WARRIOR MET COAL, INC. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020


☐			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		81-0706839
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

16243 Highway 216
Brookwood	Alabama	35444
(Address of Principal Executive Offices)		(Zip Code)

(205) 554-6150

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	HCC	New York Stock Exchange
Rights to Purchase Series A Junior Participating Preferred Stock, par value $0.01 per share	--	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth 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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

Number of shares of common stock outstanding as of October 26, 2020: 51,186,199

TABLE OF CONTENTS


Forward-Looking Statements		1
Part I-Financial Information		3
Item 1.	Financial Statements	4
	Condensed Statements of Operations for the three and nine months ended Sep tember 30, 2020 (Unaudited) and September 30, 2019 (Unaudited)	4
	Condensed Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	5
	Condensed Statement of Changes in Stockholders' Equity for the three and nine months ended September 30, 2020 (Unaudited) and September 30, 2019 (Unaudited)	6
	Condensed Statements of Cash Flows for the nine months ended September 30, 2020 (Unaudited) and Se ptember 30, 2019 (Unaudited)	7
	Notes to Condensed Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	37
Part II - Other Information		38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults on Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40
Signatures		41

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this "Form 10-Q") 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 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;

•the impact of the COVID-19 (as defined below) pandemic, including its impact on our business, employees, suppliers and customers, the met coal and steel industries, and global economic markets;

•a substantial or extended decline in pricing or demand for metallurgical ("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 (as amended and restated, the "ABL Facility") and the Indenture (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 and our NOL rights agreement;

•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 carry forwards ("NOLs");

•challenges to our licenses, permits and other authorizations;

•challenges associated with environmental, health and safety laws and regulations;

•regulatory requirements associated with federal, state and local regulatory agencies, and such agencies’ authority to order temporary or permanent closure of our mines;

•climate change concerns and our operations’ impact on the environment;

•failure to obtain or renew surety bonds on acceptable terms, which could affect our ability to secure reclamation and coal lease obligations;

•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;

•the timing and amount of any stock repurchases we make under our Stock Repurchase Program (as defined below) or otherwise; 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 1A. Risk Factors,” “Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-Q, and those set forth from time to time in our other filings with the Securities and Exchange Commission (the “SEC”). These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval system at http://www.sec.gov. In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements.

When considering forward-looking statements made by us in this Form 10-Q, or elsewhere, such statements speak only as of the date on which we make them. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements in this Form 10-Q after the date of this Form 10-Q, except as may be required by law. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this Form 10-Q or elsewhere might not occur.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

WARRIOR MET COAL, INC.

CONDENSED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Revenues:
Sales	$	175,229	$	280,841	$	555,610	$	1,037,950
Other revenues	4,835		6,665		14,875		25,458
Total revenues	180,064		287,506		570,484		1,063,408
Costs and expenses:
Cost of sales (exclusive of items shown separately below)	151,370		190,221		433,661		578,038
Cost of other revenues (exclusive of items shown separately below)	7,064		7,583		22,267		23,346
Depreciation and depletion	27,965		25,741		78,813		73,652
Selling, general and administrative	8,192		9,362		25,105		29,050

Total costs and expenses	194,591		232,907		559,846		704,086
Operating income (loss)	(14,527)		54,599		10,639		359,322
Interest expense, net	(8,059)		(7,250)		(23,847)		(22,793)
Loss on early extinguishment of debt	—		—		—		(9,756)
Other income	—		5,272		1,822		22,815
Income (loss) before income tax expense (benefit)	(22,586)		52,621		(11,386)		349,588
Income tax expense (benefit)	(8,152)		7,599		(9,336)		68,639
Net income (loss)	(14,434)		$	45,022	$	(2,050)	$	280,949
Basic and diluted net income (loss) per share:
Net income (loss) per share—basic	$	(0.28)	$	0.88	$	(0.04)	$	5.46
Net income (loss) per share—diluted	$	(0.28)	$	0.87	$	(0.04)	$	5.44
Weighted average number of shares outstanding—basic	51,190		51,348		51,161		51,469
Weighted average number of shares outstanding—diluted	51,356		51,482		51,275		51,599
Dividends per share:	$	0.05	$	0.05	$	0.15	$	4.56

The accompanying notes are an integral part of these condensed financial statements.

WARRIOR MET COAL, INC.

CONDENSED BALANCE SHEETS

(in thousands)


	September 30, 2020 (Unaudited)		December 31, 2019

ASSETS
Current assets:
Cash and cash equivalents	$	216,413	$	193,383
Short-term investments	8,504		14,675
Trade accounts receivable	81,417		99,471
Income tax receivable	—		12,925
Inventories, net	155,667		97,901
Prepaid expenses and other receivables	40,017		25,691
Total current assets	502,018		444,046
Mineral interests, net	102,879		110,130
Property, plant and equipment, net	607,406		606,200
Non-current income tax receivable	—		11,349
Deferred income taxes	163,565		154,297
Other long-term assets	15,145		18,242
Total assets	$	1,391,013	$	1,344,264
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	50,002	$	46,436
Accrued expenses	67,515		65,755
Short term financing lease liabilities	11,874		10,146
Other current liabilities	9,886		6,615

Total current liabilities	139,277		128,952
Long-term debt	379,722		339,189
Asset retirement obligations	55,551		53,583
Long term financing lease liabilities	24,476		25,528
Other long-term liabilities	32,276		31,430
Total liabilities	631,302		578,682

Stockholders’ Equity:
Common stock, $0.01 par value per share (Authorized -140,000,000 shares as of September 30, 2020 and December 31, 2019, 53,408,040 issued and 51,186,199 outstanding as of September 30, 2020 and 53,293,449 issued and 51,071,608 outstanding as of December 31, 2019)	533		533
Preferred stock, $0.01 par value per share (10,000,000 shares authorized, no shares issued and outstanding)	—		—
Treasury stock, at cost (2,221,841 shares as of September 30, 2020 and December 31, 2019)	(50,576)		(50,576)
Additional paid in capital	247,907		243,932
Retained earnings	561,847		571,693
Total stockholders’ equity	759,711		765,582
Total liabilities and stockholders’ equity	$	1,391,013	$	1,344,264

The accompanying notes are an integral part of these condensed financial statements.

WARRIOR MET COAL, INC.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019

Common Stock
Balance, beginning of period	$	533	$	533	$	533	$	533
Balance, end of period	533		533		533		533
Preferred Stock
Balance, beginning of period	—		—		—		—
Balance, end of period	—		—		—		—
Treasury Stock
Balance, beginning of period	(50,576)		(40,000)		(50,576)		(38,030)
Treasury stock purchase	—		(10,576)		—		(12,546)
Balance, end of period	(50,576)		(50,576)		(50,576)		(50,576)
Additional Paid in Capital
Balance, beginning of period	246,126		241,020		243,932		239,827
Stock compensation	1,781		1,438		5,247		3,875

Other	—		—		(1,272)		(1,244)
Balance, end of period	247,907		242,458		247,907		242,458
Retained Earnings
Balance, beginning of period	578,880		511,105		571,693		510,282
Net income (loss)	(14,434)		45,022		(2,050)		280,949
Dividends paid	(2,599)		(2,605)		(7,796)		(237,814)
Other	—		—		—		105
Balance, end of period	561,847		553,522		561,847		553,522
Total Stockholders' Equity	$	759,711	$	745,937	$	759,711	$	745,937

The accompanying notes are an integral part of these condensed financial statements.

WARRIOR MET COAL, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	For the nine months ended September 30,
		2020		2019

OPERATING ACTIVITIES
Net income		$	(2,050)	$	280,949
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and depletion		78,813		73,652
Deferred income tax expense (benefit)		(9,268)		68,553
Stock based compensation expense		5,634		4,218
Amortization of debt issuance costs and debt discount/premium, net		1,125		1,024
Accretion of asset retirement obligations		2,198		2,436
Loss on early extinguishment of debt		—		9,756
Changes in operating assets and liabilities:
Trade accounts receivable		18,054		29,154
Income tax receivable		24,274		21,420
Inventories		(43,887)		(20,288)
Prepaid expenses and other receivables		(5,906)		7,080
Accounts payable		11,169		18,749
Accrued expenses and other current liabilities		(4,699)		645
Other		6,696		10,917
Net cash provided by operating activities		82,153		508,265
INVESTING ACTIVITIES
Purchase of property, plant and equipment		(72,059)		(78,366)
Deferred mine development costs		(13,257)		(18,398)
Proceeds from sale of property, plant and equipment		—		3,124


Sale of short-term investments		14,733		17,501
Purchases of short-term investments		(8,500)		(24,171)
Net cash used in investing activities		(79,083)		(100,310)
FINANCING ACTIVITIES
Dividends paid		(7,796)		(237,814)
Borrowings under ABL Facility		70,000		—
Repayments under ABL Facility		(30,000)		—
Retirements of debt, premium and fees		—		(140,272)
Principal repayments of finance lease obligations		(10,972)		(13,086)

Common shares repurchased		—		(12,546)
Other		(1,272)		(1,139)
Net cash provided by (used in) financing activities		19,960		(404,857)
Net increase in cash and cash equivalents and restricted cash		23,030		3,098
Cash and cash equivalents and restricted cash at beginning of period		193,383		206,405
Cash and cash equivalents and restricted cash at end of period		$	216,413	$	209,503

The accompanying notes are an integral part of these condensed financial statements.

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

Note 1—Business and Basis of Presentation

Description of the Business

Warrior Met Coal, Inc. (the "Company") is a U.S. based environmentally and socially minded supplier to the global steel industry. The Company is dedicated entirely to mining non-thermal met coal used as a critical component of steel production by metal manufacturers in Europe, South America and Asia. The Company 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.

Basis of Presentation

The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, the financial statements include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading. For further information, refer to the financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report"). Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2020. The balance sheet at December 31, 2019 has been derived from the audited financial statements for the year ended December 31, 2019 included in the 2019 Annual Report.

Impact of the COVID-19 Pandemic Upon our Financial Condition and Results of Operations

The global steelmaking industry's demand for met coal is affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of the novel coronavirus disease 2019 ("COVID-19"), which has spread from China to many other countries including the United States. In March 2020, the World Health Organization ("WHO") declared COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

The Company operates in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. As such, the Company continues to operate its mines in a safe manner under the guidelines issued by the Centers for Disease Control and Prevention and the Alabama State Health Department. In response to these measures and for the protection of employees, the Company has taken steps to ensure our employees remain safe. As of the filing of this Form 10-Q, the Company has not had to idle or temporarily idle its mines.

Notwithstanding our continued operations, COVID-19 has begun to have and may continue to have further negative impacts on our two operating mines, supply chain, transportation networks and customers, which may continue to compress our margins, and reduce demand for the met coal that we produce. The COVID-19 outbreak is a widespread public health crisis that is adversely affecting the economies and financial markets of many countries, including those of our customers, which are primarily located in Europe, South America and Asia. A prolonged economic downturn could adversely affect demand for our met coal and contribute to volatile supply and demand conditions affecting prices and volumes. The progression of COVID-19 could also negatively impact our business or results of operations through the temporary closure of one of our mines, customers or critical suppliers, or the McDuffie Coal Terminal at the Port of Mobile, Alabama, or a disruption to our rail and barge carriers, which would delay or prevent deliveries to our customers, among others.

