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March 18, 2020, 7:54 a.m. EDT

10-K: CONTURA ENERGY, INC.

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(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides a narrative of our results of operations and financial condition for the years ended December 31, 2019 and 2018. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related notes and the risk factors included elsewhere in this Annual Report on Form 10-K. Market Overview

After strong metallurgical coal prices in the first half of 2019 with Atlantic High-Vol. A prices averaging approximately $200 per metric ton, the coal market encountered weakness beginning in July of 2019, resulting in prices averaging approximately $50 per metric ton lower in the second half of 2019. This had a negative impact on our results during the third and fourth quarters of 2019. While the economic softness and resulting coal price weakness was felt across our international markets, the most significant steel production downturns occurred in Europe and South America. This economic softness has continued into 2020 and has been further worsened by the growing impact of the coronavirus. We view the current market softness for metallurgical coal to be driven by subdued demand. Reductions in North American production and limited capital expenditures have maintained the metallurgical coal supply, and we anticipate an improved outlook for metallurgical coal demand as the coronavirus crisis subsides, and international tariff agreements are implemented. While the thermal markets also experienced weakness, the impact on our 2019 results was more subdued due to the presence of longer-term contracts.

Business Overview

We are a large-scale provider of met and thermal coal to a global customer base, operating high-quality, cost-competitive coal mines across two major U.S. coal basins (CAPP and NAPP). As of December 31, 2019, our operations consisted of twenty-nine active mines and ten coal preparation and load-out facilities, with approximately 4,360 employees. We produce, process, and sell met coal and thermal coal from operations located in Virginia, West Virginia and Pennsylvania. We also sell coal produced by others, some of which is processed and/or blended with coal produced from our mines prior to resale, with the remainder purchased for resale. As of December 31, 2019, we had 1.3 billion tons of reserves, including 861.0 million tons of proven reserves and 469.9 million tons of probable reserves.

We began operations on July 26, 2016, with mining operations in NAPP, CAPP, and the PRB. Through the Acquisition, Contura acquired a significant reserve base. We also acquired Alpha's 40.6% interest in the DTA coal export terminal in eastern Virginia, and on March 31, 2017, we acquired a portion of another partner's ownership stake and increased our interest to 65.0%. On December 8, 2017, the Company closed a transaction to sell the Eagle Butte and Belle Ayr mines located in the PRB, Wyoming, along with related coal reserves, equipment, infrastructure and other real properties. The PRB results of operations and financial position are reported as discontinued operations in the Consolidated Financial Statements. The historical information in the accompanying Notes to the Consolidated Financial Statements has been restated to reflect the effects of the PRB operations being reported as discontinued operations in the Consolidated Financial Statements. Refer to Note 4 for further information on discontinued operations. The Merger with Alpha Natural Resources Holdings, Inc. and ANR, Inc. was completed on November 9, 2018. Refer to Note 3 for information on terms of the Merger Agreement.

Our sales of met coal were made primarily to steel companies in the northeastern and midwestern regions of the United States and in several countries in Europe, Asia and the Americas. Our sales of thermal coal were made primarily to large utilities and industrial customers throughout the United States. For the years ended December 31, 2019 and 2018 approximately 54.7% and 82.7%, respectively, of our coal revenues were derived from coal sales made to customers outside the United States.

In addition, we generate other revenues from equipment sales, rentals, terminal and processing fees, coal and environmental analysis fees, royalties and the sale of natural gas. We also record freight and handling fulfillment revenue within coal revenues for freight and handling services provided in delivering coal to certain customers, which are a component of the contractual selling price.

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As of December 31, 2019, we have three reportable segments: CAPP - Met, CAPP - Thermal, and NAPP. To conform to the current period reportable segments presentation, the prior periods have been restated to reflect the change in reportable segments. Refer to Note 25 for additional disclosures on reportable segments including export coal revenue information. Business Developments

Merger with Alpha Natural Resources Holdings, Inc. and ANR, Inc.

Refer to Note 3 for information on Alpha Merger and terms of the Merger Agreement.

