The following discussion and analysis provides a narrative of our results of operations and financial condition for the years endedDecember 31, 2021 ,December 31, 2020 , andDecember 31, 2019 . You should read the following discussion and analysis of our financial condition and results of operations together with our audited financial statements and related notes appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forwardlooking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in "Part I, Item 1A. Risk Factors," our actual results could differ materially from the results described in, or implied by, the forwardlooking statements contained in the following discussion and analysis. Please see "Forward-Looking Statements." For a discussion and analysis of our results of operations and financial condition for the year endedDecember 31, 2019 , please refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Overview We are aU.S. -based, environmentally and socially minded supplier to the global steel industry. We are dedicated entirely to mining non-thermal met coal used as a critical component of steel production by metal manufacturers inEurope ,South America andAsia . 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 inAlabama , Mine No. 4 and Mine No. 7. As ofDecember 31, 2021 , Mine No. 4 and Mine No. 7, our two operating mines, had approximately 90.2 million metric tons of recoverable reserves and our undevelopedBlue 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 Index. Our HCC, mined from the Southern Appalachian portion of theBlue Creek coal seam, is characterized by low sulfur, low-to-medium ash, andLV to 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 asChina ,Australia ,the United States , Canada andRussia . 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.
COVID-19[female[feminine
The global steelmaking industry's demand for met coal is affected by pandemics,
epidemics or other public health emergencies, such as the outbreak of the novel
coronavirus ("COVID-19"), which was first reported in late 2019. In March 2020 ,
the World Health Organization ("WHO") declared COVID-19 a pandemic, and the
President of the United States declared the COVID-19 outbreak a national
emergency. In the two years since then, the pandemic has dramatically impacted
the global health and economic environment, including millions of confirmed
cases and deaths, business slowdowns or shutdowns, labor shortfalls, supply
chain challenges, regulatory challenges, and market volatility. In addition,
governments and central banks in several parts of the world have enacted fiscal
and monetary stimulus measures to counteract the impacts of COVID-19.
Over the course of 2021, COVID-19 case rates and the health and economic impacts
of the pandemic fluctuated dramatically in different communities in the U.S. and
globally, particularly with the spread of new variants. We continued to see a
prolonged impact on the economy, our industry, and our company, with increased
challenges for customers and suppliers, labor shortages, supply chain
challenges, and increasing inflation, among other impacts. We expect these and
other impacts to continue and possibly worsen, depending on the future course of
the pandemic and actions taken in connection with it.
65
--------------------------------------------------------------------------------
We continue to closely monitor and address the pandemic and related
developments, including the impact on our company, our employees, our customers,
our suppliers and our communities. The Company has considered and continues to
consider and be guided by health data and evolving guidance from the Centers for
Disease Control and Prevention (CDC ), in particular, as well as other health
organizations globally, federal, state and local governmental authorities, and
our customers, among others. We have taken, and continue to take, robust actions
to help protect the health, safety and well-being of our employees, to support
continued performance, to support our suppliers and local communities, and to
continue to serve our customers. Our goals have been, and continue to be to
lessen the potential adverse impacts, both health and economic, and to continue
to position the Company for long-term success. As of the filing of this Form
10-K, the Company has not had to idle or temporarily idle its mines due to
COVID-19.
Notwithstanding our continued operations, COVID-19 has had and may continue to
have further negative impacts on our two operating mines, supply chain,
transportation networks and customers, which may continue to compress our
margins, and reduce demand for the met coal that we produce. The COVID-19
outbreak is a widespread public health crisis that is adversely affecting the
economies and financial markets of many countries, including those of our
customers, which are primarily located in Europe , South America and Asia . A
prolonged economic downturn could adversely affect demand for our met coal and
contribute to volatile supply and demand conditions affecting prices and
volumes. The progression of COVID-19 could also negatively impact our business
or results of operations through the temporary closure of one of our mines,
customers or critical suppliers, or the McDuffie Coal Terminal at the Port of
Mobile in Alabama , or a disruption to our rail and barge carriers, which would
delay or prevent deliveries to our customers, among others.
In addition, the ability of our employees and our suppliers' and customers'
employees to work may be significantly impacted by individuals contracting or
being exposed to COVID-19, or as a result of the control measures noted above,
which may significantly affect the demand for met coal. Our customers may be
directly impacted by business curtailments or weak market conditions and may not
be willing or able to fulfill their contractual obligations or open letters of
credit. We may also experience delays in obtaining letters of credit or
processing letter of credit payments due to the impacts of COVID-19 on foreign
issuing and U.S. intermediary banks. Furthermore, the progression of, and global
response to, the COVID-19 outbreak has begun to cause, and increases the risk
of, further delays in construction activities and equipment deliveries related
to our capital projects, including potential delays in obtaining permits from
government agencies. The extent of such delays and other effects of COVID-19 on
our capital projects, certain of which are outside of our control, is unknown,
but they may impact or delay the timing of anticipated benefits of capital
projects.
Collective agreement
Our CBA contract with the UMWA expired onApril 1, 2021 , and the UMWA initiated a strike which continues 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. Due to the strike, we idled Mine No. 4 and scaled back operations at Mine No. 7. In connection with the idling of Mine No. 4 and reduced operations at Mine No. 7, we incurred idle mine expenses of$33.9 million for the year endedDecember 31, 2021 . These expenses are reported separately in the Statements of Operations and represent expenses incurred while the respective mine is idled or operating below normal capacity, such as electricity, insurance and maintenance labor. Due to the strike, we have also incurred approximately$21.4 million of business interruption expenses for the year endedDecember 31, 2021 . These expenses represent incremental expenses incurred as a direct result of the strike. These expenses are also presented separately in the 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. We believe that we are well positioned to fulfill anticipated customer volume commitments for 2022. In the current environment and without a new contract, the Company believes that production and sales volume for 2022 could be between 5.0 million and 6.0 million metric tons. These volumes include the assumed restart of Mine 4 and continued lower production at Mine 7. Similarly, with a new contract, Warrior believes that production and sales volumes over a twelve-month period could ramp up to a run rate of approximately 7.0 million metric tons within three to four months. 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. Basis of Presentation The consolidated financial statements included elsewhere in this Annual Report and the other financial information presented and discussed in this management's discussion and analysis includes the accounts ofWarrior Met Coal, Inc. and its subsidiaries (the "Company"). 66
--------------------------------------------------------------------------------
How we evaluate our operations
Our primary business, the mining and exporting of met coal for the steel
industry, is conducted in one 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; (ii) sales
volumes and average 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.
For the years ended December 31,
2021 2020 2019
(in thousands)
Segment Adjusted EBITDA $ 474,001 $ 136,701 $ 515,253
Metric tons sold 5,699 6,735 7,240
Metric tons produced 5,084 7,132 7,683
Gross price realization (1) 92 % 96 % 98 %
Average net selling price per metric ton $ 180.43 $ 113.12 $ 170.72
Cash cost of sales per metric ton $ 96.43 $ 92.31 $ 99.15
Adjusted EBITDA $ 457,008 $ 108,276 $ 485,693
(1) Gross price realization represents a volume weighted-average calculation of
our daily realized price per ton based on gross sales, which excludes demurrage
and other charges, as a percentage of the Platts Index.
