2 0 1 7 A N N U A L R E P O R T
WMC Annual Report Front Cover.indd 1
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2 0 1 7 A N N U A L R E P O R T
2017 HIGHLIGHTS
Warrior Met Coal is a large scale, low-cost U.S. based producer and exporter of premium Hard Coking Coal
(HCC), operating highly efficient longwall operations in its underground mines located in Alabama. The HCC
that Warrior 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 the premium HCC produced in Australia. The premium nature of
Warrior’s HCC makes it ideally suited as a base feed coal for steelmakers and results in price realizations near
the Australian Low Vol (LV) Index. Warrior sells all of its metallurgical (met) coal production to steel producers
in Europe, South America and Asia.
SUMMARY STATISTICS (U.S. Dollars)
Revenue:
Net Income:
Net Income Per Share:
Adjusted EBITDA(1):
Met Coal Sales:
Employees:
$1.2 Billion
$455.0 Million
$8.62
$517.7 Million
5.9 Million Metric Tons (MMT)
1,354
REVENUE
($ IN MILLIONS)
$1,400
$1,200
$1,000
$800
$600
$400
$200
$ -
$1,169
$298
ADJUSTED
EBITDA(1)
($ IN MILLIONS)
$518
$50
$600
$500
$400
$300
$200
$100
$ -
MET SALES
(MMT)
5.9
2.4
7
6
5
4
3
2
1
-
2017
2016(2)
2017
2016(2)
2017
2016(2)
FCF
($ IN MILLIONS)
FCF
Conv.(3)
$400
$350
$300
$250
$200
$150
$100
$50
$ -
$(50)
66%
-42%
$342
$(21)
2017
2016(2)
MET CASH COST
OF SALES(4)
($ PER METRIC TON)
$99.86
$82.84
$120
$100
$80
$60
$40
$20
$ -
SG&A
EXPENSE
($ IN MILLIONS)
$36
$21
$40
$35
$30
$25
$20
$15
$10
$5
$ -
CAPEX
($ IN MILLIONS)
$100
$93
$80
$60
$40
$20
$ -
$12
2017
2016(2)
2017
2016(2)
2017
2016(2)
(1) Adjusted EBITDA is a non-GAAP financial measure. See page 64 of this Annual Report on Form 10-K for the year ended December 31, 2017 for a definition of this
measure and a reconciliation to its most directly comparable GAAP measure.
(2) Represents the nine months ended December 31, 2016 (Successor).
(3) Free Cash Flow (“FCF”) Conversion is defined as FCF/Adj. EBITDA. FCF is a non-GAAP financial measure, and defined and reconciled on page A-4 of this document.
(4) Cash cost of sales per metric ton is a non-GAAP financial measure. See page 63 of the Annual Report on Form 10-K for the year ended December 31, 2017
for a definition of this measure and a reconciliation to its most directly comparable GAAP measure.
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Dear Fellow Shareholders:
Warrior Met Coal experienced an exceptional year in 2017, successfully executing on our
strategy to be an outstanding partner to our customers by operating efficiently and continuing to
put safety first. We maintained this level of excellence while ramping up production to take
advantage of a strong market for premium met coal in order to return significant capital to
shareholders. We are extremely pleased with the progress we have made as a newly public
company, and expect it will serve as a springboard for our future performance.
2017 was packed with financial and operational milestones for Warrior:
•
Initial public offering of common stock and listing on the New York Stock Exchange
under the ticker symbol “HCC” in April 2017
• New record highs in sales, production volumes, and Adjusted EBITDA
• Timely and successful completion of four longwall moves in 2017, including three back-
to-back moves in the fourth quarter
• Adoption of a formal capital allocation policy with the initiation of a regular quarterly cash
dividend of $0.05 per share and the distribution of a special cash dividend of $11.21 per
share
• Successful deployment of Warrior’s valuable deferred tax assets through a favorable
IRS ruling on the use of Net Operating Losses (“NOLs”)
• Operating a safe and productive operation in a year of significant expansion
• Maintaining an incident and severity rate well below reportable industry averages while
hiring over 1,000 new employees
Our strong performance in 2017 is a testament to the strength of our met coal assets. Warrior is
the only publicly traded pure-play hard coking coal producer in the U.S., with one of the highest
quality met coal portfolios in the world.
By combining the highest price realizations of all U.S. met coal producers together with our
exceptionally low cost structure, we believe Warrior has among the highest margins in the
industry. We are differentiated from our peers by our highly flexible mine plan, a highly variable
cost structure in areas such as labor, royalties, and logistics, and a strong balance sheet.
Delivering Strong Financial and Operating Results
We outperformed budget in several key metrics in 2017 and are pleased to report:
• Adjusted EBITDA for 2017 of $518 million, and Adjusted EBITDA margins (calculated as
Adjusted EBITDA divided by total revenues) of 44%, which we believe are some of the
highest in the industry
• Revenues in 2017 of $1.2 billion, which included met coal sales of 5.9 million metric tons
at an average net selling price of $190 per metric ton
• Full year 2017 free cash flow of $342 million, resulting from cash flows from operating
activities of $435 million less $93 million of cash used for capital expenditures
Our financial success in 2017 was grounded in the timely and successful completion of four
longwall moves (relocating longwall system from one area to another several miles away) during
the course of the year, including three back-to-back moves in the fourth quarter. Our success in
maintaining record levels of production during this time was the result of good planning,
preparation and communication, and outstanding work by our employees.
Strategically Managing Our Balance Sheet and Tax Assets
One of our key achievements in 2017 was the realization of our new formal capital allocation
policy to return excess cash to shareholders. We did so first by initiating a regular quarterly
dividend of $0.05 per share. Our Board of Directors also declared a special cash dividend
of $11.21 per share, or $600 million in the aggregate.
We were very pleased that our efforts to obtain a favorable IRS Private Letter Ruling on the use
of our NOLs were successful. By maximizing the value of Warrior’s deferred tax assets,
primarily consisting of $1.6 billion of federal and state NOLs, we expect that this ruling will
continue to favorably impact our results in the years ahead.
In addition, we expect to receive approximately $39 million from the IRS in refundable
Alternative Minimum Tax credits from 2019 through 2022 as a result of the Tax Cuts and Jobs
Act of 2017, which has also reduced our corporate income tax rate from 35% to 21%.
Operating Safely and Sustainably
Safety is central to the way we do things at Warrior, and we expect continuous improvement
from our safety program as we move forward. Our total reportable incidence rate of 3.50 was
considerably lower than the national total reportable incidence rate, and our two mines have an
Injury Severity Measure score of 144 compared to the industry average of 400. Our basic goal is
simple: to send every employee home each day without incident.
Warrior also continued to have a strong environmental performance by reducing our notices of
violation by two thirds from the previous year.
2
A-2
Focusing on the Future
We believe that Warrior’s ability to increase production with a low cost structure and capitalize
on robust demand in a favorable met coal price environment will enable us to continue to
generate strong margins and cash flows.
As a result, in 2018 we plan to invest in our business through capital spending above our normal
sustaining levels. These additional investments will further enable Warrior to increase our
production and sales volumes, increase efficiencies, lower costs, and build for the future.
Under our current guidance for 2018, we expect to spend approximately $100 million to $120
million in capital expenditures, which includes spending on discretionary projects. These include
finishing construction of a new portal at Mine No. 7 that was started in 2017 and other projects
that will improve efficiencies, lower our costs, and increase production. Due to the long lead
times on developing these projects in 2018, we expect to realize the majority of the benefits of
this spending in 2019 and beyond. We are also planning two additional longwall moves in 2018.
Importantly, when appropriate and in accordance with our capital allocation policy, we also
intend to continue to return excess cash to shareholders, over and above our regular quarterly
dividends.
I want to thank our employees for their dedication and hard work over the last year. In addition, I
would like to express my appreciation to the Board for its continued guidance and support.
Finally, I sincerely thank you, our owners, for believing in Warrior Met Coal. On behalf of the
entire management team, I look forward to realizing the full potential of our Company as the
leading dedicated U.S. producer of met coal in the months and years ahead.
Sincerely,
Walter J. Scheller, III
Chief Executive Officer
3
A-3
CONSOLIDATED RESULTS:
Successor
Predecessor
For the three
months ended
March 31,
2016
$
$
$
71,383
(53,156)
(61,816)
For the year
ended December
31,
2015
$
$
$
544,733
(319,526)
(310,581)
($ in thousands, except per share amounts and employees)
Revenues
Operating income (loss)
Net income (loss)
Basic and diluted net income (loss) per share
BALANCE SHEET
Total assets
Total liabilities
Stockholders' equity
OTHER
Capital expenditures (1)
Employees
For the year ended
December 31,
2017
$
$
$
$
1,169,092
423,401
455,046
8.62
For the nine
months ended
December 31,
2016
$
$
$
$
297,634
(47,944)
(49,673)
(0.94)
AT DECEMBER 31,
2017
$
$
$
993,315
580,292
413,023
2016
$
$
$
947,631
194,664
752,967
2017
$
2016
92,625
1,354
$
11,531
1,130
RECONCILIATION OF FREE CASH FLOW TO AMOUNTS REPORTED UNDER U.S. GAAP:
($ in thousands)
Net cash provided by (used in) operating activities
Purchases of property, plant and equipment
Free cash flow (2)
QUARTERLY HIGHLIGHTS FISCAL YEAR 2017:
($ in thousands, except per share amounts)
Revenues
Operating income
Net income
Net income per share‐basic and diluted
Successor
Predecessor
For the year ended
December 31,
2017
$
434,512
(92,625)
For the nine
months ended
December 31,
2016
$
(9,187)
(11,531)
For the three
months ended
March 31,
2016
$
(40,698)
(5,422)
For the year
ended December
31,
2015
$
(131,818)
(64,971)
$
341,887
$
(20,718)
$
(46,120)
$
(196,789)
QUARTER ENDED
March 31
$
$
$
$
253,964
110,853
108,308
2.06
June 30
$
$
$
$
363,370
163,276
129,865
2.46
September 30
311,955
82,770
119,717
2.27
$
$
$
$
December 31
$
$
$
$
239,803
66,502
97,156
1.83
Weighted average number of shares outstanding‐basic
Weighted average number of shares outstanding‐diluted
52,681,029
52,681,029
52,721,480
52,721,480
52,777,116
52,777,116
53,018,196
53,026,528
(1) Capital expenditures in 2016 represents capital expenditures during the nine months ended December 31, 2016.
(2) Free cash flow is defined as net cash provided by (used in) operating activities less purchases of property, plant and equipment. Free cash flow is not a measure of
financial performance in accordance with GAAP, and we believe items excluded from net cash provided by (used in) operating activities are significant to the reader
in understanding and assessing our results of operations. Therefore, free cash flow should not be considered in isolation, nor as an alternative to net cash provided
by (used in) operating activities under GAAP. We believe free cash flow is a useful measure of performance and we believe it aids some investors and analysts in
comparing us against other companies to help analyze our current and future potential performance. Free cash flow may not be comparable to similarly titled
measures used by other companies.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File Number: 001-38061
Warrior Met Coal, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
16243 Highway 216
Brookwood, Alabama
(Address of principal executive offices)
81-0706839
(I.R.S Employer
Identification No.)
35444
(Zip Code)
(205) 554-6150
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. Yes
No
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.
Large accelerated filer
Accelerated filer
Emerging growth company
Non-accelerated filer
(Do not check if a
smaller reporting company)
Smaller reporting company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the common stock on June 30, 2017, the
No
registrant’s most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $470.3 million.
Number of shares of common stock outstanding as of February 9, 2018: 53,284,470
Documents Incorporated By Reference
Portions of the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days of December 31, 2017, are incorporated by reference into Part III of this report for the year ended December 31, 2017.
TABLE OF CONTENTS
Forward-Looking Statements
Glossary of Selected Terms
Explanatory Note
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part I
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Part III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Part IV
Item 15.
Exhibits, Financial Statement Schedules
Signatures
Index to Financial Statements
1
3
6
7
20
47
48
54
54
55
57
60
83
83
83
84
85
86
86
86
86
86
87
90
F-1
i
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Annual 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. 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 Annual 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:
•
•
•
•
•
•
•
•
•
•
•
•
successful implementation of our business strategies;
a substantial or extended decline in pricing or demand for met coal;
global steel demand and the downstream impact on met coal prices;
inherent difficulties and challenges in the coal mining industry that are beyond our control;
geologic, equipment, permitting, site access, operational risks and new technologies related to mining;
impact of weather and natural disasters on demand and production;
our relationships with, and other conditions affecting, our customers;
unavailability of, or price increases in, the transportation of our met coal;
competition and foreign currency fluctuations;
our ability to comply with covenants in our asset-based revolving credit facility (“ABL Facility”) and indenture
governing the Notes (as defined below);
our substantial indebtedness and debt service requirements;
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;
•
•
•
•
•
•
adequate liquidity and the cost, availability and access to capital and financial markets;
any consequences related to our transfer restrictions under our certificate of incorporation;
our obligations surrounding reclamation and mine closure;
inaccuracies in our estimates of our met coal reserves;
our ability to develop or acquire met coal reserves in an economically feasible manner;
our expectations regarding our future cash tax rate as well as our ability to effectively utilize our net operating loss
carryforwards (“NOLs”);
•
challenges to our licenses, permits and other authorizations;
1
•
•
•
•
•
•
•
•
•
•
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;
costs associated with our pension and benefits, including post-retirement benefits;
costs associated with our workers’ compensation benefits;
litigation, including claims not yet asserted;
our ability to continue paying our quarterly dividend or pay any special dividend;
our ability to commence a stock repurchase program; and
terrorist attacks or security threats, including cybersecurity threats.
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 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” “Part I, Item IA. Risk Factors” and elsewhere in this Annual Report, 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 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 Annual Report 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 Annual Report after the date of this Annual Report, 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 Annual Report or elsewhere might
not occur.
2
GLOSSARY OF SELECTED TERMS
The following is a glossary of selected terms used in the Annual Report:
Ash. Impurities consisting of silica, iron, alumina and other incombustible matter that are contained in coal. Since ash
increases the weight of coal, it adds to the cost of handling and can affect the burning characteristics of coal.
Assigned reserves. Coal that is planned to be mined at an operation that is currently operating, currently idled or for
which permits have been submitted and plans are eventually to develop the mine and begin mining operations.
Bituminous coal. A common type of coal with moisture content less than 20% by weight. It is dense and black and
often has well-defined bands of bright and dull material.
British thermal unit (“Btu”). A measure of the thermal energy required to raise the temperature of one pound of pure
liquid water one degree Fahrenheit at the temperature at which water has its greatest density (39 degrees Fahrenheit).
Coal seam. Coal deposits occur in layers. Each layer is called a “seam.”
Coke. A hard, dry carbon substance produced by heating coal to a very high temperature in the absence of air. Coke is
used in the manufacture of iron and steel. Its production results in a number of useful by-products.
Continuous miner. A machine used in underground mining to cut coal from the seam and load onto conveyers or
shuttle cars in a continuous operation. In contrast, a conventional mining unit must stop extracting in order to begin loading.
Continuous mining. A form of underground mining that cuts the coal from the seam and loads the coal on to a
conveyor system continuously, thus eliminating the separate cycles of cutting, drilling, shooting and loading.
CSX. CSX Corporation.
EPA. Environmental Protection Agency.
Hard coking coal (“HCC”). Hard coking coal is a type of met coal that is a necessary ingredient in the production of
strong coke. It is evaluated based on the strength, yield and size distribution of coke produced from such coal, which is
dependent on the rank and plastic properties of the coal. Hard coking coals trade at a premium to other coals due to their
importance in producing strong coke and because they are a limited resource.
Longwall mining. A form of underground mining that employs a shearer with two rotating drums pulled mechanically
back and forth across a long exposed coal face. A hydraulic system supports the roof of the mine while the drums are mining
the coal. Conveyors move the loosened coal to an underground mine conveyor that transports coal to the surface. Longwall
mining is the most efficient underground mining method.
Metallurgical (“met”) coal. The various grades of coal with suitable carbonization properties to make coke or to be
used as a pulverized injection ingredient for steel manufacture, including hard coking coal (see definition above), semi-soft
coking coal and PCI coal. Met coal quality depends on four important criteria: (1) volatility, which affects coke yield; (2) the
level of impurities, including sulfur and ash, which affect coke quality; (3) composition, which affects coke strength; and
(4) other basic characteristics that affect coke oven safety. Met coal typically has particularly high Btu characteristics but low
ash and sulfur content.
Metric ton. Equal to approximately 2,205 pounds. The international standard for quoting price per ton is based in U.S.
dollars per metric ton. Unless otherwise indicated, the metric ton is the unit of measure referred to in this Annual Report and
any reference to “ton(s)” or “tonnage” in this Annual Report refers to metric ton(s). One metric ton is equivalent to 1.10231
short tons.
Mineable Coal. That portion of the coal reserve base which is commercially mineable and excludes all coal that will
be left, such as in pillars, fenders or property barriers.
MSHA. Mine Safety and Health Administration.
3
Overburden. Layers of earth and rock covering a coal seam. In surface mining operations, overburden must be
removed prior to coal extraction.
PCI coal. Coal used by steelmakers for pulverized coal injection (PCI) into blast furnaces to use in combination with
the coke used to produce steel. The use of PCI allows a steel maker to reduce the amount of coke needed in the steel making
process.
Preparation plant. Preparation plants are usually located on a mine site, although one plant may serve several mines.
A preparation plant is a facility for crushing, sizing and washing coal to remove impurities and prepare it for use by a particular
customer. The washing process has the added benefit of removing some of the coal’s sulfur content.
Probable reserves. Reserves for which quantity and grade and/or quality are computed from information similar to
that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less
adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity
between points of observation.
Productivity. As used in this Annual Report, refers to clean metric tons of coal produced per underground man hour
worked, as published by the MSHA.
Proven reserves. Reserves for which: (a) quantity is computed from dimensions revealed in outcrops (part of a rock
formation that appears at the surface of the ground), trenches, workings or drill holes; (b) grade and/or quality are computed
from the results of detailed sampling; and (c) the sites for inspection, sampling and measurement are spaced so closely and the
geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established.
Reclamation. The process of restoring land and the environment to their original or otherwise rehabilitated state
following mining activities. The process commonly includes “recontouring” or reshaping the land to its approximate original
appearance, restoring topsoil and planting native grass and ground covers. Reclamation operations are usually underway before
the mining of a particular site is completed. Reclamation is closely regulated by both state and federal law.
Recoverable reserves. Metric tons of mineable coal that can be extracted and marketed after deduction for coal to be
left behind within the seam (i.e. pillars left to hold up the ceiling, coal not economical to recover within the mine, etc.) and
adjusted for reasonable preparation and handling losses
Reserve. That part of a mineral deposit that could be economically and legally extracted or produced at the time of
the reserve determination.
Roof. The stratum of rock or other mineral above a coal seam; the overhead surface of a coal working place.
SEC. Securities and Exchange Commission.
Slurry Impoundment. The entire structure used for coal slurry waste disposal, including the embankment, basin,
beach, pool, and slurry. During the process of mining and cleaning coal, waste is created and must be permanently disposed of
in an impoundment. Slurry, a combination of silt, dust, water, bits of coal and clay particles is the most commonly disposed of
material held in an impoundment.
Subsidence. Lateral or vertical movement of surface land that occurs when the roof of an underground mine
collapses. Longwall mining causes planned subsidence by the mining out of coal that supports the overlying strata.
Sulfur. One of the elements present in varying quantities in coal that contributes to environmental degradation when
coal is burned. Sulfur dioxide is produced as a gaseous by-product of coal combustion.
Surface mine. A mine in which the coal lies at or near the surface and can be extracted by removing the covering
layer of soil (see “Overburden”) without tunneling underground.
Ton or tonnage. See “metric ton” above.
Thermal coal. Coal used by power plants and industrial steam boilers to produce electricity, steam or both. It
generally is lower in Btu heat content and higher in volatile matter than met coal.
4
Unassigned reserves. Coal that is likely to be mined in the future, but which is not considered “assigned reserves.”
Underground mine. Also known as a “deep” mine, it is usually located several hundred feet or more below the earth’s
surface. An underground mine’s coal is typically removed mechanically and transferred by shuttle car, conveyor and hoist to
the surface.
5
EXPLANATORY NOTE
On April 12, 2017, Warrior Met Coal, LLC, a Delaware limited liability company, converted into Warrior Met Coal, Inc.,
a Delaware corporation, as described in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations-Basis of Presentation-Factors Affecting the Comparability of our Financial Statements-Corporate
Conversion and Initial Public Offering.” We refer to this transaction herein as the “corporate conversion.” As used in this
Annual Report, unless the context otherwise requires, references to the “Company,” “Warrior,” “we,” “us,” “our” or
“Successor” refer to Warrior Met Coal, LLC, a Delaware limited liability company, and its subsidiaries for periods beginning
as of April 1, 2016 and ending immediately before the completion of our corporate conversion, and to Warrior Met Coal, Inc.,
a Delaware corporation and its subsidiaries for periods beginning with the completion of our corporate conversion and
thereafter. In the corporate conversion, 3,832,139 units of Warrior Met Coal, LLC converted into 53,442,532 shares of common
stock of Warrior Met Coal, Inc. using an approximate 13.9459-to-one conversion ratio. References in this Annual Report to the
“Predecessor” refer to the assets acquired and liabilities assumed by Warrior Met Coal, LLC from Walter Energy, Inc., a
Delaware corporation (“Walter Energy”), in the Asset Acquisition on March 31, 2016, as further described in “Part I, Item 1.
Business-Our History-Walter Energy Restructuring.” The Predecessor periods included in this Annual Report begin as of
January 1, 2015 and end as of March 31, 2016.
6
Item 1. Business
Overview
Part I
We are a large scale, low-cost U.S.-based producer and exporter of premium met coal operating two highly productive
underground mines in Alabama, Mine No. 4 and Mine No. 7, that have an estimated annual production capacity of 7.3 million
metric tons of coal. We sell a premium met coal product to leading steel manufacturers in Europe and South America. As of
December 31, 2017, based on a reserve report prepared by Marshall Miller, our two operating mines had approximately 110.0
million metric tons of recoverable reserves and, based on a reserve report prepared by Norwest, our undeveloped Blue Creek
Energy Mine contained 103.0 million metric tons of recoverable reserves.
Our hard coking coal (“HCC”), mined from the Southern Appalachian region of the United States, is characterized by
low-to-medium volatile matter (“VM”) and high coke strength after reaction (“CSR”). These qualities make our coal ideally
suited as a coking coal for the manufacture of steel. As a result of our high quality coal, our realized price has historically been
in line with, or at a slight discount to, the Australian premium low-volatility ("LV") HCC benchmark (“Australian HCC
Benchmark”). In contrast, coal produced in the Central Appalachian region of the United States is typically characterized by
medium-to-high VM and a CSR that is below the requirements of the Australian HCC Benchmark.
Our operations utilize longwall mining techniques, which is the most productive coal mining method available, and
allows mining at the lowest cost per ton. We are able to utilize longwall mining as a result of the medium to thick coal seams of
Mine No. 4 and Mine No. 7. Additionally, our operations benefit from a highly competitive initial Collective Bargaining
Agreement (“CBA”) with the United Mine Workers of America (“UMWA”), which has enabled us to structurally reduce our
cash costs.
Our two operating mines are located approximately 300 miles from our export terminal at the Port of Mobile, Alabama,
which we believe to be the shortest mine-to-port distance of any U.S.-based met coal producer. Our low cost, flexible and
efficient rail and barge network underpins our cost advantage and dependable access to the seaborne markets. We sell our coal
to a diversified customer base of blast furnace steel producers, primarily located in Europe and South America. We enjoy a
shipping time and distance advantage serving our customers throughout the Atlantic Basin relative to competitors located in
Australia and Western Canada.
We operate as a single reportable segment. See the financial statements beginning on page F-1 of this Annual Report for
our consolidated revenues, profit/loss and total assets.
Our History
Walter Energy Restructuring
Warrior Met Coal, LLC was formed on September 3, 2015 by certain lenders under Walter Energy’s 2011 Credit
Agreement, dated as of April 1, 2011 (the “2011 Credit Agreement”), and the noteholders under Walter Energy’s 9.50% Senior
Secured Notes due 2019 (such lenders and noteholders, collectively, “Walter Energy’s First Lien Lenders”) in connection with
the acquisition by the Company of certain core assets of Walter Energy and certain of its wholly-owned subsidiaries (the
“Walter Energy Debtors”) related to their Alabama mining operations. The acquisition was accomplished through a credit bid
of the first lien obligations of the Walter Energy Debtors pursuant to section 363 of the U.S. Bankruptcy Code (the “Bankruptcy
Code”) and an order by the Bankruptcy Court (I) Approving the Sale of the Acquired Assets Free and Clear of Claims, Liens,
Interests and Encumbrances; (II) Approving the Assumption and Assignment of Certain Executory Contracts and Unexpired
Leases; and (III) Granting Related Relief (Case No. 15-02741, Docket No. 1584) (the “Sale Order” and the transactions
contemplated thereunder, the “Asset Acquisition”). Prior to the closing of the Asset Acquisition, the Company had no
operations and nominal assets. The Asset Acquisition closed on March 31, 2016. Upon closing of the Asset Acquisition and in
exchange for a portion of the outstanding first lien obligations of the Walter Energy Debtors, Walter Energy’s First Lien
Lenders were entitled to receive, on a pro rata basis, a distribution of Class A Units in Warrior Met Coal, LLC.
In connection with the Asset Acquisition, we conducted rights offerings to Walter Energy’s First Lien Lenders and
certain qualified unsecured creditors to purchase newly issued Class B Units of Warrior Met Coal, LLC, which diluted the
Class A Units on a pro rata basis (the “Rights Offerings”). Proceeds from the Rights Offerings were used to pay certain costs
associated with the Asset Acquisition and for general working capital purposes.
7
Corporate Conversion and IPO
On April 12, 2017, we completed the corporate conversion pursuant to which Warrior Met Coal, LLC was converted
into a Delaware corporation and renamed Warrior Met Coal, Inc.
On April 19, 2017, we completed our initial public offering (“IPO”) of 16,666,667 shares of common stock at a price to
the public of $19.00 per share. All of the shares were offered and sold by selling stockholders. We did not receive any of the net
proceeds from the IPO.
Our Competitive Strengths
We believe that we have the following competitive strengths:
Leading met coal producer focused on premium met coal products. Unlike other publicly-listed U.S. coal
companies, substantially all of our revenue is derived from the sale of premium met coal in the global seaborne markets. All of
our resources are primarily allocated to the mining, transportation and marketing of met coal. The premium HCC we produce at
Mine No. 4 and Mine No. 7 is of a similar quality to the HCC produced in Australia. The premium nature of our HCC makes it
ideally suited as a base feed coal for steel makers and results in price realizations near or above the Australian HCC Benchmark
or the new average industry index pricing methodology. The industry benchmark price was replaced in the second quarter by a
new average index pricing methodology, which varies by supplier, but was based on the three-month average of the Platts
premium low-volatile (“low-vol”) index, the Steel Index (“TSI”) premium coking coal index and the Argus Index on a one-
month lag during each quarter (the "Australian LV Index"). Coal from Mine No. 7 is classified as a premium LV HCC and coal
from Mine No. 4 is classified as premium LV to mid-volatility ("MV") HCC. The combination of low sulfur, low-to-medium
ash, LV to MV, and other characteristics of our coal, as well as our ability to blend them, makes our HCC product an important
component within our customers’ overall coking coal requirements. As a result, our realized price has historically been in line
with or at a slight discount to the Australian HCC Benchmark or, more recently, at a slight premium to the Australian LV Index.
Other publicly-listed U.S. coal companies sell a higher proportion of lower rank met coals, including high-volatility, semi-soft
coking coal (“SSCC”), and pulverized coal injection (“PCI”) coal. These lower rank coals typically have lower realized prices
compared to LV and MV met coals due to their relative availability and lower quality characteristics. For example, the premium
LV HCC that we produce has sold at a premium of 2%, 15%, 33% and 49% of the prices realized for MV, high-volatility, PCI
and SSCC coals, respectively, based on five-year average prices. Additionally, these companies typically have significant
thermal coal production that further reduces their realized price and operating margin per metric ton. As a result of our
premium met coal, we are able to achieve higher realized prices and operating margins relative to other U.S. met coal
producers.
Highly flexible cost structure protects through-the-cycle profitability. We have “variabilized” our cost structure in
our labor, royalties and logistics contracts, increasing the proportion of our cost structure that varies in response to changes in
the Australian HCC Benchmark prices or the Australian LV Index. Our initial CBA, combined with our flexible rail, port and
barge logistics and our royalty structure, results in a highly variable operating cost profile that allows our cash cost of sales to
move with changes in the price we realize for our coal. Approximately two-thirds of our cash cost of sales relate to the cost of
production at our mines, while the remaining one-third relates to our logistics costs from mine to port as well as royalties. Our
logistics costs are structured to reduce cash requirements in lower HCC price environments and to increase cash requirements
within a range with higher HCC prices. Our royalties are calculated as a percentage of the price we realize and therefore
increase or decrease with changes in HCC prices. Our initial CBA includes variable elements that tie compensation to HCC
prices. In addition, we can adjust our usage of continuous miner units in response to HCC pricing. Our variable cost structure
dramatically lowers our cash cost of sales if our realized price falls, while being effectively capped in higher price
environments allowing us to generate significant operating cash flow. Our highly flexible cost structure provides us with a key
competitive advantage relative to our competitors and which we expect should allow us to remain profitable in all coal market
conditions.
Significant logistical cost advantage to the seaborne market. Our two operating mines are located approximately
300 miles from our export terminal capacity in Mobile, Alabama and have multiple alternative transportation routes to move
our coal to port. These alternatives include direct rail access at the mine sites and a wholly-owned barge load-out facility,
enabling us to utilize the lowest cost option between the two at any given point in time. We believe our logistics costs are
highly competitive following negotiations in 2016 that led to a reduction in rail, barge and port costs. In addition, we have a
contract with the Port of Mobile, Alabama, that provides us up to 8.0 million metric tons of annual port capacity through July
2026 for our coal at very competitive rates. The total annual capacity of the McDuffie Coal Terminal at the Port of Mobile,
Alabama is approximately 27.2 million metric tons and this coal terminal is presently utilized for all of our coal exports. Our
proximity to port contrasts with the approximately 400-mile distances for major Central Appalachian met coal producers to
8
access their nearest port, the Port of Hampton Roads, Virginia. Our proximity to port and the flexibility of our logistics
networks underpin our logistical cost advantage compared to other U.S. met coal producers.
We sell our coal to a diversified customer base of blast furnace steel producers, primarily located in Europe, South
America and Asia. We enjoy a shipping time and distance advantage serving customers throughout the Atlantic Basin relative to
competitors located in Australia and Western Canada. This advantage results in a higher margin for our met coal. Our strategic
location is enhanced by our long-tenured, well-established customer portfolio, which includes significant recurring sales to
multiple customers in excess of 10 years.
High realized prices and low cost structure drive industry leading margins. The coal from our mines is competitive
in quality with the premium HCC produced in Australia, which is used to set quarterly pricing for the industry. The
combination of low sulfur, low-to-medium ash, LV to MV and high coking strength drives our consistently high price
realization relative to other U.S. met coal producers who typically focus on lower rank met coals. We believe Mine No. 4 and
Mine No. 7 are two of the lowest cost met coal mines in North America. Our low cost position is derived from our operations’
favorable geology, automated long-wall mining methods, and significant flexibility allowed under our initial CBA.
Additionally, given our highly flexible cost structure, we believe we will be able to maintain our industry leading margins in all
coal market conditions, which we expect should allow us to continue to outperform our competitors.
Clean balance sheet and tax asset to drive robust cash flow generation. Unlike other U.S. coal producers in our peer
group, we have no pension or OPEB legacy liabilities with manageable surety bond requirements. With minimal legacy
liabilities, we are not burdened by the annual fixed obligations that are typically associated with these types of liabilities. Our
clean balance sheet and its low sustaining capital expenditure requirements position us to generate strong cash flows across a
range of met coal price environments. Additionally, we expect our cash flows to benefit from a low cash tax rate as a result of
our significant NOLs. As a result of these tax assets, and the repeal of the corporate alternative minimum tax (“AMT”)
beginning after December 31, 2017 (see Note 8 to our consolidated financial statements included elsewhere in this Annual
Report), we believe our effective cash tax rate will be approximately 0%, exclusive of the AMT credit refunds, until our NOLs
generated prior to 2018 are fully utilized or expire, which will enable strong cash conversion from our operating profits. We
also expect to receive approximately $39.3 million in 2019 to 2022 as a result of the refunding of the AMT credits acquired
from the Predecessor.
Disciplined financial policies to ensure stable performance. We believe maintaining financial discipline will provide
us with the ability to manage the volatility in our business resulting from changes in met coal prices. We intend to preserve a
strong and conservative balance sheet, with sufficient liquidity and financial flexibility to support our operations. As such, we
will seek to maintain a conservative financial leverage target of 1.50-2.00x based on normalized EBITDA and seek to maintain
minimum liquidity of $100 million. We plan to continually evaluate our liquidity needs based on our estimated capital needs.
As of December 31, 2017, we had approximately $135.5 million of available liquidity consisting of $100.0 million of
borrowing capacity under the ABL Facility and $35.5 million of cash and cash equivalents. In the event we generate cash flow
in excess of the needs of our business, we plan to take a holistic approach to capital allocation and will evaluate a range of
options, including debt repayment. We will seek to preserve our capital structure with low financial leverage that is largely free
from legacy liabilities in order to ensure maximum free cash flow generation.
Highly experienced leadership team with deep industry expertise. Our Chief Executive Officer (“CEO”), Walter J.
Scheller, III, is the former CEO of Walter Energy and has six years of direct experience managing Mine No. 4 and Mine No. 7,
and over 30 years of experience in longwall coal mining. Furthermore, following the Asset Acquisition, we hired several key
personnel with extensive direct operational experience in met coal longwall mining, including our Chief Operating Officer,
Jack Richardson, and our Chairman, Stephen D. Williams. We have a strong record of operating safe mines and are committed
to environmental excellence. Our dedication to safety is at the core of all of our overall operations as we work to further reduce
workplace incidents by focusing on policy awareness and accident prevention. Our continued emphasis on enhancing our safety
performance has resulted in zero fatal incidents as compared to the national fatal incidence rate for underground coal mines in
the United States of 0.03 for the nine months ended September 30, 2017 as well as total reportable incidence rates of 3.50 at
Mine No. 4 and 3.54 at Mine No. 7 for the year ended December 31, 2017, which are considerably lower than the national total
reportable incidence rate for all underground coal mines in the United States of 5.29 for the nine months ended September 30,
2017, which represents the latest data available.
9
Our Business Strategies
Our objective is to increase stockholder value through our continued focus on asset optimization and cost management
to drive profitability and cash flow generation. Our key strategies to achieve this objective are described below:
Maximize profitable production. In the year ended December 31, 2017, we produced 6.1 million metric tons of met
coal from Mine No. 7 and Mine No. 4. We have the flexibility in our new initial CBA that allows us to increase annual
production with relatively modest incremental capital expenditures. We operated at an annual combined production level of
7.3 million metric tons from Mine No. 4 and Mine No. 7 as recently as 2013. Based on our management’s operational
experience, we are confident in our ability to produce at or close to this capacity in a safe and efficient manner, and with a
comparable cost profile to our current costs, should market conditions warrant.
Maintain and further improve our low-cost operating cost profile. While we have already achieved significant
structural cost reductions at our two operating mines, we see further opportunities to reduce our costs over time. Our initial
CBA with the UMWA allows for these ongoing cost optimization initiatives. For example, in our initial CBA, we have
additional flexibility in our operating days and alternative work schedules as compared to certain optional and more expensive
provisions under the Walter Energy collective bargaining agreement. We have variable elements that tie compensation to HCC
prices. Additionally, our CBA enables us to contract out work under certain circumstances. We believe these types of structural
incentive provisions and workforce flexibility in the initial CBA are helpful to further align our organization with operational
excellence and to increase the proportion of our costs that vary in response to changes in the HCC price.
Broaden our marketing reach and maintain strong correlation between realized coal prices and the Australian
LV Index. We have implemented a strategy to improve both our sales and marketing focus, with a goal of achieving better
pricing relative to the Australian LV Index average price, which includes: (i) opportunistic selling into the spot met coal market
and (ii) selected instances of entering into longer term fixed price contracts. Each of these elements is intended to further
embed our coal product among a broader group of steel customers. Traditionally, we have predominantly marketed our coal to
European and South American buyers. However, we expect to increase our focus on Asian customers, in particular, Japanese
steel mills, some of which have expressed a desire to diversify their supply of premium HCC away from Australian coals. For
the year ended December 31, 2017, our geographic customer mix was 63% in Europe, 23% in South America and 14% in Asia.
Since February 2017, we have had an arrangement with Xcoal Energy & Resource (“Xcoal”) to serve as Xcoal’s strategic
partner for exports of LV HCC. Under this arrangement, Xcoal takes title to and markets coal that we would historically have
sold on the spot market, in an amount of the greater of (i) 10% of our total production during the applicable term of the
arrangement or (ii) 250,000 metric tons. While the volumes being sold through this arrangement with Xcoal are relatively
limited, we are positioned to potentially benefit from Xcoal’s expertise and relationships across all coal that we sell. To that
end, we also have an incentive-based arrangement with Xcoal to cover other tonnage, in the event Xcoal is able to offer us a
higher realized price relative to the Australian LV Index than we have previously achieved.
Description of Our Business
Our mining operations consist of two active underground met coal mines in Southern Appalachia’s coal seam (Mines
No. 7 and No. 4) and other surface met and thermal coal mines, five of which are currently under lease to third parties and four
of which are not operating and are not currently planned to be operated in the future. For a comprehensive summary of all of
our coal properties and of our coal reserves and production levels as of December 31, 2017, see the tables summarizing our
coal reserves and production in “Part I, Item 2. Properties-Estimated Recoverable Coal Reserves.” Our met coal production
totaled 6.1 million metric tons in 2017. Our natural gas operations remove and sell natural gas from the coal seams owned or
leased by us and others as a byproduct of coal production. Our degasification operations improve mining operations and safety
by reducing natural gas levels in our mines.
Our underground mining operations are headquartered in Brookwood, Alabama and as of December 31, 2017, based on
a reserve report prepared by Marshall Miller, were estimated to have approximately 110.0 million metric tons of recoverable
reserves located in west central Alabama between the cities of Birmingham and Tuscaloosa. Operating at approximately 2,000
feet below the surface, the Mines No. 4 and No. 7 are two of the deepest underground coal mines in North America. The met
coal is mined using longwall extraction technology with development support from continuous miners. We extract met coal
primarily from Alabama’s Blue Creek coal seam, which contains high-quality bituminous coal. Blue Creek coal offers high
coking strength with low coking pressure, low sulfur and low-to-medium ash content.
The met coal from our Mines No. 4 and No. 7 is sold as a high quality LV and MV met coal. Mines No. 4 and No. 7 are
located near Brookwood, Alabama, and are serviced by CSX railroad. A coal producer is typically responsible for transporting
the coal from the mine to an export coal-loading facility. Exported coal is usually sold at the loading port, with the buyer
10
responsible for further transportation from the port to their location. Both mines also have access to our barge load-out facility
on the Black Warrior River. Service via both rail and barge culminates in delivery to the Port of Mobile in Mobile, Alabama,
where shipments are exported to our international customers via ocean vessels. Substantially all of our met coal sales consist of
sales to international customers. We also own mineral rights for approximately 103.0 million additional metric tons of
recoverable reserves at our Blue Creek Energy Mine located to the northwest of the Mine No. 4, based on a reserve report
prepared by Norwest. The related mineral leases form the core of the project to be operated by Warrior Met Coal BCE, LLC, an
indirect subsidiary of the Company, which project contemplates the development of a new underground met coal mine that has
an estimated life of greater than 30 years. We refer to the underground met coal mine related to this project as the “Blue Creek
Energy Mine.”
Coal Preparation and Blending
Our met coal mines have preparation and blending facilities convenient to each mine. The met coal preparation and
blending facilities receive, blend, process and ship met coal that is produced from the mines. Using these facilities, we are able
to ensure a consistent quality and efficiently blend our met coal to meet our customers’ specifications.
Marketing, Sales and Customers
Met coal prices differ substantially by region and are impacted by many factors, including the overall economy, demand
for steel, location, market, quality and type of met coal, mine operation costs and the cost of customer alternatives. The major
factors influencing our business are the global economy and demand for steel. Our operations’ high quality met coal is
considered among the highest quality met coals in the world and is preferred as a base met coal in our customers’ blends. Our
marketing strategy is to focus on international markets mostly in Europe and South America where we have a shipping time
and distance advantage and where our met coal is in demand.
We focus on long-term customer relationships where we have a competitive advantage. We sell most of our met coal
under fixed supply contracts primarily with pricing terms of three months and volume terms of up to one year. Some of our
sales of met coal can, however, occur in the spot market as dictated by available supply and market demand. Our business is not
substantially dependent on any contract, such as a contract to sell the major part of our products or other agreement to use a
patent, formula, trade secret, process or trade name upon which our business depends to a material extent. For more
information regarding our customers, see Note 2 to our consolidated financial statements included elsewhere in this Annual
Report.
We have an arrangement with Xcoal to serve as Xcoal’s strategic partner for exports of LV HCC. Xcoal has specialized
marketing capabilities and deep technical expertise as the largest met coal marketer in the United States. Our arrangement with
Xcoal is expected to expand the geographic reach of our customers through Xcoal’s global presence. Xcoal has 16 offices
worldwide, including in Brussels, the UAE, Singapore, Beijing, Shanghai, Seoul, Mumbai, and Rio de Janeiro. We expect to be
able to leverage Xcoal’s more than 30 year history selling coal to key European and Asian steel customers to further improve
the selling prices of our met coal relative to the global Australian LV Index.
Trade Names, Trademarks and Patents
As part of the Asset Acquisition, we acquired all intellectual property, including copyrights, patents, trademarks, trade
names and trade secrets, owned by the Walter Energy Debtors and used or held for use in the business or our assets. Promptly
following the closing of the Asset Acquisition, each Walter Energy Debtor, including Walter Energy, was required to
discontinue the use of its name (and any other trade names or “d/b/a” names currently utilized by the Walter Energy Debtors)
and may not subsequently change its name to or otherwise use or employ any name which includes the words “Walter.” We do
not believe that any one such trademark is material to our individual segments or to the business as a whole.
Competition
Substantially all of our met coal sales are exported. Our major competitors are businesses that sell into our core
business areas of Europe and South America. We primarily compete with producers of premium met coal from Australia,
Canada, Russia and the United States. The principal factors on which we compete are met coal prices at the port of delivery,
coal quality and characteristics, customer relationships and the reliability of supply. The demand for our met coal is
significantly dependent on the general global economy and the worldwide demand for steel. Although there are significant
challenges in the current economy, we believe that we have competitive strengths in our business areas that provide us with
distinct advantages.
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Suppliers
Supplies used in our business include petroleum-based fuels, explosives, tires, conveyance structure, ventilation
supplies, lubricants and other raw materials as well as spare parts and other consumables used in the mining process. We use
third-party suppliers for a significant portion of our equipment rebuilds and repairs, drilling services and construction. We
believe adequate substitute suppliers are available and we are not dependent on any one supplier; however, we procure some
equipment from a 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. We
continually seek to develop relationships with suppliers that focus on reducing our costs while improving quality and service.
