Share
    8




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Reported income from continuing operations
    
    $
    23,128
    
    
    $
    26,127
    
    
    $
    50,339
    
    
    $
    806Deduct: Income tax effect of ANR Fund IX Holdings, L.P. income
from continuing operations prior to Internal Restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91
    )Income from continuing operations, as adjusted
    
    
    23,128
    
    
    
    26,127
    
    
    
    50,339
    
    
    
    715Reported income (loss) from discontinued operations
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    (214
    )Deduct: Income tax effect of ANR Fund IX Holdings, L.P. loss
from discontinued operations prior to Internal Restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Income (loss) from discontinued operations, as adjusted
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    (212
    )Net income, as adjusted
    
    $
    23,128
    
    
    $
    26,393
    
    
    $
    50,339
    
    
    $
    503Denominator:Weighted average shares  basic
    
    
    64,012,586
    
    
    
    61,091,806
    
    
    
    63,907,353
    
    
    
    50,220,404Dilutive effect of stock options and restricted stock awards
    
    
    182,153
    
    
    
    471,167
    
    
    
    151,109
    
    
    
    218,607Weighted average shares  diluted
    
    
    64,194,739
    
    
    
    61,562,973
    
    
    
    64,058,463
    
    
    
    50,439,011Net income per basic share, as adjusted in 2005:Income from continuing operations
    
    $
    0.36
    
    
    $
    0.43
    
    
    $
    0.79
    
    
    $
    0.01Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income per basic share
    
    $
    0.36
    
    
    $
    0.43
    
    
    $
    0.79
    
    
    $
    0.01Net income per diluted share, as adjusted in 2005:Income from continuing operations
    
    $
    0.36
    
    
    $
    0.43
    
    
    $
    0.79
    
    
    $
    0.01Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income per diluted share
    
    $
    0.36
    
    
    $
    0.43
    
    
    $
    0.79
    
    
    $
    0.01
 (3) Inventories
  June 30,
    
    
    December 31,2006
    
    
    2005Raw coal
    
    $
    5,024
    
    
    $
    6,401Saleable coal
    
    
    64,063
    
    
    
    65,318Materials and supplies
    
    
    15,772
    
    
    
    13,166Total inventories
    
    $
    84,859
    
    
    $
    84,885
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(4) Long-Term Debt
  June 30,
    
    
    December 31,2006
    
    
    2005Term loan
    
    $
    248,750
    
    
    $
    250,00010% Senior notes due 2012
    
    
    175,000
    
    
    
    175,000Revolving credit facility
    
    
    30,000
    
    
    
    Variable rate term notes
    
    
    
    
    
    
    293Capital lease obligations
    
    
    1,843
    
    
    
    1,496Total long-term debt
    
    
    455,593
    
    
    
    426,789Less current portion
    
    
    3,224
    
    
    
    3,242Long-term debt, net of current
portion
    
    $
    452,369
    
    
    $
    423,547
  (5) Asset Retirement Obligation
  Total asset retirement obligation at December 31, 2005
    
    $
    53,487Accretion for the six months ended June 30, 2006
    
    
    2,247Sites added during the six months ended June 30, 2006
    
    
    8,323Expenditures for the six months ended June 30, 2006
    
    
    (1,893
    )Change in estimates
    
    
    116Settlement of asset retirement obligation
    
    
    322Total asset retirement obligation at June 30, 2006
    
    $
    62,602
 11




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(6) Stock-Based Compensation Awards
 Adoption of New Accounting Method
      12




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Three months
    
    Six monthsended
    
    endedJune 30,
    
    June 30,2005
    
    2005Net income, as
adjusted (Note 2)
    
    $
    26,393
    
    
    $
    503Add: shared-based
employee compensation
cost, included in net
loss,
as adjusted, net of
income taxes and
minority interest
    
    
    2,508
    
    
    
    38,029Deduct: share-based
employee compensation
cost determined
under the fair
value based
method,
net of income taxes
and minority
interest
    
    
    (2,709
    )
    
    
    (38,375
    )Pro forma net income,
adjusted for effect
of fair value of
stock options
    
    $
    26,192
    
    
    $
    157Net income per share
 basic and diluted,
adjusted for
stock options
    
    $
    0.43
    
    
    $
    
  Expected life (years)
    
