WARRIOR MET COAL, INC. 10-Q

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 months ended March 31, 2023 and March 31, 2022. 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, 2022 included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the "2022 Annual Report"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis. Please see “ Forward-Looking Statements. ” Overview We are a U.S.-based, environmentally and socially minded supplier to the global steel industry. We are dedicated entirely to mining non-thermal metallurgical ("met") coal used as a critical component of steel production by metal manufacturers in Europe, South America and Asia. We are a large-scale, low-cost producer and exporter of premium met coal, also known as hard coking coal (“HCC”) or steelmaking coal, operating highly-efficient longwall operations in our underground mines based in Alabama, Mine No. 4 and Mine No. 7. As of December 31, 2022, 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 89.0 million metric tons of recoverable reserves and our undeveloped Blue Creek mine contained 68.2 million metric tons of recoverable reserves and 39.2 million metric tons of coal resources exclusive of reserves, which total 107.4 million metric tons. As a result of our high quality coal, our realized price has historically been in line with, or at a slight discount to, the Platts Premium Low Volatility ("LV") Free On Board ("FOB") Australia Index Price ("Platts Index"). Our HCC, mined from the Southern Appalachian portion of the Blue Creek coal seam, is characterized by low sulfur, low-to-medium ash, and LV to mid-volatility ("MV"). These qualities make our coal ideally suited as a coking coal for the manufacture of steel. We sell substantially all of our steelmaking coal production to steel producers. Steelmaking coal, which is converted to coke, is a critical input in the steel production process. Steelmaking 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 steelmaking 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 steelmaking coal, which would have a material adverse effect upon our business. Similarly, if alternative ingredients are used in substitution for steelmaking coal in the integrated steel mill process, the demand for steelmaking coal would materially decrease, which could also materially adversely affect demand for our steelmaking coal. Recent Developments U.S. inflation remains at 5.0%, driven by increased energy and food costs, supply constraints and strong consumer demand. High inflation has been driven by growth in the economy as it bounces back from the novel coronavirus ("COVID-19"), powered in part by low interest rates and government stimulus to counter the pandemic's impact. We expect COVID-19 to continue to impact global supply markets and supply chains, resulting in shortages, extended lead times and increased inflation impacting our operations and profitability. We are applying a number of different strategies to mitigate the impact of these challenges on our operations, including placing purchase orders earlier, utilizing short term contracts and leveraging our supplier relationships. In 2023, we expect inflation to continue to ease but we expect that it will continue to negatively impact our profitability, as we expect inflation to remain high for steel prices, freight rates, labor and other materials and supplies. Inflation affects, among others, the costs of belt structure, roof bolts, cable, magnetite, rock dust and other supplies, plus labor and parts on equipment repair and rebuilds. The global seaborne metallurgical coal market remains volatile, primarily driven by a weakening global macroeconomic environment, inflation, and trade disruptions driven by additional sanctions imposed on Russian coal imports. The lifting of the unofficial Chinese ban on Australian coal, the ongoing war in Ukraine, additional sanctions against Russia, a broader economic weakening as inflation rises or continues apace and stimulus spending falls are all likely to continue to impact the global steelmaking coal market and impact our business, financial condition or results of operations. 18 Collective Bargaining Agreement Our Collective Bargaining Agreement ("CBA") with the labor union representing certain of our hourly employees expired on April 1, 2021 and the labor union initiated a strike after an agreement on a new contract was not reached. As a result of the strike, we initially idled Mine No. 4 and scaled back operations at Mine No. 7. In the first quarter of 2022, we restarted operations at Mine No. 4. Due to the reduced operations at Mine No. 4 and Mine No. 7, we incurred idle mine expenses of $3.0 million for the three months ended March 31, 2022. The Company incurred no idle mine expenses for the three months ended March 31, 2023. These expenses are reported separately in the Condensed Statements of Operations and represent expenses incurred, such as electricity, insurance and maintenance labor. We have also incurred business interruption expenses of approximately $4.2 million for the three months ended March 31, 2023 and $6.7 million for the three months ended March 31, 2022, which represent non-recurring expenses that are directly attributable to the labor strike for incremental safety and security, labor negotiations and other expenses. These expenses are also presented separately in the Condensed Statements of Operations. On February 16, 2023, the labor union representing certain of our hourly employees announced that they were ending the strike and made an unconditional offer to return to work. We are currently working to complete the onboarding process with the eligible employees that wish to return to work and continue to engage in good faith negotiations with the labor union representing certain of our hourly employees to reach an agreement on a new contract. Acquisitions On March 1, 2022, we acquired the remaining 50% interest in Black Warrior Methane ("BWM") and Black Warrior Transmission ("BWT") for $0.3 million. The purchase consideration has been allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The acquisition is not deemed to be material to the condensed financial statements. On March 31, 2023, we acquired the remaining ownership interest in gas wells owned by an independent third party for $2.4 million. The purchase