Environmental and Regulatory Matters
Our businesses are subject to numerous federal, state and local laws and regulations with respect to matters such as
permitting and licensing, employee health and safety, reclamation and restoration of property and protection of the
environment. In the U.S., environmental laws and regulations include, but are not limited to, the federal Clean Air Act and its
state and local counterparts with respect to air emissions; the Clean Water Act and its state counterparts with respect to water
discharges and dredge and fill operations; the Resource Conservation and Recovery Act and its state counterparts with respect
to solid and hazardous waste generation, treatment, storage and disposal, as well as the regulation of underground storage
tanks; the Comprehensive Environmental Response, Compensation and Liability Act and its state counterparts with respect to
releases, threatened releases and remediation of hazardous substances; the Endangered Species Act with respect to protection of
threatened and endangered species; the National Environmental Policy Act with respect to the impacts of federal actions such
as the issuance of permits and licenses; and the Surface Mining Control and Reclamation Act of 1977 and its state counterparts
with respect to environmental protection and reclamation standards for mining activities. Compliance with these laws and
regulations may be costly and time-consuming and may delay commencement, continuation or expansion of exploration or
production at our operations. These laws are constantly evolving and may become increasingly stringent. The ultimate impact
of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain
implementing regulations for these environmental laws have not yet been promulgated and in certain instances are undergoing
revision or judicial review. These laws and regulations, particularly new legislative or administrative proposals (or judicial
interpretations of existing laws and regulations) related to the protection of the environment, could result in substantially
increased capital, operating and compliance costs and could have a material adverse effect on our operations and/or, along with
analogous foreign laws and regulations, our customers’ ability to use our products.
Due in part to the extensive and comprehensive regulatory requirements, along with changing interpretations of these
requirements, violations occur from time to time in our industry and at our operations. Expenditures relating to environmental
compliance are a major cost consideration for our operations and environmental compliance is a significant factor in mine
design, both to meet regulatory requirements and to minimize long-term environmental liabilities. To the extent that these
expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, operating results will be
reduced. We believe that our major North American competitors are confronted by substantially similar conditions and thus do
not believe that our relative position with regard to such competitors is materially affected by the impact of environmental laws
and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and
regulations may have an adverse effect on our competitive position with regard to foreign producers and operators who may not
be required to undertake equivalent costs in their operations. In addition, the specific impact on each competitor may vary
depending on a number of factors, including the age and location of its operating facilities, applicable legislation and its
production methods.
Permitting and Approvals
Numerous governmental permits and approvals are required for mining and natural gas operations. We are required to
prepare and present to federal, state and local authorities data pertaining to the effect or impact that any proposed exploration
project for production of coal or gas may have on the environment, the public and our employees. In addition, we must also
submit a comprehensive plan for mining and reclamation upon the completion of mining operations. The requirements are
costly and time-consuming and may delay commencement or continuation of exploration, production or expansion at our
operations. Typically we submit necessary mining permit applications several months, or even years, before we anticipate
mining a new area.
Applications for permits and permit renewals at our mining and gas operations are subject to public comment and may
be subject to litigation from third parties seeking to deny issuance of a permit or to overturn the applicable agency’s grant of the
permit application, which may also delay commencement, continuation or expansion of our mining and gas operations. Further,
regulations provide that applications for certain permits or permit modifications in the U.S. can be delayed, refused or revoked
12
if an officer, director or a stockholder with a 10% or greater interest in the entity is affiliated with or is in a position to control
another entity that has outstanding permit violations or has had a permit revoked. Significant delays in obtaining, or denial of,
permits could have a material adverse effect on our business.
Mine Safety and Health
The MSHA, under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) and the Mine Improvement and
New Emergency Response Act of 2006 (the “MINER Act”), as well as regulations adopted under these federal laws impose
rigorous safety and health standards on mining operations. Such standards are comprehensive and affect numerous aspects of
mining operations, including, but not limited to: training of mine personnel, mining procedures, ventilation, blasting, use of
mining equipment, dust and noise control, communications and emergency response procedures. For instance, MSHA
implemented a rule in August 2014 to reduce miners’ exposure to respirable coal dust, which reduced respirable dust standards
for certain occupants and miners and required certain monitoring of shift dust levels. In August 2016, Phase III of MSHA’s
respirable dust rule went into effect, further lowering the respirable dust standards. Separately, MSHA has implemented a rule
imposing a requirement on certain continuous mining machines, requiring operators to provide proximity detection systems.
MSHA monitors compliance with these laws and standards by regularly inspecting mining operations and taking enforcement
actions where MSHA believes there to be non-compliance. These federal mine safety and health laws and regulations have a
significant effect on our operating costs.
Workers’ Compensation and Black Lung
We are insured for workers’ compensation benefits for work related injuries that occur within our operations. Workers’
compensation liabilities, including those related to claims incurred but not reported, are recorded principally using annual
valuations based on discounted future expected payments using historical data of the operating subsidiary or combined
insurance industry data when historical data is limited. In addition, certain of our subsidiaries are responsible for medical and
disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969, the Mine Act and the
Black Lung Benefits Revenue Act of 1977 and the Black Lung Benefits Reform Act of 1977 (together, the “Black Lung
Benefits Act”), each as amended, and are insured beginning on April 1, 2016 for black lung claims of any of our employees. In
addition, we assumed all of the black lung liabilities of Walter Energy and its U.S. subsidiaries and are self-insured against such
black lung related claims. For additional information, please see “Part I, Item 1A. Risk Factors-Risks Related to Our Business-
We are responsible for medical and disability benefits for black lung disease under federal law. We assumed certain historical
self-insured black lung liabilities of Walter Energy and its subsidiaries incurred prior to April 1, 2016 in connection with the
Asset Acquisition. We are self-insured for these black lung liabilities and have posted certain collateral with Department of
Labor as described below. Changes in the estimated claims to be paid or changes in the amount of collateral required by the
Department of Labor may have a greater impact on our profitability and cash flows in the future.” Under the Black Lung
Benefits Act, as amended, each coal mine operator must make payments to a trust fund for the payment of benefits and medical
expenses to claimants who last worked in the coal industry prior to January 1, 1970. The trust fund is funded by an excise tax
on production; however, this excise tax does not apply to coal shipped outside the United States. Based on our limited sales of
coal in the United States, we do not expect to incur a material expense related to this excise tax. However, the excise tax may
result in a material expense to us in the future if our coal sales in the United States significantly increase. The Patient Protection
and Affordable Care Act includes significant changes to the federal black lung program, including an automatic survivor benefit
paid upon the death of a miner with an awarded black lung claim and the establishment of a rebuttable presumption with regard
to pneumoconiosis among miners with 15 or more years of coal mine employment that are totally disabled by a respiratory
condition. These changes could have a material impact on our costs expended in association with the federal black lung
program. In addition to possibly incurring liability under federal statutes we may also be liable under state laws for black lung
claims.
Surface Mining Control and Reclamation Act
The Surface Mining Control and Reclamation Act of 1977 (“SMCRA”) requires that comprehensive environmental
protection and reclamation standards be met during the course of and following completion of mining activities. Permits for all
mining operations must be obtained from the Federal Office of Surface Mining Reclamation and Enforcement (“OSM”) or,
where state regulatory agencies have adopted federally approved state programs under the SMCRA, the appropriate state
regulatory authority. The Alabama Surface Mining Commission reviews and approves SMCRA permits in Alabama.
SMCRA permit provisions include requirements for coal prospecting, mine plan development, topsoil removal, storage
and replacement, selective handling of overburden materials, mine pit backfilling and grading, subsidence control for
underground mines, surface drainage control, mine drainage and mine discharge control, treatment and revegetation. These
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requirements seek to limit the adverse impacts of coal mining and more restrictive requirements may be adopted from time to
time.
Before a SMCRA permit is issued, a mine operator must submit a bond or otherwise secure the performance of
reclamation obligations. The Abandoned Mine Land Fund, which is part of SMCRA, imposes a general funding fee on all coal
produced. The proceeds are used to reclaim mine lands closed or abandoned prior to 1977. On December 7, 2006, the
Abandoned Mine Land Program was extended for another 15 years.
We maintain extensive coal refuse areas and slurry impoundments at our mining complexes. Such areas and
impoundments are subject to comprehensive regulation. Structural failure of an impoundment can result in damage to the
environment and natural resources, such as bodies of water that the coal slurry reaches, as well as create liability for related
personal injuries, property damages and injuries to wildlife. Some of our impoundments overlie mined out areas, which can
pose a heightened risk of failure and the assessment of damages arising out of such failure. If one of our impoundments were to
fail, we could be subject to substantial claims for the resulting environmental contamination and associated liability, as well as
for related fines and penalties.
On December 12, 2008, the OSM finalized rulemaking regarding the interpretation of the stream buffer zone provisions
of SMCRA, which confirmed that excess spoil from mining and refuse from coal preparation could be placed in permitted
areas of a mine site that constitute waters of the U.S. The rule was subsequently vacated based, in part, upon the fact that the
U.S. Fish & Wildlife Service was not consulted with respect to possible effects on endangered species under terms of the
Endangered Species Act. At present, an earlier 1983 rule is in place, which requires coal companies to keep operations 100 feet
from streams or otherwise minimize any damage. On December 20, 2016, the OSM published a new, finalized “Stream
Protection Rule,” setting standards for “material damage to the hydrologic balance outside the permit area” that are applicable
to surface and underground mining operations. However, on February 16, 2017, President Trump signed a joint congressional
resolution disapproving the Stream Protection Rule pursuant to the Congressional Review Act. Accordingly, the regulations in
effect prior to the Stream Protection Rule apply, including OSM’s 1983 rule. It remains unclear whether and how additional
actions by the Trump Administration could further impact regulatory or enforcement activities pursuant to the SMCRA.
Drainage flowing from or caused by mining activities can be acidic with elevated levels of dissolved metals, a
condition referred to as “acid mine drainage” (“AMD”). Treatment of AMD can be costly. Although we do not currently face
material costs associated with AMD, there can be no assurance that we will not incur significant costs in the future.
Surety Bonds/Financial Assurance
We use 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. The amount of security required to
be obtained can change as the result of new federal or state laws, as well as changes to the factors used to calculate the bonding
or security amounts.
Surety bond rates have increased in recent years and the market terms of such bonds have generally become less
favorable. In addition, the number of companies willing to issue surety bonds has decreased. Bonding companies may also
require posting of collateral, typically in the form of letters of credit to secure the surety bonds. Moreover, the changes in the
market for coal used to generate electricity in recent years have led to bankruptcies involving prominent coal producers.
Several of these companies relied on self-bonding to guarantee their responsibilities. In response to these bankruptcies, the
OSM issued a Policy Advisory in August 2016 to state agencies that are authorized under the SMCRA to implement the act in
their states, notifying those state agencies that the OSM would more closely review self-bonding arrangements. Certain states
had previously announced that they would no longer accept self-bonding to secure reclamation obligations under the state
mining laws. This Policy Advisory may discourage authorized states from approving self-bonding arrangements and may lead
to increased demand for other forms of financial assurance, which may strain capacity for those instruments and increase our
costs of obtaining and maintaining the amounts of financial assurance needed for our operations. In addition, the OSM
announced in August 2016 that it would initiate a rulemaking under SMCRA to revise the requirements for self-bonding.
Individually and collectively, these revised various financial assurance requirements may increase the amount of financial
assurance needed and limit the types of acceptable instruments, straining the capacity of the surety markets to meet demand.
This may increase the time required to obtain, and increase the cost of obtaining, the required financial assurances. On October
24, 2017, the OSM announced that it would revisit the need for and scope of any potential rulemaking, and that it would
reconsider the scope of the Policy Advisory. Although Alabama’s regulatory framework technically allows for self-bonding, as
a practical matter, due to the onerous regulatory requirements for self-bonding, mining companies in Alabama utilize surety
bonds, collateral bonds, or letters of credit to meet their financial assurance requirements. As of December 31, 2017 we had
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outstanding surety bonds with parties for post-mining reclamation at all of our U.S. mining operations totaling $38.1 million,
and $2.1 million for miscellaneous purposes.
Climate Change
Global climate change continues to attract considerable public and scientific attention, with widespread concern about
the impacts of human activity, especially the emission of greenhouse gas (“GHG”), such as carbon dioxide and methane. Some
of our operations, such as methane release resulting from met coal mining, directly emit GHGs. Further, the products that we
produce result in the release of carbon dioxide into the atmosphere by end-users. Laws and regulations governing emissions of
GHGs have been adopted by foreign governments, including the European Union and member countries, U.S. regulatory
agencies, individual states in the U.S. and regional governmental authorities. While Congress has from time to time considered
legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce
GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, almost one-half of the
states have taken legal measures to reduce emissions of GHGs primarily through the planned development of GHG emission
inventories and/or regional GHG cap and trade programs. Further, numerous proposals have been made and are likely to
continue to be made at the international, national, regional and state levels of government that are intended to limit emissions of
GHGs by enforceable requirements and voluntary measures.
In December 2009, the EPA published findings that GHG emissions present an endangerment to public health and
welfare because, according to the EPA, emissions of such gases contribute to warming of the earth’s atmosphere and other
climatic changes. The EPA’s findings focus on six GHGs, including carbon dioxide and nitrous oxide (which are emitted from
coal combustion) and methane (which is emitted from coal beds). The findings by the EPA allowed the agency to proceed with
the adoption and implementation of regulations to restrict emissions of GHGs under existing provisions of the federal Clean Air
Act, including rules that regulate emissions of GHGs from motor vehicles and certain large stationary sources of emissions
such as power plants or industrial facilities. In May 2010, the EPA adopted regulations that, among other things, established
Prevention of Significant Deterioration (“PSD”) and Title V permit reviews for certain large stationary sources, such as coal-
fueled power plants, that are potential major sources of GHG emissions. The so-called Tailoring Rule established new GHG
emissions thresholds that determine when stationary sources must obtain permits under the PSD and Title V programs of the
Clean Air Act. On June 23, 2014, the Supreme Court held that stationary sources could not become subject to PSD or Title V
permitting solely by reason of their GHG emissions. The Court ruled, however, that the EPA may require installation of best
available control technology for GHG emissions at sources otherwise subject to the PSD or Title V programs. On August 26,
2016, the EPA proposed changes needed to bring EPA’s air permitting regulations in line with Supreme Court and D.C. Circuit
decisions on greenhouse gas permitting. The proposed rule was published in the Federal Register on October 3, 2016 and the
public comment period closed on December 16, 2016. It is unclear when a final rule will be issued and/or whether and how
additional actions by the Trump Administration could impact further regulatory developments in this area.
In June 2010, Earthjustice petitioned the EPA to make a finding that emissions from coal mines may reasonably be
anticipated to endanger public health and welfare, and to list them as a stationary source subject to further regulation of
emissions. On April 30, 2013, the EPA denied the petition. Judicial challenges seeking to force the EPA to list coal mines as
stationary sources have likewise been unsuccessful to date. If the EPA were to make an endangerment finding in the future, we
may have to further reduce our methane emissions, install additional air pollution controls, pay certain taxes or fees for our
emissions, incur costs to purchase credits that permit us to continue operations as they now exist at our underground coal mines
or perhaps curtail coal production.
In addition, in August 2015, the EPA announced three separate, but related, actions to address carbon dioxide pollution
from power plants, including final Carbon Pollution Standards for new, modified and reconstructed power plants, a final Clean
Power Plan to cut carbon dioxide pollution from existing power plants, and a proposed federal plan to implement the Clean
Power Plan emission guidelines. Upon publication of the Clean Power Plan on October 23, 2015, more than two dozen states as
well as industry and labor groups challenged the Clean Power Plan in the D.C. Circuit Court of Appeals. On February 9, 2016,
the U.S. Supreme Court stayed the Clean Power Plan pending disposition of the legal challenges. In addition, on March 28,
2017, President Trump signed an executive order directing the EPA to review all three actions and, if appropriate, initiate a
rulemaking to rescind or revise the rules consistent with the stated policy of promoting clean and safe development of the
nation’s energy resources, while at the same time avoiding regulatory burdens that unnecessarily encumber energy production.
On October 16, 2017, the EPA published a proposed rule to repeal the Clean Power Plan and, on December 28, 2017, the EPA
published an advanced notice of proposed rulemaking soliciting public comment on a potential replacement rule. If the Clean
Power Plan is not repealed or modified by the EPA, and if it ultimately is retained in its current form, it could have a material
adverse impact on the demand for thermal coal nationally. While the Clean Power Plan does not affect our marketing of met
coal, the continued regulatory focus could lead to future GHG regulations for the mining industry and its steelmaking
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customers, which ultimately could make it more difficult or costly for us to conduct our operations or adversely affect demand
for our products.
Furthermore, on January 15, 2016, the Secretary of Interior directed the Bureau of Land Management to prepare an
environmental study analyzing potential leasing and management reforms to the current federal coal program, including how
best to address the climate impacts of the federal program to meet both the nation’s energy needs and its climate goals. Pending
this review, the Secretary placed a moratorium on new applications for thermal (steam) coal leases or lease modification on
federal land, subject to certain exceptions. However, pursuant to President Trump’s March 28, 2017 executive order, on
March 29, 2017, the Secretary of Interior reversed these actions, halting the environmental study, lifting the moratorium, and
directing the Bureau of Land Management to expeditiously process coal lease applications. Several states and environmental
groups have challenged these actions, asserting that environmental review was required before restarting the coal leasing
program. While the moratorium did not affect our operations, any renewed regulatory focus could lead to future GHG
regulations for the mining industry and its steelmaking customers, which could ultimately make it more difficult or costly for us
to conduct our operations or adversely affect demand for our products.
Demand for met coal and natural gas also may be impacted by international efforts to reduce GHG emissions. In
December 2015, the United States joined the international community at the 21st Conference of the Parties of the United
Nations Framework Convention on Climate Change in Paris, France. The text of the Paris Agreement calls for nations to
undertake “ambitious efforts” to hold the increase in the global average temperature to well below 2º C above pre-industrial
levels and pursue efforts to limit the temperature increase to 1.5º C above pre-industrial levels; reach global peaking of GHG
emissions as soon as possible; and take action to conserve and enhance sinks and reservoirs of GHGs, among other
requirements. The Paris Agreement went into effect on November 4, 2016. The Paris Agreement establishes a framework for
the parties to cooperate and report actions to reduce GHG emissions. However, on June 1, 2017, President Trump announced
that the United States would withdraw from the Paris Agreement, and begin negotiations to either re-enter or negotiate an
entirely new agreement with more favorable terms for the United States. The Paris Agreement sets forth a specific exit process,
whereby a party may not provide notice of its withdrawal until three years from the effective date, with such withdrawal taking
effect one year from such notice. It is not clear what steps the Trump Administration plans to take to withdraw from the Paris
Agreement, whether a new agreement can be negotiated, or what terms would be included in such an agreement. Furthermore,
in response to the announcement, many state and local leaders have stated their intent to intensify efforts to uphold the
commitments set forth in the international accord. It is possible that the Paris Agreement and subsequent domestic and
international regulations will have adverse effects on the market for met coal, natural gas, and other fossil fuel products.
Methane must be expelled from our underground coal mines for mining safety reasons. Our gas operations extract
methane from our underground met coal mines prior to mining. With the exception of some methane that is vented into the
atmosphere when the met coal is mined, much of the methane is captured and sold into the natural gas market and used as fuel.
If regulation of GHG emissions does not exempt the release of methane, we may have to curtail met coal production, pay
certain taxes or fees for our emissions or incur costs to purchase credits that allow us to continue operations as they now exist at
our underground met coal mines.
The existing laws and regulations or other current and future efforts to stabilize or reduce GHG emissions could
adversely impact the demand for, price of and value of our products and reserves. As our operations also emit GHGs directly,
current or future laws or regulations limiting GHG emissions could increase our own costs. Although the potential impacts on
us of additional climate change regulation are difficult to reliably quantify, they could be material.
Finally, climate change may cause more extreme weather conditions such as more intense hurricanes, thunderstorms,
tornadoes and snow or ice storms, as well as rising sea levels and increased volatility in seasonal temperatures. Extreme
weather conditions can interfere with our services and increase our costs, and damage resulting from extreme weather may not
be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased
storm or weather hazards affecting our operations.
Clean Air Act
The federal Clean Air Act and comparable state laws that regulate air emissions affect coal mining operations both
directly and indirectly. Direct impacts on coal mining may occur through permitting requirements and/or emission control
requirements relating to particulate matter, such as fugitive dust, or fine particulate matter measuring 2.5 micrometers in
diameter or smaller. The Clean Air Act indirectly affects our mining operations by extensively regulating the air emissions of
sulfur dioxide, nitrogen oxides, mercury, ozone and other compounds emitted by steel manufacturers, coke ovens and coal-fired
utilities. As described above, existing and proposed regulations also subject GHG emissions to regulation under the Clean Air
Act.
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Clean Water Act
The federal CWA and corresponding state and local laws and regulations affect our operations by restricting the
discharge of pollutants, including dredged and fill materials, into waters of the United States. CWA requirements that may
directly or indirectly affect our operations include the following:
• Water Discharge. The CWA and corresponding state laws affect our operations by imposing restrictions on discharges
of wastewater into creeks and streams. These restrictions, more often than not, require us to pre-treat the wastewater
prior to discharging it. Permits requiring regular monitoring and compliance with effluent limitations and reporting
requirements govern the discharge of pollutants into regulated waters. Our mining operations maintain water discharge
permits as required under the National Pollutant Discharge Elimination System program of the CWA. We believe that
we have obtained all permits required under the CWA and corresponding state laws and are in substantial compliance
with such permits. However, new requirements under the CWA and corresponding state laws may cause us to incur
significant additional costs that could adversely affect our operating results. For instance, stringent water quality
standards for materials such as selenium have recently been issued. We have begun to incorporate these new
requirements into our current permit applications; however, there can be no guarantee that we will be able to meet
these or any other new standards with respect to our permit applications.
• Dredge and Fill Permits. Many mining activities, such as the development of refuse impoundments, fresh water
impoundments, refuse fills, and other similar structures, may result in impacts to waters of the United States, including
wetlands, streams and, in certain instances, man-made conveyances that have a hydrologic connection to such streams
or wetlands. Under the CWA, coal companies are required to obtain a Section 404 permit from the U.S. Army Corps of
Engineers (“USACE”) prior to conducting such mining activities. The USACE is authorized to issue general
“nationwide” permits for specific categories of activities that are similar in nature and that are determined to have
minimal adverse effects on the environment. Permits issued pursuant to Nationwide Permit 21 generally authorize the
disposal of dredged and fill material from surface coal mining activities into waters of the United States, subject to
certain restrictions. The USACE may also issue individual permits for mining activities that do not qualify for
Nationwide Permit 21.
Recent regulatory actions and court decisions have created some uncertainty over the scope of CWA jurisdiction. On
June 29, 2015, the EPA and the USACE jointly promulgated final rules redefining the scope of waters protected under the
CWA, revising regulations that had been in place for more than 25 years. The new rules may expand the scope of CWA
jurisdiction, making more waters subject to the CWA’s permitting and other requirements in the case of discharges. Following
its promulgation, numerous industry groups, states, and environmental groups challenged the rules. On October 9, 2015, a
federal appeals court stayed the rules’ implementation nationwide, but it is expected to lift the stay in response to a January 22,
2018 decision by the Supreme Court that the appeals court lacked jurisdiction to decide the matter. Further, on February 28,
2017, President Trump signed an executive order directing the relevant executive agencies to review the rules and to conduct
notice and comment rulemaking to rescind or revise them, as appropriate under the stated policies of protecting navigable
waters from pollution while promoting economic growth, reducing uncertainty, and showing due regard for Congress and the
states. On July 27, 2017, the EPA and the USACE published a proposed rule to rescind the 2015 rules and, February 6, 2018, in
response to the January 2018 Supreme Court decision, the agencies published a final rule to maintain the status quo (the
pre-2015 rule) through February 6, 2020 pending the agencies' review of the 2015 rules. Multiple states and environmental
groups have filed challenges to this delay. It remains unclear whether and how the rules will be implemented, what litigation
may result, and whether changes proposed by the Trump Administration could further impact regulatory developments in this
area.
Resource Conservation and Recovery Act
The Resource Conservation and Recovery Act (“RCRA”) and corresponding state laws establish standards for the
management of solid and hazardous wastes generated at our various facilities. Besides affecting current waste disposal
practices, RCRA also addresses the environmental effects of certain past hazardous waste treatment, storage and disposal
practices. In addition, RCRA also requires certain of our facilities to evaluate and respond to any past release, or threatened
release, of hazardous waste that may pose a risk to human health or the environment.
RCRA may affect coal mining operations by establishing requirements for the proper management, handling,
transportation and disposal of solid and hazardous wastes. Currently, certain coal mine wastes, such as earth and rock covering
a mineral deposit (commonly referred to as overburden) and coal cleaning wastes, are exempted from hazardous waste
management under RCRA. Any change or reclassification of this exemption could significantly increase our coal mining costs.
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On April 17, 2015, the EPA published its final power plant coal ash disposal rule. The rule regulates coal ash as a solid
waste under Subtitle D of RCRA. The rule requires closure of sites that fail to meet prescribed engineering standards, requires
regular inspections of impoundments, establishes limits on the location of new sites, and requires immediate remediation and
closure of unlined ponds that are polluting ground water. However, the rule gives states flexibility on how to implement and
enforce the rule and allows citizen suits to be filed against coal ash pond operators. The rule does not regulate closed coal ash
impoundments unless located at active power plants. On September 13, 2017, the EPA announced that it would reconsider
certain provisions of the 2015 rule as requested by industry groups. If the rule is implemented in its current form, it likely will
impose added costs for coal-fired power plants and may adversely affect the demand for coal.
Comprehensive Environmental Response, Compensation and Liability Act
The Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) and
similar state laws affect our met coal mining operations by, among other things, imposing investigation and cleanup
requirements for threatened or actual releases of hazardous substances. Under CERCLA, joint and several liability may be
imposed on operators, generators, site owners, lessees and others regardless of fault or the legality of the original activity that
caused or resulted in the release of the hazardous substances. Although the EPA excludes most wastes generated by coal mining
and processing operations from the hazardous waste laws, the universe of materials and substances governed by CERCLA is
broader than “hazardous waste” and as such even non-hazardous wastes can, in certain circumstances, contain hazardous
substances, which if released into the environment are governed by CERCLA. Alabama’s version of CERCLA mirrors the
federal version with the important difference that there is no joint and several liability. Liability is consistent with one’s
contribution to the contamination. In addition, the disposal, release or spilling of some products used by coal companies in
operation, such as chemicals, could trigger the liability provisions of CERCLA or similar state laws. Thus, we may be subject
to liability under CERCLA and similar state laws for properties that (1) we currently own, lease or operate, (2) we, our
predecessors, or former subsidiaries have previously owned, leased or operated, (3) sites to which we, our predecessors or
former subsidiaries, sent waste materials, and (4) sites at which hazardous substances from our facilities’ operations have
otherwise come to be located.
Endangered Species Act and Similar Laws
The federal Endangered Species Act and other related federal and state statutes, such as the federal Bald and Golden
Eagle Protection Act, protect species threatened or endangered with possible extinction. Protection of threatened, endangered
and other special status species may have the effect of prohibiting or delaying us from obtaining mining permits and may
include restrictions on our activities in areas containing the affected species. Also, the designation of previously unidentified
threatened, endangered or special status species in areas where we operate could cause us to incur additional costs or become
subject to operating delays, restrictions or bans.
Seasonality
Our primary business is not materially impacted by seasonal fluctuations. Demand for met coal is generally more
heavily influenced by other factors such as the global economy, demand for steel, interest rates and commodity prices.
Employees and Labor
As of December 31, 2017, we had 1,354 employees, of whom 957 were hourly employees and 397 were salaried
employees, and of whom approximately 69% were covered by the UMWA CBA, which expires on March 31, 2021. We have
not had any union-organized work stoppages since our inception. We believe that we have good relationships with our
employees and with the unions representing our employees.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You
may read and copy any documents filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Our filings with the SEC are also available to the public from commercial document retrieval services and at
the SEC’s website at http://www.sec.gov.
Our common stock is listed and traded on the New York Stock Exchange under the symbol “HCC.” Our reports, proxy
statements and other information filed with the SEC can also be inspected and copied at the New York Stock Exchange, 20
Broad Street, New York, New York 10005.
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We also make available on our website (http://www.warriormetcoal.com) all of the documents that we file with the
SEC, free of charge, as soon as reasonably practicable after we electronically file such material with the SEC. Our Code of
Business Conduct and Ethics, Corporate Governance Guidelines and the charters of our audit committee, compensation
committee, nominating and corporate governance committee and environmental, health & safety committee are also available
on our website and in print free of charge to any stockholder who requests them. Requests should be sent by mail to our
corporate secretary at our executive office at 16243 Highway 216, Brookwood, Alabama 35444. Information contained on our
website is not incorporated by reference into this Annual Report. We intend to disclose on our website any amendments or
waivers to our Code of Business Conduct and Ethics that are required to be disclosed pursuant to Item 5.05 of Form 8-K.
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Item 1A. Risk Factors
Our business involves substantial risks. Any of the risk factors described below or elsewhere in this Annual Report
could significantly and adversely affect our business prospects, financial condition and results of operations. The risks
described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we
currently deem to be immaterial may also adversely affect us.
Risks Related to Our Business
We were formed for the purpose of purchasing and operating the core assets of Walter Energy’s Alabama mining operations
pursuant to section 363 of the U.S. Bankruptcy Code and an order by the Bankruptcy Court and have a limited operating
history.
The Asset Acquisition was consummated on March 31, 2016. Therefore, we have a limited performance record and
operating history on a standalone basis, and, as a result, limited historical financial information upon which you can evaluate
our operating performance, ability to implement and achieve our business strategy or ability to pay dividends, if any, in the
future. We cannot assure you that we will be successful in implementing our business strategies or achieving our business
objective.
Deterioration in global economic conditions as they relate to the steelmaking industry, as well as generally unfavorable
global economic, financial and business conditions, may adversely affect our business, results of operations and cash flows.
Demand for met coal depends on domestic and foreign steel demand. As a result, if economic conditions in the global
steelmaking industry deteriorate as they have in past years, the demand for met coal may decrease. In addition, the global
financial markets have been experiencing volatility and disruption over the last several years. These markets have experienced,
among other things, volatility in security prices, commodities and currencies, diminished liquidity and credit availability, rating
downgrades and declining valuations of certain investments. Weaknesses in global economic conditions have had an adverse
effect and could have a material adverse effect on the demand for our met coal and, in turn, on our sales, pricing and
profitability.
If met coal prices drop to or below levels experienced in 2015 and the first half of 2016 for a prolonged period or if
there are further downturns in economic conditions, particularly in developing countries such as China and India, our business,
financial condition or results of operations could be adversely affected. While we are focused on cost control and operational
efficiencies, there can be no assurance that these actions, or any others we may take, will be sufficient in response to
challenging economic and financial conditions. In addition, the recent increase in met coal prices may not be sustainable.
Our business may suffer as a result of a substantial or extended decline in met coal pricing or the failure of any recovery or
stabilization of met coal prices to endure, as well as any substantial or extended decline in the demand for met coal and
other factors beyond our control, which could negatively affect our operating results and cash flows.
Our profitability depends on the prices at which we sell our met coal, which are largely dependent on prevailing market
prices. Market prices for met coal have been low in recent periods and the failure of any price recovery or stabilization to
endure will negatively affect our operating cash flows. We have experienced significant price fluctuations in our met coal
business, and we expect that such fluctuations will continue. For example, in the first quarter of 2016, the Australian HCC
Benchmark settlement price fell to $81 per metric ton, while in late 2016 spot market prices passed $300 per metric ton with a
first quarter 2017 Australian HCC Benchmark settlement price of $285 per metric ton. More recently, the spot market price as
of January 22, 2018 was $224.10. Demand for, and therefore the price of, met coal is driven by a variety of factors, including,
but not limited to, the following:
•
•
•
•
the domestic and foreign supply and demand for met coal;
the quantity and quality of met coal available from competitors;
the demand for and price of steel;
adverse weather, climatic and other natural conditions, including natural disasters;
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•
•
•
•
domestic and foreign economic conditions, including slowdowns in domestic and foreign economies and financial
markets;
global and regional political events;
domestic and foreign legislative, regulatory and judicial developments, environmental regulatory changes and changes
in energy policy and energy conservation measures that could adversely affect the met coal industry; and
capacity, reliability, availability and cost of transportation and port facilities, and the proximity of available met coal to
such transportation and port facilities.
The met coal industry also faces concerns with respect to oversupply from time to time, which could materially
adversely affect our financial condition and results of operations. In addition, reductions in the demand for met coal caused by
reduced steel production by our customers, increases in the use of substitutes for steel (such as aluminum, composites or
plastics) or less expensive substitutes for met coal and the use of steelmaking technologies that use less or no met coal can
significantly adversely affect our financial results and impede growth. Our natural gas business is also subject to adverse
changes in pricing due to, among other factors, changes in demand and competition from alternative energy sources.
Our customers are continually evaluating alternative steel production technologies which may reduce demand for our
product.
Our product is primarily used as HCC for blast furnace steel producers. High-quality HCC commands a significant
price premium over other forms of coal because of its value in use in blast furnaces for steel production. High-quality HCC is a
scarce commodity and has specific physical and chemical properties which are necessary for efficient blast furnace operation.
Alternative technologies are continually being investigated and developed with a view to reducing production costs or for other
reasons, such as minimizing environmental or social impact. If competitive technologies emerge or are increasingly utilized
that use other materials in place of our product or that diminish the required amount of our product, such as electric arc
furnaces or pulverized coal injection processes, demand and price for our met coal might fall. Many of these alternative
technologies are designed to use lower quality coals or other sources of carbon instead of higher cost high-quality HCC. While
conventional blast furnace technology has been the most economic large-scale steel production technology for a number of
years, and while emergent technologies typically take many years to commercialize, there can be no assurance that over the
longer term competitive technologies not reliant on HCC could emerge which could reduce demand and price premiums for
HCC.
We sell most of our met coal under fixed supply contracts primarily with pricing terms that vary and volume terms of up to
one year and are therefore exposed to commodity price risk on our sales.
Sales commitments in the met coal market are typically not long-term in nature and are generally no longer than one
year in duration. Most met coal transactions in the U.S. are done on a calendar year basis, where both prices and volumes are
fixed in the third and fourth quarter for the following calendar year. Globally the market is evolving to shorter term pricing.
Beginning in the second quarter of 2017, the quarterly Australian HCC Benchmark pricing system was replaced by the
Australian LV Index. Many of our met coal supply agreements that were priced on a quarterly basis are now priced on the basis
of a variety of indices, where prices are determined on or before shipment by averaging the leading spot indexes reported in the
market. As a result, our sales are subject to fluctuations in market pricing and we are not protected from oversupply or market
conditions where we cannot sell our coal at economic prices. Met coal has been an extremely volatile commodity over the past
ten years and prices may become volatile again in the future given the recent rapid increase. There can be no assurances we
will be able to mitigate such conditions as they arise. Any sustained failure to be able to market our coal during such periods
would have a material adverse effect on our business, results of operations, cash flows and ability to pay dividends to our
stockholders.
The failure of our customers to honor or renew contracts could adversely affect our business.
A significant portion of the sales of our met coal is to customers with whom we have had a relationship for a long
period of time. Typically, our customer contracts are for an annual term or are evergreen with respect to contracted volumes.
The success of our business depends on our ability to retain our current customers, renew our existing customer contracts and
solicit new customers. Our ability to do so generally depends on a variety of factors, including the quality and price of our
products, our ability to market these products effectively, our ability to deliver on a timely basis and the level of competition
that we face. If our customers do not honor contract commitments, or if they terminate agreements or exercise force majeure
provisions allowing for the temporary suspension of performance during specified events beyond the parties’ control and we
21
are unable to replace the contract, our revenues will be materially and adversely affected. Changes in the met coal industry may
cause some of our customers not to renew, extend or enter into new met coal supply agreements or to enter into agreements to
purchase fewer metric tons of met coal or on different terms than in the past.
Our ability to collect payments from our customers could be impaired and, as a result, our financial position could be
materially and adversely affected if their creditworthiness deteriorates, if they declare bankruptcy, or if they fail to honor
their contracts with us.
Our ability to receive payment for met coal sold and delivered depends on the continued creditworthiness and financial
stability of our customers. If we determine that a customer is not creditworthy or if a customer declares bankruptcy, we may not
be required to deliver met coal sold under the customer’s sales contract. If this occurs, we may decide to sell the customer’s met
coal on the spot market, which may be at prices lower than the contracted price, or we may be unable to sell the met coal at all.
In addition, if customers refuse to accept shipments of our met coal for which they have an existing contractual obligation, our
revenues will decrease and we may have to reduce production at our mines until our customers’ contractual obligations are
honored. Further, competition with other met coal suppliers could cause us to extend credit to customers on terms that could
increase the risk of payment default. Our inability to collect payment from counterparties to our sales contracts may materially
adversely affect our business, financial condition, results of operations and cash flows.
A significant reduction of, or loss of, purchases by our largest customers could materially adversely affect our profitability.
For the year ended December 31, 2017, we derived approximately 53% of our total sales revenues from our five largest
customers. There are inherent risks whenever a significant percentage of total revenues are concentrated with a limited number
of customers, and it is not possible for us to predict the future level of demand for our met coal that will be generated by our
largest customers. We expect to renew, extend or enter into new supply agreements with these and other customers; however,
we may be unsuccessful in obtaining such agreements with these customers and these customers may discontinue purchasing
met coal from us, reduce the quantity of met coal that they have historically purchased from us or pressure us to reduce the
prices that we charge for our met coal due to market, economic or competitive conditions. If any of our major customers were
to significantly reduce the quantities of met coal they purchase from us and we are unable to replace these customers with new
customers (or we fail to obtain new, additional customers), or if we are otherwise unable to sell met coal to those customers on
terms as favorable to us as the terms under our current agreements, our profitability could suffer significantly.
Substantially all of our revenues are derived from the sale of met coal. This lack of diversification of our business could
adversely affect our financial condition, results of operations and cash flows.
We rely on the met coal production from our two active met coal mines for substantially all of our revenues. For the
year ended December 31, 2017, revenues from the sale of met coal accounted for approximately 96.1% of our total revenues.
As noted above, demand for met coal depends on domestic and foreign steel demand. At times, the pricing and availability of
steel can be volatile due to numerous factors beyond our control. When steel prices are lower, the prices that we charge
steelmaking customers for our met coal may decline, which could adversely affect our financial condition, results of operations
and cash flows. Since we are heavily dependent on the steelmaking industry, adverse economic conditions in this industry, even
in the presence of otherwise favorable economic conditions in the broader coal industry, could have a significantly greater
impact on our financial condition and results of operations than if our business were more diversified. In addition, our lack of
diversification may make us more susceptible to such adverse economic conditions than our competitors with more diversified
operations and/or asset portfolios, such as those that produce thermal coal in addition to met coal.
All of our mining operations are located in Alabama, making us vulnerable to risks associated with having our production
concentrated in one geographic area.
All of our mining operations are geographically concentrated in Alabama. As a result of this concentration, we may be
disproportionately exposed to the impact of delays or interruptions in production caused by significant governmental
regulation, transportation capacity constraints, constraints on the availability of required equipment, facilities, personnel or
services, curtailment of production, extreme weather conditions, natural disasters or interruption of transportation or other
events that impact Alabama or its surrounding areas. If any of these factors were to impact Alabama more than other met coal
producing regions, our business, financial condition, results of operations and cash flows will be adversely affected relative to
other mining companies with operations in unaffected regions or that have a more geographically diversified asset portfolio.
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Met coal mining involves many hazards and operating risks, and is dependent upon many factors and conditions beyond
our control, which may cause our profitability and financial position to decline.
Our mining operations, including our preparation and transportation infrastructure, are subject to inherent hazards and
operating risks that could disrupt operations, decrease production and increase the cost of mining for varying lengths of time.
Specifically, underground mining and related processing activities present risks of injury to persons and damage to property and
equipment. In addition, met coal mining is dependent upon a number of conditions beyond our control that can disrupt
operations and/or affect our costs and production schedules at particular mines. These risks, hazards and conditions include, but
are not limited to:
•
variations in geological conditions, such as the thickness of the met coal seam and amount of rock embedded in the
met coal deposit and variations in rock and other natural materials overlying the met coal deposit, that could affect the
stability of the roof and the side walls of the mine;
• mining, process and equipment or mechanical failures, unexpected maintenance problems and delays in moving
longwall equipment;
•
•
•
•
•
•
•
•
adverse weather and natural disasters, such as heavy rains or snow, forest fires, flooding and other natural events,
including seismic activities, ground failures, rock bursts or structural cave-ins or slides, affecting our operations or
transportation to our customers;
railroad delays or derailments;
environmental hazards, such as subsidence and excess water ingress;
delays and difficulties in acquiring, maintaining or renewing necessary permits or mining rights;
availability of adequate skilled employees and other labor relations matters;
security breaches or terroristic acts;
unexpected mine accidents, including rock-falls and explosions caused by the ignition of met coal dust, natural gas or
other explosive sources at our mine sites or fires caused by the spontaneous combustion of met coal or similar mining
accidents;
competition and/or conflicts with other natural resource extraction activities and production within our operating
areas, such as natural gas extraction or oil and gas development; and
•
other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.
These risks and conditions could result in damage to or the destruction of our mineral properties, equipment or
production facilities, personal injury or death, environmental damage, delays in mining, regulatory investigations, actions and
penalties, repair and remediation costs, monetary losses and legal liability. In addition, a significant mine accident could
potentially cause a suspension of operations or a complete mine shutdown. Our insurance coverage may not be available or
sufficient to fully cover claims that may arise from these risks and conditions.
We have also seen adverse geological conditions in the mines, such as variations in met coal seam thickness, variations
in the competency and make-up of the roof strata, fault-related discontinuities in the met coal seam and the potential for ingress
of excessive amounts of natural gas or water. Such adverse conditions may increase our cost of sales and reduce our
profitability, and may cause us to decide to close a mine. Any of these risks or conditions could have a negative impact on our
financial condition, results of operations and cash flows.
In addition, if any of the foregoing changes, conditions or events occurs and is not excusable as a force majeure event,
any resulting failure on our part to deliver met coal to the purchaser under our contracts could result in economic penalties,
suspension or cancellation of shipments or ultimately termination of the agreement, any of which could have a material adverse
effect on our business, financial condition, results of operations and cash flows.
23
The historical Predecessor financial information that we have included in this Annual Report may not be representative of
the results we would have achieved as a stand-alone public company and may not be a reliable indicator of our future
results.
The combined financial statements of our Predecessor that we have included in this Annual Report have been
presented, in part, on a combined basis and include the historical accounts of the acquired assets and liabilities assumed which
were carved out from Walter Energy’s consolidated financial statements using the historical results of operations, cash flows,
assets and liabilities of the Predecessor and include allocations of expenses on the basis of the Predecessor’s relative headcount
and total assets to that of Walter Energy. As a result, our historical Predecessor financial statements may not necessarily reflect
what our financial condition, results of operations or cash flows would have been had we been an independent, stand-alone
entity during the periods presented or those that we will achieve in the future. We urge you to carefully consider the basis on
which the historical financial information included herein was prepared and presented. For additional information, see “Part II,
Item 6. Selected Financial Data” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this Annual
Report.
If we fail to implement our business strategies successfully, our financial performance could be harmed.
Our future financial performance and success are dependent in large part upon our ability to successfully implement our
business strategies. We may not be able to implement our business strategies successfully or achieve the anticipated benefits. If
we are unable to do so, our long-term growth, profitability and ability to service any debt we incur in the future may be
materially adversely affected. Even if we are able to implement some or all of the key elements of our business plan
successfully, our operating results may not improve to the extent we anticipate, or at all. Implementation of our business
strategies, including any decision to develop our Blue Creek Energy Mine, could also be affected by a number of factors
beyond our control, such as global economic conditions, met coal prices, domestic and foreign steel demand, and
environmental, health and safety laws and regulations.
