Alpha Natural Resources 10-Q 2013 Q2 Quarterly report

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, 2013

OR

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

For the transition period from           to

Commission File No. 001-32331

ALPHA NATURAL RESOURCES, INC.

(Exact name of registrant as specified in its charter)

Delaware	42-1638663
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
One Alpha Place, P.O. Box 16429, Bristol, Virginia	24209
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:

(276) 619-4410

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

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

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

x Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company

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

Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of July 31, 2013 - 220,946,594

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statements of Operations (Unaudited)	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	2
	Condensed Consolidated Balance Sheets (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4.	Controls and Procedures	56
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	58

Item 1. Financial Statements

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenues:
Coal revenues	$	1,123,176		$	1,565,281		$	2,263,565		$	3,204,839
Freight and handling revenues	155,218			233,357			312,385			442,707
Other revenues	56,729			49,471			92,764			135,176
Total revenues	1,335,123			1,848,109			2,668,714			3,782,722
Costs and expenses:
Cost of coal sales (exclusive of items shown separately below)	1,081,494			1,406,394			2,093,335			2,821,790
Freight and handling costs	155,218			233,357			312,385			442,707
Other expenses	27,782			10,444			34,781			29,837
Depreciation, depletion and amortization	214,716			272,850			453,729			558,622
Amortization of acquired intangibles, net	3,591			(17,286		)	(1,840		)	(52,798		)
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)	38,139			46,011			81,765			111,022
Asset impairment and restructuring	11,265			1,010,878			22,341			1,014,934
Goodwill impairment	—			1,525,332			—			1,525,332
Total costs and expenses	1,532,205			4,487,980			2,996,496			6,451,446
Loss from operations	(197,082		)	(2,639,871		)	(327,782		)	(2,668,724		)
Other income (expense):
Interest expense	(60,953		)	(46,534		)	(120,354		)	(91,968		)
Interest income	1,099			1,324			2,125			2,421
Loss on early extinguishment of debt	(33,197		)	—			(33,197		)	—
Miscellaneous income, net	14,925			627			16,854			1,266
Total other expense, net	(78,126		)	(44,583		)	(134,572		)	(88,281		)
Loss before income taxes	(275,208		)	(2,684,454		)	(462,354		)	(2,757,005		)
Income tax benefit	89,527			449,798			165,885			493,583
Net loss	$	(185,681	)	$	(2,234,656	)	$	(296,469	)	$	(2,263,422	)
Basic loss per common share	$	(0.84	)	$	(10.14	)	$	(1.34	)	$	(10.29	)
Diluted loss per common share	$	(0.84	)	$	(10.14	)	$	(1.34	)	$	(10.29	)
Weighted average shares - basic	220,840,989			220,295,415			220,791,668			220,040,698
Weighted average shares - diluted	220,840,989			220,295,415			220,791,668			220,040,698

See accompanying Notes to Condensed Consolidated Financial Statements.

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ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(Amounts in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net loss	$	(185,681	)	$	(2,234,656	)	$	(296,469	)	$	(2,263,422	)
Other comprehensive income (loss), net of tax:
Amortization of and adjustments to employee benefit costs, net of income tax of ($4,472) and $11,246, and ($4,286) and $10,175 for the three and six months ended June 30, 2013 and 2012, respectively	8,443			(18,798		)	9,176			(17,009		)
Change in fair value of cash flow hedges, net of income tax of $2,728 and $14,052, and $1,787 and $4,380 for the three and six months ended June 30, 2013 and 2012, respectively	(4,656		)	(23,488		)	(3,051		)	(7,338		)
Change in fair value of marketable securities, net of income tax of $140 and ($11), and $200 and $38 for the three and six months ended June 30, 2013 and 2012, respectively	(239		)	16			(340		)	(64		)
Total other comprehensive loss, net of tax	3,548			(42,270		)	5,785			(24,411		)
Total comprehensive loss	$	(182,133	)	$	(2,276,926	)	$	(290,684	)	$	(2,287,833	)

See accompanying Notes to Condensed Consolidated Financial Statements.

2

ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

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

	6/30/2013			12/31/2012
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	511,963		$	730,723
Trade accounts receivable, net	386,495			418,166
Inventories, net	383,015			398,060
Prepaid expenses and other current assets	695,243			786,273
Total current assets	1,976,716			2,333,222
Property, equipment and mine development costs, net	1,984,850			2,219,016
Owned and leased mineral rights and land (net of accumulated depletion of $1,045,454 and $908,416, respectively)	7,249,638			7,428,192
Goodwill, net	561,753			567,665
Other acquired intangibles (net of accumulated amortization of $386,890 and $655,047, respectively)	195,053			228,552
Other non-current assets	630,184			313,159
Total assets	$	12,598,194		$	13,089,806
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	28,839		$	95,015
Trade accounts payable	259,524			255,191
Accrued expenses and other current liabilities	913,740			872,402
Total current liabilities	1,202,103			1,222,608
Long-term debt	3,354,799			3,291,037
Pension and postretirement medical benefit obligations	1,165,799			1,195,187
Asset retirement obligations	777,541			763,482
Deferred income taxes	827,205			971,001
Other non-current liabilities	545,636			678,676
Total liabilities	7,873,083			8,121,991
Commitments and Contingencies (Note 16)
Stockholders’ Equity
Preferred stock - par value $0.01, 10.0 million shares authorized, none issued	—			—
Common stock - par value $0.01, 400.0 million shares authorized, 232.7 million issued and 220.9 million outstanding at June 30, 2013 and 232.2 million issued and 220.6 million outstanding at December 31, 2012	2,327			2,322
Additional paid-in capital	8,124,905			8,075,694
Accumulated other comprehensive income (loss)	(160,813		)	(166,598		)
Treasury stock, at cost: 11.8 million and 11.6 million shares at June 30, 2013 and December 31, 2012, respectively	(271,538		)	(270,302		)
Accumulated deficit	(2,969,770		)	(2,673,301		)
Total stockholders’ equity	4,725,111			4,967,815
Total liabilities and stockholders’ equity	$	12,598,194		$	13,089,806

See accompanying Notes to Condensed Consolidated Financial Statements.

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ALPHA NATURAL RESOURCES INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)

	Six Months Ended June 30,
	2013			2012
Operating activities:
Net loss	$	(296,469	)	$	(2,263,422	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion, accretion and amortization	509,171			612,019
Amortization of acquired intangibles, net	(1,840		)	(52,798		)
Mark-to-market adjustments for derivatives	1,500			(43,641		)
Stock-based compensation	12,598			(2,464		)
Goodwill impairment	—			1,525,332
Asset impairment and restructuring	22,341			1,014,934
Employee benefit plans, net	29,481			36,916
Loss on early extinguishment of debt	33,197			—
Deferred income taxes	(167,320		)	(496,054		)
Other, net	(8,575		)	2,786
Changes in operating assets and liabilities:
Trade accounts receivable, net	31,672			107,413
Inventories, net	15,047			(11,544		)
Prepaid expenses and other current assets	19,418			169,277
Other non-current assets	6,970			520
Trade accounts payable	3,994			(126,389		)
Accrued expenses and other current liabilities	14,422			(275,141		)
Pension and postretirement medical benefit obligations	(26,783		)	(24,220		)
Asset retirement obligations	(20,352		)	(22,287		)
Other non-current liabilities	(110,976		)	(15,888		)
Net cash provided by operating activities	67,496			135,349
Investing activities:
Capital expenditures	(107,006		)	(245,244		)
Acquisition of mineral rights under federal lease	—			(36,108		)
Purchase of equity-method investments	—			(10,100		)
Purchases of marketable securities	(469,443		)	(261,990		)
Sales of marketable securities	296,062			109,288
Other, net	5,150			5,973
Net cash used in investing activities	(275,237		)	(438,181		)
Financing activities:
Principal repayments of long-term debt	(940,927		)	(15,000		)
Principal repayments of capital lease obligations	(7,989		)	(1,767		)
Proceeds from borrowings on long-term debt	964,369			—
Debt issuance costs	(24,236		)	(6,436		)
Common stock repurchases	(1,236		)	(6,804		)
Other	(1,000		)	(851		)
Net cash used in financing activities	(11,019		)	(30,858		)
Net decrease in cash and cash equivalents	(218,760		)	(333,690		)
Cash and cash equivalents at beginning of period	730,723			585,882
Cash and cash equivalents at end of period	$	511,963		$	252,192

See accompanying Notes to Condensed Consolidated Financial Statements.

4

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

(1) Business and Basis of Presentation

Business

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

Basis of Presentation

The accompanying interim condensed consolidated financial statements of the Company are unaudited and prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for Form 10-Q. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America as long as the financial statements are not misleading. In the opinion of management, these interim condensed consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of the results for the periods presented. Results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 or any other period. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2012, filed March 1, 2013.

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include inventories; mineral reserves; allowance for non-recoupable advanced mining royalties; asset impairments; environmental and reclamation obligations; acquisition accounting; pensions, postemployment, postretirement medical and other employee benefit obligations; useful lives for depreciation, depletion, and amortization; reserves for workers’ compensation and black lung claims; current and deferred income taxes; reserves for contingencies and litigation and fair value of financial instruments. Estimates are based on facts and circumstances believed to be reasonable at the time; however, actual results could differ from those estimates.

(2)    Asset Impairment and Restructuring

In connection with plans announced to curtail mining operations and the associated company actions, the Company recorded severance expenses of $5,974 and $13,047 and professional fees and other expenses of $5,291 and $9,294 for the three and six months ended June 30, 2013, respectively.

For the three and six months ended June 30, 2012, the Company recorded asset impairment charges totaling $990,923, of which $985,346 was recorded for asset groups in our Eastern Coal Operations segment and $5,577 was recorded for an asset group in the Company's Other segment. The asset impairment charges reduced the carrying values of mineral reserves by $714,580, property, plant and equipment by $271,827, and other acquired intangibles by $4,516. The asset impairments established a new cost basis on which future depreciation, depletion and amortization will be based. Additionally, the Company also recorded severance expenses of $15,436 ($11,380 in the three months ended June 30, 2012), $2,031 for professional fees and other expenses, and reserved $6,544 for advanced royalties, deposits and other assets which may not be recoverable.

(3)    Goodwill, Net

During the three months ended June 30, 2013, the Company disposed of $5,912 of goodwill in connection with the contribution of certain assets included in its All Other segment to a joint venture.

5

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

During the three months ended June 30, 2012, the Company performed a goodwill impairment test as of June 1, 2012 and recorded a goodwill impairment charge for the three months ended June 30, 2012 of $1,525,332 to reduce the carrying value of goodwill to its implied fair value.

(4)    Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes to accumulated other comprehensive income (loss) during the six months ended June 30, 2013:

	Balance as of December 31, 2012			Other comprehensive income (loss) before reclassifications			Amounts reclassified from accumulated other comprehensive income (loss)			Balance June 30, 2013
Employee benefit costs	$	(171,394	)	$	8,061		$	1,115		$	(162,218	)
Cash flow hedges	4,755			(1,007		)	(2,044		)	1,704
Available-for-sale marketable securities	41			(328		)	(12		)	(299		)
	$	(166,598	)	$	6,726		$	(941	)	$	(160,813	)

The following table summarizes the amounts reclassified from accumulated other comprehensive income (loss) and the statement of operations line items affected by the reclassification during the three and six months ended June 30, 2013:

Details about accumulated other comprehensive income (loss) components	Amounts reclassified from accumulated other comprehensive income (loss)						Affected line item in the Condensed Consolidated Statements of Operations
	Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
Employee benefit costs:
Amortization of actuarial loss	$	2,058		$	3,586		(1)
Amortization of prior service credit	(955		)	(1,909		)	(1)
Other	58			58			(1)
Total before income tax	1,161			1,735
Tax expense	(408		)	(620		)	Income tax benefit
Total, net of tax	$	753		$	1,115
Cash flow hedges:
Commodity swaps-coal	$	(608	)	$	(1,790	)	Coal revenues
Commodity swaps-diesel fuel	1,082			302			Cost of coal sales
Commodity swaps-natural gas	(1,226		)	(1,866		)	Other revenues
Commodity options-natural gas	129			113			Other revenues
Total before income tax	(623		)	(3,241		)
Tax benefit	230			1,197			Income tax benefit
Total, net of tax	$	(393	)	$	(2,044	)
Available-for-sale marketable securities:
Unrealized gains and losses	$	(13	)	$	(20	)	Interest income
Tax benefit	5			8			Income tax benefit
Total, net of tax	$	(8	)	$	(12	)

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

⁽¹⁾ These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit costs for pension, other postretirement benefit plans and black lung. See Note 14.

(5)    Earnings Per Share

The number of shares used to calculate basic earnings per common share is based on the weighted average number of the Company’s outstanding common shares during the respective periods. The number of shares used to calculate diluted earnings per common share is based on the number of common shares used to calculate basic earnings per share plus the dilutive effect of stock options and other stock-based instruments held by the Company’s employees and directors during each period, the Company’s outstanding 3.75% convertible senior notes due 2017 (the “3.75% Convertible Notes”), 2.375% convertible senior notes due 2015 (the “2.375% Convertible Notes”), and 3.25% convertible senior notes due 2015 issued by Alpha Appalachia Holdings, Inc. (the “3.25% Convertible Notes”). As of June 30, 2013 and June 30, 2012, the 2.375% Convertible Notes and the 3.25% Convertible Notes were not convertible. As of June 30, 2013, the 3.75% Convertible Notes were not convertible. The 3.75% Convertible Notes, 2.375% Convertible Notes and 3.25% Convertible Notes become dilutive for earnings per common share calculations under certain circumstances and in specified periods. The shares that would be issued to settle the conversion spread are included in the diluted earnings per share calculation when the conversion option is in the money. In periods of net loss, the number of shares used to calculate diluted earnings per share is the same as basic earnings per share.

(6)    Inventories, net

Inventories, net consisted of the following:

	6/30/2013		12/31/2012
Raw coal	$	47,023	$	58,382
Saleable coal	237,409		233,550
Materials, supplies and other, net	98,583		106,128
Total inventories, net	$	383,015	$	398,060

(7)    Marketable Securities

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

	June 30, 2013
			Unrealized
	Cost		Gain		Loss			Fair value
Short-term marketable securities:
U.S. treasury and agency securities(a)	$	47,732	$	6	$	(8	)	$	47,730
Corporate debt securities(a)	182,846		21		(67		)	182,800
Total short-term marketable securities	$	230,578	$	27	$	(75	)	$	230,530
	December 31, 2012
			Unrealized
	Cost		Gain		Loss			Fair value
Short-term marketable securities:
U.S. treasury and agency securities(a)	$	85,537	$	32	$	(1	)	$	85,568
Corporate debt securities(a)	211,852		75		(43		)	211,884
Total short-term marketable securities	$	297,389	$	107	$	(44	)	$	297,452

^(a)  Unrealized gains and losses are recorded as a component of stockholders’ equity.

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

7

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

	June 30, 2013
			Unrealized
	Cost		Gain		Loss			Fair value
Long-term marketable securities:
U.S. treasury and agency securities(a)	$	140,469	$	1	$	(219	)	$	140,251
Corporate debt securities(a)	98,249		14		(224		)	98,039
Mutual funds held in rabbi trust(b)	7,335		2,669		(1,555		)	8,449
Total long-term marketable securities	$	246,053	$	2,684	$	(1,998	)	$	246,739
	December 31, 2012
			Unrealized
	Cost		Gain		Loss			Fair value
Long-term marketable securities:
Corporate debt securities(a)	$	754	$	1	$	—		$	755
Mutual funds held in rabbi trust(b)	7,544		2,084		(1,495		)	8,133
Total long-term marketable securities	$	8,298	$	2,085	$	(1,495	)	$	8,888

^(a)  Unrealized gains and losses are recorded as a component of stockholders’ equity.

^(b)  Unrealized gains and losses are recorded in current period earnings.

(8)    Property, Equipment and Mine Development Costs

Property, equipment and mine development costs consisted of the following:

	June 30, 2013		December 31, 2012
Plant and mining equipment	$	3,709,211	$	3,688,516
Mine development	286,823		304,765
Office equipment, software and other	69,431		89,510
Construction in progress	74,917		46,283
Total property, equipment and mine development costs	4,140,382		4,129,074
Less accumulated depreciation and amortization	2,155,532		1,910,058
Total property, equipment and mine development costs, net	$	1,984,850	$	2,219,016

(9)    Long-Term Debt

Long-term debt consisted of the following:

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

	6/30/2013			December 31, 2012
6.25% senior notes due 2021	$	700,000		$	700,000
6.00% senior notes due 2019	800,000			800,000
9.75% senior notes due 2018	500,000			500,000
Term loan due 2020	625,000			—
Term loan due 2016	—			540,000
3.75% convertible senior notes due 2017	345,000			—
3.25% convertible senior notes due 2015	310,375			536,162
2.375% convertible senior notes due 2015	106,097			287,500
Other	85,694			86,203
Debt discount, net	(88,528		)	(63,813		)
Total long-term debt	3,383,638			3,386,052
Less current portion	(28,839		)	(95,015		)
Long-term debt, net of current portion	$	3,354,799		$	3,291,037

Fourth Amended and Restated Credit Agreement

On May 22, 2013, the Company entered into a Fourth Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) with the lenders party thereto, the issuing banks party thereto, Citicorp North America, Inc., as administrative agent and as collateral agent, and all other parties thereto from time to time, which amends and restates the Company's Third Amended and Restated Credit Agreement, dated as of May 19, 2011, as amended June 26, 2012 (the “Existing Credit Agreement”).

The Amended and Restated Credit Agreement includes a new $625,000 senior secured term loan B facility (the “Term Loan Facility”), which matures on May 22, 2020, amortizes in quarterly installments at a rate of 1.0% per year and bears an interest rate at the Company's option of either LIBOR plus a margin of 2.75% (subject to a LIBOR floor of 0.75%) or an Alternate Base Rate (ABR) plus a margin of 1.75% (subject to an ABR floor of 1.75%). The proceeds of the Term Loan Facility were used to repay the entire $525,000 aggregate principal amount of the Company's outstanding obligations under its existing term loan A facility under the Existing Credit Agreement, which would have matured on June 30, 2016, with the balance used to pay fees and expenses and for general corporate purposes. The Company recorded a loss on early extinguishment of debt of $9,044, primarily related to fees incurred in the transactions that were not capitalizable and the write off of certain outstanding deferred fees.

The principal changes to the Existing Credit Agreement effected by the Amended and Restated Credit Agreement include increasing the existing senior secured revolving facility from $1,000,000 to $1,100,000 through its maturity date of June 30, 2016 and modifying the financial covenants by:

• modifying the interest coverage ratio covenant from 2.25 to 1.50 through 2013, from 2.50 to 1.50 during 2014 and from 2.50 to 2.00 from 2015 through the maturity date of the revolving credit facility;

•eliminating the leverage ratio covenant;

• extending the applicability of the senior secured leverage ratio of 2.50 through the maturity date of the revolving credit facility; and

•reducing the minimum liquidity covenant, which applies until December 31, 2014, from $500,000 to $300,000;

Additionally, the terms of the Amended and Restated Credit Agreement (i) further restrict the ability of the Company and its subsidiaries to make investments, loans and acquisitions, incur additional indebtedness, and pay dividends on its capital stock or redeem, repurchase or retire its capital stock; and (ii) require the Company to provide additional collateral to secure the obligations under the Amended and Restated Credit Agreement, consisting of receivables previously securing the Second Amended and Restated Receivables Purchase Agreement.

Termination of Account Receivable Securitization Facility

9

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Simultaneously with its entry into the Amended and Restated Credit Agreement, the Company also terminated the Second Amended and Restated Receivables Purchase Agreement, dated as of October 19, 2011 (as amended from time to time, the “A/R Facility”), by and among ANR Receivables Funding, LLC, as seller, Alpha Natural Resources, LLC, as servicer, PNC Bank, National Association, as administrator and LC Bank (as defined therein), and the other parties thereto from time to time. The A/R Facility provided for the issuance of letters of credit in a maximum aggregate amount of $275,000. As of May 22, 2013, the outstanding amount of such letters of credit was approximately $160,000, all of which have been transferred to the Amended and Restated Credit Agreement and are deemed to be issued thereunder. The Company recorded a loss on early extinguishment of debt of $1,358 in connection with the termination, primarily related to the write off of outstanding deferred fees.

