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WLT > SEC Filings for WLT > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for WALTER ENERGY, INC.

Form 10-Q for WALTER ENERGY, INC.


7-Nov-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 filed 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 filed 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 with mineral reserves 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 within Alabama, West Virginia, Northeast British Columbia in Canada and South Wales in 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 metallurgical coal surface mines in Northeast British Columbia (the Wolverine Mine, the Brule Mine, and the Willow Creek). Although the Willow Creek mine is an active coal mine, we curtailed operations at this mine during the second quarter of 2013. The Willow Creek mine includes a processing plant and a load-out facility that serves our Brule mine and we are currently operating the active portions of the Willow Creek mine with Brule as a combined "Brazion Group". Our U.K. mining operation consists of an active underground mine located in South Wales. The active underground mine produces anthracite coal, which can be sold as a low-volatile PCI coal, and the curtailed surface mine operations produced thermal coal.

Sales of metallurgical coal for the three months ended September 30, 2013 were 2.8 million metric tons and accounted for approximately 84% of our coal sales volume. Comparatively, sales of metallurgical coal were 2.6 million metric tons and accounted for approximately 74% of our coal sales volume for the three months ended September 30, 2012. The continued increase in metallurgical coal sales volume as a percentage of our total coal sales volume is consistent with our business strategy of increasing more profitable, high quality metallurgical coal production and sales.

For the three months ended September 30, 2013, sales of thermal coal were 540 thousand metric tons and accounted for approximately 16% of our coal sales volume. Comparatively, sales of thermal coal were 937 thousand metric tons and accounted for approximately 26% of our coal sales volume for the three months ended September 30, 2012.

Industry Overview and Outlook

The metallurgical coal market continues to be oversupplied primarily from mines in Australia. Australia continues to benefit from a weaker Australian dollar. Although the metallurgical coal market remains oversupplied, there are signs of improvement, as Europe and China's economic environments have all seemed to stabilize and improve over the past six months and supply rationalization has resulted in the closing of higher cost mines in the U.S. and abroad. As a result, the 2013 fourth quarter benchmark pricing has increased.

The metallurgical coal market appears to have reached a floor in the third quarter of 2013 as the benchmark for high quality hard coking coal was approximately $145 per metric ton. During the third quarter, spot prices rebounded and surpassed the third quarter benchmark prices. This resulted in an improved benchmark price for the fourth quarter of $152 per metric ton for premium hard coking metallurgical coal and $120 per metric ton for low-volatile PCI coal. This represents an increase of $7 per metric ton for hard coking coal and $4 per metric ton for low-volatile PCI coal as compared with third quarter pricing.

The current economic environment could indicate that the benchmark price of premium hard coking coal and low-volatile PCI coal will continue to improve as global demand continues to improve. China's demand for metallurgical coal has been strong and China is set to surpass Japan as the largest


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importer of hard coking coal. In Japan, the country has benefited from a weaker currency and economic growth that has increased steel production for automotive and construction products. In Korea, although steel production has decreased in 2013, demand for our low-vol PCI product remains strong. As previously mentioned, there are also positive signs in Europe as the World Steel Association projects growth in steel consumption next year of over 2%, reversing the decline of the past two years. According to the World Steel Association Short Range Outlook released in October 2013, steel demand in 2013 is now forecasted to grow 3.1%, led by forecasted growth of 6.0% in demand in China. Global crude steel production for the month of September 2013 increased 6.1% as compared with September 2012 due to an 11% increase in China and a 5.5% increase in Japan, partially offset by an 8.7% decrease in steel production in South Korea. Steel production for the nine months ended September 30, 2013 amounted to 1.2 billion tons or an increase of 2.7% compared with the prior year comparable period. The World Steel Association expects a continued recovery in global steel demand in 2014 with developed economies returning to positive growth, more than offsetting slower forecasted growth expected in China.

We believe the improved benchmark price in the fourth quarter is sustainable and metallurgical coal prices should further improve in 2014 as long as there is continued strong demand in Asia and moderate improvements in other key markets. We also believe the long-term demand for metallurgical coal within all of our markets to be strong as industry projections indicate that global steelmaking will continue to require increasing amounts of high quality metallurgical coal. As such, we are focused on the long-term metallurgical coal market 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 mines, we have the capability to increase our metallurgical coal production when the market rebounds to take advantage of potential opportunities in this highly volatile market.

We expect our full year 2013 metallurgical coal production to be approximately 11.0 million metric tons. We also anticipate 2013 metallurgical coal sales to approximate production.

