Alpha Natural Resources 10-Q 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended March 31, 2008
For the transition period from to
Commission File No. 1-32423
ALPHA NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer o Accelerated filer ¨ Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes þ No
Number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of April 23, 2008— 70,301,997
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share and per share amounts)
See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except share and per share amounts)
See accompanying notes to condensed consolidated financial statements.
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Condensed Consolidated Statements of Cash Flows (Unaudited)
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ALPHA NATURAL RESOURCES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) — (Continued)
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2008
(In thousands, except percentages and share data)
(1) Business and Basis of Presentation
Organization and Business
Alpha Natural Resources, Inc. and its consolidated subsidiaries (the “Company”) are primarily engaged in the business of extracting, processing and marketing coal from deep and surface mines, located in the Central and Northern Appalachian regions of the United States, for sale to utility and steel companies in the United States and in international markets.
Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with U.S generally accepted accounting principles for interim financial reporting. Accounting measurements at interim dates inherently rely on estimates more than at year-end; however, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Significant items subject to such estimates and assumptions include inventories; mineral reserves; allowance for non-recoupable advanced mining royalties; asset retirement obligations; employee benefit liabilities; future cash flows associated with assets; useful lives for depreciation, depletion, and amortization; workers’ compensation and black lung claims; postretirement benefits other than pensions; income taxes; revenue recognized using the percentage of completion method; and fair value of financial instruments. Due to the subjective nature of these estimates, actual results could differ from those estimates. Results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the year ending December 31, 2008. These financial statements should be read in conjunction with the audited financial statements and related notes as of and for the year ended December 31, 2007 included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Prior period coal revenues and cost of coal sales have been adjusted to exclude changes in the fair value of coal derivative contracts to conform to the current year presentation. These reclassification adjustments had no effect on previously reported income from operations or net income.
(2) New Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company does not expect this guidance to have a significant impact on our consolidated financial statements; however management is currently assessing the impact of adopting SFAS 161.
In December 2007, the Financial Accounting Standards Board issued SFAS 141(R), Business Combinations, and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements (“SFAS 160”), an amendment of ARB No. 51. SFAS 141(R) and SFAS 160 will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS 141(R) retains the fundamental requirements in SFAS 141 while providing additional definitions, such as the definition of the acquirer in a purchase and improvements in the application of how the acquisition method is applied. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests, and classified as a component of equity. These Statements become simultaneously effective January 1, 2009. Early adoption is not permitted. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
(3) Earnings Per Share
Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed using the treasury method by dividing net income by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Common stock equivalents include the number of shares issuable upon exercise of outstanding options less the number of shares that could have been purchased with the proceeds from the exercise of the options based on the average price of common stock during the period. Restricted shares which have not vested at the end of the reporting period are excluded from the calculation of basic earnings per share.
The computations of basic and diluted net income per share are set forth below:
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Inventories consisted of the following:
(5) Income Taxes
A reconciliation of the statutory federal income tax expense at 35% to income before income taxes and minority interest, and the actual income tax expense is as follows:
The Company has concluded that it is more likely than not that deferred tax assets, net of valuation allowances, currently recorded will be realized. The amount of the valuation allowance takes into consideration the Alternative Minimum Tax system as required by SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). The Company monitors the valuation allowance each quarter and makes adjustments to the allowance as appropriate.
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(6) Long-Term Debt
Long-term debt consisted of the following:
On October 26, 2005, Alpha Natural Resources, LLC (“ANR LLC”), entered into a senior secured credit facility with a group of lending institutions led by Citicorp North America, Inc., as administrative agent (the “Credit Agreement”). The Credit Agreement consists of a $250,000 term loan facility and a $275,000 revolving credit facility. The revolving credit facility includes borrowing capacity available for letters of credit.
In March 2008, the Company and our subsidiary, ANR LLC, entered into two amendments to the Credit Agreement. One of these amendments increased the amount available under the revolving credit portion of the facility from $275,000 to $375,000. The other amendment, among other things, removed Alpha Natural Resources, Inc. from the application of most of the restrictive covenants and added exceptions to certain other covenants relating to payment of dividends and distributions.