In addition, the ability of our employees and our suppliers' and customers' employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19, or as a result of the control measures noted above, which may significantly affect the demand for met coal. Our customers may be directly impacted by business curtailments or weak market conditions and may not be willing or able to fulfill their contractual obligations or open letters of credit. We may also experience delays in obtaining letters of credit or processing letter of credit payments due to the impacts of COVID-19 on foreign issuing and U.S. intermediary banks. Furthermore, the progression of, and global response to, the COVID-19 outbreak has begun to cause, and increases the risk of, further delays in construction activities and equipment deliveries related to our

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

capital projects, including potential delays in obtaining permits from government agencies. The extent of such delays and other effects of COVID-19 on our capital projects, certain of which are outside of our control, is unknown, but they may impact or delay the timing of anticipated benefits of capital projects.

Note 2—Summary of Significant Accounting Policies

The Company's significant accounting policies are consistent with those disclosed in Note 2 to its audited financial statements included in the 2019 Annual Report, except for changes related to new accounting pronouncements described in "New Accounting Pronouncements."

Cash and Cash Equivalents

Cash and cash equivalents include short-term deposits and highly liquid investments that have original maturities of three months or less when purchased and are stated at cost, which approximates fair value.

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 ("Treasury") bills with maturities ranging from six to twelve months which are classified as held to maturity and are carried at amortized cost, which approximates fair value. The Company also purchases fixed income securities and certificates of deposits with varying maturities that are classified as available for sale and are carried at fair value. Securities classified as held to maturity are those securities that management has the intent and ability to hold to maturity.

As of September 30, 2020, short-term investments consisted of $8.5 million in cash and fixed income securities. As of December 31, 2019, the Company’s short-term investments consisted of $14.7 million in cash and fixed income securities. The short-term investments are posted as collateral for the self-insured black lung related claims asserted by or on behalf of former employees of Walter Energy, Inc. ("Walter Energy") and its subsidiaries, which were assumed by the Company and relate to periods prior to March 31, 2016.

Revenue Recognition

Revenue is recognized when performance obligations under the terms of a contract with the Company's customers are satisfied; for all contracts this occurs when control of the promised goods have been transferred to its customers. For coal shipments to domestic customers via rail, control is transferred when the railcar is loaded. For coal shipments to international customers via ocean vessel, control is transferred when the vessel is loaded at the Port of Mobile, Alabama. For natural gas sales, control is transferred when the gas has been transferred to the pipeline. Revenue is disaggregated between coal sales within the Company's mining segment and natural gas sales which is included in all other revenues, as disclosed in Note 13.

Since February 2017, the Company has had an arrangement with XCoal Energy & Resources ("XCoal") to serve as XCoal's strategic partner for exports of low-volatility hard coking coal. Under this arrangement, XCoal takes title to and markets coal that the Company would historically have sold on the spot market, in an amount of the greater of (i) 10% of the Company's total production during the applicable term of the arrangement or (ii) 250,000 metric tons. During the three months ended September 30, 2020 and 2019, XCoal accounted for approximately $38.7 million, or 22.1% of total sales, and $57.8 million, or 20.6% of total sales, respectively. During the nine months ended September 30, 2020 and 2019, XCoal accounted for approximately $82.3 million, or 14.8% of total sales, and $220.8 million, or 21.2% of total sales, respectively.

Trade Accounts Receivable and Allowance for Credit Losses

Trade accounts receivable represent customer obligations that are derived from revenue recognized from contracts with customers. Credit is extended based on an evaluation of the individual customer's financial condition. The Company maintains trade credit insurance on the majority of its customers and the geographic regions of coal shipments to these customers. In some instances, the Company requires letters of credit, cash collateral or prepayments from its customers on or before shipment to mitigate the risk of loss. These efforts have consistently resulted in the Company recognizing no historical credit losses. The Company also has never had to have a claim against its trade credit insurance policy.

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

In order to estimate the allowance for credit losses on trade accounts receivable, the Company utilizes an aging approach in which potential impairment is calculated based on how long a receivable has been outstanding (e.g., current, 1-31, 31-60, etc.). The Company calculates an expected credit loss rate based on the Company’s historical credit loss rate, the risk characteristics of our customers, and the current metallurgical coal and steel market environments. As of September 30, 2020, the estimated allowance for credit losses was immaterial and did not have a material impact on the Company's financial statements.

New Accounting Pronouncements

The Company adopted Accounting Standards Update 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" as of January 1, 2020 using the modified retrospective approach. The ASU requires the use of an “expected loss” model for instruments measured at amortized cost, in which companies will be required to estimate the lifetime expected credit loss and record an allowance to offset the amortized cost basis, resulting in a net presentation of the amount expected to be collected on the financial asset. The adoption of the new standard did not have a material impact on the Company's financial statements, including accounting policies, processes and systems.

Note 3—Inventories, net

Inventories, net are summarized as follows (in thousands):


	September 30, 2020		December 31, 2019
Coal	$	126,169	$	69,064
Raw materials, parts, supplies and other, net	29,498		28,837
Total inventories, net	$	155,667	$	97,901

Note 4—Income Taxes

For the three and nine months ended September 30, 2020, the Company utilized a discrete period method to calculate taxes, as it does not believe that the annual effective tax rate method represents a reliable estimate given the current uncertainty surrounding COVID-19 and its impact on the Company's annual guidance. For the three and nine months ended September 30, 2020, the Company had an income tax benefit of $8.2 million and $9.3 million, respectively. The income tax benefit of $9.3 million is due to a $3.3 million income tax benefit from the Internal Revenue Code ("IRC") Section 45I Marginal Well Credit and other discrete items, a $3.2 million income tax benefit from depletion expense and a $2.9 million income tax benefit from the loss recognized before income taxes. The Marginal Well Credit is a production-based tax credit that provides a credit for qualified natural gas production. The credit is phased out when natural gas prices exceed certain levels. The Company had income tax expense of $7.6 million and $68.6 million for the three and nine months ended September 30, 2019, respectively.

On March 27, 2020, the President of the United States signed and enacted into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, provides temporary relief from certain aspects of the Tax Cuts and Jobs Act of 2017 that had imposed limitations on the utilization of certain losses, interest expense deductions and alternative minimum tax ("AMT") credits. The CARES Act also provides opportunities for businesses to improve their cash flows by obtaining refunds for prior taxable years and reducing their income and deferring payroll tax liabilities for the current taxable year. Specifically, Section 2305 of the CARES Act accelerates the ability to receive refunds of remaining AMT credits for tax years 2019, 2020 and 2021. As a result, in the first quarter of 2020, the Company recorded an adjustment of approximately $11.3 million to reclassify AMT credits from a non-current income tax receivable to a current income tax receivable. During the third quarter of 2020, the Company received approximately $24.3 million for refunds of AMT credits. The Company is continuing to evaluate the impact of the CARES Act on its business, financial results and disclosures.

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

Note 5—Debt

Debt consisted of the following (in thousands):


	September 30, 2020		December 31, 2019		Weighted Average Interest Rate at September 30, 2020	Final Maturity
Senior Secured Notes	$	343,435	$	343,435	8%	2024
ABL Borrowings	40,000		—		3.75%	2023
Debt discount/premium, net	(3,713)		(4,246)
Total debt	379,722		339,189
Less: current debt	—		—
Total long-term debt	$	379,722	$	339,189

Senior Secured Notes

On November 2, 2017, the Company issued $350.0 million aggregate principal amount of its 8.00% Senior Secured Notes due 2024 (the "Original Notes"). It then issued an additional $125.0 million in aggregate principal amount of its 8.00% Senior Secured Notes due 2024 (the “New Notes” and, together with the Original Notes, the "Notes") on March 1, 2018. The New Notes were issued as "Additional Notes" under the indenture dated as of November 2, 2017 (the "Original Indenture"), among the Company, the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee and priority lien collateral trustee, as supplemented by the First Supplemental Indenture, dated as of March 1, 2018 (the "First Supplemental Indenture" and, the Original Indenture as supplemented thereby and by the Second Supplemental Indenture, dated as of March 2, 2018, the "Indenture"). The Notes mature on November 1, 2024 and interest is payable on May 1 and November 1 of each year.

Offers to Purchase the Notes

On February 21, 2019, the Company commenced an offer to purchase (the “Restricted Payment Offer”), in cash, up to $150,000,000 principal amount of its outstanding Notes, at a repurchase price of 103% of the aggregate principal amount of such Notes, plus accrued and unpaid interest with respect to such Notes to, but not including, the date of repurchase (the “Restricted Payment Repurchase Price”). Concurrently with, but separate from, the Restricted Payment Offer, the Company commenced a cash tender offer (the “Tender Offer” and, together with the Restricted Payment Offer, the “Offers”) to purchase up to $150,000,000 principal amount of the Notes at a repurchase price of 104.25% of the aggregate principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of repurchase (the “TO Repurchase Price”). The Offers expired on March 22, 2019 (the “Expiration Date”).

Restricted Payment Offer

As of the Expiration Date, $1,900,000 aggregate principal amount of the Notes were validly tendered and not validly withdrawn pursuant to the Restricted Payment Offer. Pursuant to the terms of the Restricted Payment Offer:

(1) an automatic pro ration factor of 31.5789% was applied to the $1,900,000 aggregate principal amount of the Notes that were validly tendered and not validly withdrawn in the Restricted Payment Offer (rounded down to avoid the purchase of Notes in a principal amount other than in integrals of $1,000), which resulted in $599,000 aggregate principal amount of the Notes (the “RP Pro-Rated Tendered Notes”);

(2) the Company accepted all $599,000 aggregate principal amount of the RP Pro-Rated Tendered Notes for payment of the Restricted Payment Repurchase Price in cash; and

(3) the remaining balance of $1,301,000 aggregate principal amount of the Notes tendered that were not RP Pro-Rated Tendered Notes were not accepted for payment and were returned to the tendering holder of the Notes.

The Company consummated the Restricted Payment Offer on March 25, 2019.

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

Accordingly, pursuant to the terms of the Indenture, the Company was permitted to make one or more restricted payments in the form of special dividends to holders of the Company’s common stock and/or repurchases of the Company’s common stock in the aggregate amount of up to $299,401,000 (the "RP Basket") without having to make another offer to repurchase Notes. The Company used a portion of the RP Basket to pay a special cash dividend totaling approximately $230.0 million, which was paid to stockholders on May 14, 2019 and intends to use the remainder of the RP Basket to make repurchases under the Stock Repurchase Program (as defined in Note 11).

