Alpha Natural Resources 10-Q 2010 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2010

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

For the transition period from           to

Commission File No. 001-32331

ALPHA NATURAL RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Delaware	42-1638663
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
One Alpha Place, P.O. Box 2345, Abingdon, Virginia	24212
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code:

(276) 619-4410

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

þ Large accelerated filer      o Accelerated filer      ¨ Non-accelerated filer    ¨ Smaller reporting company

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

Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of July 30, 2010 – 120,378,741

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations (Unaudited)	2
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68
Item 4.	Controls and Procedures	69
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	69
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 6.	Exhibits	72

1

Item 1. Financial Statements

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Revenues:
Coal revenues	$	894,104		$	334,970		$	1,725,370		$	760,773
Freight and handling revenues		90,268			35,445			155,056			81,499
Other revenues		16,033			16,599			41,983			30,701
Total revenues		1,000,405			387,014			1,922,409			872,973
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		657,199			267,014			1,232,266			570,039
Freight and handling costs		90,268			35,445			155,056			81,499
Other expenses		8,443			(6,451	)		24,127			4,398
Depreciation, depletion and amortization		91,098			36,352			186,225			76,557
Amortization of acquired coal supply agreements, net		55,633			-			121,590			-
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		44,231			22,907			92,020			39,373
Total costs and expenses		946,872			355,267			1,811,284			771,866
Income from operations		53,533			31,747			111,125			101,107
Other income (expense):
Interest expense		(18,504	)		(10,166	)		(40,624	)		(20,019	)
Interest income		848			355			1,528			980
Loss on early extinguishment of debt		(1,349	)		-			(1,349	)		-
Miscellaneous income (expense), net		(274	)		65			(478	)		181
Total other expense, net		(19,279	)		(9,746	)		(40,923	)		(18,858	)
Income from continuing operations before income taxes		34,254			22,001			70,202			82,249
Income tax benefit (expense)		4,928			(5,323	)		(16,350	)		(18,950	)
Income from continuing operations		39,182			16,678			53,852			63,299
Discontinued operations:
Loss from discontinued operations before income taxes		(616	)		(2,059	)		(1,663	)		(9,310	)
Income tax benefit		231			740			649			2,334
Loss from discontinued operations		(385	)		(1,319	)		(1,014	)		(6,976	)
Net income	$	38,797		$	15,359		$	52,838		$	56,323
Basic earnings per common share:
Income from continuing operations	$	0.33		$	0.24		$	0.45		$	0.91
Loss from discontinued operations		-			(0.02	)		(0.01	)		(0.10	)
Net income	$	0.33		$	0.22		$	0.44		$	0.81
Diluted earnings per common share:
Income from continuing operations	$	0.32		$	0.24		$	0.44		$	0.90
Loss from discontinued operations		-			(0.02	)		(0.01	)		(0.10	)
Net income	$	0.32		$	0.22		$	0.43		$	0.80
Weighted average shares - basic		120,124,707			69,920,621			119,983,999			69,902,874
Weighted average shares - diluted		121,861,913			70,894,017			121,903,512			70,795,334

See accompanying Notes to Condensed Consolidated Financial Statements.

2

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

	June 30, 2010			December 31, 2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	418,885		$	465,869
Trade accounts receivable, net		316,390			232,631
Inventories, net		200,549			176,372
Prepaid expenses and other current assets		263,978			176,953
Total current assets		1,199,802			1,051,825
Property, equipment and mine development costs (net of accumulated depreciation & amortization of $742,635 and $615,163, respectively)		1,095,135			1,082,446
Owned and leased mineral rights (net of accumulated depletion of $277,416 and $222,047, respectively)		1,940,342			1,958,855
Owned lands		94,635			91,262
Goodwill		380,296			380,296
Acquired coal supply agreements (net of accumulated amortization of $258,376 and $133,016, respectively)		271,131			396,491
Other non-current assets		170,085			157,024
Total assets	$	5,151,426		$	5,118,199
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	11,839		$	33,500
Trade accounts payable		176,430			152,662
Accrued expenses and other current liabilities		292,481			269,793
Total current liabilities		480,750			455,955
Long-term debt		734,060			756,753
Pension and postretirement medical benefit obligations		721,957			682,991
Asset retirement obligations		198,145			190,724
Deferred income taxes		256,584			302,630
Other non-current liabilities		148,592			137,857
Total liabilities		2,540,088			2,526,910
Commitments and Contingencies (Note 14)
Stockholders' Equity
Preferred stock - par value $0.01, 10.0 million shares authorized, none issued		-			-
Common stock - par value $0.01, 200.0 million shares authorized, 121.7 million issued and 120.4 million outstanding at June 30, 2010 and 120.8 million issued and 120.5 million outstanding at December 31, 2009		1,217			1,208
Additional paid-in capital		2,223,514			2,194,305
Accumulated other comprehensive income (loss)		(15,523	)		5,812
Treasury stock, at cost: 1.3 million and 0.3 million shares at June 30, 2010 and December 31, 2009, respectively		(49,546	)		(8,874	)
Retained earnings		451,676			398,838
Total stockholders' equity		2,611,338			2,591,289
Total liabilities and stockholders' equity	$	5,151,426		$	5,118,199

See accompanying Notes to Condensed Consolidated Financial Statements.

3

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)

	Six Months Ended
	June 30,
	2010			2009
Operating activities:
Net income	$	52,838		$	56,323
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, accretion and amortization		203,998			88,020
Amortization of acquired coal supply agreements, net		121,590			-
Mark-to-market adjustments for derivatives		9,421			(14,769	)
Stock-based compensation		17,007			7,471
Employee benefit plans, net		30,320			3,647
Loss on early extinguishment of debt		1,349			-
Deferred income taxes		(40,111	)		7,838
Other, net		66			1,306
Changes in operating assets and liabilities:
Trade accounts receivable, net		(83,759	)		5,612
Notes and other receivables		10,509			909
Inventories, net		(24,177	)		(13,070	)
Prepaid expenses and other current assets		14,213			(31,646	)
Other non-current assets		395			1,591
Trade accounts payable		12,404			(23,586	)
Accrued expenses and other current liabilities		23,749			(30,578	)
Pension and postretirement medical benefit obligations		(9,751	)		(211	)
Asset retirement obligations		(3,221	)		(2,261	)
Other non-current liabilities		1,091			980
Net cash provided by operating activities		337,931			57,576
Investing activities:
Capital expenditures		(135,895	)		(46,111	)
Acquisition of mineral rights under federal lease		(36,108	)		-
Purchase of acquired company		-			(1,750	)
Purchase of equity-method investment		(3,000	)		-
Purchases of marketable securities		(181,145	)		-
Sales of marketable securities		57,680			-
Other, net		2,017			312
Net cash used in investing activities		(296,451	)		(47,549	)
Financing activities:
Principal repayments of note payable		-			(10,892	)
Principal repayments of long-term debt		(50,934	)		(232	)
Debt issuance costs		(8,690	)		(5,277	)
Excess tax benefit from stock-based awards		7,587			-
Common stock repurchases		(40,672	)		(2,027	)
Proceeds from exercise of stock options		4,245			230
Other, net		-			(651	)
Net cash used in financing activities		(88,464	)		(18,849	)
Net decrease in cash and cash equivalents		(46,984	)		(8,822	)
Cash and cash equivalents at beginning of period		465,869			676,190
Cash and cash equivalents at end of period	$	418,885		$	667,368
Supplemental cash flow information:
Cash paid for interest	$	31,915		$	14,356
Cash paid for income taxes	$	27,518		$	27,704

See accompanying Notes to Condensed Consolidated Financial Statements.

4

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(1) Business and Basis of Presentation

Business

Alpha Natural Resources, Inc. and its consolidated subsidiaries (the “Company” or “Alpha”) are primarily engaged in the business of extracting, processing and marketing steam and metallurgical coal from surface and deep mines, and mainly sell to electric utilities, steel and coke producers, and industrial customers. The Company, through its subsidiaries, is also involved in marketing coal produced by others to supplement its own production and, through blending, provides its customers with coal qualities beyond those available from its own production.

On July 31, 2009, Alpha Natural Resources, Inc. (“Old Alpha”) and Foundation Coal Holdings, Inc. (“Foundation”) merged (the “Merger”) with Foundation continuing as the surviving legal corporation of the Merger. Subsequent to the Merger, Foundation was renamed Alpha Natural Resources, Inc. For financial accounting purposes, the Merger was treated as a reverse acquisition and Old Alpha was treated as the accounting acquirer. As a result, Foundation’s financial results are not included in the three and six months ended June 30, 2009.

Basis of Presentation

The accompanying interim condensed consolidated financial statements of the Company are unaudited and prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for Form 10-Q.  Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America as long as the statements are not misleading. In the opinion of management, these interim condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the results for the periods presented. Results of operations for the three and six months ended June 30, 2010 are not necessarily indicati ve of the results to be expected for the year ending December 31, 2010. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on Form 10-K for the twelve months ended December 31, 2009, filed March 1, 2010 and included on Form 8-K filed on March 15, 2010.

The Company’s condensed 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 condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include inventories; mineral reserves; allowance for non-recoupable advanced mining royalties; asset impairments; environmental and reclamation obligations; acquisition accounting; pensions, postemployment, postretirement m edical and other employee benefit obligations; useful lives for depreciation, depletion, and amortization; reserves for workers’ compensation and black lung claims; current and deferred income taxes; reserves for contingencies and litigation; revenue recognized using the percentage of completion method; and fair value of financial instruments. Estimates are based on facts and circumstances believed to be reasonable at the time; however, actual results could differ from those estimates.

Reclassifications

Prior period coal revenues, other revenues and other expenseshave been adjusted due to the reclassification of mark-to-market gains and losses on derivative swap and option agreements; forward coal sale and purchase contracts that are accounted for as derivatives; and financial settlements of coal contracts. Mark-to-market gains and losses for all derivative instruments were previously reported in (increase) decrease in fair value of derivative instruments, netin the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009. Mark-to-market gains and losses on commodity swap and diesel fuel option agreements are reported in other expensesand mark-to-market gains and losses on forward coal sale and purchase contracts and commodity coal option agreements are reported in other revenues. Contract settlements, which previously were reported in coal revenues, are reported in other revenues. As a result of the change in presentation, the following reclassifications have been made in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009:

5

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

	Three Months Ended June 30, 2009						Six Months Ended June 30, 2009
	Previously reported			As Reported			Previously reported			As Reported
Coal revenues	$	333,857		$	334,970		$	758,273		$	760,773
Other revenues	$	16,867		$	16,599		$	33,132		$	30,701
Other expenses	$	7,235		$	(6,451	)	$	19,098		$	4,398
Increase in fair value of derivative instruments, net	$	(14,531	)	$	-		$	(14,769	)	$	-

During the three months ended June 30, 2010, the Company reclassified $11,500 related to the current portion of interest rate swaps from other non-current liabilities to accrued expenses and other current liabilities in the accompanying Condensed Consolidated Balance Sheets as of December 31, 2009.

During the three months ended June 30, 2010, the Company finalized the purchase price allocation for the Merger and recorded certain adjustments to the preliminary purchase price allocation. Accordingly, the December 31, 2009 consolidated balance sheet was adjusted to reflect these changes as if they were recorded on the acquisition date in accordance with generally accepted accounting principles related to acquisition accounting. See Note 18 for further details.

(2) New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update 2010-6, Improving Disclosures About Fair Value Measurements (“ASU 2010-6”), which requires reporting entities to make new disclosures about recurring or nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. ASU 2010-6 relates solely to disclosures in the financial statement notes and will not have an effect on the Company’s financial position or results of operations. See Note 9 regarding the Company’s fair value disclosures.

(3) Earnings Per Share

The number of shares used to calculate basic earnings per common share is based on the weighted average number of the Company’s outstanding common shares during the respective periods. The number of shares used to calculate diluted earnings per common share is based on the number of common shares used to calculate basic earnings per share plus the dilutive effect of stock options and other stock-based instruments held by the Company’s employees and directors during each period and the Company’s outstanding 2.375% convertible senior notes due 2015 (the “Convertible Notes”). The Convertible Notes, which were issued in April 2008, become dilutive for earnings per common share calculations when the average share price for the quarter exceeds the conversion price of $54.66. The shares that would be issued to sett le the conversion spread are included in the diluted earnings per common share calculation when the conversion option is in the money. At June 30, 2010, the conversion option for the Convertible Notes was not in the money, and therefore, there was no dilutive earnings per common share impact. At June 30, 2009, due to the Merger, the Convertible Notes were convertible; however, because the conversion price exceeded the average share price, there was no dilutive earnings per share impact.

6

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Weighted average shares - basic		120,124,707		69,920,621		119,983,999		69,902,874
Dilutive impact of stock options and restricted stock plans		1,737,206		973,396		1,919,513		892,460
Weighted average shares - diluted		121,861,913		70,894,017		121,903,512		70,795,334

(4) Inventories, net

Inventories, net consisted of the following:

	June 30, 2010		December 31, 2009
Raw coal	$	15,091	$	19,180
Saleable coal		139,016		112,004
Equipment for resale		672		1,489
Materials and supplies, net		45,770		43,699
Total inventories, net	$	200,549	$	176,372

(5) Marketable Securities

Short-term marketable securities, included in prepaid expenses and other current assets, consisted of the following:

	June 30, 2010
			Unrealized
	Cost		Gain		Loss			Fair Value
Short-term marketable securities:
U.S. treasury and agency securities	$	85,578	$	38	$	-		$	85,616
Corporate debt securities		59,087		-		(1	)		59,086
Total short-term marketable securities:	$	144,665	$	38	$	(1	)	$	144,702
	December 31, 2009
			Unrealized
	Cost		Gain		Loss			Fair Value
Short-term marketable securities:
U.S. treasury and agency securities	$	22,338	$	-	$	(15	)	$	22,323
Corporate debt securities		7,180		-		(2	)		7,178
Total short-term marketable securities:	$	29,518	$	-	$	(17	)	$	29,501

7

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Long-term marketable securities, with maturity dates between one and three years, included in other non-current assets, consisted of the following:

	June 30, 2010
			Unrealized
	Cost		Gain		Loss			Fair Value
Long-term marketable securities:
U.S. treasury and agency securities	$	97,836	$	128	$	(16	)	$	97,948
	December 31, 2009
			Unrealized
	Cost		Gain		Loss			Fair Value
Long-term marketable securities:
U.S. treasury and agency securities	$	89,828	$	-	$	(343	)	$	89,485

(6) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

	June 30, 2010		December 31, 2009
Wages and employee benefits	$	79,922	$	72,469
Current portion of asset retirement obligations		12,960		14,908
Deferred income taxes -- current		2,924		10,237
Taxes other than income taxes		67,765		58,245
Freight		13,023		8,827
Current portion of self insured workers' compensation obligations		7,919		10,893
Interest payable		9,215		11,215
Derivative financial instruments		24,686		26,461
Current portion of postretirement medical benefit obligations		27,392		27,393
Other		46,675		29,145
Total	$	292,481	$	269,793

(7) Long-Term Debt

Long-term debt consisted of the following:

	June 30, 2010			December 31, 2009
Term loan due under the Alpha Credit Facility	$	233,815		$	284,750
7.25% senior notes due 2014		298,285			298,285
2.375% convertible senior notes due 2015		287,500			287,500
Debt discount		(73,701	)		(80,282	)
Total long-term debt		745,899			790,253
Less current portion		11,839			33,500
Long-term debt, net of current portion	$	734,060		$	756,753

8

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Credit Facility

On April 15, 2010, the Company and its lenders amended and restated (the “Amend and Extend”) the Alpha Credit Facility (the “Facility”). The Amend and Extend, among other things, extended the maturity of $236,800 of the then-outstanding term loans and $554,000 of existing revolving credit facility (the “revolver”) commitments from July 7, 2011 to July 31, 2014. The Amend and Extend added $300,400 of additional borrowing capacity with a maturity of July 31, 2014, to increase the aggregate principal amount available to be drawn under the revolver to $950,400. Subsequently, the Company terminated $96,000 of commitments under the revolver and prepaid $39,600 of the term loans, both of which related to lenders that chose not to extend their commitments beyond the original expiration date of July 7, 2011. Ad ditionally, the Amend and Extend (1) increased the amount of the “accordion” feature of the Facility to $400,000, all of which was available for the Company to exercise following the closing of the Amend and Extend; and, (2) also made other changes to the Facility, including increases to certain portions of the Facility under the negative covenants to provide the Company greater financial and operating flexibility.

As of June 30, 2010, the total borrowing capacity under the revolver was $854,400. Borrowings under the revolver bear interest at a base rate plus an applicable margin or at an adjusted London interbank offered rate (“LIBOR”) plus an applicable margin. The applicable margin is subject to adjustment based on leverage ratios. There were no borrowings outstanding under the revolver at June 30, 2010 or December 31, 2009. The revolver can also be used to secure outstanding letters of credit.  Letters of credit in the amount of $42,518 and $113,633 were outstanding under the revolver as of June 30, 2010 and December 31, 2009, respectively.  The amount available under the revolver as of June 30, 2010 was $811,882 after giving effect to the outstanding letters of credit. Additionally, the Company is required to pa y a commitment fee of 0.5% on unused borrowings.

The credit facility’s secured term loans bear interest at a base rate plus an applicable margin or at an adjusted LIBOR rate plus an applicable margin.  The interest rate approximated 3.56% and 3.50% at June 30, 2010 and December 31, 2009, respectively.  As of June 30, 2010, the Company’s secured term loans had a carrying value of $232,456, net of debt discount of $1,359, with $11,839 classified as current portion of long-term debt.  As of December 31, 2009, the Company’s secured term loans had a carrying value of $282,739, net of debt discount of $2,011, with $33,500 classified as current portion of long-term debt.

7.25% Senior Notes Due August 1, 2014

Foundation PA Coal Company, LLC (“Foundation PA”), one of the Company’s subsidiaries, has notes that mature on August 1, 2014 (the “2014 Notes”) in the aggregate principal amount of $298,285 at both June 30, 2010 and December 31, 2009. The 2014 Notes are guaranteed on a senior unsecured basis by Alpha Natural Resources, Inc. and all of its subsidiaries other than Foundation PA and ANR Receivables Funding LLC. The 2014 Notes pay interest semi-annually and are redeemable at Foundation PA’s option, at a redemption price equal to 102.417%, 101.208% and 100% of the principal amount if redeemed during the twelve month periods beginning August 1, 2010, 2011 and 2012, respectively, plus accrued interest.  As of June 30, 2010, the carrying value of the 2014 Notes was $297,131, net of debt discount of $1,154.  As of December 31, 2009, the carrying value of the 2014 Notes was $296,990, net of debt discount of $1,295.

2.375% Convertible Senior Notes Due April 15, 2015

As of June 30, 2010 and December 31, 2009, the Company had $287,500 aggregate principal amount of 2.375% convertible senior notes due April 15, 2015. The Convertible Notes bear interest at a rate of 2.375% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, and will mature on April 15, 2015, unless previously repurchased by the Company or converted.  The Company accounts for the Convertible Notes under Accounting Standards Codification (“ASC”) 470-20, which requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers’ nonconvertible debt borrowing rate.  The related deferred loan costs and discount are being amortized and accreted, respectively, over the seven-year term of the Convertible Notes, and provide for an effective interest rate of 8.64%.  As of June 30, 2010 and December 31, 2009, the carrying amounts of the debt component were $216,312 and $210,524, respectively.  As of June 30, 2010 and December 31, 2009, the unamortized debt discount was $71,188 and $76,976, respectively.

Accounts Receivable Securitization

The Company and certain of its subsidiaries are party to a $150,000 accounts receivable securitization facility with a third party financial institution (the “A/R Facility”).  As of June 30, 2010 and December 31, 2009, letters of credit in the amount of $141,612 and $143,474, respectively, were outstanding under the A/R Facility and no cash borrowing transactions had taken place.

9

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

(8) Asset Retirement Obligations

As of June 30, 2010 and December 31, 2009, the Company had recorded asset retirement obligation accruals for mine reclamation and closure costs (including perpetual water treatment) totaling $211,105 and $205,632, respectively. The portion of the costs expected to be paid within a year of $12,960 and $14,908, as of June 30, 2010 and December 31, 2009, respectively, is included in accrued expenses and other current liabilities. There were no assets that were legally restricted for purposes of settling asset retirement obligations at June 30, 2010 or December 31, 2009. The Company is self-bonded for its asset retirement obligations in West Virginia and Wyoming, subject to periodic evaluation of the Company’s financial position by the applicable state and meeting certain financial ratios defined by each state. Asset retirement obligat ions for states other than Wyoming and West Virginia are secured by surety bonds.

Changes in the asset retirement obligations were as follows:

Total asset retirement obligations at December 31, 2009	$	205,632
Additions for the period		141
Accretion for the period		8,784
Revisions in estimated cash flows		(231	)
Expenditures for the period		(3,221	)
Total asset retirement obligations at June 30, 2010	$	211,105
Less current portion		12,960
Long-term portion	$	198,145

(9) Fair Value of Financial Instruments and Fair Value Measurements

The estimated fair values of financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision. The following methods and assumptions are used to estimate the fair value of each class of financial instruments.

The carrying amounts for cash and cash equivalents, trade accounts receivable, net, prepaid expenses and other current assets, trade accounts payable, and accrued expenses and other current liabilities approximate fair value due to the short maturity of these instruments.

Long-term debt: The fair value of the Convertible Notes was estimated using observable market prices as these securities are traded. The fair value of the 2014 Notes and the term loan due 2014 is estimated based on a current market rate of interest offered to the Company for debt of similar maturities.

The estimated fair values of long-term debt were as follows:

	June 30, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Term loan due 2014(1)	$	232,456	$	233,812	$	282,739	$	279,055
7.25% senior notes due 2014(2)		297,131		303,505		296,990		302,014
2.375% convertible senior notes due 2015(3)		216,312		288,219		210,524		325,953
Total long-term debt	$	745,899	$	825,536	$	790,253	$	907,022

(1) Net of debt discount of $1,359 and $2,011 as of June 30, 2010 and December 31, 2009, respectively.

(2) Net of debt discount of $1,154 and $1,295 as of June 30, 2010 and December 31, 2009, respectively.

(3) Net of debt discount of $71,188 and $76,976 as of June 30, 2010 and December 31, 2009, respectively.

10

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

ASC 820 requires disclosures about how fair value is determined for assets and liabilities and a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

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

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

Level 3 – Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

The following tables set forth by level, within the fair value hierarchy, the Company’s financial and non-financial assets and liabilities that were accounted for at fair value on a recurring and non-recurring basis as of June 30, 2010 and December 31, 2009, respectively.  As required by ASC 820, financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the determination of fair value for assets and liabilities and their placement within the fair value hierarchy levels.

	June 30, 2010
	Total Fair			Quoted Prices in Active Markets		Significant Other Observable Inputs			Significant Unobservable Inputs
	Value			(Level 1)		(Level 2)			(Level 3)
Financial assets (liabilities):
U.S. treasury and agency securities	$	183,564		$	183,564	$	-		$	-
Corporate debt securities	$	59,086		$	-	$	59,086		$	-
Forward coal sales	$	347		$	-	$	347		$	-
Forward coal purchases	$	(2,404	)	$	-	$	(2,404	)	$	-
Commodity swaps	$	(8,795	)	$	-	$	(8,795	)	$	-
Commodity options	$	(410	)	$	-	$	(410	)	$	-
Interest rate swaps	$	(24,519	)	$	-	$	(24,519	)	$	-

	December 31, 2009
	Total Fair			Quoted Prices in Active Markets		Significant Other Observable Inputs			Significant Unobservable Inputs
	Value			(Level 1)		(Level 2)			(Level 3)
Financial assets (liabilities):
U.S. treasury and agency securities	$	111,808		$	111,808	$	-		$	-
Corporate debt securities	$	7,178		$	-	$	7,178		$	-
Forward coal sales	$	3,414		$	-	$	3,414		$	-
Forward coal purchases	$	(2,861	)	$	-	$	(2,861	)	$	-
Commodity swaps	$	(8,691	)	$	-	$	(8,691	)	$	-
Commodity options	$	(255	)	$	-	$	(255	)	$	-
Interest rate swaps	$	(24,232	)	$	-	$	(24,232	)	$	-

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

11

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Level 1 Fair Value Measurements

U.S. Treasury and Agency Securities – The fair value of marketable securities is based on observable market data.

Level 2 Fair Value Measurements

Forward Coal Purchases and Sales – The fair values of the forward coal purchase and sale contracts were estimated using discounted cash flow calculations based upon actual prices and forward commodity price curves. The curves were obtained from independent pricing services reflecting broker market quotes. The fair values are adjusted for counter-party risk, when applicable.