The Credit Agreement and the Senior Notes each place restrictions on the ability of ANR LLC and its subsidiaries to make distributions or loans to the Company. At March 31, 2008, ANR LLC had net assets of $400,945 and, except for allowable distributions for the payment of income taxes, administrative expenses and, in certain circumstances, dividends or repurchases of common stock of the Company, the net assets of ANR LLC are restricted.
All of the Company borrowings under the Credit Agreement are at a variable rate, so the Company is exposed to the effect of rising interest rates. As of March 31, 2008, the Company has a $233,125 term loan outstanding with a variable interest rate based upon the 3-month London Interbank Offered Rate (“LIBOR”) (2.67% at March 31, 2008) plus the applicable margin (1.75%, at March 31, 2008). To reduce the Company's exposure to rising interest rates, effective May 22, 2006, the Company entered into a pay-fixed, receive variable interest rate swap on the notional amount of $233,125 for a period of approximately six and one-half years. In effect, this swap converted the variable interest rates based on LIBOR to a fixed interest rate of 5.59% plus the applicable margin defined in the debt agreement for the remainder of our term loan. The Company accounts for the interest rate swap as a cash flow hedge and changes in fair value of the swap are recorded to other comprehensive income (loss). The critical terms of the swap and the underlying debt instrument that it hedges coincide, resulting in no hedge ineffectiveness being recognized in the income statement during the quarter ended March 31, 2008. The fair value of the swap at March 31, 2008 was $21,999 which was recorded in other liabilities in the condensed consolidated balance sheet and the offsetting unrealized loss of $16,564, net of tax benefit, was recorded in accumulated other comprehensive loss. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive loss related to the derivative hedging instrument are reclassified into earnings to obtain a net cost on the debt obligation of 5.59% plus the applicable margin. For the three months ended March 31, 2008 and 2007, $448 and $133, respectively, of losses in accumulated other comprehensive loss were reclassified into interest expense.
(7) Asset Retirement Obligation
At March 31, 2008 and December 31, 2007, the Company had recorded asset retirement obligation accruals for mine reclamation and closure costs totaling $91,852 and $91,199, respectively. The portion of the costs expected to be incurred within a year in the amounts of $8,187 and $8,179 at March 31, 2008 and December 31, 2007, respectively, is included in accrued expenses and other current liabilities. These regulatory obligations are secured by surety bonds in the amount of $144,273 at March 31, 2008 and $142,471 at December 31, 2007. Changes in the reclamation obligation were as follows:
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(8) Share-Based Compensation Awards
Stock option activity for the three months ended March 31, 2008 is summarized in the following table:
The aggregate intrinsic value of options outstanding at March 31, 2008 was $16,852 and the aggregate intrinsic value of exercisable options was $5,594. The total intrinsic value of options exercised during the three months ended March 31, 2008 and 2007 was $2,048 and $0, respectively. Cash received from the exercise of stock options during the three months ended March 31, 2008 and 2007 was $1,688 and $0, respectively. As of March 31, 2008, $2,686 of unrecognized compensation cost related to stock options is expected to be recognized as expense over a weighted-average period of 1.78 years. The weighted average grant date fair value of options outstanding at March 31, 2008 and 2007 was $7.38 and $7.57, respectively.
Restricted Stock Awards
Non-vested share award activity for the quarter ended March 31, 2008 is summarized in the following table:
The fair value of non-vested restricted share awards is estimated based on the closing stock price on the date of grant, and for purposes of expense recognition, the total number of awards expected to vest is adjusted for estimated forfeitures. As of March 31, 2008, there was $13,063 of unamortized compensation cost related to non-vested shares, which is expected to be recognized as expense over a weighted-average period of 2.17 years.
