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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2006

or



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

For the Transition Period From  to

Commission File Number 333-120979-49

Foundation Coal Corporation

(Exact Name of Registrant as Specified in Its Charter)



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

Registrants telephone number, including area code (410) 689-7500

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is 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. (Check one):

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer x

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

Yes ̈No  x

The Registrants common equity is not publicly traded. The common stock of the Registrants Public parent, Foundation Coal Holdings, Inc., began trading on the New York Stock Exchange on December 9, 2004. There were
45,432,643 shares of Foundation Coal Holdings, Inc. common stock outstanding on October 31, 2006. There were 100 shares of Foundation Coal Corporation common stock outstanding on October 31, 2006, all held by its parent, FC2 Corp., which
are not publicly traded.



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TABLE OF CONTENTS



|         |  |                                                                                                                       |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                       |  | Page
|         |  |                                                                                                                      
|         |  | PART IFINANCIAL INFORMATION                                                                                          |  |     
|         |  |                                                                                                                      
|ITEM 1.  |  | FINANCIAL STATEMENTS                                                                                                  |  | 3   
|         |  |                                                                                                                      
|         |  | Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005                                            |  | 3   
|         |  |                                                                                                                      
|         |  | Statements of Consolidated Operations and Comprehensive Income for the Three Months Ended September 30, 2006 and 2005 |  | 4   
|         |  |                                                                                                                      
|         |  | Statements of Consolidated Operations and Comprehensive Income for the Nine Months Ended September 30, 2006 and 2005  |  | 5   
|         |  |                                                                                                                      
|         |  | Statements of Consolidated Cash Flows for the Nine Months Ended September 30, 2006 and 2005                           |  | 6   
|         |  |                                                                                                                      
|         |  | Notes to Consolidated Financial Statements                                                                            |  | 7   
|         |  |                                                                                                                      
|ITEM 2.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                 |  | 28  
|         |  |                                                                                                                      
|ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                            |  | 52  
|         |  |                                                                                                                      
|ITEM 4.  |  | CONTROLS AND PROCEDURES                                                                                               |  | 53  
|         |  |                                                                                                                      
|         |  | PART IIOTHER INFORMATION                                                                                             |  |     
|         |  |                                                                                                                      
|ITEM 1.  |  | LEGAL PROCEEDINGS                                                                                                     |  | 54  
|         |  |                                                                                                                      
|ITEM 1A. |  | RISK FACTORS                                                                                                          |  | 54  
|         |  |                                                                                                                      
|ITEM 2.  |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                           |  | 54  
|         |  |                                                                                                                      
|ITEM 3.  |  | DEFAULTS UPON SENIOR SECURITIES                                                                                       |  | 54  
|         |  |                                                                                                                      
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                   |  | 54  
|         |  |                                                                                                                      
|ITEM 5.  |  | OTHER INFORMATION                                                                                                     |  | 54  
|         |  |                                                                                                                      
|ITEM 6.  |  | EXHIBITS                                                                                                              |  | 54  



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PART I  FINANCIAL INFORMATION

Unless the context otherwise indicates, as used in this Form 10-Q the terms
we, our, us and similar terms refer to Foundation Coal Corporation and its consolidated subsidiaries. Foundation Coal Corporation is an indirect wholly owned subsidiary of Foundation Coal Holdings, Inc. For
purposes of this filing, Foundation Coal Holdings, Inc. is referred to as the Public parent or FCL.



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------

Foundation Coal Corporation and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)



|                                                                                                                 |  |                   |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                 |  | September 30,2006 |           |   | December 31,2005 |  
|                                                                                                                 |  | (Unaudited)       |           |   |                  |  
|Assets                                                                                                           |  |                   |           |   |                  |   |           |  
|Current assets:                                                                                                  |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                        |  | $                 | 45,048    |   |                  | $ | 22,424    |  
|Trade accounts receivable                                                                                        |  |                   | 117,474   |   |                  |   | 110,125   |  
|Inventories, net                                                                                                 |  |                   | 34,358    |   |                  |   | 96,896    |  
|Deferred income taxes                                                                                            |  |                   | 4,933     |   |                  |   | 4,933     |  
|Prepaid expenses                                                                                                 |  |                   | 32,875    |   |                  |   | 22,447    |  
|Other current assets                                                                                             |  |                   | 7,025     |   |                  |   | 2,885     |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total current assets                                                                                             |  |                   | 241,713   |   |                  |   | 259,710   |  
|Owned surface lands                                                                                              |  |                   | 29,390    |   |                  |   | 27,510    |  
|Plant, equipment and mine development costs, net                                                                 |  |                   | 610,016   |   |                  |   | 567,062   |  
|Owned and leased mineral rights, net                                                                             |  |                   | 1,027,748 |   |                  |   | 1,071,596 |  
|Coal supply agreements, net                                                                                      |  |                   | 37,786    |   |                  |   | 53,050    |  
|Other noncurrent assets                                                                                          |  |                   | 19,845    |   |                  |   | 29,183    |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total assets                                                                                                     |  | $                 | 1,966,498 |   |                  | $ | 2,008,111 |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Liabilities                                                                                                      |  |                   |           |   |                  |   |           |  
|Current liabilities:                                                                                             |  |                   |           |   |                  |   |           |  
|Current portion of long-term debt                                                                                |  | $                 | 4,188     |   |                  | $ |          |  
|Trade accounts payable                                                                                           |  |                   | 40,091    |   |                  |   | 35,384    |  
|Accrued expenses and other current liabilities                                                                   |  |                   | 162,423   |   |                  |   | 181,883   |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total current liabilities                                                                                        |  |                   | 206,702   |   |                  |   | 217,267   |  
|Long-term debt                                                                                                   |  |                   | 630,812   |   |                  |   | 635,000   |  
|Deferred income taxes                                                                                            |  |                   | 28,049    |   |                  |   | 67,629    |  
|Coal supply agreements, net                                                                                      |  |                   | 31,377    |   |                  |   | 59,013    |  
|Postretirement benefits                                                                                          |  |                   | 479,092   |   |                  |   | 464,418   |  
|Other noncurrent liabilities                                                                                     |  |                   | 234,998   |   |                  |   | 225,413   |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total liabilities                                                                                                |  |                   | 1,611,030 |   |                  |   | 1,668,740 |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Commitments and contingencies (Note 21)                                                                          |  |                   |           |   |                  |   |           |  
|Stockholder Equity                                                                                               |  |                   |           |   |                  |   |           |  
|Common stock, $0.01 par value; 100 shares authorized and outstanding at September 30, 2006 and December 31, 2005 |  |                   |          |   |                  |   |          |  
|Additional paid-in capital                                                                                       |  |                   | 253,648   |   |                  |   | 235,011   |  
|Retained earnings                                                                                                |  |                   | 102,069   |   |                  |   | 105,137   |  
|Accumulated other comprehensive loss                                                                             |  |                   | (249      | ) |                  |   | (777      | )
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total stockholder equity                                                                                         |  |                   | 355,468   |   |                  |   | 339,371   |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total liabilities and stockholder equity                                                                         |  | $                 | 1,966,498 |   |                  | $ | 2,008,111 |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  

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



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Foundation Coal Corporation and Subsidiaries

Statements of Consolidated Operations and Comprehensive Income

(Dollars in thousands, except share and per share data)

(Unaudited)



|                                                                                                |  |                                  |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                |  | Three Months Ended September 30, |        
|                                                                                                |  | 2006                             |         |   | 2005 |  
|Revenues:                                                                                       |  |                                  |         |   |      |   |         |  
|Coal sales                                                                                      |  | $                                | 347,511 |   |      | $ | 333,469 |  
|Other revenue                                                                                   |  |                                  | 6,609   |   |      |   | 7,841   |  
|                                                                                                |  |                                  |         |   |      |   |         |  
|Total revenues                                                                                  |  |                                  | 354,120 |   |      |   | 341,310 |  
|Costs and expenses:                                                                             |  |                                  |         |   |      |   |         |  
|Cost of coal sales (excludes depreciation, depletion and amortization)                          |  |                                  | 277,453 |   |      |   | 241,238 |  
|Selling, general and administrative expense (excludes depreciation, depletion and amortization) |  |                                  | 11,159  |   |      |   | 13,244  |  
|Accretion on asset retirement obligations                                                       |  |                                  | 2,219   |   |      |   | 2,119   |  
|Depreciation, depletion and amortization                                                        |  |                                  | 45,170  |   |      |   | 53,131  |  
|Amortization of coal supply agreements                                                          |  |                                  | (2,309  | ) |      |   | (20,467 | )
|                                                                                                |  |                                  |         |   |      |   |         |  
|Income from operations                                                                          |  |                                  | 20,428  |   |      |   | 52,045  |  
|Other income (expense):                                                                         |  |                                  |         |   |      |   |         |  
|Interest expense                                                                                |  |                                  | (23,058 | ) |      |   | (15,092 | )
|Mark-to-market loss on interest rate swaps                                                      |  |                                  | (112    | ) |      |   |        |  
|Interest income                                                                                 |  |                                  | 958     |   |      |   | 235     |  
|                                                                                                |  |                                  |         |   |      |   |         |  
|(Loss) income before income tax benefit (expense)                                               |  |                                  | (1,784  | ) |      |   | 37,188  |  
|Income tax benefit (expense)                                                                    |  |                                  | 1,962   |   |      |   | (14,714 | )
|                                                                                                |  |                                  |         |   |      |   |         |  
|Net income                                                                                      |  |                                  | 178     |   |      |   | 22,474  |  
|Components of other comprehensive income:                                                       |  |                                  |         |   |      |   |         |  
|Unrealized gain on interest rate swaps, net of tax expense of $324 in 2005                      |  |                                  |        |   |      |   | 457     |  
|                                                                                                |  |                                  |         |   |      |   |         |  
|Comprehensive income                                                                            |  | $                                | 178     |   |      | $ | 22,931  |  
|                                                                                                |  |                                  |         |   |      |   |         |  

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



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Foundation Coal Corporation and Subsidiaries

Statements of Consolidated Operations and Comprehensive Income

(Dollars in thousands, except share and per share data)

(Unaudited)



|                                                                                                |  |                                 |           |   |      |   |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ---- | - | ------- | -
|                                                                                                |  | Nine Months Ended September 30, |          
|                                                                                                |  | 2006                            |           |   | 2005 |  
|Revenues:                                                                                       |  |                                 |           |   |      |   |         |  
|Coal sales                                                                                      |  | $                               | 1,094,272 |   |      | $ | 958,027 |  
|Other revenue                                                                                   |  |                                 | 22,260    |   |      |   | 18,267  |  
|                                                                                                |  |                                 |           |   |      |   |         |  
|Total revenues                                                                                  |  |                                 | 1,116,532 |   |      |   | 976,294 |  
|Costs and expenses:                                                                             |  |                                 |           |   |      |   |         |  
|Cost of coal sales (excludes depreciation, depletion and amortization)                          |  |                                 | 835,890   |   |      |   | 697,736 |  
|Selling, general and administrative expense (excludes depreciation, depletion and amortization) |  |                                 | 36,456    |   |      |   | 33,633  |  
|Accretion on asset retirement obligations                                                       |  |                                 | 6,327     |   |      |   | 6,203   |  
|Depreciation, depletion and amortization                                                        |  |                                 | 137,678   |   |      |   | 160,625 |  
|Amortization of coal supply agreements                                                          |  |                                 | (11,773   | ) |      |   | (66,983 | )
|                                                                                                |  |                                 |           |   |      |   |         |  
|Income from operations                                                                          |  |                                 | 111,954   |   |      |   | 145,080 |  
|Other income (expense):                                                                         |  |                                 |           |   |      |   |         |  
|Interest expense                                                                                |  |                                 | (50,706   | ) |      |   | (43,769 | )
|Mark-to-market loss on interest rate swaps                                                      |  |                                 | (112      | ) |      |   |        |  
|Interest income                                                                                 |  |                                 | 2,184     |   |      |   | 537     |  
|                                                                                                |  |                                 |           |   |      |   |         |  
|Income before income tax expense                                                                |  |                                 | 63,320    |   |      |   | 101,848 |  
|Income tax expense                                                                              |  |                                 | (8,418    | ) |      |   | (39,949 | )
|                                                                                                |  |                                 |           |   |      |   |         |  
|Net income                                                                                      |  |                                 | 54,902    |   |      |   | 61,899  |  
|Components of other comprehensive income:                                                       |  |                                 |           |   |      |   |         |  
|Unrealized gain on interest rate swaps, net of tax expense of $584 in 2005                      |  |                                 |          |   |      |   | 873     |  
|                                                                                                |  |                                 |           |   |      |   |         |  
|Comprehensive income                                                                            |  | $                               | 54,902    |   |      | $ | 62,772  |  
|                                                                                                |  |                                 |           |   |      |   |         |  

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



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Foundation Coal Corporation and Subsidiaries

Statements of Consolidated Cash Flows

(Dollars in thousands)

(Unaudited)



|                                                                                  |  |                                 |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Nine Months Ended September 30, |         
|                                                                                  |  | 2006                            |          |   | 2005 |  
|Operating activities:                                                             |  |                                 |          |   |      |   |          |  
|Net income                                                                        |  | $                               | 54,902   |   |      | $ | 61,899   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |          |   |      |   |          |  
|Accretion on asset retirement obligations                                         |  |                                 | 6,327    |   |      |   | 6,203    |  
|Depreciation, depletion and amortization                                          |  |                                 | 125,905  |   |      |   | 93,642   |  
|Amortization or write-off of deferred financing costs                             |  |                                 | 11,091   |   |      |   | 3,022    |  
|Gain on sale of assets                                                            |  |                                 | (899     | ) |      |   |         |  
|Non-cash stock compensation                                                       |  |                                 | 2,045    |   |      |   | 1,056    |  
|Non-cash mark-to-market adjustment for interest rate swaps                        |  |                                 | 112      |   |      |   |         |  
|Deferred income taxes                                                             |  |                                 | (17,815  | ) |      |   | 24,815   |  
|Other                                                                             |  |                                 | (250     | ) |      |   |         |  
|Changes in operating assets and liabilities:                                      |  |                                 |          |   |      |   |          |  
|Trade accounts receivable                                                         |  |                                 | (7,349   | ) |      |   | (45,849  | )
|Inventories, net                                                                  |  |                                 | 1,988    |   |      |   | (38,772  | )
|Prepaid expenses                                                                  |  |                                 | (10,428  | ) |      |   | (1,135   | )
|Other current assets                                                              |  |                                 | (5,533   | ) |      |   | (6,074   | )
|Other noncurrent assets                                                           |  |                                 | 508      |   |      |   | 3,373    |  
|Asset retirement obligations                                                      |  |                                 | (2,020   | ) |      |   | (1,962   | )
|Trade accounts payable                                                            |  |                                 | 4,707    |   |      |   | 1,342    |  
|Accrued expenses and other current liabilities                                    |  |                                 | (18,799  | ) |      |   | (4,890   | )
|Noncurrent liabilities                                                            |  |                                 | 13,510   |   |      |   | 6,137    |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                 | 158,002  |   |      |   | 102,807  |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Investing activities:                                                             |  |                                 |          |   |      |   |          |  
|Purchases of property, plant and equipment                                        |  |                                 | (119,713 | ) |      |   | (102,203 | )
|Purchases of mining assets                                                        |  |                                 | (14,630  | ) |      |   |         |  
|Proceeds from disposition of property, plant and equipment                        |  |                                 | 1,704    |   |      |   | 5,355    |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                 | (132,639 | ) |      |   | (96,848  | )
|                                                                                  |  |                                 |          |   |      |   |          |  
|Financing activities:                                                             |  |                                 |          |   |      |   |          |  
|Payment of cash dividends to Public parent for repurchase of common stock         |  |                                 | (11,889  | ) |      |   |         |  
|Payment of cash dividends to Public parent for payment of ordinary dividends      |  |                                 | (6,817   | ) |      |   |         |  
|Proceeds from revolving credit facility                                           |  |                                 |         |   |      |   | 76,000   |  
|Repayment of revolving credit facility                                            |  |                                 |         |   |      |   | (76,000  | )
|Capital contribution from Public parent                                           |  |                                 | 7,479    |   |      |   |         |  
|Excess tax benefit from stock-based awards                                        |  |                                 | 10,672   |   |      |   |         |  
|Interest rate swap termination                                                    |  |                                 | 2,259    |   |      |   |         |  
|Payment of deferred financing costs                                               |  |                                 | (4,443   | ) |      |   |         |  
|Repayment of long-term debt                                                       |  |                                 |         |   |      |   | (20,000  | )
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash used in financing activities                                             |  |                                 | (2,739   | ) |      |   | (20,000  | )
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |  |                                 | 22,624   |   |      |   | (14,041  | )
|Cash and cash equivalents at beginning of period                                  |  |                                 | 22,424   |   |      |   | 25,043   |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                               | 45,048   |   |      | $ | 11,002   |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Supplemental cash flow information:                                               |  |                                 |          |   |      |   |          |  
|Cash paid for interest                                                            |  | $                               | 42,142   |   |      | $ | 41,427   |  
|Cash paid for income taxes                                                        |  | $                               | 17,210   |   |      | $ | 32,182   |  

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



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Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands)



|(1) | Basis of Presentation of Consolidated Financial Statements
|--- | ----------------------------------------------------------

The accompanying interim consolidated financial statements of Foundation Coal Corporation and Subsidiaries (the Company) are unaudited and prepared in accordance with the rules and regulations of the Securities and Exchange
Commission for Form 10-Q. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the
United States of America as long as the statements are not misleading. In the opinion of management, these interim consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the results of the
periods presented. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on Form 10-K for the twelve months ended December 31,
2005, filed March 17, 2006 and the related Form 10K/A filed October 6, 2006.

The Companys consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Companys consolidated financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management
estimates and assumptions relate to coal reserves that are the basis for future cash flow estimates and units-of-production depreciation, depletion and amortization calculations; environmental and reclamation obligations; asset impairments;
post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred income taxes; reserves for contingencies and litigation; and the fair value and accounting treatment of certain financial instruments.
Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates. In addition, different assumptions or
conditions could reasonably be expected to yield different results. The operating results for the three and nine months ended September 30, 2006 may not necessarily be indicative of the results to be expected in the fourth quarter or for the
twelve months ended December 31, 2006.

Reclassifications

Certain amounts in the prior period have been reclassified to conform to the 2006 presentation. The Company reclassified the balance sheet amount for prepaid major repairs from the historical presentation in
Other noncurrent assets to Plant, equipment and mine development costs, net. The Company reclassified $9,300 of cash inflows from the three months ended March 31, 2006 from financing activities to operating activities in the
unaudited Statements of Consolidated Cash Flows for the nine months ended September 30, 2006. This amount related to the settlement of certain intercompany balances with the Companys Public parent in the three months ended March 31, 2006. The
Company reclassified $22,447 of the balance sheet amount included in Other current assets at December 31, 2005 to Prepaid expenses.



|(2) | Recent Accounting Pronouncements
|--- | --------------------------------

On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which replaces SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on fair value of the share-based payment at the grant date. SFAS No. 123(R) generally
requires companies to measure the cost of employee services received in exchange for an award of equity instruments (such as stock options and restricted stock) based on the grant-date fair value of the award and to recognize that cost over the
period during which the employee is required to provide service (usually the vesting period of the award). SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash
flow, rather than as an operating cash flow as previously required. See Note 14 for the impact of the adoption of SFAS No. 123(R) on the consolidated financial statements and additional disclosures.



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Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

The Company adopted Emerging Issues Task Force (EITF) Issue
No. 04-6, Accounting for Stripping Costs Incurred during Production in the Mining Industry (EITF Issue 04-6), on January 1, 2006. EITF Issue 04-6 addresses the accounting for stripping costs incurred during the
production phase of a mine, concluding that these costs are considered variable production costs and under a full absorption costing system are considered a component of inventory to be recognized in cost of coal sales in the same period as the
revenue from the sale of the inventory. Capitalization of post-production stripping costs is appropriate only to the extent inventory exists at the end of a reporting period. The guidance requires application through recognition of a cumulative
effect adjustment to opening retained earnings in the period of adoption, with no charge to current earnings for prior periods. Accordingly, prior period results have not been restated. At December 31, 2005, stripping costs associated with coal
that had not been extracted were $60,406 and were classified on the Consolidated Balance Sheets as a component of work-in-process inventory referred to as deferred overburden. The effect on the consolidated financial statements upon adoption of EITF
Issue 04-6 resulted in a cumulative effect adjustment which reduced opening retained earnings, as of January 1, 2006, by $39,264, net of tax of $21,142, thereby removing the $60,406 current asset previously classified on the Consolidated
Balance Sheets as a component of work-in-process (deferred overburden) inventory. See Note 5.

In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in a companys financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS No. 109). FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt this Interpretation on January 1, 2007. The Company is currently evaluating this Interpretation and has not
determined its impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS No. 157). This statement defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America, and expands
disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company expects to adopt SFAS
No. 157 on January 1, 2008. The Company has not determined the impact of SFAS No. 157 on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS
No. 158). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position
and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 requires the Company to initially recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. Additionally, for fiscal years ending after December 15, 2008, the Company is required to measure plan assets and benefit obligations as of
the date of the Companys fiscal year-end statement of financial position rather than at an interim period. The Company expects to adopt SFAS No. 158 on December 31, 2006. The Company is currently evaluating the impact of SFAS
No. 158 on the consolidated financial statements.



|(3) | Significant Property Transaction
|--- | --------------------------------

In the third
quarter of 2006, Pioneer Fuel Corporation, an indirect wholly owned subsidiary of the Company, purchased mining assets from Appalachian Fuels, LLC for $15,400. The purchased assets consisted of approximately 7.3 million tons of reserves, land
and mining equipment that are recorded in Owned and leased mineral rights, net, Owned surface lands and Plant, equipment and mine development costs, net, respectively, in the Consolidated Balance Sheets. The
acquired reserves are located adjacent to and will be integrated and jointly managed with the existing Pax surface operations. In accordance with terms set forth in the asset purchase agreement, $1,000 of the purchase price was withheld for
contingencies, but will be remitted to Appalachian Fuels eighteen months after the acquisition date if no contingencies materialize. The Company also recorded $1,243 for the estimated asset retirement obligations associated with the acquired assets.