A key element of our business strategy involves increasing production at our existing mines and the potential expansion
into our Blue Creek Energy Mine recoverable reserves in a cost efficient manner should market conditions warrant such
expansion. As we expand our business activities, there will be additional demands on our financial, technical, operational and
management resources. These aspects of our strategy are subject to numerous risks and uncertainties, including:
•
•
•
•
an inability to retain or hire experienced crews and other personnel and other labor relations matters;
a lack of customer demand for our mined met coal;
an inability to secure necessary equipment, raw materials or engineering in a timely manner to successfully execute
our expansion plans;
unanticipated delays that could limit or defer the production or expansion of our mining activities and jeopardize our
long term relationships with our existing customers and adversely affect our ability to obtain new customers for our
mined met coal; and
•
a lack of available cash or access to sufficient debt or equity financing for investment in our expansion.
Our business is subject to inherent risks, some for which we maintain third party insurance. We may incur losses and be
subject to liability claims that could have a material adverse effect on our financial condition, results of operations or cash
flows.
We maintain insurance policies that provide limited coverage for some, but not all, potential risks and liabilities
associated with our business. We may not obtain insurance if we believe the cost of available insurance is excessive relative to
the risks presented. As a result of market conditions, premiums and deductibles for certain insurance policies can increase
substantially, and in some instances, certain insurance may become unavailable or available only for reduced amounts of
coverage. As a result, we may not be able to renew our existing insurance policies or procure other desirable insurance on
commercially reasonable terms, if at all. In addition, certain environmental, contamination and pollution risks generally are not
fully insurable. Even where insurance coverage applies, insurers may contest their obligations to make payments. Our financial
condition, results of operations and cash flows could be materially and adversely affected by losses and liabilities from
uninsured or under-insured events, as well as by delays in the payment of insurance proceeds, or the failure by insurers to make
payments.
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We also may incur costs and liabilities resulting from claims for damages to property or injury to persons arising from
our operations. We must compensate employees for work-related injuries. If we do not make adequate provision for our
workers’ compensation and black lung liabilities, or we are pursued for applicable sanctions, costs and liabilities, our operations
and profitability could be adversely affected. Certain of our subsidiaries are responsible for medical and disability benefits for
black lung disease under federal law and are insured beginning April 1, 2016 for claims made by or on behalf of any of our
employees. As a result of our limited operating history as a stand-alone company, the Department of Labor required us to
provide insurance coverage rather than be self-insured for these obligations for a minimum of three years from March 31, 2016.
We are responsible for medical and disability benefits for black lung disease under federal law. We assumed certain
historical self-insured black lung liabilities of Walter Energy and its subsidiaries incurred prior to April 1, 2016 in
connection with the Asset Acquisition. We are self-insured for these black lung liabilities and have posted certain collateral
with Department of Labor as described below. Changes in the estimated claims to be paid or changes in the amount of
collateral required by the Department of Labor may have a greater impact on our profitability and cash flows in the future.
We are responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and
Safety Act of 1969, the Mine Act and the Black Lung Benefits Act, each as amended, and are self-insured for black lung related
claims asserted by or on behalf of former employees of Walter Energy and its subsidiaries as assumed in the Asset Acquisition
for the period prior to April 1, 2016. We perform an annual actuarial evaluation of the overall black lung liabilities as of each
December 31st. The calculation is performed using assumptions regarding rates of successful claims, discount factors, benefit
increases and mortality rates, among others. If the number of or severity of successful claims increases, or we are required to
accrue or pay additional amounts because the successful claims prove to be more severe than our original assessment, our
operating results and cash flows could be negatively impacted. Our self-insurance program for these legacy liabilities is unique
to the industry and was specifically negotiated with the Department of Labor requiring us to post $17.5 million in Treasury bills
as collateral in addition to maintaining a black lung trust of $4.0 million that was acquired in the Asset Acquisition. For
additional information see “Part I, Item 1. Business-Environmental and Regulatory Matters-Workers’ Compensation and Black
Lung.” Our estimated total black lung liabilities as of December 31, 2017 were $31.9 million (net of the black lung trust). In
future years, the Department of Labor could require us to increase the amount of the collateral which could negatively impact
our cash flows.
Defects in title of any real property or leasehold interests in our properties or associated met coal reserves could limit our
ability to mine or develop these properties or result in significant unanticipated costs.
All of our mining operations are conducted on properties owned or leased by us. Our right to mine our met coal
reserves may be materially adversely affected by defects in title or boundaries or if our property interests are subject to superior
property rights of third parties. We do not have title insurance for any of our real property or leasehold interests and, as part of
the Asset Acquisition, we did not independently verify title to our leased properties or associated met coal reserves. Any
challenge to our title or leasehold interests could delay the mining of the property, result in the loss of some or all of our interest
in the property or met coal reserves and increase our costs. In order to conduct our mining operations on properties where these
defects exist, we may incur unanticipated costs perfecting title. In addition, if we mine or conduct our operations on property
that we do not own or lease, we could incur civil damages or liabilities for such mining operations and be subject to conversion,
negligence, trespass, regulatory sanction and penalties. Some leases have minimum production requirements or require us to
commence mining operations in a specified term to retain the lease. Failure to meet those requirements could result in losses of
prepaid royalties and, in some rare cases, could result in a loss of the lease itself.
We face uncertainties in estimating our proven and probable met coal reserves, and inaccuracies in our estimates of our met
coal reserves could result in decreased profitability from lower than expected revenues or higher than expected costs.
Our future performance depends on, among other things, the accuracy of our estimates of our proven and probable met
coal reserves. Reserve estimates are based on a number of sources of information, including engineering, geological, mining
and property control maps and data, our operational experience of historical production from similar areas with similar
conditions and assumptions governing future pricing and operational costs. We update our estimates of the quantity and quality
of proven and probable met coal reserves at least annually to reflect the production of met coal from the reserves, updated
geological models and mining recovery data, the tonnage contained in new lease areas acquired and estimated costs of
production and sales prices. There are numerous factors and assumptions inherent in estimating met coal quantities, qualities
and costs to mine, including many factors beyond our control, such as the following:
•
•
geological and mining conditions, including faults in the met coal seam;
historical production from the area compared with production from other producing areas;
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•
•
•
•
•
•
the percentage of met coal ultimately recoverable;
the assumed effects of regulations and taxes and other payments to governmental agencies;
our ability to obtain, maintain and renew all required permits;
future improvements in mining technology;
assumptions concerning the timing of the development of the reserves; and
assumptions concerning equipment and operational productivity, future met coal prices, operating costs, including
those for critical supplies such as fuel, tires and explosives, capital expenditures and development and reclamation
costs.
Each of these factors may vary considerably from the assumptions used in estimating the reserves. As a result, estimates
of the quantities and qualities of economically recoverable met coal attributable to any particular group of properties,
classifications of reserves based on risk of recovery, estimated cost of production, and estimates of future net cash flows
expected from these properties as prepared by different engineers or by the same engineers at different times may vary
materially due to changes in the above factors and assumptions. Actual production recovered from identified reserve areas and
properties, and revenues and expenditures associated with our mining operations may vary materially from estimates. Any
inaccuracy in our estimates related to our reserves could result in decreased profitability from lower than expected revenues
and/or higher than expected costs.
Our inability to develop met coal reserves in an economically feasible manner or our inability to acquire additional met coal
reserves that are economically recoverable may adversely affect our business.
Our long-term profitability depends in part on our ability to cost-effectively mine and process met coal reserves that
possess the quality characteristics desired by our customers. As we mine, our met coal reserves decline. As a result, our future
success depends upon our ability to develop or acquire additional met coal reserves that are economically recoverable to
replace the reserves that we produce. Coal is economically recoverable when the price at which our met coal can be sold
exceeds the costs and expenses of mining and selling such met coal. We may not be able to obtain adequate economically
recoverable replacement reserves when we require them and, even if available, such reserves may not be at favorable prices or
we may not be capable of mining those reserves at costs that are comparable to our existing met coal reserves. Our ability to
develop or acquire met coal reserves in the future may also be limited by the availability of cash from our operations or
financing under our existing or future financing arrangements, as well as certain restrictions under such arrangements. If we are
unable to develop or acquire replacement reserves, our future production may decrease significantly as existing reserves are
depleted and this may have a material adverse impact on our cash flows, financial position and results of operations.
We may be unsuccessful in integrating the operations of any future acquisitions, including acquisitions involving new lines
of business, with our existing operations, and in realizing all or any part of the anticipated benefits of any such acquisitions.
From time to time, we may evaluate and acquire assets and businesses that we believe complement our existing assets
and business. The assets and businesses we acquire may be dissimilar from our existing lines of business. Acquisitions may
require substantial capital or the incurrence of substantial indebtedness. Our capitalization and results of operations may change
significantly as a result of future acquisitions. Acquisitions and business expansions involve numerous risks, including the
following:
•
•
•
difficulties in the integration of the assets and operations of the acquired businesses;
inefficiencies and difficulties that arise because of unfamiliarity with new assets and the businesses associated with
them and new geographic areas;
the possibility that we have insufficient expertise to engage in such activities profitably or without incurring
inappropriate amounts of risk; and
•
the diversion of management’s attention from other operations.
Further, unexpected costs and challenges may arise whenever businesses with different operations or management are
combined, and we may experience unanticipated delays in realizing the benefits of an acquisition. Entry into certain lines of
26
business may subject us to new laws and regulations with which we are not familiar, and may lead to increased litigation and
regulatory risk. Also, following an acquisition, we may discover previously unknown liabilities associated with the acquired
business or assets for which we have no recourse under applicable indemnification provisions. If a new business generates
insufficient revenue or if we are unable to efficiently manage our expanded operations, our results of operations may be
adversely affected.
Our failure to obtain and renew permits necessary for our mining operations could negatively affect our business.
Mining companies must obtain numerous permits that impose strict regulations on various environmental and
operational matters in connection with met coal mining. These include permits issued by various federal, state and local
agencies and regulatory bodies. The permitting rules, and the interpretations of these rules, are complex, change frequently and
are often subject to discretionary interpretations by the regulators, all of which may make compliance more difficult or
impractical, and may possibly preclude the continuance of ongoing operations or the development of future mining operations.
The public, including non-governmental organizations, anti-mining groups and individuals, have certain statutory rights to
comment upon and submit objections to requested permits and environmental impact statements prepared in connection with
applicable regulatory processes, and otherwise engage in the permitting process, including bringing citizens’ lawsuits to
challenge the issuance of permits, the validity of environmental impact statements or performance of mining activities.
Accordingly, required permits may not be issued or renewed in a timely fashion or at all, or permits issued or renewed may be
conditioned in a manner that may restrict our ability to efficiently and economically conduct our mining activities, any of which
would materially reduce our production, cash flow and profitability.
If transportation for our met coal is disrupted, unavailable or more expensive for our customers, our ability to sell met coal
could suffer.
Transportation costs represent a significant portion of the total cost of met coal to be delivered to our customers and, as
a result, the cost of delivery is a factor in a customer’s purchasing decision. Overall price increases in our transportation costs
could make our met coal less competitive with the same or alternative products from competitors with lower transportation
costs. We typically depend upon overland conveyor, trucks, rail or barges to transport our products. Disruption or delays of any
of these transportation services due to weather related problems, which are variable and unpredictable, strikes or lock-outs,
accidents, infrastructure damage, governmental regulation, third-party actions, lack of capacity or other events beyond our
control could impair our ability to supply our products to our customers and result in lost sales and reduced profitability. In
addition, increases in transportation costs resulting from emission control requirements and fluctuations in the price of gasoline
and diesel fuel, could make met coal produced in one region of the United States less competitive than met coal produced in
other regions of the United States or abroad.
All of our met coal mines are served by only one rail carrier, which increases our vulnerability to these risks, although
our access to barge transportation partially mitigates that risk. In addition, the majority of the met coal produced by our
underground mining operations is sold to met coal customers who typically arrange and pay for transportation from the state-
run docks at the Port of Mobile, Alabama to the point of use. As a result, disruption at the docks, port congestion and delayed
met coal shipments may result in demurrage fees to us. If this disruption were to persist over an extended period of time,
demurrage costs could significantly impact our profits. In addition, there are limited cost effective alternatives to the port. The
cost of securing additional facilities and services of this nature could significantly increase transportation and other costs. An
interruption of rail or port services could significantly limit our ability to operate and, to the extent that alternate sources of port
and rail services are unavailable or not available on commercially reasonable terms, could increase transportation and port costs
significantly. Further, delays of ocean vessels could affect our revenues, costs and relative competitiveness compared to the
supply of met coal and other products from our competitors.
Any significant downtime of our major pieces of mining equipment could impair our ability to supply met coal to our
customers and materially and adversely affect our results of operations and cash flows.
We depend on several major pieces of mining equipment to produce and transport our met coal, including, but not
limited to, longwall mining systems, continuous mining units, our preparation plant and blending facilities, and conveyors.
Obtaining or repairing these major pieces of mining equipment often involves long lead times. If any of these pieces of
equipment or facilities suffer major damage or are destroyed by fire, abnormal wear, flooding, incorrect operation or otherwise,
we may be unable to replace or repair them in a timely manner or at a reasonable cost, which would impact our ability to
produce and transport met coal and materially and adversely affect our business, results of operations, financial condition and
cash flows. Moreover, MSHA and other regulatory agencies sometimes make changes with regards to requirements for pieces
of equipment. For example, in 2015, MSHA promulgated a new regulation requiring the implementation of proximity detection
27
devices on all continuous mining machines. Such changes could cause delays if manufacturers and suppliers are unable to make
the required changes in compliance with mandated deadlines.
If either our preparation plant or river barge load-out facilities, or those of a third party processing or loading our met
coal, suffer extended downtime, including major damage, or are destroyed, our ability to process and deliver met coal to
prospective customers would be materially impacted, which would materially adversely affect our business, 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 and 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 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.
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. We procure some of this equipment from a 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, if any of our suppliers experiences an
adverse event, 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.
Our business may require substantial ongoing capital expenditures, and we may not have access to the capital required to
reach full productive capacity at our mines.
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, facilities 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 existing mines or to develop the high-quality met coal recoverable reserves at our
Blue Creek Energy Mine in the future could also affect our capital needs or cause future capital expenditures to be higher than
in the past and/or higher than our estimates. We cannot assure you that we will be able to maintain our production levels or
generate sufficient cash flow, or that we will have access to sufficient financing to continue our production, exploration,
permitting and development activities at or above our present levels and on our current or projected timelines, and we may be
required to defer all or a portion of our capital expenditures. Our results of operations, business and financial condition may be
materially adversely affected if we cannot make such capital expenditures.
To fund our capital expenditures, we will be required to use cash from our operations, incur debt or sell equity
securities. Using cash from operations will reduce cash available for maintaining or increasing our operations activities. Our
ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings, on the other hand,
may be limited by our financial condition at the time of any such financing or offering and the covenants in our existing debt
agreements, as well as by general economic conditions, contingencies and uncertainties that are beyond our control. If cash
flow generated by our operations or available borrowings under our bank financing arrangements are insufficient to meet our
capital requirements and we are unable to access the capital markets on acceptable terms or at all, we could be forced to curtail
the expansion of our existing mines and the development of our properties, which, in turn, could lead to a decline in our
production and could materially and adversely affect our business, financial condition and results of operations.
28
Work stoppages, labor shortages and other labor relations matters may harm our business. Union-represented labor creates
an increased risk of work stoppages and higher labor costs.
If we fail to maintain satisfactory labor relations, disputes with the unionized portion of our workforce could affect us
adversely. Union-represented labor creates an increased risk of work stoppages and higher labor costs. As of December 31,
2017, 69% of our employees were represented by the UMWA. In connection with the Asset Acquisition, we negotiated a new
initial CBA with the UMWA (the “UMWA CBA”), which was ratified by UMWA’s members on February 16, 2016 and has a
five-year term. If we are unable to negotiate the renewal of the UMWA CBA before its expiration date, our operations and our
profitability could be adversely affected. Future work stoppages, labor union issues or labor disruptions at our mining
operations, as well as at the operations of key customers or service providers, could impede our ability to produce and deliver
our products, to receive critical equipment and supplies or to collect payment. This may increase our costs or impede our ability
to operate one or more of our operations.
We require a skilled workforce to run our business. If we cannot hire qualified people to meet replacement or expansion
needs, we may not be able to achieve planned results.
Efficient met coal mining using modern techniques and equipment requires skilled laborers with mining experience and
proficiency as well as qualified managers and supervisors. The demand for skilled employees sometimes causes a significant
constriction of the labor supply resulting in higher labor costs. When met coal producers compete for skilled miners, recruiting
challenges can occur and employee turnover rates can increase, which negatively affect operating efficiency and costs. If a
shortage of skilled workers exists and we are unable to train or retain the necessary number of miners, it could adversely affect
our productivity, costs and ability to expand production.
Our executive officers and other key personnel are important to our success and the loss of one or more of these individuals
could harm our business.
Our executive officers and other key personnel have significant experience in the met coal or other commodity
businesses and the loss of certain of these individuals could harm our business. Moreover, there may be a limited number of
persons with the requisite experience and skills to serve in our senior management positions. Although we have been successful
in attracting qualified individuals for key management and corporate positions in the past, there can be no assurance that we
will continue to be successful in attracting and retaining a sufficient number of qualified personnel in the future or that we will
be able to do so on acceptable terms. The loss of key management personnel could harm our ability to successfully manage our
business functions, prevent us from executing our business strategy and have a material adverse effect on our results of
operations and cash flows.
Significant competition, as well as changes in foreign markets or economies, could harm our sales, profitability and cash
flows.
We compete with other producers primarily on the basis of price, met coal quality, transportation costs and reliability of
delivery. The consolidation of the global met coal industry over the last several years has contributed to increased competition
among met coal producers and we cannot assure you that the result of current or further consolidation will not adversely affect
us. In addition, some of our global competitors have significantly greater financial resources and/or a broader portfolio of coals
than we do, and in recent periods a number of our competitors idled production in light of lower met coal prices in 2015 and the
first half of 2016. The production that was idled by our competitors may restart and may affect domestic and foreign met coal
supply into the seaborne market and associated prices and impact our ability to retain or attract met coal customers.
Further, potential changes to international trade agreements, trade concessions, foreign currency fluctuations or other
political and economic arrangements may benefit met coal producers operating in countries other than the United States. We
may be adversely impacted on the basis of price or other factors with companies that in the future may benefit from favorable
foreign trade policies or other arrangements. In addition, increases in met coal prices could encourage existing producers to
expand capacity or could encourage new producers to enter the market. Overcapacity and increased production within the met
coal industry, both domestically and internationally, could materially reduce met coal demand and prices and therefore
materially reduce our revenues and profitability. In addition, our ability to ship our met coal to international customers depends
on port and transportation capacity. Increased competition within the domestic met coal industry for international sales could
result in us not being able to obtain throughput capacity at port facilities, as well as transport capacity, could cause the rates for
such services to increase to a point where it is not economically feasible to export our met coal.
The general economic conditions in foreign markets and changes in currency exchange rates are factors outside of our
control that may affect international met coal prices. If our competitors’ currencies decline against the U.S. dollar or against our
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customers’ currencies, those competitors may be able to offer lower prices to our customers. Furthermore, if the currencies of
our overseas customers were to significantly decline in value in comparison to the U.S. dollar, on which our sales contracts are
based, those customers may seek decreased prices for the met coal that we sell to them. These factors, in addition to adversely
affecting the competitiveness of our met coal in international markets, may also negatively impact our collection of trade
receivables from our customers and could reduce our profitability or result in lower met coal sales.
Our sales in foreign jurisdictions are subject to risks and uncertainties that may have a negative impact on our profitability.
Substantially all of our met coal sales consist of sales to international customers and we expect that international sales
will continue to account for a substantial portion of our revenue. A number of foreign countries in which we sell our met coal
implicate additional risks and uncertainties due to the different economic, cultural and political environments. Such risks and
uncertainties include, but are not limited to:
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longer sales-cycles and time to collection;
tariffs, international trade barriers and export license requirements;
fewer or less certain legal protections for contract rights;
different and changing legal and regulatory requirements;
potential liability under the U.S. Foreign Corrupt Practices Act of 1977, as amended, or comparable foreign
regulations;
government currency controls;
fluctuations in foreign currency exchange and interest rates; and
political and economic instability, changes, hostilities and other disruptions, as well as unexpected changes in
diplomatic and trade relationships.
Negative developments in any of these factors in the foreign markets into which we sell our met coal could result in a
reduction in demand for met coal, the cancellation or delay of orders already placed, difficulty in collecting receivables, higher
costs of doing business and/or non-compliance with legal and regulatory requirements, each or any of which could materially
adversely impact our cash flows, results of operations and profitability.
In addition, access to international markets may be subject to ongoing interruptions and trade barriers due to policies
and tariffs of individual countries, and the actions of certain interest groups to restrict the import or export of certain
commodities. Although there are currently no significant trade barriers existing or impending of which we are aware that do, or
could, materially affect our access to certain markets, there can be no assurance that our access to these markets will not be
restricted in the future. An inability for U.S. met coal suppliers to access international markets would likely result in an
oversupply of met coal in the domestic market, resulting in a decrease in prices.
Extensive environmental, health and safety laws and regulations impose significant costs on our operations and future
regulations could increase those costs, limit our ability to produce or adversely affect the demand for our products.
Our businesses are subject to numerous federal, state and local laws and regulations with respect to matters such as:
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permitting and licensing requirements;
employee health and safety, including occupational and mine health and safety;
• workers’ compensation;
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black lung disease;
reclamation and restoration of property; and
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•
environmental laws and regulations, including those related to greenhouse gases and climate change, air quality, water
quality, stream and surface water quality and protection, management of materials generated by mining operations, the
storage, treatment and disposal of wastes, protection of plant and wildlife such as endangered species, protection of
wetlands and remediation of contaminated soil and groundwater.
In addition, the coal industry in the U.S. is affected by significant legislation mandating certain benefits for current and
retired coal miners. Compliance with these requirements imposes significant costs on us and can result in reduced productivity.
Moreover, the possibility exists that new health and safety legislation and/or regulations may be adopted and/or orders may be
entered that may materially and adversely affect our mining operations. We must compensate employees for work-related
injuries. If we do not make adequate provisions for our workers’ compensation liabilities, it could harm our future operating
results. In addition, the erosion through tort liability of the protections we are currently provided by workers’ compensation
laws could increase our liability for work-related injuries and materially and adversely affect our operating results.
Compliance with applicable federal, state and local laws and regulations may be costly and time-consuming and may
delay commencement or interrupt continuation of exploration or production at one or more of our operations. These laws are
constantly evolving and may become increasingly stringent. The ultimate impact of complying with existing laws and
regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for these
laws have not yet been promulgated and in certain instances are undergoing revision. These laws and regulations, particularly
new legislative or administrative proposals (or judicial interpretations of existing laws and regulations), could result in
substantially increased capital, operating and compliance costs and could have a material adverse effect on our operations and/
or, along with analogous foreign laws and regulations, our customers’ ability to use our products.
Due in part to the extensive and comprehensive regulatory requirements, along with changing interpretations of these
requirements, violations of applicable federal, state and local laws and regulations occur from time to time in our industry and
at our operations. Changes in the law may require an unprecedented compliance effort on our part, could divert management’s
attention, and may require significant expenditures. To the extent that these expenditures, as with all costs, are not ultimately
reflected in the prices of our products and services, operating results will be detrimentally impacted. We believe that our major
North American competitors are confronted by substantially similar conditions and thus do not believe that our relative position
with regard to such competitors is materially affected by the impact of safety and environmental laws and regulations.
However, the costs and operating restrictions necessary for compliance with safety and environmental laws and regulations,
which is a major cost consideration for our operations, may have an adverse effect on our competitive position with regard to
foreign producers and operators who may not be required to undertake equivalent costs in their operations. In addition, the
specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating
facilities, applicable state legislation and its production methods.
Our mines are subject to stringent federal and state safety regulations that increase our cost of doing business at active
operations and may place restrictions on our methods of operation. In addition, federal, state or local regulatory agencies
have the authority to order certain of our mines to be temporarily or permanently closed under certain circumstances, which
could materially and adversely affect our ability to meet our customers’ demands.
The Mine Act and the MINER Act impose stringent health and safety standards on mining operations. Regulations that
have been adopted under the Mine Act and MINER Act are comprehensive and affect numerous aspects of mining operations,
including training of mining personnel, mining procedure, the equipment used in emergency procedures, and other matters.
Alabama has a similar program for mine safety and health regulation and enforcement. The various requirements mandated by
law or regulation can place restrictions on our methods of operations, and potentially lead to fees and civil penalties for the
violation of such requirements, creating a significant effect on operating costs and productivity.
In addition, federal, state or local regulatory agencies have the authority under certain circumstances following
significant health and safety incidents, such as fatalities, to order a mine to be temporarily or permanently closed. If this
occurred, we may be required to incur capital expenditures to re-open the mine. In the event that these agencies order the
closing of our mines, our met coal sales contracts generally permit us to issue force majeure notices, which suspend our
obligations to deliver met coal under these contracts; however, our customers may challenge our issuances of force majeure
notices. If these challenges are successful, we may have to purchase met coal from third-party sources, if available, to fulfill
these obligations or incur capital expenditures to re-open the mines and/or negotiate settlements with the customers, which may
include price reductions, the reduction of commitments, and the extension of time for delivery or terminate customers’
contracts. Any of these actions could have a material adverse effect on our business and results of operations.
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Increased focus by regulatory authorities on the effects of coal mining on the environment and recent regulatory
developments related to coal mining operations could make it more difficult or increase our costs to receive new permits or
to comply with our existing permits to mine met coal or otherwise adversely affect us.
Regulatory agencies are increasingly focused on the effects of coal mining on the environment, particularly relating to
water quality, which has resulted in more rigorous permitting requirements and enforcement efforts. See “Part I, Item 1.
Business-Environmental and Regulatory Matters” for a detailed discussion of these regulations and programs.
The SMCRA requires that comprehensive environmental protection and reclamation standards be met during the course
of and following completion of mining activities. Among other requirements, the SMCRA provides that the applicable
regulatory authority may not issue a permit unless the operation has been designed to prevent material damage to the
hydrologic balance outside the permit area. In 1983, the OSM issued rules providing that no land within 100 feet of a stream
shall be disturbed by surface mining activities, unless specifically authorized by the regulatory authority. On December 20,
2016, the OSM published a new, finalized “Stream Protection Rule,” setting standards for “material damage to the hydrologic
balance outside the permit area” that are applicable to surface and underground mining operations. However, on February 16,
2017, President Trump signed a joint congressional resolution disapproving the Stream Protection Rule pursuant to the
Congressional Review Act. Accordingly, the regulations in effect prior to the Stream Protection Rule now apply, including
OSM’s 1983 rule. It remains unclear whether and how additional actions by the Trump Administration could further impact
regulatory or enforcement activities pursuant to the SMCRA.
Section 404 of the Clean Water Act (“CWA”) requires mining companies to obtain USACE permits to place material in
streams for the purpose of creating slurry ponds, water impoundments, refuse areas, valley fills or other mining activities. As is
the case with other met coal mining companies, our construction and mining activities require Section 404 permits. The
issuance of permits to construct valley fills and refuse impoundments under Section 404 of the CWA has been the subject of
many court cases and increased regulatory oversight, resulting in additional permitting requirements that are expected to delay
or even prevent the opening of new mines. Stringent water quality standards for materials such as selenium have recently been
issued. We have begun to incorporate these new requirements into our current permit applications; however, there can be no
guarantee that we will be able to meet these or any other new standards with respect to our permit applications.
Additionally, in January 2011, the EPA rescinded a federal CWA permit held by another coal mining company for a
surface mine in Appalachia citing associated environmental damage and degradation. On April 23, 2013, the D.C. Circuit ruled
that the EPA has the power under the CWA to retroactively veto a Section 404 dredge and fill permit “whenever” it makes a
determination about certain adverse effects, even years after the USACE has granted the permit to an applicant. On March 24,
2014, the U.S. Supreme Court denied petitions for review. Subsequently, on July 19, 2016, the D.C. Circuit affirmed the district
court’s further ruling that the EPA’s decision to withdraw approval for disposal sites satisfied administrative requirements. The
D.C. Circuit held that the EPA’s ex post withdrawal was a product of its broad veto authority under the CWA, not a procedural
defect. While our operations are not directly impacted by this ruling, it could be an indication that other surface mining water
permits could be subject to more substantial review in the future.
Recent regulatory actions and court decisions have created some uncertainty over the scope of CWA jurisdiction. On
June 29, 2015, in response to a 2006 Supreme Court decision discussing the scope of CWA jurisdiction, the EPA and the
USACE jointly promulgated final rules redefining the scope of waters protected under the CWA, revising regulations that had
been in place for more than 25 years. The new rules may expand the scope of CWA jurisdiction, making more waters subject to
the CWA's permitting and other requirements in the case of discharges. Following its promulgation, numerous industry groups,
states, and environmental groups challenged the rules. On October 9, 2015, a federal appeals court stayed the rules’
implementation nationwide, but it is expected to lift the stay in response to a January 22, 2018 decision by the Supreme Court
that the appeals court lacked jurisdiction to decide the matter. Further, on February 28, 2017, President Trump signed an
executive order directing the relevant executive agencies to review the rules and to conduct notice and comment rulemaking to
rescind or revise them, as appropriate under the stated policies of protecting navigable waters from pollution while promoting
economic growth, reducing uncertainty, and showing due regard for Congress and the states. On July 27, 2017, the EPA and the
USACE published a proposed rule to rescind the 2015 rules and, on February 6, 2018, in response to the January 2018 Supreme
Court decision, the agencies published a final rule to maintain the status quo (the pre-2015 rules) through February 6, 2020
pending the agencies' review of the 2015 rules. Multiple states and environmental groups have filed challenges to this delay. It
remains unclear whether and how the rules will be implemented, what litigation may result, and whether changes proposed by
the Trump Administration could further impact regulatory developments in this area.
It is unknown what future changes will be implemented to the permitting review and issuance process or to other
aspects of mining operations, but increased regulatory focus, future laws and judicial decisions could materially and adversely
affect all coal mining companies. In addition, the public, including non-governmental organizations, anti-mining groups and
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individuals, have certain statutory rights to comment upon and submit objections to requested permits and environmental
impact statements prepared in connection with applicable regulatory processes, and otherwise engage in the permitting process,
including bringing citizens’ lawsuits to challenge the issuance of permits, the validity of environmental impact statements or
performance of mining activities.
In each jurisdiction in which we operate, we could incur additional permitting and operating costs, may be unable to
obtain new permits or maintain existing permits and could incur fines, penalties and other costs, any of which could materially
adversely affect our business. If met coal mining methods are limited or prohibited, it could significantly increase our
operational costs and make it more difficult to economically recover a significant portion of our reserves. In the event that we
cannot increase the price we charge for met coal to cover the higher production costs without reducing customer demand for
our met coal, there could be a material adverse effect on our financial condition and results of operations. In addition, increased
public focus on the environmental, health and aesthetic impacts of coal mining could harm our reputation and reduce demand
for met coal.
Regulation of greenhouse gas emissions could increase our operating costs and impact the demand for, price of and value
of our products.
Climate change continues to attract public and scientific attention, and increasing attention by government as well as
private businesses is being paid to reducing GHG emissions. There are three primary sources of GHGs associated with the met
coal industry. First, the end use of our met coal by our customers in steelmaking is a source of GHGs. Second, combustion of
fuel by equipment used in met coal production and to transport our met coal to our customers is a source of GHGs. Third, met
coal mining itself can release methane, which is considered to be a more potent GHG than CO2, directly into the atmosphere.
These emissions from met coal consumption, transportation and production are subject to pending and proposed regulation as
part of initiatives to address global climate.
There are many legal and regulatory approaches currently in effect or being considered to address GHGs, including
international treaty commitments, new foreign, federal and state legislation that may impose a carbon emissions tax or establish
a “cap and trade” program, and regulation by the EPA. See “Part I, Item 1. Business—Environmental and Regulatory Matters—
Climate Change” for a detailed discussion of these regulations and programs.
The existing laws and regulations or other current and future efforts to stabilize or reduce GHG emissions could
adversely impact the demand for, price of and value of our products and reserves. As our operations also emit GHGs directly,
current or future laws or regulations limiting GHG emissions could increase our own costs. For example, methane must be
expelled from our underground met coal mines for mining safety reasons. Methane has a greater GHG effect than carbon
dioxide. Although our natural gas operations capture methane from our underground met coal mines, some methane is vented
into the atmosphere when the met coal is mined. In June 2010, Earthjustice petitioned the EPA to make a finding that emissions
from coal mines may reasonably be anticipated to endanger public health and welfare, and to list them as a stationary source
subject to further regulation of emissions. On April 30, 2013, the EPA denied the petition. Judicial challenges seeking to force
the EPA to list coal mines as stationary sources have likewise been unsuccessful to date. If the EPA were to make an
endangerment finding in the future, we may have to further reduce our methane emissions, install additional air pollution
controls, pay certain taxes or fees for our emissions, incur costs to purchase credits that permit us to continue operations as they
now exist at our underground met coal mines or perhaps curtail met coal production. Although the potential impacts on us of
additional climate change regulation are difficult to reliably quantify, they could be material. Also, while President Trump
signed an executive order on March 28, 2017 directing the EPA and other executive agencies to review their existing
regulations, orders, guidance documents and policies that unnecessarily obstruct, delay, curtail or otherwise impose significant
costs on the development of energy resources, it remains unclear how and to what extent these executive actions and
subsequent agency actions will impact the regulation of GHG emissions at the federal level.
In addition, there have also been efforts in recent years to influence the investment community, including investment
advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and
pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism
and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities,
operations and ability to access capital.
In addition, claims have been made against certain companies alleging that GHG emissions constitute a public nuisance
under federal and/or state common law. Private individuals or public entities may seek to enforce environmental laws and
regulations against us and could allege personal injury, property damages or other liabilities. While we are not a party to any
such litigation, we could be named in actions making similar allegations. An unfavorable ruling in any such case could
significantly impact our operations and could have an adverse impact on our financial condition.
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Further, climate change may cause more extreme weather conditions such as more intense hurricanes, thunderstorms,
tornadoes and snow or ice storms, as well as rising sea levels and increased volatility in seasonal temperatures. Extreme
weather conditions can interfere with our services and increase our costs, and damage resulting from extreme weather may not
be fully insured. However, at this time, we are unable to determine the extent to which climate change may lead to increased
storm or weather hazards affecting our operations.
Our operations may impact the environment or cause exposure to hazardous substances and our properties may have
environmental contamination, which could result in material liabilities to us.
Our operations currently use hazardous materials from time to time. We could become subject to claims for toxic torts,
natural resource damages and other damages as well as for the investigation and cleanup of soil, surface water, groundwater
and other media. Such claims may arise, for example, out of conditions at sites that we currently own or operate, as well as at
sites that we previously owned or operated, or may acquire. Our liability for such claims may be joint and several, so that we
may be held responsible for more than our share of the contamination or other damages, or even for the entire amount of
damages assessed.
We maintain extensive met coal refuse areas and slurry impoundments at our mining complexes. Such areas and
impoundments are subject to comprehensive regulation. Slurry impoundments have been known to fail, releasing large volumes
of met coal slurry into the surrounding environment. Structural failure of an impoundment can result in extensive damage to the
environment and natural resources, such as bodies of water that the met coal slurry reaches, as well as create liability for related
personal injuries, property damages and injuries to wildlife. Some of our impoundments overlie mined out areas, which can
pose a heightened risk of failure and the assessment of damages arising out of such failure. If one of our impoundments were to
fail, we could be subject to substantial claims for the resulting environmental contamination and associated liability, as well as
for related fines and penalties.
Drainage flowing from or caused by mining activities can be acidic with elevated levels of dissolved metals, a
condition referred to as AMD. Treatment of AMD can be costly. Although we do not currently face material costs associated
with AMD, it is possible that we could incur significant costs in the future.
These and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to
hazardous substances or wastes associated with our operations, could result in costs and liabilities that could materially and
adversely affect us. See also “Part I, Item 1. Business—Environmental and Regulatory Matters.”
Failure to obtain or renew surety bonds on acceptable terms could affect our ability to secure reclamation and coal lease
obligations and, therefore, our ability to mine or lease met coal.
Federal and state laws require us to obtain surety bonds or post other financial security to secure performance or
payment of certain long-term obligations, such as mine closure or reclamation costs, federal and state workers’ compensation
and black lung benefits costs, coal leases and other obligations. The amount of security required to be obtained can change as
the result of new federal or state laws, as well as changes to the factors used to calculate the bonding or security amounts. We
may have difficulty procuring or maintaining our surety bonds. Our bond issuers may demand higher fees or additional
collateral, including letters of credit or other terms less favorable to us upon those renewals. Because we are required by state
and federal law to have these bonds or other acceptable security in place before mining can commence or continue, our failure
to maintain surety bonds, letters of credit or other guarantees or security arrangements would materially and adversely affect
our ability to mine or lease met coal. That failure could result from a variety of factors, including lack of availability, higher
expense or unfavorable market terms, the exercise by third-party surety bond issuers of their right to refuse to renew the surety
and restrictions on availability of collateral for current and future third-party surety bond issuers under the terms of our
financing arrangements.
We have reclamation and mine closing obligations. If the assumptions underlying our accruals are inaccurate, we could be
required to expend greater amounts than anticipated.
The SMCRA establishes operational, reclamation and closure standards for our mining operations. Alabama has a state
law counterpart to SMCRA. We accrue for the costs of current mine disturbance and of final mine closure, including the cost of
treating mine water discharge where necessary. The amounts recorded are dependent upon a number of variables, including the
estimated future closure costs, estimated proven reserves, assumptions involving profit margins, inflation rates and the assumed
credit-adjusted risk-free interest rates. If these accruals are insufficient or our liability in a particular year is greater than
currently anticipated, our future operating results could be materially adversely affected. We are also required to post bonds for
the cost of coal mine reclamation.
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We and our owners and controllers are subject to the Applicant Violator System.
Under SMCRA and its state law counterparts, all coal mining applications must include mandatory “ownership and
control” information, which generally includes listing the names of our officers and directors, and our principal stockholders
owning 10% or more of our voting shares, among others. Ownership and control reporting requirements are designed to allow
regulatory review of any entities or persons deemed to have ownership or control of a coal mine, and bars the granting of a coal
mining permit to any applicant who, or whose owner or controller, has unabated or uncorrected violations.
A federal database, known as the Applicant Violator System, is maintained for this purpose. Certain relationships are
presumed to constitute ownership or control, including the following: being an officer or director of an entity; being the
operator of the coal mining operation; having the ability to commit the financial or real property assets or working resources of
the permittee or operator; based on the instruments of ownership or the voting securities of a corporate entity, owning of record
10% or more of the mining operator, among others. This presumption, in most cases, can be rebutted where the person or entity
can demonstrate that it in fact does not or did not have authority directly or indirectly to determine the manner in which the
relevant coal mining operation is conducted. An ownership and control notice must be filed by us each time an entity obtains a
10% or greater interest in us. If we have unabated violations of SMCRA or its state law counterparts, have a coal mining permit
suspended or revoked, or forfeit a reclamation bond, we and our “owners and controllers,” as discussed above, may be
prohibited from obtaining new coal mining permits, or amendments to existing permits, until such violations of law are
corrected. This is known as being “permit-blocked.” Additionally, if an “owner or controller” of us is an “owner or controller”
of another mining company, then, as such, we could be permit-blocked based upon the violations of or permit-blocked status of
such an “owner or controller” of us.
We may be subject to litigation, the disposition of which could negatively affect our profitability and cash flow in a
particular period, or have a material adverse effect on our business, financial condition and results of operations.
Our profitability or cash flow in a particular period could be affected by an adverse ruling in any litigation that may be
filed against us in the future. In addition, such litigation could have a material adverse effect on our business, financial
condition and results of operations. See “Part I, Item 3. Legal Proceedings.”
We are a holding company and rely on dividends and other payments, advances and transfers of funds from our subsidiaries
to meet any dividend and other obligations.
We are a holding company with no direct operations and no material assets other than our direct ownership of 100% of
the equity interests of Warrior Met Coal Intermediate Holdco, LLC, our wholly-owned holding company, through which we
indirectly hold our operating subsidiaries. As a result of this structure, our cash flow and ability to meet our obligations or to
pay any dividends on our common stock depend significantly on the cash flows of our subsidiaries and the payment of funds by
our subsidiaries to us in the form of dividends, loans and other payments. The ability of our subsidiaries to make such payments
or loans to us, however, depends on their earnings and available assets, the terms of our ABL Facility, the indenture governing
our 8.00% Senior Secured Notes due 2024 (the "Notes") and of any future agreements that may govern the indebtedness of our
subsidiaries, and legal restrictions applicable to our subsidiaries, and could be affected by a claim or other action by a third
party, including a creditor. To the extent we need funds and any of our subsidiaries are restricted from making such
distributions under applicable law or regulation or under the terms of their financing arrangements, or they are otherwise unable
to provide such funds, our liquidity and financial condition could be materially adversely affected.
We have a substantial amount of indebtedness. Our substantial indebtedness could adversely affect our ability to raise
additional capital to fund our operations and dividend policy, limit our ability to react to changes in the economy or our
industry and prevent us from making debt service payments on the Notes.
As of December 31, 2017, we had approximately $345.9 million of outstanding indebtedness (consisting of
$350.0 million of Notes, net of $7.8 million in unamortized debt discount, and a $3.7 million promissory note), all of which are
secured, and $100.0 million of availability under our ABL Facility (subject to meeting the borrowing base and other conditions
therein).
Our substantial indebtedness could have important consequences for us. For example, it could:
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restrict us from making strategic acquisitions, engaging in development activities, introducing new technologies or
exploiting business opportunities;
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cause us to make non-strategic divestitures;
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require us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness,
thereby reducing funds available to us for other purposes, including the payment of quarterly dividends or any special
dividends, as well as engaging in any stock repurchases;
limit our flexibility in planning for, or reacting to, changes in our operations or business;
limit our ability to raise additional capital for working capital, capital expenditures, operations, debt service
requirements, strategic initiatives or other purposes;
limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to
borrow additional funds or dispose of assets;
prevent us from raising the funds necessary to repurchase all of the Notes tendered to us upon the occurrence of
certain changes of control, which failure to repurchase would constitute a default under the indenture governing the
Notes;
• make it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Notes, and any
failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing
conditions could result in an event of default under the indenture governing the Notes and the agreements governing
other indebtedness;
• make us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage;
• make us more vulnerable to downturns in our business or the economy; or
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expose us to the risk of increased interest rates, as certain of our borrowings, including borrowings under the ABL
Facility, are at variable rates of interest.
In addition, our ABL Facility and the indenture governing the Notes contain restrictive covenants that limit our ability
to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an
event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to
satisfy our obligations under our indebtedness that may not be successful.
Our ability to pay principal and interest on the Notes and to satisfy our other debt obligations will depend upon, among
other things:
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our future financial and operating performance (including the realization of any cost savings described herein), which
will be affected by prevailing economic, industry and competitive conditions and financial, business, legislative,
regulatory and other factors, many of which are beyond our control; and
our future ability to borrow under the ABL Facility, the availability of which depends on, among other things, our
complying with the covenants in the ABL Facility.