Segment Adjusted EBITDA
We define Segment Adjusted EBITDA as net income (loss) adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, and certain transactions or adjustments that the CEO, 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 distributions;
• our ability to incur and service debt and finance capital expenditures; and
• the viability of acquisitions and other investment projects and the returns on investment from various investment opportunities, such as
Sales volumes, gross price realization and average
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 coal sales contracts, for which prices generally are set on daily index averages or a quarterly basis. The volume of coal we sell is also a function of the pricing environment in the international met coal markets and the amounts ofLV and MV coal that we sell. We evaluate the price we receive for our coal on two primary metrics: first, our gross price realization and second, our average net selling price per metric ton. 67 -------------------------------------------------------------------------------- Our gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on the blended gross sales of ourLV and MV coal, excluding demurrage and quality specification adjustments, as a percentage of the Platts Index daily price. Our gross price realizations reflect the premiums and discounts we achieve on ourLV and MV coal versus the Platts Index price because of the high quality premium products we sell into the export markets. In addition, the premiums and discounts in a quarter or year can be impacted by a rising or falling price environment. On a quarterly basis, our blended gross selling price per metric ton may differ from the Platts Index price per metric ton, primarily due to our gross sales price per ton being based on a blended average of gross sales price on ourLV and MV coals as compared to the Platts Index price and due to the fact that many of our met coal supply agreements are based on a variety of indices. 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 the previously mentioned 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 GAAP, are classified in the Statements of Operations as costs other than cost of sales, but relate directly to the costs incurred to produce met coal and sell it free-on-board at thePort of Mobile inAlabama . 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 investment projects and the returns on investment from various investment opportunities, such as
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 on a consistent basis 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 costs 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 free-on-board at thePort of Mobile inAlabama . Period-to-period comparisons of cash cost of sales are intended to help management identify and assess additional trends potentially impacting our Company 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 provides 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.
For the years ended December 31,
2021 2020 2019
(in thousands)
Cost of sales $ 554,282
Accretion of asset retirement obligation and valuation adjustment
(2,802) (1,702) (1,519) Stock compensation expense (1,917) (1,789) (1,405) Cash cost of sales$ 549,563 $ 621,679 $ 717,821 68
--------------------------------------------------------------------------------
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before net interest expense, income tax expense (benefit), depreciation and depletion, non-cash asset retirement obligation accretion and valuation adjustments, non-cash stock compensation expense, other non-cash accretion and valuation adjustments, non-cash mark-to-market loss on gas hedges, loss on early extinguishment of debt, business interruption expenses, idle mine expenses and other income and expenses. 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 investment projects and the returns on investment from various investment opportunities, such as
We believe that the presentation of Adjusted EBITDA in this Annual 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 (loss). Adjusted EBITDA should not be considered an
alternative to net income or loss or any other measure of financial performance
or liquidity presented in accordance with GAAP. Adjustments excludes some, but
not all, items that affect net income (loss) 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
(loss), the most directly comparable GAAP financial measure, on a historical
basis for each of the periods indicated.
For the years ended
2021 2020 2019 (in thousands) Net income (loss)$ 150,881 $ (35,761) $ 301,699 Interest expense, net 35,389 32,310 29,335 Income tax expense (benefit) 49,096 (20,144) 65,417 Depreciation and depletion 141,418 118,092 97,330
Accretion of retirement obligations and value adjustment (1)
3,427 2,631 (7,891) Stock compensation expense (2) 9,370 7,602 5,820 Other non-cash accretion and valuation adjustments (3) 1,881 6,014 7,042 Non-cash mark-to-market loss on gas hedges 1,595 - - Loss on early extinguishment of debt (4) 9,678 - 9,756 Business interruption (5) 21,372 - - Idle mine (6) 33,899 - - Other income and expenses (7) (998) (2,468) (22,815) Adjusted EBITDA$ 457,008 $ 108,276 $ 485,693 (1)Represents non-cash accretion expense and valuation adjustment associated with our asset retirement obligations (see Note 8 to our consolidated financial statements). (2)Represents non-cash stock compensation expense associated with equity awards (see Note 12 to our consolidated financial statements). (3)Represents non-cash accretion expense and valuation adjustment associated with our black lung obligations (see Note 10 to our consolidated financial statements). (4)Represents a loss incurred in connection with the early extinguishment of debt (see Note 13 to our consolidated financial statements) (5)Represents business interruption expenses associated with the UMWA strike. (6)Represents idle mine expenses incurred in connection with the idling of Mine No. 4 and reduced operations at Mine No. 7. 69 -------------------------------------------------------------------------------- (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 and other Walter Claims (each discussed below).
Operating results
Year ended
The following table summarizes certain financial information relating to our operating results that have been derived from our audited financial statements for the year endedDecember 31, 2021 and 2020.