8



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

In a separate transaction, coal stockpiles containing an estimated 8,300
tons were also acquired from Appalachian Fuels, LLC for $232 that is recorded in Inventories, net in the Consolidated Balance Sheets.



|(4) | Bank Debt Refinancing
|--- | ---------------------

Effective July 7, 2006,
the Company completed an $835,000 amended and restated Senior Secured Credit Facility agreement (the new facility) consisting of a five-year $335,000 Term Loan A and a five-year $500,000 revolving credit facility. The new facility, which
expires in July 2011, bears interest at an applicable margin, plus the lenders base rate or LIBOR at the Companys option, and requires the Company to pay a commitment fee to the lenders for the unutilized portion of the commitment under
the revolving credit facility based on a quarterly leverage ratio calculation. The revolving credit facility provides for up to $500,000 for borrowings on same-day notice, referred to as swingline loans, LIBOR loans or letters of credit up to a
maximum of the unutilized portion of the revolver. Costs of $4,443 incurred in connection with the issuance of the new facility were capitalized and are being amortized over the term of the related indebtedness of five years, using the effective
interest method. As of September 30, 2006, the Company had $327,176 of available borrowings under its revolving credit facility, after giving effect to $172,824 of letters of credit outstanding and had $335,000 outstanding borrowings under the
Term Loan A component of the new facility. The new facility replaces the existing Senior Secured Credit Facility (the original facility) and provides more favorable pricing and financial flexibility then the original facility. The
$500,000 revolving credit facility will be used for general corporate purposes including working capital, capital expenditures and letters of credit.

In the third quarter of 2006, the Company wrote-off $9,209 of non-cash unamortized deferred financing costs associated with the original Senior Secured Credit Facility which is included in Interest expense
in the Statements of Consolidated Operations and Comprehensive Income.



|(5) | Inventories
|--- | -----------

Inventories consisted of the
following:



|                                                     |  |                   |        |   |                  |   |         |  
|---------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------- | -
|                                                     |  | September 30,2006 |        |   | December 31,2005 |  
|                                                     |  | (Unaudited)       |        |   |                  |  
|Saleable coal                                        |  | $                 | 13,688 |   |                  | $ | 18,820  |  
|Raw coal                                             |  |                   | 1,728  |   |                  |   | 2,207   |  
|Work-in-process (deferred overburden)                |  |                   |       |   |                  |   | 60,406  |  
|Materials and supplies                               |  |                   | 26,916 |   |                  |   | 23,501  |  
|                                                     |  |                   |        |   |                  |   |         |  
|                                                     |  |                   | 42,332 |   |                  |   | 104,934 |  
|Less materials and supplies reserve for obsolescence |  |                   | (7,974 | ) |                  |   | (8,038  | )
|                                                     |  |                   |        |   |                  |   |         |  
|                                                     |  | $                 | 34,358 |   |                  | $ | 96,896  |  
|                                                     |  |                   |        |   |                  |   |         |  

Saleable coal represents coal stockpiles ready for shipment to a customer. Raw coal represents
coal that requires further processing prior to shipment. At December 31, 2005, work-in-process consisted of costs incurred to remove overburden above an unmined coal seam as part of the surface mining process and generally included labor,
supplies, operating overhead and equipment costs charged to operations as coal from the seam was sold.



9



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)



|(6) | Prepaid Expenses
|--- | ----------------

Prepaid expenses consisted of the
following:



|                                |  |                   |        |                  |   |       
|------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                |  | September 30,2006 |        | December 31,2005
|                                |  | (Unaudited)       |        |                 
|Prepaid royalties               |  | $                 | 1,379  |                  | $ | 2,122 
|Prepaid longwall move expense   |  |                   | 8,636  |                  |   | 5,525 
|Prepaid SO2 emission allowances |  |                   | 2,051  |                  |   | 1,204 
|Prepaid taxes                   |  |                   | 4,512  |                  |   | 2,573 
|Prepaid insurance               |  |                   | 15,337 |                  |   | 10,327
|Other                           |  |                   | 960    |                  |   | 696   
|                                |  |                   |        |                  |   |       
|                                |  | $                 | 32,875 |                  | $ | 22,447
|                                |  |                   |        |                  |   |       



|(7) | Plant, Equipment, Mine Development Costs and Owned and Leased Mineral Rights
|--- | ----------------------------------------------------------------------------

Plant, equipment, mine development costs and owned and leased mineral rights consisted of the following:



|                                                |  |                   |           |   |                  |   |           |  
|----------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                |  | September 30,2006 |           |   | December 31,2005 |  
|                                                |  | (Unaudited)       |           |   |                  |  
|Owned surface and coal lands                    |  |                   |           |   |                  |   |           |  
|Owned surface lands                             |  | $                 | 29,390    |   |                  | $ | 27,510    |  
|                                                |  |                   |           |   |                  |   |           |  
|Owned and leased mineral rights                 |  | $                 | 1,258,857 |   |                  | $ | 1,245,135 |  
|Less accumulated depletion                      |  |                   | (231,109  | ) |                  |   | (173,539  | )
|                                                |  |                   |           |   |                  |   |           |  
|                                                |  | $                 | 1,027,748 |   |                  | $ | 1,071,596 |  
|                                                |  |                   |           |   |                  |   |           |  
|Plant, equipment and mine development costs     |  |                   |           |   |                  |   |           |  
|Plant, equipment and asset retirement costs     |  | $                 | 786,557   |   |                  | $ | 678,617   |  
|Mine development costs                          |  |                   | 28,335    |   |                  |   | 15,721    |  
|Natural gas well development costs              |  |                   | 315       |   |                  |   | 315       |  
|Coalbed methane equipment and development costs |  |                   | 5,072     |   |                  |   | 4,024     |  
|                                                |  |                   |           |   |                  |   |           |  
|                                                |  |                   | 820,279   |   |                  |   | 698,677   |  
|                                                |  |                   |           |   |                  |   |           |  
|Less accumulated depreciation and amortization: |  |                   |           |   |                  |   |           |  
|Plant, equipment and asset retirement costs     |  |                   | (206,484  | ) |                  |   | (129,654  | )
|Mine development costs                          |  |                   | (2,815    | ) |                  |   | (1,187    | )
|Natural gas well development costs              |  |                   | (136      | ) |                  |   | (89       | )
|Coalbed methane equipment and development costs |  |                   | (828      | ) |                  |   | (685      | )
|                                                |  |                   |           |   |                  |   |           |  
|                                                |  |                   | (210,263  | ) |                  |   | (131,615  | )
|                                                |  |                   |           |   |                  |   |           |  
|                                                |  | $                 | 610,016   |   |                  | $ | 567,062   |  
|                                                |  |                   |           |   |                  |   |           |  



|(8) | Other Noncurrent Assets
|--- | -----------------------

Other noncurrent assets
consisted of the following:



|                                          |  |                   |        |                  |   |       
|----------------------------------------- |  | ----------------- | ------ | ---------------- | - | ------
|                                          |  | September 30,2006 |        | December 31,2005
|                                          |  | (Unaudited)       |        |                 
|Receivables from asset dispositions       |  | $                 | 2,687  |                  | $ | 3,346 
|Unamortized deferred financing costs, net |  |                   | 12,707 |                  |   | 19,355
|Advance mining royalties                  |  |                   | 2,974  |                  |   | 2,828 
|Fair value of interest rate swaps         |  |                   |       |                  |   | 2,143 
|Other                                     |  |                   | 1,477  |                  |   | 1,511 
|                                          |  |                   |        |                  |   |       
|                                          |  | $                 | 19,845 |                  | $ | 29,183
|                                          |  |                   |        |                  |   |       



10



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)



|(9) | Accrued Expenses and Other Current Liabilities
|--- | ----------------------------------------------

Accrued expenses and other current liabilities consisted of the following:



|                                           |  |                   |         |                  |   |        
|------------------------------------------ |  | ----------------- | ------- | ---------------- | - | -------
|                                           |  | September 30,2006 |         | December 31,2005
|                                           |  | (Unaudited)       |         |                 
|Accrued federal and state income taxes     |  | $                 | 3,290   |                  | $ | 4,979  
|Accrued sales contract settlements         |  |                   |        |                  |   | 150    
|Wages and employee benefits                |  |                   | 32,415  |                  |   | 33,998 
|Pension benefits                           |  |                   | 14,700  |                  |   | 15,439 
|Postretirement benefits other than pension |  |                   | 23,464  |                  |   | 23,464 
|Interest                                   |  |                   | 3,625   |                  |   | 9,063  
|Royalties                                  |  |                   | 7,005   |                  |   | 8,823  
|Taxes other than income taxes              |  |                   | 30,755  |                  |   | 31,866 
|Asset retirement obligations               |  |                   | 2,406   |                  |   | 4,376  
|Workers compensation                      |  |                   | 8,259   |                  |   | 8,297  
|Accrued capital expenditures               |  |                   | 10,306  |                  |   | 9,758  
|Other                                      |  |                   | 26,198  |                  |   | 31,670 
|                                           |  |                   |         |                  |   |        
|                                           |  | $                 | 162,423 |                  | $ | 181,883
|                                           |  |                   |         |                  |   |        



|(10) | Other Noncurrent Liabilities
|---- | ----------------------------

Other noncurrent
liabilities consisted of the following:



|                                       |  |                   |         |                  |   |        
|-------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                       |  | September 30,2006 |         | December 31,2005
|                                       |  | (Unaudited)       |         |                 
|Postemployment benefits                |  | $                 | 5,005   |                  | $ | 5,028  
|Pension benefits                       |  |                   | 28,488  |                  |   | 34,529 
|Workers compensation                  |  |                   | 22,405  |                  |   | 20,525 
|Minimum royalty obligations            |  |                   | 81      |                  |   | 83     
|Black lung reserves                    |  |                   | 7,438   |                  |   | 6,206  
|Contract settlement accrual            |  |                   | 14,836  |                  |   | 20,044 
|Asset retirement obligations           |  |                   | 120,098 |                  |   | 111,778
|Deferred production tax                |  |                   | 14,531  |                  |   | 7,254  
|Deferred credits and other             |  |                   | 2,450   |                  |   | 1,847  
|Deferred equipment purchase commitment |  |                   | 19,666  |                  |   | 18,119 
|                                       |  |                   |         |                  |   |        
|                                       |  | $                 | 234,998 |                  | $ | 225,413
|                                       |  |                   |         |                  |   |        

During 2005, the Companys Northern Appalachia business unit took delivery of one hundred new
longwall shields to remedy a warranty issue associated with shields currently used in its underground mining operations. The Company entered into a purchase commitment for the shields in the amount of $21,685 and in accordance with the payment
terms, periodic progress payments to the manufacturer are not scheduled to start until the fourth quarter of 2007, with scheduled completion within one year. The Company recorded a deferred equipment purchase commitment liability representing the
present value of the future payments due in accordance with the terms of the purchase commitment. Interest expense is imputed and recognized in a manner consistent with the established payment terms, over which, the liability will be increased to
the full value of $21,685.



11



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)



|(11) | Accumulated Other Comprehensive Loss
|---- | ------------------------------------

Accumulated
other comprehensive loss consisted of the following:



|                                                                                      |  |                   |        |   |                  |   |        |  
|------------------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                      |  | September 30,2006 |        |   | December 31,2005 |  
|                                                                                      |  | (Unaudited)       |        |   |                  |  
|Changes in fair value of interest rate swaps, net of tax of $648 at December 31, 2005 |  | $                 |       |   |                  | $ | 964    |  
|Unamortized gain on interest rate swaps                                               |  |                   | 1,492  |   |                  |   |       |  
|Minimum pension liability adjustments, net of tax of $933                             |  |                   | (1,741 | ) |                  |   | (1,741 | )
|                                                                                      |  |                   |        |   |                  |   |        |  
|                                                                                      |  | $                 | (249   | ) |                  | $ | (777   | )
|                                                                                      |  |                   |        |   |                  |   |        |  



|(12) | Pension and Postretirement Benefit Plans
|---- | ----------------------------------------

Components of Net
Periodic Pension Costs

Net periodic pension costs included the following:



|                               |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                               |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                               |  | 2006                             |        |   | 2005                            |   |        | 2006 |  |   | 2005   |  
|                               |  | (Unaudited)                      |        |   | (Unaudited)                     |  
|Service cost                   |  | $                                | 1,544  |   |                                 | $ | 1,130  |      |  | $ | 4,635  |   |  | $ | 4,018  |  
|Interest cost                  |  |                                  | 2,766  |   |                                 |   | 2,309  |      |  |   | 8,299  |   |  |   | 8,212  |  
|Expected return on plan assets |  |                                  | (2,641 | ) |                                 |   | (2,216 | )    |  |   | (7,925 | ) |  |   | (7,883 | )
|Amortization of:               |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Prior service cost             |  |                                  | 25     |   |                                 |   |       |      |  |   | 75     |   |  |   |       |  
|Actuarial losses               |  |                                  | 100    |   |                                 |   | 80     |      |  |   | 299    |   |  |   | 287    |  
|                               |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net expense                    |  | $                                | 1,794  |   |                                 | $ | 1,303  |      |  | $ | 5,383  |   |  | $ | 4,634  |  
|                               |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  

Components of Net Periodic Postretirement Benefit Costs

Net periodic postretirement medical and life insurance costs are as follows:



|                                 |  |                                  |       |                                 |   |       |  |      |        |  |   |       
|-------------------------------- |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ------ |  | - | ------
|                                 |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                 |  | 2006                             |       | 2005                            |   | 2006  |  | 2005
|                                 |  | (Unaudited)                      |       | (Unaudited)                    
|Service cost                     |  | $                                | 2,274 |                                 | $ | 1,630 |  | $    | 6,824  |  | $ | 5,586 
|Interest cost                    |  |                                  | 7,525 |                                 |   | 6,730 |  |      | 22,574 |  |   | 23,061
|Amortization of actuarial losses |  |                                  | 25    |                                 |   |      |  |      | 75     |  |   |      
|                                 |  |                                  |       |                                 |   |       |  |      |        |  |   |       
|Net expense                      |  | $                                | 9,824 |                                 | $ | 8,360 |  | $    | 29,473 |  | $ | 28,647
|                                 |  |                                  |       |                                 |   |       |  |      |        |  |   |       

The Companys postretirement medical and life insurance plans are unfunded.



12



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)



|(13) | Pneumoconiosis (Black Lung) Expense and Trust
|---- | ---------------------------------------------

The
components of net periodic benefit costs are as follows:



|                                 |  |                                  |      |   |                                 |   |      |      |  |   |       |   |  |   |      |  
|-------------------------------- |  | -------------------------------- | ---- | - | ------------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                 |  | Three Months Ended September 30, |      |   | Nine Months Ended September 30, |  
|                                 |  | 2006                             |      |   | 2005                            |   |      | 2006 |  |   | 2005  |  
|                                 |  | (Unaudited)                      |      |   | (Unaudited)                     |  
|Service cost                     |  | $                                | 176  |   |                                 | $ | 163  |      |  | $ | 529   |   |  | $ | 331  |  
|Interest cost                    |  |                                  | 329  |   |                                 |   | 409  |      |  |   | 986   |   |  |   | 831  |  
|Expected return on plan assets   |  |                                  | (144 | ) |                                 |   | (281 | )    |  |   | (431  | ) |  |   | (571 | )
|Amortization of actuarial losses |  |                                  | 50   |   |                                 |   | 116  |      |  |   | 149   |   |  |   | 236  |  
|                                 |  |                                  |      |   |                                 |   |      |      |  |   |       |   |  |   |      |  
|Net expense                      |  | $                                | 411  |   |                                 | $ | 407  |      |  | $ | 1,233 |   |  | $ | 827  |  
|                                 |  |                                  |      |   |                                 |   |      |      |  |   |       |   |  |   |      |  



|(14) | Stock-Based Compensation
|---- | ------------------------

On July 30, 2004,
Foundation Coal Holdings, Inc.s Board of Directors adopted the Foundation Coal Holdings, Inc. 2004 Stock Incentive Plan (the Plan), which is designed to assist the Company in recruiting and retaining key employees, directors
and consultants. The Plan permits FCL to grant key employees, directors and consultants of the Company nonqualified stock options (options), stock appreciation rights, restricted stock or other stock-based awards. The Plan is currently
authorized for the issuance of awards for up to 5,978,483 shares of FCLs common stock. At September 30, 2006, 2,207,954 shares of FCL common stock were available for grant under the Plan.

Prior to January 1, 2006, the Company accounted for its stock-based compensation plans under the recognition and measurement provisions of APB
No. 25, and related interpretations, as permitted by SFAS No. 123. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), using the modified prospective transition method. Under
the modified prospective transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all stock-based awards granted prior to but not yet vested as of January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS No. 123; and (b) compensation cost for all stock-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). For all grants, the amount of compensation expense to be recognized is adjusted for an estimated forfeiture rate which is based on historical data. Results for prior periods have not been restated. There were no
modifications made to outstanding options prior to the adoption of the standard. There were no changes made by FCL to the terms, quantity or type of instruments used for stock-based compensation as a result of the adoption of the new standard.

The Company has two types of stock-based awards: restricted stock units and options. Total compensation expense related to the stock-based
awards recognized in Selling, general and administrative expense for the three months ended September 30, 2006 was $688, consisting of $378 and $310 for restricted stock units and options, respectively. Total compensation related to
the stock-based awards recognized in Selling, general and administrative expense for the nine months ended September 30, 2006 was $2,045, consisting of $1,007 and $1,038 for restricted stock units and options, respectively. For the
three months and nine months ended September 30, 2005, compensation expense of approximately $655 and $1,025, respectively, was recognized as a component of Selling, general and administrative expense for restricted stock units. No
expense related to options was charged against income in the prior periods as the Company elected to apply the provisions of APB No. 25 to those periods as permitted by SFAS No. 123.



13



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Pursuant to the adoption of this new accounting standard, the table below
provides a summary of the effect of applying the provisions of SFAS No. 123(R) on the Companys consolidated financial statements related to options for the three and nine months ended September 30, 2006.



|                                 |  |                                       |      |   |                                      |   |        |  
|-------------------------------- |  | ------------------------------------- | ---- | - | ------------------------------------ | - | ------ | -
|                                 |  | Three Months Ended September 30, 2006 |      |   | Nine Months Ended September 30, 2006 |  
|                                 |  | (Unaudited)                           |     
|Income before income tax expense |  | $                                     | (310 | ) |                                      | $ | (1,038 | )
|Income tax expense               |  |                                       | 309  |   |                                      |   | 141    |  
|                                 |  |                                       |      |   |                                      |   |        |  
|Net income                       |  | $                                     | (1   | ) |                                      | $ | (897   | )
|                                 |  |                                       |      |   |                                      |   |        |  

SFAS No. 123(R) also requires that the excess tax benefit from the exercise of options be
reflected in the Statements of Consolidated Cash Flows as a cash inflow from financing activities. Prior to the adoption of SFAS No. 123(R), this tax benefit would have been reflected as a cash inflow from operations. The excess tax benefit
from the exercise of options was $10,672 and $0 during the nine months ended September 30, 2006 and 2005, respectively.

SFAS
No. 123(R) also requires that forfeitures be estimated and included in the calculation of compensation cost. Upon adoption of SFAS No. 123(R), the Company quantified the effect related to the estimation of forfeitures for stock-based
awards that were not vested at December 31, 2005. The Companys estimate was based on previous forfeiture activity combined with the Companys reasonable expectations of forfeitures. The gross adjustment for forfeitures was not
material to the consolidated financial statements.

Below is a summary of the key terms and methods of valuation for the Companys
stock-based compensation awards granted by FCL to employees of the Company:

Restricted Stock Units

At December 31, 2005, 180,948 restricted stock performance units (performance units) were outstanding. The units are earned ratably each
December 31 over the vesting period upon achievement of certain annual performance targets. The earned units vest subject to continued employment with the Company through the vesting date, at which time shares of common stock will be
distributed. Also, at December 31, 2005, 15,000 restricted stock time units (time units) were outstanding. These time units vest subject to continued employment with the Company through the vesting date at which time shares of
common stock of FCL will be distributed. The weighted-average grant-date fair value of restricted stock units granted in 2005 was $27.75 per unit.

During the nine months ended September 30, 2006, the Company granted 124,248 performance units and 35,840 time units to certain key employees. These performance units are earned each December 31, beginning December 31, 2006
and ending December 31, 2008, contingent upon the achievement of certain annual performance targets. The earned units vest subject to continued employment with the Company through the vesting dates, which occur in the first quarter of 2009, at
which time shares of common stock of FCL will be distributed. The time units vest over various periods through June 30, 2009. The weighted-average grant-date fair value of restricted stock units granted in the three and nine months ended
September 30, 2006 was $45.46 and $42.21 per unit, respectively.



14



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

The following is a summary of the Companys restricted stock unit
activity during the nine months ended September 30, 2006:



|                                                         |  |                 |   |  |                                         |      
|-------------------------------------------------------- |  | --------------- | - |  | --------------------------------------- | -----
|                                                         |  | Numberof Shares |   |  | Weighted-AverageGrant-DateFair Value(1)
|Restricted stock units outstanding at December 31, 2005  |  | 195,948         |   |  | $                                       | 27.75
|Granted                                                  |  | 160,088         |   |  | $                                       | 42.21
|Vested                                                   |  |                |   |  |                                         | N/A  
|Forfeited                                                |  | (8,850          | ) |  | $                                       | 27.86
|                                                         |  |                 |   |  |                                         |      
|Restricted stock units outstanding at September 30, 2006 |  | 347,186         |   |  | $                                       | 34.46
|                                                         |  |                 |   |  |                                         |      

---

|(1) | The weighted-average grant-date fair value reflects the value of restricted stock units for
which the measurement date has occurred.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

Performance units for which the annual performance targets have been set at the
date of grant are valued at the market price on the date of grant. The measurement date for performance units for which annual performance targets have not been set at the date of grant is the date on which the performance target is approved. At
September 30, 2006, the measurement date had not occurred for 108,978 performance units. Compensation expense is recognized ratably from the measurement date of each tranche through the vesting date at which time the number of shares of common
stock of FCL which have been earned will be distributed.

Unrecognized compensation expense for time and performance units, based on the
current expectation of targets to be achieved for restricted stock units expected to be earned, is $3,526. These costs are expected to be recognized over a weighted-average period of 1.6 years. If the maximum target for performance units that the
Company believes could be earned is achieved, total unrecognized compensation expense would be $3,976.

Nonqualified Stock Options

On August 10, 2004, options to acquire 3,536,432 shares of common stock of FCL were issued to eight members of senior management of the Company. No
options were granted during 2006 or 2005. Of the total options granted, there were 982,343 options granted at an exercise price of $4.87 per share, which are subject to continued employment, vest and become exercisable on each December 31
beginning December 31, 2004 and ending on December 31, 2008. Additionally, there were 2,554,089 options granted at an exercise price of $8.53 per share, which are subject to continued employment, vest and become exercisable on the eighth
anniversary of the date of grant and provide for partial accelerated vesting each calendar year through December 31, 2008 upon achievement of certain annual performance targets. During 2005 and 2004, respectively, 766,230 and 255,409 of the
options granted at the $8.53 per-share exercise price vested on an accelerated basis as a result of achieving certain performance targets.