We cannot assure you that our business will generate cash flow from operations, or that we will be able to draw under
the ABL Facility or otherwise, in an amount sufficient to fund our liquidity needs, including the payment of principal and
interest on the Notes.
If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay
capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness, including the Notes. These
alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to
restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time.
Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which
could further restrict our business operations. In addition, the terms of existing or future debt agreements, including the ABL
Facility and the indenture governing the Notes, may restrict us from adopting some of these alternatives. In the absence of such
operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets
or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions for fair
market value or at all. Furthermore, any proceeds that we could realize from any such dispositions may not be adequate to meet
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our debt service obligations then due. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to
refinance our indebtedness on commercially reasonable terms or at all, could result in a material adverse effect on our business,
results of operations and financial condition and could negatively impact our ability to satisfy our obligations under the Notes.
If we cannot make scheduled payments on our indebtedness, we will be in default, and holders of the Notes could
declare all outstanding principal and interest to be due and payable, the lenders under the ABL Facility could terminate their
commitments to loan money, our secured lenders (including the lenders under the ABL Facility and the holders of the Notes)
could foreclose against the assets securing their loans and the Notes and we could be forced into bankruptcy or liquidation.
Despite our current indebtedness levels, we may still be able to incur substantially more debt, including secured
indebtedness.
As of December 31, 2017, we had approximately $345.9 million of total debt outstanding (consisting of $350.0 million
of Notes, net of $7.8 million in unamortized debt discount, and a promissory note in the amount of $3.7 million). Despite our
current indebtedness, we may be able to incur substantial additional debt in the future, including secured indebtedness. As of
December 31, 2017, we had $100.0 million of availability under our ABL Facility. Although covenants under the indenture
governing the Notes and the ABL Facility will limit our ability to incur additional indebtedness, these restrictions are subject to
a number of qualifications and exceptions and, under certain circumstances, debt incurred in compliance with these restrictions
could be substantial. Further, subsidiaries that we designate as unrestricted subsidiaries can incur unlimited additional
indebtedness that is structurally senior to the Notes. In addition, the indenture governing the Notes and the ABL Facility will
not limit us from incurring obligations that do not constitute indebtedness as defined therein.
If we incur any additional indebtedness secured by liens that rank equally with those securing the Notes, including any
additional notes or term loan facilities, the holders of that indebtedness will be entitled to share ratably with the holders in any
proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of our
company. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.
Additionally, we may recapitalize, incur additional indebtedness and take a number of other actions that could have the effect
of diminishing our ability to make payments on the Notes when due.
Our debt agreements contain restrictions that will limit our flexibility in operating our business.
The ABL Facility and the indenture governing the Notes contain, and any other existing or future indebtedness of ours
would likely contain, a number of covenants that will impose significant operating and financial restrictions on us, including
restrictions on our and our subsidiaries ability to, among other things:
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incur additional debt, guarantee indebtedness or issue certain preferred shares;
pay dividends on or make distributions in respect of, or repurchase or redeem, our capital stock or make other
restricted payments;
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prepay, redeem or repurchase subordinated debt;
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sell certain assets;
grant or assume liens;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates;
alter the businesses we conduct;
enter into agreements restricting our subsidiaries’ ability to pay dividends; and
designate our subsidiaries as unrestricted subsidiaries.
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As a result of these covenants, we will be limited in the manner in which we conduct our business, and we may be
unable to engage in favorable business activities or finance future operations or capital needs.
In addition, our ABL Facility requires us to maintain a minimum fixed charge coverage ratio at any time when the
average availability is less than a certain amount at such time. In that event, we must satisfy a minimum fixed charge ratio of
1.0 to 1.0.
A failure to comply with the covenants under the ABL Facility or any of our other future indebtedness could result in an
event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and
results of operations. In the event of any such default, the lenders thereunder:
• will not be required to lend any additional amounts to us;
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could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and
payable and terminate all commitments to extend further credit;
could require us to apply all of our available cash to repay these borrowings; or
could effectively prevent us from making debt service payments on the Notes (due to a cash sweep feature);
any of which could result in an event of default under the Notes.
Such actions by the lenders under the ABL Facility could also cause cross defaults under our other indebtedness. If we
were unable to repay those amounts, the lenders under the ABL Facility could proceed against the collateral granted to them to
secure the ABL Facility. If any of our outstanding indebtedness under the ABL Facility or our other indebtedness, including the
Notes, were to be accelerated, there can be no assurance that our assets would be sufficient to repay such indebtedness in full.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.
Borrowings under our ABL Facility are at variable rates of interest and expose us to interest rate risk. If interest rates
increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remains
the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly
decrease.
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 our deferred tax assets.
In connection with the Asset Acquisition consummated on March 31, 2016, we acquired deferred tax assets primarily
associated with NOLs attributable to Walter Energy’s write-off of its investment in Walter Energy Canada Holdings, Inc. As a
result of our history of losses and other factors, a valuation allowance has been recorded against our deferred tax assets,
including our NOLs. A valuation allowance was established on our opening balance sheet at April 1, 2016 because it was more
likely than not that a portion of the acquired deferred tax assets would not be realized in the future. Certain factors could
change or circumstances could arise that could further limit or eliminate the amount of the available NOLs to the Company,
such as an ownership change or an adjustment by a tax authority, and could necessitate a change in our valuation allowance or
our liability for income taxes. In addition, we have a limited operating history as a new standalone company, have incurred
additional operating losses since the Asset Acquisition and have recorded additional deferred tax assets and valuation
allowances with respect thereto. Also, certain circumstances, including our failing to generate sufficient future taxable income
from operations, could limit our ability to fully utilize our deferred tax assets. At December 31, 2017 (Successor), we had a
valuation allowance of $312.5 million against all federal and state NOLs and gross deferred tax assets not expected to provide
future tax benefits. Under the Internal Revenue Code of 1986, as amended (the "Code"), a company is generally allowed a
deduction for NOLs against its federal taxable income. At December 31, 2017 (Successor), we had federal and state NOLs, in
each case, of approximately $1.6 billion (after giving effect to the downward adjustment to our NOLs resulting from the
favorable private letter ruling described below and current year utilization). These NOLs and our other gross deferred tax assets
collectively represent a deferred tax asset of approximately $429.1 million, before reduction for the valuation allowance
described above.
Our NOLs are subject to adjustment on audit by the Internal Revenue Service (the “IRS”) and state authorities. The IRS
has not audited any of the tax returns for any of the years in which the losses giving rise to the NOLs were generated. Were the
IRS to challenge the size or availability of our NOLs and prevail in such challenge, all or a portion of our NOLs, or our ability
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to utilize our NOLs to offset any future taxable income, may be impaired, which could have a significant negative impact on
our financial condition, results of operations and cash flows.
A company’s ability to deduct its NOLs and utilize certain other available tax attributes can be substantially constrained
under the general annual limitation rules of Section 382 of the Code if it undergoes an “ownership change” as defined in
Section 382 or if similar provisions of state law apply. We experienced an ownership change in connection with the Asset
Acquisition and as such, the limitations under Section 382 would generally apply unless an exception to such rule applies. An
exception to the limitation rules of Section 382 is applicable to certain companies under the jurisdiction of a bankruptcy court.
Due to certain uncertainties as to whether such exception applies to us, we filed a request for a private letter ruling from the
IRS on these points.
On September 18, 2017, the IRS issued to us a private letter ruling, which favorably resolved these uncertainties. Based
on such private letter ruling, we believe that there is no current limitation under Section 382 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 the IRS by us. If any of these material
facts, assumptions, representations, statements or undertakings are, or become, incorrect, inaccurate or incomplete, the private
letter ruling may be invalidated and our ability to rely on the conclusions reached therein could be jeopardized.
While we do not believe an ownership change has occurred since April 1, 2016, because the rules under Section 382 are
highly complex and actions of our stockholders which are beyond our control or knowledge could impact whether an
ownership change has occurred, we cannot give you any assurance that another Section 382 ownership change will not occur in
the future. As a result of our qualifying for the aforementioned exception, were we to undergo a subsequent ownership change
prior to April 1, 2018, our NOLs would effectively be reduced to zero. An ownership change after such date would subject our
utilization of the NOLs to annual limitations pursuant to Section 382.
Certain transactions, including public offerings by us or our stockholders and redemptions may cause us to undergo an
“owner shift” which by itself or when aggregated with other owner shifts that we have undergone or will undergo could cause
us to experience an ownership change. Our certificate of incorporation contains transfer restrictions (the “382 Transfer
Restrictions”) to minimize the likelihood of an ownership change. See “-Risks Related to the Ownership of Our Common
Stock-Our common stock is subject to the 382 Transfer Restrictions under our certificate of incorporation which are intended to
prevent a Section 382 “ownership change,” which if not complied with, could result in the forfeiture of such stock and related
distributions. Accordingly, this may impact the market price of our common stock.” We may engage in transactions or approve
waivers of the 382 Transfer Restrictions that may cause an ownership shift. In doing so we expect to first perform the
calculations necessary to confirm that our ability to use our NOLs and other federal income tax attributes will not be affected or
otherwise determine that such transactions or waivers are in our best interests. For example, under certain circumstances, our
board of directors may determine it is in our best interest to exempt certain transactions from the operation of the 382 Transfer
Restrictions, if such transaction is determined not to be detrimental to the utilization of our NOLs or otherwise in our best
interests. These calculations are complex and reflect certain necessary assumptions. Accordingly, it is possible that we could
approve or engage in a transaction involving our common stock that causes an ownership change and impairs the use of our
NOLs and other federal income tax attributes. For more information, see “—Risks Related to the Ownership of Our Common
Stock-We could engage in or approve transactions involving our common stock that adversely affect significant stockholders
and our other stockholders.”
The effects of the Tax Cuts and Jobs Act on our business could have an adverse effect on our net income and are uncertain
at this time.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act
significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from
35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a
territorial tax system, limiting the deduction for interest expense, limiting the use of net operating losses generated on or after
January 1, 2018 to offset taxable income and repealing the corporate AMT and refunding all prior year AMT credits. As a
result of the Tax Cuts and Jobs Act, the Company has recorded an income tax benefit of approximately $38.6 million primarily
due to the refund of prior year AMT credits of $39.3 million (as discussed further in Note 8 to our consolidated financial
statements).
The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities
and the impact to AMT tax credits and included these amounts in its consolidated financial statements for the year ended
December 31, 2017. Since the changes included in the Tax Cuts and Jobs Act are broad and complex, the final transition
impacts of the Tax Cuts and Jobs Act may differ from the above estimate, possibly materially, due to among other things,
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changes in interpretations of the Tax Cuts and Jobs Act, any legislative action to address questions that arise because of the Tax
Cuts and Jobs Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Cuts
and Jobs Act, or any updates or changes to estimates the Company has utilized to calculate the transition impacts and the
ultimate impacts of the Tax Cuts and Jobs Act on our net income and financial condition are subject to similar uncertainty. The
SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Cuts and
Jobs Act to finalize the accounting of the impact of the Tax Cuts and Jobs Act on a Company's financial statements and we will
expect to finalize our analysis within this time period. As a result, the ultimate impact of the Tax Cuts and Jobs Act on our
financial statements is uncertain at this time.
Terrorist attacks and cyber-attacks or other security breaches may negatively affect our business, financial condition and
results of operations and cash flows.
Our business is affected by general economic conditions, fluctuations in consumer confidence and spending, and
market liquidity, all of which can decline as a result of numerous factors outside of our control, such as terrorist attacks and acts
of war. Future terrorist attacks against U.S. targets, rumors or threats of war, actual conflicts involving the United States or its
allies, or military or trade disruptions affecting our customers could cause delays or losses in transportation and deliveries of
met coal to our customers, decreased sales of our met coal and extension of time for payment of accounts receivable from our
customers. Strategic targets such as energy-related assets may be at greater risk of future terrorist attacks than other targets in
the United States. It is possible that any, or a combination, of these occurrences could have a material adverse effect on our
business, financial condition and results of operations.
In addition, we have become increasingly dependent upon digital technologies, including information systems,
infrastructure and cloud applications and services, to operate our businesses, process and record financial and operating data,
communicate with our employees and business partners, analyze seismic and drilling information, estimate quantities of met
coal reserves, as well as other activities related to our businesses. To that end, we have implemented security protocols and
systems with the intent of maintaining the physical security of our operations and protecting our and our counterparties’
confidential information and information related to identifiable individuals against unauthorized access. Despite such efforts,
we may be subject to security breaches, which could result in unauthorized access to our facilities or the information that we
are trying to protect. Unauthorized physical access to one of our facilities or electronic access to our information systems could
result in, among other things, unfavorable publicity, litigation by affected parties, damage to sources of competitive advantage,
disruptions to our operations, loss of customers, financial obligations for damages related to the theft or misuse of such
information and costs to remediate such security vulnerabilities, any of which could have a substantial impact on our results of
operations, financial condition or cash flows. Our insurance may not protect us against such occurrences. Further, as cyber
incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our
protective measures or to investigate and remediate any vulnerability to cyber incidents.
Risks Related to the Ownership of our Common Stock
The market price of our common stock may fluctuate significantly and investors in our common stock could incur
substantial losses.
The market price of our common stock could fluctuate significantly due to a number of factors, including:
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our quarterly or annual earnings, or those of other companies in our industry;
actual or anticipated fluctuations in our operating and financial results, including reserve estimates;
changes in accounting standards, policies, guidance, interpretations or principles;
the public reaction to our press releases, our other public announcements and our filings with the SEC;
announcements by us or our competitors of significant acquisitions, dispositions or innovations;
changes in financial estimates and recommendations by securities analysts following our stock, or the failure of
securities analysts to cover our common stock;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
the operating and stock price performance of other comparable companies;
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declaration of bankruptcy by any of our customers or competitors;
general economic conditions and overall market fluctuations, including changes in the price of met coal, steel or other
commodities;
additions or departures of key management personnel;
actions by our stockholders;
the trading volume of our common stock;
sales of our common stock by us or our Principal Stockholders (as defined below) or the perception that such sales
may occur; and
changes in business, legal or regulatory conditions, or other developments affecting participants in, and publicity
regarding, the met coal mining business, the domestic steel industry or any of our significant customers.
In particular, the realization of any of the risks described in these “Risk Factors” could have a material and adverse
impact on the market price of our common stock in the future and cause the price of our stock to decline. In addition, the stock
market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our
actual performance. In the past, following periods of volatility in the market price of a company’s securities, stockholders have
often instituted securities class action litigation against the company. If we were to be involved in a class action lawsuit, it
could divert the attention of senior management, and, if adversely determined, have a material adverse effect on our business,
results of operations and financial condition.
If securities or industry analysts adversely change their recommendations regarding our stock or if our operating results do
not meet their expectations, our stock price could decline.
The trading market for our common stock could be influenced by the research and reports that industry or securities
analysts may publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading
volume to decline. Moreover, if one or more of the analysts who cover our company downgrade our stock or if our operating
results do not meet their expectations, our stock price could decline.
Any declaration and payment of future dividends to holders of our common stock may be limited by restrictive covenants of
our ABL Facility and the indenture governing the Notes, and will be at the sole discretion of our board of directors and will
also depend on many factors.
Any declaration and payment of future dividends to holders of our common stock may be limited by restrictive
covenants of our ABL Facility and the indenture governing the Notes, and will be at the sole discretion of our board of directors
and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness,
borrowing availability under our ABL Facility, statutory and contractual restrictions applying to the payment of dividends and
other considerations that our board of directors deems relevant. The terms of our ABL Facility and the indenture governing the
Notes may restrict our ability to pay cash dividends on our common stock. We are prohibited from paying any cash dividend on
our common stock unless we satisfy certain conditions. Furthermore, we are permitted under the terms of our ABL Facility and
the indenture governing the Notes to incur additional indebtedness, the terms of which may severely restrict or prohibit the
payment of dividends and the associated debt service may impact our ability to satisfy the conditions for paying dividends
under our ABL Facility and the indenture governing the Notes. The agreements governing our current and future indebtedness
may not permit us to pay dividends on our common stock.
The requirements of being a public company may strain our resources, increase our costs and divert management’s
attention from our business, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that
we did not incur as a private company. We incur costs associated with our public company reporting requirements pursuant to
the Exchange Act. We are required to ensure that we have the ability to prepare financial statements that comply with SEC
reporting requirements on a timely basis. We are also subject to other reporting and corporate governance requirements,
including the listing standards of the New York Stock Exchange (“NYSE”) and certain provisions of The Sarbanes-Oxley Act
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of 2002 (the “Sarbanes-Oxley Act”) and the regulations promulgated thereunder, which impose significant compliance
obligations upon us.
Specifically, since the IPO, we have been required to:
prepare and distribute periodic reports and other stockholder communications in compliance with our obligations
under the federal securities laws and NYSE rules;
create or expand the roles and duties of our board of directors and committees of the board;
institute compliance and internal audit functions that are more comprehensive;
evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment
thereof, in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and
regulations of the SEC and the Public Company Accounting Oversight Board;
enhance our investor relations function;
establish or amend internal policies, including those relating to disclosure controls and procedures as well as insider
trading; and
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involve and retain outside legal counsel and accountants in connection with the activities listed above.
As a public company, we are required to commit significant resources and board and management oversight to the
above-listed requirements, which cause us to incur significant costs and which place a strain on our systems and resources. As a
result, the attention of our board of directors and management might be diverted from other business concerns. In addition, we
might not be successful in implementing these requirements. In addition, we also expect these rules and regulations may make
it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may
be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.
We are no longer an emerging growth company and are not able to take advantage of the reduced disclosure requirements
applicable to emerging growth companies.
We were an emerging growth company under the Jumpstart Our Business Startups Act until December 31, 2017. As an
emerging growth company, we took advantage of certain exemptions from various reporting requirements that are applicable to
other public companies. As of December 31, 2017, our revenues exceeded $1.07 billion and we therefore ceased being an
emerging growth company and the reduced disclosure obligations of emerging growth companies are no longer available to us.
As a result, we will need to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act beginning with the Annual Report on Form 10-K for the year ending December 31, 2018, will be required to hold a say-on-
frequency vote at our 2018 annual meeting of stockholders, and will no longer be entitled to provide the reduced executive
compensation disclosures permitted by emerging growth companies beginning with this Annual Report and the proxy statement
for our 2018 annual meeting of stockholders. We expect that the disclosure obligations will require additional attention from
management and will result in increased costs to us, which could include higher legal fees, accounting and related fees and fees
associated with investor relations activities, among others.
We will be subject to the requirements of Section 404 of the Sarbanes-Oxley Act. If we are unable to timely comply with
Section 404 or if the costs related to developing and maintaining internal controls over financial reporting are significant,
our profitability, stock price, results of operations and financial condition could be materially adversely affected.
We will be required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act. Beginning with our
Annual Report on Form 10-K for the year ending December 31, 2018 (subject to any change in applicable SEC rules),
Section 404 will require that we include management’s assessment of our internal control over financial reporting in our annual
reports. In addition, Section 404 will require that our independent registered public accounting firm attest to our internal
controls in such annual report. We are currently evaluating our existing controls against the criteria established by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). During the course of our ongoing
evaluation and implementation of internal control over financial reporting, we may identify areas requiring improvement, and
we may have to design enhanced processes and controls to address issues identified through this review. We believe that the
out-of-pocket costs, the diversion of management’s attention from running the day-to-day operations and operational changes
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caused by the need to comply with the requirements of Section 404 of the Sarbanes-Oxley Act could be significant. The time
and costs associated with such compliance could exceed our current expectations and our results of operations could be
adversely affected.
We cannot be certain at this time that we will be able to successfully implement the procedures, certification and
attestation requirements of Section 404 when required or that we or our auditors will not identify further material weaknesses in
internal control over financial reporting. Our independent registered public accounting firm identified two material weaknesses
as of March 31, 2016, which we remediated in the first quarter of 2017 as described in “Part II, Item 9A. Controls and
Procedures—Remediation of Material Weaknesses in Internal Control Over Financial Reporting.” If we fail to comply with the
requirements of Section 404, or if at any time we or our auditors identify and report any material weaknesses in internal control
over financial reporting, the accuracy and timeliness of the filing of our annual and quarterly reports may be materially
adversely affected (which, in some cases, could result in a restatement of our financial statements) and could cause investors to
lose confidence in the accuracy and completeness of our reported financial information, which could have a negative effect on
the trading price of our common stock. In addition, a material weakness in the effectiveness of our internal control over
financial reporting could result in an increased chance of fraud, reputational harm and the loss of customers, reduce our ability
to obtain financing, subject us to investigations by the NYSE, the SEC or other regulatory authorities and require additional
expenditures and management attention to address these matters, each of which could have a material adverse effect on our
business, results of operations, financial condition and trading price of our common stock.
The market price of our common stock could decline as a result of the sale or distribution of a large number of shares of
our common stock in the market or the perception that a sale or distribution could occur. These factors also could make it
more difficult for us to raise funds through future offerings of our common stock.
Sales of substantial amounts of our common stock in the public market, or the perception that those sales might occur,
could materially adversely affect the market price of our common stock. As of December 31, 2017, the Principal Stockholders
(as defined below) beneficially owned approximately 25,335,919 shares, or 47.4%, of our common stock. The Principal
Stockholders have no contractual obligation to retain any of our common stock. Subject to applicable securities laws, the
Principal Stockholders may sell any or all of our common stock that they beneficially own. Any disposition by the Principal
Stockholders of our common stock in the public market, or the perception that such dispositions could occur, could adversely
affect prevailing market prices for our common stock.
The shares of our common stock sold in the IPO, as well as any of our shares that have been sold or have otherwise had
their transfer restrictions removed, are freely tradable without restriction, except for any shares acquired by an affiliate of our
company which can be sold under Rule 144 under the Securities Act, subject to various volume and other limitations. In
addition, in connection with the IPO, we entered into a registration rights agreement with the Principal Stockholders and certain
investment funds managed, advised or sub-advised by Caspian Capital LP or its affiliates (together with the Principal
Stockholders, the “Holders”), pursuant to which the Holders have the ability to require us to register shares of our common
stock held by them for resale and which gives them certain “piggyback” registration rights. Further, we filed a registration
statement with the SEC on Form S-8 providing for the registration of shares of our common stock issued or reserved for
issuance under our 2017 Equity Incentive Plan. Subject to the satisfaction of vesting conditions, shares registered under the
registration statement on Form S-8 will be available for resale immediately in the public market without restriction, subject to
Rule 144 limitations with respect to affiliates.
In the future, we may also issue common stock for a number of reasons, including to finance our operations and
business strategy, to adjust our ratio of debt to equity, or to provide incentives pursuant to certain executive compensation
arrangements. Such future issuances of equity securities, or the expectation that they will occur, could cause the market price
for our common stock to decline. The price of our common stock also could be affected by hedging or arbitrage trading activity
that may exist or develop involving our common stock.
An investor’s percentage ownership in us may be diluted by future issuances of capital stock or securities or instruments
that are convertible into our capital stock, which could reduce its influence over matters on which stockholders vote.
Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our
authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be
issued to satisfy our obligations under our incentive plans, shares of our authorized but unissued preferred stock and securities
and instruments that are convertible into our common stock. Issuances of common stock or voting preferred stock would reduce
an investor’s influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, likely
would result in its interest in us being subject to the prior rights of holders of that preferred stock.
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We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or
series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our
common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more
classes or series of preferred stock could adversely impact the voting power or value of our common stock. In addition, the
issuance of such preferred stock could make it more difficult for a third party to acquire us. For example, we might grant
holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events
or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might
assign to holders of preferred stock could affect the residual value of the common stock.
Our four largest stockholders control a significant percentage of our common stock, and their interests may conflict with
those of our other stockholders.
As of December 31, 2017, investment funds managed, advised or sub-advised by Apollo Global Management LLC or
its affiliates (such funds, the “Apollo Funds”), investment funds managed, advised or sub-advised by GSO Capital Partners LP
or its affiliates (such funds, the “GSO Funds”), investment funds managed, advised or sub-advised by KKR Credit Advisors
(US) LLC or its affiliates (such funds, the “KKR Funds”), and investment funds managed, advised or sub-advised by Franklin
Mutual Advisers, LLC or its affiliates (such funds, the “Franklin Funds” and, together with the Apollo Funds, the GSO Funds
and the KKR Funds, the “Principal Stockholders”) beneficially owned 19.0%, 12.2%, 7.6% and 8.7%, respectively, of our
common stock. As a result, each of the Principal Stockholders may be able to exercise significant influence over matters
requiring stockholder approval, including the election of directors, changes to our organizational documents and significant
corporate transactions. Further, several individuals who serve as our directors are affiliates of each of the Principal
Stockholders. This concentration of ownership and relationships with the Principal Stockholders make it unlikely that any other
holder or group of holders of our common stock will be able to affect the way we are managed or the direction of our business.
The interests of the Principal Stockholders and of our directors who are affiliates of any of the Principal Stockholders with
respect to matters potentially or actually involving or affecting us, such as future acquisitions, financings and other corporate
opportunities, and attempts to acquire us, may conflict with the interests of our other stockholders, and the resolution of these
conflicts may not always be in your best interest. This continued concentrated ownership will make it impossible for another
company to acquire us and for you to receive any related takeover premium for your shares unless each of these stockholders
approves the acquisition. In addition, the Principal Stockholders’ concentration of stock ownership may also adversely affect
the trading price of our common stock to the extent investors perceive a disadvantage in owning stock of a company with
significant stockholders.
Our common stock is subject to the 382 Transfer Restrictions under our certificate of incorporation which are intended to
prevent a Section 382 “ownership change,” which if not complied with, could result in the forfeiture of such stock and
related dividends. Accordingly, this may impact the market price of our common stock.
Our certificate of incorporation contains certain transfer restrictions on our shares, which we refer to as the “382
Transfer Restrictions.” The 382 Transfer Restrictions are intended to prevent the likelihood that we will be deemed to have an
“ownership change” within the meaning of Section 382 of the Code that could limit or eliminate our ability to utilize significant
NOLs and other federal income tax attributes under and in accordance with the Code and regulations promulgated by the IRS.
In particular, without the approval of our board of directors, no person or group of persons treated as a single entity
under Treasury Regulation Section 1.382-3 will be permitted to acquire, whether directly, indirectly or constructively, and
whether in one transaction or a series of related transactions, any of our common stock or any other instrument treated as stock
for purposes of Section 382, to the extent that after giving effect to such purported acquisition (a) the purported acquirer, or any
other person by reason of the purported acquirer’s acquisition, would become a Substantial Holder (as defined below), or (b)
the percentage of ownership of our common stock by a person that, prior to giving effect to the purported acquisition, is already
a Substantial Holder would be increased. A “Substantial Holder” is a person that owns (as determined for purposes of Section
382 of the Code) at least 4.99% of the total value of our common stock, including any instrument treated as stock for purposes
of Section 382 of the Code.
Furthermore, under our certificate of incorporation, our board of directors has the sole power to determine compliance
with the 382 Transfer Restrictions and we cannot assure you that our board of directors will concur with any conclusions
reached by any holder of our securities or their respective advisors, and/or approve or ratify any proposed acquisitions of our
securities. If our board of directors determines that a Prohibited Transfer (as defined in our certificate of incorporation) has
occurred, such Prohibited Transfer shall, to the fullest extent permitted by law, be void ab initio and have no legal effect, and
44
upon written demand by us, the Purported Transferee (as defined in the certificate of incorporation) shall disgorge or cause to
be disgorged our securities, together with any dividends or distributions received, with respect to such securities.
The 382 Transfer Restrictions may make our stock less attractive to large institutional holders, discourage potential
acquirers from attempting to take over our company, limit the price that investors might be willing to pay for shares of our
common stock and otherwise have an adverse impact on the market for our common stock. Because of the complexity of
applying Section 382, and because the determination of ownership for purposes of Section 382 does not correspond to SEC
beneficial ownership reporting on Schedules 13D and 13G, stockholders and potential acquirers of our securities should consult
with their legal and tax advisors prior to making any acquisition of our securities that could implicate the 382 Transfer
Restrictions.
We could engage in or approve transactions involving our common stock that adversely affect significant stockholders and
our other stockholders.
Under the 382 Transfer Restrictions that are contained in our certificate of incorporation, prior to the third anniversary of
the IPO, our 4.99% stockholders will effectively be required to seek the approval of, or a determination by, our board of
directors before they engage in certain transactions involving our common stock. Furthermore, we could engage in or approve
transactions involving our common stock that limit our ability to approve future transactions involving our common stock by
our 4.99% stockholders without impairing the use of our federal income tax attributes. In addition, we could engage in or
approve transactions involving our common stock that cause stockholders owning less than 4.99% to become 4.99%
stockholders, resulting in those stockholders’ having to either disgorge our securities, and any dividends or distributions related
to such securities, in accordance with the 382 Transfer Restrictions or seek the approval of, or a determination by, our board of
directors before they could engage in certain future transactions involving our common stock. For example, share repurchases
could reduce the number of our common stock outstanding and result in a stockholder, that prior to the share repurchase held
less than 4.99%, becoming a 4.99% stockholder even though it has not acquired any additional shares. If it is determined by our
board of directors, such 4.99% stockholder may be required to disgorge our securities, and any dividends or distributions
related to such securities, in accordance with the 382 Transfer Restrictions and be subject to additional requirements as
determined by our board of directors in order to preserve our NOLs and other federal income tax attributes.
Provisions in our certificate of incorporation and bylaws and Delaware law make it more difficult to effect a change in
control of the Company, which could adversely affect the price of our common stock.
The existence of some provisions in our certificate of incorporation and bylaws and Delaware corporate law could
delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders. Our
certificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult, including:
•
•
•
•
•
•
our board of directors’ ability to issue, from time to time, one or more series of preferred stock and, with respect to
each such series, to fix the terms thereof by resolution;
provisions relating to the appointment of directors upon an increase in the number of directors or vacancy on our
board of directors;
provisions requiring stockholders to hold at least a majority of our outstanding common stock in the aggregate to
request special meetings;
provisions that restrict transfers of our stock (including any other instruments treated as stock for purposes of Section
382) that could limit our ability to utilize NOLs;
provisions that provide that the doctrine of “corporate opportunity” will not apply with respect to the Company, to any
of our stockholders or directors, other than any stockholder or director that is an employee, consultant or officer of
ours; and
provisions that set forth advance notice procedures for stockholders’ nominations of directors and proposals for
consideration at meetings of stockholders.
In addition, we have elected to opt out of Section 203 of the Delaware General Corporation Law ("DGCL"), which,
subject to some exceptions, prohibits business combinations between a Delaware corporation and an interested stockholder,
which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s
voting stock for a three-year period following the date that the stockholder became an interested stockholder.
45
These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to
elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders, which may limit the price that investors are willing to pay in the
future for shares of our common stock.
Our certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types
of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a
favorable judicial forum for disputes with us or our directors, officers or other employees.
Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of
Delaware will be the sole and exclusive forum for:
•
•
•
any derivative action or proceeding brought on our behalf;
any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or other employees to us
or our stockholders;
any action asserting a claim against us arising pursuant to any provision of the DGCL, our certificate of incorporation
or bylaws; or
•
any other action asserting a claim against us that is governed by the internal affairs doctrine.
In addition, our certificate of incorporation provides that if any action specified above (each is referred to herein as a
“covered proceeding”), is filed in a court other than the specified Delaware courts without the approval of our board of
directors (each is referred to herein as a foreign action), the claiming party will be deemed to have consented to (i) the personal
jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive
forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement
action by service upon such claiming party’s counsel in the foreign action as agent for such claiming party.
These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes
with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers
and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or
unenforceable in respect of, one or more of the covered proceedings, we may incur additional costs associated with resolving
such matters in other jurisdictions, which could adversely affect our business and financial condition.
The related party transactions and corporate opportunities provisions in our certificate of incorporation permit us to enter
into transactions in which one or more of our directors or officers may be a party to or may be interested in and could
enable our non-employee directors or stockholders and their affiliates to benefit from corporate opportunities that might
otherwise be available to us.
Subject to the limitations of applicable law, our certificate of incorporation, among other things:
•
•
•
permits us to enter into contracts and transactions in which one or more of our officers or directors may be a party to
or may be are financially or otherwise interested in so long as such contract or transaction is approved by our board of
directors in accordance with the DGCL;
permits any of our stockholders or non-employee directors and their affiliates to engage in a corporate opportunity in
the same or similar business activities or lines of business in which we engage or propose to engage, compete with us
and to make investments in any kind of property in which we may make investments and will not be deemed to have
(i) acted in a manner inconsistent with his or her fiduciary or other duties to us regarding the opportunity, (ii) acted in
bad faith or in a manner inconsistent with our best interests or (iii) be liable to us or our stockholders for breach of any
fiduciary duty by reason of the fact that they have engaged in such activities; and
provides that if any of our stockholders, non-employee directors or their affiliates acquire knowledge of a potential
business opportunity, transaction or other matter (other than one expressly offered to any non-employee director in
writing solely in his or her capacity as our director ), such stockholder, non-employee director or affiliate will have no
duty to communicate or offer that opportunity to us, and will be permitted to pursue or acquire such opportunity or
offer that opportunity to another person and will not be deemed to have (i) acted in a manner inconsistent with his or
her fiduciary or other duties to us regarding the opportunity, (ii) acted in bad faith or in a manner inconsistent with our
46
best interests or (iii) be liable to us or our stockholders for breach of any fiduciary duty by reason of the fact that they
have pursued or acquired such opportunity or offered the opportunity to another person.
Our Principal Stockholders or their affiliates, or our non-employee directors, may become aware, from time to time, of
certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in
which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity.
Further, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be
available to us or causing them to be more expensive for us to pursue. As a result, our renouncing our interest and expectancy
in any business opportunity that may be from time to time presented to our Principal Stockholders and their affiliates, or our
non-employee directors, could adversely impact our business or prospects if attractive business opportunities are procured by
such parties for their own benefit rather than for ours.
Each of our Principal Stockholders has resources greater than ours, which may make it more difficult for us to
compete with our Principal Stockholders with respect to commercial activities as well as for potential acquisitions. We cannot
assure you that any conflicts that may arise between us and our stockholders, on the one hand, and our Principal Stockholders,
on the other hand will be resolved in our favor. As a result, competition from our Principal Stockholders, and their affiliates
could adversely impact our results of operations.
Item 1B. Unresolved Staff Comments
None.
47
Item 2. Properties
The following map shows the major locations of our mining operations.
48
Our administrative headquarters and production facilities as of December 31, 2017 were as follows:
Business Unit/Location
(State/County/Town)
Principal Operations
Leased Owned
Leased Owned
Warrior Met Coal Mining, LLC
Land Acreage
Building Square
Footage
Alabama/Tuscaloosa/
Brookwood
Alabama/Jefferson &
Tuscaloosa/Adger &
Brookwood
Alabama/Mobile/Mobile
Warrior Met Coal BCE, LLC
Alabama/Tuscaloosa/Whitson
Warrior Met Coal Gas, LLC
Administrative headquarters & mine
support facilities
Coal mines, mine support facilities, land
holdings & barge loadout
-
-
- 624,070
20,898
46,863
-
Administrative headquarters, mine support
facilities & real estate
-
-
1,471
-
-
Coal mines & land holdings
26,194
1,930
-
2,360
Alabama/Tuscaloosa/Tuscaloosa Administrative headquarters & mine support
facilities
Natural gas fields-developed
Alabama/Tuscaloosa & Fayette /
Various
10
90,092
28
-
-
15,425
-
-
Real estate
Real estate-mineral interest only
-
21,216
- 170,075
400
-
12,430
-
Warrior Met Coal Land, LLC
Alabama/Various/Various
Alabama/Various/Various
Warrior Met Coal TRI, LLC
Alabama/Tuscaloosa/
Brookwood
Warrior Met Coal LA, LLC
Louisiana/Terrebonne/Houma
Warrior Met Coal WV, LLC
Real estate
Real estate
West Virginia/Various/Various
West Virginia/Various/Various
Real estate
Real estate-mineral interest only
-
-
-
-
188
440
3,460
3,223
2,510
3,740
-
-
-
-
-
-
Estimated Recoverable Coal Reserves
The estimates of our proven and probable reserves as of December 31, 2017 included in this Annual Report (i) for our
Mine No. 4 and Mine No. 7 were prepared by Marshall Miller, (ii) for our Blue Creek Energy Mine were prepared by Norwest,
and (iii) for our other mining properties described in this Annual Report were prepared by McGehee. Within Marshall Miller,
the technical person primarily responsible for preparing the estimates of our proven and probable reserves for our Mine No. 4
and Mine No. 7 is K. Scott Keim. Within Norwest, the technical person primarily responsible for preparing the estimates of our
proven and probable reserves for our Blue Creek Energy Mine is Kevin Whipkey. Within McGehee, the technical person
primarily responsible for preparing the estimates of our proven and probable reserves for our mining properties owned by
Warrior Met Coal TRI, LLC and Warrior Met Coal Land, LLC is Sanford M. Hendon.
We maintain an internal staff of engineers and geoscience professionals who worked closely with our independent reserve
engineers to ensure the integrity, accuracy and timeliness of the data used to calculate our estimated reserves. Our internal
technical team members meet with our independent reserve engineers periodically to discuss the assumptions and methods used
in the proved reserve estimation process. We provide historical information to the independent reserve engineers for our
properties, such as ownership interest, production, test data, commodity prices and operating and development costs.
These estimates are based on engineering, economic and geologic data, coal ownership information and current and
proposed mine plans. Our proven and probable coal reserves are reported as “recoverable coal reserves,” which is the portion of
the coal that could be economically and legally extracted or produced at the time of the reserve determination, taking into
account mining recovery and preparation plant yield. These estimates are periodically updated to reflect past coal production,
new drilling information and other geologic or mining data. Acquisitions or dispositions of coal properties will also change
49
these estimates. Changes in mining methods may increase or decrease the recovery basis for a coal seam, as will changes in
preparation plant processes.
“Reserves” are defined by the SEC Industry Guide 7 as that part of a mineral deposit which could be economically and
legally extracted or produced at the time of the reserve determination. Industry Guide 7 divides reserves between “proven
(measured) reserves” and “probable (indicated) reserves,” which are defined as follows:
•
•
“Proven (Measured) Reserves.” Reserves for which (a) quantity is computed from dimensions revealed in outcrops,
trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the
sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that
size, shape, depth and mineral content of reserves are well-established.
“Probable (Indicated) Reserves.” Reserves for which quantity and grade and/or quality are computed from information
similar to that used for proven (measured) reserves, but the sites for inspection, sampling and measurement are farther
apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven
(measured) reserves, is high enough to assume continuity between points of observation.
As of December 31, 2017, we had estimated reserves totaling 221.7 million metric tons, of which 117.3 million metric
tons, or 52.9%, were “assigned” recoverable reserves that were either being mined, were controlled and accessible from a then
active mine, or located at idled facilities where limited capital expenditures would be required to initiate operations when
conditions warrant. The remaining 104.3 million metric tons were classified as “unassigned,” representing coal at currently
non-producing locations that we anticipate mining in the future, but which would require significant additional development
capital before operations could begin. Our estimated reserves have increased as compared to December 31, 2016, primarily due
to updated mine plans and acquisition of additional mineral interest offset partially by production.
Our reserve estimates are predicated on engineering, economic, and geological data assembled and analyzed by internal
engineers, geologists and finance associates, as well as third-party consultants. We update our reserve estimates annually to
reflect past coal production, new drilling information and other geological or mining data, and acquisitions or sales of coal
properties.
The following table provides the location and coal reserves associated with each mine or potential mine as of December
31, 2017:
As of December 31, 2017
(in thousands of metric tons)(1)
Type(7)
Status of
Operation(6)
Coal Bed
Assigned/
Unassigned(4)
Reserves(2)
Proven(3)
Probable(3)
Owned
Leased
Recoverable Reserves(2)
Reserve Control(5)
Location/Mine
Alabama:
Warrior Met Coal Mining,
LLC
No. 4
U
Production
Blue Creek/
Mary Lee
Blue Creek/
Mary Lee
Assigned
41,994
41,979
15
— 41,994
Assigned
68,026
50,756
17,270
425
67,601
Production
No. 7
U
Warrior Met Coal BCE, LLC
U
Blue Creek Energy Mine
Warrior Met Coal TRI, LLC
Carter/Swann’s Crossing
S
Warrior Met Coal Land, LLC
S
S
S
S
S
Beltona East
Howton
Kimberly(8)
Morris(8)
Searles 8(8)
Exploration
Mary Lee
Unassigned
103,042
64,309
38,733
2,624
100,418
Idled
Brookwood Assigned
2,803
2,803
—
2,803
Development Black Creek Unassigned
Idled
Brookwood Unassigned
Development Black Creek Assigned
Assigned
Mary Lee
Production
Brookwood Assigned
Production
1,013
1,013
271
128
4,021
364
271
128
4,021
364
—
—
—
—
—
1,013
271
128
4,021
364
—
—
—
—
—
—
Total Alabama
Total Warrior Met Coal
221,662
165,644
56,018
11,649
210,013
221,662
165,644
56,018
11,649
210,013
50
(1) 1 metric ton is equivalent to 1.102311 short tons.
(2) Reserves are that part of a mineral deposit which can be economically and legally extracted or produced at the time of the reserve
determination. Recoverable reserves represent the amount of proven and probable reserves that can actually be recovered taking into
account all mining and preparation losses involved in producing a saleable product using existing methods under current law.
Recoverable reserve estimates incorporate losses for dilution and mining recovery based upon a 95% longwall recovery, 35% to 40%
continuous miner recovery and a 95% preparation plant efficiency. The ranges of met coal sales prices used to assess our reserves at the
time the reserve estimates were prepared were $102 and $93 per metric ton (which represents a 3-year average between 2014 and 2016)
at Mine No. 4 and Mine No. 7, respectively, and $160 to $180 per metric ton at Blue Creek Energy Mine. We believe that the ranges of
met coal sales prices used to assess our reserves at the time of the reserves estimates exclude favorable changes in met coal prices since
such time. Our mineral reserves were also assessed using a historical three year average met coal sales price to determine the reserves
were economical. Mine No. 4 and Mine No. 7 proven reserves were estimated within a 3/4 mile radius from point of measurement with
thickness and representative coal quality and probable reserves were estimated within a 3/4 mile radius from a point of measurement
with thickness but no representative coal quality. Mine No. 4 and Mine No. 7 mineral reserves were estimated within an accuracy
threshold of plus or minus 15 percent which represents the margin of error of a standard final feasibility study. The Blue Creek Energy
Mine and our surface mines proven reserves were estimated within a 3/4 mile radius from point of measurement. The Blue Creek Energy
Mine mineral reserves were estimated within an accuracy threshold of plus or minus 25 percent which represents the margin of error of a
standard pre-feasibility study. The Blue Creek Energy Mine is an adjacent property to our existing operating Mines No. 7 and No. 4 and
could allow for either a continuation of current production levels or allow for additional tons to be brought to market. This property has
similar mining conditions, measured geology and the ability to utilize equipment and infrastructure from our current operations.
(3) Reserves are further categorized as Proven (Measured) and Probable (Indicated) as defined by SEC Industry Guide 7 as follows: Proven
(Measured) Reserves are reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill
holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites of inspection, sampling and measurement
are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-
established. Probable (Indicated) Reserves are reserves for which quantity and grade and/or quality are computed from information
similar to that used for proven (measured) reserves, but the sites for inspection, sampling and measurement are father apart or are
otherwise less adequately spaced. The degree of assurance, although lower than for proven (measured) reserves, is high enough to
assume continuity between points of observation.
(4) “Assigned” reserves represent recoverable reserves that are either currently being mined, reserves that are controlled and accessible from
a currently active mine or reserves at idled facilities where limited capital expenditures would be required to initiate operations.
