Alpha Natural Resources 10-Q 2007 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2007

or

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

For the Transition Period From                    to                    

Commission File Number 001-32331

Foundation Coal Holdings, 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 No.)

999 Corporate Boulevard, Suite 300 Linthicum Heights, Maryland	21090
(Address of Principal Executive Offices)	(Zip Code)

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

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

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

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

There were 45,384,492 shares of common stock outstanding on July 31, 2007.

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
	Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3
	Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended June 30, 2007 and 2006	4
	Consolidated Statements of Operations and Comprehensive Income for the Six Months Ended June 30, 2007 and 2006	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	6
	Notes to Consolidated Financial Statements	7
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
ITEM 4.	CONTROLS AND PROCEDURES	42
ITEM 4T.	CONTROLS AND PROCEDURES	42
PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	43
ITEM 1A.	RISK FACTORS	43
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	43
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	43
ITEM 5.	OTHER INFORMATION	43
ITEM 6.	EXHIBITS	43

2

PART I – FINANCIAL INFORMATION

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

ITEM 1. FINANCIAL STATEMENTS.

Foundation Coal Holdings, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	June 30, 2007			December 31, 2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	82,106		$	33,720
Trade accounts receivable		104,593			119,603
Inventories, net		40,843			36,771
Deferred income taxes		15,525			15,525
Prepaid expenses		20,800			30,790
Other current assets		5,774			4,238
Total current assets		269,641			240,647
Owned surface lands		34,817			30,388
Plant, equipment and mine development costs, net		653,461			626,234
Owned and leased mineral rights, net		963,553			1,003,804
Coal supply agreements, net		26,063			31,343
Other noncurrent assets		16,036			17,164
Total assets	$	1,963,571		$	1,949,580
LIABILITIES
Current liabilities:
Current portion of long-term debt	$	8,375		$	—
Trade accounts payable		36,906			41,584
Accrued expenses and other current liabilities		169,221			162,014
Total current liabilities		214,502			203,598
Long-term debt		618,250			626,625
Deferred income taxes		14,099			8,273
Coal supply agreements, net		15,652			24,223
Postretirement benefits		496,102			536,628
Other noncurrent liabilities		268,469			252,420
Total liabilities		1,627,074			1,651,767
Commitments and contingencies (Note 17)
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value; 100.0 million shares authorized, 46.1 million shares issued and           45.4 million shares outstanding at June 30, 2007; 45.8 million shares issued and 45.4 million shares outstanding at December 31, 2006		461			458
Additional paid-in capital		287,271			279,436
Retained earnings		79,466			63,220
Accumulated other comprehensive loss		(5,446	)		(33,412	)
Treasury stock, at cost: 0.8 million shares at June 30, 2007; 0.3 million shares at December 31, 2006		(25,255	)		(11,889	)
Total stockholders’ equity		336,497			297,813
Total liabilities and stockholders’ equity	$	1,963,571		$	1,949,580

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

3

Foundation Coal Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(Unaudited, dollars in thousands, except share and per share data)

	Three Months Ended June 30,
	2007			2006
Revenues:
Coal sales	$	359,793		$	359,159
Other revenue		8,688			7,928
Total revenues		368,481			367,087
Costs and expenses:
Cost of coal sales (excludes depreciation, depletion and amortization)		287,839			268,195
Selling, general and administrative expenses (excludes depreciation, depletion and amortization)		16,963			14,094
Accretion on asset retirement obligations		2,485			2,203
Depreciation, depletion and amortization		50,743			48,211
Amortization of coal supply agreements		(1,467	)		(3,266	)
Employee and contract termination costs		9,731			—
Income from operations		2,187			37,650
Other income (expense):
Interest expense		(13,239	)		(13,974	)
Interest income		886			858
(Loss) income before income tax benefit (expense)		(10,166	)		24,534
Income tax benefit (expense)		6,381			(2,499	)
Net (loss) income		(3,785	)		22,035
Other comprehensive income:
Adjustments to unrecognized gains and losses and amortization of employee benefit plan costs, net of tax expense of $19,646 in 2007		28,648			—
Unrealized gain on interest rate swaps, net of tax expense of $7 in 2006		—			10
Reclassification of unrealized gain on interest rate swap intoInterest expense		(374	)		—
Comprehensive income	$	24,489		$	22,045
Basic (loss) earnings per common share	$	(0.08	)	$	0.49
Diluted (loss) earnings per common share	$	(0.08	)	$	0.46
Weighted-average shares—basic		45,236,870			45,560,740
Weighted-average shares—diluted		45,236,870			47,099,636
Dividends declared per share	$	0.05		$	0.05

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

4

Foundation Coal Holdings, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(Unaudited, dollars in thousands, except share and per share data)

	Six Months Ended June 30,
	2007			2006
Revenues:
Coal sales	$	746,025		$	746,761
Other revenue		17,378			15,651
Total revenues		763,403			762,412
Costs and expenses:
Cost of coal sales (excludes depreciation, depletion and amortization)		572,081			558,437
Selling, general and administrative expenses (excludes depreciation, depletion and amortization)		30,790			26,678
Accretion on asset retirement obligations		4,857			4,108
Depreciation, depletion and amortization		101,827			92,508
Amortization of coal supply agreements		(2,597	)		(9,464	)
Employee and contract termination costs		11,983			—
Income from operations		44,462			90,145
Other income (expense):
Interest expense		(26,259	)		(27,648	)
Interest income		1,518			1,226
Income before income tax benefit (expense)		19,721			63,723
Income tax benefit (expense)		1,048			(10,380	)
Net income		20,769			53,343
Other comprehensive income:
Adjustments to unrecognized gains and losses and amortization of employee benefit plan costs, net of tax expense of $19,688 in 2007		28,710			—
Unrealized gain on interest rate swaps, net of tax expense of $90 in 2006		—			139
Reclassification of unrealized gain on interest rate swap intoInterest expense		(744	)		—
Comprehensive income	$	48,735		$	53,482
Basic earnings per common share	$	0.46		$	1.18
Diluted earnings per common share	$	0.45		$	1.13
Weighted-average shares—basic		45,179,704			45,342,453
Weighted-average shares—diluted		46,482,482			47,017,933
Dividends declared per share	$	0.10		$	0.10

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

5

Foundation Coal Holdings, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

	Six Months Ended June 30,
	2007			2006
Operating activities:
Net income	$	20,769		$	53,343
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion on asset retirement obligations		4,857			4,108
Depreciation, depletion and amortization		99,230			83,044
Amortization of deferred financing costs		918			1,434
Gain on sale of assets		(2,601	)		(384	)
Non-cash stock compensation		2,954			1,485
Deferred income taxes		(13,862	)		(9,500	)
Asset retirement obligations		(336	)		(869	)
Other		(94	)		99
Changes in operating assets and liabilities:
Trade accounts receivable		15,035			(12,026	)
Inventories, net		(4,188	)		(9,170	)
Prepaid expenses and other current assets		9,432			3,580
Other noncurrent assets		184			599
Trade accounts payable		(4,678	)		1,697
Accrued expenses and other current liabilities		(3,827	)		(12,203	)
Noncurrent liabilities		11,686			8,118
Net cash provided by operating activities		135,479			113,355
Investing activities:
Purchases of property, plant and equipment		(76,079	)		(75,382	)
Proceeds from disposition of property, plant and equipment		1,892			528
Net cash used in investing activities		(74,187	)		(74,854	)
Financing activities:
Payment of cash dividends		(4,523	)		(4,546	)
Proceeds from issuance of common stock		2,624			7,010
Excess tax benefit from stock-based awards		2,260			8,607
Common stock repurchases		(13,267	)		—
Net cash (used in) provided by financing activities		(12,906	)		11,071
Net increase in cash and cash equivalents		48,386			49,572
Cash and cash equivalents at beginning of period		33,720			22,432
Cash and cash equivalents at end of period	$	82,106		$	72,004
Supplemental cash flow information:
Cash paid for interest	$	23,479		$	24,122
Cash paid for income taxes, net of refunds	$	10,672		$	15,182

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

6

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands, except per share data)

(1) Basis of Presentation of Consolidated Financial Statements

The accompanying interim consolidated financial statements of Foundation Coal Holdings, Inc. and Subsidiaries (the “Company”) are unaudited and prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission for Form 10-Q. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America as long as the statements are not misleading. In the opinion of management, these interim consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the results of the periods presented. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on Form 10-K for the twelve months ended December 31, 2006, filed March 1, 2007.

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring the use of management estimates and assumptions relate to coal reserves that are the basis for future cash flow estimates and units-of-production depreciation, depletion and amortization calculations; environmental and reclamation obligations; asset impairments; postemployment, postretirement and other employee benefit liabilities; valuation allowances for deferred income taxes; income tax provision calculations; reserves for contingencies and litigation; and the fair value and accounting treatment of certain financial instruments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates. In addition, different assumptions or conditions could reasonably be expected to yield different results. The operating results for the three and six months ended June 30, 2007 may not necessarily be indicative of the results to be expected in future quarters or for the twelve months ended December 31, 2007.

(2) Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159,The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115(“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company expects to adopt SFAS No. 159 on January 1, 2008 and has not yet determined the impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement clarifies how to measure fair value as permitted under other accounting pronouncements but does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company expects to adopt SFAS No. 157 on January 1, 2008 and has not yet determined the impact on the consolidated financial statements.

7

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”), which requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement plans (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. SFAS No. 158 requires the Company to initially recognize the funded status of a defined benefit pension and other postretirement plans and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. Additionally, for fiscal years ending after December 15, 2008, the Company is required to measure plan assets and benefit obligations as of the date of the Company’s fiscal year-end statement of financial position rather than at an interim period. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158. The Company expects to early adopt the measurement date provisions on December 31, 2007.

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s consolidated financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more-likely-than-not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 requires that a liability created for unrecognized tax benefits shall be presented as a liability and not combined with deferred tax liabilities or assets.

At January 1, 2007, the cumulative effect of the adoption of FIN 48 was zero. Our liability at the date of adoption for unrecognized tax benefits was $9,671. If recognized, $3,769 would affect the effective tax rate; however, the Company does not expect that these unrecognized tax benefits will significantly change this year. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of tax expense. The total amount of accrued interest and penalties as of January 1, 2007 was $163.

The Company files income tax returns in the U.S. federal jurisdiction and various states. Our United States federal tax obligations have been settled through the year 2002, although certain carry forward tax attributes that were generated prior to 2002 may still be adjusted upon examination by tax authorities if they either have been or will be used in periods subsequent to 2002.

(3) Inventories

Inventories consisted of the following:

	June 30, 2007			December 31, 2006
Saleable coal	$	17,195		$	16,052
Raw coal		1,170			2,199
Materials and supplies		28,029			23,620
		46,394			41,871
Less materials and supplies reserve for obsolescence		(5,551	)		(5,100	)
	$	40,843		$	36,771

Saleable coal represents coal stockpiles ready for shipment to a customer. Raw coal represents coal that requires further processing prior to shipment.