    
    4.0Expected volatility
    
    
    38.0
    %Risk-free interest rate
    
    
    3.38
    %Expected annual dividend
    
    $
    0.10
      Disclosure of Share-Based Payment Arrangements
  13




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Weighted-Weighted-
    
    
    AverageAverage
    
    
    RemainingNumber of
    
    
    Exercise
    
    
    ContractShares
    
    
    Price
    
    
    Life (Years)Outstanding at December 31, 2005
    
    
    1,253,593
    
    
    $
    16.71Granted
    
    
    
    
    
    
    Exercised
    
    
    (60,195
    )
    
    $
    15.86Forfeited/Cancelled
    
    
    (36,000
    )
    
    $
    19.00Outstanding at June 30, 2006
    
    
    1,157,398
    
    
    $
    16.68
    
    
    
    8.54Exercisable at June 30, 2006
    
    
    174,041
    
    
    $
    17.24
    
    
    
    8.55
   Weighted-AverageNumber of
    
    
    Grant DateShares
    
    
    Fair ValueNonvested shares outstanding at December 31, 2005
    
    
    684,465
    
    
    $
    19.15Granted
    
    
    519,242
    
    
    
    21.26Vested
    
    
    (358,848
    )
    
    
    19.31Forfeited
    
    
    Nonvested shares outstanding at June 30, 2006
    
    
    844,859
    
    
    $
    20.38
   15




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(7) Postretirement Benefits Other Than Pensions
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    859
    
    
    $
    1,000
    
    
    $
    1,920
    
    
    $
    1,944Interest cost
    
    
    766
    
    
    
    717
    
    
    
    1,413
    
    
    
    1,255Amortization of net (gain) or loss
    
    
    85
    
    
    
    15
    
    
    
    93
    
    
    
    9Amortization of prior service cost
    
    
    489
    
    
    
    608
    
    
    
    1,136
    
    
    
    1,306Net periodic benefit cost
    
    $
    2,199
    
    
    $
    2,340
    
    
    $
    4,562
    
    
    $
    4,514
   (8) Related Party Transactions
  June 30,
    
    
    December 31,2006
    
    
    2005AMCI
    
    $
    63
    
    
    $
    10,390Robindale Energy & Subsidiary
    
    
    
    
    
    
    63Total
    
    $
    63
    
    
    $
    10,453
  16




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June 30,
    
    
    December 31,2006
    
    
    2005AMCI
    
    $
    7,535
    
    
    $
    13,735First Reserve Fund IX, L.P.
    
    
    
    
    
    
    4,500Foundation Energy
    
    
    
    
    
    
    2,605Robindale Energy & Subsidiary
    
    
    10
    
    
    
    51Total
    
    $
    7,545
    
    
    $
    20,891
  (9) Segment Information
   CorporateCoal
    
    All
    
    andOperations
    
    Other
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    488,975
    
    
    $
    15,339
    
    
    $
    (8,633
    )
    
    $
    495,681Depreciation, depletion, and amortization
    
    
    32,072
    
    
    
    1,435
    
    
    
    700
    
    
    
    34,207EBITDA
    
    
    92,998
    
    
    
    2,209
    
    
    
    (18,581
    )
    
    
    76,626Capital expenditures
    
    
    32,430
    
    
    
    60
    
    
    
    71
    
    
    
    32,561Total assets
    
    
    1,098,569
    
    
    
    90,418
    
    
    
    (135,495
    )
    
    
    1,053,492
 17




---



##### Table of Contents



CorporateCoal
    
    All
    
    andOperations
    
    Other
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    961,514
    
    
    $
    34,825
    
    
    $
    (18,348
    )
    
    $
    977,991Depreciation, depletion, and amortization
    
    
    63,132
    
    
    
    3,414
    
    
    
    1,295
    
    
    
    67,841EBITDA
    
    
    187,711
    
    
    
    4,894
    
    
    
    (35,424
    )
    
    
    157,181Capital expenditures
    
    
    76,872
    
    
    
    6,025
    
    
    
    1,103
    
    
    
    84,000Total assets
    
    
    1,098,569
    
    
    
    90,418
    
    
    
    (135,495
    )
    
    
    1,053,492
  CorporateCoal
    
    All
    
    andOperations
    
    Other
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    414,660
    
    
    $
    10,517
    
    
    $
    (7,541
    )
    