3.75% Convertible Senior Notes due 2017

On May 13, 2013, the Company issued $345,000 principal amount of 3.75% Convertible Notes. The 3.75% Convertible Notes bear interest at a rate of 3.75% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, and will mature on December 15, 2017.

The proceeds from the 3.75% Convertible Notes, together with cash on hand, were used to repurchase $225,787 of the Company's outstanding 3.25% Convertible Notes and $181,403 of the Company's outstanding 2.375% Convertible Notes. The Company recorded a loss on early extinguishment of debt of $22,795, primarily related to the write off of outstanding debt discounts.

The Company separately accounts for the liability and equity components of the 3.75% Convertible Notes in a manner reflective of its' nonconvertible debt borrowing rate. The related deferred loan costs and discount are being amortized and accreted, respectively, over the four-year term of the 3.75% Convertible Notes, and provide for an effective interest rate of 8.49%. As of June 30, 2013, the carrying amount of the debt component was $284,576, and the unamortized debt discount was $60,424. As of June 30, 2013, the carrying amount of the equity component was $61,949. 

The 3.75% Convertible Notes are the Company's senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. The 3.75% Convertible Notes are guaranteed on a senior unsecured basis by each of our current and future wholly owned domestic subsidiaries that guarantee the Company's obligations under its 9.75% senior notes due 2018. The 3.75% Convertible Notes are effectively subordinated to all of the Company's existing and future secured indebtedness and all existing and future liabilities of its non-guarantor subsidiaries, including trade payables.

The 3.75% Convertible Notes are convertible in certain circumstances and in specified periods at an initial conversion rate of 99.0589 shares of common stock per $1 of principal amount of notes, subject to adjustment upon the occurrence of certain events set forth in the fourth supplemental indenture (the “Fourth Supplemental Indenture”) to the indenture dated June 1, 2011 (the “Base Indenture” and, together with the Fourth Supplemental Indenture, the “3.75% Convertible Notes Indenture”) governing the 3.75% Convertible Notes, equivalent to an initial conversion price of approximately $10.10 per share of common stock. Upon conversion, the notes may be settled, at the Company's election, in cash, shares of our common stock or a combination thereof. The Company intends to settle conversions, if any, using a combination of cash and shares.

The 3.75% Convertible Notes Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee, Union Bank of California, or the holders of not less than 25% in aggregate principal amount of the 3.75% Convertible Notes then outstanding may declare the principal of the 3.75% Convertible Notes and any accrued and unpaid interest thereon immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization relating to the Company, the principal amount of the 3.75% Convertible Notes together with any accrued and unpaid interest thereon will automatically become due and be immediately payable.

The 3.75% Convertible Notes were not convertible as of June 30, 2013 and, as a result, have been classified as long-term debt as of that date.

(10)    Asset Retirement Obligations

The following table summarizes the changes in asset retirement obligations for the six months ended June 30, 2013:

10

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Total asset retirement obligations at December 31, 2012	$	856,701
Accretion for the period	30,258
Revisions in estimated cash flows	3,225
Expenditures for the period	(20,352		)
Total asset retirement obligations at June 30, 2013	$	869,832
Less current portion	(92,291		)
Long-term portion	$	777,541

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

The estimated fair values of financial instruments are determined based on relevant market information. These estimates involve uncertainty and cannot be determined with precision.

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

The following tables set forth by level, within the fair value hierarchy, the Company’s long-term debt at fair value as of June 30, 2013 and December 31, 2012, respectively.

	June 30, 2013
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
6.25% senior notes due 2021	$	700,000	$	570,500	$	570,500	$	—	$	—
6.00% senior notes due 2019	800,000		648,000		648,000		—		—
9.75% senior notes due 2018(4)	495,871		485,000		485,000		—		—
Term loan due 2020(5)	621,925		625,172		—		625,172		—
3.75% convertible senior notes due 2017(6)	284,576		295,458		295,458		—		—
3.25% convertible senior notes due 2015(2)	300,804		282,441		282,441		—		—
2.375% convertible senior notes due 2015(3)	94,768		97,609		97,609		—		—
Total long-term debt	$	3,297,944	$	3,004,180	$	2,379,008	$	625,172	$	—

	December 31, 2012
	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
6.25% senior notes due 2021	$	700,000	$	649,110	$	649,110	$	—	$	—
6.00% senior notes due 2019	800,000		755,600		755,600		—		—
9.75% senior notes due 2018(4)	495,161		540,125		540,125		—		—
Term loan due 2016(1)	539,481		537,316		—		537,316		—
3.25% convertible senior notes due 2015(2)	515,901		513,375		513,375		—		—
2.375% convertible senior notes due 2015(3)	249,306		268,094		268,094		—		—
Total long-term debt	$	3,299,849	$	3,263,620	$	2,726,304	$	537,316	$	—

⁽¹⁾  Net of debt discount of $519 as of December 31, 2012.

⁽²⁾  Net of debt discount of $9,571 and $20,261 as of June 30, 2013 and December 31, 2012, respectively.

11

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

⁽³⁾  Net of debt discount of $11,329 and $38,194 as of June 30, 2013 and December 31, 2012, respectively.

⁽⁴⁾  Net of debt discount of $4,129 and $4,839 as of June 30, 2013 and December 31, 2012, respectively.

⁽⁵⁾  Net of debt discount of $3,075 as of June 30, 2013.

⁽⁶⁾  Net of debt discount of $60,424 as of June 30, 2013.

The following tables set forth by level, within the fair value hierarchy, the Company’s financial and non-financial assets and liabilities that were accounted for at fair value on a recurring and non-recurring basis as of June 30, 2013 and December 31, 2012, respectively. Financial and non-financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the determination of fair value for assets and liabilities and their placement within the fair value hierarchy levels.

	June 30, 2013
	Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets (liabilities):
U.S. treasury and agency securities	$	187,981	$	187,981	$	—	$	—
Mutual funds held in rabbi trust	$	8,449	$	8,449	$	—	$	—
Corporate debt securities	$	280,839	$	—	$	280,839	$	—
Forward coal sales	$	14,153	$	—	$	14,153	$	—
Forward coal purchases	$	4	$	—	$	4	$	—
Commodity swaps	$	1,873	$	—	$	1,873	$	—

	December 31, 2012
	Total Fair Value			Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial assets (liabilities):
U.S. treasury and agency securities	$	85,568		$	85,568	$	—		$	—
Mutual funds held in rabbi trust	$	8,133		$	8,133	$	—		$	—
Corporate debt securities	$	212,639		$	—	$	212,639		$	—
Forward coal sales	$	15,359		$	—	$	15,359		$	—
Forward coal purchases	$	(4	)	$	—	$	(4	)	$	—
Commodity swaps	$	7,080		$	—	$	7,080		$	—
Commodity options	$	138		$	—	$	138		$	—

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

Level 1 Fair Value Measurements

U.S. Treasury and Agency Securities and Mutual Funds Held in Rabbi Trust - The fair value of marketable securities is based on observable market data.

6.25% senior notes due 2021, 6.00% senior notes due 2019, 9.75% senior notes due 2018 (collectively, the “Senior Notes”), 3.75% Convertible Notes, 2.375% Convertible Notes, and 3.25% Convertible Notes - The fair value is based on observable market data.

12

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Level 2 Fair Value Measurements

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

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

Commodity Swaps - The fair values of commodity swaps are estimated using valuation models which include assumptions about commodity prices based on those observed in the underlying markets. The fair values are adjusted for counter-party credit risk, when applicable.

Commodity Options - The fair values of the commodity options were estimated using an option pricing model that incorporates historical volatility of the underlying commodity, the strike price, notional amount, current market price and risk free interest rate. The fair values are adjusted for counter-party risk, when applicable.

Term Loans due 2016 and 2020 - The fair values of the term loans due 2016 and 2020 are estimated based on market rates of interest offered for debt of similar maturities.

(12)    Derivative Financial Instruments

Forward Contracts

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

Swap Agreements

Commodity Swaps

The Company uses diesel fuel in its production process and incurs significant expenses for its purchase. Diesel fuel expenses represented approximately 6% of cost of coal sales for the six months ended June 30, 2013. The Company is subject to the risk of price volatility for this commodity and as a part of its risk management strategy, the Company enters into swap agreements with financial institutions to mitigate the risk of price volatility for diesel fuel. The terms of the swap agreements allow the Company to pay a fixed price and receive a floating price, which provides a fixed price per unit for the volume of purchases being hedged. As of June 30, 2013, the Company had swap agreements outstanding to hedge the variable cash flows related to 64% and 41% of anticipated diesel fuel usage for the remaining six months of 2013 and calendar year 2014, respectively. The average fixed price per swap for diesel fuel hedges is $3.02 per gallon and $2.82 per gallon for the remaining six months of 2013 and calendar year 2014, respectively. All cash flows associated with derivative instruments are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012.

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

13

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

		Asset Derivatives
Derivatives designated as cash flow hedging instruments	Statement of Financial Position Location	6/30/2013		12/31/2012
Commodity swaps	Prepaid expenses and other current assets	$	5,867	$	6,484
Commodity swaps	Other non-current assets	2,570		4,718
Commodity options	Prepaid expenses and other current assets	—		138
		$	8,437	$	11,340
Derivatives not designated as cash flow hedging instruments	Statement of Financial Position Location	6/30/2013		12/31/2012
Forward coal sales	Prepaid expenses and other current assets	$	13,974	$	15,359
Forward coal sales	Other non-current assets	179		—
Forward coal purchases	Prepaid expenses and other current assets	4		—
		$	14,157	$	15,359
Total asset derivatives		$	22,594	$	26,699

		Liability Derivatives
Derivatives designated as cash flow hedging instruments	Statement of Financial Position Location	6/30/2013		12/31/2012
Commodity swaps	Accrued expenses and other current liabilities	$	4,217	$	2,457
Commodity swaps	Other non-current liabilities	1,952		972
		$	6,169	$	3,429
Derivatives not designated as cash flow hedging instruments	Statement of Financial Position Location	6/30/2013		12/31/2012
Forward coal purchases	Accrued expenses and other current liabilities	$	—	$	4
Commodity swaps	Accrued expenses and other current liabilities	395		693
		$	395	$	697
Total liability derivatives		$	6,564	$	4,126

The following tables present the gains and losses from derivative instruments for the six months ended June 30, 2013 and 2012 and their location within the Condensed Consolidated Financial Statements:

Derivatives designated as cash flow hedging instruments	Gain (loss) reclassified from accumulated other comprehensive income (loss) to earnings				Gain (loss) recorded in accumulated other comprehensive income (loss)
	2013		2012		2013			2012
Commodity swaps(1) (2) (3)	$	2,034	$	7,583	$	(942	)	$	230
Commodity options(1) (2)	10		—		(65		)	15
	$	2,044	$	7,583	$	(1,007	)	$	245

⁽¹⁾  Amounts are recorded as a component of cost of coal sales in the Condensed Consolidated Statements of Operations.

⁽²⁾  Net of tax.

⁽³⁾  Ineffectiveness during the period was immaterial.

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Derivatives not designated as cash flow hedging instruments	Gain (loss) recorded in earnings
	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Forward coal sales(1)	$	4,392		$	4,296		$	(1,205	)	$	53,555
Forward coal purchases(1)	4			3,952			8			(9,332		)
Commodity swaps(2)	(270		)	(626		)	(20		)	(251		)
Interest rate swap(3)	—			(9		)	—			(330		)
	$	4,126		$	7,613		$	(1,217	)	$	43,642

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

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

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

Unrealized losses recorded in accumulated other comprehensive income (loss) are generally reclassified to income or loss as the financial swaps settle and the Company purchases the underlying items that are being hedged. During the three months ended June 30, 2013, the Company reclassified $508, net of tax, out of accumulated other comprehensive income (loss) because the underlying forecasted transactions were considered probable not to occur. During the next twelve months, the Company expects to reclassify approximately $1,332, net of tax, to earnings.

(13)    Income Taxes

A reconciliation of the statutory federal income tax benefit at 35% to the actual income tax benefit is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Federal statutory income tax benefit	$	(96,323	)	$	(939,559	)	$	(161,824	)	$	(964,952	)
Increases (reductions) in taxes due to:
Percentage depletion allowance	(9,155		)	(14,184		)	(20,847		)	(32,902		)
State taxes, net of federal tax impact	(3,773		)	(19,033		)	(10,039		)	(21,730		)
State statutory tax rate change, net of federal tax impact	—			(6,397		)	—			(6,397		)
Non-deductible fines and penalties	10,064			1,111			11,219			1,824
Non-deductible goodwill impairment	—			506,634			—			506,634
Change in valuation allowance	5,601			21,300			7,684			22,754
Other, net	4,059			330			7,922			1,186
Income tax benefit	$	(89,527	)	$	(449,798	)	$	(165,885	)	$	(493,583	)

(14)    Employee Benefit Plans

The Company sponsors or participates in several benefit plans for its employees, including postretirement health care and life insurance, defined benefit and defined contribution pension plans, and provides black lung benefits.

Components of Net Periodic Pension Costs

The components of net periodic benefit costs (credits) are as follows:

15

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Interest cost	$	6,756		$	8,333		$	14,453		$	16,196
Expected return on plan assets	(8,923		)	(9,129		)	(18,144		)	(19,163		)
Amortization of net actuarial loss	16			556			507			735
Loss on settlement	58			—			58			—
Net periodic benefit credits	$	(2,093	)	$	(240	)	$	(3,126	)	$	(2,232	)

Components of Net Periodic Costs of Other Postretirement Benefit Plans

The components of net periodic benefit costs (credits) are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Service cost	$	3,680		$	3,484		$	7,283		$	8,084
Interest cost	9,894			10,275			19,616			22,175
Amortization of prior service cost (credit)	(955		)	109			(1,909		)	209
Amortization of net actuarial loss (gain)	1,424			(346		)	2,461			1,904
Net periodic benefit cost	$	14,043		$	13,522		$	27,451		$	32,372

Components of Net Periodic Costs of Black Lung

The components of net periodic benefit costs (credits) are as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013			2012
Service cost	$	648	$	2,447		$	1,419		$	3,954
Interest cost	1,738		1,051			3,134			2,844
Expected return on plan assets	2		(14		)	(16		)	(27		)
Amortization of net actuarial loss (gain)	618		(318		)	618			—
Net periodic benefit cost	$	3,006	$	3,166		$	5,155		$	6,771

(15)    Stock-Based Compensation Awards

On May 22, 2013, the Board of Directors authorized an additional 3,600,000 shares of common stock for issuance under the 2012 LTIP Plan. The 2012 LTIP is currently authorized for the issuance of awards of up to 10,000,000 shares of common stock, and as of June 30, 2013, 4,341,221 shares of common stock were available for grant under the plan.

During the six months ended June 30, 2013, the Company awarded certain of its executives and key employees 1,572,152 time-based restricted share units and 1,468,240 performance-based restricted share units under its existing stock plans. The time-based share units vest, subject to continued employment, ratably over three-years or cliff vest after three years (with accelerated vesting upon a change of control and certain retirement scenarios). The performance-based share units cliff vest after three years, subject to continued employment and the satisfaction of the performance criteria (with accelerated vesting upon a change of control and certain retirement scenarios). The performance-based restricted share units awarded under the existing stock plans during the six months ended June 30, 2013 have the potential to be distributed from 0% to 200% of the awarded amount, depending on the actual results versus the pre-established performance criteria over the three-year period.

16

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

At June 30, 2013, the Company had two types of stock-based awards outstanding: restricted share units (both time-based and performance-based) and stock options. Stock-based compensation expense (benefit) totaled $6,863 and $(9,478) for the three months ended June 30, 2013 and 2012, respectively. Stock-based compensation expense (benefit) totaled $12,598 and $(2,464), for the six months ended June 30, 2013 and 2012, respectively. For the three months ended June 30, 2013 and 2012, approximately 77% and 97%, respectively, of stock-based compensation expense is reported as selling, general and administrative expenses. For the six months ended June 30, 2013 and 2012, approximately 79% and 70%, respectively, of stock-based compensation expense is reported as selling, general and administrative expenses. Approximately 23% and 3%, of stock-based compensation expense was recorded as cost of coal sales for the three months ended June 30, 2013 and 2012, respectively. Approximately 21% and 30%, of stock-based compensation expense was recorded as cost of coal sales for the six months ended June 30, 2013 and 2012, respectively.

The Company is authorized to repurchase common shares from employees (upon the election by the employee) to satisfy the employees’ minimum statutory tax withholdings upon the vesting of restricted stock and restricted share units (both time-based and performance-based).  Shares that are repurchased to satisfy the employees’ minimum statutory tax withholdings are recorded in treasury stock at cost, and these shares are not added back into the pool of shares available for grant of the respective plans the shares were granted from. During the six months ended June 30, 2013 and 2012, the Company repurchased 144,622 and 355,517, respectively, of common shares from employees at an average price paid per share of $8.55 and $19.14, respectively.

(16)    Commitments and Contingencies

(a) General

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

(b) Commitments and Contingencies

Commitments

The Company leases coal mining and other equipment under long-term capital and operating leases with varying terms. In addition, the Company leases mineral interests and surface rights from land owners under various terms and royalty rates.

The Company has obligations for a federal coal lease, which contains an estimated 222,000 tons of proven and probable coal reserves in the Powder River Basin. The annual installments in 2013 through 2015 of $42,130 are due each November until the obligation is satisfied.

Contingencies

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

During the normal course of business, contract-related matters arise between the Company and its customers. When a loss related to such matters is considered probable and can reasonably be estimated, the Company records a liability. During the first quarter of 2013, the Company recorded a gain of $55,454 in other expenses in the condensed consolidated statement of operations related to the resolution of a contract-related matter.

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

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

17

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Management does not expect any material losses to result from these guarantees or other off-balance sheet financial instruments.

Letters of Credit

As of June 30, 2013, the Company had $150,621 of letters of credit outstanding under its senior secured revolving facility.

(d) Legal Proceedings

The Company’s legal proceedings range from cases brought by a single plaintiff to purported class actions. These legal proceedings, as well as governmental examinations, involve various business units and a variety of claims including, but not limited to, contract disputes, personal injury claims, property damage claims (including those resulting from blasting, trucking and flooding), environmental and safety issues, and employment matters. While some matters pending against the Company or its subsidiaries specify the damages claimed by the plaintiffs, many seek an unquantified amount of damages or are at very early stages of the legal process. Even when the amount of damages claimed against the Company or its subsidiaries is stated, (i) the claimed amount may be exaggerated or unsupported; (ii) the claim may be based on a novel legal theory or involve a large number of parties; (iii) there may be uncertainty as to the likelihood of a class being certified or the ultimate size of the class; (iv) there may be uncertainty as to the outcome of pending appeals or motions; and/or (v) there may be significant factual issues to be resolved. As a result, the Company may be unable to estimate a range of possible loss for matters that have not yet progressed sufficiently through discovery and development of important factual information and legal issues. Other matters have progressed sufficiently that the Company is able to estimate a range of possible loss. Accordingly, for those legal proceedings and governmental examinations disclosed below as to which a loss is reasonably possible in future periods and for which the Company is able to estimate a range of possible loss, the current estimated range is up to $500,000 in excess of the accrued liability (if any) related to those matters. This aggregate range represents the Company’s estimate of additional possible loss in excess of the accrued liability (if any) with respect to these matters and net of third party indemnification arrangements (if any, other than insurance) as described below related to those matters, based on currently available information, including any damages claimed by the plaintiffs, and is subject to significant judgment and a variety of assumptions and inherent uncertainties. For example, at the time of making an estimate, the Company may have only preliminary, incomplete, or inaccurate information about the facts underlying a claim; its assumptions about the future rulings of the court or other tribunal on significant issues, or the behavior and incentives of adverse parties, regulators, indemnitors or co-defendants, may prove to be wrong; and the outcomes it is attempting to predict are often not amenable to the use of statistical or other quantitative analytical tools. In addition, from time to time an outcome may occur that the Company had not accounted for in its estimate because it had considered that outcome to be remote. Furthermore, as noted above, the aggregate range does not include any matters for which the Company is not able to estimate a range of possible loss. Accordingly, the estimated aggregate range of possible loss does not represent the Company’s maximum loss exposure. The legal proceedings and governmental examinations underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. The Company intends to defend these legal proceedings vigorously, litigating or settling cases where in the Company’s judgment it would be in the best interest of shareholders to do so.

For purposes of FASB ASC Topic 450 (“ASC 450”), an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” ASC 450 requires accrual for a liability when it is (a) “probable that one or more future events will occur confirming the fact of loss” and (b) “the amount of loss can be reasonably estimated.” If a range of loss is estimated, the best estimate within the range is required to be accrued. If no amount within the range is a better estimate, the minimum amount of the range is required to be accrued.