“Unassigned” reserves represent coal at currently non-producing locations that would require significant additional capital spending
before operations begin.
(5) “Reserve Control” of recoverable reserves is either through direct ownership of the property or through third-party leases. Third-party
leases have initial terms extending up to 30 years and generally provide for terms or renewals through the anticipated life of the
associated mine. These renewals are conditioned upon the payment of minimum royalties. Under current mining plans, assigned reserves
reported will be mined out within the period of existing leases or within the time period of probable lease renewal periods. All
recoverable reserves reported are either 100% owned or controlled through lease agreements.
(6) The “Status of Operation” for each mine is classified as follows: Exploration-mines where exploration has been conducted sufficient to
define recoverable reserves, but the mine is not yet in development or production stage; Development-we are engaged in the preparation
of an established commercially minable deposit (reserves) for extraction but that are not yet in production; Production-the mine is
actively operating; Idled -previously active mines that have been idled until such time as reinitiating operations are considered feasible.
If conditions warrant, the mines could be re-opened with less capital investment than would be required to develop a new mine.
(7) Type of Mine: U = Underground; S = Surface
(8) Reserve is leased to a third party, royalty is collected by us from the third party and we have first right of refusal to purchase mined
product if we elect to exercise the right.
51
The following table provides a summary of the quality of our reserves as of December 31, 2017:
Estimated Recoverable Coal Reserves (Continued)
As of December 31, 2017
(in thousands of metric tons)(1)
Quality
Location/Mine
Reserves
Type(2)
% Ash
% Sulfur
BTU/lb.
Average
Coal
Seam
Thickness
(in Feet)
Date Mine:
Acquired/
Opened
Ceased/
Idled
Alabama:
Warrior Met Coal Mining, LLC
No. 4 (3)
No. 7
Warrior Met Coal BCE, LLC
41,994 LVM/MVM 10.00
8.76
LVM
68,026
0.76
0.62
N/A
N/A
6.50
5.40
1,976
1,978
N/A
N/A
Blue Creek Energy Mine
103,042
HVM
9.10
0.70
N/A
5.20
N/A
N/A
Warrior Met Coal TRI, LLC
Carter/Swann’s Crossing
2,803
M/T
11.04
1.21
12,609
9.93
2011
2013
Warrior Met Coal Land, LLC
Beltona East
Howton
Kimberly
Morris
Searles 8
Total Alabama
Total Warrior Met Coal
1,013
271
128
4,021
364
221,662
221,662
M/T
M/T
M/T
T
M/T
7.79
11.94
6.47
20.39
11.99
2.58
1.27
2.32
1.19
1.29
14,162
12,686
13,747
11,272
12,544
4.88
7.52
5.58
5.15
7.92
N/A
2006
N/A
2014
2013
N/A
2009
N/A
N/A
N/A
1 metric ton is equivalent to 1.102311 short tons.
(1)
(2) Coal Type: M=Metallurgical Coal; T=Thermal; LVM = LV Metallurgical Coal; MVM = MV Metallurgical Coal; HVM =
High Volatility Metallurgical Coal
(3) Current pricing for Mine No. 4 reflects a combination of both LV and MV markets. It is anticipated that the pricing of
coal produced at Mine No. 4 for at least the next six years will be priced relative to the LV and MV markets. Beyond this
period, the volatile contents in the area are anticipated to increase and the coal may be priced relative to the MV and HV
markets.
52
The following table provides a summary of information regarding our mining operations as of December 31, 2017:
Location/Mine
Alabama:
Warrior Met Coal Mining, LLC
No. 4
No. 5*
No. 7
Warrior Met Coal BCE, LLC
Blue Creek Energy Mine
Warrior Met Coal TRI, LLC
Carter/Swann’s Crossing
Warrior Met Coal Land, LLC
Beltona East
Howton
Kimberly
Morris
Searles 8
Total Alabama
Total Warrior Met Coal
Transportation
Preparation Plant
Reserves
(thousands of
metric tons)(1)
Type(2)
Mining
Equipment(3) Rail
Other(4)
Capacity
(metric tons
per hr)
Utilization
%
Source of
Power(5)
LW,CM CSX
N/A
LW,CM CSX
N/A
T,B
N/A
T,B
1,180
907
2,177
86%
97%
88%
ALPCO
ALPCO
ALPCO
In exploration or development
S,T
N/A
T,B
N/A
N/A
ALPCO
In exploration or development
N/A
T
N/A
N/A
ALPCO
In exploration or development
N/A
N/A
T
T
N/A
N/A
N/A
N/A
ALPCO
ALPCO
S,T
S,T
S,T
41,994
U
N/A N/A
U
U
S
S
S
S
S
S
68,026
103,042
2,803
1,013
271
128
4,021
364
221,662
221,662
1 metric ton is equivalent to 1.102311 short tons.
(1)
(2) Type of Mine: S = Surface; U = Underground
(3) Mining Equipment: D = Dragline; S = Shovel/Excavator/Loader; T = Trucks; LW = Longwall; CM = Continuous Miner;
H=Highwall Miner
(4) Transportation: Other T = Trucks; B = Barge Loadout availability
(5) Source of Power: ALPCO = Alabama Power Company
*
Represents a preparation plant
The following table provides the production (in thousands) and average coal selling price per metric ton for our operating
mines for each of the three years ended December 31, 2017, 2016 and 2015:
Location/Mine
Alabama:
Warrior Met Coal Mining, LLC
No. 4
No. 7
Total Alabama
Production(1) / Average Coal Selling Price Per Metric Ton
2017
2016
2015
$188.68
$190.40
1,678
4,413
6,091
312
2,783
3,095
$138.00
$103.00
2,192
2,754
$99.00
$100.00
4,946
(1) There were no purchases of coal from third parties during the periods presented. All metric tons produced were on leased
property.
Information provided within the previous tables concerning our properties has been prepared in accordance with
applicable U.S. federal securities laws. All mineral reserve estimates have been prepared in accordance with SEC Industry
Guide 7.
53
Item 3. Legal Proceedings
We are involved in various legal proceedings occurring in the ordinary course of business. It is the opinion of
management, after consultation with legal counsel, that these matters will not materially affect our consolidated financial
position, results of operations or cash flows.
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. See “Part I, Item 1. Business—Environmental and
Regulatory Matters” for additional information. The Company believes that it is in substantial 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.
Item 4. Mine Safety Disclosures
The information concerning mine safety violations and other regulatory matters is filed as Exhibit 95 to this Annual
Report 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).
54
Part II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock began trading on the NYSE under the symbol “HCC” on April 13, 2017. Before then, there was no
public market for our common stock. The following table sets forth, for the periods indicated, the high and low sales prices of
our common stock as reported by the NYSE since April 13, 2017.
Second Quarter of 2017 (beginning April 13, 2017)
Third Quarter of 2017
Fourth Quarter of 2017
Holders
Low
High
$19.08 $15.10
$27.29 $17.32
$30.49 $18.56
As of February 7, 2018, we had approximately 444 holders of record of our common stock.
Dividends
On May 17, 2017, our board of directors adopted a policy (the “Dividend Policy”) of paying a quarterly cash dividend
of $0.05 per share. The initial quarterly dividend of $2.7 million was paid on June 13, 2017 to stockholders of record on May
30, 2017. The Dividend Policy also 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, our board of directors 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 our board of directors and subject to
consideration of a number of factors, including business and market conditions, future financial performance and other strategic
investment opportunities. We will also seek to optimize our capital structure to improve returns to stockholders while allowing
flexibility for us to pursue very selective strategic growth opportunities that can provide compelling stockholder returns. Our
ability to pay dividends on our common stock is limited by covenants in the ABL Facility and the indenture governing the
Notes and may be further restricted by the terms of any future debt or preferred securities. See “Part I, Item 1A. Risk Factors—
Risks Related to the Ownership of our Common Stock—Any declaration and payment of future dividends to holders of our
common stock may be limited by restrictive covenants of our ABL Facility and the indenture governing the Notes, and will be
at the sole discretion of our board of directors and will also depend on many factors” and “Part II, Item 7. Management’s
Discussion and Analysis of Financial Conditions and Results of Operation—Liquidity and Capital Resources—ABL Facility”
and “—Senior Secured Notes.”
On March 31, 2017, our board of managers declared a cash distribution payable to holders of our Class A Units, Class
B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in the aggregate amount of $190.0
million (the “March Special Distribution”). The March Special Distribution was funded with available cash on hand and was
paid to Computershare Trust Company, N.A., as disbursing agent, on March 31, 2017.
On July 31, 2017, our board of directors declared a regular quarterly cash dividend of $0.05 per share, which was paid
on August 23, 2017 to stockholders of record as of the close of business on August 14, 2017.
On October 25, 2017, our board of directors declared a regular quarterly cash dividend of $0.05 per share, which was
paid on November 10, 2017 to stockholders of record as of the close of business on November 3, 2017.
On November 2, 2017, our board of directors declared a special cash dividend of approximately $600.0 million, or
$11.21 per share to all our stockholders on a pro rata basis (the "November Special Dividend"). The November Special
Dividend was funded with the net proceeds from our private offering (the "Notes Offering") of $350.0 million aggregate
principal amount of Notes, together with cash on hand of approximately $260.0 million and was paid on November 22, 2017 to
stockholders of record as of the close of business on November 13, 2017.
55
Equity Compensation Plans
The following table sets forth certain information relating to our equity compensation plans as of December 31, 2017:
Number of Securities
to be Issued upon
Exercise of
Outstanding Options,
Warrants, and Rights
Weighted Average
Exercise Price of
Outstanding Options,
Warrants, and Rights(1)
Number of
Securities
Remaining
Available for
Future Issuance
Equity compensation plans approved
by security holders:
2017 Equity Incentive Plan
2016 Equity Incentive Plan
95,642(2)
43,580(3)
$
$
—
—
5,832,508
— (4)
(1) The weighted-average exercise price does not take into account restricted stock units or phantom units, which do not have
an exercise price.
(2) The number of securities to be issued under our 2017 Equity Incentive Plan represents 8,332 unvested restricted stock units
and 87,310 shares of common stock issuable upon settlement of vested restricted stock unit awards.
(3) The number of securities to be issued under our 2016 Equity Incentive Plan represents 43,580 shares of common stock
issuable upon settlement of a vested phantom unit award.
(4) While our 2016 Equity Incentive Plan remains in effect with respect to awards granted prior to the effectiveness of our 2017
Equity Incentive Plan, no further awards will be granted under the 2016 Equity Plan.
Recent Sales of Unregistered Securities
Total Number of
Shares Purchased
Average Price Paid
Per Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
161,324
$26.78
—
—
Period
November 1, 2017 -
November 30, 2017
__________
(1) 161,000 of 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. 324 of 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 2017 Equity Incentive Plan. Upon acquisition, these 324 shares
were retired.
Stock Performance Graph
The performance graph and the information contained in this section is not “soliciting material”, is being “furnished”
not “filed” with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act or the
Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language contained in
such filing.
The following graph shows a comparison from April 13, 2017 (the date our common stock commenced trading on the
NYSE) through December 31, 2017 of the cumulative total return for our common stock, the Russell 3000 Stock Index and the
Dow Jones U.S. Coal Index. The graph assumes that $100 was invested on April 13, 2017 in our common stock and each index
and that all dividends were reinvested.
Note that historical stock price performance is not necessarily indicative of future stock price performance.
56
Item 6. Selected Historical Financial Data
The following tables set forth our selected historical financial data as of and for each of the periods indicated. The
selected consolidated historical financial data as of December 31, 2017 and 2016, for the year ended December 31, 2017 and
for the nine months ended December 31, 2016 is derived from the audited consolidated financial statements of the Successor
included elsewhere in this Annual Report. The selected combined historical financial data for the three months ended March 31,
2016 and the year ended December 31, 2015 is derived from the audited combined financial statements of our Predecessor
included elsewhere in this Annual Report. The term “Successor” refers to (1) Warrior Met Coal, LLC and its subsidiaries for
periods beginning as of April 1, 2016 and ending immediately before the completion of our corporate conversion and (2)
Warrior Met Coal, Inc. and its subsidiaries for periods beginning with the completion of our corporate conversion and
thereafter. The term “Predecessor” refers to the assets acquired and liabilities assumed by Warrior Met Coal, LLC from Walter
Energy in the Asset Acquisition on March 31, 2016. The Predecessor periods included in this Annual Report begin as of
January 1, 2015 and end as of March 31, 2016.
You should read this selected consolidated and combined historical and pro forma financial data together with “Part II,
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements
and related notes thereto included elsewhere in this Annual Report. Our historical results are not necessarily indicative of our
future results of operations, financial position and cash flows.
57
Statements of Operations Data :
Revenues:
Sales
Other revenues
Total revenues
Costs and expenses:
Cost of sales (exclusive of items shown separately below)
Cost of other revenues (exclusive of items shown separately
Depreciation and depletion
Selling, general and administrative
Other postretirement benefits
Restructuring costs
Asset impairment charges
Transaction and other costs
Total costs and expenses
Operating income (loss)
Interest (expense), net
Gain on extinguishment of debt
Reorganization items, net
Income (loss) before income taxes
Income tax (benefit) expense (1)
Net income (loss)
Basic and diluted net income (loss) per share:
Net income (loss) per share—basic and diluted
Weighted average number of shares outstanding—basic
Weighted average number of shares outstanding— diluted
Dividends per share:
Statements of Cash Flow Data:
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Successor
Predecessor
For the
year ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
(in thousands except per share data)
$
65,154
6,229
71,383
72,297
4,698
28,958
9,008
514,334
30,399
544,733
601,545
27,442
123,633
38,922
6,160
3,418
—
—
124,539
(53,156)
(16,562)
—
7,920
(61,798)
18
30,899
13,832
27,986
—
864,259
(319,526)
(51,077)
26,968
(7,735)
(351,370)
(40,789)
(61,816) $ (310,581)
$
$ 1,124,645
44,447
1,169,092
276,560
21,074
297,634
$
592,530
28,422
75,413
36,453
—
—
—
12,873
745,691
423,401
(6,947)
—
—
416,454
(38,592)
455,046
8.62
52,800
52,806
14.92
$
$
$
244,723
19,367
47,413
20,507
—
—
—
13,568
345,578
(47,944)
(1,711)
—
—
(49,655)
18
(49,673)
(0.94)
52,640
52,640
—
$
$
$
$
434,512
$
$
$
(92,625) $
$ (458,279) $
(9,187)
(30,884)
192,727
$
$
$
(40,698) $ (131,818)
(5,422) $
(64,249)
(6,240) $ (147,145)
(1) The year ended December 31, 2017 includes the impact of the enactment of the Tax Cuts and Jobs Act discussed further in
Note 8 to our consolidated financial statements.
58
Balance Sheet Data:
Cash and cash equivalents
Working capital(2)
Mineral interests, net
Property, plant and equipment, net
Total assets
Long-term debt
Total liabilities not subject to compromise
Total stockholders’/members’ equity and parent net investment
__________________
Successor
Predecessor
December 31,
2017
December 31,
2016
December 31,
2015
(in thousands)
$
$
$
$
$
$
$
$
35,470
163,614
130,004
536,745
993,315
342,948
580,292
413,023
$
$
$
$
$
$
$
$
150,045
228,986
143,231
496,959
947,631
3,725
194,664
752,967
$
$
$
$
$
$
$
$
79,762
129,558
5,295
567,594
802,137
—
126,720
(820,861)
(2) Working capital consists of current assets less current liabilities, excluding current portion of long-term debt.
59
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides a narrative of our results of operations and financial condition for the
year ended December 31, 2017 (Successor), the nine months ended December 31, 2016 (Successor), the three months ended
March 31, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor). 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 forward looking 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 forward looking statements contained in the following discussion and analysis. Please see “Forward-Looking
Statements.”
Overview
We are a large scale, low cost U.S.-based producer and exporter of premium met coal operating two highly productive
underground mines in Alabama.
As of December 31, 2017 (Successor), Mine No. 4 and Mine No. 7, our two operating mines, had approximately 110.0
million metric tons of recoverable reserves and our undeveloped Blue Creek Energy Mine contained 103.0 million metric tons
of recoverable reserves. As a result of our high quality coal, our realized price has historically been in line with, or at a slight
discount to, the Australian LV 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 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.
Basis of Presentation
Our results on a “Predecessor” basis relate to the assets acquired and liabilities assumed by Warrior Met Coal, LLC
from Walter Energy in the Asset Acquisition and the related periods ending on or prior to March 31, 2016. Our results on a
“Successor” basis relate to Warrior Met Coal, LLC and its subsidiaries for periods beginning as of April 1, 2016 and Warrior
Met Coal, Inc. after giving effect to our corporate conversion on April 12, 2017 from a Delaware limited liability company into
a Delaware corporation. Our results for the Predecessor and Successor periods have been separated by a vertical line to identify
these different bases of accounting.
The historical costs and expenses reflected in the Predecessor combined results of operations include an allocation for
certain corporate functions historically provided by Walter Energy. Substantially all of the Predecessor’s senior management
were employed by Walter Energy and certain functions critical to the Predecessor’s operations were centralized and managed
by Walter Energy. Historically, the centralized functions have included executive senior management, financial reporting,
financial planning and analysis, accounting, shared services, information technology, tax, risk management, treasury, legal,
human resources, and strategy and development. The costs of each of these services have been allocated to the Predecessor on
the basis of the Predecessor’s relative headcount, revenue and total assets to that of Walter Energy.
The combined financial statements of our Predecessor included elsewhere in this Annual Report and the other historical
Predecessor combined financial information presented and discussed in this management’s discussion and analysis may not be
indicative of what our financial condition, results of operations and cash flows would actually have been had we been a
separate stand-alone entity, nor are they indicative of what our financial position, results of operations and cash flows may be in
the future.
60
Factors Affecting the Comparability of our Financial Statements
Asset Acquisition
On March 31, 2016, we consummated the acquisition of the Predecessor on a debt free basis with minimum legacy
liabilities. The Asset Acquisition included Mine No. 4 and Mine No. 7, which management believes to be two of the highest
quality and lowest cost met coal mines in the United States. Prior to the Asset Acquisition, the Company had no operations and
nominal assets. We acquired the Predecessor for an aggregate cash consideration of $50.8 million and the release of claims
associated with the 2011 Credit Agreement and Walter Energy’s 9.50% Senior Secured Notes due 2019. In connection with the
closing of the Asset Acquisition and in exchange for a portion of the outstanding first lien debt, Walter Energy’s First Lien
Lenders were entitled to receive, on a pro rata basis, a distribution of our Class A Units. We accounted for the Asset Acquisition
as a business combination under Accounting Standard Codification (“ASC”) Topic 805, Business Combinations.
As part of the Asset Acquisition, we incurred transaction costs related to professional fees in the amount of $10.5
million for the nine months ended December 31, 2016 (Successor), which is recorded in transaction and other costs on the
Statement of Operations.
Rights Offerings
As part of the Asset Acquisition, we also conducted the Rights Offerings. The Rights Offerings gave Walter Energy’s
First Lien Lenders and certain qualified unsecured creditors the option to purchase an aggregate 2,500,004 Class B Units for
$80.00 per unit and irrevocably commit to purchase, on the same pro rata basis, Class A Units in one or more capital raising
transactions at such later date and on such terms and subject to such conditions as determined by a supermajority vote of our
board of managers. The $200.0 million raised from the Rights Offerings was used to pay cash consideration of $50.8 million
for the Asset Acquisition, including repayment of certain debtor-in-possession credit agreements of Walter Energy, to sustain
our coal mining operations following consummation of the Asset Acquisition and for general corporate purposes.
Corporate Conversion and IPO
On April 12, 2017, in connection with the IPO, Warrior Met Coal, LLC filed a certificate of conversion, whereby
Warrior Met Coal, LLC effected a corporate conversion from a Delaware limited liability company to a Delaware corporation
and changed its name to Warrior Met Coal, Inc. As part of the corporate conversion, holders of Class A, Class B Units (which
included the Class B Units which had converted into Class A Units) and Class C Units of Warrior Met Coal, LLC received
shares of our common stock for each unit held immediately prior to the corporate conversion using an approximate 13.9459-to-
one conversion ratio. In connection with this corporate conversion, the Company filed a certificate of incorporation. Pursuant to
the Company’s certificate of incorporation, the Company is authorized to issue up to 140,000,000 shares of common stock,
$0.01 par value per share, and 10,000,000 shares of preferred stock, $0.01 par value per share. All references in this
“Management's Discussion and Analysis of Financial Condition and Results of Operations” to the number of shares and per
share amounts of common stock have been retroactively recast to reflect the corporate conversion.
On April 19, 2017, the Company completed its IPO, whereby certain selling stockholders sold 16,666,667 shares of
common stock at a price to the public of $19.00 per share. The Company did not receive any proceeds from the sale of common
stock in the IPO. All of the net proceeds from the IPO were received by the selling stockholders. The aggregate net proceeds to
the selling stockholders in the IPO were $296.9 million, net of underwriting discounts and commissions of $19.8 million. The
Company paid the offering expenses of $15.9 million on behalf of the selling stockholders. Following the closing of the IPO,
53,442,532 shares of common stock were outstanding. On April 13, 2017, our common stock began trading on the NYSE under
the ticker symbol “HCC” and on April 19, 2017, we closed our IPO.
61
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.
(in thousands)
Segment Adjusted EBITDA
Metric tons sold
Metric tons produced
Gross price realization (1)
Average net selling price per metric ton
Cash cost of sales per metric ton
Adjusted EBITDA
Successor
Predecessor
For the year
ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
$ 532,115
$
31,837
$
5,921
6,091
2,391
2,294
96%
92%
(7,143)
777
$ (115,197)
5,121
801
104%
4,946
97%
$
$
189.94
99.86
$ 517,702
$
$
$
115.67
82.84
50,089
$
$
$
83.85
$
100.44
69.74
(9,048)
$
112.96
$ (145,805)
(1) Gross price realization represents gross sales, excluding demurrage and other charges, divided by tons sold as a percentage of
the Australian LV Index or the Australian HCC Benchmark depending on the time period. The gross price realization for the
year ended December 31, 2017 is based on a volume weighted average Australian LV Index, and for the nine months ended
December 31, 2016 and the year ended December 31, 2015 is based on a volume weighted average Australian HCC
Benchmark.
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 fund capital expenditures; and
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment
opportunities.
62
Sales Volumes, Gross Price Realization 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 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 of LV 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.
Our gross price realization represents the blended gross sales of our LV and MV coal, excluding demurrage and quality
specification adjustments, divided by tons sold as a percentage of the quarterly Australian LV Index, which is a LV index price.
Our historical gross price realizations reflect the premiums and discounts we achieve on our LV and MV coal versus the
quarterly LV Australian LV Index average 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 quarterly Australian LV Index
average price per metric ton, primarily due to (a) tons that were priced at a previous quarter’s industry index price, but for
which revenue was recognized in a subsequent quarter and (b) due to our gross sales price per ton being based on a blended
average of gross sales price on our LV and MV coals as compared to the quarterly Australian LV Index average price.
The gross price realization for the year ended December 31, 2017 (Successor) and for the nine months ended December
31, 2016 (Successor) is based on a volume weighted average Australian LV Index average price as the Australian LV Index
average price is only set quarterly. As discussed in “-Overview,” beginning in the second quarter of 2017, the quarterly
Australian HCC Benchmark pricing methodology was replaced by an average index-based pricing methodology. Many of our
met coal supply agreements that were priced on a quarterly Australian HCC Benchmark basis are now priced based on either
the new industry average index-based quarterly price or 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 the Port of Mobile. 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.
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 the
Port of Mobile. 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.
63
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.
(in thousands)
Cost of sales
Asset retirement obligation accretion
Stock compensation expense
Mine No. 4 idle costs (1)
VEBA contribution (2)
Other (operating overhead, etc.)
Cash cost of sales
Successor
Predecessor
For the year
ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
$
$
592,530
(621)
(667)
—
—
—
$
591,242
$
244,723
(998)
—
(8,726)
(25,000)
(11,924)
198,075
$
$
72,297
(93)
—
(10,173)
—
(7,843)
54,188
$
601,545
—
—
—
—
(23,007)
578,538
$
(1) Represents idle costs incurred, such as electricity, insurance and maintenance labor. This mine was idled in early 2016
and restarted in August 2016.
(2) We entered into a new initial CBA with the UMWA pursuant to which we agreed to contribute $25.0 million to a
Voluntary Employees' Beneficiary Association (“VEBA”) trust formed and administered by the UMWA.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before net interest expense, income tax expense (benefit),
depreciation and depletion, net reorganization items, gain on extinguishment of debt, restructuring costs, asset impairment
charges, transaction and other costs, Mine No. 4 idle costs, VEBA contributions, non-cash stock compensation expense and
non-cash asset retirement obligation accretion. 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 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 loss and our presentation of Adjusted EBITDA may vary from that presented by other companies.
64
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.
Successor
Predecessor
For the year
ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
(in thousands)
Net income (loss)
$
455,046
$
Interest expense, net
Income tax expense (benefit)
Depreciation and depletion
Asset retirement obligation accretion (1)
Stock compensation expense (2)
Transaction and other costs (3)
Reorganization items, net (4)
Restructuring costs (5)
Mine No. 4 idle costs (6)
Gain on extinguishment of debt (7)
Asset impairment charges (8)
VEBA contribution (9)
6,947
(38,592)
75,413
1,834
4,181
12,873
—
—
—
—
—
—
Adjusted EBITDA
$
517,702
$
(49,673)
1,711
$
(61,816) $
16,562
18
47,413
2,817
509
13,568
—
—
8,726
—
—
18
28,958
1,169
390
—
(7,920)
3,418
10,173
—
—
(310,581)
51,077
(40,789)
123,633
4,236
4,034
—
7,735
13,832
—
(26,968)
27,986
25,000
50,089
$
—
(9,048) $
—
(145,805)
(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-recurring costs incurred by the Company in connection with our IPO and the Asset Acquisition (see
Notes 1 and 3 to our consolidated financial statements).
(4) Represents expenses and income directly associated with the Predecessor’s Chapter 11 Cases (as defined in Note 1 and
Note 11 to our consolidated financial statements).
(5) Represents cost and expenses in connection with workforce reductions at Mine No. 4 and Mine No. 7 and corporate
headquarters. (see Note 12 to our consolidated financial statements)
(6) Represents idle costs incurred, such as electricity, insurance and maintenance labor. This mine was idled in early 2016
and restarted in August 2016.
(7) Represents a portion of the gain on extinguishment of debt that was attributed to the Predecessor.
(8) Represents asset impairment charges associated with the Blue Creek Energy Mine, which was impaired during the
fourth quarter of 2015.
(9) We entered into a new initial CBA with the UMWA pursuant to which we agreed to contribute $25.0 million to a VEBA
trust formed and administered by the UMWA.
Results of Operations
The results of operations, cash flows and financial condition for the Predecessor and Successor periods reflect different
bases of accounting due to the impact of the Asset Acquisition on the financial statements. To aid the reader in understanding
the results of operations of each of these distinctive periods, we have provided the following discussion of our historical results
for the year ended December 31, 2017 (Successor), the nine months ended December 31, 2016 (Successor), the three months
ended March 31, 2016 (Predecessor), and the year ended December 31, 2015 (Predecessor). Due to these periods not being
comparable, each period is discussed below on a standalone basis.
65
Year Ended December 31, 2017 (Successor)
The following table summarizes certain financial information relating to our operating results that have been derived
from our audited financial statements for the year ended December 31, 2017 (Successor).
(in thousands)
Revenues:
Sales
Other revenues
Total revenues
Costs and expenses:
Cost of sales (exclusive of items shown separately below)
Cost of other revenues (exclusive of items shown separately below)
Depreciation and depletion
Selling, general and administrative
Transaction and other costs
Total costs and expenses
Operating income
Interest expense, net
Income before income tax benefit
Income tax benefit
Net income
Successor
For the year
ended December 31,
2017
% of
Total
Revenues
$
1,124,645
44,447
96.2 %
3.8 %
1,169,092
100.0 %
592,530
50.7 %
28,422
75,413
36,453
12,873
745,691
423,401
(6,947)
416,454
(38,592)
455,046
2.4 %
6.5 %
3.1 %
1.1 %
63.8 %
36.2 %
(0.6)%
35.6 %
(3.3)%
38.9 %
$
Sales, production and cost of sales components on a per unit basis for the year ended December 31, 2017 (Successor)
were as
follows:
Met Coal (metric tons in thousands)
Metric tons sold
Metric tons produced
Gross price realization (1)
Average net selling price per metric ton
Cash cost of sales per metric ton
Successor
For the year
ended December 31, 2017
5,921
6,091
96%
189.94
99.86
$
$
(1) Gross price realization represents gross sales, excluding demurrage and other charges, divided by tons sold as a percentage of
the Australian LV Index. The gross price realization for the year ended December 31, 2017 is based on a volume weighted
average Australian LV Index. Our gross price realization for the last nine months of 2017, which represents the period for the
new index methodology, was 100%.
Sales were $1.1 billion for the year ended December 31, 2017 (Successor), and were comprised of met coal sales of
5.9 million metric tons at an average selling price of $189.94 per metric ton. Mine No. 4 and Mine No. 7 were both operational
for the full year for the year ended December 31, 2017 (Successor), with one longwall operating at Mine No. 4 and two
longwalls operating at Mine No. 7. During the fourth quarter of 2017, we successfully moved three longwall operations, which
lowered total production as expected when compared to previous quarters during 2017.
Other revenues were $44.4 million, and were comprised of revenue derived from our natural gas operations, as well as
earned royalty revenue. Other revenues includes a realized gain of $5.4 million recognized on the fair value adjustment related
66
to our natural gas swap contracts. Cost of other revenues was $28.4 million, representing 2.4% of total revenues and 63.9% of
other revenues.
Cost of sales (exclusive of items shown separately below) was $592.5 million, or 50.7% of total revenues, and was
primarily comprised of met coal sales of 5.9 million metric tons at an average cash cost of sales of $99.86 per metric ton. Our
cost of sales reflects wages and benefits under our new initial CBA and our transportation and royalty contracts, which allow
for our cash cost of sales to move with changes in the price that we realize for our coal. During the fourth quarter of 2017, we
successfully moved three longwall operations, which lowered total production as expected when compared to previous quarters
during 2017. Longwall moves are challenging when combined with the normal difficult geological conditions near the end of a
panel, however, our success with completing the three longwall moves was the result of good planning and preparation. The
longwall moves increased our cash cost of sales per metric ton in the fourth quarter of 2017 compared to the previous quarters
in 2017 as expected.
Depreciation and depletion was $75.4 million, or 6.5% of total revenues, and was primarily related to depreciation of
machinery and equipment and depletion of mineral interests. Mine No. 7 and Mine No. 4 were both operational for the full
year in 2017.
Selling, general and administrative expenses were $36.5 million, or 3.1% of total revenues, reflecting the benefits of a
restructured business without the legacy costs and liabilities which were not assumed in the Asset Acquisition. Our selling,
general and administrative expenses also include costs associated with being a publicly traded entity. These expenses included
incremental independent auditor, legal, insurance and stock compensation expenses.
Transaction and other costs were $12.9 million, or 1.1% of total revenues, which was comprised primarily of
professional fees incurred in connection with the IPO.
Interest expense of $6.9 million, or 0.6% of total revenues, was comprised of interest on our Notes and security
agreement and promissory note, and $1.9 million amortization of debt discount and debt issuance costs associated with our
Notes and ABL Facility.
Income tax benefit for the year ended December 31, 2017 (Successor) was $38.6 million or an effective tax rate of
(9.27)%.
The Tax Cuts and Jobs Act significantly revised the U.S. corporate income tax regime by, among other things, lowering
the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic
production activities, implementing a territorial tax system, limiting the deduction for interest expense, limiting the use of net
operating losses generated on or after January 1, 2018 to offset taxable income and repealing the corporate AMT and triggering
refunding provisions for existing AMT credits. As of the date of this Annual Report, our accounting for the tax effects of
enactment of the Tax Cuts and Jobs Act is provisional as we have made a reasonable estimate of the effects on existing deferred
tax balances. Amounts recorded for the year ended December 31, 2017 (Successor) principally relate to the remeasurement of
the deferred tax assets and liabilities due to the reduction in the U.S. corporate income tax rate from 35% to 21%. This
remeasurement resulted in the Company reporting an income tax benefit of approximately $1.7 million due to the
remeasurement of the deferred tax liability associated with the indefinitely lived asset that will now reverse at the new 21% rate
along with a corresponding valuation allowance release. The remeasurement of the other deferred tax assets and liabilities had
a corresponding adjustment to the valuation allowance which resulted in no tax expense or benefit. We have made calculations
to reflect the changes for the Tax Cuts and Jobs Act based on currently available information and subsequent guidance may
result in a change to the current estimates. Additionally, the Tax Cuts and Jobs Act eliminated the AMT tax after 2017 and
provided for a refunding of AMT taxes paid in earlier years. This change resulted in the removal of the valuation allowance,
net of the current sequestration rate, on AMT credits and the reclassification of AMT credits to income taxes receivable. The
amount of AMT credits recorded as income taxes receivable is $39.3 million net of a sequestration estimate of $2.8 million.
These AMT credits are expected to be received in 2019 to 2022.
Our estimated savings in cash taxes for 2017 resulting from the utilization of our NOL carryforwards were
approximately $122.8 million (excluding impact of AMT credits), or $2.33 per diluted share.
On March 31, 2016, the Company experienced an ownership change for purposes of Section 382 of the Code. As a
result of such ownership change, absent an applicable exception to such rules, an annual limitation under Section 382 would
apply for federal and certain state income tax purposes with respect to the utilization of NOLs. In 2017, the Company had
requested a private letter ruling (“PLR”) from the IRS to clarify certain matters, that if ruled favorably on by the IRS, would
allow the Company to qualify for an exception to the aforementioned rules limiting its utilization of its NOLs. On September
67
18, 2017, the IRS issued to the Company a favorable PLR. Prior to the issuance of the PLR, the Company operated and
prepared its financial statements based on an assumption that an annual limitation on the utilization of the NOLs existed.
Based on the receipt of the favorable PLR, the Company now believes that it qualifies for an exception to such NOL limitation
rules and as such, no annual Code Section 382 limitation to the utilization of its federal NOLs applies. As a result of qualifying
for such exception and due to the reduction in the corporate income tax rate, the Company's federal and state NOLs were
revised downward to approximately $1.9 billion and $2.0 billion, respectively, as of December 31, 2016. Under the
aforementioned exception to the Code Section 382 limitation, if we were to undergo a subsequent ownership change within two
years of the consummation of the Asset Acquisition, or at any time prior to April 1, 2018, our NOLs would effectively be
reduced to zero. A subsequent ownership change could severely limit or eliminate our ability to utilize our NOLs and other tax
attributes. See "Part I, Item 1A. Risk Factors - 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." for additional discussion of this risk.
The Company records deferred tax assets to the extent these assets will more likely than not be realized. In making
such determination, the Company considered all available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, historical financial performance, our industry's historically cyclical
financial results and tax planning strategies. In 2016, the Company recorded a full valuation allowance against its net deferred
tax assets due to its cumulative three-year loss position compounded by negative industry-wide business trends at that time.
Despite strong recent financial performance in 2017, the Company concluded as of December 31, 2017 (Successor) that the
valuation allowance was still needed on its net deferred tax assets based upon the weight of the factors described above,
especially considering the history of losses. The Company continues to evaluate its cumulative income position and income
trend as well as its future projections of sustained profitability and whether this profitability trend constitutes sufficient positive
evidence to support a reversal of its valuation allowance (in full or in part).
Nine Months Ended December 31, 2016 (Successor)
The following table summarizes certain financial information relating to our operating results that have been derived
from our audited financial statements for the nine months ended December 31, 2016 (Successor).
(in thousands)
Revenues:
Sales
Other revenues
Total revenues
Costs and expenses:
Cost of sales (exclusive of items shown separately below)
Cost of other revenues (exclusive of items shown separately below)
Depreciation and depletion
Selling, general and administrative
Transaction and other costs
Total costs and expenses
Operating loss
Interest expense, net
Loss before income taxes
Income tax expense
Net loss
Successor
For the nine months
ended December 31,
2016
% of
Total
Revenues
$
$
276,560
21,074
297,634
244,723
19,367
47,413
20,507
13,568
345,578
(47,944)
(1,711)
(49,655)
18
(49,673)
92.9 %
7.1 %
100.0 %
82.2 %
6.5 %
15.9 %
6.9 %
4.6 %
116.1 %
(16.1)%
(0.6)%
(16.7)%
—
(16.7)%
Sales, production and cost of sales components on a per unit basis for the nine months ended December 31, 2016
(Successor) were as follows:
68
Met Coal (metric tons in thousands)
Metric tons sold
Metric tons produced
Gross price realization (1)
Average net selling price per metric ton
Cash cost of sales per metric ton
Successor
For the nine months
ended December 31, 2016
2,391
2,294
92%
115.67
82.84
$
$
(1) Gross price realization represents gross sales, excluding demurrage and other charges, divided by tons sold as a percentage of
the Australian HCC Benchmark price. The gross price realization for the nine months ended December 31, 2016 is based on a
volume weighted average Australian HCC Benchmark price as the Australian HCC Benchmark price was only set quarterly.
Sales were $276.6 million for the nine months ended December 31, 2016, and were comprised of met coal sales of 2.4
million metric tons at an average selling price of $115.67 per metric ton. Substantially all of these sales came from Mine No. 7
as Mine No. 4 was idled in early 2016 and reinitiated operations in August of 2016. Also, we restarted a second longwall in
Mine No. 7 in October 2016. Our sales were negatively impacted by roof instability issues experienced at Mine No. 7.
Beginning in October 2016, we completed mining on the longwall panel where we experienced the roof instability issues and
began production on a new longwall panel.
Other revenues were $21.1 million, and were comprised of revenue derived from our natural gas operations, as well as
earned royalty revenue. Cost of other revenues was $19.4 million, representing 6.5% of total revenues and 91.9% of other
revenues.
Cost of sales (exclusive of items shown separately below), was $244.7 million, or 82.2% of total revenues, and was
primarily comprised of met coal sales of 2.4 million metric tons at an average cash cost of sales of $82.84 per metric ton. Our
cash cost of sales was negatively impacted by the previously mentioned roof instability issues at Mine No. 7, carrying costs of
$8.7 million for the idled Mine No. 4, the $25.0 million VEBA contribution and an increase in royalty expense due to an
increase in our realized sales price.
Depreciation and depletion expense was $47.4 million, or 15.9% of total revenues, and was primarily related to
depreciation of machinery and equipment and depletion of mineral interests.
Selling, general and administrative expenses were $20.5 million, or 6.9% of total revenues, reflecting the benefits of a
restructured business without the legacy costs and liabilities which were not assumed in the Asset Acquisition.
Transaction and other costs associated with the Asset Acquisition and IPO were $13.6 million, or 4.6% of total
revenues, of which $10.5 million was comprised primarily of professional fees incurred in connection with the Asset
Acquisition and $3.1 million was comprised of professional fees incurred in connection with the IPO.
Interest expense of $1.7 million, or 0.6% of total revenues, is comprised of interest on our security agreement and
promissory note, and amortization of our ABL Facility origination fees.
Three Months Ended March 31, 2016 (Predecessor)
The following table summarizes certain financial information relating to the Predecessor’s operating results that have
been derived from our audited financial statements for the three months ended March 31, 2016 (Predecessor).
69
(in thousands)
Revenues:
Sales
Other revenues
Total revenues
Costs and expenses:
Cost of sales (exclusive of items shown separately below)
Cost of other revenues (exclusive of items shown separately below)
Depreciation and depletion
Selling, general and administrative
Other postretirement benefits
Restructuring cost
Total costs and expenses
Operating loss
Interest expense, net
Reorganization items, net
Loss before income taxes
Income tax expense
Net loss
Predecessor
For the three months
ended March 31,
2016
% of
Total
Revenues
$
$
65,154
6,229
71,383
72,297
4,698
28,958
9,008
6,160
3,418
124,539
(53,156)
(16,562)
7,920
(61,798)
18
(61,816)
91.3 %
8.7 %
100.0 %
101.3 %
6.6 %
40.6 %
12.6 %
8.6 %
4.8 %
174.5 %
(74.5)%
(23.2)%
11.1 %
(86.6)%
—
(86.6)%
Sales, production and cost of sales components on a per unit basis for the three months ended March 31, 2016
(Predecessor) were as follows:
Met Coal (metric tons in thousands)
Metric tons sold
Metric tons produced
Gross price realization (1)
Average net selling price per metric ton
Cash cost of sales per metric ton
Predecessor
For the three months
ended March 31, 2016
777
801
104%
83.85
69.74
$
$
(1) Gross price realization represents gross sales, excluding demurrage and other charges, divided by tons sold as a percentage of
the Australian HCC Benchmark price.
Sales were $65.2 million for the three months ended March 31, 2016, and were comprised of met coal sales of
0.8 million metric tons at an average selling price of $83.85 per metric ton.
Other revenues were $6.2 million, and were comprised of revenue derived from our natural gas operations, as well as
earned royalty revenue. Cost of other revenues was $4.7 million, representing 6.6% of total revenues and 75.4% of other
revenues.
Cost of sales (exclusive of items shown separately below), was $72.3 million, or 101.3% of total revenues, and was
primarily comprised of met coal sales of 0.8 million metric tons at an average cash cost of sales of $69.74 per metric ton. Our
cost of sales were negatively impacted by carrying costs of $10.2 million for the idled Mine No. 4.
70
Depreciation and depletion expense was $29.0 million, or 40.6% of total revenues, and was primarily related to
depreciation of machinery and equipment and mine development costs.
Selling, general and administrative expenses were $9.0 million, or 12.6% of total revenues, and were primarily
comprised of employee salaries and benefits.
Other postretirement benefits were $6.2 million, or 8.6% of total revenues, and represent postretirement healthcare
benefits of the Predecessor.
Restructuring cost of $3.4 million, or 4.8% of total revenues, resulted from the Predecessor idling Mine No. 4 and
workforce reductions at both Mine No. 4 and Mine No. 7 and corporate headquarters due to the continued decline in met coal
prices.
Interest expense of $16.6 million, or 23.2% of total revenues, represents interest on liabilities subject to compromise,
which were attributed to the Predecessor.
Reorganization items, net, was $7.9 million, or 11.1% of total revenues, and was comprised of an allocation of
corporate professional fees incurred by the Predecessor in relation to the Chapter 11 Cases of $11.0 million offset by rejected
executory contracts and leases of $18.9 million.
An income tax expense of $18.0 thousand was recognized for the three months ended March 31, 2016 as a result of
the recognition of a full valuation allowance.
Year Ended December 31, 2015 (Predecessor)
The following table summarizes certain financial information relating to the Predecessor’s operating results that have
been derived from our audited combined financial statements for the year ended December 31, 2015 (Predecessor).