Tender Offer

As of the Expiration Date, $415,099,000 aggregate principal amount of the Notes were validly tendered and not validly withdrawn pursuant to the Tender Offer. Pursuant to the terms of the Tender Offer:

(1) an automatic pro ration factor of 31.5789% was applied to the $415,099,000 aggregate principal amount of the Notes that were validly tendered and not validly withdrawn in the Tender Offer (rounded down to avoid the purchase of Notes in a principal amount other than in integrals of $1,000), which resulted in $130,966,000 aggregate principal amount of the Notes (the “TO Pro-Rated Tendered Notes”);

(2) the Company accepted all $130,966,000 aggregate principal amount of the TO Pro-Rated Tendered Notes for payment of the TO Repurchase Price in cash; and

(3) the remaining balance of $284,133,000 aggregate principal amount of the Notes tendered that were not TO Pro-Rated Tendered Notes were not accepted for payment and were returned to the tendering holder of the Notes.

The Company consummated the Tender Offer on March 26, 2019.

In connection with the payments for the RP Pro-Rated Tendered Notes and the TO Pro-Rated Tendered Notes, the Company recognized a loss on early extinguishment of debt of $9.8 million during the three months ended March 31, 2019.

ABL Facility

On March 24, 2020, the Company borrowed $70.0 million in a partial draw of the ABL Facility (the “ABL Draw”) as a precautionary measure in order to increase the Company’s cash position and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 outbreak. In June 2020, the Company reduced the outstanding principal amount of the ABL Draw by $30.0 million. As of September 30, 2020, the Company had an aggregate principal amount of $40.0 million drawn under the ABL Facility. In accordance with the terms of the ABL Facility, the proceeds from the ABL Draw will be available to be used, if needed, for working capital and general corporate purposes. The Company believes that the $216.4 million of cash on hand and the $64.0 million of availability under the ABL Facility as of September 30, 2020 provides adequate liquidity for the Company in the current environment.

Note 6—Other Long-Term Liabilities

Other long-term liabilities are summarized as follows (in thousands):


	September 30, 2020		December 31, 2019
Black lung obligations	$	30,013	$	30,233
Other	2,263		1,197
Total other long-term liabilities	$	32,276	$	31,430

Note 7—Leases

The Company primarily enters into rental agreements for certain mining equipment that are for periods of 12 months or less, some of which include options to extend the leases. Leases that are for periods of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense on these agreements on a straight-line basis over the lease term. Additionally, the Company has certain finance leases for mining equipment that expire over various contractual periods. The

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

leases have remaining lease terms of one to five years. These leases do not include an option to renew. Amortization expense for finance leases is included in depreciation and depletion expense.

Supplemental balance sheet information related to leases was as follows (in thousands):


	September 30, 2020			December 31, 2019
Finance lease right-of-use assets, net(1)	$	43,882		$	40,227
Finance lease liabilities
Current	11,874			10,146
Noncurrent	24,476			25,528
Total finance lease liabilities	$	36,350		$	35,674

Weighted average remaining lease term - finance leases (in months)	41.9			44.7
Weighted average discount rate - finance leases(2)	5.70		%	6.02		%

(1) Finance lease right-of-use assets are recorded net of accumulated amortization of $8.1 million and $4.8 million and are included in property, plant and equipment, net in the Condensed Balance Sheet as of September 30, 2020 and the Balance Sheet as of December 31, 2019, respectively.

(2) When an implicit discount rate is not readily available in a lease, the Company uses its incremental borrowing rate based on information available at the commencement date when determining the present value of lease payments.

The components of lease expense were as follows (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Operating lease cost(1):	$	801	$	688	$	1,594	$	1,866
Finance lease cost:
Amortization of leased assets	2,943		2,120		8,859		7,950
Interest on lease liabilities	315		786		1,403		1,194
Net lease cost	$	4,059	$	3,594	$	11,856	$	11,010

(1) Includes leases that are for periods of 12 months or less.

Maturities of lease liabilities were as follows (in thousands):


	Finance Leases(1)
2020	$	3,741
2021	15,412
2022	9,680
2023	9,680
2024	1,964
Thereafter	382
Total	40,859
Less: amount representing interest	(4,509)
Present value of lease liabilities	$	36,350

(1) Finance lease payments include $2.9 million of future payments required under signed lease agreements that have not yet commenced.

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

Supplemental cash flow information related to leases was as follows (in thousands):


	For the nine months ended September 30,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	$	1,403	$	1,194
Financing cash flows from finance leases	$	10,972	$	13,086
Non-cash right-of-use assets obtained in exchange for lease obligations:
Finance leases	$	12,036	$	42,114

As of September 30, 2020, the Company had additional commitments for finance leases, primarily for mining equipment, that have not yet commenced of $2.9 million. These finance leases will commence between fiscal year 2020 and 2021 with lease terms of one to two years.

Note 8—Net Income (Loss) per Share

Basic and diluted net income (loss) per share was calculated as follows (in thousands, except per share data):


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Numerator:
Net income (loss)	$	(14,434)	$	45,022	$	(2,050)	$	280,949
Denominator:
Weighted-average shares used to compute net income (loss) per share—basic	51,190		51,348		51,161		51,469
Dilutive restrictive stock awards	166		134		114		130
Weighted-average shares used to compute net income (loss) per share—diluted	51,356		51,482		51,275		51,599
Net income (loss) per share—basic	$	(0.28)	$	0.88	$	(0.04)	$	5.46
Net income (loss) per share—diluted	$	(0.28)	$	0.87	$	(0.04)	$	5.44

2017 Equity Plan

On February 13, 2020, the Company awarded 420,303 restricted stock unit awards under the Company's 2017 Equity Incentive Plan (the "2017 Equity Plan"). These awards have certain service-based, performance-based and market-based vesting conditions, as applicable. The service-based awards vest over a period of three years and the performance-based and market-based awards are based on the Company's performance in each of the three years. The Company recognized approximately $0.9 million and $2.4 million in stock compensation expense associated with these awards for the three and nine months ended September 30, 2020, respectively.

On April 24, 2020, the Company awarded 56,715 restricted stock unit awards under the Company's 2017 Equity Plan. These awards have service-based vesting conditions and vest over a period of three years. The Company recognized approximately $87.8 thousand and $151.7 thousand in stock compensation expense associated with these awards for the three and nine months ended September 30, 2020.

As of September 30, 2020, there were 281,588 restricted stock unit awards for which the service-based vesting conditions for these awards were not met as of the measurement date. As such, these awards were excluded from basic earnings per share. These awards had a 80,845 and 42,314 share impact on dilutive weighted average shares for the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, there were 447,295 restricted stock unit awards for which the performance-based and market-based vesting conditions were not met as of the measurement date and, as such, these awards were excluded from basic and diluted earnings per share. Based on the Company's closing share price on September 30,

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

2020, there were 87,822 restricted stock unit awards classified as a liability. The Company considered the impact on diluted earnings as if the award was settled in cash or in shares. These awards had a 44,252 and 35,492 share impact on dilutive weighted average shares for the three and nine months ended September 30, 2020, respectively.

As of September 30, 2020, there were 43,580 shares of the Company's common stock contingently issuable upon the settlement of a vested phantom unit award granted under our 2016 Equity Plan (as defined below) and 13,157 shares of its common stock contingently issuable upon the settlement of a vested restricted stock unit award under the 2017 Equity Plan. The settlement date for these awards is the earlier of a change in control as described in the 2016 Equity Plan or 2017 Equity Plan, as applicable, 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 (loss) per share.

2016 Equity Plan

As of September 30, 2020, there were 52,221 restricted stock unit awards granted under the Company's 2016 Equity Incentive Plan (the "2016 Equity Plan") to certain directors and employees, for which the service-based vesting conditions for these awards were not met as of the measurement date. As such, these awards were excluded from basic earnings per share. These awards had a 41,640 and 35,662 share impact on dilutive weighted average shares for the three and nine months ended September 30, 2020, respectively.

Note 9—Related Party Transactions

The Company owns 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 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 totaled $0.6 million and $1.9 million for the three and nine months ended September 30, 2020, respectively, and $0.6 million and $1.1 million for the three and nine months ended September 30, 2019, respectively.

Note 10—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.

The Company believes it is in compliance with federal, state and local environmental laws and regulations. The Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and can be reasonably estimated. As of September 30, 2020 and December 31, 2019, there were no accruals for environmental matters other than asset retirement obligations for mine reclamation.

Miscellaneous Litigation

From time to time, the Company is party to lawsuits arising in the ordinary course of 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 September 30, 2020 and December 31, 2019, there were no items accrued for miscellaneous litigation.

Walter Canada Settlement Proceeds

On July 15, 2015, Walter Energy and certain of its wholly owned U.S. subsidiaries, including Jim Walter Resources, Inc. (“JWR”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the “Chapter 11 Cases”) in the Northern District of Alabama, Southern Division. On December 7, 2015, Walter Energy Canada Holdings, Inc.,

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

Walter Canadian Coal Partnership and their Canadian affiliates (collectively “Walter Canada”) applied for and were granted protection under the Companies’ Creditors Arrangement Act (the “CCAA”) pursuant to an Initial Order of the Supreme Court of British Columbia.

In connection with the Company’s acquisition of certain core operating assets of Walter Energy, the Company acquired a receivable owed to Walter Energy by Walter Canada for certain shared services provided by Walter Energy to Walter Canada (the “Shared Services Claim”) and a receivable for unpaid interest owed to Walter Energy from Walter Canada in respect of a promissory note (the “Hybrid Debt Claim”). Each of these claims were asserted by the Company in the Walter Canada CCAA proceedings. Walter Energy deemed these receivables to be impaired for the year ended December 31, 2015 and the Company did not assign any value to these receivables in acquisition accounting as collectability was deemed remote. In March 2020, the Company received approximately $1.8 million in settlement proceeds for the Shared Services Claim and Hybrid Debt Claim which is reflected as other income in the Condensed Statement of Operations. These settlement proceeds are in addition to the $22.8 million received in 2019. The collectability of additional amounts, if any, related to the Shared Services Claim and Hybrid Debt Claim depends on the outcome of, and the timing of any resolutions of, the Walter Canada CCAA proceedings and cannot be predicted with certainty.

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, the unloading of rail cars or barges, and the loading of vessels. If the Company does not meet its minimum throughput obligations, which are based on annual minimum amounts, it is required to pay the transportation providers or the Alabama State Port Authority a contractually specified amount per metric ton for the difference between the actual throughput and the minimum throughput requirement. At September 30, 2020 and December 31, 2019, the Company had no liability recorded for minimum throughput requirements.

Royalty Obligations

A substantial amount of the coal that the Company mines is produced from mineral reserves leased from third-party 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 $12.0 million and $39.8 million for the three and nine months ended September 30, 2020, respectively, and $19.7 million and $75.7 million for the three and nine months ended September 30, 2019, respectively.

Note 11—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.

