NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2017 (UNUDITED)
Note 1—Business and Basis of Presentation
Description of the Business
Warrior Met Coal, LLC (the “Company” or, for the periods beginning as of April 1, 2016, the “Successor”) was formed on September 3, 2015 by certain Walter Energy, Inc. (“Walter Energy” or the “Parent”) lenders under the 2011 Credit Agreement, dated as of April 1, 2011 (the “2011 Credit Agreement”) and the noteholders under the
9.50%
Senior Secured Notes due 2019 (such lenders and noteholders, collectively, “Walter Energy’s First Lien Lenders”) in connection with the acquisition by the Company of certain core operating assets of Walter Energy under section 363 under Chapter 11 of Title 11 (the "Chapter 11 Cases") of the U.S. Bankruptcy Code (“U.S. Bankruptcy Code”) in the Northern District of Alabama, Southern Division (the "Bankruptcy Court"). These operating assets acquired and liabilities assumed are referred to as the “Predecessor” for all periods on or before March 31, 2016. The Company and its Predecessor are a U.S. based producer and exporter of metallurgical (“met”) coal for a diversified customer base of blast furnace steel producers located primarily in Europe and South America. The Company also generates ancillary revenues from the sale of natural gas extracted as a byproduct from the underground coal mines and royalty revenues from leased properties.
On November 5, 2015, Walter Energy and certain of its wholly owned U.S. subsidiaries (collectively, the "Walter Energy Debtors") entered into an asset purchase agreement (as amended, the “Asset Purchase Agreement”) with the Company, pursuant to which, among other things, the Company, on behalf of Walter Energy’s First Lien Lenders, agreed to acquire the Predecessor through a credit bid of $
1.1 billion
and a release of the liens under the 2011 Credit Agreement and the
9.50%
Senior Secured Notes due 2019 (“Walter Energy First Lien Obligations”), to assume certain liabilities of the Walter Energy Debtors and to pay cash consideration in accordance with sections 363 and 365 of the U.S. Bankruptcy Code (the “Asset Acquisition”). On January 8, 2016, the Bankruptcy Court approved the Asset Acquisition, which closed on March 31, 2016.
In connection with the Asset Acquisition, the Company also conducted rights offerings to Walter Energy’s First Lien Lenders and certain qualified unsecured creditors to purchase newly issued Class B Units of the Company, which diluted the Class A Units on a pro rata basis (the “Rights Offerings”). Proceeds from the Rights Offerings were used to pay certain costs associated with the Asset Acquisition and for general working capital purposes.
Special Distribution
On March 31, 2017, our board of managers declared a cash distribution payable to holders of our then outstanding Class A Units, Class B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in the aggregate amount of $
190.0 million
(the “Special Distribution”). The Special Distribution was funded with available cash on hand and was paid to Computershare Trust Company, N.A., as disbursing agent, on March 31, 2017.
Corporate Conversion and Initial Public Offering
On April 12, 2017, in connection with the Company’s initial public offering (“IPO”), Warrior Met Coal, LLC filed a certificate of conversion, whereby Warrior Met Coal, LLC effected a corporate conversion from a Delaware limited liability company to a Delaware corporation and changed its name to Warrior Met Coal, Inc. In connection with this corporate conversion, the Company filed a certificate of incorporation. Pursuant to the Company’s certificate of incorporation, the Company is authorized to issue up to
140,000,000
shares of common stock $
0.01
par value per share and
10,000,000
shares of preferred stock $
0.01
par value per share. All references in the unaudited interim condensed financial statements to the number of shares and per share amounts of common stock have been retroactively recast to reflect the corporate conversion.
On April 19, 2017, the Company completed its IPO whereby the selling stockholders named in the Registration Statement on Form S-1 (File No. 333-216499) sold
16,666,667
shares of common stock at a price to the public of $
19.00
per share. The Company did not receive any proceeds from the sale of common stock in the IPO, and will not receive any proceeds from the exercise of the underwriters’ option to purchase additional shares of common stock, if any. All of the net proceeds from the IPO were received by the selling stockholders.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
The aggregate net proceeds to the selling stockholders in the IPO were
$296.9 million
, net of underwriting discounts and commissions of
$19.8 million
. The Company has paid cumulative offering expenses of
$15.9 million
on behalf of the selling stockholders. Upon the closing of the IPO,
53,442,532
shares of common stock were outstanding. On April 13, 2017, our common stock began trading on the New York Stock Exchange under the ticker symbol "HCC" and on April 19, 2017, we closed our IPO.
Basis of Presentation
Prior to the closing of the Asset Acquisition on March 31, 2016, the Company had no operations and nominal assets.
The accompanying financial statements have been presented on a condensed consolidated basis for the “Successor” periods subsequent to the Asset Acquisition, which include the three and six months ended June 30, 2017, and on a condensed combined basis for the “Predecessor” periods prior to the Asset Acquisition, which includes the three months ended March 31, 2016. The financial information of the Company has been separated by a vertical line on the face of the financial statements to identify these different bases of accounting for Predecessor and Successor periods.
