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WLT > SEC Filings for WLT > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for WALTER ENERGY, INC.


8-May-2013

Quarterly Report


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

The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2012.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report includes statements of our expectations, intentions, plans and beliefs that constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are intended to come within the safe harbor protection provided by those sections. These statements, which involve risks and uncertainties, relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable and may also relate to our future prospects, developments and business strategies. We have used the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," "should" and similar terms and phrases, including references to assumptions, in this report to identify forward-looking statements. These forward-looking statements are made based on expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control, that could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to:


unfavorable economic, financial and business conditions;


global economic crisis;


market conditions beyond our control;


prolonged decline in the price of coal;


decline in global coal or steel demand;


prolonged or dramatic shortages or difficulties in coal production;


our customers' refusal to honor or renew contracts;


our ability to collect payments from our customers;


weather patterns and conditions affecting production;


geological, equipment and other operational risks associated with mining;


availability of adequate skilled employees and other labor relations matters;


title defects preventing us from (or resulting in additional costs for) mining our mineral interests;


availability of licenses, permits, and other authorizations may be subject to challenges;


concentration of our mineral operations in a limited number of areas subjects us to risk;


a significant reduction of, or loss of purchases by our largest customer;


unavailability of cost-effective transportation for our coal;


availability, performance and costs of railroad, barge, truck and other transportation;


disruptions or delays at the port facilities used by the Company;


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risks associated with our reclamation and mine closure obligations; including failure to obtain or renew surety bonds;


inaccuracies in our estimates of coal reserves;


estimates concerning economically recoverable coal reserves;


significant cost increases and delays in the delivery of raw materials, mining equipment and purchased components;


failure to meet project development and expansion targets;


risks associated with operating in foreign jurisdictions;


significant increase in competitive pressures and foreign currency fluctuations;


new laws and regulations to reduce greenhouse gas emissions that impact the demand for our coal reserves;


greater than anticipated costs incurred for compliance with environmental liabilities or limitations on our ability to produce or sell coal;


future regulations that may increase our costs or limit our ability to produce coal;


risks related to our indebtedness and our ability to generate cash for our financial obligations;


inability to access needed capital;


events beyond our control may result in an event of default under one or more of our debt instruments;


costs related to our post-retirement benefit obligations and workers' compensation obligations;


downgrade in our credit rating;


adverse rulings in current or future litigation;


our ability to attract and retain key personnel;


our ability to identify suitable acquisition candidates to promote growth;


our ability to successfully integrate acquisitions;


volatility in the price of our common stock;


our ability to pay regular dividends to stockholders;


our exposure to indemnification obligations; and


other factors, including the other factors discussed in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2012 and as updated by any subsequent Form 10-Qs or other documents that are on file with the Securities and Exchange Commission.

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


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Overview

Walter Energy, Inc. ("Walter") is a leading producer and exporter of metallurgical coal for the global steel industry from underground and surface mines located in the United States, Canada and the United Kingdom. We also extract, process, market and/or possess mineral reserves of thermal coal and anthracite coal, as well as produce metallurgical coke and coal bed methane gas.

We currently operate 11 active coal mines, a coke plant and a coal bed methane extraction operation located throughout Alabama, West Virginia, Northeast British Columbia and the U.K. We operate our business through two principal business segments: U.S. Operations and Canadian and U.K. Operations. The U.S. Operations segment includes hard coking coal and thermal coal mines in both Alabama and West Virginia, a coke plant in Alabama, and coal bed methane extraction operations located in Alabama. The Canadian mining operations currently operate three surface metallurgical coal mines in Northeast British Columbia's coalfields (the Wolverine Mine, the Brule Mine, and the Willow Creek Mine). Our U.K. mining operation consists of an idled underground and an idled surface mine located in South Wales. The underground mine produced anthracite coal, which can be sold as a low-volatile PCI coal and the surface mine operations produced thermal coal.

Sales of metallurgical coal for the three months ended March 31, 2013 were 2.8 million metric tons and accounted for approximately 88% of our coal sales volume. Comparatively, for the three months ended March 31, 2012, sales of metallurgical coal were 2.4 million metric tons and accounted for approximately 75% of our coal sales volume. The increase in metallurgical coal sales volume as a percentage of our total coal sales volume in comparison to the prior year comparable quarter is consistent with our business strategy of increasing profitable, high quality metallurgical coal production and sales volume, as metallurgical coal generally sells for prices significantly higher than those for thermal coal.

For the three months ended March 31, 2013, sales of thermal coal were 387 thousand metric tons and accounted for approximately 12% of our coal sales volume. Comparatively, for the three months ended March 31, 2012, sales of thermal coal were 807 thousand metric tons and accounted for approximately 25% of our coal sales volume.