Stock Repurchase Program

On March 26, 2019, the Company's board of directors (the "Board") approved the Company's second stock repurchase program (the “Stock Repurchase Program”) that authorizes repurchases of up to an aggregate of $70.0 million of the Company's outstanding common stock. The Company fully exhausted its previous stock repurchase program of $40.0 million of its outstanding common stock. The Stock Repurchase Program does not require the Company to repurchase a specific number of shares or have an expiration date. The Stock Repurchase Program may be suspended or discontinued by the Board at any time without prior notice.

Under the Stock Repurchase Program, the Company may repurchase shares of its common stock from time to time, in amounts, at prices and at such times as the Company deems appropriate, subject to market and industry conditions, share price, regulatory requirements as determined from time to time by the Company and other considerations. The Company’s repurchases may be executed using open market purchases or privately negotiated transactions in accordance with applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act and repurchases may be executed pursuant to Rule 10b5-1 under the Exchange Act. Repurchases will be subject to limitations in the ABL Facility and the Indenture. The Company intends to fund repurchases under the Stock Repurchase Program from cash on hand and/or other sources of liquidity.

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

As of September 30, 2020, the Company has repurchased 500,000 shares for approximately $10.6 million, leaving approximately $58.8 million of share repurchases authorized under the Stock Repurchase Program.

In light of the uncertainties resulting from COVID-19 and as a precautionary measure to preserve liquidity, the Company has temporarily suspended its share repurchase program. The Company will continue to monitor its liquidity in light of the COVID-19 pandemic and will consider when to reinstate the program.

Regular Quarterly Dividend

On February 14, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.6 million, which was paid on March 2, 2020, to stockholders of record as of the close of business on February 25, 2020.

On April 24, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.6 million, which was paid on May 11, 2020 to stockholders of record as of the close of business on May 5, 2020.

On July 28, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling $2.6 million, which was paid on August 13, 2020 to stockholders of record as of the close of business on August 7, 2020.

Note 12—Fair Value of Financial Instruments

The Company had no assets or any other liabilities measured at fair value on a recurring basis as of September 30, 2020 or December 31, 2019.

The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:

Cash and cash equivalents, short-term investments, receivables and trade accounts payable—The carrying amounts reported in the Condensed Balance Sheets approximate fair value due to the short-term nature of these assets and liabilities.

Debt—The Company's outstanding debt is carried at cost. As of September 30, 2020, the Company had $40.0 million outstanding under the ABL Facility, with $64.0 million available, net of outstanding letters of credit of $9.4 million. There were no borrowings outstanding under the ABL Facility and there were $8.9 million of letters of credit issued and outstanding under the ABL Facility as of December 31, 2019. As of September 30, 2020, the estimated fair value of the Notes is approximately $349.4 million based upon observable market data (Level 2) and the carrying amount of the ABL Facility approximates fair value.

Note 13—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.

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

The Company does not allocate all of its assets, or its depreciation and depletion expense, selling, general and administrative expenses, transactions costs, interest expense, and income tax expense by segment.

The following tables include reconciliations of segment information to consolidated amounts (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Revenues
Mining	$	175,229	$	280,841	$	555,610	$	1,037,950
All other	4,835		6,665		14,875		25,458
Total revenues	$	180,064	$	287,506	$	570,484	$	1,063,408


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Capital Expenditures
Mining	$	20,660	$	23,494	$	65,687	$	73,583
All other	2,645		2,772		6,372		4,783
Total capital expenditures	$	23,305	$	26,266	$	72,059	$	78,366

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, net interest expense, income tax expense, loss on early extinguishment of debt, other income 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):


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Segment Adjusted EBITDA	$	23,859	$	90,620	$	121,949	$	459,912
Other revenues	4,835		6,665		14,875		25,458
Cost of other revenues	(7,064)		(7,583)		(22,267)		(23,346)
Depreciation and depletion	(27,965)		(25,741)		(78,813)		(73,652)
Selling, general and administrative	(8,192)		(9,362)		(25,105)		(29,050)

Loss on early extinguishment of debt	—		—		—		(9,756)
Other income	—		5,272		1,822		22,815
Interest expense, net	(8,059)		(7,250)		(23,847)		(22,793)
Income tax benefit (expense)	8,152		(7,599)		9,336		(68,639)
Net income (loss)	$	(14,434)	$	45,022	$	(2,050)	$	280,949

WARRIOR MET COAL, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

NINE MONTHS ENDED SEPTEMBER 30, 2020 (UNAUDITED)

Note 14—Subsequent Events

Regular Quarterly Dividend

On October 22, 2020, the Board declared a regular quarterly cash dividend of $0.05 per share, totaling approximately $2.6 million, which will be paid on November 9, 2020 to stockholders of record as of the close of business on November 2, 2020.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides a narrative of our results of operations and financial condition for the three and nine months ended September 30, 2020 and September 30, 2019. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Form 10-Q and the audited financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Annual Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Please see “Forward-Looking Statements.”

Overview

We are a U.S. based, environmentally and socially minded supplier to the global steel industry. We are dedicated

entirely to mining non-thermal met coal used as a critical component of steel production by metal manufacturers in Europe,

South America and Asia. We are a large-scale, low-cost producer and exporter of premium met coal, also known as hard

coking coal (“HCC”), operating highly-efficient longwall operations in our underground mines based in Alabama, Mine No. 4

and Mine No. 7.

As of December 31, 2019, based on a reserve report prepared by Marshall Miller & Associates, Inc. ("Marshall Miller"), Mine No. 4 and Mine No. 7, our two operating mines, had approximately 105.3 million metric tons of recoverable reserves and, based on a reserve report prepared by Stantec Consulting Services, Inc. ("Stantec") our undeveloped Blue Creek 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 Platts Premium Low Volatility ("LV") Free On Board ("FOB") Australia Index Price ("Platts Index"). Our HCC, mined from the Southern Appalachian portion of the Blue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and LV to mid-volatility ("MV"). These qualities make our coal ideally suited as a coking coal for the manufacture of steel.

We sell substantially all of our met coal production to steel producers. Met coal, which is converted to coke, is a critical input in the steel production process. Met coal is both consumed domestically in the countries where it is produced and exported by several of the largest producing countries, such as China, Australia, the United States, Canada and Russia. Therefore, demand for our coal will be highly correlated to conditions in the global steelmaking industry. The steelmaking industry’s demand for met coal is affected by a number of factors, including the cyclical nature of that industry’s business, technological developments in the steelmaking process and the availability of substitutes for steel such as aluminum, composites and plastics. A significant reduction in the demand for steel products would reduce the demand for met coal, which would have a material adverse effect upon our business. Similarly, if alternative ingredients are used in substitution for met coal in the integrated steel mill process, the demand for met coal would materially decrease, which could also materially adversely affect demand for our met coal.

The global steelmaking industry's demand for met coal is also affected by pandemics, epidemics or other public health emergencies, such as the recent outbreak of the novel coronavirus disease 2019 ("COVID-19"), which has spread from China to many other countries including the United States. In March 2020, the World Health Organization ("WHO") declared COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19.

We are a company operating in a critical infrastructure industry, as defined by the U.S. Department of Homeland Security. As such, we continue to operate our mines in a safe manner under the guidelines issued by the Centers for Disease Control and Prevention and Alabama State Health Department. This includes, among other things, eliminating business travel, staggering manbuses, cage and shift start times to allow for social distancing, enhanced disinfectant cleaning at all locations, maintaining antibacterial supplies at all locations, providing employees with masks, gloves and other gear, eliminating visitors or vendors on property without strict screening process and testing the temperature of all employees. As of the filing of this Form 10-Q, we have not had to idle or temporarily idle our mines.

Notwithstanding our continued operations, COVID-19 has begun to have and may continue to have further negative impacts on our two operating mines, supply chain, transportation networks and customers, which may compress our margins, and reduce demand for the met coal that we produce, including as a result of preventative and precautionary measures that we, other businesses and governments are taking. An example of the negative effects of the COVID-19 pandemic on our operations is that the average selling price per metric ton of met coal for the three months ended September 30, 2020 was $99.96 compared to $134.47 per metric ton and $155.59 per metric ton for the three months ended March 31, 2020 and September 30, 2019, respectively. The COVID-19 outbreak is a widespread public health crisis that is adversely affecting the economies and financial markets of many countries, including those of our customers, which are primarily located in Europe, South America and Asia. A prolonged economic downturn could adversely affect demand for our met coal and contribute to volatile supply and demand conditions affecting prices and volumes. The progression of COVID-19 could also negatively impact our business or results of operations through the temporary closure of one of our mines, customers or critical suppliers, or the McDuffie Coal Terminal at the Port of Mobile, Alabama, or a disruption to our rail and barge carriers, which would delay or prevent deliveries to our customers, among others.

In light of the uncertainties regarding the duration of the COVID-19 pandemic and its overall impact on the Company, its operations and the global economy, we withdrew our full-year 2020 guidance issued on February 19, 2020. We also continue to appropriately adjust our operational needs, including managing our expenses, capital expenditures, working capital, liquidity and cash flows. In addition, as a precautionary measure, we borrowed $70.0 million under the ABL Facility on March 24, 2020 ( the "ABL Draw") in order to increase the Company's cash position and preserve financial flexibility. In June 2020, we reduced the principal amount of the outstanding ABL Draw by $30.0 million. As of September 30, 2020, the Company had an aggregate principal amount of $40.0 million drawn under the ABL Facility. We intend on retaining the funds in cash to preserve liquidity amid the growing uncertainty surrounding the COVID-19 outbreak. We also delayed the budgeted $25.0 million development of Blue Creek until at least the early part of 2021 and temporarily suspended our Stock Repurchase Program. Our financial approach continues to focus on cash flow management and protecting the balance sheet in order to strategically move through this period of uncertainty and mitigate potential long-term impacts to the business (see Liquidity and Capital Resources below).

On March 27, 2020, the President of the United States signed and enacted into law the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"). The CARES Act, among other things, provides temporary relief from certain aspects of the Tax Cuts and Jobs Act of 2017 that had imposed limitations on the utilization of certain losses, interest expense deductions and alternative minimum tax ("AMT") credits. The CARES Act also provides opportunities for businesses to improve their cash flows by obtaining refunds for prior taxable years and reducing their income and deferring payroll tax liabilities for the current taxable year. Specifically, Section 2305 of the CARES Act accelerates the ability to receive refunds of remaining AMT credits for tax years 2019, 2020 and 2021. As a result, in the first quarter of 2020, we recorded an adjustment of approximately $11.3 million to reclassify AMT credits from a non-current income tax receivable to a current income tax receivable. During the third quarter of 2020, we received approximately $24.3 million for refunds of AMT credits. We are continuing to evaluate the impact of the CARES Act on our business, financial results and disclosures.

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 (as defined

below), a non-GAAP financial measure; (ii) sales volumes and average selling price, which drive coal sales revenue; (iii) cash cost of sales, a non-GAAP financial measure; and (iv) Adjusted EBITDA, a non-GAAP financial measure.


