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Alpha Natural Resources Reports 2007 Second Quarter Results

    ABINGDON, Va., Aug. 7 /PRNewswire-FirstCall/ --

                       Financial & Operating Highlights
             (in millions, except per-share and per-ton amounts)

                                             Q2           Q1           Q2
                                            2007         2007         2006

    Coal sales revenues                   $386.1       $376.9       $437.3

    Income from operations                 $15.3        $20.2        $42.2

    Net income                              $4.7         $8.3        $23.1

    Earnings per diluted share             $0.07        $0.13        $0.36

    EBITDA                                 $53.7        $56.1        $76.6

    Tons of coal produced and processed      6.2          6.1          6.4

    Tons of coal sold                        6.8          6.6          7.5

    Coal margin per ton                    $9.55       $10.21       $12.31

    A reconciliation of EBITDA to net income, the most directly comparable
    U.S. GAAP measure, is included in the notes accompanying the financial

Alpha Natural Resources, Inc. (NYSE:ANR), a leading supplier of high-quality Appalachian coal, reported a decline in second quarter results compared with last year due to weaker demand and a soft pricing environment for coal in 2007.

"As expected, comparisons versus last year for most U.S. coal producers have been challenged by a softer environment, particularly for thermal coal," said Michael J. Quillen, Alpha's chairman and CEO. "We have taken a number of actions to optimize our sales mix, with the goal of maximizing our cash flow potential this year while setting ourselves up for greater opportunities in 2008."

An upward move in forward pricing expectations enabled Alpha to lock in three million tons of next year's planned thermal coal production at favorable prices during the second quarter, but the company has maintained a large uncommitted position for its metallurgical coals, said Kevin Crutchfield, Alpha's president.

"We're now 80 percent contracted on our expected captive steam coal production for next year, at an average price between $47 and $48 per ton, not including sulfur and other premiums, and we'd expect that average to go up when we lock up the remaining tons of high-quality thermal coal at an expected realization in the low $50s," Crutchfield said.

"On the other hand, we remain substantially open to the strengthening domestic and global market for metallurgical coal, with nearly six million tons of metallurgical coal uncommitted and unpriced and another one million tons committed but unpriced for 2008," Crutchfield continued. "That represents about three-quarters of our planned captive metallurgical production next year, and we're optimistic about the pricing we'll ultimately obtain. Timing of our commitments is critical to both securing a home for planned production and maximizing the margin potential of those products that are in greatest demand."

Financial Performance - Second Quarter

For the most recent quarter, Alpha posted total revenues of $434.3 million and net income of $4.7 million, or $0.07 per diluted share, compared with revenues of $496.3 million and net income of $23.1 million, or $0.36 per diluted share, in the second quarter of 2006.

Coal sales revenues totaled $386.1 million in the most recent quarter, down 12 percent from the same period last year but 2 percent better than the first quarter of this year, as coal sales volumes were marginally better on a sequential basis but fell short of last year's near-record second quarter shipments. Other revenues of $6.5 million were down from $8.1 million during the second quarter of 2006, primarily due to a portion of the West Virginia King Coal highway project that was completed last September.

Earnings before interest, income taxes, depreciation, depletion and amortization (EBITDA) was $53.7 million in the quarter just ended, compared with $76.6 million in the second quarter of 2006. Declining prices and sales volumes year-over-year, as well as a 1 percent increase in unit cost of coal sales, were contributing factors. The definition of EBITDA and a reconciliation to net income, the most directly comparable U.S. GAAP measure, is provided in a table included with the accompanying financial schedules.

Selling, general and administrative (SG&A) expenses for the quarter just ended were $4.0 million lower than the same period last year, which included an IPO-related stock compensation charge of $3.2 million. Excluding the charge, SG&A declined by 6 percent. Depreciation, depletion and amortization (DD&A) totaled $37.9 million in the most recent quarter, compared with $34.2 million in the same period last year.