For the years ended
% of % of
Total Total
(in thousands) 2021 Revenues 2020 Revenues
Revenues:
Sales $ 1,028,283 97.1 % $ 761,871 97.3 %
Other revenues 30,933 2.9 % 20,867 2.7 %
Total revenues 1,059,216 100.0 % 782,738 100.0 %
Costs and expenses: cost of sales (excluding items listed separately below)
554,282 52.3 % 625,170 79.9 % Cost of other revenues (exclusive of items shown separately below) 28,899 2.7 % 33,736 4.3 % Depreciation and depletion 141,418 13.4 % 118,092 15.1 % Selling, general and administrative 35,593 3.4 % 32,879 4.2 % Business interruption 21,372 2.0 % - - % Idle mine 33,899 3.2 % - - % Total costs and expenses 815,463 77.0 % 809,877 103.5 % Operating income (loss) 243,753 23.0 % (27,139) (3.5) % Interest expense, net (35,389) (3.3) % (32,310) (4.1) % Loss on early extinguishment of debt (9,678) (0.9) % - - % Other income 1,291 0.1 % 3,544 0.5 % Income (loss) before income tax expense (benefit) 199,977 18.9 % (55,905) (7.1) % Income tax expense (benefit) 49,096 4.6 % (20,144) (2.6) % Net income (loss) $ 150,881 14.2 % (35,761) (4.6) %
Components of sales, production and cost of sales on a unit basis for the year ended
For the years ended
2021 2020 Met Coal (metric tons in thousands) Metric tons sold 5,699 6,735 Metric tons produced 5,084 7,132 Gross price realization 92 % 96 % Average net selling price per metric ton$ 180.43 $ 113.12 Cash cost of sales per metric ton $ 96.43$ 92.31
The year ended
70 --------------------------------------------------------------------------------
The following list highlights our key achievements for the year ended
•we achieved an annual sales volume of 5.7 million metric tons and a production volume of 5.1 million metric tons;
•we made a net profit of
•we delivered positive cash flows from operations of$351.5 million and positive free cash flow of$280.2 million while continuing to invest$71.4 million in property, plant and equipment and mine development;
•we maintained a strong balance sheet with total liquidity of
available under our ABL facility;
•we achieved a record total reportable incidence rate of 1.25, which is considerably lower than the national total reportable incidence rate for all underground coal mines inthe United States of 4.89 for the nine months endedSeptember 30, 2021 (represents the latest data available);
•we successfully refinanced our senior notes and amended our ABL facility strengthening our balance sheet and financial position for long-term success; and
• we have demonstrated an ongoing commitment to returning capital to our shareholders, paying our
Sales were$1.0 billion for the year endedDecember 31, 2021 , compared to$761.9 million for the year endedDecember 31, 2020 . The$266.4 million increase in revenues was primarily driven by a$383.6 million increase related to a$67.31 increase in the average selling price per metric ton of met coal offset partially by a$117.2 million decrease due to a 1.0 million metric ton decrease in met coal sales volume. Other revenues for the year endedDecember 31, 2021 were$30.9 million compared to$20.9 million for the year endedDecember 31, 2020 . Other revenues are comprised of revenue derived from our natural gas operations, as well as earned royalty revenue. The$10.1 million increase in other revenues is primarily due to an average increase in natural gas prices of approximately 90% offset partially by a loss of$1.6 million on our natural gas hedges. Cost of sales (exclusive of items shown separately below) was$554.3 million , or 52.3% of total revenues for the year endedDecember 31, 2021 , compared to$625.2 million , or 79.9% of total revenues for the year endedDecember 31, 2020 . The$70.9 million decrease in cost of sales was primarily driven by a$95.6 million decrease due to a 1.0 million metric ton decrease in met coal sales volumes offset partially by a$23.5 million increase due to a$4.12 per metric ton increase in the average cash cost of sales per metric ton. The increase in average cash cost of sales per metric ton is primarily due to our variable cost structure in our labor, royalties and logistics contracts that vary in response to changes in met coal prices. Cost of other revenues was$28.9 million for the year endedDecember 31, 2021 , compared to$33.7 million for the year endedDecember 31, 2020 . The$4.8 million decrease is primarily due to a net change of$4.3 million in our black lung obligation valuation adjustment recorded annually in the fourth quarter primarily attributable to changes in discount rates and claims history. Depreciation and depletion was$141.4 million , or 13.4% of total revenues, for the year endedDecember 31, 2021 , compared to$118.1 million , or 15.1% of total revenues for the year endedDecember 31, 2020 . The increase in depreciation expense is primarily driven by the immediate recognition of$20.7 million in depreciation expense that would normally be capitalized into coal inventory when produced but was not due to the idled status of Mine No. 4 combined with a 0.7 million metric ton drawdown in our ending coal inventory balances as depreciation and depletion is first capitalized into coal inventory and relieved when tons are sold. Selling, general and administrative expenses were$35.6 million , or 3.4% of total revenues, for the year endedDecember 31, 2021 compared to$32.9 million , or 4.2% of total revenues for the year endedDecember 31, 2020 . The$2.7 million increase in selling, general and administrative expenses is primarily driven by an increase in employee related expenses and stock compensation expense due to the accelerated vesting of awards for certain individualswho have reached retirement eligibility offset partially by a decrease in other professional services. 71 --------------------------------------------------------------------------------
Business interruption charges were
Idle mine expenses were$33.9 million for the year endedDecember 31, 2021 . These expenses represent idle expenses incurred in connection with the idling of Mine No. 4 and reduced operations at Mine No. 7, such as electricity, insurance and maintenance labor. Interest expense, net was$35.4 million , or 3.3% of total revenues, for the year endedDecember 31, 2021 , compared to$32.3 million , or 4.1% of total revenues, for the year endedDecember 31, 2020 . The$3.1 million increase was primarily driven by an increase of$1.8 million due to interest on new equipment financing leases, an increase of$0.8 million in interest on our senior notes due to the timing of the issuance of the New Notes (as defined below) and a decrease in interest income. For the year endedDecember 31, 2021 , we recognized a loss on early extinguishment of debt of$9.7 million upon the extinguishment of$343.4 million of our Existing Notes (as defined below). The loss on early extinguishment of debt represents a premium paid to retire the debt, accelerated amortization of debt discount, net, and the write-off of Existing Notes debt issuance costs. Other income was$1.3 million , or 0.1% of total revenues, for the year endedDecember 31, 2021 compared to$3.5 million or 0.5% of total revenues, for the year endedDecember 31, 2020 . Other income for the year endedDecember 31, 2021 , represents proceeds received in connection with the settlement of a lawsuit offset partially by COVID-19 pandemic related expenses. In connection with our acquisition of certain core operating assets of Walter Energy, we acquired a receivable owed to Walter Energy byWalter Canada for certain shared services provided by Walter Energy toWalter Canada (the "Shared Services Claim") and a receivable for unpaid interest owed to Walter Energy fromWalter Canada in respect of a promissory note (the "Hybrid Debt Claim"). Each of these claims were asserted by us in the Walter Canada CCAA proceedings. Walter Energy deemed these receivables to be uncollectible for the year endedDecember 31, 2015 and we did not assign any value to these receivables in acquisition accounting as collectability was deemed remote. In 2020, we received$1.8 million in settlement proceeds for the Shared Services Claim and Hybrid Debt Claim which is reflected as other income in the Statements of Operations. The collectability of additional amounts, if any, related to the Shared Services Claim and Hybrid Debt Claim depends on the outcome of, and the timing of any resolution of, the Walter Canada CCAA proceedings and cannot be predicted with certainty
During the fourth quarter of 2020, we received
For the year endedDecember 31, 2021 , we recognized income tax expense of$49.1 million or an effective tax rate of 24.6% primarily due to pre-tax income of$200.0 million combined with the establishment of a non-cash state deferred income tax asset valuation allowance of$46.0 million offset partially by an income tax benefit of$22.4 million due to the remeasurement of state deferred income tax assets and liabilities,$12.2 million of depletion and a$4.7 million income tax benefit from the IRC Section 451 Marginal Well Credit. The Marginal Well 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. For the year endedDecember 31, 2020 , we recognized an income tax benefit of$20.1 million or an effective tax rate of 36.0% primarily due to a loss recognized before income taxes and a$4.0 million income tax benefit from the IRC Section 451 Marginal Well Credit. AtDecember 31, 2021 , we had federal and state NOLs of approximately$722.3 million and$992.6 million , respectively. Accordingly, we expect to continue to utilize our federal NOLs and credit carryforwards, we believe we will not pay any cash federal income taxes for the next six to eight years based on our long-term forecast of met coal prices, sales volumes and performance. OurU.S. federal and state pre-tax net operating loss carryforwards do not begin to expire until 2034 and 2029, respectively. In addition, the Company has approximately$23.3 million of general business credit carryforwards which begin to expire inDecember 31, 2027 and fully expire inDecember 31, 2041 . See Note 7 of the Notes to the Financial Statements for more information. 72 --------------------------------------------------------------------------------