	For the three months ended September 30,						For the nine months ended September 30,
	2020			2019			2020			2019
(in thousands)
Segment Adjusted EBITDA	$	23,859		$	90,620		$	121,949		$	459,912
Metric tons sold	1,753			1,805			4,734			5,738
Metric tons produced	1,712			1,963			5,536			6,039
Gross price realization(1)	90		%	102		%	92		%	99		%
Average selling price per metric ton	$	99.96		$155.59			$	117.37		$	180.89
Cash cost of sales per metric ton	$	85.92		$104.97			$	91.09		$	100.37
Adjusted EBITDA	$	16,080		$	82,720		$	97,284		$	439,628

(1) For the three and nine months ended September 30, 2020 and 2019, our gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on gross sales, which excludes demurrage and other charges, as a percentage of the Platts Index price.

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, loss on early extinguishment of debt, other income and certain transactions or adjustments that the Chief Executive Officer, our Chief Operating Decision Maker, does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:

•our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure;

•the ability of our assets to generate sufficient cash flow to pay dividends;

•our ability to incur and service debt and fund capital expenditures; and

•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

Sales Volumes, 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. 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 a volume weighted-average calculation of our daily realized price per ton based on the blended gross sales of our LV and MV coal, excluding demurrage and quality specification adjustments, as a percentage of the Platts Index daily price. Our gross price realizations reflect the premiums and discounts we achieve on our LV and MV coal versus the Platts Index price because of the high quality premium products we sell into the export markets. In addition, the premiums and discounts in a quarter or year can be impacted by a rising or falling price environment.

On a quarterly basis, our blended gross selling price per metric ton may differ from the Platts Index price per metric ton, primarily due to our gross sales price per ton being based on a blended average of gross sales price on our LV and MV coals as

compared to the Platts Index price due to the fact that many of our met coal supply agreements are based on a variety of indices such as the Platts Index and the Steel Index and due to the timing of shipments.

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 accounting principles generally accepted in the United States ("GAAP"), are classified in the Condensed Statements of Operations as costs other than cost of sales, but relate directly to the costs incurred to produce met coal and sell it FOB at the Port of Mobile, Alabama. Our cash cost of sales per metric ton is calculated as cash cost of sales divided by the metric tons sold. Cash cost of sales is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:

•our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and

•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that this non-GAAP financial measure provides additional insight into our operating performance, and reflects how management analyzes our operating performance and compares that performance against other companies for purposes of business decision making by excluding the impact of certain items that management does not believe are indicative of our core operating performance. We believe that cash cost of sales presents a useful measure of our controllable costs and our operational results by including all costs incurred to produce met coal and sell it FOB at the Port of Mobile, Alabama. Period-to-period comparisons of cash cost of sales are intended to help management identify and assess additional trends that potentially impact us and that may not be shown solely by period-to-period comparisons of cost of sales. Cash cost of sales should not be considered an alternative to cost of sales or any other measure of financial performance or liquidity presented in accordance with GAAP. Cash cost of sales excludes some, but not all, items that affect cost of sales, and our presentation may vary from the presentations of other companies. As a result, cash cost of sales as presented below may not be comparable to similarly titled measures of other companies.

The following table presents a reconciliation of cash cost of sales to total cost of sales, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
(in thousands)
Cost of sales	$	151,370	$	190,221	$	433,661	$	578,038
Asset retirement obligation accretion	(368)		(373)		(1,106)		(1,120)
Stock compensation expense	(385)		(372)		(1,312)		(999)
Cash cost of sales	$	150,617	$	189,476	$	431,243	$	575,919

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before net interest expense, income tax expense (benefit), depreciation and depletion, non-cash stock compensation expense, non-cash asset retirement obligation accretion, loss on early extinguishment of debt and other income. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:

•our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and

•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.

We believe that the presentation of Adjusted EBITDA in this report provides information useful to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to Adjusted EBITDA is net income (loss). Adjusted EBITDA should not be considered an alternative to net income (loss) or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjustments exclude some, but not all, items that affect net income (loss) and our presentation of Adjusted EBITDA may vary from that presented by other companies.

The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.


	For the three months ended September 30,				For the nine months ended September 30,
	2020		2019		2020		2019
Net income (loss)	$	(14,434)	$	45,022	$	(2,050)	$	280,949
Interest expense, net	8,059		7,250		23,847		22,793
Income tax expense (benefit)	(8,152)		7,599		(9,336)		68,639
Depreciation and depletion	27,965		25,741		78,813		73,652
Asset retirement obligation accretion (1)	732		812		2,198		2,436
Stock compensation expense (2)	1,910		1,568		5,634		4,218

Loss on early extinguishment of debt (3)	—		—		—		9,756
Other income(4)	—		(5,272)		(1,822)		(22,815)
Adjusted EBITDA	$	16,080	$	82,720	$	97,284	$	439,628

(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 a loss incurred in connection with the early extinguishment of debt (discussed below).

(4)Represents settlement proceeds received for the Shared Services Claim and Hybrid Debt Claim associated with the Walter Canada CCAA (each discussed below).

Results of Operations

Three Months Ended September 30, 2020 and 2019

The following table summarizes certain unaudited financial information for the three months ended September 30, 2020 and 2019.


	For the three months ended September 30,
(in thousands)	2020		% of Total Revenues		2019		% of Total Revenues
Revenues:
Sales	$	175,229	97.3	%	$	280,841	97.7	%
Other revenues	4,835		2.7	%	6,665		2.3	%
Total revenues	180,064		100.0	%	287,506		100.0	%
Costs and expenses:
Cost of sales (exclusive of items shown separately below)	151,370		84.1	%	190,221		66.2	%
Cost of other revenues (exclusive of items shown separately below)	7,064		3.9	%	7,583		2.6	%
Depreciation and depletion	27,965		15.5	%	25,741		9.0	%
Selling, general and administrative	8,192		4.5	%	9,362		3.3	%

Total costs and expenses	194,591		108.1	%	232,907		81.0	%
Operating income (loss)	(14,527)		(8.1)	%	54,599		19.0	%
Interest expense, net	(8,059)		(4.5)	%	(7,250)		(2.5)	%

Other income	—		—	%	5,272		1.8	%
Income (loss) before income taxes	(22,586)		(12.5)	%	52,621		18.3	%
Income tax expense (benefit)	(8,152)		(4.5)	%	7,599		2.6	%
Net income (loss)	$	(14,434)	(8.0)	%	$	45,022	15.7	%

Sales and cost of sales components on a per unit basis for the three months ended September 30, 2020 and 2019 were as follows:


	For the three months ended September 30,
	2020			2019
Met Coal (metric tons in thousands)
Metric tons sold	1,753			1,805
Metric tons produced	1,712			1,963
Gross price realization(1)	90		%	102	%
Average selling price per metric ton	$	99.96		$155.59
Cash cost of sales per metric ton	$	85.92		$104.97

(1) For the three months ended September 30, 2020 and 2019, our gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on gross sales, which excludes demurrage and other charges, as a percentage of the Platts Index price.

Sales for the three months ended September 30, 2020 were $175.2 million compared to $280.8 million for the three months ended September 30, 2019. The $105.6 million decrease in revenues was primarily driven by a $97.5 million decrease in revenues related to a $55.63 decrease in the average selling price per metric ton of met coal combined with an $8.1 million decrease in revenues due to a 52 thousand metric ton decrease in met coal sales volume.

For the three months ended September 30, 2020, our geographic customer mix was 51% in Europe, 27% in South America and 22% in Asia. For the three months ended September 30, 2019, our geographic customer mix was 55% in Europe, 25% in South America and 20% in Asia. Our geographic customer mix typically varies each period based on the timing of customer orders and shipments.

Other revenues for the three months ended September 30, 2020 were $4.8 million compared to $6.7 million for the three months ended September 30, 2019. Other revenues are comprised of revenue derived from our natural gas operations, gains on sales and disposals of property, plant and equipment and land, as well as earned royalty revenue. The $1.8 million decrease in other revenues is primarily due to a $0.24, or 11.1%, decrease in average gas selling prices. Cost of other revenues for the period was consistent with the prior year period.

Cost of sales (exclusive of items shown separately below) was $151.4 million, or 84.1% of total revenues, for the three months ended September 30, 2020, compared to $190.2 million, or 66.2% of total revenues for the three months ended September 30, 2019. The $38.9 million decrease is primarily driven by a $33.3 million decrease due to the decrease in met coal sales prices and its impact on our variable cost structure combined with a $5.5 million decrease due to a 52 thousand metric ton decrease in met coal sales volumes.

Depreciation and depletion was $28.0 million, or 15.5% of total revenues, for the three months ended September 30, 2020, compared to $25.7 million, or 9.0% for the three months ended September 30, 2019. The $2.3 million increase in depreciation and depletion is primarily driven by an increase in assets placed in service.

Selling, general and administrative expenses were $8.2 million, or 4.5% of total revenues, for the three months ended September 30, 2020, compared to $9.4 million, or 3.3% of total revenues, for the three months ended September 30, 2019. The $1.2 million decrease in selling, general and administrative expenses for the period is primarily driven by a decrease in professional fees and employee related expenses.

Interest expense, net was $8.1 million, or 4.5% of total revenues, for the three months ended September 30, 2020, compared to $7.3 million, or 2.5% of total revenues, for the three months ended September 30, 2019. The $0.8 million increase is primarily driven by a decrease in interest income of $0.7 million and a $0.4 million increase in interest expense related to the ABL Draw, offset partially by a decrease in interest expense of $0.3 related to our Notes (as defined below).

Other income was $5.3 million, or 1.8% of total revenues, for the three months ended September 30, 2019. On July 15, 2015, Walter Energy, Inc. (“Walter Energy”) and certain of its wholly owned U.S. subsidiaries, including Jim Walter Resources, Inc. (“JWR”) filed voluntary petitions for relief under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the “Chapter 11 Cases”) in the Northern District of Alabama, Southern Division. On December 7, 2015, Walter Energy Canada Holdings, Inc., Walter Canadian Coal Partnership and their Canadian affiliates (collectively “Walter Canada”) applied for and were granted protection under the Companies’ Creditors Arrangement Act (the “CCAA”) pursuant to an Initial Order of the Supreme Court of British Columbia.

In connection with our acquisition of certain core operating assets of Walter Energy, we acquired a receivable owed to Walter Energy by Walter Canada for certain shared services provided by Walter Energy to Walter Canada (the “Shared Services Claim”) and a receivable for unpaid interest owed to Walter Energy from Walter Canada in respect of a promissory note (the “Hybrid Debt Claim”). Each of these claims were asserted by us in the Walter Canada CCAA proceedings. Walter Energy deemed these receivables to be impaired for the year ended December 31, 2015 and we did not assign any value to these receivables in acquisition accounting as collectability was deemed remote. In August 2019, we received an additional $5.3 million in settlement proceeds for the Shared Services Claim and Hybrid Debt Claim, which is reflected as other income in the Condensed Statement of Operations. The collectability of additional amounts, if any, related to the Shared Services Claim and

Hybrid Debt Claim depends on the outcome of, and the timing of any resolution of, the Walter Canada CCAA proceedings and

cannot be predicted with certainty.