Production and Sales - Second Quarter

Sales volumes of thermal and metallurgical coal in the quarter just ended were 6.8 million tons, approximately 200,000 tons higher than the prior quarter but 600,000 tons short of last year's second quarter. The company announced last year that it would reduce production by one million tons to protect margins as it anticipated weaker markets in 2007. Of the 6.8 million tons sold, 2.5 million tons were metallurgical coal at an average realization per ton of $71.39, while 4.3 million tons of thermal coal were sold at an average realization per ton of $47.76.

As in the first quarter of this year, Alpha chose to reduce outside coal purchases in favor of production from captive and contractor-run mines. Coal production from company and contract-operated mines totaled 6.2 million tons in the quarter just ended, 1 percent more than the preceding quarter but 4 percent less than the comparable period in 2006, again mostly due to this year's planned production cutbacks. Purchased coal volumes for the quarter were down 10 percent year-over-year.

For the quarter just ended, Alpha's average cost of coal sales per ton was $46.90, compared with $46.66 in the preceding quarter and $46.32 in the second quarter of 2006, indicating that annualized cost inflation has been reduced to about 1 percent.

"We have been closely monitoring key cost components, particularly diesel fuel and the costs imposed by the new MINER Act," Quillen said. "Most importantly, we've managed costs within our expected range while continuing to make operational adjustments to lower costs further, boost productivity and maintain our safety standards."

                          Production and Sales Data
                    (in thousands, except per-ton amounts)
                      Q2      Q1     %      Q2     %     6 Mos.  6 Mos.   %
                     2007    2007  Change  2006  Change   2007    2006  Change
    processed       6,179   6,144    1%   6,420   (4%)  12,323  12,688   (3%)
    Purchased         870     714   22%     963  (10%)   1,584   2,078  (24%)
      Total         7,049   6,858    3%   7,383   (5%)  13,907  14,766   (6%)

    Tons sold
    Steam           4,326   4,260    2%   4,892  (12%)   8,586   9,247   (7%)
    Metallurgical   2,515   2,368    6%   2,567   (2%)   4,882   5,336   (8%)
      Total         6,841   6,628    3%   7,460   (8%)  13,468  14,582   (8%)

    Coal sales
    Steam          $47.76  $48.07   (1%) $50.08   (5%)  $47.92  $49.57   (3%)
    Metallurgical  $71.39  $72.70   (2%) $74.90   (5%)  $72.02  $75.62   (5%)
      Total        $56.45  $56.87   (1%) $58.62   (4%)  $56.66  $59.10   (4%)

    Cost of coal
    Alpha mines    $46.05  $45.46    1%  $42.73    8%   $45.75  $41.66   10%
     mines(2)      $51.29  $50.16    2%  $53.26   (4%)  $50.76  $53.25   (5%)

       processed   $46.98  $46.22    2%  $44.39    6%   $46.60  $43.48    7%
    Purchased      $46.31  $50.30   (8%) $57.82  (20%)  $48.17  $62.27  (23%)
      Total        $46.90  $46.66    1%  $46.32    1%   $46.78  $46.38    1%

    Coal margin
     per ton(3)     $9.55  $10.21   (6%) $12.31  (22%)   $9.87  $12.72  (22%)

    (1) Excludes freight, DD&A and SG&A
    (2) Includes coal purchased from third parties & processed at our plants
        prior to resale
    (3) Coal sales revenue/ton less cost of coal sales/ton

Year-to-Date Results

For the first half of 2007, Alpha reported total revenues of $861.6 million, including coal sales revenues of $763.1 million and other revenues of $13.8 million. For the first half of last year, total revenues were $978.7 million, coal sales revenues totaled $861.9 million and other revenues were $19.5 million.

Net income for the first six months of this year was $13.1 million, or $0.20 per diluted share, compared with net income of $50.3 million, or $0.79 per diluted share, for the comparable period last year. EBITDA for the first half of 2007 was $109.8 million compared with $157.2 million in the first half of 2006.