Commodity Swaps – Since the Company’s commodity swaps are not traded on a market exchange, the fair values are estimated using valuation models from a third party provider which include assumptions about commodity prices based on those observed in the underlying markets. The fair values are adjusted for counter-party risk, when applicable.

Commodity Options – The fair values of the commodity options were estimated using discounted cash flow calculations based upon forward commodity price curves. The curves were obtained from independent pricing services reflecting broker market quotes. The fair values are adjusted for counter-party risk, when applicable.

Interest Rate Swaps – The fair values of the interest rate swaps were estimated using discounted cash flow calculations based upon forward interest-rate yield curves. The curves were obtained from independent pricing services reflecting broker market quotes. The fair values are adjusted for counter-party risk, when applicable.

Corporate Debt Securities – The fair values of the Company’s corporate debt securities are obtained from a third-party pricing service provider. The fair values provided by the pricing service provider are estimated using pricing models, where the inputs to those models are based on observable market inputs including credit spreads and broker-dealer quotes, among other inputs. The Company classifies the prices obtained from the pricing services within Level 2 of the fair value hierarchy because the underlying inputs are directly observable from active markets. However, the pricing models used do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.

(10) Derivative Financial Instruments

Forward Contracts

The Company manages price risk for coal sales and purchases through the use of coal supply agreements. The Company evaluates each of its coal sales and coal purchase forward contracts to determine whether they meet the definition of a derivative and if so, whether they qualify for the normal purchase normal sale (“NPNS”) exception prescribed by ASC 815-10-10. The majority of the Company’s forward contracts do not meet the definition of a derivative. For those contracts that do meet the definition of a derivative, they generally also qualify for the NPNS exception based on management’s intent and ability to physically deliver or take physical delivery of the coal. Contracts that meet the definition of a derivative and do not qualify for the NPNS exception are accounted for at fair value and, accordingly, the Compan y includes the unrealized gains and losses in current period earnings or losses.

Swap Agreements

Commodity Swaps

The Company uses diesel fuel and explosives in its production process and incurs significant expenses for the purchase of these commodities. Diesel fuel and explosives expenses represented approximately 7% of cost of coal sales for the six months ended June 30, 2010. The Company is subject to the risk of price volatility for these commodities and as a part of its risk management strategy, the Company enters into swap agreements with financial institutions to mitigate the risk of price volatility for both diesel fuel and explosives. The terms of the swap agreements allow the Company to pay a fixed price and receive a floating price, which provides a fixed price per unit for the volume of purchases being hedged. As of June 30, 2010, the Company had swap agreements outstanding to hedge the variable cash flows related to 65% and 48% of antic ipated diesel fuel usage for calendar years 2010 and 2011, respectively. The average fixed price per swap for diesel fuel hedges is $2.34 per gallon and $2.39 per gallon for calendar years 2010 and 2011, respectively. As of June 30, 2010, the Company had swap agreements outstanding to hedge the variable cash flows related to approximately 63% and 23% of anticipated explosives usage in the Powder River Basin for calendar years 2010 and 2011, respectively. All cash flows associated with derivative instruments are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009.

The Company sells coalbed methane through its Coal Gas Recovery business. The revenues derived from the sale of coalbed methane are subject to volatility based on the changes in natural gas prices. In order to reduce that risk, the Company enters into “pay variable, receive fixed” natural gas swaps for a portion of its anticipated gas production in order to fix the selling price for a portion of its production. The natural gas swaps have been designated as qualifying cash flow hedges. As of June 30, 2010, the Company had swap agreements outstanding to hedge the variable cash flows related to approximately 79% and 32% of anticipated natural gas production in 2010 and 2011, respectively.

12

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Interest Rate Swaps

The Company has variable rate debt outstanding and is subject to interest rate risk based on volatility in underlying interest rates. The Company previously entered into pay fixed, receive variable interest rate swaps to convert the Company’s previous variable-rate term loan into fixed-rate debt. The interest rate swaps were designated as qualifying cash flow hedges. During the year ended December 31, 2009, the Company repaid the related term loan and de-designated the swaps as cash flow hedges. The Company did not terminate the interest rate swaps due to the swaps’ potential benefit in offsetting a portion of the effect of interest rate changes in the Company’s other variable rate debt. Subsequent changes in fair value are recorded in Interest expense.

The following tables present the fair values and location of the Company’s derivative instruments within the Condensed Consolidated Balance Sheets:

	Asset Derivatives
Derivatives designated as cash flow hedging instruments	June 30, 2010		December 31, 2009
Commodity swaps (1)	$	4,287	$	2,222
Derivatives not designated as cash flow hedging instruments	June 30, 2010		December 31, 2009
Forward coal sales (2)	$	347	$	3,414
Commodity swaps (3)		6		5,066
Commodity options-diesel (4)		3		-
Total	$	356	$	8,480
Total asset derivatives	$	4,643	$	10,702

(1) As of June 30, 2010, $3,417 is recorded in prepaid expenses and other current assets and $870 is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.  As of December 31, 2009, $390 is recorded in prepaid expenses and other current assetsand $1,832 is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.

(2) As of June 30, 2010, $347 is recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. As of December 31, 2009, $3,216 is recorded in prepaid expenses and other current assets and $198 is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.

(3) As of June 30, 2010, $6 is recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. As of December 31, 2009, $4,333 is recorded in prepaid expenses and other current assets and $733 is recorded in other non-current assets in the Condensed Consolidated Balance Sheets.

(4) As of June 30, 2010, $3 is recorded in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

13

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

	Liability Derivatives
Derivatives designated as cash flow hedging instruments	June 30, 2010		December 31, 2009
Commodity swaps (1)	$	11,394	$	1,148
Derivatives not designated as cash flow hedging instruments	June 30, 2010		December 31, 2009
Forward coal purchases (2)	$	2,404	$	2,861
Commodity swaps (3)		1,694		14,831
Commodity options-coal (4)		413		255
Interest rate swap (5)		24,519		24,232
Total	$	29,030	$	42,179
Total liability derivatives	$	40,424	$	43,327

(1) As of June 30, 2010, $9,404 is recorded in accrued expenses and other current liabilities and $1,990 is recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets. As of December 31, 2009, $1,148 is recorded in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

(2) As of June 30, 2010, $1,638 is recorded in accrued expenses and other current liabilities and $766 is recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets. As of December 31, 2009, $2,861 is recorded in accrued expenses and other current liabilitiesin the Condensed Consolidated Balance Sheets.

(3) As of June 30, 2010, $1,694 is recorded in accrued expenses and other current liabilitiesin the Condensed Consolidated Balance Sheets. As of December 31, 2009, $10,833 is recorded in accrued expenses and other current liabilitiesand $3,998inother non-current liabilitiesin the Condensed Consolidated Balance Sheets.

(4) As of June 30, 2010, $34 is recorded in accrued expenses and other current liabilitiesand $379inother non-current liabilitiesin the Condensed Consolidated Balance Sheets. As of December 31, 2009, $119 is recorded in accrued expenses and other current liabilitiesand $136in other non-current liabilitiesin the Condensed Consolidated Balance Sheets.

(5) As of June 30, 2010, $11,916 is recorded in accrued expenses and other current liabilities and $12,603 is recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets. As of December 31, 2009, $11,500 is recorded in accrued expenses and other current liabilities and $12,732 is recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets.

The following tables present the gains and losses from derivative instruments for the six months ended June 30, 2010 and 2009 and their location within the Condensed Consolidated Financial Statements:

	Gain (loss) reclassified from accumulated other comprehensive income (loss) to earnings				Gain (loss) recorded in accumulated other comprehensive income (loss)
Derivatives designated as cash flow hedging instruments	2010		2009		2010			2009
Commodity swaps (2)	$	226	$	-	$	(2,594	)	$	576
Interest rate swap (1)		-		-		-			3,506
Total	$	226	$	-	$	(2,594	)	$	4,082

(1) Amounts related to the interest rate swap were recorded as a component of interest expense in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2010.

(2) Amounts recorded for commodity swaps are included in other expenses in the Condensed Consolidated Statements of Operations for the six months ended June 30, 2010.  

14

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

	Gain (loss) recorded in earnings
	Three months ended						Six months ended
	June 30,						June 30,
Derivatives not designated as cash flow hedging instruments	2010			2009			2010			2009
Forward coal sales (1)	$	(1,818	)	$	(1,318	)	$	(3,066	)	$	396
Forward coal purchases (1)		(1,893	)		2,080			457			(495	)
Commodity swaps (2)		(262	)		13,144			(611	)		14,868
Commodity options-diesel fuel (2)		(91	)		625			(91	)		-
Commodity options-coal (1)		533			-			(158	)		-
Interest rate swap (3)		(5,005	)		-			(5,952	)		-
Total	$	(8,536	)	$	14,531		$	(9,421	)	$	14,769

(1) Amounts are recorded as a component of other revenues in the Condensed Consolidated Statements of Operations.

(2) Amounts are recorded as a component of other expenses in the Condensed Consolidated Statements of Operations.

(3) Amounts are recorded as a component of interest expense in the Condensed Consolidated Statements of Operations.

Unrealized losses recorded in accumulated other comprehensive income (loss) are reclassified to income or loss as the financial swaps settle and the Company purchases the underlying items that are being hedged. During the next twelve months, the Company expects to reclassify approximately ($978), net of tax, to earnings. The following table summarizes the changes to accumulated other comprehensive income (loss) related to hedging activities during the six months ended June 30, 2010 and 2009:

	Six Months Ended
	June 30,
	2010			2009
Balance at beginning of period	$	899		$	(20,961	)
Net change associated with current year hedging transactions		(2,594	)		4,082
Net amounts reclassified to earnings		226			-
Balance at end of period	$	(1,469	)	$	(16,879	)

(11) Income Taxes

The total income tax (benefit) expense provided on pretax income was allocated as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Continuing operations	$	(4,928	)	$	5,323		$	16,350		$	18,950
Discontinued operations		(231	)		(740	)		(649	)		(2,334	)
Total	$	(5,159	)	$	4,583		$	15,701		$	16,616

15

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

A reconciliation of the statutory federal income tax expense at 35% to income from continuing operations before income taxes and the actual income tax (benefit) expense from continuing operations is as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Federal statutory income tax expense	$	11,988		$	7,701		$	24,570		$	28,787
Increases (reductions) in taxes due to:
Percentage depletion allowance		(15,451	)		(6,398	)		(30,920	)		(14,065	)
State taxes, net of federal tax impact		(227	)		688			(437	)		2,178
Deduction for domestic production activities		(1,884	)		-			(3,771	)		(569	)
Change in valuation allowance		-			3,194			-			2,355
Change in law - Medicare Part D Subsidy		-			-			25,566			-
Other, net		646			138			1,342			264
Income tax (benefit) expense from continuing operations	$	(4,928	)	$	5,323		$	16,350		$	18,950

The Patient Protection and Affordable Care Act (the “PPACA”) and the Reconciliation Act were signed into law in March 2010. As a result of these two acts, tax benefits available to employers that receive the Medicare Part D subsidy will be eliminated starting in years ending after December 31, 2012. Since these acts were signed into law during the six months ended June 30, 2010, ASC 740 – Income Taxes, required that the effect of the tax law change be recorded immediately as a component of tax expense. During the three and six months ended June 30, 2010, the income tax effect related to these acts was a reduction of $0 and $25,566, respectively, to the deferred tax asset related to the postretirement prescription drug benefits.

(12) Employee Benefit Plans

The Company sponsors or participates in several benefit plans for its employees, including postemployment health care and life insurance, defined benefit and defined contribution pension plans, and workers’ compensation and black lung benefits. In connection with the Merger, the Company assumed all of the employee benefit plans of Foundation (the “Foundation Plans”) and is contractually obligated to continue to provide similar or improved benefits to those Foundation Plans for a period of eighteen months after the Merger date.

Components of Net Periodic Pension Costs

The components of net periodic benefit costs are as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
Service cost	$	1,733		$	-	$	3,807		$	-
Interest cost		3,583			-		7,239			-
Expected return on plan assets		(3,217	)		-		(6,456	)		-
Amortization of net actuarial loss		58			-		58			-
Net periodic benefit cost	$	2,157		$	-	$	4,648		$	-

16

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Components of Net Periodic Costs of Other Postretirement Benefit Plans

The components of net periodic benefit costs are as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Service cost	$	2,330		$	514		$	5,103		$	1,208
Interest cost		9,095			1,149			17,917			2,004
Amortization of prior service cost		524			537			1,074			1,129
Amortization of net actuarial gain		(251	)		(50	)		(251	)		(50	)
Curtailment gain		-			(712	)		-			(712	)
Net periodic benefit cost	$	11,698		$	1,438		$	23,843		$	3,579

Components of Net Periodic Black Lung Costs

The components of net periodic benefit costs are as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010			2009		2010			2009
Service cost	$	360		$	5	$	674		$	9
Interest cost		577			15		1,057			30
Expected return on plan assets		(16	)		-		(36	)		-
Amortization of prior service cost		-			14		-			28
Amortization of net actuarial loss		105			-		134			-
Net periodic benefit cost	$	1,026		$	34	$	1,829		$	67

In March 2010, the PPACA was enacted, potentially impacting the costs to provide healthcare benefits to the Company’s eligible active and certain retired employees and workers’ compensation benefits related to occupational disease resulting from coal workers’ pneumoconiosis (“Black Lung”). The PPACA has both short-term and long-term implications on healthcare benefit plan standards. Implementation of this legislation is planned to occur in phases, with plan standard changes taking effect beginning in 2010, but to a greater extent with the 2011 benefit plan year and extending through 2018.  Plan standard changes that could affect the Company in the short term include raising the maximum age for covered dependents to receive benefits, the elimination of lifetime dollar limits per covered individual a nd restrictions on annual dollar limits per covered individual, among other standard requirements. Plan standard changes that are expected to affect the Company in the long term include an excise tax on “high cost” plans and the elimination of annual dollar limits per covered individual, among other standard requirements.

Beginning in 2018, the PPACA will impose a 40% excise tax on employers to the extent that the value of their healthcare plan coverage exceeds certain dollar thresholds. The Company re-measured its retiree welfare plan obligations during the three months ended June 30, 2010 in order to account for the estimated impact of the excise tax and updated other assumptions related to anticipated retirement ages and health care cost trend rates. The re-measurement resulted in an additional $27,100 increase to the retiree welfare plans obligation, which is included in pension and postretirement medical benefit obligations on the accompanying Condensed Consolidated Balance Sheets, with an offset to accumulated other comprehensive income (loss). The Company anticipates that certain government agencies will provide additional regulations or interpreta tions concerning the application of this excise tax. The Company will need to continue to evaluate the impact of the PPACA in future periods, and when these regulations or interpretations are published, the Company will evaluate its assumptions in light of the new information.

The PPACA also amended previous legislation related to coal workers’ Black Lung, providing automatic extension of awarded lifetime benefits to surviving spouses and providing changes to the legal criteria used to assess and award claims. The Company evaluated the impact of these changes to its current population of beneficiaries and possible future claimants, and as a result re-measured the obligations for its self insured black lung plans as of March 31, 2010. The re-measurement resulted in an estimated $6,658 increase to the obligation as of March 31, 2010 included in other non-current liabilities in the accompanying Condensed Consolidated Balance Sheets, with an offset to accumulated other comprehensive income (loss).

17

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

(13) Stock-Based Compensation Awards

On May 19, 2010, the Stockholders approved the 2010 Long-Term Incentive Plan (the “2010 LTIP”). The principal purpose of the 2010 LTIP is to advance the interests of the Company and its stockholders by providing incentives to certain eligible persons who contribute significantly to the strategic and long-term performance objectives and growth of the Company. The 2010 LTIP provides for a variety of awards, including options, stock appreciation rights, restricted stock, restricted share units (both time-based and performance-based), and any other type of award deemed by the Compensation Committee in its discretion to be consistent with the purposes of the 2010 LTIP.  The 2010 LTIP is currently authorized for the issuance of awards for up to 3,250,000 shares of common stock, and as of June 30, 2010, 3,249,528 shares of common stock were available for grant under the plan.

During the six months ended June 30, 2010, the Company awarded certain of its executives and key employees 363,630 time-based restricted share units and 265,636 performance-based restricted share units. The time-based share units vest, subject to continued employment, ratably over three-years or cliff vest after three years (with accelerated vesting upon a change of control and certain retirement scenarios). The performance-based share units cliff vest after three years, subject to continued employment and the satisfaction of the performance criteria (with accelerated vesting upon a change of control and certain retirement scenarios). The 265,636 performance-based restricted share units awarded during the six months ended June 30, 2010 have the potential to be distributed from 0% to 200% of the awarded amount, depending on the actual res ults versus the pre-established performance criteria over the three-year period.

At June 30, 2010, the Company had three types of stock-based awards outstanding: restricted stock, restricted share units (both time-based and performance-based), and stock options. Stock-based compensation expense from continuing operations totaled $8,301 and $4,246, for the three months ended June 30, 2010 and 2009, respectively. Stock-based compensation expense from continuing operations totaled $17,007 and $7,471, for the six months ended June 30, 2010 and 2009, respectively. For the three months ended June 30, 2010 and 2009, approximately 77% and 75%, respectively, of stock-based compensation expense from continuing operations is reported as selling, general and administrative expenses. For the six months ended June 30, 2010 and 2009, approximately 73% and 74%, respectively, of stock-based compensation expense from continuing operat ions is reported as selling, general and administrative expenses. Approximately 23% and 25%, of stock-based compensation expense from continuing operations was recorded as a component of cost of coal sales for the three months ended June 30, 2010 and 2009, respectively. Approximately 27% and 26%, of stock-based compensation expense from continuing operations was recorded as a component of cost of coal sales for the six months ended June 30, 2010 and 2009, respectively.

In November 2008, the Board of Directors authorized the Company to repurchase common shares from employees (upon the election by the employee) to satisfy the employees’ minimum statutory tax withholdings upon the vesting of restricted stock and restricted share units (both time-based and performance-based).  Shares that are repurchased to satisfy the employees’ minimum statutory tax withholdings are recorded in treasury stock at cost, and these shares are not added back into the pool of shares available for grant of the respective plans the shares were granted from. During the six months ended June 30, 2010 and 2009, the Company repurchased 347,716 and 106,937, respectively, of common shares from employees at an average price paid per share of $45.58 and $18.96, respectively.

(14) Commitments and Contingencies

(a) General

Estimated losses from loss contingencies and legal expenses associated with contingencies are accrued by a charge to income when information available indicates that it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the consolidated financial statements when it is at least reasonably possible that a loss will be incurred and the loss is material.

(b) Commitments

In connection with the Merger, the Company assumed the obligations for a federal coal lease, which contains an estimated 224.0 million tons of proven and probable coal reserves in the Powder River Basin. The lease bid was $180,500, payable in five equal annual installments of $36,108. The first two installments were paid in 2009 and 2008 by Foundation. The third installment was paid in 2010 by the Company. The two remaining annual installments of $36,108 each are due on May 1, the anniversary date of the lease in 2011 and 2012.

18

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

(c) Contingencies

Extensive regulation of the impacts of mining on the environment and of maintaining workplace safety, and related litigation, has had or may have a significant effect on the Company’s costs of production and results of operations. Further regulations, legislation or litigation in these areas may also cause the Company’s sales or profitability to decline by increasing costs or by hindering the Company’s ability to continue mining at existing operations or to permit new operations.

(d) Guarantees and Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit, performance or surety bonds, and other guarantees and indemnities related to the obligations of affiliated entities which are not reflected in the Company's Condensed Consolidated Balance Sheets. Management does not expect any material losses to result from these guarantees or other off-balance sheet financial instruments.

Letters of Credit

The amount of outstanding bank letters of credit issued under the Company’s accounts receivable securitization program as of June 30, 2010 was $141,612. As of June 30, 2010, the Company had $42,518 of additional letters of credit outstanding under the revolver.

(e) Legal Proceedings

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

Nicewonder Litigation

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

In September 2007, the Court ruled that the WVDOH and the Federal Highway Administration (which is now a party to the suit) could not, under the circumstances of this case, enter into a contract that did not require the contractor to pay the prevailing wages as required by the Davis-Bacon Act. In anticipation of a potential Court directive that the contract be renegotiated for such payment, for which the WVDOH had committed to reimburse NCI, the Company recorded a $9,000 long-term liability for the potential obligations under the ruling and an offsetting $9,000 long-term receivable for the recovery of these costs from the WVDOH.

On September 30, 2009, the Court issued an order that dismissed or denied for lack of standing all of the plaintiff’s claims under federal law and remanded the remaining state claims to circuit court in Kanawha County, WV for resolution. The Court also vacated portions of its September 2007 order, and held that the plaintiff lacked standing to pursue the Davis-Bacon Act claim and further concluded that no private right of action exists to challenge the absence of a provision in a contract for highway construction requiring payment of prevailing wages established by the Davis-Bacon Act.  As a result of the September 30, 2009 ruling, the Company’s previously established long-term liability and offsetting long-term receivable of $9,000 have been reversed.

On May 7, 2010, the Circuit Court of Kanawha County entered Summary Judgment in favor of NCI.  The plaintiffs have filed a petition for appeal with the West Virginia Supreme Court of Appeals, but the Court of Appeals has not yet accepted the appeal.

19

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

(15) Comprehensive Income

Total comprehensive income is as follows for the three and six months ended June 30, 2010:

	Three Months Ended June 30, 2010			Six Months Ended June 30, 2010
Net income	$	38,797		$	52,838
Adjustments to unrecognized losses and amortization of employee benefit costs, net of tax effect of $9,780 and $12,099 for the three and six months ended June 30, 2010, respectively		(15,583	)		(19,279	)
Change in fair value of cash flow hedges, net of tax effect of $2,911 and $1,347 for the three months and six months ended June 30, 2010, respectively		(4,888	)		(2,368	)
Change in fair value of available-for-sale marketable securities, net of tax effect of ($94) and ($197) for the three and six months ended June 30, 2010, respectively		149			312
Total comprehensive income	$	18,475		$	31,503

Total comprehensive income is as follows for the three and six months ended June 30, 2009:

	Three Months Ended June 30, 2009		Six Months Ended June 30, 2009
Net income	$	15,359	$	56,323
Change in fair value of cash flow hedge related to interest rate swaps, net of tax effect of ($1,150) and ($1,158) for the three and six months ended June 30, 2009, respectively		3,482		3,506
Adjustments to unrecognized losses and amortization of employee benefit costs, net of tax effect of ($1,771) and ($1,924) for the three and six months ended June 30, 2009, respectively		5,366		5,828
Change in fair value of cash flow hedges, net of tax effect of ($188) and ($190) for the three and six months ended June 30, 2009, respectively		570		576
Total comprehensive income	$	24,777	$	66,233

The following table summarizes the components of accumulated other comprehensive income (loss) as of June 30, 2010 and December 31, 2009:

	June 30, 2010			December 31, 2009
Adjustments to unrecognized gains and losses and amortization of employee benefit costs, net of tax effect of $5,997 and ($6,102) as of June 30, 2009 and December 31, 2009, respectively		(14,146	)		5,133
Unrealized losses on cash flow hedges, net of tax effect of $795 and ($552) as of June 30, 2010 and December 31, 2009, respectively		(1,469	)		899
Change in fair value of available-for-sale marketable securities, net of tax effect of ($57) and $140 as of June 30, 2010 and December 31, 2009, respectively		92			(220	)
Total accumulated other comprehensive income (loss)	$	(15,523	)	$	5,812

(16) Segment Information

The Company discloses information about operating segments using the management approach, where segments are determined and reported based on the way that management organizes the enterprise for making operating decisions and assessing performance.  The Company periodically evaluates its application of accounting guidance for reporting its segments.

The Company extracts, processes and markets steam and metallurgical coal from surface and deep mines for sale to electric utilities, steel and coke producers, and industrial customers. The Company operates only in the United States with mines in Central Appalachia, Northern Appalachia, and the Powder River Basin. Prior to the Merger, Old Alpha had only one reportable segment, Coal Operations, which included operations in Central and Northern Appalachia. As a result of the Merger, the Company changed its organizational structure and re-evaluated its reportable segments.  Based on a review of the required economic characteristics, the Company aggregated its operating segments into two reportable segments: Western Coal Operations, which consists of two Powder River Basin surface mines as of June 30, 2010 and Eastern Coal Operation s, which consists of 39 underground mines and 24 surface mines in Central and Northern Appalachia as of June 30, 2010, as well as the Company’s road construction business which operates in Central Appalachia and its coal brokerage activities.