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. Operating results for the three and six months ended June 30, 2017 (Successor) are not necessarily indicative of the final results that may be expected for the year ended December 31, 2017. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2016 included in the final prospectus for the IPO dated April 12, 2017 and filed pursuant to Rule 424(b)(4) with the Securities and Exchange Commission (the “SEC”) on April 14, 2017 (the “IPO Prospectus”), which is part of our registration statement on Form S-1 (File No. 333-216499).
Predecessor Presentation
The Predecessor’s condensed combined financial statements for the three months ended March 31, 2016, have been “carved-out” from the accounting records of Walter Energy.
Historically, the Predecessor did not operate as an independent standalone company. For periods subsequent to filing the Chapter 11 Cases and prior to March 31, 2016, the Predecessor applied the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852,
Reorganizations,
in preparing its condensed combined financial statements. ASC 852 requires that the financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that were realized or incurred in the Chapter 11 Cases have been recorded in a reorganization line item on the Condensed Combined Statements of Operations.
Preparation of the condensed combined financial statements for the three months ended March 31, 2016, included making certain adjustments necessary to reflect all costs of doing business to present the historical records on a basis as if the Predecessor had been a separate stand alone entity. These adjustments include, for example, allocations of Parent overhead and selling, general and administrative expenses.
The historical costs and expenses reflected in the condensed combined financial statements include an allocation for certain corporate functions historically provided by the Parent. Substantially all of the Predecessor’s senior management were employed by the Parent and certain functions critical to the Predecessor’s operations were centralized and managed by the Parent. Historically, the centralized functions have included executive senior management, financial reporting, financial planning and analysis, accounting, shared services, information technology, tax, risk management, treasury, legal, human resources, and strategy and development. The costs of each of these services has been allocated to the Predecessor on the basis of the Predecessor’s relative headcount, revenue and total assets to that of the Parent. These cost allocations were $
7.8 million
for the three months ended March 31, 2016 (Predecessor).
All intracompany transactions have been eliminated. The net effect of the settlement of transactions between the Predecessor, the Parent and other affiliates of the Parent, together with cash transfers to and from the Parent’s cash management
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
accounts are reflected in the Condensed Statements of Changes in Stockholders' Equity and Parent Net Investment as net transfers to Parent and in the Condensed Statements of Cash Flows as a financing activity.
The allocation methodologies have been described in the notes to the financial statements where appropriate, and management considers the allocations to be reasonable. The financial information included herein may not necessarily reflect the financial position, results of operations and cash flows of the Predecessor in the future or what they would have been had the Predecessor been a separate, standalone entity during the periods presented.
Note 2—Summary of Significant Accounting Policies
Our significant accounting policies are consistent with those disclosed in Note 2 to our audited financial statements included in our IPO Prospectus.
Cash and Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the Condensed Balance Sheets that sum to the total of the same such amounts shown in the Condensed Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
Successor
|
|
June 30, 2017
|
|
December 31,
2016
|
Cash and cash equivalents
|
$
|
155,792
|
|
|
$
|
150,045
|
|
Restricted cash included in other long-term assets
|
1,354
|
|
|
2,611
|
|
Total cash and cash equivalents and restricted cash included in the Statements of Cash Flows
|
$
|
157,146
|
|
|
$
|
152,656
|
|
Cash and cash equivalents include short-term deposits and highly liquid investments that have original maturities of three months or less when purchased and are stated at cost, which approximates fair value. As of June 30, 2017 (Successor) and December 31, 2016 (Successor), restricted cash included in other long-term assets in the Condensed Balance Sheet represents amounts funded to an escrow account as collateral for coal royalties due under certain underground coal mining lease contracts.
Short-Term Investments
Instruments with maturities greater than three months, but less than twelve months, are included in short-term investments. The Company purchases United States Treasury bills with maturities ranging from six to twelve months which are classified as held to maturity and are carried at amortized cost, which approximates fair value. Securities classified as held to maturity securities are those securities that management has the intent and ability to hold to maturity.
As of
June 30, 2017
(Successor) and December 31, 2016 (Successor), the Company’s short-term investments consisted of
$17.5 million
in Treasury bills with a maturity of
six months
. These Treasury bills were posted as collateral for the self-insured black lung related claims asserted by or on behalf of former employees of Walter Energy and its subsidiaries, which were assumed in the Asset Acquisition and relate to periods prior to March 31, 2016.
New Accounting Pronouncements
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The guidance is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We adopted the amendments of ASU 2015-16, effective January 1, 2017. We recognized a
$3.5 million
measurement-period adjustment during the three months ended March 31, 2017 (Successor), which we reflected prospectively (see Note 3).