    $
    417,636Depreciation, depletion, and amortization
    
    
    14,344
    
    
    
    369
    
    
    
    362
    
    
    
    15,075EBITDA, as adjusted
    
    
    70,502
    
    
    
    1,112
    
    
    
    (14,867
    )
    
    
    56,747Capital expenditures
    
    
    35,924
    
    
    
    40
    
    
    
    235
    
    
    
    36,199Total assets
    
    
    505,097
    
    
    
    72,329
    
    
    
    30,806
    
    
    
    608,232
  CorporateCoal
    
    All
    
    andOperations
    
    Other
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    722,116
    
    
    $
    20,229
    
    
    $
    (12,554
    )
    
    $
    729,791Depreciation, depletion, and amortization
    
    
    27,494
    
    
    
    788
    
    
    
    963
    
    
    
    29,245EBITDA, as adjusted
    
    
    116,377
    
    
    
    2,341
    
    
    
    (61,864
    )
    
    
    56,854Capital expenditures
    
    
    65,458
    
    
    
    322
    
    
    
    431
    
    
    
    66,211Total assets
    
    
    505,097
    
    
    
    72,329
    
    
    
    30,806
    
    
    
    608,232
 18




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Total segment EBITDA, as adjusted, for
2005 for continuing operations
    
    $
    76,626
    
    
    $
    56,747
    
    
    $
    157,181
    
    
    $
    56,854Interest expense
    
    
    (10,786
    )
    
    
    (6,647
    )
    
    
    (21,063
    )
    
    
    (12,764
    )Interest income
    
    
    171
    
    
    
    191
    
    
    
    358
    
    
    
    478Income tax expense from continuing operations
    
    
    (8,676
    )
    
    
    (9,089
    )
    
    
    (18,296
    )
    
    
    (11,599
    )Depreciation, depletion and amortization from
continuing operations
    
    
    (34,207
    )
    
    
    (15,075
    )
    
    
    (67,841
    )
    
    
    (29,245
    )Minority interest in income from continuing
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,918
    )Income from continuing operations
    
    $
    23,128
    
    
    $
    26,127
    
    
    $
    50,339
    
    
    $
    806
  (10) Commitment and Contingencies
 ( a ) Guarantees and Financial Instruments with Off-balance Sheet Risk
  ( b ) Litigation
  19




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##### Table of Contents



(11) Discontinued Operations
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2005Total revenues
    
    $
    906
    
    
    $
    4,523Total costs and expenses
    
    
    1,251
    
    
    
    5,607Gain on sale of discontinued operations
    
    
    704
    
    
    
    704Income (loss) from operations
    
    
    359
    
    
    
    (380
    )Miscellaneous income
    
    
    0
    
    
    
    1Income tax benefit (expense) from discontinued
operations
    
    
    93
    
    
    
    (93
    )Minority interest in income (loss) from
discontinued operations
    
    
    0
    
    
    
    (72
    )Income (loss) from discontinued operations
    
    $
    266
    
    
    $
    (214
    )
 (12) Income Taxes
    20




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##### Table of Contents



Three months
    
    
    Six monthsended
    
    
    ended2005
    
    
    2005Continuing operations
    
    $
    9,089
    
    
    $
    11,599Discontinued operations
    
    
    93
    
    
    
    (93
    )$
    9,182
    
    
    $
    11,506
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Federal statutory income tax expense
    
    $
    11,131
    
    
    $
    12,325
    
    
    $
    24,023
    
    
    $
    5,362Increases (reductions) in taxes due to:Percentage depletion allowance
    
    
    (5,077
    )
    
    
    (4,895
    )
    
    
    (9,941
    )
    
    
    (6,563
    )Extraterritorial income exclusion
    
    
    (469
    )
    
    
    (521
    )
    
    
    (882
    )
    
    
    (705
    )Deduction for domestic production activities
    
    
    (101
    )
    
    
    (202
    )
    
    
    (266
    )
    
    
    (279
    )State taxes, net of federal tax impact
    
    
    806
    
    
    
    757
    
    
    
    1,771
    
    
    
    1,056Stock-based compensation
    
    
    1,199
    
    
    
    1,300
    
    
    
    2,229
    
    
    
    13,354Change in valuation allowance
    
    
    986
    
    
    