The Company evaluates, on a quarterly basis, developments in legal proceedings and governmental examinations that could cause an increase or decrease in the amount of the reserves previously recorded. Excluding fees paid to external legal counsel, the Company recognized expense, net of expected insurance recoveries, associated with litigation-related reserves of $25,896 and $29,300 during the three months ended June 30, 2013 and 2012, respectively.

Federal Securities Class Actions

Upper Big Branch (“UBB”) Purported Securities Class Action

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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

On April 29, 2010 and May 28, 2010, two purported class actions that were subsequently consolidated into one case were brought against, among others, Massey Energy Company ("Massey"), now the Company’s subsidiary Alpha Appalachia Holdings, Inc. (“Alpha Appalachia”), in the United States District Court for the Southern District of West Virginia in connection with alleged violations of the federal securities laws.  The lead plaintiffs allege, purportedly on behalf of a class of former Massey stockholders, that (i) Massey and certain former Massey directors and officers violated Section 10(b) of the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”), and Rule 10b-5 thereunder by intentionally misleading the market about the safety of Massey’s operations and that (ii) Massey’s former officers violated Section 20(a) of the Exchange Act by virtue of their control over persons alleged to have committed violations of Section 10(b) of the Exchange Act.  The lead plaintiffs seek a determination that this action is a proper class action; certification as class representatives; an award of compensatory damages in an amount to be proven at trial, including interest thereon; and an award of reasonable costs and expenses, including counsel fees and expert fees.

On February 16, 2011, the lead plaintiffs moved to partially lift the statutory discovery stay imposed under the Private Securities Litigation Reform Act of 1995.  On March 3, 2011, the United States moved to intervene and to stay discovery until the completion of criminal proceedings allegedly arising from the same facts that allegedly give rise to this action. On July 9, 2012, the Court entered an order maintaining the stay of discovery until the earlier of either the completion of the United States’ criminal investigation of the UBB explosion or January 15, 2013. The Court has extended the stay several times; most recently, on July 18, 2013, the Court further extended the existing discovery stay until January 15, 2014.

On April 25, 2011, the defendants moved to dismiss the operative complaint.  On March 27, 2012, the court denied the defendants’ motion to dismiss. On July 16, 2012, the Company filed its answer to the consolidated amended class action complaint.

Emerald Purported Securities Class Action

On July 13, 2012, a purported class action brought on behalf of a putative class of former Massey stockholders was filed in Boone County, West Virginia Circuit Court. The complaint asserts claims under the Securities Act of 1933, as amended, against the Company and certain of its officers and current and former directors, and generally asserts that the defendants made false statements about the Company’s Emerald mine in its public filings associated with the acquisition of Massey by the Company (the "Massey Acquisition"). The plaintiff seeks, among other relief, an award of compensatory damages in an amount to be proven at trial.

On August 16, 2012, the defendants removed the case to the United States District Court for the Southern District of West Virginia. On August 30, 2012, the plaintiff filed a motion to remand the case back to the Circuit Court of Boone County, West Virginia. On September 13, 2012, the defendants filed an opposition to the plaintiff’s motion to remand.

The defendants filed a motion to dismiss the action on October 19, 2012, and the plaintiff filed an opposition to that motion on November 2, 2012. On November 5, 2012, the federal court remanded the case back to the Boone County Circuit Court (without ruling on the pending motion to dismiss). The plaintiff filed an amended complaint in the Boone County Circuit Court on February 6, 2013. The defendants filed motions to dismiss the amended complaint on March 22, 2013 and March 29, 2013, which motions are currently pending. The Boone County Circuit Court has set a preliminary trial date of June 24, 2014.

UBB Explosion and Related Investigations and Litigation

On April 5, 2010, before the Massey Acquisition by the Company, an explosion occurred at the UBB mine, resulting in the deaths of 29 miners.  The Federal Mine Safety and Health Administration (“MSHA”), the Office of Miner’s Health, Safety, and Training of the State of West Virginia (“State”), and the Governor’s Independent Investigation Panel (“GIIP”) initiated investigations into the cause of the UBB explosion and related issues.  Additionally, the U.S. Attorney for the Southern District of West Virginia (the “Office”) commenced a grand jury investigation.  The GIIP published its final report on May 19, 2011; MSHA released its final report on December 6, 2011; and the State released its final report on February 23, 2012.

On December 6, 2011, the Company, the Office and the United States Department of Justice entered into a Non-Prosecution Agreement (the “Agreement”) resolving the criminal investigation against Massey and its affiliates relating to the UBB explosion and other health and safety related issues at Massey, and the Company also reached a comprehensive settlement with MSHA resolving outstanding civil citations, violations, and orders related to MSHA’s investigation arising from the UBB

19

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

explosion and other non-UBB related matters involving legacy Massey entities prior to the Massey Acquisition. The Agreement does not resolve individual responsibilities related to the UBB explosion.

Under the terms of the Agreement and MSHA settlement, the Company has agreed to pay outstanding MSHA fines, and has agreed to invest in additional measures designed to improve miner health and safety, provide restitution to the families of the fallen miners and two individuals injured in the UBB explosion, and create a charitable organization to research mine safety. The Company has further agreed to cooperate fully with all governmental agencies in all continuing investigations and prosecutions against any individuals that arise out of the UBB explosion and related conduct described in the Agreement until such investigations and prosecutions are concluded.

The Company cannot predict the outcome of these investigations, including whether or not any individual will become subject to possible criminal and civil penalties or enforcement actions.  In order to accommodate these investigations, the UBB mine was initially idled. On April 20, 2012, the Company was authorized by regulatory authorities to close the UBB mine permanently, and on June 19, 2012, the sealing of the mine was completed.

On June 28, 2012, sixteen individuals who claim to have been injured in the UBB explosion filed a petition in the United States District Court for the Southern District of West Virginia to amend or set aside the Agreement. On July 27, 2012, Alpha and Alpha Appalachia filed a motion to dismiss. The injury claims of those sixteen individuals were separately settled in August 2012, and on August 29, 2012, the court ordered that the action be dismissed and stricken from the docket.

On October 19, 2012, the administrators for the estates of three miners who died in the UBB explosion filed an action against Alpha and Alpha Appalachia in the United States District Court for the Southern District of West Virginia claiming they are entitled to “criminal restitution” under the Agreement. On November 27, 2012, the defendants filed their motion to dismiss the complaint. The plaintiffs were subsequently granted leave to amend their complaint, which they filed on January 23, 2013, rendering the defendants’ previously filed motion to dismiss moot. On May 10, 2013, the Court dismissed the amended complaint. On July 17, 2013, the plaintiffs filed another complaint seeking "criminal restitution" under the Agreement. The same plaintiffs filed their appeal of the May dismissal with the United States Court of Appeals for the Fourth Circuit on July 29, 2013.

Wrongful Death and Personal Injury Suits

Twenty of the twenty-nine families of the deceased miners filed wrongful death suits against Massey and certain of its subsidiaries in Boone County Circuit Court and Wyoming County Circuit Court. In addition, as of July 19, 2013, two seriously injured employees had filed personal injury claims against Massey and certain of its subsidiaries in Boone County Circuit Court seeking damages for physical injuries and/or alleged psychiatric injuries, and thirty-nine employees had filed lawsuits against Massey and certain of its subsidiaries in Boone County Circuit Court and Wyoming County Circuit Court alleging emotional distress or personal injuries due to their proximity to the explosion.  On April 19, 2012, the Company filed a motion to transfer the Wyoming County lawsuits to Boone County.

On October 19, 2011, the Boone County Circuit Court ordered that the cases pending before it be mediated by a panel of three mediators. These mediations are, per order of the court, strictly confidential. The Company reached agreements to settle with all twenty-nine families of the deceased miners as well as the two employees who were seriously injured. The settlements reached with the families of the deceased miners have received court approval. The settlements relating to the two serious injuries did not require court approval.

On May 4, 2012, the Boone County Circuit Court ordered that the remaining personal injury and emotional distress claims continue to be mediated through July 6, 2012. Until that date, a stay was in place for all remaining cases until further order from the court. The stay was lifted on July 6, 2012 but mediation was ordered to continue. On July 20, 2012, the stay was reinstated for discovery-related activities at the request of the United States Attorney and by agreement of the parties. This stay is expected to remain in effect until the United States’ criminal investigation of the UBB explosion is completed. Mediation efforts in August 2012 successfully resolved all but two of the personal injury and emotional distress claims. On June 26, 2013, the Court granted the Company’s motion to dismiss in part, dismissing plaintiffs' claims alleging the tort of outrage and negligent infliction of emotional distress. Two of plaintiffs' claims remain pending. The Wyoming County lawsuits were settled and dismissed prior to the court ruling on the Company’s motion to transfer.

20

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

On April 5, 2012, one of the families of the deceased miners filed a class action suit in Boone County Circuit Court, purportedly on behalf of the families that settled their claims prior to the mediation, alleging fraudulent inducement into a contract, naming as defendants Massey, the Company and certain of its subsidiaries, the Company’s CEO and the Company’s Board of Directors.

Uniform Fraudulent Transfers Act Action

On June 1, 2011, certain of the plaintiffs who had filed wrongful death cases filed a complaint against Massey, Massey Coal Services, Inc., Performance Coal Company, and certain individuals in the Circuit Court of Boone County, West Virginia, alleging that the Massey Acquisition represented a fraudulent transfer intended to prevent plaintiffs from recovering damages in their wrongful death actions. Plaintiffs request that the court order defendants to post a bond of at least $500,000. Each plaintiff in this action has agreed to settle their wrongful death cases, as discussed above, and as part of those settlements, has also agreed to dismiss this action. On May 14, 2012, the Court entered an order dismissing this case with prejudice.

Derivative and Related Class Action Litigation

UBB-Related Derivatives Actions

A number of purported former Massey stockholders have brought lawsuits derivatively, purportedly on behalf of Massey, in West Virginia and Delaware state courts, in connection with the April 5, 2010 explosion at the UBB mine and in connection with claims allegedly arising out of the Massey Acquisition. Certain of these former stockholders have also initiated contempt proceedings in West Virginia state court in connection with alleged violations of the settlement of a previous derivative lawsuit. In addition, these and other purported former Massey stockholders have asserted class action claims allegedly arising out of the Massey Acquisition in Delaware and West Virginia state courts and Virginia federal court. These cases are summarized below.

Delaware Chancery Court Suit

In a case filed on April 23, 2010 in Delaware Chancery Court, In re Massey Energy Company Derivative and Class Action Litigation (“In re Massey”), a number of purported former Massey stockholders (the “Delaware Plaintiffs”) allege, purportedly on behalf of Massey, that certain former Massey directors and officers breached their fiduciary duties by failing to monitor and oversee Massey’s employees, allegedly resulting in fines against Massey and the explosion at UBB, and by wasting corporate assets by paying allegedly excessive and inflated amounts to former Massey Chairman and Chief Executive Officer Don L. Blankenship as part of his retirement package.  The Delaware Plaintiffs also allege, on behalf of a purported class of former Massey stockholders, that certain former Massey directors breached their fiduciary duties by agreeing to the Massey Acquisition.  The Delaware Plaintiffs allege that defendants breached their fiduciary duties by failing to secure the best price possible, by failing to secure any downside protection for the acquisition consideration, and by purportedly eliminating the possibility of a superior proposal by agreeing to a “no shop” provision and a termination fee.  In addition, the Delaware Plaintiffs allege that defendants agreed to the Massey Acquisition to eliminate the liability that defendants faced on the Delaware Plaintiffs’ derivative claims.  Finally, the Delaware Plaintiffs allege that defendants failed to fully disclose all material information necessary for Massey stockholders to cast an informed vote on the Massey Acquisition.

The Delaware Plaintiffs also name the Company and Mountain Merger Sub, Inc. (“Merger Sub”), the Company’s wholly-owned subsidiary created for purposes of effecting the Massey Acquisition, which, at the effective time of the Massey Acquisition, was merged with and into Massey, as defendants. The Delaware Plaintiffs allege that the Company and Merger Sub aided and abetted the former Massey directors’ alleged breaches of fiduciary duty and agreed to orchestrate the Massey Acquisition for the purpose of eliminating the former Massey directors’ potential liability on the derivative claims. Two additional putative class actions were brought against Massey, certain former Massey directors and officers, the Company and Merger Sub in the Delaware Court of Chancery following the announcement of the Massey Acquisition, which were consolidated for all purposes with In re Massey on February 9, 2011 and February 24, 2011, respectively.

The Delaware Plaintiffs seek an award against each defendant for restitution and/or compensatory damages, plus pre-judgment interest; an order establishing a litigation trust to preserve the derivative claims asserted in the complaint; and an award of costs, disbursements and reasonable allowances for fees incurred in this action. The Delaware Plaintiffs also sought to enjoin consummation of the Massey Acquisition.  The court denied their motion for a preliminary injunction on May 31, 2011.

21

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

On June 10, 2011, Massey moved to dismiss the Delaware Plaintiffs’ derivative claims on the ground that the Delaware Plaintiffs, as former Massey stockholders, lacked the legal right to pursue those claims, and the Company and Alpha Appalachia Merger Sub moved to dismiss the purported class action claim against them for failure to state a claim upon which relief may be granted.  On June 10 and 13, 2011, certain former Massey director and officer defendants moved to dismiss the derivative claims and filed answers to the remaining direct claims.

On September 14, 2011, the parties submitted a Stipulation Staying Proceedings, which stayed the matter until March 1, 2012, without prejudice to the parties’ right to seek an extension or a termination of the stay by application to the court.  The court approved the stipulation and entered the stay that same day.  The Court has extended the stay several times; most recently, on July 29, 2013, the Court further extended the existing discovery stay until the earlier of the completion of the United States’ criminal investigation of the UBB explosion or January 15, 2014.

West Virginia State Court Derivative Suit

In a case filed on April 15, 2010 in West Virginia state court, three purported former Massey stockholders (the “West Virginia Plaintiffs”) allege, purportedly on behalf of Massey, that certain former Massey directors and officers breached their fiduciary duties by failing to monitor and oversee Massey’s employees, allegedly resulting in fines against Massey and the explosion at UBB. The West Virginia Plaintiffs seek an award against each defendant and in favor of Massey for the amount of damages sustained by Massey as a result of defendants’ alleged breaches of fiduciary duty and an award to the West Virginia Plaintiffs of the costs and disbursements of the action, including reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses.

On May 2, 2011, the West Virginia Plaintiffs moved for leave to amend their complaint to add Alpha and Merger Sub as additional defendants and to add claims allegedly arising out of the then-proposed Massey Acquisition. In their proposed amended complaint, the West Virginia Plaintiffs allege that certain former Massey directors breached their fiduciary duties by failing to obtain the highest price reasonably available for Massey and by failing to disclose material information to Massey’s then-stockholders in connection with the stockholder vote on the Massey Acquisition. The West Virginia Plaintiffs also allege that Massey, Merger Sub and the Company aided and abetted the former Massey directors’ breaches of fiduciary duty. The West Virginia Plaintiffs further allege that certain former Massey directors wasted corporate assets by failing to maintain sufficient internal controls over Massey’s safety and environmental reporting; failing to properly consider the interests of Massey and its stockholders, including the value of the derivative claims asserted by the West Virginia Plaintiffs in the Massey Acquisition; failing to conduct proper supervision; paying undeserved incentive compensation to certain Massey executive directors, particularly former Massey Chairman and CEO Don L. Blankenship during Massey’s alleged years of noncompliance with safety regulations and more recently as part of Blankenship’s retirement package; incurring millions of dollars in fines due to safety and environmental violations; and incurring potentially hundreds of millions of dollars of legal liability and/or legal costs to defend defendants’ allegedly unlawful actions. Finally, the West Virginia Plaintiffs’ proposed amended complaint alleges that certain former Massey directors were unjustly enriched by their compensation as directors.

On May 25, 2011, the West Virginia Plaintiffs filed a petition with the West Virginia Supreme Court for a preliminary injunction against the consummation of the Massey Acquisition, which was denied on May 31, 2011.

On June 24, 2011, the defendants moved to dismiss the West Virginia Plaintiffs’ original complaint on the grounds that plaintiffs, as former Massey stockholders, lacked the legal right to pursue those claims, or, alternatively, to stay this case in favor of In re Massey, described above.  Defendants also filed an opposition to the West Virginia Plaintiffs’ motion to amend.  On August 19, 2011, the West Virginia Plaintiffs filed a combined memorandum in opposition to defendants’ motion to dismiss or stay and in further support of their motion to amend.  On August 22, 2011, defendants filed a memorandum in further support of their motion to dismiss or stay and in further opposition to plaintiffs’ motion to amend.  On August 23, 2011, the court held a hearing on defendants’ motion to dismiss and plaintiffs’ motion to amend.  Without deciding the motions, the court requested the parties to submit competing proposed orders containing findings of fact and conclusions of law and proposed scheduling orders for the court’s consideration, which the parties did on September 9, 2011.  The motions remain pending.

West Virginia State Court - Contempt Proceedings

On April 16, 2010, Manville Personal Injury Settlement Trust (“Manville”), one of the West Virginia Plaintiffs, filed a petition in the Circuit Court of Kanawha County, West Virginia, requesting that the court initiate civil contempt proceedings against certain of the then-current members of Massey’s board of directors with respect to alleged violations of a settlement

22

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

agreement.  In July 2007, Manville filed a complaint, purportedly on behalf of Massey, alleging that certain of Massey’s then directors and officers breached their fiduciary duties.  On May 20, 2008, the parties executed a stipulation of settlement, which the court subsequently approved.  The settlement provided for a release of all claims that were or could have been asserted on behalf of Massey in exchange for, among other things, certain corporate governance reforms and an agreement that the Massey board of directors would make a Corporate Social Responsibility Report to its stockholders on an annual basis that would include, among other things, a report on Massey’s environmental and worker safety compliance.  Manville alleges that Massey’s 2009 Corporate Social Responsibility Report did not contain a sufficient report on worker safety compliance.  On April 22, 2010, the court issued an order for a rule to show cause, initiating the contempt proceedings.

On May 31, 2011, Manville, now joined by the other two West Virginia Plaintiffs, filed a new petition for civil contempt, requesting that the court initiate civil contempt proceedings against certain of the then-current members of Massey’s board of directors and certain then-current Massey officers in connection with certain additional alleged violations of the settlement.

On June 22, 2011, the individual defendants that had been served with the new petition filed a motion to dismiss that petition, as well as the original April 16 petition, and also moved to vacate the 2008 order, in which the court approved the settlement, as against them.  On June 28, 2011, nominal defendant Alpha Appalachia joined in the individual defendants’ motions to dismiss and vacate.  On July 21, 2011, the court held a hearing on the defendants’ motions to dismiss and vacate.

On September 29, 2011, the court granted the individual defendants’ motions to dismiss and vacate and ordered that the contempt proceedings be terminated in their entirety.  The plaintiffs appealed the dismissal of the contempt proceedings to the Supreme Court of Appeals of West Virginia. That appeal remains pending. Oral argument has been scheduled for September 4, 2013.

Mine Water Discharge Suits

On March 20, 2012, three environmental groups filed a citizen’s suit against two of the Company’s subsidiaries, Alex Energy, Inc. and Elk Run Coal Company, Inc., in federal court in the Southern District of West Virginia alleging violations of the terms of the subsidiaries’ water discharge permits. The plaintiffs seek a civil penalty as well as injunctive relief.

On April 16, 2012, three environmental groups filed a citizen’s suit in federal court in the Southern District of West Virginia against one of the Company’s subsidiaries, Boone East Development Company (“Boone East”), which owns land previously mined and reclaimed by other companies, alleging that Boone East is discharging pollutants without a permit. Plaintiffs have since voluntarily terminated this action.

On May 9, 2012, three environmental groups filed a citizen’s suit in federal court in the Southern District of West Virginia against two of the Company’s subsidiaries alleging violations of the terms of the subsidiaries’ water discharge permits. The plaintiffs seek a civil penalty as well as injunctive relief.

On May 15, 2012, the West Virginia Department of Environmental Protection filed a civil enforcement action against the Company’s subsidiary Riverside Energy Company, LLC, in McDowell County Circuit Court in West Virginia seeking civil penalties and injunctive relief based on alleged discharge of selenium in excess of permitted levels.