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. ASU 2015-14 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and permits early adoption on a limited basis. ASU 2014-09, “Revenue from Contracts with Customers”, requires an entity to recognize revenue upon transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated results of operations. The Company plans to complete its assessment of the impact of the new standard in 2017 and expects to be compliant by the first quarter of 2018.
Note 3—Acquisition of the Predecessor
On November 5, 2015, the Walter Energy Debtors entered into the Asset Purchase Agreement with the Company, pursuant to which, among other things, the Company, on behalf of Walter Energy’s First Lien Lenders, agreed to acquire the Predecessor via a credit bid and release of the liens on the Walter Energy First Lien Obligations. On January 8, 2016, the Bankruptcy Court approved the Asset Acquisition, which closed on March 31, 2016.
The cash consideration of $
50.8 million
included the funding of escrow accounts to be used to pay certain expenses on behalf of the Walter Energy Debtors, some of which required residual amounts contained in the escrow accounts to be refunded to the Company after a specified time period. The net cash paid for the Asset Acquisition was $
24.1 million
, which was $
50.8 million
of cash paid less cash and cash equivalents acquired of $
26.7 million
.
The purchase consideration has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the Asset Acquisition. During the first quarter of 2017, the Company completed the valuation of the assets and liabilities with the assistance of an independent third party and recorded a measurement-period adjustment to the preliminary purchase price allocation. The measurement-period adjustment was due to updated estimates for the acquired mineral interests including estimates for future royalty income, production volumes and timing which resulted in a
$3.5 million
decrease in fair value allocated to mineral interests as compared to the December 31, 2016 preliminary fair value. This also resulted in a decrease to additional paid in capital. The measurement-period adjustment was recorded during the first quarter of 2017 and had no impact on reported earnings for the three and six months ended
June 30, 2017
(Successor).
In determining the fair values of net assets acquired in the Asset Acquisition, the Company considered, among other factors, the analyses of the Predecessor’s historical financial performance and estimates of the future performance of the acquired business, as well as the highest and best use of the acquired assets.
Working capital, excluding inventory, and non-current restricted cash were recorded at the Predecessor’s carrying value, which is representative of the fair value on the date of acquisition. Inventory was valued at its net realizable value.
Mineral interest was recorded at fair value utilizing the income approach. The income approach utilized the Company’s operating projections as of the valuation date. Under the income approach, fair value was estimated based upon the present value of future cash flows. A number of significant assumptions and estimates were involved in forecasting the future cash flows including sales volumes and prices, costs to produce (including costs for labor, commodity supplies and contractors), transportation costs, capital spending, working capital changes and a risk adjusted, after-tax cost of capital (all of which generally constitute unobservable Level 3 inputs under the fair value hierarchy).
Property, plant and equipment, and other assets were recorded at fair values based on the cost and market approaches. The cost approach utilized trending and direct costing techniques to develop replacement costs. The market approach is based on independent secondary market data (which generally constitute Level 2 inputs under the fair value hierarchy).
Black lung obligations and asset retirement obligations were recorded at fair value using a combination of market data, operational data and discounted cash flows and were adjusted by a discount rate factor reflecting current market conditions at the time of acquisition.
The following tables summarize the final purchase price allocation, including the applicable measurement-period adjustments made upon finalization during the first quarter of 2017 (in thousands):
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
|
|
|
|
|
Final purchase price:
|
|
Cash paid
|
$
|
50,830
|
|
Fair value of First Lien Obligations relinquished in exchange for net assets of the Predecessor
|
598,607
|
|
Total purchase price
|
$
|
649,437
|
|
|
|
|
|
|
Final fair values of assets acquired and liabilities assumed:
|
|
Cash and cash equivalents
|
$
|
26,723
|
|
Trade and other receivables
|
14,358
|
|
Inventories
|
46,464
|
|
Prepaid expenses and other current assets
|
30,722
|
|
Mineral interests
|
144,224
|
|
Property, plant and equipment
|
533,441
|
|
Other long-term assets
|
28,865
|
|
Total assets
|
824,797
|
|
Accounts payable
|
10,470
|
|
Accrued expenses
|
12,843
|
|
Other current liabilities
|
24,044
|
|
Current debt
|
2,879
|
|
Long-term debt
|
5,758
|
|
Deferred income taxes
|
1,400
|
|
Other long-term liabilities
|
117,966
|
|
Total liabilities
|
175,360
|
|
Total fair value of net assets acquired
|
$
|
649,437
|
|
Supplemental Unaudited Pro Forma Financial Information
The following unaudited pro forma results of operations give effect to the Asset Acquisition as if it had occurred on January 1, 2015. This unaudited pro forma financial information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the Asset Acquisition had actually occurred on that date, nor the results of operations in the future. The 2016 supplemental unaudited pro forma financial information was adjusted to (i) reflect the impact of certain fair value adjustments, including an adjustment to depreciation and depletion expense as a result of a change in the basis of Property, Plant and Equipment and Mineral Interests, (ii) eliminate historical interest expense related to the notes, loans and other debt that was not assumed by the Company as part of the Asset Acquisition, (iii) eliminate a gain on reorganization items associated with the Chapter 11 Cases and (iv) eliminate the Predecessor's historical other postretirement benefit expense associated with the Predecessor's historical other postretirement benefit obligations for retiree medical and life insurance benefits, which were not assumed by the Company.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
For the three months ended
March 31, 2016
|
(in thousands)
|
|
As
reported
|
|
Pro forma
|
Revenue
|
|
$
|
71,383
|
|
|
$
|
71,383
|
|
Net loss
|
|
$
|
(61,816
|
)
|
|
$
|
(31,759
|
)
|
Note 4—Inventories, net
Inventories, net are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Successor
|
|
June 30, 2017
|
|
December 31, 2016
|
Coal
|
$
|
52,738
|
|
|
$
|
18,788
|
|
Raw materials, parts, supplies and other, net
|
22,548
|
|
|
20,632
|
|
Total inventories, net
|
$
|
75,286
|
|
|
$
|
39,420
|
|
Note 5—Income Taxes
The Company calculates the interim income tax provision using actual year to date financial results. The tax effect of unusual or infrequently occurring items, including effects of changes in tax laws or rates, are reported in the interim period in which they occur.