Cash and capital resources
Overview
Our sources of cash have been coal and natural gas sales to customers, proceeds received from 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 coal and natural gas production operations, working capital, 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 used available cash on hand to repurchase shares of common stock and to pay our quarterly and special dividends, each of which reduces or reduced 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. 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 the CBA contract negotiations with the UMWA. There remains significant uncertainty as to the effects of new COVID-19 variants on the global economy, 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 ofBlue Creek . Our available liquidity as ofDecember 31, 2021 was$479.0 million , consisting of$395.8 million of cash and cash equivalents and$83.2 million of availability under our ABL Facility. As ofDecember 31, 2021 , no loans were outstanding under the ABL Facility and there were$9.4 million of letters of credit issued and outstanding under the ABL Facility. OnMarch 24, 2020 , we borrowed$70.0 million in a partial draw of the ABL Facility (the "ABL Draw") as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of the uncertainty resulting from the COVID-19 outbreak. InJune 2020 , we reduced the outstanding principal amount of the ABL Draw by$30.0 million and in the third quarter of 2021, we reduced the remaining$40.0 million outstanding principal amount of the ABL Draw. 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 ofDecember 31, 2021 , we had outstanding surety bonds and letters of credit with parties for post-mining reclamation at all of our mining operations totaling$40.9 million ,$17.0 million as collateral for self-insured black lung related claims and$3.6 million for miscellaneous purposes. We believe that our future cash flows from operations, together with cash on our balance sheet and proceeds from the borrowings under our ABL Facility, will provide adequate resources to fund our debt service payments and planned operating and capital expenditure needs for at least the next twelve months and beyond. However, we will continue to assess our liquidity needs in light of the ongoing CBA contract negotiations with the UMWA and the ongoing impact of COVID-19. The Company's 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 to the financial statements 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 73 -------------------------------------------------------------------------------- (iv) restrictions in our ABL Facility, the Indenture (as defined below), and any other existing or future debt agreements. There can be no assurance that we will have or continue to have access to the capital markets on terms acceptable to us or at all. Statements of Cash Flows
Cash balances were
The following table provides a summary of net cash provided by (used in) operating, investing and financing activities for the period (in thousands):
For the years ended
2021 2020 2019 Net cash provided by operating activities$ 351,543 $ 112,626 $ 532,814 Net cash used in investing activities (71,146) (108,189) (134,213) Net cash (used in) provided by financing activities (96,474) 14,096 (411,623) Net increase (decrease) in cash and cash equivalents and restricted cash$ 183,923 $ 18,533 $ (13,022) Operating Activities Net cash flows from operating activities consist of net income (loss) adjusted for noncash items, such as depreciation and depletion of property, plant and equipment and mineral interests, deferred income tax expense (benefit), stock-based compensation, amortization of debt issuance costs and debt discount, net, accretion expense and valuation adjustment associated with our asset retirement obligations, mark-to-market losses on gas hedges, loss on early extinguishment of debt and changes in net working capital. The timing between the conversion of our billed and unbilled receivables into cash from our customers, production and sale of coal inventory and disbursements to our vendors is the primary driver of changes in our working capital. Net cash provided by operating activities was$351.5 million for the year endedDecember 31, 2021 , and was primarily attributed to net income of$150.9 million adjusted for depreciation and depletion expense of$141.4 million , deferred income tax expense of$49.1 million , stock-based compensation expense of$9.4 million , loss on early extinguishment of debt of$9.7 million , accretion expense and valuation adjustment of asset retirement obligations of$3.4 million , amortization of debt issuance costs and debt discount of$1.7 million , mark-to-market loss on gas hedges of 1.6 million, an increase in other operating activities of$5.7 million and an increase in net working capital of$21.4 million . The increase in our working capital was primarily attributable to an increase in trade accounts receivable combined with a decrease in accounts payable and accrued expenses and other current liabilities offset partially by a decrease in inventories. The increase in trade accounts receivable is due to the timing of sales and a$67.31 increase in the average selling price per metric ton. The decrease in inventories, accounts payable and accrued expenses and other current liabilities is due to lower production volumes with the idling of Mine No. 4 for much of the year combined with lower spending due to the ongoing UMWA strike. Net cash provided by operating activities was$112.6 million for the year endedDecember 31, 2020 , and was primarily attributed to a net loss of$35.8 million adjusted for depreciation and depletion expense of$118.1 million , an increase in other operating activities of$19.6 million , stock-based compensation expense of$7.6 million , accretion expense of asset retirement obligations of$3.0 million , amortization of debt issuance costs and debt discount of$1.5 million and a decrease in net working capital of$19.0 million , partially offset by a deferred income tax benefit of$20.1 million and a change in the asset retirement obligation due to a change in estimate of$0.4 million . The decrease in our working capital was primarily attributable to a decrease in income tax receivable and trade accounts receivable combined with an increase in accounts payable offset partially by an increase in inventories combined with a decrease in accrued expenses. The decrease in income tax receivable is due to the alternative minimum tax ("AMT") credit refund of$24.3 million received during the third quarter of 2020. The decrease in trade accounts receivable and increase in inventories is due to a 0.5 million metric ton decrease in met coal sales volume. The increase in our accounts payable is primarily driven by the timing of payments. Net cash provided by operating activities was$532.8 million for the year endedDecember 31, 2019 , and was primarily attributed to net income of$301.7 million adjusted for depreciation and depletion expense of$97.3 million , deferred income tax expense of$68.5 million , an increase in other operating activities of$26.1 million , loss on early extinguishment of debt of$9.8 74 -------------------------------------------------------------------------------- million, stock-based compensation expense of$5.8 million , accretion expense of asset retirement obligations of$3.2 million , amortization of debt issuance costs and debt discount of$1.4 million , and a decrease in net working capital of$30.2 million , partially offset by a change in asset retirement obligation due to a change in estimate of$11.1 million . The decrease in our working capital was primarily attributable to a decrease in trade accounts receivable combined with a decrease in income tax receivable and an increase in inventories offset by accrued expenses and accounts payable due to decreased fourth quarter production and sales volume. Investing Activities Net cash used in investing activities was$71.1 million for the year endedDecember 31, 2021 , primarily comprised of$57.9 million of purchases of property, plant and equipment and$13.5 million of capitalized mine development costs associated with our Mine No. 4 development. We spent approximately$45.2 million in sustaining capital and spent an additional$12.7 million in other discretionary capital, which included primarily the service shaft construction and bathhouse at Mine No. 4. Net cash used in investing activities was$108.2 million for the year endedDecember 31, 2020 , primarily comprised of$87.5 million of purchases of property, plant and equipment and$27.1 million of capitalized mine development costs associated with our Mine No. 4 development. We spent approximately$60.0 million in sustaining capital and spent an additional$28.0 million in other discretionary capital, which included primarily the service shaft construction and bathhouse at Mine No. 4. The cash capital expenditures exclude non-cash capital accruals and leases of approximately$44.8 million . Net cash used in investing activities also includes$8.5 million of purchases of short-term investments offset partially by$14.7 million of sales of short-term investments and$0.2 million of proceeds from sale of property, plant and equipment. Net cash used in investing activities was$134.2 million for the year endedDecember 31, 2019 , primarily comprised of$107.3 million of purchases of property, plant and equipment and$23.4 million of capitalized mine development costs associated with our Mine 4 development. We spent approximately$89.0 million in sustaining capital and spent an additional$18.0 million in other discretionary capital, which included primarily the shaft construction at Mine No. 4. The cash capital expenditures exclude non-cash capital accruals and leases of approximately$45.5 million . Net cash used in investing activities also includes$24.2 million of purchases of short-term investments offset partially by$17.5 million of sales of short-term investments and$3.1 million of proceeds from sale of property, plant and equipment.
