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(Exact name of registrant as specified in its charter)
iDelaware
i81-0706839
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i16243 Highway 216, iBrookwood,
iAlabama
i35444
(Address of Principal Executive Offices)
(Zip
Code)
(i205) i554-6150
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $.01 per share
iHCC
iNew
York Stock Exchange
iRights to Purchase Series A Junior Participating Preferred Stock, par value $0.01 per share
--
iNew York Stock Exchange
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No o
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
ý
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No iý
Number of shares of common stock outstanding as of October 31, 2022: i51,653,568
This Quarterly Report on Form 10-Q (this "Form 10-Q" or "this report") includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies, including any potential changes to our production and sales volumes as a result of our negotiations with the United Mine Workers of America (the "UMWA").
We have used the words “anticipate,”“approximately,”“assume,”“believe,”“could,”“contemplate,”“continue,”“estimate,”“expect,”“target,”“future,”“intend,”“may,”“plan,”“potential,”“predict,”“project,”“should” and similar terms and phrases, including in references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to:
•the
impact of global pandemics, such as the novel coronavirus (“COVID-19”) pandemic, including its impact on our business, employees, suppliers and customers, the metallurgical ("met") coal and steel industries, and global economic markets;
•the impacts of inflation on our business, including on our costs and our profitability;
•our relationships with, and other conditions affecting, our customers;
•successful implementation of our business strategies;
•unavailability of, or price increases in, the transportation of our met coal;
•significant cost increases and fluctuations, and delay in the delivery of raw materials,
mining equipment and purchased components;
•work stoppages, negotiation of labor contracts, employee relations and workforce availability;
•competition and foreign currency fluctuations;
•litigation, including claims not yet asserted;
•terrorist attacks or security threats, including cybersecurity threats;
•global steel demand and the downstream impact on met coal prices;
•impact of weather and natural disasters on demand and production;
•a
substantial or extended decline in pricing or demand for met coal;
•inherent difficulties and challenges in the coal mining industry that are beyond our control;
•our ability to develop or acquire met coal reserves in an economically feasible manner;
•geologic, equipment, permitting, site access, operational risks and new technologies related to mining;
•inaccuracies in our estimates of our met coal reserves;
•costs associated with our workers’ compensation benefits;
•challenges to our licenses, permits and other authorizations;
•challenges
associated with environmental, health and safety laws and regulations;
•regulatory requirements associated with federal, state and local regulatory agencies, and such agencies’ authority to order temporary or permanent closure of our mines;
•climate change concerns and our operations’ impact on the environment;
•failure to obtain or renew surety bonds on acceptable terms, which could affect our ability to secure reclamation and coal lease obligations;
•our obligations surrounding reclamation and mine closure;
•our substantial indebtedness and debt service requirements;
•our
ability to comply with covenants in our ABL Facility (as defined below) and the Indenture (as defined below);
•adequate liquidity and the cost, availability and access to capital and financial markets;
•our expectations regarding our future cash tax rate as well as our ability to effectively utilize our net operating loss carry forwards (“NOLs”);
•our ability to continue paying our quarterly dividend or pay any special dividend;
•the timing and amount of any stock repurchases we make under our Stock Repurchase Program (as defined below) or otherwise;
•geopolitical events, including the effects of the Russia-Ukraine war.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under “Part II, Item 1A. Risk
Factors,”“Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q, and those set forth from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). These documents are available through our website at www.warriormetcoal.com or through the SEC's Electronic Data Gathering and Analysis Retrieval system at http://www.sec.gov. In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements.
When considering forward-looking statements made by us in this Form 10-Q, or elsewhere, such statements speak only
as of the date on which we make them. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-Q after the date of this Form 10-Q, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this Form 10-Q or elsewhere might not occur.
Warrior Met Coal, Inc. (the "Company") is a U.S.-based environmentally and socially minded supplier to the global steel industry. The Company is dedicated entirely to mining non-thermal met coal used as a critical component of steel production by metal manufacturers in Europe, South America and Asia. The Company is a large-scale, low-cost producer and exporter of premium met coal, also known as hard-coking coal ("HCC"), operating highly efficient longwall operations in its underground mines based in Alabama. The HCC that the Company produces from the
Blue Creek coal seam contains very low sulfur, has strong coking properties and is of a similar quality to coal referred to as premium HCC produced in Australia. The Company also generates ancillary revenues from the sale of natural gas extracted as a byproduct from the underground coal mines and royalty revenues from leased properties.
iBasis of Presentation
The accompanying financial statements
are presented in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, the financial statements include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading. For further information, refer to the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report"). Operating results for the three and nine months ended September 30, 2022 are
not necessarily indicative of the final results that may be expected for the year ended December 31, 2022. The balance sheet at December 31, 2021 has been derived from the audited financial statements for the year ended December 31, 2021 included in the 2021 Annual Report.
Collective Bargaining Agreement
The Company's Collective Bargaining Agreement ("CBA") contract with the UMWA expired on April 1, 2021. While the Company
continues to engage in good faith negotiations with the UMWA, the Company has not reached a new contract and the UMWA is engaging in a strike. As a result of the strike, the Company initially idled Mine No. 4 and scaled back operations at Mine No. 7. In the first quarter of 2022, the Company restarted operations at Mine No. 4. Due to the reduced operations at Mine No. 4 and Mine No. 7, the Company incurred idle mine expenses of $i5.4 million
and $i10.1 million, for the three and nine months ended September 30, 2022 and $i9.3 million and $i20.2 million
for the three and nine months ended September 30, 2021, respectively. These expenses are reported separately in the Condensed Statements of Operations and represent expenses incurred, such as electricity, insurance and maintenance labor. The Company has also incurred business interruption expenses of approximately $i7.1 million and $i20.1 million,
for the three and nine months ended September 30, 2022 and $i6.9 million and $i13.9 million for the three and nine months ended September 30,
2021, respectively, which represent non-recurring expenses that are directly attributable to the ongoing UMWA strike for incremental safety and security, labor negotiations and other expenses. These expenses are also presented separately in the Condensed Statements of Operations.
Black Warrior Methane (“BWM”) and Black Warrior Transmission (“BWT”)
On March 1, 2022, the Company acquired the remaining ii50/%
interest in BWM and BWT for $i0.3 million. The purchase consideration has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The acquisition is not deemed to be material to the condensed financial statements.
Note 2. iSummary
of Significant Accounting Policies
The Company's significant accounting policies are consistent with those disclosed in Note 2 to its audited financial statements included in the 2021 Annual Report, except for changes related to new accounting pronouncements described in "New Accounting Pronouncements."
iCash and Cash Equivalents
Cash
and cash equivalents include short-term deposits and highly liquid investments that have original maturities of three months or less when purchased and are stated at cost, which approximates fair value.
8
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
Instruments with maturities greater than three months, but less than twelve months, are included in short-term investments. The Company purchases United States Treasury bills with maturities ranging from six to twelve months which are classified as held to maturity and are carried at amortized cost, which approximates fair value. The Company also purchases fixed income securities and certificates of deposits with varying maturities that are classified as available for sale and are carried at fair value. Securities classified as held to maturity are those securities that management has the intent and ability to hold to maturity.
As of September 30,
2022 and December 31, 2021, short-term investments consisted of $ii8.5/
million in cash and fixed income securities. The short-term investments are posted as collateral for the self-insured black lung related claims asserted by or on behalf of former employees of Walter Energy, Inc. ("Walter Energy") and its subsidiaries, which were assumed by the Company and relate to periods prior to March 31, 2016.
iRevenue
Recognition
Revenue is recognized when performance obligations under the terms of a contract with the Company's customers are satisfied; for all contracts this occurs when control of the promised goods has been transferred to its customers. For coal shipments to domestic customers via rail, control is transferred when the railcar is loaded. For coal shipments to international customers via ocean vessel, control is transferred when the vessel is loaded at the Port of Mobile, Alabama. For natural gas sales, control is transferred when the gas has been transferred to the pipeline. Revenue is disaggregated between coal sales within
the Company's mining segment and natural gas sales which is included in all other revenues, as disclosed in Note 13.
Since February 2017, the Company has had an arrangement with XCoal Energy & Resources ("XCoal") to serve as XCoal's strategic partner for exports of low-volatility HCC. Under this arrangement, XCoal takes title to and markets coal that the Company would historically have sold on the spot market, in an amount of the greater of (i) i10%
of the Company's total production during the applicable term of the arrangement or (ii) i250,000 metric tons. During the three and nine months ended September 30, 2022, XCoal accounted for approximately $i69.8
million, or i20.6% of total sales, and $i281.3 million, or i20.7%
of total sales, respectively. During the three and nine months ended September 30, 2021, XCoal accounted for approximately $i122.3 million, or i61.1%
of total sales, and $i370.4 million, or i58.5% of total sales, respectively.
i
Trade
Accounts Receivable and Allowance for Credit Losses
Trade accounts receivable represent customer obligations that are derived from revenue recognized from contracts with customers. Credit is extended based on an evaluation of the individual customer's financial condition. The Company maintains trade credit insurance on the majority of its customers and the geographic regions of coal shipments to these customers. In some instances, the Company requires letters of credit, cash collateral or prepayments from its customers on or before shipment to mitigate the risk of loss. These efforts have consistently resulted in the
Company recognizing no historical credit losses. The Company also has never had to have a claim against its trade credit insurance policy.
In order to estimate the allowance for credit losses on trade accounts receivable, the Company utilizes an aging approach in which potential impairment is calculated based on how long a receivable has been outstanding (e.g., current, 1-31 days, 31-60 days, etc.). The Company calculates an expected credit loss rate based on the Company’s historical credit loss rate, the risk characteristics of our customers, and the current met coal and steel
market environments. As of September 30, 2022 and December 31, 2021, the estimated allowance for credit losses was immaterial and did not have a material impact on the Company's financial statements.
i
New Accounting Pronouncements
In November 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-10, “Disclosures
by Business Entities about Government Assistance,” which requires business entities to make annual disclosures about transactions with a government accounted for by analogizing to a grant or contribution accounting model. The required annual disclosures include the nature of the transaction, the related accounting policy, the financial statement line items affected and the amounts reflected in the current period financial statements, and any significant terms and conditions. The ASU is effective for fiscal years beginning after December 15, 2021. The adoption of this ASU is not expected to have a material impact to the Company's results of operations, financial condition, cash flows or financial statement presentation.