    268
    
    
    
    989
    
    
    
    397Taxes not provided for minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,001
    )Taxes not provided for pass-through entity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133
    )Other, net
    
    
    201
    
    
    
    57
    
    
    
    373
    
    
    
    111Actual income tax expense
    
    $
    8,676
    
    
    $
    9,089
    
    
    $
    18,296
    
    
    $
    11,599
 21




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##### Table of Contents



(13) Progress Acquisition
  (14) Accumulated Other Comprehensive Income
  (15) New Accounting Pronouncements
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Cautionary Note Regarding Forward Looking Statements
 22




---



##### Table of Contents




    
    market demand for coal, electricity and steel;
    
    future economic or capital market conditions;
    
    weather conditions or catastrophic weather-related damage;
    
    our production capabilities;
    
    the consummation of financing, acquisition or disposition transactions and the effect thereof on our business;
    
    our ability to successfully integrate the operations we acquired in the Nicewonder and
Progress acquisitions with our existing operations, and to successfully operate the highway
construction business we acquired in the Nicewonder acquisition, as well as our ability to
successfully integrate operations we may acquire in the future;
    
    our plans and objectives for future operations and expansion or consolidation;
    
    our relationships with, and other conditions affecting, our customers;
    
    timing of changes in customer coal inventories;
    
    long-term coal supply arrangements;
    
    inherent risks of coal mining beyond our control;
    
    environmental laws, including those directly affecting our coal mining and production,
and those affecting our customers coal usage;
    
    competition in coal markets;
    
    railroad, barge, truck and other transportation performance and costs;
    
    availability of mining and processing equipment and parts;
    
    our assumptions concerning economically recoverable coal reserve estimates;
    
    availability of skilled employees and other employee workforce factors;
    
    regulatory and court decisions;
    
    future legislation and changes in regulations, governmental policies or taxes;
    
    changes in postretirement benefit obligations;
 23




---



##### Table of Contents




    
    our liquidity, results of operations and financial condition; and
    
    other factors, including the other factors discussed in Overview  Coal Pricing Trends
and Uncertainties and Outlook below, and the factors discussed in Part I, Item 1A Risk
Factors section of our annual report on Form 10-K for the year ended December 31, 2005.
  Overview
      Accounting for Derivative Instruments and
Hedging Activities
 24




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##### Table of Contents



Coal Pricing Trends and Uncertainties.
    25




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##### Table of Contents



Reconciliation of Non-GAAP Measures
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income
    
    $
    23,128
    
    
    $
    26,393
    
    
    $
    50,339
    
    
    $
    592Interest expense
    
    
    10,786
    
    
    
    6,647
    
    
    
    21,063
    
    
    
    12,764Interest income
    
    
    (171
    )
    
    
    (191
    )
    
    
    (358
    )
    
    
    (478
    )Income tax expense
    
    
    8,676
    
    
    
    9,182
    
    
    
    18,296
    
    
    
    11,506Depreciation, depletion and amortization
    
    
    34,207
    
    
    
    15,048
    
    
    
    67,841
    
    
    
    29,528EBITDA (1)
    
    
    76,626
    
    
    
    57,079
    
    
    
    157,181
    
    
    
    53,912Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,846EBITDA, as adjusted (1)
    
    $
    76,626
    
    
    $
    57,079
    
    
    $
    157,181
    
    
    $
    56,758
 
 (1)
    
    EBITDA is defined as net income plus interest expense, income tax expense (benefit),
depreciation, depletion, and amortization, less interest income. EBITDA, as adjusted,
includes EBITDA plus minority interest. EBITDA and EBITDA, as adjusted, are used by management to
measure operating performance, and management also believes they are useful indicators of our
ability to meet debt service and capital expenditure requirements. Because EBITDA and EBITDA, as
adjusted, are not calculated identically by all companies, our calculation may not be comparable to
similarly titled measures of other companies. In addition, the amounts presented for EBITDA and
EBITDA, as adjusted, differ from the amounts calculated under the definition of EBITDA used in our
debt covenants. The definition of EBITDA used in our debt covenants is further adjusted for certain
cash and non-cash charges and is used to determine compliance with financial covenants and our
ability to engage in certain activities such as incurring debt and making certain payments.
Adjusted EBITDA as it is used and defined in our debt covenants is described and reconciled to net
income (loss) in  Analysis of Material Debt Covenants below. Results of Operations
 Three months Ended June 30, 2006 Compared to the Three months Ended June 30, 2005
 Summary
   26