(in thousands)
Revenues:
Sales
Other revenues
Total revenues
Costs and expenses:
Cost of sales (exclusive of items shown separately below)
Cost of other revenues (exclusive of items shown separately below)
Depreciation and depletion
Selling, general and administrative
Other postretirement benefits
Restructuring cost
Asset impairment charges
Total costs and expenses
Operating loss
Interest expense, net
Gain on extinguishment of debt
Reorganization items, net
Loss before income taxes
Income tax expense
Net loss
71
Predecessor
For the year
ended December 31,
2015
% of
Total
Revenues
$
$
514,334
30,399
544,733
601,545
27,442
123,633
38,922
30,899
13,832
27,986
864,259
(319,526)
(51,077)
26,968
(7,735)
(351,370)
(40,789)
(310,581)
94.4 %
5.6 %
100.0 %
110.4 %
5.0 %
22.7 %
7.1 %
5.7 %
2.5 %
5.1 %
158.7 %
(58.7)%
(9.4)%
5.0 %
(1.4)%
(64.5)%
(7.5)%
(57.0)%
Sales, production and cost of sales components on a per unit basis for the year ended December 31, 2015
(Predecessor) were as follows:
Met Coal (metric tons in thousands)
Metric tons sold
Metric tons produced
Gross price realization (1)
Average selling price per metric ton
Cash cost of sales per metric ton
Predecessor
For the year
ended December 31, 2015
5,121
4,946
97%
100.44
112.96
$
$
(1) Gross price realization represents gross sales, excluding demurrage and other charges, divided by tons sold as a percentage of
the Australian HCC Benchmark price. The gross price realization for the year ended December 31, 2015 is based on a volume
weighted average Australian HCC Benchmark price as the Australian HCC Benchmark price was only set quarterly.
Total revenues were $544.7 million for the year ended December 31, 2015.
Sales were $514.3 million for the year ended December 31, 2015, and were comprised of met coal sales of 5.1 million
metric tons at an average selling price of $100.44 per metric ton.
Other revenues were $30.4 million, and were comprised of revenue derived from our natural gas operations, as well as
earned royalty revenue. Cost of other revenues was $27.4 million, representing 5.0% of total revenues and 90.3% of other
revenues.
Cost of sales (exclusive of items shown separately below) was $601.5 million, or 110.4% of revenues, and was
primarily comprised of met coal sales of 5.1 million metric tons at an average cash cost of sales of $112.96 per metric ton.
Depreciation and depletion expense was $123.6 million, or 22.7% of total revenues, and was primarily related to
depreciation of machinery and equipment and mine development costs.
Selling, general and administrative expenses were $38.9 million, or 7.1% of total revenues, and were primarily
comprised of employee salaries and benefits and professional fees incurred in connection with the Chapter 11 Cases.
Other postretirement benefits were $30.9 million, or 5.7% of total revenues, and represent postretirement healthcare
benefits of the Predecessor.
Restructuring costs of $13.8 million, or 2.5% of total revenues, resulting from the Predecessor idling Mine No. 4 and
workforce reductions at both Mine No. 4 and Mine No. 7 as well as corporate headquarters due to the continued decline in in
met coal prices.
Asset impairment charges of $28.0 million, or 5.1% of total revenues, represent an asset impairment recognized in the
fourth quarter of 2015 associated with the Blue Creek Energy Mine as a result of management’s recoverability analysis.
Interest expense of $51.1 million, or 9.4% of total revenues, represents interest on liabilities subject to compromise
which were attributed to the Predecessor.
On March 6, 2015, Walter Energy issued an aggregate of 8.65 million shares of its common stock in exchange for $66.7
million of its 8.50% Senior Notes due 2021 and recognized a net gain on extinguishment of debt of $58.6 million, of which
$27.0 million, or 5.0% of total revenues, has been allocated to the Predecessor.
Reorganization items, net, was $7.7 million, or 1.4% of total revenues, and was comprised of an impairment of an
intercompany receivable from Walter Energy Canada Holdings, Inc. of $13.6 million, which was acquired in the Asset
72
Acquisition and an allocation of $19.3 million for corporate professional fees incurred in relation to the Chapter 11 Cases offset
by rejected workers’ compensation liabilities of $22.2 million and executory contracts of $2.8 million.
An income tax benefit of $40.8 million was recognized for the year ended December 31, 2015.
Liquidity and Capital Resources
Overview
Our sources of cash have been coal and natural gas sales to customers, proceeds received from the Rights Offering, the
Notes Offering 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, our capital expenditures, our reclamation obligations, professional fees and
other costs incurred in connection with the Asset Acquisition and our IPO. In addition, we use available cash on hand to pay
our quarterly dividend, and used cash on hand to pay the March Special Distribution and a portion of the November Special
Dividend, each of which reduced cash and cash equivalents.
Going forward, we will need cash to fund debt service payments on the Notes and our other indebtedness and to fund
operating activities, working capital, capital expenditures, and strategic investments. 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. We believe that our future cash flow from
operations, together with cash on our balance sheet and borrowing availability 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.
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. Although we
believe we can currently finance our operations on acceptable terms and conditions, 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 governing the Notes 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. See “Part I, Item 1A, Risk
Factors.”
Our available liquidity as of December 31, 2017 (Successor) was $135.5 million, consisting of cash and cash
equivalents of $35.5 million and $100.0 million available under our ABL Facility. We currently do not have any outstanding
borrowings under the ABL Facility. For the year ended December 31, 2017 (Successor), cash flows provided by operating
activities were $434.5 million, cash flows used in investing activities were $92.6 million and cash flows used in financing
activities were $458.3 million.
As discussed further in Note 8 to our consolidated financial statements, on September 18, 2017, the IRS issued to us a
private letter ruling that favorably impacts our ability to utilize our NOLs for federal income tax purposes. Prior to the issuance
of the private letter ruling, we applied an annual limitation on the utilization of NOLs pursuant to Section 382 of the Code and,
accordingly, expected to pay a significantly higher amount of income taxes for 2017. Following the issuance of the private
letter ruling, we believe that our NOLs will not be subject to the annual limit of Section 382 as previously applied during 2017.
Also, as discussed further in Note 8 to our consolidated financial statements the Tax Cuts and Jobs Act was enacted in
December 2017. We expect that our future free cash flow will meaningfully benefit from the favorable private letter ruling and
the Tax Cuts and Jobs Act due to (i) the unlimited use of our $1.6 billion NOLs and (ii) the refunding of AMT credits of
approximately $39.3 million, which we expect to receive in 2019 through 2022.
Statements of Cash Flows
Cash balances were $35.5 million, $150.0 million and $79.8 million at December 31, 2017 (Successor), December 31,
2016 (Successor) and December 31, 2015 (Predecessor), respectively.
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):
73
Successor
Predecessor
For the year
ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
$
$
434,512
(92,625)
(458,279)
(9,187)
(30,884)
192,727
$
(40,698) $ (131,818)
(64,249)
(5,422)
(147,145)
(6,240)
Net increase (decrease) in cash and cash equivalents and
restricted cash
$
(116,392) $
152,656
$
(52,360) $ (343,212)
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, non-cash reorganization items, amortization of debt issuance costs and debt discount, accretion of asset
retirement obligations and changes in net working capital. The timing between the conversion of our billed and unbilled
receivables into cash from our customers and disbursements to our vendors is the primary driver of changes in our working
capital.
Net cash provided by operating activities was $434.5 million for the year ended December 31, 2017 (Successor), and
was primarily attributed to net income of $455.0 million adjusted for depreciation and depletion expense of $75.4 million,
stock-based compensation expense of $4.2 million, amortization of debt issuance costs and debt discount of $1.9 million and
accretion of asset retirement obligations of $1.8 million, offset by a net increase in our working capital of $61.0 million. The
increase in our working capital was primarily driven by an increase in trade accounts receivables, income tax receivables, other
receivables, inventories, and prepaid expenses and other current assets offset partially by an increase in accounts payable,
accrued expenses and other current liabilities. The increase in our accounts receivable was primarily driven by an increase in
the average selling price per metric ton of our coal coupled with an increase in metric tons sold. The increase in our long-term
income tax receivable was due to refundable AMT credits which will be received in 2019 through 2022 for the 2018 through
2021 tax years, as a result of changes from the Tax Cuts and Jobs Act of 2017. The increase in inventories was due to the
continued ramp up of production throughout 2017. The increase in prepaid expenses was primarily due to an increase in
capitalized deferred longwall move expenses associated with the three longwall moves that occurred during the fourth quarter
of 2017. The increase in accounts payable and accrued expenses and other current liabilities was primarily driven by an
increase in expenditures due to the increase in production at Mine No. 4 and Mine No. 7.
Net cash used in operating activities was $9.2 million for the nine months ended December 31, 2016 (Successor), and
was primarily attributed to a net loss of $49.7 million adjusted for depreciation and depletion expense of $47.4 million,
amortization of debt issuance costs and debt discount of $1.2 million and accretion of asset retirement obligations of $2.8
million, offset by a net decrease in our working capital of $17.7 million. The decrease in our working capital was primarily
driven by effects of the Asset Acquisition, an increase in trade accounts receivable offset by an increase in accrued expenses
and other current liabilities as a result of an increase in sales and an increase in operating costs associated with the reinitiation
of Mine No. 4 operations in August 2016.
Net cash used in operating activities was $40.7 million for the three months ended March 31, 2016 (Predecessor), and
was primarily attributed to a net loss of $61.8 million adjusted for depreciation and depletion expense of $29.0 million, non-
cash reorganization items of $18.9 million, amortization of debt issuance costs and debt discount of $10.2 million and accretion
of asset retirement obligations of $1.2 million, offset partially by a net decrease in our working capital of $1.6 million. The net
decrease in our working capital was primarily driven by higher disbursements for accounts payable and accrued expenses and
other current liabilities in the period associated with our purchases from vendors, partially offset by a decrease in trade accounts
receivable.
Net cash used in operating activities was $131.8 million for the year ended December 31, 2015 (Predecessor), and was
primarily attributed to a net loss of $310.6 million adjusted for depreciation and depletion expense of $123.6 million, deferred
income tax benefit of $40.8 million, stock-based compensation expense of $4.0 million, non-cash reorganization items of $11.6
million, amortization of debt issuance costs and debt discount of $6.8 million, gain on extinguishment of debt of $27.0 million,
asset impairment charges of $28.0 million and accretion of asset retirement obligations of $4.3 million, and a net increase in
74
our working capital of $102.3 million. The increase in our working capital was primarily driven by lower disbursements for
accounts payable and accrued expenses and other current liabilities in the period associated with our purchases from vendors,
as well as a decrease in trade accounts receivable and inventories as a result of lower production and sales volumes due to the
decline in met coal prices during the period.
Investing Activities
Net cash used in investing activities was $92.6 million for the year ended December 31, 2017 (Successor), primarily as
a result of a significant capital investment program that we implemented in 2017 to upgrade all key production equipment to
further improve efficiency and reliability of the mining operations. We spent approximately $62.0 million in sustaining capital,
$26.0 million in capital for projects that had been deferred in prior years due to low met coal price environments and spent an
additional $19.0 million in other discretionary capital, which included the start of construction of a new portal at Mine No. 7
that we expect will be completed in 2018. The cash capital expenditures exclude non-cash capital accruals and leases of
approximately $15.0 million.
Net cash used in investing activities was $30.9 million for the nine months ended December 31, 2016 (Successor),
primarily as a result of the cash used in connection with the Asset Acquisition and the purchase of U.S. Treasury bills posted as
collateral for the self-insured black lung claims that were assumed in the Asset Acquisition of $17.5 million.
Net cash used in investing activities was $5.4 million and $64.2 million for the three months ended March 31, 2016
(Predecessor) and the year ended December 31, 2015 (Predecessor), respectively, primarily due to purchases of property, plant
and equipment.
Financing Activities
Net cash used in financing activities was $458.3 million for the year ended December 31, 2017 (Successor), primarily
due to the payment of the March Special Distribution, November Special Dividend and quarterly dividends totaling $796.9
million in the aggregate, payment of debt issuance costs of $2.6 million, retirements of debt of $3.1 million, offset partially by
the net proceeds from the Notes Offering of $344.8 million.
Net cash provided by financing activities was $192.7 million for the nine months ended December 31, 2016
(Successor), primarily due to the proceeds received from the Rights Offerings offset by payments of debt issuance costs. Net
cash used in financing activities was $6.2 million for the three months ended March 31, 2016 (Predecessor). Cash flows from
financing activities for the Predecessor periods primarily represent net transfers to/from Walter Energy and net payments on
debt. As cash and the financing of our Predecessor's operations have historically been managed by Walter Energy, the
components of net transfers to/from Walter Energy include cash transfers from us to Walter Energy and the payments by Walter
Energy to settle our obligations. These transactions are considered to be effectively settled for cash at the time the transaction
is recorded.
Dividend Policy
On May 17, 2017, our board of directors adopted the Dividend Policy of paying a quarterly cash dividend of $0.05 per
share. The initial quarterly dividend of $2.7 million was paid on June 13, 2017 to stockholders of record on May 30, 2017. The
Dividend Policy also 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, our board of directors 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 our board of directors 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 flexibility for the Company to pursue very selective strategic growth opportunities that can provide compelling
stockholder returns.
On July 31, 2017, our board of directors declared a regular quarterly cash dividend of $0.05 per share, totaling $2.7
million, which was paid on August 23, 2017, to stockholders of record as of the close of business on August 14, 2017.
On October 25, 2017, our board of directors declared a regular quarterly cash dividend of $0.05 per share, totaling $2.7
million, which was paid on November 10, 2017, to stockholders of record as of the close of business on November 3, 2017.
75
On February 13, 2018, our board of directors declared a regular quarterly cash dividend of $0.05 per share, totaling
$2.7 million, which will be paid on March 2, 2018, to stockholders of record as of the close of business on February 23, 2018.
March Special Distribution
On March 31, 2017, our board of managers declared a cash distribution payable to holders of our Class A Units, Class
B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in the aggregate amount of $190.0
million. The March Special Distribution was funded with available cash on hand and was paid to Computershare Trust
Company, N.A., as disbursing agent, on March 31, 2017.
November Special Dividend
On November 2, 2017, our board of directors declared the November Special Dividend of approximately $600.0
million, which was funded with the net proceeds from the Notes Offering, together with cash on hand of approximately $260.0
million and was paid on November 22, 2017 to stockholders of record as of the close of business on November 13, 2017.
Public Company Transaction Expenses
General and administrative expenses related to being a publicly traded company include: Exchange Act reporting
expenses; expenses associated with listing on the NYSE; incremental independent auditor fees; incremental legal fees; investor
relations expenses; registrar and transfer agent fees; incremental director and officer liability insurance costs; and director
compensation. As a publicly traded company, we expect that general and administrative expenses will increase in future
periods.
ABL Facility
On April 1, 2016, we entered into the ABL Facility with certain lenders and Citibank, 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.
On January 23, 2017, we entered into Amendment No. 1 to the ABL Facility (the “First Amendment”) to, among other
things, (i) increase the aggregate lender commitment to $100.0 million, (ii) reduce the applicable interest rate margins by 100
basis points (“bps”), (iii) permit the corporate conversion and (iv) allow the IPO to be consummated without triggering a
change of control.
On March 24, 2017, we entered into Amendment No. 2 to the ABL Facility to modify certain terms relating to the
restricted payment covenant, which provides us with improved flexibility to pay dividends, including the November Special
Dividend.
On May 15, 2017, we entered into Amendment No. 3 to the ABL Facility and Amendment No. 1 to the Pledge and
Security Agreement dated as of April 1, 2016 (the “Security Agreement”) to, among other things, (i) allow for the posting of
cash collateral to secure certain swap and hedging arrangements permitted under the ABL Facility and (ii) allow for the
payment of dividends permitted under the ABL Facility within 60 days of declaration thereof.
On October 3, 2017, we entered into Amendment No. 4 to the ABL Facility and Amendment No. 2 to the Security
Agreement (the “Fourth Amendment”) to, among other things, (i) provide an exception to the indebtedness and lien negative
covenants in the ABL Facility to permit us to incur indebtedness in an aggregate principal amount not to exceed $500.0 million
at any time outstanding, which indebtedness may be unsecured or secured and (ii) to amend certain provisions in the Security
Agreement to reflect additional lien and indebtedness capacity granted under the ABL Facility as amended by the Fourth
Amendment.
Under the ABL Facility, up to $10.0 million of the commitments may be used to incur swingline loans from Citibank
and up to $50.0 million of the commitments may be used to issue letters of credit. The ABL Facility will mature on April 1,
2019. As of December 31, 2017 (Successor), no amounts were outstanding under the ABL Facility and there were no
outstanding letters of credit. At December 31, 2017 (Successor), we had $100.0 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
76
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 LIBOR plus an applicable margin, which is
determined based on the average availability of the commitments under the ABL Facility, and ranged from 300 bps to 350 bps
as of December 31, 2016 and subsequent to the First Amendment dated January 23, 2017 ranges from 200 bps to 250 bps. 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 250 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 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 of December 31, 2017, 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 December 31, 2017 (Successor).
Senior Secured Notes
On November 2, 2017, we consummated the Notes Offering of $350.0 million aggregate principal amount of the Notes.
The Notes mature on November 1, 2024 and are fully and unconditionally guaranteed on a joint and several basis by each of
our direct and indirect wholly-owned domestic restricted subsidiaries that are guarantors under the ABL Facility (subject to
customary release provisions). The Notes are governed by an indenture dated as of November 2, 2017. The Notes accrue
interest at 8.00% per annum and are payable semi-annually in arrears on May 1 and November 1 of each year. We used the net
proceeds of approximately $340.0 million from the Notes Offering, together with cash on hand of approximately $260.0
million, to pay the November Special Dividend.
The Notes will mature on November 1, 2024 and interest is payable on May 1 and November 1 of each year,
commencing May 1, 2018.
At any time prior to November 1, 2020, 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) 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 after November 1, 2020, at redemption prices specified in the indenture, plus accrued and unpaid
interest, if any, to, but excluding the redemption date. At any time on or prior to November 1, 2020, 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 108.00%
77
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 it
experiences 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 it makes certain asset sales or dispositions and does 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.
Promissory Note
As of December 31, 2017 (Successor), we had debt outstanding of $3.7 million, $2.9 million of which was classified as
current, which represents a security agreement and promissory note assumed in the Asset Acquisition. The promissory note
matures on March 31, 2019 and bears a fixed interest rate of 4.00% per annum. We are required to make periodic payments of
principal and interest over the term of the promissory note. The promissory note is secured by the underground mining
equipment it was used to purchase.
Voluntary Employee Beneficiary Association
In connection with the Asset Acquisition, we entered into a new initial CBA with the UMWA pursuant to which we
agreed to contribute $25.0 million to a VEBA trust to be formed and administered by the UMWA. We paid $4.2 million and
$20.8 million in installments during the year ended December 31, 2017 and the nine months ended December 31, 2016,
respectively. Contributions to the VEBA are non-recurring in nature and were immediately expensed and included within cost
of sales in the Statements of Operations.
Restricted Cash
As of December 31, 2017 (Successor), restricted cash included $0.8 million in other long-term assets in the
Consolidated Balance Sheet which represents amounts invested in certificate of deposits as financial assurance for post mining
reclamation obligations.
Short-Term Investments
During the year ended December 31, 2017, we purchased $17.5 million in United States Treasury bills with a maturity
of six months. These Treasury bills 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 Asset Acquisition and relate to
periods prior to March 31, 2016.
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. 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 or to develop the high-quality met coal recoverable reserves at our Blue
Creek Energy Mine in the future 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 that are beyond our control.
Our cash capital expenditures were $92.6 million for the year ended December 31, 2017 (Successor), primarily as a
result of a significant capital investment program that we implemented in 2017 to upgrade all key production equipment to
further improve efficiency and reliability of our mining operations. We spent approximately $62.0 million in sustaining capital
which was within our guidance of $60.0 to $65.0 million, $26.0 million in capital for projects that had been deferred in prior
years due to low met coal price environments, which was within our guidance of $22.0 to $27.0 million, and an additional
$19.0 million in other discretionary capital, which included the start of construction of a new portal at Mine No. 7 that we
78
expect will be completed in 2018 and which was also within our guidance. The cash capital expenditures exclude non-cash
capital accruals and leases of approximately $15.0 million.
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.
We expect to continue making significant capital expenditures in 2018 above our normal sustaining capital expenditures
that we believe will further improve efficiency, reliability and production levels in 2018 and the future. Total capital spending
will depend upon a number of factors, including business and economic conditions, the met coal pricing environment and our
expected financial performance and our capital expenditures can be reduced if those conditions were to deteriorate in 2018 or
beyond. Our capital spending is expected to range from $100.0 to $120.0 million for the full year 2018, consisting of
sustaining capital expenditures of approximately $70.0 to $83.0 million and discretionary capital expenditures of approximately
$30.0 to $36.0 million. Our sustaining capital expenditures include expenditures related to longwall operations, safety
upgrades and gas businesses. Our discretionary capital expenditures include the completion of a new portal for Mine No. 7 and
other various operational improvements, which will increase efficiency, increase production and lower costs over time. Because
of the long lead times on the discretionary capital spending, we expect to realize the benefits of those projects primarily in 2019
and beyond. These amounts set forth above do not include any potential spending associated with our Blue Creek Energy Mine
should we decide to develop it for production in the future.
Contractual Obligations
The following is a summary of our significant contractual obligations at December 31, 2017.
Promissory note (principal and interest)(1)
Senior Secured Notes (principal and interest)(2)
Minimum throughput obligations(3)
Royalty obligations(4)
Black lung obligations(5)
Asset retirement obligations(5)
Capital lease obligations (6)
Payments due by Year
Total
Less than
1 year
1 - 3 years
3 - 5 years
More than
5 years
$
3,824 $
3,060 $
764 $
— $
(in thousands)
546,000
344,403
86,106
92,295
112,407
5,784
28,000
43,500
5,486
1,685
3,586
5,313
58,333
87,769
10,348
4,356
11,896
471
56,000
88,820
10,324
4,094
9,843
—
—
403,667
124,314
59,948
82,160
87,082
—
Total contractual obligations
$ 1,190,819 $
90,630 $
173,937 $
169,081 $
757,171
(1) Represents a security agreement and promissory note assumed in the Asset Acquisition. The agreement was entered into
for the purchase of underground mining equipment. The promissory note matures on March 31, 2019, has a fixed interest
rate of 4.00% per annum and is secured by the underground mining equipment it was used to purchase.
(2) Represents principal and interest payments on our Notes. See Note 16 to our consolidated financial statements.
(3) Represents minimum throughput obligations with our rail and port providers.
(4) We have obligations on various coal and land leases to prepay certain amounts, which are recoupable in future years
when mining occurs.
(5) Represents estimated costs for black lung and asset retirement obligations, which have been presented on an
undiscounted basis.
(6) Represents a capital lease obligations for the purchase of underground mining equipment.
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 December 31, 2017 (Successor), we had outstanding surety bonds and letters of credit with
parties for post-mining reclamation at all of our mining operations totaling $38.1 million, and $2.1 million for miscellaneous
purposes.
79
Critical 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.
Coal Reserves
There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal
reserves, including many factors that are beyond our control. As a result, estimates of economically recoverable coal reserves
are by their nature uncertain. Information about our reserves 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 estimates including:
•
•
•
•
•
•
geological conditions;
historical production from the area compared with production from other producing areas;
the assumed effects of regulations and taxes by governmental agencies;
previously completed geological and reserve studies;
assumptions governing future prices; and
future operating costs.
Some of the factors and assumptions, which will change from time to time, that impact economically recoverable
reserve estimates include, among other factors:
• mining activities;
•
•
new engineering and geological data;
acquisition or divestiture of reserve holdings; and
• modification of mining plans or mining methods.
Each of these factors may vary considerably from the assumptions used in estimating reserves. For these reasons,
estimates of economically recoverable quantities of coal attributable to a particular group of properties, and classifications of
these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production,
revenues and expenditures with respect to reserves 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 and depletion
rates. As of December 31, 2017, we had 221.7 million metric tons of proven and probable coal reserves.
80
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 in the 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. 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.
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. At December 31, 2017 (Successor),
we had recorded asset retirement obligation liabilities of $99.7 million, including $3.6 million reported as current.
Black Lung
We also have significant liabilities for uninsured miners’ black lung benefit liabilities that were assumed in connection
with the Asset Acquisition. The recorded amounts of these liabilities are based on estimates of loss from individual claims and
on estimates of incurred but not reported claims determined on an actuarial basis from historical experience using assumptions
regarding rates of successful claims, benefit increases and mortality rates.
Black lung benefit liabilities are also affected by discount rates used. A discount rate of 3.56% was used to calculate the
present value of the obligation as of December 31, 2017 (Successor). Changes in the frequency or severity of losses from
historical experience and changes in discount rates or actual losses on individual claims that differ materially from estimated
amounts could affect the recorded amount of these liabilities. As of December 31, 2017 (Successor), we had recorded black
lung liabilities of $31.9 million, of which $1.7 million is classified in other current liabilities and the remainder of $30.2 million
is shown as a long-term liability as a separate line item in the Balance Sheet. At December 31, 2017 (Successor), a one-
percentage-point increase in the discount rate would decrease the liability by $4.4 million, while a one-percentage-point
decrease in the discount rate would increase the liability by $5.6 million.
Income Taxes
As a result of the Asset Acquisition, we have significant federal and state NOLs of approximately $1.6 billion as of
December 31, 2017 (Successor).
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
regular U.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.”
On September 18, 2017, the IRS 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 the IRS 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. As a result of our qualifying for this
exemption, if we were to undergo a subsequent ownership change within two years of the Asset Acquisition, or prior to April 1,
2018, our NOLs would effectively be reduced to zero. In addition, a subsequent ownership change occurring after April 1, 2018
could limit our ability to utilize our NOLs and other tax attributes.
81
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 U.S. deferred tax assets, we considered all available positive and
negative evidence, including scheduled reversals of deferred tax liabilities, carryback of future period losses to prior periods,
projected future taxable income, tax planning strategies and recent financial performance. Based on our review of all positive
and negative evidence, including a three year U.S. cumulative pre-tax loss, we concluded that a valuation allowance should be
recorded against our deferred tax assets that are not expected to be realized through future sources of taxable income generated
from carrybacks of future period losses, scheduled reversals of deferred tax liabilities and tax planning strategies. As a result, a
valuation allowance was recorded to reflect the portion of the U.S. federal and state deferred tax assets that are not likely to be
realized based upon all available evidence. If we later determine that we will more likely than not realize all, or a portion, of the
U.S. deferred tax assets, we will reverse the valuation allowance in a future period. All future reversals of the valuation
allowance would result in a tax benefit in the period recognized.
The Tax Cuts and Jobs Act, which was enacted in December 2017, had a substantial impact on our income tax benefit
and deferred income taxes for the year ended December 31, 2017. See Note 8 to our consolidated financial statements for
further detail.
Recently Adopted Accounting Standards
See Note 2 of our consolidated financial statements for disclosures related to new accounting policies adopted.
82
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
We are exposed to commodity price risk on sales of coal. We sell most of our met coal under contracts primarily with
pricing terms of three months and volume terms of up to one year. 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 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. As of December 31, 2017 (Successor), we had
natural gas swap contracts outstanding with notional amounts totaling 8,400 million British thermal units maturing in the fourth
quarter of 2018. 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
Statements of Operations. All of our derivative instruments were entered into for hedging purposes rather than speculative
trading.
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 exposure to
credit losses and maintain allowances for anticipated losses. As of December 31, 2017 (Successor) and December 31, 2016
(Successor) we did not have any allowance for credit losses associated with our trade accounts receivables.
Interest Rate Risk
On November 2, 2017, we consummated the Notes Offering of $350.0 million aggregate principal amount of the Notes.
The Notes have a fixed rate of 8.00% per annum and are payable semi-annually in arrears on May 1 and November 1 of each
year.
On April 1, 2016, we entered into the ABL Facility, as amended, that bears an interest rate equal to LIBOR plus an
applicable margin, which is based on the average availability of the commitments under the ABL Facility, ranging currently
from 200 bps to 250 bps. 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 December 31, 2017 (Successor),
assuming we had $100.0 million outstanding under our ABL Facility, a 100 bps point increase or decrease in interest rates
would increase or decrease our annual interest expense under the ABL Facility by approximately $1.0 million.
Impact of Inflation
While inflation may impact our revenues and cost of sales, we believe the effects of inflation, if any, on our results of
operations and financial condition have not been significant. However, there can be no assurance that our results of operations
and financial condition will not be materially impacted by inflation in the future.
Item 8. Financial Statements and Supplementary Data
The information required by this item appears beginning on page F-1 following the signature pages of this Annual
Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
83
Item 9A. 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 December 31, 2017. Based on the
evaluation of our disclosure controls and procedures as of December 31, 2017, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2017, 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.
This Annual Report does not include a report of management’s assessment regarding internal control over financial
reporting or an attestation report of our registered public accounting firm due to a transition period established by the rules of
the SEC for newly public companies.
Remediation of Material Weaknesses in Internal Control Over Financial Reporting
Prior to the Asset Acquisition, we were a newly formed company that acquired its operating assets from Walter Energy,
which had recently filed for bankruptcy. This resulted in our accounting and financial reporting function having limited
accounting and financial reporting personnel and other resources with which to address our internal controls and procedures. In
connection with the audits of the financial statements of our Predecessor, our independent registered public accounting firm
identified two material weaknesses in our internal control over financial reporting. A material weakness is defined as a
deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
These material weaknesses resulted in material adjustments to the financial statements of our Predecessor which were corrected
in the historical periods presented.
•
•
The two material weaknesses identified related to our Predecessor’s internal control over financial reporting:
Financial close processes: This material weakness relates to the Predecessor’s design and operation of the account
balance reconciliation process, including the performance and preparation of accounting reconciliations and the
adequacy of the review of such account balance reconciliations.
Process to estimate asset retirement obligation costs: This material weakness relates to the Predecessor’s calculation of
asset retirement obligations and ineffective coordination between operational and accounting personnel to determine
the appropriate asset retirement obligation.
At the time that the material weaknesses occurred, Walter Energy, the parent of our Predecessor, was in bankruptcy.
Many of the employees directly involved in the Predecessor’s account reconciliation process and calculation of the asset
retirement obligation had been terminated or had resigned. Many routine and non-routine functions were reassigned to a limited
number of financial reporting personnel. Further, during this time, GAAP financial statements were not being prepared for
purposes of public disclosure and filing with the SEC.
Management remediated these material weaknesses in the first quarter of 2017. The remediation process began
following the closing of the Asset Acquisition, when we implemented a new enterprise resource planning system, re-designed
and implemented additional internal controls, including establishing additional controls over the compilation and validation of
data and inputs used to estimate asset retirement obligation costs, reassigned existing personnel and hired additional personnel,
including a Chief Financial Officer effective January 1, 2017.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable and
not absolute assurance that the objectives of the system will be met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future events. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been
detected or that judgments in decision-making are not based on faulty input.
84
Our independent registered public accounting firm has not yet performed an audit of our internal control over financial
reporting and is not required to report on management’s assessment of our internal control over financial reporting until we file
our Annual Report on Form 10-K for the year ended December 31, 2018.
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.
Item 9B. Other Information
None.
85
Item 10. Directors, Executive Officers and Corporate Governance
Part III
Information regarding our Code of Business Conduct and Ethics and Corporate Governance Guidelines for our
principal executive officer and principal financial and accounting officer are described in “Item 1. Business” in this Annual
Report. Pursuant to paragraph 3 of General Instruction G to Form 10-K, we incorporate by reference into this Item 10 the
information to be disclosed in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC
within 120 days after the close of the year ended December 31, 2017.
Item 11. Executive Compensation
Pursuant to paragraph 3 of General Instruction G to Form 10-K, we incorporate by reference into this Item 11 the
information to be disclosed in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC
within 120 days after the close of the year ended December 31, 2017.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The equity compensation plan information as required by Item 201(d) of Regulation S-K is included in Part II, Item 5
of this Annual Report. Pursuant to paragraph 3 of General Instruction G to Form 10-K, we incorporate by reference into this
Item 12 all other information to be disclosed in our definitive proxy statement, which is to be filed pursuant to Regulation 14A
with the SEC within 120 days after the close of the year ended December 31, 2017.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Pursuant to paragraph 3 of General Instruction G to Form 10-K, we incorporate by reference into this Item 13 the
information to be disclosed in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC
within 120 days after the close of the year ended December 31, 2017.
Item 14. Principal Accounting Fees and Services
Pursuant to paragraph 3 of General Instruction G to Form 10-K, we incorporate by reference into this Item 14 the
information to be disclosed in our definitive proxy statement, which is to be filed pursuant to Regulation 14A with the SEC
within 120 days after the close of the year ended December 31, 2017.
86
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
Our consolidated financial statements are included in this Annual Report beginning on page F-1.
(a) (2) Financial Statement Schedules
All schedules have been omitted because they are either not applicable, not required or the information called for
therein appears in the consolidated financial statements or notes thereto.
(a) (3) Exhibits
Exhibit
Number
2.1#
2.2
3.1
3.2
4.1
4.2
10.1
10.2
Description
Amended and Restated Asset Purchase Agreement, dated as of March 31, 2016, by and among Warrior Met
Coal, LLC and the other purchasers party thereto, as buyers, and Walter Energy, Inc. and certain subsidiaries of
Walter Energy, Inc., as sellers (incorporated by reference to Exhibit 2.1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-216499) filed with the Commission on March 7, 2017).
Form of Certificate of Conversion of Warrior Met Coal, LLC (incorporated by reference to Exhibit 2.2 to the
Registrant's Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-216499) filed with the
Commission on April 3, 2017).
Certificate of Incorporation of Warrior Met Coal, Inc. (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-8 (File No. 333-217389) filed with the Commission on April 19,
2017).
Bylaws of Warrior Met Coal, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-8 (File No. 333-217389) filed with the Commission on April 19, 2017).
Indenture, dated as of November 2, 2017, by and among Warrior Met Coal, Inc., the Subsidiary Guarantors
party thereto from time to time and Wilmington Trust, National Association, as trustee and as priority lien
collateral trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K (File
No. 001-38061) filed with the Commission on November 6, 2017).
Specimen Certificate for shares of common stock, par value $0.01 per share, of the Company (incorporated by
reference to Exhibit 4.1 to the Registrant's Amendment No. 2 to the Registration Statement on Form S-1 (File
No. 333-216499) filed with the Commission on April 3, 2017).
Asset-Based Revolving Credit Agreement, dated as of April 1, 2016, by and among Warrior Met Coal, LLC and
certain of its subsidiaries, as borrowers, the guarantors party thereto, Citibank, N.A., as administrative agent and
swingline agent, Citibank N.A. and Credit Suisse AG, Cayman Islands Branch, as letter of credit Issuers, the
other lenders party thereto, and Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC, as joint
lead arrangers and joint bookrunners (incorporated by reference to Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1 (File No. 333-216499) filed with the Commission on March 7, 2017).
Amendment No. 1 to Asset-Based Revolving Credit Agreement, dated as of January 23, 2017, to the Asset-
Based Revolving Credit Agreement, dated as of April 1, 2016, among Warrior Met Coal, LLC and certain of its
subsidiaries, as borrowers, the guarantors party thereto, Citibank, N.A. as administrative agent and collateral
agent, each lender providing additional commitment pursuant to the Amendment, as commitment increase
lenders, and the other lenders party to the Credit Agreement, as existing lenders (incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (File No. 333-216499) filed with the
Commission on March 7, 2017).
87
10.3
10.4
10.5
10.6*
10.7
10.8†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
Amendment No. 2 to Asset-Based Revolving Credit Agreement, dated as of March 24, 2017, to the Asset-Based
Revolving Credit Agreement, dated as of April 1, 2016, among Warrior Met Coal, LLC and certain of its
subsidiaries, as borrowers, the guarantors party thereto, each lender party thereto, and Citibank, N.A. as
administrative agent and collateral agent (incorporated by reference to Exhibit 10.12 to the Registrant's
Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-216499) filed with the Commission
on March 27, 2017).
Amendment No. 3 to Asset-Based Revolving Credit Agreement, dated as of May 15, 2017, to the Asset-Based
Revolving Credit Agreement, dated as of April 1, 2016, among Warrior Met Coal, Inc. and certain of its
subsidiaries, as borrowers, the guarantors party thereto, Citibank, N.A., as administrative agent and collateral
agent, each lender providing additional commitment pursuant to the Amendment, as commitment increase
lenders, and the other lenders party to the Credit Agreement, as existing lenders (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (File No. 001-38061) filed with the
Commission on August 3, 2017).
Amendment No. 4 to Asset-Based Revolving Credit Agreement, dated as of October 3, 2017, to the Asset-Based
Revolving Credit Agreement, dated as of April 1, 2016, among Warrior Met Coal, Inc. and certain of its
subsidiaries, as borrowers, the guarantors party thereto, Citibank, N.A., as administrative agent and collateral
agent, each lender providing additional commitment pursuant to the Amendment, as commitment increase
lenders, and the other lenders party to the Credit Agreement, as existing lenders (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-38061) filed with the Commission
on October 4, 2017).
Intercreditor Agreement, dated as of November 2, 2017, among Citibank, N.A., initial ABL agent, Wilmington
Trust National Association, as trustee and initial term agent, and each additional term debt agent from time to
time party thereto.
Registration Rights Agreement, dated as of April 19, 2017, among Warrior Met Coal, Inc. and certain of its
equity holders party thereto (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q (File No. 001-38061) filed with the Commission on August 3, 2017).
Warrior Met Coal, Inc. 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K (File No. 001-38061) filed with the Commission on April 19, 2017).
Warrior Met Coal, LLC 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.11 to the
Registrant's Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-216499) filed with the
Commission on March 27, 2017).
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K (File No. 001-38061) filed with the Commission on April 19, 2017.
Employment Agreement, dated March 31, 2016 by and between Warrior Met Coal, LLC and Walter J. Scheller,
III (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (File No.
333-216499) filed with the Commission on March 7, 2017).
Employment Agreement, dated March 31, 2016 by and between Warrior Met Coal, LLC and Michael T.
Madden (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (File
No. 333-216499) filed with the Commission on March 7, 2017).
Employment Agreement, dated March 31, 2016 by and between Warrior Met Coal, LLC and Jack K.
Richardson (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1
(File No. 333-216499) filed with the Commission on March 7, 2017).
Employment Agreement, dated January 1, 2017, by and between Warrior Met Coal, LLC and Dale W. Boyles
(incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (File No.
333-216499) filed with the Commission on March 7, 2017).
10.15†*
Employment Agreement, dated March 31, 2016, by and between Warrior Met Coal, LLC and Kelli K. Gant.
10.16†
10.17†
Form of Warrior Met Coal, Inc. 2017 Equity Incentive Plan Restricted Stock Unit Award Agreement
(incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (File No. 001-38061)
filed with the Commission on June 5, 2017).
Restricted Unit Award Agreement, dated March 31, 2016, by and between Warrior Met Coal, LLC and Walter J.
Scheller, III (incorporated by reference to Exhibit 10.13 to the Registrant's Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-216499) filed with the Commission April 10, 2017).
88
10.18†
10.19†
10.20†
10.21†
10.22†
10.23†
21.1*
23.1*
23.2*
23.3*
23.4*
31.1*
31.2*
32.1**
95*
101*
Restricted Unit Award Agreement, dated April 20, 2016, by and between Warrior Met Coal, LLC and Michael T.
Madden (incorporated by reference to Exhibit 10.14 to the Registrant's Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-216499) filed with the Commission on April 10, 2017).
Restricted Unit Award Agreement, dated April 20, 2016, by and between Warrior Met Coal, LLC and Jack K.
Richardson (incorporated by reference to Exhibit 10.15 to the Registrant's Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-216499) filed with the Commission on April 10, 2017).
Restricted Unit Award Agreement, dated January 1, 2017, by and between Warrior Met Coal, LLC and Dale W.
Boyles (incorporated by reference to Exhibit 10.16 to the Registrant's Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-216499) filed with the Commission on April 10, 2017).
Restricted Unit Award Agreement, dated March 31, 2016, by and between Warrior Met Coal, LLC and Stephen
D. Williams (incorporated by reference to Exhibit 10.17 to the Registrant's Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 333-216499) filed with the Commission on April 10, 2017).
Restricted Unit Award Agreement, dated February 24, 2017, by and between Warrior Met Coal, LLC and
Stephen D. Williams (incorporated by reference to Exhibit 10.18 to the Registrant's Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 333-216499) filed with the Commission on April 10, 2017).
Phantom Unit Award Agreement, dated March 31, 2016, by and between Warrior Met Coal, LLC and Stephen
D. Williams (incorporated by reference to Exhibit 10.19 to the Registrant's Amendment No. 3 to the
Registration Statement on Form S-1 (File No. 333-216499) filed with the Commission on April 10, 2017).
List of Subsidiaries of the Company.
Consent of Ernst & Young LLP.
Consent of Marshall Miller & Associates, Inc.
Consent of Norwest Corporation.
Consent of McGehee Engineering Corp.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18. U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Mine Safety Disclosures Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act and Item 104 of Regulation S-K (17 CFR 299.104)
XBRL (Extensible Business Reporting Language) - The following materials from Warrior Met Coal, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL (eXtensible Business
Reporting Language): (i) the Balance Sheets, (ii) the Statements of Operations, (iii) the Statements of Changes
in Stockholders' Equity, (v) the Statements of Cash Flows, and (vi) Notes to Financial Statements.
*Filed herewith.
**
†
#
Company will furnish copies of such schedules to the SEC upon request.
Furnished herewith.
Management contract, compensatory plan or arrangement.
The schedules to this agreement have been omitted for this filing pursuant to Item 601(b)(2) of Regulation S-K. The
89
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Warrior Met Coal, Inc.
By:
/s/ Dale W. Boyles
Dale W. Boyles
Chief Financial Officer (on behalf of the registrant)
Date: February 14, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Walter J. Scheller, III
Walter J. Scheller, III
/s/ Dale W. Boyles
Dale W. Boyles
/s/ Stephen D. Williams
Stephen D. Williams
/s/ Michael Addeo
Michael Addeo
/s/ J. Brett Harvey
J. Brett Harvey
/s/ Keith Luh
Keith Luh
/s/ Blaine MacDougald
Blaine MacDougald
/s/ Matthew R. Michelini
Matthew R. Michelini
/s/ Alan H. Schumacher
Alan H. Schumacher
/s/ Gareth Turner
Gareth Turner
Chief Executive Officer (Principal
Executive Officer) and Director
February 14, 2018
Chief Financial Officer (Principal
Financial and Accounting Officer)
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
February 14, 2018
Director
Director
Director
Director
Director
Director
Director
Director
90
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets at December 31, 2017 (Successor) and December 31, 2016 (Successor)
Statements of Operations for the year ended December 31, 2017 (Successor), the nine months ended December 31,
2016 (Successor), the three months ended March 31, 2016 (Predecessor) and the year ended December 31, 2015
(Predecessor)
Statements of Changes in Equity for the year ended December 31, 2017 (Successor), the nine months ended
December 31, 2016 (Successor), the three months ended March 31, 2016 (Predecessor) and the year ended
December 31, 2015 (Predecessor)
Statements of Cash Flows for the year ended December 31, 2017 (Successor), the nine months ended December 31,
2016 (Successor), the three months ended March 31, 2016 (Predecessor) and the year ended December 31, 2015
(Predecessor)
Notes to Financial Statements
F-2
F-3
F-4
F-5
F-6
F-8
F-1
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors of Warrior Met Coal, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Warrior Met Coal, Inc. (the Company) as of December 31,
2017 and 2016, the related consolidated statements of operations, changes in equity, and cash flows for the year ended
December 31, 2017 and for the nine months ended December 31, 2016, and the related notes. We also have audited the
accompanying combined statements of operations, changes in Parent net investment and cash flows of the Company’s
Predecessor for the three months ended March 31, 2016 and for the year ended December 31, 2015. In our opinion, the
financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company
at December 31, 2017 and 2016 and the consolidated and combined results of operations and cash flows of the Company and
its Predecessor for the periods referred to above, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due
to error or fraud. The Company and its Predecessor are not required to have, nor were we engaged to perform, an audit of their
internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control
over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's or the
Predecessor's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due
to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2016.
Birmingham, Alabama
February 14, 2018
F-2
WARRIOR MET COAL, INC.