9
WARRIOR
MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
For the three and nine months ended September 30, 2022, the Company estimated its annual effective tax rate and applied this effective tax rate to its year-to-date pretax income at the end of the interim reporting period. The tax effect of unusual or infrequently occurring items, including the effects of changes in tax laws or rates and changes in judgment about the realizability of
deferred tax assets, are reported in the interim period in which they occur. For the three and nine months ended September 30, 2022, the Company had an income tax expense of $i20.3 million and $i122.1 million,
respectively.
For the three and nine months ended September 30, 2021, the Company utilized a discrete period method to calculate taxes, as it did not believe that the annual effective tax rate method represented a reliable estimate given the uncertainty at the time surrounding the COVID-19 pandemic, the Chinese ban on Australian coal, the CBA contract negotiations with the UMWA and other potentially disruptive factors and its impact on the Company's annual guidance. For the three and nine months ended September 30, 2021, the
Company had an income tax expense of $i5.4 million and $i22.4 million, respectively. The income tax expense of $i5.4 million
for the three months ended September 30, 2021, was primarily due to a pre-tax operating income combined with the Internal Revenue Code Section 45I Marginal Well Credit ("Section 45I Credit"). The Section 45I Credit is a production-based tax credit that provides a credit for qualified natural gas production. The $i22.4 million of income tax expense for the nine months ended September 30, 2021 was primarily due to the establishment of a non-cash $i47.8 million
state deferred income tax asset valuation allowance offset partially by a net non-cash income tax benefit of $i22.9 million due to the remeasurement of state deferred income tax assets and liabilities and $i2.5 million
of net income tax expense due to pre-tax operating income for the period, the Section 45I Credit, depletion and other adjustments.
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law. The IRA contains a number of revisions to the Internal Revenue Code, including a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022. While these tax law changes have no immediate effect and are not expected to have a material adverse effect on our results of operations going forward, we will continue to evaluate its impact as further information becomes available.
Note 5. iDebt
i
The
Company's debt consisted of the following (in thousands):
(1) Borrowings
under the ABL Facility bear interest at a rate equal to Secured Overnight Financing Rate ("SOFR") ranging from i1.5% to i2.0%, plus a credit adjustment
spread, ranging currently from i0.11448% to i0.42826%, or an alternate base rate plus an applicable margin, which is determined based on the average availability
of the commitments under the ABL Facility, ranging from i0.5% to i1.0%.
/
10
WARRIOR
MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
On December 6, 2021, the Company issued $i350.0 million in aggregate principal
amount of i7.875% senior secured notes due 2028 (the “Notes”) at an initial price of i99.343% of their face amount. The Notes were issued to qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States in accordance with Regulation S under the Securities Act. The Company used the net proceeds of the offering of the Notes, together with cash on hand, to fund the redemption of all of the Company’s outstanding i8.00% senior secured notes due 2024 (the
“Existing Notes”), including payment of the redemption premium in connection with such redemption. The Notes will mature on December 1, 2028.
During the three months ended September 30, 2022, the Company repurchased in the open market and extinguished approximately $i37.8 million principal amount of our Notes. In connection with
the extinguishment of our Notes, we recognized a loss on early extinguishment of debt of $i0.5 million which is included in interest expense, net in the Condensed Statements of Operations.
ABL Facility
On December 6, 2021, the Company entered into the Second Amended and Restated Asset-Based Revolving Credit
Agreement (the “Second Amended and Restated Credit Agreement”), by and among the Company and certain of its subsidiaries, as borrowers, the guarantors party thereto, the lenders from time to time party thereto and Citibank, as administrative agent (in such capacity, the "Agent"), which amends and restates in its entirety the then existing Amended and Restated Asset-Based Revolving Credit Agreement (as amended, the “ABL Facility”). The Second Amended and Restated Credit Agreement, among other things, (i) extended the maturity date of the ABL Facility to December 6, 2026; (ii) changed the calculation of the interest rate payable on borrowings from being based on a London Inter-Bank Offered Rate to be based on a SOFR, with corresponding
changes to the applicable interest rate margins with respect to such borrowings, (iii) amended certain definitions related to the calculation of the borrowing base; (iv) increased the commitments that may be used to issue letters of credit to $i65.0 million; and (v) amended certain baskets contained in the covenants to conform to the baskets contained in the indenture governing the Notes (the "Indenture"). The
Second Amended and Restated Credit Agreement also allows the Company to borrow up to $i132.0 million through October 13, 2023, decreasing to $i116.0 million
through November 2026, subject to availability under the borrowing base and other conditions.
As of September 30, 2022, ino loans were outstanding under the ABL Facility and there were $i8.7
million of letters of credit issued and outstanding under the ABL Facility. At September 30, 2022, the Company had $i123.3 million of availability under the ABL Facility (calculated net of $i8.7
million of letters of credit outstanding at such time).
Note 6. iOther Long-Term Liabilities
i
Other
long-term liabilities are summarized as follows (in thousands):
The
Company primarily enters into rental agreements for certain mining equipment that are for periods of 12 months or less, some of which include options to extend the leases. Leases that are for periods of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense on these agreements on a straight-line basis over the lease term. Additionally, the Company has certain finance leases for mining equipment that expire over various contractual periods. These leases have remaining lease terms of one to ifive
years and do not include an option to renew. Amortization expense for finance leases is included in depreciation and depletion expense.
11
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
Weighted
average remaining lease term - finance leases (in months)
28.9
35.1
Weighted average discount rate - finance leases(2)
i5.90
%
i6.11
%
(1)
Finance lease right-of-use assets are recorded net of accumulated amortization of $i25.9 million and $i17.7 million
and are included in property, plant and equipment, net in the Condensed Balance Sheets as of September 30, 2022 and the Condensed Balance Sheets as of December 31, 2021, respectively.
/
(2) When an implicit discount rate is not readily available in a lease, the Company uses its incremental borrowing rate based on information available at the commencement date when determining the present value of lease payments.
i
The
components of lease expense were as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases
$
i2,557
$
i2,935
Financing
cash flows from finance leases
$
i22,400
$
i22,284
Non-cash
right-of-use assets obtained in exchange for lease obligations:
Finance leases
$
i2,011
$
i42,842
/
As
of September 30, 2022, the Company had additional commitments for finance leases, primarily for mining equipment, that have not yet commenced of $i4.9 million. These finance leases will commence during the fiscal year 2022 and 2023 with lease terms of one to itwo
years.
Note 8. iNet Income per Share
i
Basic
and diluted net income per share was calculated as follows (in thousands, except per share data):
Weighted-average
shares used to compute net income per share—basic
i51,654
i51,416
i51,612
i51,315
Dilutive
restrictive stock awards
i90
i169
i87
i109
Weighted-average
shares used to compute net income per share—diluted
i51,744
i51,585
i51,699
i51,424
Net
income per share—basic
$
i1.91
$
i0.75
$
i10.49
$
i0.24
Net
income per share—diluted
$
i1.90
$
i0.74
$
i10.48
$
i0.24
/
Note 9. iCommitments
and Contingencies
Environmental Matters
The Company is subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of its plants, mines and other facilities and with respect to remediating environmental conditions that may exist at its own and other properties.
The Company believes it is in compliance with federal, state and local environmental laws and regulations. The Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the
costs are probable and can be reasonably estimated. As of September 30, 2022 and December 31, 2021, there were no accruals for environmental matters other than asset retirement obligations for mine reclamation.
Miscellaneous Litigation
From time to time, the Company is party to lawsuits arising in the ordinary course of its businesses. The Company records costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company’s future results
of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. As of September 30, 2022
13
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
and December 31, 2021, there were no items accrued for miscellaneous litigation. For the three months ended September 30, 2021,
the Company received $i1.4 million upon the settlement of a lawsuit which is reflected as other income in the Condensed Statement of Operations.
On July 15, 2015, Walter Energy and certain of its wholly owned U.S. subsidiaries, including Jim Walter Resources,
Inc. (“JWR”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the “Chapter 11 Cases”) in the Northern District of Alabama, Southern Division. On December 7, 2015, Walter Energy Canada Holdings, Inc., Walter Canadian Coal Partnership and their Canadian affiliates (collectively “Walter Canada”) applied for and were granted protection under the Companies’ Creditors Arrangement Act (the “CCAA”) pursuant to an Initial Order of the Supreme Court of British Columbia. As a result of the Company’s acquisition of certain core operating assets of Walter Energy during the Chapter 11 Cases, in the first quarter of 2022 the Company received $i0.7
million, from the Chapter 11 Cases which is reflected as other income in the Condensed Statement of Operations for the nine months ended September 30, 2022. The Company received iino/
payments for the three and nine months ended September 30, 2021 from the Chapter 11 Cases.
Other Commitments and Contingencies
The Company is party to various transportation and throughput agreements with rail and barge transportation providers and the Alabama State Port Authority. These agreements contain annual minimum tonnage guarantees with respect to coal transported from the mine sites to the Port of Mobile, Alabama, the unloading of rail cars or barges, and the loading of vessels. If the Company does not meet its minimum throughput obligations, which are based on annual minimum amounts, it is required to pay the transportation providers or the Alabama
State Port Authority a contractually specified amount per metric ton for the difference between the actual throughput and the minimum throughput requirement. At September 30, 2022 and December 31, 2021, the Company had iino/
liability recorded for minimum throughput requirements.
Royalty Obligations
A substantial amount of the coal that the Company mines is produced from mineral reserves leased from third-party landowners. These leases convey mining rights to the Company in exchange for royalties to be paid to the landowner as either a fixed amount per ton or as a percentage of the sales price. Although coal leases have varying renewal terms and conditions, they generally last for the economic life of the reserves. Coal royalty expense was $i42.4
million and $i116.3 million for the three and nine months ended September 30, 2022, respectively, and $i13.2 million and $i41.6 million
for the three and nine months ended September 30, 2021, respectively. Coal royalty expense has increased in the current year as compared to the prior year periods due to the increase in the average net selling price of our coal.
Note 10. iStockholders' Equity
Common Shares
The
Company is authorized to issue up to ii140,000,000/
common shares, $ii0.01/ par value per share. Holders
of common shares are entitled to receive dividends when authorized by the Company's Board of Directors (the "Board").
