Alpha Natural Resources 10-Q 2005 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2005

or

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

For the Transition Period From                 to                 

Commission File Number 001-32331

Foundation Coal Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	42-1638663
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
999 Corporate Boulevard, Suite 300
Linthicum Heights, Maryland	21090
(Address of Principal Executive Offices)	(Zip Code)

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

There were 44,630,047 shares of common stock outstanding on November 7, 2005.

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
	Statements of Consolidated Operations and Comprehensive Income (Loss) for the Three Months Ended September 30, 2005, For The Period From February 9, 2004 (date of formation) Through September 30, 2004 and One Month Ended July 29, 2004	3
	Statements of Consolidated Operations and Comprehensive Income (Loss) for the Nine Months Ended September 30, 2005, For The Period From February 9, 2004 (date of formation) Through September 30, 2004 and Seven Months Ended July 29, 2004	4
	Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004	5
	Statements of Consolidated Cash Flows for the Nine Months Ended September 30, 2005, For The Period From February 9, 2004 (date of formation) Through September 30, 2004 and Seven Months Ended July 29, 2004	6
	Notes to Consolidated Financial Statements	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	53
ITEM 4.	CONTROLS AND PROCEDURES	54
PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	55
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	55
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	55
ITEM 4.	SUBMISSION OF MATTERS OF VOTE OF SECURITY HOLDERS	55
ITEM 5.	OTHER INFORMATION	55
ITEM 6.	EXHIBITS	55

2

Part I—FINANCIAL INFORMATION

Unless the context otherwise indicates, as used in this Form 10-Q the terms “we”, “our”, “us” and similar terms refer to Foundation Coal Holdings, Inc. and its consolidated subsidiaries.

ITEM 1.FINANCIAL STATEMENTS

Foundation Coal Holdings, Inc. and Subsidiaries
Statements of Consolidated Operations and Comprehensive Income (Loss)
(Dollars in thousands, except share and per share data)

	Successor							Predecessor
	Three Months Ended September 30, 2005			For the Period From February 9, 2004 (date of formation) Through September 30, 2004				One Month Ended July 29, 2004
	(Unaudited)			(Unaudited)				(Unaudited)
Revenues:
Coal sales	$	333,469			$	180,427			$	70,849
Other revenue	7,841				2,793				1,724
Total revenues	341,310				183,220				72,573
Costs and expenses:
Cost of coal sales (excludes depreciation, depletion and amortization)	241,238				147,620				70,989
Selling, general and administrative expense (excludes depreciation, depletion and amortization)	14,526				6,693				6,521
Accretion on asset retirement obligations	2,119				1,343				574
Depreciation, depletion and amortization	53,131				26,197				8,750
Amortization of coal supply agreements	(20,467		)		(22,453		)		1,042
Income (loss) from operations	50,763				23,820				(15,303		)
Other income (expense):
Interest expense	(15,092		)		(8,533		)		(1,746		)
Contract Settlement	—				—				(26,015		)
Mark-to-market gain on interest rate swaps	—				(90		)		—
Loss on early debt extinguishment	—				—				(21,724		)
Interest income	235				157				72
Income (loss) before income tax (expense) benefit	35,906				15,354				(64,716		)
Income tax (expense) benefit	(14,683		)		(5,090		)		22,380
Net income (loss)	21,223				10,264				(42,336		)
Components of comprehensive income (loss):
Unrealized gain on interest rate swaps, net of tax expense of $324 for the three months ended September 30, 2005	457				—				—
Comprehensive income (loss)	$	21,680			$	10,264			$	(42,336	)
Basic and diluted earnings (loss) per common share:
Basic	$	0.47			$	0.52			$	(308.70	)
Diluted	$	0.46			$	0.52			$	(308.70	)
Weighted average shares—basic	44,624,647				19,600,000				137,143
Weighted average shares—diluted	46,321,599				19,600,000				137,143
Dividends declared per share	$	0.05			$	—			$	—

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

3

Foundation Coal Holdings, Inc. and Subsidiaries
Statements of Consolidated Operations and Comprehensive Income (Loss)
(Dollars in thousands, except share and per share data)

	Successor								Predecessor
	Nine Months Ended September 30, 2005				For the Period From February 9, 2004 (date of formation) Through September 30, 2004				Seven Months Ended July 29, 2004
	(Unaudited)				(Unaudited)
Revenues:
Coal sales		$	958,027			$	180,427			$	544,882
Other revenue		18,267				2,793				6,153
Total revenues		976,294				183,220				551,035
Costs and expenses:
Cost of coal sales (excludes depreciation, depletion and amortization)		697,736				147,620				484,457
Selling, general and administrative expense (excludes depreciation, depletion and amortization)		35,307				6,693				27,375
Accretion on asset retirement obligations		6,203				1,343				4,020
Depreciation, depletion and amortization		160,625				26,197				61,236
Amortization of coal supply agreements		(66,983		)		(22,453		)		8,837
Income (loss) from operations		143,406				23,820				(34,890		)
Other income (expense):
Interest expense		(43,769		)		(8,533		)		(18,010		)
Loss on termination of hedge accounting for interest rate swaps		—				—				(48,854		)
Contract settlement		—				—				(26,015		)
Mark-to-market gain on interest rate swaps		—				(90		)		5,804
Loss on early debt extinguishment		—				—				(21,724		)
Interest income		637				157				1,274
Income (loss) before income tax (expense) benefit		100,274				15,354				(142,415		)
Income tax (expense) benefit		(39,949		)		(5,090		)		51,824
Income (loss) from continuing operations		60,325				10,264				(90,591		)
Income from discontinued operations, net of income tax expense		—				—				2,315
Gain on disposal of discontinued operations, net of income tax expense		—				—				20,750
Net income (loss)		60,325				10,264				(67,526		)
Components of comprehensive income (loss):
Unrealized gain on interest rate swaps, net of tax expense of $584 for the nine months ended September 30, 2005 and $16,890 for the seven months ended July 29, 2004		873				—				28,820
Comprehensive income (loss)		$	61,198			$	10,264			$	(38,706	)
Basic and diluted earnings (loss) per common share:
Income (loss) from continuing operations, basic		$	1.35			$	0.52			$	(660.56	)
Income from discontinued operations, net of income taxes, basic		—				—				168.18
Net income (loss), basic		$	1.35			$	0.52			$	(492.38	)
Income (loss) from continuing operations, diluted		$	1.31			$	0.52			$	(660.56	)
Income from discontinued operations, net of income taxes, diluted		—				—				168.18
Net income (loss), diluted		$	1.31			$	0.52			$	(492.38	)
Weighted average shares—basic		44,624,647				19,600,000				137,143
Weighted average shares—diluted		46,185,810				19,600,000				137,143
Dividends declared per share		$	0.13			$	—			$	—

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

4

Foundation Coal Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)

	September 30, 2005				December 31, 2004
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	11,012			$	470,313
Trade accounts receivable, net of allowance ($217 in 2004)		112,333				66,484
Inventories, net		78,490				39,718
Deferred income taxes		18,525				15,145
Other current assets		29,548				27,821
Total current assets		249,908				619,481
Owned surface lands		29,333				29,171
Plant, equipment and mine development costs, net		550,985				487,495
Owned and leased mineral rights, net		1,130,436				1,282,989
Coal supply agreements, net		58,852				84,508
Other noncurrent assets		36,648				41,586
Total assets		$	2,056,162			$	2,545,230
LIABILITIES
Current liabilities:
Trade accounts payable		$	31,659			$	30,512
Accrued expenses and other current liabilities		154,753				155,691
Dividends payable		—				444,088
Total current liabilities		186,412				630,291
Long-term debt		665,000				685,000
Deferred income taxes		112,890				133,828
Coal supply agreements, net		82,736				178,210
Postretirement benefits		461,405				449,683
Other noncurrent liabilities		234,686				211,455
Total liabilities		1,743,129				2,288,467
Commitments and contingencies (Note 19)
STOCKHOLDERS’ EQUITY
Preferred stock, $0.01 par value; 10 million shares authorized, no shares issued and outstanding		—				—
Common stock, $0.01 par value; 100 million shares authorized, 44,630,047 shares issued and outstanding at September 30, 2005; 41,362,826 shares issued and outstanding at December 31, 2004		446				414
Additional paid-in capital		258,341				185,643
Stock dividend distributable		—				71,747
Retained earnings (deficit)		53,808				(715		)
Unearned restricted stock compensation		(109		)		—
Accumulated other comprehensive income (loss)		547				(326		)
Total stockholders’ equity		313,033				256,763
Total liabilities and stockholders’ equity		$	2,056,162			$	2,545,230

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

5

Foundation Coal Holdings, Inc. and Subsidiaries
Statements of Consolidated Cash Flows
(Dollars in thousands)

	Successor								Predecessor
	Nine Months Ended September 30, 2005				For the Period From February 9, 2004 (date of formation) Through September 30, 2004				Seven Months Ended July 29, 2004
	(Unaudited)				(Unaudited)
Operating activities:
Net income (loss)		$	60,325			$	10,264			$	(67,526	)
Loss on discontinued operations		—				—				(23,065		)
Income (loss) from continuing operations		60,325				10,264				(90,591		)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Accretion on asset retirement obligations		6,203				1,343				4,020
Depreciation, depletion and amortization		93,642				3,744				70,073
Amortization of deferred financing costs		3,022				99				—
Gain on sale of assets		—				—				(960		)
Non-cash restricted stock compensation		1,056				—				—
Non-cash mark-to-market adjustment for interest rate swap		—				90				(5,804		)
Non-cash expense from termination of hedge accounting for interest rate swap		—				—				48,854
Loss on early extinguishment of debt		—				—				21,724
Deferred income taxes		24,815				5,042				(46,399		)
Changes in operating assets and liabilities:
Trade accounts receivable		(45,849		)		(2,924		)		(9,341		)
Inventories, net		(38,772		)		(7,488		)		(6,113		)
Other current assets		(1,727		)		513				(1,679		)
Other noncurrent assets		3,373				12,428				2,445
Trade accounts payable		1,342				(4,455		)		5,572
Accrued expenses and other current liabilities		(4,602		)		2,944				(27,231		)
Noncurrent liabilities		4,791				3,358				27,386
Net cash provided by (used in) continuing operations		107,619				24,958				(8,044		)
Net cash provided by discontinued operations		—				—				6,973
Net cash provided by (used in) operating activities		107,619				24,958				(1,071		)
Investing activities:
Acquisition of RAG American Coal Holding, Inc., net of cash acquired		—				(912,910		)		—
Purchases of property, plant and equipment		(102,203		)		(12,740		)		(52,695		)
Proceeds from disposition of property, plant and equipment		5,355				1,517				2,049
Net cash used in investing activities - continuing operations		(96,848		)		(924,133		)		(50,646		)
Net cash provided by investing activities - discontinued operations		—				—				184,954
Net cash (used in) provided by investing activities		(96,848		)		(924,133		)		134,308
Financing activities:
Capital contribution		—				196,000				—
Proceeds from Parent advance		—				—				306,057
Proceeds from revolving credit facility		76,000				60,000				—
Repayment of revolving credit facility		(76,000		)		(60,000		)		—
Proceeds from issuance of long-term debt		—				770,000				—
Payment of cash dividends		(449,890		)		—				—
Payment of offering costs		(182		)		(27,710		)		—
Repayment of long-term debt		(20,000		)		—				(614,644		)
Payment of expenses resulting from early debt extinguishment		—				—				(21,724		)
Repayment of capital lease obligations		—				—				(1,679		)
Interest rate swap termination		—				—				(48,854		)
Net decrease in cash pledged on debt		—				—				20,000
Net decrease in cash on deposit with Predecessor		—				—				233,023
Net cash (used in) provided by financing activities		(470,072		)		938,290				(127,821		)
Net increase (decrease) in cash and cash equivalents		(459,301		)		39,115				5,416
Cash and cash equivalents at beginning of period		470,313				—				7,649
Cash and cash equivalents at end of period		$	11,012			$	39,115			$	13,065
Supplemental cash flow information:
Cash paid for interest		$	30,552			$	—			$	29,615
Cash paid for income taxes		$	32,182			$	54			$	220

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

6

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share data)

(1)   Basis of Presentation of Financial Statements

The following interim consolidated financial statements of Foundation Coal Holdings, Inc. and Subsidiaries (the “Company”) are unaudited and prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles as long as the statements are not misleading. In the opinion of management, these financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the results of the periods presented. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2004, filed March 31, 2005.

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to coal reserves that are the basis for future cash flow estimates and units-of-production depreciation, depletion and amortization calculations; environmental and reclamation obligations; asset impairments; post-employment, post-retirement and other employee benefit liabilities; valuation allowances for deferred taxes; reserves for contingencies and litigation; and the fair value and accounting treatment of certain financial instruments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ significantly from these estimates. In addition, different assumptions or conditions could reasonably be expected to yield different results. The operating results for the three and nine month periods ended September 30, 2005 may not necessarily be indicative of the results to be expected in the fourth quarter or for the year ended December 31, 2005.

Foundation Coal Holdings, Inc. and its indirect subsidiary, Foundation Coal Corporation (“FCC”), were formed to acquire the North American coal mining assets of RAG American Coal Holding, Inc., a wholly owned subsidiary of RAG Coal International AG (“RAG”), which acquisition closed on July 30, 2004 (the “acquisition”). The acquisition was accounted for using the purchase method of accounting whereby identifiable assets acquired and liabilities assumed were recorded at their fair market values as of the date of acquisition. The Company performed the purchase price allocation based on the results of an independent appraisal performed by a reputable consulting firm well known in the industry, actuarial valuations of employee benefits performed by consulting actuaries and other internal analysis. Certain judgments and estimates by the Company regarding future cash flows from individual mine sites, employee benefit assumptions and other plans were integral to the valuations performed by the valuation specialists. During the quarter ended September 30, 2005, the purchase price accounting allocations related to the acquisition were finalized as described in Note 3.

RAG American Coal Holding, Inc. had two primary operating units: Riverton Coal Production, Inc. and subsidiaries (“RCP”) and RAG American Coal Company, LLC and subsidiaries (“RACC”). On February 29, 2004, RACC signed a definitive Stock Purchase Agreement to sell RAG Coal AG’s Colorado operations which included Twentymile Coal Company, RAG Empire Corporation, RAG Shoshone Coal

7

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

Corporation and Colorado Yampa Coal Company (collectively referred to as the RAG Colorado Business Unit) to a subsidiary of Peabody Energy Corporation. This transaction closed on April 15, 2004. Accordingly, all references to Foundation Coal Holdings, Inc., exclude the RAG Colorado Business Unit which is accounted for and presented in the accompanying financial statements as discontinued operations. Prior period financial statements have also been restated to reflect the RAG Colorado Business Unit as a discontinued operation.

The following provides a description of the basis of presentation during all periods presented:

“Successor”—represents the consolidated financial position of Foundation Coal Holdings, Inc. and consolidated subsidiaries as of September 30, 2005 and December 31, 2004, and the consolidated results of operations and cash flows for the period from February 9, 2004 (date of formation) through September 30, 2004, and the three and nine month periods ended September 30, 2005. Foundation Coal Holdings, Inc. had no significant activities until the acquisition on July 30, 2004. Therefore, the results of operations and cash flows for the period from February 9, 2004 (date of formation) through September 30, 2004 reflect only the activity for the two month period ended September 30, 2004.

“Predecessor”—represents the consolidated results of operations and cash flows of RAG American Coal Holding, Inc. and subsidiaries for all periods prior to the acquisition. This presentation reflects the historical basis of accounting.

The consolidated financial statements as of and for the three and nine month periods ended September 30, 2005 and the year ended December 31, 2004 reflect the acquisition under the purchase method of accounting, in accordance with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations.

Unless otherwise indicated, “the Company” as used throughout the remainder of these notes to the consolidated financial statements refers to both the Successor and the Predecessor.

Reclassifications

Certain amounts in the prior period have been reclassified to conform to the 2005 presentation.

