Contura Energy, Inc. 10-Q Summary
Entity note: This filing is for Contura Energy, Inc. for the quarter ended June 30, 2019; it is not filed under the later name Alpha Metallurgical Resources, Inc. Financial statements are unaudited and amounts below are rounded to millions unless noted.
Business context and reporting period
Contura mined and marketed metallurgical and thermal coal in Central and Northern Appalachia and operated a trading and logistics business. The November 2018 merger with Alpha Natural Resources Holdings and ANR added substantial operations, including CAPP-Thermal. Accordingly, 2019 and 2018 comparisons are not fully like-for-like. The company reported four segments: CAPP-Met, CAPP-Thermal, NAPP, and Trading and Logistics.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $656.2 | $528.9 | $1,265.3 | $1,011.3 |
| Operating income | $66.9 | $84.7 | $84.7 | $152.5 |
| Continuing-operations net income | $24.3 | $74.6 | $32.3 | $132.9 |
| Net income (loss), including discontinued operations | $(113.7) | $73.8 | $(106.8) | $130.7 |
| Adjusted EBITDA (non-GAAP) | $140.8 | $86.1 | $224.1 | $185.1 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $117.1 | $115.6 |
| Capital expenditures | $42.8 | $18.9 | $83.9 | $38.3 |
Approximate operating margin was 10.2% in Q2 2019 versus 16.0% in Q2 2018, and 6.7% versus 15.1% for the six-month periods. These are calculated from reported operating income and revenue. At June 30, cash and cash equivalents were $249.6; total cash and restricted cash was $500.5, including $250.9 of restricted cash. Total current assets were $862.7 and current liabilities $326.4.
Debt was $609.4 net of discounts and issuance costs, comprising $28.9 current and $580.5 long-term. The new $561.8 senior secured term loan matures in 2024 and bore 9.41% interest at quarter-end. The ABL facility had no borrowings and $39.5 of letters of credit outstanding; reported unused availability was $185.5. Total liquidity was reported as $435.1. The company said it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Q2 revenue rose 24.1%, mainly because coal sales volume increased 45.2% to 6.4 million tons following the merger. Six-month revenue rose 25.1% on a 49.4% increase in volume.
- Despite higher revenue, operating income and continuing-operations earnings fell, reflecting higher coal costs, depreciation and asset-retirement accretion, as well as higher interest expense. The 2019 quarter included a $26.5 million debt-extinguishment/modification loss.
- Adjusted EBITDA increased to $140.8 million for Q2 and $224.1 million for six months. CAPP-Met and NAPP improved, while Trading and Logistics Adjusted EBITDA declined to $9.3 million for Q2 and $19.2 million for six months, primarily on lower trading volume following the merger.
- Metallurgical coal realization weakened: CAPP-Met was $121.85 per ton in Q2, down 5.2%, and $122.73 for six months, down 8.5%. CAPP-Met coal margin per ton fell 30.7% in Q2 and 39.9% for six months. CAPP-Thermal’s six-month margin was $1.83 per ton.
- Export coal’s share of revenue fell to 55% in Q2 and 56% for six months, from 88% in both 2018 periods. The shift reflects a changed business mix, including the merger and reduced Trading and Logistics volumes.
- Operating cash flow was broadly stable year over year, but investing outflows increased with capital spending. Working-capital changes used $90.1 million of cash in the first half of 2019.
Outlook, commentary, risks and unusual items
- Management said cash on hand and operating cash generation should cover working capital, expected capital expenditures, debt service, acquisition-related obligations and reclamation obligations for the next 12 months, while cautioning that deterioration in market conditions or inaccurate assumptions could require additional financing.
- As of August 5, 2019, contracted 2019 shipments included approximately 7.0 million NAPP tons (100% priced; average realized price $43.06 per ton), 11.8 million CAPP-Met tons (72% priced; $124.46 per ton), and 4.5 million CAPP-Thermal tons (98% priced; $58.61 per ton). These are commitments, not a full-year earnings forecast.
- Blackjewel filed for Chapter 11 on July 1, 2019, after the quarter ended. The permit transfer for the former PRB mines had not occurred. Contura remeasured reclamation obligations, recorded a $145.9 million discontinued-operations charge primarily for the increased asset-retirement obligation, and recorded a $16.5 million discontinued-operations impairment, primarily a tax receivable write-off. The resulting Q2 discontinued-operations loss was $138.0 million after tax.
- Contura reported $237.3 million of PRB-related surety bonds and said the associated restricted cash and deposits were not expected to return to operating cash in the near term. In August, a bankruptcy judge verbally approved a proposed $33.75 million purchase of the Eagle Butte, Belle Ayr and Pax mines, subject to final court approval and agreements on pre-petition claims. Contura had deposited $8.1 million; additional obligations could be assumed.
- Other risks include coal-price and demand volatility, customer concentration and credit, operating and input-cost pressures, environmental and permitting requirements, reclamation and surety-bond availability, pension and benefit obligations, and the ability to refinance or raise capital. Management reported effective disclosure controls as of June 30, 2019.
Important facts for investors to verify
- Whether Blackjewel-related permit, reclamation, receivable and restricted-cash exposures change, and whether the proposed mine purchase closes on the stated terms.
- How much of reported cash is unrestricted and readily available, given substantial reclamation collateral and letters of credit.
- Whether contracted shipment volumes and pricing are achieved, particularly for CAPP-Met, and how lower realized prices and segment margins affect earnings.
- The sustainability and comparability of Adjusted EBITDA, including merger-related accounting, trading-volume changes and excluded or unusual items.
- Debt-service costs under the high-rate term loan, future refinancing needs, covenant headroom, and the availability and cost of surety bonds.