The Company records deferred tax assets to the extent these assets will more likely than not be realized. In making such determination, the Company considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. Based upon the review of all positive and negative evidence, including its recent history of operating losses, the Company concluded that a full valuation allowance was necessary for net deferred tax assets at
June 30, 2017
(Successor) and
December 31, 2016
(Successor), exclusive of certain deferred tax liabilities that have an indefinite life.
Results of operations of the Predecessor have historically been included in the federal and state income tax returns of the Parent. Accordingly, the income tax provision included in the Predecessor financial statements was calculated using a method consistent with a separate return basis, as if the Predecessor had been a separate taxpayer. Similarly, historical tax attributes (net operating losses, alternative minimum tax credits, etc.) have been allocated to the Predecessor’s business utilizing a reasonable method of allocation.
As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could impact management’s view with regard to future realization of deferred income tax assets. As part of the Asset Acquisition, the Company succeeded to certain tax attributes and assumed the tax bases of the acquired assets and assumed liabilities. The tax attributes included net operating losses and alternative minimum tax and general business tax credits. As part of the evaluation of the acquired assets and assumed liabilities as of April 1, 2016, management determined that a valuation allowance was needed for deferred tax assets not expected to provide future tax benefits. If it is later determined that the Company will more likely than not realize all, or a portion, of the deferred tax assets, the Company will adjust the valuation allowance in a future period. Future recognized tax benefits in relation to the valuation allowance will result in a tax benefit in the period recognized.
The Company recognized income tax expense of
$32.8 million
and
$34.7 million
for the three and six months ended
June 30, 2017
(Successor), respectively. The Company recognized
no
income tax expense for the three months ended
June 30, 2016
(Successor) and recognized income tax expense of
$18.0 thousand
for the three months ended March 31, 2016 (Predecessor).
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
The Company continues to utilize a discrete period method to calculate taxes for the three and six months ended June 30, 2017, as it does not believe that the annual effective tax rate method would represent a reliable estimate given current circumstances. The effective tax rate for the three months ended June 30, 2017 of
20.1%
is less than the statutory tax rate primarily as a result of changes in the valuation allowance and percentage depletion. The Company continues to maintain a significant valuation allowance against deferred tax asset positions due to our cumulative losses in recent years, which limit its ability to look to future taxable income in assessing the realizability of these assets. Additionally, the Company's utilization of available net operating losses ("NOL") is currently limited in the amount that can be used in any given year due to changes in ownership that occurred in connection with the Asset Acquisition for purposes of Internal Revenue Code ("IRC") Section 382. During the three months ended June 30, 2017 (Successor), the Company exceeded the estimated annual limit under IRC Section 382 for utilization of these available NOLs, which caused the increase in the effective tax rate from the three months ended June 30, 2016.
Note 6—Debt
On April 1, 2016, the Company entered into an Asset-Based Revolving Credit Agreement (the “ABL Facility”) with certain lenders and Citibank, N.A. (together with its affiliates, “Citibank”), as administrative agent and collateral agent, with an aggregate lender commitment to make a revolving loan of up to
$50.0 million
, subject to borrowing base availability. On January 23, 2017, the Company entered into Amendment No. 1 to the ABL Facility to, among other things, (i) increase the aggregate lender commitment to
$100.0 million
, (ii) reduce the applicable interest rate margins by
100
basis points ("bps"), (iii) permit the corporate conversion and (iv) allow the IPO to be consummated without triggering a change of control. On March 24, 2017, the Company entered into Amendment No. 2 to the ABL Facility to modify certain terms relating to the restricted payment covenant, which provides the Company with improved flexibility to pay dividends, including the Special Distribution. On May 15, 2017, the Company entered into an Amendment No. 3 to the ABL Facility to, among other things, (i) allow for the posting of cash collateral to secure certain swap and hedging arrangements permitted under the ABL Facility and (ii) allow for the payment of dividends permitted under the ABL Facility within 60 days of declaration thereof. At
June 30, 2017
(Successor), the Company had
$100.0 million
of availability under the ABL Facility.