(2)   Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which replaces SFAS No. 123, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value at the grant date. SFAS No. 123R generally requires companies to measure the cost of employee services received in exchange for an award of equity instruments (such as stock options and restricted stock) based on the grant-date fair value of the award, and to recognize that cost over the period during which the employee is required to provide service (usually the vesting period of the award). FAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement

8

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

recognition. On April 14, 2005, the Securities and Exchange Commission (“SEC”) delayed the implementation of SFAS No. 123R from its original implementation date by six months for most registrants, requiring all public companies to adopt FAS 123R no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company expects to adopt this standard on January 1, 2006. The impact of adopting SFAS No. 123R cannot be reasonably predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R during the prior period, the results are expected to be consistent with the pro forma disclosure under SFAS No. 123, except that forfeitures will be considered in the calculation of compensation expense under SFAS No. 123R. When adopted, the Company may elect to change the valuation method or assumptions and such changes could have a material impact on the amount of stock-based compensation the Company records.

In March 2005, the Emerging Issues Task Force reached consensus on Issue No. 04-6, Accounting for Stripping Costs in the Mining Industry (“EITF Issue 04-6”) concluding that post-production stripping costs are a component of mineral inventory costs subject to the provisions of the American Institute of Certified Public Accountants Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins, Chapter 4, Inventory Pricing, (“ARB No. 43”). The FASB ratified the EITF consensus. Based upon this consensus, post production stripping costs are considered costs of the extracted minerals under a full absorption costing system and are recognized as a component of inventory to be recognized in costs of coal sales in the same period as the revenue from the sale of the inventory. In addition, capitalization of such costs would be appropriate only to the extent inventory exists at the end of a reporting period. The guidance in this consensus will be effective for financial statements issued for the first reporting period in fiscal years beginning after December 15, 2005, with early adoption permitted. At a June EITF meeting, the Task Force modified the transition provisions of EITF Issue 04-6, indicating that companies that adopt in periods beginning after June 29, 2005 may utilize a cumulative effect adjustment approach where the cumulative effect adjustment is recorded directly to retained earnings in the year of adoption. Alternatively, a company may recognize this change in accounting by restatement of its prior-period financial statements through retrospective application. The Company expects to adopt EITF Issue 04-6 on January 1, 2006 and expects to utilize the cumulative effect adjustment approach and record an adjustment directly to retained earnings upon adoption. Historically, the Company recorded stripping costs associated with in-process production as a separate component of inventory described as deferred overburden in Note 4. At September 30, 2005, such stripping costs associated with coal that has not been extracted was $46,089. Applying the requirements of this EITF as of September 30, 2005 would have resulted in a maximum decrease of $46,089 in inventory with the off-set recorded to retained earnings, net of tax. The effect on the financial statements upon adoption on January 1, 2006 will depend on the balance of deferred overburden included in the Company’s inventory at December 31, 2005.

The FASB issued FASB Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations” in March 2005. FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. This interpretation also clarifies the circumstances under which an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect this guidance to have a material impact on its financial statements.

9

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

(3)   Acquisition of RAG

On July 30, 2004, the Company, through its indirect wholly owned subsidiary FCC, acquired 100% of the outstanding common shares of all of the direct and indirect subsidiaries of RAG engaged in coal mining in North America for a purchase price of $986,918 including associated transaction costs of approximately $19,618. The purchase price along with the associated transaction costs were funded by $196,000 of cash from shareholder’s equity contributed to the Company and its subsidiaries FC2 Corp. and FCC by Foundation Coal Holdings, LLC (“LLC”); $300,000 of cash proceeds from 71¤4% Senior Notes due 2014 issued by Foundation PA Coal Company (“Foundation PA”); and $530,000 of cash proceeds from a senior secured credit facility consisting of a term loan facility and revolving credit facility (the “Senior Credit Facility”). The Senior Credit Facility issued by Foundation PA, consisted of $470,000 from the term loan and $60,000 draw from the revolving credit facility.

The acquisition was accounted for using the purchase method of accounting whereby identifiable assets acquired and liabilities assumed were recorded at their fair market values as of the date of acquisition. The allocation of the purchase price for the acquisition has been finalized and recorded in the accompanying consolidated financial statements as of and for the period subsequent to July 30, 2005.

The following table summarizes the purchase price allocation based on the fair values of the assets acquired and liabilities assumed at the date of acquisition:

Accounts receivable	$	73,969
Materials and supplies inventories	10,636
Coal inventory	11,984
Other current assets	46,509
Owned surface lands	30,054
Plant, equipment, mine development, asset retirement costs	490,794
Owned and leased mineral rights	1,277,237
Coal supply agreements	101,081
Other noncurrent assets	14,114
Total assets acquired	2,056,378
Accounts payable and accrued expenses	(164,764		)
Coal supply agreements	(255,872		)
Other noncurrent liabilities	(730,832		)
Total liabilities assumed	(1,151,468		)
Total purchase price net of cash acquired of $82,008	$	904,910

The purchase price allocation was completed based upon analysis provided by an independent appraisal performed by a reputable consulting firm well known in the industry, actuarial valuations of employee benefits performed by consulting actuaries and other internal analysis. Certain judgments and estimates by the Company regarding future cash flows from individual mine sites, employee benefit assumptions and other plans were integral to the valuations performed by the valuation specialists.

Cash and cash equivalents, accounts receivable, other current assets and accounts payable and accrued expenses were stated at historical carrying values. Given the short-term nature of these assets and

10

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

liabilities, it was determined that these historical carrying values approximate fair value. The Company’s projected pension, post-retirement and post-employment benefit obligations and assets have been reflected in the allocation of purchase price at the projected benefit obligation less plan assets at fair market value, based on independent actuaries engaged by the Company. Deferred income taxes have been provided in the consolidated balance sheet based on the Company’s estimated tax versus book basis of the assets acquired and liabilities assumed, as adjusted to estimated fair values. Owned surface lands, inventory, plant, equipment, mine development costs, owned and leased mineral rights and coal supply agreements have been recorded at estimated fair value based on work performed by the independent valuation specialists as of the date of the acquisition, subsequently adjusted by management to reflect the final accounting allocation of the purchase price.

During the quarter ended September 30, 2005, the Company completed the purchase price allocation and recorded final purchase accounting adjustments that reduced the fair value of total assets acquired and liabilities assumed by $59,568, respectively, or approximately 3% of the fair value assigned. The most significant component of this decrease related to a revision in deferred income tax liabilities associated with projected post-retirement benefit obligations resulting from changes in the assumptions regarding the impact on these obligations of the Medicare Part D prescription drug benefits. The effect of the reduction between the preliminary and final purchase price allocation on assets acquired was a decrease in the fair value assigned to owned and leased mineral rights assets of $59,320, a decrease in coal supply agreement assets of $4,384, offset by an increase in the fair value of land and other assets of $4,136. The effect of the reduction between the preliminary and final purchase price allocation on assumed liabilities was a decrease in coal supply agreement liabilities of $10,533, a decrease in accounts payable and accrued expenses of $1,042 and a decrease in deferred income taxes and other noncurrent liabilities of $47,993.

Coal supply agreement assets or liabilities are amortized over the term of the contracts based on the tons of coal shipped under each contract. Based on the preliminary purchase price allocation, amortization of the asset for above market contracts was anticipated to be approximately $20,000, $11,000, $7,000 and $6,000 for the years ended December 31, 2006, 2007, 2008 and 2009, respectively. Subsequent to the final purchase accounting adjustments discussed above, amortization of the asset for above market contracts is anticipated to decrease by approximately $1,700, $700, $600 and $500 for the years ended December 31, 2006, 2007, 2008 and 2009, respectively. Based on the preliminary purchase price allocation, amortization of the liability for below market contracts was anticipated to be approximately ($42,000), ($15,000), ($4,000) and ($1,000) for the years ended December 31, 2006, 2007, 2008 and 2009, respectively. Subsequent to the final purchase accounting adjustments discussed above, amortization of the liability for above market contracts is anticipated to decrease by approximately $3,600, $1,100, $200 and $100 for the years ended December 31, 2006, 2007, 2008 and 2009, respectively.

11

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

The following unaudited pro forma financial information reflects the consolidated results of operations for the periods presented as if the acquisition had taken place on January 1, 2004. The pro forma information incorporates the accounting for the acquisition, including but not limited to, the application of purchase accounting for coal supply agreements, owned and leased mineral rights, employee benefit liabilities and property, plant and equipment. The pro forma financial information may not necessarily be indicative of actual results.

	Pro forma (unaudited)
	Three Months Ended   September 30,   2004				Nine Months Ended   September 30,   2004
	(In millions, except per share data)
Revenues		$	255.6			$	733.3
Loss from continuing operations		$	(5.9	)		$	(25.2	)
Net loss		$	(5.9	)		$	(2.1	)
Basic and diluted Earnings Per Share:
Loss from continuing operations, basic		$	(0.13	)		$	(0.56	)
Net loss, basic		$	(0.13	)		$	(0.05	)
Loss from continuing operations, diluted		$	(0.13	)		$	(0.54	)
Net loss, diluted		$	(0.13	)		$	(0.05	)
Common shares outstanding – basic		44.6				44.6
Common shares outstanding – diluted		46.3				46.2

Pro forma basic common shares outstanding include all shares issued in connection with the formation of the Company, the Company’s initial public offering and stock dividends declared as if they were issued or declared as of the beginning of each period presented. Pro forma diluted common shares outstanding include the dilutive effect associated with stock options granted as if they were issued as of the beginning of each period presented and are considered to have a dilutive effect on the pro forma earnings per share computation.

(4)   Inventories

Inventories consisted of the following:

	September 30, 2005				December 31, 2004
	(Unaudited)
Saleable coal		$	16,641			$	11,609
Raw coal		2,592				2,893
Work-in-process (deferred overburden)		46,089				13,889
Materials and supplies		20,961				18,983
		86,283				47,374
Less materials and supplies reserve for obsolescence		(7,793		)		(7,656		)
		$	78,490			$	39,718

12

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

Saleable coal represents coal stockpiles ready for shipment to a customer. Raw coal represents coal that requires further processing prior to shipment. Work-in-process consists of costs incurred to remove overburden above an unmined coal seam as part of the surface mining process and generally includes labor, supplies, operating overhead and equipment costs charged to operations as coal from the seam is sold.

(5)Other Current Assets

Other current assets consisted of the following:

	September 30, 2005			December 31, 2004
	(Unaudited)
Prepaid royalties		$	2,332		$	3,142
Prepaid longwall move expense		5,693			7,497
Prepaid SO2 emission allowances		1,030			780
Prepaid expenses		16,385			12,886
Other		4,108			3,516
		$	29,548		$	27,821

(6)Property, Plant, Equipment and Owned and Leased Mineral Rights

Property, plant, equipment and owned and leased mineral rights consisted of the following:

	September 30, 2005				December 31, 2004
	(Unaudited)
Owned surface and coal lands
Owned surface lands		$	29,333			$	29,171
Owned and leased mineral rights		$	1,277,858			$	1,336,557
Less accumulated depletion		(147,422		)		(53,568		)
		$	1,130,436			$	1,282,989
Plant, equipment and mine development costs
Plant, equipment and asset retirement costs		$	641,042			$	518,525
Mine development costs		14,164				6,196
Coal bed methane equipment and development costs		3,461				3,959
		658,667				528,680
Less accumulated depreciation and amortization:
Plant, equipment and asset retirement costs		(106,373		)		(40,898		)
Mine development costs		(872		)		(108		)
Coal bed methane equipment and development costs		(437		)		(179		)
		(107,682		)		(41,185		)
		$	550,985			$	487,495

13

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

(7)Other Noncurrent Assets

Other noncurrent assets consisted of the following:

	September 30, 2005			December 31, 2004
	(Unaudited)
Receivables from asset dispositions		$	994		$	5,863
Prepaid major repairs		3,165			737
Unamortized debt issuance costs, net		21,020			24,162
Advance mining royalties		2,802			2,620
Work-in-process coal inventory (deferred overburden)		—			3,576
Prepaid longwall development		1,633			1,633
Fair value of interest rate swaps		1,987			530
Other		5,047			2,465
		$	36,648		$	41,586

(8)Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

	September 30, 2005			December 31, 2004
	(Unaudited)
Accrued federal and state income taxes		$	1,743		$	3,815
Accrued sales contract settlements		—			7,431
Wages and employee benefits		30,417			27,977
Pension benefits		7,712			5,970
Postretirement benefits other than pension		23,000			21,350
Interest		3,539			9,065
Royalties		6,305			8,657
Taxes other than income taxes		27,716			28,328
Asset retirement obligations		4,411			4,398
Workers’ compensation		9,648			9,717
Other		40,262			28,983
		$	154,753		$	155,691

14

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

(9)Other Noncurrent Liabilities

Other noncurrent liabilities consisted of the following:

	September 30, 2005			December 31, 2004
	(Unaudited)
Post employment benefits		$	5,823		$	6,365
Pension benefits		40,278			43,987
Workers’ compensation		17,756			18,938
Minimum royalty obligations		95			876
Black lung reserves		5,799			4,972
Contract settlement accrual		22,421			26,672
Asset retirement obligations		111,839			100,202
Deferred production tax		10,687			7,144
Deferred credits and other		2,162			2,299
Deferred equipment purchase commitment		17,826			—
		$	234,686		$	211,455

During the quarter ended September 30, 2005, the Company’s Northern Appalachia business unit took delivery of one hundred new longwall shields to remedy a warranty issue associated with shields currently used in their underground mining operations. The Company entered into a purchase commitment for the shields in the amount of $21,685, and in accordance with the payment terms related to the purchase commitment, periodic progress payments to the manufacturer are not scheduled to start until the fourth quarter of 2007, with scheduled completion within one year. As a result of this transaction, the Company recorded a deferred purchase commitment liability of $17,826 representing the present value of the future payments due in accordance with the terms of the purchase commitment. Interest expense will be imputed and recognized in a manner consistent with the established payment terms, ultimately increasing the liability to its full value of $21,685.

(10)Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) consisted of the following:

	September 30, 2005				December 31, 2004
	(Unaudited)
Changes in fair value of hedge instruments, net of tax of $584		$	873			$	—
Minimum pension liability adjustments, net of tax of $192		(326		)		(326		)
		$	547			$	(326	)

15

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

(11)   Pension and Postretirement Benefit Plans

Components of Net Periodic Pension Costs

Net periodic pension costs included the following:

	Successor								Predecessor				Successor								Predecessor
	Three Months Ended September 30, 2005				For the Period From February 9, 2004 (date of formation) Through September 30, 2004				One Month Ended July 29, 2004				Nine Months Ended September 30, 2005				For the Period From February 9, 2004 (date of formation) Through September 30, 2004				Seven Months Ended July 29, 2004
	(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Service cost		$	1,130			$	804			$	451			$	4,018			$	804			$	3,160
Interest cost		2,309				1,646				918				8,212				1,646				6,431
Expected return on plan assets		(2,216		)		(1,471		)		(792		)		(7,883		)		(1,471		)		(5,556		)
Amortization of:
Prior service cost		—				—				3				—				—				23
Actuarial losses		80				—				329				287				—				2,279
		1,303				979				909				4,634				979				6,337
Less: amounts allocated to discontinued operations		—				—				—				—				—				(373		)
Total from continuing operations		$	1,303			$	979			$	909			$	4,634			$	979			$	5,964

Components of Net Periodic Postretirement Benefit Costs

Net periodic postretirement medical and life insurance are as follows:

	Successor						Predecessor			Successor						Predecessor
	Three Months Ended September 30, 2005			For the Period From February 9, 2004 (date of formation) Through September 30, 2004			One Month Ended July 29, 2004			Nine Months Ended September 30, 2005			For the Period From February 9, 2004 (date of formation) Through September 30, 2004			Seven Months Ended July 29,  2004
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Service cost		$	1,630		$	1,153		$	575		$	5,586		$	1,153		$	4,039
Interest cost		6,730			4,722			2,500			23,061			4,722			17,501
Amortization of:
Prior service cost		—			—			49			—			—			348
Actuarial losses		—			—			1,087			—			—			7,703
		8,360			5,875			4,211			28,647			5,875			29,591
Less: amounts allocated to discontinued operations		—			—			—			—			—			(323		)
Total from continuing operations		$	8,360		$	5,875		$	4,211		$	28,647		$	5,875		$	29,268

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

16

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

(12)   Pneumoconiosis (Black Lung) Expense and Trust

The components of net periodic benefit cost are as follows:

	Successor								Predecessor				Successor								Predecessor
	Three Months Ended September 30, 2005				For the Period From February 9, 2004 (date of formation) Through September 30, 2004				One Month Ended July 29, 2004				Nine Months Ended September 30, 2005				For the Period From February 9, 2004 (date of formation) Through September 30, 2004				Seven Months Ended July 29, 2004
	(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Service cost		$	163			$	84			$	44			$	331			$	84			$	309
Interest cost		409				208				108				831				208				752
Expected return on plan assets		(281		)		(163		)		(81		)		(571		)		(163		)		(568		)
Amortization of:
Transition asset		—				—				(10		)		—				—				(148		)
Prior service cost		—				—				11				—				—				79
Actuarial losses		116				—				23				236				—				319
		407				129				95				827				129				743
Less: amounts allocated to discontinued operations		—				—				—				—				—				(13		)
Total from continuing operations		$	407			$	129			$	95			$	827			$	129			$	730

(13)   Stock-Based Compensation

The Company records compensation expense for all employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and related interpretations. Under APB No. 25, compensation expense is recorded over the vesting period to the extent that the fair value of the underlying stock on the date of grant exceeds the exercise or acquisition price of the stock or stock-based award. We have adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS No. 123”), as amended by SFAS No. 148 Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123 (“SFAS No. 148”).

