Table
            of Contents
  
   **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **Form 10-Q**
 **(Mark
        One)**
 þ
              
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 **For
        the quarterly period ended September 30, 2007**
 **OR**
 o
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 **For
        the transition period from
                                                            to**
 **Commission
        File No. 1-32423**
 **ALPHA
        NATURAL RESOURCES, INC.**
 *(Exact
        name of registrant as specified in its charter)*
 **Delaware**
              
              **02-0733940***(State
                  or other jurisdiction of*
              
              *(I.R.S.
                  Employer**incorporation
                  or organization)*
              
              *Identification
                  Number)***One
                  Alpha Place, P.O. Box 2345, Abingdon, VA**
              
              **24212***(Address
                  of principal executive offices)*
              
              *(Zip
                  Code)*
 **Registrant’s
        telephone number, including area code:**
 **(276) 619-4410**
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject to
        such filing requirements for the past 90 days. þ Yes ̈
        No
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 
 þ
        Large accelerated
        filer     o Accelerated
        filer      ̈
        Non-accelerated
        filer
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in
        Rule 12b-2 of the Exchange Act).
  ̈
        Yesþ  No
 
 Number
        of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of
        October 30, 2007 — 65,612,827
 
  Table
            of Contents
  
  
 **TABLE
        OF CONTENTS**
 **Page****PART
                  I**Item 1.
                  Financial StatementsCondensed
                  Consolidated Balance Sheets
                  (Unaudited)
              
              2Condensed
                  Consolidated Statements of Income
                  (Unaudited)
              
              3Condensed
                  Consolidated Statements of Cash Flows
                  (Unaudited)
              
              4Notes
                  to Condensed Consolidated Financial Statements
                  (Unaudited)
              
              6Item 2.
                  Management’s Discussion and Analysis of Financial
                  Condition and Results of Operations
              
              22Item 3.
                  Quantitative and Qualitative Disclosures about
                  Market Risk
              
              32Item 4.
                  Controls and Procedures
              
              33**PART
                  II**Item 1.
                  Legal Proceedings
              
              33Item 1A.
                  Risk Factors
              
              33Item 6.
                  Exhibits
              
              33EX-10.1:
                  Description of Compensation
                  Payable to Independent DirectorsEX-31.A:
                  CERTIFICATIONEX-31.B:
                  CERTIFICATIONEX-32.A:
                  CERTIFICATIONEX-32.B:
                  CERTIFICATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 -1-
 Table
            of Contents
 
 
 **Item 1.*Financial Statements***
 **ALPHA
        NATURAL RESOURCES, INC. AND SUBSIDIARIES**
 **Condensed
        Consolidated Balance Sheets (Unaudited)**
 **(In
        thousands, except share and per share amounts)**
 **September
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              16,267
              
              
              $
              33,256Trade
                  accounts receivable, net
              
              
              194,599
              
              
              
              171,195Notes
                  and other receivables
              
              
              5,959
              
              
              
              6,466Inventories
              
              
              76,718
              
              
              
              76,844Prepaid
                  expenses and other current assets
              
              
              29,843
              
              
              
              50,893Total
                  current assets
              
              
              323,386
              
              
              
              338,654Property,
                  plant, and equipment, net
              
              
              665,034
              
              
              
              637,136Goodwill
              
              
              20,547
              
              
              
              20,547Other
                  intangibles, net
              
              
              9,882
              
              
              
              11,720Deferred
                  income taxes
              
              
              95,555
              
              
              
              94,897Other
                  assets
              
              
              57,147
              
              
              
              42,839Total
                  assets
              
              $
              1,171,551
              
              
              $
              1,145,793**Liabilities
                  and Stockholders’ Equity**Current
                  liabilities:Current
                  portion of long-term debt
              
              $
              3,154
              
              
              $
              3,254Note
                  payable
              
              
              —
              
              
              
              20,941Bank
                  overdraft
              
              
              582
              
              
              
              23,814Trade
                  accounts payable
              
              
              91,368
              
              
              
              75,986Deferred
                  income taxes
              
              
              6,012
              
              
              
              7,601Accrued
                  expenses and other current liabilities
              
              
              89,810
              
              
              
              90,594Total
                  current liabilities
              
              
              190,926
              
              
              
              222,190Long-term
                  debt, net of current portion
              
              
              427,574
              
              
              
              421,456Workers’
                  compensation benefits
              
              
              9,553
              
              
              
              7,169Postretirement
                  medical benefits
              
              
              55,654
              
              
              
              50,712Asset
                  retirement obligation
              
              
              84,058
              
              
              
              69,495Deferred
                  gains on sale of property interests
              
              
              3,215
              
              
              
              3,885Other
                  liabilities
              
              
              27,024
              
              
              
              26,837Total
                  liabilities
              
              
              798,004
              
              
              
              801,744Minority
                  interest
              
              
              1,255
              
              
              
              —Commitments
                  and contingenciesStockholders’
                  equity:Preferred
                  stock — par value $0.01, 10,000,000 shares authorized, none
                  issued
              
              
              —
              
              
              
              —Common
                  stock — par value $0.01, 100,000,000 shares authorized, 65,537,896 and
                  64,964,287 shares issued and outstanding at September 30, 2007
                  and
                  December 31, 2006, respectively
              
              
              655
              
              
              
              650Additional
                  paid-in capital
              
              
              221,327
              
              
              
              215,020Accumulated
                  other comprehensive loss
              
              
              (19,133
              )
              
              
              (19,019
              )Retained
                  earnings
              
              
              169,443
              
              
              
              147,398Total
                  stockholders’ equity
              
              
              372,292
              
              
              
              344,049Total
                  liabilities and stockholders’ equity
              
              $
              1,171,551
              
              
              $
              1,145,793
 See
        accompanying
        notes to condensed consolidated financial statements.
 
 
  -2-
 Table
            of Contents
  
 
 
 
 **ALPHA
        NATURAL RESOURCES, INC. AND SUBSIDIARIES**
 **Condensed
        Consolidated Statements of Income (Unaudited)**
 **(In
        thousands, except share and per share amounts)**
 **Three
                  months ended**
              
              
              **Nine
                  months ended****September
                  30,**
              
              
              **September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Revenues:Coal
                  revenues
              
              $
              438,618
              
              
              $
              420,179
              
              
              $
              1,201,678
              
              
              $
              1,282,0332Freight
                  and handling revenues
              
              
              58,384
              
              
              
              45,805
              
              
              
              143,183
              
              
              
              143,132Other
                  revenues
              
              
              10,137
              
              
              
              9,134
              
              
              
              23,915
              
              
              
              28,604Total
                  revenues
              
              
              507,139
              
              
              
              475,118
              
              
              
              1,368,776
              
              
              
              1,453,769Costs
                  and expenses:Cost
                  of coal sales (exclusive of items shown separately below)
              
              
              361,704
              
              
              
              340,440
              
              
              
              991,766
              
              
              
              1,016,831Freight
                  and handling costs
              
              
              58,384
              
              
              
              45,805
              
              
              
              143,183
              
              
              
              143,132Cost
                  of other revenues
              
              
              7,860
              
              
              
              5,774
              
              
              
              18,256
              
              
              
              19,170Depreciation,
                  depletion and amortization
              
              
              43,926
              
              
              
              36,422
              
              
              
              117,570
              
              
              
              104,263Selling,
                  general and administrative expenses (exclusive of depreciation
                  and
                  amortization shown separately above)
              
              
              14,466
              
              
              
              16,837
              
              
              
              41,687
              
              
              
              51,489Total
                  costs and expenses
              
              
              486,340
              
              
              
              445,278
              
              
              
              1,312,462
              
              
              
              1,334,885Income
                  from operations
              
              
              20,799
              
              
              
              29,840
              
              
              
              56,314
              
              
              
              118,884Other
                  income (expense):Interest
                  expense
              
              
              (10,101
              )
              
              
              (10,735
              )
              
              
              (30,124
              )
              
              
              (31,798
              )Interest
                  income
              
              
              265
              
              
              
              156
              
              
              
              1,359
              
              
              
              514Miscellaneous
                  income, net
              
              
              281
              
              
              
              27
              
              
              
              835
              
              
              
              323Total
                  other income (expense), net
              
              
              (9,555
              )
              
              
              (10,552
              )
              
              
              (27,930
              )
              
              
              (30,961
              )Income
                  before income taxes and minority interest
              
              
              11,244
              
              
              
              19,288
              
              
              
              28,384
              
              
              
              87,923Income
                  tax expense
              
              
              2,363
              
              
              
              4,744
              
              
              
              6,494
              
              
              
              23,040Minority
                  interest
              
              
              (68
              )
              
              
              —
              
              
              
              (155
              )
              
              
              —Net
                  Income
              
              $
              8,949
              
              
              $
              14,544
              
              
              $
              22,045
              
              
              $
              64,883Net
                  income per shareBasic
                  and diluted:
              
              $
              0.14
              
              
              $
              0.23
              
              
              $
              0.34
              
              
              $
              1.01
 See
        accompanying
        notes to condensed consolidated financial statements.
 
 
  -3-
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            of Contents
  
 
 
 **ALPHA
        NATURAL RESOURCES, INC. AND SUBSIDIARIES**
 **Condensed
        Consolidated Statements of Cash Flows (Unaudited)**
 **(In
        thousands)**
 **Nine
                  months ended****September 30,****2007**
              
              
              **2006**Operating
                  activities:Net
                  income
              
              $
              22,045
              
              
              $
              64,883Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation,
                  depletion and amortization
              
              
              117,570
              
              
              
              104,263Amortization
                  of debt issuance costs
              
              
              1,725
              
              
              
              1,712Accretion
                  of asset retirement obligation
              
              
              4,960
              
              
              
              3,472Change
                  in fair value of derivative instruments
              
              
              (2,253
              )
              
              
              (2,277
              )Share
                  based compensation
              
              
              6,747
              
              
              
              15,815Amortization
                  of deferred gains on sales of property interests
              
              
              (707
              )
              
              
              (745
              )Amortization
                  of deferred gain on railroad incentives
              
              
              —
              
              
              
              (154
              )Gain
                  on sale of fixed assets, net
              
              
              (2,200
              )
              
              
              (621
              )Loss
                  on settlement of asset retirement obligation
              
              
              634
              
              
              
              322Provision
                  for non-recoupable advance royalties
              
              
              562
              
              
              
              469Minority
                  interest
              
              
              (155
              )
              
              
              —Deferred
                  income taxes
              
              
              (2,211
              )
              
              
              7,189Other
              
              
              267
              
              
              
              628Changes
                  in operating assets and liabilities:Trade
                  accounts receivable
              
              
              (23,562
              )
              
              
              (25,307
              )Notes
                  and other receivables
              
              
              (1,429
              )
              
              
              3,664Inventories
              
              
              9,605
              
              
              
              15,620Prepaid
                  expenses and other current assets
              
              
              18,376
              
              
              
              5,848Other
                  assets
              
              
              (15,787
              )
              
              
              (3,162
              )Trade
                  accounts payable
              
              
              16,400
              
              
              
              (33,154
              )Accrued
                  expenses and other current liabilities
              
              
              5,215
              
              
              
              (17,284
              )Workers’
                  compensation benefits
              
              
              2,262
              
              
              
              1,038Postretirement
                  medical benefits
              
              
              6,274
              
              
              
              6,683Asset
                  retirement obligation
              
              
              (4,915
              )
              
              
              (1,837
              )Other
                  liabilities
              
              
              3,829
              
              
              
              1,252Net
                  cash provided by operating activities
              
              
              163,252
              
              
              
              148,317
 
 
  -4-
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            of Contents
  
 
 
 **ALPHA
        NATURAL RESOURCES, INC. AND SUBSIDIARIES**
 **Condensed
        Consolidated Statements of Cash Flows (Unaudited) —
(Continued)**
 **(In
        thousands)**
  **Nine
                  months ended****September 30,****2007**
              
              
              **2006**Investing
                  activities:Capital
                  expenditures
              
              $
              (101,491
              )
              
              $
              (110,538
              )Proceeds
                  from disposition of property, plant, and equipment
              
              
              3,734
              
              
              
              1,060Purchase
                  of equity investment
              
              
              (403
              )
              
              
              (228
              )Purchase
                  of net assets of acquired companies
              
              
              (43,908
              )
              
              
              (28,273
              )Collections
                  on note receivable from coal supplier
              
              
              —
              
              
              
              3,000Other
              
              
              (612
              )
              
              
              (501
              )Net
                  cash used in investing activities
              
              
              (142,680
              )
              
              
              (135,480
              )Financing
                  activities:Repayments
                  of notes payable
              
              
              (20,941
              )
              
              
              (55,477
              )Proceeds
                  from issuance of long-term debt
              
              
              21,400
              
              
              
              287,000Repayments
                  on long-term debt
              
              
              (15,382
              )
              
              
              (289,585
              )Increase
                  (decrease) in bank overdraft
              
              
              (23,232
              )
              
              
              18,574Distributions
                  to prior members of ANR Holdings, LLC subsequent to Internal
                  Restructuring
              
              
              —
              
              
              
              (2,400
              )Proceeds
                  from exercise of stock options
              
              
              594
              
              
              
              953Net
                  cash used by financing activities
              
              
              (37,561
              )
              
              
              (40,935
              )Net
                  decrease in cash and cash equivalents
              
              
              (16,989
              )
              
              
              (28,098
              )Cash
                  and cash equivalents at beginning of period
              
              
              33,256
              
              
              
              39,622Cash
                  and cash equivalents at end of period
              
              $
              16,267
              
              
              $
              11,524
 See
        accompanying
        notes to condensed consolidated financial statements.
 
 
  -5-
 Table
            of Contents
  
 
 
 
 **ALPHA
        NATURAL RESOURCES, INC. AND
        SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**
 **September
        30, 2007**
 **(In
        thousands, except percentages and share data)**
 
 **(1) Business
        and Basis of Presentation**
 
 ***Organization
        and Business***
 
 Alpha
        Natural Resources, Inc. and its operating subsidiaries (the “Company”) are
        engaged in the business of extracting, processing and marketing coal from
        deep
        and surface mines, located in the Central and Northern Appalachian regions
        of
        the United States, for sale to utility and steel companies in the United
        States
        and in international markets.
 
 ***Basis
        of Presentation***
 
 The
        accompanying interim condensed consolidated financial statements have been
        prepared in accordance with U.S generally accepted accounting principles
        for
        interim financial reporting. Accounting measurements at interim dates inherently
        rely on estimates more than at year-end; however, in the opinion of management,
        all adjustments (consisting of normal recurring accruals) considered necessary
        for a fair presentation have been included. Results of operations for the
        nine
        months ended September 30, 2007 are not necessarily indicative of the results
        to
        be expected for the year ending December 31, 2007. Certain prior period
        amounts have been reclassified to conform to the current period presentation.
        These financial statements should be read in conjunction with the audited
        financial statements and related notes as of and for the year ended
        December 31, 2006 included in the Company's Annual Report on Form 10-K
        filed with the Securities and Exchange Commission.
 
 **(2) Earnings
        Per Share**
 
 Basic
        earnings per share are computed by dividing net income by the weighted average
        number of shares of common stock outstanding during the period. Diluted earnings
        per share are computed using the treasury method by dividing net income by
        the
        weighted average number of shares of common stock and dilutive common stock
        equivalents outstanding during the period. Common stock equivalents include
        the
        number of shares issuable upon exercise of outstanding options less the number
        of shares that could have been purchased with the proceeds from the exercise
        of
        the options based on the average price of common stock during the period.
        Restricted shares which have not vested at the end of the reporting period
        are
        excluded from the calculation of basic earnings per share. The number of
        stock
        options which were not included in the calculation of diluted earnings per
        share, because to do so would have been antidilutive, in the nine months
        ended
        September  30, 2007 and 2006 was 983,890 and 1,118,976,
        respectively. The number of restricted shares which were not included in
        the
        calculation of diluted earnings per share because to do so would have been
        antidilutive in the nine months ended September  30, 2007 and 2006
        was 639,172 and 554,876, respectively.
 
 The
        computations of basic
        and diluted net income per share are set forth below:
 
 **Three
                  Months Ended September 30,**
              
              
              **Nine
                  Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Numerator:Net
                  income
              
              $
              8,949
              
              
              $
              14,544
              
              
              $
              22,045
              
              
              $
              64,883Denominator:Weighted
                  average shares — basic
              
              
              64,602,4144
              
              
              
              64,191,811
              
              
              
              64,590,052
              
              
              
              64,003,215Dilutive
                  effect of stock options and restricted stock awards
              
              
              393,111
              
              
              
              22,921
              
              
              
              244,987
              
              
              
              105,551Weighted
                  average shares — diluted
              
              
              64,995,525
              
              
              
              64,214,732
              
              
              
              64,835,039
              
              
              
              64,108,766Net
                  income per basic and diluted share:
              
              $
              0.14
              
              
              $
              0.23
              
              
              $
              0.34
              
              
              $
              1.01
  
 **(3) Inventories**
 
 Inventories
        consisted of the following:
 
 **September
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006**Raw
                  coal
              
              $
              8,917
              
              
              $
              8,868Saleable
                  coal
              
              
              53,602
              
              
              
              53,428Equipment
                  for resale
              
              
              1,719
              
              
              
              1,774Materials
                  and supplies
              
              
              12,480
              
              
              
              12,774Total
                  inventories
              
              $
              76,718
              
              
              $
              76,844
 
 
 -6-
 Table
            of Contents
 
 **(4) Long-Term
        Debt**
 
 Long-term
        debt consisted of the
        following:
  **September 30,**
                
                
                **December
                    31,****2007**
                
                
                **2006**Term
                    loan
                
                $
                245,625
                
                
                $
                247,50010%
                    Senior notes due 2012
                
                
                175,000
                
                
                
                175,000Capital
                    lease obligations
                
                
                903
                
                
                
                1,510Gallatin
                    project financing
                
                
                8,500
                
                
                
                —Other
                
                
                700
                
                
                
                700Total
                    long-term debt
                
                
                430,728
                
                
                
                424,710Less
                    current portion
                
                
                3,154
                
                
                
                3,254Long-term
                    debt, net of current portion
                
                $
                427,574
                
                
                $
                421,456
 On
          June 28,
          2007, the Company’s subsidiaries, Alpha NR Holding, Inc. (“Holdings”) and Alpha
          Natural Resources, LLC (“ANR LLC”), entered into an amendment and consent (the
“Amendment”) to the Credit Agreement, dated as of October 26, 2005 (as amended,
          the “Credit Agreement”), among Holdings, ANR LLC (as borrower), the lenders and
          issuing banks party thereto from time to time, and Citicorp North America,
          Inc.,
          as administrative agent and as collateral agent for the lenders and issuing
          banks. The Amendment amended the Credit Agreement to, among other things,
          permit
          the merger of Holdings into its direct parent, the Company.  The
          Company assumed the obligations of Holdings under the Credit Agreement
          and
          related guaranty and collateral agreement and became a parent guarantor
          of the
          $175,000 10% Senior Notes due 2012 co-issued by ANR LLC and Alpha Natural
          Resources Capital Corp in 2004 (the “Senior Notes”). The Amendment also
          increased the maximum amount of permitted receivables financing from $75,000
          to
          $150,000.
 