Liquidity and Capital Resources

Cash provided by operations for the most recent quarter was $49.7 million, compared with $67.0 million in the second quarter of 2006. Operating cash flow of $102.3 million for the first half of 2007 was up $1.9 million from last year.

Capital expenditures for the second quarter of 2007 totaled $27.1 million, including $4.4 million spent on the Gallatin lime project but excluding the Mingo Logan Ben Creek acquisition, compared with $32.6 million in the corresponding period last year. Total debt outstanding at June 30, 2007 was $445.1 million, compared with $437.9 million at the end of the first quarter of 2007. The company had available liquidity of $170.5 million at the end of the second quarter of 2007, including cash of $8.7 million and $172.9 million available under the company's credit facility.

    Recent Developments
    -- Alpha's safety performance continues to improve. Year-to-date, the rate
       for days lost at all operations due to accidents, a key safety measure,
       improved by 9 percent compared with the first half of 2006, and was
       18 percent better than the industry benchmark for comparable coal
       mining operations.
    -- At the end of June, Alpha completed the purchase of Arch Coal's Mingo
       Logan Ben Creek assets in West Virginia for approximately $43.9 million
       in cash plus assumed liabilities and an estimate of working capital.
       The two acquired mines are now fully staffed and operating as planned.
       The mines and a preparation plant are part of Alpha's new Cobra Natural
       Resources, LLC subsidiary. Cobra expects to produce approximately
       one million tons of coal in 2008, mostly for Alpha's metallurgical
       customer base. Alpha anticipates that the Mingo Logan acquisition will
       be accretive to earnings this year and will generate EBITDA in excess
       of $25 million in 2008.
    -- In spite of weather delays, construction of the first phase of the
       Gallatin lime plant in Kentucky remains on schedule, with production
       from the first kiln scheduled to commence late this year. Through
       mid-July, Alpha had funded its total contribution of $10.3 million as
       well as its loan requirement of $3.8 million for the project's first

Market Outlook

Alpha believes that difficult conditions for the coal markets this year are transitioning to more positive conditions in 2008 and 2009. Based on various data sources, Alpha believes that a combination of reduced domestic coal production, higher net electrical generation by coal-burning utilities, reduced coal imports from South America and a surge in exports to Europe has led to a 20-25 million ton swing in the balance of coal supply and demand compared with last year, through mid-July.

The company believes that these strengthening conditions helped its sales group obtain commitments during the second quarter for approximately 3.5 million tons of thermal coal for 2008, with realizations ranging from $47 to $50 per ton for typical Central Appalachian specification coals, excluding sulfur or other premiums. Additionally, during the second quarter the company committed and priced close to one million tons of thermal coal for 2009 in excess of $50 per ton. Approximately 20 percent of planned thermal production remains uncommitted for 2008 and approximately 66 percent is uncommitted for 2009.

As the leading exporter of metallurgical coal from the U.S., Alpha is pursuing opportunities to capitalize on tight global supplies and sustained buyer interest from a number of foreign countries. Strong global steel production, coupled with high ocean freight rates and weather and logistical problems encountered by Australian producers, has created opportunities for unplanned metallurgical sales overseas this year. Alpha has used its high quality reserve base, blending capabilities and spot purchases of specific coal types to shift sales from the steam to the metallurgical markets. Year- to-date, Alpha's met sales have been running ahead of target, at 36 percent of overall sales. Three-fourths of Alpha's planned metallurgical coal production remains unpriced for next year.

As of July 17, 2007, the company had 99 percent of this year's total planned production of 24-25 million tons committed and priced.

Financial and Operational Targets

Alpha is updating and enhancing its annual financial and production targets as of the end of the second quarter.

The company is leaving its target unchanged for produced and processed tons at 24 million to 25 million, but based on the current outlook for seaborne metallurgical coal, is increasing its purchased coal expectations to between 3 million tons and 4 million tons from the previous target of 3 million tons.