20

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

In addition to the two reportable segments, the All Other category includes an idled underground mine in Illinois; expenses associated with closed mines; Dry Systems Technologies; revenues and royalties from the sale of coalbed methane at our Coal Gas Recovery business and natural gas extraction; equipment sales and repair operations; terminal services; the leasing of mineral rights; general corporate overhead and corporate assets and liabilities. The Company evaluates the performance of its segments based on EBITDA from continuing operations, which the Company defines as income from continuing operations plus interest expense, income tax expense, amortization of acquired coal supply agreements, net and depreciation, depletion and amortization, less interest income and income tax benefit. All prior period segment information has been rec lassified to conform to the current presentation.

Segment operating results and capital expenditures from continuing operations for the three months ended June 30, 2010 were as follows:

	Eastern Coal Operations		Western Coal Operations		All Other			Consolidated
Total revenues	$	866,734	$	122,497	$	11,174		$	1,000,405
Amortization of acquired coal supply agreements, net	$	33,714	$	21,919	$	-		$	55,633
Depreciation, depletion, and amortization	$	73,365	$	14,138	$	3,595		$	91,098
EBITDA from continuing operations	$	185,295	$	17,583	$	(4,237	)	$	198,641
Capital expenditures	$	53,595	$	9,562	$	11,859		$	75,016
Acquisition of mineral rights under federal lease	$	-	$	36,108	$	-		$	36,108

        Segment operating results and capital expenditures from continuing operations for the three months ended June 30, 2009 were as follows:

	Eastern Coal Operations		Western Coal Operations		All Other			Consolidated
Total revenues	$	381,123	$	-	$	5,891		$	387,014
Depreciation, depletion, and amortization	$	35,596	$	-	$	756		$	36,352
EBITDA from continuing operations	$	73,438	$	-	$	(5,274	)	$	68,164
Capital expenditures	$	26,111	$	-	$	1,864		$	27,975

Segment operating results and capital expenditures from continuing operations for the six months ended June 30, 2010 were as follows:

	Eastern Coal Operations		Western Coal Operations		All Other			Consolidated
Total revenues	$	1,643,743	$	256,588	$	22,078		$	1,922,409
Amortization of acquired coal supply agreements, net	$	77,851	$	43,739	$	-		$	121,590
Depreciation, depletion, and amortization	$	150,236	$	28,992	$	6,997		$	186,225
EBITDA from continuing operations	$	394,764	$	38,310	$	(15,961	)	$	417,113
Capital expenditures	$	103,396	$	15,512	$	16,987		$	135,895
Acquisition of mineral rights under federal lease	$	-	$	36,108	$	-		$	36,108

21

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Segment operating results and capital expenditures from continuing operations for the six months ended June 30, 2009 were as follows:

	Eastern Coal Operations		Western Coal Operations		All Other		Consolidated
Total revenues	$	860,998	$	-	$	11,975	$	872,973
Depreciation, depletion, and amortization	$	75,123	$	-	$	1,434	$	76,557
EBITDA from continuing operations	$	174,285	$	-	$	3,560	$	177,845
Capital expenditures	$	43,244	$	-	$	2,867	$	46,111

The following table presents a reconciliation of EBITDA from continuing operations to income from continuing operations:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
EBITDA from continuing operations	$	198,641		$	68,164		$	417,113		$	177,845
Interest expense		(18,504	)		(10,166	)		(40,624	)		(20,019	)
Interest income		848			355			1,528			980
Income tax benefit (expense)		4,928			(5,323	)		(16,350	)		(18,950	)
Depreciation, depletion and amortization		(91,098	)		(36,352	)		(186,225	)		(76,557	)
Amortization of acquired coal supply agreements, net		(55,633	)		-			(121,590	)		-
Income from continuing operations	$	39,182		$	16,678		$	53,852		$	63,299

The following table presents total assets and goodwill as of June 30, 2010 and December 31, 2009:

	Assets				Goodwill
	June 30, 2010		December 31, 2009		June 30, 2010		December 31, 2009
Eastern Coal Operations	$	3,893,424	$	3,644,696	$	321,641	$	321,641
Western Coal Operations		434,069		721,574		52,800		52,800
All Other		823,933		751,929		5,855		5,855
Total	$	5,151,426	$	5,118,199	$	380,296	$	380,296

The Company markets produced, processed, and purchased coal to customers in the United States and in international markets. Export revenues totaled $375,683 and $630,529, or approximately 38% and 34%, respectively, of total coal and freight revenues for the three and six months ended June 30, 2010, respectively. Export revenues totaled $126,480 and $321,577, or approximately 34% and 38%, respectively, of total coal and freight revenues for the three and six months ended June 30, 2009, respectively.

(17) Discontinued Operations

Kingwood Mining Company, LLC

On December 3, 2008, the Company announced the permanent closure of Kingwood.  The decision was a result of adverse geologic conditions and regulatory requirements that rendered the coal seam unmineable at this location. The mine stopped producing coal in early January 2009 and Kingwood ceased equipment recovery operations at the end of April 2009. Beginning in the first quarter of 2009, the results of operations for the current and prior periods have been reported as discontinued operations.

22

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

The following table reflects the activities for Kingwood’s discontinued operations for the three and six months ended June 30, 2010 and 2009:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Total revenues	$	-		$	419		$	-		$	3,326
Costs and expenses		(633	)		(2,478	)		(1,680	)		(12,636	)
Loss from operations		(633	)		(2,059	)		(1,680	)		(9,310	)
Miscellaneous income (expense)		17			-			17			-
Income tax benefit from discontinued operations		231			740			649			2,334
Loss from discontinued operations	$	(385	)	$	(1,319	)	$	(1,014	)	$	(6,976	)

The assets and liabilities of Kingwood as of June 30, 2010 and December 31, 2009 are shown below:

	June 30, 2010			December 31, 2009
Property, plant, and equipment, net	$	605		$	1,636
Other assets		440			442
Total assets of discontinued operations		1,045			2,078
Current liabilities		3,650			4,830
Non-current liabilities		11,188			10,166
Total liabilities of discontinued operations		14,838			14,996
Net liability	$	(13,793	)	$	(12,918	)

(18) Mergers and Acquisitions

Merger with Foundation Coal Holdings, Inc.

On May 11, 2009, Old Alpha and Foundation executed an agreement and plan of merger pursuant to which Old Alpha was to be merged with and into Foundation, with Foundation continuing as the surviving corporation of the Merger. On July 31, 2009, the Merger was completed and Foundation was renamed Alpha Natural Resources, Inc.

During the three months ended June 30, 2010, the Company finalized the purchase price allocation for the Merger and recorded adjustments to the preliminary purchase price allocation related to certain contract liabilities and reserve estimates. Accordingly, the December 31, 2009 consolidated balance sheet was adjusted to reflect these changes as if they were recorded on the acquisition date in accordance with generally accepted accounting principles related to acquisition accounting. The increase to goodwill is reported in the Company’s Eastern Coal Operations, Western Coal Operations and All Other category as of June 30, 2010 and December 31, 2009.

23

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

The following table presents the details of the preliminary purchase price allocation reported in the Company’s 2009 Annual Report on Form 10-K, the adjustments made in the three months ended June 30, 2010 and the final purchase price allocation.

	Preliminary December 31, 2009			Adjustments			Final December 31, 2009
Cash	$	23,505		$	-		$	23,505
Trade accounts receivable		83,531			-			83,531
Coal inventories		47,433			-			47,433
Other current assets		61,269			-			61,269
Property and equipment		716,749			-			716,749
Owned lands		76,134			-			76,134
Owned and leased mineral rights		1,873,347			(27,000	)		1,846,347
Coal supply agreements		529,507			-			529,507
Other non-current assets		14,296			-			14,296
Goodwill		337,321			22,427			359,748
Total assets		3,763,092			(4,573	)		3,758,519
Current liabilities		(176,233	)		(9,261	)		(185,494	)
Long-term debt, net (including current portion)		(595,817	)		-			(595,817	)
Asset retirement obligation (including current portion)		(99,574	)		-			(99,574	)
Deferred income taxes		(443,744	)		13,834			(429,910	)
Pension and post retirement obligations (including current portion)		(713,095	)		-			(713,095	)
Other non-current liabilities		(66,231	)		-			(66,231	)
Total liabilities		(2,094,694	)		4,573			(2,090,121	)
Net tangible and intangible assets acquired	$	1,668,398		$	-		$	1,668,398

The following unaudited pro forma information has been prepared for illustrative purposes only and assumes the Merger occurred at the beginning of the period being presented. The unaudited pro forma results have been prepared based on estimates and assumptions, which the Company believes are reasonable; however, they are not necessarily indicative of the consolidated results of operations had the Merger occurred at the beginning of the period presented, or of future results of operations.

The unaudited pro forma results for the three and six months ended June 30, 2009 are as follows:

	Three Months Ended June 30, 2009			Six Months Ended June 30, 2009
Total revenues
As reported	$	387,014		$	872,973
Pro forma	$	780,647		$	1,661,158
Income (loss) from continuing operations
As reported	$	16,678		$	63,299
Pro forma	$	(12,141	)	$	(24,095	)
Earnings (loss) per share from continuing operations-basic
As reported	$	0.24		$	0.91
Pro forma	$	(0.10	)	$	(0.20	)
Earnings (loss) per share from continuing operations-diluted
As reported	$	0.24		$	0.90
Pro forma	$	(0.10	)	$	(0.20	)

24

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

(19) Supplemental Guarantor and Non-Guarantor Financial Information

On July 30, 2004, Foundation’s subsidiary, Foundation PA (the “2014 Notes Issuer”), issued the 2014 Notes. The 2014 Notes were guaranteed on a senior unsecured basis by Foundation Coal Corporation (“FCC”), an indirect parent of Foundation PA, and certain of its subsidiaries. As a result of the Merger, Foundation PA and FCC became subsidiaries of the Company.

On August 1, 2009, in connection with the Merger, Foundation PA, the Company and certain of its subsidiaries (which were also former subsidiaries of Old Alpha) (the “New Subsidiaries”) executed a supplemental indenture (the “Third Supplemental Indenture”), which supplements the indenture dated as of July 30, 2004 as supplemented, governing the 2014 Notes.

Pursuant to the Third Supplemental Indenture, the Company assumed the obligations of FCC in respect of the 2014 Notes and, along with the New Subsidiaries, became obligated as guarantors on the indenture governing the 2014 Notes. On August 1, 2009, in connection with the Merger, FCC merged with and into the Company. In accordance with the indenture governing the 2014 Notes, the “Guarantor Subsidiaries,” under the 2014 Notes, referred to as the “2014 Notes Guarantor Subsidiaries,” are each of the direct and indirect wholly owned subsidiaries of the Company, other than the Issuer Subsidiary and the Non-Guarantor Subsidiary. The Company and the 2014 Notes Guarantor Subsidiaries have fully and unconditionally guaranteed the 2014 Notes, jointly and severally, on a senior unsecured basis.

Presented below are condensed consolidating financial statements as of June 30, 2010 and December 31, 2009 and for the three and six months ended June 30, 2010 and 2009, based on the guarantor structure that was in place at June 30, 2010. As the Merger was treated as a “reverse acquisition” and Old Alpha was treated as the accounting acquirer, Old Alpha’s historical financial statements are the historical financial statements of the Company for comparative purposes. As a result, “Parent” in the tables below refers to Old Alpha in reference to dates prior to the Merger and to the Company in reference to dates following the Merger, and refers to the Company as a guarantor of the 2014 Notes; information is presented for “2014 Notes Issuer” only for dates following the Merger because the 2014 Notes I ssuer was a subsidiary of Foundation prior to the Merger; and information for “2014 Notes Guarantor Subsidiaries” prior to the Merger includes only those 2014 Notes Guarantor Subsidiaries that were subsidiaries of Old Alpha prior to the Merger. "Non-Guarantor Subsidiary" refers, for the tables below dated as of and for the periods ended June 30, 2010, to ANR Receivables Funding LLC, a wholly-owned indirect subsidiary of the Company formed on March 25, 2009 in connection with the A/R Facility, that was not and is not a guarantor of the 2014 Notes. Separate consolidated financial statements and other disclosures concerning the 2014 Notes Guarantor Subsidiaries are not presented because management believes that such information is not material to holders of the 2014 Notes or related guarantees.

25

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Balance Sheet

June 30, 2010

	Parent		2014 Notes Issuer		2014 Notes Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			Total Consolidated
Assets
Current assets:
Cash and cash equivalents	$	46,114	$	-	$	372,771	$	-	$	-		$	418,885
Trade accounts receivable, net		-		-		18,353		298,037		-			316,390
Inventories, net		-		-		200,549		-		-			200,549
Prepaid expenses and other current assets		-		-		263,978		-		-			263,978
Total current assets		46,114		-		855,651		298,037		-			1,199,802
Property, equipment and mine development costs, net		-		-		1,095,135		-		-			1,095,135
Owned and leased mineral rights, net		-		-		1,940,342		-		-			1,940,342
Owned lands		-		-		94,635		-		-			94,635
Goodwill		-		-		380,296		-		-			380,296
Acquired coal supply agreements, net		-		-		271,131		-		-			271,131
Other non-current assets		4,973,490		1,622,283		3,465,976		46,251		(9,937,915	)		170,085
Total assets	$	5,019,604	$	1,622,283	$	8,103,166	$	344,288	$	(9,937,915	)	$	5,151,426
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	-	$	11,839	$	-	$	-	$	-		$	11,839
Trade accounts payable		452		-		175,978		-		-			176,430
Accrued expenses and other current liabilities		1,423		10,156		280,842		60		-			292,481
Total current liabilities		1,875		21,995		456,820		60		-			480,750
Long-term debt		216,312		517,748		-		-		-			734,060
Pension and postretirement medical benefit obligations		-		-		721,957		-		-			721,957
Asset retirement obligations		-		-		198,145		-		-			198,145
Deferred income taxes		-		-		256,584		-		-			256,584
Other non-current liabilities		2,190,079		671,273		1,328,330		339,069		(4,380,159	)		148,592
Total liabilities		2,408,266		1,211,016		2,961,836		339,129		(4,380,159	)		2,540,088
Stockholders' Equity
Total stockholders' equity		2,611,338		411,267		5,141,330		5,159		(5,557,756	)		2,611,338
Total liabilities and stockholders' equity	$	5,019,604	$	1,622,283	$	8,103,166	$	344,288	$	(9,937,915	)	$	5,151,426

26

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Balance Sheet

December 31, 2009

	Parent		2014 Notes Issuer		2014 Notes Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			Total Consolidated
Assets
Current assets:
Cash and cash equivalents	$	69,410	$	-	$	396,459	$	-	$	-		$	465,869
Trade accounts receivable, net		-		-		18,541		214,090		-			232,631
Inventories, net		-		-		176,372		-		-			176,372
Prepaid expenses and other current assets		-		-		176,953		-		-			176,953
Total current assets		69,410		-		768,325		214,090		-			1,051,825
Property, equipment and mine development costs, net		-		-		1,082,446		-		-			1,082,446
Owned and leased mineral rights, net		-		-		1,958,855		-		-			1,958,855
Owned lands		-		-		91,262		-		-			91,262
Goodwill		-		-		380,296		-		-			380,296
Acquired coal supply agreements, net		-		-		396,491		-		-			396,491
Other non-current assets		4,121,982		1,659,904		2,559,580		49,472		(8,233,914	)		157,024
Total assets	$	4,191,392	$	1,659,904	$	7,237,255	$	263,562	$	(8,233,914	)	$	5,118,199
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	-	$	33,500	$	-	$	-	$	-		$	33,500
Trade accounts payable		1,469		-		151,193		-		-			152,662
Accrued expenses and other current liabilities		1,423		9,552		258,750		68		-			269,793
Total current liabilities		2,892		43,052		409,943		68		-			455,955
Long-term debt		210,524		546,229		-		-		-			756,753
Pension and postretirement medical benefit obligations		-		-		682,991		-		-			682,991
Asset retirement obligations		-		-		190,724		-		-			190,724
Deferred income taxes		-		-		302,630		-		-			302,630
Other non-current liabilities		1,386,687		671,273		594,100		259,172		(2,773,374	)		137,858
Total liabilities		1,600,103		1,260,554		2,180,388		259,240		(2,773,374	)		2,526,911
Stockholders' Equity
Total stockholders' equity		2,591,289		399,350		5,056,867		4,322		(5,460,540	)		2,591,288
Total liabilities and stockholders' equity	$	4,191,392	$	1,659,904	$	7,237,255	$	263,562	$	(8,233,914	)	$	5,118,199

27

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2010

	Parent			2014 Notes Issuer			2014 Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Total Consolidated
Revenues:
Coal revenues	$	-		$	-		$	894,104		$	-		$	-		$	894,104
Freight and handling revenues		-			-			90,268			-			-			90,268
Other revenues		-			-			13,806			2,227			-			16,033
Total revenues		-			-			998,178			2,227			-			1,000,405
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		-			-			657,199			-			-			657,199
Freight and handling costs		-			-			90,268			-			-			90,268
Other expenses		-			-			8,443			-			-			8,443
Depreciation, depletion and amortization		-			-			91,098			-			-			91,098
Amortization of acquired coal supply agreements, net		-			-			55,633			-			-			55,633
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		14			-			43,417			800			-			44,231
Total costs and expenses		14			-			946,058			800			-			946,872
(Loss) income from operations		(14	)		-			52,120			1,427			-			53,533
Other income (expense):
Interest expense		(4,845	)		(12,019	)		(895	)		(745	)		-			(18,504	)
Interest income		-			-			848			-			-			848
Loss on early extinguishment of debt		-			-			(1,349	)		-			-			(1,349	)
Miscellaneous expense, net		-			-			(274	)		-			-			(274	)
Total other expense, net		(4,845	)		(12,019	)		(1,670	)		(745	)		-			(19,279	)
Income (loss) from continuing operations before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries		(4,859	)		(12,019	)		50,450			682			-			34,254
Income tax benefit (expense)		1,895			4,688			(1,389	)		(266	)		-			4,928
Equity in earnings of investments in Issuer and Guarantor Subsidiaries		41,761			(10,729	)		-			-			(31,032	)		-
Income (loss) from continuing operations		38,797			(18,060	)		49,061			416			(31,032	)		39,182
Discontinued operations:
Loss from discontinued operations before income taxes		-			-			(616	)		-			-			(616	)
Income tax benefit		-			-			231			-			-			231
Loss from discontinued operations		-			-			(385	)		-			-			(385	)
Net income (loss)	$	38,797		$	(18,060	)	$	48,676		$	416		$	(31,032	)	$	38,797

28

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statement of Operations

For the Three Months Ended June 30, 2009

	Parent			2014 Notes Issuer		2014 Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Total Consolidated
Revenues:
Coal revenues	$	-		$	-	$	334,970		$	-		$	-		$	334,970
Freight and handling revenues		-			-		35,445			-			-			35,445
Other revenues		-			-		15,765			834			-			16,599
Total revenues		-			-		386,180			834			-			387,014
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		-			-		267,014			-			-			267,014
Freight and handling costs		-			-		35,445			-			-			35,445
Other expenses		-			-		(6,451	)		-			-			(6,451	)
Depreciation, depletion and amortization		-			-		36,352			-			-			36,352
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		(73	)		-		22,788			192			-			22,907
Total costs and expenses		(73	)		-		355,148			192			-			355,267
Income from operations		73			-		31,032			642			-			31,747
Other income (expense):
Interest expense		(4,704	)		-		(5,063	)		(399	)		-			(10,166	)
Interest income		-			-		355			-			-			355
Miscellaneous income, net		-			-		65			-			-			65
Total other expense, net		(4,704	)		-		(4,643	)		(399	)		-			(9,746	)
Income (loss) from continuing operations before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries		(4,631	)		-		26,389			243			-			22,001
Income tax benefit (expense)		1,806			-		(7,035	)		(94	)		-			(5,323	)
Equity in earnings of investments in Issuer and Guarantor Subsidiaries		18,184			-		-			-			(18,184	)		-
Income from continuing operations		15,359			-		19,354			149			(18,184	)		16,678
Discontinued operations:
Loss from discontinued operations before income taxes		-			-		(2,059	)		-			-			(2,059	)
Income tax benefit		-			-		740			-			-			740
Loss from discontinued operations		-			-		(1,319	)		-			-			(1,319	)
Net income	$	15,359		$	-	$	18,035		$	149		$	(18,184	)	$	15,359

29

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2010

	Parent			2014 Notes Issuer			2014 Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Total Consolidated
Revenues:
Coal revenues	$	-		$	-		$	1,725,370		$	-		$	-		$	1,725,370
Freight and handling revenues		-			-			155,056			-			-			155,056
Other revenues		-			-			37,658			4,325			-			41,983
Total revenues		-			-			1,918,084			4,325			-			1,922,409
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		-			-			1,232,266			-			-			1,232,266
Freight and handling costs		-			-			155,056			-			-			155,056
Other expenses		-			-			24,127			-			-			24,127
Depreciation, depletion and amortization		-			-			186,225			-			-			186,225
Amortization of acquired coal supply agreements, net		-			-			121,590			-			-			121,590
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		14			-			90,538			1,468			-			92,020
Total costs and expenses		14			-			1,809,802			1,468			-			1,811,284
(Loss) income from operations		(14	)		-			108,282			2,857			-			111,125
Other income (expense):
Interest expense		(9,628	)		(23,362	)		(6,150	)		(1,484	)		-			(40,624	)
Interest income		-			-			1,528			-			-			1,528
Loss on early extinguishment of debt		-			-			(1,349	)		-			-			(1,349	)
Miscellaneous expense, net		-			-			(478	)		-			-			(478	)
Total other expense, net		(9,628	)		(23,362	)		(6,449	)		(1,484	)		-			(40,923	)
Income (loss) from continuing operations before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries		(9,642	)		(23,362	)		101,833			1,373			-			70,202
Income tax benefit (expense)		3,760			9,111			(28,686	)		(535	)		-			(16,350	)
Equity in earnings of investments in Issuer and Guarantor Subsidiaries		58,720			26,168			-			-			(84,888	)		-
Income from continuing operations		52,838			11,917			73,147			838			(84,888	)		53,852
Discontinued operations:
Loss from discontinued operations before income taxes		-			-			(1,663	)		-			-			(1,663	)
Income tax benefit		-			-			649			-			-			649
Loss from discontinued operations		-			-			(1,014	)		-			-			(1,014	)
Net income	$	52,838		$	11,917		$	72,133		$	838		$	(84,888	)	$	52,838

30

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statement of Operations

For the Six Months Ended June 30, 2009

	Parent			2014 Notes Issuer		2014 Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Total Consolidated
Revenues:
Coal revenues	$	-		$	-	$	760,773		$	-		$	-		$	760,773
Freight and handling revenues		-			-		81,499			-			-			81,499
Other revenues		-			-		29,491			1,210			-			30,701
Total revenues		-			-		871,763			1,210			-			872,973
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		-			-		570,039			-			-			570,039
Freight and handling costs		-			-		81,499			-			-			81,499
Other expenses		-			-		4,398			-			-			4,398
Depreciation, depletion and amortization		-			-		76,557			-			-			76,557
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		61			-		39,087			225			-			39,373
Total costs and expenses		61			-		771,580			225			-			771,866
(Loss) income from operations		(61	)		-		100,183			985			-			101,107
Other income (expense):
Interest expense		(9,257	)		-		(10,324	)		(438	)		-			(20,019	)
Interest income		-			-		980			-			-			980
Miscellaneous income, net		-			-		181			-			-			181
Total other expense, net		(9,257	)		-		(9,163	)		(438	)		-			(18,858	)
Income (loss) from continuing operations before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries		(9,318	)		-		91,020			547			-			82,249
Income tax benefit (expense)		3,634			-		(22,371	)		(213	)		-			(18,950	)
Equity in earnings of investments in Issuer and Guarantor Subsidiaries		62,007			-		-			-			(62,007	)		-
Income from continuing operations		56,323			-		68,649			334			(62,007	)		63,299
Discontinued operations:
Loss from discontinued operations before income taxes		-			-		(9,310	)		-			-			(9,310	)
Income tax benefit		-			-		2,334			-			-			2,334
Loss from discontinued operations		-			-		(6,976	)		-			-			(6,976	)
Net income	$	56,323		$	-	$	61,673		$	334		$	(62,007	)	$	56,323

31

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2010

	Parent			2014 Notes Issuer			2014 Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Total Consolidated
Net cash (used in) provided by operating activities	$	(9,628	)	$	(23,367	)	$	368,699		$	2,227		$	337,931
Investing activities:
Capital expenditures	$	-		$	-		$	(135,895	)	$	-		$	(135,895	)
Acquisition of mineral rights under federal lease		-			-			(36,108	)		-			(36,108	)
Purchase of equity method investment		-			-			(3,000	)		-			(3,000	)
Purchases of marketable securities, net		-			-			(123,465	)		-			(123,465	)
Other, net		-			-			2,017			-			2,017
Net cash used in investing activities	$	-		$	-		$	(296,451	)	$	-		$	(296,451	)
Financing activities:
Principal repayments of long-term debt	$	-		$	(50,934	)	$	-		$	-		$	(50,934	)
Debt issuance costs		-			(8,690	)		-			-			(8,690	)
Excess tax benefit from stock-based awards		-			-			7,587			-			7,587
Common stock repurchases		(40,672	)		-			-			-			(40,672	)
Proceeds from exercise of stock options		4,245			-			-			-			4,245
Transactions with affiliates		22,759			82,991			(103,523	)		(2,227	)		-
Net cash (used in) provided by financing activities	$	(13,668	)	$	23,367		$	(95,936	)	$	(2,227	)	$	(88,464	)
Net decrease in cash and cash equivalents	$	(23,296	)	$	-		$	(23,688	)	$	-		$	(46,984	)
Cash and cash equivalents at beginning of period		69,410			-			396,459			-			465,869
Cash and cash equivalents at end of period	$	46,114		$	-		$	372,771		$	-		$	418,885

32

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2009

	Parent			2014 Notes Issuer		2014 Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Total Consolidated
Net cash (used in) provided by operating activities	$	(9,257	)	$	-	$	65,623		$	1,210		$	57,576
Investing activities:
Capital expenditures	$	-		$	-	$	(46,111	)	$	-		$	(46,111	)
Purchase of acquired company		-			-		(1,750	)		-			(1,750	)
Other, net		-			-		312			-			312
Net cash used in investing activities	$	-		$	-	$	(47,549	)	$	-		$	(47,549	)
Financing activities:
Principal repayments of note payable	$	-		$	-	$	(10,892	)	$	-		$	(10,892	)
Principal repayments of long-term debt		-			-		(232	)		-			(232	)
Debt issuance costs		-			-		(5,277	)		-			(5,277	)
Common stock repurchases		(2,027	)		-		-			-			(2,027	)
Proceeds from exercise of stock options		230			-		-			-			230
Transactions with affiliates		7,143			-		(5,933	)		(1,210	)		-
Other, net		-			-		(651	)		-			(651	)
Net cash provided by (used in) financing activities	$	5,346		$	-	$	(22,985	)	$	(1,210	)	$	(18,849	)
Net decrease in cash and cash equivalents	$	(3,911	)	$	-	$	(4,911	)	$	-		$	(8,822	)
Cash and cash equivalents at beginning of period		73,321			-		602,869			-			676,190
Cash and cash equivalents at end of period	$	69,410		$	-	$	597,958		$	-		$	667,368

The Company may issue new registered debt securities (the “New Notes”) in the future that will be fully and unconditionally guaranteed, jointly and severally, on a senior or subordinated unsecured basis by the 2014 Notes Guarantor Subsidiaries and the 2014 Notes Issuer (collectively, the “New Notes Guarantor Subsidiaries”).