Fundraising activities
Net cash used in financing activities was$96.5 million for the year endedDecember 31, 2021 , primarily due to the redemption of the Existing Notes of$350.3 million , the repayment of the ABL Draw of$40.0 million , principal repayments of financing lease obligations of$29.0 million , payment of dividends of$10.5 million and payment of debt issuance costs associated with the issuance of the New Notes and the amendment of the ABL Facility of$11.4 million offset partially by$347.7 million in proceeds received from the issuance of the New Notes. Net cash provided by financing activities was$14.1 million for the year endedDecember 31, 2020 , primarily due to the proceeds received from the ABL Draw of$70.0 million offset by the subsequent partial repayment of the ABL Draw in an amount equal to$30.0 million , principal repayments of financing lease obligations of$14.2 million and the payment of dividends of$10.4 million . Net cash used in financing activities was$411.6 million for the year endedDecember 31, 2019 , primarily due to the payment of regular quarterly dividends and theApril 2019 Special Dividend totaling$240.4 million in the aggregate, retirements of debt of$140.3 million , repayments of financing lease obligations of$17.3 million , and common shares repurchased of$12.5 million .
Capital allocation policy
OnMay 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 the Company generates 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. The Company will also seek to optimize its capital structure to improve returns to stockholders while allowing 75 --------------------------------------------------------------------------------
flexibility for the Company to pursue highly selective strategic growth opportunities that can provide attractive returns for shareholders.
As the Company continues to monitor its liquidity in light of the COVID-19 pandemic, the Chinese ban on Australian coal and our CBA contract negotiations with the UMWA, the Company may decide to suspend its Capital Allocation Policy in the future if the Board deems it to be necessary or appropriate. The Company has paid a regular quarterly cash dividend of$0.05 per share every quarter since the Board adopted the Capital Allocation Policy. As ofDecember 31, 2021 , the Company has paid$49.9 million of regular quarterly cash dividends under the Capital Allocation Policy.
OnApril 23, 2019 , the Board declared a special cash dividend of approximately$230.0 million which was paid with cash on hand and was paid onMay 14, 2019 to stockholders of record as of the close of business onMay 6, 2019 .
Share buyback program
OnMarch 26, 2019 , the Board approved the Company's second stock repurchase program (the "New Stock Repurchase Program") that authorizes repurchases of up to an aggregate of$70.0 million of the Company's outstanding common stock. The Company fully exhausted its previous stock repurchase program (the "First Stock Repurchase Program") of$40.0 million of its outstanding common stock. The New Stock Repurchase Program does not require the Company to repurchase a specific number of shares or have an expiration date. The New Stock Repurchase Program may be suspended or discontinued by the Board at any time without prior notice. Under the New 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 and other considerations as determined from time to time by us. 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. Repurchases will be subject to limitations in the ABL Facility and the Indenture. We intend to fund repurchases under the New Stock Repurchase Program from cash on hand and/or other sources of liquidity.
From
In light of the uncertainties resulting from COVID-19 and as a precautionary measure to preserve liquidity, the Company has temporarily suspended its New Stock Repurchase Program. The Company will continue to monitor its liquidity in light of the pandemic, the Chinese ban on Australian coal and our CBA contract negotiations with the UMWA and will consider when to reinstate the program.
ABL installation
OnApril 1, 2016 , we entered into the Asset-Based Revolving Credit Agreement with certain lenders andCitibank, N.A . (together with its affiliates, "Citibank"), as administrative agent and collateral agent, with an aggregate lender commitment of up to$50.0 million , at any time outstanding, subject to borrowing base availability. OnOctober 15, 2018 , we entered into an Amended and Restated Asset-Based Revolving Credit Agreement, by and among us and certain of our subsidiaries, as borrowers, the guarantors party thereto, the lenders from time to time party thereto and Citibank, as administrative agent, which amended and restated in its entirety the existing ABL Facility and, among other things (i) increased the aggregate commitments available to be borrowed under the ABL Facility to$125.0 million , (ii) extended the maturity date of the Asset-Based Revolving Credit Agreement toOctober 15, 2023 ; (iii) decreased the applicable interest rate margins with respect to the loans and the applicable fees in connection with the issuance of letters of credit; and (iv) amended certain covenants and other terms and provisions. OnDecember 19, 2019 , we entered into an Amendment No. 2 to the Amended and Restated Credit Agreement, which, among other things amended the definitions of Fixed Charges and Fixed Charge Coverage Ratio in the Amended and Restated Credit Agreement to generally conform to the corresponding definitions in the Indenture, solely for purposes of incurring 76 --------------------------------------------------------------------------------
unsecured debt based on fixed charge coverage ratio and added customary language in relation to rules for suspending qualified financial contracts.