For 2007, Alpha is raising its target for average realized price per ton to between $56 and $57, from $55 to $56 previously. The company now expects its average cost of coal sales to be between $46 and $47 for the full year.

Also, Alpha is introducing targets for EBITDA, net income and earnings per share for 2007. The company expects EBITDA between $225 million and $240 million, net income between $25 million and $36 million, and earnings per diluted share of $0.38 to $0.55.

Targets for depreciation, depletion and amortization and effective tax rate remain unchanged at $150 million to $155 million and 24 percent to 26 percent, respectively.

The company expects to reduce its annual budget for sustaining capital by $20 million. The company continues to evaluate further reductions in both thermal coal capacity and associated capital expenditures. Such decisions will be largely dependent on market conditions. For all of 2007, Alpha continues to expect that it will generate positive free cash after all capital expenditures and the Mingo Logan acquisition.

Conference Call Webcast

Alpha will hold a conference call to discuss second quarter results on Tuesday, August 7, 2007 at 11:00 a.m. ET. The call will be accessible through the Internet at Alpha's web site,, and will be archived on the site as well. A replay will be available through August 21 on the company's web site, or can be accessed by phone by dialing 800-642-1687 (toll-free) or 706-645-9291 and entering pass code 10225050.

About Alpha Natural Resources

Alpha Natural Resources is a leading supplier of high-quality Appalachian coal to electric utilities, steel producers and heavy industry. Approximately 91 percent of the company's reserve base is high Btu coal and 82 percent is low sulfur, qualities that are in high demand among electric utilities which use steam coal. Alpha is also one of the nation's largest producers and exporters of metallurgical coal, a key ingredient in steel manufacturing. Alpha and its subsidiaries currently operate mining complexes in four states, consisting of 62 mines feeding 11 coal preparation and blending plants. The company and its subsidiaries employ more than 3,500 people.


Forward Looking Statements

This news release includes forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Alpha's expectations and beliefs concerning future events and involve risks and uncertainties that may cause actual results to differ materially from current expectations. These factors are difficult to predict accurately and may be beyond Alpha's control. The following factors are among those that may cause actual results to differ materially from our forward-looking statements: market demand for coal, electricity and steel; future economic or capital market conditions; weather conditions or catastrophic weather-related damage; our production capabilities; the consummation of financing, acquisition or disposition transactions and the effect thereof on our business; our ability to successfully integrate the operations we have acquired with our existing operations and implement our business plans for these new operations, as well as our ability to successfully integrate operations we may acquire in the future and implement our related business plans; our plans and objectives for future operations and expansion or consolidation; our relationships with, and other conditions affecting, our customers; timing of changes in customer coal inventories; changes in, renewal of and acquiring new long-term coal supply arrangements; inherent risks of coal mining beyond our control; environmental laws, including those directly affecting our coal mining production, and those affecting our customers' coal usage; competition in coal markets; railroad, barge, truck and other transportation performance and costs; the geological characteristics of Central and Northern Appalachian coal reserves; availability of mining and processing equipment and parts; our assumptions concerning economically recoverable coal reserve estimates; availability of skilled employees and other employee workforce factors; regulatory and court decisions; future legislation and changes in regulations, governmental policies or taxes; changes in postretirement benefit obligations; our liquidity, results of operations and financial condition; decline in coal prices; forward sales and purchase contracts not accounted for as a hedge; indemnification of certain obligations not being met; continued funding of the road construction business; and disruption in coal supplies. These and other risks and uncertainties are discussed in greater detail in Alpha's Annual Report on Form 10-K and other documents filed with the Securities and Exchange Commission. Forward-looking statements in this news release or elsewhere speak only as of the date made. New uncertainties and risks come up from time to time, and it is impossible for Alpha to predict these events or how they may affect the company. Alpha has no duty to, and does not intend to, update or revise the forward-looking statements in this news release after the date it is issued. In light of these risks and uncertainties, investors should keep in mind that the results, events or developments disclosed in any forward- looking statement made in this news release may not occur.