In connection with the Asset Acquisition, the Company assumed a security agreement and promissory note, which had an outstanding balance of
$5.2 million
as of
June 30, 2017
(Successor), of which
$2.9 million
was classified as a current obligation. The amount owed in respect of the promissory note was originally used for the purchase of underground mining equipment and such note is secured by the same mining equipment. The promissory note matures on March 31, 2019 and bears a fixed interest rate of
4.00%
per annum. The Company is required to make monthly payments of principal and interest during the term of the promissory note.
Note 7—Net Income (Loss) per Share
Basic and diluted net income (loss) per share was calculated as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
(Unaudited)
|
|
For the three
months ended
June 30,
|
|
For the six
months ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
$
|
129,865
|
|
|
$
|
(50,063
|
)
|
|
$
|
238,173
|
|
Denominator:
|
|
|
|
|
|
Weighted-average shares used to compute net income (loss) per share—basic and diluted
|
52,721
|
|
|
52,640
|
|
|
52,702
|
|
Net income (loss) per share—basic and diluted
|
$
|
2.46
|
|
|
$
|
(0.95
|
)
|
|
$
|
4.52
|
|
As of
June 30, 2017
(Successor), there were
798,124
shares of common stock issued under our 2016 Equity Incentive Plan (the "2016 Equity Plan") to certain directors and employees, for which neither the performance nor market based vesting
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
conditions were met as of the measurement date. As such, these common shares have been excluded from basic and diluted earnings per share. As of
June 30, 2017
(Successor), there were
43,580
shares of our common stock contingently issuable upon the settlement of a vested phantom unit award under our 2016 Equity Plan and
13,157
shares of our common stock contingently issuable upon the settlement of a vested restricted stock unit award under our 2017 Equity Incentive Plan (the "2017 Equity Plan"). The settlement date is the earlier of a change in control as described in our 2016 Equity Plan and 2017 Equity Plan or
five
years from the grant date. These awards are vested and as such have been included in the weighted-average shares used to compute basic and diluted net income per share. As of
June 30, 2017
(Successor), there were
17,582
shares of common stock issued under our 2017 Equity Plan to certain directors and employees.
On March 31, 2017 (Successor), our board of managers declared a cash distribution of
$3.56
per share, totaling
$190.0 million
, which was paid on March 31, 2017 to holders of our Class A Units, Class B Units and Class C Units of record as of March 27, 2017.
On May 17, 2017, the board of directors of the Company (the "Board") adopted a policy (the "Dividend Policy") of paying a quarterly cash dividend of
$0.05
per share. The initial quarterly dividend of
$2.7 million
was paid on June 13, 2017 to stockholders of record on May 30, 2017. The Dividend Policy also states the following: In addition to the regular quarterly dividend and to the extent that the Company generates excess cash that is beyond the then current requirements of the business, the Board may consider returning all or a portion of such excess cash to stockholders through a special dividend or implementation of a stock repurchase program. Any future dividends or stock repurchases will be at the discretion of the Board and subject to consideration of a number of factors, including business and market conditions, future financial performance and other strategic investment opportunities. The Company will also seek to optimize its capital structure to improve returns to stockholders while allowing flexibility for the Company to pursue very selective strategic growth opportunities that can provide compelling stockholder returns.
On July 31, 2017, the Board declared a regular quarterly cash dividend of
$0.05
per share to be paid on August 23, 2017, to stockholders of record as of the close of business on August 14, 2017.
Note 8—Related Party Transactions
In connection with the Asset Acquisition the Company acquired a
50%
interest in Black Warrior Methane (“BWM”) and Black Warrior Transmission (“BWT”), which are accounted for under the proportionate consolidation method and equity method, respectively. The Company has granted the rights to produce and sell methane gas from its coal mines to BWM and BWT. The Company’s net investments in, advances to/from BWT and equity in earnings or loss of BWT are not material to the Company. The Company supplied labor to BWM and incurred costs, including property and liability insurance, to support the joint venture. The Company charged the joint venture for such costs on a monthly basis, which were
$0.1 million
and
$0.8 million
for the three and six months ended June 30, 2017, respectively, and
$0.3 million
for each of the three months ended June 30, 2016 (Successor) and the three months ended March 31, 2016 (Predecessor).
The Predecessor also received revenue from coal sales to affiliates of the Parent that were not acquired in connection with the Asset Acquisition. The Predecessor recognized revenue from these affiliates of
$1.4 million
for the three months ended March 31, 2016 (Predecessor).