For the three months ended September 30, 2020, we utilized a discrete period method to calculate taxes, as we do not believe that the annual effective tax rate method represents a reliable estimate given the current uncertainty surrounding the recent outbreak of COVID-19 and its impact on our annual guidance. For the three months ended September 30, 2020, we recognized an income tax benefit of $8.2 million primarily due to a loss recognized before income taxes and a $3.3 million income tax effect from the IRC Section 451 Marginal Well Credit and other discrete items. The Marginal Well Credit is a production-based tax credit that provides a credit for qualified natural gas production. The credit is phased out when natural gas prices exceed certain levels. For the three months ended September 30, 2019, we recognized income tax expense of $7.6 million.

Nine Months Ended September 30, 2020 and 2019

The following table summarizes certain unaudited financial information for the nine months ended September 30, 2020 and 2019.


	For the nine months ended September 30,
(in thousands)	2020		% of Total Revenues		2019		% of Total Revenues
Revenues:
Sales	$	555,610	97.4	%	$	1,037,950	97.6	%
Other revenues	14,875		2.6	%	25,458		2.4	%
Total revenues	570,484		100.0	%	1,063,408		100.0	%
Costs and expenses:
Cost of sales (exclusive of items shown separately below)	433,661		76.0	%	578,038		54.4	%
Cost of other revenues (exclusive of items shown separately below)	22,267		3.9	%	23,346		2.2	%
Depreciation and depletion	78,813		13.8	%	73,652		6.9	%
Selling, general and administrative	25,105		4.4	%	29,050		2.7	%

Total costs and expenses	559,846		98.1	%	704,086		66.2	%
Operating income	10,639		1.9	%	359,322		33.8	%
Interest expense, net	(23,847)		(4.2)	%	(22,793)		(2.1)	%
Loss on early extinguishment of debt	—		—	%	(9,756)		(0.9)	%
Other income	1,822		0.3	%	22,815		2.1	%
Income before income taxes	(11,386)		(2.0)	%	349,588		32.9	%
Income tax expense (benefit)	(9,336)		(1.6)	%	68,639		6.5	%
Net income (loss)	$	(2,050)	(0.4)	%	$	280,949	26.4	%

Sales and cost of sales components on a per unit basis for the nine months ended September 30, 2020 and 2019 were as follows:


	For the nine months ended September 30,
	2020			2019
Met Coal (metric tons in thousands)
Metric tons sold	4,734			5,738
Metric tons produced	5,536			6,039
Gross price realization(1)	92		%	99		%
Average selling price per metric ton	$	117.37		$	180.89
Cash cost of sales per metric ton	$	91.09		$	100.37

(1) For the nine months ended September 30, 2020 and 2019, our gross price realization represents a volume weighted-average calculation of our daily realized price per ton based on gross sales, which excludes demurrage and other charges, as a percentage of the Platts Index price.

Sales for the nine months ended September 30, 2020 were $555.6 million compared to $1,038.0 million for the nine months ended September 30, 2019. The $482.4 million decrease in revenues is primarily driven by a $300.7 million decrease in revenues related to a $63.52 decrease in the average selling price per metric ton of met coal, combined with a $181.6 million decrease in revenues due to a 1.0 million metric ton decrease in met coal sales volume.

For the nine months ended September 30, 2020, our geographic customer mix was 59% in Europe, 26% in South America and 15% in Asia. For the nine months ended September 30, 2019, our geographic customer mix was 56% in Europe, 23% in South America and 21% in Asia. Our geographic customer mix typically varies each period based on the timing of

customer orders and shipments. There were no significant changes in our customer base for the nine months ended September 30, 2020.

Other revenues for the nine months ended September 30, 2020 were $14.9 million compared to $25.5 million for the nine months ended September 30, 2019. Other revenues are comprised of revenue derived from our natural gas operations, gains on sales and disposals of property, plant and equipment and land, as well as earned royalty revenue. The $10.6 million decrease in other revenues is primarily due to a $0.79, or 30.2%, decrease in average natural gas selling prices. Cost of other revenues for the period was consistent with the prior year period.

Cost of sales (exclusive of items shown separately below) was $433.7 million, or 76.0% of total revenues, for the nine months ended September 30, 2020, compared to $578.0 million, or 54.4% of total revenues for the nine months ended September 30, 2019. The $144.4 million decrease is primarily driven by a $100.7 million decrease due to a 1.0 million metric ton decrease in met coal sales volumes combined with a decrease in cost of sales due to a decrease in met coal sales prices and its impact on our variable cost structure.

Depreciation and depletion was $78.8 million, or 13.8% of total revenues, for the nine months ended September 30, 2020, compared to $73.7 million, or 6.9% for the nine months ended September 30, 2019. The $5.1 million increase in depreciation and depletion is primarily driven by an increase in assets placed in service.

Selling, general and administrative expenses were $25.1 million, or 4.4% of total revenues, for the nine months ended September 30, 2020, compared to $29.1 million, or 2.7% of total revenues, for the nine months ended September 30, 2019. The $4.0 million decrease in selling, general and administrative expenses for the period is primarily due to a decrease in professional fees and employee related expenses.

Interest expense, net was $23.8 million, or 4.2% of total revenues, for the nine months ended September 30, 2020, compared to $22.8 million, or 2.1% of total revenues, for the nine months ended September 30, 2019. The $1.1 million increase is primarily driven by a decrease in interest income of $2.1 million and a $1.0 million increase in interest expense related to the ABL Draw, offset partially by a decrease in interest expense of $2.0 million primarily related to the extinguishment of our Notes (as defined below) in the prior period.

For the nine months ended September 30, 2019, we recognized a loss on early extinguishment of debt of $9.8 million upon the extinguishment of $131.6 million of our Notes. The loss on early extinguishment of debt represents a premium paid to retire the debt, accelerated amortization of debt discount, net, and fees incurred in connection with the transaction.

Other income was $1.8 million, or 0.3% of total revenues, for the nine months ended September 30, 2020. In March 2020, we received an additional $1.8 million in settlement proceeds for the Shared Services Claim and Hybrid Debt Claim which is reflected as other income in the Condensed Statement of Operations. These settlement proceeds are in addition to the $22.8 million received in 2019. The collectability of additional amounts, if any, related to the Shared Services Claim and Hybrid Debt Claim depends on the outcome of, and the timing of any resolution of, the Walter Canada CCAA proceedings and cannot be predicted with certainty.

For the nine months ended September 30, 2020, we utilized a discrete period method to calculate taxes, as we do not believe that the annual effective tax rate method represents a reliable estimate given the current uncertainty surrounding the recent outbreak of COVID-19 and its impact on our annual guidance. For the nine months ended September 30, 2020, we recognized an income tax benefit of $9.3 million primarily due to a $3.3 million income tax effect from the IRC Section 451 Marginal Well Credit and other discrete items, a $3.2 million income tax effect from depletion expense and a $2.9 million income tax effect from the loss recognized before income taxes. The Marginal Well Credit is a production-based tax credit that provides a credit for qualified natural gas production. The credit is phased out when natural gas prices exceed certain levels. For the nine months ended September 30, 2019, we recognized income tax expense of $68.6 million.

On March 27, 2020, the President of the United States signed and enacted into law the CARES Act. The CARES Act, among other things, provides temporary relief from certain aspects of the Tax Cuts and Jobs Act of 2017 that had imposed limitations on the utilization of certain losses, interest expense deductions and AMT credits. The CARES Act also provides opportunities for businesses to improve their cash flows by obtaining refunds for prior taxable years and reducing their income and deferring payroll tax liabilities for the current taxable year. Specifically, Section 2305 of the CARES Act accelerates the ability to receive refunds of remaining AMT credits for tax years 2019, 2020 and 2021. As a result, in the first quarter of 2020 we recorded an adjustment of approximately $11.3 million to reclassify AMT credits from a non-current income tax receivable to a current income tax receivable. During the third quarter of 2020, we received approximately $24.3 million for refunds of AMT credits. We are continuing to evaluate the impact of the CARES Act on our business, financial results and disclosures.

Liquidity and Capital Resources

Overview

Our sources of cash have been met coal and natural gas sales to customers, proceeds received from the issuance of the Notes (as defined below) and access to our ABL Facility. Historically, our primary uses of cash have been for funding the operations of our met coal and natural gas production operations, our capital expenditures, our reclamation obligations, payment of principal and interest on our Notes, professional fees and other non-recurring transaction expenses. In addition, we have used available cash on hand to repurchase shares of our common stock, pay quarterly dividends, and pay special dividends, each of which reduces cash and cash equivalents.

Going forward, we will use cash to fund debt service payments on our Notes, the ABL Facility and our other indebtedness, to fund operating activities, working capital, capital expenditures, and strategic investments, and, if declared, to pay our quarterly and/or special dividends. Our ability to fund our capital needs going forward will depend on our ongoing ability to generate cash from operations and borrowing availability under the ABL Facility, and, in the case of any future strategic investments, capital expenditures, or special dividends financed partially or wholly with debt financing, our ability to access the capital markets to raise additional capital.

Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on continued stable global economic conditions. In March 2020, the WHO declared the outbreak of COVID-19 as a global pandemic. There is significant uncertainty as to the effects of this pandemic on the global economy, which in turn may, among other things, impact our ability to generate positive cash flows from operations, fund capital expenditure needs and successfully execute and fund key initiatives, such as the development of Blue Creek. As events relating to COVID-19 continue to develop globally and impact the capital markets, our liquidity could also be adversely impacted due to possible deterioration in our customers' financial condition and their ability to timely pay outstanding receivables owed to us.

Our total liquidity as of September 30, 2020 was $280.4 million, consisting of cash and cash equivalents of $216.4 million and $64.0 million available under our ABL Facility. As of September 30, 2020 , we had an aggregate principal amount of $40.0 million drawn under the ABL Facility and issued and outstanding letters of credit with a face amount equal to $9.4 million. On March 24, 2020, we borrowed $70.0 million in a partial draw of the ABL Facility (the “ABL Draw”) as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 outbreak. In June 2020, we reduced the outstanding principal amount of the ABL Draw by $30.0 million.

We believe that our future cash flows from operations, together with cash on our balance sheet and proceeds from the ABL Draw, will provide adequate resources to fund our debt service payments and planned operating and capital expenditure needs for at least the next twelve months. However, as the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity needs. A continued worldwide disruption could materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, capitalization and capital investments. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.

If our cash flows from operations are less than we require, we may need to incur additional debt or issue additional equity. From time to time we may need to access the long-term and short-term capital markets to obtain financing. Our access to, and the availability of, financing on acceptable terms and conditions in the future will be affected by many factors, including: (i) our credit ratings, (ii) the liquidity of the overall capital markets, (iii) the current state of the global economy and (iv) restrictions in our ABL Facility, the Indenture (as defined below), and any other existing or future debt agreements. There can be no assurance that we will have or continue to have access to the capital markets on terms acceptable to us or at all.