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##### Table of Contents



Revenues
 Three months Ended
    
    
    IncreaseJune 30,
    
    
    (Decrease)2006
    
    
    2005
    
    
    $ or Tons
    
    
    %(in thousands, except per ton data)Coal revenues
    
    $
    436,529
    
    
    $
    364,070
    
    
    $
    72,459
    
    
    
    20
    %Freight and handling revenues
    
    
    50,935
    
    
    
    48,239
    
    
    
    2,696
    
    
    
    6
    %Other revenues
    
    
    8,217
    
    
    
    5,327
    
    
    
    2,890
    
    
    
    54
    %Total revenues
    
    $
    495,681
    
    
    $
    417,636
    
    
    $
    78,045
    
    
    
    19
    %Tons Sold:Steam
    
    
    4,893
    
    
    
    3,906
    
    
    
    987
    
    
    
    25
    %Metallurgical
    
    
    2,567
    
    
    
    2,784
    
    
    
    (217
    )
    
    
    (8
    )%Total
    
    
    7,460
    
    
    
    6,690
    
    
    
    770
    
    
    
    12
    %Coal sales realization per ton:Steam
    
    $
    50.16
    
    
    $
    40.97
    
    
    $
    9.19
    
    
    
    22
    %Metallurgical
    
    
    74.44
    
    
    
    73.29
    
    
    
    1.15
    
    
    
    2
    %Total
    
    $
    58.52
    
    
    $
    54.42
    
    
    $
    4.10
    
    
    
    8
    %
 Coal Revenues.
 Freight and Handling Revenues.
 Other Revenues.
 Costs and Expenses
 Three months ended
    
    
    IncreaseJune 30,
    
    
    (Decrease)2006
    
    
    2005
    
    
    $
    
    
    %(in thousands, except per ton data)Cost of coal sales (exclusive of items shown separately below)
    
    $
    345,505
    
    
    $
    293,493
    
    
    $
    52,012
    
    
    
    18
    %Freight and handling costs
    
    
    50,935
    
    
    
    48,239
    
    
    
    2,696
    
    
    
    6
    %Cost of other revenues
    
    
    5,445
    
    
    
    4,319
    
    
    
    1,126
    
    
    
    26
    %Depreciation, depletion and amortization
    
    
    34,207
    
    
    
    15,075
    
    
    
    19,132
    
    
    
    127
    %Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and including
stock-based compensation
expense in the amount of $5,311 in 2006 and $3,381 in 2005)
    
    
    18,583
    
    
    
    14,870
    
    
    
    3,713
    
    
    
    25
    %
 27




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##### Table of Contents



Three months ended
    
    
    IncreaseJune 30,
    
    
    (Decrease)2006
    
    
    2005
    
    
    $
    
    
    %(in thousands, except per ton data)Total costs and expenses
    
    $
    454,675
    
    
    $
    375,996
    
    
    $
    78,679
    
    
    
    21
    %Cost of coal sales per ton:Company
mines
    
    $
    42.63
    
    
    $
    36.65
    
    
    $
    5.98
    
    
    
    16
    %Contract mines (including
purchased and
processed)
    
    
    53.40
    
    
    
    53.12
    
    
    
    0.28
    
    
    
    1
    %Total produced and
processed
    
    
    44.39
    
    
    
    40.40
    
    
    
    3.99
    
    
    
    10
    %Purchased and sold without
processing
    
    
    57.82
    
    
    
    56.46
    
    
    
    1.36
    
    
    
    2
    %Cost of coal sales per ton
    
    $
    46.32
    
    
    $
    43.87
    
    
    $
    2.45
    
    
    
    6
    %
 Cost of Coal Sales:
 Freight and Handling Costs.
 Cost of Other Revenues
 Depreciation, Depletion and Amortization.
 Selling, General and Administrative Expenses.
 Interest Expense.
 Interest Income.
 Income Tax Expense:
 28




---



##### Table of Contents



Six months Ended June 30, 2006 Compared to the Six months Ended June 30, 2005
 Summary
   Revenues
 Six months Ended
    