Presented below are condensed consolidating financial statements as of June 30, 2010 and December 31, 2009 and for the three and six months ended June 30, 2010 and 2009, respectively, based on the guarantor structure that would be in place in the event the Company issues New Notes in the future. As the Merger is treated as a “reverse acquisition” and Old Alpha is treated as the accounting acquirer, Old Alpha’s historical financial statements became the historical financial statements of the Company for comparative purposes. As a result, “Parent” in the tables below refers to Old Alpha in reference to dates prior to the Merger and to the Company in reference to dates following the Merger, and refers to the Company as the issuer of any New Notes that may be issued in the future; and information for “New Notes Guarantor Subsidiaries” prior to the Merger includes only those New Notes Guarantor Subsidiaries that were subsidiaries of Old Alpha prior to the Merger. "Non-Guarantor Subsidiary" refers, for the tables below dated as of and for the periods ended June 30, 2010, to ANR Receivables Funding LLC, a wholly-owned indirect subsidiary of the Company formed on March 25, 2009 in connection with the A/R Facility, that was not and would not be a guarantor of the New Notes. Separate consolidated financial statements and other disclosures concerning the New Notes Guarantor Subsidiaries are not presented because management believes that such information would not be material to holders of any New Notes or related guarantees that may be issued by the Company.

33

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Balance Sheet

June 30, 2010

	Parent (Issuer)		New Notes Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			Total Consolidated
Assets
Current assets:
Cash and cash equivalents	$	46,114	$	372,771	$	-	$	-		$	418,885
Trade accounts receivable, net		-		18,353		298,037		-			316,390
Inventories, net		-		200,549		-		-			200,549
Prepaid expenses and other current assets		-		263,978		-		-			263,978
Total current assets		46,114		855,651		298,037		-			1,199,802
Property, equipment and mine development costs, net		-		1,095,135		-		-			1,095,135
Owned and leased mineral rights, net		-		1,940,342		-		-			1,940,342
Owned lands		-		94,635		-		-			94,635
Goodwill		-		380,296		-		-			380,296
Acquired coal supply agreements, net		-		271,131		-		-			271,131
Other non-current assets		4,973,490		5,088,259		46,251		(9,937,915	)		170,085
Total assets	$	5,019,604	$	9,725,449	$	344,288	$	(9,937,915	)	$	5,151,426
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	-	$	11,839	$	-	$	-		$	11,839
Trade accounts payable		452		175,978		-		-			176,430
Accrued expenses and other current liabilities		1,423		290,998		60		-			292,481
Total current liabilities		1,875		478,815		60		-			480,750
Long-term debt		216,312		517,748		-		-			734,060
Pension and postretirement medical benefit obligations		-		721,957		-		-			721,957
Asset retirement obligations		-		198,145		-		-			198,145
Deferred income taxes		-		256,584		-		-			256,584
Other non-current liabilities		2,190,079		1,999,603		339,069		(4,380,159	)		148,592
Total liabilities		2,408,266		4,172,852		339,129		(4,380,159	)		2,540,088
Stockholders' Equity
Total stockholders' equity		2,611,338		5,552,597		5,159		(5,557,756	)		2,611,338
Total liabilities and stockholders' equity	$	5,019,604	$	9,725,449	$	344,288	$	(9,937,915	)	$	5,151,426

34

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Balance Sheet

December 31, 2009

	Parent (Issuer)		New Notes Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			Total Consolidated
Assets
Current assets:
Cash and cash equivalents	$	69,410	$	396,459	$	-	$	-		$	465,869
Trade accounts receivable, net		-		18,541		214,090		-			232,631
Inventories, net		-		176,372		-		-			176,372
Prepaid expenses and other current assets		-		176,953		-		-			176,953
Total current assets		69,410		768,325		214,090		-			1,051,825
Property, equipment and mine development costs, net		-		1,082,446		-		-			1,082,446
Owned and leased mineral rights, net		-		1,958,855		-		-			1,958,855
Owned lands		-		91,262		-		-			91,262
Goodwill		-		380,296		-		-			380,296
Acquired coal supply agreements, net		-		396,491		-		-			396,491
Other non-current assets		4,121,982		4,219,484		49,472		(8,233,914	)		157,024
Total assets	$	4,191,392	$	8,897,159	$	263,562	$	(8,233,914	)	$	5,118,199
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt	$	-	$	33,500	$	-	$	-		$	33,500
Trade accounts payable		1,469		151,193		-		-			152,662
Accrued expenses and other current liabilities		1,423		268,302		68		-			269,793
Total current liabilities		2,892		452,995		68		-			455,955
Long-term debt		210,524		546,229		-		-			756,753
Pension and postretirement medical benefit obligations		-		682,991		-		-			682,991
Asset retirement obligations		-		190,724		-		-			190,724
Deferred income taxes		-		302,630		-		-			302,630
Other non-current liabilities		1,386,687		1,265,373		259,172		(2,773,374	)		137,858
Total liabilities		1,600,103		3,440,942		259,240		(2,773,374	)		2,526,911
Stockholders' Equity
Total stockholders' equity		2,591,289		5,456,217		4,322		(5,460,540	)		2,591,288
Total liabilities and stockholders' equity	$	4,191,392	$	8,897,159	$	263,562	$	(8,233,914	)	$	5,118,199

35

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Consolidating Statement of Operations

For the Three Months Ended June 30, 2010

	Parent (Issuer)			New Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Total Consolidated
Revenues:
Coal revenues	$	-		$	894,104		$	-		$	-		$	894,104
Freight and handling revenues		-			90,268			-			-			90,268
Other revenues		-			13,806			2,227			-			16,033
Total revenues		-			998,178			2,227			-			1,000,405
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		-			657,199			-			-			657,199
Freight and handling costs		-			90,268			-			-			90,268
Other expenses		-			8,443			-			-			8,443
Depreciation, depletion and amortization		-			91,098			-			-			91,098
Amortization of acquired coal supply agreements, net		-			55,633			-			-			55,633
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		14			43,417			800			-			44,231
Total costs and expenses		14			946,058			800			-			946,872
(Loss) income from operations		(14	)		52,120			1,427			-			53,533
Other income (expense):
Interest expense		(4,845	)		(12,914	)		(745	)		-			(18,504	)
Interest income		-			848			-			-			848
Loss on early extinguishment of debt		-			(1,349	)		-			-			(1,349	)
Miscellaneous expense, net		-			(274	)		-			-			(274	)
Total other expense, net		(4,845	)		(13,689	)		(745	)		-			(19,279	)
Income (loss) from continuing operations before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries		(4,859	)		38,431			682			-			34,254
Income tax benefit (expense)		1,895			3,299			(266	)		-			4,928
Equity in earnings of investments in Issuer and Guarantor Subsidiaries		41,761			(10,729	)		-			(31,032	)		-
Income from continuing operations		38,797			31,001			416			(31,032	)		39,182
Discontinued operations:
Loss from discontinued operations before income taxes		-			(616	)		-			-			(616	)
Income tax benefit		-			231			-			-			231
Loss from discontinued operations		-			(385	)		-			-			(385	)
Net income	$	38,797		$	30,616		$	416		$	(31,032	)	$	38,797

36

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Consolidating Statement of Operations

For the Three Months Ended June 30, 2009

	Parent (Issuer)			New Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Total Consolidated
Revenues:
Coal revenues	$	-		$	334,970		$	-		$	-		$	334,970
Freight and handling revenues		-			35,445			-			-			35,445
Other revenues		-			15,765			834			-			16,599
Total revenues		-			386,180			834			-			387,014
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		-			267,014			-			-			267,014
Freight and handling costs		-			35,445			-			-			35,445
Other expenses		-			(6,451	)		-			-			(6,451	)
Depreciation, depletion and amortization		-			36,352			-			-			36,352
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		(73	)		22,788			192			-			22,907
Total costs and expenses		(73	)		355,148			192			-			355,267
Income from operations		73			31,032			642			-			31,747
Other income (expense):
Interest expense		(4,704	)		(5,063	)		(399	)		-			(10,166	)
Interest income		-			355			-			-			355
Miscellaneous income, net		-			65			-			-			65
Total other expense, net		(4,704	)		(4,643	)		(399	)		-			(9,746	)
Income (loss) from continuing operations before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries		(4,631	)		26,389			243			-			22,001
Income tax benefit (expense)		1,806			(7,035	)		(94	)		-			(5,323	)
Equity in earnings of investments in Issuer and Guarantor Subsidiaries		18,184			-			-			(18,184	)		-
Income from continuing operations		15,359			19,354			149			(18,184	)		16,678
Discontinued operations:
Loss from discontinued operations before income taxes		-			(2,059	)		-			-			(2,059	)
Income tax benefit		-			740			-			-			740
Loss from discontinued operations		-			(1,319	)		-			-			(1,319	)
Net income	$	15,359		$	18,035		$	149		$	(18,184	)	$	15,359

37

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Consolidating Statement of Operations

For the Six Months Ended June 30, 2010

	Parent (Issuer)			New Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Total Consolidated
Revenues:
Coal revenues	$	-		$	1,725,370		$	-		$	-		$	1,725,370
Freight and handling revenues		-			155,056			-			-			155,056
Other revenues		-			37,658			4,325			-			41,983
Total revenues		-			1,918,084			4,325			-			1,922,409
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		-			1,232,266			-			-			1,232,266
Freight and handling costs		-			155,056			-			-			155,056
Other expenses		-			24,127			-			-			24,127
Depreciation, depletion and amortization		-			186,225			-			-			186,225
Amortization of acquired coal supply agreements, net		-			121,590			-			-			121,590
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		14			90,538			1,468			-			92,020
Total costs and expenses		14			1,809,802			1,468			-			1,811,284
(Loss) income from operations		(14	)		108,282			2,857			-			111,125
Other income (expense):
Interest expense		(9,628	)		(29,512	)		(1,484	)		-			(40,624	)
Interest income		-			1,528			-			-			1,528
Loss on early extinguishment of debt		-			(1,349	)		-			-			(1,349	)
Miscellaneous expense, net		-			(478	)		-			-			(478	)
Total other expense, net		(9,628	)		(29,811	)		(1,484	)		-			(40,923	)
Income (loss) from continuing operations before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries		(9,642	)		78,471			1,373			-			70,202
Income tax benefit (expense)		3,760			(19,575	)		(535	)		-			(16,350	)
Equity in earnings of investments in Issuer and Guarantor Subsidiaries		58,720			26,168			-			(84,888	)		-
Income from continuing operations		52,838			85,064			838			(84,888	)		53,852
Discontinued operations:
Loss from discontinued operations before income taxes		-			(1,663	)		-			-			(1,663	)
Income tax benefit		-			649			-			-			649
Loss from discontinued operations		-			(1,014	)		-			-			(1,014	)
Net income	$	52,838		$	84,050		$	838		$	(84,888	)	$	52,838

38

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Consolidating Statement of Operations

For the Six Months Ended June 30, 2009

	Parent (Issuer)			New Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Total Consolidated
Revenues:
Coal revenues	$	-		$	760,773		$	-		$	-		$	760,773
Freight and handling revenues		-			81,499			-			-			81,499
Other revenues		-			29,491			1,210			-			30,701
Total revenues		-			871,763			1,210			-			872,973
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)		-			570,039			-			-			570,039
Freight and handling costs		-			81,499			-			-			81,499
Other expenses		-			4,398			-			-			4,398
Depreciation, depletion and amortization		-			76,557			-			-			76,557
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		61			39,087			225			-			39,373
Total costs and expenses		61			771,580			225			-			771,866
(Loss) income from operations		(61	)		100,183			985			-			101,107
Other income (expense):
Interest expense		(9,257	)		(10,324	)		(438	)		-			(20,019	)
Interest income		-			980			-			-			980
Miscellaneous income, net		-			181			-			-			181
Total other expense, net		(9,257	)		(9,163	)		(438	)		-			(18,858	)
Income (loss) from continuing operations before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries		(9,318	)		91,020			547			-			82,249
Income tax benefit (expense)		3,634			(22,371	)		(213	)		-			(18,950	)
Equity in earnings of investments in Issuer and Guarantor Subsidiaries		62,007			-			-			(62,007	)		-
Income from continuing operations		56,323			68,649			334			(62,007	)		63,299
Discontinued operations:
Loss from discontinued operations before income taxes		-			(9,310	)		-			-			(9,310	)
Income tax benefit		-			2,334			-			-			2,334
Loss from discontinued operations		-			(6,976	)		-			-			(6,976	)
Net income	$	56,323		$	61,673		$	334		$	(62,007	)	$	56,323

39

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2010

	Parent (Issuer)			New Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Total Consolidated
Net cash (used in) provided by operating activities	$	(9,628	)	$	345,332		$	2,227		$	337,931
Investing activities:
Capital expenditures	$	-		$	(135,895	)	$	-		$	(135,895	)
Acquisition of mineral rights under federal lease		-			(36,108	)		-			(36,108	)
Purchase of equity method investment		-			(3,000	)		-			(3,000	)
Purchases of marketable securities, net		-			(123,465	)		-			(123,465	)
Other, net		-			2,017			-			2,017
Net cash used in investing activities	$	-		$	(296,451	)	$	-		$	(296,451	)
Financing activities:
Principal repayments on long-term debt	$	-		$	(50,934	)	$	-		$	(50,934	)
Debt issuance costs		-			(8,690	)		-			(8,690	)
Excess tax benefit from stock-based awards		-			7,587			-			7,587
Common stock repurchases		(40,672	)		-			-			(40,672	)
Proceeds from exercise of stock options		4,245			-			-			4,245
Transactions with affiliates		22,759			(20,532	)		(2,227	)		-
Net cash used in financing activities	$	(13,668	)	$	(72,569	)	$	(2,227	)	$	(88,464	)
Net decrease in cash and cash equivalents	$	(23,296	)	$	(23,688	)	$	-		$	(46,984	)
Cash and cash equivalents at beginning of period		69,410			396,459			-			465,869
Cash and cash equivalents at end of period	$	46,114		$	372,771		$	-		$	418,885

40

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, amounts in thousands except share data)

(Continued)

Alpha Natural Resources, Inc. and Subsidiaries

Supplemental Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2009

	Parent (Issuer)			New Notes Guarantor Subsidiaries			Non-Guarantor Subsidiary			Total Consolidated
Net cash (used in) provided by operating activities	$	(9,257	)	$	65,623		$	1,210		$	57,576
Investing activities:
Capital expenditures	$	-		$	(46,111	)	$	-		$	(46,111	)
Purchase of acquired company		-			(1,750	)		-			(1,750	)
Other, net		-			312			-			312
Net cash used in investing activities	$	-		$	(47,549	)	$	-		$	(47,549	)
Financing activities:
Principal repayments of note payable	$	-		$	(10,892	)	$	-		$	(10,892	)
Principal repayments of long-term debt		-			(232	)		-			(232	)
Debt issuance costs		-			(5,277	)		-			(5,277	)
Common stock repurchases		(2,027	)		-			-			(2,027	)
Proceeds from exercise of stock options		230			-			-			230
Transactions with affiliates		7,143			(5,933	)		(1,210	)		-
Other, net		-			(651	)		-			(651	)
Net cash provided by (used in) financing activities	$	5,346		$	(22,985	)	$	(1,210	)	$	(18,849	)
Net decrease in cash and cash equivalents	$	(3,911	)	$	(4,911	)	$	-		$	(8,822	)
Cash and cash equivalents at beginning of period		73,321			602,869			-			676,190
Cash and cash equivalents at end of period	$	69,410		$	597,958		$	-		$	667,368

(20) Share Repurchase Program

On May 19, 2010, the Board of Directors authorized a share repurchase program, which permits the Company to repurchase up to $125,000 of its outstanding common stock, par value $0.01 per share (“Shares”). The program enables the Company to repurchase Shares from time to time, as market conditions warrant. As of June 30, 2010, the Company repurchased 683,200 Shares for $24,823 under this program, which was recorded as treasury stock in the Condensed Consolidated Balance Sheets. The Company may purchase up to an additional $100,177 of Shares under the program.

41

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

Explanatory Note

On July 31, 2009, Alpha Natural Resources, Inc. (“Old Alpha”) and Foundation Coal Holdings, Inc. (“Foundation”) merged (the “Merger”) with Foundation continuing as the surviving legal corporation of the Merger which was renamed Alpha Natural Resources, Inc. (“Alpha”). For accounting purposes, the Merger is treated as a “reverse acquisition” with Old Alpha considered the accounting acquirer. Accordingly, Old Alpha’s historical financial statements are included in periodic filings of Alpha subsequent to the Merger. The results of operations for the three and six months ended June 30, 2010 contain the combined results of both companies.  The results of operations for the three and six months ended June 30, 2009 only include the historical results of Old Alpha.

Unless we have indicated otherwise, or the context otherwise requires, references in this report to “Alpha,” “we,” “us” and “our” or similar terms are to Alpha and its consolidated subsidiaries in reference to dates subsequent to the Merger and to Old Alpha and its consolidated subsidiaries in reference to dates prior to the Merger.

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2009.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “ project,” “should” and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.

The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

· worldwide market demand for coal, electricity and steel;

· global economic, capital market or political conditions, including a prolonged economic recession in the markets in which we operate;

· decline in coal prices;

· our liquidity, results of operations and financial condition;

· regulatory and court decisions;

· competition in coal markets;

· changes in environmental laws and regulations, including those directly affecting our coal mining and production, and those affecting our customers' coal usage, including potential carbon or greenhouse gas related legislation;

· changes in safety and health laws and regulations and the ability to comply with such changes;

· availability of skilled employees and other employee workforce factors, such as labor relations;

· the inability of our third-party coal suppliers to make timely deliveries and our customers refusing to receive coal under agreed contract terms;

· potential instability and volatility in worldwide financial markets;

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

· inherent risks of coal mining beyond our control;

· disruption in coal supplies;

· the geological characteristics of the Powder River Basin, Central and Northern Appalachian coal reserves;

· our production capabilities and costs;

· our ability to successfully integrate operations that we may acquire or develop in the future;

42

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

· the consummation of financing transactions, acquisitions or dispositions and the related effects on our business;

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

· reductions or increases in customer coal inventories and the timing of those changes;

· changes in and renewal or acquisition of new long-term coal supply arrangements;

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

· availability of mining and processing equipment and parts;

· 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;

· our assumptions concerning economically recoverable coal reserve estimates;

· our ability to obtain, maintain or renew any necessary permits or rights, and our ability to mine properties due to defects in title on leasehold interests;

· changes in postretirement benefit obligations, pension obligations and federal black lung obligations;

· increased costs and obligations potentially arising from the recently enacted Patient Protection and Affordable Care Act;

· fair value of derivative instruments not accounted for as hedges that are being marked to market;

· indemnification of certain obligations not being met;

· continued funding of the road construction business, related costs, and profitability estimates;

· restrictive covenants in our secured credit facility and the indentures governing the 7.25% notes due 2014 and the 2.375% convertible senior notes due 2015;

· certain terms of the 7.25% notes due 2014 and the 2.375% convertible senior notes due 2015, including any conversions, that may adversely impact our liquidity;

· weather conditions or catastrophic weather-related damage; and

· other factors, including the other factors discussed in “-Overview - Coal Pricing Trends, Uncertainties and Outlook” below, Part II, Item 1A “Risk Factors” below and the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2009 and Quarterly Report on Form 10-Q for the three months ended March 31, 2010.

When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and the documents incorporated by reference. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events, which may cause actual results to differ from those expressed or implied by the forward-looking statements contained in this report.

Overview

We are one of America’s premier coal suppliers, operating 65 mines and 14 coal preparation and load-out facilities in Northern and Central Appalachia and the Powder River Basin, with approximately 6,400 employees.

We produce, process, and sell steam and metallurgical coal from six business units located throughout Virginia, West Virginia, Kentucky, Pennsylvania, and Wyoming. We also sell coal produced by others, the majority of which we process and/or blend with coal produced from our mines prior to resale, providing us with a higher overall margin for the blended product than if we had sold the coals separately. For the three and six months ended June 30, 2010, sales of steam coal were 16.9 million and 35.7 million tons, respectively, and accounted for approximately 84% and 86%, respectively, of our coal sales volume. Comparatively, for the three and six months ended June 30, 2009, sales of steam coal were 2.8 million and 6.0 million tons, respectively, and accounted for approximately 66% and 63% of our coal sales volume, respectively. For the th ree and six months ended June 30, 2010, sales of metallurgical coal, which generally sells at a premium over steam coal, were 3.3 million and 5.9 million tons, respectively, and accounted for approximately 16% and 14%, respectively, of our coal sales volume. Comparatively, for the three and six months ended June 30, 2009, sales of metallurgical coal, were 1.5 million and 3.5 million tons, respectively, and accounted for approximately 34% and 37%, respectively, of our coal sales volume. The effect of the Merger on the relative percentages of coal sales volumes for three and six months ended June 30, 2010 is discussed below in “Results of Operations-Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009” and “Results of Operations-Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009”.

Our sales of steam coal for the three and six months ended June 30, 2010 and 2009 were made primarily to large utilities and industrial customers throughout the United States, and our sales of metallurgical coal were made primarily to steel companies in the Northeastern and Midwestern regions of the United States and in several countries in Europe, Asia and South America. For the three and six months ended June 30, 2010, approximately 38% and 34% of our coal revenues combined with freight and handling revenues, respectively, were derived from sales made outside the United States, compared to 34% and 38% for the three and six months ended June 30, 2009, respectively. For the six months ended June 30, 2010, revenues earned from sales outside the U.S. were primarily from Brazil, India, Italy, U.K., Turkey, France, Canada, Belgium, Ukraine a nd Egypt. For the six months ended June 30, 2009, revenues earned from sales outside the U.S. were primarily from Brazil, Italy, Belgium, Spain, India, Sweden and Canada.