Performance Share Awards
2008 Granted Awards
The Company granted 164,737 performance share awards in the first quarter of 2008. Recipients of these awards can receive shares of the Company's common stock at the end of a performance period which ends on December 31, 2010, based on the Company's actual performance against pre-established operating income goals, strategic goals, and total shareholder return goals. In order to receive the shares, the recipient must also be employed by the Company on the vesting date. The performance share awards represent the number of shares of common stock to be awarded based on the achievement of targeted performance and may range from 0 percent to 150 percent of the targeted amount. The grant date fair value of the awards related to operating income targets is based on the closing price of the Company's common stock on the New York Stock Exchange on the grant date of the award and is being amortized over the performance period. The awards related to strategic goals do not meet the criteria for grant date pursuant to SFAS No. 123(R), Share-based Payments (as amended), (“SFAS 123(R)”). The fair value of the awards related to total shareholder return targets is based upon a Monte Carlo simulation and is being amortized over the performance period. For executive officers of the Company to receive these performance share awards, the Company must achieve a pre-determined EBITDA level during the performance period in addition to the criteria set for all other employees participating in the plan. The Company reassesses at each reporting date whether achievement of each of the performance conditions is probable, as well as estimated forfeitures, and adjusts the accruals of compensation expense as appropriate. At March 31, 2008, the Company assessed the operating income and total shareholder return targets as probable of achievement. As of March 31, 2008, there was $2,821 of unamortized compensation cost related to the performance share awards for 2008. This unamortized compensation cost is expected to be recognized over the periods ending December 31, 2010.
Share-based compensation expense measured in accordance with SFAS 123(R) totaled $2,989 ($2,276 on a net-of-tax basis, or $0.03 per basic and diluted share) and $2,650 ($1,994 on a net-of-tax basis, or $0.03 per basic and diluted share) for the three months ended March 31, 2008 and 2007, respectively.
As of March 31, 2008 and 2007, approximately 66% and 70%, respectively, of share-based compensation expense is reported as selling, general and administrative expenses, and approximately 34% and 30%, respectively, is reported as a component of cost of sales, and both are included in the Corporate and Eliminations category for segment reporting purposes (Note 14). As of March 31, 2008 and 2007, approximately $170 and $206, respectively, of stock-based compensation costs was capitalized as a component of inventories. Under SFAS 123(R), the Company is required to report the benefits of income tax deductions that exceed recognized compensation as cash flow from financing activities. The excess tax benefits for the quarters ended March 31, 2008 and 2007 were $734 and $0, respectively.
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(9) Derivative Financial Instruments
Derivative financial instruments are accounted for in accordance with SFAS 133, which requires all derivative financial instruments to be reported on the balance sheet at fair value. Changes in fair value are recognized either in earnings or equity, depending on whether the transaction qualifies for hedge accounting and if so, the nature of the underlying exposure being hedged and how effective the derivatives are at offsetting price movements in the underlying exposure.
The Company accounts for certain forward purchase and forward sale coal contracts that do not qualify under the “normal purchase and normal sale” exception of SFAS 133 as derivatives and records these contracts as assets or liabilities at fair value. Changes in fair value of these derivative contracts have been recorded as an (increase) decrease in fair value of derivative coal contracts, net, and included as a component of costs and expenses in the consolidated statements of income. At March 31, 2008, the Company had unrealized gains (losses) on open purchase and open sales contracts of $43,609 and ($20,177), respectively. These amounts are recorded in prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively.
The Company has utilized interest rate swap agreements to modify the interest characteristics of a portion of the Company's outstanding debt. The swap agreements essentially convert variable-rate debt to fixed-rate debt and have been designated as cash flow hedges. Changes in the fair value of interest rate swaps designated as hedging instruments of the variability of cash flows associated with floating rate and long-term debt obligations are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into interest expense in the same period in which the related floating rate debt obligation affects earnings.
The Company is also exposed to the risk of fluctuations in cash flows related to its purchase of diesel fuel. The Company has entered into diesel fuel swap agreements and diesel put options to reduce the volatility in the price of diesel fuel for its operations. The diesel fuel swap agreements and put options are not designated as hedges and therefore the changes in the fair value for these derivative instrument contracts have been recorded in cost of sales. These diesel fuel swaps and put options use the NYMEX New York Harbor #2 heating oil as the underlying commodity reference price. Any unrealized loss is recorded in other current liabilities and any unrealized gain is recorded in other current assets.