Stock Repurchase Program
On March 26, 2019, the Board approved the Company's second stock repurchase program (the “Stock Repurchase Program”) that authorizes repurchases of up to an aggregate of approximately $i70.0
million of the Company's outstanding common stock. The Company fully exhausted its previous stock repurchase program of $i40.0 million of its outstanding common stock. The Stock Repurchase Program does not require the Company to repurchase a specific number of shares or have an expiration
date. The Stock Repurchase Program may be suspended or discontinued by the Board at any time without prior notice.
Under the Stock Repurchase Program, the Company may repurchase shares of its common stock from time to time, in amounts, at prices and at such times as the Company deems appropriate, subject to market and industry conditions, share price, regulatory requirements as determined from time to time by the Company and other considerations. The Company’s repurchases may be executed using open market purchases or privately negotiated transactions in accordance with applicable
securities laws and regulations, including Rule 10b-18 of the Exchange Act and repurchases may be executed pursuant to Rule
14
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
10b5-1 under the Exchange Act. Repurchases will be subject to limitations in the ABL Facility and the Indenture. The Company intends to fund repurchases under the Stock Repurchase
Program from cash on hand and/or other sources of liquidity.
As of September 30, 2022 and December 31, 2021, the Company has repurchased ii500,000/
shares for approximately $ii10.6/
million, leaving approximately $ii59.4/
million of share repurchases authorized under the Stock Repurchase Program.
Dividends
i
The Company declared the following dividends on common shares as of the filing date of this Form 10-Q:
The Company is authorized to issue up to ii10,000,000/
shares of preferred stock, $ii0.01/ par
value per share.
Note 11. iDerivative Instruments
The Company enters into natural gas swap contracts from time to time to hedge the exposure
to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the Company’s forecasted sales. As of September 30, 2022, the Company had ino natural gas swap contracts outstanding as
all swap contracts scheduled to mature in early 2023 were settled during the quarter ended June 30, 2022. As of December 31, 2021, the Company had i6,100,000 metric million British thermal unit natural gas swap contracts
outstanding.
The Company’s natural gas swap contracts economically hedge certain risks but are not designated as hedges for financial reporting purposes. All changes in the fair value of these derivative instruments are recorded as other revenues in the Condensed Statements of Operations. The Company recognized a loss related to natural gas swap contracts of $i27.7 million,
for the nine months ended September 30, 2022 and recognized ino gains or losses for the three months ended September 30, 2022. For the three and nine months ended September 30, 2021, the Company recognized a loss of $i5.8 million
and $i8.7 million, respectively related to natural gas swap contracts. The Company records all derivative instruments at fair value and had iino/
asset or liability recorded as of September 30, 2022 and had an asset of $ii4.0/ million
as of December 31, 2021 in prepaid expenses and other in the accompanying Condensed Balance Sheets.
Note 12. iFair Value of Financial Instruments
i
The
following table presents information about the Company’s financial liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy utilized to determine such fair value (in thousands):
The
Company had no significant assets or any other liabilities measured at fair value on a recurring basis as of September 30, 2022 or December 31, 2021. During the nine months ended September 30, 2022, there were no transfers between Level 1, Level 2 and Level 3. The Company uses quoted dealer prices for similar contracts in active over-the-counter markets for determining fair value of Level 2 liabilities. There were no changes to the valuation techniques used to measure liability fair values on a recurring basis during the nine months ended September 30, 2022.
The
following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:
Cash and cash equivalents, short-term investments, receivables and trade accounts payable — The carrying amounts reported in the Condensed Balance Sheets approximate fair value due to the short-term nature of these assets and liabilities.
Debt — The Company's outstanding debt is carried at cost. As of September 30, 2022, there were ino
borrowings outstanding under the ABL Facility, with $i123.3 million available, net of outstanding letters of credit of $i8.7
million. As of December 31, 2021, the Company had ino borrowings outstanding under the ABL Facility, with $i83.2 million
available, net of outstanding letters of credit of $i9.4 million. As of September 30, 2022 and December 31, 2021, the estimated fair value of the Notes based upon observable market data (Level 2) was approximately $i298.2
million and $i359.6 million, respectively.
Note 13. iSegment
Information
The Company identifies a business as an operating segment if: (i) it engages in business activities from which it may earn revenues and incur expenses; (ii) its operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance; and (iii) it has available discrete financial information. The Company has determined that its itwo
underground mining operations are its operating segments. The CODM reviews financial information at the operating segment level to allocate resources and to assess the operating results and financial performance for each operating segment. Operating segments are aggregated into a reportable segment if the operating segments have similar quantitative economic characteristics and if the operating segments are similar in the following qualitative characteristics: (i) nature of products and services; (ii) nature of production processes; (iii) type or class of customer for their products and services; (iv) methods used to distribute the products or provide services; and (v) if applicable, the nature of the regulatory environment.
The Company has determined that the itwo
operating segments are similar in both quantitative and qualitative characteristics and thus the itwo operating segments have been aggregated into ione reportable
segment. The Company has determined that its natural gas and royalty businesses and the Blue Creek mine development did not meet the criteria in ASC 280 to be considered as operating or reportable segments. Therefore, the Company has included their results in an “all other” category as a reconciling item to consolidated amounts.
The Company does not allocate all of its assets, or its depreciation and depletion expense, selling, general and administrative expenses, transactions costs, interest expense, and income tax expense or benefit by segment.
i
The
following tables include reconciliations of segment information to consolidated amounts (in thousands):
The
Company evaluates the performance of its segment based on Segment Adjusted EBITDA, which is defined as net income adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, business interruption, idle mine, other income, interest expense, net, income tax expense, and certain transactions or adjustments that the CODM does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA does not represent and should not be considered as an alternative to cost of sales under GAAP and may not be comparable to other similarly titled measures used by other companies. iBelow
is a reconciliation of Segment Adjusted EBITDA to net income, which is its most directly comparable financial measure calculated and presented in accordance with GAAP (in thousands):
ITEM
2. 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 three and nine months ended September 30, 2022 and September 30, 2021. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Form 10-Q and the audited financial statements for the year ended December 31, 2021 included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report"). Some of the information contained in this discussion and analysis or set forth
elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Please see “Forward-Looking Statements.”
Overview
We are a U.S.-based, environmentally and socially minded supplier to the global steel industry. We are dedicated entirely to mining non-thermal metallurgical ("met") coal used as a critical component of steel production by metal manufacturers
in Europe, South America and Asia. We are a large-scale, low-cost producer and exporter of premium met coal, also known as hard coking coal (“HCC”), operating highly-efficient longwall operations in our underground mines based in Alabama, Mine No. 4 and Mine No. 7.
As of December 31, 2021, based on a reserve report prepared by Marshall Miller & Associates, Inc. ("Marshall Miller"), Mine No. 4 and Mine No. 7, our two operating mines, had approximately 90.2 million metric tons of recoverable reserves and our undeveloped Blue Creek mine contained 63.3 million metric tons of recoverable reserves and 44.9 million metric tons of coal resources exclusive of reserves, which total 108.2 million metric tons. As a result of our high quality coal, our realized price has historically been in line with, or at a slight discount to, the Platts Premium Low Volatility ("LV")
Free On Board ("FOB") Australia Index Price ("Platts Index"). Our HCC, mined from the Southern Appalachian portion of the Blue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and LV to mid-volatility ("MV"). These qualities make our coal ideally suited as a coking coal for the manufacture of steel.
We sell substantially all of our met coal production to steel producers. Met coal, which is converted to coke, is a critical input in the steel production process. Met coal is both consumed domestically in the countries where it is produced and exported by several of the largest producing countries, such as China, Australia, the United States, Canada and Russia. Therefore, demand for our coal will be highly correlated to conditions in the global steelmaking industry. The steelmaking industry’s demand for met coal is affected by a number of factors, including the cyclical nature of that industry’s
business, technological developments in the steelmaking process and the availability of substitutes for steel such as aluminum, composites and plastics. A significant reduction in the demand for steel products would reduce the demand for met coal, which would have a material adverse effect upon our business. Similarly, if alternative ingredients are used in substitution for met coal in the integrated steel mill process, the demand for met coal would materially decrease, which could also materially adversely affect demand for our met coal.
The global steelmaking industry's demand for met coal is also affected by pandemics, epidemics or other public health emergencies, such as the outbreak of the novel coronavirus ("COVID-19"). As of the filing of this Form 10-Q, we have not had to idle or temporarily idle our mines as a result of COVID-19.
In addition, future governmental
policy changes in foreign countries may be detrimental to the global coal market and could thus impact our business, financial condition or results of operation. For example, the Chinese government has from time to time implemented regulations and promulgated new laws or restrictions, such as the unofficial ban on Australian coal in November 2020, on their domestic coal industry, sometimes with little advance notice, which has impacted worldwide coal demand, supply and prices. The ban on Australian coal has significantly impacted the global met coal market in recent years. During the past several years, the Chinese government has initiated a number of anti-smog measures aimed at reducing hazardous air emissions through temporary production capacity restrictions with the steel, coal and coal-fired power sectors.
In February 2022, the war in Ukraine pushed seaborne met coal export prices to record levels. After the invasion
began, spot cargo requests for Australian met coals could not be filled. The U.S., Canada and Indonesia were also not able to step up at short notice. These supply shortages combined with the urgent purchases of non-Russian coal against a backdrop of mounting sanctions, trade finance problems and seaborne logistical constraints pushed the Queensland PLV HCC index price to over $660.00 per metric ton by mid-March. On August 10, 2022, the European Union ban on the importation of Russian coal became effective which significantly impacted coking coal markets by disrupting previously existing trading patterns. The Queensland PLV HCC index price started the quarter at approximately $302.00 per metric ton falling to a floor of $188.00 per
18
metric
ton on August 2, 2022 and finishing the quarter at $270.50. The resulting volatility, including market expectations of potential changes in coal prices and inflationary pressures on steel products, may significantly affect prices for our coal or the cost of supplies and equipment.
U.S. inflation surged to a new four decade record high of 9.1% in July 2022 and remained at 8.2% in September 2022, driven by increased energy and food costs, supply constraints and strong consumer demand. High inflation has been driven by growth in the economy as it bounces back from COVID-19, powered in part by low interest rates and government stimulus to counter the pandemic's impact. We expect COVID-19 to continue to impact global supply markets and supply chains, resulting in shortages, extended lead times and increased inflation impacting our operations and profitability. We are applying
a number of different strategies to mitigate the impact of these challenges on our operations, including placing purchase orders earlier, utilizing short term contracts and leveraging our supplier relationships. In 2022, we expect inflation to have a larger negative impact on our profitability, as we expect increases in steel prices, freight rates, labor and other materials and supplies. These increases affect, among others, the costs of belt structure, roof bolts, cable, magnetite, rock dust and other supplies, plus labor and parts on equipment repair and rebuilds.