8

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

(4) Prepaid Expenses

Prepaid expenses consisted of the following:

	June 30, 2007		December 31, 2006
Prepaid royalties	$	1,171	$	1,427
Prepaid longwall move expenses		8,015		8,628
Prepaid SO2 emission allowances		1,671		2,052
Prepaid taxes		4,643		6,330
Prepaid insurance		3,483		10,796
Other		1,817		1,557
	$	20,800	$	30,790

(5) Plant, Equipment, Mine Development Costs and Owned and Leased Mineral Rights

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

	June 30, 2007			December 31, 2006
Owned surface and coal lands
Owned surface lands	$	34,817		$	30,388
Owned and leased mineral rights	$	1,253,218		$	1,253,127
Less accumulated depletion		(289,665	)		(249,323	)
	$	963,553		$	1,003,804
Plant, equipment and mine development costs
Plant, equipment and asset retirement costs	$	867,168		$	798,159
Mine development costs		39,401			27,507
Internal use software		35,759			30,726
Coalbed methane equipment and development costs		9,601			7,022
	$	951,929		$	863,414
Less accumulated depreciation and amortization:
Plant, equipment and asset retirement costs	$	(283,399	)	$	(226,788	)
Mine development costs		(5,721	)		(3,368	)
Internal use software		(8,030	)		(5,911	)
Coalbed methane equipment and development costs		(1,318	)		(1,113	)
		(298,468	)		(237,180	)
	$	653,461		$	626,234

(6) Other Noncurrent Assets

Other noncurrent assets consisted of the following:

	June 30, 2007		December 31, 2006
Receivables from asset dispositions	$	1,839	$	1,839
Unamortized deferred financing costs, net		11,241		12,159
Advance mining royalties		1,429		1,657
Other		1,527		1,509
	$	16,036	$	17,164

9

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

(7) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following:

	June 30, 2007		December 31, 2006
Wages and employee benefits	$	28,887	$	33,619
Employee termination costs		2,320		—
Postretirement benefits other than pension		22,340		21,420
Interest		9,063		9,063
Royalties		8,925		6,271
Taxes other than income taxes		37,951		35,409
Asset retirement obligations		2,645		2,940
Workers’ compensation		8,140		8,140
Deferred equipment purchase commitment		13,011		4,337
Accrued capital expenditures		13,205		10,495
Other		22,734		30,320
	$	169,221	$	162,014

(8) Other Noncurrent Liabilities

Other noncurrent liabilities consisted of the following:

	June 30, 2007		December 31, 2006
Postemployment benefits	$	5,021	$	4,803
Pension benefits		48,419		45,387
Workers’ compensation		24,591		23,347
Minimum royalty obligations		81		81
Black lung reserves		12,057		11,305
Contract settlement accrual		10,930		13,986
Asset retirement obligations		141,588		122,076
Deferred production tax		11,090		9,642
Deferred credits and other		7,048		6,140
Deferred equipment purchase commitment		7,644		15,653
	$	268,469	$	252,420

During 2005, the Company’s Northern Appalachia business unit took delivery of one hundred new longwall shields to remedy a warranty issue associated with shields currently used in its underground mining operations. The Company entered into a purchase commitment for the shields in the amount of $21,685 and in accordance with the payment terms, periodic progress payments to the manufacturer are not scheduled to start until the fourth quarter of 2007, with scheduled completion within one year. The current portion of the deferred equipment purchase commitment liability of $13,011 is recorded inAccrued expenses and other current liabilities. See Note 7. The Company recorded a deferred equipment purchase commitment liability representing the present value of the future payments due in accordance with the terms of the purchase commitment. Interest expense is imputed and recognized in a manner consistent with the established payment terms, over which, the liability will be increased to the full value of $21,685.

10

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

(9) Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted of the following:

	June 30, 2007			December 31, 2006
Unrealized gain on interest rate swaps	$	370		$	1,114
Defined benefit pension, postretirement and other Company sponsored plans		(5,816	)		(34,526	)
	$	(5,446	)	$	(33,412	)

(10) Pension, Other Postretirement Benefit Plans and Pneumoconiosis

Actuarial liabilities related to the Company’s defined benefit pension and postretirement benefit plans were re-measured in the quarter ended June 30, 2007 in connection with the curtailment event which occurred with respect to the closing of the Wabash mine, as further discussed in Note 18. The curtailment gains of $5,703 were recorded inOther comprehensive income because the curtailment gains did not exceed the unrecognized net losses recorded inAccumulated other comprehensive income related to these plans.

Components of Net Periodic Pension Costs

The components of net periodic benefit costs are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Service cost	$	1,710		$	1,698		$	3,241		$	3,091
Interest cost		3,113			2,845			6,067			5,533
Expected return on plan assets		(3,162	)		(2,636	)		(6,090	)		(5,284	)
Amortization of:
Prior service cost		271			53			269			50
Actuarial (gains) losses		(67	)		172			(5	)		199
Net expense	$	1,865		$	2,132		$	3,482		$	3,589

Components of Net Periodic Other Postretirement Benefit Plans Costs

The components of net periodic benefit costs are as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2007		2006			2007		2006
Service cost	$	1,664	$	2,350		$	3,920	$	4,550
Interest cost		7,272		7,201			15,412		15,049
Amortization of:
Actuarial (gains) losses		—		(522	)		—		50
Net expense	$	8,936	$	9,029		$	19,332	$	19,649

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

11

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

Components of Pneumoconiosis Costs

The components of net periodic benefit costs are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Service cost	$	166		$	176		$	348		$	353
Interest cost		346			329			680			657
Expected return on plan assets		(119	)		(144	)		(250	)		(287	)
Amortization of:
Actuarial losses		14			50			58			99
Net expense	$	407		$	411		$	836		$	822

(11) Stock-Based Compensation

On July 30, 2004, the Company’s Board of Directors adopted the Foundation Coal Holdings, Inc. 2004 Stock Incentive Plan (the “Plan”), which is designed to assist the Company in recruiting and retaining key employees, directors and consultants. The Plan permits the Company to grant its key employees, directors and consultants nonqualified stock options (“options”), stock appreciation rights, restricted stock or other stock-based awards. The shares under the Plan may be issued at an exercise price of no less than 100% of the fair market value of the Company’s common stock on the date of grant. The Plan is currently authorized for the issuance of awards for up to 5,978,483 shares of common stock. At June 30, 2007, 2,212,190 shares of common stock were available for grant under the Plan.

The Company has three types of stock-based awards: restricted stock units, restricted stock and options. Total compensation expense related to the stock-based awards recognized inSelling, general and administrative expenses for the six months ended June 30, 2007 was $2,954, consisting of $2,051, $196 and $707 for restricted stock units, restricted stock and options, respectively. Compensation expense related to the stock-based awards recognized inSelling, general and administrative expenses for the six months ended June 30, 2006 was $1,485, consisting of $629, $128 and $728 for restricted stock units, restricted stock and options, respectively.

(12) Interest Rate Swaps

On September 30, 2004, the Company entered into pay-fixed, receive-variable interest rate swap agreements on a notional amount of $85,000. The term of these swaps was for three years. Under these swaps, the Company received a variable rate of three month US dollar LIBOR and paid a fixed rate of 3.26%. Settlement of interest payments occurred quarterly. The Company was required to enter into these swaps in order to maintain at least 50% of its outstanding debt at a fixed rate as required by the Senior Secured Credit Facility. These swap agreements essentially converted $85,000 of the Company’s variable rate borrowings under the Senior Secured Credit Facility to fixed rate borrowings for a three-year period beginning September 30, 2004. The Company designated these interest rate swaps at inception as cash flow hedges of the variable interest payments due on $85,000 of its variable rate debt through September 2007 under SFAS No. 133,Accounting for Derivative Financial Instruments and Hedging Activities (“SFAS No. 133”).

In connection with the closing of the $835,000 amended and restated Senior Secured Credit Facility agreement on July 7, 2006, the Company terminated the interest rate swaps. On the date the Company made the decision to terminate the interest rate swaps, the interest rate swaps no longer qualified for cash flow hedge accounting treatment and accordingly, any change in the market value of the interest rate swaps affects net income. On July 11, 2006, the Company monetized the $2,371 derivative asset included inOther noncurrent assets on the Consolidated Balance Sheets at June 30, 2006 and recognized a $112 mark-to-market loss on the swaps. The $1,841 unrealized gain at June 30, 2006 from the change in the market value of the interest rate swaps recorded inAccumulated other comprehensive loss is being amortized into income on a prorated basis over the remaining term of the original interest rate swap agreement through September 28, 2007, in accordance with SFAS No. 133 and related amendments. At December 31, 2006, the unamortized unrealized gain on the swaps was $1,114. During the three and six months ended June 30, 2007, the Company amortized $374 and $744, respectively, which was recorded as an offset againstInterest expense.

12

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

(13) Asset Retirement Obligations

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

The following table is a reconciliation of the Company’s asset retirement obligation liability from December 31, 2006 through June 30, 2007:

Asset retirement obligation, December 31, 2006	$	125,016
Accretion expense		4,857
Revisions in estimated cash flows and liabilities incurred		14,696
Payments		(336	)
Asset retirement obligation, June 30, 2007	$	144,233

The current portions of the asset retirement obligation liabilities of $2,645 and $2,940 at June 30, 2007 and December 31, 2006, respectively, are included inAccrued expenses and other current liabilities. See Note 7. The noncurrent portion of the Company’s asset retirement obligation liabilities of $141,588 and $122,076 at June 30, 2007 and December 31, 2006, respectively, are included inOther noncurrent liabilities. See Note 8. There were no assets that were legally restricted for purposes of settling asset retirement obligations at June 30, 2007 or December 31, 2006. At June 30, 2007, regulatory obligations for asset retirements are secured by surety bonds in the amount of $259,023. These surety bonds are partially collateralized by letters of credit issued by the Company.

(14) Stockholders’ Equity and Earnings Per Share

Stockholders’ Equity

During the six months ended June 30, 2007, the Company declared and paid cash dividends of $4,523.

During the three and six months ended June 30, 2007, 305,409 and 350,345 options were exercised, respectively.

Earnings Per Share

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

	Three Months Ended June 30,		Six Months Ended June 30,
	2007	2006	2007	2006
Weighted average shares outstanding—basic	45,236,870	45,560,740	45,179,704	45,342,453
Dilutive impact of stock options	—	1,480,808	1,220,716	1,619,719
Dilutive impact of restricted stock plans	—	58,088	82,062	55,761
Weighted average shares outstanding—diluted	45,236,870	47,099,636	46,482,482	47,017,933

In periods of loss from continuing operations, basic earnings per share and dilutive earnings per share are the same. The Company reported a loss from continuing operations for the three months ended June 30, 2007 and accordingly excluded 1,235,979 shares and 104,461 shares related to outstanding stock options and restricted stock plans, respectively.

13

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

Common Share Repurchases

In July 2006, the Board of Directors authorized a stock repurchase program (the “Repurchase Program”), authorizing the Company to repurchase shares of its common stock. The Company may repurchase its common stock from time to time, as determined by authorized officers of the Company, up to an aggregate amount of $100,000. During the six months ended June 30, 2007, the Company expended $13,267 to repurchase 433,653 shares of its common stock at an average price of $30.59 per share under the Repurchase Program.

(15) Segment Information

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

Operating segment results for the three months ended June 30, 2007 are as follows:

	Powder River Basin		Northern Appalachia			Central Appalachia			Other			Consolidated
Total revenues	$	118,877	$	130,335		$	112,984		$	6,285		$	368,481
Income (loss) from operations		20,999		13,839			(2,945	)		(29,706	)		2,187
Depreciation, depletion and amortization		10,988		19,721			17,574			2,460			50,743
Amortization of coal supply agreements		1,130		(388	)		(2,346	)		137			(1,467	)
Capital expenditures		8,548		17,070			1,756			646			28,020
Total assets at June 30, 2007	$	537,259	$	897,961		$	466,316		$	62,035		$	1,963,571

Operating segment results for the three months ended June 30, 2006 are as follows:

	Powder River Basin		Northern Appalachia			Central Appalachia			Other			Consolidated
Total revenues	$	104,635	$	138,562		$	111,675		$	12,215		$	367,087
Income (loss) from operations		10,363		44,411			3,242			(20,366	)		37,650
Depreciation, depletion and amortization		10,433		20,487			15,179			2,112			48,211
Amortization of coal supply agreements		3,229		(2,549	)		(4,070	)		124			(3,266	)
Capital expenditures		2,202		11,222			11,721			10,277			35,422
Total assets at December 31, 2006	$	497,956	$	863,702		$	469,616		$	118,306		$	1,949,580

Operating segment results for the six months ended June 30, 2007 are as follows:

	Powder River Basin		Northern Appalachia		Central Appalachia			Other			Consolidated
Total revenues	$	234,618	$	278,330	$	229,657		$	20,798		$	763,403
Income (loss) from operations		41,829		53,949		180			(51,496	)		44,462
Depreciation, depletion and amortization		21,615		41,545		34,593			4,074			101,827
Amortization of coal supply agreements		2,002		158		(4,705	)		(52	)		(2,597	)
Capital expenditures		11,139		34,346		16,954			13,640			76,079
Total assets at June 30, 2007	$	537,259	$	897,961	$	466,316		$	62,035		$	1,963,571

14

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

Operating segment results for the six months ended June 30, 2006 are as follows:

	Powder River Basin		Northern Appalachia			Central Appalachia			Other			Consolidated
Total revenues	$	207,964	$	290,209		$	236,341		$	27,898		$	762,412
Income (loss) from operations		18,893		98,425			13,695			(40,868	)		90,145
Depreciation, depletion and amortization		20,721		38,513			29,182			4,092			92,508
Amortization of coal supply agreements		6,747		(5,132	)		(11,206	)		127			(9,464	)
Capital expenditures		7,140		19,444			33,242			15,556			75,382
Total assets at December 31, 2006	$	497,956	$	863,702		$	469,616		$	118,306		$	1,949,580

(16) Other Revenue

Other revenue consisted of the following:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Royalty income	$	1,079	$	1,072	$	1,872	$	1,500
Synfuel fees		1,383		2,781		2,662		4,920
Coalbed methane		1,525		830		2,253		1,968
Transloading and plant processing fees		308		1,043		492		1,878
Gain on sale of assets		2,258		52		2,601		384
Combined Benefit Fund refund		—		—		1,325		—
Dry Systems Technologies equipment and filter sales		841		1,118		1,852		2,211
Other		1,294		1,032		4,321		2,790
Total other revenue	$	8,688	$	7,928	$	17,378	$	15,651

(17) Commitments and Contingencies

General

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

Asset Retirement Obligations

At June 30, 2007, the Company’s accruals for reclamation and mine closure totaled $144,233. The portion of the costs expected to be incurred within one year of June 30, 2007 is $2,645, and is included inAccrued Expenses and other current liabilities. See Note 7. At June 30, 2007, these regulatory obligations are secured by surety bonds in the amount of $259,023. These surety bonds are partially collateralized by letters of credit issued by the Company.