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In addition, we generate other revenues from equipment and parts sales and repair, Dry Systems Technologies equipment and filters, road construction, rentals, commissions, coal handling, terminal and processing fees, coal and environmental analysis fees, royalties, override royalty payments from a coal supply agreement now fulfilled by another producer and the sale of coalbed methane and natural gas. We also record revenue for freight and handling charges incurred in delivering coal to certain customers, for which we are reimbursed by our customers. As such, freight and handling revenues are offset by equivalent freight and handling costs and do not contribute to our profitability.

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

We have two reportable segments, Eastern Coal Operations and Western Coal Operations. Eastern Coal Operations consists of our operations in Northern and Central Appalachia, our coal brokerage activities and our road construction business. Western Coal Operations consists of two Powder River Basin mines in Wyoming. Our All Other category includes an idled underground mine in Illinois; expenses associated with closed mines; Dry Systems Technologies; revenues and royalties from the sale of coalbed methane in connection with Coal Gas Recovery and natural gas extraction; equipment sales and repair operations; terminal services; the leasing of mineral rights and general corporate overhead.

Coal Pricing Trends, Uncertainties and Outlook

Our long-term outlook for the coal markets in the U.S. remains positive. The Energy Information Administration (“EIA”) in its 2010 Annual Energy Outlook forecasts that coal-fired electrical generation will increase by an average annual growth rate of 2.2% through 2015. In 2010, however, the EIA estimates that electric power generation from coal will begin to recover from 2009 levels and grow at a rate of 1.0%. Long-term demand for coal and coal-based electricity generation in the U.S. will likely be driven by various factors such as the economy, increasing population, increasing demand to power residential electronics and plug-in hybrid electric vehicles, public demands for affordable electricity, the inability of renewable energy sources such as wind and solar to become the base load source of electric power, geopolitical ri sks associated with importing large quantities of global oil and natural gas resources, increasing demand for coal outside the U.S. resulting in increased exports and the relatively abundant steam coal reserves located within the United States. Despite the recent downturn to the U.S. and global economies, the International Monetary Fund’s April 2010 World Economic Outlook forecasts U.S. annual GDP to grow 3.1% and 2.6% in 2010 and 2011, respectively.

According to the National Energy Technology Laboratory’s (“NETL”) January 2010 report on new coal-fired power plants, there are 13,755 megawatts of new coal-fired electrical generation under construction in the United States and 320 megawatts of new coal-fired electrical generation capacity near construction. This expected new capacity will increase the annual coal consumption for electrical generation by an estimated 46 million tons, much of which is expected to be supplied from the Powder River Basin in Wyoming. Additionally, approximately 3,280 megawatts of coal-fired electrical generation are in the permitting phase and 26,233 megawatts of coal-fired electrical generation have been announced and are in the early stages of permitting and development.

Coal exports from the U.S. decreased from approximately 82 million tons in 2008 to approximately 59 million tons in 2009 in response to the worldwide economic downturn. In the first half of 2010, exports recovered from their 2009 decline, reaching 38 million tons. Total exports for 2010 are projected by the EIA to reach approximately 74 million tons. According to the EIA’s 2010 International Energy Outlook (“IEO”), global primary energy demand is projected to grow by 48% between 2010 and 2035, with coal demand rising most in absolute terms and fossil fuels accounting for most of the increase in demand between now and 2035. Total coal use is expected to grow by 56% above 2007 levels by 2035, with China and India alone accounting for 85% of that increase. The IEO has reached a general conclusion that dependence on coal fo r power rises strongly in countries with emerging economies and relatively large coal reserves, while it stagnates in the more developed nations and nations with smaller coal reserves.

Ultimately, the global demand for and use of coal may be limited by any global treaties which place restrictions on carbon dioxide emissions. As part of the United Nations Framework Convention on Climate Change, representatives from 187 nations, including the U.S., met in Bali, Indonesia in December 2007 to discuss a program to limit greenhouse gas emissions after 2012. The convention adopted the “Bali Road Map” that detailed a two-year process to finalizing a binding agreement in Copenhagen in 2009. In December 2009 participants gathered in Copenhagen to develop a framework for climate change mitigation beyond 2012. The principal output of the Copenhagen summit was the Copenhagen Accord, a document that is neither legally binding nor voted upon nor signed, but was simply “noted” by the 194 participating countries . Although the results from the Copenhagen summit were considered modest by many participants, the ultimate outcome of future summits, and any treaty or other arrangement ultimately adopted by the United States or other countries, may have a material adverse impact on the global demand for and supply of coal. This is particularly true if cost effective technology for the capture and storage of carbon dioxide is not sufficiently developed.

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Proposed coal-fired electricity generating facilities that do not include technologies to capture and store carbon dioxide are facing increasing opposition from environmental groups as well as state and local governments who are concerned with global climate change and uncertain financial impacts of potential greenhouse gas regulations. Coal-fired generating plants incorporating carbon dioxide capture and storage technologies will be more expensive to build than conventional pulverized coal generating plants and the technologies are still in the developmental stages. This dynamic may cause power generating companies to cut back on plans to build coal-fired plants in the near term. Nevertheless, the desire to attain U.S. energy independence suggests the construction of new coal-fired generating facilities is likely to remain a viable opti on. This desire, coupled with heightened interest in coal gasification and coal liquefaction, is a potential indicator of increasing demand for coal in the United States.

Based on weekly coal production reporting through June 30, 2010 from the EIA, second quarter 2010 Appalachian production remained steady compared to the first quarter 2010. Compared to the first quarter 2010, Western coal production decreased by approximately 1.6% in the second quarter of 2010. In Central Appalachia, delays with respect to permits to construct valley fills at surface mines and maintain water quality standards are likely to slow the permitting process for mining in that region with resultant uncertainties for producers. Through June 30, 2010, prices for Central Appalachian coal have increased 23% while Northern Appalachian coal prices have increased 14%. Average spot market prices for Powder River Basin coal have risen nearly 32% in 2010, with the basin offering the least expensive fossil fuel on a dollar per Btu basis. L ong-term, the delicate balance of coal supply and increasing coal demand is expected to result in strong, but potentially volatile fundamentals for the U.S. coal industry.

In the U.S. utility inventories have fallen sharply and are approximately 160 million tons as a result of extended hot summer weather, reduced fuel switching and lower production levels.  New contracting activity among utilities remains subdued, but as the summer cooling season eats through existing stockpiles, we expect a resurgence of utility buying later in 2010.  Given increased exports in the first half of 2010 compared to the 2009 levels, more steam coal crossing over into the met market and lower U.S. production levels, particularly in Central Appalachia, where regulatory pressures could reduce coal supply as permit issuance has almost come to a standstill and costs increase, higher forward prices for U.S. thermal coal have been fairly persistent in 2010.

Our revenues depend on the price at which we are able to sell our coal. The pricing environment for U.S. steam coal production in 2010 has recovered steadily above the low levels seen in 2009. Recent steam coal market conditions indicate that supply and demand have largely come into balance and the forecasted upswing in demand is resulting in improved prices for suppliers. Prices for high quality metallurgical coal, used to manufacture coke for steelmaking, had deteriorated in 2009 in response to decreased worldwide demand for steel. However, strong global demand for steel, particularly in China, and limited metallurgical coal supply have created market conditions that suggest favorable pricing for the remainder of 2010.

The worldwide economic slowdown and the volatility and uncertainty in the credit markets have had an impact on the demand for and price of coal. Global energy fundamentals, including the relative decline in demand and prices for both natural gas and crude oil have driven spot prices of coal lower in the marketplace. Steel manufacturers had shut-in significant capacity in the early part of 2009 due to the lack of near-term visibility around demand for steel for construction, automobile manufacturing and other down-stream products. Steel manufacturers appear to have completed destocking their inventories and steel plant utilization has steadily increased since the early part of 2009, which has translated into strong metallurgical coal pricing and demand so far in 2010. The relatively low price of natural gas is creating further competitive pressure on the demand for steam coal. A weak economic recovery could slacken demand for metallurgical and steam coals and could negatively influence pricing in the near-term. Longer-term, coal industry fundamentals remain intact. Coal has been the fastest growing fossil fuel for six of the last eight years, and significant additional growth is expected worldwide. Seaborne coal has grown to nearly 1 billion tons annually, and U.S. exports will be needed to meet worldwide demand, particularly in China and India. In addition, the idling of coal mines due to weakened market conditions, and the resulting decrease in production, particularly in Central Appalachia, should better match production to demand. These factors should lead to a tighter market for coal, both globally and in the United States, in the coming years.

Our results of operations are dependent upon the prices we obtain for our coal as well as our ability to improve productivity and control costs. Our operating costs include maintenance and repair parts and services, electricity, fuel, roof control and support items, explosives, tires, conveyance structure, ventilation supplies and lubricants.

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Our management continues to aggressively control costs and strives to improve operating performance to mitigate external cost pressures. As is common in the current economic environment, we are experiencing volatility in operating costs related to fuel, explosives, steel, tires, contract services and healthcare and have taken measures to mitigate the increases in these costs at all operations. We have a centralized sourcing group for major supplier contract negotiation and administration, for the negotiation and purchase of major capital goods, and to support the business units. The supplier base has been relatively stable for many years, but there has been some consolidation. We are not dependent on any one supplier in any region. We promote competition between suppliers and seek to develop relationships with suppliers that focus on low ering our costs. We seek suppliers who identify and concentrate on implementing continuous improvement opportunities within their area of expertise. To the extent upward pressure on costs exceeds our ability to realize sales increases, or if we experience unanticipated operating or transportation difficulties, our operating margins would be negatively impacted. Employee labor costs have historically increased primarily due to the demands associated with attracting and retaining a workforce; however, recent stability in the marketplace has helped ease this situation. We may also continue to experience difficult geologic conditions, delays in obtaining permits, labor shortages, unforeseen equipment problems and shortages of critical materials such as tires and explosives that may result in adverse cost increases and limit our ability to produce at forecasted levels.

In March 2010, the Patient Protection and Affordable Care Act (the “PPACA”) was enacted, potentially impacting the costs to provide healthcare benefits to our eligible active and certain retired employees and workers’ compensation benefits related to occupational disease resulting from coal workers’ pneumoconiosis (���Black Lung”). The PPACA has both short-term and long-term implications on healthcare benefit plan standards. Implementation of this legislation is planned to occur in phases, with plan standard changes taking effect beginning in 2010, but to a greater extent with the 2011 benefit plan year and extending through 2018.

In the short term, the PPACA eliminated the tax benefits available to employers that receive Medicare Part D subsidies beginning in years ending after December 31, 2012. As a result of this change in law, we reduced our deferred tax assets by $25.6 million, which was included in our total income tax expense for the three months ended March 31, 2010 and six months ended June 30, 2010. Other plan standard changes that could affect us in the short term include raising the maximum age for covered dependents to receive benefits, the elimination of lifetime dollar limits per covered individual and restrictions on annual dollar limits per covered individual, among other standard requirements. Plan standard changes that are expected to affect us in the long term include an excise tax on “high cost” plans and the elimination of annual dollar limits per covered individual, among other standard requirements.

Beginning in 2018, the PPACA will impose a 40% excise tax on employers to the extent that the value of their healthcare plan coverage exceeds certain dollar thresholds for individuals and families. We re-measured our retiree welfare plan obligations during the three months ended June 30, 2010 in order to account for the estimated impact of the excise tax and updated other assumptions related to anticipated retirement ages and health care cost trend rates. The re-measurement resulted in a $27.1 million increase to the obligations, which are included in pension and postretirement medical benefit obligations on the accompanying Condensed Consolidated Balance Sheets, with an offset to accumulated other comprehensive income (loss). With the exception of the excise tax, we do not believe any other plan standard changes will be significant to f uture healthcare costs for eligible active employees and postretirement benefit obligations for certain retired employees. We anticipate that certain government agencies will provide additional regulations or interpretations concerning the application of this excise tax. We will need to continue to evaluate the impact of the PPACA in future periods and when these regulations or interpretations are published, we will evaluate our assumptions in light of the new information.

The PPACA also amended previous legislation related to coal workers’ Black Lung, providing automatic extension of awarded lifetime benefits to surviving spouses and providing changes to the legal criteria used to assess and award claims. We evaluated the impact of these changes to our current population of beneficiaries and possible future claimants, and as a result re-measured the obligations for our self insured black lung plans as of March 31, 2010. The re-measurement resulted in an additional $6.7 million increase to the obligation, which is included in other non-current liabilities on the accompanying Condensed Consolidated Balance Sheets, with an offset to accumulated other comprehensive income (loss).

Results of Operations

As a result of the Merger, the results of operations for the three and six months ended June 30, 2010 are not comparable to the three and six months ended June 30, 2009 due to the fact that the results for the three and six months ended June 30, 2009 do not include the results of Foundation. To help understand the operating results, the term “Foundation operations” refers to the results of Foundation on a stand-alone basis for the three and six months ended June 30, 2010 and the term “legacy Alpha operations” refers to the results of Old Alpha on a stand-alone basis for three and six months ended June 30, 2010. Additionally, the calculations of selling, general and administrative expenses for both companies are not comparable calculations to the expenses that would have been calculated as separate entities due to certain intercompany allocations of the combined company. Unless specifically indicated otherwise, all amounts discussed in the following analysis of results of operations relate to amounts from continuing operations and do not include any amounts related to discontinued operations.

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

The following table reconciles EBITDA from continuing operations to income from continuing operations, the most directly comparable GAAP measure:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
	(in thousands)						(in thousands)
Income from continuing operations	$	39,182		$	16,678		$	53,852		$	63,299
Interest expense		18,504			10,166			40,624			20,019
Interest income		(848	)		(355	)		(1,528	)		(980	)
Income tax expense (benefit)		(4,928	)		5,323			16,350			18,950
Depreciation, depletion and amortization		91,098			36,352			186,225			76,557
Amortization of acquired coal supply agreements, net		55,633			-			121,590			-
EBITDA from continuing operations	$	198,641		$	68,164		$	417,113		$	177,845

Three Months Ended June 30, 2010 Compared to the Three Months Ended June 30, 2009

Summary

Total revenues increased $613.4 million, or 158%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in total revenues consisted of the addition of $439.6 million in revenues from the Foundation operations and an increase of $173.8 million in revenues from the legacy Alpha operations. The increase in revenues from the legacy Alpha operations was due to an increase in coal revenues of $128.9 million, or 39%, and increased freight and handling revenues of $53.5 million, partially offset by a decrease of $8.6 million in other revenues.

Income from continuing operations increased $22.5 million, or 135%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase was largely due to increased coal revenues of $559.1 million and a decrease in income tax expense of $10.2 million, partially offset by increased certain operating costs and expenses of $536.7 million, an $8.3 million increase in interest expense, a $1.3 million loss on early extinguishment of debt and a decrease of $0.5 million in other revenues.

The increase in certain operating costs and expenses of $536.7 million consisted of the addition of $440.5 million from the Foundation operations and an increase of $96.2 million related to the legacy Alpha operations. The increase related to the legacy Alpha operations was due to an increase in cost of coal sales of $77.5 million, increases in other expenses of $11.4 million and increases in selling, general and administrative expenses of $9.2 million, partially offset by a decrease in depreciation, depletion and amortization of $1.9 million. The $440.5 million related to the Foundation operations consisted of $312.7 million of cost of coal sales, $56.6 million of depreciation, depletion and amortization expenses, $55.6 million of amortization of acquired coal supply agreements, $12.1 million of selling, general and administrative expen ses, and $3.5 million of other expenses.

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We sold 20.2 million tons of coal during the three months ended June 30, 2010 compared to 4.3 million tons in the prior year period, an increase of 15.9 million tons, or 370%. The 20.2 million tons sold during the three months ended June 30, 2010 consisted of 15.2 million tons from the Foundation operations and 5.0 million tons from the legacy Alpha operations. Total coal sales volume from the legacy Alpha operations increased 0.7 million tons, or 17%, during the three months ended June 30, 2010 compared to the prior year period. This increase consisted of an increase in metallurgical coal sales volume of 1.1 million tons, or 78%, partially offset by a decrease in eastern steam coal sales volume of 0.4 million tons, or 15%. The 15.2 million tons sold by the Foundation operations included 11.1 million tons of steam coal from our West ern Coal Operations and 3.5 million tons and 0.6 million tons of steam and metallurgical coal, respectively, from our Eastern Coal Operations.

The consolidated weighted average coal sales realization per ton for the three months ended June 30, 2010 was $44.24 compared to $77.84 for the three months ended June 30, 2009. The decrease was largely attributable to the inclusion of coal sales from our Western Coal Operations, which has a substantially lower coal sales realization per ton due to the difference in pricing for coal in the Powder River Basin and in the eastern coal basins. The difference in pricing between Powder River Basin coal and eastern basin coal is more fully explained in our segment analysis below. The weighted average coal sales realization per ton for the legacy Alpha operations increased $14.42, or 19%, to $92.25 for the three months ended June 30, 2010 compared to $77.84 for the three months ended June 30, 2009. This increase reflects a higher proportion of m etallurgical coal sales volumes to total coal sales volumes and higher average pricing for the legacy Alpha operations compared to the prior year period. The weighted average coal sales realization per ton for the Foundation operations was $28.34, which reflects a high proportion of coal sales volumes from the Western Coal Operations at an average coal sales realization per ton of $10.92. Coal sales realization per ton for eastern steam coal was $62.93 and coal sales realization per ton for eastern metallurgical coal was $140.27 for the Foundation operations for the three months ended June 30, 2010.

Consolidated coal margin percentage, calculated as consolidated coal revenues less consolidated cost of coal sales (excluding cost of coal sales in our All Other segment), divided by consolidated coal revenues, was 27% for the three months ended June 30, 2010 compared to 21% for the three months ended June 30, 2009. Coal margin percentage for the Foundation operations was 29% and coal margin percentage for the legacy Alpha operations was 26% for the three months ended June 30, 2010. Consolidated coal margin per ton, calculated as consolidated coal sales realization per ton less consolidated cost of coal sales per ton, was $11.96 for the three months ended June 30, 2010 compared to $16.10 for the three months ended June 30, 2009. Coal margin per ton for the Foundation operations was $8.08 and coal margin per ton for the legacy Alpha opera tions was $23.68 for the three months ended June 30, 2010.

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Revenues

	Three Months Ended June 30,				Increase (Decrease)
	2010			20091	$ or Tons			%
	(in thousands, except per ton data)
Revenues:
Coal revenues:
Eastern steam	$	389,124	$	198,744	$	190,380			96	%
Western steam		120,744		-		120,744		NM
Metallurgical		384,236		136,226		248,010			182	%
Freight and handling revenues		90,268		35,445		54,823			155	%
Other revenues		16,033		16,599		(566	)		(3	)%
Total revenues	$	1,000,405	$	387,014	$	613,391			158	%
Tons sold :
Eastern steam		5,886		2,830		3,056			108	%
Western steam		11,056		-		11,056		NM
Metallurgical		3,267		1,473		1,794			122	%
Total		20,209		4,303		15,906			370	%
Coal sales realization per ton:
Eastern steam	$	66.11	$	70.23	$	(4.12	)		(6	)%
Western steam	$	10.92	$	-	$	10.92		NM
Metallurgical	$	117.61	$	92.46	$	25.15			27	%
Average	$	44.24	$	77.84	$	(33.60	)		(43	)%

1 - Adjusted from amounts reported in prior periods for the reclassification of the change in fair value of derivative instruments and contract settlements. See Note 1 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Coal revenues. Coal revenues increased $559.1 million, or 167%, for the three months ended June 30, 2010 compared to the prior year period. The increase in coal revenues consisted of the addition of $430.2 million related to the Foundation operations and an increase of $128.9 million related to the legacy Alpha operations. The increase in coal revenues related to the legacy Alpha operations was due to a $157.5 million increase in metallurgical coal revenue partially offset by a $28.6 million decrease in eastern steam coal revenue. The decrease in eastern steam coal revenue related to the legacy Alpha operations was due to lower coal sales volumes of 0.4 million tons as average sales realization per ton was approximately the same as in the prior year period. The increase in metallur gical coal revenues related to the legacy Alpha operations was largely a result of a 1.1 million ton increase in coal sales volumes due to increased demand for coking coal from domestic steel producers, a rise in demand in the export market compared to the prior year period and increases in metallurgical coal prices. The increased coal revenues from the Foundation operations included $218.9 million in eastern steam coal revenues, $120.8 million in western steam coal revenues and $90.5 million in metallurgical coal revenues.

Our sales mix of metallurgical coal and steam coal based on volume for the three months ended June 30, 2010 was 16% and 84%, respectively, compared with 34% and 66%, respectively, for the three months ended June 30, 2009. The sales mix of metallurgical coal and steam coal based on volume for the legacy Alpha operations for the three months ended June 30, 2010 was 52% and 48%, respectively, compared to 34% and 66%, respectively, in the prior year period. The sales mix of metallurgical coal and steam coal for the Foundation operations was 4% and 96%, respectively, for the three months ended June 30, 2010.  For the three months ended June 30, 2010, approximately 43% of consolidated coal revenues were derived from the sale of metallurgical coal compared with 41% in the prior year period.

Freight and handling revenues. Freight and handling revenues were $90.3 million for the three months ended June 30, 2010, an increase of $54.8 million compared to the three months ended June 30, 2009. The increase was due to higher export and domestic shipments combined with higher shipping rates compared to the prior year period. These revenues are primarily related to the legacy Alpha operations and are offset by equivalent costs and do not contribute to our profitability.

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Other revenues. Other revenues decreased $0.5 million, or 3%, for the three month period ended June 30, 2010 compared to the three months ended June 30, 2009. This decrease consisted of a decrease of $8.6 million from the legacy Alpha operations partially offset by the addition of $8.1 million from the Foundation operations. The decrease from the legacy Alpha operations was due to a decrease in road construction revenues of $7.6 million and decreased mark-to-market gains of $3.8 million on coal sales contracts that are reported at fair value, partially offset by increases in terminal fee revenue of $1.2 million, revenue of $1.0 million related to coal sales contracts that were financially settled and royalty revenue of $0.6 m illion. Other revenues from the Foundation operations consisted of revenues related to our Dry Systems Technology of $1.5 million, Coal Gas Recovery business of $2.7 million, $1.8 million in royalties and $2.1 million of other miscellaneous revenues.

Costs and Expenses

	Three Months Ended June 30,					Increase (Decrease)
	2010			20091		$ or Tons			%
	(in thousands, except per ton data)
Cost of coal sales (exclusive of items shown separately below)	$	657,199	$	267,014		$	390,185			146	%
Freight and handling costs		90,268		35,445			54,823			155	%
Other expenses		8,443		(6,451	)		14,894			231	%
Depreciation, depletion and amortization		91,098		36,352			54,746			151	%
Amortization of acquired coal supply agreements, net		55,633		-			55,633		NM
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		44,231		22,907			21,324			93	%
Total costs and expenses	$	946,872	$	355,267		$	591,605			167	%
Cost of coal sales per ton:2
Eastern coal operations	$	60.38	$	61.74		$	(1.36	)		(2	)%
Western coal operations	$	9.01	$	-		$	9.01		NM
Average	$	32.28	$	61.74		$	(29.46	)		(48	)%

1- Adjusted from amounts reported in prior periods for the reclassification of the change in fair value of derivative instruments and contract settlements. See Note 1 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

2- Cost of coal sales per ton includes only costs associated with our Eastern and Western Coal operations.

Cost of coal sales. Cost of coal sales increased $390.2 million, or 146%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009.  The increase consisted of the inclusion of $312.7 million from the Foundation operations and an increase of $77.5 million from the legacy Alpha operations. The increase related to the legacy Alpha operations was primarily due to increases in purchased coal expense, employee wages, operating supplies and an increase in other variable expenses due to higher metallurgical coal sales volumes. The weighted average total cost of coal sales per ton was $32.28 for the three months ended June 30, 2010, a decrease of 48% compared to $61.74 for the three months ended June 30, 2009. The decrease is primarily related to t he inclusion of our Western Coal Operations from the Merger, which operates at a substantially lower cost than our Eastern Coal Operations. Cost of coal sales per ton for the legacy Alpha operations increased approximately 11% to $68.57 per ton. The average cost of coal sales per ton for the Foundation operations during the three months ended June 30, 2010 was $20.26, which reflects a high proportion of coal sales volumes from the Western Coal Operations, which had an average cost of coal sales per ton of $9.01. Cost of coal sales per ton for the Eastern Coal Operations related to the Foundation operations was $50.40 for the three months ended June 30, 2010.