Within the seaborne metallurgical coal market, the three months ended September 30, 2022 were characterized by significant volatility, primarily driven by a weakening global macroeconomic environment, inflation and trade
disruptions following the previously mentioned sanctions imposed on Russian coal imports. The Chinese ban on Australian coal, the ongoing war in Ukraine, additional sanctions against Russia and a broader economic weakening as inflation rises and stimulus falls are all likely to continue to impact the global met coal market and impact our business, financial condition or results of operations.
Collective Bargaining Agreement
Our Collective Bargaining Agreement ("CBA") with the United Mine Workers of America (the "UMWA") expired on April 1, 2021, and the UMWA initiated a strike which continues through today. We continue to negotiate in good faith to reach a new union contract. During the strike, we continue to successfully execute
our business continuity plans, allowing us to meet the needs of our valued customers. As a result of the strike, we initially idled Mine No. 4 and scaled back operations at Mine No. 7. In the first quarter of 2022, we restarted operations at Mine No. 4. Due to the reduced operations at Mine No. 4 and Mine No. 7, we incurred idle mine expenses of $5.4 million and $10.1 million, for the three and nine months ended September 30, 2022, respectively, and $9.3 million and $20.2 million for the three and nine months ended September 30, 2021, respectively. These expenses are reported separately in the Condensed Statements of Operations and represent expenses incurred, such as electricity, insurance and maintenance labor. We have also incurred business interruption expenses of approximately $7.1 million and $20.1 million, for the three and nine months ended September 30,
2022, respectively, and $6.9 million and $13.9 million for the three and nine months ended September 30, 2021, respectively, which represent non-recurring expenses that are directly attributable to the ongoing UMWA strike for incremental safety and security, labor negotiations and other expenses. These expenses are also presented separately in the Condensed Statements of Operations. Despite incurring costs associated with the strike, we have been able to manage our working capital and spending to deliver strong results in the current markets. While we have business continuity plans in place, the strike may still cause disruption to production and shipping activities, and our plans may vary significantly from quarter to quarter in 2022.
How We Evaluate Our Operations
Our primary business, the mining and exporting of met coal
for the steel industry, is conducted in one reportable business segment: mining. All other operations and results are reported under the “All Other” category as a reconciling item to consolidated amounts, which includes the business results from our sale of natural gas extracted as a byproduct from our underground coal mines and royalties from our leased properties. Our natural gas and royalty businesses do not meet the criteria in ASC 280, Segment Reporting, to be considered as operating or reportable segments.
Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) Segment Adjusted EBITDA (as defined below), a non-GAAP financial measure; (ii) sales volumes and average net selling price, which drive coal sales revenue; (iii) cash
cost of sales, a non-GAAP financial measure; and (iv) Adjusted EBITDA, a non-GAAP financial measure. The following table presents supplementary data on a historical basis for each of the periods indicated.
19
For
the three months ended September 30,
For the nine months ended September 30,
(in thousands)
2022
2021
2022
2021
Segment Adjusted EBITDA
$
168,503
$
107,772
$
847,796
$
232,405
Metric
tons sold
1,360
961
3,782
4,385
Metric tons produced
1,490
1,024
4,397
4,079
Average net selling
price per metric ton
$
273.49
$
207.85
$
364.27
$
144.01
Cash cost of sales per metric ton
$
148.56
$
94.68
$
139.15
$
90.37
Adjusted
EBITDA
$
171,612
$
104,942
$
846,680
$
216,823
Segment Adjusted EBITDA
We define Segment Adjusted EBITDA as net income adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, business
interruption, idle mine expense, interest expense, net, income tax expense, other income and certain transactions or adjustments that the Chief Executive Officer, our Chief Operating Decision Maker, does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
•our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure;
•the ability of our assets to generate sufficient cash flow to pay dividends;
•our
ability to incur and service debt and fund capital expenditures; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Sales Volumes and Average Net Selling Price
We evaluate our operations based on the volume of coal we can safely produce and sell in compliance with regulatory standards, and the prices we receive for our coal. Our sales volume and sales prices are largely dependent upon the terms of our annual coal sales contracts, for which prices generally are set on daily index averages. The volume of coal we sell is
also a function of the pricing environment in the international met coal markets and the amounts of LV and MV coal that we sell. We evaluate the price we receive for our coal based on our average net selling price per metric ton.
Our average net selling price per metric ton represents our coal net sales revenue divided by total metric tons of coal sold. In addition, our average net selling price per metric ton is net of demurrage and quality specification adjustments.
Cash Cost of Sales
We evaluate our cash cost of sales on a cost per metric ton basis. Cash cost of sales is based on reported cost of sales and includes items such as freight, royalties, manpower, fuel and other similar production and sales cost items, and
may be adjusted for other items that, pursuant to accounting principles generally accepted in the United States ("GAAP"), are classified in the Condensed Statements of Operations as costs other than cost of sales, but relate directly to the costs incurred to produce met coal and sell it FOB at the Port of Mobile, Alabama. Our cash cost of sales per metric ton is calculated as cash cost of sales divided by the metric tons sold. Cash cost of sales is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
•our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and
•the
viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
20
We believe that this non-GAAP financial measure provides additional insight into our operating performance, and reflects how management analyzes our operating performance and compares that performance against other companies for purposes of business decision making by excluding the impact of certain items that management does not believe are indicative of our core operating performance. We believe that cash cost of sales presents a useful measure of our controllable costs and our operational results by including all costs incurred to produce met coal and sell it FOB at the Port of Mobile, Alabama. Period-to-period comparisons of cash cost
of sales are intended to help management identify and assess additional trends that potentially impact us and that may not be shown solely by period-to-period comparisons of cost of sales. Cash cost of sales should not be considered an alternative to cost of sales or any other measure of financial performance or liquidity presented in accordance with GAAP. Cash cost of sales excludes some, but not all, items that affect cost of sales, and our presentation may vary from the presentations of other companies. As a result, cash cost of sales as presented below may not be comparable to similarly titled measures of other companies.
The following table presents a reconciliation of cash cost of sales to total cost of sales, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.
Cost of sales (exclusive of depreciation and depletion)
$
203,441
$
91,973
$
529,869
$
399,088
Asset
retirement obligation accretion
(493)
(432)
(1,480)
(1,297)
Stock compensation expense
(909)
(555)
(2,136)
(1,536)
Cash
cost of sales
$
202,039
$
90,986
$
526,253
$
396,255
Adjusted EBITDA
We define Adjusted EBITDA as net income before interest expense, net, income taxes, depreciation and depletion, non-cash asset retirement obligation accretion, non-cash stock compensation
expense, other non-cash accretion, mark-to-market loss on gas hedges, business interruption, idle mine and other income. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
•our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We believe that the presentation of Adjusted EBITDA in this report provides information useful to investors in assessing
our financial condition and results of operations. The GAAP measure most directly comparable to Adjusted EBITDA is net income. Adjusted EBITDA should not be considered an alternative to net income or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjustments exclude some, but not all, items that affect net income and our presentation of Adjusted EBITDA may vary from that presented by other companies.
The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.
(1)Represents non-cash accretion expense associated with our asset retirement obligations.
(2)Represents non-cash stock compensation expense associated with equity awards.
(3)Represents non-cash accretion
expense associated with our black lung obligations.
(4)Represents mark-to-market loss recognized on gas hedges.
(5)Represents business interruption expenses associated with the ongoing UMWA strike.
(6)Represents idle mine expenses incurred in connection with reduced operations at Mine No. 4 and Mine No. 7.
(7)Represents proceeds received upon settlement of a lawsuit, COVID-19 pandemic related expenses and settlement proceeds received for the Shared Services Claim and Hybrid Debt Claim associated with the Walter Canada CCAA proceedings (discussed below).
We produced 1.5 million metric tons of met coal for the three months ended September 30, 2022 compared to 1.0 million metric tons for the three months ended September 30, 2021. The
tons produced in the third quarter of 2022 resulted from us running both longwalls and five continuous miner units at Mine No. 7 and the longwall and three continuous miner units at Mine No. 4. In the prior year comparable period, Mine No. 7 was running both longwalls and four continuous miner units and Mine No. 4 was idled.
Sales for the three months ended September 30, 2022 were $371.9 million compared to $199.7 million for the three months ended September 30, 2021. The $172.2 million increase in sales was primarily driven by a $89.3 million increase in sales related to a $65.64 per metric ton increase in the average net selling price per metric ton of met coal combined with a $82.9 million increase in sales due to a 0.4 million metric ton increase in met coal sales volume. Sales volume for the three months ended September 30,
2022 continued to be impacted by shipment delays attributed to the lack of available rail transportation, port maintenance and port congestion.
For the three months ended September 30, 2022, our geographic customer mix was 62% in Europe, 21% in Asia, and 17% in South America. For the three months ended September 30, 2021, our geographic customer mix was 49% in Asia, 47% in Europe and 4% in South America. The higher mix of sales into Asia in the prior year period was the result of us taking advantage of opportunities with new Chinese customers during the COVID-19 pandemic and the impact of the Chinese ban on Australian coal. Our geographic customer mix typically varies each period based on the timing of customer orders and shipments.
Other revenues for the three months ended
September 30, 2022 were $18.2 million compared to $2.7 million for the three months ended September 30, 2021. Other revenues are comprised of revenue derived from our natural gas operations, gains on sales and disposals of property, plant and equipment and land, changes in the fair value of our natural gas swap contracts, as well as earned royalty revenue. The $15.5 million increase in other revenues is primarily due to an increase in gas revenues due to a $5.75, or 145%, increase in the natural gas average selling prices combined with the prior year period including a $5.8 million loss recognized on the fair value adjustment related to our natural gas swap contracts due to an increase in
natural gas futures at the time.
Cost of sales (exclusive of items shown separately below) was $203.4 million, or 52.1% of total revenues, for the three months ended September 30, 2022, compared to $92.0 million, or 45.4% of total revenues for the three months ended September 30, 2021. The $111.4 million increase is primarily driven by a $73.3 million increase due to higher costs on price sensitive transportation and royalty costs, and the impact of inflation combined with a $38.1 million increase due to a 0.4 million metric ton increase in met coal sales volumes. Inflation accounted for approximately $6.8 million, or $4.55 per metric ton, due to increases in the costs of diesel fuel, belt structure, roof bolts, cable, magnetite, rock dust and other supplies, plus labor and parts on repair and rebuilds.