Guarantees

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

15

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

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

Contingencies

Extensive regulation of the impacts of mining on the environment and 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 hindering the Company’s ability to continue mining operations or by increasing costs.

Legal Proceedings

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

Letters of Credit

At June 30, 2007, the Company had $170,915 of letters of credit outstanding under its revolving credit facility.

(18) Employee and Contract Termination Costs

Employee Termination Costs

Wage agreements between three affiliates of the Company and the United Mine Workers of America (“UMWA”) expired on or shortly after March 31, 2007. Specifically, the UMWA wage agreement for Wabash Mine Holding Company (“Wabash”) expired at 11:59 p.m. on March 31, 2007 and the UMWA wage agreements with Cumberland Coal Resources, LP (“Cumberland”) and Emerald Coal Resources, LP (“Emerald”) expired at 11:59 p.m. on April 1, 2007. Negotiations between these respective subsidiaries and the UMWA commenced in early January of 2007 but intensified in late March of 2007 and continued through April 3, 2007. Emerald Coal Resources, LP and Cumberland Coal Resources, LP reiterated their willingness to sign the 2007 National Bituminous Coal Operators Association (“BCOA”) UMWA wage agreement. The Company would not sign the BCOA Agreement for Wabash. The hourly workforce continued to work without a formal agreement of the parties under the terms of the expired wage agreement until 12:01 a.m. on April 4, 2007 at which time, alleging unfair labor practices by Wabash, Emerald and Cumberland, the UMWA represented hourly workforces struck the Wabash, Emerald and Cumberland mines. On the same day, Wabash announced the closure of the mine in southern Illinois. The mining operation had become economically unviable as a result of a combination of factors, including aging infrastructure, softening market conditions and the prospect of a new higher cost labor contract with the UMWA.

On April 10, 2007, negotiations between the UMWA and the three subsidiaries resumed. In the early evening of April 12, 2007, it was announced that the UMWA and the three subsidiaries had reached agreement and that the workforces at Emerald and Cumberland would return to work. The Wabash mine remained closed and the effects of the closure had been negotiated with the UMWA.

16

Foundation Coal Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited, dollars in thousands, except per share data)

During the six months ended June 30, 2007, as a result of the Wabash mine closure, the Company recognized employee termination costs of $5,350 and $1,462 in accordance with the provisions of SFAS No.146,Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No.146”) and the provisions of SFAS No. 112,Employers’ Accounting for Postemployment Benefits (“SFAS No. 112”), respectively. During the three months ended June 30, 2007, employee termination costs associated with one-time benefit arrangements of $5,350 were recognized in accordance with SFAS No. 146. Termination costs resulting from one-time benefit arrangements include medical insurance continuance costs and negotiated severance to hourly employees and one-time retention pay to salaried employees. The communication date related to these one-time benefit arrangements occurred during the three months ended June 30, 2007. The Company expects to recognize additional costs in the third quarter related to the remainder of the service periods associated with one-time retention benefits. During the three months ended June 30, 2007, the Company also reduced its estimate of certain previously recognized employee termination costs associated with on-going benefit arrangements in accordance with SFAS No. 112 by $790. These employee termination costs are recorded asEmployee and contract termination costs in the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2007. Wabash is included in the Company’sOther segment.

During the three and six months ended June 30, 2007, the Company made cash payments of $4,492 related to employee termination costs. At June 30, 2007, the Company’s liability for employee termination costs included inOther current liabilities in the Consolidated Balance Sheet was $2,320, comprised of medical and severance benefits. See Note 7.

Contract Termination Costs

Wabash was the seller under three coal supply agreements supplied from the Wabash mine. Two of the agreements were with Duke Energy Indiana, Inc. and the third with Alcoa, Inc.’s Warrick Works (“Alcoa”). Wabash continued to ship coal under the coal supply agreements through April 3, 2007, just prior to the mine closure. Each agreement contained force majeure language excusing the seller from supplying coal in the event of a work stoppage. On April 3, 2007, Wabash and Duke Energy Indiana, Inc. executed a Termination Agreement and Mutual Release buying-out, subject to certain conditions, all obligations under their two contracts in exchange for a cash payment of $5,734 which was paid by the Company on April 5, 2007. The Company believes there will be no further obligations of Wabash under these two contracts. During the three and six months ended June 30, 2007, the Company recognized $5,171 of net contract termination costs in accordance with the provisions of SFAS No. 146. The contract termination cost was recognized based on the date the Termination Agreement & Mutual Release was agreed-to between the parties. These contract termination costs are recorded asEmployee and contract termination costs in the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2007. With respect to the Alcoa coal supply agreement, Wabash claimed relief under force majeure for future contractual shipments. Because the Company believes a valid force majeure claim exists, and because this coal supply agreement provided pricing at levels approximately equal to current market prices, the Company does not consider it probable that Alcoa will assert a claim for damages under the coal supply agreement.

17

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

Special Note Regarding Forward-Looking Statements

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

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

• market demand for coal, electricity and steel;

• future economic or capital market conditions;

• weather conditions or catastrophic weather-related damage;

• our ability to produce coal at existing and planned future operations;

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

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

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

• timing of reductions or increases in customer coal inventories;

• long-term coal supply arrangements;

• risks in coal mining;

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

• competition;

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

• our assumptions concerning economically recoverable coal reserve estimates;

• employee workforce factors;

• regulatory and court decisions;

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

• changes in postretirement benefit and pension obligations;

• our liquidity, results of operations and financial condition;

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

• continuation of other revenues from fees received from synthetic fuel (“synfuel”) processors.

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

18

Overview

We are the fourth largest coal producer in the United States, operating a diverse group of thirteen coal mines located in Pennsylvania, West Virginia and the Powder River Basin region of Wyoming. Four of our operations are surface mines, two of our operations are underground mines using highly efficient longwall mining technology and the remaining seven operations are underground mines that utilize continuous miners. On April 4, 2007, Wabash Mine Holding Company (“Wabash”) announced the closure of the Wabash mine, an underground, continuous miner operation located in southern Illinois. The mine had become economically unviable as a result of a combination of factors discussed further in “Wage Negotiations with the UMWA and Closure of the Company’s Illinois Basin Mining Operations” below.

For the three months ended June 30, 2007, we sold 18.3 million tons of coal, including 17.8 million tons that were produced and processed at our operations. For the comparable period in 2006, we sold 18.6 million tons of coal, including 18.0 million tons that were produced and processed at our operations. For the six months ended June 30, 2007, we sold 37.1 million tons of coal, including 36.2 million tons that were produced and processed at our operations. For the comparable period in 2006, we sold 37.1 million tons of coal, including 35.8 tons produced and processed at our operations. As of December 31, 2006, we had approximately 1.6 billion tons of proven and probable coal reserves. In addition to mining coal, we are also involved in marketing coal produced by others to supplement our own production and, through blending, provide our customers with coal qualities beyond those available from our own production. We purchased and resold approximately 0.5 million and 0.6 million tons of coal in the three months ended June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, we purchased and resold approximately 0.9 and 1.3 million tons of coal, respectively.

We are primarily a supplier of steam coal to U.S. utilities for use in generating electricity. We also sell steam coal to industrial plants. Steam coal sales accounted for approximately 97% of our coal sales volume for both the three month periods ended June 30, 2007 and 2006, representing approximately 91% of our coal sales revenue in both of the three month periods ended June 30, 2007 and 2006. For the six months ended June 30, 2007 and 2006, steam coal sales accounted for approximately 97% of our coal sales volume in both periods, representing approximately 90% and 92% of our coal sales revenue for the six month periods ended June 30, 2007 and 2006, respectively. We sell metallurgical coal to steel producers where it is used to make coke for steel production. Metallurgical coal accounted for approximately 3% of our coal sales volume in both of the three month periods ended June 30, 2007 and 2006, representing approximately 9% of our coal sales revenue in both of the three month periods ended June 30, 2007 and 2006. Metallurgical coal accounted for approximately 3% of our coal sales volume for both of the six month periods ended June 30, 2007 and 2006, representing approximately 10% and 8% of our coal sales revenue in both of the six month periods ended June 30, 2007 and 2006, respectively.

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

Results of Operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

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

Revenues

	Three Months Ended June 30,				Increase (Decrease)
	2007		2006		Amount			Percent
	(Unaudited, in thousands, except per ton data)
Coal sales	$	359,793	$	359,159	$	634		—
Other revenue		8,688		7,928		760		10	%
Total revenues	$	368,481	$	367,087	$	1,394		—
Tons sold		18,254		18,582		(328	)	(2	)%
Coal sales realization per ton sold	$	19.71	$	19.33	$	0.38		2	%

19

Coal sales revenues for the three months ended June 30, 2007 increased by $0.6 million compared to the coal sales revenues for the three months ended June 30, 2006 as a result of a 2% increase in average coal sales realization per ton, due to a period-over-period increase in base revenue realization, partially offset by a 2% decrease in tons sold. Consolidated weighted-average sales realization per ton for the second quarter of 2007 reflected a higher proportion of lower value Powder River Basin shipments compared to the same period in 2006.

Coal sales revenues in Northern Appalachia for the three months ended June 30, 2007 decreased 7% compared to coal sales revenues for the three months ended June 30, 2006 due primarily to a combination of lower coal sales volumes from lower tons shipped, lower base revenue and lower coal quality premium/penalty revenue. Total revenue realization per ton sold in Northern Appalachia increased slightly in the 2007 quarter due to higher base revenue realization per ton and higher coal quality premium/penalty revenue. Coal sales volumes in Northern Appalachia decreased by 0.4 million tons (11%) period-over-period primarily as a result of decreased production and shipments from the Cumberland mine due to the nine day strike by the United Mine Workers of America (“UMWA”), that began shortly after the wage agreement expired on April 1, 2007 and the scheduled longwall move that took place in the second quarter of 2007 inclusive of receiving an unanticipated regulatory ruling that delayed the restart of longwall production subsequent to the completion of the move. Emerald shipments were higher in the 2007 quarter compared to 2006 despite the UMWA strike as coal inventories were reduced.

Coal sales revenues in Central Appalachia for the three months ended June 30, 2007 increased 3% compared to the coal sales revenues for the three months ended June 30, 2006. Total revenue realization per ton sold increased 10% period-over-period due to higher base revenue and higher coal quality premium/penalty revenue, partially offset by lower coal sales volumes from lower tons shipped. Coal sales volumes in Central Appalachia decreased by 0.2 million tons (7%) period-over-period reflecting decreased tons that were purchased and resold and decreased shipments from all West Virginia mining operations except for the Pax surface mine and from Laurel Creek’s underground mines. Production in Central Appalachia decreased by 4% due primarily to the impact of reduced mining activities at the Rockspring mine in June to address regulatory issues related to new standards established for underground seals.

Coal sales revenues in the Powder River Basin for the three months ended June 30, 2007 increased by 14% compared to the coal sales revenues for the three months ended June 30, 2006 as a result of a 4% increase in tons sold and a combination of higher base revenue, offset partially by lower premium/penalty revenue, resulting in a 9% increase in average coal sales realization per ton. Base revenue realization per ton increased by 16% period-over-period while coal quality premium/penalty revenue decreased 84% period-over-period. Coal sales realization per ton increased due to shipments under higher priced 2007 contracts than the comparable period in 2006. Coal sales volumes in the Powder River Basin increased by 0.5 million tons (4%) to a shipment level of 12.8 million tons primarily due to a 15% increase in both production and shipments from the Belle Ayr mine, offset partially by 6% lower period-over-period production and shipments at the Eagle Butte mine.

Coal sales revenues in the Illinois Basin for the three months ended June 30, 2007 decreased substantially compared to the coal sales revenues for the three months ended June 30, 2006 due to the April 4, 2007 closure of the Wabash mine in southern Illinois.

Other revenues for the three months ended June 30, 2007 increased by $0.8 million (10%) compared to the three months ended June 30, 2006. The increase was due to: (a) increased gains on the sale of assets ($2.2 million); (b) higher coalbed methane sales ($0.7 million); (c) increased miscellaneous revenues ($0.3 million); partially offset by (d) lower synfuel fees ($1.4 million); (e) lower transloading and plant processing fees ($0.7 million); and (f) decreased revenues from the sale of equipment and filters by Dry Systems Technologies ($0.3 million).