Freight and handling costs. Freight and handling costs were $90.3 million for the three months ended June 30, 2010, an increase of $54.8 million compared to the three months ended June 30, 2009. The increase was due to higher export and domestic shipments combined with higher shipping rates compared to the prior year period. These costs are primarily related to the legacy Alpha operations and are offset by equivalent revenue and do not contribute to our profitability.

Other expenses. Other expenses increased $14.9 million, or 231%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase consisted of the inclusion of $3.5 million of other expenses from the Foundation operations and an $11.4 million increase in other expenses related to the legacy Alpha operations. The increase in other expenses related to the legacy Alpha operations was due to mark-to-market gains on derivatives recorded in earnings in the prior year period that are now recorded as a component of other comprehensive income (loss) due to our designation of the derivative instruments as qualifying cash flow hedges in the first quarter of 2010. Other expenses of $3.5 million related to the Foundation operations consisted primarily of e xpenses for our Dry Systems Technology and Coal Gas Recovery businesses.

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Depreciation, depletion and amortization. Depreciation, depletion, and amortization increased $54.7 million, or 151%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase consisted of the inclusion of $56.6 million of depreciation, depletion and amortization expense from the Foundation operations, partially offset by a $1.9 million decrease in depreciation, depletion and amortization expense from the legacy Alpha operations. The decrease from the legacy Alpha operations was due to lower depreciation and amortization expense on property, equipment and mine development costs. Depreciation, depletion, and amortization related to the Foundation operations consisted of $39.5 million of depreciation and amortization of property, equipmen t and mine development costs and $17.1 million of depletion expense.

Amortization of acquired coal supply agreements, net. Application of acquisition accounting in connection with the Merger resulted in the recognition of a significant asset for above market-priced coal supply agreements and a liability for below market-priced coal supply agreements on the date of the acquisition. The coal supply agreement assets and liabilities are being amortized over the actual amount of tons shipped under each contract. Amortization of acquired coal supply agreements, net was $55.6 million for the three months ended June 30, 2010.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $21.3 million, or 93%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase consisted of the addition of $12.1 million in expenses from the Foundation operations and an increase of $9.2 million related to the legacy Alpha operations. The increase related to the legacy Alpha operations was due to an increase in employee compensation of $4.4 million, including a $1.5 million increase in non-cash stock-based compensation, an increase of $3.9 million of other miscellaneous expenses including severance and relocation-related costs and legal and professional fees of $0.9 million primarily related to consulting and integration costs. Conso lidated selling, general and administrative expenses for the three months ended June 30, 2010 included approximately $2.1 million of expenses related to the Merger.

Interest expense. Interest expense increased $8.3 million, or 82%, during the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in interest expense consisted of the addition of $11.2 million from the Foundation operations, partially offset by a decrease of $2.9 million from the legacy Alpha operations. The decrease related to the legacy Alpha operations was primarily due to the decrease in interest expense and amortization of deferred loan fees associated with the legacy Alpha term loan that was paid off subsequent to the Merger, partially offset by an increase in interest expense associated with the realized and unrealized losses due to the changes in fair value of the legacy Alpha interest rate swap that was de-designated as a ca sh flow hedge as a result of paying off the legacy Alpha term loan. Interest expense related to the Foundation operations primarily consisted of interest expense from the outstanding term loan due 2014, the outstanding 7.25% notes due 2014 and accretion of debt discount.

Interest income. Interest income increased by $0.5 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009.

Loss on early extinguishment of debt. During the three months ended June 30, 2010, we amended our credit facility and prepaid approximately $39.6 million of the outstanding term loan. As a result, we wrote off a portion of the deferred financing costs and recorded a loss of $1.3 million.

Miscellaneous income (expense), net. Miscellaneous income (expense), net was an expense of ($0.3) million for the three months ended June 30, 2010 and income of $0.1 million for the three months ended June 30, 2009.

Income tax benefit. Income tax benefit from continuing operations of $4.9 million was recorded for the three months ended June 30, 2010 on income from continuing operations before income taxes of $34.3 million. The income tax benefit is due primarily to the tax benefits associated with percentage depletion. Income tax expense from continuing operations of $5.3 million was recorded for the three months ended June 30, 2009 on income from continuing operations before income taxes of $22.0 million, which equates to an effective tax rate of 24%. This rate is lower than the federal statutory rate of 35% due primarily to the tax benefits associated with percentage depletion, partially offset by an increase in the valuation allowance.

Discontinued operations. Loss from discontinued operations for the three months ended June 30, 2010 was $0.4 million, net of tax, compared to a loss from discontinued operations of $1.3 million, net of tax, for the three months ended June 30, 2009.

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Segment Analysis

The price of coal is influenced by many factors that vary by region. Such factors include, but are not limited to: (1) coal quality, which includes energy content (heat value), sulfur, ash, volatile matter and moisture content; (2) transportation costs; (3) regional supply and demand; (4) available competitive fuel sources such as natural gas, nuclear or hydro; and (5) production costs, which vary by mine type, available technology and equipment utilization, productivity, geological conditions, and mine operating expenses.

The energy content or heat value of coal is a significant factor influencing coal prices as higher energy coal is more desirable to consumers and typically commands a higher price in the market. The heat value of coal is commonly measured in British thermal units or the amount of heat needed to raise the temperature of one pound of water by one degree Fahrenheit. Coal from the Eastern and Midwest regions of the United States tends to have a higher heat value than coal found in the Western United States.

Powder River Basin coal, with its lower energy content, lower production cost and often greater distance to travel to the consumer, typically sells at a lower price than Northern and Central Appalachian coal that has a higher energy content and is often located closer to the end user.

	Three Months Ended June 30,				Increase (Decrease)
	2010		2009		$ or Tons			%
	(in thousands, except per ton data)
Western Coal Operations
Steam tons sold		11,056		-		11,056		NM
Steam coal sales realization per ton	$	10.92	$	-	$	10.92		NM
Total revenues	$	122,497	$	-	$	122,497		NM
EBITDA from continuing operations	$	17,583	$	-	$	17,583		NM
Eastern Coal Operations
Steam tons sold		5,886		2,830		3,056			108	%
Metallurgical tons sold		3,267		1,473		1,794			122	%
Steam coal sales realization per ton	$	66.11	$	70.23	$	(4.12	)		(6	)%
Metallurgical coal sales realization per ton	$	117.61	$	92.46	$	25.15			27	%
Total revenues	$	866,734	$	381,123	$	485,611			127	%
EBITDA from continuing operations	$	185,295	$	73,438	$	111,857			152	%

Western Coal Operations – Our Western Coal Operations are located in the southern Powder River Basin of Wyoming and were acquired in the Merger and therefore, we do not have reported comparative results. We operate two large open-pit mines at Belle Ayr and Eagle Butte and produce steam coal for shipment primarily to utilities. EBITDA from continuing operations for our Western Coal Operations was $17.6 million for the three months ended June 30, 2010, which included $120.7 million in coal revenues and $99.6 million in cost of coal sales. Coal sales realization per ton was $10.92 and coal sales volumes were 11.1 million tons. Coal sales volumes for Western Coal Operations for the three months ended June 30, 2010 were affected by lower shipments to customers w ith contracted volumes that are based on requirements rather than stated volumes.

Eastern Coal Operations – Our Eastern Coal Operations are located in Pennsylvania, West Virginia, Virginia and Kentucky and produce steam coal that is sold primarily to electric utilities and industrial customers. Our Eastern Coal Operations also produce metallurgical coal that is sold primarily to steel producers. Steam coal sales volumes from our Eastern Coal Operations increased 3.1 million tons, or 108%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in steam coal sales volumes consisted of 3.5 million tons from the Foundation operations, partially offset by a decrease of 0.4 million tons from the legacy Alpha operations. The Foundation operations shipped 3.5 million tons of steam coal for the thr ee months ended June 30, 2010, which included 2.6 million tons from our Pennsylvania Services business unit, and 0.9 million tons from the Foundation mines included in our Northern West Virginia business unit.

Steam coal sales realization per ton at our Eastern Coal Operations decreased $4.12 per ton, or 6%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 due to lower contract prices from the Foundation operations. Steam coal sales realization per ton for the legacy Alpha operations increased 1% to $70.70 per ton for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The average steam coal sales realization per ton for the Foundation operations was $62.93 per ton, which included coal sales realization per ton of $61.84 from our Pennsylvania Services business unit and $66.37 from the Foundation mines included in our Northern West Virginia business unit.

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Metallurgical coal sales volumes from our Eastern Coal Operations increased 1.8 million tons, or 122%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in metallurgical coal sales volumes consisted of an increase of 1.2 million tons from the legacy Alpha operations combined with 0.6 million tons shipped from the Foundation operations. The increase of 1.2 million tons in metallurgical coal sales volumes from the legacy Alpha operations is due primarily to increased demand for coking coal from domestic steel producers and a rise in demand in the export market compared to the prior year period. The Foundation operations shipped 0.6 million tons for the three months ended June 30, 2010, primarily from the Foundation mines included in our Northern West Virginia business unit.

Metallurgical coal sales realization per ton at our Eastern Coal Operations increased $25.15 per ton, or 27%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase was due to higher contract prices realized from the legacy Alpha operations and the inclusion of higher priced contracts from the Foundation operations. Metallurgical coal sales realization per ton for the legacy Alpha operations was $112.04, an increase of $19.58 per ton, or 21%, for the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The average metallurgical coal sales realization per ton for the Foundation operations was $140.27.

EBITDA from continuing operations for the three months ended June 30, 2010 for our Eastern Coal Operations increased $111.9 million, or 152%, compared to the three months ended June 30, 2009. The increase was primarily due to increased coal revenues of $438.4 million, partially offset by increased cost of coal sales of $287.0 million, higher selling, general and administrative expenses of $22.1 million, increased other expenses of $8.2 million, decreased other revenues of $7.5 million, a loss on early extinguishment of debt of $1.3 million and a decrease of other miscellaneous income of $0.4 million. The increase in coal revenues was due to the increase in coal sales volumes and average coal sales realization per ton discussed in the preceding paragraphs.

Six Months Ended June 30, 2010 Compared to the Six Months Ended June 30, 2009

Summary

Total revenues increased $1.0 billion, or 120%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.  The increase in total revenues consisted of the addition of $899.7 million in revenues from the Foundation operations and an increase of $149.8 million in revenues from the legacy Alpha operations. The increase in revenues from the legacy Alpha operations was due to an increase in coal revenues of $85.1 million, or 11%, and increased freight and handling revenues of $71.2 million, partially offset by a decrease of $6.5 million in other revenues.

Income from continuing operations decreased $9.4 million, or 15%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease was largely due to an increase in certain operating costs and expenses of $965.8 million, an increase in interest expense of $20.6 million, a $1.3 million loss on early extinguishment of debt and a $0.2 million increase in other miscellaneous expenses, partially offset by increased coal and other revenue of $964.6 million and $11.3 million, respectively, and a $2.6 million decrease in income tax expense.

The increase in certain operating costs and expenses of $965.8 million consisted of $868.4 million from the Foundation operations and an increase of $97.4 million related to the legacy Alpha operations. The increase related to the legacy Alpha operations was due to increased cost of coal sales of $67.4 million, increased selling, general and administrative expenses of $24.3 million, and increased other expenses of $12.6 million, partially offset by a decrease in depreciation, depletion and amortization of $6.9 million. The $868.4 million related to the Foundation operations consisted of $594.8 million of cost of coal sales, $121.6 million of amortization of acquired coal supply agreements, net, $116.5 million of depreciation, depletion and amortization expenses, $28.4 million of selling, general and administrative expenses, and $7.1 mill ion of other expenses.

We sold 41.6 million tons of coal during the six months ended June 30, 2010 compared to 9.5 million tons in the prior year period, an increase of 32.1 million tons, or 339%. The 41.6 million tons sold during the six months ended June 30, 2010 consisted of 31.9 million tons from the Foundation operations and 9.7 million tons from the legacy Alpha operations. Total coal sales volume from the legacy Alpha operations increased 0.2 million tons, or 2%, during the six months ended June 30, 2010 compared to the prior year period. The increase from the legacy Alpha operations consisted of an increase in metallurgical coal sales volume of 1.4 million tons, or 40%, partially offset by a decrease in eastern steam coal sales volume of 1.2 million tons, or 20%. The 31.9 million tons sold by the Foundation operations included 23.3 million tons of stea m coal from our Western Coal Operations and 7.6 million tons and 1.0 million tons of steam and metallurgical coal, respectively, from our Eastern Coal Operations.

The consolidated weighted average coal sales realization per ton for the six months ended June 30, 2010 was $41.50 compared to $80.30 for the six months ended June 30, 2009. The decrease was largely attributable to the inclusion of coal sales from our Western Coal Operations, which has a substantially lower coal sales realization per ton due to the difference in pricing between coal in the Powder River Basin and coal in the eastern coal basins. The weighted average coal sales realization per ton for the legacy Alpha operations increased $7.26, or 9%, to $87.57 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This increase reflects a higher proportion of metallurgical coal sales volumes to total coal sales volumes and higher average pricing for the legacy Alpha operations compared to the prior year pe riod. The weighted average coal sales realization per ton for the Foundation operations was $27.56, which reflects a high proportion of coal sales volumes from the Western Coal Operations at an average coal sales realization per ton of $10.86. Coal sales realization per ton for eastern steam and metallurgical coal was $64.23 and $135.48, respectively, for the Foundation operations for the six months ended June 30, 2010.

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Consolidated coal margin percentage, calculated as consolidated coal revenues less consolidated cost of coal sales (excluding cost of coal sales in our All Other segment), divided by consolidated coal revenues, was 29% for the six months ended June 30, 2010 compared to 25% for the six months ended June 30, 2009. Coal margin percentage for the Foundation operations was 34% and coal margin percentage for the legacy Alpha operations was 24% for the six months ended June 30, 2010.

Consolidated coal margin per ton, calculated as consolidated coal sales realization per ton less consolidated cost of coal sales per ton, was $12.06 for the six months ended June 30, 2010 compared to $19.88 for the six months ended June 30, 2009. Coal margin per ton for the Foundation operations was $9.25 per ton and coal margin per ton for the legacy Alpha operations was $21.35 per ton for the six months ended June 30, 2010.

Revenues

	Six Months Ended June 30,				Increase (Decrease)
	2010			20091	$ or Tons			%
	(in thousands, except per ton data)
Revenues:
Coal revenues:
Eastern steam	$	828,136	$	413,079	$	415,057			100	%
Western steam		252,820		-		252,820		NM
Metallurgical		644,414		347,694		296,720			85	%
Freight and handling revenues		155,056		81,499		73,557			90	%
Other revenues		41,983		30,701		11,282			37	%
Total revenues	$	1,922,409	$	872,973	$	1,049,436			120	%
Tons sold :
Eastern steam		12,400		5,976		6,424			107	%
Western steam		23,271		-		23,271		NM
Metallurgical		5,903		3,498		2,405			69	%
Total		41,574		9,474		32,100			339	%
Coal sales realization per ton:
Eastern steam	$	66.79	$	69.12	$	(2.33	)		(3	)%
Western steam	$	10.86	$	-	$	10.86		NM
Metallurgical	$	109.17	$	99.41	$	9.76			10	%
Average	$	41.50	$	80.30	$	(38.80	)		(48	)%

1 - Adjusted from amounts reported in prior periods for the reclassification of the change in fair value of derivative instruments and contract settlements. See Note 1 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Coal revenues. Coal revenues increased $964.6 million, or 127%, for the six months ended June 30, 2010 compared to the prior year period. The increase in coal revenues consisted of the addition of $879.5 million related to the Foundation operations and an increase of $85.1 million related to the legacy Alpha operations. The increase in coal revenues related to the legacy Alpha operations was due to a $160.7 million increase in metallurgical coal revenue partially offset by a $75.6 million decrease in eastern steam coal revenue. The increase in metallurgical coal revenues related to legacy Alpha operations was due to a 1.4 million ton increase in coal sales volumes due to increased demand for coking coal from domestic steel producers and a rise in demand in the export market compare d to the prior year period and increases in metallurgical coal prices. The decrease in eastern steam coal revenue related to the legacy Alpha operations was due to lower coal sales volumes of 1.2 million tons, partially offset by an increase of $1.76 in average sales realization per ton due to higher contract prices compared to the prior year period. The $879.5 million in coal revenue from the Foundation operations included $490.7 million in eastern steam coal revenues, $252.8 million in western steam coal revenues and $136.0 million in metallurgical coal revenues.

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Our sales mix of metallurgical coal and steam coal based on volume for the six months ended June 30, 2010 was 14% and 86%, respectively, compared with 37% and 63%, respectively, for the six months ended June 30, 2009.  The sales mix of metallurgical coal and steam coal based on volume for the legacy Alpha operations for the six months ended June 30, 2010 was 51% and 49%, respectively, compared to 37% and 63%, respectively, in the prior year period. The sales mix of metallurgical coal and steam coal for the Foundation operations was 3% and 97%, respectively, for the six months ended June 30, 2010. For the six months ended June 30, 2010, approximately 37% of consolidated coal revenues were derived from the sale of metallurgical coal compared with 46% in the prior year period.

Freight and handling revenues. Freight and handling revenues were $155.1 million for the six months ended June 30, 2010, an increase of $73.6 million compared to the six months ended June 30, 2009. The increase was due to higher export and domestic shipments combined with higher shipping rates compared to the prior year period. These revenues are primarily related to the legacy Alpha operations and are offset by equivalent costs and do not contribute to our profitability.

Other revenues. Other revenues increased $11.3 million, or 37%, for the six month period ended June 30, 2010 compared to the six months ended June 30, 2009. The increase consisted of the addition of $17.8 million from the Foundation operations, partially offset by a decrease of $6.5 million from the legacy Alpha operations. The decrease from the legacy Alpha operations was due to a decrease in road construction revenues of $8.9 million and an increase in mark-to-market adjustments of $2.7 million on coal sales contracts that are reported at fair value, partially offset by increases in terminal fee revenue of $1.9 million, revenue of $2.6 million related to coal sales contracts that were financially settled and other miscellan eous revenues of $0.6 million. Other revenues from the Foundation operations consisted of revenues related to our Dry Systems Technology of $3.7 million, Coal Gas Recovery business of $5.0 million, $3.8 million in royalties and $5.3 million of other miscellaneous revenues.

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Costs and Expenses

	Six Months Ended June 30,				Increase (Decrease)
	2010			20091	$ or Tons			%
	(in thousands, except per ton data)
Cost of coal sales (exclusive of items shown separately below)	$	1,232,266	$	570,039	$	662,227			116	%
Freight and handling costs		155,056		81,499		73,557			90	%
Other expenses		24,127		4,398		19,729			449	%
Depreciation, depletion and amortization		186,225		76,557		109,668			143	%
Amortization of acquired coal supply agreements, net		121,590		-		121,590		NM
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)		92,020		39,373		52,647			134	%
Total costs and expenses	$	1,811,284	$	771,866	$	1,039,418			135	%
Cost of coal sales per ton:2
Eastern coal operations	$	55.51	$	60.42	$	(4.91	)		(8	)%
Western coal operations	$	8.93	$	-	$	8.93		NM
Average	$	29.44	$	60.42	$	(30.98	)		(51	)%

1-  Adjusted from amounts reported in prior periods for the reclassification of the change in fair value of derivative instruments and contract settlements. See Note 1 to the Condensed Consolidated Financial Statements  included elsewhere in this Quarterly Report on Form 10-Q.

2- Cost of coal sales per ton includes only costs associated with our Eastern and Western Coal operations.

Cost of coal sales. Cost of coal sales increased $662.2 million, or 116%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.  The increase in cost of coal sales was due to the inclusion of $594.8 million from the Foundation operations and an increase of $67.4 million from the legacy Alpha operations. The increase related to the legacy Alpha operations was primarily due to increases in purchased coal expense and employee wages and benefits. The weighted average total cost of coal sales per ton was $29.44 for the six months ended June 30, 2010, a decrease of 51% compared to $60.42 for the six months ended June 30, 2009. The decrease is primarily related to the inclusion of our Western Coal Operations from the Merger, which operates at a s ubstantially lower cost than our Eastern Coal Operations. Cost of coal sales per ton for the legacy Alpha operations increased approximately 10% to $66.21 per ton. The average cost of coal sales per ton for the Foundation operations during the six months ended June 30, 2010 was $18.31, which reflects a high proportion of coal sales volumes from the Western Coal Operations, which had an average cost of coal sales per ton of $8.93. Cost of coal sales per ton for the Eastern Coal Operations related to the Foundation operations was $43.55 for the six months ended June 30, 2010.

Freight and handling costs. Freight and handling costs were $155.1 million for the six months ended June 30, 2010, an increase of $73.6 million compared to the six months ended June 30, 2009. The increase was due to higher export and domestic shipments combined with higher shipping rates compared to the prior year period. These costs are primarily related to the legacy Alpha operations and are offset by equivalent revenue and do not contribute to our profitability.

Other expenses. Other expenses increased $19.7 million, or 449%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase consisted of the inclusion of $7.1 million of other expenses from the Foundation operations and a $12.6 million increase in other expenses related to the legacy Alpha operations. The increase in other expenses related to the legacy Alpha operations was due primarily to mark-to-market gains on derivatives recorded in earnings in the prior year period that are now recorded as a component of other comprehensive income (loss) due to our designation of the derivative instruments as qualifying cash flow hedges in the first quarter of 2010. Other expenses of $7.1 million related to the Foundation operations consisted primarily of expenses for our Dry Systems Technology and Coal Gas Recovery businesses.

Depreciation, depletion and amortization. Depreciation, depletion, and amortization increased $109.6 million, or 143%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase consisted of the inclusion of $116.5 million of depreciation, depletion and amortization expense from the Foundation operations, partially offset by a $6.9 million decrease in depreciation, depletion and amortization expense from the legacy Alpha operations. The decrease from the legacy Alpha operations was due to lower depreciation and amortization expense on property, equipment and mine development costs and lower depletion due to a decrease in tons produced compared to the prior year period. Depreciation, depletion, and amortization related to the Foundation opera tions consisted of $75.9 million of depreciation and amortization of property, equipment and mine development costs and $40.6 million of depletion expense.

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Amortization of acquired coal supply agreements, net. Application of acquisition accounting in connection with the Merger resulted in the recognition of a significant asset for above market-priced coal supply agreements and a liability for below market-priced coal supply agreements on the date of the acquisition. The coal supply agreement assets and liabilities are being amortized over the actual amount of tons shipped under each contract. Amortization of acquired coal supply agreements, net was $121.6 million for the six months ended June 30, 2010.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $52.7 million, or 134%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase consisted of the addition of $28.4 million in expenses from the Foundation operations and an increase of $24.3 million related to the legacy Alpha operations. The increase related to the legacy Alpha operations was due to legal and professional fees of $5.3 million primarily related to consulting and integration costs, increased employee compensation of $9.4 million, including a $3.6 million increase in non-cash stock-based compensation, and $9.6 million of other miscellaneous expenses including severance and relocation-related costs. Consolidated selling, gene ral and administrative expenses for the six months ended June 30, 2010 included approximately $6.6 million of expenses related to the Merger.

Interest expense. Interest expense increased $20.6 million, or 103%, during the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in interest expense consisted of the addition of $23.8 million from the Foundation operations, partially offset by a decrease of $3.2 million from the legacy Alpha operations. The decrease related to the legacy Alpha operations was primarily due to the decrease in interest expense and amortization of deferred loan fees associated with the legacy Alpha term loan that was paid off subsequent to the Merger, partially offset by an increase in interest expense associated with the realized and unrealized losses due to the changes in fair value of the legacy Alpha interest rate swap that was de-designated as a cash flow hedge as a result of paying off the legacy Alpha term loan in July, 2009. Interest expense related to the Foundation operations primarily consisted of interest expense from the outstanding term loan due 2014, the outstanding 7.25% notes due 2014 and amortization of deferred financing fees and accretion of debt discount.

Interest income. Interest income increased by $0.5 million, or 56% for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.

Miscellaneous income (expense), net. Miscellaneous income (expense), net was an expense of ($0.5) million for the six months ended June 30, 2010 and income of $0.2 million for the six months ended June 30, 2009.