Industry Overview and Outlook

During 2012, the metallurgical coal market was adversely impacted by a combination of slowing Chinese demand growth, the weak economic environment in Europe and the recovery of Australian supply, all of which resulted in an oversupply of metallurgical coal. This oversupply of metallurgical coal put pressure on the selling price of metallurgical coal reducing the price to levels not experienced in several years. According to the World Steel Association Short Range Outlook for 2013 and 2014, steel use during 2012 increased at the slowest rate since 2009 when demand declined by 6.5%. In the early part of 2013, the key risks to the global economy surrounding the Eurozone crisis and the U.S. fiscal cliff issue have stabilized and a recovery in global steel demand is expected by the second half of 2013, led by emerging economies. However, a recent downward trend in short-term growth expectations for China's economy has added a level of uncertainty to the second half of 2013 pricing expectations. In 2014, the World Steel Association expects a further pickup in global steel demand with the developed economies increasingly contributing to the growth.

During the first quarter of 2013 supply-demand imbalance resulted in a benchmark for high quality metallurgical coal of $165. Although the benchmark for high quality coals decreased in the first quarter of 2013, our average realized metallurgical coal sales prices improved compared to the fourth quarter of 2012 due to higher sales volume of our premium low-volatile hard coking coal as a percentage of total metallurgical coal sales.


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We have seen evidence of stronger demand and improved pricing for the second quarter of 2013, as the second quarter benchmark price of hard coking coal is approximately $172 per metric ton and $141 per metric ton for low-volatile PCI. Although we anticipate a slight improvement in average realized metallurgical coal prices the second quarter of 2013, the latest estimates of China's economic short-term growth combined with ample supply to the market has driven the spot market prices down causing the third quarter of 2013 pricing to be less certain and the recovery in the global economy and metallurgical coal markets continues to be volatile and remain uncertain. Although the remainder of 2013 remains uncertain, according to the World Steel Association Short Range Outlook for 2013 and 2014, global steel use is expected to increase by 2.9% in 2013 and by 3.2% in 2014.

Our management strives to aggressively control costs and improve operating performance. During the three months ended March 31, 2013, we announced the planned curtailment of production at our Willow Creek mine in the Canadian and U.K. Operations segment. The Company also plans to close the operations at the North River mine in the U.S. Operations segment approximately nine months earlier than the previously expected end of mine life of 2014. The Willow Creek surface mine reserves primarily consist of metallurgical coal comprised of an estimated one-third hard coking coal and two-thirds low-volatile PCI. The North River mine reserves primarily consist of thermal coal. Due to the Willow Creek mine curtailment, for the three months ended March 31, 2013, we recognized severance charges of $4.4 million and contract termination costs of $3.0 million. In addition to the curtailment of these operations, in the previous twelve months the Company idled the development spending at the Aberpergwm mine in South Wales, idled the Gauley Eagle surface mine in West Virginia and curtailed production at its Maple underground mine in West Virginia. The curtailment and in some cases the idling of these higher-cost and lower-quality coal production mines allows us to focus on our higher margin and higher-quality coal mine operations. We believe these actions position us well as we look ahead to the remainder of 2013. We will continue to evaluate market conditions and will make further adjustments if market conditions warrant.

Despite the short-term challenges, we believe the long-term demand for metallurgical coal within all of our geographic markets is anticipated to be strong as industry projections indicate that global steelmaking will continue to require increasing amounts of high quality metallurgical coal, which is a limited commodity. As such, we are focused on the long-term metallurgical coal market as we anticipate strong long-term demand for the high-quality metallurgical coals we produce. Although we have responded to the short-term deterioration in market conditions by curtailing and in some cases idling higher-cost and lower-quality coal production mines, when the market rebounds from its current weakness, we have the capability to increase our metallurgical coal production to take advantage of such potential opportunities in this highly volatile market.

Even though we have taken steps to curtail and in some cases idle lower margin mines, we expect 2013 metallurgical coal production to be approximately 11.0 million tons as we expect to operate our higher margin hard coking coal mines at capacity.