As of March 31, 2008 approximately 10,848 gallons or 54% of the Company's anticipated 2008 remaining diesel fuel usage has been capped with the swap agreements in which the company has agreed to pay a fixed price and receive a floating price per gallon of diesel fuel. The fixed prices for the notional quantity of 10,848 gallons range from $2.39 to $2.90 per gallon for the last nine months of 2008. The fair value of these diesel fuel swap agreements is an asset of $2,739 as of March 31, 2008.
As of March 31, 2008, the Company entered into diesel fuel put options for 4,486 gallons at a price range of $2.20 to $2.45 per gallon for the last nine months of 2008. In the event that diesel prices decline below the strike price, the Company can exercise the put options and sell the 4,486 gallons at the strike price, therefore reducing the impact of the swap agreements. These put options provide downside protection and reduce the fixed position risk of the outstanding diesel fuel swap agreements in the event of a decline in diesel fuel prices below the strike price. The fair value of these diesel fuel put options is an asset of $122 as of March 31, 2008.
(10) Fair Value Measurements
The Company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”) on January 1, 2008. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Additionally, on January 1, 2008, the Company elected the partial adoption of SFAS 157 under the provisions of Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 157-2, which amends SFAS 157 to allow an entity to delay the application of this statement until January 1, 2009 for certain non-financial assets and liabilities. The adoption of SFAS 157 did not have a material impact on our consolidated financial statements.
The Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115 (“SFAS 159”), on January 1, 2008. This standard permits entities to choose to measure many financial instruments and certain other items at fair value. The adoption of SFAS 159 did not impact our consolidated financial statements, as the Company elected not to measure any additional financial assets or liabilities at fair value other than those which were recorded at fair value prior to adoption.
SFAS 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset and liability. As a basis for considering such assumptions, SFAS 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy defined by SFAS 157 are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities;
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
Level 3 - Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.
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The following table sets forth by level within the fair value hierarchy the company's financial assets that were accounted for at fair value on a recurring basis as of March 31, 2008. As required by SFAS 157, 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 valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the tables above.
Level 2 Fair Value Measurements
Forward Coal Purchases and Sales — The fair value of the forward coal purchases and sales contracts were estimated using discounted cash flow calculations based upon forward commodity price curves. The curves were obtained from independent pricing services reflecting broker market quotes.
Diesel Fuel derivatives — Since the Company’s diesel fuel derivative instruments are not traded on a market exchange, the fair values are determined using valuation models which include assumptions about commodity prices based on those observed in the underlying markets.
Interest Rate Swaps — The fair value of the interest rate swaps were estimated using discounted cash flow calculations based upon forward interest-rate yield curves. The curves were obtained from independent pricing services reflecting broker market quotes.
(11) Postretirement Benefits Other Than Pensions
The following table details the components of the net periodic benefit cost for the Company’s retiree medical plan (the Plan):
Employer contributions for postretirement medical benefits paid were $32 for the three months ended March 31, 2008 and 2007. Employee contributions are not expected to be made and the Plan is unfunded.
Two of the Company’s subsidiaries are required to make contributions to the 1974 UMWA Pension Plan and Trust and/or the 1993 UMWA Benefit Plan. The contributions that the Company made to these plans were $45 and $25 for the three months ended March 31, 2008 and 2007, respectively.
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(12) Comprehensive Income
Total comprehensive income is as follows for the three months ended March 31, 2008:
The following table summarizes the components of accumulated other comprehensive loss at March 31, 2008:
(13) Commitments and Contingencies
(a) 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 and performance or surety bonds. No liabilities related to these arrangements are reflected in the Company's condensed consolidated balance sheets. Management does not expect any material losses to result from these guarantees or off-balance sheet financial instruments. The amount of bank letters of credit outstanding as of March 31, 2008 was $88,195. The amount of surety bonds outstanding at March 31, 2008 related to the Company's reclamation obligations is presented in Note 7 to the condensed consolidated financial statements. The Company has provided guarantees for equipment financing obtained by certain of its contract mining operators totaling approximately $780 as of March 31, 2008. The estimated fair value of these guarantees is not significant.