17

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

Had compensation expense for stock option grants been determined based on the fair value at the grant dates consistent with the method required by SFAS No. 123, the Company’s net income available to common shareholders and earnings per common share would have been changed to the pro forma amounts as indicated in the following table. The Predecessor had no stock option plans; therefore, no Predecessor information is presented.

	Three Months Ended September 30, 2005				Nine Months Ended September 30, 2005
	(Unaudited)				(Unaudited)
Net income available to common shareholders, as reported		$	21,223			$	60,325
Add:
Stock-based employee compensation included in reported net income, net of related tax effects		401				636
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(592		)		(1,195		)
Pro forma net income available to common shareholders		$	21,032			$	59,766
Earnings per share:
Basic earnings per share—as reported		$	0.47			$	1.35
Basic earnings per share—pro forma		$	0.47			$	1.34
Diluted earnings per share—as reported		$	0.46			$	1.31
Diluted earnings per share—pro forma		$	0.45			$	1.29

The Company granted restricted stock performance unit awards (“performance units”) to certain key employees in March 2005. All of the performance units granted are subject to continued employment and vest on each December 31, beginning December 31, 2005 and ending on December 31, 2007 contingent upon the achievement of certain annual performance targets. Shares of common stock are then awarded in March of the year following the final vesting period. Compensation expense of approximately $655 and $1,025 (pretax) were recorded for the three and nine month periods ended September 30, 2005 for the initial year’s performance units that management expects will vest on December 31, 2005.

(14)   Derivative Instruments and Hedging Activities

The Predecessor entered into an interest rate swap agreement effective June 20, 1999 to manage its exposure to fluctuations in interest rates relating to its outstanding variable rate debt. The interest rate swap agreement was designated as a cash flow hedge, and was designed to be entirely effective by matching the terms of the swap agreement with the debt. The base rate for both the debt and the swap is LIBOR and the instruments have the same renewal dates over the lives of the instruments. The contract’s notional amount was $434,000 at inception, and declined semi-annually over the life of the contract in proportion to the Predecessor’s outstanding balance on its related debt. The Predecessor paid a fixed rate of 6.55% and received six-month LIBOR which reset every 180 days. The maturity date of the contract was July 30, 2009. However, in connection with the definitive Stock Purchase Agreement for the sale of the RAG Colorado Business Unit entered into on February 29, 2004, the Predecessor notified the holders of the variable rate

18

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

notes of their intention to repay the notes. Accordingly, the interest rate swaps no longer qualified for hedge accounting treatment and in the quarter ended March 31, 2004, the full amount of unrealized loss included in accumulated other comprehensive income was recognized in net income. The Predecessor settled the interest rate swaps in April 2004. Between February 29, 2004 and April 27, 2004, mark-to-market gains on the interest rate swaps were $5,804 and were included in other income.

On September 30, 2004, the Successor entered into pay-fixed, receive-variable interest rate swap agreements on a notional amount of $85,000. The term of these swaps is for three years. Under these swaps, the Company receives a variable rate of three month US dollar LIBOR and pays a fixed rate of 3.26%. Settlement of interest payments occurs quarterly. The Company was required to enter into these swaps in order to maintain at least 50% of its outstanding debt at a fixed rate as required by the Senior Credit Facility. These swap agreements essentially convert $85,000 of the Company’s variable rate borrowings under the Senior Credit Facility to fixed rate borrowings for a three year period beginning September 30, 2004. Effective January 1, 2005, the Company designated these interest rate swaps as cash flow hedges of the variable interest payments due on $85,000 of its variable rate date through September 2007 under SFAS No 133, Accounting for Derivative Financial Instruments and Hedging Activities upon completion of the effectiveness testing and related documentation. As of September 30, 2005, the fair value of this cash flow hedge was $1,987 which was recorded as a noncurrent asset and the offsetting unrealized gain of $873, net of tax expense was recorded in accumulated other comprehensive income. At December 31, 2004, the fair value of these swaps was $530 which was recorded as a noncurrent asset.

(15)Asset Retirement Obligations

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

The following table is a reconciliation of the Company’s asset retirement obligation (“ARO”) liability from December 31, 2004 through September 30, 2005:

Asset retirement obligation, December 31, 2004	$	104,600
Accretion expense	6,203
Revisions in estimated cash flows and liabilities incurred	6,880
Payments	(1,433		)
Asset retirement obligation, September 30, 2005	$	116,250

Revisions in estimated cash flows and liabilities incurred relate specifically to a recent annual review and increase in the final reclamation bond amount associated with our open pit operations in the Powder River Basin.

19

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

The current portions of the asset retirement obligation liabilities of $4,411 and $4,398 at September 30, 2005 and December 31, 2004, respectively, are included in accrued expenses and other current liabilities as illustrated in Note 8. There were no assets that were legally restricted for purposes of settling asset retirement obligations at September 30, 2005 or December 31, 2004, respectively.

(16)Stockholders’ Equity and Earnings Per Share

Stockholder’s Equity

On December 8, 2004, the Company completed an initial public offering (“IPO” or “Offering”) of 23,610,000 shares of common stock. Net proceeds from the offering, after deducting underwriting discounts and offering expenses, were approximately $481,100. On December 8, 2004 immediately preceding the IPO, the Board of Directors (the “Board”) approved, authorized and declared a 0.879639 for one reverse stock split of all the 19,600,000 common shares issued and outstanding thereby reducing common shares outstanding to approximately 17,240,900 shares. The Board also approved the declaration of two separate cash dividends of $0.058 and $25.41 per share, respectively, of common stock issued and outstanding for shareholders of record. The Company used approximately $434,000 of the net proceeds from the Offering to pay the dividends to its stockholders. The Company used the remaining net proceeds of approximately $47,100 to repay a portion of outstanding indebtedness and for other general corporate purposes. The Underwriting Agreement provided for up to 3,541,500 shares of common stock to be reserved for the satisfaction of an over-allotment option allowing the underwriters an option to purchase additional shares. Pursuant to this underwriters’ option 511,900 shares were sold generating net proceeds, after deducting underwriting discounts and estimated offering expenses, of approximately $10,560. The Company used these proceeds and cash on hand to pay an additional dividend to its existing stockholders in January 2005 in the amount of $11,142. The Board declared a stock dividend for the remaining over-allotment shares not purchased by the underwriters to the stockholders of record immediately prior to the IPO. All per share amounts in these consolidated financial statements and related notes reflect the stock dividend.

On December 8, 2004, the Board declared a stock dividend of 3,029,600 shares which was distributed in January 2005 to all shareholders of record on December 8, 2004. Additionally, the Board declared a stock dividend of 231,621 shares distributed in January 2005 to members of management. In the aggregate, these stock dividends were valued at $71,747 or $22 per share, representing the price at which all shares were sold in conjunction with the December 8, 2004 IPO. The dividends were accounted for as stock dividends distributable in the Company’s Consolidated Balance Sheets at December 31, 2004. All earnings per share information in the consolidated financial statements and notes have appropriately reflected these stock dividends.

On February 15, 2005, the Board declared a cash dividend for the first quarter of $0.04 per share to shareholders of record on March 7, 2005. The $1,785 dividend was paid on March 28, 2005. On May 20, 2005, the Board declared a cash dividend for the second quarter of $0.04 per share to shareholders of record on June 14, 2005. The $1,785 dividend was paid on June 28, 2005. On August 9, 2005, the Board declared a cash dividend for the third quarter of $0.05 per share to shareholders of record on September 14, 2005. The $2,232 dividend was paid on September 30, 2005.

20

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

Earnings Per Share

The following table provides a reconciliation of weighted average shares outstanding used in the basic and diluted earnings per share computations for the periods presented:

	Successor				Predecessor		Successor				Predecessor
	Three Months Ended September 30, 2005		For the Period From February 9, 2004 (date of formation) Through September 30, 2004		One Month Ended July 29, 2004		Nine Months Ended September 30, 2005		For the Period From February 9, 2004 (date of formation) Through September 30, 2004		Seven Months Ended July 29, 2004
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Weighted average shares outstanding – basic		44,624,647		19,600,000		137,143		44,624,647		19,600,000		137,143
Dilutive impact of stock options		1,696,952		—		—		1,561,163		—		—
Weighted average shares outstanding – diluted		46,321,599		19,600,000		137,143		46,185,810		19,600,000		137,143

(17)Segment Information

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

21

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

Successor:

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

	Powder River Basin		Northern Appalachia				Central Appalachia				Other			Consolidated
Revenues	$	85,964		$	120,707			$	108,807		$	25,832			$	341,310
Income (loss) from operations	6,884			45,818				10,781			(12,720		)		50,763
Depreciation, depletion and amortization	15,837			20,297				15,209			1,788				53,131
Amortization of coal supply agreements	4,974			(13,337		)		(10,306		)	(1,798		)		(20,467		)
Capital expenditures	16,321			12,050				7,247			1,492				37,110
Total assets	$	579,263		$	921,811			$	468,118		$	86,970			$	2,056,162

Operating segment results for the period from February 9, 2004 (date of formation) through September 30, 2004 are as follows:

	Powder River Basin		Northern Appalachia				Central Appalachia				Other			Consolidated
Revenues	$	57,483		$	57,879			$	42,807		$	25,051			$	183,220
Income (loss) from operations	3,752			20,424				5,167			(5,523		)		23,820
Depreciation, depletion and amortization	5,512			11,845				8,604			236				26,197
Amortization of coal supply agreements	5,971			(17,124		)		(10,722		)	(578		)		(22,453		)
Capital expenditures	1,589			7,359				4,880			(1,088		)		12,740
Total assets	$	608,382		$	765,444			$	387,944		$	377,083			$	2,138,853

Predecessor:

Operating segment results for the one month ended July 29, 2004 are as follows:

	Powder River Basin		Northern Appalachia				Central Appalachia				Other			Consolidated
Revenues	$	23,839		$	23,949			$	18,886		$	5,899			$	72,573
Income (loss) from operations	4,628			(2,258		)		(6,547		)	(11,126		)		(15,303		)
Depreciation, depletion and amortization	1,489			3,978				2,712			571				8,750
Amortization of coal supply agreements	874			60				—			108				1,042
Capital expenditures	944			856				725			(283		)		2,242
Total assets	$	425,573		$	553,504			$	142,359		$	296,932			$	1,418,368

22

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

Successor:

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

	Powder River Basin		Northern Appalachia				Central Appalachia				Other			Consolidated
Revenues	$	240,671		$	358,863			$	308,233		$	68,527			$	976,294
Income (loss) from operations	10,223			127,660				42,970			(37,447		)		143,406
Depreciation, depletion and amortization	52,859			57,660				44,614			5,492				160,625
Amortization of coal supply agreements	13,982			(44,237		)		(33,341		)	(3,387		)		(66,983		)
Capital expenditures	33,718			33,521				31,895			3,069				102,203
Total assets	$	579,263		$	921,811			$	468,118		$	86,970			$	2,056,162

Operating segment results for the period from February 9, 2004 (date of formation) through September 30, 2004 are as follows:

	Powder River Basin		Northern Appalachia				Central Appalachia				Other			Consolidated
Revenues	$	57,483		$	57,879			$	42,807		$	25,051			$	183,220
Income (loss) from operations	3,752			20,424				5,167			(5,523		)		23,820
Depreciation, depletion and amortization	5,512			11,845				8,604			236				26,197
Amortization of coal supply agreements	5,971			(17,124		)		(10,722		)	(578		)		(22,453		)
Capital expenditures	1,589			7,359				4,880			(1,088		)		12,740
Total assets	$	608,382		$	765,444			$	387,944		$	377,083			$	2,138,853

Predecessor:

Operating segment results for the seven months ended July 29, 2004 are as follows:

	Powder River Basin		Northern Appalachia				Central Appalachia				Other			Consolidated
Revenues	$	179,758		$	160,562			$	159,004		$	51,711			$	551,035
Income (loss) from operations	30,748			(10,368		)		(9,797		)	(45,473		)		(34,890		)
Depreciation, depletion and amortization	10,918			27,864				18,761			3,693				61,236
Amortization of coal supply agreements	7,521			391				—			925				8,837
Capital expenditures	11,483			26,549				12,208			2,455				52,695
Total assets	$	425,573		$	553,504			$	142,359		$	296,932			$	1,418,368

23

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

(18)Other Revenue

Other revenue consisted of the following:

	Successor							Predecessor				Successor							Predecessor
	Three Months Ended September 30, 2005			For the Period From February 9, 2004 (date of formation) Through September 30, 2004				One Month Ended July 29, 2004				Nine Months Ended September 30, 2005			For the Period From February 9, 2004 (date of formation) Through September 30, 2004				Seven Months Ended July 29, 2004
	(Unaudited)			(Unaudited)				(Unaudited)				(Unaudited)			(Unaudited)
Royalty income		$	1,658		$	767			$	190			$	2,225		$	767			$	1,696
Synfuel fees		2,056			731				269				5,278			731				2,281
Coalbed methane		1,923			1,819				539				4,632			1,819				1,639
Transloading and plant processing fees		641			241				108				2,217			241				867
Gain (loss) on disposition of assets		458			—				277				419			—				960
Coal sales contract settlements		—			(1,730		)		(1,296		)		—			(1,730		)		(1,296		)
Other		1,105			965				1,637				3,496			965				6
Total other revenue		$	7,841		$	2,793			$	1,724			$	18,267		$	2,793			$	6,153

(19)Commitments and Contingencies

Asset Retirement Obligations (formerly Reclamation and Mine Closure)

At September 30, 2005, the Company’s accruals for reclamation and mine closure totaled $116,250. The portion of the costs expected to be incurred within a year of $4,411 at September 30, 2005 is included in accrued expenses and other current liabilities. At September 30, 2005, these regulatory obligations are secured by surety bonds in the amount of $229,176. These surety bonds are partially collateralized by letters of credit issued by the Company.

Guarantees

One of our former parent companies, Cyprus Amax Minerals Company, remains a guarantor with regard to future minimum royalties payable under leases through the first quarter 2006 to Blackhawk Coal Company, an affiliate of American Electric Power. Under the terms of the Stock Purchase Agreement, dated May 12, 1999 between RAG Coal International AG and Cyprus Amax Minerals Company, the Predecessor guaranteed Cyprus Amax performance under this obligation by issuing an irrevocable letter of credit to secure the minimum royalty payments still due. The Company assumed this guarantee in the acquisition. The amount of this letter of credit is reduced as the Company makes the scheduled payments. At September 30, 2005 and December 31, 2004, the letter of credit amount was $3,000 and $6,000, respectively.