RESULTS OF OPERATIONS

                       Summary Operating Results for the
                 Three Months Ended September 30, 2013 and 2012

                                       For the three months ended September 30, 2013
                                                    Canadian
                                      U.S.          and U.K.
(in thousands)                     Operations      Operations        Other        Total
Sales                              $   332,522     $   113,415     $        -   $  445,937
Miscellaneous income (loss)              4,747           5,952           (840 )      9,859

Revenues                               337,269         119,367           (840 )    455,796
Cost of sales (exclusive of
depreciation and depletion)            265,879         129,432              -      395,311
Depreciation and depletion              53,060          29,383            543       82,986
Selling, general and
administrative                          11,576           8,574          1,723       21,873
Postretirement benefits                 14,762               -            (55 )     14,707
Restructuring and asset
impairment                                   -               -              -            -

Operating loss                     $    (8,008 )   $   (48,022 )   $   (3,051 )    (59,081 )

Interest expense, net                                                              (63,529 )
Other income, net                                                                    4,886
Income tax benefit                                                                  17,000

Net loss                                                                        $ (100,724 )


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                                       For the three months ended September 30, 2012
                                                    Canadian
                                      U.S.          and U.K.
(in thousands)                     Operations      Operations       Other        Total
Sales                              $   485,720     $    126,790   $       -   $    612,510
Miscellaneous income (loss)             (2,105 )          1,115         454           (536 )

Revenues                               483,615          127,905         454        611,974
Cost of sales (exclusive of
depreciation and depletion)            320,716          128,049           -        448,765
Depreciation and depletion              44,789           37,305         466         82,560
Selling, general and
administrative                          12,732            6,807      12,947         32,486
Postretirement benefits                 13,325                -        (112 )       13,213
Restructuring and asset
impairment                             114,281          992,434           -      1,106,715

Operating loss                     $   (22,228 )   $ (1,036,690 ) $ (12,847 )   (1,071,765 )

Interest expense, net                                                              (30,432 )
Other loss, net                                                                       (943 )
Income tax benefit                                                                  41,184

Net loss                                                                      $ (1,061,956 )

                                          Dollar variance for the three months ended
                                                September 30, 2013 versus 2012
                                                     Canadian
                                         U.S.        and U.K.
(in thousands)                        Operations    Operations      Other        Total
Sales                                 $  (153,198 )  $  (13,375 ) $       -   $   (166,573 )
Miscellaneous income (loss)                 6,852         4,837      (1,294 )       10,395

Revenues                                 (146,346 )      (8,538 )    (1,294 )     (156,178 )
Cost of sales (exclusive of
depreciation and depletion)               (54,837 )       1,383           -        (53,454 )
Depreciation and depletion                  8,271        (7,922 )        77            426
Selling, general and
administrative                             (1,156 )       1,767     (11,224 )      (10,613 )
Postretirement benefits                     1,437             -          57          1,494
Restructuring charges                    (114,281 )    (992,434 )         -     (1,106,715 )

Operating income (loss)               $    14,220    $  988,668   $   9,796      1,012,684

Interest expense, net                                                              (33,097 )
Other income (loss), net                                                             5,829
Income tax benefit                                                                 (24,184 )

Net loss                                                                      $    961,232

Summary of Third Quarter Consolidated Results of Operations

Our net loss for the three months ended September 30, 2013 was $100.7 million, or $1.61 per diluted share, which compares to a loss of $1.1 billion, or $16.97 per diluted share for the three months ended September 30, 2012. The net loss was primarily due to a decrease compared to the prior quarter of approximately 31.1% in the average selling price of our metallurgical coal due to excess supply within the global market. The third quarter of 2012 net loss included a goodwill impairment charge of approximately $1.1 billion, primarily related to the effects of the weakened metallurgical coal market on future expected results and a pre-tax charge of $40.0 million associated with the abandonment of a natural gas exploration project. Earnings before interest expense, interest income, income taxes, depreciation, depletion and amortization ("EBITDA") for the third quarter of 2013 increased


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$1.0 billion as compared with the third quarter of 2012 primarily due to the 2012 impairment charge previously mentioned. A reconciliation of net loss to EBITDA is presented in the Liquidity and Capital Resources section below.

Revenues for the three months ended September 30, 2013 were $455.8 million, representing a decrease of $156.2 million from $612.0 million for the same period in 2012. The decrease in revenues was primarily due to a decrease in the average selling price of our metallurgical coal of $59.46 per metric ton, or approximately 31.1%, due to weaker worldwide sales prices for metallurgical coal. The decrease in average metallurgical coal selling price was partially offset by an increase of 201 thousand metric tons in metallurgical coal sales volume in the third quarter of 2013 as compared with the prior year comparable period.

Cost of sales, exclusive of depreciation and depletion, for the three months ended September 30, 2013 decreased $53.5 million to $395.3 million as compared with $448.8 million in the third quarter of 2012 and was primarily the result of significant decreases in per metric ton cash cost of sales for our hard coking coal across all of our operations. The average cash cost of sales per metric ton of metallurgical coal sold decreased approximately 10.8% from $132.24 in the three months ended September 30, 2012 to $117.95 in the three months ended September 30, 2013. This was the result of a concerted effort throughout the year to lower costs across all operations and the substantial improvement reflects the results of our cost containment and restructuring initiatives.