Note 9—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 that it is in substantial compliance with federal, state and local environmental laws and regulations. The Company accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and can be reasonably estimated. As of
June 30, 2017
(Successor) and
December 31, 2016
(Successor), there were no accruals for environmental matters other than asset retirement obligations for mine reclamation.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
Miscellaneous Litigation
From time to time, the Company is party to a number of lawsuits arising in the ordinary course of their businesses. The Company records costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company’s future results of operations cannot be predicted with certainty as any such effect depends on future results of operations and the amount and timing of the resolution of such matters. As of
June 30, 2017
(Successor) and
December 31, 2016
(Successor), there were no items accrued for miscellaneous litigation.
Indemnifications
In the ordinary course of business, the Company entered into a contractual arrangement under which the Company has agreed to indemnify a third party to such arrangement from any losses arising from certain events as specified in the particular contracts, which may include, for example, litigation or claims relating to past performance. The Company had accrued
$0.3 million
as of
June 30, 2017
(Successor) and
December 31, 2016
(Successor), which is included in other long-term liabilities. The remaining maximum exposure under this arrangement is
$0.2 million
.
Commitments and Contingencies—Other
The Company is party to various transportation and throughput agreements with rail and barge transportation providers and the Alabama State Port Authority. These agreements contain annual minimum tonnage guarantees with respect to coal transported from the mine sites to the Port of Mobile, Alabama, unloading of rail cars or barges, and the loading of vessels. If the Company does not meet its minimum throughput obligations, which are based on annual minimum amounts, it is required to pay the transportation providers or the Alabama State Port Authority a contractually specified amount per metric ton for the difference between the actual throughput and the minimum throughput requirement. At
June 30, 2017
(Successor), the Company had
no
liability recorded for minimum throughput requirements. At
December 31, 2016
(Successor), the Company had accrued a liability of
$2.1 million
as a result of not meeting the required minimums, which is included in accrued expenses on the Condensed Balance Sheet.
Royalty and Lease Obligations
The Company’s leases are primarily for mining equipment and automobiles. At
June 30, 2017
(Successor) and
December 31, 2016
(Successor), the Company had
no
future minimum payments due under non-cancellable operating leases.
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
$30.7 million
and
$52.2 million
, for the three and six months ended
June 30, 2017
(Successor) and
$3.9 million
and
$3.6 million
for three months ended June 30, 2016 (Successor) and March 31, 2016 (Predecessor), respectively.
Note 10—Stockholders' Equity
Pursuant to the Company's certificate of incorporation, the Company is authorized to issue up to
140,000,000
shares of common stock
$0.01
par value per share and
10,000,000
shares of preferred stock
$0.01
par value per share. As of June 30, 2017, there were
53,444,810
shares of common stock issued and outstanding.
On March 31, 2017, the board of managers declared a cash distribution payable to holders of our then outstanding Class A Units, Class B Units and Class C Units as of March 27, 2017, resulting in distributions to such holders in the aggregate amount of $
190.0 million
(the “Special Distribution”). In connection with the conversion of Warrior Met Coal, LLC into Warrior Met Coal, Inc., the Class C Units, which were issued pursuant to the 2016 Equity Plan, were converted into restricted shares (the "Restricted Shares") of common stock of the Company, par value
$0.01
per share, and the Special Distribution with respect to such Restricted Shares was not paid but held in trust pending their vesting. As of June 30, 2017 (Successor), approximately
$3.1 million
is held in the trust and is included within other long term assets in the accompanying Condensed Balance Sheets.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
On June 1, 2017, the Compensation Committee (the "Committee") of the board of directors approved the modification described below (the “Modification”) to the award agreements (the “Awards”) for the Restricted Shares to certain officers, directors and employees of the Company. Pursuant to the Modification, the Committee waived certain vesting requirements with respect to the Special Distribution for the Restricted Shares such that funds currently held in trust as described above with respect to the Special Distribution will vest immediately for recipients that received less than
$100.0 thousand
and for recipients that received greater than
$100.0 thousand
,
50%
of the Restricted Shares vest immediately. However, funds held in trust with respect to the Special Distribution for the remaining
50%
of the Restricted Shares will not be released until such shares vest pursuant to the original terms of the Awards on the basis of the passage of time and the Company’s achievement of certain metrics.
In addition and pursuant to the Modification, the holders of the Restricted Shares were permitted to elect to receive the 2017 Dividend released from trust as described above with respect to their Restricted Shares (i)
100%
in cash; (ii)
50%
in cash and
50%
in restricted stock units (“RSUs”); or (iii)
100%
in RSUs.