Neweagle Industries, Inc. (“Neweagle”) is a wholly-owned indirect subsidiary of the Company. Starting in early 2001, Neweagle supplied and sold coal to Arch Coal Sales Company, Inc. (“Arch Sales”) pursuant to a Conditional Coal Supply Agreement dated October 1, 1996 (CCSA). This coal was in turn

24

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

resold by Arch Sales under a separate and distinct Coal Sales Agreement dated October 1, 1989 (“Rocky Mount Contract”) with Cogentrix of Rocky Mount, Inc. (“Cogentrix”) as the buyer which expires December 31, 2013. On March 23, 2003, the Predecessor (now known as Foundation American Coal Holding, LLC) conditionally issued to Arch Sales a Guaranty and Indemnity (“Guaranty”) of Neweagle’s performance under the CCSA, and also agreed to indemnify Arch Sales and its affiliates and other parties for any liability related to the Rocky Mount Contract. As part of a global settlement of litigation relating to numerous issues between affiliates of the Predecessor and Arch Sales, a Mutual Release and Settlement Agreement (“MRSA”) was executed effective November 12, 2004. Pursuant to the MRSA, the CCSA and the Guaranty were terminated. Also pursuant to the MRSA, Neweagle agreed to continue selling and supplying coal to Arch in the quantities required under the Rocky Mount Contract for re-sale by Arch to Cogentrix thereunder. The MRSA also was executed by the Predecessor (now known as Foundation American Coal Holding, LLC) As a signatory to the MRSA, Foundation American Coal Holding, LLC and Neweagle agreed to indemnify, defend, and save harmless Arch and its affiliates from any non-performance, default or breach of (i) Neweagle’s obligation to supply coal to Arch Sales under the MSRA and (ii) for so long as the MRSA remains in force, any default, breach, or non-fulfillment of Arch Sales contract obligations under the Rocky Mount Contract as a result of acts or omissions (other than by Cogentrix) occurring on or after November 12, 2004.

Neweagle Industries, Inc., Neweagle Coal Sales Corp., Laurel Creek Co., Inc. and Rockspring Development, Inc. (“Sellers”) are wholly-owned indirect subsidiaries of the Company. The Sellers sell coal to Birchwood Power Partners, L.P. (“Birchwood”) under a Coal Supply Agreement dated July 22, 1993 which expires November 15, 2021 (Birchwood Contract). Laurel Creek Co., Inc. and Rockspring Development, Inc. were parties to the Birchwood Contract since its inception, at which time those entities were not affiliated with Neweagle Industries, Inc., Neweagle Coal Sales Corp., or the Company. Effective January 31, 1994, the Birchwood Contract was assigned to Neweagle Industries, Inc. and Neweagle Coal Sales Corp. by AgipCoal Holding USA, Inc. and AgipCoal Sales USA, Inc., which at the time were affiliates of Arch Coal, Inc. Despite this assignment, Arch Coal, Inc. (“Arch”) and its affiliates have separate contractual obligations to provide coal to Birchwood if Sellers fail to perform. Pursuant to an Agreement & Release dated September 30, 1997, the Predecessor (now known as Foundation American Coal Holding, LLC) agreed to defend, indemnify, and hold harmless Arch and its subsidiaries from and against any claims arising out of any failure of Sellers to perform under the Birchwood Contract. By acknowledgement dated February 16, 2005, the Predecessor and Arch acknowledged the continuing validity and effect of the Agreement & Release dated September 30, 1997.

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

Contingencies

Several of our subsidiaries have been named as defendants in several separate complaints filed in Raleigh and Wyoming Counties, West Virginia, starting in late 2001, alleging personal injury and property

25

Foundation Coal Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands, except share and per share data)

damage caused by flooding on or about July 8, 2001. Similar suits may be filed in the future based on this or subsequent weather events. The general alleged basis for the lawsuits is that coal mining, oil and gas drilling and timbering operations altered the topography in the area to such an extent that flooding resulting from heavy rains caused more severe damage than would have otherwise resulted. Numerous similar complaints were filed by hundreds of plaintiffs against over 100 defendants, in a total of seven southern West Virginia counties. All such civil actions have been referred by the West Virginia Supreme Court to a three-judge panel, sitting in Raleigh County, pursuant to the Court’s Mass Litigation Rule.

On December 9, 2004, the West Virginia Supreme Court issued an opinion addressing certain questions of law certified to it by the three-judge panel. Among other rulings, the Supreme Court decision held that plaintiffs may not proceed under a strict liability theory, as had been asserted in their complaints. The court also held that where damages can be shown to have been caused by an unusual act of nature combined with the conduct of a defendant, the defendant should be given an opportunity to show by clear and convincing evidence that it caused only a portion of those damages, in order to avoid incurring liability for all damages.

In March 2005 the three judge panel issued a scheduling order indicating that six different trials will be held, one for each watershed impacted. Each trial will be held in two phases with the liability phase being held first, and then a damages phase. The first trial is currently scheduled to commence in March 2006. This will relate to flooding in the Upper Guyandotte River watershed in which our affiliates do have operations. Discovery and other pretrial proceedings associated with this first trial are now underway.

We believe the claims against our entities are fully covered by insurance. Common defense counsel and experts are representing numerous defendants and costs are being shared. While the outcome of litigation is subject to uncertainties, based on our preliminary evaluation of the issues and the potential impact on us, we believe this matter will be resolved without a material adverse effect on our financial condition, results of operations or cash flow.

Extensive regulation of the impacts of mining on the environment and related litigation has had and may have a significant effect on our costs of production and competitive position. Further regulations, legislation or litigation may also cause our sales or profitability to decline by hindering our ability to continue our mining operations, by increasing our costs, or by causing coal to become a less attractive fuel source.

Legal Proceedings

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

26

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our future prospects, developments and business strategies.

We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project” and similar terms and phrases, including references to assumptions, in this Form 10-Q to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. The factors, described below and elsewhere in this Form 10-Q, and in other documents we file with the SEC from time to time, are among those that may cause actual results to differ materially from our forward-looking statements:

·market demand for coal, electricity and steel;

·future economic or capital market conditions;

��weather conditions or catastrophic weather-related damage;

·our production capabilities;

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

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

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

·timing of reductions or increases in customer coal inventories;

·long-term coal supply arrangements;

·risks in coal mining;

·environmental laws, including those directly affecting our coal mining and production, and those affecting our customers’ coal usage;

·competition;

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

·our assumptions concerning economically recoverable coal reserve estimates;

·employee workforce factors;

·regulatory and court decisions;

·future legislation and changes in regulations or governmental policies or changes in interpretations thereof;

·changes in postretirement benefit and pension obligations;

·our liquidity, results of operations and financial condition; and

27

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

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

Overview

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

Our primary product is steam coal, sold primarily to electric power generators located in the United States. Approximately 9% of our coal sales revenue for the nine months ended September 30, 2005 and 8% of our pro-forma sales revenue for the nine months ended September 30, 2004 was made from the sale of metallurgical coal to the domestic and export metallurgical coal markets where it is used to make coke for steel production.

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

From July 1, 1999 through July 29, 2004, we were a stand-alone wholly owned subsidiary of RAG Coal International AG (“RAG”) headquartered in Essen, Germany. In October 2003, RAG announced its intention to divest its international mining subsidiaries. In addition to RAG American Coal Holding, Inc., these international mining subsidiaries consisted of operations in Australia and Venezuela. On February 29, 2004, RAG announced the sale of four of our subsidiaries, collectively known as the RAG Colorado Business Unit, to a third party. The subsidiaries comprising the RAG Colorado Business Unit owned an underground longwall mine located in Routt County, Colorado, an idled underground longwall mine located in Moffat County, Colorado and surface lands located in northwest Colorado and southern Wyoming. The transaction closed on April 15, 2004. In the financial statements of the Predecessor for the first quarter of 2004, the RAG Colorado Business Unit was classified as a discontinued operation.

On May 24, 2004, RAG, entered into a definitive agreement with Foundation Coal Corporation, which was owned by affiliates of First Reserve, Blackstone and AMCI, to sell all of its operations except the RAG Colorado Business Unit which was sold on April 15, 2004. The transaction closed on July 30, 2004.

Results of Continuing Operations

Basis of Presentation:

RAG American Coal Holding, Inc. and its subsidiaries, excluding the subsidiaries comprising the RAG Colorado Business Unit which were sold on April 15, 2004, were acquired by a subsidiary of Foundation Coal Holdings, Inc. on July 30, 2004. Due to the change in ownership, and the resultant

28

application of purchase accounting, the historical financial statements of the Predecessor and the Successor included in this Form 10-Q have been prepared on different bases for the periods presented and are not comparable.

The following provides a description of the basis of presentation during all periods presented:

Successor—represents the consolidated financial position of Foundation Coal Holdings, Inc. as of December 31, 2004 and September 30, 2005, our consolidated results of operations for the quarter ended September 30, 2005 and our consolidated results of operations and cash flows for the nine months ended September 30, 2005. Foundation Coal Holdings, Inc. had no significant activities until the acquisition on July 30, 2004. Our consolidated financial position at September 30, 2005, and our consolidated results of operations for the quarter and nine months ended September 30, 2005 reflect the final purchase price allocation based on appraisals prepared by independent valuation specialists, employee benefit valuations prepared by independent actuaries and other internal analysis. Deferred income taxes have been provided in the consolidated balance sheet based on the tax versus book basis of the fair values of the assets acquired and liabilities assumed. During the quarter ended September 30, 2005, we completed the purchase price allocation, and recorded final purchase accounting adjustments that reduced the fair value of the total assets acquired by approximately $60 million, or approximately 3%, of the preliminary value assigned to the assets acquired. The most significant final purchase accounting adjustment reduced deferred income tax liabilities, with corresponding changes to the values assigned to owned and leased mineral rights and coal supply agreements, due to a change in assumption as to how Medicare Part D will be implemented with regard to retiree health care obligations. The preliminary valuation of deferred income taxes assumed that Medicare Part D would be coordinated with the Company’s retiree health care plans. Additional information obtained and analysis performed prior to the finalization of purchase accounting caused this assumption to change to an expectation that the Company will utilize the income tax free subsidy offered under Medicare Part D. Our consolidated financial position at December 31, 2004 reflected our preliminary estimates of purchase price allocation before the final purchase accounting adjustments described above. The application of purchase accounting to the acquired assets of RAG American Coal Holding, Inc. resulted in increases to owned and leased mineral rights, surface lands, coal inventories, and the asset arising from recognition of asset retirement obligations. It resulted in decreases to plant and equipment and current deferred taxes. In addition, the historical cost assigned to deferred overburden in the acquired asset balance sheet was eliminated. The values assigned to uncovered and partially covered coal lands considered the stage of the mining process in which these two groups of coal lands were at the acquisition date. The application of purchase accounting to the acquired liabilities of RAG American Coal Holding, Inc. resulted in increases to postretirement health care obligations, pension obligations, black lung obligations, asset retirement obligations and noncurrent deferred taxes. Separate assets or liabilities were established to reflect the valuation of above or below market coal supply agreements in relation to market price curves. With regard to consolidated results of operations for the three and nine month periods ended September 30, 2005, the principal effects of the application of purchase accounting, in comparison to reporting for historical periods, were to decrease the cost of coal sold due to lower expenses for postretirement health care and pensions, to decrease the cost of coal sold for net deferrals of deferred overburden costs, to decrease net amortization expense for coal supply agreements which is now a credit because our contracts at acquisition represented a net liability, and to increase the cost of depletion expense for owned and leased mineral rights.

Predecessor—represents the results of operations for RAG American Coal Holding, Inc. for the one and seven months ended July 29, 2004 and cash flows for RAG American Coal Holding, Inc. for the seven months ended July 29, 2004. These consolidated financial statements are based on the historical assets, liabilities, sales and expenses of the Predecessor for these periods.

Pro forma—To facilitate the three and nine month period comparisons throughout management’s discussion and analysis, we discuss “pro forma” results for the quarter and nine month periods ended

29

September 30, 2004. The pro forma results present the third quarter and first nine months of 2004 as if Foundation Coal Holdings, Inc.: (a) acquired RAG American Coal Holding, Inc. on January 1, 2004; (b) completed the Initial Public Offering on January 1, 2004; and transacted the sale of the RAG Colorado Business Unit and associated repayment of Predecessor bank debt and settlement of Predecessor interest rate swaps on December 31, 2003. Pro-forma amounts are not recognized measures under GAAP and do not purport to be alternatives to GAAP operating measures. Management believes that the discussion of pro forma operating results is important to the readers of the financial statements to understand key operating trends in comparing the third quarter of 2005 to the third quarter of 2004 and the nine months ended September 30, 2005 to the nine months ended September 30, 2004. In the following sections tables present unaudited results of operations for the Successor for the quarter ended September 30, 2005, unaudited results of operations for the Predecessor on a pro forma basis as described above for the quarter ended September 30, 2004, unaudited results of operations for the Successor for the nine months ended September 30, 2005, and unaudited results of operations for the Predecessor on a pro forma basis as described above for the nine months ended September 30, 2004.

Quarter ended September 30, 2005—Successor compared to period July 1 through July 29, 2004—Predecessor and period February 9 (date of formation) through September 30, 2004 (two month operating period)—Successor

As previously described there are significant differences in the basis of financial reporting between the Successor and Predecessor periods as a result of the purchase of RAG American Coal Holding, Inc. by Foundation Coal Corporation on July 30, 2004, and the resultant application of purchase accounting to the assets and liabilities acquired. The Successor reported income from continuing operations of $21.2 million for the quarter ended September 30, 2005 whereas the Predecessor reported a loss from continuing operations of $42.3 million for period July 1 through July 29, 2004 and the Successor reported income from continuing operations of $10.3 million for the two month operating period ended September 30, 2005.

During the period July 1 through July 29, 2004, the Predecessor recorded a non-cash pre-tax loss related to a coal contact settlement in the amount of $26.0 million and $21.7 million of pre-tax expenses for early debt extinguishment. These non-recurring charges, net of income tax benefits, were the main reasons for the loss from continuing operations.

During the third quarter of 2005, the Successor achieved stronger production and tons sold and enjoyed significantly higher per ton sales realizations. Year-over-year increases in cost of coal sales, selling general and administrative expenses and depreciation, depletion and amortization were more than absorbed by higher coal sales revenues. The operating trends discussed in the following section, Historical quarter ended September 30, 2005 compared to pro forma quarter ended September 30, 2004, also apply to comparisons of the two Successor periods and the Predecessor period July 1 through July 29, 2004.

30

Historical and Pro Forma
Consolidated Condensed Statements of Operations
(Dollars in millions, except per share)

	Successor								Predecessor								Pro Forma
	Quarter Ended September 30, 2005				Two Months Ended September 30, 2004				July 1 Through July 29, 2004				Pro Forma Adjustments				Quarter Ended September 30, 2004
	(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenues		$	341.3			$	183.2			$	72.5			$	(0.1	)(a)		$	255.6
Cost of coal sales		241.2				147.6				71.0				(8.3		)(b)		210.3
Selling, general & administrative expense		14.5				6.7				6.5				(2.1		)(c)		11.1
Accretion on asset retirement obligations		2.1				1.3				0.6				—				1.9
Depreciation, depletion & amortization		53.2				26.2				8.7				7.0		(d)		41.9
Amortization of coal supply agreements		(20.5		)		(22.4		)		1.0				(11.6		)(e)		(33.0		)
Income (loss) from operations		50.8				23.8				(15.3		)		14.9				23.4
Interest expense		(15.1		)		(8.5		)		(1.7		)		(2.8		)(f)		(13.0		)
Interest income		0.2				0.2				0.1				—				0.3
Loss on termination of hedge accounting for interest rate swaps		—				—				(0.1		)		0.1		(g)		—
Loss on early debt extinguishment		—				—				(21.7		)		21.7		(g)		—
Contract settlement		—				—				(26.0		)		—				(26.0		)
Mark-to-market gain on interest rate swaps		—				(0.1		)		—				—				(0.1		)
Income (loss) before income taxes		35.9				15.4				(64.7		)		33.9				(15.4		)
Income tax (expense) benefit		(14.7		)		(5.1		)		22.4				(7.8		)(h)		9.5
Income (loss) from continuing operations		21.2				10.3				(42.3		)		26.1				(5.9		)
Income from discontinued operations, net of income tax expense		—				—				—				—				—
Net income (loss)		$	21.2			$	10.3			$	(42.3	)		$	26.1			$	(5.9	)
Basic earnings per share-net income (loss)		$	0.47			$	0.52			$	(308.70	)						$	(0.13	)
Diluted earnings per share-net income (loss)		$	0.46			$	0.52			$	(308.70	)						$	(0.13	)

(a)    Reflects the elimination of royalty income as a result of purchase accounting

(b)    Reflects an adjustment of $3.1 million of overburden removal costs reflected on depreciation, depletion and amortization as a result of purchase accounting, $1.4 million of elimination of actuarial losses on pension and other postretirement benefits as a result of purchase accounting and $3.8 million elimination of additional costs due to coal inventories written up to fair value in purchase accounting.

(c)    Reflects an adjustment of $0.2 million for expense arising from a management incentive plan eliminated when RAG American Coal holding, Inc. was acquired by Foundation Coal Corporation, $0.1 million of elimination of actuarial losses on pensions, other postretirement benefits and black lung benefits as a result of purchase accounting and an adjustment of $1.8 million for the cost of a one-time bonus awarded to certain employees in connection with the sale of RAG American Coal Holding, Inc.

