Contura Energy, Inc. (now identified in the request as Alpha Metallurgical Resources, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing registrant was Contura Energy, Inc. Figures are unaudited and in U.S. dollars; financial amounts below are rounded to millions unless noted.
Business context and comparability
Contura produces and markets metallurgical and thermal coal, with operations in Central and Northern Appalachia and a trading and logistics business. The Alpha merger closed November 9, 2018, so Q1 2019 includes the acquired Alpha operations for the full quarter, while Q1 2018 does not. Year-over-year comparisons therefore are not like-for-like; the merger also added the CAPP-Thermal segment. The former Powder River Basin operations are reported as discontinued operations.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $609.1 million | $482.3 million |
| Income from continuing operations | $8.0 million | $58.3 million |
| Net income, including discontinued operations | $6.8 million | $56.9 million |
| Diluted earnings per share | $0.35 | $5.53 |
| Adjusted EBITDA (non-GAAP) | $83.4 million | $99.0 million |
| Net cash from operating activities | $14.6 million | $(30.3) million |
| Capital expenditures | $41.1 million | $19.4 million |
Revenue increased 26.3%, primarily reflecting acquired production and higher sales volumes. Coal sales totaled 5.9 million tons, up 54.2%; average coal realization fell 14.7% to $89.99 per ton. Met coal realization declined 7.8% to $128.77 per ton, while thermal coal realization rose 12.5% to $47.20. Revenue growth did not translate into higher earnings: cost of coal sales rose 48.6% to $438.5 million, and depreciation, depletion and amortization increased to $61.3 million from $11.6 million. Operating income was $17.8 million, versus $67.8 million; operating margin was approximately 2.9% versus 14.1%.
Adjusted EBITDA declined 15.8%. CAPP-Met generated $91.7 million; CAPP-Thermal lost $4.3 million; NAPP generated $4.8 million; Trading and Logistics generated $9.9 million; and All Other was a loss of $18.7 million. CAPP-Thermal results were hurt by ventilation-related production issues. Trading and Logistics EBITDA fell from $42.8 million, partly because of lower purchased-coal sales following the merger.
Operating cash flow improved from a use of cash to a source of cash, but working-capital changes used $54.8 million, including increases in receivables and inventory. Investing cash outflow was $45.3 million; financing cash outflow was $11.8 million. Cash, cash equivalents and restricted cash decreased $42.5 million during the quarter.
At March 31, cash and cash equivalents were $182.0 million; restricted cash was $252.8 million, including short-term restricted cash. Management reported total liquidity of $378.3 million, including $196.3 million of available ABL commitments, subject to facility limitations. Total debt, net of discounts and issuance costs, was $583.5 million, including $43.1 million current. The $550 million term loan was priced at 7.49% at quarter-end and matures in November 2025. The company had no ABL borrowings and $28.7 million of letters of credit under that facility. It was in covenant compliance and management said liquidity was expected to cover requirements for the next 12 months.
Material changes, outlook, and risks
- Q1 results include a $9.1 million gain from an exchange of a PRB overriding royalty interest for met coal reserves. A $1.9 million non-cash mark-to-market loss on an acquisition-related contingent revenue obligation was also recorded.
- Coal inventory fair-value adjustments from the merger added $7.2 million to Q1 cost of coal sales; management described the impact as short term. Acquired-intangible amortization was a net credit of $6.7 million, versus expense of $10.2 million in Q1 2018.
- As of May 7, 2019, the company expected 2019 shipments of 7.2 million tons of NAPP coal (98% priced; average $43.12 per ton), 9.8 million tons of CAPP-Met (79% priced; $125.68), and 4.4 million tons of CAPP-Thermal (100% priced; $55.16). These are sales commitments, not earnings guidance.
- On May 15, 2019, after quarter-end, the company signed a conditional commitment letter for a proposed $555 million, five-year first-lien facility to refinance the existing term loan. Expected pricing was LIBOR plus 7.00% for two years and LIBOR plus 8.00% thereafter, with a 2.00% LIBOR floor; closing remained subject to customary conditions.
- The PRB permit transfer remained pending, with objections scheduled for May 15–16, 2019. Contura had $237.3 million of PRB-related surety bonds outstanding and estimated that about $9.1 million of restricted cash and deposits could return to operating cash after transfer. The filing warns that an unsuccessful or delayed transfer could materially adversely affect the company.
- Other notable exposures include $579.9 million of total surety bonds, substantial reclamation and employee-benefit obligations, and dependence on surety availability. The company also disclosed possible federal setoff of tax refunds and AMT credits against claims arising from Alpha’s bankruptcy, and customer concentration: two customers each exceeded 10% of receivables at quarter-end.
- Management cited coal-price and demand volatility, operating and transportation costs, permitting and environmental regulation, labor and mining risks, and the ability to obtain financing and bonding as material uncertainties. Management reported disclosure controls effective at a reasonable assurance level.
Important facts for investors to verify
- Assess earnings and cash generation on a post-merger, comparable basis; the reported Q1 2018 comparison excludes Alpha operations before the merger.
- Check realized prices, production costs and margins by segment, particularly CAPP-Met and the loss-making CAPP-Thermal operation.
- Confirm completion, final terms and costs of the proposed refinancing, including any write-off of existing debt discounts and issuance costs.
- Track the Wyoming PRB permit transfer, related objections, surety releases and return of restricted funds, as well as Blackjewel’s commitments to replace Contura-backed collateral.
- Review the availability and collateral requirements of surety bonds, restricted cash, reclamation obligations, and the status and recoverability of the disclosed tax claims and refunds.