consideration has been preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. A full and detailed valuation of the assets and liabilities is being completed. Accordingly , the allocation is preliminary and may change as additional information becomes available and is assessed by us. The final allocation of the consideration transferred may include adjustments to the fair value estimates of identifiable assets and liabilities, after a full review has been completed. The acquisition is not deemed to be material to the condensed financial statements. How We Evaluate Our Operations Our primary business, the mining and exporting of steelmaking coal for the steel industry, is conducted in one reportable business segment: mining. All other operations and results are reported under the “All Other” category as a reconciling item to consolidated amounts, which includes the business results from our sale of natural gas extracted as a byproduct from our underground coal mines and royalties from our leased properties. Our natural gas and royalty businesses do not meet the criteria in ASC 280, Segment Reporting , to be considered as operating or reportable segments. Our management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include: (i) Segment Adjusted EBITDA (as defined below), a non-GAAP financial measure; (ii) sales volumes and average net selling price, which drive coal sales revenue; (iii) cash cost of sales, a non-GAAP financial measure; and (iv) Adjusted EBITDA, a non-GAAP financial measure. The following table presents supplementary data on a historical basis for each of the periods indicated. For the three months ended March 31, (in thousands) 2023 2022 Segment Adjusted EBITDA $ 267,861 $ 247,092 Metric tons sold 1,767 1,022 Metric tons produced 1,596 1,395 Average net selling price per metric ton $ 283.24 $ 374.20 Cash cost of sales per metric ton $ 131.04 $ 131.48 Adjusted EBITDA $ 259,407 $ 243,823 19 Segment Adjusted EBITDA We define Segment Adjusted EBITDA as net income adjusted for other revenues, cost of other revenues, depreciation and depletion, selling, general and administrative, business interruption, idle mine expense, interest income (expense), net, income tax expense, other income and certain transactions or adjustments that the Chief Executive Officer, our Chief Operating Decision Maker, does not consider for the purposes of making decisions to allocate resources among segments or assessing segment performance. Segment Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess: • our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; • the ability of our assets to generate sufficient cash flow to pay dividends; • our ability to incur and service debt and fund capital expenditures; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. Sales Volumes and Average Net Selling Price We evaluate our operations based on the volume of coal we can safely produce and sell in compliance with regulatory standards, and the prices we receive for our steelmaking coal. Our sales volume and sales prices are largely dependent upon the terms of our annual steelmaking coal sales contracts, for which prices generally are set on daily index averages. The volume of steelmaking 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 steelmaking coal based on our average net selling price per metric ton. Our average net selling price per metric ton represents our coal net sales revenue divided by total metric tons of coal sold. In addition, our average net selling price per metric ton is net of demurrage and quality specification adjustments. Cash Cost of Sales We evaluate our cash cost of sales on a cost per metric ton basis. Cash cost of sales is based on reported cost of sales and includes items such as freight, royalties, manpower, fuel and other similar production and sales cost items, and may be adjusted for other items that, pursuant to accounting principles generally accepted in the United States ("GAAP"), are classified in the Condensed Statements of Operations as costs other than cost of sales, but relate directly to the costs incurred to produce met coal and sell it FOB at the Port of Mobile, Alabama. Our cash cost of sales per metric ton is calculated as cash cost of sales divided by the metric tons sold. Cash cost of sales is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess: • our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. 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. 20 The following table presents a reconciliation of cash cost of sales to total cost of sales, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated. (in thousands) For the three months ended March 31, 2023 2022 Cost of sales (exclusive of depreciation and depletion) $ 232,630 $ 135,341 Asset retirement obligation accretion (540) (493) Stock compensation expense (534) (475) Cash cost of sales $ 231,556 $ 134,373 Adjusted EBITDA We define Adjusted EBITDA as net income before interest (income) expense, net, income taxes, depreciation and depletion, non-cash asset retirement obligation accretion, non-cash stock compensation expense, other non-cash accretion, mark-to-market (gain) loss on gas hedges, business interruption, idle mine and other income. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess: • our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure; and • the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. We believe that the presentation of Adjusted EBITDA in this report provides information useful to investors in assessing our financial condition and results of operations. The GAAP measure most directly comparable to Adjusted EBITDA is net income. Adjusted EBITDA should not be considered an alternative to net income or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjustments exclude some, but not all, items that affect net income and our presentation of Adjusted EBITDA may vary from that presented by other companies. The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated. For the three months ended March 31, 2023 2022 Net income 182,277 146,249 Interest (income) expense, net (1,460) 7,822 Income tax expense 29,064 33,453 Depreciation and depletion 37,213 25,797 Asset retirement obligation accretion (1) 906 867 Stock compensation expense (2) 7,702 7,218 Other non-cash accretion (3) 414 231 Mark-to-market (gain) loss on gas hedges (4) (705) 13,165 Business interruption (5) 4,217 6,688 Idle mine expense (6) — 3,008 Other income (7) (221) (675) Adjusted EBITDA $ 259,407 $ 243,823 (1) Represents non-cash accretion expense associated with our asset retirement obligations. (2) Represents non-cash stock compensation expense associated with equity awards. (3) Represents non-cash accretion expense associated with our black lung obligations. (4) Represents mark-to-market (gain) loss recognized on gas hedges. (5) Represents business interruption expenses associated with the labor strike. (6) Represents idle mine expenses incurred in connection with reduced operations at Mine No. 4 and Mine No. 7. (7) Represents proceeds received associated with the Chapter 11 Cases from Walter Energy, Inc. 21 Results of Operations Three Months Ended March 31, 2023 and 2022 The following table summarizes certain unaudited financial information for these periods. For the three months ended March 31, ($ in thousands) 2023 % of Total Revenues 2022 % of Total Revenues Revenues: Sales $ 500,491 98.2 % $ 382,433 101.0 % Other revenues 9,183 1.8 % (3,781) (1.0) % Total revenues 509,674 100.0 % 378,652 100.0 % Costs and expenses: Cost of sales (exclusive of items shown separately below) 232,630 45.6 % 135,341 35.7 % Cost of other revenues (exclusive of items shown separately below) 11,438 2.2 % 7,040 1.9 % Depreciation and depletion 37,213 7.3 % 25,797 6.8 % Selling, general and administrative 14,516 2.8 % 13,929 3.7 % Business interruption 4,217 0.8 % 6,688 1.8 % Idle mine — — % 3,008 0.8 % Total costs and expenses 300,014 58.9 % 191,803 50.7 % Operating income 209,660 41.1 % 186,849 49.3 % Interest income (expense), net 1,460 0.3 % (7,822) (2.1) % Other income 221 — % 675 0.2 % Income before income tax expense 211,341 41.5 % 179,702 47.5 % Income tax expense 29,064 5.7 % 33,453 8.8 % Net income $ 182,277 35.8 % $ 146,249 38.6 % Sales and cost of sales components on a per unit basis were as follows: For the three months ended March 31, 2023 2022 Met Coal (metric tons in thousands) Metric tons sold 1,767 1,022 Metric tons produced 1,596 1,395 Average net selling price per metric ton $ 283.24 $ 374.20 Cash cost of sales per metric ton $ 131.04 $ 131.48 We produced 1.6 million metric tons of steelmaking coal for the three months ended March 31, 2023 compared to 1.4 million metric tons for the three months ended March 31, 2022, representing a 14% increase.. The increased production drove an increase in sales as both Mine No. 4 and Mine No. 7 operated at higher capacity levels in the first quarter of 2023 compared to the first quarter of 2022, when operations at Mine No. 4 were being restarted and both Mine No. 4 and Mine No. 7 were being operated at reduced capacity. Sales for the three months ended March 31, 2023 were $500.5 million compared to $382.4 million for the three months ended March 31, 2022. The $118.1 million increase in sales was primarily driven by a $278.8 million increase in sales due to a 73% or 0.7 million metric ton increase in steelmaking coal sales volume offset partially by a $160.7 million decrease in sales related to a $90.96 per metric ton decrease in the average net selling price per metric ton of steelmaking coal. The 73% increase in sales volumes was driven by the drawdown of coal inventory levels in the current quarter due to improved performance at the McDuffie Terminal combined with an increase in sales driven by increased production as both Mine No. 4 and Mine No. 7 operated at higher capacity levels in the first quarter of 2023 compared to the first quarter of 2022, when operations at Mine No. 4 were being restarted and both Mine No. 4 and Mine No. 7 were being operated at reduced capacity. 22 For the three months ended March 31, 2023, our geographic customer mix was 52% in Europe, 23% in South America, 21% in Asia and 3% in the United States. For the three months ended March 31, 2022, our geographic customer mix was 66% in Europe, 22% in Asia and 12% in South America. Our geographic customer mix typically varies each period based on the timing of customer orders and shipments. Other revenues for the three months ended March 31, 2023 were $9.2 million compared to $(3.8) million for the three months ended March 31, 2022. Other revenues are comprised of revenue derived from our natural gas operations, gains on sales and disposals of property, plant and equipment and land, changes in the fair value of our natural gas swap contracts, as well as earned royalty revenue. The $13.0 million increase in other revenues is primarily due to the prior year including a $13.2 million loss recognized on the fair value adjustment related to our natural gas swap contracts due to an increase in natural gas futures at that time. Cost of sales (exclusive of items shown separately below) was $232.6 million, or 45.6% of total revenues, for the three months ended March 31, 2023, compared to $135.3 million, or 35.7% of total revenues for the three months ended March 31, 2022. The $97.3 million increase is primarily driven by a $98.0 million increase due to a 0.7 million metric ton increase in steelmaking coal sales volumes, plus the cumulative impact of inflation on supplies and electricity. Depreciation and depletion expenses were $37.2 million, or 7.3% of total revenues, for the three months ended March 31, 2023, compared to $25.8 million, or 6.8% for the three months ended March 31, 2022. The $11.4 million increase in depreciation and depletion is primarily driven by a 0.7 million metric ton increase in met coal sales volume as depreciation and depletion is first capitalized into coal inventory and relieved when the tons are sold. Selling, general and administrative expenses were $14.5 million, or 2.8% of total revenues, for the three months ended March 31, 2023, compared to $13.9 million, or 3.7% of total revenues, for the three months ended March 31, 2022. The $0.6 million increase in selling, general and administrative expenses for the period is due to an increase in stock compensation expense. Business interruption expenses were $4.2 million and $6.7 million for the three months ended March 31, 2023 and 2022, respectively. These expenses remained relatively consistent with the prior period and represent non-recurring expenses that are directly attributable to the