The fair market value of option grants was estimated on the date of the grant using the Black-Scholes option-pricing model using the following assumptions:



|                         |  |       |  
|------------------------ |  | ----- | -
|Risk-free interest rates |  | 3.94  | %
|Dividend yield           |  | 0.70  | %
|Expected volatility      |  | 55.00 | %
|Expected life in years   |  | 8.00  |  

As FCL lacked a sufficient trading history at the date the fair value of options was estimated in
2004, FCLs volatility was based on the volatility of other companies in the mining industry. The weighted-average grant-date fair value of the options was $2.45.



15



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

The following is a summary of all option activity during the nine months
ended September 30, 2006:



|                                          |  |                  |   |  |                               |      |                         |   |       
|----------------------------------------- |  | ---------------- | - |  | ----------------------------- | ---- | ----------------------- | - | ------
|                                          |  | Number of Shares |   |  | Weighted-AverageExercisePrice |      | AggregateIntrinsicValue
|Options outstanding at December 31, 2005  |  | 3,491,244        |   |  | $                             | 7.52 |                         |   |       
|Granted                                   |  |                 |   |  |                               | N/A  |                         |   |       
|Exercised                                 |  | (1,044,908       | ) |  | $                             | 7.16 |                         |   |       
|Forfeited                                 |  | (144,587         | ) |  | $                             | 7.60 |                         |   |       
|                                          |  |                  |   |  |                               |      |                         |   |       
|Options outstanding at September 30, 2006 |  | 2,301,749        |   |  | $                             | 7.68 |                         | $ | 77,170
|                                          |  |                  |   |  |                               |      |                         |   |       
|Exercisable at September 30, 2006         |  | 342,902          |   |  | $                             | 8.53 |                         | $ | 11,205
|Expected to vest as of September 30, 2006 |  | 1,369,675        |   |  | $                             | 7.28 |                         | $ | 46,468

The total intrinsic value, the difference between the exercise price and the market price on the
date of exercise, of all options exercised during the nine months ended September 30, 2006 was $35,579. No options were exercised during the nine months ended September 30, 2005.

A summary of the Companys options outstanding at September 30, 2006 follows:



|               |  |                     |  |                                      |  |                                |  |         |  |                               
|-------------- |  | ------------------- |  | ------------------------------------ |  | ------------------------------ |  | ------- |  | ------------------------------
|               |  | Options Outstanding |  | Options Exercisable                 
|Exercise Price |  | Shares              |  | Weighted-averageremaining life (yrs) |  | Weighted-averageexercise
price |  | Shares  |  | Weighted-averageexercise
price
|$4.87          |  | 534,147             |  | 7.9                                  |  | $4.87                          |  |        |  | $4.87                         
|$8.53          |  | 1,767,602           |  | 7.9                                  |  | $8.53                          |  | 342,902 |  | $8.53                         

Total unrecognized compensation expense from options was $1,944 as of September 30, 2006,
which is expected to be recognized over a weighted-average period of 2.2 years.

For the nine months ended September 30, 2005, the
Company applied the intrinsic value based method of accounting for options prescribed by APB No. 25. Accordingly, no compensation expense was recognized for these options since all options granted have an exercise price equal to the market
value of the underlying stock on the grant date. If compensation expense had been recognized based on the estimate of the fair value of each option granted in accordance with the provisions of SFAS No. 123 as amended by SFAS No. 148, the
Companys net income would have been reduced to the following pro forma amounts as follows:



|                                                                        |  |                                      |        |   |                                     |   |        |  
|----------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ----------------------------------- | - | ------ | -
|                                                                        |  | Three MonthsEnded September 30, 2005 |        |   | Nine MonthsEnded September 30, 2005 |  
|                                                                        |  | (in thousands)                       |       
|Net income as reported                                                  |  | $                                    | 22,474 |   |                                     | $ | 61,899 |  
|Add: stock-based employee compensation expense recorded, net of tax     |  |                                      | 401    |   |                                     |   | 636    |  
|Deduct: pro forma stock-based employee compensation expense, net of tax |  |                                      | (592   | ) |                                     |   | (1,195 | )
|                                                                        |  |                                      |        |   |                                     |   |        |  
|Pro forma net income                                                    |  | $                                    | 22,283 |   |                                     | $ | 61,340 |  
|                                                                        |  |                                      |        |   |                                     |   |        |  



16



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Pro forma compensation expense recognized under SFAS No. 123 does not
consider potential forfeitures. This computational difference creates incomparability between the pro forma stock compensation presented above and the stock compensation recognized in 2006. However, the impact of estimated forfeitures on such
compensation expense is immaterial.



|(15) | Derivative Instruments and Hedging Activities
|---- | ---------------------------------------------

On
September 30, 2004, the Company entered into pay-fixed, receive-variable interest rate swap agreements on a notional amount of $85,000. The term of these swaps was for three years. Under these swaps, the Company received a variable rate of
three month US dollar LIBOR and paid a fixed rate of 3.26%. Settlement of interest payments occurred quarterly. The Company was required to enter into these swaps in order to maintain at least 50% of its outstanding debt at a fixed rate as required
by the Senior Credit Facility. These swap agreements essentially converted $85,000 of the Companys variable rate borrowings under the Senior Credit Facility to fixed rate borrowings for a three year period beginning September 30, 2004.
The Company designated these interest rate swaps at inception as cash flow hedges of the variable interest payments due on $85,000 of its variable rate debt through September 2007 under SFAS No. 133, Accounting for Derivative Financial
Instruments and Hedging Activities (SFAS No. 133). At December 31, 2005, the fair value of these swaps was $2,143 which was recorded in Other noncurrent assets and the offsetting unrealized gain of $964, net of
tax expense, was recorded in Accumulated other comprehensive loss. In connection with the closing of the $835,000 amended and restated Senior Secured Credit Facility agreement on July 7, 2006, the Company terminated the interest
rate swaps. On the date the Company made the decision to terminate the interest rate swaps, the interest rate swaps no longer qualified for cash flow hedge accounting treatment and accordingly, any change in the market value of the interest rate
swaps affects net income. On July 11, 2006, the Company monetized the $2,371 derivative asset included in Other noncurrent assets on the Consolidated Balance Sheets at June 30, 2006 and recognized a $112 mark-to-market loss on
the swaps. The $1,841 unrealized gain from the change in the market value of the interest rate swaps recorded in Accumulated other comprehensive loss will be amortized into income on a prorated basis over the remaining term of the
original interest rate swap agreement through September 28, 2007, in accordance with SFAS No. 133 and related amendments. During the three months ended September 30, 2006, the Company amortized $349, which was recorded as an offset
against interest expense.



|(16) | Asset Retirement Obligations
|---- | ----------------------------

The Companys
mining activities are subject to various federal and state laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its
operations so as to protect the public health and environment and believes its operations are in material compliance with all applicable laws and regulations. The Company has made, and expects to make in the future, expenditures to comply with such
laws and regulations, but cannot predict the exact amount of such future expenditures. Estimated future reclamation costs are based principally on legal and regulatory requirements.

The following table is a reconciliation of the Companys asset retirement obligation liability from December 31, 2005 through
September 30, 2006:



|                                                           |  |   |         |  
|---------------------------------------------------------- |  | - | ------- | -
|Asset retirement obligation, December 31, 2005             |  | $ | 116,154 |  
|Accretion expense                                          |  |   | 6,327   |  
|Revisions in estimated cash flows and liabilities incurred |  |   | 2,043   |  
|Payments                                                   |  |   | (2,020  | )
|                                                           |  |   |         |  
|Asset retirement obligation, September 30, 2006            |  | $ | 122,504 |  
|                                                           |  |   |         |  



17



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

The current portions of the asset retirement obligation liabilities of
$2,406 and $4,376 at September 30, 2006 and December 31, 2005, respectively, are included in Accrued expenses and other current liabilities. See Note 9. The noncurrent portion of the Companys asset retirement obligation
liabilities of $120,098 and $111,778 at September 30, 2006 and December 31, 2005, respectively, are included in Other noncurrent liabilities. See Note 10. There were no assets that were legally restricted for purposes of
settling asset retirement obligations at September 30, 2006 or December 31, 2005. At September 30, 2006, regulatory obligations for asset retirements are secured by surety bonds in the amount of $242,848. These surety bonds are
partially collateralized by letters of credit issued by the Company.



|(17) | Stockholder Equity
|---- | ------------------

During the nine months ended
September 30, 2006, the Company paid cash dividends of $6,817 through FC 2 Corp. (the Parent) to FCL for payment of ordinary dividends to common shareholders of FCL. During the three months ended September 30, 2006, the Company
paid cash dividends of $11,889 through the Parent to FCL for the repurchase of common stock in accordance with a stock repurchase program authorized by the Board of Directors of FCL.



|(18) | Segment Information
|---- | -------------------

The Company produces primarily
steam coal from surface and deep mines for sale to utility and industrial customers. The Company operates in the United States with mines in all of the major coal basins. The Company has four reportable business segments: Northern Appalachia,
consisting of two underground mines in southwestern Pennsylvania; Central Appalachia, consisting of seven underground mines and two surface mines in southern West Virginia; and the Powder River Basin, consisting of two surface mines in Wyoming.
Other includes an underground mine in Illinois, centralized sales functions, corporate overhead, business development activities, expenses for closed mines and the elimination of intercompany transactions. The Company evaluates the performance of
its segments based on income from operations.

Operating segment results for the three months ended September 30, 2006 are as follows
(unaudited):



|                                         |  |                  |         |                    |   |         |                   |  |   |         |   |  |              |         |   |  |   |           |  
|---------------------------------------- |  | ---------------- | ------- | ------------------ | - | ------- | ----------------- |  | - | ------- | - |  | ------------ | ------- | - |  | - | --------- | -
|                                         |  | PowderRiverBasin |         | NorthernAppalachia |   |         | CentralAppalachia |  |   | Other   |   |  | Consolidated |        
|Revenues                                 |  | $                | 107,510 |                    | $ | 128,474 |                   |  | $ | 105,685 |   |  | $            | 12,451  |   |  | $ | 354,120   |  
|Income (loss) from operations            |  |                  | 13,244  |                    |   | 22,000  |                   |  |   | 1,750   |   |  |              | (16,566 | ) |  |   | 20,428    |  
|Depreciation, depletion and amortization |  |                  | 10,839  |                    |   | 17,507  |                   |  |   | 14,989  |   |  |              | 1,835   |   |  |   | 45,170    |  
|Amortization of coal supply agreements   |  |                  | 3,912   |                    |   | (1,936  | )                 |  |   | (4,504  | ) |  |              | 219     |   |  |   | (2,309    | )
|Capital expenditures                     |  |                  | 8,681   |                    |   | 15,676  |                   |  |   | 6,794   |   |  |              | 13,180  |   |  |   | 44,331    |  
|Total assets at September 30, 2006       |  | $                | 506,799 |                    | $ | 867,409 |                   |  | $ | 468,831 |   |  | $            | 123,459 |   |  | $ | 1,966,498 |  

Operating segment results for the three months ended September 30, 2005 are as follows
(unaudited):



|                                         |  |                  |         |                    |   |         |                   |  |   |         |   |  |              |         |   |  |   |           |  
|---------------------------------------- |  | ---------------- | ------- | ------------------ | - | ------- | ----------------- |  | - | ------- | - |  | ------------ | ------- | - |  | - | --------- | -
|                                         |  | PowderRiverBasin |         | NorthernAppalachia |   |         | CentralAppalachia |  |   | Other   |   |  | Consolidated |        
|Revenues                                 |  | $                | 85,964  |                    | $ | 120,707 |                   |  | $ | 108,807 |   |  | $            | 25,832  |   |  | $ | 341,310   |  
|Income (loss) from operations            |  |                  | 6,884   |                    |   | 45,818  |                   |  |   | 10,781  |   |  |              | (11,438 | ) |  |   | 52,045    |  
|Depreciation, depletion and amortization |  |                  | 15,837  |                    |   | 20,297  |                   |  |   | 15,209  |   |  |              | 1,788   |   |  |   | 53,131    |  
|Amortization of coal supply agreements   |  |                  | 4,974   |                    |   | (13,337 | )                 |  |   | (10,306 | ) |  |              | (1,798  | ) |  |   | (20,467   | )
|Capital expenditures                     |  |                  | 16,321  |                    |   | 12,050  |                   |  |   | 7,247   |   |  |              | 1,492   |   |  |   | 37,110    |  
|Total assets at September 30, 2005       |  | $                | 579,263 |                    | $ | 921,811 |                   |  | $ | 468,118 |   |  | $            | 86,961  |   |  | $ | 2,056,153 |  



18



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Operating segment results for the nine months ended September 30, 2006
are as follows (unaudited):



|                                         |  |                  |         |                    |   |         |                   |  |   |         |   |  |              |         |   |  |   |           |  
|---------------------------------------- |  | ---------------- | ------- | ------------------ | - | ------- | ----------------- |  | - | ------- | - |  | ------------ | ------- | - |  | - | --------- | -
|                                         |  | PowderRiverBasin |         | NorthernAppalachia |   |         | CentralAppalachia |  |   | Other   |   |  | Consolidated |        
|Revenues                                 |  | $                | 315,474 |                    | $ | 418,683 |                   |  | $ | 342,026 |   |  | $            | 40,349  |   |  | $ | 1,116,532 |  
|Income (loss) from operations            |  |                  | 32,137  |                    |   | 120,425 |                   |  |   | 15,445  |   |  |              | (56,053 | ) |  |   | 111,954   |  
|Depreciation, depletion and amortization |  |                  | 31,560  |                    |   | 56,020  |                   |  |   | 44,171  |   |  |              | 5,927   |   |  |   | 137,678   |  
|Amortization of coal supply agreements   |  |                  | 10,659  |                    |   | (7,068  | )                 |  |   | (15,710 | ) |  |              | 346     |   |  |   | (11,773   | )
|Capital expenditures                     |  |                  | 15,821  |                    |   | 35,120  |                   |  |   | 40,036  |   |  |              | 28,736  |   |  |   | 119,713   |  
|Total assets at September 30, 2006       |  | $                | 506,799 |                    | $ | 867,409 |                   |  | $ | 468,831 |   |  | $            | 123,459 |   |  | $ | 1,966,498 |  

Operating segment results for the nine months ended September 30, 2005 are as follows
(unaudited):



|                                         |  |                  |         |                    |   |         |                   |  |   |         |   |  |              |         |   |  |   |           |  
|---------------------------------------- |  | ---------------- | ------- | ------------------ | - | ------- | ----------------- |  | - | ------- | - |  | ------------ | ------- | - |  | - | --------- | -
|                                         |  | PowderRiverBasin |         | NorthernAppalachia |   |         | CentralAppalachia |  |   | Other   |   |  | Consolidated |        
|Revenues                                 |  | $                | 240,671 |                    | $ | 358,863 |                   |  | $ | 308,233 |   |  | $            | 68,527  |   |  | $ | 976,294   |  
|Income (loss) from operations            |  |                  | 10,223  |                    |   | 127,660 |                   |  |   | 42,970  |   |  |              | (35,773 | ) |  |   | 145,080   |  
|Depreciation, depletion and amortization |  |                  | 52,859  |                    |   | 57,660  |                   |  |   | 44,614  |   |  |              | 5,492   |   |  |   | 160,625   |  
|Amortization of coal supply agreements   |  |                  | 13,982  |                    |   | (44,237 | )                 |  |   | (33,341 | ) |  |              | (3,387  | ) |  |   | (66,983   | )
|Capital expenditures                     |  |                  | 33,718  |                    |   | 33,521  |                   |  |   | 31,895  |   |  |              | 3,069   |   |  |   | 102,203   |  
|Total assets at September 30, 2005       |  | $                | 579,263 |                    | $ | 921,811 |                   |  | $ | 468,118 |   |  | $            | 86,961  |   |  | $ | 2,056,153 |  



|(19) | Other Revenue
|---- | -------------

Other revenue consisted of the
following:



|                                       |  |                                 |       |                                 |      |   |       |  |      |        |  |   |       
|-------------------------------------- |  | ------------------------------- | ----- | ------------------------------- | ---- | - | ----- |  | ---- | ------ |  | - | ------
|                                       |  | Three MonthsEnded September 30, |       | Nine Months Ended September 30,
|                                       |  | 2006                            |       |                                 | 2005 |   | 2006  |  | 2005
|                                       |  | (Unaudited)                     |       | (Unaudited)                    
|Royalty income                         |  | $                               | 2,389 |                                 |      | $ | 1,658 |  | $    | 3,888  |  | $ | 2,225 
|Synfuel fees                           |  |                                 | 391   |                                 |      |   | 2,056 |  |      | 5,312  |  |   | 5,278 
|Coalbed methane                        |  |                                 | 1,046 |                                 |      |   | 1,736 |  |      | 3,015  |  |   | 4,028 
|Transloading and plant processing fees |  |                                 | 680   |                                 |      |   | 641   |  |      | 2,558  |  |   | 2,217 
|Natural gas                            |  |                                 | 170   |                                 |      |   | 187   |  |      | 618    |  |   | 604   
|Gain on sale of assets                 |  |                                 | 514   |                                 |      |   | 458   |  |      | 899    |  |   | 419   
|Coal sales contract settlements        |  |                                 | (390  | )                               |      |   |      |  |      | 74     |  |   |      
|Other                                  |  |                                 | 1,809 |                                 |      |   | 1,105 |  |      | 5,896  |  |   | 3,496 
|                                       |  |                                 |       |                                 |      |   |       |  |      |        |  |   |       
|Total other revenue                    |  | $                               | 6,609 |                                 |      | $ | 7,841 |  | $    | 22,260 |  | $ | 18,267
|                                       |  |                                 |       |                                 |      |   |       |  |      |        |  |   |       



|(20) | Supplemental Guarantor and Non-Guarantor Financial Information
|---- | --------------------------------------------------------------

On July 30, 2004, the Companys indirect wholly owned subsidiary, Foundation PA Coal Company (the Issuer or Non-Guarantor Subsidiary), issued $300,000 aggregate principal amount of
7.25% Senior Notes (the Notes) that mature on August 1, 2014. In accordance with the indenture governing the Notes, the Guarantor Subsidiaries (Guarantor Subsidiaries) are each of the direct and indirect wholly owned
subsidiaries of the Company, other than the Issuer. The Guarantor Subsidiaries have fully and unconditionally guaranteed the Notes, jointly and severally, on a senior unsecured basis. Separate consolidated financial statements and other disclosures
concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to holders of the Notes.



19



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Unaudited Supplemental Condensed Consolidating Balance Sheet

September 30, 2006



|                                                 |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|------------------------------------------------ |  | ------------ | -------- | - | ------------------------------- | - | -------- | --------------------- |  | ------------ | --------- |  | ------------ | ---------- | - |  | - | ---------
|                                                 |  | GuarantorFCC |          |   | Non-GuarantorSubsidiary(Issuer) |   |          | GuarantorSubsidiaries |  | Eliminations |           |  | Consolidated
|Assets                                           |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Current assets:                                  |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Cash and cash equivalents                        |  | $            | 44,992   |   |                                 | $ |         |                       |  | $            | 56        |  | $            |           |   |  | $ | 45,048   
|Trade accounts receivable                        |  |              |         |   |                                 |   |         |                       |  |              | 117,474   |  |              |           |   |  |   | 117,474  
|Inventories, net                                 |  |              |         |   |                                 |   |         |                       |  |              | 34,358    |  |              |           |   |  |   | 34,358   
|Deferred income taxes                            |  |              |         |   |                                 |   | 3,797    |                       |  |              | 1,136     |  |              |           |   |  |   | 4,933    
|Prepaid expenses                                 |  |              | 673      |   |                                 |   | 933      |                       |  |              | 31,269    |  |              |           |   |  |   | 32,875   
|Other current assets                             |  |              | 2,266    |   |                                 |   |         |                       |  |              | 4,759     |  |              |           |   |  |   | 7,025    
|                                                 |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total current assets                             |  |              | 47,931   |   |                                 |   | 4,730    |                       |  |              | 189,052   |  |              |           |   |  |   | 241,713  
|Owned surface lands                              |  |              |         |   |                                 |   |         |                       |  |              | 29,390    |  |              |           |   |  |   | 29,390   
|Plant, equipment and mine development costs, net |  |              | 18,571   |   |                                 |   |         |                       |  |              | 591,445   |  |              |           |   |  |   | 610,016  
|Owned and leased mineral rights, net             |  |              |         |   |                                 |   |         |                       |  |              | 1,027,748 |  |              |           |   |  |   | 1,027,748
|Coal supply agreements, net                      |  |              |         |   |                                 |   |         |                       |  |              | 37,786    |  |              |           |   |  |   | 37,786   
|Other noncurrent assets                          |  |              | 510,935  |   |                                 |   | 431,407  |                       |  |              | 850,008   |  |              | (1,772,505 | ) |  |   | 19,845   
|                                                 |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total assets                                     |  | $            | 577,437  |   |                                 | $ | 436,137  |                       |  | $            | 2,725,429 |  | $            | (1,772,505 | ) |  | $ | 1,966,498
|                                                 |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Liabilities                                      |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Current liabilities:                             |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Current portion long term debt                   |  | $            |         |   |                                 | $ | 4,188    |                       |  | $            |          |  | $            |           |   |  | $ | 4,188    
|Trade accounts payable                           |  |              | 865      |   |                                 |   |         |                       |  |              | 39,226    |  |              |           |   |  |   | 40,091   
|Accrued expenses and other current liabilities   |  |              | 25,878   |   |                                 |   | 4,383    |                       |  |              | 132,162   |  |              |           |   |  |   | 162,423  
|                                                 |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total current liabilities                        |  |              | 26,743   |   |                                 |   | 8,571    |                       |  |              | 171,388   |  |              |           |   |  |   | 206,702  
|                                                 |  |              |          |   |                                
|Long-term debt                                   |  |              |         |   |                                 |   | 630,812  |                       |  |              |          |  |              |           |   |  |   | 630,812  
|Deferred income taxes                            |  |              | (154,577 | ) |                                 |   | 103,890  |                       |  |              | 78,736    |  |              |           |   |  |   | 28,049   
|Coal supply agreements, net                      |  |              |         |   |                                 |   |         |                       |  |              | 31,377    |  |              |           |   |  |   | 31,377   
|Postretirement benefits                          |  |              | 1,983    |   |                                 |   |         |                       |  |              | 477,109   |  |              |           |   |  |   | 479,092  
|Other noncurrent liabilities                     |  |              | 347,820  |   |                                 |   | (388,778 | )                     |  |              | 1,088,917 |  |              | (812,961   | ) |  |   | 234,998  
|                                                 |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total liabilities                                |  |              | 221,969  |   |                                 |   | 354,495  |                       |  |              | 1,847,527 |  |              | (812,961   | ) |  |   | 1,611,030
|Stockholder Equity                               |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Stockholder equity                               |  |              | 355,468  |   |                                 |   | 81,642   |                       |  |              | 877,902   |  |              | (959,544   | ) |  |   | 355,468  
|                                                 |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total liabilities and stockholder equity         |  | $            | 577,437  |   |                                 | $ | 436,137  |                       |  | $            | 2,725,429 |  | $            | (1,772,505 | ) |  | $ | 1,966,498
|                                                 |  |              |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          