BALANCE SHEETS
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Trade accounts receivable
Other receivables
Inventories, net
Prepaid expenses and other
Total current assets
Mineral interests, net
Property, plant and equipment, net
Income tax receivable
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Asset retirement obligations
Other current liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt
Deferred income taxes
Asset retirement obligations
Black lung obligations
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 18)
Stockholders’ Equity:
Common stock, $0.01 par value per share (Authorized -140,000,000 shares, issued and
outstanding - 53,284,470 and 53,442,532, respectively)
Preferred stock, $0.01 par value per share (10,000,000 shares authorized, no shares
issued and outstanding)
Additional paid in capital
Retained earnings (accumulated deficit)
Total stockholders’ equity
Total liabilities and stockholders’ equity
Successor
December 31,
2017
December 31,
2016
$
$
$
$
$
$
$
35,470
17,501
117,746
14,482
54,294
29,376
268,869
130,004
536,745
39,255
18,442
993,315
28,076
66,704
3,572
6,903
2,965
108,220
342,948
258
96,096
30,208
2,562
580,292
150,045
17,501
65,896
5,901
39,420
12,010
290,773
143,231
496,959
—
16,668
947,631
6,043
47,339
3,098
5,307
2,849
64,636
3,725
1,944
96,050
27,156
1,153
194,664
534
533
—
329,993
82,496
413,023
993,315
$
—
802,107
(49,673)
752,967
947,631
The accompanying notes are an integral part of these consolidated financial statements.
F-3
WARRIOR MET COAL, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Successor
Predecessor
For the
year ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
$ 1,124,645
$
276,560
$
65,154
$
514,334
44,447
1,169,092
21,074
297,634
6,229
71,383
30,399
544,733
Revenues:
Sales
Other revenues
Total revenues
Costs and expenses:
Cost of sales (exclusive of items shown separately below)
592,530
244,723
72,297
601,545
Cost of other revenues (exclusive of items shown separately
below)
Depreciation and depletion
Selling, general and administrative
Other postretirement benefits
Restructuring costs
Asset impairment charges
Transaction and other costs
Total costs and expenses
Operating income (loss)
Interest (expense), net
Gain on extinguishment of debt
Reorganization items, net
Income (loss) before income taxes
Income tax (benefit) expense
Net income (loss)
Basic and diluted net income (loss) per share:
Net income (loss) per share—basic and diluted
Weighted average number of shares outstanding—basic
Weighted average number of shares outstanding— diluted
Dividends per share:
28,422
75,413
36,453
—
—
—
12,873
745,691
423,401
(6,947)
—
—
416,454
(38,592)
455,046
8.62
52,800
52,806
$
$
19,367
47,413
20,507
—
—
—
13,568
345,578
(47,944)
(1,711)
—
—
(49,655)
18
(49,673)
(0.94)
52,640
52,640
14.92
$
—
$
$
$
$
4,698
28,958
9,008
6,160
3,418
—
—
27,442
123,633
38,922
30,899
13,832
27,986
—
124,539
(53,156)
(16,562)
—
864,259
(319,526)
(51,077)
26,968
(7,735)
(351,370)
(40,789)
(61,816) $ (310,581)
7,920
(61,798)
18
The accompanying notes are an integral part of these consolidated financial statements.
F-4
WARRIOR MET COAL, INC.
STATEMENT OF CHANGES IN EQUITY
(in thousands)
Predecessor
Balance at December 31, 2014
Net loss
Change in attribution of Parent debt (Note 22)
Net transfers to Parent
Balance at December 31, 2015 (Predecessor)
Net loss
Change in attribution of Parent debt
Net transfers to Parent
Balance at March 31, 2016 (Predecessor)
Total Parent
Net Investment
$
$
$
288,699
(310,581)
(663,701)
(135,278)
(820,861)
(61,816)
(626)
(12,900)
(896,203)
Common
Stock
Preferred
Stock
Additional Paid
in Capital
Retained
Earnings
(Accumulated
deficit)
Total
Stockholders’
Equity
Balance at April 1, 2016 (Successor)
$
— $
— $
— $
— $
—
—
—
502
(49,673)
—
601,605
—
601,783
Net loss
Equity award compensation
Issuance of 17,772,724 common shares
(formerly Class A member units)
Issuance of 34,864,802 common shares
(formerly Class B member units)
Balance at December 31, 2016 (Successor) $
Net income
Dividends paid ($14.92 per share)
Purchase accounting measurement
period adjustment (See Note 3)
Equity award modification (See Note
15)
Stock compensation
Common shares issued
Balance at December 31, 2017 (Successor) $
—
7
178
348
533
—
—
—
—
—
—
— $
$
—
—
—
—
—
200,000
802,107
$
—
(474,025)
—
(49,673) $
455,046
(322,877)
(3,525)
1,255
4,181
—
—
—
1
534
$
—
— $
—
329,993
$
—
82,496
$
—
(49,673)
509
200,348
752,967
455,046
(796,902)
(3,525)
1,255
4,181
1
413,023
The accompanying notes are an integral part of these consolidated financial statements.
F-5
WARRIOR MET COAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and depletion
Deferred income tax (benefit) expense
Stock-based compensation expense
Non-cash reorganization items
Amortization of debt issuance costs and debt discount, net
Gain on extinguishment of debt
Asset impairment charges
Accretion of asset retirement obligations
Changes in operating assets and liabilities:
Trade accounts receivable
Other receivables
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Income tax receivable
Other
Net cash provided by (used in) operating activities
INVESTING ACTIVITIES
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Cash paid for acquisition, net of cash acquired
Cash receipt from escrow agreement
Proceeds from termination of life insurance policy
Purchases of short-term investments
Net cash used in investing activities
FINANCING ACTIVITIES
Dividends paid
Proceeds from issuance of debt
Proceeds from rights offering
Retirements of debt
Principal repayments of capital lease obligations
Net cash transfers to Parent
Debt issuance costs paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents and restricted
cash
Cash and cash equivalents and restricted cash at beginning of period
Successor
Predecessor
For the year
ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
$
455,046
$
(49,673)
$
(61,816) $
(310,581)
75,413
(1,686)
4,181
—
1,889
—
—
1,834
(51,850)
(8,121)
(13,732)
(17,366)
14,388
15,642
(39,255)
(1,871)
434,512
47,413
544
509
—
1,244
—
—
2,817
(54,911)
(2,530)
9,524
(11,001)
(4,144)
45,408
—
5,613
(9,187)
28,958
18
390
(18,882)
10,164
—
—
1,169
15,097
1,070
677
13,020
(15,338)
(16,083)
—
858
(40,698)
123,633
(40,789)
4,034
(11,558)
6,760
(26,968)
27,986
4,276
46,858
(12,474)
20,604
8,378
16,675
22,303
—
(10,955)
(131,818)
(92,625)
(11,531)
(5,422)
(64,971)
—
—
—
—
—
(92,625)
(796,902)
344,750
—
(3,060)
(505)
—
(2,562)
(458,279)
(116,392)
152,656
34
(24,107)
9,364
12,857
(17,501)
(30,884)
—
—
200,000
(2,295)
—
—
(4,978)
192,727
152,656
—
—
—
—
—
—
722
—
—
—
—
(5,422)
(64,249)
—
15,723
—
(285)
—
(13,290)
(8,388)
(6,240)
(52,360)
84,462
—
—
—
(4,610)
—
(142,535)
—
(147,145)
(343,212)
427,674
84,462
Cash and cash equivalents and restricted cash at end of period
$
36,264
$
152,656
$
32,102
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
WARRIOR MET COAL, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
Successor
Predecessor
For the year
ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest
Cash paid for income taxes
$
$
211
2,349
$
$
231
$
— $
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital leases - equipment
Assets acquired in Asset Acquisition (Note 3)
Liabilities assumed in Asset Acquisition (Note 3)
$
$
$
7,355
$
— $
— $
— $
828,321
175,360
$
$
— $
— $
— $
— $
— $
42,595
—
—
—
—
F-7
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1—Business and Basis of Presentation
Description of the Business
Warrior Met Coal, LLC (the “Company” or, for the periods beginning as of April 1, 2016, the “Successor”) was formed
on September 3, 2015 by certain Walter Energy, Inc. (“Walter Energy” or the “Parent”) lenders under the 2011 Credit
Agreement, dated as of April 1, 2011 (the “2011 Credit Agreement”) and the noteholders under the 9.50% Senior Secured Notes
due 2019 (such lenders and noteholders, collectively, “Walter Energy’s First Lien Lenders”) in connection with the acquisition
by the Company of certain core operating assets of Walter Energy under section 363 under Chapter 11 of Title 11 (the "Chapter
11 Cases") of the U.S. Bankruptcy Code (“U.S. Bankruptcy Code”) in the Northern District of Alabama, Southern Division (the
"Bankruptcy Court"). These operating assets acquired and liabilities assumed are referred to as the “Predecessor” for all periods
on or before March 31, 2016. The Company and its Predecessor are a U.S. based producer and exporter of metallurgical (“met”)
coal for a diversified customer base of blast furnace steel producers located primarily in Europe and South America. 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.
On November 5, 2015, Walter Energy and certain of its wholly owned U.S. subsidiaries (collectively, the "Walter
Energy Debtors") entered into an asset purchase agreement (as amended, the “Asset Purchase Agreement”) with the Company,
pursuant to which, among other things, the Company, on behalf of Walter Energy’s First Lien Lenders, agreed to acquire the
Predecessor through a credit bid of $1.1 billion and a release of the liens under the 2011 Credit Agreement and the 9.50%
Senior Secured Notes due 2019 (“Walter Energy First Lien Obligations”), to assume certain liabilities of the Walter Energy
Debtors and to pay cash consideration in accordance with sections 363 and 365 of the U.S. Bankruptcy Code (the “Asset
Acquisition”). On January 8, 2016, the Bankruptcy Court approved the Asset Acquisition, which closed on March 31, 2016.
In connection with the Asset Acquisition, the Company also conducted rights offerings to Walter Energy’s First Lien
Lenders and certain qualified unsecured creditors to purchase newly issued Class B Units of the Company, which diluted the
Class A Units on a pro rata basis (the “Rights Offerings”). Proceeds from the Rights Offerings were used to pay certain costs
associated with the Asset Acquisition and for general working capital purposes.
Corporate Conversion and Initial Public Offering
On April 12, 2017, in connection with the Company’s initial public offering (“IPO”), Warrior Met Coal, LLC filed a
certificate of conversion, whereby Warrior Met Coal, LLC effected a corporate conversion from a Delaware limited liability
company to a Delaware corporation and changed its name to Warrior Met Coal, Inc. In connection with this corporate
conversion, the Company filed a certificate of incorporation. Pursuant to the Company’s certificate of incorporation, the
Company is authorized to issue up to 140,000,000 shares of common stock $0.01 par value per share and 10,000,000 shares of
preferred stock $0.01 par value per share. All references in the financial statements to the number of shares and per share
amounts of common stock have been retroactively recast to reflect the corporate conversion.
On April 19, 2017, the Company completed its IPO, whereby the selling stockholders named in the Registration
Statement on Form S-1 (File No. 333-216499) sold 16,666,667 shares of common stock at a price to the public of $19.00 per
share. The Company did not receive any proceeds from the sale of common stock in the IPO. All of the net proceeds from the
IPO were received by the selling stockholders.
The aggregate net proceeds to the selling stockholders in the IPO were $296.9 million, net of underwriting discounts
and commissions of $19.8 million. The Company has paid cumulative offering expenses of $15.9 million on behalf of the
selling stockholders. Upon the closing of the IPO, 53,442,532 shares of common stock were outstanding.
Basis of Presentation
Prior to the closing of the Asset Acquisition on March 31, 2016, the Company had no operations and nominal assets.
The accompanying financial statements have been presented on a consolidated basis for the “Successor” periods
subsequent to the Asset Acquisition, which include the year ended December 31, 2017 and the nine months ended December
F-8
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
31, 2016, and on a combined basis for the “Predecessor” periods prior to the Asset Acquisition, which include the year ended
December 31, 2015 and the three months ended March 31, 2016. The financial information of the Company has been separated
by a vertical line on the face of the financial statements to identify these different bases of accounting for Predecessor and
Successor periods.
Predecessor Presentation
The Predecessor’s combined financial statements for the three months ended March 31, 2016 and the year ended
December 31, 2015 have been “carved-out” from the accounting records of Walter Energy.
Historically, the Predecessor did not operate as an independent standalone company. For periods subsequent to filing the
Chapter 11 Cases and prior to March 31, 2016, the Predecessor applied the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 852, Reorganizations, in preparing its combined financial statements. ASC 852
requires that the financial statements distinguish transactions and events that are directly associated with the reorganization
from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions
for losses that were realized or incurred in the Chapter 11 Cases have been recorded in a reorganization line item on the
Combined Statements of Operations.
Preparation of the combined financial statements, included making certain adjustments necessary to reflect all costs of
doing business to present the historical records on a basis as if the Predecessor had been a separate standalone entity. These
adjustments include, for example, allocations of Parent overhead and selling, general and administrative expenses.
The historical costs and expenses reflected in the combined financial statements include an allocation for certain
corporate functions historically provided by the Parent. Substantially all of the Predecessor’s senior management were
employed by the Parent and certain functions critical to the Predecessor’s operations were centralized and managed by the
Parent. Historically, the centralized functions included executive senior management, financial reporting, financial planning and
analysis, accounting, shared services, information technology, tax, risk management, treasury, legal, human resources, and
strategy and development. The costs of each of these services have been allocated to the Predecessor on the basis of the
Predecessor’s relative headcount, revenue and total assets to that of the Parent. These cost allocations were $7.8 million and
$32.0 million for the three months ended March 31, 2016 (Predecessor) and the twelve months ended December 31, 2015
(Predecessor), respectively.
All intracompany transactions have been eliminated. The net effect of the settlement of transactions between the
Predecessor, the Parent and other affiliates of the Parent, together with cash transfers to and from the Parent’s cash management
accounts are reflected in the Statements of Changes in Stockholders' Equity and Parent Net Investment as net transfers to Parent
and in the Statements of Cash Flows as a financing activity.
The allocation methodologies have been described in these notes to the financial statements where appropriate, and
management considers the allocations to be reasonable. The financial information included herein may not necessarily reflect
the financial position, results of operations and cash flows of the Predecessor in the future or what they would have been had
the Predecessor been a separate, standalone entity during the periods presented.
The Parent used a centralized approach to cash management and financing of its operations. Historically, the majority
of the Predecessor’s cash was transferred to the Parent on a daily basis. This arrangement is not reflective of the manner in
which the Predecessor would have been able to finance its operations had it been a standalone business separate from the Parent
during the periods presented.
The Predecessor’s employees participated in benefit and stock-based compensation plans of the Parent. A portion of the
cost of those plans is included in the combined financial statements. See Notes 14 and 15 for a further description of the
accounting for benefit plans and stock-based compensation, respectively.
The financial statements prior to April 1, 2016 included an allocation of a portion of debt and related interest expense
from the Parent. Interest expense on the Parent’s debt attributed to the Predecessor was $16.6 million and $51.1 million for the
three months ended March 31, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor), respectively. The
Parent also recognized a net gain on extinguishment of debt of $58.6 million prior to the Chapter 11 Cases, of which $27.0
F-9
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
million was attributed to and included in the year ended December 31, 2015 (Predecessor) as a gain on extinguishment of debt
in the Statement of Operations.
Additionally, attribution of debt from the Parent related to debt incurred prior to the Chapter 11 Cases that was included
in the December 31, 2015 balance sheet of the Predecessor resulted in a net change in the Parent net investment for the
Predecessor of approximately $663.7 million for the year ended December 31, 2015.
Note 2—Summary of Significant Accounting Policies
Use of Estimates
The Company prepares its financial statements in conformity with GAAP, which requires management to make
estimates 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 during the periods
presented. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates.
Concentrations of Credit Risk and Major Customers
The Company’s principal line of business is mining and marketing met coal to foreign steel producers. For the year
ended December 31, 2017, approximately 96.2% of sales were derived from coal shipments to these customers, located
primarily in Europe, South America and Asia. At December 31, 2017 approximately 96.9% of trade receivables related to these
customers. For the year ended December 31, 2017, our geographic customer mix was 63% in Europe, 23% in South America
and 14% in Asia. 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.
During the year ended December 31, 2017, Xcoal Energy & Resources and Salzgitter Flachstahl GmBH accounted for
$181.9 million, or 16.1%, and $112.8 million, or 10%, of total revenues, respectively. During the nine months ended December
31, 2016, Salzgitter Flachstahl GmBH, Voestelpine and Huettenwerke Krupp Mannesmann GmBH accounted for $43.1 million,
or 15.6%, $35.3 million, or 12.7%, and $34.0 million, or 12.3% of total revenues, respectively. During the three months ended
March 31, 2016, Xcoal Energy & Resources and Voestelpine accounted for $10.7 million, or 16.4% and $8.3 million, or 12.8%
of total revenues, respectively. During the year ended December 31, 2015, ArcelorMittal accounted for $88.7 million, or 16.3%
of total revenues and no other customer accounted for 10% or more of total revenues. Credit is extended based on an evaluation
of the individual customer’s financial condition. In some instances, the Company required 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
minimal historical credit losses.
Revenue Recognition
For periods prior to January 1, 2018, revenue is recognized when the following criteria have been met: (i) persuasive
evidence of an arrangement exists; (ii) the price to the buyer is fixed or determinable; (iii) delivery has occurred; and (iv)
collectability is reasonably assured. Delivery is considered to have occurred at the time title and risk of loss transfers to the
customer. For coal shipments to domestic customers via rail, delivery occurs when the railcar is loaded. For coal shipments to
international customers via ocean vessel, delivery occurs when the vessel is loaded at the Port of Mobile, Alabama. For natural
gas sales, delivery occurs when the gas has been transferred to the pipeline.
For periods subsequent to January 1, 2018, revenue will be recognized when performance obligations under the terms
of a contract with our customers are satisfied; for all contracts this occurs when control of the promised goods have been
transferred to our 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.
Our coal and gas sales generally include up to 30-day payment terms following the transfer of control of the goods to the
customer. We typically do not include extended payment terms in our contracts with customers.
F-10
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Shipping and Handling
Costs incurred to transport coal to the point of sale at the Port of Mobile, Alabama, are included in cost of sales and the
gross amounts billed to customers, if any, to cover shipping and handling to the ultimate/final destination are included in sales.
Cash and Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the
Balance Sheets that sum to the total of the same such amounts shown in the Statements of Cash Flows (in thousands):
Successor
December 31,
2017
December 31,
2016
Cash and cash equivalents
$
35,470
Restricted cash included in other long-term assets
Total cash and cash equivalents and restricted cash included in the Statements of Cash Flows $
794
36,264
$
$
150,045
2,611
152,656
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. As of December 31, 2017
(Successor), restricted cash included in other long-term assets in the Balance Sheet represents amounts invested in certificate of
deposits as financial assurance for post mining reclamation obligations. As of December 31, 2016 (Successor), restricted cash
included in other long-term assets in the Balance Sheet represents amounts funded to an escrow account as collateral for coal
royalties due under certain underground coal mining lease contracts.
Short-Term Investments
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. Securities classified as held to
maturity securities are those securities that management has the intent and ability to hold to maturity.
As of December 31, 2017 (Successor) and December 31, 2016 (Successor), the Company’s short-term investments
consisted of $17.5 million in Treasury bills with a maturity of six months. These Treasury bills 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 Asset Acquisition and relate to periods prior to March 31, 2016.
Inventories
Inventories are valued at the lower of cost or net realizable value. Coal inventory costs include labor, supplies,
equipment costs, operating overhead, freight, royalties, depreciation and depletion and other related costs. Coal inventories are
valued using the first-in, first-out (“FIFO”) inventory valuation method. The valuation of coal inventories is subject to estimates
due to possible gains and losses resulting from inventory movements from the mine site to storage facilities, inherent
inaccuracies in belt scales and aerial surveys used to measure quantities and fluctuations in moisture content. Periodic
adjustments to coal tonnages on hand are made for an estimate of coal shortages and overages due to these inherent gains and
losses, primarily based on historical results from aerial surveys and periodic coal pile clean-ups. Supplies inventories are valued
using the average cost method of accounting. Management evaluates its supplies inventory in terms of excess and obsolete
exposures which includes such factors as anticipated usage, inventory turnover, inventory levels and ultimate market value. A
reserve for excess and obsolete supplies inventory is established and charged to cost of sales in the Statements of Operations.
Deferred Longwall Move Expenses
Direct costs, including labor and supplies, associated with moving longwall equipment and the related equipment
refurbishment costs are deferred and included in prepaid expenses. These deferred costs are amortized on a unit-of-production
basis into cost of sales over the life of the subsequent panel of coal mined by the longwall equipment. See Note 5 for further
disclosures related to deferred longwall move expenses.
F-11
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Advanced Mining Royalties
Lease rights to coal reserves are often acquired in exchange for royalty payments. Advance mining royalties are
advance payments made to lessors under terms of mineral lease agreements that are recoupable against future production
royalties. These advance payments are deferred and charged to operations as the coal reserves are mined. Advance mining
royalties are included in other long-term assets.
Property, Plant and Equipment
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is recorded principally on the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the lesser of the
useful life of the improvement or the remaining lease term. Estimated useful lives used in computing depreciation expense
range from three to ten years for machinery and equipment, and from fifteen to thirty years for land improvements and
buildings. Well life is used to estimate the useful life for gas properties and related development, and mine life is used for
amortizing mine development costs. Gains and losses upon disposition are reflected in the Statements of Operations in the
period of disposition. Maintenance and repair expenditures are charged to cost of sales as incurred.
Deferred Mine Development
Costs of developing new underground mines and certain underground expansion projects are capitalized. Underground
development costs, which are costs incurred to make the coal physically accessible, may include construction permits and
licenses, mine design, construction of access roads, main entries, airshafts, roof protection and other facilities. Costs of
developing the first pit within a permitted area of a surface mine are capitalized up to the point of coal production attaining a
level that would be more than de minimis. A surface mine is defined as the permitted mining area, which includes various
adjacent pits that share common infrastructure, processing equipment and a common coal reserve. Surface mine development
costs include construction costs for entry roads, drilling, blasting and removal of overburden to access the first coal seam. Mine
development costs are amortized primarily on a unit-of-production basis over the estimated reserve tons directly benefiting
from the capital expenditures. Costs amortized during the production phase of a mine are capitalized into inventory and
expensed to cost of sales as the coal is sold.
Owned and Leased Mineral Interests
Costs to obtain coal reserves and lease mineral rights are capitalized based on cost or the fair value at acquisition and
depleted using the unit-of-production method over the life of proven and probable reserves. Lease agreements are generally
long-term in nature (original terms range from 10 to 50 years) and substantially all of the leases contain provisions that allow
for automatic extension of the lease term provided certain requirements are met. Depletion expense was $9.4 million and $4.5
million for the year ended December 31, 2017 and nine months ended December 31, 2016 (Successor), respectively, and is
included in depreciation and depletion in the accompanying Statements of Operations. There was no depletion expense
recorded for the three months ended March 31, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor).
Asset Retirement Obligations
The Company has certain asset retirement obligations primarily related to mine closing reclamation costs, perpetual
water care costs and other costs associated with dismantling and removing facilities. The future costs of these obligations is
accrued at the estimated fair value in the period in which it is incurred if a reasonable estimate of fair value can be made. The
present value of the estimated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset.
Capitalized asset retirement costs are amortized on a unit-of-production basis over the estimated reserves. Accretion of the asset
retirement obligation is recognized over time and generally will escalate over the life of the producing asset, typically as
production declines. Accretion is included in cost of sales on the Statements of Operations.
Accrued mine closing costs, perpetual care costs and reclamation costs and other costs of dismantling and removing
facilities are regularly reviewed by management and revised for changes in future estimated costs and regulatory requirements,
as necessary.
F-12
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Impairment of Long-Lived Assets
Property, plant and equipment and other long-lived assets are reviewed for impairment at least annually or whenever
events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically
evaluates whether events and circumstances have occurred that would indicate possible impairment. When impairment
indicators exist, the Company uses an estimate of the future undiscounted cash flows of the related asset or asset group over the
remaining life in measuring whether or not the asset values are recoverable. If the carrying amount of an asset or asset group
exceeds its estimated future cash flows, impairment is recognized equal to the amount by which the carrying amount of the
asset exceeds the fair value of the asset or asset group. Fair value is generally determined using market quotes, if available, or a
discounted cash flow approach. The Company’s estimate of future undiscounted cash flows is based on assumptions including
long-term met coal pricing forecasts, anticipated production volumes and mine operating costs for the life of the mine or
estimated useful life of the asset.
Equity Award Compensation (Successor)
The Company accounts for equity award-based compensation to employees and non-employee/directors in accordance
with ASC 718 requiring employee equity awards to be accounted for under the fair value method adjusted for estimated
forfeitures rates based on historical experience. The Company recognizes compensation expense associated with equity awards
for all awards made to employees as the requisite service, performance and market vesting conditions are met. The Company
measures compensation expense based on the grant-date fair value of the awards calculated using a Black-Scholes or Monte
Carlo valuation model.
Compensation expense for equity awards with a service-only condition is recognized over the employee’s requisite
service period using a graded vesting method. For awards with a performance condition that affects vesting, the performance
condition is not considered in determining the award’s grant-date fair value; however, the performance conditions are
considered when estimating the quantity of awards that are expected to vest. No compensation expense is recorded for awards
with performance conditions until the performance condition is determined to be probable of achievement. For awards with a
market condition that affects vesting, the market condition is considered in determining the award’s grant-date fair value.
Compensation expense for awards with a market condition is recognized straight-line over the derived or implied service
period. For awards with both performance and market conditions, the market condition is incorporated into the fair value of the
award, while the performance condition impacts the timing of expense recognition.
Compensation expense for equity awards is included in cost of sales (exclusive of items shown separately below) and
selling, general and administrative in the accompanying Statements of Operations.
Stock-Based Compensation (Predecessor)
Prior to the Asset Acquisition, the Parent periodically granted stock-based awards to its employees and its board of
directors. Stock-based compensation expenses related to these awards were allocated to the Predecessor based on the awards
and terms previously granted to the employees of the Predecessor’s business units or subsidiaries as well as an allocation of the
Parent’s corporate employee expenses.
The Parent measured stock options and other stock-based awards granted to employees and directors based on the fair
value on the date of the grant and recognized compensation expense for those awards, net of estimated forfeitures, over the
requisite service period, which was generally the vesting period of the respective award.
The Parent recognized compensation expense for only the portion of awards that were expected to vest. In developing a
forfeiture rate estimate, the Parent considered its historical experience to estimate pre-vesting forfeitures for service-based
awards. The impact of a forfeiture rate adjustment was recognized in full in the period of adjustment, and when the actual
forfeiture rate was materially different from the estimate.
The Parent used the Black-Scholes option pricing model to value stock option grants and also estimated forfeitures in
calculating the expense related to stock-based compensation. The Parent used the Monte Carlo simulation to value its
performance share units in calculating the expense related to stock-based compensation.
F-13
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Deferred Financing Costs
The costs to obtain new debt financing or amend existing financing agreements are deferred and amortized to interest
expense over the life of the related indebtedness or credit facility using the straight line method. As of December 31, 2017 and
December 31, 2016 (Successor), respectively, there were $2.2 million and $3.7 million of origination fees related to the ABL
Facility (as defined below) in other long-term assets on the accompanying Balance Sheet. As of December 31, 2017 there were
$7.8 million of unamortized deferred financing costs and debt discount related to the Notes (as defined below), which is
presented as a deduction from the carrying amount of the debt recognized in the accompanying Balance Sheet.
Income Taxes
Results of operations of the Predecessor were historically included in the consolidated federal and state income tax
returns of the Parent. The income tax provision included in the Predecessor financial statements was calculated using a method
consistent with a separate return basis, as if the Predecessor’s business had been a separate taxpayer. Similarly, historical tax
attributes (net operating losses, alternative minimum tax credits, etc.) were allocated to the Predecessor’s business utilizing a
reasonable method of allocation.
The Company records a tax provision for the expected tax effects of the reported results of operations. The provision for
income taxes is determined using the asset and liability method, under which deferred tax assets and liabilities are recognized
for the expected future tax impact of temporary differences between the financial reporting and tax bases of assets and
liabilities, and for operating losses and tax credit carryforwards. Deferred income tax assets and liabilities are measured using
the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are
expected to be realized or settled. The Company records a valuation allowance to reduce deferred income tax assets to the
amount that is believed more likely than not to be realized. When the Company concludes that all or part of the net deferred
income tax assets are not realizable in the future, the Company makes an adjustment to the valuation allowance that is charged
to earnings in the period that such determination was made.
The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement.
The Tax Cuts and Jobs Act, which was enacted in December 2017, had a substantial impact on the Company's income
tax benefit and deferred tax assets and liabilities for the year ended December 31, 2017. See Note 8 for further detail.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets
and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs
considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy
levels are defined as follows:
Level 1: Quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets
or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that
are observable or can be corroborated by observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity that are significant to determining the fair
value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
New Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)". ASU
2016-02 contains accounting guidance that will require a lessee to recognize a right of use asset and lease liability on the
F-14
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
balance sheet for all leases, with the exception of short-term leases. Additional qualitative disclosures along with specific
quantitative disclosures will also be required. The Company plans to adopt this standard on January 1, 2019. The Company is
currently evaluating whether this standard will have a material impact on the Company's consolidated financial position and
results of operations.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting
for Measurement-Period Adjustments,” which eliminates the requirement that an acquirer in a business combination account for
measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during
the period in which it determines the amount of the adjustment. The guidance is effective for public business entities for fiscal
years beginning after December 15, 2015, and interim periods within those fiscal years. We adopted the amendments of ASU
2015-16, effective January 1, 2017. We recognized a $3.5 million measurement-period adjustment during the three months
ended March 31, 2017 (Successor), which we reflected prospectively (see Note 3).
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to
Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies the accounting for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock
compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of
cash flows. We adopted this standard on January 1, 2017, on a prospective basis, and have elected to recognize forfeitures as
they occur. The adoption of this standard had no effect on our Condensed Balance Sheets, Condensed Statements of Operations
and Condensed Statements of Cash Flows for the current period.
In May 2014, the FASB issued ASU 2014-09 “Revenue from Contracts with Customers”. The new standard requires an
entity to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled in exchange for those goods or services. The guidance also requires
additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or
fulfill a contract. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. ASU 2015-09 is effective for
annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and permits
early adoption on a limited basis. The Company adopted ASU 2014-09 as of January 1, 2018, using the modified retrospective
approach.The Company will apply the standard to all customer contracts entered into as of the date of initial application. The
Company has concluded the adoption did not change the timing at which the Company has historically recognized revenue nor
did it have a material impact on its consolidated financial statements.
Note 3—Acquisition of the Predecessor
On November 5, 2015, the Walter Energy Debtors entered into the Asset Purchase Agreement with the Company,
pursuant to which, among other things, the Company, on behalf of Walter Energy’s First Lien Lenders, agreed to acquire the
Predecessor via a credit bid and release of the liens on the Walter Energy First Lien Obligations. On January 8, 2016, the
Bankruptcy Court approved the Asset Acquisition, which closed on March 31, 2016.
The cash consideration of $50.8 million included the funding of escrow accounts to be used to pay certain expenses on
behalf of the Walter Energy Debtors, some of which required residual amounts contained in the escrow accounts to be refunded
to the Company after a specified time period. The Company received refunds of approximately $9.4 million during the nine
months ended December 31, 2016 (Successor), which is presented in the investing section of the Statement of Cash Flows. The
net cash paid for the Asset Acquisition was $24.1 million, which was $50.8 million of cash paid less cash and cash equivalents
acquired of $26.7 million.
The purchase consideration has been allocated to the assets acquired and liabilities assumed based upon their estimated
fair values at the date of the Asset Acquisition. During the first quarter of 2017, the Company completed the valuation of the
assets and liabilities with the assistance of an independent third party and recorded a measurement-period adjustment to the
preliminary purchase price allocation. The measurement-period adjustment was due to updated estimates for the acquired
mineral interests including estimates for future royalty income, production volumes and timing which resulted in a $3.5 million
decrease in fair value allocated to mineral interests as compared to the December 31, 2016 preliminary fair value. This also
resulted in a decrease to additional paid in capital. The measurement-period adjustment was recorded during the first quarter of
2017 and had no impact on reported earnings for the year ended December 31, 2017 (Successor).
F-15
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
In determining the fair values of net assets acquired in the Asset Acquisition, the Company considered, among other
factors, the analyses of the Predecessor’s historical financial performance and estimates of the future performance of the
acquired business, as well as the highest and best use of the acquired assets.
Working capital, excluding inventory, and non-current restricted cash were recorded at the Predecessor’s carrying
value, which is representative of the fair value on the date of acquisition. Inventory was valued at its net realizable value.
Mineral interest was recorded at fair value utilizing the income approach. The income approach utilized the
Company’s operating projections as of the valuation date. Under the income approach, fair value was estimated based upon the
present value of future cash flows. A number of significant assumptions and estimates were involved in forecasting the future
cash flows including sales volumes and prices, costs to produce (including costs for labor, commodity supplies and contractors),
transportation costs, capital spending, working capital changes and a risk adjusted, after-tax cost of capital (all of which
generally constitute unobservable Level 3 inputs under the fair value hierarchy).
Property, plant and equipment, and other assets were recorded at fair values based on the cost and market approaches.
The cost approach utilized trending and direct costing techniques to develop replacement costs. The market approach is based
on independent secondary market data (which generally constitute Level 2 inputs under the fair value hierarchy).
Black lung obligations and asset retirement obligations were recorded at fair value using a combination of market data,
operational data and discounted cash flows and were adjusted by a discount rate factor reflecting current market conditions at
the time of acquisition.
The following tables summarize the final purchase price allocation, including the applicable measurement-period
adjustments made upon finalization during the first quarter of 2017 (in thousands):
Final purchase price:
Cash paid
Fair value of First Lien Obligations relinquished in exchange for net assets of the Predecessor
Total purchase price
$
$
50,830
598,607
649,437
F-16
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Final fair values of assets acquired and liabilities assumed:
Cash and cash equivalents
Trade and other receivables
Inventories
Prepaid expenses and other current assets
Mineral interests
Property, plant and equipment
Other long-term assets
Total assets
Accounts payable
Accrued expenses
Other current liabilities
Current debt
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Total fair value of net assets acquired
Supplemental Unaudited Pro Forma Financial Information
$
$
26,723
14,358
46,464
30,722
144,224
533,441
28,865
824,797
10,470
12,843
24,044
2,879
5,758
1,400
117,966
175,360
649,437
The following unaudited pro forma results of operations give effect to the Asset Acquisition as if it had occurred on
January 1, 2015. This unaudited pro forma financial information should not be relied upon as necessarily being indicative of the
historical results that would have been obtained if the Asset Acquisition had actually occurred on that date, nor the results of
operations in the future. The supplemental unaudited pro forma financial information was adjusted to (i) reflect the impact of
certain fair value adjustments, including an adjustment to depreciation and depletion expense as a result of a change in the basis
of property, plant and equipment and mineral interests, (ii) eliminate historical interest expense related to the notes, loans and
other debt that was not assumed by the Company as part of the Asset Acquisition, (iii) eliminate a gain on reorganization items
associated with the Chapter 11 Cases and (iv) eliminate the Predecessor's historical other postretirement benefit expense
associated with the Predecessor's historical other postretirement benefit obligations for retiree medical and life insurance
benefits, which were not assumed by the Company.
(in thousands)
Revenue
Net loss
Successor
Predecessor
For the year ended
December 31, 2016
For the year ended December
31, 2015
As
reported (1)
Pro forma (2)
As
reported
Pro forma
$
$
297,634
$
(49,673) $
369,017
(67,476)
544,733
$
544,733
$ (310,581) $ (179,813)
$
(1) Reflects nine months of Successor period operations.
(2) Includes nine months of Successor period operations and three months of Predecessor period operations on a pro forma
basis.
Note 4—Inventories, net
Inventories, net are summarized as follows (in thousands):
F-17
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Coal
Raw materials, parts, supplies and other, net
Total inventories, net
Note 5—Prepaid Expenses and Other
Prepaid expenses and other consisted of the following (in thousands):
Deferred longwall move expenses
Prepaid insurance
Prepaid deposits
Gas hedge asset
Other
Total prepaid expenses and other
Successor
December 31, 2017
December 31, 2016
$
$
32,422
21,872
54,294
$
$
18,788
20,632
39,420
Successor
December 31, 2017
December 31, 2016
$
$
19,600
$
4,955
1,043
1,664
2,114
7,145
3,140
970
—
755
29,376
$
12,010
Note 6—Mineral Interests and Property, Plant and Equipment, net
Mineral interests totaled $144.2 million and $147.7 million and the related accumulated depletion totaled $14.2 million
and $4.5 million as of December 31, 2017 and December 31, 2016, respectively.
Property, plant and equipment are summarized as follows (in thousands):
Land
Land improvements
Building and leasehold improvements
Mine development and infrastructure costs
Machinery and equipment
Construction in progress
Total
Less: Accumulated depreciation
Property, plant and equipment, net
Successor
December 31, 2017
December 31, 2016
$
72,882
$
11,444
82,836
308
441,353
39,671
648,494
(111,749)
536,745
$
$
72,882
11,444
64,814
—
366,317
26,873
542,330
(45,371)
496,959
Depreciation and depletion expense was $75.4 million, $47.4 million, $29.0 million, and $123.6 million for the year
ended December 31, 2017 (Successor), the nine months ended December 31, 2016 (Successor), the three months ended March
31, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor), respectively.
Note 7—Other Long-Term Assets
Other long-term assets consisted of the following (in thousands):
F-18
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Successor
December 31, 2017
December 31, 2016
$
$
10,342
$
794
7,306
18,442
$
9,847
2,611
4,210
16,668
Advance mining royalties
Restricted cash
Other
Total other long-term assets
Note 8—Income Taxes
The Tax Cuts and Jobs Act was enacted on December 22, 2017. The Tax Cuts and Jobs Act significantly revised the
U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective
January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system,
limiting the deduction for interest expense, limiting the use of net operating losses generated on or after January 1, 2018 to
offset taxable income and repealing the corporate alternative minimum tax ("AMT") and triggering refunds of prior year AMT
credits. On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application
of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed
(including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs
Act. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and
the impact to AMT tax credits and included these amounts in its consolidated financial statements for the year ended December
31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things,
additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may
be issued, and actions the Company may take as a result of the Tax Cuts and Jobs Act. The accounting is expected to be
complete when the Company's 2017 U.S. corporate income tax return is filed in 2018.
Amounts recorded for the period ended December 31, 2017 (Successor) principally relate to the remeasurement of the
deferred tax assets and liabilities due to the reduction in the U.S. corporate income tax rate from 35% to 21%. This
remeasurement resulted in the Company reporting an income tax benefit of approximately $1.7 million due to the
remeasurement of the deferred tax liability associated with the indefinitely lived asset that will now reverse at the new 21% rate
along with a corresponding valuation allowance release. The remeasurement of the other deferred tax assets and liabilities had
a corresponding adjustment to the valuation allowance which resulted in no tax expense or benefit. The Company has made
calculations to reflect the changes for the Tax Cuts and Jobs Act based on currently available information and subsequent
guidance may result in a change to the current estimates. Additionally, the Tax Cuts and Jobs Act eliminated the AMT regime
after 2017 and provided for a refunding of AMT tax amounts paid in earlier years. This change resulted in a tax benefit, net of
the current sequestration rate, as the valuation allowance on AMT credit carryforwards was reversed. Additionally, the
Company reclassified these AMT credits to income taxes receivable. The amount of AMT credits recorded as long-term
income taxes receivable is $39.3 million, which is net of a sequestration estimate of $2.8 million. These AMT credits are
expected to be received in 2019 to 2022. The actual recovery will result in an income tax expense or benefit for the difference
between the actual sequestration rate and the current estimated 6.6% sequestration rate.
The Company records deferred tax assets to the extent these assets will more likely than not be realized. In making
such determination, the Company considered all available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, historical financial performance, our industry's historically cyclical
financial results and tax planning strategies. In 2016, the Company recorded a full valuation allowance against its deferred tax
assets due to its cumulative three-year loss position compounded by negative industry-wide business trends at that time. Despite
strong recent financial performance in 2017, the Company concluded as of December 31, 2017 (Successor) that the valuation
allowance was still needed on its net deferred tax assets based upon the weight of the factors described above, especially
considering the history of losses. The Company continues to evaluate its cumulative loss position and income trend as well as
its future projections of sustained profitability and whether this profitability trend constitutes sufficient positive evidence to
support a reversal of its valuation allowance (in full or in part).
Results of operations of the Predecessor have historically been included in the federal and state income tax returns of
the Parent. Accordingly, the income tax provision included in the Predecessor financial statements was calculated using a
method consistent with a separate return basis, as if the Predecessor had been a separate taxpayer. Similarly, historical tax
F-19
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
attributes (net operating losses, alternative minimum tax credits, etc.) have been allocated to the Predecessor’s business utilizing
a reasonable method of allocation.
Income tax expense (benefit) consisted of the following (in thousands):
Successor
Predecessor
For the year
ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
2016
2016
2015
Current
Federal
State
Deferred
Federal
State
Total
$
$
(36,906) $
—
(36,906)
(1,712)
26
(1,686)
(38,592) $
(526)
—
(526)
542
2
544
18
$
— $
—
—
16
2
18
18
$
—
—
—
(40,789)
—
(40,789)
(40,789)
$
The income tax expense (benefit) at the Company’s and Predecessor’s effective tax rate differed from the U.S. statutory
rate of 35% as follows (in thousands):
Income (loss) before income tax expense (benefit)
Tax expense (benefit) at statutory tax rate of 35%
Effect of:
Depletion
Estimate of the Tax Cuts and Jobs Act impact
State and local income tax, net of federal effect
Valuation allowance on deferred tax assets
Non-deductible transaction costs
Impact of restructuring
Other
Tax expense (benefit) recognized
Successor
Predecessor
For the year
ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year
ended
December 31,
2017
$
416,454
$
145,759
2016
(49,655)
(17,379)
$
2015
2016
(61,798) $ (351,370)
(122,980)
(21,629)
(25,212)
(38,592)
9,620
(129,245)
4,506
—
(5,428)
(38,592) $
$
—
—
(1,051)
14,460
4,318
—
(330)
18
$
—
—
(1,615)
22,204
—
1,111
(53)
18
$
—
—
(8,888)
81,370
—
10,067
(358)
(40,789)
Deferred income tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of
temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases.