    
    IncreaseJune 30,
    
    
    (Decrease)2006
    
    
    2005
    
    
    $ or Tons
    
    
    %(in thousands, except per ton data)Coal revenues
    
    $
    860,903
    
    
    $
    637,204
    
    
    $
    223,699
    
    
    
    35
    %Freight and handling revenues
    
    
    97,327
    
    
    
    79,991
    
    
    
    17,336
    
    
    
    22
    %Other revenues
    
    
    19,761
    
    
    
    12,596
    
    
    
    7,165
    
    
    
    57
    %Total revenues
    
    $
    977,991
    
    
    $
    729,791
    
    
    $
    248,200
    
    
    
    34
    %Tons Sold:Steam
    
    
    9,247
    
    
    
    7,111
    
    
    
    2,136
    
    
    
    30
    %Metallurgical
    
    
    5,336
    
    
    
    5,112
    
    
    
    224
    
    
    
    4
    %Total
    
    
    14,583
    
    
    
    12,223
    
    
    
    2,360
    
    
    
    19
    %Coal sales realization per ton:Steam
    
    $
    49.62
    
    
    $
    39.01
    
    
    $
    10.61
    
    
    
    27
    %Metallurgical
    
    
    75.36
    
    
    
    70.37
    
    
    
    4.99
    
    
    
    7
    %Total
    
    $
    59.04
    
    
    $
    52.13
    
    
    $
    6.91
    
    
    
    13
    %
 Coal Revenues.
 Freight and Handling Revenues.
 29




---



##### Table of Contents



Other Revenues.
 Costs and Expenses
 Six months ended
    
    
    IncreaseJune 30,
    
    
    (Decrease)2006
    
    
    2005
    
    
    $
    
    
    %(in thousands, except per ton data)Cost of coal sales (exclusive of items shown separately below)
    
    $
    676,391
    
    
    $
    519,777
    
    
    $
    156,614
    
    
    
    30
    %Freight and handling costs
    
    
    97,327
    
    
    
    79,991
    
    
    
    17,336
    
    
    
    22
    %Cost of other revenues
    
    
    13,396
    
    
    
    10,384
    
    
    
    3,012
    
    
    
    29
    %Depreciation, depletion and amortization
    
    
    67,841
    
    
    
    29,245
    
    
    
    38,596
    
    
    
    132
    %Selling, general and administrative expenses (exclusive of
depreciation and amortization shown separately above and including
stock-based compensation expense in the amount of $9,144 in 2006
and $39,788 in 2005)
    
    
    35,392
    
    
    
    62,776
    
    
    
    (27,384
    )
    
    
    (44
    )%Total costs and expenses
    
    $
    890,347
    
    
    $
    702,173
    
    
    $
    188,174
    
    
    
    27
    %Cost of coal sales per ton:Company mines
    
    $
    41.57
    
    
    $
    35.65
    
    
    $
    5.92
    
    
    
    17
    %Contract mines (including purchased and processed)
    
    
    53.18
    
    
    
    50.14
    
    
    
    3.04
    
    
    
    6
    %Total produced and processed
    
    
    43.48
    
    
    
    38.78
    
    
    
    4.70
    
    
    
    12
    %Purchased and sold without processing
    
    
    62.27
    
    
    
    58.09
    
    
    
    4.18
    
    
    
    7
    %Cost of coal sales per ton
    
    $
    46.38
    
    
    $
    42.52
    
    
    $
    3.86
    
    
    
    9
    %
 Cost of Coal Sales:
 Freight and Handling Costs.
 Cost of Other Revenues
 30




---



##### Table of Contents



Depreciation, Depletion and Amortization.
 Selling, General and Administrative Expenses.
 Interest Expense.
 Interest Income.
 Income Tax Expense:
    Liquidity and Capital Resources
  31




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##### Table of Contents



Cash Flows
     Credit Facility and Long-term Debt
  June 30,200610% Senior notes due 2012
    