20



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Supplemental Condensed Consolidating Balance Sheets

December 31, 2005



|                                                 |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|------------------------------------------------ |  | ------------- | -------- | - | ------------------------------- | - | -------- | --------------------- |  | ------------ | --------- |  | ------------ | ---------- | - |  | - | ---------
|                                                 |  | Guarantor FCC |          |   | Non-GuarantorSubsidiary(Issuer) |   |          | GuarantorSubsidiaries |  | Eliminations |           |  | Consolidated
|Assets                                           |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Current assets:                                  |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Cash and cash equivalents                        |  | $             | 22,407   |   |                                 | $ |         |                       |  | $            | 17        |  | $            |           |   |  | $ | 22,424   
|Trade accounts receivable                        |  |               | (50      | ) |                                 |   |         |                       |  |              | 110,175   |  |              |           |   |  |   | 110,125  
|Inventories, net                                 |  |               |         |   |                                 |   |         |                       |  |              | 96,896    |  |              |           |   |  |   | 96,896   
|Deferred income taxes                            |  |               |         |   |                                 |   | 3,797    |                       |  |              | 1,136     |  |              |           |   |  |   | 4,933    
|Prepaid expenses                                 |  |               | 1,851    |   |                                 |   | 608      |                       |  |              | 19,988    |  |              |           |   |  |   | 22,447   
|Other current assets                             |  |               | 485      |   |                                 |   |         |                       |  |              | 2,400     |  |              |           |   |  |   | 2,885    
|                                                 |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total current assets                             |  |               | 24,693   |   |                                 |   | 4,405    |                       |  |              | 230,612   |  |              |           |   |  |   | 259,710  
|                                                 |  |               |          |   |                                
|Owned surface lands                              |  |               |         |   |                                 |   |         |                       |  |              | 27,510    |  |              |           |   |  |   | 27,510   
|Plant, equipment and mine development costs, net |  |               | 4,083    |   |                                 |   |         |                       |  |              | 562,979   |  |              |           |   |  |   | 567,062  
|Owned and leased mineral rights, net             |  |               |         |   |                                 |   |         |                       |  |              | 1,071,596 |  |              |           |   |  |   | 1,071,596
|Coal supply agreements, net                      |  |               |         |   |                                 |   |         |                       |  |              | 53,050    |  |              |           |   |  |   | 53,050   
|Other noncurrent assets                          |  |               | 508,252  |   |                                 |   | 416,577  |                       |  |              | 743,325   |  |              | (1,638,971 | ) |  |   | 29,183   
|                                                 |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total assets                                     |  | $             | 537,028  |   |                                 | $ | 420,982  |                       |  | $            | 2,689,072 |  | $            | (1,638,971 | ) |  | $ | 2,008,111
|                                                 |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Liabilities                                      |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Current liabilities:                             |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Trade accounts payable                           |  | $             | 689      |   |                                 | $ |         |                       |  | $            | 34,695    |  | $            |           |   |  | $ | 35,384   
|Accrued expenses and other current liabilities   |  |               | 33,396   |   |                                 |   | 11,191   |                       |  |              | 137,296   |  |              |           |   |  |   | 181,883  
|                                                 |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total current liabilities                        |  |               | 34,085   |   |                                 |   | 11,191   |                       |  |              | 171,991   |  |              |           |   |  |   | 217,267  
|Long-term debt                                   |  |               |         |   |                                 |   | 635,000  |                       |  |              |          |  |              |           |   |  |   | 635,000  
|Deferred income taxes                            |  |               | (136,787 | ) |                                 |   | 104,538  |                       |  |              | 99,878    |  |              |           |   |  |   | 67,629   
|Coal supply agreements, net                      |  |               |         |   |                                 |   |         |                       |  |              | 59,013    |  |              |           |   |  |   | 59,013   
|Postretirement benefits                          |  |               | 644      |   |                                 |   |         |                       |  |              | 463,774   |  |              |           |   |  |   | 464.418  
|Other noncurrent liabilities                     |  |               | 299,715  |   |                                 |   | (437,424 | )                     |  |              | 1,118,952 |  |              | (755,830   | ) |  |   | 225,413  
|                                                 |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total liabilities                                |  |               | 197,657  |   |                                 |   | 313,305  |                       |  |              | 1,913,608 |  |              | (755,830   | ) |  |   | 1,668,740
|Stockholder Equity                               |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Stockholder Equity                               |  |               | 339,371  |   |                                 |   | 107,677  |                       |  |              | 775,464   |  |              | (883,141   | ) |  |   | 339,371  
|                                                 |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          
|Total liabilities and stockholder equity         |  | $             | 537,028  |   |                                 | $ | 420,982  |                       |  | $            | 2,689,072 |  | $            | (1,638,971 | ) |  | $ | 2,008,111
|                                                 |  |               |          |   |                                 |   |          |                       |  |              |           |  |              |            |   |  |   |          



21



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Unaudited Supplemental Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2006



|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | -------------------------------- | - | ------- | ---------------------- |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                                                             |  | Guarantor FCC |         |   | Non-Guarantor Subsidiary(Issuer) |   |         | Guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated |        
|Total revenues                                                                                               |  | $             |        |   |                                  | $ |        |                        |  | $ | 354,120      |   |  | $            |        |   |  | $ | 354,120 |  
|Costs and expenses:                                                                                          |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |         |   |  |   |         |  
|Cost of coal sales (excludes depreciation, depletion and amortization)                                       |  |               |        |   |                                  |   | 231     |                        |  |   | 277,222      |   |  |              |        |   |  |   | 277,453 |  
|Selling, general and administrative expense (excludes depreciation, depletion and amortization)              |  |               | 6,059   |   |                                  |   |        |                        |  |   | 5,100        |   |  |              |        |   |  |   | 11,159  |  
|Accretion on asset retirement obligations                                                                    |  |               |        |   |                                  |   |        |                        |  |   | 2,219        |   |  |              |        |   |  |   | 2,219   |  
|Depreciation, depletion and amortization                                                                     |  |               | 374     |   |                                  |   |        |                        |  |   | 44,796       |   |  |              |        |   |  |   | 45,170  |  
|Amortization of coal supply agreements                                                                       |  |               |        |   |                                  |   |        |                        |  |   | (2,309       | ) |  |              |        |   |  |   | (2,309  | )
|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) from operations                                                                                |  |               | (6,433  | ) |                                  |   | (231    | )                      |  |   | 27,092       |   |  |              |        |   |  |   | 20,428  |  
|Other income (expense):                                                                                      |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |         |   |  |   |         |  
|Interest expense:                                                                                            |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |         |   |  |   |         |  
|Debt and other                                                                                               |  |               | 491     |   |                                  |   | (20,599 | )                      |  |   | (2,950       | ) |  |              |        |   |  |   | (23,058 | )
|Intercompany                                                                                                 |  |               | (6,997  | ) |                                  |   | 7,051   |                        |  |   | (54          | ) |  |              |        |   |  |   |        |  
|Mark-to-market loss on interest rate swaps                                                                   |  |               |        |   |                                  |   | (112    | )                      |  |   |             |   |  |              |        |   |  |   | (112    | )
|Interest income                                                                                              |  |               | 907     |   |                                  |   |        |                        |  |   | 51           |   |  |              |        |   |  |   | 958     |  
|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |         |   |  |   |         |  
|Income (loss) before income taxes and equity in earnings of investments in issuer and guarantor subsidiaries |  |               | (12,032 | ) |                                  |   | (13,891 | )                      |  |   | 24,139       |   |  |              |        |   |  |   | (1,784  | )
|Income tax benefit (expense)                                                                                 |  |               | 2,293   |   |                                  |   |        |                        |  |   | (331         | ) |  |              |        |   |  |   | 1,962   |  
|Equity in earnings of investments in issuer and guarantor subsidiaries                                       |  |               | 9,917   |   |                                  |   | 19,004  |                        |  |   |             |   |  |              | (28,921 | ) |  |   |        |  
|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                                                                            |  | $             | 178     |   |                                  | $ | 5,113   |                        |  | $ | 23,808       |   |  | $            | (28,921 | ) |  | $ | 178     |  
|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |         |   |  |   |         |  



22



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Unaudited Supplemental Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2005



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



23



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Unaudited Supplemental Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2006



|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |          |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | -------------------------------- | - | ------- | ---------------------- |  | - | ------------ | - |  | ------------ | -------- | - |  | - | --------- | -
|                                                                                                             |  | Guarantor FCC |         |   | Non-Guarantor Subsidiary(Issuer) |   |         | Guarantor Subsidiaries |  |   | Eliminations |   |  | Consolidated |         
|Total revenues                                                                                               |  | $             |        |   |                                  | $ |        |                        |  | $ | 1,116,532    |   |  | $            |         |   |  | $ | 1,116,532 |  
|Costs and expenses:                                                                                          |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |          |   |  |   |           |  
|Cost of coal sales (excludes depreciation, depletion and amortization)                                       |  |               |        |   |                                  |   | 676     |                        |  |   | 835,214      |   |  |              |         |   |  |   | 835,890   |  
|Selling, general and administrative expense (excludes depreciation, depletion and amortization)              |  |               | 21,793  |   |                                  |   |        |                        |  |   | 14,663       |   |  |              |         |   |  |   | 36,456    |  
|Accretion on asset retirement obligations                                                                    |  |               |        |   |                                  |   |        |                        |  |   | 6,327        |   |  |              |         |   |  |   | 6,327     |  
|Depreciation, depletion and amortization                                                                     |  |               | 1,037   |   |                                  |   |        |                        |  |   | 136,641      |   |  |              |         |   |  |   | 137,678   |  
|Amortization of coal supply agreements                                                                       |  |               |        |   |                                  |   |        |                        |  |   | (11,773      | ) |  |              |         |   |  |   | (11,773   | )
|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |          |   |  |   |           |  
|Income (loss) from operations                                                                                |  |               | (22,830 | ) |                                  |   | (676    | )                      |  |   | 135,460      |   |  |              |         |   |  |   | 111,954   |  
|Other income (expense):                                                                                      |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |          |   |  |   |           |  
|Interest expense:                                                                                            |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |          |   |  |   |           |  
|Debt and other                                                                                               |  |               | 667     |   |                                  |   | (43,675 | )                      |  |   | (7,698       | ) |  |              |         |   |  |   | (50,706   | )
|Intercompany                                                                                                 |  |               | (19,058 | ) |                                  |   | 22,674  |                        |  |   | (3,616       | ) |  |              |         |   |  |   |          |  
|Mark-to-market loss on interest rate swaps                                                                   |  |               |        |   |                                  |   | (112    | )                      |  |   |             |   |  |              |         |   |  |   | (112      | )
|Interest income                                                                                              |  |               | 2,027   |   |                                  |   |        |                        |  |   | 157          |   |  |              |         |   |  |   | 2,184     |  
|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |          |   |  |   |           |  
|Income (loss) before income taxes and equity in earnings of investments in issuer and guarantor subsidiaries |  |               | (39,194 | ) |                                  |   | (21,789 | )                      |  |   | 124,303      |   |  |              |         |   |  |   | 63,320    |  
|Income tax expense                                                                                           |  |               | (5,851  | ) |                                  |   |        |                        |  |   | (2,567       | ) |  |              |         |   |  |   | (8,418    | )
|Equity in earnings of investments in issuer and guarantor subsidiaries                                       |  |               | 99,947  |   |                                  |   | 108,095 |                        |  |   |             |   |  |              | (208,042 | ) |  |   |          |  
|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |          |   |  |   |           |  
|Net income (loss)                                                                                            |  | $             | 54,902  |   |                                  | $ | 86,306  |                        |  | $ | 121,736      |   |  | $            | (208,042 | ) |  | $ | 54,902    |  
|                                                                                                             |  |               |         |   |                                  |   |         |                        |  |   |              |   |  |              |          |   |  |   |           |  



24



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands)

Unaudited Supplemental Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2005



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



25



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands, except per share data)

Unaudited Supplemental Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 30, 2006



|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|---------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------------------------- | - | ------- | --------------------- |  | - | ------------ | - |  | - | -------- | -
|                                                                             |  | GuarantorFCC |         |   | Non-GuarantorSubsidiary(Issuer) |   |         | GuarantorSubsidiaries |  |   | Consolidated |  
|Net cash provided by operating activities                                    |  | $            | 37,005  |   |                                 | $ | 2,184   |                       |  | $ | 118,813      |   |  | $ | 158,002  |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Investing activities:                                                        |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Purchases of property, plant and equipment                                   |  |              | (13,865 | ) |                                 |   |        |                       |  |   | (105,848     | ) |  |   | (119,713 | )
|Purchases of mining assets                                                   |  |              |        |   |                                 |   |        |                       |  |   | (14,630      | ) |  |   | (14,630  | )
|Proceeds from disposition of property, plant and equipment                   |  |              |        |   |                                 |   |        |                       |  |   | 1,704        |   |  |   | 1,704    |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Net cash used in investing activities                                        |  |              | (13,865 | ) |                                 |   |        |                       |  |   | (118,774     | ) |  |   | (132,639 | )
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Financing activities:                                                        |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Payment of cash dividends to Public parent for repurchase of common stock    |  |              | (11,889 | ) |                                 |   |        |                       |  |   |             |   |  |   | (11,889  | )
|Payment of cash dividends to Public parent for payment of ordinary dividends |  |              | (6,817  | ) |                                 |   |        |                       |  |   |             |   |  |   | (6,817   | )
|Capital contributions from Public parent                                     |  |              | 7,479   |   |                                 |   |        |                       |  |   |             |   |  |   | 7,479    |  
|Interest rate swap termination                                               |  |              |        |   |                                 |   | 2,259   |                       |  |   |             |   |  |   | 2,259    |  
|Payment of deferred financing costs                                          |  |              |        |   |                                 |   | (4,443  | )                     |  |   |             |   |  |   | (4,443   | )
|Excess tax benefit from stock-based awards                                   |  |              | 10,672  |   |                                 |   |        |                       |  |   |             |   |  |   | 10,672   |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Net cash used in financing activities                                        |  |              | (555    | ) |                                 |   | (2,184  | )                     |  |   |             |   |  |   | (2,739   | )
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Net increase in cash and cash equivalents                                    |  |              | 22,585  |   |                                 |   |        |                       |  |   | 39           |   |  |   | 22,624   |  
|Cash and cash equivalents at beginning of period                             |  |              | 22,407  |   |                                 |   |        |                       |  |   | 17           |   |  |   | 22,424   |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Cash and cash equivalents at end of period                                   |  | $            | 44,992  |   |                                 | $ |        |                       |  | $ | 56           |   |  | $ | 45,048   |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|                                                                            
|Nine Months Ended September 30, 2005                                         | 
|                                                                             |  |              |         |  
|                                                                             |  | GuarantorFCC |         |   | Non-GuarantorSubsidiary(Issuer) |   |         | GuarantorSubsidiaries |  |   | Consolidated |  
|Net cash provided by operating activities                                    |  | $            | 13,877  |   |                                 | $ | 20,000  |                       |  | $ | 68,930       |   |  | $ | 102,807  |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Investing activities:                                                        |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Purchases of property, plant and equipment                                   |  |              |        |   |                                 |   |        |                       |  |   | (102,203     | ) |  |   | (102,203 | )
|Proceeds from disposition of property, plant and equipment                   |  |              |        |   |                                 |   |        |                       |  |   | 5,355        |   |  |   | 5,355    |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Net cash used in investing activities                                        |  |              |        |   |                                 |   |        |                       |  |   | (96,848      | ) |  |   | (96,848  | )
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Financing activities:                                                        |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Proceeds from revolving credit facility                                      |  |              |        |   |                                 |   | 76,000  |                       |  |   |             |   |  |   | 76,000   |  
|Repayment of revolving credit facility                                       |  |              |        |   |                                 |   | (76,000 | )                     |  |   |             |   |  |   | (76,000  | )
|Repayment of long-term debt                                                  |  |              |        |   |                                 |   | (20,000 | )                     |  |   |             |   |  |   | (20,000  | )
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Net cash used in financing activities                                        |  |              |        |   |                                 |   | (20,000 | )                     |  |   |             |   |  |   | (20,000  | )
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                         |  |              | 13,877  |   |                                 |   |        |                       |  |   | (27,918      | ) |  |   | 14,041   |  
|Cash and cash equivalents at beginning of period                             |  |              | (2,290  | ) |                                 |   |        |                       |  |   | 27,333       |   |  |   | 25,043   |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  
|Cash and cash equivalents at end of period                                   |  | $            | 11,587  |   |                                 | $ |        |                       |  | $ | (585         | ) |  | $ | 11,002   |  
|                                                                             |  |              |         |   |                                 |   |         |                       |  |   |              |   |  |   |          |  



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##### Table of Contents

Foundation Coal Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Dollars in thousands, except per share data)



|(21) | Commitments and Contingencies
|---- | -----------------------------

General

The Company follows SFAS No. 5, Accounting for Contingencies, in determining its accruals and disclosures with respect to
loss contingencies. Accordingly, estimated losses from loss contingencies and legal expenses associated with the contingency are accrued by a charge to income when information available prior to issuance of the consolidated financial statements
indicates that it is probable that an asset had been impaired or a liability had been incurred and the amount of the loss can be reasonably estimated. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency
is made in the consolidated financial statements when it is at least reasonably possible that a loss may be incurred.

Guarantees

Neweagle Industries, Inc., Neweagle Coal Sales Corp., Laurel Creek Co., Inc. and Rockspring Development, Inc.
(Sellers) are indirect wholly owned subsidiaries of the Company. The Sellers sell coal to Birchwood Power Partners, L.P. (Birchwood) under a Coal Supply Agreement dated July 22, 1993 (Birchwood Contract).
Laurel Creek Co., Inc. and Rockspring Development, Inc. were parties to the Birchwood Contract since its inception, at which time those entities were not affiliated with Neweagle Industries, Inc., Neweagle Coal Sales Corp., or the
Company. Effective January 31, 1994, the Birchwood Contract was assigned to Neweagle Industries, Inc. and Neweagle Coal Sales Corp. by AgipCoal Holding USA, Inc. and AgipCoal Sales USA, Inc., which at the time were affiliates of
Arch Coal, Inc. Despite this assignment, Arch Coal, Inc. (Arch) and its affiliates have separate contractual obligations to provide coal to Birchwood if Sellers fail to perform. Pursuant to an Agreement & Release dated
September 30, 1997, the Company agreed to defend, indemnify, and hold harmless Arch and its subsidiaries from and against any claims arising out of any failure of Sellers to perform under the Birchwood Contract. By acknowledgement dated
February 16, 2005, the Company and Arch acknowledged the continuing validity and effect of said Agreement & Release.

In the
normal course of business, the Company is a party to guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit, performance or surety bonds and other guarantees and indemnities, which are not reflected in the
accompanying Consolidated Balance Sheets. Such financial instruments are valued based on the amount of exposure under the instrument and likelihood of performance being required. In the Companys past experience, no claims have been made
against these financial instruments. Management does not expect any material losses to result from these guarantees or off-balance-sheet instruments and, therefore, is of the opinion that their fair value is zero.

Contingencies

Extensive regulation of the
impacts of mining on the environment and related litigation has had and may have a significant effect on the Companys costs of production and results of operations. Further regulations, legislation or litigation may also cause the
Companys sales or profitability to decline by hindering the Companys ability to continue mining operations or by increasing costs.

Legal Proceedings

The Company is involved in various claims and other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Companys consolidated financial position, consolidated results of operations or consolidated
cash flows.

Letters of Credit

At
September 30, 2006, the Company had $172,824 of letters of credit outstanding under its revolving credit facility.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

Special Note Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking
statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet
determinable. These statements 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 and similar terms and phrases, including
references to assumptions, in this Form 10-Q 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 factors, described below and elsewhere in this Form 10-Q, and in other documents we file with the United States Securities and Exchange Commission from time to time, are among those that may cause actual results
to differ materially from our forward-looking statements:



| |  |  | market demand for coal, electricity and steel;
| | - |  | ----------------------------------------------



| |  |  | future economic or capital market conditions;
| | - |  | ---------------------------------------------



| |  |  | weather conditions or catastrophic weather-related damage;
| | - |  | ----------------------------------------------------------



| |  |  | factors affecting our production capabilities;
| | - |  | ----------------------------------------------



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



| |  |  | our plans and objectives for future operations and expansion or consolidation;
| | - |  | ------------------------------------------------------------------------------



| |  |  | our relationships with, and other conditions affecting, our customers;
| | - |  | ----------------------------------------------------------------------



| |  |  | timing of reductions or increases in customer coal inventories;
| | - |  | ---------------------------------------------------------------



| |  |  | long-term coal supply arrangements;
| | - |  | -----------------------------------



| |  |  | risks in coal mining;
| | - |  | ---------------------



| |  |  | environmental laws, including those directly affecting our coal mining and production, and those affecting our customers coal usage;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competition;
| | - |  | ------------



| |  |  | railroad, barge, trucking and other transportation performance and costs;
| | - |  | -------------------------------------------------------------------------



| |  |  | our assumptions concerning economically recoverable coal reserve estimates;
| | - |  | ---------------------------------------------------------------------------



| |  |  | employee workforce factors;
| | - |  | ---------------------------



| |  |  | regulatory and court decisions;
| | - |  | -------------------------------



| |  |  | future legislation and changes in regulations or governmental policies or changes in interpretations thereof;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | changes in postretirement benefit and pension obligations;
| | - |  | ----------------------------------------------------------



| |  |  | our liquidity, consolidated results of operations and consolidated financial condition;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | disruptions in delivery or changes in pricing from third party vendors of goods and services which are necessary for our operations, such as fuel, steel products, explosives and
tires;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continuation of other revenues from fees received from synthetic fuel (synfuel) processors; and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | our enterprise software that we use for financial reporting and controls, equipment maintenance and materials management is currently being replaced. A failure in our enterprise
software could cause disruptions in our operations, including among other things, the inability to process orders for supplies and services, make payments to our vendors or engage in similar normal business activities. If the enterprise system
replacement is not successfully implemented in a timely manner, we will have to resort to manual reporting processes that have not been planned, designed or tested.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Overview

We are the fifth largest coal company in the United States, operating nine mining complexes that consist of fourteen individual coal mines. Our mining operations are located in southwest Pennsylvania, southern West
Virginia, southern Illinois and the southern Powder River Basin region of Wyoming. Three of our mining complexes are surface mines, two of our complexes are underground mines using highly efficient longwall mining technology and the remaining four
complexes are underground mines that utilize continuous miners. In addition to mining coal, we also purchase coal from other producers and at times may utilize it with our own production in coal brokering and trading activities.

Our primary product is steam coal, sold primarily to electric power generators located in the United States. Approximately 9% of our coal sales revenues
for the nine months ended September 30, 2006 and September 30, 2005, respectively, were from the sale of metallurgical coal to the domestic and export metallurgical coal markets where it is used to make coke for steel production.

