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 Contingent Gains and Losses

Federal Black Lung Excise Tax

In 1999, the U.S. District Court of the Eastern District of Virginia entered a final judgment in favor of certain of the Company’s subsidiaries, ruling that the Federal Black Lung Excise Tax (“FBLET”) is unconstitutional as applied to export coal sales. Through December 31, 2003, the Company has received refunds including interest of $27.2 million, including $2.8 million received in 2003. The Company continues to pursue the refund of other FBLET payments. Due to uncertainty as to the ultimate receipt of additional amounts, if any, which could amount to as much as $18 million (before income taxes), the Company has not recorded receivables for additional FBLET refunds.

Litigation

The Company is defending potentially significant civil suits. Although the Company is defending these cases vigorously and believes that its defenses have merit, it is possible that one or more of these suits ultimately may be decided in favor of the plaintiffs. If so, the Company expects that the ultimate amount of unaccrued losses could range from $0 to $40 million.

Environmental Remediation

The Company has agreed to pay a portion of the remediation costs arising from hydrocarbon contamination at a formerly owned petroleum terminal facility (“Tankport”) in Jersey City, New Jersey, which was sold in 1983. The Company is in the process of completing remediation of the site under an approved plan. In the fourth quarter of 2003, the Company and a third party reached an agreement that establishes the allocation of past costs related to the recovery of environmental costs, and as a result, the Company recognized a $5.3 million pretax gain in discontinued operations. The Company estimates its portion of the remaining clean-up and operational and maintenance costs to be $2.5 million.

Other Coal-related Contingencies

The Company has also recorded estimated liabilities for other contingent liabilities, including those for Health Benefit Act premiums to the Combined Fund, expected settlement of coal-related workers’ compensation claims and certain reclamation obligations. Annual actuarial and engineering valuations of these liabilities are typically completed in the fourth quarter each year. These are discussed in more detail at “Results of Operations – Retained Liabilities and Assets of Former Natural Resource Operations – Legacy Liabilities and Assets.”

The Company is in the process of transferring mining permits to buyers of its former coal interests. Until the permits are transferred, the Company is contingently liable for the reclamation of these mining sites.

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