Depreciation
and depletion expenses were $30.8 million, or 7.9% of total revenues, for the three months ended September 30, 2022, compared to $29.0 million, or 14.3% for the three months ended September 30, 2021. The $1.8 million increase in depreciation and depletion is primarily driven by a 0.4 million metric ton increase in met coal sales volume as depreciation and depletion is first capitalized into coal inventory and relieved when the tons are sold offset partially by the immediate recognition in the prior year of $7.8 million in depreciation expense that would have normally been capitalized into coal inventory but was not due to the idled status of Mine No. 4.
Selling, general and administrative expenses were $10.6 million, or 2.7% of total revenues, for the three months ended September 30,
2022, compared to $7.4 million, or 3.7% of total revenues, for the three months ended September 30, 2021. The $3.1 million increase in selling, general and administrative expenses for the period is due to an increase in employee related expenses, primarily due to increased stock compensation expense, and an increase in professional fees.
23
Business interruption expenses were $7.1 million and $6.9 million for the three months ended September 30, 2022 and 2021, respectively. These expenses remained relatively consistent with the prior period and represent non-recurring expenses that are directly attributable to the ongoing
UMWA strike for incremental safety and security, labor negotiations and other expenses.
Idle mine expenses were $5.4 million and $9.3 million for the three months ended September 30, 2022 and 2021, respectively. These expenses represent idle mine expenses incurred in connection with reduced operations at Mine No. 7 and Mine No. 4, such as electricity, insurance and maintenance labor. The $3.9 million decrease in idle mine expenses for the period is primarily due to an increase in production of 0.5 thousand metric tons due to the restart of operations at Mine No. 4 and increased production from Mine No. 7.
Interest expense, net was $5.7 million, or 1.5% of total revenues, for the three months ended September 30, 2022, compared
to $8.8 million, or 4.3% of total revenues, for the three months ended September 30, 2021. The $3.1 million decrease is primarily driven by a decrease in interest on our outstanding senior secured notes combined with an increase in interest income.
Other income for the three months ended September 30, 2021 represents proceeds received of $1.4 million upon the settlement of a lawsuit.
For the three months ended September 30, 2022, we recognized income tax expense of $20.3 million, which was principally offset by the utilization of federal net operating loss carryforwards ("NOLs") for cash tax purposes. We estimated our annual effective tax rate and applied this effective tax rate to our year-to-date pretax income at the end
of the interim reporting period. For the three months ended September 30, 2021, we utilized a discrete period method to calculate taxes, as we did not believe that the annual effective tax rate method represented a reliable estimate given the uncertainty surrounding the contract negotiations with the UMWA, the COVID-19 pandemic, the Chinese ban on Australian coal and other potentially disruptive factors and their impact on our guidance at the time. The income tax expense of $5.4 million was primarily due to a pre-tax operating income offset partially by depletion and the Internal Revenue Code ("IRC") Section 45I Marginal Well Credit ("Section 45I Credit"). The Section 45I Credit is a production-based tax credit that provides a credit for qualified natural gas production. The credit is phased out when natural gas
prices exceed certain levels.
We produced 4.4 million metric tons of met coal for the nine months ended September 30, 2022 compared to 4.1 million metric tons for the nine months ended September 30, 2021.
Sales
for the nine months ended September 30, 2022 were $1,377.7 million compared to $631.5 million for the nine months ended September 30, 2021. The $746.2 million increase in sales was primarily driven by a $833.0 million increase in sales related to a $220.26 increase in the average net selling price per metric ton of met coal offset partially by an $86.8 million decrease in sales due to a 0.6 million metric ton decrease in met coal sales volume. The decrease in met coal sales volumes is primarily due to continued shipment delays resulting from port maintenance, lack of railcar availability and port congestion in the nine months ended September 30, 2022.
For the nine months ended September 30, 2022, our geographic customer mix was
63% in Europe, 21% in Asia, and 16% in South America. For the nine months ended September 30, 2021, our geographic customer mix was 56% in Asia, 36% in Europe and 8% in South America. The higher mix of sales into Asia in the prior year period was the result of us taking advantage of opportunities with new Chinese customers during the COVID-19 pandemic and the impact of the Chinese ban on Australian coal. Our geographic customer mix typically varies each period based on the timing of customer orders and shipments.
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Other revenues for the nine months ended September 30, 2022 were $16.3 million compared to $12.2 million for the nine months ended September 30,
2021. Other revenues are comprised of revenue derived from our natural gas operations, gains on sales and disposals of property, plant and equipment and land, changes in the fair value of our natural gas swap contracts, as well as earned royalty revenue. The $4.1 million increase in other revenues is primarily due to an increase in gas revenues due to an approximate $4.15, or 133%, increase in average natural gas selling prices offset partially by a $19.0 million increase in the loss recognized on the fair value adjustment related to our natural gas swap contracts due to an increase in natural gas futures.
Cost of sales (exclusive of items shown separately below) was $529.9 million, or 38.0% of total revenues, for the nine months ended
September 30, 2022, compared to $399.1 million, or 62.0% of total revenues for the nine months ended September 30, 2021. The $130.8 million increase is primarily driven by a $184.6 million increase due to higher costs on price sensitive transportation and royalty costs, as well as the impact of inflation, offset partially by a $53.8 million decrease due to a 0.6 million metric ton decrease in met coal sales volumes. Inflation accounted for approximately $16.3 million, or $3.71 per metric ton, due to increases in the costs of diesel fuel, belt structure, roof bolts, cable, magnetite, rock dust and other supplies, plus labor and parts on repair and rebuilds.
Depreciation and depletion expenses were $87.0 million, or 6.2% of total revenues, for the nine months ended September 30,
2022, compared to $102.0 million, or 15.8% for the nine months ended September 30, 2021. The $15.0 million decrease in depreciation and depletion is primarily driven by a 0.6 million metric ton decrease in met coal sales volumes as depreciation and depletion is first capitalized into coal inventory and relieved when the tons are sold combined with the immediate recognition in the prior year of $12.9 million in depreciation expense that would have normally been capitalized into coal inventory but was not due to the idled status of Mine No. 4.
Selling, general and administrative expenses were $37.0 million, or 2.7% of total revenues, for the nine months ended September 30, 2022, compared to $26.2 million, or 4.1% of total revenues, for the nine months ended September 30, 2021.
The $10.8 million increase in selling, general and administrative expenses for the period is due to an increase in employee related expenses, primarily due to increased stock compensation expense, and an increase in professional fees.
Business interruption expenses were $20.1 million and $13.9 million for the nine months ended September 30, 2022 and 2021, respectively. These expenses represent non-recurring expenses that are directly attributable to the ongoing UMWA strike for incremental safety and security, labor negotiations and other expenses. The $6.2 million increase in business interruption expenses is primarily due to the current period including six months of related expenses compared to the prior year period only including three months of related expenses due to the strike beginning on April
1, 2021.
Idle mine expenses were $10.1 million and $20.2 million for the nine months ended September 30, 2022 and 2021, respectively. These expenses represent idle mine expenses incurred in connection with reduced operations at Mine No. 7 and Mine No. 4, such as electricity, insurance and maintenance labor. The $10.1 million decrease in idle mine expenses is primarily due to Mine No. 4 being operational for the full nine months ended September 30, 2022 versus Mine No. 4 being idled upon expiration of the CBA on April 1, 2021 in the prior year.
Interest expense, net was $20.7 million, or 1.5% of total revenues, for the nine months ended September 30,
2022, compared to $26.0 million, or 4.0% of total revenues, for the nine months ended September 30, 2021. The $5.2 million decrease is primarily driven by a decrease in interest on our outstanding senior secured notes combined with an increase in interest income.
Other income of $0.7 million for the nine months ended September 30, 2022 represents proceeds received from the Chapter 11 Cases from Walter Energy, Inc. ("Walter Energy"). Other income for the nine months ended September 30, 2021 of $1.3 million represents proceeds received in connection with the settlement of a lawsuit offset partially by COVID-19 pandemic related expenses.
For the nine months ended September 30,
2022, we recognized income tax expense of $122.1 million, which was principally offset by the utilization of federal NOLs for cash tax purposes. We estimated our annual effective tax rate and applied this effective tax rate to our year-to-date pretax income at the end of the interim reporting period. For the nine months ended September 30, 2021, we utilized a discrete period method to calculate taxes, as we did not believe that the annual effective tax rate method represented a reliable estimate given the uncertainty surrounding the CBA contract negotiations with the UMWA, the COVID-19 pandemic, the Chinese ban on Australian coal and other potentially disruptive factors and their impact on our guidance at the time. The income tax expense of $22.4 million for the nine months ended September 30,
2021 was due to the establishment of a non-cash $47.8 million state deferred income tax asset valuation allowance, offset partially by a non-cash net income tax benefit of $22.9 million due to the remeasurement of state deferred income tax assets and liabilities and $2.5 million of net income tax benefit from the Section 45I Credit, depletion and other adjustments.
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Liquidity and Capital Resources
Overview
Our sources of cash have been met coal
and natural gas sales to customers, proceeds received from the issuance of the Notes (as defined below) and access to our ABL Facility. Historically, our primary uses of cash have been for funding the operations of our met coal and natural gas production operations, our capital expenditures, our reclamation obligations, payment of principal and interest on our Notes, professional fees and other non-recurring transaction expenses. In addition, we have used available cash on hand to repurchase shares of our common stock, pay quarterly dividends, and pay special dividends, each of which reduces cash and cash equivalents.
Going forward, we will use cash to fund debt service payments on our Notes, the ABL Facility and our other indebtedness, to fund operating activities, working capital, capital expenditures, and strategic investments, and, if declared, to pay our quarterly and/or special dividends. In addition, and, subject to
prevailing market conditions and other factors we deem relevant and as further discussed below, we may, from time to time, repurchase our Notes. Our ability to fund our capital needs going forward will depend on our ongoing ability to generate cash from operations and borrowing availability under the ABL Facility, and, in the case of any future strategic investments, capital expenditures, or special dividends financed partially or wholly with debt financing, our ability to access the capital markets to raise additional capital.
Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on continued stable global economic conditions and a resolution of negotiations regarding the Company's CBA. There remains significant uncertainty as to the continued effects of the COVID-19 pandemic, the
weakening global macroeconomic environment, inflation and trade disruptions following the previously mentioned sanctions imposed on Russian coal, which in turn may, among other things, impact our ability to generate positive cash flows from operations, fund capital expenditure needs and successfully execute and fund key initiatives, such as the development of Blue Creek.
Our total liquidity as of September 30, 2022 was $869.0 million, consisting of cash and cash equivalents of $745.7 million and $123.3 million available under our ABL Facility. As of September 30, 2022, no loans were outstanding under the ABL Facility and there were $8.7 million of letters of credit issued and outstanding under the ABL Facility.
During the three months ended September 30,
2022, we repurchased in the open market and extinguished approximately $37.8 million principal amount of our Notes at a discount to par value. The discounts to par value and the interest expense savings from these open market purchases are estimated to be approximately $19.0 million through the maturity of our Notes. In connection with the extinguishment of our Notes, we recognized a loss on early extinguishment of debt of $0.5 million which is included in interest expense, net in the Condensed Statements of Operations. In the future, we may, at any time and from time to time, seek to retire or purchase additional Notes in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, if any, and other factors.
We
are responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969, as amended. Beginning on April 1, 2016 through May 31, 2018, we were insured under a guaranteed cost insurance policy, through a third-party insurance carrier, for black lung claims raised by any employee subsequent to the acquisition of certain assets of Walter Energy. Beginning on June 1, 2018 through May 31, 2020, we had a deductible policy where we are responsible for the first $0.5 million for each black lung claim. Since June 1, 2020, we have a deductible policy where we are responsible for the first $1.0 million for each black lung claim.
In
addition, in connection with the acquisition of certain assets of Walter Energy, we assumed all black lung liabilities of Walter Energy and its U.S. subsidiaries incurred prior to March 31, 2016, for which we are self-insured. Due to a limited operating history as a stand-alone company and as a result of being self-insured for these historical black lung claims, the U.S. Department of Labor ("DOL") required us to post $17.0 million in the form of Treasury bills or surety bonds as collateral, in addition to maintaining a black lung trust acquired in the Walter Energy acquisition. We received a letter from the DOL on February 21, 2020 under its new process for self-insurance renewals that would require us to increase the amount of collateral posted to $39.8 million, but we
appealed such increase. We received a letter from the DOL on December 8, 2021 requesting additional information to support our appeal of the collateral requested by the DOL. We received another letter from the DOL on July 12, 2022 that based on their review of our arguments and submissions, requested us to increase our collateral to $28.0 million in order to remain self-insured for the legacy Walter Energy black lung liabilities, but we have appealed such increase.
As of September 30, 2022 and December 31, 2021, we had $17.0 million of surety bonds, which is collateralized by $8.5 million of short-term investments. There were also $2.3 million and $2.6 million of assets held in a black lung trust, which is offset against the
long-term portion of the black lung obligations within the Condensed Balance Sheets as of September 30,
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2022 and December 31, 2021, respectively. The estimated total black lung liabilities (net of black lung trust assets) were $36.9 million as of September 30, 2022, of which $2.6 million is classified in other current liabilities and the remainder of $34.3 million is shown as a long-term liability in a separate line item in the Condensed Balance Sheets. The estimated total black lung liabilities (net of black lung trust assets) were $37.1 million as of December 31, 2021, of which $2.6 million was classified in other current
liabilities and the remainder of $34.5 million was presented as a long-term liability in the Balance Sheets.
In the ordinary course of our business, we are required to provide surety bonds and letters of credit to provide financial assurance for certain transactions and business activities. Federal and state laws require us to obtain surety bonds or other acceptable security to secure payment of certain long-term obligations including mine closure or reclamation costs and other miscellaneous obligations. As of September 30, 2022, we had outstanding surety bonds and letters of credit with parties for post-mining reclamation at all of our mining operations totaling $41.8 million, $18.6 million as collateral for self-insured black lung related claims and $4.2 million for miscellaneous purposes.
We believe that our future cash flows
from operations, together with cash on our balance sheet, will provide adequate resources to fund our debt service payments and planned operating and capital expenditure needs for at least the next twelve months. However, we will continue to assess our liquidity needs in light of the ongoing CBA contract negotiations with the UMWA, the ongoing impact of COVID-19, the weakening global macroeconomic environment, inflation and trade disruptions following the previously mentioned sanctions imposed on Russian coal imports.
Our principal contractual commitments include repayments of long-term debt and related interest, potential minimum throughput payments associated with our rail and port providers, asset retirement obligation payments, black lung obligation payments, payments on various coal and land leases, payments under financing lease
obligations and payments associated with our natural gas swap contracts. Currently, there are no known trends or expected changes anticipated in future periods that would not be indicative of past results for our contractual commitments.
Refer to the respective notes in our audited financial statements for the year ended December 31, 2021 included in our 2021 Annual Report for further information about our credit facilities and long-term debt (Note 13), commitments and contingencies (Note 16), asset retirement obligations (Note 8), black lung obligations (Note 10), lease payment obligations (Note 14), share repurchase programs (Note 17) and derivative instruments (Note 18).
If our cash flows from operations are less than we require, we may
need to incur additional debt or issue additional equity. From time to time we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be affected by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets, (iii) the current state of the global economy and (iv) restrictions in our ABL Facility, the Indenture (as defined below), and any other existing or future debt agreements. Additionally, banks, other lenders and investors have become increasingly unwilling to provide financing to coal producers. Due to the nature of our business, we may be limited in accessing debt capital markets or obtaining additional bank financing, or the cost of assessing this financing could become more expensive. There can be no
assurance that we will have or continue to have access to bank financing or the capital markets on terms acceptable to us or at all.
The following table sets forth, a summary of the net cash provided by (used in) operating, investing and financing activities for the period (in thousands):
Net cash flows from operating activities consist of net income adjusted for noncash items, such as
depreciation and depletion of property, plant and equipment and mineral interests, deferred income tax expense, stock-based compensation, amortization of debt issuance costs and debt discount/premium, accretion of asset retirement obligations, mark-to-market losses on gas hedges and changes in net working capital.
Net cash provided by operating activities was $646.9 million for the nine months ended September 30, 2022, and was primarily attributed to net income of $541.6 million adjusted for deferred income tax expense of $122.2 million, depreciation and depletion expense of $87.0 million, stock based compensation expense of $14.3 million, mark-to-market loss on gas hedges of $4.0 million, accretion of asset retirement obligations of $2.7 million, amortization of debt issuance costs and debt discount of $2.9 million and an increase in our net working capital of $130.7 million
since December 31, 2021. The increase in our working capital was primarily driven by increases in accounts receivable and inventory offset partially by an increase in accrued expenses and other current liabilities. The increase in trade accounts receivable reflects higher sales prices and the timing of sales and the increase in inventories is due to greater production than sales volumes and continued shipment delays resulting from port maintenance, lack of railcar availability and port congestion. The increase in accrued expenses and other current liabilities is due to the restart of Mine No. 4 in the first quarter of 2022 combined with higher costs on price sensitive transportation and royalty costs, and the impact of inflation.
Net cash provided by operating activities was $176.8 million for the nine months ended September 30,
2021, and was primarily attributed to the net income of $12.4 million adjusted for depreciation and depletion expense of $102.0 million, deferred income tax expense of $22.4 million, stock based compensation expense of $8.8 million, accretion of asset retirement obligations of $2.4 million, amortization of debt issuance costs and debt discount/premium, net of $1.3 million, mark-to-market loss on gas hedges of $8.7 million and a decrease in our net working capital of $12.4 million since December 31, 2020. The decrease in our working capital was primarily driven by decreases in accounts receivable, inventory and prepaid expenses and other receivables offset partially by decreases to accounts payable and accrued expenses and other current liabilities. The decrease to inventory was due to greater sales than production volume for the period. The decrease in trade accounts receivable and accounts payable is primarily driven
by the timing of cash receipts and payments.
Investing Activities
Net cash used in investing activities was $156.7 million and $47.4 million for the nine months ended September 30, 2022 and September 30, 2021, respectively, primarily due to purchases of property, plant and equipment and mine development. The current period also includes $3.5 million cash used in connection with the acquisition of leased mineral rights and $2.5 million net cash acquired in connection with the acquisition of the remaining 50% interest in BWM and BWT.
Financing Activities
Net cash used in financing activities was $140.4 million for the nine months ended September 30,
2022, primarily due to the payment of regular quarterly and special dividends of $76.5 million, retirements of debt related to our senior notes of $37.8 million and principal repayments of finance lease obligations of $22.4 million.
Net cash used in financing activities was $72.9 million for the nine months ended September 30, 2021, primarily due to the repayment of the ABL Draw of $40.0 million, principal repayments of finance lease obligations of $22.3 million and the payment of dividends of $7.8 million.
Stock Repurchase Program
On March 26, 2019, our Board of Directors (the "Board") approved our second
stock repurchase program (the “Stock Repurchase Program”) that authorizes repurchases of up to an aggregate of $70.0 million of our outstanding common stock. We fully exhausted our previous stock repurchase program of $40.0 million of our outstanding common stock. The Stock Repurchase Program does not require us to repurchase a specific number of shares or have an expiration date. The Stock Repurchase Program may be suspended or discontinued by the Board at any time without prior notice.
Under the Stock Repurchase Program, we may repurchase shares of our common stock from time to time, in amounts, at prices and at such times as we deem appropriate, subject to market and industry conditions, share price, regulatory requirements as determined from time to time by us and other considerations. Our repurchases may be executed using open market purchases or privately negotiated transactions in accordance with applicable
securities laws and regulations, including Rule 10b-18 of the Exchange Act and repurchases may be executed pursuant to Rule 10b5-1 under the Exchange Act.
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Repurchases will be subject to limitations in the ABL Facility and the Indenture governing the Notes (the "Indenture"). We intend to fund repurchases under the Stock Repurchase Program from cash on hand and/or other sources of liquidity.
As of September 30, 2022, we have repurchased 500,000 shares for approximately $10.6 million, leaving
approximately $59.4 million of share repurchases authorized under the Stock Repurchase Program.
