Business context and reporting period
This is Contura Energy, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The filing describes a coal producer and marketer operating in Central and Northern Appalachia, with a Trading and Logistics segment. The metadata names Alpha Metallurgical Resources, Inc.; that was not the registrant name in this filing. Contura completed its merger with Alpha Natural Resources Holdings, Inc. and ANR, Inc. on November 9, 2018, after quarter-end, and subsequently began trading as CTRA on the NYSE.
Unless indicated otherwise, financial figures below are in millions of dollars. The company adopted ASC 606 in 2018, which moved freight and handling fulfillment revenue into coal revenue; this changed presentation but had no material effect on total revenue.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $447.9 | $382.5 | $1,459.1 | $1,297.3 |
| Income from continuing operations | $14.0 | $9.7 | $147.0 | $59.1 |
| Net income, including discontinued operations | $11.9 | $10.2 | $142.6 | $57.9 |
| Operating income | $23.8 | $10.0 | $176.4 | $134.7 |
| Adjusted EBITDA (non-GAAP) | $38.8 | $41.5 | $223.9 | $234.1 |
| Cash provided by operating activities | Not separately presented for the quarter | $176.3 | $259.9 |
Q3 coal sales totaled 3.9 million tons, up 2.4%; average coal realization was $90.74 per ton versus $84.26. Met-coal sales rose 10.5% and steam-coal sales declined 11.5%. The company’s defined operating margin—revenue less cost of coal sales and freight and handling costs—was $49.1 million, versus $50.2 million in Q3 2017. Q3 operating income was about 5.3% of revenue, versus 2.6% a year earlier.
For the first nine months, total revenue increased 12.5%, while net income from continuing operations rose to $147.0 million from $59.1 million. The 2018 result included a $17.1 million gain on disposal of assets and substantially lower acquired-intangible amortization than in 2017. Adjusted EBITDA declined 4.3%; it is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
At September 30, cash and cash equivalents were $238.1 million; total cash, cash equivalents and restricted cash were $283.9 million. Reported liquidity was $334.4 million, including $96.3 million of unused ABL commitments. Debt was $366.6 million, including current debt; the $380.7 million term-loan principal carried a 7.30% rate. The company had no ABL borrowings and $28.7 million of letters of credit outstanding. It reported covenant compliance.
Nine-month capital expenditures were $56.7 million. Total liabilities were $667.4 million and stockholders’ equity was $239.2 million at quarter-end. Restricted cash and deposits held as collateral were significant: approximately $45.7 million and $15.2 million, respectively.
Material changes versus the prior comparable period
- Q3 revenue increased 17.1%, largely from higher met-coal sales and freight fulfillment revenue; the latter rose 48.1%, primarily with higher rail shipments and shipping rates.
- Q3 Adjusted EBITDA declined 6.5%, despite higher revenue. CAPP and NAPP segment Adjusted EBITDA fell 10.0% and 51.9%, respectively; Trading and Logistics rose 8.0%. Higher costs per ton pressured segment margins.
- Nine-month operating cash flow fell $83.6 million to $176.3 million. Management attributed cash generation to net income and noncash adjustments, while working-capital and liability changes were a $27.1 million use.
- Continuing-operations results exclude the sold Powder River Basin operations, classified as discontinued operations. PRB sales and operating activity in the prior-year comparison therefore differ substantially.
- In the nine-month comparison, lower interest expense and the absence of 2017’s $38.7 million early debt-extinguishment loss supported earnings; the 2018 disposal gain also benefited results.
Outlook, commentary, risks and unusual items
- Management expected 2018 NAPP shipments of 6.1–6.5 million tons after Cumberland production resumed August 1 following temporary slowdowns from geologic conditions. It expected 2018 capital spending of $72–$82 million.
- As of October 25, 2018, committed 2018 shipments included 5.9 million tons of NAPP coal, 96% priced at an average realized price of $44.45 per ton, and 3.9 million tons of CAPP coal, 86% priced at an average of $130.13 per ton.
- Management stated existing cash and operating cash generation were expected to cover working capital, capital spending, debt service, acquisition-related and reclamation obligations for the next 12 months, while warning that weaker markets or incorrect assumptions could require additional financing.
- The PRB permit transfer remained pending. Contura had $237.3 million of PRB-related surety bonds outstanding and estimated that about $12.6 million of restricted cash and deposits could return to operating cash after transfer. The filing warned that delay could materially adversely affect the company. Contura also backstopped $44.8 million of Blackjewel bonding obligations, including $18.8 million of letters of credit; Blackjewel was to arrange replacement collateral by June 30, 2019.
- Contura disputed ANR’s assertion that ANR was entitled to the $78.7 million AMT credit asset. It also disputed responsibility for approximately $7.8 million in Wyoming severance taxes invoiced to Blackjewel, where the state purported to assert liens over a Contura subsidiary.
- After quarter-end, the merger closed and Contura entered new facilities: a $550 million term loan maturing in 2025 and a $225 million ABL facility maturing in 2022, replacing existing Contura facilities and refinancing debt. The filing also disclosed a West Virginia DEP arrangement requiring $9 million cash collateral and a $35 million performance bond, with additional collateral or a letter of credit required if the bond was not issued within 45 days.
- Key risks include coal price and demand volatility, export-market exposure, production and geologic disruption, cost inflation, environmental and reclamation requirements, access to surety bonds, customer credit, and restrictive debt covenants. The filing noted that a 50-basis-point change in interest rates would change annual interest expense by approximately $1.8 million on the pre-merger term facility.
Important facts for investors to verify
- Review post-merger pro forma results, share dilution, and the terms and actual balances of the new term loan and ABL facilities.
- Track PRB permit transfer progress, release of the estimated $12.6 million of collateral, and Blackjewel’s performance of its indemnity and replacement-bond commitments.
- Assess whether NAPP shipments and cost performance recover after the Cumberland disruption and whether the stated 2018 outlook was achieved.
- Separate recurring operating performance from the CAPP disposal gain, changing acquired-intangible amortization, merger costs, and other adjustments in evaluating earnings and Adjusted EBITDA.
- Monitor the AMT credit dispute, Wyoming tax and lien matter, WVDEP collateral and bond requirements, reclamation liabilities, and continued access to surety support.