 The
        Credit Agreement and the Senior Notes each place restrictions on the ability
        of
        ANR LLC and its subsidiaries to make distributions or loans to the Company.
        At
        September 30, 2007, ANR LLC had net assets of $358,958 and, except for allowable
        distributions for the payment of income taxes, administrative expenses and,
        in
        certain circumstances, dividends or repurchases of common stock of the Company,
        the net assets of ANR LLC are restricted.
 
 All
        of
        the Company borrowings under the Credit Agreement are at a variable rate,
        so the
        Company is exposed to the effect of rising interest rates. As of September
        30,
        2007, the Company has a $245,625 term loan outstanding with a variable interest
        rate based upon the 3-month London Interbank Offered Rate (“LIBOR”) (5.23% at
        September 30, 2007) plus the applicable margin (1.75%, at September 30, 2007).
        To reduce the Company's exposure to rising interest rates, effective May
        22,
        2006, the Company entered into a pay-fixed, receive variable interest rate
        swap
        on the notional amount of $233,125 for a period of approximately six and
        one-half years. In effect, this swap converted the variable interest rates
        based
        on LIBOR to a fixed interest rate of 5.59% plus the applicable margin defined
        in
        the debt agreement for a portion of our term loan. The Company accounts for
        the
        interest rate swap as a cash flow hedge and changes in fair value of the
        swap
        are recorded to other comprehensive income (loss). The critical terms of
        the
        swap and the underlying debt instrument that it hedges coincide, resulting
        in no
        hedge ineffectiveness being recognized in the income statement during the
        quarter ended September 30, 2007.  The fair value of the swap at September
        30, 2007 is an obligation of $8,740 ($6,577 net of tax) and is reflected
        in
        other liabilities in the consolidated balance sheet. As interest expense
        is
        accrued on the debt obligation, amounts in accumulated other comprehensive
        loss
        related to the derivative hedging instrument are reclassified into earnings
        to
        obtain a net cost on the debt obligation of 5.59% plus the applicable
        margin.
 
 Gallatin
          Materials, LLC (“Gallatin”), the Company’s subsidiary, entered into a
          non-recourse senior loan agreement with Nedbank on December 28, 2006 to
          provide
          phase one project financing for the construction of assets in the amount
          of
          $20,600 at an interest rate based upon the 3-month London Interbank Offered
          Rate
          (“LIBOR”) plus an applicable margin of 3.5% at September 30,
          2007.  The final maturity date is April 30, 2016. During the third
          quarter Gallatin borrowed $8,500 under this credit
          agreement.
 **(5) Asset
        Retirement Obligation**
 
 At
        September 30, 2007 and December 31, 2006, the Company has recorded
        asset retirement obligation accruals for mine reclamation and closure costs
        totaling $91,870 and $77,292, respectively. The portion of the costs expected
        to
        be incurred within a year in the amounts of $7,812 and $7,797 at September
        30,
        2007 and December 31, 2006, respectively, are included in accrued expenses
        and other current liabilities. On June 29, 2007, the Company acquired certain
        coal mining assets and assumed certain obligations in West Virginia from
        Arch
        Coal, which included asset retirement obligations of $12,107.
  These
        regulatory obligations are
        secured by surety bonds in the amount of $145,602 at September 30, 2007 and
        $138,013 at December 31, 2006. Changes in the reclamation obligation were
        as follows:
 
 Total
                  asset retirement obligation at December 31, 2006
              
              $
              77,292Accretion
                  for the period
              
              
              4,961Sites
                  added during the period
              
              
              1,828Expenditures
                  for the period
              
              
              (4,916
              )Change
                  in estimates during the period
              
              
              598Acquisition
                  during the period
              
              
              12,107Total
                  asset retirement obligation at September  30, 2007
              
              $
              91,870
 
  -7-
 Table
                of Contents
 **(6) Share-Based
          Compensation Awards**
 
 Stock
          option activity for the
          nine months ended September 30, 2007 is summarized in the following
          table:
 
 **Weighted-****Weighted-**
                
                
                **Average****Average**
                
                
                **Remaining****Number
                    of**
                
                
                **Exercise**
                
                
                **Contract****Shares**
                
                
                **Price**
                
                
                **Life
                    (Years)**Outstanding
                    at December 31, 2006
                
                
                1,137,398
                
                
                $
                16.64Forfeited/Cancelled
                
                
                (114,841
                )
                
                
                15.57Exercised
                
                
                (36,639
                )
                
                
                16.15Outstanding
                    at September  30, 2007
                
                
                985,918
                
                
                $
                16.78
                
                
                
                7.30Exercisable
                    at September  30, 2007
                
                
                358,955
                
                
                $
                16.89
                
                
                
                7.30
 The
          aggregate intrinsic value of options outstanding at September 30, 2007
          was
          $6,359 and the aggregate intrinsic value of exercisable options was $2,276.
          The
          total intrinsic value of options exercised during the three months ended
          September 30, 2007 and 2006 was $130 and $0, respectively, and for the
          nine
          months ended September 30, 2007 and 2006 was $200 and $243,
          respectively.  Cash received from the exercise of stock options during
          the three months ended September 30, 2007 and 2006 was $473 and $0,
          respectively, and $592 and $953 during the nine months ended September
          30, 2007
          and 2006, respectively. As of September 30, 2007, $3,485 of unrecognized
          compensation cost related to stock options is expected to be recognized
          as
          expense over a weighted-average period of 2.27 years.
 *Restricted
        Stock Awards*
 
 Non-vested
        share award activity
        for the nine months ended September 30, 2007 is summarized in the following
        table:
 
 **Weighted-****Average****Number
                  of**
              
              
              **Grant
                  Date****Shares**
              
              
              **Fair
                  Value**Non-vested
                  shares outstanding at December 31, 2006
              
              
              471,341
              
              
              $
              21.34Granted
              
              
              610,102
              
              
              
              12.79Vested
              
              
              (125,925
              )
              
              
              21.04Forfeited
              
              
              (73,387
              )
              
              
              15.60Non-vested
                  shares outstanding at September  30, 2007
              
              
              882,131
              
              
              $
              15.92
 
 The
        fair
        value of non-vested share awards is estimated based on the average of the
        high
        and low market stock price on the date of grant, and, for purposes of expense
        recognition, the total number of awards expected to vest is adjusted for
        estimated forfeitures. As of September 30, 2007, there was $9,675 of unamortized
        compensation cost related to non-vested shares, which is expected to be
        recognized as expense over a weighted-average period of
        1.86 years.
  *Performance
          Units*
 
 *2007
          Award*
  The
          Company granted 377,247 performance share awards during the first nine
          months of
          2007, of which 334,344 remain outstanding as of September 30, 2007. Recipients
          of these awards can receive shares of the Company's common stock at the
          end of a
          performance period which ends on December 31, 2009, based on the Company's
          actual performance against pre-established operating income goals, strategic
          goals, and total shareholder return goals. In order to receive the shares,
          the
          recipient must also be employed by the Company on the vesting date. The
          performance share awards represent the number of shares of common stock
          to be
          awarded based on the achievement of targeted performance and may range
          from 0
          percent to 150 percent of the targeted amount. The grant date fair value
          of the
          awards related to operating income targets is based on the closing price
          of
          th e
          Company's common stock on the New York Stock Exchange on the grant date
          of the
          award and is being amortized over the performance period. The awards related
          to
          strategic goals do not meet the criteria for grant date pursuant to SFAS
          No.
          123R and the Company has assessed the likelihood of achieving the performance
          goal as not probable at September 30, 2007. The fair value of the awards
          related
          to total shareholder return targets is based upon a Monte Carlo simulation
          and
          is being amortized over the performance period. The Company reassesses
          at each
          reporting date whether achievement of each of the performance conditions
          is
          probable, as well as estimated forfeitures, and adjusts the accruals of
          compensation expense as appropriate. At September 30, 2007, the Company
          has
          assessed the operating income and total shareholder return targets as probable
          of achievement. As of September 30, 2007, there was $3,615 of unamortized
          compensation cost related to the 2007 performance share awards which is
          expected
          to be recognized over the period ending December 31, 2009.
 
 Share-based
          compensation expense measured in accordance with SFAS No. 123R totaled
          $2,683
          ($2,019 on a net-of-tax basis, or $0.03 per basic and diluted share) and
          $5,870
          ($5,138 on a net-of-tax basis, or $0.08 per basic and diluted share) for
          the
          three months ended September 30, 2007 and 2006,
          respectively.  Share-based compensation expense measured in accordance
          with SFAS No. 123R totaled $6,748 ($5,079 on a net-of-tax basis, or $0.08
          per
          basic and diluted share) and $15,815 ($14,143 on a net-of-tax basis, or
          $0.22
          per basic and diluted share) for the nine months ended September 30, 2007
          and
          2006, respectively.
 
 Approximately
          60% of share-based compensation expense is reported as selling, general
          and
          administrative expenses, approximately 40% is reported as a component of
          cost of
          sales, and both are included in the Corporate and Eliminations category
          for
          segment reporting purposes (Note 10).  At September 30, 2007,
          approximately $127 of stock-based compensation costs was capitalized as
          a
          component of inventories. Under SFAS No. 123R, the Company is required
          to report
          the benefits of income tax deductions that exceed recognized compensation
          as
          cash flow from financing activities. Such excess tax benefits were insignificant
          for the periods ended September 30, 2007 and 2006.
 -8-
 Table
            of Contents
  **(7)
          Derivative Financial Instruments**
 
 Derivative
        financial instruments are accounted for in accordance with SFAS No. 133,*Accounting for Derivative Instruments and Hedging Activities*. SFAS No. 133
        requires all derivative financial instruments to be reported on the balance
        sheet at fair value. Changes in fair value are recognized either in earnings
        or
        equity, depending on whether the transaction qualifies for hedge accounting
        and
        if so, the nature of the underlying exposure being hedged and how effective
        the
        derivatives are at offsetting price movements in the underlying
        exposure.
 
 The
        Company accounts for certain forward sale and forward purchase contracts
        that do
        not qualify under the “normal purchase and normal sale” exception of SFAS No.
        133 as derivatives and records these contracts as assets or liabilities at
        fair
        value. These contracts do not currently qualify for hedge accounting.
        Accordingly, changes in fair value for forward sales and forward purchase
        contracts have been recorded in revenue and cost of sales, respectively.
        At
        September 30, 2007, the Company had unrealized gains (losses) on open sales
        and
        open purchase contracts of $2,012 and ($431), respectively. These amounts
        are
        recorded in prepaid expenses and other current assets and accrued expenses
        and
        other current liabilities, respectively.
 
 The
        Company has utilized interest rate swap agreements to modify the interest
        characteristics of a portion of the Company's outstanding debt. The swap
        agreements essentially convert variable-rate debt to fixed-rate debt and
        have
        been designated as cash flow hedges.
 
 The
        Company is also exposed to the risk of fluctuations in cash flows related
        to its
        purchase of diesel fuel. The Company has entered into two financial diesel
        fuel
        swap agreements to reduce the volatility in the price of diesel fuel for
        its
        operations for the last six months of 2007. The diesel fuel swap agreements
        are
        not designated as a hedge for accounting purposes, and therefore the changes
        in
        the fair value for these contracts have been recorded in cost of sales. The
        unrealized gain or loss is recorded in other current assets or other current
        liabilities, respectively, depending upon the market value of the swap
        agreement.
 
 Approximately
        2,000 gallons or 29 percent of the Company's remaining anticipated 2007 fuel
        usage has been fixed with the swap agreements.  At September 30, 2007, the
        Company had unrealized gains on open purchased contracts of $1,069. This
        amount
        was recorded in other current assets in the consolidated balance sheet at
        September 30, 2007.
 
 **(8) Postretirement
        Benefits Other Than Pensions**
 
 The
        following table details the components of the net periodic benefit cost for
        the
        Company’s retiree medical plan (the Plan):
 
 **Three
                  Months Ended**
              
              
              **Nine
                  Months Ended****September
                  30,**
              
              
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Service
                  cost
              
              $
              835
              
              
              $
              960
              
              
              $
              2,331
              
              
              $
              2,880Interest
                  cost
              
              
              763
              
              
              
              706
              
              
              
              2,289
              
              
              
              2,119Amortization
                  of net actuarial (gain) or loss
              
              
              —
              
              
              
              47
              
              
              
              —
              
              
              
              140Amortization
                  of prior service cost
              
              
              583
              
              
              
              568
              
              
              
              1,750
              
              
              
              1,704Net
                  periodic benefit cost
              
              $
              2,181
              
              
              $
              2,281
              
              
              $
              6,370
              
              
              $
              6,843
 
 Employer
        contributions for postretirement medical benefits paid for the nine months
        ended
        September 30, 2007 and 2006 were $95 and $0, respectively. Employee
        contributions are not expected to be made and the Plan is unfunded.
 
 Two
          of
          the Company’s subsidiaries are required to make contributions to the 1974 UMWA
          Pension Plan and Trust and/or the 1993 UMWA Benefit Plan.  The
          contributions that the Company made to these plans were $345 and $7 for the
          quarters ended September 30, 2007 and 2006, respectively, and $1,080 and
          $22 for
          the nine months ended September 30, 2007 and 2006, respectively.
  **(9) Related
          Party Transactions as of December 31, 2006**
 
 The
        Company had the following receivable balances from affiliated parties as
        of
        December 31, 2006:
 
 **December
                  31,****2006**AMCI
              
              
              $
              5,097Robindale
                  Energy & Subsidiary
              
              
              
              11Total
              
              
              $
              5,108
 
 AMCI
        is
        no longer a related party. During 2006, AMCI sold a significant number of
        shares
        of Company common stock to reduce its holdings to below five percent and
        its
        designee on the Company's Board of Directors resigned effective January 3,
        2007.
        Also, Robindale Energy is no longer a related party since its 50% owner is
        no
        longer the Company's Executive Vice President. As of December 31, 2006, $5,097
        of receivables from AMCI is included in trade accounts receivable, net. The
        majority of the AMCI receivables as of December 31, 2006 relate to coal sales
        transactions in the normal course of business.
 