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RESULTS OF OPERATIONS

                       Summary Operating Results for the
                   Three Months Ended March 31, 2013 and 2012

                                            For the three months ended March 31, 2013
                                                         Canadian
                                           U.S.          and U.K.
(in thousands)                          Operations      Operations     Other       Total
Sales                                   $   336,741     $   152,803   $     65   $ 489,609
Miscellaneous income (loss)                   2,484          (1,359 )      609       1,734

Revenues                                    339,225         151,444        674     491,343
Cost of sales (exclusive of
depreciation and depletion)                 269,548         151,371         15     420,934
Depreciation and depletion                   47,473          33,232        485      81,190
Selling, general and administrative          14,265           8,283      8,126      30,674
Postretirement benefits                      14,780               -        (55 )    14,725
Restructuring charges                           116           7,324          -       7,440

Operating loss                          $    (6,957 )   $   (48,766 ) $ (7,897 )   (63,620 )

Interest expense, net                                                              (51,968 )
Other income                                                                           105
Income tax benefit                                                                  66,039

Net loss                                                                         $ (49,444 )

                                            For the three months ended March 31, 2012
                                                         Canadian
                                           U.S.          and U.K.
(in thousands)                          Operations      Operations     Other       Total
Sales                                   $   446,118     $   180,830   $    350   $ 627,298
Miscellaneous income (loss)                   6,032          (2,479 )      712       4,265

Revenues                                    452,150         178,351      1,062     631,563
Cost of sales (exclusive of
depreciation and depletion)                 276,575         154,404        555     431,534
Depreciation and depletion                   42,142          24,136        215      66,493
Selling, general and administrative          13,127          13,366      9,754      36,247
Postretirement benefits                      13,325               -       (112 )    13,213

Operating income (loss)                 $   106,981     $   (13,555 ) $ (9,350 )    84,076

Interest expense, net                                                              (27,790 )
Other loss                                                                          (6,993 )
Income tax expense                                                                  (8,677 )

Net income                                                                       $  40,616


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                                          Dollar variance for the three months ended
                                                  March 31, 2013 versus 2012
                                                        Canadian
                                         U.S.           and U.K.
(in thousands)                        Operations       Operations     Other       Total
Sales                                 $   (109,377 )   $   (28,027 ) $   (285 ) $ (137,689 )
Miscellaneous income (loss)                 (3,548 )         1,120       (103 )     (2,531 )

Revenues                                  (112,925 )       (26,907 )     (388 )   (140,220 )
Cost of sales (exclusive of
depreciation and depletion)                 (7,027 )        (3,033 )     (540 )    (10,600 )
Depreciation and depletion                   5,331           9,096        270       14,697
Selling, general and
administrative                               1,138          (5,083 )   (1,628 )     (5,573 )
Postretirement benefits                      1,455               -         57        1,512
Restructuring charges                          116           7,324          -        7,440

Operating income (loss)               $   (113,938 )   $   (35,211 ) $  1,453     (147,696 )

Interest expense, net                                                              (24,178 )
Other income (loss)                                                                  7,098
Income tax benefit (expense)                                                        74,716

Net income (loss)                                                               $  (90,060 )

Summary of First Quarter Consolidated Results of Operations

Our net loss for the three months ended March 31, 2013 was $49.4 million, or $0.79 per diluted share, which compares to net income of $40.6 million, or $0.65 per diluted share for the three months ended March 31, 2012. The net loss is primarily due to a decrease of approximately 30% in the average selling price of metallurgical coal as a result of lower global metallurgical coal prices. Earnings before interest expense, interest income, income taxes, depreciation, depletion and amortization ("EBITDA") for the first quarter of 2013 decreased $125.9 million as compared to the first quarter of 2012 primarily due to the decrease in revenues as a result of lower pricing. A reconciliation of net income (loss) to EBITDA is presented in the Liquidity and Capital Resources section below.

Revenues for the three months ended March 31, 2013 were $491.3 million, representing a decrease of $140.2 million from $631.6 million in the same period in 2012. The decrease in revenues was primarily due to a decrease in the average selling price of metallurgical coal of $65.81, or approximately 30%, per ton due to weaker worldwide demand for metallurgical coal. The significant decrease in the average selling price was partially offset by an increase in metallurgical coal sales volumes of approximately 410,000 tons, for a 17% increase year over year.

Cost of sales, exclusive of depreciation and depletion, decreased $10.6 million to $420.9 million as compared to the first quarter of 2012 and was primarily the result of a significant improvement in per ton cost of sales for low-volatile PCI partially offset by an increase in sales volumes of metallurgical coal. The average cash cost of sales per ton of low-volatile PCI sold decreased approximately 40% from $207.70 in the first quarter of 2012 to $123.64 in the first quarter of 2013 primarily due to a concentrated effort throughout 2012 and the first quarter of 2013 to lower costs in our Canadian and U.K. Operations segment. The substantial improvement in low-volatile PCI costs reflects the results of our cost containment and restructuring initiatives.

Selling, general and administrative expense decreased $5.5 million or approximately 15% to $30.7 million, as compared to $36.2 million in the first quarter of 2012, primarily due to the reclassification of selling, general and administrative expenses as discussed in Note 1 of the "Notes to Condensed Consolidated Financial Statements" in this Form 10-Q combined with the results of our cost containment initiatives offset partially by proxy contest expenses.