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

Foundation Coal Corporation is an its indirect wholly owned subsidiary of Foundation Coal Holdings, Inc. (the
Public parent). The Public parent began operations on July 30, 2004 by acquiring all of the U.S. coal mining operations of RAG American Coal Holding, Inc. (the Acquisition).

Results of Operations

Three Months Ended
September 30, 2006 Compared to Three Months Ended September 30, 2005

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

Revenues



|                                    |  |                                                |         |                     |   |         |  |   |         |   |  |     |   
|----------------------------------- |  | ---------------------------------------------- | ------- | ------------------- | - | ------- |  | - | ------- | - |  | --- | --
|                                    |  | Three Months EndedSeptember 30,                |         | Increase (Decrease) |  
|                                    |  | 2006                                           |         | 2005                |   | Amount  |  |   | Percent |  
|                                    |  | (Unaudited, in thousands, except per ton data) |        
|Coal sales                          |  | $                                              | 347,511 |                     | $ | 333,469 |  | $ | 14,042  |   |  | 4   | % 
|Other revenue                       |  |                                                | 6,609   |                     |   | 7,841   |  |   | (1,232  | ) |  | (16 | )%
|                                    |  |                                                |         |                     |   |         |  |   |         |   |  |     |   
|Total revenues                      |  | $                                              | 354,120 |                     | $ | 341,310 |  | $ | 12,810  |   |  | 4   | % 
|                                    |  |                                                |         |                     |   |         |  |   |         |   |  |     |   
|Tons sold                           |  |                                                | 18,495  |                     |   | 17,867  |  |   | 628     |   |  | 4   | % 
|Coal sales realization per ton sold |  | $                                              | 18.79   |                     | $ | 18.66   |  | $ | 0.13    |   |  | 1   | % 

Coal sales revenues for the three months ended September 30, 2006 increased by 4% compared to
the coal sales revenues for the three months ended September 30, 2005 as a result of a 4% increase in tons sold and a 1% increase in average coal sales realization per ton.

Coal sales volumes in Northern Appalachia decreased by 0.2 million tons (6%), primarily a result of decreased shipments and production from the
Cumberland mine due to a scheduled longwall move in the third quarter of 2006. No such longwall move occurred in the corresponding quarter of 2005.



29



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##### Table of Contents

Coal sales volumes in Central Appalachia decreased by 0.3 million tons (14%) reflecting
decreased shipments from all West Virginia mining operations except for the Pax surface mine and from the Laurel Creek underground mine. Production in Central Appalachia declined by 6% due to lower production at all the West Virginia operations
except Pax and Laurel Creek, where their combined production increased approximately 0.1 million tons (20%) compared to the third quarter of 2005. The Pax surface mine has been increasing its production during the advancing stages of mine
development, which was completed in the third quarter of 2006. The Pax mine, which replaces the Simmons Fork mine that depleted its reserves in 2004, began production in the fourth quarter of 2004, produced 0.6 million tons in 2005 and is
expected to produce at an annual rate of approximately 1 million tons per year before the integration of the recently acquired mining assets at Pax South discussed below in Significant Property Transactions below.

Coal sales volumes in the Powder River Basin increased by 1.5 million tons (13%) to a record quarterly shipment level of 13.0 million tons
due to higher production and shipments from the Belle Ayr and Eagle Butte mines. Annual production capacity at Belle Ayr was increased by 5.0 million tons effective January 1, 2006.

Coal sales volumes from the Illinois Basin decreased by 0.2 million tons (44%) as compared to the third quarter of 2005, reflecting lower
production from the Wabash mine due to the diversion of scheduled operating shifts to maintain the mines underground infrastructure and the mines compliance with federal and state regulations. Purchased coal activities by our trading
group decreased by approximately 0.2 million tons (82%), compared to the third quarter of 2005, due to the timing of purchased coal transactions.

Coal sales realization per ton sold in Northern Appalachia increased by 14% in 2006 due to the substitution of higher priced contracts which took effect in late 2005 and early 2006 for lower priced contracts that
expired, offset by 7% lower coal quality premium realization per ton reflecting decreased prices for sulfur dioxide emission allowances. In Central Appalachia, coal sales realization per ton sold increased by 14% due primarily to shipments under
higher priced contracts replacing lower priced expiring 2005 contracts and generally higher coal quality premium realization per ton. In the Powder River Basin, coal sales realizations per ton increased by 11% due to the commencement of shipments
under higher priced contracts and higher coal quality premiums. The consolidated weighted average sales realization per ton for the third quarter of 2006 reflected a 6% higher proportion of lower value Powder River Basin shipments compared to the
prior year.

Other revenues for the three months ended September 30, 2006 decreased by $1.2 million (16%) compared to the three
months ended September 30, 2005. The decrease was due to lower synfuel fees ($1.7 million) and lower coalbed methane sales ($0.7 million), partially offset by higher royalty income ($0.7 million).

Costs and Expenses



|                                                                                                |  |                                  |         |   |                     |   |         |        |  |   |         |   |  |     |     
|----------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------- | - | ------- | ------ |  | - | ------- | - |  | --- | ----
|                                                                                                |  | Three Months Ended September 30, |         |   | Increase (Decrease) |  
|                                                                                                |  | 2006                             |         |   | 2005                |   |         | Amount |  |   | Percent |  
|                                                                                                |  | (Unaudited, in thousands)        |        
|Cost of coal sales (excludes depreciation, depletion and amortization)                          |  | $                                | 277,453 |   |                     | $ | 241,238 |        |  | $ | 36,215  |   |  | 15  | %(1)
|Selling, general and administrative expense (excludes depreciation, depletion and amortization) |  |                                  | 11,159  |   |                     |   | 13,244  |        |  |   | (2,085  | ) |  | (16 | )%  
|Accretion on asset retirement obligations                                                       |  |                                  | 2,219   |   |                     |   | 2,119   |        |  |   | 100     |   |  | 5   | %   
|Depreciation, depletion and amortization                                                        |  |                                  | 45,170  |   |                     |   | 53,131  |        |  |   | (7,961  | ) |  | (15 | )%  
|Amortization of coal supply agreements                                                          |  |                                  | (2,309  | ) |                     |   | (20,467 | )      |  |   | 18,158  |   |  | 89  | %   
|                                                                                                |  |                                  |         |   |                     |   |         |        |  |   |         |   |  |     |     
|Total costs and expenses                                                                        |  | $                                | 333,692 |   |                     | $ | 289,265 |        |  | $ | 44,427  |   |  | 15  | %   
|                                                                                                |  |                                  |         |   |                     |   |         |        |  |   |         |   |  |     |     

---

|(1) | Excluding the credit related to deferral of costs associated with overburden removal in the three months ended September 30, 2005, cost of coal sales increased
approximately 12%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Cost of coal sales. The cost of coal sales increased $36.2 million for the three months
ended September 30, 2006 compared to the three months ended September 30, 2005 primarily due to: (a) increases in labor costs as a result of both compensation increases and hiring of additional personnel ($6.8 million);
(b) increases in materials, consumables and commodity supply costs, most notably diesel fuel, large equipment tires and explosives ($20.6 million); (c) increases in royalties and coal production taxes as a result of higher revenues ($3.8
million); (d) decreases in purchased coal costs as a result of lower purchased coal volumes ($19.7 million); (e) an accounting change, effective January 1, 2006, requiring expensing of overburden removal costs ($7.2 million);
(f) a charge to expense for a decrease in coal inventories in the third quarter of 2006 compared to a credit from increases in coal inventories during the third quarter of 2005 ($18.2 million); and (g) increases in miscellaneous expenses
($0.7 million). Production costs increased partly due to higher period-over-period production. Cost of coal sales per ton was $15.00 for the three months ended September 30, 2006 compared to $13.50 per ton for the three months ended
September 30, 2005. The $13.50 cost of coal sales per ton for the three months ended September 30, 2005 includes a $7.2 million credit related to the deferral of costs associated with overburden removal. Subsequent to the Companys
adoption of Emerging Issues Task Force (EITF) Issue No. 04-6, Accounting for Stripping Costs Incurred during Production in the Mining Industry(EITF Issue 04-6) on January 1, 2006, such costs were no longer
deferred. Cost of coal sales per ton was $13.90 after adjusting for the impact of the accounting change for overburden removal costs, an increase of approximately 8%.

Selling, general and administrative expense. Selling, general and administrative expense for the three months ended September 30, 2006 was $11.1 million compared to $13.2 million for the three
months ended September 30, 2005. Period-over-period decreases were due to lower expenses incurred for employee compensation and benefit related expenses ($1.5 million); lower insurance expenses ($0.2 million); and lower miscellaneous overhead
expenses including legal and audit fees ($0.4 million).

Accretion on asset retirement obligations. Accretion on asset
retirement obligations is a component of accounting for asset retirement obligations under Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations(SFAS
No. 143). Accretion represents the increase in the asset retirement liability to reflect the change in the liability for the passage of time. Slightly higher accretion expense in 2006 was due to increased asset retirement obligation
estimates at closed mines.

Depreciation, depletion and amortization. Depreciation, depletion and amortization
(DD&A) includes depreciation of plant and equipment, cost depletion of amounts assigned to coal lands and mining rights and amortization of mine development costs and leasehold improvements. DD&A expense decreased $8.0 million
for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, primarily due to lower cost depletion, partially offset by higher depreciation and amortization. Cost depletion declined by $11.3 million
due to a combination of: (a) lack of depletion expense in the 2006 quarter pertaining to purchase accounting values assigned to partially and fully uncovered coal at the Powder River Basin surface mines as these assets were fully depleted
during 2005; and (b) final purchase accounting adjustments recorded in 2005 that reduced the values assigned to coal lands and mining rights, partly offset by higher production in the Powder River Basin during 2006. Depreciation and
amortization increased by $3.3 million in the third quarter of 2006 mainly due to capital additions to plant & equipment during the twelve months ended September 30, 2006.

Coal supply agreement amortization. Application of purchase accounting resulted in recognition of a significant liability for below market
priced coal supply agreements as well as a significant asset for above market priced coal supply agreements, both in relation to market prices at the date of Acquisition. Coal supply agreement amortization decreased $18.2 million for the three
months ended September 30, 2006 compared to the three months ended September 30, 2005. Amortization of the liability for below market priced coal supply agreements during the three months ended September 30, 2006 was $8.0 million of
credit to expense compared to $26.7 million of credit to expense in the comparable period of the prior year. Amortization of the asset for above market priced coal supply agreements during the three months ended September 30, 2006 was $5.7
million of expense compared to $6.2 million of expense in the comparable period of the prior year. During the twelve months ended September 30, 2006, shipments on a number of coal supply agreements valued in purchase accounting were completed.



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##### Table of Contents

Segment Analysis

Utilizing data published by Argus Media, the following graph sets forth representative steam coal prices in various U.S. markets summarized for the monthly periods from January 1, 2005 through September 30,
2006. The prices are not necessarily representative of the coal prices actually obtained by the Company. Changes in coal prices have an impact over time on the Companys average sales realization per ton and, ultimately, its consolidated
financial results.

LOGO



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##### Table of Contents

|                                  |      |                                                            |         |                     |        |         |  |         |         |   |  |     |   
|--------------------------------- | ---- | ---------------------------------------------------------- | ------- | ------------------- | ------ | ------- |  | ------- | ------- | - |  | --- | --
|                                  |      | Three Months EndedSeptember 30,                            |         | Increase (Decrease) |       
|                                  | 2006 |                                                            | 2005    |                     | Tons/$ |         |  | Percent |        
|                                  |      | (Unaudited, in thousands except sales realization per ton) |        
|Powder River Basin                |      |                                                            |         |                     |        |         |  |         |         |   |  |     |   
|Tons sold                         |      |                                                            | 12,971  |                     |        | 11,481  |  |         | 1,490   |   |  | 13  | % 
|Average sales realization per ton |      | $                                                          | 8.27    |                     | $      | 7.46    |  | $       | 0.81    |   |  | 11  | % 
|Revenues                          |      | $                                                          | 107,510 |                     | $      | 85,964  |  | $       | 21,546  |   |  | 25  | % 
|Income from operations            |      | $                                                          | 13,244  |                     | $      | 6,884   |  | $       | 6,360   |   |  | 92  | % 
|Northern Appalachia               |      |                                                            |         |                     |        |         |  |         |         |   |  |     |   
|Tons sold                         |      |                                                            | 3,254   |                     |        | 3,457   |  |         | (203    | ) |  | (6  | )%
|Average sales realization per ton |      | $                                                          | 39.10   |                     | $      | 34.39   |  | $       | 4.71    |   |  | 14  | % 
|Revenues                          |      | $                                                          | 128,474 |                     | $      | 120,707 |  | $       | 7,767   |   |  | 6   | % 
|Income from operations            |      | $                                                          | 22,000  |                     | $      | 45,818  |  | $       | (23,818 | ) |  | (52 | )%
|Central Appalachia                |      |                                                            |         |                     |        |         |  |         |         |   |  |     |   
|Tons sold                         |      |                                                            | 2,002   |                     |        | 2,317   |  |         | (315    | ) |  | (14 | )%
|Average sales realization per ton |      | $                                                          | 52.24   |                     | $      | 45.66   |  | $       | 6.58    |   |  | 14  | % 
|Revenues                          |      | $                                                          | 105,685 |                     | $      | 108,807 |  | $       | (3,122  | ) |  | (3  | )%
|Income from operations            |      | $                                                          | 1,750   |                     | $      | 10,781  |  | $       | (9,031  | ) |  | (84 | )%

Powder River BasinIncome from operations increased $6.4 million
period-over-period due to increased revenues of $21.5 million, partly offset by increased production costs of $15.1 million. As explained in the revenue section above, the increased revenues resulted from a 13% increase in tons sold from record 2006
quarterly shipments and an 11% increase in average sales realization per ton. We continue to expect future increases in tons sold at the Belle Ayr mine primarily due to the expansion of its annual capacity. Increased production costs were primarily
in the following areas: (a) royalties, excise taxes and coal production taxes, which respond to changes in coal sales revenues ($2.2 million); (b) diesel fuel and utilities ($3.0 million); (c) repairs and maintenance ($2.2 million);
(d) large equipment tires and other operating supplies ($1.0 million); (e) explosives ($1.7 million); (f) labor and employee benefits ($2.4 million); (g) other materials, supplies and services ($0.8 million); and
(h) depreciation and amortization ($1.5 million). Production cost increases occurred primarily due to higher period-over-period production. There was a period-over-period $1.1 million reduction in amortization of coal supply agreements as
shipments on a number of coal supply agreements valued in purchase accounting were completed. Production costs in the three months ended September 30, 2005 included a $7.2 million credit for overburden removal costs added to work-in-process
inventory offset by $6.5 million in higher cost depletion expense in the prior year mainly relating to depletion of partially and fully uncovered coal established in purchase accounting. With the implementation of EITF Issue 04-6, effective
January 1, 2006, the Powder River Basin mines are no longer recognizing work-in-process inventory for uncovered coal. Cost of coal sales per ton, after adjusting for the impact of the accounting change for overburden removal costs, increased
approximately 8% period-over-period for reasons discussed above.

Northern AppalachiaDespite higher revenue of $7.8
million, income from operations decreased by $23.8 million period-over-period from increased production costs of $19.2 million and a $12.4 million increase in costs associated with a reduction in coal inventory. Increased revenues resulted from a
14% increase in average sales realization per ton that was offset by a 6% decrease in tons sold. Fewer tons sold resulted from a decrease in shipments, primarily the result of a 25% decrease in production at the Cumberland mine due to a scheduled
longwall move which shut down longwall mining operations for an approximate two week period during the quarter. The prior year third quarter did not contain a longwall move. Shipments from the Emerald mine increased by 8%, reducing coal inventory
because production decreased 15% due to sporadic difficult mining conditions experienced during the quarter. Higher production costs were primarily due to increases in the following areas: (a) labor and employee benefit costs ($3.3 million);
(b) other materials, supplies and services ($5.5 million); (c) diesel fuel and utilities ($0.4 million); (d) repairs and maintenance costs ($0.9 million); (e) operating supplies ($1.3 million); and (f) property taxes ($0.4
million). Costs associated with the change in coal inventory were $12.4 million higher, while cost depletion expense decreased by $3.2 million from $10.1 million in the 2005 quarter. There was a period-over-period $11.4 million reduction in the
credit for amortization of coal supply agreements as shipments on a number of coal supply agreements valued in purchase accounting were completed. Cost of coal sales per ton increased approximately 43% period-over-period.



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Central AppalachiaIncome from operations decreased by $9.0 million period-over-period
due to decreased revenues of $3.1 million, increased cost of coal sales of $0.3 million, increased depreciation and amortization expense of $1.2 million, a reduced credit to expense for amortization of coal supply agreements of $5.8 million, and a
reduced cost depletion expense of $1.4 million. As explained in the revenue section above, the decrease in revenues resulted from a 14% decrease in tons sold, offset by a 14% increase in average sales realizations per ton resulting from the roll-off
of lower priced coal sales agreements from 2005. Tons sold decreased primarily due to a 6% combined reduction in tons produced at all mining operations except the Pax surface mine and Laurel Creek underground mine and from lower volumes of purchased
coal. Higher cost of coal sales were primarily due to increases in the following areas: (a) labor and fringe benefits ($1.6 million); (b) materials, supplies and services, led by increases in diesel fuel and maintenance and repairs ($4.1
million); and (c) royalties and severance taxes ($1.6 million), offset by purchased coal costs ($9.5 million). Cost of coal sales per ton increased approximately 16% period-over-period.

OtherIncludes the Companys Illinois Basin operation, the Wabash mine; expenses associated with closed mines; its coal trading
operations and selling, general and administrative expenses not charged-out to the Powder River Basin, Northern Appalachia or Central Appalachia mines. During the three months ended September 30, 2006, the Other segment reported a loss from
operations of $16.6 million compared to a loss from operations of $11.4 million in the three months ended September 30, 2005. The increased period-over-period loss from operations of $5.2 million was primarily a result of an increased operating
loss at the Wabash mine ($6.5 million) due to an approximate 40% decline in production and shipped tons as well as a 13% decline in coal sales realization per ton. As described in the revenue section above, the planned production decline occurred
due to the diversion of scheduled operating shifts to maintain the mines underground infrastructure and for compliance with federal and state regulations. The operating losses attributable to closed mines were less by $0.6 million in the third
quarter of 2006 compared to the third quarter of 2005. Selling, general and administrative expenses not charged out to the other operating segments decreased by $2.8 million period-over-period.

Interest Expense, Net



|                                                          |      |                                 |         |      |                     |   |         |   |  |         |       |   |  |     |   
|--------------------------------------------------------- | ---- | ------------------------------- | ------- | ---- | ------------------- | - | ------- | - |  | ------- | ----- | - |  | --- | --
|                                                          |      | Three Months EndedSeptember 30, |         |      | Increase (Decrease) |  
|                                                          | 2006 |                                 |         | 2005 |                     |   | Amount  |   |  | Percent |      
|                                                          |      | (Unaudited, in thousands)       |        
|Interest expensedebt related                             |      | $                               | (10,941 | )    |                     | $ | (10,674 | ) |  | $       | 267   |   |  | 3   | % 
|Interest expenseamortization of deferred financing costs |      |                                 | (9,657  | )    |                     |   | (1,475  | ) |  |         | 8,182 |   |  | 555 | % 
|Interest expensesurety bond and letter of credit fees    |      |                                 | (1,872  | )    |                     |   | (2,561  | ) |  |         | (689  | ) |  | (27 | )%
|Interest expenseother                                    |      |                                 | (588    | )    |                     |   | (382    | ) |  |         | 206   |   |  | 54  | % 
|Interest income                                           |      |                                 | 958     |      |                     |   | 235     |   |  |         | 723   |   |  | 308 | % 
|                                                          |      |                                 |         |      |                     |   |         |   |  |         |       |   |  |     |   
|Interest expense, net                                     |      | $                               | (22,100 | )    |                     | $ | (14,857 | ) |  | $       | 7,243 |   |  | 49  | % 
|                                                          |      |                                 |         |      |                     |   |         |   |  |         |       |   |  |     |   

Interest expense, net for the three months ended September 30, 2006 includes a $9.2 million
non-cash write-off of unamortized deferred financing costs recorded as a result of the Companys amendment to its debt agreement as more fully described in the Liquidity and Capital Resources section below. Excluding this charge, interest
expense, net for the three months ended September 30, 2006, was lower than the three months ended September 30, 2005 due primarily to lower surety bond and letter of credit fees and higher interest income resulting from interest on
invested cash balances. The reduction in surety bond and letter of credit fees was primarily attributable to fewer letters of credit outstanding. Debt related interest expense for the three months ended September 30, 2006 was slightly higher
than the debt related interest expense for the three months ended September 30, 2005 due to an approximate 140 basis point increase in the interest rate on variable rate debt, partly offset by the impact of repaying $50.0 million of variable
rate debt in the second half of 2005.



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Income Tax Benefit (Expense)



|                             |      |                                 |       |  |                             |         |   |         |   |        |  |     |  
|---------------------------- | ---- | ------------------------------- | ----- |  | --------------------------- | ------- | - | ------- | - | ------ |  | --- | -
|                             |      | Three Months EndedSeptember 30, |       |  | Income Tax Benefit Increase |        
|                             | 2006 |                                 | 2005  |  |                             | Amount  |   | Percent |  
|                             |      | (Unaudited, in thousands)       |      
|Income tax benefit (expense) |      | $                               | 1,962 |  | $                           | (14,714 | ) |         | $ | 16,676 |  | 113 | %

For the three months ended September 30, 2006, the $2.0 million income tax benefit
represented an effective rate of approximately 110%, which was derived from the difference in the projected annual effective rate of 13.6% at September 30, 2006 and 16.3% at June 30, 2006. The projected annual effective rate is determined
based upon the projected full year taxable income and projected full year book-to-tax differences. The projected annual effective tax rate was reduced in the three month period ended September 30, 2006 from the previous quarter due to revisions
in previous estimates. For the three months ended September 30, 2005 income taxes were provided at an effective rate of approximately 40.0%. The reduction in effective income tax rate period-over-period is primarily due to an increase in the
percentage depletion projected at the Cumberland mine due to fully depleting its tax basis in coal reserves late in 2005. Because of the excess book depletion adjustments above the tax basis of the coal reserves, percentage depletion from Cumberland
which was treated as a temporary difference in the effective income tax rate used during 2005, is now treated as a permanent difference in estimating the effective income tax rate for 2006. In addition, the Emerald mine and the Central Appalachia
mines are expected to generate increased percentage depletion, which is treated as a permanent difference, during 2006.