 -9-
 Table
            of Contents
  **(10) Segment
        Information**
  The
          Company
          extracts, processes and markets steam and metallurgical coal from surface
          and
          deep mines for sale to electric utilities, steel and coke producers, and
          industrial customers. The Company operates only in the United States with
          mines
          in the Central Appalachian and Northern Appalachian regions. The Company
          has one
          reportable segment: Coal Operations, which as of September 30, 2007, consisted
          of 33 underground mines and 25 surface mines located in Central Appalachia
          and
          Northern Appalachia. Coal Operations also includes the Company's coal sales
          function, which markets the Company's Appalachian coal to domestic and
          international customers. The All Other category includes the Company's
          equipment
          sales and repair operations, as well as other ancillary business activities,
          including terminal services, coal and environmental analysis services,
          leasing
          of mineral rights, road construction and lime processing
          businesses.  Also included in the All Other category are minimal
          rights owned by our subsidiaries which are leased to subsidiaries in the
          Coal
          Operations segment and to third parties.  The Corporate and
          Eliminations category includes general corporate overhead and the elimination
          of
          intercompany transactions. The revenue elimination amount represents
          inter-segment revenues. The Company evaluates the performance of its segment
          based on EBITDA, which the Company defines as net income plus interest
          expense,
          income tax expense, depreciation, depletion and amortization, less interest
          income.
 Operating
        segment results for the three months ended September 30, 2007 and segment
        assets as of September 30, 2007 were as follows:
 
 **Corporate****Coal**
              
              **All**
              
              **and****Operations**
              
              **Other**
              
              **Eliminations**
              
              **Consolidated**Revenues
              
              $
              500,823
              
              
              $
              15,367
              
              
              $
              (9,051
              )
              
              $
              507,139Depreciation,
                  depletion, and amortization
              
              
              42,175
              
              
              
              1,337
              
              
              
              414
              
              
              
              43,926EBITDA
              
              
              76,931
              
              
              
              2609
              
              
              
              (14,466
              )
              
              
              65,074Capital
                  expenditures
              
              
              20,908
              
              
              
              8,856
              
              
              
              72
              
              
              
              29,836Total
                  assets
              
              
              1,316,333
              
              
              
              107,671
              
              
              
              (252,453
              )
              
              
              1,171,551
  Operating
        segment results for the nine months ended September 30, 2007 were as
        follows:
 
 **Corporate****Coal**
              
              **All**
              
              **and****Operations**
              
              **Other**
              
              **Eliminations**
              
              **Consolidated**Revenues
              
              $
              1,353,143
              
              
              $
              43,913
              
              
              $
              (28,280
              )
              
              $
              1,368,776Depreciation,
                  depletion, and amortization
              
              
              113,023
              
              
              
              3,599
              
              
              
              948
              
              
              
              117,570EBITDA
              
              
              210,989
              
              
              
              5,576
              
              
              
              (41,691
              )
              
              
              174,874Capital
                  expenditures
              
              
              83,077
              
              
              
              17,287
              
              
              
              1,127
              
              
              
              101,491
 
 Operating
        segment results for the three months ended September 30, 2006 and segment
        assets as of September 30, 2006 were as follows:
 
 **Corporate****Coal**
              
              **All**
              
              **and****Operations**
              
              **Other**
              
              **Eliminations**
              
              **Consolidated**Revenues
              
              $
              467,336
              
              
              $
              20,395
              
              
              $
              (12,613
              )
              
              $
              475,118Depreciation,
                  depletion, and amortization
              
              
              34,705
              
              
              
              1,437
              
              
              
              280
              
              
              
              36,422EBITDA
              
              
              79,626
              
              
              
              3,454
              
              
              
              (16,791
              )
              
              
              66,289Capital
                  expenditures
              
              
              26,355
              
              
              
              183
              
              
              
              —
              
              
              
              26,538Total
                  assets
              
              
              1,116,412
              
              
              
              88,843
              
              
              
              (157,596
              )
              
              
              1,047,659
 
 -10-
 Table
            of Contents
  Operating
        segment results for the nine months ended September 30, 2006 were as
        follows:
 
 **Corporate****Coal**
              
              **All**
              
              **and****Operations**
              
              **Other**
              
              **Eliminations**
              
              **Consolidated**Revenues
              
              $
              1,429,510
              
              
              $
              55,220
              
              
              $
              (30,961
              )
              
              $
              1,453,769Depreciation,
                  depletion, and amortization
              
              
              97,837
              
              
              
              4,851
              
              
              
              1,575
              
              
              
              104,263EBITDA
              
              
              267,337
              
              
              
              8,348
              
              
              
              (52,215
              )
              
              
              223,470Capital
                  expenditures
              
              
              103,227
              
              
              
              6,208
              
              
              
              1,103
              
              
              
              110,538
  Reconciliation
        of total segment EBITDA to net income:
  **Three
                  Months Ended**
              
              
              **Nine
                  Months Ended****September
                  30,**
              
              
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Total
                  segment EBITDA
              
              $
              65,074
              
              
              $
              66,289
              
              
              $
              174,874
              
              
              $
              223,470Interest
                  expense
              
              
              (10,101
              )
              
              
              (10,735
              )
              
              
              (30,124
              )
              
              
              (31,798
              )Interest
                  income
              
              
              265
              
              
              
              156
              
              
              
              1,359
              
              
              
              514Income
                  tax expense
              
              
              (2,363
              )
              
              
              (4,744
              )
              
              
              (6,494
              )
              
              
              (23,040
              )Depreciation,
                  depletion and amortization
              
              
              (43,926
              )
              
              
              (36,422
              )
              
              
              (117,570
              )
              
              
              (104,263
              )Net
                  income
              
              $
              8,949
              
              
              $
              14,544
              
              
              $
              22,045
              
              
              $
              64,883
 
 The
        Company markets produced, processed, and purchased coal to customers in the
        United States and in international markets. Export revenues totaled $207,743
        and
        $507,612 or approximately 41% and 37%, respectively, of total revenues for
        each
        of the three months and nine months ended September 30, 2007. Export
        revenues were $164,828 and $523,277 or approximately 35% and 36%, respectively,
        of total revenues for the three and nine months ended September 30,
        2006.
 
 -11-
  **(11) Commitments
          and Contingencies**
  **(***a***)*****Guarantees and Financial Instruments with Off-balance
          Sheet
          Risk***
 
 In
        the normal course of business, the Company is a party to certain guarantees
        and
        financial instruments with off-balance sheet risk, such as bank letters of
        credit and performance or surety bonds. No liabilities related to these
        arrangements are reflected in the Company's condensed consolidated balance
        sheets. Management does not expect any material losses to result from these
        guarantees or off-balance sheet financial instruments. The amount of bank
        letters of credit outstanding as of September 30, 2007 was $92,195. The amount
        of surety bonds currently outstanding related to the Company's reclamation
        obligations is presented in Note 5 to the condensed consolidated financial
        statements. The Company has provided guarantees for equipment financing obtained
        by certain of its contract mining operators totaling approximately $1,117.
        The
        estimated fair value of these guarantees is not significant.
 
 ***(**b**)
        Litigation***
 
 The
        Company is a party to a number of legal proceedings incident to its normal
        business activities. While we cannot predict the outcome of these proceedings,
        we do not believe that any liability arising from these matters individually
        or
        in the aggregate should have a material impact upon the consolidated cash
        flows,
        results of operations or financial condition of the
        Company.
 
 *Nicewonder
        Litigation*
 The
          Affiliated Construction Trades Foundation brought an action against the
          West
          Virginia Department of Transportation, Division of Highways (“WVDOH”) and our
          wholly-owned indirect subsidiary Nicewonder Contracting, Inc. ("NCI") in
          the
          United States District Court in the Southern District of West Virginia. The
          plaintiff sought a declaration that the contract between NCI and the State
          of
          West Virginia related to NCI's road construction project was illegal as
          a
          violation of applicable West Virginia and federal competitive bidding and
          prevailing wage laws.  The plaintiff also sought an injunction prohibiting
          performance of the contract but has not sought monetary
          damages.
 
 On
          September 5, 2007, the Court ruled that the WVDOH and the Federal Highway
          Administration (who is now a party to the suit) could not exempt a contractor,
          like NCI, from paying the prevailing wages as required by the Davis-Bacon
          Act.  The most likely remedy is a directive that the contract be
          renegotiated for such payment.  In that renegotiation, the WVDOH has
          committed to agree and NCI has a contractual right to insist, that additional
          costs resulting from the order will be reimbursed by WVDOH and as such
          neither
          NCI nor the Company believe, at this time, that they have any monetary
          expense from this ruling.  As of September 30, 2007, the Company
          recorded a $5.9 million long-term receivable for the recovery of these
          costs
          from WVDOH and a $5.9 million long-term liability for the obligations under
          the
          ruling.
 
  **(12) Income
        Taxes**
 
 A
        reconciliation of the statutory federal income tax expense at 35% to income
        before income taxes and minority interest and the actual income tax expense
        is
        as follows:
 
 **Three
                  Months Ended**
              
              
              **Nine
                  Months Ended****September
                  30,**
              
              
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Federal
                  statutory income tax expense
              
              $
              3,936
              
              
              $
              6,750
              
              
              $
              9,935
              
              
              $
              30,773Increases
                  (reductions) in taxes due to:Percentage
                  depletion allowance
              
              
              (4,476
              )
              
              
              (5,728
              )
              
              
              (8,283
              )
              
              
              (15,669
              )Extraterritorial
                  income exclusion
              
              
              —
              
              
              
              (536
              )
              
              
              —
              
              
              
              (1,418
              )Deduction
                  for domestic production activities
              
              
              24
              
              
              
              133
              
              
              
              (4
              )
              
              
              (133
              )State
                  taxes, net of federal tax impact
              
              
              (34
              )
              
              
              840
              
              
              
              254
              
              
              
              2,611Non-deductible
                  share-based compensation
              
              
              85
              
              
              
              1,369
              
              
              
              470
              
              
              
              3,598Change
                  in valuation allowance
              
              
              2,623
              
              
              
              1,472
              
              
              
              3,765
              
              
              
              2,461Other,
                  net
              
              
              205
              
              
              
              444
              
              
              
              357
              
              
              
              817Income
                  tax expense
              
              $
              2,363
              
              
              $
              4,744
              
              
              $
              6,494
              
              
              $
              23,040
 
 The
        Company has concluded that it is more likely than not that deferred tax assets,
        net of valuation allowances, currently recorded will be realized. The amount
        of
        the valuation allowance takes into consideration the Alternative Minimum
        Tax
        system as required by SFAS No. 109. The Company monitors the valuation allowance
        each quarter and makes adjustments to the allowance as appropriate.
  The
        Company adopted the provisions of Financial Standards Accounting Board
        Interpretation No. 48*Accounting for Uncertainty in Income Taxes* (“FIN
        48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) on January 1,
        2007. As a result of the adoption of FIN 48, the Company recognized no
        adjustment in the unrecognized income tax benefits that existed at December
        31,
        2006. On January 1, 2007, the Company had approximately $1,754 of unrecognized
        tax benefits accrued and of this amount $1,437 would affect the effective
        tax
        rate if recognized. The Company does not anticipate that total unrecognized
        benefits recorded as of January 1, 2007 will significantly change during
        the
        twelve months following September 30, 2007.
  The
        Company's policy is to classify interest and penalties related to uncertain
        tax
        positions as part of income tax expense. As of September 30, 2007, the Company
        had not recorded any accrued interest expense since no additional cash taxes
        are
        projected to be due as a result of the uncertain tax positions.
 
 Tax
        years
        2005 and 2006 remain open to federal and state examination. The Internal
        Revenue
        Service initiated a corporate income tax audit during first quarter 2007
        for the
        Company's 2005 tax year.  The audit is still ongoing. No adjustments
        have been proposed to date, and the Company expects the examination to last
        through the first quarter of 2008.
 
  -12-
 Table
            of Contents
  **(13) Comprehensive
        Income**
 
 Total
        comprehensive income is as follows for the three months ended September 30,
        2007:
  Net
                  Income
              
              $
              8,949Change
                  in fair value of cash flow hedge, net of tax effect of $(1,606)
                  for the
                  period
              
              
              (4,885
              )Change
                  in SFAS No. 158 adjustment related to postretirement medical and
                  black lung obligations, net of tax effect of $44 for the
                  period
              
              
              133Total
                  comprehensive income
              
              $
              4,197
 
 Total
        comprehensive income is as follows for the nine months ended September 30,
        2007:
  Net
                  Income
              
              $
              22,045Change
                  in fair value of cash flow hedge, net of tax effect of $(375) for
                  the
                  period
              
              
              (1,142
              )Change
                  in SFAS No. 158 adjustment related to postretirement medical and
                  black
                  lung obligations, net of tax effect of $341 for the period
              
              
              1,028Total
                  comprehensive income
              
              $
              21,931
  
 The
        following table summarizes the components of accumulated other comprehensive
        loss at September 30, 2007:
  Fair
                  value of cash flow hedge, net of tax effect of $2,162
              
              $
              6,578SFAS
                  No. 158 adjustment related to black lung obligations, net of tax
                  effect of $118
              
              
              360SFAS
                  No. 158 adjustment related to postretirement medical obligations, net
                  of tax effect of $4,006
              
              
              12,195Total
                  accumulated other comprehensive loss
              
              $
              19,133
 
 
 **(14)
        Mingo Logan Acquisition**
  On
        June 29,
        2007, the Company completed the acquisition of certain coal mining assets
        in
        western West Virginia from Arch Coal, Inc. known as Mingo Logan for $43,890
        including working capital and assumed liabilities.  The Mingo Logan
        purchase consists of coal reserves, two mines and a load-out and processing
        plant and will be managed by Cobra Natural Resources, LLC, an indirect
        wholly-owned subsidiary of the Company.  The Company plans to finalize
        the purchase price allocation in the 4th quarter
        of
        2007.
  The
        following
        table summarizes the current estimates of fair values of the assets acquired
        and
        liabilities assumed at the date of acquisition:
 
 Current
                  assets
              
              $
              9,555Property,
                  plant, and equipment
              
              
              42,324Intangible
                  assets
              
              
              4,218Total
                  assets acquired
              
              
              56,097Asset
                  retirement obligation
              
              
              (12,107
              )Other
                  liabilities
              
              
              (100
              )Total
                  liabilities assumed
              
              
              (12,207
              )Net
                  assets acquired
              
              $
              43,890
  Estimates
        of
        fair value are subject to adjustment based upon completion of an independent
        third-party valuation.
 
 
 
 **(15) New
        Accounting Pronouncements**
 
 In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS
        157”). SFAS 157 defines fair value, establishes a framework for measuring fair
        value and enhances disclosures about fair value measures required under other
        accounting pronouncements, but does not change existing guidance as to whether
        or not an instrument is carried at fair value. SFAS 157 is effective for
        fiscal
        years beginning after November 15, 2007. The Company is currently reviewing
        the
        provisions of SFAS 157 to determine the impact on the Company's financial
        statements.
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
        entities to choose to measure many financial instruments and certain other
        items
        at fair value. The objective is to expand the use of fair value measurements
        in
        accounting for financial instruments. SFAS 159 is effective for fiscal years
        beginning after November 15, 2007. The Company is currently reviewing the
        provisions of SFAS 159 to determine the impact on the Company's financial
        statements.
 
 On
        January 1, 2007, the Company adopted the provisions of FIN 48, which clarifies
        the accounting for uncertainty in income tax positions. This interpretation
        requires the Company to recognize in the consolidated financial statements
        only
        those tax positions determined to be more likely than not of being sustained
        upon examination, based on the technical merits of the positions. The adoption
        of FIN 48 did not result in an adjustment to the Company's financial
        statements.
 
 
  -13-
 Table
            of Contents
  **(16) Supplemental
        Guarantor/Non-Guarantor Financial Information**
 
 On
        June
        28, 2007, Holdings was merged into the Company and the Company assumed the
        obligations of Holdings under the Credit Agreement and related guaranty and
        collateral agreement and became a parent guarantor of the Senior Notes. The
        payment obligations under the Senior Notes, issued jointly by our subsidiary
        Alpha Natural Resources, LLC and its wholly-owned subsidiary Alpha Natural
        Resource Capital Corp. in 2004, are unsecured, but are guaranteed fully and
        unconditionally on a joint and several basis by the Company and all its
        subsidiaries other than the issuers of the notes and our recently formed
        subsidiary, Gallatin Materials LLC.  The following financial information
        sets forth separate financial information with respect to the Company, the
        issuers, the guarantor subsidiaries and the non-guarantor subsidiary. The
        principal elimination entries eliminate investments in subsidiaries and certain
        intercompany balances and transactions.
 
 Unaudited
        Supplemental Condensed Consolidating Statement of Income for the Three Months
        Ended September 30, 2007:
  Parent
                
                
                Co-Issuers
                
                
                Guarantors
                
                
                Non-Guarantor
                
                
                Eliminations
                
                
                ConsolidatedRevenues:Coal revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                438,618
                
                
                $
                -
                
                
                $
                -
                
                
                $
                438,618Freight
                    and handling revenues
                
                
                -
                
                
                
                -
                
                
                
                58,384
                
                
                
                -
                
                
                
                -
                
                
                
                58,384Other
                    revenues
                
                
                -
                
                
                
                -
                
                
                
                10,137
                
                
                
                -
                
                
                
                -
                
                
                
                10,137Total
                    revenues
                
                
                -
                
                
                
                -
                
                
                
                507,139
                
                
                
                -
                
                
                
                -
                
                
                
                507,139Cost
                    and expenses:Cost
                    of coal sales
                
                
                -
                
                
                
                -
                
                
                
                361,704
                
                
                
                -
                
                
                
                -
                
                
                
                361,704Freight
                    and handling costs
                
                
                -
                
                
                
                -
                
                
                
                58,384
                
                
                
                -
                
                
                
                -
                
                
                
                58,384Cost
                    of other revenues
                
                
                -
                
                
                
                -
                
                
                
                7,132
                
                
                
                728
                
                
                
                -
                
                
                
                7,860Depreciation,
                    depletion and amortization
                
                
                -
                
                
                
                -
                
                
                
                43,924
                
                
                
                2
                
                
                
                -
                
                
                
                43,926Selling,
                    general and administrative expenses
                
                
                177
                
                
                
                1,693
                
                
                
                12,566
                
                
                
                30
                
                
                
                -
                
                
                
                14,466Total
                    costs and expenses
                
                
                177
                
                
                
                1,693
                
                
                
                483,710
                
                
                
                760
                
                
                
                -
                
                
                
                486,340Income
                    (loss) from operations
                
                
                (177
                )
                
                
                (1,693
                )
                
                
                23,429
                
                
                
                (760
                )
                
                
                -
                
                
                
                20,799Other
                    income (expenses):Interest
                    expense
                
                
                -
                
                
                
                (10,255
                )
                
                
                (41
                )
                
                
                (15
                )
                
                
                210
                
                
                
                (10,101
                )Interest
                    income
                
                
                38
                
                
                
                130
                
                
                
                291
                
                
                
                16
                
                
                
                (210
                )
                
                
                265Equity
                    earnings
                
                
                11,451
                
                
                
                23,269
                
                
                
                (691
                )
                
                
                -
                
                
                
                (34,029
                )
                
                
                -Miscellaneous
                    income, net
                
                
                -
                
                
                
                -
                
                
                
                281
                
                
                
                -
                
                
                
                -
                
                
                
                281Total
                    other income (expense), net
                
                
                11,489
                
                
                
                13,144
                
                
                
                (160
                )
                
                
                1
                
                
                
                (34,029
                )
                
                
                (9,555
                )Income
                    (loss) before income taxes
                  and
                    minority interest
                
                
                11,312
                
                
                
                11,451
                
                
                
                23,269
                
                
                
                (759
                )
                
                
                (34,029
                )
                
                
                11,244Income
                    tax expense
                
                
                2,363
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,363Minority
                    interest
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (68
                )
                
                
                -
                
                
                
                (68
                )Net
                    income (loss)
                
                $
                8,949
                
                
                $
                11,451
                
                
                $
                23,269
                
                
                $
                (691
                )
                
                $
                (34,029
                )
                
                $
                8,949
  -14-
 Table
            of Contents
  Unaudited
        Supplemental
        Condensed Consolidating Balance Sheet at September 30, 2007:
  Parent
                