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The $0.1 million other income for the three months ended March 31, 2013 and $7.0 million other loss for the three months ended March 31, 2012 was primarily attributable to gains and losses on the sale and re-measurement to fair value of equity investments.

We recognized an income tax benefit of $66.0 million for the three months ended March 31, 2013, compared to an income tax provision of $8.7 million for the three months ended March 31, 2012. For the three months ended March 31, 2013, we determined the current year income tax benefit for the Alabama operations using the actual year-to-date financial results as compared to the estimated annual effective tax rate method utilized in 2012. The current quarter income tax benefit for the Canada, U.K. and West Virginia operations is based upon an estimated annual effective tax rate method. The 2013 and 2012 effective tax rates also reflect the benefit of our Canadian and U.K. operations which are taxed at statutory rates lower than the U.S. rate, and the effects of tax losses in excess of losses related to foreign financing activities. The effective tax rates also reflect statutory depletion deductions in the Alabama mining operations.

The current and prior year period results also include the impact of factors discussed in the following segment analysis.

Segment Analysis

U.S. Operations

Hard coking coal sales totaled 1.7 million metric tons for the three months ended March 31, 2013, representing an increase of 11.1% compared to 1.5 million metric tons during the same period in 2012 due to continued demand for our high quality low and mid-volatility hard coking coal produced at the No. 4 and No. 7 mines. Our hard coking coal production totaled 1.7 million metric tons in the first quarter of 2013, a decrease of 11.7% from the same period in the prior year primarily as a result of lower production at the Alabama underground operations due to the operation of three longwall panels in our Alabama operations in the current quarter as opposed to the operation of four longwall panels during the three months ended March 31, 2012 and due to two longwall panel moves in the current quarter. The average selling price of hard coking coal in the first quarter of 2013 was $157.28 per metric ton, representing a 29.0% decrease from the average selling price of $221.22 per metric ton for the same period in 2012. The decrease in the average selling price of hard coking coal reflects the current depressed market conditions in the metallurgical coal market. The average cash cost of sales per ton of hard coking coal sold during the first quarter of 2013 was $109.76, a slight decrease from the average cash cost of sales per ton of hard coking coal sold during the first quarter of 2012 of $110.33.

Thermal coal sales and production totaled approximately 400 thousand metric tons for the three months ended March 31, 2013, a decrease of approximately 50.0% compared to approximately 800 thousand metric tons during the same period in 2012 primarily due to difficult mining conditions at the North River mine in Alabama and the idling of a thermal coal surface mine in the second quarter of 2012 due to lower demand and pricing. The average selling price of thermal coal for the first quarter of 2013 was $64.23 per metric ton, down 9.9% from the average selling price of $71.27 per metric ton for the same period in 2012, which was primarily attributable to the continued softening of demand for thermal coal. The average cash cost of sales per ton of thermal coal sold during the first quarter of 2013 was $90.34 compared to $78.87 for the same period in 2012 as a result of difficult mining conditions at our North River mine. In response to the continued deterioration in coal markets, we continue to take steps to reduce operations at lower margin mines and we plan to close our North River thermal coal mine in 2013 approximately nine months earlier than the previously expected end of mine life of 2014.


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Statistics for U.S. Operations are presented in the following table:

                                                                 Three months ended
                                                                     March 31,
                                                                  2013         2012
Tons of hard coking coal sold(1) (in thousands)                      1,706      1,535
Tons of hard coking coal produced (in thousands)                     1,738      1,969
Average hard coking coal selling price(1) (per metric ton)      $   157.28   $ 221.22
Average hard coking coal cash cost of sales(1) (per metric
ton)                                                            $   109.76   $ 110.33
Average hard coking coal cash cost of production (per metric
ton)                                                            $    78.11   $  71.68
Tons of thermal coal sold (in thousands)                               383        782
Tons of thermal coal produced (in thousands)                           434        816
Average thermal coal selling price (per metric ton)             $    64.23   $  71.27
Average thermal coal cash cost of sales (per metric ton)        $    90.34   $  78.87
Average thermal coal cash cost of production (per metric
ton)                                                            $    76.16   $  60.74


--------------------------------------------------------------------------------
    (1)
    Includes sales of both produced and purchased coal.

Our U.S. Operations segment reported revenues of $339.2 million for the three months ended March 31, 2013, representing a decrease of $112.9 million from the same period last year. The decrease in revenues during the first quarter of 2013 as compared to the first quarter of 2012 was primarily attributable to the decline in the average selling price of both hard coking and thermal coal, partially offset by higher hard coking coal sales volumes at the Alabama underground operations.

Cost of sales, exclusive of depreciation and depletion, of our U.S. . . .

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