Nine Months
Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005

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

Revenues



|                                    |      |                                                |           |          |        |         |         |   |         |  |    |  
|----------------------------------- | ---- | ---------------------------------------------- | --------- | -------- | ------ | ------- | ------- | - | ------- |  | -- | -
|                                    |      | Nine Months Ended September 30,                |           | Increase |       
|                                    | 2006 |                                                | 2005      |          | Amount |         | Percent |  
|                                    |      | (Unaudited, in thousands, except per ton data) |          
|Coal sales                          |      | $                                              | 1,094,272 |          | $      | 958,027 |         | $ | 136,245 |  | 14 | %
|Other revenue                       |      |                                                | 22,260    |          |        | 18,267  |         |   | 3,993   |  | 22 | %
|                                    |      |                                                |           |          |        |         |         |   |         |  |    |  
|Total revenues                      |      | $                                              | 1,116,532 |          | $      | 976,294 |         | $ | 140,238 |  | 14 | %
|                                    |      |                                                |           |          |        |         |         |   |         |  |    |  
|Tons sold                           |      |                                                | 55,603    |          |        | 51,278  |         |   | 4,325   |  | 8  | %
|Coal sales realization per ton sold |      | $                                              | 19.68     |          | $      | 18.69   |         | $ | 0.99    |  | 5  | %

Coal sales revenues for the nine months ended September 30, 2006 increased by 14% compared to
the coal sales revenues for the nine months ended September 30, 2005 as a result of an 8% increase in tons sold and a 5% increase in average coal sales realization per ton.

Coal sales volumes in Northern Appalachia increased by 0.3 million tons (3%) period-over-period mainly as a result of increased shipments and
production from the Cumberland mine, and increased shipments from the Emerald mine despite a 1% reduction in production due to sporadic difficult mining conditions experienced throughout the year. Emerald had one scheduled longwall move in the first
six months of each year while Cumberland had a scheduled longwall move in the third quarter of 2006.

Coal sales volumes in Central
Appalachia were consistent with the prior year, primarily due to higher first quarter of 2006 shipments of purchased coal utilized on selected steam coal contracts and higher shipments from the Pax surface mine, offset by lower shipments from the
majority of the remaining mining operations. Production in Central Appalachia declined by 4% between the two periods as 76% higher production at the Pax surface mine was offset by reduced production at all the other West Virginia mining operations,
a result of difficult mining conditions experienced throughout the year. The Pax surface mine, which replaced the Simmons Fork mine that depleted its reserves in 2004, began production in the fourth quarter of 2004 and, in 2005, produced
0.6 million tons. The Pax surface mine has been increasing its production during 2006 as mine development progressed to its current state of completion and is expected to produce at an annual rate of approximately 1 million tons per year
before the integration of the recently acquired mining assets of Pax South discussed in Significant Property Transactions below.



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Coal sales volumes in the Powder River Basin increased by 4.9 million tons (15%) to a record
shipment level of 37.3 million tons primarily due to a 24% increase in both production and shipments from the Belle Ayr mine where annual production capacity was increased by 5.0 million tons effective January 1, 2006. Eagle Butte
production and shipments increased 8% period-over-period primarily due to favorable second and third quarter of 2006 operating results.

Coal sales volumes from the Illinois Basin decreased by 0.5 million tons (36%), reflecting 38% lower production from the Wabash mine due to the diversion of scheduled operating shifts to maintain the mines underground
infrastructure and the mines compliance with federal and state regulations, coupled with a lower clean coal recovery percentage as compared to the same period in 2005. Purchased coal activities by our trading group decreased by approximately
0.4 million tons (74%), compared to the same period in 2005, due to the timing of purchased coal transactions.

Coal sales realization
per ton sold in Northern and Central Appalachia increased by 13% and 11%, respectively, in 2006 due to a combination of: (a) substitution of higher priced contracts which took effect in late 2005 and early 2006 for lower priced contracts that
expired; and (b) higher coal quality premiums reflecting both increased prices for sulfur dioxide emission allowances and more favorable coal quality. In the Powder River Basin, coal sales realizations per ton increased by 14% due to the
commencement of shipments under higher priced contracts and higher coal quality premiums.

Other revenues for the nine months ended
September 30, 2006 increased by $4.0 million (22%) compared to the nine months ended September 30, 2005. The increase was due to the sum of: (a) increased transloading fees ($0.3 million); (b) gains on asset sales ($0.5
million); (c) increased royalty income ($1.7 million); (d) decreased coalbed methane revenues ($1.0 million); and (e) increased miscellaneous revenues ($2.5 million).

Costs and Expenses



|                                                                                                |      |                                 |           |      |                     |   |         |   |  |         |         |   |  |     |     
|----------------------------------------------------------------------------------------------- | ---- | ------------------------------- | --------- | ---- | ------------------- | - | ------- | - |  | ------- | ------- | - |  | --- | ----
|                                                                                                |      | Nine Months Ended September 30, |           |      | Increase (Decrease) |  
|                                                                                                | 2006 |                                 |           | 2005 |                     |   | Amount  |   |  | Percent |        
|                                                                                                |      | (Unaudited, in thousands)       |          
|Cost of coal sales (excludes depreciation, depletion and amortization)                          |      | $                               | 835,890   |      |                     | $ | 697,736 |   |  | $       | 138,154 |   |  | 20  | %(1)
|Selling, general and administrative expense (excludes depreciation, depletion and amortization) |      |                                 | 36,456    |      |                     |   | 33,633  |   |  |         | 2,823   |   |  | 8   | %   
|Accretion on asset retirement obligations                                                       |      |                                 | 6,327     |      |                     |   | 6,203   |   |  |         | 124     |   |  | 2   | %   
|Depreciation, depletion and amortization                                                        |      |                                 | 137,678   |      |                     |   | 160,625 |   |  |         | (22,947 | ) |  | (14 | )%  
|Amortization of coal supply agreements                                                          |      |                                 | (11,773   | )    |                     |   | (66,983 | ) |  |         | 55,210  |   |  | 82  | %   
|                                                                                                |      |                                 |           |      |                     |   |         |   |  |         |         |   |  |     |     
|Total costs and expenses                                                                        |      | $                               | 1,004,578 |      |                     | $ | 831,214 |   |  | $       | 173,364 |   |  | 21  | %   
|                                                                                                |      |                                 |           |      |                     |   |         |   |  |         |         |   |  |     |     

---

|(1) | Excluding the credit related to deferral of costs associated with overburden removal in the nine months ended September 30, 2005, cost of coal sales increased
approximately 15%.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cost of coal sales. The cost of coal sales increased $138.2 million for the nine months
ended September 30, 2006 compared to the nine months ended September 30, 2005 primarily due to: (a) increases in labor costs as a result of both compensation increases and hiring of additional personnel ($26.6 million);
(b) increases in materials, consumables and commodity supply costs, most notably diesel fuel, large equipment tires and explosives ($64.9 million); (c) increases in royalties and coal production taxes as a result of higher revenues ($20.3
million); (d) decreases in purchased coal costs as a result of lower purchased coal volumes ($22.6 million); (e) an accounting change, effective January 1, 2006, requiring expensing of overburden removal costs ($28.6 million);
(f) an increase to expense from a decrease of coal inventories in the first nine months of 2006 compared to a decrease to expense from an increase in coal inventories during the first nine months of 2005 ($26.7 million); (g) a decrease in
longwall move expense ($4.9 million); (h) a decrease in expenses associated with contractor mining ($2.9 million); and (i) increases in other miscellaneous expenses ($1.4 million). Production costs increased partly due to higher
period-over-period



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##### Table of Contents

production. Cost of coal sales per ton was $15.03 for the nine months ended September 30, 2006 compared to $13.61
per ton for the nine months ended September 30, 2005. The $13.61 cost of coal sales per ton for the nine months ended September 30, 2005 includes a $28.6 million credit related to the deferral of costs associated with overburden removal.
Subsequent to the Companys adoption of EITF Issue 04-6 on January 1, 2006, such costs were no longer deferred. Cost of coal sales per ton was $14.17 after adjusting for the impact of the accounting change for overburden removal costs, an
increase of approximately 6%.

Selling, general and administrative expense. Selling, general and administrative expense for
the nine months ended September 30, 2006 was $36.5 million compared to $33.6 million for the nine months ended September 30, 2005. Period-over-period increases were due to additional expenses incurred for employee expenses ($4.3 million),
partially offset by lower insurance expenses and reduced sales commissions (combined $0.7 million) and lower outside service expenses including audit fees and Sarbanes Oxley 404 compliance ($0.7 million).

Accretion on asset retirement obligations. Accretion on asset retirement obligations is a component of accounting for asset retirement
obligations under SFAS No. 143. Accretion represents the increase in the asset retirement liability to reflect the change in the liability for the passage of time. Slightly higher accretion expense in 2006 was due to increased asset retirement
obligation estimates at closed mines.

Depreciation, depletion and amortization. DD&A includes depreciation of plant and
equipment, cost depletion of amounts assigned to coal lands and mining rights and amortization of mine development costs and leasehold improvements. DD&A expense decreased $22.9 million for the nine months ended September 30, 2006 compared
to the nine months ended September 30, 2005, primarily due to lower cost depletion, partially offset by higher depreciation and amortization. Cost depletion declined by $36.2 million due to a combination of: (a) lack of depletion expense
in the first nine months of 2006 pertaining to purchase accounting values assigned to partially and fully uncovered coal at the Powder River Basin surface mines as these assets were fully depleted during 2005; and (b) final purchase accounting
adjustments recorded in 2005 that reduced the values assigned to coal lands and mining rights, partly offset by higher production in the Powder River Basin during 2006. Depreciation and amortization increased by $13.3 million in the first nine
months of 2006 mainly due to capital additions to plant & equipment during the twelve months ended September 30, 2006.

Coal supply agreement amortization. Application of purchase accounting resulted in recognition of a significant liability for below market priced coal supply agreements as well as a significant asset for above market priced
coal supply agreements, both in relation to market prices at the date of Acquisition. Coal supply agreement amortization decreased $55.2 million for the nine months ended September 30, 2006 compared to the nine months ended September 30,
2005. Amortization of the liability for below market priced coal supply agreements during the nine months ended September 30, 2006 was $27.0 million of credit to expense compared to $86.2 million of credit to expense in the comparable period of
the prior year. Amortization of the asset for above market priced coal supply agreements during the nine months ended September 30, 2006 was $15.2 million of expense compared to $19.2 million of expense in the comparable period of the prior
year. During the twelve months ended September 30, 2006, shipments on a number of coal supply agreements valued in purchase accounting were completed.



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Segment Analysis

Utilizing data published by Argus Media, the following graph sets forth representative steam coal prices in various U.S. markets summarized for the monthly periods from January 1, 2005 through September 30,
2006. The prices are not necessarily representative of the coal prices actually obtained by the Company. Changes in coal prices have an impact over time on the Companys average sales realization per ton and, ultimately, its consolidated
financial results.

LOGO



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|                                  |  |                                                            |         |                     |   |         |  |   |         |   |  |     |   
|--------------------------------- |  | ---------------------------------------------------------- | ------- | ------------------- | - | ------- |  | - | ------- | - |  | --- | --
|                                  |  | Nine Months Ended September 30,                            |         | Increase (Decrease) |  
|                                  |  | 2006                                                       |         | 2005                |   | Tons/$  |  |   | Percent |  
|                                  |  | (Unaudited, in thousands except sales realization per ton) |        
|Powder River Basin                |  |                                                            |         |                     |   |         |  |   |         |   |  |     |   
|Tons sold                         |  |                                                            | 37,318  |                     |   | 32,426  |  |   | 4,892   |   |  | 15  | % 
|Average sales realization per ton |  | $                                                          | 8.42    |                     | $ | 7.38    |  | $ | 1.04    |   |  | 14  | % 
|Revenues                          |  | $                                                          | 315,474 |                     | $ | 240,671 |  | $ | 74,803  |   |  | 31  | % 
|Income from operations            |  | $                                                          | 32,137  |                     | $ | 10,223  |  | $ | 21,914  |   |  | 214 | % 
|Northern Appalachia               |  |                                                            |         |                     |   |         |  |   |         |   |  |     |   
|Tons sold                         |  |                                                            | 10,613  |                     |   | 10,289  |  |   | 324     |   |  | 3   | % 
|Average sales realization per ton |  | $                                                          | 39.05   |                     | $ | 34.45   |  | $ | 4.60    |   |  | 13  | % 
|Revenues                          |  | $                                                          | 418,683 |                     | $ | 358,863 |  | $ | 59,820  |   |  | 17  | % 
|Income from operations            |  | $                                                          | 120,425 |                     | $ | 127,660 |  | $ | (7,235  | ) |  | (6  | )%
|Central Appalachia                |  |                                                            |         |                     |   |         |  |   |         |   |  |     |   
|Tons sold                         |  |                                                            | 6,663   |                     |   | 6,661   |  |   | 2       |   |  |    | % 
|Average sales realization per ton |  | $                                                          | 50.00   |                     | $ | 45.00   |  | $ | 5.00    |   |  | 11  | % 
|Revenues                          |  | $                                                          | 342,026 |                     | $ | 308,233 |  | $ | 33,793  |   |  | 11  | % 
|Income from operations            |  | $                                                          | 15,445  |                     | $ | 42,970  |  | $ | (27,525 | ) |  | (64 | )%

Powder River BasinIncome from operations increased $21.9 million
period-over-period due to increased revenues of $74.8 million, partly offset by increased production costs of $52.8 million. As explained in the revenue section above, the increased revenues resulted from a 15% increase in tons sold from record 2006
year-to-date shipments and a 14% increase in average sales realization per ton. The increase in tons sold is primarily due to the expansion of annual capacity at the Belle Ayr mine and favorable second and third quarter of 2006 operating results at
the Eagle Butte mine, which resulted in an 8% period-over-period increase in production and shipments, respectively. Increased production costs were primarily in the following areas: (a) royalties, excise taxes and coal production taxes, which
respond to changes in coal sales revenues ($14.8 million); (b) diesel fuel and utilities ($10.5 million); (c) repairs and maintenance ($6.0 million); (d) large equipment tires and other operating supplies ($4.9 million);
(e) explosives ($3.5 million); (f) labor and employee benefits ($6.2 million); (g) other supplies and services ($1.4 million); and (h) depreciation and amortization ($5.4 million). Certain production cost increases occurred due
to higher period-over-period production. There was a period-over-period $3.3 million reduction in amortization of coal supply agreements as shipments on a number of supply agreements valued in purchase accounting were completed. Production costs in
the nine months ended September 30, 2005 included a $28.6 million credit for overburden removal costs added to work-in-process inventory offset by a $26.7 million in higher cost depletion expense in the prior year mainly relating to depletion
of partially and fully uncovered coal established in purchase accounting. With the implementation of EITF Issue 04-6, effective January 1, 2006, the Powder River Basin mines are no longer recognizing work-in-process inventory for uncovered
coal. Cost of coal sales per ton, after adjusting for the impact of the accounting change for overburden removal costs, increased approximately 9% period-over-period for reasons discussed above.

Northern AppalachiaDespite higher revenue of $59.8 million, income from operations decreased by $7.2 million period-over-period due
to increased production costs of $59.5 million and a $7.5 million increase in costs associated with a reduction in coal inventory. Increased revenues resulted from a 3% increase in tons sold and a 13% increase in average sales realization per ton.
The increase in shipments was primarily due to a 5% increase in shipments from the Cumberland mine as production in the first half of the year at Cumberland increased as a result of good mining conditions and strong longwall productivity, partially
offset by a 25% production decline in the third quarter of 2006, compared to 2005, due to a scheduled longwall move which shut down longwall mining operations for an approximate two week period during the 2006 quarter. Cumberland did not have a
longwall move in the first nine months of 2005. Production from the Emerald mine declined slightly period-over-period from sporadic difficult mining conditions experienced throughout the year. Higher production costs were primarily due to increases
in the following areas: (a) labor and employee benefit costs ($6.5 million); (b) repairs and maintenance costs ($4.8 million); (c) other materials, supplies and services ($9.0 million); (d) insurance premiums ($0.8 million);
(e) diesel fuel and utilities ($1.5 million); (f) depreciation and amortization ($3.7 million); (g) reduced credit for amortization of coal supply agreements ($37.2 million); (h) operating supplies ($3.5 million);
(i) royalties, excise taxes and coal production taxes, which correspond to changes in coal sales revenues ($1.1 million); and (j) change in coal inventory ($7.5 million). These increases were partly offset by reduced cost depletion of $5.4
million; and (k) lower longwall move costs ($4.9 million). Cost of coal sales per ton increased approximately 11% period-over-period.



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##### Table of Contents

Central AppalachiaIncome from operations decreased by $27.5 million
period-over-period due to increased cost of coal sales of $44.2 million, increased depreciation and amortization expense of $3.6 million and a reduced credit to expense for amortization of coal supply agreements of $17.6 million, partly offset by
increased revenues of $33.8 million and reduced cost depletion expense of $4.0 million. The increase in revenues resulted from an 11% increase in average sales realizations per ton resulting from the roll-off of lower priced coal sales agreements
from 2005. Tons sold remained constant despite increased tons that were purchased and resold and a period-over-period 76% and 64% increases in production and shipments, respectively, at the Pax surface mine due to the completion of mine development.
Higher cost of coal sales were primarily due to increases in the following areas: (a) labor and fringe benefits ($7.0 million); (b) materials, supplies and services, led by increases for maintenance and repairs, diesel fuel, explosives and
contract trucking ($17.8 million); (c) purchased coal ($29.6 million); and (d) royalties and severance taxes ($5.0 million). Cost of coal sales per ton increased approximately 17% period-over-period.

OtherIncludes the Companys Illinois Basin operation, the Wabash mine, expenses associated with closed mines, its coal trading
operations and selling general and administrative expenses not charged-out to the Powder River Basin, Northern Appalachia or Central Appalachia mines. During the nine months ended September 30, 2006, the Other segment reported a loss from
operations of $56.1 million compared to a loss from operations of $35.8 million in the nine months ended September 30, 2005. The increased period-over-period loss from operations of $20.3 million was primarily a result of an increased operating
loss at the Wabash mine ($20.3 million) due to: (a) an approximate 40% decline in production and shipments, as described in the revenue section above; (b) higher cost of coal sales; and (c) a reduced credit to expense from
amortization coal supply agreements. The operating losses attributable to closed mines were less by $3.4 million in the first nine months of 2006 compared to the first nine months of 2005. The increase in selling, general and administrative expenses
not charged out to the other operating segments was de minimisperiod-over-period.

Interest Expense, Net



|                                                          |      |                                |         |      |                     |   |         |   |  |         |        |   |  |     |   
|--------------------------------------------------------- | ---- | ------------------------------ | ------- | ---- | ------------------- | - | ------- | - |  | ------- | ------ | - |  | --- | --
|                                                          |      | Nine Months EndedSeptember 30, |         |      | Increase (Decrease) |  
|                                                          | 2006 |                                |         | 2005 |                     |   | Amount  |   |  | Percent |       
|                                                          |      | (Unaudited, in thousands)      |        
|Interest expensedebt related                             |      | $                              | (32,583 | )    |                     | $ | (31,973 | ) |  | $       | 610    |   |  | 2   | % 
|Interest expenseamortization of deferred financing costs |      |                                | (11,091 | )    |                     |   | (3,022  | ) |  |         | 8,069  |   |  | 267 | % 
|Interest expensesurety bond and letter of credit fees    |      |                                | (5,209  | )    |                     |   | (7,466  | ) |  |         | (2,257 | ) |  | (30 | )%
|Interest expenseother                                    |      |                                | (1,823  | )    |                     |   | (1,308  | ) |  |         | 515    |   |  | 39  | % 
|Interest income                                           |      |                                | 2,184   |      |                     |   | 537     |   |  |         | 1,647  |   |  | 307 | % 
|                                                          |      |                                |         |      |                     |   |         |   |  |         |        |   |  |     |   
|Interest expense, net                                     |      | $                              | 48,522  |      |                     | $ | 43,232  |   |  | $       | 5,290  |   |  | 12  | % 
|                                                          |      |                                |         |      |                     |   |         |   |  |         |        |   |  |     |   

Interest expense, net for the nine months ended September 30, 2006 includes a $9.2 million
non-cash write-off of unamortized deferred financing costs recorded as a result of the Companys amendment to its debt agreement as more fully described in the Liquidity and Capital Resources section below. Excluding this charge, interest
expense, net for the nine months ended September 30, 2006, was lower than the nine months ended September 30, 2005 due primarily to lower surety bond and letter of credit fees and higher interest income resulting from interest on invested
cash balances. The reduction in surety bond and letter of credit fees was primarily attributable to fewer letters of credit outstanding. Debt related interest expense for the nine months ended September 30, 2006 was slightly higher than the
debt related interest expense for the nine months ended September 30, 2005 due to an approximate 130 basis point increase in the interest rate on variable rate debt, partly offset by the impact of repaying $50 million of variable rate debt in
the second half of 2005.



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##### Table of Contents

Income Tax Expense



|                   |      |                                |       |                             |        |        |  |         |         |   |  |     |   
|------------------ | ---- | ------------------------------ | ----- | --------------------------- | ------ | ------ |  | ------- | ------- | - |  | --- | --
|                   |      | Nine Months EndedSeptember 30, |       | Income Tax Expense Decrease |       
|                   | 2006 |                                | 2005  |                             | Amount |        |  | Percent |        
|                   |      | (Unaudited, in thousands)      |      
|Income tax expense |      | $                              | 8,418 |                             | $      | 39,949 |  | $       | (31,531 | ) |  | (79 | )%

For the nine months ended September 30, 2006, income taxes were provided at an effective rate
of approximately 13.3% based on projected full year taxable income and projected full year book-to-tax differences. For the nine months ended September 30, 2005 income taxes were provided at an effective rate of approximately 39.2%. The
reduction in effective income tax rate period-over-period is primarily due to an increase in the percentage depletion projected at the Cumberland mine due to fully depleting its tax basis in coal reserves late in 2005. Because of the excess book
depletion adjustments above the tax basis of the coal reserves, percentage depletion from Cumberland, which was treated as a temporary difference in the effective income tax rate used during 2005, is now treated as a permanent difference in
estimating the effective income tax rate for 2006. In addition, the Emerald mine and the Central Appalachia mines are expected to generate increased percentage depletion, which is treated as a permanent difference, during 2006.

Expected Coal Production

100%
of our 2006 projected production is committed and priced. As of October 17, 2006, uncommitted and unpriced tonnage was 8%, 32% and 53% of planned production in 2007, 2008 and 2009, respectively. Eastern coals account for the majority of
uncommitted tonnage as 16%, 43% and 75% of the Companys planned eastern production remains uncommitted and unpriced in 2007, 2008 and 2009, respectively.