                
                Co-Issuers
                
                
                Guarantors
                
                
                Non-Guarantor
                
                
                Eliminations
                
                
                ConsolidatedAssets:Current
                    assets:Cash
                    and cash equivalents
                
                $
                -
                
                
                $
                43,669
                
                
                $
                (30,847
                )
                
                $
                3,445
                
                
                $
                -
                
                
                $
                16,267Trade
                    accounts receivable, net
                
                
                -
                
                
                
                -
                
                
                
                194,599
                
                
                
                -
                
                
                
                -
                
                
                
                194,599Notes
                    and other receivables
                
                
                2,568
                
                
                
                67,494
                
                
                
                16,300
                
                
                
                -
                
                
                
                (80,403
                )
                
                
                5,959Inventories
                
                
                -
                
                
                
                -
                
                
                
                76,718
                
                
                
                -
                
                
                
                -
                
                
                
                76,718Due
                    from affiliates
                
                
                -
                
                
                
                -
                
                
                
                405,394
                
                
                
                17
                
                
                
                (405,411
                )
                
                
                -Prepaid
                    expenses and other current assets
                
                
                3,276
                
                
                
                757
                
                
                
                25,746
                
                
                
                64
                
                
                
                -
                
                
                
                29,843Total
                    current assets
                
                
                5,844
                
                
                
                111,920
                
                
                
                687,910
                
                
                
                3,526
                
                
                
                (485,814
                )
                
                
                323,386Property,
                    plant, and equipment, net
                
                
                -
                
                
                
                -
                
                
                
                648,622
                
                
                
                16,412
                
                
                
                
                
                
                
                665,034Goodwill
                
                
                -
                
                
                
                -
                
                
                
                20,547
                
                
                
                -
                
                
                
                -
                
                
                
                20,547Other
                    intangibles, net
                
                
                -
                
                
                
                -
                
                
                
                6,638
                
                
                
                3,244
                
                
                
                -
                
                
                
                9,882Deferred
                    income taxes
                
                
                89,269
                
                
                
                6,286
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                95,555Other
                    assets
                
                
                365,776
                
                
                
                1,016,385
                
                
                
                34,779
                
                
                
                899
                
                
                
                (1,360,692
                )
                
                
                57,147Total
                    assets
                
                $
                460,889
                
                
                $
                1,134,591
                
                
                $
                1,398,496
                
                
                $
                24,081
                
                
                $
                (1,846,506
                )
                
                $
                1,171,551Liabilities
                    and Stockholder's/Member's EquityCurrent
                    liabilities:Current
                    portion of long-term debt
                
                $
                -
                
                
                $
                14,500
                
                
                $
                67,797
                
                
                $
                -
                
                
                $
                (79,143
                )
                
                $
                3,154Note
                    payable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Bank
                    overdrafts
                
                
                -
                
                
                
                -
                
                
                
                582
                
                
                
                -
                
                
                
                -
                
                
                
                582Due
                    to affiliates
                
                
                77,798
                
                
                
                327,613
                
                
                
                -
                
                
                
                -
                
                
                
                (405,411
                )
                
                
                -Trade
                    accounts payable
                
                
                -
                
                
                
                39
                
                
                
                90,407
                
                
                
                922
                
                
                
                -
                
                
                
                91,368Deferred
                    income tax
                
                
                6,012
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,012Accrued
                    expenses and other current liabilities
                
                
                2,387
                
                
                
                6,606
                
                
                
                81,962
                
                
                
                408
                
                
                
                (1,553
                )
                
                
                89,810Total
                    current liabilities
                
                
                86,197
                
                
                
                348,758
                
                
                
                240,748
                
                
                
                1,330
                
                
                
                (486,107
                )
                
                
                190,926Long-term
                    debt, net of current portion
                
                
                -
                
                
                
                418,125
                
                
                
                249
                
                
                
                13,033
                
                
                
                (3,833
                )
                
                
                427,574Workers'
                    compensation benefits
                
                
                -
                
                
                
                -
                
                
                
                9,553
                
                
                
                -
                
                
                
                -
                
                
                
                9,553Postretirement
                    medical benefits
                
                
                -
                
                
                
                -
                
                
                
                55,654
                
                
                
                -
                
                
                
                -
                
                
                
                55,654Asset
                    retirement obligation
                
                
                -
                
                
                
                -
                
                
                
                84,058
                
                
                
                -
                
                
                
                -
                
                
                
                84,058Deferred
                    gains on sales of property interest
                
                
                -
                
                
                
                -
                
                
                
                3,215
                
                
                
                -
                
                
                
                -
                
                
                
                3,215Other
                    liabilities
                
                
                2,400
                
                
                
                8,750
                
                
                
                15,794
                
                
                
                186
                
                
                
                (106
                )
                
                
                27,024Total
                    liabilities
                
                
                88,597
                
                
                
                775,633
                
                
                
                409,271
                
                
                
                14,549
                
                
                
                (490,046
                )
                
                
                798,004Minority
                    interest
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,255
                
                
                
                1,255Stockholders/member's
                    equity
                
                
                372,292
                
                
                
                358,958
                
                
                
                989,225
                
                
                
                9,532
                
                
                
                (1,357,715
                )
                
                
                372,292Total
                    liabilities and stockholders/members equity
                
                $
                460,889
                
                
                $
                1,134,591
                
                
                $
                1,398,496
                
                
                $
                24,081
                
                
                $
                (1,846,506
                )
                
                $
                1,171,551
  -15-
 Table
            of Contents
  Unaudited
        Supplemental
        Condensed Consolidating Statement of Income for the Three Months Ended September
        30, 2006:
 
 Parent
                
                
                Co-Issuers
                
                
                Guarantors
                
                
                Non-Guarantor
                
                
                Eliminations
                
                
                ConsolidatedRevenues:Coal revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                420,179
                
                
                $
                -
                
                
                $
                -
                
                
                $
                420,179Freight
                    and handling revenues
                
                
                -
                
                
                
                -
                
                
                
                45,805
                
                
                
                -
                
                
                
                -
                
                
                
                45,805Other
                    revenues
                
                
                -
                
                
                
                -
                
                
                
                9,134
                
                
                
                -
                
                
                
                -
                
                
                
                9,134Total
                    revenues
                
                
                -
                
                
                
                -
                
                
                
                475,118
                
                
                
                -
                
                
                
                -
                
                
                
                475,118Cost
                    and expenses:Cost
                    of coal sales
                
                
                -
                
                
                
                -
                
                
                
                340,440
                
                
                
                -
                
                
                
                -
                
                
                
                340,440Freight
                    and handling costs
                
                
                -
                
                
                
                -
                
                
                
                45,805
                
                
                
                -
                
                
                
                -
                
                
                
                45,805Cost
                    of other revenues
                
                
                -
                
                
                
                -
                
                
                
                5,774
                
                
                
                -
                
                
                
                -
                
                
                
                5,774Depreciation,
                    depletion and amortization
                
                
                -
                
                
                
                -
                
                
                
                36,422
                
                
                
                -
                
                
                
                -
                
                
                
                36,422Selling,
                    general and administrative expenses
                
                
                154
                
                
                
                5,551
                
                
                
                11,132
                
                
                
                -
                
                
                
                -
                
                
                
                16,837Total
                    costs and expenses
                
                
                154
                
                
                
                5,551
                
                
                
                439,573
                
                
                
                -
                
                
                
                -
                
                
                
                445,278Income
                    (loss) from operations
                
                
                (154
                )
                
                
                (5,551
                )
                
                
                35,545
                
                
                
                -
                
                
                
                -
                
                
                
                29,840Other
                    income (expenses):Interest
                    expense
                
                
                -
                
                
                
                (10,756
                )
                
                
                (79
                )
                
                
                -
                
                
                
                100
                
                
                
                (10,735
                )Interest
                    income
                
                
                48
                
                
                
                69
                
                
                
                139
                
                
                
                -
                
                
                
                (100
                )
                
                
                156Equity
                    earnings
                
                
                19,394
                
                
                
                35,751
                
                
                
                -
                
                
                
                -
                
                
                
                (55,145
                )
                
                
                -Miscellaneous
                    income, net
                
                
                -
                
                
                
                (119
                )
                
                
                146
                
                
                
                -
                
                
                
                -
                
                
                
                27Total
                    other income (expense), net
                
                
                19,442
                
                
                
                24,945
                
                
                
                206
                
                
                
                -
                
                
                
                (55,145
                )
                
                
                (10,552
                )Income
                    (loss) before income taxes and minority interest
                
                
                19,288
                
                
                
                19,394
                
                
                
                35,751
                
                
                
                -
                
                
                
                (55,145
                )
                
                
                19,288Income
                    tax expense
                
                
                4,744
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,744Net
                    income (loss)
                
                $
                14,544
                
                
                $
                19,394
                
                
                $
                35,751
                
                
                $
                -
                
                
                $
                (55,145
                )
                
                $
                14,544
 
  -16-
 Table
            of Contents
  Unaudited
        Supplemental
        Condensed Consolidating Balance Sheet at December 31, 2006:
  Parent
                    
                    
                    Co-Issuers
                    
                    
                    Guarantors
                    
                    
                    Non-Guarantor
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedAssets:Current
                        assets:Cash
                        and cash equivalents
                    
                    $
                    -
                    
                    
                    $
                    27,101
                    
                    
                    $
                    5,414
                    
                    
                    $
                    741
                    
                    
                    $
                    -
                    
                    
                    $
                    33,256Trade
                        accounts receivable, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    171,195
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    171,195Notes
                        and other receivables
                    
                    
                    2,568
                    
                    
                    
                    67,498
                    
                    
                    
                    13,702
                    
                    
                    
                    20
                    
                    
                    
                    (77,322
                    )
                    
                    
                    6,466Inventories
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    76,844
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    76,844Due
                        from affiliates
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    276,063
                    
                    
                    
                    -
                    
                    
                    
                    (276,063
                    )
                    
                    
                    -Prepaid
                        expenses and other current assets
                    
                    
                    3,337
                    
                    
                    
                    1,437
                    
                    
                    
                    46,119
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,893Total
                        current assets
                    
                    
                    5,905
                    
                    
                    
                    96,036
                    
                    
                    
                    589,337
                    
                    
                    
                    761
                    
                    
                    
                    (353,385
                    )
                    
                    
                    338,654Property,
                        plant, and equipment, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    637,136
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    637,136Goodwill
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,547
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,547Other
                        intangibles, net
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,803
                    
                    
                    
                    3,917
                    
                    
                    
                    -
                    
                    
                    
                    11,720Deferred
                        income taxes
                    
                    
                    88,644
                    
                    
                    
                    6,253
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    94,897Other
                        assets
                    
                    
                    330,983
                    
                    
                    
                    897,664
                    
                    
                    
                    21,625
                    
                    
                    
                    -
                    
                    
                    
                    (1,207,433
                    )
                    
                    
                    42,839Total
                        assets
                    
                    $
                    425,532
                    
                    
                    $
                    999,953
                    
                    
                    $
                    1,276,448
                    
                    
                    $
                    4,678
                    
                    
                    $
                    (1,560,818
                    )
                    
                    $
                    1,145,793Liabilities
                        and Stockholder's/Member's EquityCurrent
                        liabilities:Current
                        portion of long-term debt
                    
                    $
                    -
                    
                    
                    $
                    12,300
                    
                    
                    $
                    68,254
                    
                    
                    $
                    -
                    
                    
                    $
                    (77,300
                    )
                    
                    $
                    3,254Note
                        payable
                    
                    
                    -
                    
                    
                    
                    20,941
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    20,941Bank
                        overdrafts
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    23,814
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    23,814Due
                        to affiliates
                    
                    
                    69,087
                    
                    
                    
                    206,976
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (276,063
                    )
                    
                    
                    -Trade
                        accounts payable
                    
                    
                    -
                    
                    
                    
                    144
                    
                    
                    
                    75,534
                    
                    
                    
                    308
                    
                    
                    
                    -
                    
                    
                    
                    75,986Deferred
                        income tax
                    
                    
                    7,601
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,601Accrued
                        expenses and other current liabilities
                    
                    
                    2,395
                    
                    
                    
                    6,695
                    
                    
                    
                    81,878
                    
                    
                    
                    -
                    
                    
                    
                    (374
                    )
                    
                    
                    90,594Total
                        current liabilities
                    
                    
                    79,083
                    
                    
                    
                    247,056
                    
                    
                    
                    249,480
                    
                    
                    
                    308
                    
                    
                    
                    (353,737
                    )
                    
                    
                    222,190Long-term
                        debt, net of current portion
                    
                    
                    -
                    
                    
                    
                    420,000
                    
                    
                    
                    756
                    
                    
                    
                    700
                    
                    
                    
                    -
                    
                    
                    
                    421,456Workers'
                        compensation benefits
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,169
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,169Postretirement
                        medical benefits
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,712
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    50,712Asset
                        retirement obligation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    69,495
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    69,495Deferred
                        gains on sales of property interest
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,885
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,885Other
                        liabilities
                    
                    
                    2,400
                    
                    
                    
                    8,676
                    
                    
                    
                    15,811
                    
                    
                    
                    (50
                    )
                    
                    
                    
                    
                    
                    
                    26,837Total
                        liabilities
                    
                    
                    81,483
                    
                    
                    
                    675,732
                    
                    
                    
                    397,308
                    
                    
                    
                    958
                    
                    
                    
                    (353,737
                    )
                    
                    
                    801,744Stockholders/member's
                        equity
                    
                    
                    344,049
                    
                    
                    
                    324,221
                    
                    
                    
                    879,140
                    
                    
                    
                    3,720
                    
                    
                    
                    (1,207,081
                    )
                    
                    
                    344,049Total
                        liabilities and stockholders/members equity
                    
                    $
                    425,532
                    
                    
                    $
                    999,953
                    
                    
                    $
                    1,276,448
                    
                    
                    $
                    4,678
                    
                    
                    $
                    (1,560,818
                    )
                    
                    $
                    1,145,793
   
  -17-
 Table
            of Contents
  Unaudited
        Supplemental
        Condensed Consolidating Statement of Income for the Nine Months Ended September
        30, 2007:
  Parent
                  
                  
                  Co-Issuers
                  
                  
                  Guarantors
                  
                  
                  Non-Guarantor
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedRevenues:Coal revenues
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,201,678
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,201,678Freight
                      and handling revenues
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  143,183
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  143,183Other
                      revenues
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  23,915
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  23,915Total
                      revenues
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,368,776
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,368,776Cost
                      and expenses:Cost
                      of coal sales
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  991,766
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  991,766Freight
                      and handling costs
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  143,183
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  143,183Cost
                      of other revenues
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,189
                  
                  
                  
                  2,067
                  
                  
                  
                  -
                  
                  
                  
                  18,256Depreciation,
                      depletion and amortization
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  117,566
                  
                  
                  
                  4
                  
                  
                  
                  -
                  
                  
                  
                  117,570Selling,
                      general and administrative expenses
                  
                  
                  742
                  
                  
                  
                  4,451
                  
                  
                  
                  36,405
                  
                  
                  
                  89
                  
                  
                  
                  -
                  
                  
                  
                  41,687Total
                      costs and expenses
                  
                  
                  742
                  
                  
                  
                  4,451
                  
                  
                  
                  1,305,109
                  
                  
                  
                  2,160
                  
                  
                  
                  -
                  
                  
                  
                  1,312,462Income
                      (loss) from operations
                  
                  
                  (742
                  )
                  
                  
                  (4,451
                  )
                  
                  
                  63,667
                  
                  
                  
                  (2,160
                  )
                  
                  
                  -
                  
                  
                  
                  56,314Other
                      income (expenses):Interest
                      expense
                  
                  
                  -
                  
                  
                  
                  (30,333
                  )
                  
                  
                  (222
                  )
                  
                  
                  (15
                  )
                  
                  
                  446
                  
                  
                  
                  (30,124
                  )Interest
                      income
                  
                  
                  112
                  
                  
                  
                  1,017
                  
                  
                  
                  660
                  
                  
                  
                  16
                  
                  
                  
                  (446
                  )
                  
                  
                  1,359Equity
                      earnings
                  
                  
                  29,169
                  
                  
                  
                  62,934
                  
                  
                  
                  (2,004
                  )
                  
                  
                  -
                  
                  
                  
                  (90,099
                  )
                  
                  
                  -Miscellaneous
                      income, net
                  
                  
                  -
                  
                  
                  
                  2
                  
                  
                  
                  833
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  835Total
                      other income (expense), net
                  
                  
                  29,281
                  
                  
                  
                  33,620
                  
                  
                  
                  (733
                  )
                  
                  
                  1
                  
                  
                  
                  (90,099
                  )
                  
                  
                  (27,930
                  )Income
                      (loss) before income taxes and minority interest
                  
                  
                  28,539
                  
                  
                  
                  29,169
                  
                  
                  
                  62,934
                  
                  
                  
                  (2,159
                  )
                  
                  
                  (90,099
                  )
                  
                  
                  28,384Income
                      tax expense
                  
                  
                  6,494
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,494Minority
                      interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (155
                  )
                  
                  
                  -
                  
                  
                  
                  (155
                  )Net
                      income (loss)
                  
                  $
                  22,045
                  
                  
                  $
                  29,169
                  
                  
                  $
                  62,934
                  
                  
                  $
                  (2,004
                  )
                  
                  $
                  (90,099
                  )
                  
                  $
                  22,045
 
  -18-
 Table
            of Contents
  Unaudited
        Supplemental Condensed Consolidating Statement of Income for the Nine Months
        Ended September 30, 2006:
  Parent
                
                
                Co-Issuers
                
                
                Guarantors
                
                
                Non-Guarantor
                
                
                Eliminations
                
                
                ConsolidatedRevenues:Coal revenues
                
                $
                -
                
                
                $
                -
                
                
                $
                1,282,033
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,282,033Freight
                    and handling revenues
                
                
                -
                
                
                
                -
                
                
                
                143,132
                
                
                
                -
                
                
                
                -
                
                
                