Loss on early extinguishment of debt. During the six months ended June 30, 2010, we amended our credit facility and prepaid approximately $39.6 million of the outstanding term loan.  As a result, we wrote off a portion of the deferred financing costs and recorded a loss of $1.3 million.

Income tax expense. Income tax expense from continuing operations of $16.4 million was recorded for the six months ended June 30, 2010 on income from continuing operations before income taxes of $70.2 million, which equates to an effective tax rate of 23%. This rate is lower than the federal statutory rate of 35% due primarily to the tax benefits associated with percentage depletion partially offset by a $25.6 million deferred tax charge required for the legislative change related to the deductibility of retiree prescription drug expenses (Medicare Part D). Income tax expense from continuing operations of $19.0 million was recorded for the six months ended June 30, 2009 on income from continuing operations before income taxes of $82.2 million, which equates to an effective tax rate of 23%. This rate is lower than the federal statutory rate of 35% due primarily to the tax benefits associated with percentage depletion, partially offset by state income taxes and an increase in the valuation allowance.

Discontinued operations. Loss from discontinued operations for the six months ended June 30, 2010 was $1.0 million, net of tax, compared to a loss from discontinued operations of $7.0 million, net of tax, for the six months ended June 30, 2009.

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Segment Analysis

	Six Months Ended June 30,				Increase (Decrease)
	2010		2009		$ or Tons			%
	(in thousands, except per ton data)
Western Coal Operations
Steam tons sold		23,271		-		23,271		NM
Steam coal sales realization per ton	$	10.86	$	-	$	10.86		NM
Total revenues	$	256,588	$	-	$	256,588		NM
EBITDA from continuing operations	$	38,310	$	-	$	38,310		NM
Eastern Coal Operations
Steam tons sold		12,400		5,976		6,424			107	%
Metallurgical tons sold		5,903		3,498		2,405			69	%
Steam coal sales realization per ton	$	66.79	$	69.12	$	(2.33	)		(3	)%
Metallurgical coal sales realization per ton	$	109.17	$	99.41	$	9.76			10	%
Total revenues	$	1,643,743	$	860,998	$	782,745			91	%
EBITDA from continuing operations	$	394,764	$	174,285	$	220,479			127	%

Western Coal Operations – EBITDA from continuing operations for our Western Coal Operations was $38.3 million for the six months ended June 30, 2010, which included $252.8 million in coal revenues and $207.9 million in cost of coal sales. Coal sales realization per ton was $10.86 and coal sales volumes were 23.3 million tons. Coal sales volumes for Western Coal Operations for the six months ended June 30, 2010 were affected by lower shipments to customers with contracted volumes that are based on requirements rather than stated volumes.

Eastern Coal Operations – Steam coal sales volumes from our Eastern Coal Operations increased 6.4 million tons, or 107%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in steam coal sales volumes consisted of 7.6 million tons from the Foundation operations, partially offset by a decrease of 1.2 million tons from the legacy Alpha operations. The Foundation operations shipped 7.6 million tons of steam coal for the six months ended June 30, 2010, which included 6.1 million tons from our Pennsylvania Services business unit and 1.5 million tons from the Foundation mines included in our Northern West Virginia business unit.

Steam coal sales realization per ton at our Eastern Coal Operations decreased $2.33, or 3%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 due to lower contract prices from the Foundation operations. Steam coal sales realization per ton for the legacy Alpha operations increased 3% to $70.89 or the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The average steam coal sales realization per ton for the Foundation operations was $64.23, which included coal sales realization per ton of $62.86 from our Pennsylvania Services business unit and $69.50 from the Foundation mines included in our Northern West Virginia business unit.

Metallurgical coal sales volumes from our Eastern Coal Operations increased 2.4 million tons, or 69%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in metallurgical coal sales volumes consisted of an increase of 1.4 million tons from the legacy Alpha operations combined with 1.0 million tons shipped from the Foundation operations. The increase of 1.4 million tons in metallurgical coal sales volumes from the legacy Alpha operations is due primarily to increased demand for coking coal from domestic steel producers and a rise in demand in the export market compared to the prior year period. The Foundation operations shipped 1.0 million tons for the six months ended June 30, 2010, which was primarily shipped from Foundation mines included in our Northern West Virginia business unit.

Metallurgical coal sales realization per ton at our Eastern Coal Operations increased $9.76, or 10%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase was due to higher contract prices realized from the legacy Alpha operations and the inclusion of higher priced contracts from the Foundation operations. Metallurgical coal sales realization per ton for the legacy Alpha operations was $103.78, an increase of $4.37, or 4%, for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The average metallurgical coal sales realization per ton for the Foundation operations was $135.48.

EBITDA from continuing operations for the six months ended June 30, 2010 for our Eastern Coal Operations increased $220.5 million, or 127%, compared to the six months ended June 30, 2009. The increase was primarily due to increased coal revenues of $711.8 million, partially offset by increased cost of coal sales of $443.6 million, higher selling, general and administrative expenses of $31.7 million, increased other expenses of $11.7 million, decreased other revenues of $2.5 million, a loss on early extinguishment of debt of $1.3 million and a decrease of other miscellaneous income of $0.5 million. The increase in coal revenues was due to the increase in coal sales volumes and average coal sales realization per ton discussed in the preceding paragraphs.

58

Liquidity and Capital Resources

Our primary liquidity and capital resource requirements stem from the cost of our coal production and purchases, our annual capital expenditures, our income taxes, and our debt service and reclamation obligations.  Our primary sources of liquidity have been from sales of our coal production; borrowings under our credit facility (see “—Credit Agreement and Long-term Debt”), note issuances, sales of our common stock, and to a much lesser extent, sales of purchased coal to customers, cash from sales of non-core assets and miscellaneous revenues.

We believe that cash on hand, cash generated from our operations and borrowings available under our credit facility will be sufficient to meet our working capital requirements, anticipated capital expenditures, debt service requirements and reclamation obligations for at least the next twelve months.

At June 30, 2010, we had available liquidity of $1,473.4 million, including cash and cash equivalents of $418.9 million, marketable securities of $242.6 million and $811.9 million of unused revolving credit facility commitments available under the Facility (after giving effect to $42.5 million of letters of credit outstanding as of June 30, 2010), subject to limitations described in that agreement. Our total long-term debt, including discount, was $745.9 million at June 30, 2010.

We sponsor pension plans in the United States for salaried and non-union hourly employees. For these plans, the Pension Protection Act of 2006 (“Pension Act”) requires a funding target of 100% of the present value of accrued benefits. The Pension Act includes a funding target phase-in provision that establishes a funding target of 92% in 2008, 94% in 2009, 96% in 2010 and 100% thereafter for defined benefit pension plans. Generally, any such plan with a funding ratio of less than 80% will be deemed at risk and will be subject to additional funding requirements under the Pension Act. Annual funding contributions to the plans are made as recommended by consulting actuaries based upon the ERISA funding standards. Plan assets consist of equity and fixed income funds, real estate funds, private equity funds and alternative investm ent funds. We are required to measure plan assets and benefit obligations as of the date of our fiscal year-end balance sheet and recognize the overfunded or underfunded status of a defined benefit pension and other postretirement plans (other than a multi-employer plan) as an asset or liability in our balance sheet and recognize changes in that funded status in the year in which the changes occur through other comprehensive (loss) income. The recent economic downturn caused investment income and the value of investment assets held in our pension trust to lose value. As a result, depending on economic recovery and growth in the value of our invested assets, we may be required to increase the amount of cash contributions into the pension trust in order to comply with the funding requirements of the Pension Act.  We currently expect to make contributions in 2010 in the range of $30 to $40 million to achieve approximately a 90% funded status with respect to our defined benefit retirement plans.

In connection with the Merger, we assumed the obligations for a federal coal lease, which contains an estimated 224.0 million tons of proven and probable coal reserves in the Powder River Basin. The original lease bonus bid was $180.5 million, payable in five equal annual installments of $36.1 million. During the three months ended June 30, 2010, we made the annual $36.1 scheduled payment and the two remaining annual installments of $36.1 million each are due on May 1, 2011 and 2012.

With respect to global economic events, there continues to be uncertainty in the financial markets and this uncertainty brings potential liquidity risks for us. Such risks include declines in our stock value, less availability and higher costs of additional credit, potential counterparty defaults and further commercial bank failures. The creditworthiness of our customers is constantly monitored by us. We believe that our current group of customers is sound and represents no abnormal business risk.

In March 2010, we filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission that provides us the flexibility to raise additional debt and/or equity capital through the sale or issuance of a number of different classes of securities.  Any such transaction would be accompanied by the filing of a prospectus supplement and other documents describing the material terms of the offering as required by the rules and regulations of the Securities and Exchange Commission.

On May 19, 2010, the Board of Directors authorized a share repurchase program, which permits us to repurchase up to $125.0 million of our outstanding common stock, par value $0.01 per share ("Shares").  The program enables us to repurchase Shares from time to time, as market indicators warrant.  As of June 30, 2010, we had repurchased 683,200 Shares for $24.8 million under this program, which was recorded as treasury stock in the Condensed Consolidated Balance Sheets.  We may purchase up to an additional $100.2 million of Shares under the program.

Accounts Receivable Securitization

As of June 30, 2010, letters of credit in the amount $141.6 million were outstanding under the A/R Facility and no cash borrowing transactions had taken place.

59

Cash Flows

Cash and cash equivalents decreased by $47.0 million for the six months ended June 30, 2010.  The net change in cash and cash equivalents was attributable to the following:

	Six Months Ended
	June 30,
	2010			2009
Cash Flows (in thousands):
Net cash provided by operating activities	$	337,931		$	57,576
Net cash used in investing activities		(296,451	)		(47,549	)
Net cash used in financing activities		(88,464	)		(18,849	)
Net decrease in cash and cash equivalents	$	(46,984	)	$	(8,822	)

Our primary sources of liquidity have been from sales of our coal production, borrowings under our credit facility, sales of our common stock, and to a much lesser extent, sales of purchased coal to customers, sales of non-core assets and miscellaneous revenues.

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

Net cash provided by operating activities, including discontinued operations, for the six months ended June 30, 2010, was $337.9 million, an increase of $280.3 million from the $57.6 million of net cash provided by operations for the six months ended June 30, 2009. Non-cash amounts included in net income for the six months ended June 30, 2010 increased $250.1 million over the six months ended June 30, 2009, primarily related to an increase in depreciation, depletion, accretion and amortization of $116.0 million and amortization of acquired coal supply agreements, net, of $121.6 million. Working capital changes consist primarily of trade accounts receivable, notes and other receivables, inventories, net, prepaid and other current assets, trade accounts payable, accrued expenses and other current liabilities, and pension and postretirement medical benefit obligations.

Net cash used in investing activities, including discontinued operations, for the six months ended June 30, 2010 was $296.5 million, which included $135.9 million in capital expenditures, $36.1 million in acquisitions of mineral rights under federal lease, $123.5 million in net purchases of marketable securities and a $3.0 million investment in a joint venture that is accounted for using the equity-method of accounting.  Net cash used in investing activities for the six months ended June 30, 2009 included $46.1 million in capital expenditures and $1.8 million used to acquire a company. Capital expenditures in the six months ended June 30, 2010 increased primarily due to $76.9 million in capital expenditures related to the Foundation operations and an increase of $12.9 million related to the legacy Alpha operations.

Net cash used in financing activities, including discontinued operations, for the six months ended June 30, 2010 was $88.5 million, which included $40.7 million in common stock repurchases related to the withholding of the minimum statutory tax due for the vesting of stock-based awards and the Company’s share repurchase program, $4.2 million in proceeds from the exercise of stock options, $7.6 million of excess tax benefits related to stock-based awards, $8.7 million of debt issuance costs and a principal payment of $50.9 million on our term loan.  Net cash used in financing activities for the six months ended June 30, 2009 included $10.9 million principal payments of notes payable, $5.3 million in debt issuance costs and $2.0 million in common stock repurchases related to the withholding of the minimum tax due for the ve sting of stock-based awards.

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Credit Agreement and Long-term Debt

As of June 30, 2010, our total long-term indebtedness consisted of the following (in thousands):

	June 30, 2010
Term loan due 2014	$	233,815
7.25% senior notes due 2014		298,285
2.375% convertible senior note due 2015		287,500
Debt discount		(73,701	)
Total long-term debt		745,899
Less current portion		(11,839	)
Long-term debt, net of current portion	$	734,060

Alpha Credit Facility

On April 15, 2010, we and our lenders amended and restated (the “Amend and Extend”) the Alpha Credit Facility (the “Facility”). The Amend and Extend, among other things, extended the maturity of $236.8 million of the then-outstanding term loans and $554.0 million of existing revolving credit facility (the “revolver”) commitments from July 7, 2011 to July 31, 2014. The Amend and Extend added $300.4 million of additional borrowing capacity with a maturity of July 31, 2014, to increase the aggregate principal amount available to be drawn under the revolver to $950.4 million. Subsequently, we terminated $96.0 million of commitments under the revolver and prepaid $39.6 million of the term loans, both of which related to lenders that chose not to extend their commitments beyond the original expiration date o f July 7, 2011. Additionally, the Amend and Extend (1) increased the amount of the “accordion” feature of the Alpha Credit Facility to $400.0 million, all of which was available for us to exercise following the closing of the Amend and Extend.; and, (2) also made other changes to the Alpha Credit Facility, including increases to certain baskets under the negative covenants to provide us greater financial and operating flexibility.

As of June 30, 2010, the total borrowing capacity under the revolver was $854.4 million and the amount available was $811.9 million, after giving effect to the outstanding letters of credit of $41.5 million. Borrowings under the revolver bear interest at a base rate plus an applicable margin or at an adjusted London interbank offered rate (“LIBOR”) plus an applicable margin. The applicable margin is subject to adjustment based on leverage ratios. There were no borrowings outstanding under the revolver at June 30, 2010 or December 31, 2009. Additionally, we are required to pay a commitment fee of 0.5% on unused borrowings.

The credit facility’s secured term loans bear interest at a base rate plus an applicable margin or at an adjusted LIBOR rate plus an applicable margin.  The interest rate approximated 3.56% and 3.50% at June 30, 2010 and December 31, 2009, respectively. As of June 30, 2010, our secured term loans had a carrying value of $232.5 million, net of debt discount of $1.4 million, with $11.8 million classified as current portion of long-term debt. As of December 31, 2009, our secured term loans had a carrying value of $282.7 million, net of debt discount of $2.0 million, with $33.5 million classified as current portion of long-term debt.

The Facility places certain restrictions on us. See “—Analysis of Material Debt Covenants.”

7.25% Senior Notes Due August 1, 2014

Foundation PA Coal Company, LLC (“Foundation PA”), one of our subsidiaries, has senior unsecured notes outstanding that mature on August 1, 2014, unless previously redeemed (the “2014 Notes”) with an aggregate principal amount of $298.3 million at both June 30, 2010 and December 31, 2009. The 2014 Notes are guaranteed on a senior unsecured basis by Alpha Natural Resources, Inc. and all of our subsidiaries other than Foundation PA and ANR Receivables Funding LLC. The 2014 Notes pay interest semi-annually and are redeemable at Foundation PA’s, at a redemption price equal to 102.417%, 101.208% and 100% of the principal amount if redeemed during the twelve month periods beginning August 1, 2010, 2011 and 2012, respectively, plus accrued interest. As of June 30, 2010, the carrying value of the 2014 Notes was $297 .1 million, net of debt discount of $1.2 million.  As of December 31, 2009, the carrying value of the 2014 Notes was $297.0 million, net of debt discount of $1.3 million.

The indenture governing the 2014 Notes places certain restrictions on Alpha. See “—Analysis of Material Debt Covenants.”

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2.375% Convertible Senior Notes Due April 15, 2015

As of June 30, 2010 and December 31, 2009, we had $287.5 million aggregate principal amount of 2.375% convertible senior notes due April 15, 2015. The Convertible Notes bear interest at a rate of 2.375% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, and will mature on April 15, 2015, unless previously repurchased by us or converted. We account for the Convertible Notes under ASC 470-20, which requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers’ nonconvertible debt borrowing rate. The related deferred loan costs and discount are being amortized and accreted, respectively, over the seven-year term of the Convertible Notes, and provide for an effective interest rate of 8.64%. As of June 30, 2010 and December 31, 2009, the carrying amounts of the debt component were $216.3 million and $210.5 million, respectively. As of June 30, 2010 and December 31, 2009, the unamortized debt discount was $71.2 million and $77.0 million, respectively.

Analysis of Material Debt Covenants

We were in compliance with all covenants under the Facility and the indenture governing the 2014 Notes as of June 30, 2010. A breach of the covenants in the Facility or the 2014 Notes indenture, including the financial covenants under the Facility that measure ratios based on Adjusted EBITDA, could result in a default under the Facility or the 2014 Notes indenture and the respective lenders and note holders could elect to declare all amounts borrowed due and payable. Any acceleration under either the Facility or the 2014 Notes indenture would also result in a default under the indenture governing our Convertible Notes. Additionally, under the Facility and the 2014 Notes 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.

Covenants and required levels set forth in the Facility are:

	Actual Covenant Levels; Period Ended June 30, 2010	Required Covenant Levels; January 1, 2009 and Thereafter
Adjusted EBITDA to cash interest ratio	16.8x	2.5x
Total debt less unrestricted cash to adjusted EBITDA ratio	0.5x	3.5x

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

Certain non-cash items that may adjust EBITDA in the compliance calculation are: (a) accretion on asset retirement obligations; (b) amortization of intangibles; (c) 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; and (d) gains or losses associated with the change in fair value of derivative instruments. Certain non-recurring items that may adjust EBITDA in the compliance calculation are: (a) business optimization expenses or other restructuring charges; (b) non-cash impairment charges; (c) certain non-cash expenses or charges arising as a result of the application of acquisition accounting; (d) non-cash charges associated with loss on early extinguishment of debt; and (e) charges ass ociated with litigation, arbitration, or contract settlements. Certain other items that may adjust EBITDA in the compliance calculation are: (a) after-tax gains or losses from discontinued operations; (b) franchise taxes; and (c) other non-cash expenses that do not represent an accrual or reserve for future cash expense.

62

The Facility no longer requires us to use pro forma results for the calculation of adjusted EBITDA because we have four quarters of combined results as defined in the Facility. The calculation of adjusted EBITDA shown below is based on our results of operations in accordance with the Facility and therefore, is different from EBITDA presented elsewhere in this Quarterly Report on Form 10-Q (in thousands).

	Three Months Ended												Twelve Months Ended
	September 30, 2009			December 31, 2009			March 31, 2010			June 30, 2010			June 30, 2010
Net income (loss)	$	(16,265	)	$	17,947		$	14,041		$	38,797		$	54,520
Interest expense		42,835			19,971			22,120			18,504			103,430
Interest income		(295	)		(494	)		(680	)		(848	)		(2,317	)
Income tax expense (benefit)		(46,885	)		(8,230	)		20,860			(5,159	)		(39,414	)
Amortization of acquired coal supply agreements, net		57,983			69,625			65,957			55,633			249,198
Depreciation, depletion and amortization		78,749			97,716			95,137			91,049			362,651
EBITDA		116,122			196,535			217,435			197,976			728,068
Non-cash charges (1)		20,439			7,397			12,177			14,069			54,082
Extraordinary or non-recurring items (1)		34,953			4,827			273			279			40,332
Other adjustments (1)		2,375			2,485			3,048			(1,359	)		6,549
Adjusted EBITDA	$	173,889		$	211,244		$	232,933		$	210,965		$	829,031

(1) Calculated in accordance with the Alpha Credit Facility

Adjusted EBITDA to cash interest ratio	16.8
Total debt less unrestricted cash to adjusted EBITDA ratio	0.5

Cash interest is calculated in accordance with the Facility and is equal to interest expense less interest income and non-cash interest expense. Cash interest for the twelve months ended June 30, 2010 is calculated as follows (in thousands):

Interest expense	$	103,430
Less interest income		(2,317	)
Less non-cash interest expense		(49,162	)
Less other adjustments		(2,468	)
Pro Forma net cash interest expense (1)	$	49,483

(1) Calculated in accordance with the Alpha Credit Facility

If certain circumstances exist where all of our $287.5 million aggregate principal amount of Convertible Notes were converted at the option of the holders, we believe we would have adequate liquidity to satisfy the obligations for the Convertible Notes and remain in compliance with any required covenants.

63

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include guarantees, operating leases, 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 Condensed Consolidated Balance Sheets. However, the underlying obligations that they secure, such as asset retirement obligations, self-insured workers’ compensation liabilities, royalty obligations and certain retiree medical obligations, are reflected in our Condensed 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 various states, pay federal black lung benefits, pay retiree health care benefits to certain retired United Mine Workers Association employees and perform certain other obligations. In order to provide the required financial assurance, we generally use surety bonds and self bonding for post-mining reclamation 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 to w hich future contributions will be required. 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 $508.1 million as of June 30, 2010 to secure various obligations and commitments. In addition, we had $184.1 million of letters of credit in place, of which $42.5 million was outstanding under the Alpha Credit Facility, and $141.6 million was outstanding under our A/R Facility. These outstanding letters of credit served as collateral for workers’ compensation bonds, reclamation surety bonds, secured UMWA retiree health care obligations, secured workers’ compensation obligations and other miscellaneous obligations. In the event that additional surety bonds or self bonding capacity become unavailable, we would seek to secure our obligations with letters of credit, cash deposits or other suitable forms of collateral.

Other

As a regular part of our business, we review opportunities for, and engage in discussions and negotiations concerning, the acquisition of coal mining assets and interests in coal mining companies, and acquisitions of, or combinations with, coal mining companies. When we believe that these opportunities are consistent with our growth plans and our acquisition criteria, we will make bids or proposals and/or enter into letters of intent and other similar agreements. These bids or proposals, which may be binding or nonbinding, are customarily subject to a variety of conditions and usually permit us to terminate the discussions and any related agreement if, among other things, we are not satisfied with the results of our due diligence investigation. Any acquisition opportunities we pursue could materially affect our liquidity and capital reso urces and may require us to incur indebtedness, seek equity capital or both. There can be no assurance that additional financing will be available on terms acceptable to us, or at all.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect reported amounts. These estimates and assumptions are based on information available as of the date of the financial statements. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of results that can be expected for the full year.

We have long-term liabilities for postretirement medical benefit cost obligations.  The liabilities for these obligations are actuarially determined using various actuarial assumptions as described in our Annual Report on Form 10-K for the year ending December 31, 2009. During the three months ended June 30, 2010, we re-measured our postretirement medical benefit cost obligations to estimate the impact of the PPACA, which was passed in March, 2010. The PPACA will impose a 40% excise tax on employers to the extent that the value of their healthcare plans coverage exceeds certain dollar thresholds for individuals and families.

Please refer to the section entitled “Critical Accounting Policies and Estimates” of “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2009 for a discussion of our critical accounting policies and estimates.

64

Mine Safety and Health Administration Data

Our subsidiaries’ mining operations have consistently been recognized with numerous local, state and national awards over the years for outstanding safety performance. In the quarter ended June 30, 2010, 10 individual awards were presented to our Pennsylvania and West Virginia operations.

Our Running Right safety process involves all employees in accident prevention and continuous improvement. Safety leadership and training programs are based upon the concepts of situational awareness and observation, changing behaviors, and most importantly employee involvement. The core elements of our behavior based safety training include identification of critical behaviors, frequency of those behaviors, employee feedback and removal of barriers for continuous improvement.

The Running Right program empowers all Alpha employees to champion the safety process. Every person is challenged to identify hazards and initiate corrective actions. Reporting is anonymous, allowing hazards to be dealt with in a timely manner.

All levels of the organization are expected to be proactive and commit to perpetual improvement, implementing new safety processes that promote a safe and healthy work environment.

Our subsidiaries operate multiple mining complexes in six states and are regulated by both the U.S. Mine Safety and Health Administration (“MSHA”) and state regulatory agencies. As described in more detail in the “Environmental and Other Regulatory Matters” section of our Annual Report on Form 10-K for the year ended December 31, 2009, the Federal Mine Safety and Health Act of 1977, as amended (the “Mine Act”) and state regulatory agencies, among other regulations, imposes stringent safety and health standards on all aspects of mining operations. Regulatory inspections are mandated by these agencies with thousands of inspection shifts at our properties each year. Citations and compliance metrics at each of our 65 affiliated mining properties vary, due to the size and type of the operation. We endeavor to conduct our mining and other operations in compliance with all applicable federal, state and local laws and regulations. However, violations occur from time to time. None of the violations identified or the monetary penalties assessed upon us set forth in the tables below have been material.