OnJuly 20, 2020 , we entered into an Amendment No. 3 to the Amended and Restated Credit Agreement, which among other things (i) clarified certain definitions related to the calculation of the borrowing base and (ii) decreased the aggregate commitments available to be borrowed under the ABL Facility to$120.0 million onFebruary 28, 2021 . OnDecember 6, 2021 , we entered into the Second Amended and Restated Asset-Based Revolving Credit Agreement (the "Second Amended and Restated Credit Agreement"), by and among us 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 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 toDecember 6, 2026 ; (ii) changed the calculation of the interest rate payable on borrowings from being based on LIBOR to be based on 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$65.0 million ; and (v) amended certain baskets contained in the covenants to conform to the baskets contained in the Indenture. The Second Amended and Restated Credit Agreement also allows us to borrow up to$132.0 million throughOctober 14, 2023 , decreasing to$116.0 million throughNovember 2026 , subject to availability under the borrowing base and other conditions. The amendment to the ABL Facility inDecember 2021 was considered to be a debt modification and resulted in incremental debt issuance costs of$3.3 million which are reflected as deferred financing costs in other long-term assets on the Balance Sheet. These costs coupled with the$1.7 million of deferred financing costs related to the existing ABL will be amortized to interest expense over the remaining term of the ABL Facility. Under the ABL Facility, up to$10.0 million of the commitments may be used to incur swingline loans from Citibank. As ofDecember 31, 2021 , no loans were outstanding under the ABL Facility and there were$9.4 million of letters of credit issued and outstanding under the ABL Facility. AtDecember 31, 2021 , the Company had$83.2 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 reserves, lower of cost or market reserve, 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. Subject to permitted exceptions, the obligations of the borrowers under the ABL Facility are guaranteed by each of our domestic subsidiaries and secured by (i) first-priority security interests in the ABL Priority Collateral (as defined in the indenture governing the Notes), which includes, among other things, certain accounts receivables, inventory and cash of ours and the guarantors, and (ii) second-priority security interests in the Notes Priority Collateral (as defined in the indenture governing the Notes), which includes, among other things, material mining properties, shares of capital stock of the guarantors, intellectual property, as extracted collateral (to the extent not constituting inventory), and certain fixed assets of ours and the guarantors. Borrowings under the ABL Facility bear interest at a rate equal to either (i) 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 37.5 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. We are able to voluntarily repay outstanding loans and reduce unused commitments, in each case, in whole or in part, at any time without premium or penalty. We are required to repay outstanding loans and cash collateralize letters of credit anytime the outstanding loans and letters of credit exceed the maximum availability then in effect. We are also required to use 77 -------------------------------------------------------------------------------- net proceeds from certain significant asset sales to repay outstanding loans, but may re-borrow following such prepayments if the conditions to borrowings are met. 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 ofDecember 31, 2021 , 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 at
Senior Secured Notes OnDecember 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 outsidethe 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. As a result, we recognized a loss on early extinguishment of debt of$9.7 million which represents the write-off of the previously capitalized Existing Notes debt issuance costs and debt discount, net, along with the redemption premium. In connection with the issuance of the Notes, we incurred debt issuance costs of$8.1 million for the year endedDecember 31, 2021 , which consisted primarily of structuring fees and legal fees, and are included in long-term debt in the Balance Sheet. The Notes will accrue interest at a rate of 7.875% per year fromDecember 6, 2021 . Interest on the Notes will be payable onJune 1 andDecember 1 of each year, commencing onJune 1, 2022 . The Notes will mature onDecember 1, 2028 . At any time prior toDecember 1, 2024 , we may redeem the Notes, in whole or in part, at a price equal to 100.00% of the principal amount of the Notes redeemed plus the Applicable Premium (as defined in the indenture governing the Notes) and accrued and unpaid interest, if any, to, but excluding, the applicable redemption date. The Notes are redeemable at our option, in whole or in part, from time to time, on or afterDecember 1, 2024 , at redemption prices specified in the indenture governing the Notes, plus accrued and unpaid interest, if any, to, but excluding the redemption date. At any time on or prior toDecember 1, 2024 , we may redeem up to 40% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings, at a redemption price of 107.875% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to but excluding the redemption date. We are also required to make offers to purchase the Notes (i) at a purchase price of 101.00% of the principal amount thereof in the event we experience specific kinds of change of control triggering events, (ii) at a purchase price of 103.00% of the principal amount thereof prior to making certain restricted payments, and (iii) at a purchase price of 100.00% of the principal amount thereof in the event we make certain asset sales or dispositions and do not reinvest the net proceeds therefrom or use such net proceeds to repay certain indebtedness, in each case, plus accrued and unpaid interest, if any, to, but excluding the date of purchase.
Ticket offer
OnFebruary 21, 2019 , we commenced an offer to purchase (the "Restricted Payment Offer"), in cash, up to$150.0 million principal amount of its outstanding Existing Notes, at a repurchase price of 103% of the aggregate principal amount of such Existing Notes, plus accrued and unpaid interest with respect to such Existing Notes to, but not including, the date of repurchase. Concurrently with, but separate from, the Restricted Payment Offer, we commenced a cash tender offer (the "Tender Offer" and, together with the Restricted Payment Offer, the "Offers") to purchase up to$150.0 million principal amount of the Existing Notes at a repurchase price of 104.25% of the aggregate principal amount of such Existing Notes, plus accrued and unpaid interest to, but not including, the date of repurchase. In connection with the Offers, we extinguished$140.3 million of the Existing Notes and recognized a loss on early extinguishment of debt of$9.8 million during the year endedDecember 31, 2019 . 78 --------------------------------------------------------------------------------
Short-term investments
During the year endedDecember 31, 2021 , we had$17.0 million of surety bonds with$8.5 million of collateral recognized as short term investments. These investments were posted as collateral for the self-insured black lung related claims asserted by or on behalf of former employees of Walter Energy and its subsidiaries, which were assumed in the acquisition of certain assets of Walter Energy and relate to periods prior toMarch 31, 2016 .
Capital expenditure
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. 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 atBlue 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. Our capital expenditures were$57.9 million ,$87.5 million and$107.3 million for the year endedDecember 31, 2021 ,December 31, 2020 andDecember 31, 2019 respectively. During 2021, we spent approximately$45.2 million in sustaining capital and an additional$12.7 million in other discretionary capital, which included primarily the service shaft construction and bathhouse at Mine No. 4. As a result of the UMWA strike, we temporarily suspended work on the Mine No. 4 service shaft, bathhouse and mine development. Our deferred mine development costs were$13.5 million ,$27.1 million and$23.4 million for the years endedDecember 31, 2021 ,December 31, 2020 andDecember 31, 2019 respectively, and primarily relate to Mine No. 4. We 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. Our capital spending is expected to range from$95.0 million to$105.0 million for the full year 2022, consisting of sustaining capital expenditures of approximately$75.0 to$80.0 million and discretionary capital expenditures of approximately$20.0 to$25.0 million for the 4 North portal construction. Our sustaining capital expenditures include expenditures related to longwall operations, continuous miners, new ventilation, and bleeder shafts.