(d)   Reflects increased depreciation, depletion and amortization, primarily cost depletion on mineral rights, as a result of purchase accounting.

(e)    Reflects net credit to amortization of coal supply agreements as a result of purchase accounting.

(f)    Reflects adjustment to interest expense based on capital structure put in place by the acquisition.

(g)    Reflects adjustments to eliminate debt extinguishment charges and income from discontinued operations arising from sale of the Colorado Business Unit.

(h)   Represents the tax effect of the pro forma adjustments computed such that the pro forma income tax benefit is recognized at the effective income tax rate recorded in the Successor period of 2004.

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Historical quarter ended September 30, 2005 compared to pro forma quarter ended September 30, 2004

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

Revenues

	Successor			Pro Forma
	Quarter Ended			Quarter Ended
	September 30,			September 30,			Increase (Decrease)
	2005			2004			Amount			Percent
	(Unaudited, in millions, except per ton data)
Coal sales		$	333.5		$	251.2		$	82.3		32.8	%
Other revenue		7.8			4.4			3.4			77.3	%
Total revenues		$	341.3		$	255.6		$	85.7		33.5	%
Tons sold		17.9			16.1			1.8			11.2	%
Coal sales realization per ton sold		$	18.66		$	15.56		$	3.10		19.9	%

Coal sales revenues for the quarter ended September 30, 2005 increased by 32.8% compared to the pro forma coal sales revenues for the quarter ended September 30, 2004 as a result of an 11.2% increase in tons sold and a 19.9% increase in average coal sales realization per ton.

Coal sales volumes in Northern Appalachia increased by 0.6 million tons (21%) as a result of increased production from both Cumberland and Emerald mines. During the third quarter of 2004 production from the Emerald mine was reduced due to adverse mining conditions experienced while mining the last portion of a longwall panel prior to a scheduled longwall move that occurred in the fourth quarter of 2004. Coal sales volumes in Central Appalachia increased by 0.4 million tons (21%) primarily due to higher shipments of purchased coal utilized on a steam coal contract to increase the availability of our production for sale to higher margin industrial markets plus additional volumes of coal purchased from an independent synfuel operation. Production was comparable between the two periods as higher production at the Kingston and Pioneer/Pax complexes offset reduced production at the Laurel Creek complex and from the Rockspring mine. The Pax surface mine has been increasing its production as the mine becomes more fully developed. The Pax mine, which replaces the Simmons Fork mine that depleted its reserves in 2004, produced at an annualized rate of 0.7 million tons during the third quarter of 2005. When fully developed in 2006, it is expected to produce approximately 1 million tons per year. Coal sales volumes in the Powder River Basin increased by 0.9 million tons (8%) to a record quarterly shipment level of 11.5 million tons despite ongoing maintenance to the UP/BNSF joint line, a rail line that we utilize to ship coal. During the third quarter of 2004, we experienced less than expected levels of rail service in the Powder River Basin. The repair program on the joint line is expected to impact rail service through November 2005. Coal sales volumes from the Illinois Basin increased by 0.1 million tons (21%) reflecting shipments made to fulfill new contract obligations. Purchased coal activities by our trading group decreased by approximately 0.2 million tons, compared to the comparable quarter of the prior year, due to the timing of purchased coal transactions.

Coal sales realization per ton sold in Northern and Central Appalachia increased by 25% and 31%, respectively, in 2005 due to substitution of higher priced contracts which took effect in late 2004 and early 2005 for lower priced contracts that expired. An additional factor in Northern Appalachia was higher coal quality premiums for sulfur content as a result of record prices for sulfur dioxide allowances and lower sulfur content of shipped coal. In the Powder River Basin, coal sales realizations per ton declined by 3% due to the expiration at the end of 2004 of higher priced contracts signed during the 2001 market increase, partly offset by higher sulfur premiums. The weighted average coal sales realization per ton sold of $18.66 for the third quarter of 2005 also benefited from a larger proportion of higher priced Northern Appalachia and Central Appalachia tons sold relative to the lower priced tons from the Powder River Basin.

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Other revenues for the quarter ended September 30, 2005 increased by $3.4 million compared to the pro forma other revenues for the quarter ended September 30, 2004. The increase was mainly due to charges totaling $4.1 million during the 2004 period for settlement of future coal sales commitments that did not recur in 2005.

Costs and Expenses

	Successor				Pro Forma
	Quarter Ended September 30,				Quarter Ended September 30,				Increase (Decrease)
	2005				2004				Amount			Percent
	(Unaudited, in millions)
Cost of coal sales (excludes depreciation, depletion and amortization		$	241.2			$	210.3			$	30.9		14.7	%
Selling, general and administrative expenses (excludes depreciation, depletion and amortization)		14.5				11.2				3.3			29.5	%
Accretion on asset retirement obligations		2.1				1.9				0.2			10.5	%
Depreciation, depletion and amortization		53.2				41.9				11.3			27.0	%
Amortization of coal supply agreements		(20.5		)		(33.1		)		12.6			38.1	%
Total costs and expenses		$	290.5			$	232.2			$	58.3		25.1	%

Cost of coal sales.The cost of coal sales for the quarter ended September 30, 2005 increased from the pro forma cost of coal sales for the quarter ended September 30, 2004 due to: (a) increases in labor costs as a result of both compensation increases and hiring of additional personnel ($3.6 million); (b) increases in many categories of materials and services as a result of significantly higher commodity prices particularly for steel products and diesel fuel ($14.7 million); (c) increases in royalties and coal production taxes as a result of higher revenues ($7.9 million); (d) increases in purchased coal costs as a result of higher volumes and prices ($7.2 million); partly offset by additional credits to work-in process inventory for uncovered coal ($2.9 million). Cost of coal sales per ton were $13.50 for the quarter ended September 30, 2005 compared to a pro forma figure of $13.00 for the quarter ended September 30, 2004, an increase of 3.8%.

Selling, general and administrative expenses.Selling, general and administrative expenses for the quarter ended September 30, 2005 totaled $14.5 million compared to pro forma expense of $11.2 million for the quarter ended September 30, 2004. Year-over-year increases are due to additional expenses incurred in the areas of: (a) directors and officers’ insurance premiums ($0.2 million), (b) audit fees, including Sarbanes Oxley 404 compliance, ($0.8 million), (c) information technology costs ($0.4 million), (d) health care costs ($0.7 million); (e) non-cash stock compensation expense ($0.3 million), (f) various miscellaneous administrative expenses ($0.5 million) and (g) professional services fees and printing costs ($1.2 million), associated with the secondary stock offering completed in September 2005, partly offset by lower legal fees ($0.8 million).

Accretion on asset retirement obligation.Accretion on asset retirement obligation is a component of accounting for asset retirement obligations under SFAS No. 143. Accretion represents the increase in the asset retirement liability to reflect the change in the liability for the passage of time. Higher accretion expense in the quarter ended September 30, 2005 was attributable to increased production volumes particularly in the Powder River Basin.

Depreciation, depletion and amortization.Depreciation, depletion and amortization includes depreciation of plant and equipment, cost depletion of amounts assigned to coal lands and mining rights and amortization of mine development costs and leasehold improvements. Expense increased in the quarter ended September 30, 2005 compared to the pro forma expense for the quarter ended September 30, 2004 due to higher cost depletion ($5.3 million), resulting from a combination of increased

33

production and purchase accounting adjustments subsequent to September 30, 2004 which increased depletion of purchase accounting values assigned to partially and fully uncovered coal at the Powder River Basin surface mines, and higher depreciation and amortization ($6.0 million) due to capital additions to plant & equipment during the fourth quarter of 2004 and the first nine months of 2005 and higher production at the Northern Appalachia mines where longwall equipment is depreciated on a units of production basis.

Coal supply agreement amortization.Application of purchase accounting resulted in recognition of a significant liability for below market priced coal supply agreements as well as a significant asset for above market priced coal supply agreements, both in relation to market prices at the acquisition date. Amortization of the liability for below market priced coal supply agreements during the quarter ended September 30, 2005 totals $26.7 million of credit to expense. Amortization of the asset for above market priced coal supply agreements during the same period totals $6.2 million of charges to expense. The decrease in the net credit for amortization of coal supply agreements compared to the pro forma amount for the quarter ended September 30, 2004 is primarily due to reduced amortization of below market priced coal supply agreements due to the expiration of lower priced contracts in Northern and Central Appalachia.

Segment Analysis

	Successor			Pro Forma
	Quarter Ended September 30,			Quarter Ended September 30,			Increase (Decrease)
	2005			2004			Tons/$			Percent
	(Unaudited, in millions)
Powder River Basin
Tons sold		11.5			10.6		0.9				8.5	%
Average sales realization per ton		$	7.46		$	7.67	$	(0.21	)		(2.7	)%
Revenues		$	86.0		$	81.3	$	4.7			5.8	%
Income from operations		$	6.9		$	4.8	$	2.1			43.8	%
Northern Appalachia
Tons sold		3.5			2.9		0.6				20.7	%
Average sales realization per ton		$	34.39		$	27.44	$	6.95			25.3	%
Revenues		$	120.7		$	80.7	$	40.0			49.6	%
Income from operations		$	45.8		$	26.7	$	19.1			71.5	%
Central Appalachia
Tons sold		2.3			1.9		0.4				21.1	%
Average sales realization per ton		$	45.66		$	34.85	$	10.81			31.0	%
Revenues		$	108.8		$	62.6	$	46.2			73.8	%
Income from operations		$	10.8		$	5.1	$	5.7			111.8	%

Powder River Basin—Income from operations for the quarter ended September 30, 2005 was $6.9 million. The pro forma income from operations for the quarter ended September 30, 2004 was $4.8 million. The increase in operating income is primarily due to higher tons sold of 0.9 million partly offset by lower average per ton sales realizations as a result of the expiration of several above market contracts at year-end 2004. Cost of coal sales per ton sold decreased approximately 5% year over year as fixed operating costs were spread over more tons shipped.

Northern Appalachia—Income from operations for the quarter ended September 30, 2005 was $45.8 million compared with pro forma income from operations of $26.7 million for the quarter ended September 30, 2004. The significant improvement is primarily due to increased revenues of $40.0 million resulting from a 21% increase in tons sold and a 25% increase in average sales realization per ton. Production and shipments increased from both Cumberland and Emerald mines during the third quarter

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of 2005. During the third quarter of 2004 production from the Emerald mine was reduced due to adverse mining conditions experienced while mining the last portion of a longwall panel prior to a scheduled longwall move that occurred in the fourth quarter of 2004. During the third quarter of 2004, the Cumberland mine experienced periodic hard cutting on the longwall face and lost several shifts of longwall production due to an inability to load barges because of high river levels brought on by the rains of hurricane Ivan. Higher revenues were partly offset by increases in labor and employee benefit costs ($1.7 million), materials and supplies ($3.2 million), depreciation depletion and amortization ($3.0 million), insurance premiums ($0.3 million), charged in selling, general and administrative ($0.1 million) and a reduced credit for amortization of coal supply agreements ($12.2 million). Cost of coal sales per ton decreased approximately 10% year over year.

Central Appalachia—Income from operations for the quarter ended September 30, 2005 was $10.8 million compared with pro forma operating income of $5.1 million for the quarter ended September 30, 2004. Revenues increased by $46.2 million primarily due to a 21% increase in tons sold and a 31% increase in average sales realizations per ton. Tons sold increased due to higher production from the Kingston, and Pax mines partly offset by lower production from the Pioneer and Laurel Creek mines. Higher revenues were partly offset by increased expenses for: (a) labor and fringe benefits ($2.1 million); (b) materials and supplies, led by increases for roof control materials and diesel fuel ($8.9 million); (c) purchased coal ($13.7 million); (d) royalties and severance taxes driven by higher sales revenues ($6.1 million); (e) depreciation, depletion and amortization ($2.5 million); and (f) amortization of coal supply agreements, representing a smaller net credit due to the expiration of lower priced sales contracts valued in the purchase accounting ($5.7 million). Cost of coal sales per ton increased approximately 20% year over year.

Interest Expense, Net

	Successor				Pro Forma
	Quarter Ended				Quarter Ended
	September 30,				September 30,				Increase (Decrease)
	2005				2004				Amount			Percent
	(Unaudited, in millions)
Interest expense—debt related		$	(11.0	)		$	(10.1	)		$	0.9		8.9	%
Interest expense—amortization of deferred financing fees		(1.5		)		(0.3		)		1.2			400.0	%
Interest expense—surety bond and letter of credit fees		(2.6		)		(2.6		)		—			—	%
Interest income		0.2				0.3				0.1			33.3	%
Interest expense, net		$	(14.9	)		$	(12.7	)		$	2.2		17.3	%

Debt related interest expense for the quarter ended September 30, 2005 was higher than the pro forma debt related interest expense for quarter ended September 30, 2004 due to: (a) an approximate 180 basis point increase in the interest rate on variable rate debt and (b) an additional month of imputed interest charges that began in August 2004. These factors were partly offset by the impact of repaying approximately $39 million of variable rate debt from cash on hand at December 31, 2004. The remaining portion of the $85 million prepayment made on December 31, 2004 was funded by proceeds from the Initial Public Offering (“IPO”) and has been considered in calculating the pro forma interest expense for the quarter ended September 30, 2004. Amortization of deferred financing fees for the quarter ended September 30, 2005 increased from the pro forma amortization of deferred financing fees for the corresponding prior year quarter due to a charge-off of deferred financing fees because of a prepayment of $20 million of bank term debt on August 4, 2005. Surety bond and letter of credit fees were comparable between the two quarters.

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Income Tax (Expense) Benefit

	Successor				Pro Forma
	Quarter Ended				Quarter Ended
	September 30,				September 30,			Increase (Decrease)
	2005				2004			Amount			Percent
	(Unaudited, in millions)
Income tax (expense) benefit		$	(14.7	)		$	9.5		$	24.2		254.7	%

For the quarter ended September 30, 2005, income taxes are provided at an effective rate of 40.9% based on projected full year taxable income and projected full year temporary differences. We are providing a full valuation allowance against deferred tax assets attributable to AMT tax credits which has the effect of significantly increasing the effective book income tax rate. For the quarter ended September 30, 2004, pro forma income tax benefit was recognized at an effective rate of approximately 62% which is the combined mathematical result of recognizing pro forma income tax benefits on the pro forma loss from continuing operations for the period July 1 through July 29, 2004 at an effective income tax rate of 48.3% and recognizing income tax expense for the two month operating period ended September 30, 2004 at the same effective income tax rate of 48.3%. The prior year effective income tax rate of 48.3% is the same rate used to provide income taxes on the Successor’s pre-tax income for the five month operating period ended December 31, 2004.

Nine months ended September 30, 2005—Successor compared to period January 1 through July 29, 2004—Predecessor and period February 9 (date of formation) through September 30, 2004 (two month operating period)—Successor

As previously described there are significant differences in the basis of financial reporting between the Successor and Predecessor periods as a result of the purchase of RAG American Coal Holding, Inc. by Foundation Coal Corporation on July 30, 2004, and the resultant application of purchase accounting to the assets and liabilities acquired. The Successor reported income from continuing operations of $60.3 million for the nine months ended September 30, 2005 whereas the Predecessor reported a loss from continuing operations of $90.6 million for period January 1 through July 29, 2004 and the Successor reported income from continuing operations of $10.3 million for the two month operating period ended September 30, 2004.

During the period January 1 through July 29 the Predecessor incurred approximately $26.7, net of income taxes, of non-cash charges related to termination of hedge accounting for interest rate swaps, partly offset by a net mark-to-market gain on the interest rate swaps The predecessor also incurred charges for early extinguishment of debt of $18.8 million, net of income taxes and a coal contract settlement of $16.5 million, net of income taxes. These one-time charges total $62.0 million, net of income taxes. These charges in combination with below normal coal production from our Northern Appalachia mines were the primary reason for the significant loss from continuing operations.

During the nine months ended September 30, 2005, the Successor achieved stronger production and tons sold, enjoyed significantly higher per ton sales realizations and received the benefit of a net credit from amortization of coal supply agreements, reflecting amortization of a liability established for below market contracts in purchase accounting. Year-over-year increases in cost of coal sales, selling, general and administrative expenses and depreciation, depletion and amortization were more than absorbed by higher coal sales revenues. The operating trends discussed in the following section, Historical nine months ended September 30, 2005 compared to pro forma nine months ended September30, 2004, also apply to comparisons of the two Successor periods and the Predecessor period January 1 through July 29, 2004.