On July 16, 2012, three environmental groups filed a filed a citizen’s suit in federal court in the Southern District of West Virginia against seven of the Company’s subsidiaries alleging violations of the terms of the subsidiaries’ water discharge permits. The plaintiffs seek a civil penalty as well as injunctive relief.

On December 31, 2012 and January 2, 2013, two separate environmental groups filed citizen’s suits in federal court in the Western District of Pennsylvania against Emerald Coal Resources, L.P., and other of the Company’s subsidiaries, alleging violations of the terms of the subsidiaries’ water discharge permits. The first of these cases has since been voluntarily dismissed by the plaintiffs. The plaintiffs in the remaining case seek a civil penalty as well as injunctive relief.

On March 27, 2013, the Company’s subsidiary Alex Energy, Inc. (“Alex”) was served with a complaint from the Sierra Club, and others, alleging improper discharges by Alex into Spruce Run and Road Fork of Robinson Creek in Nicholas County, West Virginia. Alex has appropriate permits for discharges into those tributaries, and the discharges discussed in the plaintiffs’ complaint are undertaken by Alex in compliance with its permits.

23

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

On April 10, 2013, the Company’s subsidiary Bandmill Coal Co. (“Bandmill”) was served with a complaint from the Sierra Club, and others, alleging discharges of selenium from the site of Bandmill’s former Tower Mountain surface mine into waters of the United States without a proper permit. The Tower Mountain site is closed, the property has been reclaimed and West Virginia regulators previously determined that Bandmill no longer needs a National Pollutant Discharge Elimination System ("NPDES") permit for the Tower Mountain site at issue. Bandmill was also released from its obligations to monitor and treat water discharging from the site. Bandmill believes it has operated in compliance with all laws and regulations regarding discharges from the Tower Mountain site.

On July 23, 2013, the Company's subsidiary, Alex Energy, Inc., was served with a complaint alleging that discharges from the PGM No. 1 surface mine into Hardway Branch of Twentymile Creek violated state water quality standards for selenium.

On July 29, 2013, the Company's subsidiary, Pigeon Creek Processing Co. ("Pigeon Creek"), was notified by environmental groups that they intend to sue Pigeon Creek for discharging selenium from the Stonega impoundment area without the proper authorization in the NPDES permit.

The Company is currently in discussions with the EPA about addressing certain of these and other matters.

Nicewonder Litigation

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

On September 30, 2009, the District Court issued an order that dismissed or denied for lack of standing all of the plaintiff’s claims under federal law and remanded the remaining state claims to the Circuit Court of Kanawha County, West Virginia for resolution.  On May 7, 2010, the Circuit Court of Kanawha County entered summary judgment in favor of NCI.  On June 22, 2011, the West Virginia Supreme Court of Appeals reversed the Circuit Court order granting summary judgment in favor of NCI, and remanded the case back to the Circuit Court for further proceedings. Following remand, ACTF filed a motion for summary judgment, which the Circuit Court denied on November 9, 2011.  ACTF challenged the order denying its summary judgment motion to the West Virginia Supreme Court of Appeals.

On June 21, 2012, the West Virginia Supreme Court of Appeals issued an opinion finding that ACTF has standing to pursue its claims and remanded the case back to the Circuit Court of Kanawha County, West Virginia for further proceedings. NCI’s portion of the highway project under the contract is complete.

The case is now pending in the Circuit Court of Kanawha County, West Virginia. A settlement between NCI and ACTF was agreed upon in early January 2013, prior to the scheduled trial date, January 14, 2013. The Company does not expect to incur any out-of-pocket expenditures in connection with the settlement. The trial proceeded among the remaining parties.

On February 7, 2013, the Company received notice of a purported class action lawsuit against NCI filed in the Circuit Court of Mingo County, West Virginia by a former NCI employee (the “NCI Employee Litigation”). The plaintiff in the NCI Employee Litigation is represented by the same attorney who represents the plaintiff in the ACTF litigation, and the complaint’s allegations raise issues similar to those in the ACTF litigation.

On February 26, 2013, the Circuit Court of Kanawha County ruled that the contract in dispute in the ACTF litigation, as well as the awarding and implementation, of the contract were in violation of West Virginia law. The Company is reviewing the Court’s ruling and evaluating its implications in relation to the NCI Employee Litigation.  The Company believes that NCI has meritorious defenses to the claims asserted in the NCI Employee Litigation.

NCI filed its answer to the complaint in the NCI Employee Litigation on March 4, 2013.  On April 23, 2013, the Circuit Court of Kanawha County, West Virginia, granted NCI’s motion to transfer and entered an agreed order transferring the NCI Employee Litigation from the Circuit Court of Mingo County to the Circuit Court of Kanawha County.

24

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Fluor Litigation

Alpha Appalachia and certain of its subsidiaries are also parties to a number of lawsuits and other legal proceedings related to certain non-coal businesses (the “Prior Business”) previously conducted by its former affiliate Fluor Corporation. These lawsuits include the Alexander-Pederson-Helig cases in which two of Alpha Appalachia’s subsidiaries, Appalachia Holding Company (“Appalachia Holding”) and DRIH Corporation (“DRIH”), were named defendants along with Fluor. In July 2011, those cases resulted in a jury award in the City of St. Louis Circuit Court in favor of the plaintiffs for $38,500 in compensatory and economic damages and $320,000 in punitive damages. The total aggregate judgment against Alpha Appalachia’s subsidiaries is $118,500.

Under the terms of the Distribution Agreement entered into by Alpha Appalachia and Fluor as of November 30, 2000 in connection with the spin-off of Fluor by Massey, Fluor agreed to indemnify Massey with respect to all such legal proceedings and assumed defense of the proceedings. Consistent with that agreement, in September 2011, Fluor submitted to the Court a number of surety bonds covering the full amount of the judgments against Fluor and Alpha Appalachia’s subsidiaries in the Alexander-Pederson-Helig cases. On January 24, 2012, Fluor moved for a reduction in the surety bond amount pending appeal. The Missouri Court of Appeals granted Fluor’s motion on March 1, 2012 and reduced the amount of the surety bonds required to be submitted by the defendants collectively to $150,000, which Fluor has submitted on behalf of itself and Alpha Appalachia’s subsidiaries. The Company has recorded an indemnity receivable of $118,500 and has accrued a liability of $118,500, included in prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively, in the condensed consolidated balance sheet at June 30, 2013. The appeal of the judgments in the Alexander-Pederson-Helig cases remains pending.

In connection with Fluor’s sale of the Prior Business to a group of purchasers (the “Rennert Entities”) in 1994, the Rennert Entities had agreed to indemnify Fluor and its affiliates for losses and liabilities arising from the Prior Business. In late 2010, the Rennert Entities settled with the plaintiffs in the Alexander-Pederson-Helig cases without indemnifying or obtaining a release for the benefit of Fluor and Alpha Appalachia’s subsidiaries.

In January 2012, the Rennert Entities filed suit against Fluor and two of Alpha Appalachia’s subsidiaries in the United States District Court for the Eastern District of Missouri seeking return of funds previously paid by the Rennert Entities to settle personal injury and property damage claims against Fluor and Alpha Appalachia’s subsidiaries allegedly arising out of the Prior Business and a declaration of non-liability for indemnification with respect to the Alexander-Pederson-Helig cases and any future claims or judgments against Fluor and Alpha Appalachia’s subsidiaries arising out of the Prior Business. Also in January 2012, Fluor filed suit against the Rennert Entities in Missouri state court alleging various breach of contract and tort claims and seeking a declaratory judgment regarding the Rennert Entities’ indemnification obligations to Fluor and Alpha Appalachia’s subsidiaries against claims arising out of the Prior Business. On February 21, 2012, Appalachia Holding and DRIH joined Fluor as plaintiffs in this suit. At the same time, Fluor, Appalachia Holding and DRIH moved to dismiss, or in the alternative, to stay the suit pending in federal court in Missouri in favor of the Missouri state court action. On June 21, 2012, Missouri federal court stayed the case before it in favor of the suit pending in the Missouri state court.

On April 4, 2012, the Rennert entities moved to dismiss the Missouri state court action. On July 13, 2012, the Missouri state court scheduled an expedited hearing on the Rennert entities’ pending motions to dismiss for August 15, 2012. On October 5, 2012, the court denied the Rennert entities’ motions to dismiss each of Fluor’s and Alpha Appalachia’s subsidiaries’ claims except for one claim for contribution, which the court dismissed. All defendants answered on October 25, 2012. Discovery has commenced and is ongoing.

Harman Litigation

In December 1997, Wellmore Coal Corporation (“Wellmore”), then a subsidiary of A. T. Massey Coal Company (“A. T. Massey”), which is now a subsidiary of the Company, declared force majeure under its coal supply agreement with Harman Mining Corporation (“Harman”) and reduced the amount of coal to be purchased from Harman.  In October 1998, Harman and several entities affiliated with it, as well as their ultimate sole shareholder (together “Harman plaintiffs”), sued A.T. Massey and five of its subsidiaries (the “Massey Defendants”) in the Circuit Court of Boone County, West Virginia, alleging that the Massey Defendants tortiously interfered with Wellmore’s agreement with Harman, causing Harman to go out of business.  In August 2002, the jury awarded the plaintiffs $50,000 in compensatory and punitive damages.

25

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

In October 2006, the Massey Defendants appealed the case to the Supreme Court of Appeals of West Virginia (“WV Supreme Court”).  In November 2007, the WV Supreme Court issued a 3-2 majority opinion reversing the judgment against the Massey Defendants and remanding the case to the Circuit Court of Boone County with directions to enter an order dismissing the case, with prejudice, in its entirety.  On motion by the Harman plaintiffs, the WV Supreme Court agreed to rehear the case but, in April 2008, it again reversed the judgment against the Massey Defendants and remanded the case with direction to enter an order dismissing the case, with prejudice, in its entirety.

In July 2008, the Harman plaintiffs petitioned the United States Supreme Court (the “U.S. Supreme Court”) to review the WV Supreme Court’s dismissal of their claims. In December 2008, the U.S. Supreme Court agreed to review the case based on the question of whether a justice of the WV Supreme Court should have recused himself from the appeal. The U.S. Supreme Court found that the justice should have recused himself and ruled in June 2009 that the matter should be reheard by the WV Supreme Court.  

The WV Supreme Court heard oral arguments on the matter in September 2009, and in November 2009 reversed the lower court’s decision, ruling that all claims brought in connection with the parties dealings must be brought in Virginia.  The Harman plaintiffs subsequently requested that the WV Supreme Court reconsider its decision; the WV Supreme Court denied that request.

In November 2010, Harman plaintiffs re-filed their claims in the Circuit Court of Buchanan County, Virginia, this time solely against A.T. Massey, seeking compensatory damages of approximately $44,000, plus pre- and post-judgment interest and punitive damages. A. T. Massey filed a plea of res judicata, and in December 2011 the Buchanan County court granted the plea and dismissed the Harman plaintiffs’ claims. The Harman plaintiffs appealed that decision to the Virginia Supreme Court, and on April 18, 2013, the Virginia Supreme Court reversed the decision of the Buchanan County Circuit Court, finding that res judicata did not bar the Harman plaintiffs’ claims. The matter will be remanded to the Buchanan County Circuit Court for further proceedings, where it will take up other legal arguments advanced by A. T. Massey regarding the sufficiency of the Harman plaintiffs’ claims.

Other Legal Proceedings

In addition to the matters disclosed above, the Company and its subsidiaries are involved in a number of legal proceedings and governmental examinations incident to its normal business activities.  While the Company cannot predict the outcome of these proceedings, the Company does not believe that any liability arising from these matters individually or in the aggregate should have a material impact upon its consolidated cash flows, results of operations or financial condition.

(17)    Segment Information

The Company extracts, processes and markets steam and metallurgical coal from surface and deep mines for sale to electric utilities, steel and coke producers, and industrial customers. The Company operates only in the United States with mines in Northern and Central Appalachia and the Powder River Basin. The Company has two reportable segments: Western Coal Operations, which consists of two Powder River Basin surface mines as of June 30, 2013, and Eastern Coal Operations, which consists of 62 underground mines and 24 surface mines in Northern and Central Appalachia as of June 30, 2013, as well as coal brokerage activities.

In addition to the two reportable segments, the All Other category includes an idled underground mine in Illinois; expenses associated with certain closed mines; Dry Systems Technologies; revenues and royalties from the sale of coalbed methane and natural gas extraction; equipment sales and repair operations; terminal services; the leasing of mineral rights; general corporate overhead and corporate assets and liabilities. The Company evaluates the performance of its segments based on EBITDA, which the Company defines as net income (loss) plus interest expense, income tax expense, amortization of acquired intangibles, net, and depreciation, depletion and amortization, less interest income and income tax benefit.

Segment operating results and capital expenditures for the three months ended June 30, 2013 were as follows:

26

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

	Eastern Coal Operations		Western Coal Operations			All Other			Consolidated
Total revenues	$	1,212,386	$	109,942		$	12,795		$	1,335,123
Depreciation, depletion, and amortization	$	194,049	$	13,049		$	7,618		$	214,716
Amortization of acquired intangibles, net	$	4,235	$	(648	)	$	4		$	3,591
EBITDA	$	42,099	$	17,560		$	(56,706	)	$	2,953
Capital expenditures	$	60,375	$	1,241		$	1,204		$	62,820

Segment operating results and capital expenditures for the three months ended June 30, 2012 were as follows:

	Eastern Coal Operations			Western Coal Operations			All Other			Consolidated
Total revenues	$	1,696,548		$	132,601		$	18,960		$	1,848,109
Depreciation, depletion, and amortization	$	250,862		$	15,414		$	6,574		$	272,850
Amortization of acquired intangibles, net	$	(21,637	)	$	3,411		$	940		$	(17,286	)
EBITDA	$	(2,318,843	)	$	(36,637	)	$	(28,200	)	$	(2,383,680	)
Capital expenditures	$	112,791		$	4,677		$	2,002		$	119,470
Acquisition of mineral rights under federal lease	$	—		$	36,108		$	—		$	36,108

Segment operating results and capital expenditures for the six months ended June 30, 2013 were as follows:

	Eastern Coal Operations			Western Coal Operations			All Other			Consolidated
Total revenues	$	2,401,511		$	241,227		$	25,976		$	2,668,714
Depreciation, depletion, and amortization	$	410,719		$	27,177		$	15,833		$	453,729
Amortization of acquired intangibles, net	$	(873	)	$	(975	)	$	8		$	(1,840	)
EBITDA	$	170,784		$	43,798		$	(106,818	)	$	107,764
Capital expenditures	$	102,208		$	3,103		$	1,695		$	107,006

Segment operating results and capital expenditures for the six months ended June 30, 2012 were as follows:

	Eastern Coal Operations			Western Coal Operations			All Other			Consolidated
Total revenues	$	3,453,056		$	287,338		$	42,328		$	3,782,722
Depreciation, depletion, and amortization	$	514,933		$	30,415		$	13,274		$	558,622
Amortization of acquired intangibles, net	$	(62,127	)	$	6,992		$	2,337		$	(52,798	)
EBITDA	$	(2,102,105	)	$	(16,690	)	$	(42,839	)	$	(2,161,634	)
Capital expenditures	$	223,315		$	12,777		$	9,152		$	245,244
Acquisition of mineral rights under federal lease	$	—		$	36,108		$	—		$	36,108

The following table presents a reconciliation of EBITDA to net loss:

27

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
EBITDA	$	2,953		$	(2,383,680	)	$	107,764		$	(2,161,634	)
Interest expense	(60,953		)	(46,534		)	(120,354		)	(91,968		)
Interest income	1,099			1,324			2,125			2,421
Income tax benefit	89,527			449,798			165,885			493,583
Depreciation, depletion and amortization	(214,716		)	(272,850		)	(453,729		)	(558,622		)
Amortization of acquired intangibles, net	(3,591		)	17,286			1,840			52,798
Net loss	$	(185,681	)	$	(2,234,656	)	$	(296,469	)	$	(2,263,422	)

The following table presents total assets and goodwill as of June 30, 2013 and December 31, 2012:

	Total Assets				Goodwill
	6/30/2013		12/31/2012		6/30/2013		12/31/2012
Eastern Coal Operations	$	10,344,838	$	10,691,029	$	561,753	$	561,753
Western Coal Operations	621,324		647,292		—		—
All Other	1,632,032		1,751,485		—		5,912
Total	$	12,598,194	$	13,089,806	$	561,753	$	567,665

The Company markets produced, processed, and purchased coal to customers in the United States and in international markets. Export revenues totaled $614,096 and $1,198,693, or approximately 46% and 45%, respectively, of total revenues for the three and six months ended June 30, 2013, respectively. Export revenues totaled $888,685 and $1,656,392, or approximately 48%, and 44%, respectively, of total revenues for the three and six months ended June 30, 2012, respectively.

(18)    Supplemental Guarantor and Non-Guarantor Financial Information

The Company has issued Senior Notes and 3.75% Convertible Notes and may issue new registered debt securities (the “New Notes”) in the future that are and will be, respectively, fully and unconditionally guaranteed, jointly and severally, on a senior or subordinated unsecured basis by certain of the Company’s 100% owned subsidiaries (the “New Notes Guarantor Subsidiaries”).

Presented below are condensed consolidating financial statements as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012, respectively, based on the guarantor structure that was put in place in connection with the issuance of the Senior Notes and the 3.75% Convertible Notes, and would be put in place in the event the Company issues New Notes in the future. The tables below refer to the Company as issuer of the Senior Notes, the 3.75% Convertible Notes, and of any New Notes that may be issued in the future. “Non-Guarantor Subsidiaries” refers, for the tables below, to ANR Receivables Funding, LLC, Alpha Coal India Private Limited, Gray Hawk Insurance Company and Rockridge Coal Company, which were not guarantors of the Senior Notes or the 3.75% Convertible Notes and would not be guarantors of the New Notes. Separate consolidated financial statements and other disclosures concerning the New Notes Guarantor Subsidiaries are not presented because management believes that such information would not be material to holders of any New Notes or related guarantees that may be issued by the Company.