20

Costs and Expenses

	Three Months Ended June 30,						Increase (Decrease)
	2007			2006			Amount		Percent
	(Unaudited, in thousands)
Cost of coal sales (excludes depreciation, depletion and amortization)	$	287,839		$	268,195		$	19,644	7%
Selling, general and administrative expenses (excludes depreciation, depletion and amortization)		16,963			14,094			2,869	20%
Accretion on asset retirement obligations		2,485			2,203			282	13%
Depreciation, depletion and amortization		50,743			48,211			2,532	5%
Amortization of coal supply agreements		(1,467	)		(3,266	)		1,799	55%
Employee and contract termination costs		9,731			—			9,731	N/A(1)
Total costs and expenses	$	366,294		$	329,437		$	36,857	11%

⁽¹⁾ Amounts are not measurable as no such costs were incurred during the three months ended June 30, 2006.

Cost of coal sales.The cost of coal sales increased $19.6 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006, primarily due to: (a) a $19.5 million period-over-period increase in the charge to expense related to the reduction in coal inventories in the second quarter of 2007 compared to a credit to expense from an increase in coal inventories during the second quarter of 2006 due primarily to our Northern Appalachia segment shipping more tons than were produced during the three months ended June 30, 2007 compared to the three months ended June 30, 2006; (b) increases in labor and benefit costs as a result of both compensation increases and hiring of additional personnel ($5.9 million); (c) increases in coal production taxes as a result of higher coal sales revenues in our Powder River Basin segment ($2.3 million); partially offset by (d) lower repair and maintenance supplies, and operating supply costs ($2.6 million); (e) decreases in purchased coal costs as a result of lower purchased coal volumes ($2.0 million); (f) lower longwall move expense ($0.5 million); (g) a decrease in transportation and loading costs ($2.4 million); and (h) decreases in various other expenses ($0.6 million). Cost of coal sales per ton was $15.77 for the three months ended June 30, 2007 compared to $14.46 per ton for the three months ended June 30, 2006.

Selling, general and administrative expenses.Selling, general and administrative expenses for the three months ended June 30, 2007 was $17.0 million compared to $14.1 million for the three months ended June 30, 2006. Period-over-period increases were due to (a) higher expenses incurred for employee compensation and benefit related expenses ($1.5 million); (b) higher consulting fees primarily related to implementation activities for our enterprise software that do not qualify as capital expenditures and other miscellaneous administrative activities ($1.5 million), partially offset by (c) lower miscellaneous overhead expenses including legal and insurance expenses ($0.1 million).

Accretion on asset retirement obligations.Accretion on asset retirement obligations is a component of accounting for asset retirement obligations under Statement of Financial Accounting Standards (“SFAS”) No. 143,Accounting for Asset Retirement Obligations. Accretion represents the increase in the asset retirement liability to reflect the change in the liability for the passage of time because the initial liability is recorded at present value. Higher accretion expense in 2007 was due to increased asset retirement obligation estimates at closed mines.

Depreciation, depletion and amortization.Depreciation, depletion and amortization includes depreciation of plant and equipment, cost depletion of amounts assigned to coal lands and mining rights, amortization of mine development costs, internal use software and leasehold improvements. Depreciation, depletion and amortization expense increased $2.5 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006, primarily due to higher depreciation and amortization, offset by decreased cost depletion. Depreciation and amortization increased by $4.4 million in the second quarter of 2007 mainly due to capital additions to plant & equipment during the twelve months ended June 30, 2007. Cost depletion decreased by $1.9 million due to decreased production period-over-period.

21

Coal supply agreement amortization.Application of purchase accounting in 2004 resulted in the recognition of a significant liability for below market priced coal supply agreements as well as a significant asset for above market priced coal supply agreements, both in relation to market prices at the date of Acquisition. Coal supply agreement amortization decreased $1.8 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006. Amortization of the liability for below market priced coal supply agreements during the three months ended June 30, 2007 was $3.9 million of credit to expense compared to $8.0 million of credit to expense in the comparable period of the prior year. Amortization of the asset for above market priced coal supply agreements during the three months ended June 30, 2007 was $2.4 million of expense compared to $4.7 million of expense in the comparable period of the prior year. As shipments on coal supply agreements valued in purchase accounting are completed, the period-over-period impact of the amortization on both the asset and liability balances will continue to diminish until approximately 2010 when shipments associated with these coal supply agreements are estimated to be complete.

Employee and contract termination costs.As discussed below in the section entitled “Wage Negotiations with the UMWA and Closure of the Company’s Illinois Basin Mining Operation,” the UMWA wage agreement for Wabash expired at 11:59 p.m. on March 31, 2007. The Company would not sign a new agreement for Wabash and the hourly workforce continued to work without a formal agreement of the parties under the terms of the expired wage agreement until 12:01 a.m. on April 4, 2007 at which time the UMWA represented hourly workforces struck. On the same day, Wabash announced the closure of the mine in southern Illinois. As a result of the Wabash mine closure, the Company recognized employee termination costs associated with one-time benefit arrangements of $5.4 million in accordance with the provisions of SFAS No.146,Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No.146”). The Company also recognized employee termination costs associated with one-time benefit arrangements in accordance with the provisions of SFAS No. 112,Employers’ Accounting for Postemployment Benefits (“SFAS No. 112”) and during the three months ended June 30, 2007, the Company reduced its estimate of employee termination costs associated with such benefit arrangements by $0.8 million. Termination costs resulting from one-time benefit arrangements include medical insurance continuance costs and negotiated severance to hourly employees and one-time retention pay to salaried employees. The communication date related to these one-time benefit arrangements occurred during the three months ended June 30, 2007. The Company expects to recognize additional costs in the third quarter related to the remainder of the service periods associated with one-time retention benefits. These employee termination costs are included inEmployee and contract termination costs in the Consolidated Statement of Operations and Comprehensive Income for the three month period ended June 30, 2007.

Wabash was the seller under three coal supply agreements supplied from the Wabash mine. One of the agreements was with Duke Energy Indiana, Inc. Wabash continued to ship coal under the coal supply agreements through April 3, 2007, just prior to the mine closure. Each agreement contained force majeure language excusing the seller from supplying coal in the event of a work stoppage. On April 3, 2007, Wabash and Duke Energy Indiana, Inc. executed a Termination Agreement and Mutual Release buying-out. As a result, the Company recognized $5.2 million of net contract termination costs in accordance with the provisions of SFAS No. 146 and are included inEmployee and contract termination costs in the Consolidated Statement of Operations and Comprehensive Income for the six month period ended June 30, 2007.

22

Segment Analysis

Utilizing data published by Argus Media, the following graph sets forth representative steam coal prices in various U.S. markets summarized for the monthly periods from January 1, 2006 through June 30, 2007. The prices are not necessarily representative of the coal prices actually obtained by the Company. Changes in coal prices have an impact over time on the Company’s average sales realization per ton and, ultimately, its consolidated financial results.

23

	Three Months Ended June 30,					Increase (Decrease)
	2007			2006		Tons/$			Percent
	(Unaudited, in thousands, except sales realization per ton)
Powder River Basin
Tons sold		12,830			12,340		490		4	%
Average sales realization per ton	$	9.25		$	8.46	$	0.79		9	%
Total revenues	$	118,877		$	104,635	$	14,242		14	%
Income from operations	$	20,999		$	10,363	$	10,636		103	%
Northern Appalachia
Tons sold		3,233			3,622		(389	)	(11	)%
Average sales realization per ton	$	39.51		$	37.86	$	1.65		4	%
Total revenues	$	130,335		$	138,562	$	(8,227	)	(6	)%
Income from operations	$	13,839		$	44,411	$	(30,572	)	(69	)%
Central Appalachia
Tons sold		2,151			2,303		(152	)	(7	)%
Average sales realization per ton	$	51.62		$	46.78	$	4.84		10	%
Total revenues	$	112,984		$	111,675	$	1,309		1	%
(Loss) income from operations	$	(2,945	)	$	3,242	$	(6,187	)	(191	)%

Powder River Basin—Income from operations increased $10.6 million period-over-period due to increased revenues of $14.2 million, offset by increased production costs of $3.6 million. As explained in the revenue section above, the increased revenues resulted from a 4% increase in tons sold from the previous year quarterly shipments and a 9% increase in average sales realization per ton. Assuming acceptable market conditions exist, we expect future increases in tons sold at the Belle Ayr mine primarily due to the expansion of its annual capacity. Total production costs increased $3.6 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006, reflecting higher period-over-period cash costs of $4.8 million, higher depreciation and depletion of $0.6 million, higher miscellaneous expenses of $0.3 million, offset by lower coal supply contract amortization costs of $2.1 million.

The $4.8 million period-over-period increase in the cash costs of production referred to above were primarily in the following areas: (a) excise taxes and coal production taxes, which respond to changes in coal sales revenues ($3.7 million); (b) supply and service costs primarily consisting of operating supply costs, explosives, diesel fuel and outside services ($1.0 million); (c) labor and employee benefits ($0.3 million); (d) insurance ($0.2 million); and (e) miscellaneous other costs ($0.6 million), partially offset by reduced royalty costs due to mining a higher proportion of coal owned in fee ($1.0 million). These production cost increases occurred primarily due to 4% higher period-over-period production. Lower total depreciation, depletion and amortization costs of $1.5 million related primarily to a period-over-period $2.1 million reduction in the charge for the amortization of coal supply agreements as shipments on a number of coal supply agreements valued in purchase accounting were completed. Cost of coal sales per ton increased approximately 2% period-over-period.

Northern Appalachia—Income from operations decreased by $30.6 million period-over-period due to decreased revenues of $8.2 million and increased cost of coal sales of $22.4 million. As explained in the revenue section above, the decreased revenues resulted from an 11% period-over-period decrease in tons sold partially offset by a 4% increase in average sales realization per ton. Income and coal sales volumes decreased primarily as a result of decreased production and shipments from the Cumberland mine due to the nine day strike by the UMWA that began shortly after the wage agreement expired on April 1, 2007 and the scheduled longwall move that took place in the second quarter of 2007 inclusive of receiving an unanticipated regulatory ruling that delayed the restart of longwall production subsequent to the completion of the move. Emerald shipments were higher in the 2007 quarter compared to 2006 despite the UMWA strike as coal inventories were reduced.

Total production costs increased $4.5 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006, reflecting higher period-over-period cash costs of production of $3.1 million and higher depreciation, depletion and amortization costs of $1.4 million. In addition to the $4.5 million production cost increase, the total cost of coal sales increase included an $18.3 million period-over-period increase in the charge to expense related to the reduction in coal inventories in the second quarter of 2007 compared to a credit to expense from an increase in coal inventories during the second quarter of 2006 due primarily to shipping more tons than were produced during the three months ended June 30, 2007 compared to the three months ended June 30, 2006.

24

The $3.1 million period-over-period increase in the cash costs of production referred to above were primarily incurred in the following areas: (a) higher labor and employee benefit costs, due to a higher number of employees and period-over-period wage and benefit increases, due primarily to the new UMWA wage agreement ($6.4 million); partially offset by (b) lower transportation and loading costs ($1.9 million); (c) lower supply and service costs primarily consisting of operating supply costs primarily from lower usage of roof bolts, miner bits and outside services ($0.1 million); (d) lower longwall move costs ($0.5 million); (e) reduced tax costs ($0.3 million); and (f) lower miscellaneous other costs ($0.5 million).

Higher total depreciation, depletion and amortization costs of $1.4 million related primarily to: (a) a period-over-period reduction in the credit associated with the amortization of coal supply agreements as shipments on a number of coal supply agreements valued in purchase accounting were completed ($2.2 million); (b) increased depreciation primarily related to the batch weigh system, longwall shields, face conveyors and other mining equipment ($1.5 million); and (c) and lower reserve depletion expense ($2.3 million). Cost of coal sales per ton increased approximately 44% period-over-period principally reflecting the impact of the UMWA strike described above.

Central Appalachia—Income from operations decreased by $6.2 million period-over-period due to a combination of increased revenues of $1.3 million, offset by increased cost of coal sales of $8.2 million and a decreased miscellaneous income of $0.7 million. As explained in the revenue section above, the decreased revenues resulted from a 7% period-over-period decrease in tons sold, partially offset by a 10% increase in average sales realization per ton. Total coal sales revenues for the three months ended June 30, 2007 increased 1% period-over-period from the three months ended June 30, 2006 as a result of 3% higher base revenue realization and 26% higher coal quality premium revenue. Coal sales volumes in Central Appalachia decreased by 0.2 million tons (7%) period-over-period primarily from decreased tons that were purchased and resold as well as decreased shipments from all West Virginia mining operations except for the Pax surface mine and from Laurel Creek’s underground mines. Production in Central Appalachia decreased by 4% due primarily to the impact of reduced mining activities at the Rockspring mine in June to address regulatory issues related to new standards established for underground seals.