In 2006 through 2009, the Company expects coal production within the following ranges:



|                   |  |                                             |  |           |  |           |  |          
|------------------ |  | ------------------------------------------- |  | --------- |  | --------- |  | ---------
|                   |  | Expected Coal Production (Millions of Tons)
|                   |  | 2006                                        |  | 2007      |  | 2008      |  | 2009     
|East               |  | 21.022.0                                   |  | 21.523.5 |  | 21.523.5 |  | 21.523.5
|West               |  | 49.050.0                                   |  | 49.051.0 |  | 54.056.0 |  | 54.056.0
|Total Consolidated |  | 70.072.0                                   |  | 70.574.5 |  | 75.579.5 |  | 75.579.5

Based on its committed and priced planned production as of October 17, 2006, the Company
expects its committed and priced production from its Eastern mines, encompassing Northern Appalachia, Central Appalachia and the Illinois Basin, to realize in the range of $41.25 to $42.00 per ton in 2006. The Company also expects its committed and
priced production from the Powder River Basin to realize in the range of $8.25 to $8.60 per ton in 2006. These ranges of expected per ton average realizations include forecast sulfur dioxide and btu premiums based on contract terms, projected coal
qualities and sulfur dioxide emissions prices in the range of $620 to $720 per ton. The above tonnages and expected per ton average realizations exclude coal that may be purchased and resold during 2006.

Significant Property Transaction

In the third
quarter of 2006, Pioneer Fuel Corporation, an indirect wholly owned subsidiary of the Company, purchased mining assets from Appalachian Fuels, LLC for $15.4 million. The purchased assets consisted of approximately 7.3 million tons of reserves,
land and mining equipment. The acquired reserves are located adjacent to and will be integrated with the existing Pax surface operations and jointly managed. The acquired mine, referred to as Pax South, is expected to produce up to 720,000 tons per
year, after it reaches full capacity, and to provide other synergies to existing properties. In accordance with terms set forth in the asset purchase agreement, $1.0 million of the purchase price was withheld for contingencies, but will be remitted
to Appalachian Fuels eighteen months after the acquisition date if no contingencies materialize. The Company also recorded $1.2 million for the estimated asset retirement obligations associated with the acquired assets. In a separate transaction,
coal stockpiles containing an estimated 8,300 tons were also acquired from Appalachian Fuels, LLC for $0.2 million.



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##### Table of Contents

Liquidity and Capital Resources

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

Our primary uses of cash have been our cash costs of coal production, the cash cost of purchased coal, capital expenditures, interest costs, cash
payments for employee benefit obligations such as defined benefit pensions and retiree health care benefits, cash outlays related to post mining asset retirement obligations and support of working capital requirements such as coal inventories and
trade accounts receivable. Our ability to service debt and acquire new productive assets for use in our operations has been and will be dependent upon our ability to generate cash from our operations. We generally fund all of our capital expenditure
requirements with cash generated from operations. Historically, we have engaged in minimal financing of assets such as through operating leases.

The following is a summary of cash provided by or used in each of the indicated categories of activities during the nine months ended September 30, 2006 and 2005, respectively.



|                                                                                                  |  |                                 |          |   |      |   |         |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | ------- | -
|                                                                                                  |  | Nine Months Ended September 30, |         
|                                                                                                  |  | 2006                            |          |   | 2005 |  
|                                                                                                  |  | (Unaudited, in thousands)       |         
|Cash provided by (used in):                                                                       |  |                                 |          |   |      |   |         |  
|Operating activities                                                                              |  | $                               | 158,002  |   |      | $ | 102,807 |  
|Investing activities (primarily capital expenditures)                                             |  |                                 | (132,639 | ) |      |   | (96,848 | )
|Financing activitiesborrowings(1)                                                                |  |                                 |         |   |      |   | 76,000  |  
|Financing activitiesrepayments(1)                                                                |  |                                 |         |   |      |   | (96,000 | )
|Financing activitiesexcess tax benefit from stock-based awards                                   |  |                                 | 10,672   |   |      |   |        |  
|Financing activitiescapital contribution from Public parent                                      |  |                                 | 7,479    |   |      |   |        |  
|Financing activitiesproceeds from interest rate swap termination                                 |  |                                 | 2,259    |   |      |   |        |  
|Financing activitiespayment of cash dividends to Public parent for repurchase of common stock    |  |                                 | (11,889  | ) |      |   |        |  
|Financing activitiespayment of cash dividends to Public parent for payment of ordinary dividends |  |                                 | (6,817   | ) |      |   |        |  
|Financing activitiesdeferred financing costs                                                     |  |                                 | (4,443   | ) |      |   |        |  
|                                                                                                  |  |                                 |          |   |      |   |         |  
|Change in cash and cash equivalents                                                               |  | $                               | 22,624   |   |      | $ | (14,041 | )
|                                                                                                  |  |                                 |          |   |      |   |         |  

---

|(1) | The borrowings during the nine months ended September 30, 2005 in the amount of $76.0
million represent use of the revolving credit facility to maintain day-to-day liquidity. Repayments during the nine months ended September 30, 2005 include $76.0 million related to the revolving credit facility and $20.0 million related to the
repayment of long-term debt.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash provided by operating activities increased in the nine months ended September 30,
2006 compared to the nine months ended September 30, 2005 due to the content of changes in non-cash adjustments to income and smaller changes in operating working capital, principally trade accounts receivable and inventories.

Cash used in investing activities increased in the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005,
primarily from an increase in capital expenditures and the acquisition of mining assets. Capital expenditures in the nine months ended September 30, 2006 totaled $119.7 million, including a total of $55.2 million of expenditures related to the
following projects: (a) an overland coal conveyor at the Belle Ayr Mine in the Powder River Basin; (b) equipment for and development of the Pax surface mine and related rail loading facility in Central Appalachia; (c) upgrades to the
rail loading facility at Emerald; (d) construction of a new slope, overland coal conveyor and related coal handling facilities at the Wabash mine in Illinois; and (e) the acquisition and implementation of company wide enterprise resource
planning (ERP) software. Capital expenditures for the nine months ended September 30, 2005 totaled $102.2 million, including a total of $42.3 million of expenditures related to the following projects: (a) expansion of the Belle
Ayr Mine in the Powder River Basin; (b) development of the Pax surface mine in Central Appalachia; (c) addition of a continuous mining unit to the Kingston Mine in Central Appalachia; (d) the widening of the Emerald Mine longwall face
to 1,450 feet from 1,250 feet; and (e) upgrades to the rail loading facility at Emerald.



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##### Table of Contents

Cash provided by financing activities during the nine months ended September 30, 2006 consisted of
$7.5 million of capital contributions from the Public parent; $10.7 million in excess income tax benefit from issuance of stock-based awards; and $2.3 million in cash proceeds from the settlement of the interest rate swaps, offset by cash dividends
to the Public Parent of $11.9 million for the repurchase of common stock; cash dividends to the Public parent for the payment of ordinary dividends of $6.8 million; and $4.4 million for the payment of financing costs related to bank debt refinancing
activities in the third quarter. Cash used in financing activities for the nine months ended September 30, 2005 included a $20.0 million voluntary advance principal payment on the long-term portion of the Companys term loan component of
the Senior Secured Credit Facility.

Our primary source of liquidity will continue to be cash from sales of our coal production and
purchased coal to customers. We have borrowing availability under our revolving credit facility, subject to certain conditions.

As of
September 30, 2006, we have outstanding $635.0 million in aggregate indebtedness, with an additional $327.2 million of available borrowings under our revolving credit facility after giving effect to $172.8 million of letters of credit
outstanding as of September 30, 2006. Our liquidity requirements will be significant due to debt service requirements and projected capital expenditures.

Based on our current levels of operations, we believe that remaining cash on hand, cash flow from operations and available borrowings under the revolving credit portion of our Senior Secured Credit Facility will
enable us to meet our working capital, capital expenditure, debt service and other funding requirements for at least the next twelve months.

Bank Debt
Refinancing

Effective July 7, 2006, the Company completed an $835.0 million amended and restated Senior Secured Credit Facility
agreement (the new facility) consisting of a five-year $335.0 million Term Loan A and a five-year $500.0 million revolving credit facility. The new facility, which expires in July 2011, bears interest at an applicable margin, plus the
lenders base rate or LIBOR at the Companys option, and requires the Company to pay a commitment fee to the lenders for the unutilized portion of the commitment under the revolving credit facility based on a quarterly leverage ratio
calculation. The revolving credit facility provides for up to $500.0 million for borrowings on same-day notice, referred to as swingline loans, LIBOR loans or letters of credit up to a maximum of the unutilized portion of the revolver. Costs of $4.4
million incurred in connection with the issuance of the new facility were capitalized and are being amortized over the term of the related indebtedness of five years, using the effective interest method. As of September 30, 2006, the Company
had $327.2 million of available borrowings under its revolving credit facility, after giving effect to $172.8 million of letters of credit outstanding and had $335.0 million outstanding borrowings under the Term Loan A component of the new facility.
The new facility replaces the existing Senior Secured Credit Facility (the original facility) and provides more favorable pricing and financial flexibility then the original facility. The $500.0 million revolving credit facility will be
used for general corporate purposes including working capital, capital expenditures and letters of credit.

In the third quarter of 2006,
the Company wrote-off $9.2 million of non-cash unamortized deferred financing costs associated with the original Senior Secured Credit Facility which is included in Interest expense in the Statements of Consolidated Operations and
Comprehensive Income.

Interest Rate Swaps

On September 30, 2004, the Company entered into pay-fixed, receive-variable interest rate swap agreements on a notional amount of $85.0 million. These swap agreements essentially converted $85.0 million of the Companys variable
rate borrowings under the then existing facility to fixed rate borrowings for a three year period that began on September 30, 2004. The maturity date on the swap agreements is September 28, 2007. The Company designated these interest rate
swaps as cash flow hedges of the variable interest payments and recorded the quarterly changes in the fair value of the instruments in Other noncurrent assets with an offsetting unrealized gain, net of tax expense, in Accumulated
other comprehensive loss.



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In connection with the July 7, 2006 closing of the amended and restated Senior Secured Credit
Facility, the Company terminated the swap agreements. On the date the Company made the decision to terminate the interest rate swaps, the interest rate swaps no longer qualified for cash flow hedge accounting treatment and accordingly, any change in
the market value of the interest rate swaps affects net income. On July 11, 2006, the Company monetized the $2.4 million derivative asset included in Other noncurrent assets in the Companys consolidated financial statements at
June 30, 2006 and recognized a $0.1 million mark-to-market loss on the swaps. The $1.8 million unrealized gain from the change in the market value of the interest rate swaps recorded in Accumulated other comprehensive loss will be
recognized into income on a prorated basis over the remaining term of the original interest rate swap agreement through September 28, 2007, in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and related amendments.

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, including Lease by Application (LBA) bids, and acquisitions of, or
combinations with, coal mining companies. When we believe that these opportunities are consistent with our growth plans and our acquisition criteria, we will make bids or proposals and/or enter into letters of intent and other similar agreements,
which may be binding or nonbinding, that are customarily subject to a variety of conditions and usually permit us to terminate the discussions and any related agreements 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 such additional
indebtedness and/or equity capital will be available on terms acceptable to us, if at all.

Covenant Compliance

We believe that our Senior Secured Credit Facility and the indenture governing our outstanding 7.25% Senior Notes are material agreements, that the
covenants are material terms of these agreements and that information about the covenants is material to an investors understanding of our financial condition and liquidity. The breach of covenants in the Senior Secured Credit Facility that
are tied to ratios based on Adjusted EBITDA, as defined below, could result in a default under the Senior Secured Credit Facility and the lenders could elect to declare all amounts borrowed, due and payable. Any such acceleration would also result
in a default under our indenture. Additionally, under the Senior Secured Credit Facility and indenture, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios
based on Adjusted EBITDA.

Covenant levels and Adjusted EBITDA ratios for the twelve months ended September 30, 2006 are as follows:



|                                                                                                             |  |               |  |                                          
|------------------------------------------------------------------------------------------------------------ |  | ------------- |  | -----------------------------------------
|                                                                                                             |  | CovenantLevel |  | Adjusted EBITDA September 30, 2006
Ratios
|Senior Secured Credit Facility(1)                                                                            |  |               |  |                                          
|Minimum Adjusted EBITDA to cash interest ratio                                                               |  | 2.5x          |  | 6.9x                                     
|Maximum total debt less unrestricted cash to Adjusted EBITDA ratio                                           |  | 4.25x         |  | 1.8x                                     
|Indenture(2)                                                                                                 |  |               |  |                                          
|Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions |  | 2.0x          |  | 6.9x                                     

---

|(1) | The Senior Secured Credit Facility requires us to maintain an Adjusted EBITDA to cash
interest ratio at a minimum of 2.5x and a total debt to Adjusted EBITDA ratio starting at a maximum of 4.25x in each case for the most recent twelve month period. Failure to satisfy these ratio requirements would constitute a default under the
Senior Secured Credit Facility. If lenders under the Senior Secured Credit Facility failed to waive any such default, repayment obligations under the Senior Secured Credit Facility could be accelerated, which would also constitute a default under
the indenture. Covenants reflect the definition and levels required by the July 7, 2006 amended and restated Senior Secured Credit Facility.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Our ability to incur additional debt and make certain restricted payments under our indenture, subject to specified exceptions, is tied to an Adjusted EBITDA to
fixed charge ratio of at least 2.0 to 1.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Adjusted EBITDA is defined as EBITDA further adjusted to exclude non-recurring items, non-cash items and
other adjustments permitted in calculating covenant compliance under the indenture and the Senior Secured Credit Facility. EBITDA, a measure used by management to evaluate its ongoing operations for internal planning and forecasting purposes, is
defined as net income (loss) from operations less interest expense, net of interest income, income tax expense (benefit), depreciation and amortization and charges for early extinguishment of debt. EBITDA is not a financial measure recognized under
United States generally accepted accounting principles and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. The amounts shown for EBITDA
as presented, may differ from amounts calculated and may not be comparable to other similarly titled measures used by other companies.

As
of September 30, 2006, the Company was in compliance with all required financial covenants of the July 7, 2006 amended and restated Senior Secured Credit Facility described in Note 4 in ITEM 1.



|                                            |  |                                       |         |   |                                      |   |         |      |  |   |                                      |   |  |   |         |  
|------------------------------------------- |  | ------------------------------------- | ------- | - | ------------------------------------ | - | ------- | ---- |  | - | ------------------------------------ | - |  | - | ------- | -
|                                            |  | Twelve Months Ended December 31, 2005 |         |   | Deduct:                              |   |         | Add: |  |   | Twelve MonthsEndedSeptember 30,2006  |  
|                                            |  | Nine Months Ended September 30, 2005  |         |   | Nine Months Ended September 30, 2006 |   |        
|                                            |  | (Unaudited)                           |        
|EBITDA(1)                                   |  | $                                     | 322,151 |   |                                      | $ | 238,722 |      |  | $ | 237,747                              |   |  | $ | 321,176 |  
|Non-cash charges (income)(2)                |  |                                       | (10,994 | ) |                                      |   | (8,884  | )    |  |   | 8,418                                |   |  |   | 6,308   |  
|Extraordinary or non-recurring items(3)     |  |                                       |        |   |                                      |   |        |      |  |   | 840                                  |   |  |   | 840     |  
|Other adjustments(4)                        |  |                                       | 719     |   |                                      |   | 673     |      |  |   | 940                                  |   |  |   | 986     |  
|                                            |  |                                       |         |   |                                      |   |         |      |  |   |                                      |   |  |   |         |  
|Adjusted EBITDA                             |  | $                                     | 311,876 |   |                                      | $ | 230,511 |      |  | $ | 247,945                              |   |  | $ | 329,310 |  
|                                            |  |                                       |         |   |                                      |   |         |      |  |   |                                      |   |  |   |         |  
|                                            |  |                                       |         |  
|___________                                 |  |                                       |         |   |                                      |   |         |      |  |   |                                      |   |  |   |         |  
|(1)EBITDA is calculated in the table below: |  |                                       |         |   |                                      |   |         |      |  |   |                                      |   |  |   |         |  
|                                            |  |                                       |         |  
|                                            |  | Twelve Months Ended December 31, 2005 |         |   | Deduct:                              |   |         | Add: |  |   | Twelve MonthsEndedSeptember 30, 2006 |  
|                                            |  | Nine Months Ended September 30, 2005  |         |   | Nine MonthsEndedSeptember 30,2006    |   |        
|                                            |  | (Unaudited, in thousands)             |        
|Net income                                  |  | $                                     | 91,073  |   |                                      | $ | 61,899  |      |  | $ | 54,902                               |   |  | $ | 84,076  |  
|Interest expense                            |  |                                       | 59,495  |   |                                      |   | 43,769  |      |  |   | 50,706                               |   |  |   | 66,432  |  
|Interest income                             |  |                                       | (1,161  | ) |                                      |   | (537    | )    |  |   | (2,184                               | ) |  |   | (2,808  | )
|Income tax expense                          |  |                                       | 46,461  |   |                                      |   | 39,949  |      |  |   | 8,418                                |   |  |   | 14,930  |  
|Depreciation, depletion and amortization    |  |                                       | 211,186 |   |                                      |   | 160,625 |      |  |   | 137,678                              |   |  |   | 188,239 |  
|Amortization of coal supply agreements      |  |                                       | (84,903 | ) |                                      |   | (66,983 | )    |  |   | (11,773                              | ) |  |   | (29,693 | )
|                                            |  |                                       |         |   |                                      |   |         |      |  |   |                                      |   |  |   |         |  
|EBITDA                                      |  | $                                     | 322,151 |   |                                      | $ | 238,722 |      |  | $ | 237,747                              |   |  | $ | 321,176 |  
|                                            |  |                                       |         |   |                                      |   |         |      |  |   |                                      |   |  |   |         |  



45



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



|                                                                           |  |                                       |         |   |                                   |   |         |      |  |                                      |       |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | --------------------------------- | - | ------- | ---- |  | ------------------------------------ | ----- |  | - | ------ | -
|                                                                           |  | Twelve Months Ended December 31, 2005 |         |   | Deduct:                           |   |         | Add: |  | Twelve MonthsEndedSeptember 30, 2006 |      
|                                                                           |  | Nine Months Ended September 30, 2005  |         |   | Nine MonthsEndedSeptember 30,2006 |  
|                                                                           |  | (Unaudited, in thousands)             |        
|Interest rate swaps                                                        |  | $                                     |        |   |                                   | $ |        |      |  | $                                    | 112   |  | $ | 112    |  
|Overburden removal included in depreciation, depletion and amortization(a) |  |                                       | (22,624 | ) |                                   |   | (16,093 | )    |  |                                      |      |  |   | (6,531 | )
|Accretion on asset retirement obligations/reclamation expense              |  |                                       | 8,507   |   |                                   |   | 6,203   |      |  |                                      | 6,327 |  |   | 8,631  |  
|Stock based compensation expense(b)                                        |  |                                       | 1,490   |   |                                   |   | 1,006   |      |  |                                      | 1,979 |  |   | 2,463  |  
|Write-down of long-lived asset                                             |  |                                       | 1,633   |   |                                   |   |        |      |  |                                      |      |  |   | 1,633  |  
|                                                                           |  |                                       |         |   |                                   |   |         |      |  |                                      |       |  |   |        |  
|Total                                                                      |  | $                                     | (10,994 | ) |                                   | $ | (8,884  | )    |  | $                                    | 8,418 |  | $ | 6,308  |  
|                                                                           |  |                                       |         |   |                                   |   |         |      |  |                                      |       |  |   |        |  

---

| | (a) | In purchase accounting, the fair value of partially and fully uncovered coal included
consideration of the effort spent prior to the purchase date to remove overburden and get the coal to its partially or fully uncovered state. Therefore, the fair value assigned to partially or fully uncovered coal reserves was higher than that
assigned to other coal reserves. Depletion of coal reserves, including the incremental fair value related to pre-Acquisition overburden removal efforts, is included in depreciation, depletion and amortization. Subsequent to the Acquisition date, but
prior to the adoption of EITF Issue 04-6, effective January 1, 2006, the costs associated with removal of overburden to uncover coal reserves was inventoried as work-in-process until the related coal was mined and the inventoried cost charged
to cost of coal sales when the coal was sold. Until coal valued as partially or fully uncovered at the Acquisition date is fully depleted, depreciation, depletion and amortization will include the value of overburden removal performed prior to the
Acquisition date which if incurred subsequent to the Acquisition date would have been included in cost of coal sales.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The amount for the nine months ended September 30, 2005 represents an accrual for
compensation expense attributable to restricted stock units. The amount for the nine months ended September 30, 2006 represents an accrual for the fair value of nonqualified stock options and for compensation expense attributable to restricted
stock units. The amounts for the nine months ended September 30, 2006 are calculated in accordance with SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | We are also required by the credit agreement to adjust EBITDA, as defined above, for the
following extraordinary or non-recurring (income) expense:
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|                                                    |  |                                       |   |                                      |   |      |  |                                      |     |  |   |    
|--------------------------------------------------- |  | ------------------------------------- | - | ------------------------------------ | - | ---- |  | ------------------------------------ | --- |  | - | ---
|                                                    |  | Twelve Months Ended December 31, 2005 |   | Deduct:                              |   | Add: |  | Twelve MonthsEndedSeptember 30, 2006
|                                                    |  | Nine Months Ended September 30, 2005  |   | Nine Months Ended September 30, 2006 |  
|                                                    |  | (Unaudited, in millions)             
|Litigation/arbitration/contract settlements, net(a) |  | $                                     |  |                                      | $ |     |  | $                                    | 700 |  | $ | 700
|Gain on asset sales(b)                              |  |                                       |  |                                      |   |     |  |                                      |    |  |   |   
|Other                                               |  |                                       |  |                                      |   |     |  | $                                    | 140 |  | $ | 140
|                                                    |  |                                       |   |                                      |   |      |  |                                      |     |  |   |    
|Total                                               |  | $                                     |  |                                      | $ |     |  | $                                    | 840 |  | $ | 840
|                                                    |  |                                       |   |                                      |   |      |  |                                      |     |  |   |    

---

| | (a) | Represents arbitration awards, litigation and contract settlements, net of related legal and
tax fees.
| | --- | ------------------------------------------------------------------------------------------------------



| | (b) | Represents gains on asset sales other than in the ordinary course of business.
| | --- | ------------------------------------------------------------------------------



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##### Table of Contents

|(4) | We are also required to make adjustments to EBITDA for items such as incremental insurance
costs and franchise taxes not included in income tax expense.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------

Cash interest for the twelve months ended September 30,
2006 is calculated as follows (unaudited, in thousands):



|                                                                                      |  |   |         |  
|------------------------------------------------------------------------------------- |  | - | ------- | -
|Pro forma cash interest expense for the twelve months ended December 31, 2005(a)      |  | $ | 49,407  |  
|Interest expense for the nine months ended September 30, 2006                         |  |   | 50,706  |  
|Amortization of deferred financing costs for the nine months ended September 30, 2006 |  |   | (11,091 | )
|Cash interest income for the nine months ended September 30, 2006                     |  |   | (2,184  | )
|Other non cash interest expense for the nine months ended September 30, 2006          |  |   | (1,822  | )
|Pro forma cash interest expense for the nine months ended September 30, 2005(a)       |  |   | (37,321 | )
|                                                                                      |  |   |         |  
|                                                                                      |  | $ | 47,695  |  
|                                                                                      |  |   |         |  

---

| | (a) | As defined by Foundation Coal Corporations bank credit agreement.
| | --- | ------------------------------------------------------------------

In future periods, adjustments to EBITDA that could be used to calculate compliance with the debt covenants are:
(a) accretion on asset retirement obligations; (b) non-recurring litigation or arbitration settlements; (c) any non-cash expenses or charges arising as a result of the application of purchase accounting in acquisitions;
(d) business optimization expenses or other restructuring charges; (e) non-cash impairment charges resulting from the application of SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets; (f) amortization of intangibles pursuant to SFAS No. 141, Business Combinations; and (g) any long term incentive plan accruals or any non-cash compensation expense
realized from grants of stock appreciation or similar rights, stock options or other rights to officers, directors and employees.

