Management’s Discussion and Analysis

Operations Results of Operations Liquidity and Capital Resources Market Risk Exposures Application of Critical Accounting Pronouncements Recent Accounting Pronouncements Forward-Looking Information

Overview Summary of Cash Flow Information Operating Activities Investing Activities Business Segment Cash Flows Financing Activities Capitalization Off Balance Sheet Arrangements Contractual Obligations Other Potential Use of Credit Other Contingent Gains and Losses

Liquidity and Capital Resources

Other Potential Use of Credit

Surety Bonds

The Company is required by various state and federal laws to provide security with regard to its obligations to pay workers’ compensation, to reclaim lands used for mining by the Company’s former coal operations and to satisfy other benefits. As of December 31, 2003, the Company had outstanding surety bonds with third parties totaling approximately $178 million that it has arranged in order to satisfy the various security requirements. Most of these bonds provide financial security for previously recorded liabilities. Because some of the Company’s reclamation obligations have been assumed by purchasers of the Company’s former coal operations, $13 million of the Company’s surety bonds are expected to be replaced by purchasers’ surety bonds after the state mining permits are transferred. Surety bonds are typically renewable on a yearly basis; however, there can be no assurance the bonds will be renewed or that premiums in the future will not increase. If the surety bonds are not renewed, the Company believes that it has adequate available borrowing capacity under its U.S. Revolving Facility to provide letters of credit or other collateral to secure its obligations.

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