Alpha Metallurgical Resources, Inc. annual report, FY2019

Business context and reporting period

This is Contura Energy, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed March 18, 2020. The request identifies Alpha Metallurgical Resources, Inc., but the supplied filing is for Contura Energy, Inc. (ticker CTRA). Contura produced and marketed metallurgical and thermal coal from Central and Northern Appalachia. The year-over-year comparison is affected by the November 2018 merger with Alpha Natural Resources: 2019 includes a full year of acquired operations, while 2018 includes them only after the merger closed. Former Powder River Basin operations are reported as discontinued operations.

Financial results and position

Metric	2019	2018
Total revenue	$2.290 billion	$2.031 billion
Operating income (loss)	$(157.5) million	$193.8 million
Net income (loss), including discontinued operations	$(316.3) million	$299.2 million
Operating cash flow	$131.9 million	$158.4 million
Capital expenditures	$192.4 million	$81.9 million
Adjusted EBITDA (non-GAAP)	$295.6 million	$335.1 million

• Coal revenue increased 12.9%, while tons sold rose 34.8% to 23.7 million. The increase principally reflects a full year of merged operations, not equivalent same-asset growth.
• Average non-GAAP coal realization fell 11.8% to $84.24 per ton. Non-GAAP coal margin per ton declined to $16.20 from $21.87. CAPP-Met margin was $25.85 per ton (down from $32.16); NAPP was $5.00 (down from $6.73); CAPP-Thermal was $4.09, versus a $(1.89) loss in 2018.
• Losses included $124.4 million of goodwill impairment and $66.3 million of asset impairment, as well as higher depreciation, interest, and debt-extinguishment costs. Fourth-quarter continuing-operations loss was $191.9 million, including $60.5 million of asset impairment and the full goodwill impairment.
• Cash and cash equivalents were $212.8 million at year-end; reported working capital was $396.3 million. Total liquidity was $327.8 million, including $115.0 million of available revolving commitments, subject to facility limitations. Cash, cash equivalents, and restricted cash together were $347.7 million.
• Debt was $622.7 million before debt discounts and issuance costs ($593.0 million net on the balance sheet). The new $561.8 million secured term loan matures in June 2024 and bore 9.00% interest at year-end. The company reported covenant compliance and no borrowings under its ABL facility.
• Cash declined $129.6 million during 2019. Investing used $191.8 million and financing used $69.7 million. Restricted cash and other collateral requirements limit the usefulness of headline cash balances.

Material changes, outlook, and risks

• Management said met-coal prices weakened from July 2019; Atlantic High-Vol. A prices averaged about $50 per metric ton lower in the second half than in the first. It attributed weakness to subdued demand and reported further economic softness and coronavirus-related uncertainty entering 2020.
• As of March 6, 2020, contracted 2020 shipments were 6.4 million NAPP tons at an average realized price of $43.43 per ton; 12.3 million CAPP-Met tons, 52% priced at an average $97.91 per ton; and 3.0 million CAPP-Thermal tons at an average $55.95 per ton. These commitments are not full-year production or earnings guidance. Expected 2020 capital expenditures were $145–$165 million.
• Management said cash on hand and expected operating cash would cover anticipated needs for 12 months, but also warned that continued weak prices could mean operating losses and cash outflows. Credit ratings were downgraded in late 2019 and February 2020; Moody’s outlook was negative.
• A new federal black-lung self-insurance reauthorization required $65.7 million collateral, versus about $2.6 million previously. Contura disputed the calculation and planned to appeal; an unsuccessful appeal could materially reduce liquidity.
• The Blackjewel bankruptcy delayed transfer of permits for the sold Wyoming mines. Contura remained the permit holder pending transfer, although ESM had posted substitute bonds and agreed to indemnify Contura. The filing said remaining reclamation risk was expected to be low, but not eliminated before permit transfer.
• The ESM transaction involved $90.0 million cash consideration, a $13.5 million payment for Wyoming back taxes, and a $59.5 million gain in discontinued operations from reducing reclamation obligations. The 2019 discontinued-operations loss was $113.2 million, partly offset in the fourth quarter by this gain.
• Reclamation liabilities were $224.7 million recorded, with estimated undiscounted closure costs of $757.7 million. Pension obligations were $204.1 million; black-lung obligations were $120.1 million. Surety bonds totaled about $343.7 million, with potential for additional collateral demands.
• KPMG gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Material weaknesses affected risk assessment, coal inventory valuation, and procurement controls; management reported remediation efforts underway and no resulting material misstatement identified for 2019.
• Other material exposures include coal-price and export-market volatility, customer concentration (top 10 customers represented about 56% of revenue), environmental and permitting requirements, transportation dependence, benefit obligations, and possible IRS setoff of tax refunds against pre-bankruptcy claims.

Key facts for investors to verify

1. Reconcile the merger-driven increase in sales volumes with lower realized prices, declining segment margins, and the $39.5 million reduction in Adjusted EBITDA.
2. Review the quality and availability of liquidity: restricted cash, revolving-facility borrowing-base limits, letter-of-credit usage, debt service, and the outcome of the $65.7 million black-lung collateral appeal.
3. Track the 2020 contracted volumes and pricing against actual shipments and market conditions; distinguish these commitments from company guidance.
4. Confirm completion of Western Asset permit transfers and assess any remaining reclamation, tax, or indemnity exposure.
5. Monitor remediation and independent validation of the material weaknesses in financial reporting controls.
6. Assess whether tax refunds, including the $64.2 million NOL carryback receivable and AMT credits, are collected without IRS setoff, and whether pension, reclamation, and surety requirements increase cash needs.