Reconciliation of EBITDA

EBITDA is a non-GAAP financial measure used by management to gauge operating performance. Alpha defines EBITDA as net income or loss plus interest expense, income taxes, and depreciation, depletion and amortization, less interest income. Management presents EBITDA as a supplemental measure of the company's performance and debt-service capacity that may be useful to securities analysts, investors and others. EBITDA is not, however, a measure of financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or cash flow as determined in accordance with U.S. GAAP. Moreover, EBITDA is not calculated identically by all companies. A reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, is provided in an accompanying table. No reconciliation of projected EBITDA to projected net income, the most directly comparable U.S. GAAP measure, is provided because the company's forecasts are developed at a level of detail different than that used to prepare GAAP-based financial measures and because certain items are out of our control and/or cannot be reasonably predicted. For example, it is impractical to estimate future fluctuations in interest rates on our variable-rate debt facilities. Thus, such a reconciliation is not available without unreasonable efforts.

                           FINANCIAL TABLES FOLLOW

                  Consolidated Statements of Income (Unaudited)
                (In thousands, except share and per share amounts)

                                 Three months ended       Six months ended
                                      June 30,                June 30,
                                  2007        2006        2007        2006

     Coal sales revenues       $386,130    $437,323    $763,060    $861,854
     Freight and handling
      revenues                   41,588      50,935      84,799      97,327
     Other revenues               6,548       8,053      13,778      19,470
       Total revenues           434,266     496,311     861,637     978,651

    Costs and expenses:
     Cost of coal sales
      (exclusive of items
      shown separately below)   320,807     345,505     630,062     676,391
     Freight and handling
      costs                      41,588      50,935      84,799      97,327
     Cost of other revenues       4,768       5,445      10,396      13,396
     Depreciation, depletion
      and amortization           37,855      34,207      73,644      67,841
     Selling, general and
      administrative expenses
      (exclusive of
      depreciation and
      amortization shown
      separately above)          13,982      18,013      27,221      34,652
       Total costs and
        expenses                419,000     454,105     826,122     889,607

       Income from operations    15,266      42,206      35,515      89,044

    Other income (expense):
     Interest expense           (10,030)    (10,786)    (20,023)    (21,063)
     Interest income                457         171       1,094         358
     Miscellaneous income, net      512         213         554         296
      Total other income
       (expense), net            (9,061)    (10,402)    (18,375)    (20,409)
      Income before income
       taxes and minority
       interest                   6,205      31,804      17,140      68,635
    Income tax expense            1,502       8,676       4,131      18,296
    Minority interest               (44)          -         (87)          -
      Net income                 $4,747     $23,128     $13,096     $50,339

    Net income per basic and
     diluted share                $0.07       $0.36       $0.20       $0.79

     Weighted average
      shares-basic           64,588,324  64,012,586  64,583,769  63,907,353
     Weighted average
      shares-diluted         64,841,698  64,194,739  64,789,502  64,058,462

                    Consolidated  Balance Sheets (Unaudited)
               (In thousands, except share and per share amounts)

                                                  June 30,     December 31,
                                                    2007             2006
    Current assets:
      Cash and cash equivalents                    $8,655          $33,256
      Trade accounts receivable, net              146,525          171,195
      Notes and other receivables                   6,166            6,466
      Inventories                                  90,447           76,844
      Prepaid expenses and other current assets    39,574           50,893
              Total current assets                291,367          338,654

    Property, plant, and equipment, net           681,571          637,136
    Goodwill                                       20,547           20,547
    Other intangibles, net                         10,185           11,720
    Deferred income taxes                          93,563           94,897
    Other assets                                   48,965           42,839
              Total assets                     $1,146,198       $1,145,793