Increased cost of coal sales of $8.2 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 consisted of $8.6 million higher total production costs, a $1.0 million period-over-period decrease in the credit to expense related to the reduction in coal inventories during the three months ended June 30, 2007 compared to a credit to expense from the increase in coal inventories during the second quarter of 2006 due primarily to shipping more tons than were produced during the comparable periods, offset by a $1.4 million reduction in purchased coal expense.

The $8.6 million total production cost increase resulted from higher period-over-period depreciation, depletion and amortization costs of $4.1 million and higher cash operating costs of $4.5 million. Increased depreciation, depletion and amortization consisted of higher depreciation of $2.2 million, higher reserve depletion of $0.2 million and a reduced credit to expense for amortization of coal supply agreements of $1.7 million.

The $4.5 million period-over-period increase in cash costs of production referred to above were primarily due to increases in the following areas: (a) labor and fringe benefits ($2.3 million); (b) supply and service costs primarily consisting of repairs and maintenance costs, operating supplies, utility and fuel costs ($1.4 million); (c) higher royalty, production and severance taxes ($0.3 million); and higher insurance and other miscellaneous costs ($0.5 million). Cost of coal sales per ton increased approximately 10% period-over-period.

Other—Includes the Company’s Illinois Basin operation, the Wabash mine, which ceased operations in the second quarter of 2007; expenses associated with closed mines; its coal trading operations and selling, general and administrative expenses not charged out to the Powder River Basin, Northern Appalachia or Central Appalachia mines. During the three months ended June 30, 2007, the Other segment reported a loss from operations of $29.7 million compared to a loss of operations of $20.4 million in the three months ended June 30, 2006. The increased period-over-period loss from operations of $9.3 million was primarily due to employee and contract termination costs incurred as a result of the closure of the Wabash mine.

25

Interest Expense, Net

	Three Months Ended June 30,				Increase (Decrease)
	2007		2006		Amount		Percent
	(Unaudited, in thousands)
Interest expense—debt related	$	(10,781)	$	(10,870)	$	(89)	—	%
Interest expense—amortization of deferred financing costs		(462)		(717)		(255)	(35	)%
Interest expense—surety bond and letter of credit fees		(1,485)		(1,791)		(306)	(17	)%
Interest expense—other		(511)		(596)		(85)	(14	)%
Total interest expense		(13,239)		(13,974)		(735)	(5	)%
Interest income		886		858		28	3	%
Interest expense, net	$	(12,353)	$	(13,116)	$	(763)	(6	)%

Interest expense, net for the three months ended June 30, 2007, was lower than the three months ended June 30, 2006 due primarily to lower surety bond and letter of credit fees and decreased amortization of deferred financing costs. The reduction in surety bond and letter of credit fees was primarily attributable to fewer letters of credit outstanding. The reduction in the amortization of deferred financing cost was caused by a lower deferred financing asset balance being amortized due to the write-off of a portion of the unamortized deferred financing costs resulting from the July 2006 completion of an amended and restated Senior Secured Credit Agreement.

Income Tax Benefit (Expense)

	Three Months Ended June 30,					Income Tax Expense Decrease
	2007		2006			Amount			Percent
	(Unaudited, in thousands)
Income tax benefit (expense)	$	6,381	$	(2,499	)	$	(8,880	)	(355)%

For the three months ended June 30, 2007, the $6.4 million income tax benefit represents a quarterly effective tax benefit of 62.8% that is based on a projected full-year effective tax benefit of 5.3%. The most significant reason for the increase in the projected tax benefit for 2007 relates to the impact of permanent differences for excess depletion deductions. The percentage impact of these permanent differences changes during interim periods, as the Company reconsiders its forecast of full-year pretax income, based upon its most recent experience.

The second quarter effective tax rate includes a change in estimate, reducing income tax expense from the effective rate recognized in the first quarter. The change in estimate primarily relates to (a) second quarter revisions to the estimated percentage impact of permanent differences related to excess depletion deductions (as discussed above) and (b) re-estimation of the valuation allowance needed for projected increases in net deferred tax assets during 2007. These changes in estimates were reflected in the effective tax rate in the period in which the information became available to the Company.

Results of Operations

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

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

Revenues

	Six Months Ended June 30,				Increase (Decrease)
	2007		2006		Amount			Percent
	(Unaudited, in thousands, except per ton data)
Coal sales	$	746,025	$	746,761	$	(736	)	—%
Other revenue		17,378		15,651		1,727		11%
Total revenues	$	763,403	$	762,412	$	991		—%
Tons sold		37,058		37,107		(49	)	—%
Coal sales realization per ton sold	$	20.13	$	20.12	$	0.01		—%

26

Coal sales revenues for the six months ended June 30, 2007 decreased by $0.7 million compared to the coal sales revenues for the six months ended June 30, 2006. Tons sold and average coal sales realization per ton was consistent between periods. The consolidated weighted-average sales realization per ton for the six months ended 2007 reflected a higher proportion of lower value Powder River Basin shipments compared to the same period in 2006.

Coal sales revenues in Northern Appalachia for the six months ended June 30, 2007 decreased 5% compared to coal sales revenues for the six months ended June 30, 2006 due primarily to a combination of lower coal sales volumes from lower tons shipped, lower base revenue and lower coal quality premium/penalty revenue. Total revenue realization per ton sold in Northern Appalachia increased 3% period-over-period due to 6% higher base revenue realization per ton, offset by lower coal quality premium/penalty revenue. Coal sales volumes in Northern Appalachia decreased by 0.5 million tons (7%) period-over-period primarily as a result of decreased production and shipments from the Cumberland mine due to the nine day strike by the UMWA, that began shortly after the wage agreement expired on April 1, 2007 and the scheduled longwall move that took place in the second quarter of 2007 inclusive of receiving an unanticipated regulatory ruling that delayed the restart of longwall production subsequent to the completion of the move. Emerald shipments were higher in the 2007 compared to 2006 despite the UMWA strike as the absence of the longwall move in 2007 more than offset the impact of the UMWA strike.

Coal sales revenues in Central Appalachia for the six months ended June 30, 2007 decreased 2% compared to the coal sales revenues for the six months ended June 30, 2006. Total revenue realization per ton sold increased 6% period-over-period as a result of higher base revenue and lower coal quality premium/penalty revenue per ton. Coal sales volumes from lower tons shipped declined by 8% (0.3 million tons) primarily from decreased tons that were purchased and resold. Coal sales volumes in Central Appalachia decreased at all mining operations except for the Pax surface mine and from Laurel Creek’s underground mines. Production in Central Appalachia was adversely impacted by reduced mining activities at the Rockspring mine in June to address regulatory issues related to new standards established for underground seals.

Coal sales revenues in the Powder River Basin for the six months ended June 30, 2007 increased by 13% compared to the coal sales revenues for the six months ended June 30, 2006. Total revenue realization per ton sold increased 8% due to a combination of the increase in tons sold and higher base revenue, offset partially by a lower premium/penalty revenue. Coal sales realization per ton increased due to increased shipments under higher priced 2007 contracts than the comparative period in 2006. Coal sales volumes in the Powder River Basin increased by 1.1 million tons (5%) to a shipment level of 25.5 million tons primarily due to an 13% increase in both production and shipments from the Belle Ayr mine, offset partially by 3% lower period-over-period production and shipments at the Eagle Butte mine.

Coal sales revenues in the Illinois Basin for the six months ended June 30, 2007 decreased substantially compared to the coal sales revenues for the six months ended June 30, 2006 due to the April 4, 2007 closure of the Wabash mine in southern Illinois.

Other revenues for the six months ended June 30, 2007 increased by $1.7 million (11%) compared to the six months ended June 30, 2006. The increase was due to: (a) increased gains on the sale of assets ($2.2 million); (b) higher coalbed methane sales ($0.3 million); (c) increased royalty and miscellaneous other revenues ($3.2 million); partially offset by (d) lower synfuel fees ($2.2 million); (e) lower transloading and plant processing fees ($1.4 million); and (f) decreased revenues from the sale of equipment and filters by Dry Systems Technologies ($0.4 million).

27

Costs and Expenses

	Six Months Ended June 30,						Increase (Decrease)
	2007			2006			Amount		Percent
	(Unaudited, in thousands)
Cost of coal sales (excludes depreciation, depletion and amortization)	$	572,081		$	558,437		$	13,644	2%
Selling, general and administrative expenses (excludes depreciation, depletion and amortization)		30,790			26,678			4,112	15%
Accretion on asset retirement obligations		4,857			4,108			749	18%
Depreciation, depletion and amortization		101,827			92,508			9,319	10%
Amortization of coal supply agreements		(2,597	)		(9,464	)		6,867	73%
Employee and contract termination costs		11,983			—			11,983	N/A(1)
Total costs and expenses	$	718,941		$	672,267		$	46,674	7%

⁽¹⁾ Amounts are not measurable as no such costs were incurred during the six months ended June 30, 2006.

Cost of coal sales.The cost of coal sales increased $13.6 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006, primarily due to: (a) a $3.8 million period-over-period decrease in the credit to expense related to the reduction in coal inventories in 2007 compared to the credit to expense from an increase in coal inventories during 2006 due primarily to all segments shipping more tons than were produced in the six months ended June 30, 2007 compared to the six months ended June 30, 2006; (b) increases in labor and benefit costs as a result of both compensation increases and hiring of additional personnel ($13.1 million); (c) increases in coal production taxes as a result of higher coal sales revenues in our Powder River Basin segment ($0.3 million); (d) higher repair and maintenance supplies, and operating supply costs ($15.8 million); (e) higher longwall move expense ($2.5 million); (f) increased transportation and loading costs ($2.4 million); partially offset by (g) decreases in purchased coal costs as a result of lower purchased coal volumes ($18.0 million); (h) decreases in insurance, transportation and loading and various other expenses ($6.3 million). Cost of coal sales per ton was $15.44 for the six months ended June 30, 2007 compared to $15.06 per ton for the six months ended June 30, 2006.

Selling, general and administrative expenses.Selling, general and administrative expenses for the six months ended June 30, 2007 was $30.8 million compared to $26.7 million for the six months ended June 30, 2006. Period-over-period increases were due to (a) higher expenses incurred for employee compensation and benefit related expenses ($2.5 million); (b) higher consulting fees primarily related to implementation activities for our enterprise software that do not qualify as capital expenditures and other miscellaneous administrative activities ($2.7 million), partially offset by (c) lower miscellaneous overhead expenses including legal and insurance expenses ($1.1 million).

Accretion on asset retirement obligations.Accretion on asset retirement obligations is a component of accounting for asset retirement obligations under Statement of Financial Accounting Standards (“SFAS”) No. 143,Accounting for Asset Retirement Obligations. Accretion represents the increase in the asset retirement liability to reflect the change in the liability for the passage of time because the initial liability is recorded at present value. Higher accretion expense in 2007 was due to increased asset retirement obligation estimates at closed mines.

Depreciation, depletion and amortization.Depreciation, depletion and amortization includes depreciation of plant and equipment, cost depletion of amounts assigned to coal lands and mining rights, amortization of mine development costs, internal use software and leasehold improvements. Depreciation, depletion and amortization expense increased $9.3 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006, primarily due to increased cost depletion and higher depreciation and amortization. Cost depletion increased by $1.0 million. Depreciation and amortization increased by $8.3 million in the first six months of 2007 mainly due to capital additions to plant & equipment during the twelve months ended June 30, 2007.

28

Coal supply agreement amortization.Application of purchase accounting in 2004 resulted in the recognition of a significant liability for below market priced coal supply agreements as well as a significant asset for above market priced coal supply agreements, both in relation to market prices at the date of Acquisition. Coal supply agreement amortization decreased $6.9 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. Amortization of the liability for below market priced coal supply agreements during the six months ended June 30, 2007 was $7.9 million of credit to expense compared to $19.1 million of credit to expense in the comparable period of the prior year. Amortization of the asset for above market priced coal supply agreements during the six months ended June 30, 2007 was $5.3 million of expense compared to $9.6 million of expense in the comparable period of the prior year. As shipments on coal supply agreements valued in purchase accounting are completed, the period-over-period impact of the amortization on both the asset and liability balances will continue to diminish until approximately 2010 when shipments associated with these coal supply agreements are estimated to be complete.