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Historical and Pro Forma
Consolidated Condensed Statements of Operations
(Dollars in millions, except per share)

	Successor								Predecessor								Pro Forma
	Nine Months Ended September 30, 2005				Two Months Ended September 30, 2004				January 1 Through  July 29, 2004				Pro Forma Adjustments				Nine Months Ended September 30, 2004
	(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Revenues		$	976.3			$	183.2			$	551.0			$	(0.9	)(a)		$	733.3
Cost of coal sales		697.8				147.6				484.5				(31.3		)(b)		600.8
Selling, general & administrative expense		35.3				6.7				27.4				(4.7		)(c)		29.4
Accretion on asset retirement obligations		6.2				1.3				4.0				0.6		(d)		5.9
Depreciation, depletion & amortization		160.6				26.2				61.2				58.0		(e)		145.4
Amortization of coal supply agreements		(67.0		)		(22.4		)		8.8				(92.6		)(f)		(106.2		)
Income (loss) from operations		143.4				23.8				(34.9		)		69.1				58.0
Interest expense		(43.8		)		(8.5		)		(18.0		)		(15.0		)(g)		(41.5		)
Interest income		0.7				0.2				1.3				—				1.5
Loss on termination of hedge accounting for interest rate swaps		—				—				(48.9		)		48.9		(h)		—
Loss on early debt extinguishment										(21.7		)		21.7		(h)
Contract settlement										(26.0		)						(26.0		)
Mark-to-market gain on interest rate swaps		—				(0.1		)		5.8				(5.8		)(h)		(0.1		)
Income (loss) before income taxes		100.3				15.4				(142.4		)		118.9				(8.1		)
Income tax (expense) benefit		(40.0		)		(5.1		)		51.8				(40.7		)(i)		6.0
Income (loss) from continuing operations		60.3				10.3				(90.6		)		78.2				(2.1		)
Income from discontinued operations, net of income tax expense		—				—				23.1				(23.1		)(h)		—
Net income (loss)		$	60.3			$	10.3			$	(67.5	)		$	55.1			$	(2.1	)
Basic earnings per share-net income(loss)		$	1.35			$	0.52			$	(492.38	)						$	(0.05	)
Diluted earnings per share-net income(loss)		$	1.31			$	0.52			$	(492.38	)						$	(0.05	)

(a)Reflects the elimination of royalty income as a result of purchase accounting.

(b)Reflects an adjustment of $21.4 million of overburden removal costs reflected on depreciation, depletion and amortization as a result of purchase accounting and $9.9 million of elimination of actuarial losses on pension and other postretirement benefits as a result of purchase accounting.

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(c)Reflects an adjustment of $2.4 million for expense arising from a management incentive plan eliminated when RAG American Coal holding, Inc. was acquired by Foundation Coal Corporation, $0.4 million of elimination of actuarial losses on pensions, other postretirement benefits and black lung benefits as a result of purchase accounting and an adjustment of $1.8 million for the cost of a one-time bonus awarded to certain employees in connection with the sale of RAG American Coal Holding, Inc.

(d)Reflects accretion expense on the additional asset retirement obligation recognized in purchase accounting.

(e)Reflects increased depreciation, depletion and amortization, primarily cost depletion on mineral rights, as a result of purchase accounting.

(f)Reflects net credit to amortization of coal supply agreements as a result of purchase accounting.

(g)Reflects adjustment to interest expense based on capital structure put in place by the acquisition.

(h)Reflects adjustments to eliminate debt extinguishment charges and income from discontinued operations arising from sale of the Colorado Business Unit.

(i)Represents the tax effect of the pro forma adjustments computed such that the pro forma income tax benefit is recognized at the effective income tax rate recorded in the Successor period of 2004.

Historical nine months ended September 30, 2005 compared to pro forma nine months ended September 30, 2004

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

Revenues

	Successor			Pro Forma
	Nine Months Ended			Nine Months Ended
	September 30,			September 30,			Increase (Decrease)
	2005			2004			Amount			Percent
	(Unaudited, in millions, except per ton data)
Coal sales		$	958.0		$	725.3		$	232.7		32.1	%
Other revenue		18.3			8.0			10.3			128.8	%
Total revenues		$	976.3		$	733.3		$	243.0		33.1	%
Tons sold		51.3			47.4			3.9			8.2	%
Coal sales realization per ton sold		$	18.68		$	15.30		$	3.38		22.1	%

Coal sales revenues for the nine months ended September 30, 2005 increased by 32.1% compared to the pro forma coal sales revenues for the nine months ended September 30, 2004 as a result of an 8.2% increase in tons sold and a 22.1% increase in average coal sales realization per ton.

Coal sales volumes in Northern Appalachia increased by 2.3 million tons (29%) primarily as a result of increased production from the Cumberland Mine. Coal sales volumes in Northern Appalachia in the nine months of 2004 were decreased by interruptions to operations caused by the idling of the Cumberland Mine longwall for approximately eleven weeks during the prior year period, an extended duration longwall move at the Emerald Mine during the first quarter of 2004 and adverse mining conditions at Emerald during the third quarter of 2004. The scheduled longwall move at Emerald during the second quarter of 2005 was of shorter duration than the move during the first quarter of 2004. From February 17 through May 7, 2004, the longwall mining equipment at the Cumberland Mine was idled due to alleged violations

38

resulting from a revised interpretation of regulations issued by MSHA regarding the ventilation system at the Mine. In response, we revised the ventilation system to minimize any future business disruption and on May 7, 2004 we resumed longwall operations at the Cumberland Mine. There was no interruption of production due to ventilation issues during the first nine months of 2005.

Coal sales volumes in Central Appalachia increased by 0.8 million tons (14%) due to higher production at the Kingston, Rockspring and Pax Mines plus increased sales of purchased coal partly offset by lower production from the Laurel Creek complex. Production capacity at Kingston was expanded in early 2005 by the addition of a continuous miner unit. Production from the Pioneer/Pax surface mine complex increased the prior year as the closure of the Simmons Fork Mine was more than offset by production from the developing Pax Mine. The Pax Mine produced at an annualized rate of 0.7 million tons during the third quarter of 2005. When fully developed in 2006, it is expected to produce approximately one million tons of coal per year. Coal sales volumes in the Powder River Basin increased by 1.2 million tons (4%) as a higher level of committed sales was partly offset by worse than expected levels of rail service brought on by unusually inclement weather during May and resultant repairs to the rail lines, particularly the UP/BNSF joint line south of Gillette. The repair program on the joint line is expected to impact rail service through November 2005. However, our Powder River Basin mines shipped at a record level in the third quarter of 2005 and made up part of the shortfall from the second quarter. Coal sales volumes from the Illinois Basin increased by 0.2 million tons (15%) reflecting shipments made to fulfill new contract obligations. Purchased coal activities by our trading group decreased by approximately 0.6 million tons, compared to the comparable nine months of the prior year due to the timing of purchased coal transactions.

Coal sales realization per ton sold in Northern and Central Appalachia increased by 27% and 33%, respectively, in 2005 due to substitution of higher priced contracts which took effect in late 2004 and early 2005 for lower priced contracts that rolled off. An additional factor in Northern Appalachia was higher coal quality premiums for sulfur content as a result of record prices for sulfur dioxide allowances and lower sulfur content of shipped coal. In the Powder River Basin, coal sales realizations per ton declined by 2% due to the expiration at the end of 2004 of higher priced contracts signed during the 2001 market increase, partly offset by higher sulfur premiums. The weighted average coal sales realization per ton sold of $18.68 for the nine months of 2005 also benefited from a larger proportion of higher priced Northern Appalachia and Central Appalachia tons sold relative to the lower priced tons from the Powder River Basin.

All of our 2005 projected production is committed and priced. As of October 25, 2005, uncommitted and unpriced tonnage was 5%, 26% and 51% of planned production in 2006, 2007 and 2008, respectively. Eastern coals account for the majority of uncommitted tonnage as 12%, 36% and 62% of the Company’s planned eastern production remains uncommitted and unpriced in 2006, 2007 and 2008, respectively.

In 2006 through 2008, Foundation Coal expects coal production within the following ranges:

Expected Coal Production (Millions of Tons)

	2006	2007	2008
East	21.5—23.5	21.5—23.5	21.5—23.5
West	49.0—51.0	49.0—51.0	54.0—56.0
Total Consolidated	70.5—74.5	70.5—74.5	75.5—79.5

Based on its committed and priced planned production as of October 25, 2005, the Company expects its committed and priced production from its Eastern mines, encompassing Northern Appalachia, Central Appalachia and the Illinois Basin, to realize in the range of $39.32 to $39.72 per ton in 2006. The Company also expects its committed and priced production from the Powder River Basin to realize in the range of $7.90 to $8.10 per ton in 2006. These ranges of expected per ton average realizations include forecast sulfur

39

dioxide and btu premiums based on contract terms, projected coal qualities and historical realized premiums. The above tonnages and expected per ton average realizations exclude coal that may be purchased and resold during 2006.

Other revenues for the nine months ended September 30, 2005 increased by $10.3 million compared to the pro forma other revenues for the nine months ended September 30, 2004. The increase was partly due to charges totaling $7.9 million during the 2004 period for settlement of future coal sales commitments compared to $0.7 million of such charges in 2005, combined with higher revenues for synfuel fees ($2.3 million) and higher coal bed methane sales ($1.2 million) during the 2005 period.

Costs and Expenses

	Successor				Pro Forma
	Nine Months Ended				Nine Months Ended
	September 30,				September 30,				Increase (Decrease)
	2005				2004				Amount			Percent
	(Unaudited, in millions)
Cost of coal sales (excludes depreciation, depletion and amortization)		$	697.8			$	600.8			$	97.0		16.1	%
Selling, general and administrative expenses (excludes depreciation, depletion and amortization)		35.3				29.4				5.9			20.1	%
Accretion on asset retirement obligations		6.2				5.9				0.3			5.1	%
Depreciation, depletion and amortization		160.6				145.4				15.2			10.5	%
Amortization of coal supply agreements		(67.0		)		(106.2		)		39.2			36.9	%
Total costs and expenses		$	832.9			$	675.3			$	157.6		23.3	%

Cost of coal sales.The cost of coal sales for the nine months ended September 30, 2005 increased from the pro forma cost of coal sales for the nine months ended September 30, 2004 due to: (a) increases in labor costs as a result of both compensation increases and hiring of additional personnel ($26.3 million); (b) increases in many categories of materials and services as a result of significantly higher commodity prices particularly for steel products and diesel fuel ($48.8 million); (c) increases in royalties and coal production taxes as a result of higher revenues ($13.5 million); (d) increases in purchased coal costs due to both higher prices and higher volumes ($13.0 million) partly offset by additional credits to work-in-process inventory for uncovered coal ($3.4 million). Cost of coal sales per ton were $13.61 for the nine months ended September 30, 2005 compared to a pro forma figure of $12.57 for the nine months ended September 30, 2004, an increase of 8.3%.

Selling, general and administrative expenses.Selling, general and administrative expenses for the nine months ended September 30, 2005 totaled $35.3 million compared to pro forma expense of $29.4 million for the nine months ended September 30, 2004. Year-over-year increases in the first nine months of 2005 are due to additional expenses incurred in the areas of: (a) directors and officers’ insurance premiums ($1.1 million), (b) audit fees, including Sarbanes Oxley 404 compliance, ($1.8 million), (c) information technology costs ($0.8 million), (d) salaries and cash incentive compensation ($2.1 million) (e) non-cash stock compensation expense ($0.5 million), (f) various miscellaneous administrative expenses ($0.5 million) and (g) professional services fees and printing costs ($1.2 million), associated with the secondary stock offering completed in September 2005, partly offset by lower legal fees ($1.6 million) and reduced health care costs ($.7 million).

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Accretion on asset retirement obligation.Accretion on asset retirement obligation is a component of accounting for asset retirement obligations under SFAS No. 143. Accretion represents the increase in the asset retirement liability to reflect the change in the liability for the passage of time. Higher accretion expense in the quarter ended September 30, 2005 was attributable to increased production volumes.

Depreciation, depletion and amortization.Depreciation, depletion and amortization includes depreciation of plant and equipment, cost depletion of amounts assigned to coal lands and mining rights and amortization of mine development costs and leasehold improvements. Expense increased in the nine months ended September 30, 2005 compared to the pro forma expense for the nine months ended September 30, 2004 due to higher cost depletion ($8.9 million) resulting from a combination of increased production and purchase accounting adjustments subsequent to September 30, 2004 which increased depletion of purchase accounting values assigned to partially and fully uncovered coal at the Powder River Basin surface mines, and higher depreciation and amortization ($6.2 million) due to capital additions to plant & equipment during the fourth quarter of 2004 and the first nine months of 2005 and higher production at the Northern Appalachia mines where longwall equipment is depreciated on a units of production basis.

Coal supply agreement amortization.Application of purchase accounting resulted in recognition of a significant liability for below market priced coal supply agreements as well as a significant asset for above market priced coal supply agreements, both in relation to market prices at the acquisition date. Amortization of the liability for below market priced coal supply agreements during the nine months ended September 30, 2005 totals $86.3 million of credit to expense. Amortization of the asset for above market priced coal supply agreements during the same period totals $19.3 million of charges to expense. The decrease in the net credit for amortization of coal supply agreements compared to the pro forma amount for the nine months ended September 30, 2004 is primarily due to reduced amortization of below market priced coal supply agreements due to the expiration of lower priced contracts in Northern and Central Appalachia.

Segment Analysis

	Successor			Pro Forma
	Nine Months Ended September 30,			Nine Months Ended September 30,			Increase (Decrease)
	2005			2004			Tons/$			Percent
	(Unaudited, in millions)
Powder River Basin
Tons sold		32.4			31.2		1.2				3.8	%
Average sales realization per ton		$	7.38		$	7.55	$	(0.17	)		(2.3	)%
Revenues		$	240.7		$	237.2	$	3.5			1.5	%
Income from operations		$	10.2		$	6.1	$	4.1			67.2	%
Northern Appalachia
Tons sold		10.3			8.0		2.3				28.8	%
Average sales realization per ton		$	34.45		$	27.14	$	7.31			26.9	%
Revenues		$	358.9		$	217.3	$	141.6			65.2	%
Income from operations		$	127.7		$	60.5	$	67.2			111.1	%
Central Appalachia
Tons sold		6.7			5.9		0.8				13.5	%
Average sales realization per ton		$	45.00		$	33.97	$	11.03			32.5	%
Revenues		$	308.2		$	197.6	$	110.6			56.0	%
Income from operations		$	43.0		$	29.1	$	13.9			47.8	%

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Powder River Basin—Income from operations for the nine months ended September 30, 2005 was $10.2 million compared to pro forma income from operations of $6.1 million for the nine months ended September 30, 2004. The increase in operating income is primarily due to higher revenues as increased shipments and higher coal quality premiums were partly offset by lower sales realizations per ton reflecting the expiration of several above market contracts at year end 2004. Lower amortization of coal supply agreements ($16.9 million) as a result of the expiration of above market contracts was largely offset by a 4% year-over-year increase in per ton cost of coal sales and higher depreciation, depletion and amortization. During the nine months ended September 30, 2005, the Company estimates that worse than expected levels of rail service, during the second quarter, resulted in reduced shipments of approximately 1.0 million tons and reduced income from operations in the range of $0.8 million to $1.3 million.

Northern Appalachia—Income from operations for the nine months ended September 30, 2005 was $127.7 million compared to pro forma income from operations of $60.5 million for the nine months ended September 30, 2004. The significant improvement is primarily due to increased revenues of $141.6 million resulting from a 29% increase in tons sold and a 27% increase in average sales realization per ton. Production from the Cumberland Mine increased substantially during the first nine months of 2005. During the first half of 2004, Cumberland’s longwall was idle from February 17 to May 7 for reasons previously described. Emerald had longwall moves in both nine month periods, but the 2005 longwall move was of shorter duration and its impact on revenues was mitigated by shipments from inventories. Higher revenues were partly offset by increases in labor and employee benefit expenses ($17.1 million), materials and supplies ($20.1 million), coal production taxes ($2.1 million), depreciation, depletion and amortization ($5.9 million) and a reduced credit for amortization of coal supply agreements ($31.5 million). Cost of coal sales per ton decreased approximately 7% year over year.