Sale of PRB Operations

Discontinued operations consist of ongoing activity related to our former PRB operations. On December 8, 2017, we closed a transaction with Blackjewel to sell our Eagle Butte and Belle Ayr mines located in Wyoming. However, during the post-closing mine permit transfer period, we were required to maintain our existing reclamation bonds and related collateral. To facilitate permit transfer to the Buyer, during 2018, we agreed to backstop a total of $44.8 million of Blackjewel's bonding obligations with respect to the Eagle Butte and Belle Ayr permits by entering into secondary general indemnification agreements and providing letters of credit totaling $18.8 million to sureties as collateral for our indemnification obligations. Blackjewel agreed that, by June 30, 2019, it would enter into additional financial arrangements and cause each surety to release and return each letter of credit and cancel our general indemnification agreements. Indemnity bonds in the amount of $26.0 million were issued by a third-party insurer in our favor to insure Blackjewel's performance obligations with respect to cancellation of the general indemnification agreements and return of the letters of credit.

On July 1, 2019, prior to the transfer of the permits, Blackjewel announced that it and certain affiliated entities had filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of West Virginia (the "Bankruptcy Court"), which cases, along with the cases filed by certain other affiliates of Blackjewel a few weeks later, are being jointly administered under the caption In re Blackjewel, L.L.C., Case No. 19-30289 (Bankr. S.D. W. Va.). On July 25, 2019, we announced that we would seek to serve as the stalking horse purchaser for certain assets offered for sale through Blackjewel's bankruptcy proceedings. On August 6, 2019, the Bankruptcy Court verbally approved our purchase of the Eagle Butte and Belle Ayr mines in Wyoming and the Pax Surface Mine in West Virginia for $33.8 million pending resolution of outstanding objections and approval of certain regulatory agencies. In connection with our agreement to serve as stalking horse purchaser, we made a purchase deposit of $8.1 million (the "Stalking Horse Purchase Deposit"). On August 29, 2019, as a result of ongoing objections with respect to the Wyoming mines, the Bankruptcy Court entered an order approving the separate sale of the Pax Surface Mine to us for $6.2 million (comprised, in part, of $5.1 million credited against the Stalking Horse Deposit). On September 18, 2019, we announced that we had entered into an agreement which would allow a third party to purchase the Eagle Butte and Belle Ayr mines from Blackjewel and assume associated reclamation obligations.

On October 4, 2019, the Bankruptcy Court entered an order approving the sale by Blackjewel of the Belle Ayr and Eagle Butte mines to ESM, an affiliate of FM Coal, LLC ("FM Coal"). The closing of the ESM acquisition occurred on October 18, 2019. As discussed above, we were the former owner of the Western Assets. As the mine permit transfer process relating to our sale of the Western Assets to Blackjewel had not been completed prior to Blackjewel's filing for Chapter 11 bankruptcy protection, we remained the permitholder in good standing for both mines and maintained surety bonding to cover related reclamation and other obligations.

In connection with ESM's acquisition of the Western Assets from Blackjewel, on October 18, 2019 (the "ESM Transaction"), Contura and ESM finalized an agreement which provided, among other items, for the transfer of the Western Asset permits from Contura to ESM once certain approvals for their transfer have been obtained and for the assumption by ESM of the related reclamation obligations.

In connection with the closing of the ESM Transaction, the surety bonding previously maintained by us for the benefit of the DEQ was released and has been replaced with substitute surety bonds arranged for by ESM in the amount of approximately $238.0 million. In accordance with separate agreements with ESM's surety providers, we have no liability with respect to the substitute surety bonds. In addition, pursuant to an agreement with ESM, FM Coal, and the United States Department of Interior's Office of Surface Mining, Reclamation and Enforcement ("OSM"), OSM has agreed that we would not be linked to any future bond forfeiture related to the Western Assets nor any Surface Mining Control and Reclamation Act of 1977 violations by ESM prior to permit transfer. ESM is operating the mines during the permit transfer process and has agreed to use commercially reasonable efforts to cause the permits to be transferred as promptly as possible. As Blackjewel's surety bonds

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were also released in connection with the ESM Transaction, our $44.8 million backstop of Blackjewel's bonding program and $18.8 million supporting letters of credit were released.