                143,132Other
                    revenues
                
                
                -
                
                
                
                -
                
                
                
                28,604
                
                
                
                -
                
                
                
                -
                
                
                
                28,604Total
                    revenues
                
                
                -
                
                
                
                -
                
                
                
                1,453,769
                
                
                
                -
                
                
                
                -
                
                
                
                1,453,769Cost
                    and expenses:Cost
                    of coal sales
                
                
                -
                
                
                
                -
                
                
                
                1,016,831
                
                
                
                -
                
                
                
                -
                
                
                
                1,016,831Freight
                    and handling costs
                
                
                -
                
                
                
                -
                
                
                
                143,132
                
                
                
                -
                
                
                
                -
                
                
                
                143,132Cost
                    of other revenues
                
                
                -
                
                
                
                -
                
                
                
                19,170
                
                
                
                -
                
                
                
                -
                
                
                
                19,170Depreciation,
                    depletion and amortization
                
                
                -
                
                
                
                -
                
                
                
                104,263
                
                
                
                -
                
                
                
                -
                
                
                
                104,263Selling,
                    general and administrative expenses
                
                
                706
                
                
                
                15,523
                
                
                
                35,260
                
                
                
                -
                
                
                
                -
                
                
                
                51,489Total
                    costs and expenses
                
                
                706
                
                
                
                15,523
                
                
                
                1,318,656
                
                
                
                -
                
                
                
                -
                
                
                
                1,334,885Income
                    (loss) from operations
                
                
                (706
                )
                
                
                (15,523
                )
                
                
                135,113
                
                
                
                -
                
                
                
                -
                
                
                
                118,884Other
                    income (expenses):Interest
                    expense
                
                
                -
                
                
                
                (31,801
                )
                
                
                (238
                )
                
                
                -
                
                
                
                241
                
                
                
                (31,798
                )Interest
                    income
                
                
                144
                
                
                
                274
                
                
                
                337
                
                
                
                -
                
                
                
                (241
                )
                
                
                514Equity
                    earnings
                
                
                88,485
                
                
                
                135,694
                
                
                
                -
                
                
                
                -
                
                
                
                (224,179
                )
                
                
                -Miscellaneous
                    income, net
                
                
                -
                
                
                
                (159
                )
                
                
                482
                
                
                
                -
                
                
                
                -
                
                
                
                323Total
                    other income (expense), net
                
                
                88,629
                
                
                
                104,008
                
                
                
                581
                
                
                
                -
                
                
                
                (224,179
                )
                
                
                (30,961
                )Income
                    (loss) before income taxes and minority interest
                
                
                87,923
                
                
                
                88,485
                
                
                
                135,694
                
                
                
                -
                
                
                
                (224,179
                )
                
                
                87,923Income
                    tax expense
                
                
                23,040
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                23,040Net
                    income (loss)
                
                $
                64,883
                
                
                $
                88,485
                
                
                $
                135,694
                
                
                $
                -
                
                
                $
                (224,179
                )
                
                $
                64,883
 
  -19-
 Table
            of Contents
  Unaudited
        Supplemental
        Condensed Consolidating Statement of Cash Flows for the Nine Months Ended
        September 30, 2007:
 Parent
                
                
                Co-Issuers
                
                
                Guarantors
                
                
                Non-Guarantor
                
                
                Eliminations
                
                
                Consolidated******Cash
                  flows from operating activities:Net
                    cash flows from operating activities
                
                $
                (594
                )
                
                $
                31,147
                
                
                $
                121,008
                
                
                $
                (622
                )
                
                $
                12,313
                
                
                $
                163,252Cash
                    flows from investing activities:Capital
                    expenditures
                
                
                -
                
                
                
                -
                
                
                
                (85,540
                )
                
                
                (15,951
                )
                
                
                -
                
                
                
                (101,491
                )Proceeds
                    from disposition of property, plant, & equipment
                
                
                -
                
                
                
                -
                
                
                
                3,734
                
                
                
                -
                
                
                
                -
                
                
                
                3,734Equity
                    investments
                
                
                -
                
                
                
                (263
                )
                
                
                (7,122
                )
                
                
                -
                
                
                
                6,982
                
                
                
                (403
                )Purchase
                    of acquired companies
                
                
                -
                
                
                
                -
                
                
                
                (43,908
                )
                
                
                -
                
                
                
                -
                
                
                
                (43,908
                )Other,
                    net
                
                
                -
                
                
                
                -
                
                
                
                (594
                )
                
                
                (18
                )
                
                
                -
                
                
                
                (612
                )Net
                    cash flows from investing activities
                
                
                -
                
                
                
                (263
                )
                
                
                (133,430
                )
                
                
                (15,969
                )
                
                
                6,982
                
                
                
                (142,680
                )Cash
                    flows from financing activities:Repayments
                    of notes payable
                
                
                -
                
                
                
                (20,941
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (20,941
                )Proceeds
                    from issuance of long-term debt
                
                
                -
                
                
                
                21,400
                
                
                
                -
                
                
                
                12,313
                
                
                
                (12,313
                )
                
                
                21,400Repayments
                    on long-term debt
                
                
                -
                
                
                
                (14,775
                )
                
                
                (607
                )
                
                
                -
                
                
                
                -
                
                
                
                (15,382
                )Change
                    in bank overdraft
                
                
                -
                
                
                
                -
                
                
                
                (23,232
                )
                
                
                -
                
                
                
                -
                
                
                
                (23,232
                )Proceeds
                    from exercise of stock options
                
                
                594
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                594Distributions
                    to original shareholders of Alpha NR Holding
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,982
                
                
                
                (6,982
                )
                
                
                -Net
                    cash flows from financing activities
                
                
                594
                
                
                
                (14,316
                )
                
                
                (23,839
                )
                
                
                19,295
                
                
                
                (19,295
                )
                
                
                (37,561
                )Increase
                    (decrease) in cash and cash equivalents
                
                
                -
                
                
                
                16,568
                
                
                
                (36,261
                )
                
                
                2,704
                
                
                
                -
                
                
                
                (16,989
                )Cash
                    and cash equivalents at beginning of period
                
                
                -
                
                
                
                27,101
                
                
                
                5,414
                
                
                
                741
                
                
                
                -
                
                
                
                33,256Cash
                    and cash equivalents at end of period
                
                $
                -
                
                
                $
                43,669
                
                
                $
                (30,847
                )
                
                $
                3,445
                
                
                $
                -
                
                
                $
                16,267
  -20-
 Table
              of Contents
 Unaudited
        Supplemental
        Condensed Consolidating Statement of Cash Flows for the Nine Months Ended
        September 30, 2006:
  Parent
                  
                  
                  Co-Issuers
                  
                  
                  Guarantors
                  
                  
                  Non-Guarantor
                  
                  
                  Eliminations
                  
                  
                  ConsolidatedCash
                    flows from operating activities:Net
                      cash flows from operating activities
                  
                  $
                  1,447
                  
                  
                  $
                  11,681
                  
                  
                  $
                  135,189
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  148,317Cash
                      flows from investing activities:Capital
                      expenditures
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (110,538
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (110,538
                  )Proceeds
                      from disposition of property, plant, & equipment
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,060
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,060Equity
                      investments
                  
                  
                  -
                  
                  
                  
                  (19
                  )
                  
                  
                  (209
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (228
                  )Purchase
                      of acquired companies
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (28,273
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (28,273
                  )Other,
                      net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,499
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,499Net
                      cash flows from investing activities
                  
                  
                  -
                  
                  
                  
                  (19
                  )
                  
                  
                  (135,461
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (135,480
                  )Cash
                      flows from financing activities:Repayments
                      of notes payable
                  
                  
                  -
                  
                  
                  
                  (55,671
                  )
                  
                  
                  194
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (55,477
                  )Proceeds
                      from issuance of long-term debt
                  
                  
                  -
                  
                  
                  
                  287,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  287,000Repayments
                      on long-term debt
                  
                  
                  -
                  
                  
                  
                  (289,585
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (289,585
                  )Change
                      in bank overdraft
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18,574
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  18,574Proceeds
                      from exercise of stock options
                  
                  
                  953
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  953Distributions
                      to original shareholders of Alpha NR Holding
                  
                  
                  (2,400
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,400
                  )Net
                      cash flows from financing activities
                  
                  
                  (1,447
                  )
                  
                  
                  (58,256
                  )
                  
                  
                  18,768
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (40,935
                  )Increase
                      (decrease) in cash and cash equivalents
                  
                  
                  -
                  
                  
                  
                  (46,594
                  )
                  
                  
                  18,496
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (28,098
                  )Cash
                      and cash equivalents at beginning of period
                  
                  
                  -
                  
                  
                  
                  46,669
                  
                  
                  
                  (7,047
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  39,622Cash
                      and cash equivalents at end of period
                  
                  $
                  -
                  
                  
                  $
                  75
                  
                  
                  $
                  11,449
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  11,524
  
  -21-
 Table
            of Contents
  **Item
          2.*Management’s Discussion and Analysis of Financial
          Condition and Results of Operation***
  You
        should read the following discussion and analysis in conjunction with our
        financial statements and related notes included elsewhere in this report
        and the
        Company's Annual Report on Form 10-K for the year ended December 31,
        2006.
  **Cautionary
        Note Regarding Forward Looking Statements**
 
 This
        report includes statements of our expectations, intentions, plans and beliefs
        that constitute “forward-looking statements” within the meaning of
        Section 27A of the Securities Act of 1933 and Section 21E of the
        Securities Exchange Act of 1934 and are intended to come within the safe
        harbor
        protection provided by those sections. These statements, which involve risks
        and
        uncertainties, relate to analyses and other information that are based on
        forecasts of future results and estimates of amounts not yet determinable
        and
        may also relate to our future prospects, developments and business strategies.
        We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “predict,” “project,” “should” and similar terms and
        phrases, including references to assumptions, in this report to identify
        forward-looking statements. These forward-looking statements are made based
        on
        expectations and beliefs concerning future events affecting us and are subject
        to uncertainties and factors relating to our operations and business
        environment, all of which are difficult to predict and many of which are
        beyond
        our control, that could cause our actual results to differ materially from
        those
        matters expressed in or implied by these forward-looking
        statements.
 
 The
        following factors are among those that may cause actual results to differ
        materially from our forward-looking statements:
 
 **·**
              market
                  demand for coal, electricity and
                  steel;
 
 **·**
              future
                  economic or capital market
                  conditions;
 
 **·**
              weather
                  conditions or catastrophic weather-related
                  damage;
 
 **·**
              our
                  production capabilities;
 
 **·**
              the
                  consummation of financing, acquisition or disposition transactions
                  and the
                  effect thereof on our business;
 
 **·**
              our
                  ability to successfully integrate the operations we have acquired
                  with our
                  existing operations, as well as our ability to successfully integrate
                  operations we may acquire in the
                  future;
 
 **·**
              our
                  plans and objectives for future operations and expansion or
                  consolidation;
 
 **·**
              our
                  relationships with, and other conditions affecting, our
                  customers;
  **·**
              the
                  progress of project construction plans and marketing agreements
                  relating
                  to Gallatin Materials LLC;
 
 **·**
              timing
                  of changes in customer coal
                  inventories;
 
 **·**
              changes
                  in, renewal of and acquiring new long-term coal supply
                  arrangements;
 
 **·**
              inherent
                  risks of coal mining beyond our
                  control;
 
 **·**
              environmental
                  laws, including those directly affecting our coal mining and production,
                  and those affecting our customers' coal
                  usage;
 
 **·**
              competition
                  in coal markets;
 
 **·**
              railroad,
                  barge, truck and other transportation performance and
                  costs;
 
 **·**
              the
                  geological characteristics of Central and Northern Appalachian
                  coal
                  reserves;
  **·**
              availability
                  of mining and processing equipment and
                  parts;
 
 **·**
              our
                  assumptions concerning economically recoverable coal reserve
                  estimates;
 
 
  -22-
 Table
            of Contents
   **·**
              availability
                  of skilled employees and other employee workforce
                  factors;
 
 **·**
              regulatory
                  and court decisions;
 
 **·**
              future
                  legislation and changes in regulations, governmental policies or
                  taxes;
 
 **·**
              changes
                  in postretirement benefit
                  obligations;
 
 **·**
              our
                  liquidity, results of operations and financial
                  condition;
 
 **·**
              decline
                  in coal prices;
 
 **·**
              forward
                  sales and purchase contracts not accounted for as a
                  hedge;
 
 **·**
              indemnification
                  of certain obligations not being
                  met;
  **·**
              continued
                  funding of the road construction
                  business;
  **·**
              disruption
                  in coal supplies;
  **·**
              unfavorable
                  government intervention in, or nationalization of, foreign
                  investments;
 
 **·**
              other
                  factors, including the other factors discussed in “Overview - Coal Pricing
                  Trends and Uncertainties” and “Outlook” below, and the factors discussed
                  in Part I, Item 1A “Risk Factors” section of our annual report on Form
                  10-K for the year ended December 31,
                  2006.
  When
        considering these forward-looking statements, you should keep in mind the
        cautionary statements in this report and the documents incorporated by
        reference. We do not undertake any responsibility to release publicly any
        revisions to these forward-looking statements to take into account events
        or
        circumstances that occur after the date of this report. Additionally, we
        do not
        undertake any responsibility to update you on the occurrence of any
        unanticipated events which may cause actual results to differ from those
        expressed or implied by the forward-looking statements contained in this
        report.
 
 **Overview**
 
 We
        produce, process and sell steam and metallurgical coal (met coal) from eight
        regional business units, which, as of September 30, 2007, are supported by
        33
        active underground mines, 25 active surface mines and 11 preparation plants
        located throughout Virginia, West Virginia, Kentucky and Pennsylvania. We
        also
        sell coal produced by others, the majority of which we process and/or blend
        with
        coal produced from our mines prior to resale, providing us with a higher
        overall
        margin for the blended product than if we had sold the coals separately.
        For the
        three months and nine months ended September 30, 2007, sales of steam coal
        were
        4.4 and 13.0 million tons, respectively, and accounted for approximately
        58% and 62%, respectively, of our coal sales volume. For the three and nine
        months ended September 30, 2007, sales of metallurgical coal, which generally
        sells at a premium over steam coal, were 3.2 and 8.1 million tons,
        respectively, and accounted for approximately 42% and 38%, respectively,
        of our
        sales volume. Our sales of steam coal were made primarily to large utilities
        and
        industrial customers in the Eastern region of the United States, and our
        sales
        of metallurgical coal were made primarily to steel companies in the Northeastern
        and Midwestern regions of the United States and in several countries in Europe,
        Asia and South America. Approximately 38% of our coal sales volume in the
        first
        nine months of 2007 was derived from sales made outside the United States,
        primarily in Egypt, Turkey, Belgium and India.
 
 On
        June
        29, 2007, the Company completed the acquisition of certain coal mining assets
        in
        western West Virginia from Arch Coal, Inc. known as Mingo Logan for $43.9
        million including working capital and assumed liabilities.  The Mingo
        Logan purchase consisted of coal reserves, two mines and a load-out and
        processing plant and managed by Cobra Natural Resources, LLC, an indirect
        wholly
        owned subsidiary of the Company.
 
 We
        also
        own 94% of Gallatin Materials LLC (“Gallatin”), a lime manufacturing venture
        near Cincinnati, Ohio. Construction of the first of two lime plants has begun
        and is on schedule. Fabrication and site work has been ongoing since January
        and
        major component assembly is expected to continue for the next few months.
        The
        first of two planned kilns is targeted to start producing late this year,
        with
        about three-fourths of planned production already sold through 2012. We have
        funded our total contribution of $10.3 million as well as our loan requirement
        of $3.8 million for the project's first phase. In addition, we have provided
        a
        $2.6 million letter of credit to cover any potential cost overruns related
        to
        the project's first phase.  Approximately $8.4 million and $15.0 million
        was spent on capital expenditures by Gallatin during the three months and
        nine
        months ended September 30, 2007, respectively.  In the third
        quarter, Gallatin borrowed $8.5 million for project financing.
 
 In
        addition, we generate other revenues from road construction, equipment and
        parts
        sales, equipment repair income, rentals, royalties, commissions, coal handling,
        terminal and processing fees, and coal and environmental analysis fees.  We
        also record revenue for freight and handling charges incurred in delivering
        coal
        to our customers, which we treat as being reimbursed by our customers. However,
        these freight and handling revenues are offset by equivalent freight and
        handling costs and do not contribute to our profitability.
 
 Our
        business is seasonal, with operating results varying from quarter to quarter.
        Primarily due to the freezing of the lakes that we use to transport coal
        to some
        of our customers, we generally experience lower sales and hence build coal
        inventory during the winter months.
 
 Our
        primary expenses are wages and benefits, supply costs, repair and maintenance
        expenditures, cost of contract mining services, cost of purchased coal,
        royalties, freight and handling costs, and taxes incurred in selling our
        coal.
        Historically, our cost of coal sales per ton is lower for sales of our produced
        and processed coal than for sales of purchased coal that we do not process
        prior
        to resale.
 
 We
        have
        one reportable segment, Coal Operations, which includes all of our revenues
        and
        costs from coal production and sales, freight and handling, rentals, commissions
        and coal handling and processing operations and coal recovery incidental
        to our
        road construction operations. These revenues and costs included in our Coal
        Operations segment are reported by us in our coal sales revenues and cost
        of
        coal sales, except for the revenues and costs from rentals, commissions,
        and
        coal handling, processing operations and road construction, which we report
        in
        our other revenues and cost of other revenues, respectively.
 -23-
 Table
              of Contents
  **Coal
          Pricing Trends, Uncertainties and Outlook**
  Due
          to a
          decline in steam coal pricing and anticipated softer market conditions
          in the
          first half of 2007, we idled approximately one million tons of capacity
          last
          year.  By the end of the third quarter of 2007, we saw a reversal of
          the soft eastern US thermal market. Strong domestic consumption coupled
          with
          increased demand for US thermal coal in Europe has had a positive impact
          on the
          current supply/demand balance. This is evidenced by increased demand, shipments,
          spot pricing, and customer interest in contracting future
          deliveries.
 