Central Appalachia—Income from operations for the nine months ended September 30, 2005 was $43.0 million compared to pro forma operating income of $29.1 million for the nine months ended September 30, 2004. Revenues increased by $110.6 million primarily due to a 14% increase in tons sold, driven by higher production at the Kingston, Rockspring and Pax mines, and a 33% increase in average sales realizations per ton. Higher revenues were partly offset by increased expenses for: (a) labor and fringe benefits ($8.7 million); (b) materials and supplies, led by increases for roof control materials and diesel fuel ($18.6 million); (c) purchased coal ($32.8 million); (d) royalties and severance taxes driven by higher sales revenues ($9.8 million); (e) depreciation, depletion and amortization ($4.4 million); and (f) amortization of coal supply agreements, representing a smaller net credit due to the expiration of lower priced sales contracts valued in the purchase accounting ($24.0 million). Also, the pro forma operating income for the nine months ended September 30, 2004 included a $1.5 million charge for settlement of litigation. Cost of coal sales per ton increased approximately 21% year over year.

Interest Expense, Net

	Successor				Pro Forma
	Nine Months Ended September 30,				Nine Months Ended September 30,				Increase (Decrease)
	2005				2004				Amount				Percent
	(Unaudited, in millions)
Interest expense—debt related		$	(33.3	)		$	(29.9	)		$	3.4			11.4	%
Interest expense—amortization of deferred financing fees		(3.0		)		(3.8		)		(0.8		)		(21.1	)%
Interest expense—surety bond and letter of credit fees		(7.5		)		(7.8		)		(0.3		)		(3.8	)%
Interest income		0.7				1.5				0.8				53.3	%
Interest expense, net		$	(43.1	)		$	(40.0	)		$	3.1			7.8	%

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Debt related interest expense for the nine months ended September 30, 2005 was higher than the pro forma debt related interest expense for nine months ended September 30, 2004 due to: (a) about a 160 basis point increase in the interest rate on variable rate debt; (b) imputed interest charges that began in the second half of 2004 and (c) greater utilization of the revolving credit agreement. These factors were partly offset by the impact of repaying approximately $39 million of variable rate debt from cash on hand at December 31, 2004 and an additional $20 million from cash on hand at August 4, 2005. The remaining portion of the $105 million of total prepayments since July 30, 2004 was funded by proceeds from the Initial Public Offering (“IPO”) and has been considered in calculating the pro forma interest expense for the nine months ended September 30, 2004. Pro forma amortization of deferred financing fees for the nine months ended September 30, 2004 includes $1.7 million of accelerated amortization from the repayment of variable rate debt with IPO proceeds; there is $0.7 million of accelerated amortization from repayment of variable rate debt in the nine months ended September 30, 2005. The decrease in surety bond and letter of credit fees in the nine month period of 2005 is due to reductions in the amounts of these financial assurance instruments compared to the period immediately following the purchase of RAG American Coal Holding, Inc. The reduction in interest income between nine month periods is primarily due to lower cash balances available for investment in the nine months ended September 30, 2005.

Income Tax (Expense) Benefit

	Successor				Pro Forma
	Nine Months Ended September 30,				Nine Months Ended September 30,			Increase (Decrease)
	2005				2004			Amount			Percent
	(Unaudited, in millions)
Income tax (expense) benefit		$	(40.0	)		$	6.0		$	46.0		766.7	%

For the nine months ended September 30, 2005, income taxes are provided at an effective rate of 39.8% based on projected full year taxable income and projected full year temporary differences. Current tax expense, which represents taxes currently payable on operations, was approximately 29% of pre-tax income. We are providing a full valuation allowance against deferred tax assets attributable to AMT tax credits. For the nine months ended September 30, 2004, pro forma income tax expense was recognized at an effective rate of 48.3%, the same effective rate used to provide taxes on the Successor’s pre-tax income for the five months ended December 31, 2004.

Liquidity and Capital Resources

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

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

In the Predecessor periods, cash balances in excess of our day-to-day operating requirements were placed on deposit with RAG where cash balances could be aggregated to earn better investment returns. This cash on deposit was available to us on a one day turn-around. Increases in the cash on deposit with RAG have been classified under financing activities as uses of cash in the consolidated cash flow

43

statements. Decreases in cash on deposit with RAG have been classified under financing activities as cash provided.

The following is a summary of cash provided by or used in each of the indicated categories of activities during nine months ended September 30, 2005 and 2004, respectively.

	Successor				Predecessor
	Nine Months Ended				Two Months Ended				Seven Months Ended
	September 30, 2005				September 30, 2004				July 29, 2004
	(Unaudited, in millions)
Cash provided by (used in):
Operating activities—continuing operations		$	107.6			$	24.9			$	(8.0	)
Operating activities—discontinued operations		—				—				7.0
Investing activities—continuing operations		(96.8		)		(924.1		)		(50.7		)
Investing activities—discontinued operations		—				—				185.0
Financing activities—borrowings(2)		76.0				830.0				306.0
Financing activities—repayments(2)		(96.0		)		(60.0		)		(686.9		)
Financing activities—sales of equity securities		—				196.0				—
Financing activities—dividends on common stock		(449.9		)		—				—
Financing activities—other		(0.2		)		(27.7		)		—
Financing activities—pledged cash		—				—				20.0
Financing activities—on deposit with RAG(1)		—				—				233.0
Change in cash and cash equivalents		$	(459.3	)		$	39.1			$	5.4

(1)Represents the decrease in the balance of cash on deposit with RAG.

(2)The borrowings and repayments during the nine months ended September 30, 2005 in the amount of $76.0 million represent use of the Revolving Credit facility to maintain day-to-day liquidity and a $20.0 million repayment of long term debt in advance of maturity in August 2005.

(3)Cash used in investing activities by the Successor for the two months ended September 30, 2004 include $912.9 million, net of cash acquired to acquire RAG American Coal Holding, Inc. and subsidiaries from RAG Coal International AG.

Cash provided by operating activities from continuing operations increased in the nine months ended September 30, 2005 as compared to the pro forma combined results of the Successor for the two months ended September 30, 2004 and the Predecessor for the seven months ended July 29, 2004 are primarily due to higher net income from continuing operations partly offset by increases in working capital, mainly trade accounts receivable and inventories.

Cash used in investing activities for continuing operations, excluding the purchase of RAG American Coal Holding, Inc., increased in the nine months ended September 30, 2005 as compared to the combined pro forma results of the Successor for the two months ended September 30, 2004 and the Predecessor for the seven months ended July 29, 2004 due to higher capital expenditures in the 2005 period. Capital expenditures for the nine months ended September 30, 2005 totaled $102.2 million, including $42.3 million of expenditures related to the expansion of the Belle Ayr Mine in the Powder River Basin, development of the Pax surface mine and related rail loading facility in Central Appalachia, addition of a continuous mining unit to the Kingston Mine in Central Appalachia, the widening of the Emerald Mine longwall face to 1,450 feet from 1,250 feet and upgrades to the rail loading facility at Emerald. Pro forma combined

44

capital expenditures of the Successor for the two months ended September 30, 2004 and for the Predecessor for the seven months ended July 29, 2004 of $65.4 million were mainly for replacement of equipment and other expenditures necessary to sustain mine operations.

Cash used in financing activities by the Successor for the nine months ended September 30, 2005 includes the payment of $449.9 million of cash dividends, including $444.1 million of cash dividends related to the IPO that were accrued as of December 31, 2004 and paid on January 4, 2005. The remaining $5.8 million in cash dividends were a quarterly dividend of $.04 per share paid in March and June 2005 and a quarterly dividend of $0.05 per share paid in September 2005. Cash used in financing activities by the Successor for the nine months ended September 30, 2005 also includes a $20.0 million repayment of our Senior Notes in advance of their scheduled maturity. This payment was voluntary and consistent with management’s strategy to deleverage the Company as funds are available from excess working capital generated by the business.

Cash used in financing activities of the Predecessor for the seven months ended July 29, 2004 represents repayment of all long-term debt of the Predecessor including cash prepayment penalties coupled with the settlement of the Predecessor’s interest rate swaps. These repayments utilized the proceeds from the sale of the RAG Colorado Business Unit, cash previously reported as cash on deposit with Parent, cash pledged and $306.0 of cash advanced by RAG Coal International AG that the Predecessor repaid from a portion of the cash acquisition price that Foundation Coal paid to RAG.

The cash acquisition price including transaction costs of $912.9 million paid by Foundation for RAG American Coal Holding, Inc and subsidiaries, net of cash acquired, was funded by $830.0 million of Successor long-term debt, consisting of $470.0 of senior secured term Loan B, $300.0 million of senior unsecured long-term notes, $60.0 of drawings under the $350.0 million revolving credit facility and $196.0 million of cash equity contributed by the shareholders. The $60.0 million of drawings under the revolving credit facility were fully repaid on the first business day after the Transactions utilizing cash of the acquired subsidiaries. The $27.7 million other cash used in financing activities was for costs associated with arranging long-term debt used to fund the acquisition which are accounted for as deferred financing fees and amortized over the lives of the senior secured Loan B and the senior unsecured long-term notes.

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

As of September 30, 2005, we have outstanding $665.0 million in aggregate indebtedness, with an additional $165.0 million of available borrowings under our revolving credit facility (after giving effect to $185.0 million of letters of credit outstanding as of September 30, 2005). Our liquidity requirements will be significant, primarily due to debt service requirements. Of the $43.1 million of interest expense, net of interest income, for the nine months ended September 30, 2005, approximately $39.0 million has or will be paid in cash.

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

45

As a regular part of our business, we review opportunities for, and engage in discussions and negotiations concerning, the acquisition of coal mining assets, including LBA bids, and acquisitions of, or combinations with, coal mining companies. When we believe that these opportunities are consistent with our growth plans and our acquisition criteria, we will make bids or proposals and/or enter into letters of intent and other similar agreements, which may be binding or nonbinding, that are customarily subject to a variety of conditions and usually permit us to terminate the discussions and any related agreements if, among other things, we are not satisfied with the results of our due diligence investigation. Any acquisition opportunities we pursue could materially affect our liquidity and capital resources and may require us to incur indebtedness, seek equity capital or both.

Covenant Compliance

We believe that our Senior Credit Facilities and the indenture governing our outstanding 71¤4% Senior Notes are material agreements, that the covenants are material terms of these agreements and that information about the covenants is material to an investor’s understanding of our financial condition and liquidity. The breach of covenants in the Senior Credit Facilities that are tied to ratios based on Adjusted EBITDA, as defined below, could result in a default under the Senior Credit Facilities and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under our indenture. Additionally, under the Senior Credit Facilities and indenture, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

Covenant levels and Adjusted EBITDA ratios for the four quarters ended September 30, 2005 are as follows:

	Covenant Level		Adjusted EBITDA September 30, 2005 Ratios
Senior Credit Facilities(1)
Minimum Adjusted EBITDA to cash interest ratio		1.875X		5.2X
Maximum total debt to Adjusted EBITDA ratio		5.75X		2.5X
Indenture(2)
Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions		2.0X		5.2X

(1)The Senior Credit Facilities require us to maintain an Adjusted EBITDA to cash interest ratio starting at a minimum of 1.75x and a total debt to Adjusted EBITDA ratio starting at a maximum of 6.0x in each case for the most recent four quarter period. Failure to satisfy these ratio requirements would constitute a default under the Senior Credit Facilities. If lenders under the Senior Credit Facilities failed to waive any such default, repayment obligations under the Senior Credit Facilities could be accelerated, which would also constitute a default under the indenture.

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

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Adjusted EBITDA is defined as EBITDA further adjusted to exclude non-recurring items, non-cash items and other adjustments permitted in calculating covenant compliance under the indenture, and the Senior Credit Facilities, as shown in the table below. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with financing covenants.

					Deduct:				Deduct:				Add:
	Four Quarters Ended December 31, 2004				Period January 1 Through July 29, 2004				Period February 9 (date of formation) Through September 30, 2004				Nine Months Ended September 30, 2005				Four Quarters Ended September 30, 2005
	(Unaudited, in millions)
EBITDA(1)		$	15.6			$	(55.7	)		$	27.4			$	237.1			$	281.0
Non-cash charges (income)(2)		70.4				79.1				5.2				(8.9		)		(22.8		)
Unusual or non-recurring items(3)		35.9				32.1				0.8				—				3.0
Cumberland Mine force majeure(4)		31.1				31.1				—				—				—
Other adjustments(5)		(0.5		)		(1.4		)		(0.4		)		0.6				1.9
Adjusted EBITDA		$	152.5			$	85.2			$	33.0			$	228.8			$	263.1

(1)EBITDA is calculated in the table below:

					Deduct:				Deduct:				Add:
	Four Quarters Ended December 31, 2004				Period January 1 Through July 29, 2004				Period February 9 (date of formation) Through September 30, 2004				Nine Months Ended September 30, 2005				Four Quarters Ended September 30, 2005
	(Unaudited, in millions)
Income (loss) from continuing operations		$	(76.1	)		$	(90.6	)		$	10.3			$	60.3			$	64.5
Interest expense		44.7				18.0				8.5				43.8				62.0
Interest income		(2.3		)		(1.3		)		(0.2		)		(0.6		)		(1.4		)
Income tax expense (benefit)		(38.2		)		(51.8		)		5.1				40.0				48.5
Depreciation, depletion and amortization		146.0				61.2				26.2				160.6				219.2
Amortization of coal supply agreements		(58.5		)		8.8				(22.5		)		(67.0		)		(111.8		)
EBITDA		$	15.6			$	(55.7	)		$	27.4			$	237.1			$	281.0

47

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

					Deduct:			Deduct:			Add:
	Four Quarters Ended December 31, 2004				Period January 1 Through July 29, 2004			Period February 9 (date of formation) Through September 30, 2004			Nine Months Ended September 30, 2005				Four Quarters Ended September 30, 2005
	(Unaudited, in millions)
Interest rate swaps(a)		$	42.6			$	43.1		$	0.1		$	—			$	(0.6	)
Early extinguishment of debt		21.7				21.7			—			—				—
Profit in inventory(b)		3.8				—			3.8			—				—
Overburden removal included in depreciation, depletion and amortization(c)		(15.3		)		—			—			(16.1		)		(31.4		)
Accretion on asset retirement obligations/reclamation expense		7.3				4.0			1.3			6.2				8.2
Stock based compensation expense(d)		—				—			—			1.0				1.0
Asset impairment charges		—				—			—			—				—
Amortization included in benefits expense(e)		10.3				10.3			—			—				—
Total		$	70.4			$	79.1		$	5.2		$	(8.9	)		$	(22.8	)

(a)Includes $48.9 million of expense resulting in the four quarters ended December 31, 2004 from loss on termination of hedge accounting for interest rate swaps less $6.3 million mark-to-market adjustment.

(b)Represents incremental cost of sales recorded in the period arising from the preliminary estimate of manufacturing profit added to inventory in purchase accounting.

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

(d)Represents an accrual for compensation expense attributable to restricted stock performance units and restricted stock awarded to certain directors.

(e)Represents the portion of pension, other postretirement and black lung expense resulting from the amortization of unrecognized actuarial losses, prior service costs and transition obligations. Unrecognized actuarial losses, prior service costs and transition obligations were eliminated when the pension, other postretirement and black lung obligations were fair valued in purchase accounting.

48

(3)We are also required by the credit agreement to adjust EBITDA, as defined above, for the following unusual (income) expense:

					Deduct:				Deduct:			Add:
	Four Quarters Ended December 31, 2004				Period January 1 Through July 29, 2004				Period February 9 (date of formation) Through September 30, 2004			Nine Months Ended September 30, 2005			Four Quarters Ended September 30, 2005
	(Unaudited, in millions)
Litigation/arbitration/contract settlements, net(a)		$	28.9			$	28.9			$	—		$	—		$	—
Transaction bonus(b)		1.8				1.8				—			—			—
Long-term incentive plan expense(c)		2.4				2.4				—			—			—
Gain on asset sales		(1.0		)		(1.0		)		—			—			—
Other(d)		3.8				—				0.8			—			3.0
Total		$	35.9			$	32.1			$	0.8		$	—		$	3.0

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

(b)Represents the cost of a one-time bonus awarded to certain employees in connection with the sale of RAG American Coal Holding, Inc.