28

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Balance Sheet
June 30, 2013
	Parent (Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Total Consolidated
Assets
Current assets:
Cash and cash equivalents	$	467	$	510,775	$	721	$	—		$	511,963
Trade accounts receivable, net	—		386,495		—		—			386,495
Inventories, net	—		383,015		—		—			383,015
Prepaid expenses and other current assets	—		691,834		3,409		—			695,243
Total current assets	467		1,972,119		4,130		—			1,976,716
Property, equipment and mine development costs, net	—		1,984,850		—		—			1,984,850
Owned and leased mineral rights and land, net	—		7,249,638		—		—			7,249,638
Goodwill, net	—		561,753		—		—			561,753
Other acquired intangibles, net	—		195,053		—		—			195,053
Other non-current assets	9,018,325		9,448,512		9,861		(17,846,514		)	630,184
Total assets	$	9,018,792	$	21,411,925	$	13,991	$	(17,846,514	)	$	12,598,194
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	6,250	$	22,589	$	—	$	—		$	28,839
Trade accounts payable	6,020		253,481		23		—			259,524
Accrued expenses and other current liabilities	3,130		910,610		—		—			913,740
Total current liabilities	15,400		1,186,680		23		—			1,202,103
Long-term debt	2,990,889		363,910		—		—			3,354,799
Pension and postretirement medical benefit obligations	—		1,165,799		—		—			1,165,799
Asset retirement obligations	—		777,541		—		—			777,541
Deferred income taxes	—		827,205		—		—			827,205
Other non-current liabilities	1,287,392		1,832,994		36		(2,574,786		)	545,636
Total liabilities	4,293,681		6,154,129		59		(2,574,786		)	7,873,083
Stockholders’ Equity
Total stockholders’ equity	4,725,111		15,257,796		13,932		(15,271,728		)	4,725,111
Total liabilities and stockholders’ equity	$	9,018,792	$	21,411,925	$	13,991	$	(17,846,514	)	$	12,598,194

29

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Balance Sheet
December 31, 2012
	Parent (Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiary		Eliminations			Total Consolidated
Assets
Current assets:
Cash and cash equivalents	$	277	$	729,662	$	784	$	—		$	730,723
Trade accounts receivable, net	—		19,222		398,944		—			418,166
Inventories, net	—		398,060		—		—			398,060
Prepaid expenses and other current assets	—		783,578		2,695		—			786,273
Total current assets	277		1,930,522		402,423		—			2,333,222
Property, equipment and mine development costs, net	—		2,219,016		—		—			2,219,016
Owned and leased mineral rights, net	—		7,428,192		—		—			7,428,192
Goodwill, net	—		567,665		—		—			567,665
Other acquired intangibles, net	—		228,552		—		—			228,552
Other non-current assets	9,202,925		9,342,804		5,083		(18,237,653		)	313,159
Total assets	$	9,203,202	$	21,716,751	$	407,506	$	(18,237,653	)	$	13,089,806
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	75,000	$	20,015	$	—	$	—		$	95,015
Trade accounts payable	8,291		246,838		62		—			255,191
Accrued expenses and other current liabilities	3,130		869,248		24		—			872,402
Total current liabilities	86,421		1,136,101		86		—			1,222,608
Long-term debt	2,708,948		582,089		—		—			3,291,037
Pension and postretirement medical benefit obligations	—		1,195,187		—		—			1,195,187
Asset retirement obligations	—		763,482		—		—			763,482
Deferred income taxes	—		971,001		—		—			971,001
Other non-current liabilities	1,440,018		1,726,255		392,441		(2,880,038		)	678,676
Total liabilities	4,235,387		6,374,115		392,527		(2,880,038		)	8,121,991
Stockholders’ Equity
Total stockholders’ equity	4,967,815		15,342,636		14,979		(15,357,615		)	4,967,815
Total liabilities and stockholders’ equity	$	9,203,202	$	21,716,751	$	407,506	$	(18,237,653	)	$	13,089,806

30

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2013
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations		Total Consolidated
Revenues:
Coal revenues	$	—		$	1,123,176		$	—		$	—	$	1,123,176
Freight and handling revenues	—			155,218			—			—		155,218
Other revenues	—			56,055			674			—		56,729
Total revenues	—			1,334,449			674			—		1,335,123
Cost and expenses:
Cost of coal sales (exclusive of items shown separately below)	—			1,081,494			—			—		1,081,494
Freight and handling costs	—			155,218			—			—		155,218
Other expenses	(6		)	27,788			—			—		27,782
Depreciation, depletion, and amortization	—			214,716			—			—		214,716
Amortization of acquired intangibles, net	—			3,591			—			—		3,591
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)	—			36,979			1,160			—		38,139
Asset impairment and restructuring	—			11,265			—			—		11,265
Total costs and expenses	(6		)	1,531,051			1,160			—		1,532,205
Income (loss) from operations	6			(196,602		)	(486		)	—		(197,082		)
Other income (expense):
Interest expense	(56,998		)	(3,538		)	(417		)	—		(60,953		)
Interest income	—			1,083			16			—		1,099
Loss on early extinguishment of debt	(26,970		)	(4,869		)	(1,358		)	—		(33,197		)
Miscellaneous expense, net	—			14,957			(32		)	—		14,925
Total other expense, net	(83,968		)	7,633			(1,791		)	—		(78,126		)
Loss before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries	(83,962		)	(188,969		)	(2,277		)	—		(275,208		)
Income tax benefit	32,745			55,894			888			—		89,527
Equity in earnings of investments in Issuer and Guarantor Subsidiaries	(134,464		)	—			—			134,464		—
Net loss	$	(185,681	)	$	(133,075	)	$	(1,389	)	$	134,464	$	(185,681	)

31

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2012
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations		Total Consolidated
Revenues:
Coal revenues	$	—		$	1,565,281		$	—		$	—	$	1,565,281
Freight and handling revenues	—			233,357			—			—		233,357
Other revenues	—			45,949			3,522			—		49,471
Total revenues	—			1,844,587			3,522			—		1,848,109
Cost and expenses:
Cost of coal sales (exclusive of items shown separately below)	—			1,406,394			—			—		1,406,394
Freight and handling costs	—			233,357			—			—		233,357
Other expenses	—			10,444			—			—		10,444
Depreciation, depletion, and amortization	—			272,850			—			—		272,850
Amortization of acquired intangibles, net	—			(17,286		)	—			—		(17,286		)
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)	—			45,228			783			—		46,011
Asset impairment and restructuring	—			1,010,878			—			—		1,010,878
Goodwill impairment	—			1,525,332			—			—		1,525,332
Total costs and expenses	—			4,487,197			783			—		4,487,980
Income (loss) from operations	—			(2,642,610		)	2,739			—		(2,639,871		)
Other income (expense):
Interest expense	(39,290		)	(6,535		)	(709		)	—		(46,534		)
Interest income	—			1,311			13			—		1,324
Miscellaneous expense, net	—			628			(1		)	—		627
Total other expense, net	(39,290		)	(4,596		)	(697		)	—		(44,583		)
Income (loss) before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries	(39,290		)	(2,647,206		)	2,042			—		(2,684,454		)
Income tax benefit (expense)	15,323			435,271			(796		)	—		449,798
Equity in earnings of investments in Issuer and Guarantor Subsidiaries	(2,210,689		)	—			—			2,210,689		—
Net income (loss)	$	(2,234,656	)	$	(2,211,935	)	$	1,246		$	2,210,689	$	(2,234,656	)

32

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2013
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations		Total Consolidated
Revenues:
Coal revenues	$	—		$	2,263,565		$	—		$	—	$	2,263,565
Freight and handling revenues	—			312,385			—			—		312,385
Other revenues	—			89,030			3,734			—		92,764
Total revenues	—			2,664,980			3,734			—		2,668,714
Cost and expenses:
Cost of coal sales (exclusive of items shown separately below)	—			2,093,335			—			—		2,093,335
Freight and handling costs	—			312,385			—			—		312,385
Other expenses	—			34,781			—			—		34,781
Depreciation, depletion, and amortization	—			453,729			—			—		453,729
Amortization of acquired intangibles, net	—			(1,840		)	—			—		(1,840		)
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)	—			78,869			2,896			—		81,765
Asset impairment and restructuring	—			22,341			—			—		22,341
Total costs and expenses	—			2,993,600			2,896			—		2,996,496
Income (loss) from operations	—			(328,620		)	838			—		(327,782		)
Other income (expense):
Interest expense	(110,317		)	(8,856		)	(1,181		)	—		(120,354		)
Interest income	—			2,102			23			—		2,125
Loss on early extinguishment of debt	(26,970		)	(4,869		)	(1,358		)	—		(33,197		)
Miscellaneous expense, net	—			16,893			(39		)	—		16,854
Total other expense, net	(137,287		)	5,270			(2,555		)	—		(134,572		)
Loss before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries	(137,287		)	(323,350		)	(1,717		)	—		(462,354		)
Income tax benefit	53,542			111,673			670			—		165,885
Equity in earnings of investments in Issuer and Guarantor Subsidiaries	(212,724		)	—			—			212,724		—
Net loss	$	(296,469	)	$	(211,677	)	$	(1,047	)	$	212,724	$	(296,469	)

33

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2012
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations		Total Consolidated
Revenues:
Coal revenues	$	—		$	3,204,839		$	—		$	—	$	3,204,839
Freight and handling revenues	—			442,707			—			—		442,707
Other revenues	—			128,299			6,877			—		135,176
Total revenues	—			3,775,845			6,877			—		3,782,722
Cost and expenses:
Cost of coal sales (exclusive of items shown separately below)	—			2,821,790			—			—		2,821,790
Freight and handling costs	—			442,707			—			—		442,707
Other expenses	—			29,837			—			—		29,837
Depreciation, depletion, and amortization	—			558,622			—			—		558,622
Amortization of acquired intangibles, net	—			(52,798		)	—			—		(52,798		)
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)	—			109,098			1,924			—		111,022
Asset impairment and restructuring	—			1,014,934			—			—		1,014,934
Goodwill impairment	—			1,525,332			—			—		1,525,332
Total costs and expenses	—			6,449,522			1,924			—		6,451,446
Income from operations	—			(2,673,677		)	4,953			—		(2,668,724		)
Other income (expense):
Interest expense	(77,890		)	(12,655		)	(1,423		)	—		(91,968		)
Interest income	—			2,407			14			—		2,421
Miscellaneous expense, net	—			1,327			(61		)	—		1,266
Total other expense, net	(77,890		)	(8,921		)	(1,470		)	—		(88,281		)
Income (loss) before income taxes and equity in earnings of investments in Issuer and Guarantor Subsidiaries	(77,890		)	(2,682,598		)	3,483			—		(2,757,005		)
Income tax benefit (expense)	30,377			464,564			(1,358		)	—		493,583
Equity in earnings of investments in Issuer and Guarantor Subsidiaries	(2,215,909		)	—			—			2,215,909		—
Net income (loss)	$	(2,263,422	)	$	(2,218,034	)	$	2,125		$	2,215,909	$	(2,263,422	)

34

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended June 30, 2013
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total Consolidated
Net loss	$	(185,681	)	$	(133,075	)	$	(1,389	)	$	134,464	$	(185,681	)
Total comprehensive loss	$	(182,133	)	$	(136,623	)	$	(1,389	)	$	138,012	$	(182,133	)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
Three Months Ended June 30, 2012
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations		Total Consolidated
Net income (loss)	$	(2,234,656	)	$	(2,211,935	)	$	1,246	$	2,210,689	$	(2,234,656	)
Total comprehensive income (loss)	$	(2,276,926	)	$	(2,254,205	)	$	1,246	$	2,252,959	$	(2,276,926	)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
Six Months Ended June 30, 2013
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total Consolidated
Net loss	$	(296,469	)	$	(211,677	)	$	(1,047	)	$	212,724	$	(296,469	)
Total comprehensive loss	$	(290,684	)	$	(217,462	)	$	(1,047	)	$	218,509	$	(290,684	)

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statements of Comprehensive Income (Loss)
Six Months Ended June 30, 2012
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations		Total Consolidated
Net income (loss)	$	(2,263,422	)	$	(2,218,034	)	$	2,125	$	2,215,909	$	(2,263,422	)
Total comprehensive income (loss)	$	(2,287,833	)	$	(2,242,445	)	$	2,125	$	2,240,320	$	(2,287,833	)

35

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2013
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Total Consolidated
Net cash (used in) provided by operating activities	$	(2,271	)	$	69,858		$	(91	)	$	67,496
Investing activities:
Capital expenditures	—			(107,006		)	—			(107,006		)
Purchases of marketable securities, net	—			(173,381		)	—			(173,381		)
Other, net	—			5,150			—			5,150
Net cash used in investing activities	—			(275,237		)	—			(275,237		)
Financing activities:
Principal repayments of long-term debt	(717,658		)	(223,269		)	—			(940,927		)
Principal repayments of capital lease obligations	—			(7,989		)	—			(7,989		)
Proceeds from borrowings on long-term debt	964,369			—			—			964,369
Debt issuance costs	(24,236		)	—			—			(24,236		)
Common stock repurchases	(1,236		)	—			—			(1,236		)
Other	—			(1,000		)	—			(1,000		)
Transactions with affiliates	(218,778		)	218,750			28			—
Net cash (used in) provided by financing activities	2,461			(13,508		)	28			(11,019		)
Net increase (decrease) in cash and cash equivalents	190			(218,887		)	(63		)	(218,760		)
Cash and cash equivalents at beginning of period	277			729,662			784			730,723
Cash and cash equivalents at end of period	$	467		$	510,775		$	721		$	511,963

36

ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES

NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Alpha Natural Resources, Inc. and Subsidiaries
Supplemental Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2012
	Parent (Issuer)			Guarantor Subsidiaries			Non-Guarantor Subsidiary		Total Consolidated
Net cash (used in) provided by operating activities	$	(8,038	)	$	143,348		$	39	$	135,349
Investing activities:
Capital expenditures	—			(245,244		)	—		(245,244		)
Acquisition of mineral rights under federal lease	—			(36,108		)	—		(36,108		)
Purchase of equity-method investment	—			(10,100		)	—		(10,100		)
Purchases of marketable securities, net	—			(152,702		)	—		(152,702		)
Other, net	—			5,973			—		5,973
Net cash used in investing activities	—			(438,181		)	—		(438,181		)
Financing activities:
Principal repayments of long-term debt	(15,000		)	—			—		(15,000		)
Principal repayments of capital lease obligations	—			(1,767		)	—		(1,767		)
Debt issuance costs	(6,436		)	—			—		(6,436		)
Common stock repurchases	(6,804		)	—			—		(6,804		)
Other	149			(1,000		)	—		(851		)
Transactions with affiliates	35,433			(35,446		)	13		—
Net cash (used in) provided by financing activities	7,342			(38,213		)	13		(30,858		)
Net increase (decrease) in cash and cash equivalents	(696		)	(333,046		)	52		(333,690		)
Cash and cash equivalents at beginning of period	613			584,273			996		585,882
Cash and cash equivalents at end of period	$	(83	)	$	251,227		$	1,048	$	252,192

37

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

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

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

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

• our liquidity, results of operations and financial condition;

• decline in coal prices;

• worldwide market demand for coal, electricity and steel;

• utilities switching to alternative energy sources such as natural gas, renewables and coal from basins where we do not operate;

• our production capabilities and costs;

• availability of mining and processing equipment and parts;

• changes in environmental laws and regulations, including those directly affecting our coal mining and production, and those affecting our customers’ coal usage, including potential climate change initiatives;

• changes in safety and health laws and regulations and their implementation, and the ability to comply with such changes;

• competition in coal markets;

• regulatory and court decisions;

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

• global economic, capital market or political conditions, including a prolonged economic downturn in the markets in which we operate and disruptions in worldwide financial markets;

• the outcome of pending or potential litigation or governmental investigations, including with respect to the Upper Big Branch explosion;

• our relationships with, and other conditions affecting, our customers, including the inability to collect payments from our customers if their creditworthiness declines;

• changes in, renewal or acquisition of, terms of and performance of customers under coal supply arrangements;

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

• inherent risks of coal mining beyond our control;

• cybersecurity attacks or failures, threats to physical security, extreme weather conditions or other natural disasters;

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

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

• disruptions in delivery or changes in pricing from third party vendors of key equipment and materials that are necessary for our operations, such as diesel fuel, steel products, explosives and tires;

• inflationary pressures on supplies and labor;

• funding for and changes in postretirement benefit obligations, pension obligations, including multi-employer pension plans, and federal and state black lung obligations;

• increased costs and obligations potentially arising from the Patient Protection and Affordable Care Act;

• reclamation, water treatment and mine closure obligations;

• our assumptions concerning economically recoverable coal reserve estimates;

38

• significant or rapid increases in commodity prices;

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

• disruption in coal supplies;

• attracting and retaining key personnel and other employee workforce factors, such as labor relations, our ability to negotiate new United Mine Workers of America (“UMWA”) wage agreements on terms acceptable to us, increased unionization of our workforce in the future, and any strikes by our workforce;

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

• our ability to integrate successfully operations that we have acquired or developed with our existing operations, as well as those operations that we may acquire or develop in the future, or the risk that any such integration could be more difficult, time-consuming or costly than expected;

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

• indemnification of certain obligations not being met;

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

• our substantial indebtedness and potential future indebtedness;

• restrictive covenants in our secured credit facility and the indentures governing our outstanding debt securities;

• certain terms of our outstanding debt securities, including any conversions of our convertible senior debt securities, that may adversely impact our liquidity;

• our ability to obtain or renew surety bonds on acceptable terms or maintain self-bonding status;

• goodwill impairment charges; and

• other factors, including the other factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and “Risk Factors” sections of this Quarterly Report on Form 10-Q for the three months ended June 30, 2013, the Quarterly Report on Form 10-Q for the three months ended March 31, 2013, and our Annual Report on Form 10-K for the year ended December 31, 2012.

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

Overview

We are one of America’s premier coal suppliers, operating 88 mines and 24 coal preparation and load-out facilities as of June 30, 2013 in Northern and Central Appalachia and the Powder River Basin (“PRB”), with approximately 11,600 employees. We produce, process, and sell steam and metallurgical coal from our operations located in Virginia, West Virginia, Kentucky, Pennsylvania, and Wyoming. We also sell coal produced by others, the majority of which we process and/or blend with coal produced from our mines prior to resale, providing us with a higher overall margin for the blended product than if we had sold the coal separately.

During the six months ending June 30, 2013, we idled certain mines located in West Virginia in response to weak market conditions and recorded restructuring and asset impairment expenses of $22.3 million, of which $13.0 million was for severance and related benefits and $9.3 million for professional fees and other expenses. We may take additional actions in the future which could include shutting down additional mines and/or facilities in order to align our operations with current market conditions. If it becomes necessary for us to take additional actions, we may be required to test our goodwill or long-lived assets for impairment, which may require us to record additional impairment expenses that could be material.

On July 15, 2013, we announced that production was suspended at our Cumberland mine due to adverse geological conditions in the mine's headgate area. Production remains suspended and work continues to remediate the roof conditions at the Cumberland headgate. Production is expected to resume at the end of August. We expect the shutdown to negatively impact our results of operations and cash flows.

For the three and six months ended June 30, 2013, sales of steam coal were 15.9 million tons and 33.8 million tons, respectively, and accounted for approximately 74% and 76% of our coal sales volume. Comparatively, for the three and six months ended June 30, 2012, sales of steam coal were 21.2 million tons and 44.5 million tons, respectively, and accounted for approximately 79% and 81% of our coal sales volume. For the three and six months ended June 30, 2013, sales of metallurgical coal, which generally sells at a premium over steam coal, were 5.6 million tons and 10.7 million tons, respectively, and accounted for approximately 26% and 24% of our coal sales volume. Comparatively, for the three and six months ended June 30, 2012, sales of metallurgical coal were 5.6 million tons and 10.5 million tons and accounted for approximately 21% and 19% of our coal sales volume.

39

Our sales of steam coal for the three and six months ended June 30, 2013 and 2012 were made primarily to large utilities and industrial customers throughout the United States, and our sales of metallurgical coal were made primarily to steel companies in the Northeastern and Midwestern regions of the United States and in several countries in Europe, Asia and South America. For the three and six months ended June 30, 2013, approximately 46% and 45%, respectively, of our total revenues were derived from coal sales made to customers outside the United States, compared to 48% and 44%, respectively, for the three and six months ended June 30, 2012.

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

Coal Pricing Trends, Uncertainties and Outlook

During the second quarter of 2013, the global seaborne market for metallurgical coal deteriorated further due to increasing supply out of Australia together with the expectation of slowing Chinese steel production growth and the ongoing economic malaise in Europe and Brazil. The third quarter Asian benchmark price was announced at $145 per metric tonne, down $27 from $172 per metric tonne in the preceding quarter, and recent spot transactions have been reported at levels below the current benchmark. Lower capacity utilization rates have allowed many steelmakers to lengthen cycle times in their coke ovens, enabling them to increase their reliance on lower quality metallurgical coals in order to manage their input costs. While the market remains weak, lower rank metallurgical coal prices have changed little in the last several months and higher quality metallurgical coal prices have fallen, resulting in spread compression between different qualities.

In the current market environment, a significant proportion of global production is estimated to be uneconomic, and, consequently, production cutbacks have been widespread, with several cutbacks recently announced in Australia and the United States. Thus, the market may begin to move back toward supply/demand balance. In the intermediate to long run, the world is expected to require increasing volumes of metallurgical coal, and assuming market conditions improve, driven in part by the current dearth of new development projects in the face of today's challenging market conditions, we believe we will be well-positioned to benefit from our leadership position in met coal reserves, met coal production and export terminal capacity.

The Energy Information Administration (“EIA”) 2013 Annual Energy Outlook forecasts that coal-fired electrical generation will decrease by an average annual rate of 0.4% through 2016. Nationwide utility inventories of thermal coal continue to trend lower and reached an estimated 169 million tons at the end of June. However, market conditions for domestic thermal coal continue to vary by region. Based on weekly coal production reporting through June 30, 2013 from the EIA, year-over-year Appalachian production decreased by approximately 8.7% and western coal production decreased by approximately 3.1% in the first half of 2013.

Inventories of Northern Appalachian ("NAPP") thermal coal are slightly below normal and opportunities exist for producers to contract additional volumes with utility customers. When our Cumberland mine is back in full production, we should be positioned to benefit more fully from our strong position in NAPP.

Inventories of Powder River Basin ("PRB") coal have continued to decrease to a level of days of burn that is slightly below normal at the end of the quarter. This inventory trend may suggest improving market conditions in the future; however, with prices recently reported at 3-month lows, the PRB appears to be continuing to suffer under the specter of excess capacity in the near-term.