The Company is a party to a number of legal proceedings incident to our normal business activities. While we cannot predict the outcome of these proceedings, we do not believe that any liability arising from these matters individually or in the aggregate should have a material impact upon our consolidated cash flows, results of operations or financial condition.
In December 2004, prior to our Nicewonder Acquisition in October 2005, the Affiliated Construction Trades Foundation brought an action against the West Virginia Department of Transportation, Division of Highways (“WVDOH”) and Nicewonder Contracting, Inc. ("NCI"), which became our wholly-owned indirect subsidiary after the Nicewonder Acquisition, in the United States District Court in the Southern District of West Virginia. The plaintiff sought a declaration that the contract between NCI and the State of West Virginia related to NCI's road construction project was illegal as a violation of applicable West Virginia and federal competitive bidding and prevailing wage laws. The plaintiff also sought an injunction prohibiting performance of the contract but has not sought monetary damages.
On September 5, 2007, the Court ruled that WVDOH and the Federal Highway Administration (which is now a party to the suit) could not, under the circumstances of this case, enter into a contract not requiring the contractor to pay the prevailing wages as required by the Davis-Bacon Act. Although the Court has not yet decided what remedy it will impose, the Company expects a ruling before mid-2008. The Company anticipates that the most likely remedy is a directive that the contract be renegotiated for such payment. If that renegotiation occurs, WVDOH has committed to agree, and NCI has a contractual right to insist, that additional costs resulting from the order will be reimbursed by WVDOH and as such neither NCI nor the Company believe, at this time, that they have any monetary expense from this ruling. As of March 31, 2008, the Company had a $6,600 long-term receivable for the recovery of these costs from WVDOH and a long-term liability for the obligations under the ruling.
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(14) 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 the Central Appalachian and Northern Appalachian regions. The Company has one reportable segment: Coal Operations, which as of March 31, 2008, consisted of 33 active underground mines and 24 surface mines located in Central Appalachia and Northern Appalachia. Coal Operations also includes the Company's purchased coal sales function, which markets the Company's Appalachian coal to domestic and international customers. The All Other category includes the Company's equipment sales and repair operations, as well as other ancillary business activities, including terminal services, trucking services, coal and environmental analysis services, and leasing of mineral rights. In addition, the All Other category includes revenues from the operation of its road construction businesses which the Company acquired on October 26, 2005 as part of the Nicewonder Acquisition. The Corporate and Eliminations category includes general corporate overhead and the elimination of intercompany transactions. The revenue elimination amount represents inter-segment revenues. The Company evaluates the performance of its segment based on EBITDA which the Company defines as net income plus interest expense, income tax expense, and depreciation, depletion and amortization, less tax benefit and interest income.
Segment operating results and capital expenditures for the three months ended March 31, 2008, and segment assets as of March 31, 2008 were as follows:
Segment operating results and capital expenditures for the three months ended March 31, 2007, and segment assets as of March 31, 2007 were as follows:
Reconciliation of total segment EBITDA to net income:
The Company markets produced, processed, and purchased coal to customers in the United States and in international markets. Export revenues totaled $218,443, approximately 43% of total coal and freight revenues, for the three months ended March 31, 2008 and $146,482, approximately 35% of total coal and freight revenues, for the three months ended March 31, 2007.
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(15) Supplemental Guarantor/Non-Guarantor Financial Information>
On June 28, 2007, Alpha NR Holding, Inc. ("Holdings") was merged into the Company and the Company became a parent guarantor of the Senior Notes. The payment obligations under the Senior Notes, issued jointly by our subsidiary ANR LLC and its wholly-owned subsidiary Alpha Natural Resource Capital Corp. in 2004, are unsecured, but are guaranteed fully and unconditionally on a joint and several basis by the Company and all its subsidiaries other than the issuers of the notes and our subsidiary, Gallatin. The following financial information sets forth separate financial information with respect to the Company, the issuers, the guarantor subsidiaries and the non-guarantor subsidiary. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions.
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