labor strike for incremental safety and security, labor negotiations and other expenses. The $2.5 million decrease in business interruption expenses is primarily driven by reduced spending on security. Idle mine expenses were $3.0 million for the three months ended March 31, 2022. These expenses represent idle mine expenses incurred in connection with reduced operations at Mine No. 7 and Mine No. 4, such as electricity, insurance and maintenance labor. Interest income, net was $1.5 million, or 0.3% of total revenues, for the three months ended March 31, 2023, compared to interest expense, net of $7.8 million, or 2.1% of total revenues, for the three months ended March 31, 2022. The $9.3 million increase is primarily driven by a decrease in interest on our outstanding senior secured notes combined with an increase in interest income. Other income for the three months ended March 31, 2023 and 2022 represents proceeds received from the Chapter 11 Cases from Walter Energy, Inc. For the three months ended March 31, 2023, we recognized income tax expense of $29.1 million. We estimated our annual effective tax rate and applied this effective tax rate to our year-to-date pretax income at the end of the interim reporting period. The $29.1 million income tax expense for the three months ended March 31, 2023, includes a benefit related to depletion and Internal Revenue Code ("IRC") Section 250 Deduction: Foreign-Derived Intangible Income ("FDII"). The Tax Cuts and Jobs Act ("TCJA") was enacted on December 22, 2017 and enacted IRC Section 250 Deduction: FDII, which provides for, among other things, a deduction of 37.5% with respect to foreign-derived intangible income, which reduces the statutory tax rate from 21% to 13.125%. Beginning in 2026, the deduction is reduced from 37.5% to 22.5% of foreign-derived intangible income. We have historically not been eligible to claim the deduction due to the deduction being limited to taxable income and our ability to utilize our net operating losses to offset taxable income. For the three months ended March 31, 2022, we recognized income tax expense of $33.5 million, which was principally offset by the utilization of federal NOLs for cash tax purposes. We estimated our annual effective tax rate and applied this effective tax rate to our year-to-date pretax income at the end of the interim reporting period. Liquidity and Capital Resources 23 Overview Our sources of cash have been steelmaking coal and natural gas sales to customers, proceeds received from the Notes (as defined below) and access to our ABL Facility. Historically, our primary uses of cash have been for funding the operations of our coal and natural gas production operations, working capital, our capital expenditures, our reclamation obligations, payment of principal and interest on our Notes, professional fees and other non-recurring transaction expenses. In addition, we used available cash on hand to repurchase shares of common stock and to pay our quarterly and special dividends, each of which reduces or reduced cash and cash equivalents. Going forward, we will use cash to fund debt service payments on our Notes, the ABL Facility and our other indebtedness, to fund operating activities, working capital, capital expenditures, our reclamation obligations, professional fees and other non-recurring transaction expenses and strategic investments, the development of Blue Creek, and, if declared, to pay our quarterly and/or special dividends. Our ability to fund our capital needs, including the development of Blue Creek, 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 needs, the development of Blue Creek, or special dividends financed partially or wholly with debt financing, our ability to access the capital markets to raise additional capital. Our ability to generate positive cash flow from operations in the future will be, at least in part, dependent on continued stable global economic conditions and a resolution of the CBA contract negotiations with the labor union representing certain of our hourly employees. There remains uncertainty as to the effects of new COVID-19 variants on the global economy, which in turn may, among other things, impact our ability to generate positive cash flows from operations, fund capital expenditure needs and successfully execute and fund key initiatives, such as the development of Blue Creek. Our total liquidity as of March 31, 2023 was $985.8 million, consisting of cash and cash equivalents of $862.5 million and $123.3 million available under our ABL Facility. As of March 31, 2023, no loans were outstanding under the ABL Facility and there were $8.7 million of letters of credit issued and outstanding under the ABL Facility. During the three months ended March 31, 2023, we repurchased in the open market and extinguished approximately $8.0 million principal amount of our Notes at a discount to par value. The discounts to par value and the interest expense savings from this open-market purchase is estimated to be approximately $4.0 million through the maturity of our Notes. In connection with the extinguishment of our Notes, we recognized a loss on early extinguishment of debt of $0.1 million which is included in interest income (expense), net in the Condensed Statements of Operations. In the future, we may, at any time and from time to time, seek to retire or purchase additional Notes in open-market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will be upon such terms and at such prices as we may determine, and will depend on prevailing market conditions, our liquidity requirements, contractual restrictions, if any, and other factors. We are responsible for medical and disability benefits for black lung disease under the Federal Coal Mine Health and Safety Act of 1969, as amended. Beginning on April 1, 2016 through May 31, 2018, we were insured under a guaranteed cost insurance policy, through a third-party insurance carrier, for black lung claims raised by any employee subsequent to the acquisition of certain assets of Walter Energy. Beginning on June 1, 2018 through May 31, 2020, we had a deductible policy where we are responsible for the first $0.5 million for each black lung claim. Since June 1, 2020, we have a deductible policy where we are responsible for the first $1.0 million for each black lung