Statements of Cash Flows

Cash balances were $216.4 million and $193.4 million at September 30, 2020 and December 31, 2019, 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):


	For the nine months ended September 30,
	2020		2019
Net cash provided by operating activities	$	82,153	$	508,265
Net cash used in investing activities	(79,083)		(100,310)
Net cash provided by (used in) financing activities	19,960		(404,857)
Net increase in cash and cash equivalents and restricted cash	$	23,030	$	3,098

Operating Activities

Net cash flows from operating activities consist of net income adjusted for noncash items, such as depreciation and depletion of property, plant and equipment and mineral interests, deferred income tax expense (benefit), stock-based compensation, amortization of debt issuance costs and debt discount/premium, accretion of asset retirement obligations, loss on early extinguishment of debt and changes in net working capital.

Net cash provided by operating activities was $82.2 million for the nine months ended September 30, 2020, and was primarily attributed to net loss of $2.0 million adjusted for depreciation and depletion expense of $78.8 million, deferred income tax benefit of $9.3 million, stock based compensation expense of $5.6 million, accretion of asset retirement obligations of $2.2 million and amortization of debt issuance costs and debt discount/premium, net of $1.1 million, coupled with a net increase in our working capital of $1.0 million since December 31, 2019. The increase in our working capital was primarily driven by an increase in inventory and prepaid expenses and other receivables offset partially by a decrease in income tax receivable and trade accounts receivable and an increase in accounts payable. The increase in inventory and decrease in trade accounts receivable is primarily due to a 1.0 million decrease in metric tons sold. The decrease in trade accounts receivable is also due to a decrease in the average selling price per metric ton sold. The decrease in income tax receivable is due to the alternative minimum tax ("AMT") credit refund of $24.3 million received during the third quarter of 2020. The increase in our accounts payable is primarily driven by the timing of payments.

Net cash provided by operating activities was $508.3 million for the nine months ended September 30, 2019, and was

primarily attributed to net income of $280.9 million adjusted for deferred income tax expense of $68.6 million, depreciation

and depletion expense of $73.7 million, loss on early extinguishment of debt of $9.8 million, stock based compensation

expense of $4.2 million, accretion of asset retirement obligations of $2.4 million and amortization of debt issuance costs and

debt discount/premium, net of $1.0 million, coupled with a net decrease in our working capital of $56.8 million. The decrease

in our working capital was primarily driven by a decrease in trade accounts receivable and income tax receivable, coupled

with an increase in accounts payable offset partially by an increase in inventories. The decrease in trade accounts receivables is

due to the timing of receipts. The decrease in income tax receivables is due to the income tax refund received in the second

quarter of 2019. The increase in our accounts payable is primarily driven by the timing of payments and the increase in

inventories is driven by an increase in production volume.

Investing Activities

Net cash used in investing activities was $79.1 million and $100.3 million for the nine months ended September 30, 2020 and September 30, 2019, respectively, primarily due to purchases of property, plant and equipment and mine development offset partially by purchases and sales of short-term investments.

Financing Activities

Net cash provided by financing activities was $20.0 million for the nine months ended September 30, 2020, primarily due to the proceeds received from the ABL Draw of $70.0 million offset by the subsequent partial repayment of the ABL Draw in an amount equal to $30.0 million, principal repayments of capital lease obligations of $11.0 million and the payment of dividends of $7.8 million. Net cash used in financing activities was $404.9 million for the nine months ended September 30, 2019, primarily due to the payment of dividends of $237.8 million, the retirement of debt of $140.3 million, principal repayments of financing lease obligations of $13.1 million, and common shares repurchased of $12.5 million.

Stock Repurchase Program

On March 26, 2019, our board of directors (the "Board") approved our second stock repurchase program (the “Stock Repurchase Program”) that authorizes repurchases of up to an aggregate of $70.0 million of our outstanding common stock. We fully exhausted our previous stock repurchase program of $40.0 million of our outstanding common stock. The Stock Repurchase Program does not require us to repurchase a specific number of shares or have an expiration date. The Stock Repurchase Program may be suspended or discontinued by the Board at any time without prior notice.

Under the Stock Repurchase Program, we may repurchase shares of our common stock from time to time, in amounts, at prices and at such times as we deem appropriate, subject to market and industry conditions, share price, regulatory requirements as determined from time to time by us and other considerations. Our repurchases may be executed using open market purchases or privately negotiated transactions in accordance with applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act and repurchases may be executed pursuant to Rule 10b5-1 under the Exchange Act. Repurchases will be subject to limitations in the ABL Facility and the Indenture. We intend to fund repurchases under the Stock Repurchase Program from cash on hand and/or other sources of liquidity.

As of September 30, 2020, we have repurchased 500,000 shares for approximately $10.6 million, leaving approximately $58.8 million of share repurchases authorized under the Stock Repurchase Program.

In light of the uncertainties resulting from the COVID-19 pandemic and as a precautionary measure to preserve liquidity, the Company has temporarily suspended its Stock Repurchase Program. The Company will continue to monitor its liquidity in light of the pandemic and will consider when to reinstate the program.

Dividend Policy

On May 17, 2017, the Board adopted a dividend policy (the "Dividend Policy") of paying a quarterly cash dividend of $0.05 per share. The Dividend Policy also states the following: In addition to the regular quarterly dividend and to the extent that we generate excess cash that is beyond the then current requirements of the business, the Board may consider returning all or a portion of such excess cash to stockholders through a special dividend or repurchase of common stock pursuant to a stock repurchase program. Any future dividends or stock repurchases will be at the discretion of the Board and subject to consideration of a number of factors, including business and market conditions, future financial performance and other strategic investment opportunities. 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.

The Company has paid a regular quarterly cash dividend of $0.05 per share every quarter since the Board adopted the

Dividend Policy. As of September 30, 2020, the Company has paid $36.9 million of regular quarterly cash dividends under the

Dividend Policy.

As the Company continues to monitor its liquidity in light of the COVID-19 pandemic, the Company may decide to suspend its Dividend Policy in the future if the Board deems it to be necessary or appropriate.

April 2019 Special Dividend

On April 23, 2019, the Board declared a special cash dividend of $4.41 per share (the "April 2019 Special Dividend"), totaling approximately $230.0 million, which was paid on May 14, 2019 to stockholders of record as of the close of business on May 6, 2019.

ABL Facility

The ABL Facility will mature on October 15, 2023. As of September 30, 2020, we had an aggregate principal amount of $40.0 million outstanding in a partial draw of the ABL Facility and there were $9.4 million of outstanding letters of credit. At September 30, 2020, we had $64.0 million of availability under the ABL Facility.

We intend to retain these funds in cash to preserve liquidity amid the growing uncertainty surrounding the COVID-19 outbreak. The ABL Draw, which is a proactive measure similar to actions taken by other public companies, is one of the Company’s precautionary measures taken to reduce risk during these unprecedented times.

The 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 receivable, certain eligible inventory, certain eligible supplies inventory and qualified cash, in each case, subject to specified advance rates. The borrowing base availability is subject to certain reserves, which may be established by the agent in its reasonable credit discretion. The reserves may include rent reserves, lower of cost or market reserve, port charges reserves and any other reserves that the agent determines in its reasonable credit judgement 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. On July 20, 2020, we entered into Amendment No. 3 to the Amended and Restated Asset-Based Revolving Credit Agreement (the "Amendment"). The purpose of the Amendment was to clarify certain definitions related to the borrowing base.

The ABL Facility contains customary covenants for asset-based credit agreements of this type, including among other things: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on the existence or incurrence of certain indebtedness; (iii) restrictions on the existence or incurrence of certain liens; (iv) restrictions on making certain restricted payments; (v) restrictions on making certain investments; (vi) restrictions on certain mergers, consolidations and asset dispositions; (vii) restrictions on certain transactions with affiliates; and (viii) restrictions on modifications to certain indebtedness. Additionally, the ABL Facility contains a springing fixed charge coverage ratio of not less than 1.00 to 1.00, which ratio is tested if availability under the ABL Facility is less than a certain amount. As of September 30, 2020, we were not subject to this covenant. Subject to customary grace periods and notice requirements, the ABL Facility also contains customary events of default.

We were in compliance with all applicable covenants under the ABL Facility as of September 30, 2020.

Senior Secured Notes

On November 2, 2017, we issued $350.0 million aggregate principal amount of our 8.00% Senior Secured Notes due 2024 (the "Original Notes"). We then issued an additional $125.0 million in aggregate principal amount of our 8.00% Senior Secured Notes due 2024 (the “New Notes” and, together with the Original Notes, the "Notes") on March 1, 2018. The New Notes were issued as "Additional Notes" under the indenture dated as of November 2, 2017 (the "Original Indenture"), among us, the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee and priority lien collateral trustee, as supplemented by the First Supplemental Indenture, dated as of March 1, 2018 (the "First Supplemental Indenture" and, the Original Indenture as supplemented thereby and by the Second Supplemental Indenture, dated as of March 2, 2018, the "Indenture"). The Notes mature on November 1, 2024 and interest is payable on May 1 and November 1 of each year.

Offers to Purchase the Notes

On February 21, 2019, we commenced an offer to purchase (the “Restricted Payment Offer”), in cash, up to $150,000,000 principal amount of our outstanding Notes, at a repurchase price of 103% of the aggregate principal amount of such Notes, plus accrued and unpaid interest with respect to such Notes to, but not including, the date of repurchase (the “Restricted Payment Repurchase Price”). Concurrently with, but separate from, the Restricted Payment Offer, we commenced a cash tender offer (the “Tender Offer” and, together with the Restricted Payment Offer, the “Offers”) to purchase up to $150,000,000 principal amount of the Notes at a repurchase price of 104.25% of the aggregate principal amount of such Notes, plus accrued and unpaid interest to, but not including, the date of repurchase (the “TO Repurchase Price”). The Offers expired at 5:00 P.M., New York City time, on March 22, 2019 (such date and time, the “Expiration Date”).

Restricted Payment Offer

(2) we accepted all $599,000 aggregate principal amount of the RP Pro-Rated Tendered Notes for payment of the Restricted Payment Repurchase Price in cash; and

We consummated the Restricted Payment Offer on March 25, 2019.

Accordingly, pursuant to the terms of the Indenture, we were permitted to make one or more restricted payments in the form of special dividends to holders of our common stock and/or repurchases of our common stock in the aggregate amount of up to $299,401,000 (the "RP Basket") without having to make another offer to repurchase Notes. We used a portion of the RP Basket to pay a special cash dividend totaling approximately $230.0 million, which was paid to stockholders on May 14, 2019 and intend to use the remainder of the RP Basket to make repurchases under the Stock Repurchase Program.

Tender Offer

(2) we accepted all $130,966,000 aggregate principal amount of the TO Pro-Rated Tendered Notes for payment of the TO Repurchase Price in cash; and

We consummated the Tender Offer on March 26, 2019. In connection with the payment, we recognized a loss on early extinguishment of debt of $9.8 million.

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 regarding the development of the high-quality met coal recoverable reserves at Blue Creek could also affect our capital needs or cause future capital expenditures to be higher than in the past and/or higher than our estimates.