    $
    175,000Term Loan
    
    
    248,750Revolving credit facility
    
    
    30,000Capital
lease obligations
    
    
    1,843Total long-term debt
    
    
    455,593Less current portion
    
    
    3,224Long-term debt, net of current portion
    
    $
    452,369
  32




---



##### Table of Contents



Analysis of Material Debt Covenants
   
    
    Alpha NR Holding Inc. must maintain a leverage ratio, defined as the ratio of
consolidated adjusted debt (consolidated debt less unrestricted cash and cash equivalents)
to Adjusted EBITDA (as defined in the new credit agreement), of not more than 4.00 at
December 31, 2005, March 31, June 30, September 30 and December 31, 2006, 3.75 at March 31,
June 30, September 30 and December 31, 2007 and 3.50 at March 31, 2008 and each quarter end
thereafter with Adjusted EBITDA being computed using the most recent four quarters; and
    
    Alpha NR Holding Inc. must maintain an interest coverage ratio, defined as the ratio of
Adjusted EBITDA, to cash interest expense, of 2.50 or greater on the last day of any fiscal
quarter.
   33




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##### Table of Contents



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




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##### Table of Contents



Critical Accounting Estimates and Assumptions
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Commodity Price Risk
    Purchase Price
    
    
    Tons
    
    
    
    
    
    
    Mark-To-MarketPurchase Contracts
    
    Range
    
    
    Outstanding
    
    
    Delivery Period
    
    
    Adjustment (In Millions)$
    33.50
    
    
    
    27,740
    
    
    
    07/01/06-12/31/07
    
    
    $
    .4$
    49.50-$56.00
    
    
    
    937,477
    
    
    
    07/01/06-12/31/07
    
    
    $
    (2.0
    )965,217
    
    
    
    
    
    
$
(1.6
    )
 35




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##### Table of Contents



Selling Price
    
    
    Tons
    
    
    
    
    
    
    Mark-To-MarketSales Contracts
    
    Range
    
    
    Outstanding
    
    
    Delivery Period
    
    
    Adjustment (In Millions)$
    50.00-$55.00
    
    
    
    268,620
    
    
    
    07/01/06-12/31/07
    
    
    $
    0.9$
    55.00-$60.00
    
    
    
    660,567
    
    
    
    07/01/06-12/31/07
    
    
    $
    5.0929,187
    
    
    
    
    
    
    $
    5.9
 Interest Rate Risk
   
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures.
 Changes in internal control over financial reporting.
 Accounting for
Derivative Instruments and Hedging Activities
 36




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##### Table of Contents



Limitations of the effectiveness of internal control.
 37




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##### Table of Contents



PART II
 
 Item 1A. Risk Factors
   
 Item 4. Submission of Matters to a Vote of Security Holders
   Nominee
    
    Total Votes For
    
    Total Votes WithheldE. Linn Draper, Jr.
    
    
    51,984,708
    
    
    
    5,384,867Glenn A. Eisenberg
    
    
    52,160,978
    
    
    
    5,208,597John W. Fox, Jr.
    
    
    52,175,250
    
    
    
    5,194,325Fritz R. Kundrun
    
    
    51,892,157
    
    
    
    5,447,418Hans J. Mende
    
    
    37,957,218
    
    
    
    19,412,357Michael J. Quillen
    
    
    52,844,572
    
    
    
    4,525,003Ted G. Wood
    
    
    52,955,453
    
    
    
    4,414,122
  Vote totals:For:
    
    
    56,818,442Against:
    
    
    531,199Abstained:
    
    
    19,934
 
 Item 6. Exhibits
  38




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##### Table of Contents



SIGNATURE
  ALPHA NATURAL RESOURCES, INC.By:
Name:
    
    /s/ David C. Stuebe

David C. StuebeTitle:
    
    Vice President and Chief Financial Officer
  39




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##### Table of Contents



10-Q EXHIBIT INDEX
 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 30,
2005).4.1*
    
     Fifth Supplemental Indenture dated as of May 1, 2006, among Alpha
Natural Resources, LLC, Alpha Natural Resources Capital Corp., the
Guarantors party thereto, the Guaranteeing Subsidiary party thereto
and Wells
Fargo Bank, N.A. as Trustee10.1
    
    Form of Director Deferred Compensation Agreement for Alpha Natural Resources, Inc. 2005 Long-Term
Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Alpha
Natural Resources, Inc. (File No. 1-32423) filed on August 3, 2006).31(a)*
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 200231(b)*
    
    Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant
to § 302 of the Sarbanes-Oxley Act of 200232(a)*
    
    Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 200232(b)*
    
    Certification Pursuant to 18 U.S.C. § 1350, As Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith. 40