Our subsidiaries received no flagrant violations under Section 110(b)(2), no imminent danger orders under Section 107(a) and no written notice of a pattern of violations under Section 104(e) of the Mine Act, nor the potential to have such a pattern, and they experienced no mining-related fatalities during the current quarterly reporting period.

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For reporting purposes of The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, we include the following table that sets forth the total number of specific citations and orders and the total dollar value of the proposed civil penalty assessments that were issued by MSHA during the current quarterly reporting period, pursuant to the Mine Act, for each of our subsidiaries that is a coal mine operator, by individual mine, excluding all citations and orders that were issued and vacated by MSHA during the current quarterly reporting period:

MSHA Mine ID	Mine Operator	Section 104 of the Mine Act Significant and Substantial Citations (1)		Section 104(b) of the Mine Act Orders		Section 104(d) of the Mine Act Unwarrantable Failure Citation/Orders		Total Dollar Value of Proposed MSHA Assessments (in thousands) (2)
4800732	Alpha Coal West, Inc.		-		-		-	$	7.38
4801078	Alpha Coal West. Inc.		1		-		-	$	-
3607688	AMFIRE Mining Company LLC		-		-		-	$	-
3608422	AMFIRE Mining Company LLC		4		-		-	$	-
3608497	AMFIRE Mining Company LLC		-		-		-	$	0.10
3608620	AMFIRE Mining Company LLC		-		-		-	$	-
3608704	AMFIRE Mining Company LLC		2		-		-	$	2.37
3608848	AMFIRE Mining Company LLC		1		-		-	$	-
3608850	AMFIRE Mining Company LLC		10		-		-	$	10.90
3608853	AMFIRE Mining Company LLC		-		-		-	$	-
3609005	AMFIRE Mining Company LLC		6		-		-	$	5.14
3609033	AMFIRE Mining Company LLC		3		-		-	$	2.00
3609127	AMFIRE Mining Company LLC		3		-		-	$	5.89
3609246	AMFIRE Mining Company LLC		-		-		-	$	-
3609284	AMFIRE Mining Company LLC		-		-		-	$	0.53
3609414	AMFIRE Mining Company LLC		-		-		-	$	-
3609140	AMFIRE Mining Company, LLC		-		-		-	$	-
4606045	Brooks Run Mining Company LLC		-		-		-	$	-
4606263	Brooks Run Mining Company LLC		7		-		-	$	3.71
4608885	Brooks Run Mining Company LLC		2		-		-	$	9.11
4609036	Brooks Run Mining Company LLC		-		-		-	$	-
4609066	Brooks Run Mining Company LLC		1		-		-	$	16.76
4609126	Brooks Run Mining Company LLC		3		-		-	$	0.54
4609213	Brooks Run Mining Company LLC		2		-		-	$	2.50
4609348	Brooks Run Mining Company, LLC		-		-		-	$	-
4607484	Cobra Natural Resources LLC		-		-		-	$	0.10
4607985	Cobra Natural Resources LLC		10		-		-	$	-
4608730	Cobra Natural Resources LLC		18		-		-	$	27.24
3609744	Coral Energy Services LLC		-		-		-	$	-
3605018	Cumberland Coal Resources LP		20		-		2	$	65.77
4406444	Dickenson-Russell Coal Co LLC		41		-		-	$	61.71
4406864	Dickenson-Russell Coal Co LLC		21		-		-	$	102.45
4407146	Dickenson-Russell Coal Co LLC		29		-		-	$	35.20
4405311	Dickenson-Russell Coal Co., LLC		-		-		-	$	-
4402277	Dickenson-Russell Coal Co., LLC		-		-		-	$	-
3605466	Emerald Coal Resources LP		32		-		5	$	223.72
1519189	Enterprise Mining Co LLC		2		-		-	$	-
1511121	Enterprise Mining Company LLC		-		-		-	$	0.30
1516858	Enterprise Mining Company LLC		6		-		-	$	0.88
1518507	Enterprise Mining Company LLC		1		-		-	$	5.43
1519116	Enterprise Mining Company LLC		4		-		-	$	10.90
4604637	Kepler Processing Company LLC		-		-		-	$	2.27
4608625	Kingston Mining, Inc.		8		-		-	$	15.72
4608932	Kingston Mining, Inc.		9		-		-	$	18.84
4604343	Kingston Processing Inc		-		-		-	$	0.43
4605872	Litwar Processing Company, LLC		3		-		-	$	0.56
4406949	Paramont Coal Company Virginia LLC		3		-		-	$	-
4407123	Paramont Coal Company Virginia LLC		10		2		-	$	11.64
4407163	Paramont Coal Company Virginia LLC		1		-		-	$	-
4407190	Paramont Coal Company Virginia LLC		3		-		-	$	4.25
4407231	Paramont Coal Company Virginia LLC		8		-		-	$	4.17
4407223	Paramont Coal Company Virginia LLC		-		-		-	$	0.10
4405270	Paramont Coal Company Virginia, LLC		3		-		-	$	0.53
4406929	Paramont Coal Company Virginia, LLC		37		-		-	$	35.58
4407129	Paramont Coal Company Virginia, LLC		16		-		-	$	12.47
4607545	Premium Energy LLC		-		-		-	$	-
1517278	Rivereagle Corporation		-		-		-	$	0.59
4605121	Rockspring Development Inc		62		-		1	$	190.92
4608030	Rockspring Development Inc		2		-		-	$	2.00
4608582	Simmons Fork Mining Inc.		-		-		-	$	0.33
4609026	Simmons Fork Mining, Inc.		-		-		-	$	0.10
4609114	Simmons Fork Mining, Inc.		-		-		-	$	-
4403658	Twin Star Mining, Inc.		-		-		-	$	7.34
4403929	Twin Star Mining, Inc.		-		-		-	$	0.42
4608632	White Flame Energy, Inc		-		-		-	$	-

(1) Section 104(d) Citations and Orders are not included in the number of Significant and Substantial Citations.

(2) The MSHA Assessments issued during the quarterly reporting period do not necessarily relate to the citations or orders issued by MSHA during the quarterly reporting period or to the pending cases reported below.

Idle facilities are not included in the foregoing chart, unless they received a citation or order issued by MSHA during the current quarterly reporting period.

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The following is a list of legal actions pending before the Federal Mine Safety and Health Review Commission, including the Administrative Law Judges thereof, for each of our subsidiaries that is a coal mine operator, by individual mine:

MSHA Mine ID	Mine Operator	Legal Actions pending before the Federal Mine Safety and Health Review Commission
4800732	Alpha Coal West, Inc.	1
4801078	Alpha Coal West. Inc.	2
3607688	AMFIRE Mining Company LLC	-
3608422	AMFIRE Mining Company LLC	1
3608497	AMFIRE Mining Company LLC	-
3608620	AMFIRE Mining Company LLC	-
3608704	AMFIRE Mining Company LLC	8
3608848	AMFIRE Mining Company LLC	-
3608850	AMFIRE Mining Company LLC	16
3608853	AMFIRE Mining Company LLC	-
3609005	AMFIRE Mining Company LLC	9
3609033	AMFIRE Mining Company LLC	13
3609127	AMFIRE Mining Company LLC	15
3609246	AMFIRE Mining Company LLC	1
3609284	AMFIRE Mining Company LLC	1
3609414	AMFIRE Mining Company LLC	-
3609140	AMFIRE Mining Company, LLC	-
4606045	Brooks Run Mining Company LLC	1
4606263	Brooks Run Mining Company LLC	4
4608218	Brooks Run Mining Company LLC	5
4608885	Brooks Run Mining Company LLC	6
4609036	Brooks Run Mining Company LLC	-
4609055	Brooks Run Mining Company LLC	9
4609066	Brooks Run Mining Company LLC	26
4609126	Brooks Run Mining Company LLC	-
4609213	Brooks Run Mining Company LLC	6
4609348	Brooks Run Mining Company, LLC	-
4607484	Cobra Natural Resources LLC	2
4607985	Cobra Natural Resources LLC	3
4608730	Cobra Natural Resources LLC	14
3609744	Coral Energy Services LLC	-
3605018	Cumberland Coal Resources LP	25
4406444	Dickenson-Russell Coal Co LLC	7
4406864	Dickenson-Russell Coal Co LLC	15
4407146	Dickenson-Russell Coal Co LLC	5
4405311	Dickenson-Russell Coal Co., LLC	1
4402277	Dickenson-Russell Coal Co., LLC	1
3605466	Emerald Coal Resources LP	34
1518558	Enterprise Mining Co LLC	1
1519189	Enterprise Mining Co LLC	-
1511121	Enterprise Mining Company LLC	-
1516858	Enterprise Mining Company LLC	-
1518507	Enterprise Mining Company LLC	9
1519116	Enterprise Mining Company LLC	5
4604637	Kepler Processing Company LLC	-
4608625	Kingston Mining, Inc.	8
4608932	Kingston Mining, Inc.	9
4604343	Kingston Processing Inc	2
4608751	Kingwood Mining Company LLC	15
4605872	Litwar Processing Company, LLC	-
4406949	Paramont Coal Company Virginia LLC	-
4407123	Paramont Coal Company Virginia LLC	7
4407163	Paramont Coal Company Virginia LLC	-
4407190	Paramont Coal Company Virginia LLC	-
4407231	Paramont Coal Company Virginia LLC	-
4407223	Paramont Coal Company Virginia LLC	-
4405270	Paramont Coal Company Virginia, LLC	-
4406929	Paramont Coal Company Virginia, LLC	7
4407129	Paramont Coal Company Virginia, LLC	3
4607545	Premium Energy LLC	2
1517278	Rivereagle Corporation	-
4605121	Rockspring Development Inc	29
4608030	Rockspring Development Inc	-
4608582	Simmons Fork Mining Inc.	-
4609026	Simmons Fork Mining, Inc.	-
4609114	Simmons Fork Mining, Inc.	-
4403658	Twin Star Mining, Inc.	1
4403929	Twin Star Mining, Inc.	-
4608632	White Flame Energy, Inc	1

The foregoing list includes legal actions which were initiated prior to the current quarterly reporting period and which do not necessarily relate to the citations, orders or proposed assessments issued by MSHA during the quarterly reporting period. All of the above legal actions were initiated by us to contest citations, orders, or proposed assessments issued by MSHA, and if we are successful, may result in reduction or dismissal of those citations, orders or assessments.

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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. As of July 22, 2010, we had sales commitments for 100% of planned shipments for 2010. Uncommitted and unpriced tonnage was 0% and 12% for 2010 and 2011, respectively. The discussion below presents the sensitivity of the market value of selected financial instruments to selected changes in market rates and prices. The range of changes reflects our view of changes that are reasonably possible over a one-year period. Market values are the present value of projected future cash flows based on the market rates and prices chosen.

We have exposure to price risk for supplies that are used directly or indirectly in the normal course of production such as diesel fuel, steel and other items such as explosives. We manage our risk for these items through strategic sourcing contracts in normal quantities with our suppliers and may use derivative instruments from time to time, primarily swap contracts with financial institutions, for a certain percentage of our monthly requirements. Swap agreements essentially fix the price paid for our diesel fuel and explosives by requiring us to pay a fixed price and receive a floating price.

We expect to use approximately 18,400 tons of explosives during the remaining six months of 2010 and 36,000 tons in calendar year 2011 at our Western Coal Operations. Through our derivative swap contracts, we have fixed prices for approximately 63% of our expected explosive needs for the remaining six months of 2010 and 23% for calendar year 2011. If the price of natural gas were to decrease, our expense resulting from our natural gas derivatives would increase, which would be largely offset by a decrease in the cost of our physical explosive purchases.

We expect to use approximately 23.1 million gallons of diesel fuel during the remaining six months of 2010 and 47.0 million gallons of diesel fuel in calendar year 2011. Through our derivative swap contracts, we have fixed prices for approximately 65% and 48% of our expected diesel fuel needs for the remaining six months of 2010 and for calendar year 2011, respectively. If the price of diesel fuel were to decrease, our expense resulting from our diesel fuel derivative swap contracts would increase, which would be offset by a decrease in the cost of our physical diesel fuel purchases.

Credit Risk

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

Interest Rate Risk

Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. As we continue to monitor the interest rate environment in concert with our risk mitigation objectives, consideration is being given to future interest rate risk reduction strategies.

We have exposure to changes in interest rates through our Alpha Credit Facility, which has a variable interest rate of 3.25 percentage points over the London interbank offered rate (“LIBOR”), subject, in the case of the revolving credit line, to adjustment based on leverage ratios. As of June 30, 2010, our term loan due 2014 under the Alpha Credit Facility had an outstanding balance of $233.8 million, net of debt discount of $1.4 million. The current portion of the term loan due is $11.8 million. A 50 basis point increase or decrease in interest rates would increase or decrease our quarterly interest expense by $0.3 million, which would be partially offset by our interest rate swap.

To achieve risk mitigation objectives, we have in the past managed our interest rate exposure through the use of interest rate swaps. To reduce our exposure to rising interest rates, effective May 22, 2006 we entered into interest rate swaps to reduce the risk that changing interest rates could have on our operations. The swaps initially qualified for cash flow hedge accounting and changes in fair value were recorded as a component of equity; however, the debt instrument was subsequently paid in 2009 and the swaps no longer qualified for cash flow hedge accounting. The amounts that were previously recorded in equity were recognized in our Consolidated Statements of Operations in 2009. Subsequent changes in fair value of the interest rate swaps will be recorded in earnings. If interest rates were to decrease during the remaining six month s of 2010, our expense resulting from our interest rate swaps would increase, which would be partially offset by a decrease in the amount of actual interest paid on our Alpha Credit Facility.

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Item 4. Controls and Procedures

Our Disclosure Committee has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our SEC reports is timely recorded, processed, summarized and reported. In addition, we have established a Code of Business Ethics designed to provide a statement of the values and ethical standards to which we require our employees and directors to adhere. The Code of Business Ethics provides the framework for maintaining the highest possible standards of professional conduct.  We also maintain an ethics hotline for employees. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human err or and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report, in ensuring that material information relating to Alpha Natural Resources, Inc., required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the requisite time periods and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

On July 31, 2009, Old Alpha and Foundation merged, with Foundation continuing as the surviving corporation of the Merger. For accounting purposes, the Merger was treated as a “reverse acquisition” and Old Alpha was considered the accounting acquirer. Management’s assessment of internal controls over financial reporting as of December 31, 2009 excluded the operations of Foundation and we are in the process of integrating these operations into our control environment. The integration of these controls will be complete as soon as practical and will be included in Management’s assessment as of December 31, 2010.

There have not been any significant changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Nicewonder Litigation

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

In September 2007, the Court ruled that the WVDOH and the Federal Highway Administration (which is now a party to the suit) could not, under the circumstances of this case, enter into a contract that did not require the contractor to pay the prevailing wages as required by the Davis-Bacon Act. In anticipation of a potential Court directive that the contract be renegotiated for such payment, for which the WVDOH had committed to reimburse NCI, we recorded a $9.0 million long-term liability for the potential obligations under the ruling and an offsetting $9.0 million long-term receivable for the recovery of these costs from the WVDOH.

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On September 30, 2009, the Court issued an order that dismissed or denied for lack of standing all of the plaintiff’s claims under federal law and remanded the remaining state claims to circuit court in Kanawha County, WV for resolution. The Court also vacated portions of its September 2007 order, and held that the plaintiff lacked standing to pursue the Davis-Bacon Act claim and further concluded that no private right of action exists to challenge the absence of a provision in a contract for highway construction requiring payment of prevailing wages established by the Davis-Bacon Act. As a result of the September 30, 2009 ruling, our previously established long-term liability and offsetting long-term receivable of $9.0 million have been reversed.

On May 7, 2010, the Circuit Court of Kanawha County entered Summary Judgment in favor of NCI.  The plaintiffs have filed a petition for appeal with the West Virginia Supreme Court of Appeals, but the Court of Appeals has not yet accepted the appeal.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” Section in the Annual Report on Form 10-K for the year ended December 31, 2009 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 together with the cautionary statement under the caption “Cautionary Note Regarding Forward-Looking Statements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and the additional risks set forth below. These described risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Recent regulatory developments could make it more difficult and costly to mine coal in Appalachia and impose additional costs on our customers

In April 2010, as initial steps toward issuing a new Stream Protection Rule under the Surface Mining Control and Reclamation Act, the U.S. Office of Surface Mining Reclamation and Enforcement (“OSM”) commenced a pre-rulemaking information gathering process and solicited public comment on a notice of intent to conduct an environmental impact study.  The new rule would replace OSM’s Stream Buffer Zone Rule which, as revised in 2008, allows disposal of excess spoil within 100 feet of streams if OSM makes findings of impact minimization that overlap findings required by the COE in administration of the Clean Water Act Section 404 permit program.  OSM reports that the options under consideration for the new rule include:  requiring more extensive baseline data on hydrology, geology and aquatic b iology in permit applications; specifically defining the “material damage” that would be prohibited outside permitted areas; requiring additional monitoring during mining and reclamation; establishing corrective action thresholds; and limiting variances and exceptions to the “approximate original contour” requirement for reclamation.  In a settlement agreement with environmental groups that filed legal challenges seeking to invalidate the 2008 rule, OSM has agreed to issue a new proposed rule by February 2011 and a final rule by June 2012.

New U.S. Environmental Protection Agency (“EPA”) proposed regulations would impose additional costs on coal-fired power plants.  In May 2010, EPA issued proposed regulations governing management and disposal of coal ash from coal-fired power plants.  EPA sought public comment on two regulatory options.  Under the more stringent option, EPA would regulate coal ash as a “special waste” subject to hazardous waste standards when disposed in landfills or surface impoundments, which would be subject to stringent design, permitting, closure and corrective action requirements.  Alternatively, coal ash would be regulated as non-hazardous waste under RCRA subtitle D, with national minimum criteria for disposal but no federal permitting or enforcement.  Under both options, EP A would establish dam safety requirements to address the structural integrity of surface impoundments to prevent catastrophic releases.  In addition, in July 2010, EPA issued its proposed Air Pollution Transport Rule to further control nitrogen oxides and sulphur dioxide emissions from power plants in 31 eastern states and the District of Columbia.  EPA plans to issue a final rule, which would replace the Clean Air Interstate Rule that was overturned in court, by June 2011.

We are currently evaluating the impact of these recent developments on our current and future mining operations.  These developments may make it more difficult or increase our costs to obtain future or maintain existing permits necessary to perform our surface mining operations, and could increase the costs of coal use by our customers, which could adversely affect our financial condition, results of operations and cash flows.

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

	Total Number of Shares Purchased  (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (000's omitted) (3)
April 1, 2010 through April 30, 2010		3,196	$	51.28		-	$	-
May 1, 2010 through May 31, 2010		42	$	38.17		-		-
June 1, 2010 through June 30, 2010		683,428	$	36.33		683,200		100,177
		686,666	$	36.40		683,200	$	100,177

(1) In November 2008, the Board of Directors authorized the Company to repurchase common shares from employees to satisfy the employees’ minimum statutory tax withholdings upon the vesting of restricted stock and performance shares. During the three months ended June 30, 2010, the Company issued 9,825 shares of common stock to employees upon vesting of restricted stock and restricted stock units and repurchased 3,466 shares of common stock to satisfy the employees’ minimum statutory tax withholdings.

(2) On May 19, 2010, the Board of Directors authorized the Company to repurchase up to $125,000,000 of common shares.

(3) Management cannot estimate the number of shares that will be repurchased because decisions to purchase are based on the Company's outlook, business conditions and current investment opportunity.

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Item 6. Exhibits

See the Exhibit Index following the signature page of this quarterly report.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ALPHA NATURAL RESOURCES, INC.
Date: August 9, 2010	By:	/s/    Frank J. Wood
	Name:	Frank J. Wood
	Title:	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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10-K EXHIBIT INDEX

��
Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on August 5, 2009.)
3.2	Amended and Restated Bylaws of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on August 5, 2009.)
4.1	Form of certificate of Alpha Natural Resources, Inc. common stock (Incorporated by reference to Amendment No. 3 to the Registration Statement on Form S-1 of Alpha Natural Resources, Inc./Old (File No. 333-121002) filed on February 10, 2005.)
4.2	Indenture, dated as of April 7, 2008, between Alpha Natural Resources, Inc. (SEC File No. 1-32423) and Union Bank of California, N.A., as Trustee (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K of Alpha Natural Resources, Inc./Old (SEC File No. 1-32423) filed on April 9, 2008.)
4.3	Supplemental Indenture No. 1 dated as of April 7, 2008, between Alpha Natural Resources, Inc. (SEC File No. 1-32423) and Union Bank of California, N.A., as Trustee (Incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. /Old (SEC File No. 1-32423) filed on April 9, 2008.)
4.4	Form of 2.375% Convertible Senior Note due 2015 (Incorporated by reference to Exhibit 4.4 to the Current Report on Form 8-K (SEC File No. 1-32423) of Alpha Natural Resources, Inc./Old (SEC File No. 1-32423) filed on April 9, 2008.)
4.5	Supplemental Indenture No. 2 dated as of July 31, 2009, between Alpha Natural Resources, Inc. and Union Bank of California, N.A., as Trustee (Incorporated by reference to Exhibit 4.4 of the Current Report on Form 8-K filed by Alpha Natural Resources, Inc. on August 5, 2009.)
4.6	Subordinated Indenture dated as of April 7, 2008, between Alpha Natural Resources, Inc. and Union Bank of California, N.A. as Trustee (Incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K of Alpha Natural Resources, Inc./Old (SEC File No. 1-32423) filed on April 9, 2008.)
4.7	Supplemental Indenture No. 1 dated as of July 31, 2009, between Alpha Natural Resources, Inc. and Union Bank, N.A., as Trustee (Incorporated by reference to Exhibit 4.6 the Quarterly Report on Form 10-Q filed by Alpha Natural Resources, Inc. on August 7, 2009.)
4.8	Senior Notes Indenture dated as of July 30, 2004, among Foundation PA Coal Company (nka Foundation PA Coal Company, LLC), the Guarantors named therein and The Bank of New York, as Trustee, (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1/A (SEC File No. 333-118427) of Foundation Coal Holdings, Inc. filed on December 7, 2004.)
4.9	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 (Incorporated by reference to Exhibit 10.12 to the Quarterly Report on Form 10-Q of Foundation Coal Holdings, Inc. filed on November 14, 2005.)
4.10	Supplemental Indenture dated as of October 5, 2007 among Foundation PA Coal Terminal, LLC, a subsidiary of Foundation Coal Corporation, Foundation PA Coal Company, LLC and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.3.2 to the Quarterly Report on Form 10-Q of Foundation Coal Holdings, Inc. filed on November 9, 2007.)
4.11	Third Supplemental Indenture dated as of August 1, 2009 among Foundation PA Coal Company, LLC, Alpha Natural Resources, Inc., certain subsidiaries of Alpha Natural Resources, Inc. and The Bank of New York, as Trustee (Incorporated by reference to Exhibit 4.8 of the Current Report on Form 8-K filed by Alpha Natural Resources, Inc. on August 5, 2009.)
10.1	Second Amended and Restated Credit Agreement, dated as of July 30, 2004, as amended and restated as of July 7, 2006, as further amended effective July 31, 2009, and as further amended and restated as of April 15, 2010, by and among Alpha Natural Resources, Inc., Foundation PA Coal Company, LLC, Citicorp North America, Inc. as administrative agent and lender and the other lenders party thereto.  (Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. filed on April 16, 2010.)

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10-K EXHIBIT INDEX – (Continued)

Exhibit No.	Description of Exhibit
10.2*	Alpha Natural Resources, Inc. and Subsidiaries 2010 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Employees (Grades 22-30)
10.3*	Alpha Natural Resources, Inc. and Subsidiaries 2010 Long-Term Incentive Plan Performance Share Unit Award Agreement for Employees (Grades 22-30)
10.4*	Alpha Natural Resources, Inc. and Subsidiaries 2010 Long-Term Incentive Plan Restricted Stock Unit Award Agreement for Non-Employee Directors
10.5	Alpha Natural Resources, Inc. and Subsidiaries 2010 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Registration Statement on Form S-8 filed on May 19, 2010.)
12.1*	Computation of Ratio of Earnings to Fixed Charges.
12.2*	Computation of Other Ratios.
31(a)*	Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31(b)*	Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32(a)*	Certification Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32(b)*	Certification Pursuant to 18 U.S.C. §1350, As Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
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101.SCH*	XBRL taxonomy extension schema
101.CAL*	XBRL taxonomy extension calculation linkbase
101.LAB*	XBRL taxonomy extension label linkbase
101.PRE*	XBRL taxonomy extension presentation linkbase
*	Filed herewith.

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