Rights agreement
OnFebruary 14, 2020 , we adopted the Rights Agreement in an effort to prevent the imposition of significant limitations under Section 382 of the Code on our ability to utilize our current NOLs to reduce our future tax liabilities. The Company's stockholders ratified the Rights Agreement at the 2020 Annual Meeting of Stockholders. The Rights Agreement is intended to supplement the 382 Transfer Restrictions and is designed to serve the interests of all stockholders by preserving the availability of our NOLs and is similar to plans adopted by other companies with significant NOLs. Pursuant to the Rights Agreement, one preferred stock purchase right (a "Right" or the "Rights") was distributed to stockholders of the Company for each share of common stock of the Company outstanding as of the close of business onFebruary 28, 2020 . Initially, these Rights will not be exercisable and will trade with the shares of common stock. If the Rights become exercisable, each Right will initially entitle stockholders to buy one one-thousandth of a share of a newly created series of preferred stock designated as "Series A Junior Participating Preferred Stock" at an exercise price of$31.00 per Right. While the Rights Agreement is in effect, any person or group that acquires beneficial ownership of 4.99% or more of the common stock or any existing stockholderwho currently owns 5.00% or more of the common stock that acquires any additional shares of common stock (such person, group or existing stockholder, an "Acquiring Person") without approval from the Board would be subject to significant dilution in their ownership interest in the Company. In such an event, each Right will entitle its holder to buy, at the exercise price, common stock having a market value of two times the then current exercise price of the Right and 79 -------------------------------------------------------------------------------- the Rights held by such Acquiring Person will become void. The Rights Agreement also gives discretion to the Board to determine that someone is an Acquiring Person even if they do not own 4.99% or more of the Common Stock but do own 4.99% or more in value of the outstanding stock, as determined pursuant to Section 382 of the Code and the regulations promulgated thereunder. In addition, the Board has established procedures to consider requests to exempt certain acquisitions of the Company's securities from the Rights Agreement if the Board determines that doing so would not limit or impair the availability of the NOLs or is otherwise in the best interests of the Company. The Board may redeem the Rights for$0.01 per Right at any time before any person or group triggers the Rights Agreement. The distribution of the Rights is not a taxable event for stockholders of the Company and will not affect the Company's' financial condition or results of operations (including earnings per share). The Rights will expire on the earliest of (i) the close of business onFebruary 14 , 2023,(ii) the close of business on the first anniversary of the date of entry into the Rights Agreement, if stockholder approval of the Rights Agreement has not been received by or on such date, (iii) the time at which the Rights are redeemed as provided in the Rights Agreement, (iv) the time at which the Rights are exchanged as provided in the Rights Agreement, (v) the time at which the Board determines that the NOLs are fully utilized or no longer available under Section 382 of the Code, (vi) the effective date of the repeal of Section 382 of the Code if the Board determines that the Rights Agreement is no longer necessary or desirable for the preservation of NOLs, or (vii) the closing of any merger or other acquisition transaction involving the Company pursuant to an agreement of the type described in the Rights Agreement. Additional details about the Rights Agreement is contained in the Company's Current Report on Form 8-K filed with theSEC onFebruary 14, 2020 .
Designation of Series A Junior Participating Preferred Shares
In connection with the adoption of the Rights Agreement, the Board approved a certificate of designations of Series A Junior Participating Preferred Stock designating 140,000 shares of preferred stock, which was filed onFebruary 14, 2020 with the Secretary of State of theState of Delaware and became effective on such date. Each one one-thousandth of a share of Series A Junior Participating Preferred Stock, if issued:
• will not be refundable;
• entitle its holder to quarterly dividend payments equal to the dividend paid on an ordinary share;
•will entitle the holder upon liquidation, dissolution or winding-up of the Company to receive the greater of (a)$0.01 per one one-thousandth of a share of Series A Junior Participating Preferred Stock (plus any accrued but unpaid dividends) and (b) an amount equal to the payment made on one share of common stock;
•will have the same voting power as an ordinary share; and
•if shares of common stock are exchanged via merger, consolidation, or a similar transaction, will entitle the holder to a payment equal to the payment made on one share of Common Stock.Blue Creek We believe thatBlue Creek represents one of the few remaining untapped reserves of premium High Vol A met coal inthe 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 fromBlue Creek , assuming we achieve our expected price realizations, will generate some of the highest met coal margins in theU.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 theSEC'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 thatBlue 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 CSR. High Vol A met coal has traditionally priced at a discount to the Australian Premium Low Vol and theU.S. Low Vol coals; however, in the last eighteen months, it has been priced at or slightly 80 -------------------------------------------------------------------------------- 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. If we are able to successfully developBlue Creek , we expect that it will be a transformational investment for us. We expect that the new single longwall mine atBlue Creek will have the capacity to produce an average of 3.9 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 54%. 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 inthe United States . Due to the ongoing uncertainty related to the COVID-19 pandemic, the Chinese ban on Australian coal and our current CBA contract negotiations with the UMWA, we incurred minimal spend on the development ofBlue Creek in 2021. We have delayed the development of theBlue Creek project, while we focus on preserving cash and liquidity. Outlook During the UMWA strike, the Company continues to successfully execute its business continuity plans, allowing it to meet the needs of its valued customers. Despite incurring costs associated with the strike, the Company has been able to manage its working capital and spending to deliver strong results in the current markets.U.S. inflation hit its fastest pace in nearly four decades in 2021 as pandemic related supply and demand imbalances, along with stimulus intended to shore up the economy, pushed the consumer price index up to a 7% annual rate. 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. While inflation did not have a significant impact to our profitability in 2021, we do expect ongoing inflation to have a larger impact in 2022. 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 machinery and equipment purchases. The Company believes that it is well positioned to fulfill anticipated customer volume commitments for 2022. In the current operating environment and without a new labor contract, the Company believes that production and sales volume for 2022 could be between 5.5 million and 6.5 million short tons. These volumes include the assumed restart of Mine 4 and continued lower production at Mine 7. While the Company has business continuity plans in place, the strike and COVID-19 may still cause disruption to production and shipment activities, and the plans may vary significantly from quarter to quarter for the full year of 2022. Similarly, with a new contract, Warrior believes that production and sales volume over a twelve-month period could ramp up to a run rate of approximately 7.5 million short tons within three to four months.
Significant Accounting Policies and Estimates
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.
We believe the following discussion addresses our most critical accounting
estimates, which 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 reasonable under the circumstances. Changes in
estimates used in these and other items could have a material impact on our
financial statements. Our significant accounting policies are described in Note
2 to our financial statements included elsewhere in this Annual Report.
81
--------------------------------------------------------------------------------
Coal reserves
Our mineral reserves and resources estimates are calculated in accordance with subpart 1300 of Regulation S-K under the Modernization of Property Disclosures for Mining Registrants of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our mineral reserves and resources are updated on an annual basis. There are numerous uncertainties inherent in estimating quantities and values of mineral reserves and resources, including many factors that are beyond our control. As a result, estimates of mineral reserves and resources are by their nature uncertain. Information about our reserves and resources consists of estimates based on engineering, economic and geological data assembled by our internal engineers and geologists or third-party consultants. A number of sources of information are used to determine accurate recoverable reserve and resource estimates including:
•geological conditions;
•the historical production of the zone compared to the production of the other production zones;
•the supposed effects of regulations and taxes by government agencies;
•geological studies and reserves already completed;
•future price assumptions; and
•future operating expenses.
Some of the factors and assumptions, which will change from time to time, that affect the mineral reserve and resource estimates include, among other factors:
•mining activities;
•new engineering and geological data;
•the acquisition or sale of reserves; and
• modification of mining plans or mining methods.