Inventories of Central Appalachia ("CAPP") thermal coals have also been decreasing but remain elevated at the end of June 2013. We continue to believe that a significant portion of the decreased consumption of CAPP thermal coal is structural, driven by fuel switching in favor of gas, coal-fired plant retirements that are disproportionately impacting the regions served by CAPP coal, and encroachment of other lower cost coals, such as from the Illinois Basin. In the near-term, demand has been further dampened by current API2 spot prices that render most U.S. thermal coal production, and essentially all CAPP thermal coal production, uneconomic on the export seaborne market. In light of decreased demand for CAPP thermal coals, we have significantly reduced our production of thermal coal in CAPP, and we continue to review our production footprint in CAPP as part of our ongoing optimization process in order to match production with anticipated demand.

40

For additional information regarding some of the risks and uncertainties that affect our business, see Item 1A “Risk Factors.”

Results of Operations

EBITDA is defined as net income (loss) plus interest expense, income tax expense, depreciation, depletion, and amortization, and amortization of acquired intangibles, net, less interest income and income tax benefit. EBITDA is not a financial measure recognized under accounting principles generally accepted in the United States ("GAAP"). It is used by management to measure operating performance, and management also believes it is a useful indicator of our ability to meet debt service and capital expenditure requirements. Because EBITDA is not calculated identically by all companies, our calculation may not be comparable to similarly titled measures of other companies.

The following table reconciles EBITDA to net loss, the most directly comparable GAAP measure:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Net loss	$	(185,681	)	$	(2,234,656	)	$	(296,469	)	$	(2,263,422	)
Interest expense	60,953			46,534			120,354			91,968
Interest income	(1,099		)	(1,324		)	(2,125		)	(2,421		)
Income tax benefit	(89,527		)	(449,798		)	(165,885		)	(493,583		)
Depreciation, depletion and amortization	214,716			272,850			453,729			558,622
Amortization of acquired intangibles, net	3,591			(17,286		)	(1,840		)	(52,798		)
EBITDA	$	2,953		$	(2,383,680	)	$	107,764		$	(2,161,634	)

Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

Summary

Total revenues decreased$513.0 million, or 28%, for the three months ended June 30, 2013 compared to the prior year period. The decrease in total revenues was due to decreased coal revenues of $442.1 million and decreased freight and handling revenues of $78.1 million, partially offset by increased other revenues of $7.3 million. The decrease in coal revenues was due primarily to lower steam coal sales volumes and lower average coal sales realization per ton for metallurgical and steam coal. The decrease in coal revenues consisted of decreased steam coal revenues of $294.3 million and decreased metallurgical coal revenues of $147.8 million. The decrease in freight and handling revenues was due primarily to decreased export shipments and decreased freight rates. The increase in other revenues was due primarily to amortization of certain contract-related liabilities.

Net loss decreased$2,049.0 million for the three months ended June 30, 2013 compared to the prior year period. The decrease was largely due to decreased goodwill impairment expenses of $1,525.3 million, decreased asset impairment and restructuring expenses of $999.6 million, decreases in certain operating costs and expenses, which are described below, of $352.7 million and increased other revenues discussed above, partially offset by decreased coal revenues discussed above, decreased income tax benefits of $360.3 million and increased other expense, net of $33.5 million.

The decrease in certain operating costs and expenses of $352.7 million consisted of decreased cost of coal sales of $324.9 million, or 23%, decreased depreciation, depletion and amortization expenses of $58.1 million, or 21%, and decreased selling, general and administrative expenses of $7.9 million, or 17%, partially offset by increased expenses for amortization of acquired intangibles, net of $20.9 million, or 121%, and increased other expenses of $17.3 million, or 166%.

Coal sales volumes decreased5.2 million tons, or 20%, compared to the prior year period. The decrease in coal sales volumes was due primarily to decreases of 3.9 million and 1.4 million tons of eastern steam and western steam coal, respectively. The decreases in eastern and western steam coal were due primarily to decreased demand and the impacts of planned production curtailments and mine idlings implemented during 2012 and 2013.

The consolidated average coal sales realization per ton for the three months ended June 30, 2013 was $52.10 compared to $58.41 in the prior year period, a decrease of $6.31 per ton, or 11%. The decrease was largely attributable to decreases of

41

$26.88 per ton, or 21%, $2.51 per ton, or 4%, and $0.59 per ton, or 5%, in metallurgical, eastern steam and western steam average coal sales realization per ton, respectively. The average coal sales realization per ton for metallurgical coal and eastern steam coal was $100.95 and $62.54, respectively, for the three months ended June 30, 2013 compared to $127.83 and $65.05 in the prior year period. The average coal sales realization per ton for western steam coal was $12.37 for the three months ended June 30, 2013 compared to $12.96 in the prior year period.

Consolidated coal margin percentage, calculated as consolidated coal revenues less consolidated cost of coal sales (excluding cost of coal sales in our All Other segment), divided by consolidated coal revenues, was 5% for the three months ended June 30, 2013 compared to 11% in the prior year period. Coal margin percentage for our Eastern and Western Coal Operations was 4% and 19%, respectively, for the three months ended June 30, 2013 compared to 11% and 15% in the prior year period. Consolidated coal margin per ton, calculated as consolidated coal sales realization per ton less consolidated cost of coal sales per ton (excluding cost of coal sales per ton in our All Other segment), was $2.72 for the three months ended June 30, 2013 compared to $6.57 in the prior year period. Coal margin per ton for our Eastern and Western Coal Operations was $3.03 and $2.29, respectively, for the three months ended June 30, 2013 compared to $9.38 and $1.95 in the prior year period.

	Three Months Ended June 30,				Increase (Decrease)
	2013		2012		$ or Tons			%
	(in thousands, except per ton data)
Revenues:
Coal revenues:
Eastern steam	$	447,246	$	718,416	$	(271,170	)	(38	)%
Western steam	108,633		131,733		(23,100		)	(18	)%
Metallurgical	567,297		715,132		(147,835		)	(21	)%
Freight and handling revenues	155,218		233,357		(78,139		)	(33	)%
Other revenues	56,729		49,471		7,258			15	%
Total revenues	$	1,335,123	$	1,848,109	$	(512,986	)	(28	)%
Tons sold:
Eastern steam	7,152		11,043		(3,891		)	(35	)%
Western steam	8,785		10,161		(1,376		)	(14	)%
Metallurgical	5,620		5,595		25			—	%
Total	21,557		26,799		(5,242		)	(20	)%
Coal sales realization per ton:
Eastern steam	$	62.54	$	65.05	$	(2.51	)	(4	)%
Western steam	$	12.37	$	12.96	$	(0.59	)	(5	)%
Metallurgical	$	100.95	$	127.83	$	(26.88	)	(21	)%
Average	$	52.10	$	58.41	$	(6.31	)	(11	)%

Coal revenues. Coal revenues decreased$442.1 million, or 28%, for the three months ended June 30, 2013 compared to the prior year period. The decrease in coal revenues consisted of decreases in eastern steam, western steam and metallurgical coal revenues.

Total eastern steam coal revenues decreased$271.2 million, or 38%, which consisted of decreased domestic coal revenues of $205.7 million, or 36%, and decreased export coal revenues of $65.5 million, or 45%, compared to the prior year period. The decrease in eastern steam coal revenues was largely due to fewer coal shipments as a result of decreased demand and the impacts of production curtailments and mine idlings implemented during 2012 and 2013, and lower coal sales realization per ton. Eastern steam coal shipments decreased3.9 million tons, which consisted of decreased domestic shipments of 2.8 million tons, or 33%, and decreased export shipments of 1.1 million tons, or 45%, compared to the prior year period. Coal sales realization per ton for eastern steam domestic sales was $63.34 per ton compared to $66.47 per ton in the prior year period and coal sales realization per ton for eastern steam export sales was $59.02 per ton compared to $59.96 per ton in the prior year period.

42

Total metallurgical coal revenues decreased$147.8 million, or 21%, which consisted of decreased export coal revenues of $136.3 million, or 26%, and decreased domestic coal revenues of $11.5 million, or 6%, compared to the prior year period. The decrease in metallurgical coal revenues was largely due to lower average coal sales realization per ton, which was impacted by weaker market conditions, lower demand, as well as the mix of coal qualities as a larger portion of lower quality metallurgical tons were sold in the three months ended June 30, 2013 compared to the prior year period. Metallurgical coal shipments were consistent from the prior year period, although export shipments of metallurgical coal decreased by 0.3 million tons and domestic shipments increased by the same amount. Coal sales realization per ton for metallurgical export sales was $95.83 per ton compared to $119.73 per ton in the prior year period and coal sales realization per ton for metallurgical domestic sales was $114.79 per ton compared to $158.42 per ton in the prior year period.

The decrease in western steam coal revenues was primarily due to decreased coal shipments as a result of decreased demand and the impacts of production curtailments and a decrease of $0.59 in average coal sales realization per ton due to decreased demand and weak market conditions. Western coal sales volumes decreased1.4 million tons compared to the prior year period.

Our sales mix of metallurgical coal and steam coal based on volume was 26% and 74%, respectively, for the three months ended June 30, 2013 compared with 21% and 79% in the prior year period. Our sales mix of metallurgical coal and steam coal based on coal revenues was 51% and 49%, respectively, for the three months ended June 30, 2013 compared with 46% and 54%, respectively, in the prior year period.

Freight and handling. Freight and handling revenues and costs were $155.2 million for the three months ended June 30, 2013, a decrease of $78.1 million, or 33%, compared to the prior year period. The decrease was primarily due to decreased export shipments and decreased freight rates compared to the prior year period.

Other. Other revenues increased$7.3 million, or 15%, and other expenses increased$17.3 million, or 166%, for the three months ended June 30, 2013 compared to the prior year period, resulting in a net decrease to income from operations of $10.0 million. The decrease was due primarily to decreased mark-to-market gains for derivative contracts accounted for at fair value, a loss on assets contributed to an equity affiliate, and increased losses on our sea-going vessel charters, partially offset by increased contractual settlement related income.

	Three Months Ended June 30,					Increase (Decrease)
	2013		2012			$ or Tons			%
	(in thousands, except per ton data)
Cost of coal sales (exclusive of items shown separately below)	$	1,081,494	$	1,406,394		$	(324,900	)	(23	)%
Freight and handling costs	155,218		233,357			(78,139		)	(33	)%
Other expenses	27,782		10,444			17,338			166	%
Depreciation, depletion and amortization	214,716		272,850			(58,134		)	(21	)%
Amortization of acquired intangibles, net	3,591		(17,286		)	20,877			121	%
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)	38,139		46,011			(7,872		)	(17	)%
Asset impairment and restructuring	11,265		1,010,878			(999,613		)	(99	)%
Goodwill impairment	—		1,525,332			(1,525,332		)	(100	)%
Total costs and expenses	$	1,532,205	$	4,487,980		$	(2,955,775	)	(66	)%
Cost of coal sales per ton:1
Eastern Coal Operations	$	76.41	$	76.78		$	(0.37	)	—	%
Western Coal Operations	$	10.08	$	11.01		$	(0.93	)	(8	)%
Average	$	49.38	$	51.84		$	(2.46	)	(5	)%
EBITDA:
Eastern Coal Operations	$	42,099	$	(2,318,843	)	$	2,360,942		102	%
Western Coal Operations	$	17,560	$	(36,637	)	$	54,197		148	%

¹ Cost of coal sales per ton includes only costs associated with our Eastern and Western Coal Operations.

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Cost of coal sales. Cost of coal sales decreased$324.9 million, or 23%, for the three months ended June 30, 2013 compared to the prior year period. The decrease in cost of coal sales was due primarily to decreased supplies and maintenance expenses, decreased purchased coal expenses, decreased merger-related expenses, decreased labor and benefit expenses related to production curtailments, decreased expenses related to mine idlings implemented during 2012 and the first half of 2013, other cost control measures, and decreased sales-related variable costs associated with decreased metallurgical and steam coal revenues, partially offset by increased expenses for regulatory matters.

Depreciation, depletion and amortization. Depreciation, depletion, and amortization decreased$58.1 million, or 21%, for the three months ended June 30, 2013 compared to the prior year period. The decrease was primarily due to decreased depletion and amortization expense due to lower thermal coal production and lower depletion rates at certain mines that recorded asset impairment charges during 2012 and decreased depreciation expense related to lower capital expenditures over the last twelve months compared to the same time period in the prior year period.

Amortization of acquired intangibles, net. Amortization expense of acquired intangibles, net increased$20.9 million, or 121%, for the three months ended June 30, 2013 compared to the prior year period. The increase in expense for amortization of acquired intangibles, net, was primarily due to lower amortization of below-market contracts assumed in the Massey Acquisition due to the completion of shipments under many of the contracts assumed.

Selling, general and administrative. Selling, general and administrative expenses decreased$7.9 million, or 17%, for the three months ended June 30, 2013 compared to the prior year period. The decrease in selling, general and administrative expenses was due primarily to decreased wage and benefits expenses as a result of lower headcount, decreased merger-related expenses and decreased professional fees, partially offset by increased stock compensation expenses due to the reversal of stock compensation expenses in 2012 related to performance-based awards.

Asset impairment and restructuring. Asset impairment and restructuring expenses were $11.3 million for the three months ended June 30, 2013 and consisted primarily of severance and related benefits and professional fees related to consulting. Asset impairment and restructuring expenses were $1,010.9 million for the three months ended June 30, 2012 and consisted primarily of asset impairment expenses of $990.9 million and restructuring expenses of $20.0 million related to severance and related benefits, professional fees and other expenses. See Note 2 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Goodwill impairment. See Note 3 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Interest expense. Interest expense increased$14.4 million, or 31%, during the three months ended June 30, 2013 compared to the prior year period due primarily to the issuance of 9.75% senior notes in October 2012.

Income taxes. Income tax benefit of $89.5 million was recorded for the three months ended June 30, 2013 on a loss before income taxes of $275.2 million. The benefit rate is lower than the federal statutory rate of 35% primarily due to the impact of non-deductible fines and penalties and changes in the valuation allowance, partially offset by the impact of the percentage depletion allowance.

Income tax benefit of $449.8 million was recorded for the three months ended June 30, 2012 on a loss before income taxes of $2,684.5 million. The benefit rate is lower than the federal statutory rate of 35% primarily due to the impact of the non-deductible goodwill impairment.

Segment EBITDA

Eastern Coal Operations - EBITDA increased $2,360.9 million, or 102%, for the three months ended June 30, 2013 compared to the prior year period. The increase in EBITDA was largely due to decreased asset impairment and restructuring expenses of $990.8 million, decreased goodwill impairment expenses of $1,472.0 million, partially offset by decreased coal margin per ton of $6.35, or 68%. The decrease in coal margin per ton was due primarily to decreased steam coal sales volumes and decreased steam and metallurgical coal revenues discussed above. The decrease in coal margin per ton consisted of decreased average coal sales realization per ton of $6.72, or 8%, partially offset by decreased cost of coal sales per ton of $0.37. Despite cost control measures implemented during 2012 and the first half of 2013, cost of coal sales per ton was negatively impacted by reduced shipments and increased costs per ton at our eastern longwall mines due to difficult mining conditions and geological factors.

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Western Coal Operations - EBITDA increased $54.2 million, or 148%, for the three months ended June 30, 2013 compared to the prior year period. The increase in EBITDA was due primarily to goodwill impairment expenses of $53.3 million recorded in the prior year period and increased coal margin per ton of $0.34, or 17%. The increase in coal margin per ton consisted of decreased cost of coal sales per ton of $0.93, or 8%, partially offset by decreased average coal sales realization per ton of $0.59, or 5%. The decrease in cost of coal sales per ton was due primarily to cost control measures and mining a higher proportion of coal owned in fee for which there is no production royalty expenses. The increase in coal margin per ton more than offset the 14% decrease in coal sales volumes.

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

Summary

Total revenues decreased $1,114.0 million, or 29%, for the six months ended June 30, 2013 compared to the prior year period. The decrease in total revenues was due to decreased coal revenues of $941.3 million, decreased freight and handling revenues of $130.3 million, and decreased other revenues of $42.4 million. The decrease in coal revenues was due primarily to lower steam coal sales volumes and lower average coal sales realization per ton for metallurgical and eastern steam coal. The decrease in coal revenues consisted of decreased steam coal revenues of $602.4 million and decreased metallurgical coal revenues of $338.9 million. The decrease in freight and handling revenues was due primarily to decreased freight rates and fewer export shipments. The decrease in other revenues was due primarily to derivative contracts accounted for at fair value, partially offset by amortization of certain contract-related liabilities.

Net loss decreased $1,966.9 million for the six months ended June 30, 2013 compared to the prior year period. The decrease was largely due to decreased goodwill impairment expenses of $1,525.3 million, decreased asset impairment and restructuring expenses of $992.6 million and decreased certain operating costs and expenses, which are described below, of $806.7 million, partially offset by decreased income tax benefits of $327.7 million, decreased coal and other revenues discussed above, and increased other expense, net of $46.3 million.

The decrease in certain operating costs and expenses of $806.7 million consisted of decreased cost of coal sales of $728.4 million, or 26%, decreased depreciation, depletion and amortization expenses of $104.9 million, and decreased selling, general and administrative expenses of $29.3 million, or 26%, partially offset by decreased credits to expense for amortization of acquired intangibles, net of $51.0 million and increased other expenses of $4.9 million, or 17%.

Coal sales volumes decreased 10.5 million, or 19%, compared to the prior year period. The decrease in coal sales volumes was due to decreases of 7.5 million and 3.2 million tons of eastern steam and western steam coal, respectively, partially offset by an increase of 0.2 million tons of metallurgical coal. The decreases in eastern and western steam coal were due primarily to decreased demand and the impacts of planned production curtailments and mine idlings implemented during 2012 and the first half of 2013.

The consolidated average coal sales realization per ton for the six months ended June 30, 2013 was $50.91 compared to $58.33 in the prior year period, a decrease of $7.42 per ton, or 13%. The decrease was largely attributable to decreases of $34.03 per ton, or 25%, and $4.09 per ton, or 6%, in metallurgical and eastern steam average coal sales realization per ton, respectively. The average coal sales realization per ton for metallurgical coal and eastern steam coal was $102.05 and $62.20, respectively, for the six months ended June 30, 2013 compared to $136.08 and $66.29 in the prior year period. The average coal sales realization per ton for western steam coal was $12.72 for the six months ended June 30, 2013 compared to $12.96 in the prior year period.

Consolidated coal margin percentage, calculated as consolidated coal revenues less consolidated cost of coal sales (excluding cost of coal sales in our All Other segment), divided by consolidated coal revenues, was 9% for the six months ended June 30, 2013 compared to 13% in the prior year period. Coal margin percentage for our Eastern and Western Coal Operations was 7% and 21%, respectively, for the six months ended June 30, 2013 compared to 13% and 15%, respectively, in the prior year period. Consolidated coal margin per ton, calculated as consolidated coal sales realization per ton less consolidated cost of coal sales per ton, was $4.44 for the six months ended June 30, 2013 compared to $7.67 in the prior year period. Coal margin per ton for our Eastern and Western Coal Operations was $5.73 and $2.67, respectively, for the six months ended June 30, 2013 compared to $11.46 and $1.97 in the prior year period.

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	Six Months Ended June 30,				Increase (Decrease)
	2013		2012		$ or Tons			%
	(in thousands, except per ton data)
Revenues:
Coal revenues:
Eastern steam	$	936,290	$	1,492,840	$	(556,550	)	(37	)%
Western steam	238,323		284,174		(45,851		)	(16	)%
Metallurgical	1,088,952		1,427,825		(338,873		)	(24	)%
Freight and handling revenues	312,385		442,707		(130,322		)	(29	)%
Other revenues	92,764		135,176		(42,412		)	(31	)%
Total revenues	$	2,668,714	$	3,782,722	$	(1,114,008	)	(29	)%
Tons sold:
Eastern steam	15,053		22,519		(7,466		)	(33	)%
Western steam	18,738		21,933		(3,195		)	(15	)%
Metallurgical	10,671		10,493		178			2	%
Total	44,462		54,945		(10,483		)	(19	)%
Coal sales realization per ton:
Eastern steam	$	62.20	$	66.29	$	(4.09	)	(6	)%
Western steam	$	12.72	$	12.96	$	(0.24	)	(2	)%
Metallurgical	$	102.05	$	136.08	$	(34.03	)	(25	)%
Average	$	50.91	$	58.33	$	(7.42	)	(13	)%

Coal revenues. Coal revenues decreased $941.3 million, or 29%, for the six months ended June 30, 2013 compared to the prior year period. The decrease in coal revenues consisted of decreases in eastern steam, western steam and metallurgical coal revenues.