Capital Allocation Policy
On May 17, 2017, the Board adopted the Capital Allocation Policy of paying a quarterly cash dividend of $0.05 per share. The Capital Allocation Policy states the following: In addition to the regular quarterly dividend and to the extent that we generate excess cash that is beyond the then-current requirements of the business, the Board may consider returning all or a portion of such excess cash to stockholders through a special dividend or implementation of a stock repurchase program. Any future dividends or stock repurchases will be at the discretion of the Board and subject to consideration
of a number of factors, including business and market conditions, future financial performance and other strategic investment opportunities.
In February 2022, we announced that the Board approved an increase in the regular quarterly cash dividend by 20%, from $0.05 per share to $0.06 per share. On May 3, 2022, we provided an update on our capital allocation strategy. Our strategy continues to be focused on optimizing our capital structure to improve returns to stockholders, through special cash dividends, while allowing flexibility for us to develop Blue Creek. We intend on returning cash to stockholders in stronger price markets where we are generating significant amounts of cash flow, and less cash to stockholders during weaker markets. We also intend on using stock buybacks when there is no short- or long-term use for additional cash that will deliver meaningful value
to stockholders. We have paid a regular quarterly cash dividend every quarter since the Board adopted the Capital Allocation Policy.
During the nine months ended September 30, 2022, we have paid $76.5 million of regular quarterly and special cash dividends under the Capital Allocation Policy.
Regular Quarterly Dividend
On February 18, 2022, the Board declared a regular quarterly cash dividend of $0.06 per share, totaling approximately $3.1 million, which was paid on March 10, 2022, to stockholders of record as of the close of business on March 3,
2022.
On April 26, 2022, the Board declared a regular quarterly cash dividend of $0.06 per share, totaling approximately $3.1 million, which was paid on May 13, 2022, to stockholders of record as of the close of business on May 6, 2022.
On August 1, 2022 the Board declared a regular quarterly cash dividend of $0.06 per share, totaling approximately $3.1 million, which was paid on August 18, 2022 to stockholders of record as of the close of business on August 11, 2022.
On October 24, 2022
the Board declared a regular quarterly cash dividend of $0.06 per share, totaling approximately $3.1 million, which will be paid on November 11, 2022 to stockholders of record as of the close of business on November 4, 2022.
Special Dividend
On May 3, 2022, the Board declared a special cash dividend of $0.50 per share, totaling approximately $25.8 million, which was paid on May 20, 2022, to stockholders of record as of the close of business on May 13, 2022.
On August 1, 2022, the Board declared a special cash dividend of $0.80 per share, totaling
approximately $41.3 million, which was paid on August 29, 2022 to stockholders of record as of the close of business on August 22, 2022.
ABL Facility
The ABL Facility will mature on December 6, 2026. As of September 30, 2022, no loans were outstanding under the ABL Facility and there were $8.7 million of letters of credit issued and outstanding under the ABL Facility. At September 30, 2022, we had $123.3 million of availability under the ABL Facility.
Revolving loan (and
letter of credit) availability under the ABL Facility is subject to a borrowing base, which at any time is equal to the sum of certain eligible billed and unbilled accounts, certain eligible inventory, certain eligible supplies inventory and qualified cash, in each case, subject to specified advance rates. The borrowing base availability is subject to certain reserves, which may be established by the agent in its reasonable credit discretion. The reserves may include rent
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reserves, lower of cost or market reserves, port charges reserves and any other reserves that the Agent determines in its reasonable credit judgment to the extent such reserves relate to conditions that could reasonably be expected to have an adverse effect on the value of the collateral included in
the borrowing base.
Borrowings under the ABL Facility bear interest at a rate equal to either (i) the Secured Overnight Financing Rate ("SOFR"), plus a credit adjustment spread, ranging currently from approximately 11 bps to 43 bps depending on the interest period selected by us, or (ii) an alternate base rate plus, in each case of the foregoing (i) and (ii), an applicable margin, which is determined based on the average availability of the commitments under the ABL Facility, ranging currently from 150 bps to 200 bps or 50 bps to 100 bps, respectively. In addition to paying interest on the outstanding borrowings under the ABL Facility, we are required to pay a fee in respect of unutilized commitments, which is based on the availability of the commitments under the ABL Facility, ranging from 25 bps to 38 bps. We are also required to pay a fee on amounts available to be drawn under outstanding letters of credit under
the ABL Facility at a rate not in excess of 200 bps, and certain administrative fees.
The ABL Facility contains customary covenants for asset-based credit agreements of this type, including among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence of certain indebtedness; (iii) restrictions on the existence or incurrence of certain liens; (iv) restrictions on making certain restricted payments; (v) restrictions on making certain investments; (vi) restrictions on certain mergers, consolidations and asset dispositions; (vii) restrictions on certain transactions with affiliates; and (viii) restrictions on modifications to certain indebtedness. Additionally, the ABL Facility contains a springing fixed charge coverage ratio of not less than 1.00 to 1.00, which ratio is tested if availability under the ABL Facility is less than a certain amount. As
of September 30, 2022, we were not subject to this covenant. Subject to customary grace periods and notice requirements, the ABL Facility also contains customary events of default.
We were in compliance with all applicable covenants under the ABL Facility as of September 30, 2022.
Senior Secured Notes
On December 6, 2021, we issued $350.0 million in aggregate principal amount of 7.875% senior secured notes due 2028 (the “Notes”) at an initial price of 99.343% of their face amount. The Notes were issued to qualified institutional buyers pursuant to Rule 144A under
the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States in accordance with Regulation S under the Securities Act. We used the net proceeds of the offering of the Notes, together with cash on hand, to fund the redemption of all of our outstanding 8.00% senior secured notes due 2024 (the “Existing Notes”), including payment of the redemption premium in connection with such redemption.
The Notes will accrue interest at a rate of 7.875% per year from December 6, 2021. Interest on the Notes will be payable on June 1 and December 1 of each year, commencing on June 1, 2022. The Notes will mature on December 1, 2028.
During the three months ended
September 30, 2022, we repurchased in the open market and extinguished approximately $37.8 million principal amount of our Notes. In connection with the extinguishment of our Notes, we recognized a loss on early extinguishment of debt of $0.5 million which is included in interest expense, net in the Condensed Statements of Operations.
Capital Expenditures
Our mining operations require investments to maintain, expand, upgrade or enhance our operations and to comply with environmental regulations. Maintaining and expanding mines and related infrastructure is capital intensive. Specifically, the exploration, permitting and development of met coal reserves, mining costs, the maintenance of machinery and equipment and
compliance with applicable laws and regulations require ongoing capital expenditures. The cost of our capital expenditures are also impacted by inflation and any prolonged inflation could result in higher costs and decreased margins and earnings. While a significant amount of the capital expenditures required at our mines has been spent, we must continue to invest capital to maintain our production. In addition, any decisions to increase production at our mines and the development of the high-quality met coal recoverable reserves at Blue Creek could also affect our capital needs or cause future capital expenditures to be higher than in the past and/or higher than our estimates.
To fund our capital expenditures, we may be required to use cash from our operations, incur debt or sell equity securities. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be
limited by our financial condition at the time of any such financing or offering and the covenants in our current or future debt agreements, as well as by general economic conditions, contingencies and uncertainties, including as a result of the COVID-19 pandemic, that are beyond our control.
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Our capital expenditures were $120.0 million and $34.1 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. Capital expenditures for these periods primarily related to investments required to maintain our property, plant and equipment. Our capital expenditures in the current year include approximately $0.5 million of capitalized interest. Our
deferred mine development costs were $35.7 million and $13.5 million for the nine months ended September 30, 2022 and September 30, 2021, respectively, and relate to Mine No. 4 and the development of Blue Creek.
Our guidance for capital expenditures in 2022 consists of sustaining capital spending of approximately $75.0 - $80.0 million, including regulatory and gas requirements, and discretionary capital spending of $110.0 - $120.0 million for the 4 North portal construction, deposits on two new sets of longwall shields and the development of the Blue Creek project for which we have budgeted $45.0 million for 2022. The 4 North portal construction is a new development in the north section of Mine No. 4 that includes a new portal, bathhouse, hoist shaft, office building, and warehouse that will shorten the travel distance for
our current Mine No. 4 employees. We will continue to evaluate our spending on an ongoing basis in connection with our mining plans and the prices of met coal taking into consideration the funding available to maintain our operations at optimal production levels.
Relaunch of Blue Creek
On May 3, 2022, we announced the relaunch of the development of our Blue Creek mine, a strategic growth project that we expect will deliver significant future returns to stockholders.
We believe that Blue Creek represents one of the few remaining untapped reserves of premium High Vol A met coal in the United States and that it has the potential to provide us with meaningful growth. We
believe that the combination of a low production cost and the high quality of the High Vol A met coal mined from Blue Creek, assuming we achieve our expected price realizations, will generate some of the highest met coal margins in the U.S., generate strong investment returns for us and achieve a rapid payback of our investment across a range of met coal price environments.
According to our third-party reserve report, and under the SEC's new rules governing mineral reserves, specifically subpart 1300 of Regulation S-K under the Modernization of Property Disclosures for Mining Registrants, Blue Creek has 63.3 million metric tons of recoverable reserves and 44.9 million metric tons of coal resources exclusive of reserves, which total 108.2 million metric tons. We have the ability to acquire adjacent reserves that would increase total reserves to over 154 million metric tons. We expect that Blue Creek will have a mine life
of approximately 50 years assuming a single longwall operation.
Our third-party reserve report also indicates that, once developed, Blue Creek will produce a premium High Vol A met coal that is characterized by low-sulfur and high coke strength after reaction. High Vol A met coal has traditionally priced at a discount to the Australian Premium Low Vol and the U.S. Low Vol coals; however, recently, it has been priced at or slightly above these coals. Warrior expects High Vol A coals will continue to become increasingly scarce as a result of Central Appalachian producers mining thinner and deeper reserves, which we expect will continue to support prices. This trend creates an opportunity for us to take advantage of favorable pricing dynamics driven by the declining supply of premium High Vol A met coal.
Since the initial announcement, inflation in steel and other commodity prices,
including labor costs have increased the total capital spending requirements of this project. However, during a refresh of the project, we have identified production increases of approximately 10% and we are able to accelerate the start of longwall production by approximately fifteen months based on design modifications and stronger available liquidity to fund the project.
If we are able to successfully develop Blue Creek, we expect that it will be a transformational investment for us. We expect that the new single longwall mine at Blue Creek will have the capacity to produce an average of 4.4 million metric tons per annum of premium High Vol A met coal over the first ten years of production, thereby increasing our annual production capacity by 60%. This, in turn, would expand our product portfolio to our global customers by allowing us to offer three premium hard coking coals from a single port location. Given these factors,
and assuming we achieve expected price realizations, we believe that we will achieve some of the highest premium met coal margins in the United States.