Pursuant to the terms of the ESM Transaction, we agreed to pay ESM $90.0 million ($81.3 million at closing and an additional $8.7 million into escrow pursuant to terms to be mutually agreed upon between the parties). In addition, we agreed to finalize the conveyance of certain Wyoming real property to ESM upon release of such property as collateral by the DEQ, waive its rights to the remaining $3.1 million of the Stalking Horse Purchase Deposit provided to Blackjewel in connection with the stalking horse agreement, and pay certain Blackjewel debtor-in-possession ("DIP") lenders $3.0 million of principal and interest pursuant to an existing agreement between us and those lenders. Refer to Note

As of the ESM Transaction closing date, our asset retirement obligation with respect to the Western Assets totaled $152.9 million. Prior to the transfer of the Western Asset permits to ESM, we will continue to have potential risk with respect to the related reclamation obligations. However, given (i) the release of our bonding obligations described above and the posting of substitute bonds by ESM, (ii) the agreement with ESM's surety providers that release us from liability with respect to the substitute bonds or the obligations secured thereby, (iii) the terms of the OSM agreement, (iv) the terms on which ESM is authorized to operate pursuant to the permits, and (v) the ESM indemnity with respect to the reclamation obligations, we expect the remaining risk to be low. As a result, following the closing of the ESM Transaction and payment of amounts to ESM, our remaining reclamation obligation was reduced to zero during the three months ended December 31, 2019. We will closely monitor the permit transfer process and periodically re-assess our reclamation obligations as required. We received approximately $9.0 million of cash collateral returned related to the release of our surety bonds.

Additionally, in connection with the closing of the ESM Transaction, we paid $13.5 million to Campbell County, Wyoming for accrued ad valorem back taxes for 2018 and were released from all claims related thereto. Pursuant to an agreement with ESM, the State of Wyoming Department of Revenue, and Blackjewel, the State of Wyoming Department of Revenue released us from any outstanding claims related to state tax obligations arising from or related to the Western Mines for any period through and including the closing date of the transaction.

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air. The volatility of met coal determines the percentage of feed coal that actually becomes coke, known as coke yield, with lower volatility producing a higher coke yield.

Regional Supply and Demand. Our realized price per ton is influenced by market forces of the regional market into which such coal is to be sold. Market pricing may vary according to region and lead to different discounts or premiums to the most directly comparable benchmark price for such coal product.

Costs. Our results of operations are dependent upon our ability to improve productivity and control costs. Our primary expenses are for operating supply costs, repair and maintenance expenditures, cost of purchased coal, royalties, current wages and benefits, post-employment benefits, freight and handling costs, and taxes incurred in selling our coal. Principal goods and services we use in our operations include maintenance and repair parts and services, electricity, fuel, roof control and support items, explosives, tires, conveyance structure, ventilation supplies and lubricants.

Results of Operations

Our results of operations for the years ended December 31, 2019 and 2018 are discussed in these "Results of Operations" presented below.

For the discussion of our results of operations and financial condition for the year ended December 31, 2018 compared to the year ended December 31, 2017, refer to " Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations " in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.







        Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
        Revenues
        The following table summarizes information about our revenues during the years
        ended December 31, 2019 and 2018:
                          Year Ended December 31,        Increase (Decrease)
        (In thousands)      2019            2018         $ or Tons        %
        Coal revenues  $   2,282,007    $ 2,020,889    $   261,118      12.9  %
        Other revenues         8,253         10,316         (2,063 )   (20.0 )%
        Total revenues $   2,290,260    $ 2,031,205    $   259,055      12.8  %
        Tons sold             23,706         17,587          6,119      34.8  %
        


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Coal revenues. Coal revenues increased $261.1 million, or 12.9%, for the year ended December 31, 2019 compared to the prior year period. The increase was primarily due to higher coal sales volume of 6.1 million tons resulting from inclusion of a full year of activity from the properties acquired in the Merger. Refer to the Coal Operations section below for further detail on coal revenues for the year ended December 31, 2019 compared to the prior year period.