        Liabilities and Stockholders' Equity
    Current liabilities:
      Current portion of long-term debt            $3,230           $3,254
      Note payable                                  7,088           20,941
      Bank overdraft                               11,065           23,814
      Trade accounts payable                       68,217           75,986
      Deferred income taxes                         6,940            7,601
      Accrued expenses and other current
       liabilities                                 84,901           90,594
              Total current liabilities           181,441          222,190

    Long-term debt, net of current portion        434,816          421,456
    Workers' compensation benefits                  9,086            7,169
    Postretirement medical benefits                53,669           50,712
    Asset retirement obligation                    81,611           69,495
    Deferred gains on sale of property interests    3,429            3,885
    Other liabilities                              16,277           26,837
              Total liabilities                   780,329          801,744
    Minority Interest                                 980                -

    Stockholders' equity:
      Preferred stock - par value $0.01,
       10,000,000 shares authorized, none issued        -                -
      Common stock - par value $0.01,
       100,000,000 shares authorized, 65,517,630
       and 64,964,287 shares issued and
       outstanding                                    655              650
      Additional paid-in capital                  218,121          215,020
      Accumulated other comprehensive loss        (14,381)         (19,019)
      Retained earnings                           160,494          147,398
        Total stockholders' equity                364,889          344,049
        Total liabilities and stockholders'
         equity                                $1,146,198       $1,145,793

                Consolidated Statements of Cash Flows (Unaudited)
                                 (In thousands)

                                                      Six months ended
                                                   2007              2006

    Operating activities:
      Net income                                 $13,096           $50,339
      Adjustments to reconcile net income
        to net cash provided by operating
          Depreciation, depletion and
           amortization                           73,644            67,841
          Amortization of debt issuance costs      1,140             1,132
          Accretion of asset retirement
           obligation                              3,123             2,246
          Stock-based compensation                 4,064             9,945
          Amortization of deferred gains
           on sales of property interests           (493)             (488)
          Gain on sale of fixed assets, net       (1,650)             (134)
          Minority interest                          (87)                -
          Change in fair value of derivative
           instruments                              (840)           (4,336)
          Deferred income taxes                     (854)            5,274
          Other                                      385               753
          Changes in operating assets and
           liabilities                            10,780           (32,145)
                Net cash provided by
                   operating activities          102,308           100,427

    Investing activities:
      Capital expenditures                      $(71,655)         $(84,000)
      Proceeds from disposition of
       property, plant, and equipment              2,559               264
      Investment in and advances to investee        (147)             (107)
      Purchase of acquired companies             (43,890)          (28,273)
      Collections on note receivable from
       coal supplier                                   -             3,000
      Other                                         (630)                -
                Net cash used in
                 investing activities           (113,763)         (109,116)

    Financing activities:
      Repayments of notes payable                (13,853)          (50,232)
      Proceeds from issuance of long-term debt    15,000           200,000
      Repayments on long-term debt                (1,664)         (171,806)
      Decrease in bank overdraft                 (12,749)           (2,649)
      Distributions to prior members of ANR
       Holdings, LLC subsequent to Internal
       Restructuring                                   -            (2,400)
      Proceeds from exercise of stock
       options                                       120               954
                Net cash used in
                   financing activities          (13,146)          (26,133)
                Net decrease in cash
                   and cash equivalents          (24,601)          (34,822)
    Cash and cash equivalents at
     beginning of period                          33,256            39,622
    Cash and cash equivalents at end of period    $8,655            $4,800

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

                                   Quarter ended         Six Months Ended
                                      June 30,               June 30,
                                  2007       2006        2007        2006
                                   (In thousands)         (In thousands)

         Net income              $4,747    $23,128     $13,096     $50,339
         Interest expense        10,030     10,786      20,023      21,063
         Interest income           (457)      (171)     (1,094)       (358)
         Income tax expense       1,502      8,676       4,131      18,296
          depletion and
          amortization           37,855     34,207      73,644      67,841
              EBITDA            $53,677    $76,626    $109,800    $157,181

Source: Alpha Natural Resources, Inc.

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