We expect to invest approximately $650.0 to $700.0 million over the next five years to develop Blue Creek with expected spending in 2022 of approximately $45.0 million to begin the project. Based on the current schedule, we expect the first development tons from continuous miner units to occur in the third quarter of 2024 with the longwall scheduled to start up in the second quarter of 2026. Our strong cash flow generation and current available liquidity, as well as the ability to finance $120.0 to $130.0 million of capital expenditures through equipment leases, allows us to be opportunistic as we evaluate funding options for Blue Creek with the goal of maintaining an efficient and low-cost capital.
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Critical
Accounting Policies
The financial statements are prepared in conformity with GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses in the period presented. Management evaluates these estimates and assumptions on an ongoing basis, using historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from management’s estimates.
Our most critical accounting estimates are those that are most important to the presentation of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based upon management’s historical experience and on various other assumptions that we believe are reasonable under the circumstances. Changes in estimates used in these and other items could have a material impact on our financial statements.
As of September 30, 2022, there have been no material changes to our critical accounting estimates as described in the "Critical Accounting Policies" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2021 Annual Report.
Off-Balance Sheet Arrangements
In
the ordinary course of our business, we are required to provide surety bonds and letters of credit to provide financial assurance for certain transactions and business activities. Federal and state laws require us to obtain surety bonds or other acceptable security to secure payment of certain long-term obligations including mine closure or reclamation costs and other miscellaneous obligations. As of September 30, 2022, we had outstanding surety bonds and letters of credit with parties for post-mining reclamation at all of our U.S. mining operations totaling $41.8 million, for collateral for self-insured black lung related claims totaling $18.6 million and for miscellaneous purposes totaling $4.2 million .
Recently Adopted Accounting Standards
A
summary of recently adopted accounting pronouncements is included in Note 2 of the "Notes to Condensed Financial Statements" in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We are exposed to commodity price risk on sales of met coal. We sell most of our met coal under fixed supply contracts primarily with indexed pricing terms and volume terms of up to one to three years. Sales commitments in the met coal market are typically not long-term in nature, and we are, therefore, subject to fluctuations in market pricing.
We
occasionally enter into natural gas swap contracts to hedge the exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to our forecasted sales. Our natural gas swap contracts economically hedge certain risk but are not designated as hedges for financial reporting purposes. All changes in the fair value of these derivative instruments are recorded as other revenues in the Condensed Statements of Operations. Historically, all of our derivative instruments were entered into for hedging purposes rather than speculative trading. As of September 30, 2022, the Company had no natural gas swap
contracts outstanding.
We have exposure to price risk for supplies that are used directly or indirectly in the normal course of production, such as diesel fuel, steel, explosives and other items. We manage our risk for these items through strategic sourcing contracts in normal quantities with our suppliers. We historically have not entered into any derivative commodity instruments to manage the exposure to changing price risk for supplies.
Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk consist principally of trade receivables. We provide our products to customers based on an evaluation of the financial condition
of our customers. In some instances, we require letters of credit, cash collateral or prepayments from our customers on or before shipment to mitigate the risk of loss. Exposure to losses on receivables is principally dependent on each customer’s financial condition. We monitor the
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exposure to credit losses and maintain allowances for anticipated losses. As of September 30, 2022 and December 31, 2021, the estimated allowance for credit losses was immaterial and did not have a material impact on the Company's financial statements.
Interest
Rate Risk
We are exposed to market risk from changes in interest rates. Our Notes have a fixed rate of interest of 7.875% per annum and are payable semi-annually in arrears on June 1 and December 1 of each year.
Our ABL Facility bears an interest rate equal to SOFR, plus a credit adjustment spread, ranging currently from 11 bps to 43 bps, or an alternate base rate plus an applicable margin, which is determined based on the average availability of the commitments under the ABL Facility, ranging currently from 150 bps to 200 bps or 50 bps to 100 bps, respectively. Any debt that we incur under the ABL Facility will expose us to interest rate risk. If interest rates increase significantly in the future, our exposure to interest rate risk will increase. As of September 30, 2022, assuming we had $132.0 million outstanding under our ABL
Facility, a 100-basis point increase or decrease in interest rates would increase or decrease our annual interest expense under the ABL Facility by approximately $1.3 million.
Impact of Inflation
We have exposure to inflation for supplies that are used directly or indirectly in the normal course of production, such as belt structure, roof bolts, cable, magnetite, rock dust and other supplies, plus labor and parts on repair and rebuild equipment. These inflationary pressures have contributed to rising costs for us and may continue to do so in the future. We are applying a number of different strategies to mitigate the impact of inflation on our operations, including placing purchase orders earlier, utilizing short term contracts and leveraging our supplier relationships.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of September 30, 2022. Based on the evaluation of our disclosure controls and procedures as of September 30, 2022, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under
the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Disclosure Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 9 of the “Notes to Condensed Financial Statements” in this Form 10-Q for a description of current legal proceedings, which
is incorporated by reference in this Part II, Item 1.
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We and our subsidiaries are parties to a number of other lawsuits arising in the ordinary course of our business. We record costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such litigation
will not have a material adverse effect on our financial statements.
Item 1A. Risk Factors.
Other than as set forth below, there have been no material changes to the risk factors disclosed in "Risk Factors" in "Part I, Item 1A. Risk Factors" in our 2021 Annual Report. Our business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause actual results to vary materially from recent results or from anticipated future results. In addition to the other information set forth in this Form 10-Q, you should carefully consider the risks discussed in "Part I, Item 1A. Risk Factors" in our 2021 Annual Report, which could materially affect our business, financial condition or future results. However,
the risks described in our 2021 Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may become material and adversely affect our business, financial condition and/or operating results.
The Russia-Ukraine war, and sanctions brought against Russia, may adversely affect our business due to the impact on the global economy, including significant market disruptions that may lead to increased volatility in the price of certain commodities.
We face risks related to the ongoing Russia-Ukraine war that began in February 2022. The extent and duration of the military conflict involving Russia and Ukraine, resulting sanctions and future market or supply disruptions in the region, are impossible to predict, but could be significant and may have a severe adverse effect on the region. Globally, various governments,
such as the European Union, have banned imports from Russia including commodities such as natural gas and coal. These events significantly impacted coking coal markets by disrupting previously existing trading patterns. The resulting volatility, including market expectations of potential changes in coal prices and inflationary pressures on steel products, may significantly affect prices for our coal or the cost of supplies and equipment.
The war, trade and monetary sanctions, as well as any escalation of the conflict and future developments, could significantly affect coking coal prices and the demand for our coal. This could have a material adverse effect on our business, financial condition and results of operations, along with our operating costs, making it difficult to execute our planned capital expenditure program or the development of Blue Creek. Additionally, the geopolitical and macroeconomic consequences of the
war and associated sanctions cannot be predicted, but could severely impact the world economy. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for our coal, causing a reduction in our revenues or an increase in our costs, which would materially adversely affect our results of operations, financial condition and cash flows.
Our business is subject to the risk of increases or fluctuations in the cost, and delay in the delivery, of raw materials, mining equipment and purchased components.
Met coal mining consumes large quantities of commodities including steel, copper, rubber products, diesel and other liquid fuels, and requires the use of capital equipment. Some commodities, such as steel, are needed to comply with roof control plans required by regulation. The cost of roof
bolts we use in our mining operations depends on the price of scrap steel. The prices we pay for commodities and capital equipment are strongly impacted by the global market. A rapid or significant increase in the costs of commodities or capital equipment we use in our operations could impact our mining operations costs because we may have a limited ability to negotiate lower prices and, in some cases, may not have a ready substitute.
Inflation rates in the U.S. have increased to levels not seen in several years, which may result in decreased demand for our products, increases in our operating costs, constrained credit and liquidity, reduced government spending and volatility in financial markets. Future increases in costs for supplies that are used directly or indirectly in the normal course of our business and increases in other operating costs, such as increases in steel prices, freight rates, labor and other materials
and supplies may negatively impact our profitability.
We use equipment in our met coal mining and transportation operations such as continuous mining units, conveyors, shuttle cars, rail cars, locomotives, roof bolters, shearers and shields. Some equipment and materials are needed to comply with regulations, such as proximity detection devices on continuous mining machines. We procure some of this equipment from a
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concentrated group of suppliers, and obtaining this equipment often involves long lead times.Occasionally, demand for such equipment by mining companies can be high and some types of equipment may be in short supply. Delays
in receiving or shortages of this equipment, as well as the raw materials used in the manufacturing of supplies and mining equipment, which, in some cases, do not have ready substitutes, or the cancellation of our supply contracts under which we obtain equipment and other consumables, could limit our ability to obtain these supplies or equipment. In addition, there continues to be consolidation in the supplier base providing mining materials and equipment, which has resulted in a limited number of suppliers for certain types of equipment and supplies.If any of our suppliers experiences an adverse event (including as a result of the COVID-19 pandemic), decides to cease producing products used by the mining industry, or decides to no longer do business with us, we may be unable to obtain sufficient equipment and raw materials in
a timely manner or at a reasonable price to allow us to meet our production goals and our revenues may be materially adversely impacted.
We use considerable quantities of steel in the mining process. If the price of steel or other materials increases substantially or if the value of the U.S. dollar declines relative to foreign currencies with respect to certain imported supplies or other products, our operating expenses could increase. Any of the foregoing events could materially and adversely impact our business, financial condition, results of operations and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth share repurchases
of our common stock made during the three months ended September 30, 2022:
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under The Plans or Programs(1)
(1)On
March 26, 2019, the Board approved the Stock Repurchase Program that authorizes repurchases of up to an aggregate of $70.0 million of our outstanding common stock. The Stock Repurchase Program does not require us to repurchase a specific number of shares or have an expiration date.
(2)These shares were acquired to satisfy certain employees' tax withholding obligations associated with the lapse of restrictions on certain restricted stock awards granted under the 2016 Equity Incentive Plan and 2017 Equity Incentive Plan. Upon acquisition, these shares were retired.
Item 3. Defaults on Senior Securities.
None.
Item 4.
Mine Safety Disclosures.
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The information concerning mine safety violations and other regulatory matters is filed as Exhibit 95 to this Form 10-Q pursuant to the requirements of Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104).
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