Employee and contract termination costs.As discussed below in the section entitled “Wage Negotiations with the UMWA and Closure of the Company’s Illinois Basin Mining Operation,” the UMWA wage agreement for Wabash expired at 11:59 p.m. on March 31, 2007. The Company would not sign a new agreement for Wabash and the hourly workforce continued to work without a formal agreement of the parties under the terms of the expired wage agreement until 12:01 a.m. on April 4, 2007 at which time the UMWA represented hourly workforces struck. On the same day, Wabash announced the closure of the mine in southern Illinois. As a result of the Wabash mine closure, the Company recognized employee termination costs associated with one-time benefit arrangements of $5.4 million and $1.4 million in accordance with the provisions of SFAS No.146 and the provisions of SFAS No. 112, respectively. Termination costs resulting from one-time benefit arrangements include medical insurance continuance costs and negotiated severance to hourly employees and one-time retention pay to salaried employees. The communication date related to these one-time benefit arrangements occurred during the three month period ended June 30, 2007. The Company expects to recognize additional costs in the third quarter related to the remainder of the service periods associated with the one-time retention benefits. These employee termination costs are included inEmployee and contract termination costs in the Consolidated Statement of Operations and Comprehensive Income for the six month period ended June 30, 2007.

Wabash was the seller under three coal supply agreements supplied from the Wabash mine. One of the agreements was with Duke Energy Indiana, Inc. Wabash continued to ship coal under the coal supply agreements through April 3, 2007, just prior to the mine closure. Each agreement contained force majeure language excusing the seller from supplying coal in the event of a work stoppage. On April 3, 2007, Wabash and Duke Energy Indiana, Inc. executed a Termination Agreement and Mutual Release buying-out. As a result, the Company recognized $5.2 million of net contract termination costs in accordance with the provisions of SFAS No. 146 and are included inEmployee and contract termination costs in the Consolidated Statement of Operations and Comprehensive Income for the six month period ended June 30, 2007.

29

Segment Analysis

Utilizing data published by Argus Media, the following graph sets forth representative steam coal prices in various U.S. markets summarized for the monthly periods from January 1, 2006 through June 30, 2007. The prices are not necessarily representative of the coal prices actually obtained by the Company. Changes in coal prices have an impact over time on the Company’s average sales realization per ton and, ultimately, its consolidated financial results.

30

	Six Months Ended June 30,				Increase (Decrease)
	2007		2006		Tons/$			Percent
	(Unaudited, in thousands, except sales realization per ton)
Powder River Basin
Tons sold		25,467		24,347		1,120		5	%
Average sales realization per ton	$	9.19	$	8.51	$	0.68		8	%
Total revenues	$	234,618	$	207,964	$	26,654		13	%
Income from operations	$	41,829	$	18,893	$	22,936		121	%
Northern Appalachia
Tons sold		6,833		7,359		(526	)	(7	)%
Average sales realization per ton	$	40.09	$	39.02	$	1.07		3	%
Total revenues	$	278,330	$	290,209	$	(11,879	)	(4	)%
Income from operations	$	53,949	$	98,425	$	(44,476	)	(45	)%
Central Appalachia
Tons sold		4,312		4,661		(349	)	(7	)%
Average sales realization per ton	$	52.02	$	49.03	$	2.99		6	%
Total revenues	$	229,657	$	236,341	$	(6,684	)	(3	)%
Income from operations	$	180	$	13,695	$	(13,515	)	(99	)%

Powder River Basin—Income from operations increased $22.9 million period-over-period due to increased revenues of $26.7 million, offset by increased production costs of $3.8 million. As explained in the revenue section above, the increased revenues resulted from a 5% increase in tons sold from the previous year shipments and an 8% increase in average sales realization per ton. Assuming acceptable market conditions exist, we expect future increases in tons sold at the Belle Ayr mine primarily due to the expansion of its annual capacity. Total production costs increased $3.8 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006, reflecting higher period-over-period cash costs of $6.8 million, higher depreciation and depletion of $0.9 million, higher miscellaneous expenses of $0.8 million, offset by lower coal supply contract amortization costs of $4.7 million.

The $6.8 million period-over-period increase in the cash costs of production referred to above were primarily in the following areas: (a) excise taxes and coal production taxes, which respond to changes in coal sales revenues ($6.5 million); (b) supply and service costs primarily consisting of operating supply costs, explosives, diesel fuel and outside services ($3.7 million); (c) labor and employee benefits ($1.5 million); (d) insurance ($0.4 million); and (e) rental expense ($0.7 million), partially offset by (f) reduced royalty costs due to mining a higher proportion of coal owned in fee ($6.0 million). These production cost increases occurred primarily due to 4% higher period-over-period production. Lower total depreciation, depletion and amortization costs of $3.9 million related primarily to a period-over-period $4.7 million reduction in the charge for the amortization of coal supply agreements as shipments on a number of coal supply agreements valued in purchase accounting were completed. Cost of coal sales per ton were unchanged period-over-period.

Northern Appalachia—Income from operations decreased by $44.5 million period-over-period due to decreased revenues of $11.9 million and increased cost of coal sales of $32.6 million. As explained in the revenue section above, the decreased revenues resulted from a 7% period-over-period decrease in tons sold, partially offset by a 3% increase in average sales realization per ton. Income and coal sales volumes decreased primarily as a result of decreased production and shipments from the Cumberland mine due to the nine day strike by the UMWA, that began shortly after the wage agreement expired on April 1, 2007 and the scheduled longwall move that took place in the second quarter of 2007 inclusive of receiving an unanticipated regulatory ruling that delayed the restart of longwall production subsequent to the completion of the move. Emerald shipments were higher in the 2007 period-over-period despite the UMWA strike as the absence of the longwall move in 2007 more than offset the impact of the UMWA strike.

Total production costs increased $29.0 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006, reflecting higher period-over-period cash costs of production of $20.7 million and higher depreciation, depletion and amortization costs of $8.3 million. In addition to the $29.0 million production cost increase, the total cost of coal sales increase included a $4.1 million period-over-period increase in the charge to expense related to the reduction in coal inventories during the six months ended June 30, 2007 compared to a credit to expense from an increase in coal inventories during the second quarter of 2006 due primarily to shipping more tons than were produced during the comparable periods.

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The $20.7 million period-over-period increase in the cash costs of production referred to above were primarily incurred in the following areas: (a) higher labor and employee benefit costs, due to a higher number of employees and period-over-period wage and benefit increases, due primarily to the new UMWA wage agreement ($10.5 million); (b) higher supply and service costs primarily consisting of operating supply costs from increased usage of roof bolts, miner bits and water handling requirements, repairs and maintenance costs due to the timing of rebuilding longwall and other mining equipment and outside services ($6.2 million); (c) higher coal shipping costs on export sales and subsidence settlements ($1.8 million); (d) higher longwall move costs amortization ($2.5 million); partially offset by (e) lower miscellaneous other costs ($0.3 million).

Higher total depreciation, depletion and amortization costs of $8.3 million related primarily to: (a) a period-over-period reduction in the credit associated with the amortization of coal supply agreements as shipments on a number of coal supply agreements valued in purchase accounting were completed ($5.3 million); (b) increased depreciation primarily related to the batch weigh system, longwall shields, face conveyors and other mining equipment ($3.4 million); and (c) and lower reserve depletion expense ($0.4 million). Cost of coal sales per ton increased by approximately 25% period-over-period principally reflecting the effect of the UMWA strike described above.

Central Appalachia—Income from operations decreased by $13.5 million period-over-period due to a combination of decreased revenues of $6.7 million and increased cost of coal sales of $8.0 million and a decreased miscellaneous expense of $1.2 million. As explained in the revenue section above, the decreased revenues resulted from a 7% period-over-period decrease in tons sold, partially offset by a 6% increase in average sales realization per ton. Total coal sales revenues for the six months ended June 30, 2007 decreased 3% period-over-period from the six months ended June 30, 2006 as a result of 1% lower base revenue realization and 17% lower coal quality premium revenue. Coal sales volumes in Central Appalachia decreased by 0.3 million tons (7%) period-over-period primarily from decreased tons that were purchased and resold as well as decreased shipments from all West Virginia mining operations except for the Pax surface mine and from Laurel Creek’s underground mines. Production in Central Appalachia decreased by 1% due primarily to the impact of reduced mining activities at the Rockspring mine in June to address regulatory issues related to new standards established for underground seals.

Increased cost of coal sales of $8.0 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 consisted of $23.0 million higher total production costs, offset by a $15.0 million reduction in purchased coal expense. The $23.0 million total production cost increase resulted from higher period-over-period depreciation, depletion and amortization costs of $11.9 million and higher cash operating costs of $11.1 million. Increased depreciation, depletion and amortization consisted of higher depreciation of $4.4 million, higher reserve depletion of $1.0 million and a reduced credit to expense for amortization of coal supply agreements of $6.5 million.

The $11.1 million period-over-period increase in cash costs of production referred to above were primarily due to increases in the following areas: (a) labor and fringe benefits ($3.6 million); (b) supply and service costs primarily consisting of repairs and maintenance costs, operating supplies, utility and fuel costs ($7.1 million); (c) higher royalty, production and severance taxes ($0.7 million); (d) higher transportation and loading costs ($1.8 million); and (e) higher insurance and other miscellaneous costs ($0.3 million); partially offset by lower contract mining costs ($2.4 million). Cost of coal sales per ton increased approximately 5% period-over-period.

Other—Includes the Company’s Illinois Basin operation, the Wabash mine, which ceased operations in the second quarter of 2007; expenses associated with closed mines; its coal trading operations and selling, general and administrative expenses not charged out to the Powder River Basin, Northern Appalachia or Central Appalachia mines. During the six months ended June 30, 2007, the Other segment reported a loss from operations of $51.5 million compared to a loss of operations of $40.9 million in the six months ended June 30, 2006. The increased period-over-period loss from operations of $10.6 million was primarily due to employee and contract termination costs incurred as a result of the closure of the Wabash mine.

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Interest Expense, Net

	Six Months Ended June 30,						Increase (Decrease)
	2007			2006			Amount			Percent
	(Unaudited, in thousands)
Interest expense—debt related	$	(21,564	)	$	(21,643	)	$	(79	)	—	%
Interest expense—amortization of deferred financing costs		(919	)		(1,434	)		(515	)	(36	)%
Interest expense—surety bond and letter of credit fees		(2,777	)		(3,337	)		(560	)	(17	)%
Interest expense—other		(999	)		(1,234	)		(235	)	(19	)%
Total interest expense		(26,259	)		(27,648	)		(1,389	)	(5	)%
Interest income		1,518			1,226			292		24	%
Interest expense, net	$	(24,741	)	$	(26,422	)	$	(1,681	)	(6	)%

Interest expense, net for the six months ended June 30, 2007, was lower than the six months ended June 30, 2006 due primarily to lower surety bond and letter of credit fees and decreased amortization of deferred financing costs. The reduction in surety bond and letter of credit fees was primarily attributable to fewer letters of credit outstanding. The reduction in the amortization of deferred financing cost was caused by a lower deferred financing asset balance being amortized due to the write-off of a portion of the unamortized deferred financing costs resulting from the July 2006 completion of an amended and restated Senior Secured Credit Agreement.

Income Tax Benefit ( Expense)

	Six Months Ended June 30,					Income Tax Expense Decrease
	2007		2006			Amount			Percent
	(Unaudited, in thousands)
Income tax benefit (expense)	$	1,048	$	(10,380	)	$	(11,428	)	(110)%

For the six months ended June 30, 2007, the $1.0 million income tax benefit represents a projected full-year effective benefit of 5.3%. The most significant reason for the increase in projected tax benefit for 2007 relates to the impact of permanent differences for excess depletion deductions. The percentage impact of these permanent differences changes during interim periods, as the Company reconsiders its forecast of full-year pretax income, based upon its most recent experience.

The effective tax rate includes a change in estimate, reducing income tax expense from the effective rate recognized in the first quarter. The change in estimate primarily relates to (a) second quarter revisions to the estimated percentage impact of permanent differences related to excess depletion deductions (as discussed above) and (b) re-estimation of the valuation allowance needed for projected increases in net deferred tax assets during 2007. These changes in estimates were reflected in the effective tax rate in the period in which the information became available to the Company.

Expected Coal Production

As of July 17, 2007, uncommitted and unpriced tonnage was 1%, 16%, 40% and 72% of planned production in 2007, 2008, 2009 and 2010, respectively. Eastern coals account for the majority of uncommitted tonnage as 3%, 25%, 63% and 92% of the Company’s planned eastern production remains uncommitted and unpriced in 2007, 2008, 2009 and 2010, respectively.

In 2007 through 2010, Foundation Coal expects coal production within the following ranges (millions of tons):

	2007	2008	2009	2010
East	20.5–22.0	19.5–21.5	19.5–21.5	19.5–21.5
West	49.5–53.0	50.0–53.0	52.0–56.0	52.0–56.0
Total Consolidated	70.0–75.0	69.5–74.5	71.5–77.5	71.5–77.5

Based on its committed and priced planned production as of April 23, 2007, the Company expects its committed and priced production from its Eastern mines, encompassing Northern Appalachia and Central Appalachia, to realize in the range of $44.00 to $46.00 per ton in 2007. The Company also expects its committed and priced production from the Powder River Basin to realize in the range of $9.10 to $9.50 per ton in 2007. These ranges of expected per ton average realizations include forecast sulfur dioxide and btu premiums based on contract terms, projected coal qualities and historical realized premiums.