Deferred income tax assets and liabilities are measured using enacted tax rates that apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Significant components of the Company's deferred income tax assets and liabilities were (in thousands):
F-20
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Deferred income tax assets:
Net operating loss and credit carryforwards
$
395,526
$
896,181
Successor
December 31, 2017
December 31, 2016
Inventory
Asset retirement obligations
Black lung obligations
Accrued expenses
Other
Total
Less: valuation allowance for deferred income tax assets
Net deferred income tax assets
Deferred income tax liabilities:
Prepaid expenses
Property, plant and equipment
Other
Total deferred income tax liabilities
Net deferred income tax liability
1,083
23,765
7,991
561
197
429,123
(312,493)
116,630
(9,416)
(105,715)
(1,757)
(116,888)
$
(258) $
851
37,425
10,826
2,501
1,963
949,747
(767,290)
182,457
(8,073)
(174,098)
(2,230)
(184,401)
(1,944)
On March 31, 2016, the Company experienced an ownership change for purposes of Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a result of such ownership change, absent an applicable exception to such
rules, an annual limitation under Section 382 would apply for federal and certain state income tax purposes with respect to the
utilization of net operating loss carryforwards ("NOLs"). In 2017, the Company requested a private letter ruling ("PLR") from
the Internal Revenue Service ("IRS") to clarify certain matters, that if ruled favorably on by the IRS, would allow the Company
to qualify for an exception to the aforementioned rules limiting its utilization of its NOLs. On September 18, 2017, the IRS
issued to the Company a favorable PLR. Prior to the issuance of the PLR, the Company operated and prepared its financial
statements based on an assumption that an annual limitation on the utilization of the NOLs existed. As a result of qualifying for
such exception, the Company's gross federal and state NOLs were revised downward to approximately $1.9 billion and $2.0
billion, respectively, as of December 31, 2016 (Successor) and $1.6 billion for both federal and state NOLs as of December 31,
2017 (Successor). This revision reflected a decrease to the NOL deferred tax asset and a corresponding adjustment to the
valuation allowance recorded against those NOLs. Under the aforementioned exception to the Code Section 382 limitation, if
the Company were to undergo a subsequent ownership change within two years of the consummation of the Asset Acquisition,
or at any time prior to April 1, 2018, its NOLs would effectively be reduced to zero. A subsequent ownership change could
severely limit or eliminate the Company's ability to utilize its NOLs and other tax attributes.
A roll forward of the deferred tax asset valuation allowance is as follows (in thousands):
Beginning balance
Addition/(Reduction) - current tax expense/(benefit)
Additions - purchase accounting
Reduction due to application of IRC Section 382
Estimate of Tax Cuts and Jobs Act impact
Ending balance
Successor
December 31, 2017
December 31, 2016
$
$
767,290
(129,245)
—
(130,327)
(195,225)
312,493
$
$
—
14,460
752,830
—
—
767,290
The Parent filed income tax returns in the U.S. and in various state and local jurisdictions which are routinely examined
by tax authorities in these jurisdictions. Net operating losses and carryforwards are subject to adjustments based on examination
F-21
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
and the statute of limitations is currently open for all such loss and credit carryforwards. The Company and the Predecessor had
no unrecognized tax benefits or accruals for unrecognized tax benefits as of December 31, 2017 and 2016, respectively.
The Company has federal net operating loss carryforwards of approximately $1.6 billion as of December 31, 2017
(Successor), which expire predominantly in December 31, 2034 through December 31, 2036. The Company has state net
operating loss carryforwards of approximately $1.6 billion, which expire predominantly in December 31, 2029 through
December 31, 2031. In addition, the Company has approximately $6.6 million of general business credits which begin to expire
in December 31, 2027 and fully expire in December 31, 2034. Additionally, the Company has $39.3 million of AMT credits,
net of estimated sequestration impacts, which it has recorded as a long-term income tax receivable and are expected to be
received in 2019 through 2022. Included in other receivables are income tax receivables of $9.1 million, which represents
estimated overpayments of income tax in 2017.
The Company did not record any interest or penalties associated with income taxes but would record interest and
penalties within income tax expense.
Note 9—Asset Retirement Obligations
Changes in the asset retirement obligations (“ARO”) were as follows (in thousands):
Balance at Beginning of Period
ARO liability assumed in the Asset Acquisition
Accretion expense
Revisions in estimated cash flows
Obligations settled
Balance at End of Period
Successor
For the twelve
months ended
December 31, 2017
For the nine
months ended
December 31,
2016
$
$
99,148
$
—
1,834
(658)
(656)
99,668
$
—
96,642
2,817
—
(311)
99,148
The portion of costs expected to be paid within a year of December 31, 2017 is $3.6 million. The portion of costs
expected to be incurred beyond one year as of December 31, 2017 is $96.1 million. There were no assets that were legally
restricted for purposes of settling asset retirement obligations at December 31, 2017.
Note 10—Accrued Expenses
Accrued expenses consisted of the following (in thousands):
Accrued wages and employee benefits
Accrued operating expenses
Accrued royalties
Accrued freight
Accrued interest
Accrued non-income taxes
Other
Total accrued expenses
F-22
Successor
December 31, 2017
December 31, 2016
$
24,832
$
17,203
9,185
5,051
4,589
1,553
4,291
$
66,704
$
12,789
12,584
7,393
2,029
—
1,440
11,104
47,339
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 11—Reorganization Items, Net
Expenses and income directly associated with the Chapter 11 Cases are reported separately in the Statements of
Operations as reorganization items as required by ASC 852. Reorganization items also include adjustments to reflect the
carrying value of liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments are
determined.
Reorganization items include an allocation of professional fees incurred in relation to the Chapter 11 Cases. For the
three months ended March 31, 2016 (Predecessor) and for the year ended December 31, 2015 (Predecessor), the cost of these
professional fees was allocated on the basis of the Predecessor’s assets as compared to the total assets of the Parent for each
reporting period.
The following table presents reorganization items (in thousands):
Rejected workers’ compensation liabilities
Professional fees
Walter Energy Canada Holdings Inc. receivable impairment
Rejected executory contracts, leases and other
Reorganization items, net
Predecessor
For the three
months ended
March 31,
For the year
ended
December 31,
2016
2015
— $
(10,962)
—
18,882
7,920
$
22,169
(19,293)
(13,627)
3,016
(7,735)
$
$
Net cash paid for reorganization items for the three months ended March 31, 2016 (Predecessor) and for the year
ended December 31, 2015 (Predecessor) totaled approximately $12.3 million and $11.5 million, respectively.
Note 12—Restructuring Costs
For the three months ended March 31, 2016 (Predecessor) and for the year ended December 31, 2015 (Predecessor), the
Predecessor recognized restructuring charges of approximately $3.4 million and $13.8 million, respectively, due to workforce
reductions at the Alabama No. 7 underground mine, the Alabama No. 4 underground mine and corporate headquarters in
conjunction with cost containment initiatives implemented in response to the deterioration in the metallurgical coal market. The
restructuring charges consist primarily of severance and related benefits costs. The Company does not expect to incur any
additional restructuring charges in the Successor periods in connection with the Predecessor restructuring actions.
As a result of the depressed met coal market associated with global supply and demand factors and a reduction in global
steel production and steel demand, the Predecessor determined that indicators of impairment existed with respect to
substantially all of its property, plant and equipment and mineral interest reserves during 2015. The Predecessor’s asset groups
generally consist of assets and applicable liabilities of one or more mines and preparation plants and associated coal reserves for
which the cash flows are largely independent of cash flows of other mines, preparation plants and associated coal reserves.
Management concluded that all of the long-lived assets that were tested for impairment during 2015 were recoverable from
future cash flows, except for the Blue Creek Energy Mine. The Predecessor recognized asset impairment charges of
approximately $28.0 million to write-off advance royalties and mine development costs for the Blue Creek Energy Mine in
2015.
Note 13—Workers' Compensation and Pneumoconiosis ("Black Lung") Obligations
Workers' Compensation Obligations
Beginning on April, 1 2016, the Company is insured, through third party insurance carriers, for workers' compensation
benefits for work related injuries.
F-23
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Statements of Operations include expense associated with the Predecessor’s self-insured workers’ compensation
arrangements of zero for the three months ended March 31, 2016 (Predecessor) and $6.4 million for the year ended December
31, 2015 (Predecessor). The Predecessor’s workers’ compensation obligations are included in cost of sales and selling, general
and administrative expense on the Statements of Operations and represent the expected losses for claims incurred over each
respective period.
In connection with the Chapter 11 Cases, the State of Alabama Department of Labor required the Predecessor to
contribute $15.0 million as a security deposit to the State in order for the Predecessor to remain self-insured for its workers’
compensation liabilities. As a result of the Chapter 11 Cases and due to the insolvency of the Parent, the Alabama Worker’s
Compensation Self-Insurers Guaranty Association assumed all of the Predecessor workers’ compensation liabilities and retained
the $15.0 million security deposit, which resulted in the recognition of a $22.2 million gain in reorganization items, net in the
Statement of Operations for the year ended December 31, 2015 (see Note 11).
Black Lung Obligations
The Company is 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, the Company is insured, through a third-party
insurance carrier, for black lung claims raised by any employee. In addition, in connection with the Asset Acquisition, the
Company assumed all black lung liabilities of Walter Energy and its U.S. subsidiaries incurred prior to March 31, 2016. The
Company is self-insured for the black lung claims assumed in the Asset Acquisition. 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 Department of Labor
required the Company to post $17.5 million in Treasury bills as collateral, in addition to maintaining a black lung trust acquired
in the Asset Acquisition. The $17.5 million of collateral is recognized as short-term investments and the $4.0 million black lung
trust is offset against the long-term portion of the black lung obligations within the Balance Sheet as of December 31, 2017
(Successor) and December 31, 2016 (Successor). Under the terms of the agreement with the U.S. Department of Labor, the
Company may elect to replace the $17.5 million collateral deposit with a surety bond or other form of assurance every six
months. The estimated total black lung liabilities (net of black lung trust assets) were $31.9 million as of December 31, 2017
(Successor), of which $1.7 million is classified in other current liabilities and the remainder of $30.2 million is shown as a long-
term liability as a separate line item in the Balance Sheet. For the year ended December 31, 2016 (Successor), the estimated
black lung liabilities were $28.7 million, of which $1.5 million is classified in other current liabilities and $27.2 million is
displayed as a long-term liability as a separate line item in the Balance Sheet. The Company performs an annual evaluation of
its black lung liabilities at each balance sheet date. The calculation uses assumptions regarding rates of successful claims,
discount factors, benefit increases and mortality rates, among others.
Note 14—Pension and Other Postretirement Benefits
Successor Benefit Plans
In connection with the Asset Acquisition, the Company did not assume any of the Parent’s obligations under the plans
discussed in further detail below. The Company established new employee benefit plans for its employees subsequent to closing
the Asset Acquisition. The plans are defined contribution plans. Contributions to these defined contribution plans amounted to
1.4 million for the year ended December 31, 2017 (Successor) and $1.1 million for the nine months ended December 31, 2016
(Successor).
New Initial CBA
In connection with the Asset Acquisition, the Company negotiated a new initial collective bargaining agreement
(“CBA”) with the United Mine Workers of America ("UMWA") (the “UMWA CBA”), which was ratified by UMWA’s
members on February 16, 2016 and expires on March 31, 2021. Pursuant to the UMWA CBA, the Company agreed to
contribute $25.0 million to a Voluntary Employee Beneficiary Association (“VEBA”) trust formed and administered by the
UMWA. Approximately 69% and 68% of the Company's employees were represented by the UMWA as of December 31, 2017
and December 31, 2016, respectively.
F-24
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Predecessor Benefit Plans
In the Predecessor periods, the Parent had various defined benefit pension plans covering eligible salaried and hourly
employees. The Parent also provided certain postretirement benefits other than pensions, primarily healthcare, to eligible
retirees. In addition to its own pension plans and other postretirement benefit plans, the Parent contributed to several multi-
employer benefit plans covering eligible employees who were represented by the UMWA. The Parent funded its defined benefit
pension plans in amounts sufficient to satisfy the “Minimum Funding Standards” of the Employee Retirement Income Security
Act of 1974 (“ERISA”). Other postretirement benefit plans were funded as benefits were paid or as assessed by third-party plan
sponsors.
On December 28, 2015 the Bankruptcy Court entered the Memorandum Opinion and Order Granting Debtors’ Motion
for an Order (I) authorizing the Walter Energy Debtors to (A) reject collective bargaining agreements, (B) implement final labor
proposals, and (C) terminate retiree benefits; and (II) granting related relief, authorizing the Walter Energy Debtors to reject
their collective bargaining agreements with the UMWA (the “UMWA Order”). The UMWA Order authorized the Walter Energy
Debtors to reject their collective bargaining agreements with the UMWA and allow for the sale of the Walter Energy Debtors’
assets free and clear of collective bargaining obligations. For purposes of the Predecessor financial statements, these defined
benefit plans are being treated as multiemployer plans. Accordingly, the benefit obligations, plan assets and accumulated other
comprehensive income or loss amounts are not shown in the Balance Sheets. The contributions to the Parent’s defined benefit
plans related to the Predecessor’s employees recognized as expenses were $6.2 million and $30.9 million for the three months
ended March 31, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor), respectively.
Parent-Sponsored Defined Benefit Plans
Certain of the Predecessor’s active U.S. based salaried employees were participants in a defined benefit pension plan
sponsored by the Parent. This defined benefit plan covered active employees of the Predecessor and new employees that were
eligible upon the participation requirements. In connection with the Chapter 11 Cases, this defined benefit pension plan was
terminated on December 31, 2015 and the Pension Benefit Guaranty Corporation was appointed trustee. No amount of the plan
settlement gains or losses recognized by the Parent upon termination of the Parent sponsored pension plans were allocated to
the combined financial statements of the Predecessor.
The related defined benefit pension plan trust assets and liabilities have not been allocated to the Predecessor and are
not presented in the accompanying Balance Sheet since the obligations are and will remain a liability of the Parent. The
Predecessor recorded expenses related to claim payments made of $30.9 million for the year ended December 31, 2015, which
has been reflected within other postretirement benefits in the accompanying Statement of Operations.
UMWA Multi-employer Benefit Plans
The Parent was required under its agreement with the UMWA to contribute to multiemployer plans providing pension,
healthcare and other postretirement benefits. At December 31, 2015, approximately 61.4% of the Predecessor’s workforce was
represented by the UMWA and covered under the Predecessor’s collective bargaining agreement, which began July 11, 2012
and was to expire December 31, 2016. The Predecessor’s obligations to make contributions to the UMWA multi-employer
pension and benefit plans ceased upon entry of the UMWA Order by the Bankruptcy Court effective as of March 31, 2016.
The Parent was required under its agreements with the UMWA, specifically the 1974 UMWA Pension Plan, the UMWA
Combined Benefit Fund, the UMWA 1992 Benefit Fund, the UMWA 1993 Benefit Plan, and the 2012 Retiree Bonus Plan, to
pay amounts based principally on hours worked by UMWA represented employees. Contributions under the UMWA multi-
employer pension and benefit plans were set at an aggregate rate of $8.16 per hour worked. Aggregate contributions related to
the Predecessor’s employees under these plans were approximately $6.2 million and $22.8 million for the three months ended
March 31, 2016 (Predecessor) and year ended December 31, 2015 (Predecessor), respectively.
Note 15—Equity Award Plans
Warrior Met Coal, LLC 2016 Equity Incentive Plan
The Company adopted the Warrior Met Coal, LLC 2016 Equity Incentive Plan (the “2016 Equity Plan”). Under the
2016 Equity Plan, employees, directors and officers of the Company were granted equity interests in Warrior Met Coal, LLC in
F-25
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
the form of restricted units and phantom units. In connection with the corporate conversion on April 12, 2017, the awards of
restricted units were converted into restricted shares of common stock of the Company (the "Restricted Shares").
The Restricted Shares have certain service-based, performance-based and market-based vesting conditions, including
the occurrence of an initial public offering or a change in control as set forth in the 2016 Equity Plan and the applicable award
agreements. As of December 31, 2017 (Successor), 805,083 Restricted Shares were issued, of which approximately 532,083
had vested. Upon effectiveness of the 2017 Equity Plan (defined below), no further awards were granted under the 2016 Equity
Plan.
Holders of phantom shares have the right to receive shares of the Company on the earlier of (i) a change in control as
defined by the 2016 Equity Plan or (ii) the fifth anniversary of the grant date of the phantom share. The phantom shares are
settled in the Company’s shares. As of December 31, 2017 (Successor), there were 43,580 phantom shares issued to a director
of the Company, all of which were fully vested upon issuance.
Restricted Shares were issued proportionally as Tranche A, Tranche B, and Tranche C shares.
The Tranche A shares have service and performance based vesting conditions and the awards vest in equal installments
on each of the first five anniversaries of the grant date that occurs prior to an IPO and thereafter, subject to the employee’s
continued employment or the director’s continued service with the Company through these dates. Vesting is conditioned and
contingent upon at least 50% of the shares originally acquired by Walter Energy’s First Lien Lenders in the Asset Acquisition
having been disposed of to an independent third party, whether before or after the IPO. As of December 31, 2017 (Successor),
none of the Tranche A shares have vested. In the event of a change in control, any Tranche A shares that have not previously
vested shall become fully vested at the time of such change in control, subject to the employee’s continued employment or the
director's continued service with the Company through the change in control date.
The Tranche B and Tranche C shares are performance and market- based awards, with vesting being contingent upon
the achievement of certain market conditions and subject to the employee’s continued employment or the director's continued
service with the Company through the date of achievement. As of December 31, 2017 (Successor), the Tranche B and Tranche
C shares met the required performance and market conditions and were fully vested. In connection with the vesting of the
Tranche B and C shares, the Company recognized approximately $3.2 million in stock compensation expense. The Company
recognized an excess income tax benefit of $3.4 million in connection with this vesting. Unrecognized compensation expense
related to the 2016 Equity Plan amounted to approximately $5.7 million.
The following table presents a summary of Restricted Shares granted under the 2016 Equity Plan for the year ended
December 31, 2017 (Successor):
Non-vested at December 31, 2016
Granted
Forfeited
Vested
Outstanding at December 31, 2017
Number of
Restricted Class C
Shares
Weighted
Average Grant
Date Fair Value
684,228
$
120,855
$
(6,973) $
(532,083) $
$
266,027
10.18
16.84
16.68
6.02
21.34
The Company uses the Black-Scholes option pricing model to estimate the fair value of restricted Tranche A shares
granted and the Monte Carlo pricing model to estimate fair value of restricted Tranche B and C shares granted. The pricing
model incorporate the assumptions as presented in the following table, shown at their weighted average values:
F-26
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Expected stock price volatility (a)
Risk-free interest rate (b)
Expected life (years)
Successor
For the year ended
December 31, 2017
For the nine
months ended
December 31, 2016
35%
1.75%
4.17
25.25%
1.25%
5
(a) The Company bases its expected volatility on a group of companies believed to be a representative peer group, selected
based on industry and market capitalization.
(b) The risk-free rate for periods within the expected term of the award is based on the U.S. Government Bond yield with a
term equal to the awards' expected term on the date of grant.
(c) Expected life represents the period of time that awards granted are expected to be outstanding.
Warrior Met Coal, Inc. 2017 Equity Incentive Plan
In connection with the IPO, the Company adopted the Warrior Met Coal, Inc. 2017 Equity Incentive Plan (the “2017
Equity Plan”). Awards previously issued and outstanding under the 2016 Equity Plan will continue to be governed by the 2016
Equity Plan. However, no further awards will be granted under the 2016 Equity Plan.
Under the 2017 Equity Plan, directors, officers, employees, consultants and advisors and those of affiliated companies,
as well as those who have accepted offers of employment or consultancy from the Company or the Company’s affiliated
companies, may be granted equity interest in Warrior Met Coal, Inc. in the form of stock options, stock appreciation rights,
restricted stock, restricted stock units, stock bonus awards, and performance awards.
The total number of shares of common stock, including incentive stock options, available for grant of awards under the
2017 Equity Plan is 5,832,508. If any outstanding award expires, is canceled, forfeited, or settled in cash, the shares allocable to
that award will again be available for grant under the 2017 Equity Plan.
As of December 31, 2017 (Successor) the equity awards granted under the 2017 Equity Plan are comprised of common
stock, restricted stock awards, and restricted stock unit awards. The Company recognized stock compensation expense of $0.5
million associated with the granting of the awards. Unrecognized compensation expense related to the 2017 Equity Plan
amounted to approximately $0.1 million.
A summary of activity related to restricted stock unit award grants under the 2017 Equity Incentive Plan during the
year ended December 31, 2017 is as follows:
Non-vested at December 31, 2016
Granted
Vested
Outstanding at December 31, 2017
Equity Modification
Shares
Weighted
Average Grant
Date Fair Value
— $
$
105,875
(97,052) $
$
8,823
—
17.47
17.38
18.51
On March 31, 2017, the board of managers of the Company declared a cash distribution payable to holders of our then
outstanding Class A Units, Class B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in
the aggregate amount of $190.0 million (the “Special Distribution”). The Special Distribution with respect to such Restricted
Shares was not paid but held in trust pending their vesting. As of December 31, 2017 (Successor), approximately $4.6 million is
held in the trust and is included within other long-term assets in the accompanying Balance Sheets.
F-27
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
On June 1, 2017, the Compensation Committee (the "Committee") of the board of directors of the Company (the
"Board") approved the modification described below (the “Modification”) to the award agreements (the “Awards”) for the
Restricted Shares to certain officers, directors and employees of the Company. Pursuant to the Modification, the Committee
waived certain vesting requirements with respect to the Special Distribution for the Restricted Shares such that funds currently
held in trust as described above with respect to the Special Distribution were paid in full to recipients that received equal to or
less than $100.0 thousand and were paid with respect to 50% of the Restricted Shares for recipients that received greater than
$100.0 thousand. However, funds held in trust with respect to the Special Distribution for the remaining 50% of the Restricted
Shares for recipients that received greater than $100.0 thousand will not be released until such shares vest pursuant to the
original terms of the Awards on the basis of the passage of time and the Company’s achievement of certain metrics.
In addition and pursuant to the Modification, the holders of the Restricted Shares were permitted to elect to receive the
2017 Dividend released from trust as described above with respect to their Restricted Shares (i) 100% in cash; (ii) 50% in cash
and 50% in restricted stock units (“RSUs”); or (iii) 100% in RSUs.
In connection with the Modification, the Committee approved a form of Restricted Stock Unit Award Agreement (the
“RSU Award Agreement”) pursuant to the 2017 Equity Plan on June 1, 2017 (the “Grant Date”) for those holders who elected
to receive the Special Distribution, in whole or in part, in RSUs (the “Participants”). The RSU Award Agreement provides that
RSUs awarded pursuant to the Modification shall be fully vested on the Grant Date and shall be settled in shares of common
stock on a one-for-one basis on the earliest of (i) one-third on each of the first three anniversaries of the Grant Date; (ii) a
Change in Control (as defined in the 2017 Equity Plan); (iii) the Participant’s separation from service with the Company or its
affiliates; or (iv) death of the Participant.
In connection with the Modification, for the year ended December 31, 2017 (Successor), the Company recognized a
reduction to dividends payable of $0.2 million associated with the holders that elected to receive cash and $1.3 million was
treated as an adjustment to equity for those that elected RSUs.
Predecessor Stock-Based Compensation
Certain of the Predecessor’s employees participated in stock-based compensation plans sponsored by the Parent.
For the three months ended March 31, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor), the
Predecessor recorded stock-based compensation expense related to equity awards granted by the Parent totaling approximately
$0.4 million and $4.0 million, respectively.
Note 16—Debt
Debt consisted of the following (in thousands):
Senior secured notes
Promissory note
Debt discount
Total debt
Less: current debt
Total long-term debt
Weighted
Average Interest
Rate at
December 31,
2017
8%
4%
Final Maturity
2024
2019
December 31, 2017
December 31, 2016
$
350,000
$
3,725
(7,812)
345,913
(2,965)
342,948
$
$
—
6,574
—
6,574
(2,849)
3,725
The Company's minimum debt repayment schedule, excluding interest, as of December 31, 2017 (Successor) is as
follows (in thousands):
F-28
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Payments Due
2018
2019
2020
2021
2022
Thereafter
$
$
— $
— $
— $
— $
— $350,000
2,965
2,965
$
760
760
—
—
—
—
$
— $
— $
— $ 350,000
Senior secured notes
Promissory note
Total
ABL Facility
On April 1, 2016, the Company entered into an Asset-Based Revolving Credit Agreement (the “ABL Facility”) with
certain lenders and Citibank, N.A. (together with its affiliates, “Citibank”), as administrative agent and collateral agent, with an
aggregate lender commitment to make a revolving loan of up to $50.0 million, subject to borrowing base availability. On
January 23, 2017, the Company entered into Amendment No. 1 to the ABL Facility to, among other things, (i) increase the
aggregate lender commitment to $100.0 million, (ii) reduce the applicable interest rate margins by 100 basis points ("bps"), (iii)
permit the corporate conversion and (iv) allow the IPO to be consummated without triggering a change of control.
On March 24, 2017, the Company entered into Amendment No. 2 to the ABL Facility to modify certain terms relating
to the restricted payment covenant, which provides the Company with improved flexibility to pay dividends, including the
Special Distribution.
On May 15, 2017, the Company entered into Amendment No. 3 to the ABL Facility to, among other things, (i) allow for
the posting of cash collateral to secure certain swap and hedging arrangements permitted under the ABL Facility and (ii) allow
for the payment of dividends permitted under the ABL Facility within 60 days of declaration thereof. At December 31, 2017
(Successor), the Company had $100.0 million of availability under the ABL Facility.
On October 3, 2017, the Company entered into Amendment No. 4 to the ABL Facility and Amendment No. 2 to the
Pledge and Security Agreement dated as of April 1, 2016 (the “Security Agreement”) (the "Fourth Amendment") to, among
other things, (i) provide an exception to the indebtedness and lien negative covenants in the ABL Facility to permit the
Company to incur indebtedness in an aggregate principal amount not to exceed $500.0 million at any time outstanding, which
indebtedness may be unsecured or secured and (ii) to amend certain provisions in the Security Agreement to reflect additional
lien and indebtedness capacity granted under the ABL Facility as amended by the Fourth Amendment.
Under the ABL Facility, up to $10.0 million of the commitments may be used to incur swingline loans from Citibank
and up to $50.0 million of the commitments may be used to issue letters of credit. The ABL Facility will mature on April 1,
2019. As of December 31, 2017 (Successor), no amounts were outstanding under the ABL Facility and there were no
outstanding letters of credit. At December 31, 2017 (Successor), the Company had $100.0 million of availability under the ABL
Facility.
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 December 31, 2017, the Company
was not subject to this covenant. Subject to customary grace periods and notice requirements, the ABL Facility also contains
customary events of default.
The Company was in compliance with all applicable covenants under the ABL Facility as of December 31, 2017
(Successor).
Promissory Note
In connection with the Asset Acquisition, the Company assumed a security agreement and promissory note, which had
an outstanding balance of $3.7 million as of December 31, 2017 (Successor), of which $2.9 million was classified as a current
obligation. The amount owed in respect of the promissory note was originally used for the purchase of underground mining
F-29
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
equipment and such note is secured by the same mining equipment. The promissory note matures on March 31, 2019 and bears
a fixed interest rate of 4.00% per annum. The Company is required to make monthly payments of principal and interest during
the term of the promissory note.
Senior Secured Notes
On November 2, 2017, the Company consummated a private offering (the “Offering”) of $350.0 million aggregate
principal amount of 8.00% Senior Secured Notes due 2024 (the “Notes”) 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
approximately $340.0 million from the Offering, together with cash on hand of approximately $260.0 million, to pay a special
cash dividend of approximately $600.0 million, or $11.21 per share, to all of its stockholders on a pro rata basis (the "November
Special Dividend").
The Notes will mature on November 1, 2024 and interest is payable on May 1 and November 1 of each year,
commencing May 1, 2018. The Notes are fully and unconditionally guaranteed on a joint and several basis by each of the
Company's direct and indirect wholly-owned domestic restricted subsidiaries that are guarantors under the ABL Facility
(subject to customary release provisions).
At any time prior to November 1, 2020, the Company 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 the Company's option, in whole or in part, from time to time, on or after November 1, 2020, at redemption prices specified in
the indenture, plus accrued and unpaid interest, if any, to, but excluding the redemption date. At any time on or prior to
November 1, 2020, the Company 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 108.00% of the principal amount of the Notes, plus accrued and unpaid
interest, if any, to but excluding the redemption date. The Company is 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 it experiences 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 it makes certain asset sales or
dispositions and does 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.
Note 17—Related Party Transactions
In connection with the Asset Acquisition, the Company acquired a 50% interest in Black Warrior Methane (“BWM”)
and Black Warrior Transmission (“BWT”), which are accounted for under the proportionate consolidation method and equity
method, respectively. The Company has granted the rights to produce and sell methane gas from its coal mines to BWM and
BWT. The Company’s net investments in, advances to/from BWT and equity in earnings or loss of BWT are not material to the
Company. The Company supplied labor to BWM and incurred costs, including property and liability insurance, to support the
joint venture. The Company charged the joint venture for such costs on a monthly basis, which were $2.9 million for the year
ended December 31, 2017 (Successor), $1.7 million for the nine months ended December 31, 2016 (Successor), $0.3 million
for the three months ended March 31, 2016 (Predecessor), and $7.4 million for the year ended December 31, 2015
(Predecessor).
The Predecessor also received revenue from coal sales to affiliates of the Parent that were not acquired in connection
with the Asset Acquisition. The Predecessor recognized revenue from these affiliates of $1.4 million and $11.2 million for the
three months ended March 31, 2016 (Predecessor) and the year ended December 31, 2015 (Predecessor), respectively.
Note 18—Commitments 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.
F-30
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company believes that it is in substantial 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 December 31, 2017 (Successor) and December 31, 2016
(Successor), 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 a number of lawsuits arising in the ordinary course of their 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 December 31,
2017 (Successor) and December 31, 2016 (Successor), there were no items accrued for miscellaneous litigation.
Indemnifications
In the ordinary course of business, the Company entered into a contractual arrangement under which the Company has
agreed to indemnify a third party to such arrangement from any losses arising from certain events as specified in the particular
contracts, which may include, for example, litigation or claims relating to past performance. The Company had accrued $0.3
million as of December 31, 2017 (Successor) and December 31, 2016 (Successor), which is included in other long-term
liabilities. The remaining maximum exposure under this arrangement is $0.2 million.
Commitments and Contingencies—Other
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, 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 December 31, 2017 (Successor), the
Company had no liability recorded for minimum throughput requirements. At December 31, 2016 (Successor), the Company
had accrued a liability of $2.1 million as a result of not meeting the required minimums, which is included in accrued expenses
on the Balance Sheet.
Lease and Royalty Obligations
The Company’s leases are primarily for mining equipment and automobiles. At December 31, 2017 (Successor) the
total cost of assets under capital leases was $9.9 million. Accumulated amortization on assets under capital leases was $1.6
million. Amortization expense for capital leases is included in depreciation and depletion expense. Future minimum payments
under non-cancellable capitalized leases as of December 31, 2017 (Successor) were as follows (in thousands):
2018
2019
2020
2021
2022
Total
Less: amount representing interest
Present value of minimum lease payments
Capitalized
Leases
5,313
471
—
—
—
5,784
(34)
5,750
$
$
At December 31, 2016 (Successor), the Company had no future minimum payments due under non-cancellable
operating and capital leases.
F-31
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
A substantial amount of the coal that the Company mines is produced from mineral reserves leased from third-party
land owners. These leases convey mining rights to the Company in exchange for royalties to be paid to the land owner 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 $93.3 million, $17.5 million, $3.6 million,
and $28.3 million for the year ended December 31, 2017 (Successor), nine months ended December 31, 2016 (Successor), the
three months ended March 31, 2016 (Predecessor), and the year ended December 31, 2015 (Predecessor), respectively.
Note 19—Stockholders' Equity
Pursuant to the Company's certificate of incorporation, the Company is authorized to issue up to 140,000,000 shares of
common stock, $0.01 par value per share, and 10,000,000 shares of preferred stock, $0.01 par value per share. As of
December 31, 2017, there were 53,284,470 shares of common stock issued and outstanding.
In connection with the Asset Acquisition and the Rights Offerings (see Note 1), the Company issued the equivalent of
52,636,959 shares of its common stock (after giving effect to the Corporate Conversion) which is reflected as common stock of
$526 and additional paid in capital of $801,605 in the statement of changes in equity for the nine month period from April 1,
2016 to December 31, 2016.
Note 20—Derivative Instruments
The Company enters 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 the Company’s forecasted sales. As of December 31, 2017
(Successor), the Company had natural gas swap contracts outstanding with notional amounts 8,400 million British thermal units
maturing in the fourth quarter of 2018. As of December 31, 2016 (Successor), the Company had natural gas swap contracts
outstanding with notional amounts totaling 7,920 million British thermal units maturing in the fourth quarter of 2017.
The Company’s 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
Statements of Operations. The Company records all derivative instruments at fair value and had an asset of $1.7 million related
to natural gas swap contracts outstanding as of December 31, 2017 (Successor), which is included in prepaid expenses, and $3.8
million as of December 31, 2016 (Successor) included in other current liabilities in the accompanying Balance Sheets.
Note 21—Fair Value of Financial Instruments
The following table presents information about the Company’s financial liabilities measured at fair value on a recurring
basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
Assets:
Natural gas swap contracts
Liabilities:
Natural gas swap contracts
Successor
Fair Value Measurements as of December 31, 2017 Using:
Level 1
Level 2
Level 3
Total
— $
1,644
$
— $
1,644
Fair Value Measurements as of December 31, 2016 Using:
Level 1
Level 2
Level 3
Total
Successor
— $
3,784
$
— $
3,784
$
$
The Company has no assets or any other liabilities measured at fair value on a recurring basis as of December 31, 2017
(Successor) or December 31, 2016 (Successor). During the year ended months ended December 31, 2017 (Successor), 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 year ended December 31, 2017 (Successor).
F-32
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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, restricted cash, receivables and accounts payable—The carrying
amounts reported in the Balance Sheet approximate fair value due to the short-term nature of these assets and liabilities.
Debt—The Company's outstanding debt is carried at cost. There were no borrowings outstanding under the ABL
Facility as of December 31, 2017 (Successor) or December 31, 2016 (Successor). The estimated fair value of the Notes is
approximately $364.0 million based upon observable market data (Level 2). The carrying value of the Company's outstanding
promissory note approximates its fair value.
Note 22—Net Income (Loss) per Share
The computation of basic net income (loss) per share is based on the number of weighted average common shares
outstanding during the period. The computation of diluted net income (loss) per share is based on the weighted average number
of shares outstanding plus the incremental shares that would be outstanding assuming issuance of restricted stock. The number
of incremental shares is calculated by applying the treasury stock method. Basic and diluted net income (loss) per share was
calculated as follows (in thousands, except per share data):
Numerator:
Net income (loss)
Denominator:
Weighted-average shares used to compute net income (loss) per share—basic
Dilutive restricted stock awards and units
Weighted-average shares used to compute net income (loss) per share—diluted
Net income (loss) per share—basic and diluted
Successor
For the
year ended
December 31,
For the nine
months ended
December 31,
2017
2016
$
455,046
$
(49,673)
52,800
6
52,806
$
8.62
$
52,640
—
52,640
(0.94)
As of December 31, 2017 (Successor), there were 266,533 shares of common stock issued under the 2016 Equity Plan
and 2017 Equity Plan to certain directors and employees, for which neither the service nor performance based vesting
conditions were met as of the measurement date. As such, these common shares have been excluded from basic and diluted
earnings per share. As of December 31, 2017 (Successor), there were 43,580 shares of common stock contingently issuable
upon the settlement of a vested phantom unit award under the 2016 Equity Plan and 13,157 shares of common stock
contingently issuable upon the settlement of a vested restricted stock unit award under the 2017 Equity Plan. The settlement
date is the earlier of a change in control as described in the 2016 Equity Plan and 2017 Equity Plan or five years from the grant
date. These awards are vested and as such have been included in the weighted-average shares used to compute basic and
diluted net income per share. As of December 31, 2017 (Successor), there were 97,052 shares of common stock issued under
the 2017 Equity Plan to certain directors and employees.
On March 31, 2017 (Successor), the Company's board of managers declared a cash distribution of $3.56 per share,
totaling $190.0 million, which was paid on March 31, 2017 to holders of Class A Units, Class B Units and Class C Units of
record as of March 27, 2017.
On May 17, 2017, the Board adopted a policy (the "Dividend Policy") of paying a quarterly cash dividend of $0.05 per
share. The initial quarterly dividend of $2.7 million was paid on June 13, 2017 to stockholders of record on May 30, 2017. The
Dividend Policy also 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,
F-33
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 flexibility for the
Company to pursue very selective strategic growth opportunities that can provide compelling stockholder returns.
On July 31, 2017, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.7 million, which
was paid on August 23, 2017, to stockholders of record as of the close of business on August 14, 2017.
On October 25, 2017, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.7 million,
which was paid on November 10, 2017, to stockholders of record as of the close of business on November 3, 2017.
On November 2, 2017, the Board declared the November Special Dividend of $11.21 per share, totaling approximately
$600 million, which was paid on November 22, 2017, to stockholders of record as of the close of business on November 13,
2017.
Note 23—Segment 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 two
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 two operating segments are similar in both quantitative and qualitative
characteristics and thus the two operating segments have been aggregated into one reportable segment. The Company has
determined that its natural gas and royalty businesses 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, other post-retirement benefits, transactions costs, restructuring costs, interest expense, reorganization
items, net and income tax expense by segment.
The following tables include reconciliations of segment information to consolidated amounts (in thousands):
Revenues
Mining
All other
Total revenues
Successor
Predecessor
For the year ended
December 31,
For the nine
months ended
December 31,
2017
2016
For the three
months ended
March 31,
2016
For the year ended
December 31,
2015
$
$
1,124,645
44,447
1,169,092
$
$
276,560
21,074
297,634
$
$
65,154
6,229
71,383
$
$
514,334
30,399
544,733
F-34
WARRIOR MET COAL, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Capital Expenditures
Mining
All other
Total capital expenditures
Successor
Predecessor
For the year ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year ended
December 31,
2017
2016
2016
2015
$
$
89,700
2,925
92,625
$
$
9,342
2,189
11,531
$
$
4,588
834
5,422
$
$
61,416
3,555
64,971
The Company evaluates the performance of its segment based on Segment Adjusted EBITDA, which is defined as net
income (loss) adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and
administrative, other postretirement benefits, 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. Below is a reconciliation of Segment Adjusted EBITDA
to net income (loss), which is its most directly comparable financial measure calculated and presented in accordance with
GAAP (in thousands):
Successor
Predecessor
For the year ended
December 31,
For the nine
months ended
December 31,
For the three
months ended
March 31,
For the year ended
December 31,
2017
2016
2016
2015
Segment Adjusted EBITDA
$
532,115
$
31,837
$
Other revenues
Cost of other revenues
Depreciation and depletion
Selling, general and administrative
Other postretirement benefits
Restructuring charges
Transaction and other costs
Interest expense, net
Reorganization items, net
Gain on extinguishment of debt
Income tax benefit (expense)
44,447
(28,422)
(75,413)
(36,453)
—
—
(12,873)
(6,947)
—
—
38,592
Net income (loss)
$
455,046
$
Note 24—Subsequent Events
Regular Quarterly Dividend
21,074
(19,367)
(47,413)
(20,507)
—
—
(13,568)
(1,711)
—
—
(18)
(49,673)
$
(7,143) $
6,229
(4,698)
(28,958)
(9,008)
(6,160)
(3,418)
—
(16,562)
7,920
—
(18)
(61,816) $
(115,197)
30,399
(27,442)
(123,633)
(38,922)
(30,899)
(13,832)
—
(51,077)
(7,735)
26,968
40,789
(310,581)
On February 13, 2018, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.7 million,
which will be paid on March 2, 2018, to stockholders of record as of the close of business on February 23, 2018.
F-35
SUPPLEMENTAL SUMMARY QUARTERLY FINANCIAL IFORMATION (UNAUDITED)
(in thousands, except per share amounts)
Fiscal Year 2017
Total revenues
Operating income
Net income (1)
Net income per share—basic and diluted
Fiscal Year 2016
Total revenues
$
$
$
$
$
Quarter Ended
Successor
March 31
June 30
September 30
December 31
253,964
110,853
108,308
2.06
$
$
$
$
363,370
163,276
129,865
2.46
$
$
$
$
311,955
82,770
119,717
2.27
$
$
$
$
239,803
66,502
97,156
1.83
Predecessor
March 31
Quarter Ended
Successor
June 30
September 30
December 31
153,269
71,383
$
(53,156) $
(61,816) $
$
91,474
$
(49,629) $
(50,063) $
(0.95) $
52,891
$
(32,948) $
(33,642) $
(0.64) $
Operating income (loss)
Net income (loss) (2)
Net income (loss) per share—basic and diluted
(1) Net income included transaction and other costs of $9.0 million and $3.8 million for the three months ended March 31,
$
$
34,633
34,032
0.65
2017 (Successor) and June 30, 2017 (Successor). Net income for the three months ended December 31, 2017 also includes
the impact of the enactment of the Tax Cuts and Jobs Act discussed further in Note 8.
(2) Net income (loss) included restructuring costs of $3.4 million and reorganization items, net of $7.9 million for the three
months ended March 31, 2016 (Predecessor). Net income (loss) included transaction and other costs of $10.5 million for
the three months ended June 30, 2016 (Successor).
(3) The sum of quarterly EPS amounts may be different than annual amounts as a result of the impact of variations in shares
outstanding.
F-36
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CORPORATE HEADQUARTERS
FORM 10-K
C O R P O R A T E D I R E C T O R Y
Warrior Met Coal, Inc.
16243 Highway 216
Brookwood, AL 35444
Tel: 205.554.6150
Web: www.warriormetcoal.com
INVESTOR CONTACT
Dale W. Boyles
Warrior Met Coal, Inc.
16243 Highway 216
Brookwood, AL 35444
Tel: 205.554.6150
Email: investorrelations@warriormetcoal.com
MEDIA CONTACT
William O. Stanhouse, Jr.
Warrior Met Coal, Inc.
16243 Highway 216
Brookwood, AL 35444
Email: william.stanhouse@warriormetcoal.com
BOARD OF DIRECTORS
Stephen D. Williams (3)
Michael A. Addeo (2, 4)
J. Brett Harvey (2, 3)
Keith W. Luh (1, 3)
Blaine D. MacDougald (1, 4)
Matthew R. Michelini (1)
Walter J. Scheller, III
Alan H. Schumacher (1)
Gareth N. Turner (2, 4)
BOARD OF DIRECTORS COMMITTEES
1 - Audit Committee
2 - Compensation Committee
3 - Environmental, Health & Safety Committee
4 - Nominating and Corporate Governance Committee
ANNUAL MEETING
Additional copies of the company’s Annual Report on Form
10-K for the year ended December 31, 2017 are available
on the company’s website, or without charge, by written
request to:
Investor Relations
Warrior Met Coal, Inc.
16243 Highway 216
Brookwood, AL 35444
Tel: 205.554.6150
Or by e-mail to: investorrelations@warriormetcoal.com
COMMON STOCK
New York Stock Exchange / Symbol: HCC
TRANSFER AGENT AND REGISTRAR
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
United States
P.O. Box 505000
Louisville, KY 40233-5000
United States
Shareholder Services
Tel: 1.800.736.3001
www.computershare.com
INDEPENDENT ACCOUNTANTS
Ernst & Young, LLP
1901 Sixth Avenue North, Suite 1200
Birmingham, AL 35203
OFFICERS OF THE CORPORATION
Walter J. Scheller, III
Chief Executive Officer
Jack K. Richardson
Chief Operating Officer
Dale W. Boyles
Chief Financial Officer
Michael T. Madden
Chief Commercial Officer
Kelli K. Gant
Chief Administrative Officer and Secretary
The Annual Meeting of Shareholders of Warrior Met Coal, Inc.
will be held Tuesday, April 24, 2018 at 9:00 am ET at the
office of Akin Gump Strauss Hauer & Feld, LLP, located at One
Bryant Park, Bank of America Tower, New York, New York.
Phillip C. Monroe
General Counsel
Brian M. Chopin
Chief Accounting Officer and Controller
WMC Annual Report Inside Back Cover.indd 1
3/7/18 3:36 PM
WARRIOR MET COAL, INC. | 16243 HIGHWAY 216 | BROOKWOOD, AL 35444 USA | (205) 554-6150
WMC Annual Report Back Cover.indd 1
3/7/18 1:41 PM