claim. In addition, in connection with the acquisition of certain assets of Walter Energy, we assumed all black lung liabilities of Walter Energy and its U.S. subsidiaries incurred prior to March 31, 2016, for which we are self-insured. We have posted $18.6 million in surety bonds and $8.7 million of collateral recognized as short-term investments in addition to maintaining a black lung trust of $2.1 million that was acquired from Walter Energy. We received a letter from the U.S. Department of Labor ("DOL") on February 21, 2020 under its new process for self-insurance renewals that would require us to increase the amount of collateral posted to $39.8 million, but we have appealed such increase. We received another letter from the DOL on December 8, 2021 requesting additional information to support our appeal of the collateral requested by the DOL. On February 9, 2022, the DOL held a conference call with representatives from the Company related to our appeal. On July 12, 2022, we received a decision on our appeal from the DOL lowering the amount of collateral required to be posted from $39.8 million to $28 million. We appealed this decision. In addition, on January 19, 2023, the DOL proposed revisions to regulations under the Black Lung Benefits Act governing authorization of self-insurers. The proposed rules requires, among other requirements, all self-insured operators to post security equal to 120 percent of their projected black lung liabilities. 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 March 31, 2023, we had outstanding surety bonds and letters of credit with parties for post- 24 mining reclamation at all of our mining operations totaling $41.2 million, $18.6 million as collateral for self-insured black lung related claims and $5.3 million for miscellaneous purposes. We believe that our future cash flows from operations, together with cash on our balance sheet and proceeds from the borrowings under our ABL Facility, will provide adequate resources to fund our debt service payments and planned operating and capital expenditure needs, including the development of Blue Creek, for at least the next twelve months and beyond. However, we will continue to assess our liquidity needs in light of the ongoing CBA contract negotiations with the labor union representing certain of our hourly employees and the ongoing impact of COVID-19. The Company's principal contractual commitments include repayments of long-term debt and related interest, potential minimum throughput payments associated with our rail and port providers, asset retirement obligation payments, black lung obligation payments, payments on various coal and land leases, payments under financing lease obligations and payments associated with our natural gas swap contracts. Currently, there are no known trends or expected changes anticipated in future periods that would not be indicative of past results for our contractual commitments. Refer to the respective notes to our audited financial statements for the year ended December 31, 2022 included in our 2022 Annual Report for further information about our credit facilities and long-term debt (Note 13), commitments and contingencies (Note 16), asset retirement obligations (Note 8), black lung obligations (Note 10), lease payment obligations (Note 14), share repurchase programs (Note 16) and derivative instruments (Note 17). 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 governing the Notes (the "Indenture"), 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 $862.5 million and $829.5 million at March 31, 2023 and December 31, 2022, 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 three months ended March 31, 2023 2022 Net cash provided by operating activities $ 192,934 $ 70,141 Net cash used in investing activities (85,018) (17,888) Net cash used in financing activities (74,848) (14,045) Net increase in cash and cash equivalents $ 33,068 $ 38,208 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, stock-based compensation, amortization of debt issuance costs and debt discount, accretion of asset retirement obligations, mark-to-market (gains) losses on gas hedges and changes in net working capital. Net cash provided by operating activities was $192.9 million for the three months ended March 31, 2023, and was primarily attributed to net income of $182.3 million adjusted for depreciation and depletion expense of $37.2 million, deferred income tax expense of $29.1 million, stock based compensation expense of $7.7 million, accretion of asset retirement obligations of $0.9 million, amortization of debt issuance costs and debt discount of $0.7 million, non-cash mark-to-market gain on gas hedges of $0.5 million, and an increase in our net working capital of $69.0 million since December 31, 2022. The increase in our working capital was primarily driven by increases in accounts receivable and decreased accrued expenses and accounts payable offset partially by a decrease in inventories. The increase in trade accounts receivable reflects higher sales 25 volumes and the timing of sales and the decrease in inventories is due to greater sales volumes than production. The decrease in accrued expenses and accounts payable is due to the timing of payments. Net cash provided by operating activities was $70.1 million for the three months ended March 31, 2022, and was primarily attributed to the net income of $146.2 million adjusted for depreciation and depletion expense of $25.8 million, deferred income tax expense of $33.4 million, stock based compensation expense of $7.2 million, accretion of asset retirement obligations of $0.9 million, amortization of debt issuance costs and debt discount/premium, net of $0.5 million, mark-to-market loss on gas hedges of $11.7 million and a decrease in our net working capital of $159.0 million since December 31, 2021. The decrease in our working capital was primarily driven by decreases in accounts receivable, inventory and prepaid expenses and other receivables offset partially by decreases to accounts payable and accrued expenses and other current liabilities. The decrease to inventory was due to greater sales than production volume for the period. The decrease in trade accounts receivable and accounts payable is primarily driven by the timing of cash receipts and payments. Investing Activities