Total eastern steam coal revenues decreased $556.6 million, or 37%, which consisted of decreased domestic coal revenues of $516.2 million, or 40%, and decreased export coal revenues of $40.4 million, or 20%, compared to the prior year period. The decrease in eastern steam coal revenues was largely due to fewer coal shipments as a result of decreased demand and the impacts of production curtailments and mine idlings implemented during 2012 and the first half of 2013, and lower coal sales realization per ton. Eastern steam coal shipments decreased 7.5 million tons, which consisted of decreased domestic shipments of 7.0 million tons, or 36%, and decreased export shipments of 0.5 million tons, or 16%, compared to the prior year period. Coal sales realization per ton for eastern steam domestic sales was $63.14 per ton compared to $67.15 per ton in the prior year period and coal sales realization per ton for eastern steam export sales was $58.02 per ton compared to $61.21 per ton in the prior year period.

Total metallurgical coal revenues decreased $338.9 million, or 24%, which consisted of decreased export coal revenues of $301.2 million, or 29%, and decreased domestic coal revenues of $37.7 million, or 10%, compared to the prior year period. The decrease in metallurgical coal revenues was largely due to lower average coal sales realization per ton, which was impacted by weaker market conditions and lower demand as well as the mix of coal qualities as a larger portion of lower quality metallurgical tons were sold in the six months ended June 30, 2013 compared to the prior year period. Metallurgical coal shipments increased 0.2 million tons, which consisted of increased domestic shipments of 0.3 million tons and decreased export shipments of 0.1 million tons compared to the prior year period. Coal sales realization per ton for metallurgical export sales was $94.54 per ton compared to $129.90 per ton in the prior year period and coal sales realization per ton for metallurgical domestic sales was $124.05 per ton compared to $157.12 per ton in the prior year period.

The decrease in western steam coal revenues was primarily due to decreased coal shipments as a result of decreased demand and the impacts of production curtailments. Western coal sales volumes decreased 3.2 million tons compared to the prior year period.

Our sales mix of metallurgical coal and steam coal based on volume was 24% and 76%, respectively, for the six months ended June 30, 2013 compared with 19% and 81% in the prior year period. Our sales mix of metallurgical coal and steam coal

46

based on coal revenues was 48% and 52%, respectively, for the six months ended June 30, 2013 compared with 45% and 55%, respectively, in the prior year period.

Freight and handling. Freight and handling revenues and costs were $312.4 million for the six months ended June 30, 2013, a decrease of $130.3 million, or 29%, compared to the prior year period. The decrease was primarily due to decreased export shipments and decreased freight rates compared to the prior year period.

Other. Other revenues decreased $42.4 million, or 31%, and other expenses increased $4.9 million, or 17%, for the six months ended June 30, 2013 compared to the prior year period resulting in a net decrease to income from operations of $47.3 million. The decrease was due primarily to decreased mark-to-market gains for derivative contracts accounted for at fair value, decreased royalty income, and a loss on assets contributed to an equity affiliate, partially offset by increased contractual settlement related income.

	Six Months Ended June 30,						Increase (Decrease)
	2013			2012			$ or Tons			%
	(in thousands, except per ton data)
Cost of coal sales (exclusive of items shown separately below)	$	2,093,335		$	2,821,790		$	(728,455	)	(26	)%
Freight and handling costs	312,385			442,707			(130,322		)	(29	)%
Other expenses	34,781			29,837			4,944			17	%
Depreciation, depletion and amortization	453,729			558,622			(104,893		)	(19	)%
Amortization of acquired intangibles, net	(1,840		)	(52,798		)	50,958			97	%
Selling, general and administrative expenses (exclusive of depreciation, depletion and amortization shown separately above)	81,765			111,022			(29,257		)	(26	)%
Asset impairment and restructuring	22,341			1,014,934			(992,593		)	(98	)%
Goodwill impairment	—			1,525,332			(1,525,332		)	(100	)%
Total costs and expenses	$	2,996,496		$	6,451,446		$	(3,454,950	)	(54	)%
Cost of coal sales per ton:1
Eastern coal operations	$	73.00		$	77.01		$	(4.01	)	(5	)%
Western coal operations	$	10.05		$	10.99		$	(0.94	)	(9	)%
Average	$	46.47		$	50.66		$	(4.19	)	(8	)%
EBITDA:
Eastern Coal Operations	$	170,784		$	(2,102,105	)	$	2,272,889		(108	)%
Western Coal Operations	$	43,798		$	(16,690	)	$	60,488		(362	)%

¹ Cost of coal sales per ton includes only costs associated with our Eastern and Western Coal Operations.

Cost of coal sales. Cost of coal sales decreased $728.5 million, or 26%, for the six months ended June 30, 2013 compared to the prior year period. The decrease in cost of coal sales was due primarily to decreased supplies and maintenance expenses, decreased purchased coal expenses, decreased merger-related expenses, decreased labor and benefit expenses related to production curtailments, decreased expenses related to mine idlings implemented during 2012 and the first half of 2013, other cost control measures, and decreased sales-related variable costs associated with decreased metallurgical and steam coal revenues, partially offset by increased expenses for regulatory matters.

Depreciation, depletion and amortization. Depreciation, depletion, and amortization decreased $104.9 million, or 19%, for the six months ended June 30, 2013 compared to the prior year period. The decrease was primarily due to decreased depletion and amortization expense due to lower coal production and lower depletion rates at certain mines that recorded asset impairment charges during 2012 and decreased depreciation expense related to lower capital expenditures over the last twelve months compared to the same time period in the prior year period.

Amortization of acquired intangibles, net. Amortization expense of acquired intangibles, net increased $51.0 million, or 97%, for the six months ended June 30, 2013 compared to the prior year period. The increase in expense for amortization of

47

acquired intangibles, net, was primarily due to lower amortization of below-market contracts assumed in the Massey Acquisition due to the completion of shipments under many of the contracts assumed.

Selling, general and administrative. Selling, general and administrative expenses decreased $29.3 million, or 26%, for the six months ended June 30, 2013 compared to the prior year period. The decrease in selling, general and administrative expenses was due primarily to decreased wage and benefits expenses as a result of lower headcount, decreased merger-related expenses, partially offset by increased stock compensation expenses due to the reversal of stock compensation expenses in the second quarter of 2012 related to performance-based awards.

Asset impairment and restructuring. Asset impairment and restructuring expenses were $22.3 million for the six months ended June 30, 2013 and consisted primarily of severance and related benefits and professional fees related to consulting. Asset Impairment and restructuring expenses were $1,014.9 million for the six months ended June 30, 2012 and consisted primarily of asset impairment expenses of $990.9 million and restructuring expenses of $24.0 million related to severance and related benefits, professional fees and other expenses. See Note 2 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Goodwill impairment. See Note 3 to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Interest expense. Interest expense increased $28.4 million, or 31%, during the six months ended June 30, 2013 compared to the prior year period due primarily to the issuance of 9.75% senior notes in October 2012.

Income taxes. Income tax benefit of $165.9 million was recorded for the six months ended June 30, 2013 on loss before income taxes of $462.4 million. The benefit rate is higher than the federal statutory rate of 35% primarily due to the impact of the percentage depletion allowance and state tax benefit, net of federal tax impact, mostly offset by the impact of non-deductible fines and penalties and changes in the valuation allowance.

Income tax benefit of $493.6 million was recorded for the six months ended June 30, 2012 on a loss before income taxes of $2,757.0 million. The benefit rate is lower than the federal statutory rate of 35% primarily due to the impact of the non-deductible goodwill impairment.

Segment EBITDA

Eastern Coal Operations - EBITDA increased $2,272.9 million, or 108%, for the six months ended June 30, 2013 compared to the prior year period. The increase in EBITDA was largely due to decreased asset impairment and restructuring expenses of $988.0 million, decreased goodwill impairment expenses of $1,472.0 million, decreased other expense, decreased selling, general and administrative expenses and increased other miscellaneous income, partially offset by decreased other revenues and decreased coal margin per ton of $5.73, or 50%. The decrease in coal margin per ton was due primarily to decreased steam coal sales volumes and decreased steam and metallurgical coal revenues discussed above. The decrease in coal margin per ton consisted of decreased average coal sales realization per ton of $9.74, or 11%, partially offset by decreased cost of coal sales per ton of $4.01, or 5%. The decrease in cost of coal sales per ton was due primarily to lower volumes of purchased coal, the impact of idling higher cost mines during 2012 and the first half of 2013, other cost control measures and a higher mix of coal produced from our eastern longwall mines during the six month period ending June 30, 2013 compared to the prior year period. Although our eastern longwall mines had a favorable impact on cost of coal sales per ton for the six month period ended June 30, 2013, the last three months of that period were impacted by reduced shipments and increased costs per ton due to difficult mining conditions and geological factors. The decrease in selling, general and administrative expenses was due primarily to lower headcount and cost control measures. The decrease in other revenues and other expenses was due primarily to decreased mark-to-market gains for derivative contracts accounted for at fair value, contractual settlement-related revenues and expenses. The increase in other miscellaneous income was primarily due to increased income recorded for equity investments.

Western Coal Operations - EBITDA increased $60.5 million, or 362%, for the six months ended June 30, 2013 compared to the prior year period. The increase in EBITDA was due primarily to goodwill impairment expenses of $53.3 million recorded in the prior year period and increased coal margin per ton of $0.70, or 36%. The increase in coal margin per ton consisted of decreased cost of coal sales per ton of $0.94, or 9%, partially offset by decreased average coal sales realization per ton of $0.24. The decrease in cost of coal sales per ton was due primarily to cost control measures and mining a higher proportion of coal owned in fee for which there is no production royalty expenses. The increase in coal margin per ton more than offset the 15% decrease in coal sales volumes.

48

Liquidity and Capital Resources

Our primary liquidity and capital resource requirements stem from the cost of our coal production and purchases, our capital expenditures, our debt service, our reclamation obligations, our litigation and regulatory costs and settlements and associated costs, and from time to time, our securities repurchases. Our primary sources of liquidity have been from sales of coal, our credit facility and debt arrangements (see “Credit Agreement and Long-Term Debt”), and to a much lesser extent, cash from sales of non-core assets and miscellaneous revenues.

We believe that cash on hand, cash generated from our operations and borrowing capacity available under our Fourth Amended and Restated Credit Agreement (the “Credit Agreement”) will be sufficient to meet our working capital requirements, anticipated capital expenditures, debt service requirements, reclamation obligations, potential securities repurchases, and expected settlements and costs related to outstanding litigation for at least the next twelve months.

At June 30, 2013, we had total liquidity of $1,930.2 million, including cash and cash equivalents of $512.0 million, marketable securities of $468.8 million and $949.4 million of unused commitments available under our Credit Agreement’s revolving credit facility, after giving effect to $150.6 million of letters of credit outstanding as of June 30, 2013, subject to limitations described in our Credit Agreement.

Weak market conditions and depressed coal prices, and recently the suspension of production at our Cumberland mine, have resulted in operating losses and decreased cash flows from operations. If market conditions do not improve, we expect our liquidity to be adversely affected. We have worked and are working to enhance our capital structure and financial flexibility as opportunities arise through repayment or repurchase of outstanding debt, amendment of our credit facility, and other methods. We may decide to pursue or not pursue these opportunities at any time. As part of this strategy, we may from time to time repurchase some of our outstanding notes through open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise, upon such terms and at such prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, we may make purchases pursuant to one or more trading plans under Rule 10b5-1 of the Exchange Act, which allow us to repurchase securities during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Any such plans may be discontinued at any time.

We sponsor pension plans in the United States for salaried and non-union hourly employees. For these plans, the Pension Protection Act of 2006 (“PPA”) requires a funding target of 100% of the present value of accrued benefits. Generally, any such plan with a funding ratio of less than 80% will be deemed at risk and will be subject to additional funding requirements under the PPA. Annual funding contributions to the plans are made as recommended by consulting actuaries based upon the Employee Retirement Income Security Act (“ERISA”) funding standards. Plan assets consist of cash and cash equivalents, an investment in a group annuity contract, equity and fixed income funds, and private equity funds. We are required to measure plan assets and benefit obligations as of the date of our fiscal year-end balance sheet, or sooner under certain circumstances, and recognize the overfunded or underfunded status of our defined benefit pension and other postretirement plans (other than a multi-employer plan) as an asset or liability in our balance sheet and recognize changes in that funded status in the year in which the changes occur through other comprehensive income (loss). We may be required to increase the amount of cash contributions into the pension trust in order to comply with the funding requirements of the PPA. Our plans are not currently deemed to be at risk and subject to additional funding requirements under the PPA. We have not made any pension contributions during the first half of 2013 and anticipate minimal contributions during the remainder of the year.

With respect to global economic events, there continues to be uncertainty in the financial markets and weakness in the coal industry. In addition, on August 5, 2013, Moody's Investors Service announced that it had placed us on review for possible downgrade of certain of our ratings, including our B1 Corporate Family Rating, B1-PD Probability of Default Rating, Ba1 rating on senior secured term loan, and the B2 rating on senior unsecured debt. These issues bring potential liquidity risks for us, including the risks of declines in our stock value, declines in our cash and cash equivalents, less availability and higher costs of additional credit, restrictions to or the loss of our self-bonding capability and requests for additional collateral by surety providers, and potential counterparty defaults and failures. We constantly monitor the creditworthiness of our customers. We believe that the creditworthiness of our current group of customers is sound and represents no abnormal business risk.

Cash Flows

Cash and cash equivalents decreased by$218.8 million for the six months ended June 30, 2013. The net change in cash and cash equivalents was attributable to the following:

49

	Six Months Ended June 30,
	2013			2012
Cash Flows (in thousands):
Net cash provided by operating activities	$	67,496		$	135,349
Net cash used in investing activities	(275,237		)	(438,181		)
Net cash used in financing activities	(11,019		)	(30,858		)
Net decrease in cash and cash equivalents	$	(218,760	)	$	(333,690	)

Net cash provided by operating activities for the six months ended June 30, 2013 was $67.5 million compared to $135.3 million for the six months ended June 30, 2012. The decrease in cash provided by operating activities in the first half of 2013 as compared to the first half of 2012 is primarily due to a decrease in cash earnings, as well as changes in working capital.

Net cash used in investing activities for the six months ended June 30, 2013 was $275.2 million, a decrease of $163.0 million from the $438.2 million of net cash used in investing activities during the six months ended June 30, 2012. The primary uses of cash for investing activities for the six months ended June 30, 2013 included $107.0 million of capital expenditures and $469.4 million of purchases of marketable securities, partially offset by cash generated from sales of marketable securities of $296.1 million.

Net cash used in financing activities for the six months ended June 30, 2013 was $11.0 million compared to net cash used in financing activities of $30.9 million for the six months ended June 30, 2012. The primary uses of cash for financing activities for the six months ended June 30, 2013 included principal repayments of long-term debt of $940.9 million, cash paid for debt issuance costs of $24.2 million, and capital lease principal payments of $8.0 million, partially offset by cash proceeds of $342.5 million from the issuance of our 3.75% convertible senior notes due 2017 and cash proceeds of $621.9 million from the issuance of our term loan B due 2020.

Long-Term Debt

Fourth Amended and Restated Credit Agreement

On May 22, 2013, we entered into the Credit Agreement with the lenders party thereto, the issuing banks party thereto, Citicorp North America, Inc., as administrative agent and as collateral agent, and all other parties thereto from time to time, which amends and restates the Company's Third Amended and Restated Credit Agreement, dated as of May 19, 2011, as amended June 26, 2012 (the “Existing Credit Agreement”).

The Credit Agreement includes a new $625.0 million senior secured term loan B facility (the “Term Loan Facility”), which matures on May 22, 2020, amortizes in quarterly installments at a rate of 1.0% per year and bears an interest rate at the Company's option of either LIBOR plus a margin of 2.75% (subject to a LIBOR floor of 0.75%) or an Alternate Base Rate (ABR) plus a margin of 1.75% (subject to an ABR floor of 1.75%). The proceeds of the Term Loan Facility were used to repay the entire $525.0 million aggregate principal amount of our outstanding obligations under our existing term loan A facility under the Existing Credit Agreement, which would have matured on June 30, 2016, with the balance used to pay fees and expenses and for general corporate purposes.

The principal changes to the Existing Credit Agreement effected by the Amended and Restated Credit Agreement include increasing the existing senior secured revolving facility from $1.0 billion to $1.1 billion through its maturity date of June 30, 2016 and modifying the financial covenants by:

• modifying the interest coverage ratio covenant from 2.25 to 1.50 through 2013, from 2.50 to 1.50 during 2014 and from 2.50 to 2.00 from 2015 through the maturity date of the revolving credit facility;

•eliminating the leverage ratio covenant;

• extending the applicability of the senior secured leverage ratio of 2.50 through the maturity date of the revolving credit facility; and

• reducing the minimum liquidity covenant, which applies until December 31, 2014, from $500.0 million to $300.0 million;

Additionally, the terms of the Credit Agreement (i) further restrict our ability and that of our subsidiaries to make investments, loans and acquisitions, incur additional indebtedness, and pay dividends on our capital stock or redeem, repurchase or retire our capital stock; and (ii) require us to provide additional collateral to secure the obligations under the

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Amended and Restated Credit Agreement, consisting of receivables previously securing the Second Amended and Restated Receivables Purchase Agreement.

Termination of Account Receivable Securitization Facility

Simultaneously with our entry into the Amended and Restated Credit Agreement, we terminated the Second Amended and Restated Receivables Purchase Agreement, dated as of October 19, 2011 (as amended from time to time, the “A/R Facility”), by and among ANR Receivables Funding, LLC, as seller, Alpha Natural Resources, LLC, as servicer, PNC Bank, National Association, as administrator and LC Bank (as defined therein), and the other parties thereto from time to time. The A/R Facility provided for the issuance of letters of credit in a maximum aggregate amount of $275.0 million. As of May 22, 2013, the outstanding amount of such letters of credit was approximately $160.0 million, all of which have been transferred to the Amended and Restated Credit Agreement and are deemed to be issued thereunder.

3.75% Convertible Senior Notes due 2017

On May 9, 2013, we issued $345.0 million principal amount of convertible senior notes due 2017 (the “3.75% Convertible Notes”). The 3.75% Convertible Notes bear interest at a rate of 3.75% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, and will mature on December 15, 2017. The proceeds from the 3.75% Convertible Notes, together with cash on hand, were used to repurchase approximately $225.8 million of our outstanding 3.25% Convertible Notes and approximately $181.4 million of our outstanding 2.375% Convertible Notes.

We separately account for the liability and equity components of the 3.75% Convertible Notes under ASC 470-20, which requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers' nonconvertible debt borrowing rate. The related deferred loan costs and discount are being amortized and accreted, respectively, over the four-year term of the 3.75% Convertible Notes, and provide for an effective interest rate of 8.49%. As of June 30, 2013, the carrying amount of the debt component was $284.6 million, and the unamortized debt discount was $60.4 million. As of June 30, 2013, the carrying amount of the equity component was $61.9 million. 

The 3.75% Convertible Notes are our senior unsecured obligations and rank equally with all of our existing and future senior unsecured indebtedness. The 3.75% Convertible Notes are guaranteed on a senior unsecured basis by each of our current and future wholly owned domestic subsidiaries that guarantee our obligations under our 9.75% senior notes due 2018. The 3.75% Convertible Notes are effectively subordinated to all of our existing and future secured indebtedness and all existing and future liabilities of our non-guarantor subsidiaries, including trade payables.

The 3.75% Convertible Notes are convertible in certain circumstances and in specified periods at an initial conversion rate of 99.0589 shares of common stock per $1,000 of principal amount of notes, subject to adjustment upon the occurrence of certain events set forth in the fourth supplemental indenture (the “Fourth Supplemental Indenture”) to the indenture dated June 1, 2011 (the “Base Indenture” and, together with the Fourth Supplemental Indenture, the “3.75% Convertible Notes Indenture”) governing the 3.75% Convertible Notes, equivalent to an initial conversion price of approximately $10.10 per share of common stock. Upon conversion, the notes may be settled, at our election, in cash, shares of our common stock or a combination thereof. Our intention is to settled an conversions using a combination of cash and shares.

The 3.75% Convertible Notes Indenture contains customary terms and covenants, including that upon certain events of default occurring and continuing, either the trustee, Union Bank of California, or the holders of not less than 25% in aggregate principal amount of the 3.75% Convertible Notes then outstanding may declare the principal of the 3.75% Convertible Notes and any accrued and unpaid interest thereon immediately due and payable. In the case of certain events of bankruptcy, insolvency or reorganization relating to us, the principal amount of the 3.75% Convertible Notes together with any accrued and unpaid interest thereon will automatically become due and be immediately payable.