Each of these factors may vary considerably from the assumptions used in estimating reserves and resources. For these reasons, estimates of economically recoverable quantities of coal attributable to a particular group of properties, and classifications of these reserves and resources based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenues and expenditures with respect to reserves and resources will likely vary from estimates and these variances may be material. Variances could affect our projected future revenues and expenditures, as well as the valuation of coal reserves, resources and depletion rates. As ofDecember 31, 2021 , we had estimated reserves totaling 162.8 million metric tons and estimated mineral resources exclusive of reserves of 44.9 million metric tons
Asset retirement obligations
Our asset retirement obligations primarily consist of spending estimates to reclaim surface lands and supporting infrastructure at both surface and underground mines in accordance with applicable reclamation laws inthe United States as defined by each mining permit. Significant reclamation activities include reclaiming refuse piles and slurry ponds, reclaiming the pit and support acreage at surface mines, and sealing portals at underground mines. Asset retirement obligations are determined for each mine using various estimates and assumptions, including estimates of disturbed acreage as determined from engineering data, estimates of future costs to reclaim the disturbed acreage and the timing of related cash flows, discounted using a credit-adjusted, risk-free rate. Our asset retirement obligations also include estimates to reclaim gas wells in accordance with the Oil and Gas Board ofAlabama . On at least an annual basis, we review our entire asset retirement obligation liability and make necessary adjustments for permit changes, the anticipated timing of mine closures, and revisions to cost estimates and productivity assumptions to reflect current experience. As changes in estimates occur, the carrying amount of the obligation and asset are revised to reflect the new estimate after applying the appropriate credit-adjusted, risk-free discount rate. For sites where there is no asset, expense or income is recognized for changes in estimates. If our assumptions differ from actual experience, or if changes in the regulatory environment occur, our actual cash expenditures and costs that we incur could be materially different than currently estimated. AtDecember 31, 2021 , we had recorded asset retirement obligation liabilities of$70.7 million , including$5.1 million reported as a current liability. 82 --------------------------------------------------------------------------------
Income taxes
As a result of the acquisition of certain assets of Walter Energy, we have significant federal and state NOLs. The Company has federal NOL carryforwards of approximately$722.3 million as ofDecember 31, 2021 , of which$31.0 million are indefinite lived and the remainder expire predominantly inDecember 31, 2034 throughDecember 31, 2036 . The Company has state NOL carryforwards of approximately$992.6 million , which expire predominantly inDecember 31, 2029 throughDecember 31, 2031 . In addition, the Company has approximately$23.3 million of general business credits which begin to expire inDecember 31, 2027 and fully expire inDecember 31, 2041 We believe the utilization of these NOLs, subject to certain limitations, will significantly reduce the amount of federal and state income taxes payable by us for the foreseeable future as compared to what we would have had to pay at the statutory rates without these NOL benefits. Under Section 382 of the Code, these NOLs could be subject to annual limitations, further limitations, or elimination, as described below, if we were to undergo a subsequent ownership change in the future. To the extent we have taxable income in the future and can utilize these NOL carryforwards, subject to certain limitations, to reduce taxable income, our cash taxes will be significantly reduced in those future years. Notwithstanding the above, even if all of our regularU.S. federal income tax liability for a given year is reduced to zero by virtue of utilizing our NOLs, we may still be subject to state, local or other non-federal income taxes. See "Part I, Item 1A. Risk Factors-Risks Related to Our Business-We may be unable to generate sufficient taxable income from future operations, or other circumstances could arise, which may limit or eliminate our ability to utilize our significant tax NOLs or maintain our deferred tax assets." OnSeptember 18, 2017 , theIRS issued to us a private letter ruling, which favorably resolved certain questions about our ability to qualify for an exception to the annual limitations under Section 382 of the Code on the utilization of NOLs to reduce taxable income. Based on such private letter ruling, we believe that there is no limitation on the utilization of our NOLs to shield our income from federal taxation. The private letter ruling was issued based on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings provided to theIRS by us. If any of these facts, assumptions, representations, statements or undertakings are, or become, incorrect, inaccurate or incomplete, the private letter ruling may be invalid and the conclusions reached therein could be jeopardized. If we were to undergo a subsequent ownership change, our ability to utilize our NOLs and other tax attributes could be subject to severe limitations. GAAP requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. Deferred tax assets are required to be reduced by a valuation allowance if it is "more likely than not" that some portion or the entire deferred tax asset will not be realized. In our evaluation of the need for a valuation allowance on our deferred tax assets, we consider, among other things, all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, the overall business environment, our historical financial results, our industry's historically cyclical financial results, our cumulative three-year income or loss position and potential current and future tax planning strategies. AtDecember 31, 2017 , we had a valuation allowance established against our deferred income tax assets, which represented a full valuation allowance against our net deferred income tax assets. As ofDecember 31, 2018 , after considering all relevant factors, we concluded that our deferred income tax assets were more likely than not to be realized and released our valuation allowance against our net deferred income tax assets resulting in a$225.8 million income tax benefit. OnFebruary 12, 2021 , theAlabama Governor signed into law Alabama House Bill 170, now Act 2021-1 (the "Act"). The Act makes several changes to the state's business tax structure. Among the provisions of the Act, is the repeal of the so-called corporate income tax "throwback rule." That rule required all sales originating inAlabama and delivered to a jurisdiction where the seller was not subject to tax, to be included in the seller'sAlabama income tax base. Thus, prior to repeal of the throwback rule, we had to rely on its Alabama NOL carryforwards to shelter taxes imposed under such throwback rule. As a result of the now repealed throwback rule, effectiveJanuary 1, 2021 , all such sales should now be excluded fromAlabama taxable income without the need to utilize Alabama NOLs. As a result of the repeal of the throwback rule, we remeasured ourAlabama deferred income tax assets and liabilities and recorded a non-cash income tax benefit of$22.4 million . Additionally, we determined that it is not more likely than not that we would have sufficient taxable income to utilize all of ourAlabama deferred income tax assets prior to expiration. Therefore, we established a non-cash valuation allowance of$46.0 million against such deferred income tax assets. As ofDecember 31, 2021 , we considered all positive and negative evidence and concluded that our federal deferred income tax assets remain more likely than not to be realized and a valuation allowance was not required. Certain factors, could change or circumstances could arise that could further limit or eliminate the amount of the available NOLs to us, such as an ownership change or an adjustment by a tax authority. Also, certain circumstances, such as the COVID-19 pandemic, the Chinese ban on Australian coal, the ongoing UMWA strike and the unknown duration and overall impact on our operations, 83 --------------------------------------------------------------------------------
including our inability to generate sufficient future taxable income from operations, could limit our ability to fully utilize our deferred tax assets prior to their expiration.
Recently Adopted Accounting Standards
See note 2 of our consolidated financial statements for information on the new accounting standards.
84
————————————————– ——————————
© Edgar Online, source