Net cash used in investing activities was $85.0 million and $17.9 million for the three months ended March 31, 2023 and March 31, 2022, respectively, primarily due to purchases of property, plant and equipment and mine development. The current period also includes $2.4 million cash paid to acquire the remaining ownership interest in gas wells owned by an independent third party. The prior year period also includes net cash acquired in connection with the acquisition of the remaining 50% interest in BWM and BWT. Financing Activities Net cash used in financing activities was $74.8 million for the three months ended March 31, 2023, primarily due to the payment of regular quarterly and special dividends of $50.0 million, retirements of debt related to our senior notes of $8.0 million and principal repayments of finance lease obligations of $7.6 million. Net cash used in financing activities was $14.0 million for the three months ended March 31, 2022, primarily due to principal repayments of finance lease obligations of $7.2 million and the payment of dividends of $3.1 million. Stock Repurchase Program On March 26, 2019, the Board of Directors (the "Board") approved the Company's second stock repurchase program (the “New Stock Repurchase Program”) that authorizes repurchases of up to an aggregate of $70.0 million of the Company's outstanding common stock. The Company fully exhausted its previous stock repurchase program (the "First Stock Repurchase Program") of $40.0 million of its outstanding common stock. The New Stock Repurchase Program does not require the Company to repurchase a specific number of shares or have an expiration date. The New Stock Repurchase Program may be suspended or discontinued by the Board at any time without prior notice. Under the New Stock Repurchase Program, we may repurchase shares of our common stock from time to time, in amounts, at prices and at such times as we deem appropriate, subject to market and industry conditions, share price, regulatory requirements and other considerations as determined from time to time by us. Our repurchases may be executed using open market purchases or privately negotiated transactions in accordance with applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act and repurchases may be executed pursuant to Rule 10b5-1 under the Exchange Act. Repurchases will be subject to limitations in the ABL Facility and the Indenture. We intend to fund repurchases under the New Stock Repurchase Program from cash on hand and/or other sources of liquidity. On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law. The IRA contains a number of revisions to the Internal Revenue Code, including a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022. Therefore, any future repurchases of shares of our common stock are subject to the 1% excise tax. As of March 31, 2023, we have repurchased 500,000 shares for approximately $10.6 million, leaving approximately $59.4 million of share repurchases authorized under the Stock Repurchase Program. Capital Allocation Policy On May 17, 2017, the Board adopted the Capital Allocation Policy of paying a quarterly cash dividend of $0.05 per share. In February 2022, we announced that the Board approved an increase in the regular quarterly cash dividend by 20%, from $0.05 per share to $0.06 per share. In February 2023, we announced that the Board approved an increase in the regular 26 quarterly cash dividend by 17%, from $0.06 per share to $0.07 per share. Our strategy continues to be focused on optimizing our capital structure to improve returns to stockholders, through special cash dividends, while allowing flexibility for us to develop our strategic growth project Blue Creek. We intend on returning cash to stockholders in stronger price markets where we are generating significant amounts of cash flow, and less cash to stockholders during weaker markets. We also intend on using stock repurchases when there is no short- or long-term use for additional cash that will deliver meaningful value to stockholders. We have paid a regular quarterly cash dividend every quarter since the Board adopted the Capital Allocation Policy. The Capital Allocation Policy states the following: In addition to the regular quarterly dividend and to the extent that the Company generates excess cash that is beyond the then current requirements of the business, the Board may consider returning all or a portion of such excess cash to stockholders through a special dividend or implementation of a stock repurchase program. Any future dividends or stock repurchases will be at the discretion of the Board and subject to consideration of a number of factors, including business and market conditions, future financial performance and other strategic investment opportunities. The Company will also seek to optimize its capital structure to improve returns to stockholders while allowing flexibility for the Company to pursue selective strategic growth opportunities that can provide compelling stockholder returns. During the three months ended March 31, 2023, we have paid $50.0 million of regular quarterly and special cash dividends under the Capital Allocation Policy . Regular Quarterly Dividend On February 18, 2022, the Board declared a regular quarterly cash dividend of $0.06 per share, totaling approximately $3.1 million, which was paid on March 10, 2022, to stockholders of record as of the close of business on March 3, 2022. On February 9, 2023, the Board approved an increase in the regular quarterly cash dividend by 17% and declared a regular quarterly cash dividend of $0.07 per share, totaling approximately $3.6 million, which was paid on February 27, 2023 to stockholders of record as of the close of business on February 20, 2023. Special Dividend On February 13, 2023, the Board declared a special cash dividend of $0.88 per share, totaling approximately $46.4 million, which was paid on March 7, 2023 to stockholders of record as of the close of business on February 28, 2023. ABL Facility The ABL Facility will mature on December 6, 2026. As of March 31, 2023, no loans were outstanding under the ABL Facility and there were $8.7 million of letters of credit issued and outstanding under the ABL Facility. At March 31, 2023, we had $123.3 million of availability under the ABL Facility. Revolving loan (and