In connection with the Modification, the Committee approved a form of Restricted Stock Unit Award Agreement (the “RSU Award Agreement”) pursuant to the 2017 Equity Plan on June 1, 2017 (the “Grant Date”) for those Holders who elected to receive the Special Distribution, in whole or in part, in RSUs (the “Participants”). The RSU Award Agreement provides that RSUs awarded pursuant to the Modification shall be fully vested on the Grant Date and shall be settled in shares of Common Stock on a
one
-for-one basis on the earliest of (i) one-third on each of the first three anniversaries of the Grant Date; (ii) a Change in Control (as defined in the Plan); (iii) the Participant’s separation from service with the Company or its affiliates; or (iv) death of the Participant.
In connection with the Modification, for the three and six months ended June 30, 2017 (Successor), the Company recognized a reduction to dividends payable of
$0.2 million
associated with the holders that elected to receive cash and
$1.3 million
was treated as an adjustment to equity for those that elected RSUs. Also, due to the Company's IPO, the Company also recognized approximately
$0.5 million
of stock compensation expense for awards granted under the 2016 Equity Plan.
For the three and six months ended June 30, 2017 (Successor), the Company also recognized approximately
$0.4 million
of compensation expense for awards granted under the 2017 Equity Plan.
Note 11—Derivative Instruments
The Company enters into natural gas swap contracts to hedge the exposure to variability in expected future cash flows associated with the fluctuations in the price of natural gas related to the Company’s forecasted sales. As of
June 30, 2017
(Successor), the Company had natural gas swap contracts outstanding with notional amounts totaling
3,960 million
British thermal units maturing in the fourth quarter of 2017 and
2,400 million
maturing in the fourth quarter of 2018. As of
December 31, 2016
(Successor), the Company had natural gas swap contracts outstanding with notional amounts totaling
7,920 million
British thermal units maturing in the fourth quarter of 2017.
The Company’s natural gas swap contracts economically hedge certain risk but are not designated as hedges for financial reporting purposes. All changes in the fair value of these derivative instruments are recorded as other revenues in the Condensed Statements of Operations. The Company records all derivative instruments at fair value and had an asset of
$0.4 million
related to natural gas swap contracts outstanding as of
June 30, 2017
(Successor), of which
$0.2 million
was included in prepaid expenses and
$0.2 million
was included in other long-term assets and
$3.8 million
as of
December 31, 2016
(Successor) included in other current liabilities in the accompanying Condensed Balance Sheets.
Note 12—Fair Value of Financial Instruments
The following table presents information about the Company’s financial liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Fair Value Measurements as of June 30, 2017 Using:
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Natural gas swap contracts
|
|
$
|
—
|
|
|
$
|
440
|
|
|
$
|
—
|
|
|
$
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Fair Value Measurements as of December 31, 2016 Using:
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
|
Natural gas swap contracts
|
|
$
|
—
|
|
|
$
|
3,784
|
|
|
$
|
—
|
|
|
$
|
3,784
|
|
The Company has
no
assets or any other liabilities measured at fair value on a recurring basis as of
June 30, 2017
(Successor) or
December 31, 2016
(Successor). During the
three and six
months ended
June 30, 2017
(Successor), there were no transfers between Level 1, Level 2 and Level 3. The Company uses quoted dealer prices for similar contracts in active over-the-counter markets for determining fair value of Level 2 liabilities. There were no changes to the valuation techniques used to measure liability fair values on a recurring basis during the
three and six
months ended
June 30, 2017
(Successor).
The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:
Cash and cash equivalents, short-term investments, restricted cash, receivables and accounts payable—
The carrying amounts reported in the Condensed Balance Sheet approximate fair value due to the short-term nature of these assets and liabilities.
Debt—
The Company's outstanding promissory note approximates fair value.
Note 13—Reorganization Items, Net
Expenses and income directly associated with the Chapter 11 Cases are reported separately in the Condensed Statements of Operations as reorganization items as required by ASC 852. Reorganization items also include adjustments to reflect the carrying value of liabilities subject to compromise at their estimated allowed claim amounts, as such adjustments are determined.
Reorganization items include an allocation of professional fees incurred in relation to the Chapter 11 Cases. For the three months ended March 31, 2016 (Predecessor), the cost of these professional fees was allocated on the basis of the Predecessor’s assets as compared to the total assets of the Parent for each reporting period.
The following table presents reorganization items (in thousands):
|
|
|
|
|
|
Predecessor
|
|
For the three months
ended March 31, 2016
|
Professional fees
|
(10,962
|
)
|
Rejected executory contracts, leases and other
|
18,882
|
|
Reorganization items, net
|
$
|
7,920
|
|
Net cash paid for reorganization items for the three months ended March 31, 2016 (Predecessor) totaled approximately $
12.3 million
.
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
Note 14—Restructuring Costs
For the three months ended March 31, 2016 (Predecessor), the Predecessor recognized restructuring charges of approximately $
3.4 million
due to workforce reductions at the Alabama No. 7 underground mine, the Alabama No. 4 underground mine and corporate headquarters in conjunction with cost containment initiatives implemented in response to the deterioration in the metallurgical coal market. The restructuring charges consist primarily of severance and related benefits costs. The Company does not expect to incur any additional restructuring charges in the Successor periods in connection with the Predecessor restructuring actions.