The 3.75% Convertible Notes were not convertible as of June 30, 2013 and, as a result, have been classified as long-term debt as of that date.

As of June 30, 2013, our total long-term indebtedness consisted of the following (in thousands):

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	June 30, 2013
6.25% senior notes due 2021	$	700,000
6.00% senior notes due 2019	800,000
9.75% senior notes due 2018	500,000
Term loan due 2020	625,000
3.75% convertible senior notes due 2017	345,000
3.25% convertible senior notes due 2015	310,375
2.375% convertible senior notes due 2015	106,097
Other	85,694
Debt discount, net	(88,528		)
Total long-term debt	$	3,383,638
Less current portion	(28,839		)
Long-term debt, net of current portion	$	3,354,799

Analysis of Material Debt Covenants

We were in compliance with all covenants under the Credit Agreement and the indentures governing our notes as of June 30, 2013. A breach of the covenants in the Amended and Restated Credit Agreement or the indentures governing our notes, including the financial covenants under the Amended and Restated Credit Agreement that measure ratios based on Adjusted EBITDA, could result in a default under the Amended and Restated Credit Agreement or the indentures governing our notes and the respective lenders and note holders could elect to declare all amounts borrowed due and payable. Any acceleration under either the Amended and Restated Credit Agreement or one of the indentures governing our notes would also result in a default under the other indentures governing our notes. Additionally, under the Amended and Restated Credit Agreement and the indentures governing our notes our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

Actual covenant levels and required levels set forth in our Credit Agreement are:

	Actual Covenant Levels; Period Ended June 30, 2013		Required Covenant Levels;
Minimum Adjusted EBITDA to cash interest ratio	4.7x		1.5x
Maximum total senior secured debt less unrestricted cash to Adjusted EBITDA ratio	(.08)x		2.5x
Minimum consolidated liquidity (in thousands)	$	1,930,164	$	300,000

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

Certain non-cash items that may adjust EBITDA in the compliance calculation are: (a) accretion of asset retirement obligations; (b) amortization of intangibles; (c) any long-term incentive plan accruals or any non-cash compensation expense recorded from grants of stock appreciation or similar rights, stock options or other rights to officers, directors and employees; and (d) gains or losses associated with the change in fair value of derivative instruments. Certain non-recurring items that may adjust EBITDA in the compliance calculation are: (a) business optimization expenses or other restructuring charges; (b) non-cash impairment charges; (c) certain non-cash expenses or charges arising as a result of the application of acquisition accounting; (d) non-cash charges associated with loss on early extinguishment of debt; and (e) charges associated with litigation, arbitration, or contract settlements. Certain other items that may adjust EBITDA in the compliance calculation are:

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(a) after-tax gains or losses from discontinued operations; (b) franchise taxes; and (c) other non-cash expenses that do not represent an accrual or reserve for future cash expense.

The calculation of adjusted EBITDA shown below is based on our results of operations in accordance with the Credit Agreement and therefore, is different from EBITDA presented elsewhere in this Quarterly Report on Form 10-Q.

	Three Months Ended												Twelve Months Ended
	September 30, 2012			December 31, 2012			March 31, 2013			June 30, 2013			June 30, 2013
	(In thousands)
Net loss	$	(46,146	)	$	(127,578	)	$	(110,788	)	$	(185,681	)	$	(470,193	)
Interest expense	47,345			58,834			59,401			60,953			226,533
Interest income	(1,328		)	376			(1,026		)	(1,099		)	(3,077		)
Income tax expense (benefit)	(83,182		)	26,769			(76,358		)	(89,527		)	(222,298		)
Amortization of acquired intangibles, net	(11,682		)	(5,858		)	(5,431		)	3,591			(19,380		)
Depreciation, depletion and amortization	238,894			240,059			239,013			214,716			932,682
EBITDA	$	143,901		$	192,602		$	104,811		$	2,953		$	444,267
Non-cash charges (1) (2)	56,800			218,557			20,611			73,815			369,783
Other adjustments (1) (3)	14,206			40,747			12,121			20,805			87,879
Adjusted EBITDA	$	214,907		$	451,906		$	137,543		$	97,573		$	901,929

⁽¹⁾  Calculated in accordance with the Credit Agreement.

⁽²⁾  Includes $188.2 million for the three months ended December 31, 2012 characterized under the Credit Agreement as goodwill impairment, which corresponds to goodwill impairment described in the Annual Report on Form 10-K for the year ending December 31, 2012.

⁽³⁾  Includes $11.3 million million for the three months ended June 30, 2013, $11.1 million for the three months ended March 31, 2013, $40.3 million for the three months ended December 31, 2012 and $13.7 million for the three months ended September 30, 2012 characterized under the Credit Agreement as business optimization expenses and other restructuring charges, which corresponds to asset impairment and restructuring charges described in our Annual Report on Form 10-K for the year ending December 31, 2012 and asset impairment and restructuring charges described elsewhere in this Quarterly Report on Form 10-Q for the period ending June 30, 2013.

Cash interest is calculated in accordance with the Credit Agreement and is equal to interest expense less interest income and non-cash interest expense plus pro forma interest expense. Cash interest for the twelve months ended June 30, 2013 is calculated as follows (in thousands):

Interest expense	$	226,533
Less interest income	(3,077		)
Less non-cash interest expense	(53,420		)
Plus pro forma interest	19,901
Net cash interest expense (1)	$	189,937

⁽¹⁾  Calculated in accordance with the Credit Agreement

Consolidated liquidity is calculated in accordance with our Credit Agreement and is equal to the sum of all unrestricted cash and cash equivalents, marketable securities and unused revolving credit facility commitments available under our Credit Agreement. As of June 30, 2013, we had available liquidity of $1.9 billion, including cash and cash equivalents of $512.0 million, marketable securities of $468.8 million and $0.9 billion of unused revolving credit facility commitments available under our Credit Agreement.

Off-Balance Sheet Arrangements

In the normal course of business, we are a party to certain off-balance sheet arrangements. These arrangements include

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guarantees, operating leases, indemnifications and financial instruments with off-balance sheet risk, such as bank letters of

credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our Condensed

Consolidated Balance Sheets. However, the underlying obligations that they secure, such as asset retirement obligations, self-insured workers’ compensation liabilities, royalty obligations and certain retiree medical obligations, are reflected in our

Condensed Consolidated Balance Sheets.

We are required to provide financial assurance in order to perform the post-mining reclamation required by our mining permits, pay our federal production royalties, pay workers’ compensation claims under self-insured workers’ compensation laws in various states, pay federal black lung benefits, pay retiree health care benefits to certain retired UMWA employees and perform certain other obligations. In order to provide the required financial assurance, we generally use surety bonds and self-bonding for post-mining reclamation and bank letters of credit for self-insured workers’ compensation obligations and UMWA retiree health care obligations. Federal black lung benefits are paid from a dedicated trust fund to which future contributions will be required. Bank letters of credit are also used to collateralize a portion of the surety bonds.

As of June 30, 2013, we had outstanding surety bonds with a total face amount of $438.9 million to secure various obligations and commitments. In addition, as collateral for various obligations and commitments, we had $150.6 million of letters of credit in place under our Amended and Restated Credit Agreement. These outstanding letters of credit served as collateral for workers’ compensation bonds, reclamation surety bonds, secured UMWA retiree health care obligations, secured workers’ compensation obligations and other miscellaneous obligations. We meet frequently with our surety providers and have discussions with certain providers regarding the extent of and the terms of their participation in the program. These discussions may cause us to shift surety bonds between providers or to alter the terms of their participation in our program. In the event that our self-bonding capacity or additional surety bonds become unavailable or our surety bond providers require additional collateral, we would seek to secure our obligations with letters of credit, cash deposits or other suitable forms of collateral, which would likely require greater use of our Amended and Restated Credit Agreement for this purpose. A failure to maintain our self-bonding status, an inability to acquire surety bonds or additional collateral requirements could result from a variety of factors, including a significant decline in our financial position or creditworthiness, and restrictions on the availability of collateral under our credit agreements and indentures.

Other

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

Contractual Obligations

Our coal purchase commitments totaled $20.7 million for the remainder of 2013. We entered into capital leases during the six months ended June 30, 2013 which have principal payments of $1.3 million in the remainder of 2013, $2.7 million in 2014, $2.8 million in 2015, and $0.7 million in 2016. In May 2013, we issued $345.0 million of 3.75% Convertible Notes and entered into a $625.0 million Term Loan B due 2020, which amortizes in quarterly installments at a rate of 1.0% per year and bears an interest rate at the Company's option of either LIBOR plus a margin of 2.75% (subject to a LIBOR floor of 0.75%) or an Alternate Base Rate (ABR) plus a margin of 1.75% (subject to an ABR floor of 1.75%) and repaid the outstanding principal amount of $525.0 million of our Term Loan A. There have been no other significant changes as of June 30, 2013 to contractual obligations as reported in our Annual Report on Form 10-K for the twelve months ended December 31, 2012.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts. These estimates and assumptions are based on information available as of the date of the financial statements. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of results that can be expected for the full year. Please refer to the section entitled “Critical Accounting Policies and Estimates” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-

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K for the year ended December 31, 2012 for a discussion of our critical accounting policies and estimates other than those discussed below.

Goodwill

Goodwill represents the excess of purchase price over the fair value of the identifiable net assets of acquired companies. Goodwill is not amortized; instead, it is tested for impairment annually as of October 31 of each year, or more frequently if indicators of impairment exist.

We test goodwill for impairment using a fair value approach at the reporting unit level. We perform our goodwill impairment test in two steps. Step one compares the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit determined in step one is lower than its carrying value, we proceed to step two, which compares the carrying value of goodwill to its implied fair value. In estimating the implied fair value of goodwill at a reporting unit, we assigned the fair value of the reporting unit to all of the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of carrying value of goodwill over its implied fair value at a reporting unit is recorded as impairment.

The valuation methodology utilized in step one to estimate the fair value of the reporting units is based on both a market and income approach and is within the range of fair values yielded under each approach. The income approach is based on a discounted cash flow methodology in which expected future net cash flows are discounted to present value, using an appropriate after-tax weighted average cost of capital (discount rate). The market approach is based on a guideline company and similar transaction methodology. Under the guideline company approach, certain operating metrics from a selected group of publicly traded guideline companies that have similar operations to the Company's reporting units are used to estimate the fair value of the reporting units. Under the similar transaction approach, recent merger and acquisition transactions for companies that have similar operations to the Company's reporting units are used to estimate the fair value of the Company's reporting units.

The income approach is dependent upon a number of significant management estimates about future performance including sales volumes and prices, costs to produce, income taxes, capital spending, working capital changes and the after-tax weighted average cost of capital. Changes in any of these assumptions could materially impact the estimated fair value of our reporting units. Our forecasts of coal prices generally reflect a long-term outlook of market prices expected to be received for our coal. However, coal prices are influenced by global market conditions beyond our control. If actual coal prices are less than our expectations, it could have a material impact on the fair value of our reporting units. Our forecasts of costs to produce coal are based on our operating forecasts and an assumed inflation rate for materials and supplies such as steel, diesel fuel and explosives. However, the costs of the materials and supplies used in our production process such as steel, diesel fuel and explosives are influenced by global market conditions beyond our control. If actual costs are higher or if inflation increases above our expectations, it could have a material impact on the fair value of our reporting units. We also are faced with increasingly stringent safety standards and governmental regulation, much of which is beyond our control, which could increase our costs and materially decrease the fair value of our reporting units. For a further discussion of the factors that could result in a change in our assumptions, see “Risk Factors” in our Annual Report on Form 10-K, this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission.

As of June 30, 2013, the Company's goodwill totaled $561.8 million, all of which relates to one reporting unit within our Eastern Coal Operations. As of October 31, 2012, the date of our last goodwill impairment test, the fair value of this reporting unit exceeded its carrying value by approximately $400 million, or 9%. Continued global economic weakness and in particular further deterioration or continued weakness for an extended period of time in the global metallurgical coal market, as well as other factors that could result in adverse changes in the key assumptions described above, could lead to a reduction in the fair value of the reporting unit. Accordingly, the goodwill associated with this reporting unit may be at risk for further impairment charges.

Income Taxes

We recognize deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we analyze both positive and negative evidence. Such evidence includes objective evidence obtained from our historical earnings, future sales commitments, outlooks on the coal industry by us and third parties, expected level of future earnings (with sensitivities on expectations considered), timing of temporary difference reversals, ability or inability to meet forecasted earnings, unsettled industry circumstances, ability to utilize net operating losses, available tax planning strategies, limitations on deductibility of temporary differences, and the impact of the alternative minimum tax on the utilization of deferred tax assets. The valuation allowance is monitored and reviewed quarterly. If our conclusions change in the future

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regarding the realization of a portion or all of our deferred tax assets, we may record a change to the valuation allowance through income tax expense in the period the determination is made, which may have a material impact on our results. As of June 30, 2013, we were in a net deferred tax liability position with tax computed at regular tax rates on gross temporary differences. Deferred tax assets related to minimum tax credit carryforwards and federal and state net operating losses partially offset the net deferred tax liability related to gross temporary differences. If deferred tax assets related to alternative minimum tax credit carryforwards and federal net operating loss carryforwards increase relative to our net deferred tax liability related to gross temporary differences, we may be required to establish additional valuation allowances.

The West Virginia corporate income tax rate is scheduled to decrease from 7% to 6.5%, effective for tax years starting on or after January 1, 2014.  Under West Virginia statutory tax law, the tax rate decrease is contingent upon the reserve balance, as measured on June 30, 2013, meeting or exceeding 10% of the General Revenue Fund budgeted for the fiscal year starting July 1, 2013.  At the time of this filing, West Virginia has not announced whether the General Revenue Fund requirements have been met.  Therefore, we have not remeasured our deferred tax assets and liabilities at June 30, 2013 to reflect the impact of the West Virginia corporate tax rate reduction.  We will monitor announcements from West Virginia and remeasure the deferred tax assets and liabilities in the reporting period during which a formal announcement is made by West Virginia. 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Commodity Price Risk

We manage our commodity price risk for coal sales through the use of long-term coal supply agreements. As of July 17, 2013, we had sales commitments for approximately 99% of planned shipments for 2013, 2% of which is unpriced. The discussion below presents the sensitivity of the market value of selected financial instruments to selected changes in market rates and prices. The range of changes reflects our view of changes that are reasonably possible over a one-year period. Market values are the present value of projected future cash flows based on the market rates and prices chosen.

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

We expect to use approximately 29.2 million gallons of diesel fuel for the last six months of 2013 and 61.4 million gallons of diesel fuel for 2014. Through our derivative swap contracts, we have fixed prices for approximately 64% and 41% of our expected diesel fuel needs for the remaining six months of 2013 and for the year of 2014, respectively. If the price of diesel fuel were to decrease during the remaining six months of 2013, our expense resulting from our diesel fuel derivative swap contracts would increase, which would be offset by a decrease in the cost of our physical diesel fuel purchases.

Credit Risk

Our credit risk is primarily with electric power generators and steel producers. Our policy is to independently evaluate each customer’s creditworthiness prior to entering into transactions and to 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.

Item 4. Controls and Procedures

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

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

For a description of the Company’s legal proceedings, see Note 16, part (d), to the unaudited condensed consolidated financial statements, which is incorporated herein by reference.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” sections in the Annual Report on Form 10-K for the year ended December 31, 2012 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, together with the cautionary statement under the caption “Cautionary Note Regarding Forward Looking Statements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report. These described risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Share Repurchase Program (2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (000’s omitted) (3)
April 1, 2013 through April 30, 2013	2,075	$	8.13	—	500,002
May 1, 2013 through May 31, 2013	2,532	$	7.05	—	500,002
June 1, 2013 through June 30, 2013	42,366	$	6.21	—	500,002
	46,973			—	500,002

⁽¹⁾  In November 2008, the Board of Directors authorized the Company to repurchase common shares from employees to satisfy the employees’ minimum statutory tax withholdings upon the vesting of restricted stock and performance shares. During the three months ended June 30, 2013, the Company issued 154,543 shares of common stock to employees upon vesting of restricted stock and restricted stock units and repurchased 46,973 shares of common stock to satisfy the employees’ minimum statutory tax withholdings.

⁽²⁾  On August 22, 2011, the Board of Directors authorized the company to repurchase up to $600,000,000 of common shares. Under this program, we may repurchase shares from time to time on the open market or in privately negotiated transactions, including structured or accelerated transactions, at prevailing prices as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, we may make purchases

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pursuant to one or more trading plans under Rule 10b5-1 of the Exchange Act, which allow us to repurchase shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. This program may be discontinued at any time.

⁽³⁾  Management cannot estimate the number of shares that will be repurchased because decisions to purchase are based on company outlook, business conditions and current investment opportunity. The amount of shares we may repurchase is subject to the terms governing our Credit Facility.

Item 4. Mine Safety Disclosures

Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 to this Quarterly Report on Form 10-Q.

Item 5. Other Information

In the table entitled Reconciliation of Adjusted Net Loss to Net Loss, which accompanied our earnings press release issued on August 2, 2013, as furnished on Form 8-K and Form 8-K/A on that date, and which accompanied the investor presentation furnished on Form 8-K on August 5, 2013, “Estimated income tax effect of above adjustments” should be $(17,944) and $(20,621) for the three and six months ended June 30, 2013, respectively, and the adjusted amounts that include this item should also be adjusted accordingly. Corrected versions of the earnings press release and investor presentation are available on our website, www.alphanr.com.

Item 6. Exhibits

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q.

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SIGNATURES

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

	ALPHA NATURAL RESOURCES, INC.
Date: August 8, 2013	By:	/s/ Frank J. Wood
	Name:	Frank J. Wood
	Title:	Executive Vice President and Chief Financial Officer         (Principal Financial and Accounting Officer)

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Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on August 5, 2009).
3.2	Certificate of Amendment of the Restated Certificate of Incorporation of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on June 1, 2011).
3.3	Amended and Restated Bylaws of Alpha Natural Resources, Inc. (Incorporated by reference to Exhibit 3.4 to the Current Report on Form 8-K of Alpha Natural Resources, Inc. (File No. 001-32331) filed on December 27, 2011).
4.1	Indenture, dated as of June 1, 2011, among Alpha Natural Resources, Inc., the Guarantors named therein and Union Bank, N.A., as trustee (incorporated herein by reference to Exhibit 4.1 of Alpha's Current Report on Form 8-K filed on June 1, 2011).
4.2	Fourth Supplemental Indenture, dated as of May 13, 2013, among Alpha Natural Resources, Inc., the Guarantors named therein and Union Bank, N.A., as trustee (incorporated herein by reference to exhibit 4.2 of Alpha's Current Report on Form 8-K filed on May 13, 2013).
4.3	Form of 3.75% Convertible Senior Note due 2017 (incorporated herein by reference to exhibit 4.3 of Alpha's Current Report on Form 8-K filed on May 13, 2013).
10.1	Fourth Amended and Restated Credit Agreement, dated as of May 22, 2013, among Alpha Natural Resources, Inc., the lenders party thereto and Citicorp North America, Inc., as administrative agent and collateral agent (incorporated herein by reference to Exhibit 10.1 of Alpha's Current Report on Form 8-K filed on May 22, 2013).
10.2‡	Alpha Natural Resources, Inc. Amended and Restated 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 of Alpha Natural Resources, Inc. filed on May 22, 2013).
10.3‡	Alpha Natural Resources, Inc. Amended and Restated Annual Incentive Bonus Plan (incorporated herein by reference to Exhibit 10.1 of Alpha's Current Report on Form 8-K filed on May 24, 2013).
12.1*	Computation of Ratio of Earnings to Fixed Charges
12.2*	Computation of Other Ratios
31(a)*	Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
31(b)*	Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32(a)*	Certification Pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32(b)*	Certification Pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
95*	Mine Safety Disclosure Exhibit
101.INS*	XBRL instance document
101.SCH*	XBRL taxonomy extension schema
101.CAL*	XBRL taxonomy extension calculation linkbase
101.DEF*	XBRL taxonomy extension definition linkbase
101.LAB*	XBRL taxonomy extension label linkbase
101.PRE*	XBRL taxonomy extension presentation linkbase

* Filed herewith.

‡ Management contract of compensatory plan or arrangement

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