 We
          believe that these more favorable market conditions will extend into 2008
          and
          2009. Based on various data sources, we believe that a combination of reduced
          domestic coal production, higher net electrical generation by coal-burning
          utilities, reduced coal imports from South America and a surge in both
          met and
          thermal exports to Europe has led to a 40-45 million ton swing in the balance
          of
          coal supply and demand compared with last year, through
          mid-October.
 
 We
          believe that these strengthening conditions helped our sales group obtain
          commitments during the third quarter of 2007 for approximately 13.6 million
          tons
          of thermal coal for 2008, with realizations ranging from $48.00 to $49.00
          per
          ton for typical Central Appalachian specification coals. Additionally,
          during
          the third quarter, we committed and priced close to 5.4 million tons of
          thermal
          coal for 2009 in excess of $48.00 per ton. Approximately 4 percent of planned
          thermal production remains uncommitted for 2008 and approximately 58 percent
          is
          uncommitted for 2009.
 
 We
          continue to gradually layer in contractual commitments. As of October 22,
          2007,
          76 and 28 percent of our total planned production for 2008 and 2009,
          respectively, was committed and priced.
 
 While
          we
          continued in the third quarter to reduce our unsold book of thermal coal
          for
          2008, we have maintained a substantial portion of our planned 2008 metallurgical
          coal primarily used for coke production—about 5 million tons—uncommitted and
          unpriced.
 
 As
          the
          leading exporter of metallurgical coal from the U.S., we are pursuing
          opportunities to capitalize on tight global supplies and sustained buyer
          interest from a number of foreign countries. Strong global steel production,
          coupled with high ocean freight rates and weather and logistical problems
          encountered by Australian producers, has created opportunities for unplanned
          metallurgical coal sales overseas this year. We will use our high quality
          reserve base, blending capabilities and spot purchases of specific coal
          types to
          maximize sales into the metallurgical coal markets. Year-to-date, our
          metallurgical coal sales have been running ahead of target, at 52 percent
          of
          overall sales. Also, fifty-two percent of our planned metallurgical coal
          production remains unpriced for next year.
 
 In
          the
          fourth quarter of this year, we expect a more normal proportion of metallurgical
          coal sales to thermal sales than we experienced in the third quarter, as
          remaining thermal sales commitments in the U.S. are fulfilled for the balance
          of
          the year. Therefore, we expect a slightly lower average unit realization
          than we
          realized during the third quarter.
 Factors
        that may impact our future cost of coal production are:
  ·
              The
                  Miner Act and various other state legislation continue to place
                  upward
                  cost pressure on mine operators as they attempt to comply with
                  the new
                  statutes.·
              The
                  recent ratification of the Bituminous Coal Operators and Associates
                  new
                  contract will increase the cost structures of mine operators who
                  have
                  United Mine Workers of America representation, which could impact
                  the cost
                  structures of non-represented workforces.·
              A
                  recent court decision, initially impacting surface mining operations
                  in
                  the Huntington District of the U.S. Corps of Engineers, threatens
                  to
                  further slow the issuance of mining permits and constrain production.
                  This
                  decision could spread to other districts, including ones where
                  we
                  operate.·
              New
                  technological advances in coal-to-gas and coal-to-liquids are increasing
                  the demand for coal usage and could cause upward pressure on the
                  demand
                  for coal and increase the price we pay for purchased
                  coal.
 
 We
          own a
          24.5% interest, a $6.1 million investment, in Excelven Pty Ltd., a coal
          mine
          development project located in Venezuela.  We account for the
          investment under the equity method.  The project is challenged by
          political risk.  In particular, the Venezuelan government has
          expressed an interest in increasing government ownership in Venezuelan
          natural
          resources.  We are in the final stages of the Affectation of Resources
          (AoR) permit process and believe the permit will be granted, with mining
          expected to commence approximately 6 to 12 months after the grant
          date.  Any future deterioration in the political environment in
          Venezuela or the government’s denial of the AoR permit could lead to a potential
          impairment adjustment.
 For
        additional information regarding some of the risks and uncertainties that
        affect
        our business, see Item 2 and Item 1A “Risk Factors” in our Annual Report on Form
        10-K.
 
 **Reconciliation
        of Non-GAAP Measures**
 
 The
        following unaudited table reconciles EBITDA to net income, the most directly
        comparable GAAP measure.
 
 **Three
                  months ended**
              
              
              **Nine
                  months ended****September
                  30,**
              
              
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****(in
                  thousands)**Net
                  income
              
              $
              8,949
              
              
              $
              14,544
              
              
              $
              22,045
              
              
              $
              64,883Interest
                  expense
              
              
              10,101
              
              
              
              10,735
              
              
              
              30,124
              
              
              
              31,798Interest
                  income
              
              
              (265
              )
              
              
              (156
              )
              
              
              (1,359
              )
              
              
              (514
              )Income
                  tax expense
              
              
              2,363
              
              
              
              4,744
              
              
              
              6,494
              
              
              
              23,040Depreciation,
                  depletion and amortization
              
              
              43,926
              
              
              
              36,422
              
              
              
              117,570
              
              
              
              104,263EBITDA
                  (1)
              
              $
              65,074
              
              
              $
              66,289
              
              
              $
              174,874
              
              
              $
              223,470
 (1)
              
              EBITDA
                  is defined as net income plus interest expense, income tax expense,
                  depreciation, depletion and amortization, less interest income.
                  EBITDA is
                  a non-GAAP measure used by management to measure operating performance,
                  and management also believes it is a useful indicator of our ability
                  to
                  meet debt service and capital expenditure requirements. Because
                  EBITDA is
                  not calculated identically by all companies, our calculation may
                  not be
                  comparable to similarly titled measures of other companies. Adjusted
                  EBITDA, as it is used and defined in our debt covenants, is described
                  and
                  reconciled to net income in “Analysis of Material Debt Covenants”
                  below.
 -24-
 Table
            of Contents
  **Results
        of Operations**
 
 ***Three
        Months Ended September 30, 2007 Compared to the Three Months Ended
        September 30, 2006***
 
 *Summary*
 
 For
        the
        quarter ended September 30, 2007, we recorded revenues of
        $507.1 million compared to $475.1 million for the quarter ended
        September 30, 2006, an increase of $32.0 million. Net income decreased
        from $14.5 million ($0.23 per diluted share) in the third quarter of 2006
        to $8.9 million ($0.14 per diluted share) for the third quarter of
        2007.  Our results for the third quarter of 2007 included a pre-tax
        charge of $2.1 million (approximately $0.02 per diluted share) for development
        work at an underground mine that was abandoned due to regulatory issues.
        EBITDA,
        as reconciled to our net income in the table under “Reconciliation of Non-GAAP
        Measures” above, was $65.1 million and $66.3 million in the third quarter of
        2007 and 2006, respectively.
 We
        sold 7.6 million tons of coal during the third quarter of 2007,
        0.2 million more than the comparable period in 2006.  Coal
        margin, which we define as coal revenues less cost of coal sales, divided
        by
        coal revenues, decreased from 19.0% in the third quarter of 2006 to 17.5%
        in the
        third quarter of 2007. Coal margin per ton was $10.13 in the third quarter
        of
        2007, a 5.6% decrease from the third quarter of 2006. Coal margin per ton
        is
        calculated as coal sales realization (sales price) per ton less cost of coal
        sales per ton. The decrease in coal margin from the third quarter of 2006
        to the third quarter of 2007 is the result of a 4.1% increase in our average
        cost of coal sales per ton partially offset by an increase of 2.2% in our
        average coal sales revenue per ton on a 2.1% increase in coal sales
        volume.
 
 *Revenues*
 **Three
                  months Ended**
              
              
              **Increase****September
                  30,**
              
              
              **(Decrease)****2007**
              
              
              **2006**
              
              
              **$
                  or Tons**
              
              
              **%****(in
                  thousands, except per ton data)**Coal
                  revenues
              
              $
              438,618
              
              
              $
              420,179
              
              
              $
              18,439
              
              
              
              4%Freight
                  and handling revenues
              
              
              58,384
              
              
              
              45,805
              
              
              
              12,579
              
              
              
              27%Other
                  revenues
              
              
              10,137
              
              
              
              9,134
              
              
              
              1,003
              
              
              
              11%Total
                  revenues
              
              $
              507,139
              
              
              $
              475,118
              
              
              $
              32,021
              
              
              
              7%Tons
                  Sold:Steam
              
              
              4,411
              
              
              
              5,097
              
              
              
              (686
              )
              
              
              (13%)Metallurgical
              
              
              3,178
              
              
              
              2,336
              
              
              
              842
              
              
              
              36%Total
              
              
              7,589
              
              
              
              7,433
              
              
              
              156
              
              
              
              2%Coal
                  sales realization per ton:Steam
              
              $
              48.24
              
              
              $
              48.35
              
              
              $
              (0.11
              )
              
              
              0%Metallurgical
              
              
              71.05
              
              
              
              74.36
              
              
              
              (3.31
              )
              
              
              (4%)Total
              
              $
              57.79
              
              
              $
              56. 53
              
              
              $
              1.26
              
              
              
              2%
 
 *Coal
        Revenues.* Coal revenues increased by 4.4% ($18.4 million) for the quarter
        ended September 30, 2007 from the comparable period of 2006, driven by a
        2.1% increase in coal sales volume and a 2.2% increase in sales realization
        from
        $56.53 per ton in the third quarter of 2006 to $57.79 per ton in the third
        quarter of 2007. The mark-to-market adjustment for certain forward sales
        contracts decreased revenue from the sale of steam coal by $2.2 million or
        $0.51 per ton in the third quarter of 2007 and by $1.8 million or
        $0.35 per ton in the third quarter of 2006. Our met coal realization per
        ton
        decreased by 4.5% to $71.05 per ton, and steam coal realization per ton
        decreased slightly from $48.35 per ton to $48.24 per ton. Met coal sales
        accounted for 41.9% of our coal sales volume in the third quarter of 2007
        compared with 31.4% in the third quarter of 2006. Total tons sold for the
        third
        quarter of 2007 were 7.6 million, including 3.2 million tons of met
        coal and 4.4 million of steam coal. Sales volume for the third quarter of
        2006 was 7.4 million tons, of which 2.3 million tons were met coal and
        5.1 million were steam coal.  Steam coal sales for the third
        quarter of 2007 decreased from the third quarter of 2006 mainly due to our
        decision to idle capacity and hold back sales in response to a soft spot
        market.
  *Freight
        and Handling Revenues.* Freight and handling revenues were $58.4 million for
        the three months ended September 30, 2007, an increase of
        $12.6 million compared with the three months ended September 30,
        2006.  This increase was due to 0.5 million more export tons as
        well as a slight increase in the overall freight rate caused by increased
        fuel surcharges.  These revenues are offset by equivalent costs and do
        not contribute to our profitability.
 
 *Other
        Revenues.* Other revenues increased by $1.0 million mainly due to an
        increase in revenues from our coal processing and terminal operations of
        $1.2
        million.
 
 
  -25-
 Table
            of Contents
  *Costs
        and
        Expenses*
 **Three
                  months ended**
              
              
              **Increase****September
                  30,**
              
              
              **(Decrease)****2007**
              
              
              **2006**
              
              
              **$**
              
              
              
              **%****(in
                  thousands, except per ton data)**Cost
                  of coal sales (exclusive of items shown separately below)
              
              $
              361,704
              
              
              $
              340,440
              
              
              $
              21,264
              
              
              
              6%Freight
                  and handling costs
              
              
              58,384
              
              
              
              45,805
              
              
              
              12,579
              
              
              
              27%Cost
                  of other revenues
              
              
              7,860
              
              
              
              5,774
              
              
              
              2,086
              
              
              
              36%Depreciation,
                  depletion and amortization
              
              
              43,926
              
              
              
              36,422
              
              
              
              7,504
              
              
              
              21%Selling,
                  general and administrative expenses
              
              
              14,466
              
              
              
              16,837
              
              
              
              (2,371
              )
              
              
              (14%
              )Total
                  costs and expenses
              
              $
              486,340
              
              
              $
              445,278
              
              
              $
              41,062
              
              
              
              9%Cost
                  of coal sales per ton:Company
                  mines
              
              $
              46.52
              
              
              $
              43.19
              
              
              $
              3.33
              
              
              
              8%
              %Contract
                  mines (including purchased and processed)
              
              
              51.52
              
              
              
              51.83
              
              
              
              (0.31
              )
              
              
              (1%
              )Total
                  produced and processed
              
              
              47.40
              
              
              
              44.46
              
              
              
              2.94
              
              
              
              7
              %Purchased
                  and sold without processing
              
              
              49.18
              
              
              
              54.54
              
              
              
              (5.36
              )
              
              
              (10
              %)Cost
                  of coal sales per ton
              
              $
              47.66
              
              
              $
              45.80
              
              
              $
              1.86
              
              
              
              4
              %
 
 *Cost
          of Coal Sales.*   Our cost of coal sales increased by
          $21.3 million, or $1.86 per ton, from $340.4 million, or $45.80 per
          ton, in the third quarter of 2006 to $361.7 million, or $47.66 per ton, in
          the third quarter of 2007. The mark-to-market adjustment for forward purchase
          contracts on the OTC market decreased cost of sales by $3.9 million or
          $0.51 per
          ton for the quarter, and increased cost of sales by $0.3 million or $0.04
          per ton in the third quarter of 2006. Our cost of coal sales per ton for
          our
          produced and processed coal was $47.40 per ton in the three months ended
          September 30, 2007 as compared to $44.46 per ton in the comparable period
          in 2006. This $2.94 per ton increase is attributable mainly to increased
          costs
          for labor and benefits, repairs and maintenance, diesel fuel and other
          mine
          supplies, cost of contract mining services and an increase in volume of
          coal
          purchased and processed. The cost of sales per ton of our purchased coal
          was
          $49.18 per ton in the third quarter of 2007 and $54.54 per ton for the
          corresponding period of 2006. This $5.36 per ton decrease in costs is mainly
          due
          to the current market conditions which have exerted downward pricing pressures
          in addition to a change in the mix of coal qualities purchased for
          resale.  Approximately 71.6% of our purchased coal sold during the
          third quarter of 2007 was blended with our produced coal prior to
          resale.
 *Freight
        and Handling Costs.* Freight and handling costs increased to $58.4 million
        for the three months ended September 30, 2007, an increase of
        $12.6 million compared with the three months ended September 30,
        2006.   This increase was due to 0.5 million more export
        tons as well as a slight increase in the overall freight rate caused
        by increased fuel surcharges.  These costs are offset by
        equivalent revenues.
 
 *Cost
        of**Other Revenues*. Our cost of other revenues increased by $2.1
        million in the third quarter of 2007 compared with the third quarter of 2006
        due
        to an increase of $0.9 million of costs from our road construction business
        and an increase in costs associated with our Gallatin lime venture of $0.7
        million. The increase in cost from our Gallatin lime venture is primarily
        due to compensation charges related to the vesting of restricted stock and
        other
        payroll costs. The margin from other revenues decreased by $1.1 million in
        the
        third quarter of 2007 when compared with the third quarter of 2006 mainly
        due to
        the reduced road construction operations and the additional cost associated
        with
        the Gallatin lime venture.
 
 *Depreciation,
        Depletion and Amortization.* Depreciation,
        depletion, and amortization increased $7.5 million, or 20.6%, to $43.9 million
        for the three months ended September 30, 2007 as compared with the same period
        of 2006, mainly due to a $2.1 million write-off for development costs at
        an
        underground mine that was abandoned during the quarter, depreciation from
        the
        Mingo Logan-Ben Creek mining complex acquired on June 30, 2007, and an increase
        in depletion due to a change in estimated recoverable coal reserves at one
        of
        our mines.
  *Selling,
        General and Administrative Expenses.* These expenses decreased by $2.4
        million to $14.5 million in the third quarter of 2007 from
        $16.8 million in the third quarter of 2006. This decrease is mainly due to
        the decrease of $3.2 million of share-based compensation charges recorded
        in the
        third quarter of 2006 for restricted stock issued to management in connection
        with our initial public offering (IPO) partially offset by a $0.8 million
        increase in professional fees. As a percentage of revenues, these expenses
        were
        2.9% and 3.5% for the third quarter of 2007 and 2006, respectively, including
        share-based compensation charges related to our IPO.
 
 *Interest
        Expense.* Interest expense decreased $0.6 million to $10.1 million
        during the third quarter of 2007 compared to the same period in 2006. The
        decrease in interest expense is attributable to our lower debt levels in
        the
        third quarter of 2007.
  *Interest
          Income.* Interest income increased by $0.1 million in the three months
          ended September 30, 2007 from the three months ended September 30, 2006,
          mainly
          due to additional interest earned on invested cash.
 
 *Income
          Tax Expense.* Income tax expense of $2.4 million was recorded for the three
          months ended September 30, 2007 on income before income taxes and minority
          interest of $11.2 million, which equates to an effective tax rate of 21.0%.
          This rate is lower than the federal statutory rate of 35% due primarily
          to the
          tax benefits associated with percentage depletion, partially offset by
          state
          income taxes, change in the valuation allowance, and share-based compensation
          charges which are not deductible for tax purposes. Income tax expense of
          $4.7
          million was recorded for the three months ended September 30, 2006 on income
          before income taxes and minority interest of $19.3 million, which equates
          to an
          effective rate of 24.6%. This rate is lower than the federal statutory
          rate of
          35% due primarily to the tax benefits associated with percentage depletion
          and
          the extraterritorial income exclusion, partially offset by state income
          taxes
          and the portion of the share-based compensation charge associated with
          the
          issuance of common stock to management in connection with our IPO which
          is not
          deductible for tax purposes.
  -26-
 Table
            of Contents
  ***Nine
        Months Ended September 30, 2007 Compared to the Nine Months Ended
        September 30, 2006***
 
 *Summary*
 
 For
        the
        nine months ended September 30, 2007, we recorded revenues of
        $1,368.8 million, compared to $1,453.8 million for the nine months
        ended September 30, 2006, a decrease of $85.0 million. Net income
        decreased from $64.9 million ($1.01 per diluted share) in the 2006 period
        to $22.0 million ($0.34 per diluted share) for the 2007 period. EBITDA, as
        reconciled to our net income in the table under “Reconciliation of Non-GAAP
        Measures” above, was $174.9 million in the first nine months of 2007 and
        was $223.5 million the same period in 2006.
 