letter of credit) availability under the ABL Facility is subject to a borrowing base, which at any time is equal to the sum of certain eligible billed and unbilled accounts, certain eligible inventory, certain eligible supplies inventory and qualified cash, in each case, subject to specified advance rates. The borrowing base availability is subject to certain reserves, which may be established by the agent in its reasonable credit discretion. The reserves may include rent reserves, lower of cost or market reserve, port charges reserves and any other reserves that the Agent determines in its reasonable credit judgment to the extent such reserves relate to conditions that could reasonably be expected to have an adverse effect on the value of the collateral included in the borrowing base. Borrowings under the ABL Facility bear interest at a rate equal to either (i) the Secured Overnight Financing Rate ("SOFR"), plus a credit adjustment spread, ranging currently from approximately 11 bps to 43 bps depending on the interest period selected by us, or (ii) an alternate base rate plus, in each case of the foregoing (i) and (ii), an applicable margin, which is determined based on the average availability of the commitments under the ABL Facility, ranging currently from 150 bps to 200 bps or 50 bps to 100 bps, respectively. In addition to paying interest on the outstanding borrowings under the ABL Facility, we are required to pay a fee in respect of unutilized commitments, which is based on the availability of the commitments under the ABL Facility, ranging from 25 bps to 37.5 bps. We are also required to pay a fee on amounts available to be drawn under outstanding letters of credit under the ABL Facility at a rate not in excess of 200 bps, and certain administrative fees. 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 27 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 March 31, 2023, 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 March 31, 2023. Senior Secured Notes On December 6, 2021, we issued $350.0 million in aggregate principal amount of 7.875% senior secured notes due 2028 (the “Notes”) at an initial price of 99.343% of their face amount. The Notes were issued to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to certain non-U.S. persons in transactions outside the United States in accordance with Regulation S under the Securities Act. We used the net proceeds of the offering of the Notes, together with cash on hand, to fund the redemption of all of our outstanding 8.00% senior secured notes due 2024 (the “Existing Notes”), including payment of the redemption premium in connection with such redemption. The Notes will accrue interest at a rate of 7.875% per year from December 6, 2021. Interest on the Notes will be payable on June 1 and December 1 of each year, commencing on June 1, 2022. The Notes will mature on December 1, 2028. During the three months ended March 31, 2023, we repurchased in the open market and extinguished approximately $8.0 million principal amount of our Notes. In connection with the extinguishment of our Notes, we recognized a loss on early extinguishment of debt of $0.1 million which is included in interest expense, net in the Condensed Statements of Operations. Capital Expenditures Our mining operations require investments to maintain, expand, upgrade or enhance our operations and to comply with environmental regulations. Maintaining and expanding mines and related infrastructure is capital intensive. Specifically, the exploration, permitting and development of met coal reserves, mining costs, the maintenance of machinery and equipment and compliance with applicable laws and regulations require ongoing capital expenditures. The cost of our capital expenditures are also impacted by inflation and any prolonged inflation could result in higher costs and decreased margins and earnings. While a significant amount of the capital expenditures required at our mines has been spent, we must continue to invest capital to maintain our production. In addition, any decisions to increase production at our mines and the development of the high-quality met coal recoverable reserves at Blue Creek could also affect our capital needs or cause future capital expenditures to be higher than in the past and/or higher than our estimates. To fund our capital expenditures, we may be required to use cash from our operations, incur debt or sell equity securities. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our current or future debt agreements, as well as by general economic conditions, contingencies and uncertainties, including as a result of the COVID-19 pandemic, that are beyond our control. Our capital expenditures were $68.2 million and $10.5 million for the three months ended March 31, 2023 and March 31, 2022, respectively. Capital expenditures for these periods are primarily related to investments required to develop Blue Creek and the portal facilities at Mine No. 4 as well as expenditures necessary to maintain our property, plant and equipment. Our deferred mine development costs were $14.5 million and $9.9 million for the three months ended March 31, 2023 and March 31, 2022, respectively, and relate to Mine No. 4 and the development of Blue Creek. Our capital spending is expected to range from $420.0 million to $450.0 million for the full year 2023, consisting of sustaining capital expenditures of approximately $95.0 to $105.0 million and discretionary capital expenditures of approximately $325.0 to $345.0 million for the development of Blue Creek and 4 North portal construction and payments on two extra sets of longwall shields. Our sustaining capital expenditures include expenditures related to longwall operations, continuous miners, new ventilation, and bleeder shafts. 