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Liquidity and Capital Resources

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

Our primary uses of cash have been our cash costs of coal production, the cash cost of purchased coal, capital expenditures, interest costs, cash payments for employee benefit obligations such as defined benefit pensions and retiree health care benefits, cash outlays related to post mining asset retirement obligations and support of working capital requirements such as coal inventories and trade accounts 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.

The following is a summary of cash provided by or used in each of the indicated categories of activities during the six months ended June 30, 2007 and 2006, respectively.

	Six Months Ended June 30,
	2007			2006
	(Unaudited, in thousands)
Cash provided by (used in):
Operating activities	$	135,479		$	113,355
Investing activities (primarily capital expenditures)		(74,187	)		(74,854	)
Financing activities—stock option exercise proceeds and excess tax benefit from stock-based awards		4,884			15,617
Financing activities—dividends on common stock		(4,523	)		(4,546	)
Financing activities—common stock repurchases		(13,267	)		—
Change in cash and cash equivalents	$	48,386		$	49,572

Cash provided by operating activities increased in the six months ended June 30, 2007 compared to the six months ended June 30, 2006 due to reductions in working capital requirements, most notably trade accounts receivable, coupled with an increase in non-cash adjustments to income, partially offset by a reduction in net income.

Cash used in investing activities decreased in the six months ended June 30, 2007 compared to the six months ended June 30, 2006, primarily due to an increase in asset sales proceeds, partially offset by a slight increase in capital expenditures. Capital expenditures in the six months ended June 30, 2007 totaled $76.1 million, including a total of $29.5 million of expenditures related to the following projects: (a) an overland coal conveyor at the Belle Ayr Mine in the Powder River Basin; (b) the acquisition of longwall components and upgrades to the rail loading facility at Emerald; and (c) the acquisition and implementation of company wide enterprise resource planning (“ERP”) software. Capital expenditures in the six months ended June 30, 2006 totaled $75.4 million, including a total of $24.3 million of expenditures related to the following projects: (a) an overland coal conveyor at the Belle Ayr Mine in the Powder River Basin; (b) equipment for and development of the Pax surface mine and related rail loading facility in Central Appalachia; (c) upgrades to the rail loading facility at Emerald; and (d) construction of a new slope, overland coal conveyor and related coal handling facilities at the Wabash mine in Illinois.

Cash provided by financing activities during the six months ended June 30, 2007 consisted of $2.6 million in cash proceeds from exercise of nonqualified stock options; $2.3 million in excess income tax benefit from issuance of stock-based awards; offset by quarterly cash dividends of $4.5 million ($0.05 per share paid in March and June 2007); and $13.3 million related to the repurchase of common shares in accordance with the stock repurchase program initiated by the Company during the third quarter of 2006. Cash provided by financing activities during the six months ended June 30, 2006 consisted of $7.0 million in cash proceeds from exercise of nonqualified stock options and $8.6 million in excess income tax benefit from issuance of stock-based awards, partially offset by quarterly cash dividends of $4.5 million ($0.05 per share paid in March and June 2006).

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

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

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As of June 30, 2007, we have outstanding $626.6 million in aggregate indebtedness, with an additional $329.1 million of available borrowings under our revolving credit facility after giving effect to $170.9 million of letters of credit outstanding as of June 30, 2007. Our liquidity requirements will be significant due to debt service requirements and projected capital expenditures.

Interest Rate Swaps

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

In connection with the July 7, 2006 closing of the amended and restated Senior Secured Credit Facility, the Company terminated the swap agreements. On the date the Company made the decision to terminate the interest rate swaps, the interest rate swaps no longer qualified for cash flow hedge accounting treatment and accordingly, any change in the market value of the interest rate swaps affects net income. On July 11, 2006, the Company monetized the $2.4 million derivative asset included inOther noncurrent assets in the Company’s consolidated financial statements at June 30, 2006 and recognized a $0.1 million mark-to-market loss on the swaps. The $1.8 million unrealized gain from the change in the market value of the interest rate swaps recorded inAccumulated other comprehensive loss is being recognized into income on a prorated basis over the remaining term of the original interest rate swap agreement through September 28, 2007, in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, and related amendments. At December 31, 2006, the unamortized unrealized gain was $1.1 million. During the six months ended June 30, 2007, $0.7 million was offset againstInterest expense.

Other

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

On July 18, 2006, the Board of Directors authorized a stock repurchase program (the “Repurchase Program”), authorizing the Company to repurchase share of its common stock. The Company may repurchase its common stock from time to time as determined by authorized officers of the Company, up to an aggregate amount of $100.0 million. During the six months ended June 30, 2007, the Company expended $13.3 million to repurchase 433,653 shares of its common stock at an average price of $30.59 under the Repurchase Program.

Covenant Compliance

Our indirect wholly-owned subsidiary, Foundation Coal Corporation (“FCC”) is required to comply with certain financial covenants which are considered material terms of the Senior Secured Credit Facility and the indenture governing FCC’s outstanding 7.25% Senior Notes. Information about the financial covenants is material to an investor’s understanding of FCC’s financial condition and liquidity. The breach of covenants in the Senior Secured Credit Facility that are tied to ratios based on Adjusted EBITDA, as defined below, could result in a default under the Senior Secured Credit Facility and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under our indenture. Additionally, under the Senior Secured Credit Facility and indenture, FCC’s ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

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Covenants and required levels as defined by the Senior Secured Credit Facility and the indenture governing the outstanding 7.25% Senior Notes are:

	Covenant Level
Senior Secured Credit Facility(1)
Minimum Adjusted EBITDA to cash interest ratio	2.5x
Maximum total debt less unrestricted cash to Adjusted EBITDA ratio	4.25x
Indenture(2)
Minimum Adjusted EBITDA to fixed charge ratio required to incur additional debt pursuant to ratio provisions	2.0x

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

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

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

As of June 30, 2007, FCC was in compliance with all required financial covenants of the Senior Secured Credit Facility.

Contractual Obligations

The following is a summary of our significant future contractual obligations by year as of June 30, 2007:

	2007		2008-2009		2010-2011		After 2011		Total
	(Unaudited, in thousands)
Long-term debt	$	—	$	41,875	$	284,750	$	300,000	$	626,625
Estimated cash interest on long-term debt1		27,058		84,486		69,538		56,188		237,270
Estimated cash payments for asset retirement obligations		2,637		4,569		7,989		213,475		228,670
Unconditional purchase commitments		84,586		26,008		—		—		110,594
Operating leases		1,604		5,256		2,903		4,970		14,733
Total	$	115,885	$	162,194	$	365,180	$	574,633	$	1,217,892

⁽¹⁾ The variable interest rate on debt is 6.58%, reflecting a LIBOR estimate, based on the five-year swap rate effective June 29, 2007, plus a margin of 1.25%.

We expect to use cash flows provided by operating activities to invest in the range of $175.0 million to $185.0 million in capital expenditures, excluding the LBA at the Eagle Butte mine, during calendar year 2007 of which $110.0 million to $115.0 million is to maintain production and replace mining equipment. The additional $65.0 million to $70.0 million is expected to be directed toward improvements in productivity and selective expansions of production. Approximately $45.8 million of expected 2007 capital expenditures are included in unconditional purchase commitments shown above. The remaining 2007 unconditional purchase commitments consist of $16.0 million for purchased coal and $22.8 million pertaining to forward contracts to purchase diesel fuel and explosives in normal quantities for use at our surface mines. We expect to contribute approximately $9.7 million to our defined benefit retirement plans and to pay approximately $21.4 million of retiree health care benefits, net of Medicare Part D subsidies, in calendar year 2007. We also expect to incur approximately $6.0 million per year for surety bond premiums and letters of credit fees. We believe that cash balances plus cash generated by operations will be sufficient to meet these obligations plus fund requirements for working capital and capital expenditures without incurring additional borrowings.

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Off-Balance Sheet Arrangements

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

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

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

We had outstanding surety bonds with a total face amount of $282.0 million as of June 30, 2007, of which $259.0 million secured reclamation obligations, $11.7 million secured coal lease obligations and $9.6 million secured self-insured workers’ compensation obligations. In addition, we had $170.9 million of letters of credit in place for the following purposes: $36.0 million for workers’ compensation, including collateral for workers’ compensation bonds; $7.9 million for UMWA retiree health care obligations; $112.2 million for collateral for reclamation surety bonds; and $14.8 million for other miscellaneous obligations. In the last few years, the market terms under which surety bonds can be obtained have generally become less favorable to all mining companies. In the event that additional surety bonds become unavailable, we would seek to secure our obligations with letters of credit, cash deposits or other suitable forms of collateral.

Wage Negotiations with the UMWA and Closure of the Company’s Illinois Basin Mining Operation

Wage agreements between three affiliates of the Company and the UMWA expired on or shortly after March 31, 2007. Specifically, the wage agreement for Wabash expired at 11:59 p.m. on March 31, 2007 and the UMWA wage agreements with Cumberland Coal Resources, LP (“Cumberland”) and Emerald Coal Resources, LP (“Emerald”) expired at 11:59 p.m. on April 1, 2007. Negotiations between these respective subsidiaries and the UMWA commenced in early January of 2007 but intensified in late March of 2007 and continued through April 3, 2007. Emerald Coal Resources, LP and Cumberland Coal Resources, LP reiterated their willingness to sign the 2007 National Bituminous Coal Operators Association (“BCOA”) UMWA wage agreement. The Company would not sign the BCOA Agreement for Wabash. The hourly workforce continued to work without a formal agreement of the parties under the terms of the expired wage agreement until 12:01 a.m. on April 4, 2007 at which time, alleging unfair labor practices by Wabash, Emerald and Cumberland, the UMWA represented hourly workforces struck the Wabash, Emerald and Cumberland mines. Subsequent to the commencement of a UMWA strike on April 4, 2007, Wabash announced the closure of the mine in southern Illinois. The mine had become economically unviable as a result of a combination of factors, including aged infrastructure, softening market conditions and the prospect of a new higher cost labor contract with the UMWA.

On April 10, 2007, negotiations between the UMWA and the three subsidiaries resumed. In the early evening of April 12, 2007, it was announced that the UMWA and the three subsidiaries had reached agreement and that the workforces at Emerald and Cumberland would return to work. Wabash remained closed and the effects of the closure had been negotiated with the UMWA.

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During the six months ended June 30, 2007, as a result of the Wabash mine closure, the Company recognized employee termination costs of $5.4 million and $1.4 million in accordance with the provisions of SFAS No.146 and the provisions of SFAS No. 112, respectively. Employee termination costs associated with one-time benefit arrangements of $5.4 million were recognized in accordance with SFAS No. 146. Termination costs resulting from one-time benefit arrangements include medical insurance continuance costs and negotiated severance to hourly employees and severance to salaried employees. The communication date related to these one-time benefit arrangements occurred during the three months ended June 30, 2007. The Company expects to recognize additional costs in the third quarter related to the remainder of the service periods associated with one-time retention benefits. During the three months ended June 30, 2007, the Company also reduced its estimate of certain previously recognized employee termination costs associated with on-going benefit arrangements in accordance with SFAS No. 112 by $0.8 million. These employee termination costs are recorded asEmployee and contract termination costs in the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2007.

At March 31, 2007, Wabash was the seller under three coal supply agreements supplied from the mine. Two of the agreements were with Duke Energy Indiana, Inc. and the third with Alcoa, Inc.’s Warrick Works (“Alcoa”). Wabash continued to ship coal under the coal supply agreements through April 3, 2007, just prior to the mine closure. Each agreement contained force majeure language excusing the seller from supplying coal in the event of a work stoppage. On April 3, 2007, Wabash and Duke Energy Indiana, Inc. executed a Termination Agreement and Mutual Release buying-out, subject to certain conditions, all obligations under their two contracts in exchange for a cash settlement that the Company paid on April 5, 2007. The Company believes there will be no further obligations of Wabash under these two contracts. During the three and six months ended June 30, 2007, the Company recognized $5.2 million of net contract termination costs in accordance with the provisions of SFAS No. 146. These contract termination costs are recorded asEmployee and contract termination costs in the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2007. With respect to the Alcoa coal supply agreement, Wabash claimed relief under force majeure for future contractual shipments. Because the Company believes a valid force majeure claim exists, and because this coal supply agreement provided pricing at levels approximately equal to current market prices, the Company does not consider it probable that Alcoa will assert a claim for damages under the coal supply agreement.