 We
        sold 21.1 million tons of coal during the first nine months of 2007,
        1.0 million less than the comparable period in 2006. We expected this
        decrease due to our planned reduction of about 1.0 million tons of production
        this year. Coal margin decreased from 20.7% in 2006 to 17.5% in 2007. Coal
        margin per ton was $9.97 in the nine months ended September 30, 2007, a
        17.2% decrease from the first nine months of 2006. The decrease in coal margin
        for the nine months ended September 30, 2007 compared to the comparable period
        in 2006 is the result of a 2.0% increase in our average cost of coal sales
        per
        ton and a decrease of 2.0% in our average coal sales revenue per ton on a
        4.4%
        decrease in coal sales volume.
 
 *Revenues*
 **Nine
                  months ended**
              
              
              **Increase****September
                  30,**
              
              
              **(Decrease)****2007**
              
              
              **2006**
              
              
              **$
                  or Tons**
              
              
              **%****(in
                  thousands, except per ton data)**Coal
                  revenues
              
              $
              1,201,678
              
              
              $
              1,282,033
              
              
              $
              (80,355
              )
              
              
              (6%
              )Freight
                  and handling revenues
              
              
              143,183
              
              
              
              143,132
              
              
              
              51
              
              
              
              0%Other
                  revenues
              
              
              23,915
              
              
              
              28,604
              
              
              
              (4,689
              )
              
              
              (16%
              )Total
                  revenues
              
              $
              1,368,776
              
              
              $
              1,453,769
              
              
              $
              (84,993
              )
              
              
              (6%
              )Tons
                  Sold:Steam
              
              
              12,997
              
              
              
              14,344
              
              
              
              (1,347
              )
              
              
              (9%
              )Metallurgical
              
              
              8,060
              
              
              
              7,672
              
              
              
              388
              
              
              
              5%Total
              
              
              21,057
              
              
              
              22,016
              
              
              
              (959
              )
              
              
              (4%
              )Coal
                  sales realization per ton:Steam
              
              $
              48.03
              
              
              $
              49.14
              
              
              $
              (1.11
              )
              
              
              (2%
              )Metallurgical
              
              
              71.64
              
              
              
              75.24
              
              
              
              (3.60
              )
              
              
              (5%
              )Total
              
              $
              57.07
              
              
              $
              58.23
              
              
              $
              (1.16
              )
              
              
              (2%
              )
 
 *Coal
        Revenues.* Coal sales revenues decreased by 6.3% ($80.4 million) for
        the nine months ended September 30, 2007 from the comparable period of 2006,
        driven by a 4.4% decrease in coal sales volume and a 2.0% decrease in sales
        realization from $58.23 per ton in the first nine months of 2006 to $57.07
        per
        ton in the first nine months of 2007. The mark-to-market adjustment for certain
        forward sales contracts decreased revenues from the sale of steam coal by
        $6.6
        million or $0.50 per ton in the first nine months of 2007 and increased revenues
        from the sale of steam coal by $4.1 million or $0.29 per ton in the first
        nine
        months of 2006. Our met coal realization per ton decreased by 4.8% from $75.24
        per ton to $71.64 per ton, and steam coal realization per ton decreased by
        2.3%
        from $49.14 to $48.03.  Met coal sales accounted for 38.3% of our coal
        sales volume in the nine months ended September 30, 2007 compared to 34.8%
        in the comparable period of 2006. Total tons sold during the first nine months
        of 2007 were 21.1 million, including 8.1 million tons of met coal and
        13.0 million of steam coal. Sales volumes for the first nine months of 2006
        were 22.0 million tons of which 7.7 million were met coal and
        14.3 million were steam coal. Steam coal sales for the nine months ended
        September 30, 2007 were less than those for the nine months ended September
        30,
        2006 mainly due to a continued soft spot steam market where utility stockpiles
        remained high due to mild weather conditions throughout the United
        States.  Met sales for the nine months ended September 30, 2007 were
        greater than those for the comparable period in 2006 due to stronger export
        sales.
 
 *Freight
        and Handling Revenues.* Freight and handling revenues remained flat at
        $143.2 million for the nine months ended September 30, 2007 as
        compared to the comparable period in 2006. These revenues were offset by
        an
        equivalent amount of freight and handling costs.
 
 *Other
        Revenues.* Other revenues decreased by $4.7 million mainly due to a
        decrease in revenue from our road construction business and our Maxxim Rebuild
        operation of $5.3 and $1.5 million, respectively.  This is partially
        offset by an increase in terminal and processing fees revenue of $1.8
        million.  The decrease from our road construction business consists of
        approximately $6.7 million decrease in revenue related to the completion
        of a
        portion of the King Coal Highway in West Virginia offset by a $1.4 million
        increase from our ongoing projects.  Maxxim Rebuild has reduced its
        third-party selling activity which contributed to its reduced
        revenues.
  
 -27-
 Table
            of Contents
 
 *Costs
        and
        Expenses*
 **Nine
                  months ended**
              
              
              **Increase****September
                  30,**
              
              
              **(Decrease)****2007**
              
              
              **2006**
              
              
              **$**
              
              
              
              **%****(in
                  thousands, except per ton data)**Cost
                  of coal sales (exclusive of items shown separately below)
              
              $
              991,766
              
              
              $
              1,016,831
              
              
              $
              (25,065
              )
              
              
              (2%
              )Freight
                  and handling costs
              
              
              143,183
              
              
              
              143,132
              
              
              
              51
              
              
              
              0%Cost
                  of other revenues
              
              
              18,256
              
              
              
              19,170
              
              
              
              (914
              )
              
              
              (5%
              )Depreciation,
                  depletion and amortization
              
              
              117,570
              
              
              
              104,263
              
              
              
              13,307
              
              
              
              13%Selling,
                  general and administrative expenses
              
              
              41,687
              
              
              
              51,489
              
              
              
              (9,802
              )
              
              
              (19%
              )Total
                  costs and expenses
              
              $
              1,312,462
              
              
              $
              1,334,885
              
              
              $
              (22,423
              )
              
              
              (2%
              )Cost
                  of coal sales per ton:Company
                  mines
              
              $
              46.02
              
              
              $
              42.19
              
              
              $
              3.83
              
              
              
              9%Contract
                  mines (including purchased and processed)
              
              
              51.03
              
              
              
              52.79
              
              
              
              (1.76
              )
              
              
              (3%
              )Total
                  produced and processed
              
              
              46.88
              
              
              
              43.82
              
              
              
              3.06
              
              
              
              7%Purchased
                  and sold without processing
              
              
              48.59
              
              
              
              59.92
              
              
              
              (11.33
              )
              
              
              (19%
              )Cost
                  of coal sales per ton
              
              $
              47.10
              
              
              $
              46.19
              
              
              $
              0.91
              
              
              
              2%
 
 *Cost
        of Coal Sales.*Our cost of coal sales decreased by $25.1 million and
        increased $0.91 per ton, from $1,016.8 million and $46.19 per ton in the
        nine
        months ended September 30, 2006 to $991.8 million and $47.10 per ton in the
        nine months ended September 30, 2007. The mark-to-market adjustment for certain
        forward purchase contracts decreased cost of sales by $8.0 million or $0.38
        per
        ton in the first nine months of 2007 and increased cost of sales by $1.8
        million or $0.08 per ton in the first nine months of 2006. Our cost of coal
        sales per ton for our produced and processed coal was $46.88 per ton in the
        nine
        months ended September 30, 2007 as compared with $43.82 per ton in the
        comparable period in 2006. This increase is attributable mainly to increased
        costs for labor and benefits, repairs and maintenance, diesel fuel and other
        mine supplies, and cost of contract mining services partially offset by a
        decrease in cost of coal purchased and processed.  The cost of sales
        per ton for our purchased coal was $48.59 in the first nine months of 2007,
        and
        $59.92 per ton for the corresponding period of 2006. This $11.33 per ton
        decrease in costs is mainly due to a change in the mix of coal qualities
        we
        purchased for resale, in addition to downward pricing pressures caused by
        current market conditions. We purchased more met quality coal from third
        parties
        in the first nine months of 2006 than in the first nine months of 2007.
        Approximately 66.0% of our purchased coal sold during the first nine months
        of
        2007 was blended with our produced coal prior to resale.
 
 *Freight
        and Handling Costs.* Freight and handling costs remain flat at
        $143.2 million for the nine months ended September 30, 2007 as
        compared to the comparable period in 2006.  These costs were offset by
        an equivalent amount of freight and handling revenues.
 
 *Cost
        of Other Revenues*. Our cost of other revenues decreased by $0.9 million in
        the first nine months of 2007 when compared with the nine months of 2006
        due to
        a decrease of $2.5 million of costs from our road construction business and
        a decrease in cost from our Maxxim Rebuild operation of $1.8 million, partially
        offset by an increase in costs associated with our Gallatin lime venture
        of $2.1
        million and terminal, processing, and other costs of $1.3 million. Approximately
        $3.2 million of the decrease in road construction cost was due to the completion
        of a portion of the King Coal Highway in West Virginia in September
        2006.  This decrease was offset partially by increased cost in our
        ongoing road projects.  Maxxim Rebuild has reduced its third-party
        activity and the corresponding costs. The increase in cost from our Gallatin
        lime venture is primarily due to compensation charges related to the vesting
        of
        restricted membership interest and bonus accruals. The margin from other
        revenues decreased by $3.8 million in the first nine months of 2007 when
        compared with the same period of 2006 mainly due to the reduced road
        construction and the additional cost associated with the Gallatin lime
        venture.
 *Depreciation,
          Depletion and Amortization.* Depreciation, depletion, and amortization
          increased $13.3 million, or 12.8%, to $117.6 million for the nine
          months ended September 30, 2007 as compared with the same period in
          2006.  This increase is mainly due to a $2.1 million write-off for
          development costs of an underground mine that was abandoned during the quarter,
          depreciation from the Mingo Logan-Ben Creek mining complex acquired on
          June 30,
          2007, and an increase in depletion due to a change in estimated recoverable
          coal
          reserves at one of our mines.   Depreciation, depletion, and
          amortization per ton of coal sold increased from $4.74 per ton for the
          nine
          months ended September 30, 2006 to $5.58 per ton in the same period of
          2007.
 
 *Selling,
          General and Administrative Expenses.* These expenses decreased by $9.8
          million to $41.7 million during the first nine months of 2007 from the
          corresponding period in 2006. The cost decrease was mainly due to decreases
          in
          incentive compensation accruals and reduction in share-based compensation
          charges recorded in the 2006 period in connection with the initial IPO,
          partially offset by an increase in professional fees. As a percentage of
          revenue, these costs (including our share-based compensation charge related
          to
          our IPO) were 3.0% and 3.5% for the nine months ended, September 30, 2007
          and
          2006, respectively.
 *Interest
        Expense.* Interest expense decreased $1.7 million to $30.1 million
        during the nine months ended September 30, 2007 compared with the same
        period in 2006. The decrease in interest expense is attributable to our lower
        debt levels in the first nine months of 2007.
 
 *Interest
        Income.* Interest income increased by $0.8 million in the nine months
        ended September 30, 2007 over the nine months ended September 30,
        2006, mainly due to additional interest earned on invested cash.
 
 *Income
        Tax Expense**.*Income tax expense of $6.5 million was recorded for
        the nine months ended September 30, 2007 on income before income taxes and
        minority interest of $28.4 million, which equates to an effective rate
        of 22.9%. This rate is lower than the federal statutory rate of 35% due
        primarily to the tax benefits associated with percentage depletion, partially
        offset by state income taxes, change in the valuation allowance, and share-based
        compensation charges which are not deductible for tax purposes.  Income tax
        expense of $23.0 million was recorded for the nine months ended September
        30,
        2006 on income before income taxes and minority interest of $87.9 million,
        which
        equates to an effective rate of 26.2%. This rate is lower than the federal
        statutory rate of 35% due primarily to the tax benefits associated with
        percentage depletion, partially offset by state income taxes, change in the
        valuation allowance, and share-based compensation charges related to our
        IPO
        which are not deductible for tax purposes.
  -28-
 Table
            of Contents
  **Liquidity
        and Capital Resources**
 
 Our
        primary liquidity and capital resource requirements are to finance the cost
        of
        our coal production and purchases, to make capital expenditures, to pay income
        taxes, and to service our debt and reclamation obligations. Our primary sources
        of liquidity are cash flow from sales of our produced and purchased coal,
        other
        income and borrowings under our credit agreement.
 
 At
        September 30, 2007, we had available liquidity of $198.5 million, including
        cash
        of $16.3 million and $182.8 million available under our credit agreement
        less
        checks issued in excess of bank balance (bank overdraft) of $0.6 million.
        Our
        total indebtedness was $430.7 million at September 30, 2007, an increase
        of $6.0
        million from the year ended December 31, 2006.  The increase in the
        indebtedness is primarily related to $8.5 million of borrowings for the
        construction of the lime processing plant by our Gallatin
        subsidiary.
 
 Our
        capital expenditures for the nine months ended September 30, 2007 were
        $101.5 million and we currently project capital expenditures for the full
        year of 2007 to be $135.0 million. These expenditures have been and are
        forecasted to be used to develop new mines, purchase required safety equipment,
        replace or add equipment and to construct the first of two lime kilns for
        the
        Gallatin lime venture. We believe that cash generated from our operations
        and
        borrowings under our credit agreement will be sufficient to meet our working
        capital requirements, anticipated capital expenditures and debt service
        requirements for at least the next twelve months.
 
 ***Cash
        Flows***
 
 Net
        cash
        provided by operating activities during the nine months ended September 30,
        2007
        was $163.3 million, an increase of $14.9 million from the
        $148.3 million of net cash provided by operations during the nine months
        ended September 30, 2006. Our cash requirements to fund operating assets
        and
        liabilities decreased by $62.9 million mainly driven by an increase in our
        accounts payable and accrued liabilities from the prior year
        period, partially offset by a decrease in net income of $42.8 million and a
        decrease in non-cash charges of $5.1 million.
 
 Net
        cash
        used in investing activities was $142.7 million during the nine months
        ended September 30, 2007, $7.2 million more than in the comparable period
        in 2006. This increase was primarily due to a decrease in capital expenditure
        of
        $9.0 million, offset by a $15.6 million increase in cash used for
        acquisitions.
 
 Net
        cash
        used in financing activities during the nine months ended September 30,
        2007 was $37.6 million compared with net cash used by financing activities
        of
        $40.9 million in the nine months ended September 30, 2006. During the nine
        months just ended compared to the equivalent period in 2006, our debt service
        payments increased by $43.1 million, bank overdraft decreased by $41.8
        million, and other financing activities increased by $2.0 million.
  ***Credit
        Agreement and Long-term Debt***
 
 As
        of September 30, 2007 our total long-term indebtedness, including capital
        lease obligations, consisted of the following (in thousands):
 
 **September
                  30,****2007**Term
                  loan
              
              $
              245,62510%
                  Senior notes due 2012
              
              
              175,000Capital
                  lease obligations
              
              
              903Gallatin
                  project financing
              
              
              8,500Other
              
              
              700Total
                  long-term debt
              
              
              430,728Less
                  current portion
              
              
              3,154Long-term
                  debt, net of current portion
              
              $
              427,574
 
 Our
        credit agreement and the indenture governing our senior notes each impose
        certain restrictions on our subsidiaries, including restrictions on our
        subsidiaries' ability to: incur debt; grant liens; enter into agreements
        with
        negative pledge clauses; provide guarantees in respect of obligations of
        any
        other person; pay dividends and make other distributions; make loans,
        investments, advances and acquisitions; sell assets; make redemptions and
        repurchases of capital stock; make capital expenditures; prepay, redeem or
        repurchase debt; liquidate or dissolve; engage in mergers or consolidations;
        engage in affiliate transactions; change businesses; change our fiscal year;
        amend certain debt and other material agreements; issue and sell capital
        stock
        of subsidiaries; engage in sale and leaseback transactions; and restrict
        distributions from subsidiaries. In addition, the credit agreement provides
        that
        we must meet or exceed certain interest coverage ratios and must not exceed
        certain leverage ratios.
 
 Borrowings
        under our credit agreement will be subject to mandatory prepayment (1) with
        100% of the net cash proceeds received from asset sales or other dispositions
        of
        property by the Company or its subsidiaries (including insurance and other
        condemnation proceedings), subject to certain exceptions and reinvestment
        provisions and (2) with 100% of the net cash proceeds received by the
        Company and its subsidiaries from the issuance of debt securities or other
        incurrence of debt, excluding certain indebtedness.
 
 
 On
        June
        28, 2007, our subsidiaries, Alpha NR Holding, Inc. (“Holdings”) and Alpha
        Natural Resources, LLC (“ANR LLC”), entered into an amendment and consent (the
“Amendment”) to the Credit Agreement, dated as of October 26, 2005 (the “Credit
        Agreement”), ANR LLC (as borrower), the lenders and issuing banks party there to
        from time to time, and Citicorp North America, Inc., as administrative agent
        and
        as collateral agent for the lenders and issuing banks. The Amendment amended
        the
        Credit Agreement to, among other things, permit the merger of Holdings into
        us,
        its direct parent.  We assumed the obligations of Holdings under the
        Credit Agreement and related guaranty and collateral agreement and became
        a
        parent guarantor of the 10% Senior Notes due 2012 co-issued by ANR LLC and
        Alpha
        Natural Resources Capital Corp in 2004. The Amendment also increased the
        maximum
        amount of permitted receivables financing from $75 million to $150
        million.
  -29-
 Table
            of Contents
 
 ***Analysis
        of Material Debt Covenants***
 
 We
        were
        in compliance with all covenants under our credit facility and the indenture
        governing our senior notes as of September 30, 2007.
 