        Costs and Expenses
        The following table summarizes information about our costs and expenses during
        the years ended December 31, 2019 and 2018:
                                                Year Ended December 31,          Increase (Decrease)
        (In thousands)                           2019            2018              $              %
        Cost of coal sales (exclusive of
        items shown separately below)        $ 1,924,709     $ 1,661,118     $   263,591          15.9  %
        Depreciation, depletion and
        amortization                             228,792          77,549         151,243         195.0  %
        Accretion on asset retirement
        obligations                               27,798           9,966          17,832         178.9  %
        Amortization of acquired
        intangibles, net                             (88 )        (5,392 )         5,304          98.4  %
        Selling, general and administrative
        expenses (exclusive of depreciation,
        depletion and amortization shown
        separately above)                         78,953          59,271          19,682          33.2  %
        Merger-related costs                       1,090          51,800         (50,710 )       (97.9 )%
        Asset impairment                          66,324               -          66,324         100.0  %
        Goodwill impairment                      124,353               -         124,353         100.0  %
        Total other operating (income) loss:
        Mark-to-market adjustment for
        acquisition-related obligations           (3,564 )            24          (3,588 )          NM
        Gain on settlement of
        acquisition-related obligations                -            (580 )           580         100.0  %
        Other income                                (575 )       (16,311 )        15,736          96.5  %
        Total costs and expenses             $ 2,447,792     $ 1,837,445     $   610,347          33.2  %
        


Cost of coal sales. Cost of coal sales increased $263.6 million, or 15.9%, for the year ended December 31, 2019 compared to the prior year period. The increase was primarily driven by an increase in tons sold from properties acquired in the Merger and the related supplies and maintenance expense, salaries and wages expense, and royalties and taxes, partially offset by a decrease in the cost of purchased coal during the current period.

Depreciation, depletion and amortization. Depreciation, depletion and amortization increased $151.2 million, or 195.0%, for the year ended December 31, 2019 compared to the prior year period. The increase in depreciation, depletion and amortization primarily related to increased purchases of machinery and equipment, increased asset development during the current period, and additions of property, plant and equipment, and owned and leased mineral rights as a result of the Merger.

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Merger-related costs. Merger-related costs decreased $50.7 million, or 97.9%, for the year ended December 31, 2019 compared to the prior year period. The merger-related costs related primarily to professional fees, severance pay, and incentive pay incurred related to the Merger Agreement entered into with the Alpha Companies.

The following table summarizes information about our other income (expense) during the years ended December 31, 2019 and 2018:







                                                Year Ended December 31,           Increase (Decrease)
        (In thousands)                            2019             2018             $              %
        Other income (expense):
        Interest expense                     $     (66,798 )   $  (38,810 )   $   (27,988 )       (72.1 )%
        Interest income                              7,296          1,949           5,347         274.3  %
        Loss on modification and
        extinguishment of debt                     (26,459 )      (12,042 )       (14,417 )      (119.7 )%
        Equity loss in affiliates                   (6,874 )       (6,112 )          (762 )       (12.5 )%
        Miscellaneous loss, net                    (10,332 )       (1,254 )        (9,078 )      (723.9 )%
        Total other expense, net             $    (103,167 )   $  (56,269 )   $   (46,898 )       (83.3 )%
        


Interest expense. Interest expense increased $28.0 million, or 72.1%, for the year ended December 31, 2019 compared to the prior year period, primarily due to an increase in debt outstanding, higher interest rates, and larger accretion of debt discounts related to the debt facilities in place during the current period. Refer to Note 15 for additional information.

Loss on modification and extinguishment of debt. During the year ended December 31, 2019, we recorded a loss on modification of debt of $0.3 million, primarily related to modification fees paid under the refinance, and a loss on extinguishment of debt of $26.2 million, primarily related to the write-off of . . .

Mar 18, 2020

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