28 Relaunch of Blue Creek On May 3, 2022, we announced the relaunch of the development of our Blue Creek mine, a strategic growth project that we expect will deliver significant future returns to stockholders. We believe that Blue Creek represents one of the few remaining untapped reserves of premium High Vol A met coal in the United States and that it has the potential to provide us with meaningful growth. We believe that the combination of a low production cost and the high quality of the High Vol A met coal mined from Blue Creek, assuming we achieve our expected price realizations, will generate some of the highest met coal margins in the U.S., generate strong investment returns for us and achieve a rapid payback of our investment across a range of met coal price environments. According to our third-party reserve report, and under the SEC's new rules governing mineral reserves, specifically subpart 1300 of Regulation S-K under the Modernization of Property Disclosures for Mining Registrants, Blue Creek has 68.2 million metric tons of recoverable reserves and 39.2 million metric tons of coal resources exclusive of reserves, which total 107.4 million metric tons. We have the ability to acquire adjacent reserves that would increase total reserves to 144 million metric tons. We expect that Blue Creek will have a mine life of more than 40 years assuming a single longwall operation. Our third-party reserve report also indicates that, once developed, Blue Creek will produce a premium High Vol A met coal that is characterized by low-sulfur and high coke strength after reaction. High Vol A met coal has traditionally priced at a discount to the Australian Premium Low Vol and the U.S. Low Vol coals; however, recently, it has been priced at or slightly above these coals. Warrior expects High Vol A coals will continue to become increasingly scarce as a result of Central Appalachian producers mining thinner and deeper reserves, which we expect will continue to support prices. This trend creates an opportunity for us to take advantage of favorable pricing dynamics driven by the declining supply of premium High Vol A met coal. Between the initial announcement and the announced relaunch of the development of our Blue Creek mine, inflation in steel and other commodity prices, including labor costs, have increased the total capital spending requirements of this project. However, following a review of the project, we identified potential production increases of approximately 10% and we believe that we can accelerate the start of longwall production by approximately fifteen months based on design modifications and stronger available liquidity to fund the project. Since the relaunch in May 2022, we have continued to see inflation in key materials and labor costs and are pursuing efforts in design to mitigate the actual impact on the total costs. If we are able to successfully develop Blue Creek, we expect that it will be a transformational investment for us. We expect that the new single longwall mine at Blue Creek will have the capacity to produce an average of 4.4 million metric tons per annum of premium High Vol A met coal over the first ten years of production, thereby increasing our annual production capacity by 60%. This, in turn, would expand our product portfolio to our global customers by allowing us to offer three premium HCCs from a single port location. Given these factors, and assuming we achieve expected price realizations, we believe that we will achieve some of the highest premium met coal margins in the United States. We expect to invest approximately $700.0 million over five years to develop Blue Creek. We expect to invest $250.0 to $265.0 million for the development of Blue Creek for the full year 2023. Based on the current schedule, we expect the first development tons from continuous miner units to occur in the third quarter of 2024 with the longwall scheduled to start up in the second quarter of 2026. Our strong cash flow generation and current available liquidity, as well as the ability to finance $120.0 to $130.0 million of capital expenditures through equipment leases, allows us to be opportunistic as we evaluate funding options for Blue Creek with the goal of maintaining an efficient and low-cost of capital. The estimated total costs, projected valuation amounts and anticipated schedule are as of December 2021. These amounts have not been updated since that date and are subject to material change over the projected five-year development period for the Blue Creek project. In particular, the impacts of inflation, supply chain lead time changes and project scope changes that have already occurred since December 2021 or may yet occur are not reflected in the total cost estimates, projected valuation and anticipated schedule and are subject to material change as the development of this project progresses over its projected five-year development period. Critical Accounting Policies The financial statements are prepared in conformity with GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses in the period presented. Management evaluates these estimates and assumptions on an ongoing basis, using historical experience, consultation with experts and other 29 methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from management’s estimates. Our most critical accounting estimates are those that are most important to the presentation of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These estimates are based upon management’s historical experience and on various other assumptions that we believe are reasonable under the circumstances. Changes in estimates used in these and other items could have a material impact on our financial statements. As of March 31, 2023, there have been no material changes to our critical accounting estimates as described in the "Critical Accounting Policies" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2022 Annual Report. Off-Balance Sheet Arrangements In the ordinary course of our business, we are required to provide surety bonds and letters of credit to provide financial assurance for certain transactions and business activities. Federal and state laws require us to obtain surety bonds or other acceptable security to secure payment of certain long-term obligations including mine closure or reclamation costs and other miscellaneous obligations. As of March 31, 2023, we had outstanding surety bonds and letters of credit with parties for post-mining reclamation at all of our U.S. mining operations totaling $41.2 million, for collateral for self-insured black lung related claims totaling $18.6 million and for miscellaneous purposes totaling $5.3 million . Recently Adopted Accounting Standards A summary of recently adopted accounting pronouncements is included in Note 2 of the "Notes to Condensed Financial Statements" in this Form 10-Q.