 The
        financial covenants in our credit facility require, among other things,
        that:
 
 ·
              The
                  Company must maintain a leverage ratio, defined as the ratio of
                  consolidated adjusted debt (consolidated debt less unrestricted
                  cash and
                  cash equivalents) to EBITDA (as defined in the Credit Agreement,
                  (“Adjusted EBITDA”)), of not more than 3.75 at June 30,
                  September 30 and December 31, 2007, and 3.50 at March 31, 2008
                  and each quarter end thereafter, with Adjusted EBITDA being computed
                  using
                  the most recent four quarters; and
 
 ·
              The
                  Company must maintain an interest coverage ratio, defined as the
                  ratio of
                  Adjusted EBITDA to cash interest expense, of 2.50 or greater on
                  the last
                  day of any fiscal quarter.
 
 Based
        upon Adjusted EBITDA, the Company’s leverage ratio and interest coverage ratio
        (as such ratios are defined in the credit agreement) at September 30, 2007
        were
        1.69 and 6.82, respectively. Adjusted EBITDA is used in our credit agreement
        to
        determine compliance with many of the covenants under the facility. A breach
        of
        the covenants in the credit agreement that are tied to ratios based on Adjusted
        EBITDA could result in a default under the credit agreement and the lenders
        could elect to declare all amounts borrowed due and payable. Any acceleration
        under our credit agreement would also result in a default under our
        indenture.
  Adjusted
        EBITDA is defined in our credit agreement as EBITDA, further adjusted to
        exclude
        non-recurring items, non-cash items and other adjustments permitted in
        calculating covenant compliance under our credit agreement, as shown in the
        table below. EBITDA (as defined in the credit agreement) is referred to herein
        and in the table below as “Adjusted EBITDA.” We believe that the inclusion of
        supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA
        is
        appropriate to provide additional information to investors to demonstrate
        compliance with our financial covenants.
 
 
 
 **Three
                  Months**
              
              
              **Three
                  Months**
              
              
              **Three
                  Months**
              
              
              **Three
                  Months**
              
              
              **Twelve
                  Months****Ended**
              
              
              **Ended**
              
              
              **Ended**
              
              
              **Ended**
              
              
              **Ended****December
                  31,**
              
              
              **March
                  31,**
              
              
              **June
                  30,**
              
              
              **September
                  30,**
              
              
              **September
                  30,****2006**
              
              
              **2007**
              
              
              **2007**
              
              
              **2007**
              
              
              **2007****(in
                  thousands)**Net
                  income
              
              $
              63,284
              
              
              $
              8,349
              
              
              $
              4,747
              
              
              $
              8,949
              
              
              $
              85,329Interest
                  expense, net
              
              
              9,652
              
              
              
              9,356
              
              
              
              9,573
              
              
              
              9,836
              
              
              
              38,417Income
                  tax expense (benefit)
              
              
              (53,559)
              
              
              
              2,629
              
              
              
              1,502
              
              
              
              2,363
              
              
              
              (47,065)Depreciation,
                  depletion and amortization
              
              
              36,588
              
              
              
              35,789
              
              
              
              37,855
              
              
              
              43,926
              
              
              
              154,158EBITDA
              
              
              55,965
              
              
              
              56,123
              
              
              
              53,677
              
              
              
              65,074
              
              
              
              230,839Fair
                  value of forward purchase and sales contracts
              
              
              2,126
              
              
              
              (449
              )
              
              
              (391
              )
              
              
              (1,413
              )
              
              
              (127
              )Other
                  allowable adjustments
              
              
              (1,108
              )
              
              
              (71
              )
              
              
              (1,098
              )
              
              
              (31
              )
              
              
              (2,308
              )Accretion
                  expense
              
              
              1,402
              
              
              
              1,556
              
              
              
              1,566
              
              
              
              1,838
              
              
              
              6,362Amortization
                  of deferred gains
              
              
              (97
              )
              
              
              (228
              )
              
              
              (265
              )
              
              
              (214)
              
              
              
              (804
              )Share-based
                  compensation charges
              
              
              4,649
              
              
              
              2,650
              
              
              
              1,414
              
              
              
              2,683
              
              
              
              11,396Adjusted
                  EBITDA
              
              $
              62,937
              
              
              $
              59,581
              
              
              $
              54,903
              
              
              $
              67, 937
              
              
              $
              245,358Leverage
                  ratio(1)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1.69Interest
                  coverage ratio(2)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6.82
   (1)
              Leverage
                  ratio is defined in our credit agreement as total debt divided
                  by Adjusted
                  EBITDA.
 
 (2)
              Interest
                  coverage ratio is defined in our credit agreement as Adjusted EBITDA
                  divided by cash interest expense.
 
  -30-
 Table
            of Contents
  **Other**
 
 As
        a
        regular part of our business, we review opportunities for, and engage in
        discussions and negotiations concerning, the acquisition of coal mining assets
        and interests in coal mining companies, and acquisitions of, or combinations
        with, coal mining companies. When we believe that these opportunities are
        consistent with our growth plans and our acquisition criteria, we will make
        bids
        or proposals and/or enter into letters of intent and other similar agreements.
        These bids or proposals, which may be binding or nonbinding, are customarily
        subject to a variety of conditions and usually permit us to terminate the
        discussions and any related agreement if, among other things, we are not
        satisfied with the results of our due diligence investigation. Any acquisition
        opportunities we pursue could materially affect our liquidity and capital
        resources and may require us to incur indebtedness, seek equity capital or
        both.
        There can be no assurance that additional financing will be available on
        terms
        acceptable to us, or at all.
   **Critical
        Accounting Estimates and Assumptions**
 
 The
        preparation of financial statements in conformity with US GAAP requires
        management to make estimates and assumptions that affect reported amounts.
        These
        estimates and assumptions are based on information available as of the date
        of
        the financial statements. Accounting measurements at interim dates inherently
        involve greater reliance on estimates than at year-end. The results of
        operations for the quarter and nine months ended September 30, 2007 are not
        necessarily indicative of results that can be expected for the full year.
        Please
        refer to the section entitled “Critical Accounting Estimates and Assumptions” of
“Management's Discussion and Analysis of Financial Condition and Results of
        Operations” in our annual report on Form 10-K for the year ended
        December 31, 2006 for a discussion of our critical accounting estimates and
        assumptions.
   **New
        Accounting Pronouncements**
 
 On
        January 1, 2007, the Company adopted the provisions of FIN 48, which clarifies
        the accounting for uncertainty in income tax positions. This interpretation
        requires the Company to recognize in the consolidated financial statements
        only
        those tax positions determined to be more likely than not of being sustained
        upon examination, based on the technical merits of the positions. The adoption
        of FIN 48 did not result in an adjustment to the Company's financial
        statements.
  In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS
        157”). SFAS 157 defines fair value, establishes a framework for measuring fair
        value and enhances disclosures about fair value measures required under other
        accounting pronouncements, but does not change existing guidance as to whether
        or not an instrument is carried at fair value. SFAS No. 157 is effective
        for
        fiscal years beginning after November 15, 2007. We are currently reviewing
        the
        provisions of SFAS 157 to determine the impact on our financial
        statements.
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (SFAS 159”). SFAS 159 permits
        entities to choose to measure many financial instruments and certain other
        items
        at fair value. The objective is to expand the use of fair value measurements
        in
        accounting for financial instruments. SFAS No. 159 is effective for fiscal
        years
        beginning after November 15, 2007. We are currently reviewing the provisions
        of
        SFAS 159 to determine the impact on our financial statements.
 
  -31-
 Table
            of Contents
  **Item 3.*Quantitative and Qualitative Disclosures About
        Market Risk***
  In
        addition to risks inherent in operations, we are exposed to market risks.
        The
        following discussion provides additional detail regarding our exposure to
        the
        risks of changing coal and diesel fuel prices and interest rates.
 
 ***Commodity
        Price Risk***
 
 We
        are exposed to market price risk in the normal course of selling coal. As
        of
        October 22, 2007, approximately 1% and 35% of our estimated 2007 and 2008
        planned production, respectively, was uncommitted. We have been and will
        continue to be cautious not to commit to forward steam production in 2008
        and
        2009 that does not provide adequate returns to us.
 
 We
        use
        significant quantities of diesel fuel in our operations and are also exposed
        to
        risk in the market price for diesel fuel. We currently have two financial
        diesel
        fuel swap agreements to reduce the volatility in the price of diesel fuel
        for
        our operations. The diesel fuel swap agreements are not designated as hedges
        for
        accounting purposes and therefore the changes in the fair value for these
        derivative instrument contracts are required to be recorded in cost of
        sales. As of September 30, 2007, approximately 2.0 million gallons, or 29%,
        of
        the Company's remaining anticipated 2007 fuel usage has been fixed with the
        swap
        agreements.
 
 We
        purchase coal in the over-the-counter market (OTC) and directly from third
        parties to supplement and blend with our produced and processed coal in order
        to
        provide coal of the quality and quantity to meet certain of our customer's
        requirements. We also sell in the OTC market to fix the price of uncommitted
        future production from our mines. Certain of these purchase and sales contracts
        meet the definition of a derivative instrument. Any derivative instruments
        that
        we hold are held for purposes other than trading. Our risk management policy
        prohibits the use of derivatives for speculative purpose. The use of purchase
        and sales contracts which are considered derivative instruments could materially
        affect our results of operations as a result of the requirement to mark them
        to
        market at the end of each reporting period. However, we believe that use
        of
        these instruments will not have a material adverse effect on our financial
        position or results of operations because these transactions account for
        only a
        small portion of our business.
  These
          transactions give rise to commodity price risk, which represents the potential
          loss that can be caused by an adverse change in the price of coal. Outstanding
          purchase and sales contracts that are considered derivative instruments
          at
          September 30, 2007 and are marked to market each period as summarized as
          follows:
 **Purchase
                  Contracts**
              Purchase
                  Price Range
              
              Tons
                  Outstanding
              
              Delivery
                  Period
              Mark-To-Market
                  Adjustment (In Millions) Asset/(Liability)$
              35.00-47.75
              
              
              
              720,000
              
              
              10/01/07-12/31/08
              
              
              $
              1.8$
              47.75-56.00
              
              
              
              720,000
              
              
              10/01/07-12/31/08
              
              
              $
              0.21,440,000
              
              
              
              
              
              $
              2.0**Sales
                  Contracts**
              Selling
                  Price Range
              
              Tons
                  Outstanding
              
              Delivery
                  Period
              Mark-To-Market
                  Adjustment (In Millions) Asset/(Liability)$
              50.00-60.00
              
              
              
              60,000
              
              
              10/01/07-12/31/07
              
              
              $
              0.4$
              40.00-50.00
              
              
              
              390,000
              
              
              10/01/07-12/31/08
              
              
              $
              (0.8
              )450,000
              
              
              
              
              
              $
              (0.4
              )
 
 ***Interest
        Rate Risk***
 
 All
        of our borrowings under our credit agreement are at a variable rate, exposing
        us
        to the effect of rising interest rates in the United States. As of September
        30,
        2007, we have a $245.6 million term loan outstanding with a variable interest
        rate based upon the 3-month London Interbank Offered Rate (“LIBOR”) (5.23% at
        September 30, 2007) plus an applicable margin (1.75% at September 30,
        2007).  To reduce our exposure to rising interest rates, effective May 22,
        2006 we entered into a pay-fixed, receive variable interest rate swap on
        the
        notional amount of $233.1 million for a period of approximately six and one-half
        years. In effect, this swap converted the variable interest rates based on
        the
        LIBOR to a fixed interest rate of 5.59% plus the applicable margin defined
        in
        the debt agreement (1.75%, at September 30, 2007) for a portion of our term
        loan.  A one percentage point increase in interest rates would result in an
        annualized increase in interest expense of approximately $0.1 million based
        on
        our variable rate borrowing as of September 30, 2007 in excess of the notional
        amount of the interest rate swap of $233.1 million at September 30, 2007.
        We
        account for the interest rate swap as a cash flow hedge and accordingly changes
        in fair value of the swap are recorded to other comprehensive income
        (loss).  The fair value of the swap at the quarter ended September 30, 2007
        was a liability of $8.7 million ($6.5 million net of tax).
 
  -32-
 Table
            of Contents
  **Item 4.*Controls and Procedures***
 
 Under
          the supervision and with the participation of our management, including
          our
          Chief Executive Officer and our Chief Financial Officer, we evaluated the
          effectiveness of our disclosure controls and procedures, as such term is
          defined
          under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
          as
          amended, as of the end of the period covered by this report. Based upon
          that
          evaluation, our Chief Executive Officer and Chief Financial Officer concluded
          that our disclosure controls and procedures were effective, as of the end
          of the
          period covered by this report, in ensuring that material information relating
          to
          Alpha Natural Resources, Inc., required to be disclosed in reports that
          it files
          or submits under the Securities Exchange Act of 1934, is recorded, processed,
          summarized and reported within the requisite time periods and is accumulated
          and
          communicated to our management, including our Chief Executive Officer and
          our
          Chief Financial Officer, as appropriate to allow timely decisions regarding
          disclosure.
 
 Additionally,
          during the most recent fiscal quarter, there have been no changes to our
          internal control over financial reporting that materially affected, or
          are
          reasonably likely to materially affect, our internal control over financial
          reporting.
  **PART
        II**
 **Item
        1. Legal Proceedings**
 
 The
        Company is a party to a number of legal proceedings incident to its normal
        business activities. While we cannot predict the outcome of these proceedings,
        we do not believe that any liability arising from these matters individually
        or
        in the aggregate should have a material impact upon the consolidated cash
        flows,
        results of operations or financial condition of the
        Company.
 
 
 
 *Nicewonder
        Litigation*
 
 The
          Affiliated Construction Trades Foundation brought an action against the
          West
          Virginia Department of Transportation, Division of Highways (“WVDOH”) and our
          wholly-owned indirect subsidiary Nicewonder Contracting, Inc. ("NCI") in
          the
          United States District Court in the Southern District of West Virginia. The
          plaintiff sought a declaration that the contract between NCI and the State
          of
          West Virginia related to NCI's road construction project was illegal as
          a
          violation of applicable West Virginia and federal competitive bidding and
          prevailing wage laws.  The plaintiff also sought an injunction prohibiting
          performance of the contract but has not sought monetary
          damages.
 
 On
          September 5, 2007, the Court ruled that the WVDOH and the Federal Highway
          Administration (who is now a party to the suit) could not exempt a contractor,
          like NCI, from paying the prevailing wages as required by the Davis-Bacon
          Act.  The most likely remedy is a directive that the contract be
          renegotiated for such payment.  In that renegotiation, the WVDOH has
          committed to agree and NCI has a contractual right to insist, that additional
          costs resulting from the order will be reimbursed by WVDOH and as such
          neither
          NCI nor the Company believe, at this time, that they have any monetary
          expense from this ruling.  As of September 30, 2007, the Company
          recorded a $5.9 million long-term receivable for the recovery of these
          costs
          from WVDOH and a long-term liability for the obligations under the
          ruling.
 **Item 1A.
        Risk Factors**
 
 In
        addition to the other information set forth in this report, you should carefully
        consider the factors discussed in Part I, Item 1A “Risk Factors” in
        our Annual Report on Form 10-K for the year ended December 31, 2006,
        together with the cautionary statement under the caption “Cautionary Note
        Regarding Forward Looking Statements” in “Management’s Discussion and Analysis
        of Financial Condition and Results of Operations” of this report. These
        described risks are not the only risks facing our company. Additional risks
        and
        uncertainties not currently known to us or that we currently deem to be
        immaterial also may materially adversely affect our business, financial
        condition and/or operating results.
 
 **Item 6.*Exhibits***
 
 See
        the Exhibit Index following the signature page of this quarterly
        report
 
 
  -33-
 Table
            of Contents
  
 
 
 **SIGNATURE**
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 **ALPHA
                  NATURAL RESOURCES, INC.**By:
              
              /s/
                  David
                  C. StuebeName:
              David
                  C. StuebeTitle:
              
              Vice
                  President and Chief Financial Officer
 
 Date:
        November 7, 2007
 
 
 
  Table
            of Contents
   **10-Q
        EXHIBIT INDEX-Update**
 **Exhibit
                  No**
              
              **Description
                  of Exhibit**3.1
              
              Restated
                  Certificate of Incorporation of Alpha Natural Resources,
                  Inc. (Incorporated by reference to Exhibit 3.1 to the Annual Report
                  on Form 10-K of Alpha Natural Resources, Inc. (File No. 1-32423)
                  filed on
                  March 30, 2005)3.2
              
              Amended
                  and Restated Bylaws of Alpha Natural Resources, Inc. (Incorporated by
                  reference to Exhibit 3.2 to the Annual Report on Form 10-K of Alpha
                  Natural Resources, Inc. (File No. 1-32423) filed on March 1,
                  2007)10.1*
              
              Description
                  of Compensation Payable
                  to Independent Directors31(a)*
              
              Certification
                  Pursuant to
                  Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
                  pursuant to § 302 of the Sarbanes-Oxley Act of 200231(b)*
              
              Certification
                  Pursuant to
                  Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted
                  pursuant to § 302 of the Sarbanes-Oxley Act of 200232(a)*
              
              Certification
                  Pursuant to 18 U.S.C. § 1350, As
                  Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of
                  200232(b)*
              
              Certification
                  Pursuant to 18 U.S.C. § 1350, As
                  Adopted Pursuant to § 906 of the Sarbanes-Oxley Act of
                  2002
  *
              
              Filed
                  herewith.