Certain Trends and Uncertainties

Our long-term outlook for the coal markets in the United States remains positive. The Energy Information Administration forecasts that coal demand for electrical power generation will increase at an average annual growth rate of 1.4% through 2015. Strong demand for coal and coal-based electricity generation in the U. S. is being driven by the growing economy, expected weather conditions, high prices for and limited supply of alternative fuels for electricity generation, geopolitical risks for global oil and natural gas resources and the relatively abundant steam coal reserves located within the United States.

Approximately 90,000 megawatts of new coal fired electrical generation has been proposed in the United States with the largest percentages of proposed projects located in the Midwest and West. New coal fired generating plants representing capacity of roughly 600 megawatts began operating in 2006 with an additional 870 megawatts scheduled to begin operations in 2007. Another 8,500 megawatts are currently under construction and expected to begin operation by the end of 2011. Of the remaining 80,600 megawatts, proposed plants representing approximately 11,500 megawatts are regarded as highly probable. Proposed generating plants representing the remaining approximately 69,100 megawatts are either in the very early stages of development or are in the proposal stage.

Proposed coal fired electric generating facilities that do not include technologies to capture and store carbon dioxide are facing increasing opposition from environmental groups concerned with global climate change. Coal fired generating plants incorporating carbon dioxide capture and storage technologies are 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 favor of alternative forms of baseload electrical generation in the near-term. Nevertheless, the level of interest in new coal fired generating facilities remains strong. In combination with heightened interest in coal gasification and coal liquefaction, this level of interest is a strong indicator of increasing demand for coal in the United States.

Through July 20, 2007, electric power generation in the regions using coal fired power has increased by 2.3 percent from the same period in 2006. Season-to-date cooling degree days have decreased by 11.4 percent from 2006’s cooling season and by 13.7 percent from the five-year average.

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During the first quarter of 2007, the Union Pacific Railroad lifted its moratorium on shipments from the Powder River Basin to service test burns and other new business. Through June 2007, total rail shipments from the southern Powder River Basin are approximately equal to the comparable period in 2006. The railroads are forecasting to increase deliveries from the southern Powder River Basin by approximately 5 percent in 2007 compared to 2006. The performance of the eastern railroads tends to be more mine-specific. In particular, we are reliant on Norfolk Southern (“NS”) and CSX at our Central Appalachia operations, and on the MGA joint line between NS and CSX at our Emerald mine in Northern Appalachia.

Based on weekly production reporting through July 21, 2007 from the National Mining Association, Appalachian production trails the comparable period of 2006 by approximately 4.7% partially as a result of capacity idling due to weak market conditions. Coal producers in Northern Appalachia and the Powder River Basin continue to report deferrals of previously announced mine expansion projects. Through July 21, 2007, Western coal production has declined approximately 2.1% from the comparable period of the prior year. Judicial decisions in West Virginia with respect to permits to construct valley fills at surface mines are likely to slow the process of obtaining surface mining permits in West Virginia with resultant uncertainties for producers. In addition, implementation of the Mine Improvement and New Emergency Response Act of 2006 and new state mine safety statutes has placed increased regulatory burdens on the coal industry with resultant cost increases and production constraints. The combination of strong demand for coal fired electric power and production declines and uncertainties, particularly in Central Appalachia, has led to forecasts of declines in stockpiles at coal fired electric generating plants over the next year. Spot market prices for Central Appalachia and the Powder River Basin coals increased modestly during the second quarter of 2007. Long-term, the delicate balance of coal supply and increasing coal demand is expected to result in strong, but volatile, fundamentals for the U. S. coal industry.

Our revenues depend on the price at which we are able to sell our coal. The current pricing environment for U. S. steam coal production is strong in relation to historical pricing levels, but has declined over the last year in response to the factors discussed above. Prices for high quality metallurgical coal, used to manufacture coke for steelmaking, have remained strong in response to increased worldwide demand for steel. As of July 17, 2007, we have committed and priced 99% and 84%, respectively, of the mid-points of our targeted production ranges for 2007 and 2008. In the longer term, decreases in coal prices due to, among other reasons, the supply of domestic and foreign coal, the demand for electricity and the price and availability of alternative fuels for electricity generation could affect our revenues and our ability to generate cash flows. In addition, our results of operations depend on the cost of coal production. We continue to experience increased operating costs for fuel and explosives, steel products, tires, health care, wages, salaries, contract coal haulage services and contract labor. Also, historically low interest rates have had a negative impact on expenses related to our actuarially determined employee-related liabilities.

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

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159,The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115(“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company expects to adopt SFAS No. 159 on January 1, 2008 and has not yet determined the impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement clarifies how to measure fair value as permitted under other accounting pronouncements but does not require any new fair value measurements. However, for some entities, the application of this statement will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company expects to adopt SFAS No. 157 on January 1, 2008 and has not yet determined the impact on the consolidated financial statements.

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In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”), which requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and other postretirement plans (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through other comprehensive income. SFAS No. 158 requires the Company to initially recognize the funded status of a defined benefit pension and other postretirement plans and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. Additionally, for fiscal years ending after December 15, 2008, the Company is required to measure plan assets and benefit obligations as of the date of the Company’s fiscal year-end statement of financial position rather than at an interim period. On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158. The Company expects to early adopt the measurement date provisions on December 31, 2007.

In June 2006, the FASB issued FASB Interpretation No. (“FIN”) 48,Accounting for Uncertainty in Income Taxes,an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s consolidated financial statements in accordance with SFAS No. 109,Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires an entity to recognize the financial statement impact of a tax position when it is more-likely- than-not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 requires that a liability created for unrecognized tax benefits shall be presented as a liability and not combined with deferred tax liabilities or assets.

At January 1, 2007, the cumulative effect of the adoption of FIN 48 was zero. Our liability at the date of adoption for unrecognized tax benefits was $9.7 million. If recognized, $3.8 million would affect the effective tax rate; however, the Company does not expect that these unrecognized tax benefits will significantly change this year. The Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of tax expense. The total amount of accrued interest and penalties as of January 1, 2007 was $0.2 million.

The Company files income tax returns in the U.S. federal jurisdiction and various states. Our United States federal tax obligations have been settled through the year 2002, although certain carry forward tax attributes that were generated prior to 2002 may still be adjusted upon examination by tax authorities if they either have been or will be used in periods subsequent to 2002.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Price Risk

We manage our price risk for coal sales using long-term coal supply agreements rather than by derivative instruments. As of July 17, 2007, we had sales commitments for approximately 99% of our planned 2007 production. The Company expects to make physical delivery of all coal for which we have sales commitments. As of July 17, 2007, uncommitted and unpriced tonnage was 16%, 40% and 72% of planned production in 2008, 2009 and 2010, respectively. Eastern coals account for the majority of uncommitted tonnage as 25%, 63% and 92% of the Company’s planned eastern production remains uncommitted and unpriced in 2008, 2009 and 2010, respectively.

Some of the products used in our mining activities, such as diesel fuel, explosives, large equipment tires, steel products and electricity, are subject to price volatility. Through our suppliers, we utilize forward purchase contracts to manage the exposure related to this volatility. As of June 30, 2007, the Company has entered into forward purchase commitments for approximately 85% of the diesel fuel that it expects to consume during calendar year 2007 at prices ranging from $2.02 per gallon for our Powder River Basin mines to $2.10 per gallon for our Central Appalachian mines. The Company has designated these contracts as normal purchase normal sale contracts, and, therefore, they are not deemed to be derivative financial instruments for financial reporting purposes. During the six months ended June 30, 2007 and 2006, the cost of diesel fuel represented approximately 4% of the Company’s consolidated cost of coal sales.

Credit Risk

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

Interest Rate Risk

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

In connection with the July 7, 2006 closing of the amended and restated Senior Secured Credit Facility, the Company terminated existing swap agreements. On July 11, 2006, the Company monetized a $2.4 million derivative asset included in other noncurrent assets in the Company’s consolidated financial statements at June 30, 2006 and recognized a resulting $0.1 million mark-to-market loss on the swaps. The $1.8 million unrealized gain from the change in the market value of the interest rate swaps recorded inAccumulated other comprehensive income (loss) is being recognized into income on a prorated basis over the remaining term of the original interest rate swap agreement through September 28, 2007, in accordance with Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities, and related amendments. At December 31, 2006, the unamortized unrealized gain was $1.1 million. During the three and six months ended June 30, 2007, $0.4 million and $0.7 million, respectively, was offset againstInterest expense.

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

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ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, evaluated, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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

Changes in Internal Control Over Financial Reporting

During the second quarter we implemented an enterprise resource planning (“ERP”) system which replaced our legacy computer system. The system became operational in April 2007 and changes were made to the Company’s internal controls over financial reporting in order to adapt to the new software environment. Other than the changes required by the implementation of the new ERP system, none of which materially impacted or significantly changed the effectiveness of our internal controls over financial reporting, there have not been any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 4T.     CONTROLS AND PROCEDURES.

Not Applicable.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Information required by this Item is contained in Note 17, PART I, ITEM 1 entitled “Commitments and Contingencies” contained in this Report and is incorporated herein by reference.

ITEM 1A.     RISK FACTORS.

There were no material changes from risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the twelve months ended December 31, 2006, as filed March 1, 2007.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

(a) None.

(b) None.

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

On May 17, 2007, Foundation held its annual meeting of stockholders and three proposals were considered.

The first proposal was to elect eight nominees to the Board of Directors. The following is a separate tabulation with respect to the vote for each nominee.

Nominee:	For:	Withheld:
James F. Roberts	39,660,987	740,341
William J. Crowley, Jr.	39,970,471	430,857
David I. Foley	38,296,230	2,105,098
P. Michael Giftos	39,968,020	433,308
Alex T. Krueger	39,968,487	432,861
Joel Richards, III	39,969,080	432,248
Robert C. Scharp	39,694,954	506,374
Thomas V. Shockley, III	39,968,352	432,976

The second proposal was to ratify the approval of Ernst & Young LLP as Foundation’s Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2007.

Shares of Common Stock:FOR:39,971,090AGAINST: 420,385ABSTAINED: 9,853

The third proposal was to approve any other matters that properly came before the meeting.

Shares of Common Stock:FOR: 10,850,983AGAINST: 23,933,505ABSTAINED: 5,616,840

ITEM 5. OTHER INFORMATION.

(a) None.

(b) None.

ITEM 6. EXHIBITS.

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

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SIGNATURES

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

Date: August 9, 2007	FOUNDATION COAL HOLDINGS, INC.
	(Registrant)

 Name   Title 

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

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EXHIBIT INDEX

Exhibit No.	Description of Exhibit
3.1	Third Amended and Restated Certificate of Incorporation of the Company, previously filed as an exhibit to the Company’s Form 10-Q on August 9, 2006, and incorporated by reference.
3.2	Amended and Restated By-laws of the Company, previously filed as an exhibit to the Company’s Form 8-K on May 22, 2006, and incorporated by reference.
4.1*	Form of certificate of the Company’s common stock.
4.2*	Amended and Restated Stockholders Agreement, dated as of October 4, 2004, by and among the Company, Blackstone FCH Capital Partners IV, L.P., Blackstone Family Investment Partnership IV-A L.P., First Reserve Fund IX, L.P., AMCI Acquisition, LLC and the management stockholders parties thereto.
4.2.1	Termination Agreement, dated as of February 6, 2006, by and among the Company, Blackstone FCH Capital Partners IV, L.P., Blackstone Family Investment Partnership IV-A L.P., First Reserve Fund IX, L.P., AMCI Acquisition, LLC (nka AMCI Acquisition III, LLC), and the management stockholders parties thereto, terminating the Amended and Restated Stockholders Agreement dated as of October 4, 2004, by and among the same parties, previously filed as an exhibit to the Company’s Form 8-K on February 23, 2006 and incorporated by reference.
4.3	Credit Agreement dated as of July 30, 2004, as amended and restated as of July 7, 2006 by and among Foundation Coal Corporation, Foundation PA Coal Company, LLC, the Lenders named therein and Citicorp North America, Inc. as Administrative Agent and Collateral Agent and the Issuing Banks and other agents party thereto, previously filed as an exhibit to the Company’s Form 8-K on July 13, 2006, and incorporated by reference.
10.1**	Amendment Number 2, dated June 18 2007, to Amended and Restated Employment Agreement, dated March 13, 2006, by and between Foundation Coal Corporation and James J. Bryja.
10.2**	Amendment Number 2, dated June 18, 2007, to Amended and Restated Employment Agreement, dated March 13, 2006, by and between Foundation Coal Corporation and Kurt D. Kost.
10.3**	Restricted Stock Unit Agreement, approved June 18, 2007, and executed June 29, 2007, by and between the Company and Kurt D. Kost.
31.1**	Certification of periodic report by the Company’s Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**	Certification of periodic report by the Company’s Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of periodic report by the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of periodic report by the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

** Filed herewith.

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