Alpha Metallurgical Resources, Inc. quarterly report, Q3 FY2022

Alpha Metallurgical Resources, Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Alpha is a U.S. coal producer operating in Virginia and West Virginia, principally supplying metallurgical coal to steelmakers. The former Northern Appalachia operations are reported as discontinued operations. Unless otherwise noted, financial amounts below are in millions of dollars.

Financial results and key metrics

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Total revenue	$869.8	$648.8	$3,278.1	$1,430.4
Operating income	$261.0	$100.0	$1,364.4	$81.3
Net income	$252.8	$83.3	$1,227.9	$31.3
Diluted earnings per share	$14.27	$4.40	$65.31	$1.67
Adjusted EBITDA (non-GAAP)	$294.9	$148.2	$1,493.2	$217.0

Q3 coal sales were 4.15 million tons, down 12.3% year over year. Coal revenue nevertheless rose 34.1%, primarily from higher realized prices. Met-segment non-GAAP realization was $184.31 per ton, up 62.4%; non-GAAP coal margin was $79.44 per ton versus $36.90. Consolidated non-GAAP coal margin was $319.9 million, versus $166.8 million. Cost pressures included supplies and maintenance, wages, rail freight, royalties and taxes.

For the first nine months, coal sales totaled 12.50 million tons, down 2.5%, while coal revenue increased 129.4%. Met-segment realization rose 152.8% to $237.98 per ton; its non-GAAP coal margin per ton increased to $131.27 from $21.18. These non-GAAP measures are company-defined and should be considered alongside GAAP results.

Cash flow and liquidity: Nine-month operating cash flow was $1,299.0 million; investing cash outflow was $182.6 million and financing cash outflow was $844.1 million. Cash, cash equivalents and restricted cash increased $272.3 million during the period. At September 30, cash and cash equivalents were $404.4 million and reported total liquidity was $495.5 million, including $91.1 million of ABL availability. Working capital was $806.1 million.

Debt and balance sheet: The company prepaid the remaining $449.4 million term loan in full on June 3, terminated the credit agreement and reported $4.7 million of debt, principally financing leases and other financing obligations, at quarter-end. Total assets were $2,259.9 million and stockholders’ equity was $1,371.7 million. The ABL had no cash borrowings; $63.9 million of letters of credit was outstanding. The company reported compliance with its ABL covenants and no Liquidity Period at September 30.

Material changes versus prior periods

Strong earnings and cash generation reflected the substantially improved coal-price environment, despite lower Q3 sales tonnage. Nine-month operating cash flow increased from $70.6 million in 2021 to $1,299.0 million in 2022.
Cost of coal sales rose 13.8% in Q3 and 46.9% for the nine-month period, with per-ton costs also higher; revenue and margins increased more sharply.
Interest expense fell to $1.7 million in Q3 from $17.3 million and to $20.0 million for nine months from $53.3 million, mainly due to debt reduction.
Nine-month income tax expense was $114.1 million, including a $73.7 million reduction in the deferred-tax-asset valuation allowance. This contributed to a higher reported effective tax rate than in the prior-year period.
Cash deployment included $450.5 million of principal repayments, $391.2 million of share repurchases and $6.8 million of dividends paid during the first nine months. Treasury stock increased to $521.1 million from $107.8 million at year-end 2021.

Outlook, commentary, risks and unusual items

Management stated cash on hand and operating cash generation should cover working capital, anticipated capital spending, debt service and other obligations for the next 12 months and the reasonably foreseeable future. Estimated 2022 capital expenditures were $160–190 million; $103.4 million had been spent through September.
As of October 28, 2022, 2022 sales commitments included 14.5 million tons of met coal, 87% priced, at an average realized price of $243.30 per ton; and 1.2 million tons of thermal coal, 100% priced, at $97.43 per ton. These are management-reported commitments, not a full-year earnings forecast.
Management described recessionary pressure, the Russia-Ukraine war, European energy-market disruption, inflation and weakening steel-demand expectations as market risks. Coal indices declined during Q3; by October 31, low-volatility indices had risen from quarter-end levels. The World Steel Association forecast a 2.3% contraction in 2022 steel demand and 1.0% growth in 2023.
Material risks include coal-price and demand volatility; inflation and availability/cost of diesel, supplies, labor and transportation; customer concentration and export-market currency competitiveness; mining, permitting and environmental regulation; and the availability or cost of surety bonds and collateral.
The DOL’s black-lung self-insurance reauthorization process remains unresolved. The stated collateral requirement was $65.7 million, versus approximately $2.6 million previously provided. Alpha appealed and indicated willingness to allocate an additional $10 million; an adverse outcome could reduce liquidity.
Surety bonds outstanding were $162.1 million, and letters of credit were $63.9 million. The company warned that inability to renew bonds or demands for additional collateral could materially affect liquidity. Asset retirement obligations totaled $168.6 million.
The contingent revenue obligation was carried at $29.5 million; its fair value is Level 3 and depends on unobservable assumptions, including forecast revenue. A $10.6 million nine-month mark-to-market loss was recorded, primarily reflecting increased forecast future revenue.
Subsequent events: On November 4, the Board declared a regular quarterly dividend of $0.418 per share and a one-time special dividend of $5.00 per share, both payable January 3, 2023. It also increased the share repurchase authorization by $400 million to $1.0 billion. Future dividends and repurchases remain subject to Board decisions, cash needs and other constraints.
The Inflation Reduction Act introduced a 1% excise tax on stock repurchases for tax years beginning after December 31, 2022; the company was assessing its impact. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Whether coal prices, realized prices and contracted volumes remain supportive as steel-demand forecasts weaken; review the company’s reported pricing and tonnage updates.
Whether cost inflation, freight, royalties and operating constraints continue to erode per-ton margins.
The outcome and collateral implications of the DOL black-lung self-insurance appeal, along with surety-bond renewals and total restricted cash and investments.
The sustainability and cash funding of the $5.00 special dividend, ongoing quarterly dividends and expanded $1.0 billion repurchase authorization.
Cash-flow conversion, capital spending against the $160–190 million 2022 estimate, and ongoing obligations for coal purchases, transportation, reclamation and the contingent revenue obligation.
Customer and export concentration: export coal accounted for 74% of Q3 coal revenue, and the largest customer represented 18% of total Q3 revenue.