Note 15—Segment Information
The Company identifies a business as an operating segment if: i) it engages in business activities from which it may earn revenues and incur expenses; ii) its operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”), who is the Company’s Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance; and iii) it has available discrete financial information. The Company has determined that its
two
underground mining operations are its operating segments. The CODM reviews financial information at the operating segment level to allocate resources and to assess the operating results and financial performance for each operating segment. Operating segments are aggregated into a reportable segment if the operating segments have similar quantitative economic characteristics and if the operating segments are similar in the following qualitative characteristics: i) nature of products and services; ii) nature of production processes; iii) type or class of customer for their products and services; iv) methods used to distribute the products or provide services; and v) if applicable, the nature of the regulatory environment.
The Company has determined that the
two
operating segments are similar in both quantitative and qualitative characteristics and thus the
two
operating segments have been aggregated into
one
reportable segment. The Company has determined that its natural gas and royalty businesses did not meet the criteria in ASC 280 to be considered as operating or reportable segments. Therefore, the Company has included their results in an “all other” category as a reconciling item to consolidated amounts.
The Company does not allocate all of its assets, or its depreciation and depletion expense, selling, general and administrative expenses, other post-retirement benefits, transactions costs, restructuring costs, interest expense, reorganization items, net and income tax expense by segment.
The following tables include reconciliations of segment information to consolidated amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
For the three
months ended
June 30,
|
|
For the six months ended June 30,
|
|
|
For the three
months ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
|
2016
|
Revenues
|
|
|
|
|
|
|
|
|
Mining
|
$
|
351,788
|
|
|
$
|
85,415
|
|
|
$
|
592,844
|
|
|
|
$
|
65,154
|
|
All other
|
11,582
|
|
|
6,059
|
|
|
24,490
|
|
|
|
6,229
|
|
Total revenues
|
$
|
363,370
|
|
|
$
|
91,474
|
|
|
$
|
617,334
|
|
|
|
$
|
71,383
|
|
WARRIOR MET COAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
For the three
months ended
June 30,
|
|
For the six months ended June 30,
|
|
|
For the three
months ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
|
2016
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
Mining
|
16,093
|
|
|
$
|
5,343
|
|
|
$
|
26,586
|
|
|
|
$
|
4,588
|
|
All other
|
792
|
|
|
671
|
|
|
1,677
|
|
|
|
834
|
|
Total capital expenditures
|
16,885
|
|
|
$
|
6,014
|
|
|
$
|
28,263
|
|
|
|
$
|
5,422
|
|
The Company evaluates the performance of its segment based on Segment Adjusted EBITDA, which is defined as net income (loss) adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, other postretirement benefits, and certain transactions or adjustments that the CODM does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA does not represent and should not be considered as an alternative to cost of sales under GAAP and may not be comparable to other similarly titled measures used by other companies. Below is a reconciliation of Segment Adjusted EBITDA to net income (loss), which is its most directly comparable financial measure calculated and presented in accordance with GAAP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
For the three
months ended
June 30,
|
|
For the six months ended June 30,
|
|
|
For the three
months ended
March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
|
2016
|
Segment Adjusted EBITDA
|
$
|
191,636
|
|
|
$
|
(18,451
|
)
|
|
$
|
326,548
|
|
|
|
$
|
(7,143
|
)
|
Other revenues
|
11,582
|
|
|
6,059
|
|
|
24,490
|
|
|
|
6,229
|
|
Cost of other revenues
|
(7,795
|
)
|
|
(5,126
|
)
|
|
(15,974
|
)
|
|
|
(4,698
|
)
|
Depreciation and depletion
|
(19,650
|
)
|
|
(15,821
|
)
|
|
(34,232
|
)
|
|
|
(28,958
|
)
|
Selling, general and administrative
|
(8,660
|
)
|
|
(5,815
|
)
|
|
(13,830
|
)
|
|
|
(9,008
|
)
|
Other postretirement benefits
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(6,160
|
)
|
Restructuring charges
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(3,418
|
)
|
Transaction and other costs
|
(3,837
|
)
|
|
(10,475
|
)
|
|
(12,873
|
)
|
|
|
—
|
|
Interest expense, net
|
(642
|
)
|
|
(434
|
)
|
|
(1,250
|
)
|
|
|
(16,562
|
)
|
Reorganization items, net
|
—
|
|
|
—
|
|
|
—
|
|
|
|
7,920
|
|
Income tax expense
|
(32,769
|
)
|
|
—
|
|
|
(34,706
|
)
|
|
|
(18
|
)
|
Net income (loss)
|
$
|
129,865
|
|
|
$
|
(50,063
|
)
|
|
$
|
238,173
|
|
|
|
$
|
(61,816
|
)
|