To fund our capital expenditures, we may be required to use cash from our operations, incur debt or sell equity securities. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our current or future debt agreements, as well as by general economic conditions, contingencies and uncertainties, including as a result of the COVID-19 pandemic, that are beyond our control.

Our capital expenditures were $72.1 million and $78.4 million for the nine months ended September 30, 2020 and September 30, 2019, respectively. Capital expenditures for these periods primarily related to investments required to maintain our property, plant and equipment. Our deferred mine development costs were $13.3 million and $18.4 million for the nine months ended September 30, 2020 and September 30, 2019, respectively, and relate to Mine No. 4. We evaluate our spending on an ongoing basis in connection with our mining plans and the prices of met coal taking into consideration the funding available to maintain our operations at optimal production levels.

As a result of the COVID-19 pandemic and the unprecedented period of uncertainty, including the unknown duration and overall impact on our operations and the global economy, the Company withdrew its full-year 2020 guidance issued on February 19, 2020.

Blue Creek

We believe that Blue Creek represents one of the few remaining untapped reserves of premium high volatility ("High Vol") A met coal in the United States and that it has the potential to provide us with meaningful growth. We believe that the combination of a low production cost and the high quality of the High Vol A met coal mined from Blue Creek, assuming we achieve our expected price realizations, will generate some of the highest met coal margins in the U.S., generate strong investment returns for us and achieve a rapid payback of our investment across a range of met coal price environments.

According to our third party reserve report, Blue Creek contains approximately 103.0 million metric tons of recoverable reserves and we have the ability to acquire adjacent reserves that would increase total reserves to over 170 million metric tons. We expect that Blue Creek will have a mine life of approximately 50 years assuming a single longwall operation.

Our third-party reserve report also indicates that, once developed, Blue Creek will produce a premium High Vol A met coal that is characterized by low-sulfur and high CSR. High Vol A met coal has traditionally priced at a discount to the Australian Premium Low Vol and the U.S. Low Vol coals; however, in the last eighteen months, it has been priced at or slightly above these coals. Warrior expects High Vol A coals will continue to become increasingly scarce as a result of Central Appalachian producers mining thinner and deeper reserves, which we expect will continue to support prices. This trend creates an opportunity for us to take advantage of favorable pricing dynamics driven by the declining supply of premium High Vol A met coal.

If we are able to successfully develop Blue Creek, we expect that it will be a transformational investment for us. We expect that the new single longwall mine at Blue Creek will have the capacity to produce an average of 3.9 million metric tons per annum of premium High Vol A met coal over the first ten years of production, thereby increasing our annual production capacity by 54%. This, in turn, would expand our product portfolio to our global customers by allowing us to offer three premium hard coking coals from a single port location. Given these factors, and assuming we achieve expected price realizations, we believe that we will achieve some of the highest premium met coal margins in the United States.

The COVID-19 pandemic has substantially affected national and international financial markets, which could affect our ability to obtain financing for Blue Creek. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the geographic spread of the virus, the severity of the disease, the duration of the outbreak, the actions that may be taken by various governmental authorities in response to the outbreak and the impact on the U.S. or global economy. As a result of this uncertainty, we have incurred minimal spend on the development of Blue Creek in 2020 and have delayed the majority of the first year budgeted $25.0 million development of the Blue Creek project until at least the early part of 2021.

Outlook

As a result of the COVID-19 pandemic and the unprecedented period of uncertainty, including the unknown duration and overall impact on our operations and the global economy, we withdrew our full-year 2020 guidance issued on February 19, 2020. Although we are aggressively managing our response to the recent COVID-19 pandemic, its impact on our full-year fiscal 2020 results and beyond is uncertain. The Company is taking a more conservative approach to managing its cash flow given this uncertainty, and is carefully managing operating expenses, working capital, and capital expenditures during this period, as well as suspending our Stock Repurchase Program. We have also implemented extensive preventative measures across all operations in order to safeguard the health of our employees. This includes among other things: eliminating business travel, staggering manbuses, cage and shift start times to allow for social distancing, enhanced disinfectant cleaning at all locations, maintaining antibacterial supplies at all locations, providing employees with mask, gloves and other gear, eliminating visitors or vendors on property without strict screening process and testing temperatures of all employees. We believe that the most significant elements of uncertainty are the intensity and duration of the impact on the global steel industry, primarily due

to restrictions to contain the virus. However, we believe the execution of our strategy will continue to provide attractive opportunities for profitable growth in the long term following the recovery of the global economy from the effects of the COVID-19 pandemic.

Off-Balance Sheet Arrangements

In the ordinary course of our business, we are required to provide surety bonds and letters of credit to provide financial assurance for certain transactions and business activities. Federal and state laws require us to obtain surety bonds or other acceptable security to secure payment of certain long-term obligations including mine closure or reclamation costs and other miscellaneous obligations. As of September 30, 2020, we had outstanding surety bonds and letters of credit with parties for post-mining reclamation at all of our U.S. mining operations totaling $40.8 million, and $19.2 million, respectively, for miscellaneous purposes.

Recently Adopted Accounting Standards

A summary of recently adopted accounting pronouncements is included in Note 2 of the "Notes to Condensed Financial Statements" in this Form 10-Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We are exposed to commodity price risk on sales of met coal. We sell most of our met coal under fixed supply contracts primarily with indexed pricing terms and volume terms of up to one to three years. Sales commitments in the met coal market are typically not long-term in nature, and we are, therefore, subject to fluctuations in market pricing.

We occasionally enter into natural gas swap contracts to hedge the exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to our forecasted sales. Our natural gas swap contracts economically hedge certain risk but are not designated as hedges for financial reporting purposes. All changes in the fair value of these derivative instruments are recorded as other revenues in the Condensed Statements of Operations. 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 September 30, 2020 and December 31, 2019, we did not have any allowance for credit losses associated with our trade accounts receivables.

Interest Rate Risk

Our Notes have a fixed rate of interest of 8.00% per annum and are payable semi-annually in arrears on May 1 and November 1 of each year.

Our ABL Facility 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 150 to 200 basis points. On March 24, 2020, the Company borrowed $70.0 million in a partial draw of the ABL Facility as a precautionary measure and in order to increase the Company's cash position and preserve financial flexibility in light of the current uncertainty resulting from the COVID-19 outbreak. In June 2020, the Company made a principal repayment of $30.0 million on the ABL Facility. The debt we incur under the ABL Facility exposes us to interest rate risk. If interest rates increase significantly in the future, our exposure to interest rate risk will increase. As of September 30, 2020, based on the $40.0 million outstanding under our ABL Facility as of such date, a 100 basis point increase or decrease in interest rates would increase or decrease our annual interest expense under the ABL Facility by approximately $0.4 million. Furthermore, such interest rates under our ABL Facility are based upon benchmarks that are subject to potential change or elimination, including as a result of the announcement from the United Kingdom Financial Conduct Authority ("FCA"), which regulates LIBOR, that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021.

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.

Except for the change in our long-term debt from a fixed rate obligation to include a variable rate obligation discussed above and the broader negative effects of the COVID-19 pandemic on the global economy and major financial markets, there have been no other material changes to our exposure from market risks from those disclosed in Part II, Item 7a. Quantitative and Qualitative Disclosure about Market Risk of our Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Exchange Act) as of September 30, 2020. Based on the evaluation of our disclosure controls and procedures as of September 30, 2020, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2020, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Disclosure Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 10 of the “Notes to Condensed Financial Statements” in this Form 10-Q for a description of current legal proceedings, which is incorporated by reference in this Part II, Item 1.

We and our subsidiaries are parties to a number of other lawsuits arising in the ordinary course of our business. We record costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. While the results of litigation cannot be predicted with certainty, we believe that the final outcome of such litigation will not have a material adverse effect on our financial statements.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in "Risk Factors" in "Part I, Item 1A. Risk Factors" in our 2019 Annual Report and Part II, "Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. Our business, financial condition, operating results and cash flows can be impacted by a number of factors, any one of which could cause actual results to vary materially from recent results or from anticipated future results. In addition to the other information set forth in this Form 10-Q, you should carefully consider the risks discussed in "Part I, Item 1A. Risk Factors" in our 2019 Annual Report and Part II, "Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which could materially affect our business, financial condition or future results. However, the risks described in our 2019 Annual Report and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth share repurchases of our common stock made during the quarter ended September 30, 2020:


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate dollar value of shares that may yet be purchased under the plans or programs(1)
July 1, 2020 - July 31, 2020
Stock Repurchase Program(1)	—	$	—	—	$	59,000,000
Employee Transactions(2)	—	$	—	—
August 1, 2020 - August 31, 2020
Stock Repurchase Program(1)	—	$	—	—
Employee Transactions(2)	—	$	—	—
September 1, 2020 - September 30, 2020
Stock Repurchase Program(1)	—	$	—	—
Employee Transactions(2)	15	$	15.89	—
Total	15			—

__________

(1)On March 26, 2019, the Board approved the Stock Repurchase Program that authorizes repurchases of up to an aggregate of $70.0 million of our outstanding common stock. The Stock Repurchase Program does not require us to repurchase a specific number of shares or have an expiration date.

(2)These shares were acquired to satisfy certain employees' tax withholding obligations associated with the lapse of restrictions on certain restricted stock awards granted under the 2016 Equity Incentive Plan and 2017 Equity Incentive Plan. Upon acquisition, these shares were retired.

Item 3. Defaults on Senior Securities.

None.

Item 4. Mine Safety Disclosures.

The information concerning mine safety violations and other regulatory matters is filed as Exhibit 95 to this Form 10-Q pursuant to the requirements of Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104).

Item 5. Other Information.

None.

Item 6. Exhibits


Exhibit Number						Description


3.1						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).

3.2						Certificate of Amendment to the Certificate of Incorporation of Warrior Met Coal, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-38061) filed with the Commission on March 20, 2020).

3.3						Bylaws of Warrior Met Coal, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form S-8 (File No. 333-217389) filed with the Commission on April 19, 2017).

3.4						Certificate of Designations of Series A Junior Participating Preferred Stock of Warrior Met Coal, Inc., as filed with the Secretary of State of the State of Delaware on February 14, 2020 (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K (File No. 001-38061) filed with the Commission on February 14, 2020).

31.1*						Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*						Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**						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.

95*						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).

101.INS*						XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*						Inline XBRL Taxonomy Extension Schema Document

101.CAL*						Inline XBRL Taxonomy Extension Calculation LinkBase Document

101.DEF*						Inline XBRL Taxonomy Extension Definition LinkBase Document

101.LAB*						Inline XBRL Taxonomy Extension Label LinkBase Document

101.PRE*						Inline XBRL Taxonomy Extension Presentation LinkBase Document

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			Warrior Met Coal, Inc.

			By:						/s/ Dale W. Boyles
									Dale W. Boyles
									Chief Financial Officer (on behalf of the registrant and as Principal Financial and Accounting Officer)

									Date: October 28, 2020