In
future periods, cash interest is expected to be calculated by adding back amortization of deferred financing costs and deducting cash interest income from the interest expense reported in the Consolidated Statement of Operations.

Contractual Obligations

The following is a summary
of our significant future contractual obligations by year as of September 30, 2006.



|                                               |  |                           |        |           |   |           |  |            |         |       |   |         |  |   |          
|---------------------------------------------- |  | ------------------------- | ------ | --------- | - | --------- |  | ---------- | ------- | ----- | - | ------- |  | - | ---------
|                                               |  | 2006                      |        | 2007-2008 |   | 2009-2010 |  | After 2010 |         | Total
|                                               |  | (Unaudited, in thousands)
|Long-term debt and capital leases              |  | $                         |       |           | $ | 25,125    |  | $          | 58,625  |       | $ | 551,250 |  | $ | 635,000  
|Cash interest on long-term debt(1)             |  |                           | 10,647 |           |   | 85,174    |  |            | 85,174  |       |   | 88,356  |  |   | 269,351  
|Cash payments for asset retirement obligations |  |                           | 1,195  |           |   | 1,077     |  |            | 7,003   |       |   | 213,191 |  |   | 222,466  
|Unconditional purchase commitments             |  |                           | 53,586 |           |   | 166,485   |  |            |        |       |   |        |  |   | 220,071  
|Operating leases                               |  |                           | 1,483  |           |   | 5,454     |  |            | 3,753   |       |   | 4,623   |  |   | 15,313   
|                                               |  |                           |        |           |   |           |  |            |         |       |   |         |  |   |          
|Total                                          |  | $                         | 66,911 |           | $ | 283,315   |  | $          | 154,555 |       | $ | 857,420 |  | $ | 1,362,201
|                                               |  |                           |        |           |   |           |  |            |         |       |   |         |  |   |          

---

|(1) | The variable interest rate on debt is 6.22%, reflecting a LIBOR estimate, based on the five
year swap rate effective September 30, 2006, plus a margin of 1.25%.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect to use cash flows provided by operating
activities to invest in the range of $150.0 million to $170.0 million in capital expenditures during calendar year 2006 of which $100.0 million to $110.0 million is to maintain production and replace mining equipment. The additional $50.0
million to $60.0 million is expected to be directed toward selective expansions of production and improvements in productivity. Approximately $43.0 million of expected fourth quarter 2006 capital expenditures are included in unconditional
purchase commitments shown above. The remaining fourth quarter 2006 unconditional purchase commitments consist of $2.9 million for purchased coal and $7.7 million pertaining to forward contracts to purchase diesel fuel and explosives in normal
quantities for use at our surface mines. The remaining unconditional purchase commitments, totaling $166.5 million in 2007-2008 consists of $25.7 million for purchased coal, $112.7 million for future capital expenditures, and $28.1 million
pertaining to forward contracts to purchase diesel fuel in 2007 in normal quantities for use at our surface mines. We expect to contribute approximately $12.2 million to our defined benefit retirement plans and to pay approximately
$23.5 million of retiree health care benefits in calendar year 2006. We also expect to incur approximately $7.0 million per year for surety bond premiums and letters of credit fees. We believe that cash balances plus cash generated by
operations will be sufficient to meet these 2006 obligations, plus fund requirements for working capital and capital expenditures without incurring additional borrowings.



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Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees, indemnifications and financial instruments with off-balance sheet risk, such as bank
letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our Consolidated Balance Sheets. However, the underlying obligations that they secure, such as asset retirement obligations,
self-insured workers compensation liabilities, royalty obligations and certain retiree medical obligations, are reflected in our Consolidated Balance Sheets.

We are required to provide financial assurance in order to perform the post-mining reclamation required by our mining permits, pay our federal production royalties, pay workers compensation claims under
self-insured workers compensation laws in the various states, pay federal black lung benefits, pay retiree health care benefits to certain retired UMWA employees and perform certain other obligations.

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

We had outstanding surety bonds with a
total face amount of $267.7 million as of September 30, 2006, of which $242.8 million secured reclamation obligations, $12.6 million secured coal lease obligations and $9.6 million secured self-insured workers compensation
obligations. In addition, we had $172.8 million of letters of credit in place for the following purposes: $36.6 million for workers compensation, including collateral for workers compensation bonds; $23.4 million for UMWA retiree health
care obligations; $106.2 million for collateral for reclamation surety bonds; and $6.6 million for other miscellaneous obligations. In the last few years, surety bond costs have increased, while the market terms under which surety bonds can be
obtained have generally become less favorable to all mining companies. In the event that additional surety bonds become unavailable, we would seek to secure our obligations with letters of credit, cash deposits or other suitable forms of collateral.

Certain Trends and Uncertainties

Our
outlook for the coal markets in the United States remains positive. The U. S. economy grew at an annual rate of 3.5% in 2005 and at a preliminary annual rate of 3.3% in the first nine months 2006 as reported by the U.S. Commerce Department. U. S.
electricity generation increased by 1.7% during 2005 and 0.8% through the first eight months of 2006, as reported by the Energy Information Agency. Strong demand for coal and coal-based electricity generation in the U. S. is being driven by the
growing economy, weather conditions and high prices for alternative fuels for electricity generation. A slowing in the rate of growth for electricity combined with increased output from nuclear, natural gas and hydro generating plants in the first
eight months of 2006 has caused coal-fired electricity generation to trail 2005 levels through August by 0.8%.

Approximately 91,000
megawatts of new coal fired electric generation has been proposed in the United States with the largest percentages of proposed projects located in the Midwest and West. About 26,000 megawatts of this total is still in the very early stages of
development with an additional 42,000 megawatts in the proposal stage. But projects representing about 23,000 megawatts of this total have moved forward to the stage of obtaining permits, power sales agreement and/or project refinancing. In
addition, there is increasing interest in coal gasification and coal liquefaction projects. The high level of interest in new coal fired electric generating facilities, coal gasification and coal liquefaction is a strong indicator of increasing
future demand for coal in the United States.

During the first eight months of 2006, growth in electrical generation was less than
predicted primarily due to warm winter and spring weather across much of the United States. In addition, U. S. coal production increased by 3.0% through October 21, 2006, from the year-ago comparable period. This has allowed rebuilding of coal
stockpiles at electrical generation plants compared to the distressed levels of late 2005. At August 2006, coal stockpiles are within the five year average range and at their highest levels since June 2003. Electric generating plants using Western
coal continue to have lower stockpiles than plants using Eastern coal.



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##### Table of Contents

The ability of the railroads to ship the demanded quantities of coal was improved during the first nine
months of 2006. Shipments from the Powder River Basin for the full year 2006 are forecast to increase modestly from 2005, but not to the levels needed to satisfy demand for Powder River Basin coal. There is uncertainty as to whether we will be able
to ship all of the approximately 50.5 million tons that we have sold from the Powder River Basin in 2006. The performance of the Eastern railroads tends to be more mine specific.

In response to price erosion and continuing cost pressures, several coal producers in Central Appalachia have recently announced plans to idle high cost
mines. Coal producers in Northern Appalachia and the Powder River Basin have recently announced deferrals of previously announced mine expansion projects. These measures are expected to tighten coal supplies, thereby improving the balance of supply
and demand.

Our revenues depend on the price at which we are able to sell our coal. The current pricing environment for United States coal
is strong relative to historical pricing levels, but has declined during the first nine months of 2006 in response to increased production and reduced demand for coal fired electrical generation. As of October 17, 2006, we have committed and
priced 100% of our planned 2006 production. In the longer term, decreases in coal prices due to, among other reasons, the supply of domestic and foreign coal, the demand for electricity and the price and availability of alternative fuels for
electricity generation could adversely affect our revenues and our ability to generate cash flows. In addition, our results of operations depend on the cost of coal production. We continue to experience increased operating costs for fuel and
explosives, steel products, tires, health care, wages, salaries, contract coal haulage services and contract labor. In addition, historically low interest rates have had a negative impact on expenses related to our actuarially determined
employee-related liabilities.

We may also experience difficult geologic conditions, unforeseen equipment problems and shortages of
critical materials such as tires and explosives that may limit our ability to produce at forecasted levels. To the extent upward pressure on costs exceeds our ability to realize sales increases, or if we experience unanticipated operating or
transportation difficulties, our operating margins would be negatively impacted. See the various forward-looking statements listed at the beginning of this ITEM 2 for additional considerations regarding our outlook.

Recent Accounting Pronouncements

In September 2006,
the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). This statement defines fair value, establishes a framework for measuring fair value in accordance
with accounting principles generally accepted in the United States of America, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company expects to adopt SFAS No. 157 on January 1, 2008. The Company has not yet determined the impact of SFAS No. 157 on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan
amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 requires the Company to
initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. Additionally, for fiscal years ending after
December 15, 2008, the Company is required to measure plan assets and benefit obligations as of the date of the Companys fiscal year-end statement of financial position rather than at an interim period. The Company expects to adopt SFAS
No. 158 on December 31, 2006. The Company is currently evaluating the impact of SFAS No. 158 on the consolidated financial statements.



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In June 2006, FASB issued FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a companys consolidated financial statements in accordance with SFAS
No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt
this Interpretation on January 1, 2007. The Company is currently evaluating this Interpretation and has not determined its impact on the consolidated financial statements.

The Company adopted EITF Issue 04-6 on January 1, 2006. EITF Issue 04-6 addresses the accounting for stripping costs incurred during the production
phase of a mine, concluding that these costs are considered variable production costs and under a full absorption costing system are considered a component of inventory to be recognized in cost of coal sales in the same period as the revenue from
the sale of the inventory. Capitalization of post-production stripping costs is appropriate only to the extent inventory exists at the end of a reporting period. The guidance requires application through recognition of a cumulative effect adjustment
to opening retained earnings in the period of adoption, with no charge to current earnings for prior periods. Accordingly, prior period results have not been restated. At December 31, 2005, stripping costs associated with coal that had not been
extracted was $60.4 million which were classified on the Consolidated Balance Sheets as a component of work-in-process inventory referred to as deferred overburden. The effect on the consolidated financial statements upon adoption of EITF Issue 04-6
resulted in a cumulative effect adjustment which reduced opening retained earnings, as of January 1, 2006, by $39.3 million, net of tax of $21.1 million, thereby removing the $60.4 million current asset previously classified on the Consolidated
Balance Sheets as a component of work-in-process (deferred overburden) inventory.

Prior to January 1, 2006, the Company accounted for
its stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees(APB No. 25), and related
interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123). Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123
(revised 2004), Share-Based Payment (SFAS No. 123(R)), using the modified prospective transition method. Under the modified prospective transition method, compensation cost recognized in 2006 includes: (a) compensation
cost for all stock-based awards granted prior to but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123; and (b) compensation cost for all
stock-based awards granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). For all grants, the amount of compensation expense to be recognized is adjusted
for an estimated forfeiture rate which is based on historical data. Results for prior periods have not been restated. There were no modifications made to outstanding options prior to the adoption of the standard. There were no changes made by the
Company to the terms, quantity or type of instruments used for share-based compensation as a result of the adoption of the new standard.

The Company has three types of stock-based awards: restricted stock units; restricted stock; and options. Total compensation expense related to the stock-based awards recognized in Selling, general and administrative expense for
the three months ended September 30, 2006 was $0.7 million, consisting of $0.4 million and $0.3 million for restricted stock units and options, respectively. Total compensation related to the stock-based awards recognized in Selling,
general and administrative expense for the nine months ended September 30, 2006 was $2.0 million, consisting of $1.0 million and $1.0 million for restricted stock units and options, respectively. For the three months and nine months ended
September 30, 2005, compensation expense of $0.7 million and $1.0 million, respectively, was recognized as a component of Selling, general and administrative expense for restricted stock units. No expense related to options was
charged against income in the prior periods as the Company elected to apply the provisions of APB No. 25 to those periods as permitted by SFAS No. 123.



50



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##### Table of Contents

Pursuant to the adoption of this new accounting standard, the table below provides a summary of the
effect of applying the provisions of SFAS No. 123(R) on the Companys consolidated financial statements related to options for the three and nine months ended September 30, 2006.



|                                 |  |                                       |      |   |                                      |   |        |  
|-------------------------------- |  | ------------------------------------- | ---- | - | ------------------------------------ | - | ------ | -
|                                 |  | Three Months Ended September 30, 2006 |      |   | Nine Months Ended September 30, 2006 |  
|                                 |  | (Unaudited, thousands)                |     
|Income before income tax expense |  | $                                     | (310 | ) |                                      | $ | (1,038 | )
|Income tax expense               |  |                                       | 309  |   |                                      |   | 141    |  
|                                 |  |                                       |      |   |                                      |   |        |  
|Net income                       |  | $                                     | (1   | ) |                                      | $ | (897   | )
|                                 |  |                                       |      |   |                                      |   |        |  

SFAS No. 123(R) also requires that the excess tax benefit from the exercise of options be
reflected in the Statements of Consolidated Cash Flows as a cash inflow from financing activities. Prior to the adoption of SFAS No. 123(R), this tax benefit would have been reflected as a cash inflow from operations. The excess tax benefit
from the exercise of options was $10.7 million and $0 during the nine months ended September 30, 2006 and 2005, respectively.

SFAS
No. 123(R) also requires that forfeitures be estimated and included in the calculation of compensation cost. Upon adoption of SFAS No. 123(R), the Company quantified the effect related to the estimation of forfeitures for stock-based
awards that were not vested at December 31, 2005. The Companys estimate was based on previous forfeiture activity combined with the Companys reasonable expectations of forfeitures. The gross adjustment for forfeitures was not
material to the consolidated financial statements.

See Note 14 in ITEM 1 for additional disclosures relating to the compensation cost
related to nonvested awards not yet recognized and the expected period of recognition and valuation methodologies used in determining the fair value of options.



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##### Table of Contents

|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

Commodity Price Risk

We manage our commodity price risk for coal sales through the use of long-term coal supply agreements
rather than through the use of derivative instruments. As of October 17, 2006, we had sales commitments for approximately 100% of our planned 2006 production. As of October 17, 2006, uncommitted and unpriced tonnage was 8%, 32% and 53% of
planned production in 2007, 2008 and 2009, respectively. Eastern coals account for the majority of uncommitted tonnage as 16%, 43% and 75% of the Companys planned eastern production remains uncommitted and unpriced in 2007, 2008 and 2009,
respectively.

Some of the products used in our mining activities, such as diesel fuel, explosives, large equipment tires, steel products
and electricity, are subject to price volatility. Through our suppliers, we utilize forward purchase contracts to manage the exposure related to this volatility. As of September 30, 2006, the Company has entered into forward purchase
commitments for approximately 80% of the diesel fuel that it expects to consume during calendar year 2006 at prices ranging from $1.73 per gallon for our Powder River Basin mines to $2.04 per gallon for our Central Appalachian mines. For expected
consumption during calendar year 2007 at our Powder River Basin mines, the Company entered into forward purchase commitments for approximately 83% of expected diesel fuel usage at $2.02 per gallon. The Company has designated these contracts as
normal purchase normal sale contracts, and, therefore, they are not deemed to be derivative financial instruments for financial reporting purposes. During the nine months ended September 30, 2006 and 2005, the cost of diesel fuel represented
approximately 4% and 2.8%, respectively, of the Companys consolidated cost of coal sales.

Credit Risk

Our credit risk is primarily with electric power generators and, to a lesser extent, steel producers. Most electric power generators to whom we sell have
investment grade credit ratings. Our policy is to independently evaluate each customers creditworthiness prior to entering into transactions and to constantly monitor outstanding accounts receivable against established credit limits. When
appropriate (as determined by our credit management function), we have taken steps to reduce our credit exposure to customers that do not meet our credit standards or whose credit has deteriorated. These steps include obtaining letters of credit or
cash collateral, requiring prepayments for shipments or establishing customer trust accounts held for our benefit in the event of a failure to pay.

Interest Rate Risk

Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate
changes on earnings and cash flows and to lower overall borrowing costs. We have exposure to changes in interest rates through our bank term loan and our revolving credit facility. To achieve risk mitigation objectives, we have in the past managed
our interest rate exposure through the use of interest rate swaps.

In connection with the July 7, 2006 closing of the amended and
restated Senior Secured Credit Facility, the Company terminated existing swap agreements. On July 11, 2006, the Company monetized a $2.4 million derivative asset included in other noncurrent assets in the Companys consolidated financial
statements at June 30, 2006 and recognized a resulting $0.1 million mark-to-market loss on the swaps. The $1.8 million unrealized gain from the change in the market value of the interest rate swaps recorded in accumulated other comprehensive
income (loss) will be recognized into income on a prorated basis over the remaining term of the original interest rate swap agreement through September 28, 2007, in accordance with Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, and related amendments.

As we continue to monitor the interest rate
environment in concert with our risk mitigation objectives, consideration is being given to future interest rate risk reduction strategies.



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|ITEM 4. | CONTROLS AND PROCEDURES.
|------- | ------------------------

Evaluation of Disclosure Controls and
Procedures

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Act)), as of the end of the period covered by this quarterly report on Form 10-Q was made under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective and
are designed to (a) ensure that information required to be disclosed by us in reports we file or submit under the Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms; and (b) ensure that information required to be disclosed by us in reports filed or submitted under the Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting that occurred during the quarter ended
September 30, 2006 that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.



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PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

Information required by this Item is contained
in Note 21, PART I, ITEM 1 entitled Commitments and Contingencies contained in this Report and is incorporated herein by reference.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

There were no material changes from risk factors as
previously disclosed in the Companys Annual Report on Form 10-K for the twelve months ended December 31, 2005, as filed March 17, 2006 and the related Form 10K/A filed October 6, 2006 and on the Companys Report on Form
10-Q for the quarterly period ended June 30, 2006, as filed August 14, 2006.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------



| | (a) | None.
| | --- | -----



| | (b) | None.
| | --- | -----



|ITEM 6. | EXHIBITS.
|------- | ---------



| | (a) | The exhibits to this report are listed in the Exhibit Index.
| | --- | ------------------------------------------------------------



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SIGNATURES

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.



|                                      |  |                                                                                               
|------------------------------------- |  | ----------------------------------------------------------------------------------------------
|Date: November 14, 2006               |  | FOUNDATION COAL CORPORATION                                                                   
|                                      |  | (Registrant)                                                                                  
|                                      | 
|Name                                  |  | Title                                                                                         
|                                      | 
|/S/ JAMES F. ROBERTS JAMES F. ROBERTS |  | President, Chief Executive Officer and Director (Principal Executive Officer)                 
|                                      | 
|/S/ FRANK J. WOOD FRANK J. WOOD       |  | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|3.1         |  | Third Amended and Restated Certificate of Incorporation of Foundation Coal Holdings, Inc., previously filed as an exhibit to Foundation Coal Holdings, Inc.s Form 10-Q on August 9, 2006,
and incorporated by reference.                                                                                                                                                                                                                                                                                                                                                                   
|            | 
|3.2         |  | Amended and Restated By-laws of Foundation Coal Holdings, Inc., previously filed as an exhibit to the Foundation Coal Holdings, Inc.s Form 8-K on May 22, 2006, and incorporated by
reference.                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|4.1*        |  | Form of certificate of the Foundation Coal Holdings, Inc.s common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|            | 
|4.2*        |  | Amended and Restated Stockholders Agreement, dated as of October 4, 2004, by and among Foundation Coal Holdings, Inc., Blackstone FCH Capital Partners IV, L.P., Blackstone Family Investment
Partnership IV-A L.P., First Reserve Fund IX, L.P., AMCI Acquisition, LLC and the management stockholders parties thereto.                                                                                                                                                                                                                                                                    
|            | 
|4.2.1       |  | Termination Agreement, dated as of February 6, 2006, by and among Foundation Coal Holdings, Inc., Blackstone FCH Capital Partners IV, L.P., Blackstone Family Investment Partnership IV-A L.P.,
First Reserve Fund IX, L.P., AMCI Acquisition, LLC (nka AMCI Acquisition III, LLC), and the management stockholders parties thereto, terminating the Amended and Restated Stockholders Agreement dated as of October 4, 2004, by and among the same
parties, previously filed as an exhibit to Foundation Coal Holdings, Inc.s Form 8-K on February 23, 2006 and incorporated by reference.
|            | 
|4.3         |  | Credit Agreement dated as of July 30, 2004, as amended and restated as of July 7, 2006 by and among Foundation Coal Corporation, Foundation PA Coal Company, LLC, the Lenders named therein and
Citicorp North America, Inc. as Administrative Agent and Collateral Agent and the Issuing Banks and other agents party thereto, previously filed as an exhibit to Foundation Coal Holdings, Inc.s Form 8-K on July 13, 2006, and incorporated by
reference.                                                                                                                                
|            | 
|10.1        |  | Restricted Stock Unit Agreement dated as of July 1, 2006 by and between the Company and Allen S. Pack, Jr., previously filed as an exhibit to Foundation Coal Holdings, Inc.s Form 8-K on
July 7, 2006, and incorporated by reference.                                                                                                                                                                                                                                                                                                                                                     
|            | 
|10.2        |  | Amended and Restated Employment Agreement dated as of September 27, 2006 by and between the Company and Allen S. Pack, Jr., previously filed as an exhibit to Foundation Coal Holdings,
Inc.s Form 8-K on October 2, 2006, and incorporated by reference.                                                                                                                                                                                                                                                                                                                                  
|            | 
|31.1**      |  | Certification of periodic report by the Companys Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                       
|            | 
|31.2**      |  | Certification of periodic report by the Companys Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                       
|            | 
|32.1**      |  | Certification of periodic report by the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                                                                                                                                                                            
|            | 
|32.2**      |  | Certification of periodic report by the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                                                                                                                                                                            

---

|* | Incorporated by reference to the same numbered exhibit previously filed with the Companys registration statement on Form S-1 (SEC File No. 333-118427).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------



|** | Filed herewith.
|-- | ---------------



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