(c)Represents the cost of a long-term incentive plan instituted by RAG American Coal Holding, Inc. in 2001 that was terminated prior to closing as required by the change in control provisions in the plan agreement. We have implemented a management equity program that will not result in a cash cost to us.

(d)Represents $2.0 million from a sponsor monitoring fee and $1.8 million from a tax allowance related to the IPO in the four quarters ended December 31, 2004.

(4)Represents the adjustment required for the estimated impact of the temporary idling of our Cumberland Mine in the first half of 2004 as a result of a revised interpretation of mine ventilation laws by MSHA. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

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

Pro-forma cash interest for the four quarters ended September 30, 2005 is calculated as follows (unaudited, in millions):

Cash interest expense for nine months ended September 30, 2005		$	37.9
Interest expense for three months ended September 30, 2005		15.0
Less:	Amortization of deferred debt issuance costs for three month period ended September 30, 2005	(1.5		)
Less:	Cash interest income for the three month period ended September 30, 2005	(0.2		)
Less:	Other non cash interest expense for three months ended September 30, 2005	(0.4		)
		$50.8

In future periods, adjustments to EBITDA that could be used to calculate compliance with the debt covenants are: (a) accretion on asset retirement obligations, (b) credits from deferral of overburden

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removal costs, (c) any non-cash expenses or charges arising as a result of the application of purchase accounting in acquisitions, (d) business optimization expenses or other restructuring charges, (e) non-cash impairment charges resulting from the application of SFAS No. 142 or SFAS No. 144, (f) amortization of intangibles pursuant to SFAS No. 141, and (g) any long term incentive plan accruals or any non-cash compensation expense realized from grants of stock appreciation or similar rights, stock options or other rights to officers, directors and employees.

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

Contractual Obligations

The following is a summary of our significant future contractual obligations by year as of December 31, 2004 updated for the repayment of $20 million of bank debt in August 2005. In addition to the amounts shown in the table, we are committed to: (a) forward contracts to purchase approximately $22.9 million of diesel fuel for 2006 delivery at our Powder River Basin mines; (b) forward contracts to purchase approximately $5.4 million of diesel fuel for 2006 delivery at our Pioneer/Pax mines in Central Appalachia; (c) purchase orders and construction contracts covering approximately $12.0 million of 2006 capital expenditures.

	2005		2006-2007			2008-2009			After 2009			Total
	(Unaudited, in millions)
Long-term debt and capital leases	$	—		$	—		$	—		$	665.0	$	665.0
Cash interest on long term debt	41.3			81.4			73.6			123.7		320.0
Cash payments for asset retirement obligations	3.7			5.6			3.5			197.0		209.8
Unconditional purchase commitments	56.0			7.4			17.2			—		80.6
Operating leases	5.8			9.8			3.5			1.1		20.2
Minimum royalties	4.0			1.0			—			—		5.0
Total	$	110.8		$	105.2		$	97.8		$	986.8	$	1,300.6

We expect to invest in the range of $150.0 to $160.0 million in capital expenditures during calendar year 2005 of which approximately $100.0 million is to maintain production and replace mining equipment. The additional $50.0 to $60.0 million is expected to be directed toward selective expansions of production and improvements in productivity. Approximately $34 million of expected 2005 capital expenditures are included in unconditional purchase commitments shown above. The remaining 2005 unconditional purchase commitments and $3 million of the 2006-2007 unconditional purchase commitments relate to forward contracts to purchase diesel fuel and explosives in normal quantities for use at our surface mines. The remaining unconditional purchase commitments, totaling $4.4 million in 2006-2007 and $17.2 million in 2008-2009, relate to a contractual commitment to purchase underground mining equipment. We expect to contribute approximately $7.7 million to our defined benefit retirement plans and to pay approximately $23.0 million of retiree health care benefits in calendar year 2005. We also expect to incur approximately $9.0 million per year for surety bond premiums and letters of credit fees. We believe that cash balances plus cash generated by operations will be sufficient to meet these obligations plus fund requirements for working capital and capital expenditures without incurring additional borrowings.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees, indemnifications and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our consolidated balance sheets. However, the underlying obligations that they secure,

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such as asset retirement obligations, self-insured workers’ compensation liabilities, royalty obligations and certain retiree medical obligations, are reflected in our consolidated balance sheets.

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

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

We had outstanding surety bonds with a total face amount of $251.8 million as of September 30, 2005, of which $229.2 million secured reclamation obligations, $10.7 million secured coal lease obligations and $9.6 million secured self-insured workers’ compensation obligations. In addition, we had $185.0 million of letters of credit in place for the following purposes: $33.4 million for workers’ compensation, including collateral for workers’ compensation bonds; $23.4 million for UMWA retiree health care obligations; $121.5 million for collateral for reclamation surety bonds, $3.0 million for minimum royalty payment obligations for a closed mine in Utah; and $3.7 million for other miscellaneous obligations. Recently, surety bond costs have increased, while the market terms under which surety bonds can be obtained have generally become less favorable to all mining companies. In the event that additional surety bonds become unavailable, we would seek to secure our obligations with letters of credit, cash deposits or other suitable forms of collateral.

Certain Trends and Uncertainties

Our revenues depend on the price at which we are able to sell our coal. The current pricing environment for United States coal is strong. Any decrease in coal prices due to, among other reasons, the supply of domestic and foreign coal, the demand for electricity and the price and availability of alternative fuels for electricity generation could adversely affect our revenues and our ability to generate cash flows. In addition, our results of operations depend on the cost of coal production. We are experiencing increased operating costs for fuel and explosives, steel products, health care, wages, salaries, contract labor, and increased interest expenses for surety bonds and letters of credit. In addition, historically low interest rates have had a negative impact on expenses related to our actuarially determined employee-related liabilities.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which replaces SFAS No. 123, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”). SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value at the grant date. SFAS No. 123R generally requires companies to measure the cost of employee services received in exchange for an award of equity instruments (such as stock options and restricted stock) based on the grant-date fair value of the award, and to recognize that cost over the period during which the employee is required to provide service (usually the vesting period of the award). FAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement

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recognition. On April 14, 2005, the Securities and Exchange Commission (“SEC”) delayed the implementation of SFAS No. 123R from its original implementation date by six months for most registrants, requiring all public companies to adopt FAS 123R no later than the beginning of the first fiscal year beginning after June 15, 2005. The impact of adopting SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123R during the prior period, the results are expected to be consistent with the pro forma disclosure under SFAS No. 123, except that forfeitures will be considered in the calculation of compensation expense under SFAS No. 123R. When adopted, the Company may elect to change the valuation method or assumptions and such changes could have a material impact on the amount of stock-based compensation the Company records.

In March 2005, the Emerging Issues Task Force reached consensus on Issue No. 04-6, Accounting for Stripping Costs in the Mining Industry (“EITF Issue 04-6”) concluding that post-production stripping costs are a component of mineral inventory costs subject to the provisions of the American Institute of Certified Public Accountants Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins, Chapter 4, Inventory Pricing, (“ARB No. 43”). The FASB ratified the EITF consensus. Based upon this consensus, post production stripping costs are considered costs of the extracted minerals under a full absorption costing system and are recognized as a component of inventory to be recognized in costs of coal sales in the same period as the revenue from the sale of the inventory. In addition, capitalization of such costs would be appropriate only to the extent inventory exists at the end of a reporting period. The guidance in this consensus will be effective for financial statements issued for the first reporting period in fiscal years beginning after December 15, 2005, with early adoption permitted. At a June EITF meeting, the Task Force modified the transition provisions of EITF Issue 04-6, indicating that companies that adopt in periods beginning after June 29, 2005 may utilize a cumulative effect adjustment approach where the cumulative effect adjustment is recorded directly to retained earnings in the year of adoption. Alternatively, a company may recognize this change in accounting by restatement of its prior-period financial statements through retrospective application. The Company expects to adopt EITF Issue 04-6 on January 1, 2006 and expects to utilize the cumulative effect adjustment approach and record an adjustment directly to retained earnings upon adoption. Historically, the Company recorded stripping costs associated with in-process production as a separate component of inventory described as deferred overburden in Note 4. At September 30, 2005, such stripping costs associated with coal that has not been extracted was $46,089. Applying the requirements of this EITF would have resulted in a maximum decrease of $46,089 in inventory with the off-set recorded to retained earnings, net of tax. The effect on the financial statements upon adoption on January 1, 2006 will depend on the balance of deferred overburden included in the Company’s inventory at December 31, 2005

The FASB issued FASB Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations” in March of 2005. FIN 47 clarifies that an entity must record a liability for a conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. This interpretation also clarifies the circumstances under which an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect this guidance to have a material impact on its financial statements.

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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Commodity Price Risk

We manage our commodity price risk for coal sales through the use of long-term coal supply agreements rather than through the use of derivative instruments. As of September 30, 2005, we had sales commitments for approximately 100% of our planned 2005 production. As of October 25, 2005, uncommitted and unpriced tonnage was 5%, 26% and 51% of planned production in 2006, 2007 and 2008, respectively. Eastern coals account for the majority of uncommitted tonnage as 12%, 36% and 62% of the Company’s planned eastern production remains uncommitted and unpriced in 2006, 2007 and 2008, respectively.

Some of the products used in our mining activities, such as diesel fuel, explosives, steel products and electricity, are subject to price volatility. Through our suppliers, we utilize forward purchase contracts to manage the exposure related to this volatility. As of November 14, 2005, the Company has entered into forward purchase commitments for approximately 90% of the diesel fuel that it expects to consume during calendar year 2006 at prices ranging from $1.73 per gallon for our Powder River Basin mines to $2.04 per gallon for our Central Appalachian mines. The Company has designated these contracts as normal purchase normal sale contracts, and, therefore, they are not deemed to be derivative financial instruments for financial reporting purposes. During the nine months ended September 30, 2005, the cost of diesel fuel represents approximately 3% of the Company’s consolidated cost of coal sales.

Credit Risk

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

Counterparty risk with respect to interest rate swaps is not considered to be significant based upon the creditworthiness of the participating financial institutions.

Interest Rate Risk

Historically, we have had exposure to changes in interest rates on a portion of our existing level of indebtedness under the Predecessor. This exposure had been completely hedged for the life of the debt using pay-fixed, receive-variable interest rate swaps. From July 30, 2004 forward, we have exposure to changes in interest rates through our bank term loan and our revolving credit facility. As described below, we have used interest rate swaps to manage this risk.

We entered into swap contracts for the purpose of complying with certain financial covenants in our senior secured credit facility that require fixing the interest rate for at least three years on a minimum of 50% of our total outstanding debt. The swap contracts cover $85 million through September 2007. The following table summarizes our outstanding swap contracts at September 30, 2005.

Notional Amount	Term	Floating Rate	Fixed Rate
$20 million	September 2004 – September 2007	3-month LIBOR		3.26	%
$25 million	September 2004 – September 2007	3-month LIBOR		3.26	%
$20 million	September 2004 – September 2007	3-month LIBOR		3.26	%
$20 million	September 2004 – September 2007	3-month LIBOR		3.26	%

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As of September 30, 2005, after giving effect to the $85 million of interest rate swaps that were entered into, we had $280 million of variable rate indebtedness, representing approximately 44% of our outstanding indebtedness. A 1% change in interest rates would affect the interest expense on such indebtedness by $2.8 million per year. At September 30, 2005, the fair value of these swap agreements was an unrealized gain of $2.0 million. Effective January 1, 2005, these swaps were designated as hedges. The increase in the unrealized gain of $1.5 million pre-tax ($0.9 million, net of tax) for the nine months ended September 30, 2005 was reported as a component of comprehensive income (loss).

ITEM 4.CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, evaluated, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operations of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation as of the end of the period covered by this report, the CEO and CFO concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings. The conclusions of the CEO and CFO from this evaluation were communicated to the Audit Committee. In connection with this evaluation, there were no breaches of such controls that would require disclosure to the Audit Committee or our auditors.

In conjunction with the September 1, 2005 implementation of our sales and revenue system, changes were made to the Company’s internal controls in order to adapt to the SAP environment. Management believes that the new controls are equally effective as those that were in place prior to the implementation.

Changes in Disclosure Controls

There were no significant changes in our disclosure controls or in other factors that could significantly affect these disclosure controls in the fiscal quarter ended September 30, 2005. Management is not aware of any material weaknesses; therefore, there were no corrective actions to be taken.

Sarbanes-Oxley Act of 2002 Section 404

During the year ended December 31, 2004, we did not meet the definition of an Accelerated Filer because we have been a public company subject to the reporting requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, for less than twelve months and we have not previously filed an Annual Report on Form 10-K. We are required to comply with the final Section 404 Rule of the Sarbanes-Oxley Act of 2002 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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PART II—OTHER INFORMATION

Item 1.Legal Proceedings.

Information required by this Item is contained in Note 18, “Commitments and Contingencies,” to the consolidated financial statements contained in this Report and is incorporated herein by reference.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.Defaults Upon Senior Securities.

None.

Item 4.Submission of Matters to a Vote of Security Holders.

None.

Item 5.Other Information.

None.

Item 6.Exhibits.

The exhibits to this report are listed in the Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 14, 2005	FOUNDATION COAL HOLDINGS, INC.
	(Registrant)

	Name		Title
/s/ JAMES F. ROBERTS		President, Chief Executive Officer and Director
James F. Roberts		(Principal Executive Officer)
/s/ FRANK J. WOOD		Senior Vice President and Chief Financial Officer
Frank J. Wood		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
3.1*	Amended and Restated Certificate of Incorporation of Foundation Coal Holdings, Inc.
3.2*	Amended and Restated By-laws of Foundation Coal Holdings, Inc.
4.1*	Form of certificate of Foundation Coal Holdings, Inc. common stock
4.2*	Amended and Restated Stockholders Agreement, dated as of October 4, 2004, by and among Foundation Coal Holdings, Inc., Blackstone FCH Capital Partners IV, L.P., Blackstone Family Investment Partnership IV-A L.P., First Reserve Fund IX, L.P., AMCI Acquisition, LLC and the management stockholders parties thereto
10.1**	Amendment Number 1 to Employment Agreement, dated as of November 1, 2005 by and among Klaus-Dieter Beck and Foundation Coal Corporation.
10.2**	Amendment Number 1 to Employment Agreement, dated as of November 1, 2005 by and among James J. Bryja and Foundation Coal Corporation.
10.3**	Amendment Number 1 to Employment Agreement, dated as of November 1, 2005 by and among James A. Olsen and Foundation Coal Corporation.
10.4**	Amendment Number 1 to Employment Agreement, dated as of November 1, 2005 by and among James F. Roberts and Foundation Coal Corporation.
10.5**	Amendment Number 1 to Employment Agreement, dated as of November 1, 2005 by and among Michael R. Peelish and Foundation Coal Corporation.
10.6**	Amendment Number 1 to Employment Agreement, dated as of November 1, 2005 by and among John R. Tellmann and Foundation Coal Corporation.
10.7**	Amendment Number 1 to Employment Agreement, dated as of November 1, 2005 by and among Greg A. Walker and Foundation Coal Corporation.
10.8**	Amendment Number 1 to Employment Agreement, dated as of November 1, 2005 by and among Frank J. Wood and Foundation Coal Corporation.
10.9**	Form of Executive Officer Non-Qualified Stock Option Agreement.
10.10**	Form of Amendment Number 1 to Executive Officer Non-Qualified Stock Option Agreement.
10.11**	Supplement Number 1 dated as of September 2, 2005 (this “Supplement”), to the Guarantee and Collateral Agreement dated as of July 30, 2004, among FC2 Corp., Foundation coal Corporations, Foundation PA Coal Company, LLC as Borrower, the Subsidiary Parties thereto and Citicorp North America, Inc. as Collateral Agent.
10.12**	Supplemental Indenture dated as of September 6, 2005 among Foundation Mining LP, a subsidiary of Foundation Coal Corporation, Foundation PA Coal Company, LLC and The Bank of New York, as Trustee.
31.1**	Certification of periodic report by Foundation Coal Holdings, Inc.’s Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certification of periodic report by Foundation Coal Holdings, Inc.’s Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of periodic report by Foundation Coal Holdings, Inc.’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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32.2** Certification of periodic report by Foundation Coal Holdings, Inc.’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Incorporated by reference to the same numbered exhibit previously filed with Foundation Coal Holdings, Inc.’s registration statement on Form S-1 (SEC File No. 333-118427).

**Filed herewith.

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