Selling, general and administrative expense for the three months ended September 30, 2013 decreased $10.6 million, or approximately 32.7% to $21.9 million, as compared with $32.5 million in the third quarter of 2012. The decrease was attributable to our cost containment initiatives as well as the reclassification of approximately $5.9 million of selling, general and administrative expenses to operations they support as discussed in Note 1 of the "Notes to Condensed Consolidated Financial Statements."

Interest expense, net for the three months ended September 30, 2013 increased $33.1 million to $63.5 million, as compared with $30.4 million in the third quarter of 2012. The increase was driven by an increase in long-term debt of $492.2 million combined with an increase in interest rates on our 2011 Credit Agreement, higher interest rates on our outstanding notes, and additional interest expense related to the increase in our debt. The current quarter interest expense also includes accelerated amortization of $5.2 million related to the extinguishment of $250 million of Term Loan A debt upon the September 2013 issuance of the $450.0 million 9.50% senior secured notes.

The $5.8 million increase in other income for the three months ended September 30, 2013 as compared with the same period in 2012 was primarily attributable to a gain of $4.3 million realized upon the extinguishment of $250.0 million of our Term Loan A debt through a Dutch auction. The $0.9 million other loss for the three months ended September 30, 2012 was primarily attributable to the sale and re-measurement to fair value of certain equity investments.

We recognized an income tax benefit of $17.0 million for the three months ended September 30, 2013, compared with an income tax benefit of $41.2 million for the three months ended September 30, 2012 as the Company incurred pretax operating losses for both periods. The decrease in the Company's income tax benefit was primarily due to a non-cash deferred income tax charge of $13.7 million to reflect the revaluation of our Canadian and U.K. Operations deferred tax liabilities as the result of changes to the statutory corporate tax rates in each jurisdiction and a non-cash deferred income tax charge of $10.3 million related to foreign financing activities. 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 additional tax losses related to foreign financing activities. The effective tax rates also reflect statutory depletion deductions for the Alabama mining operations.

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


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Segment Analysis

U.S. Operations

Hard coking coal sales totaled 2.0 million metric tons for the three months ended September 30, 2013, representing an increase of 3.9% compared with 1.9 million metric tons for the same period in 2012. Our hard coking coal production totaled 2.1 million metric tons in the third quarter of 2013, representing an increase of 20.2% from the same period in the prior year due to increased production from our Alabama underground mines. The average selling price of hard coking coal in the third quarter of 2013 was $132.46 per metric ton, representing a 32.6% decrease from the average selling price of $196.41 per metric ton for the same period in 2012. The decrease in the average selling price of hard coking coal continues to reflect the pricing pressure being experienced in the metallurgical coal market. Our average cash cost of sales per metric ton of hard coking coal sold during the third quarter of 2013 was $105.26, a decrease of $13.65 from the average cash cost of sales per ton sold during the third quarter of 2012 of $118.91.

Thermal coal sales totaled approximately 540 thousand metric tons for the three months ended September 30, 2013, representing a decrease of approximately 41.7% compared with approximately 927 thousand metric tons sold during the same period in 2012, primarily due to a period of difficult mining conditions at our North River mine in Alabama and the idling of a West Virginia thermal coal surface mine in September 2012 due to lower demand and pricing. Our average selling price of thermal coal for the third quarter of 2013 was $65.04 per metric ton, remaining relatively consistent with our average selling price of $67.00 per metric ton for the same period in 2012. Thermal coal production totaled approximately 620 thousand metric tons in the third quarter of 2013, representing a decrease of approximately 23% compared with approximately 805 thousand metric tons produced during the same period in 2012. The average cash cost of sales per metric ton of thermal coal sold during the third quarter of 2013 was $53.44 per metric ton compared with $55.27 per metric ton for the same period in 2012. In response to the continued price deterioration in coal markets, in the second quarter of 2013 we renegotiated an unfavorably priced coal supply agreement to allow the accelerated closure of the North River mine, currently anticipated for the fourth quarter of 2013.

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

                                                                 Three months ended
                                                                   September 30,
                                                                  2013       2012(2)
Tons of hard coking coal sold(1) (in thousands)                      1,953      1,880
Tons of hard coking coal produced (in thousands)                     2,069      1,721
Average hard coking coal selling price(1) (per metric ton)      $   132.46   $ 196.41
Average hard coking coal cash cost of sales(1) (per metric
ton)                                                            $   105.26   $ 118.91
Average hard coking coal cash cost of production (per metric
ton)                                                            $    63.12   $  85.45
Tons of thermal coal sold (in thousands)                               540        927
Tons of thermal coal produced (in thousands)                           620        805
Average thermal coal selling price (per metric ton)             $    65.04   $  67.00
Average thermal coal cash cost of sales (per metric ton)        $    53.44   $  55.27
Average thermal coal cash cost of production (per metric
ton)                                                            $    34.77   $  57.21


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

    (2)
    Prior period balances have not been restated to reflect the

reclassification of selling, general and administrative expenses to costs of sales as discussed in Note 1 of the "Notes to Condensed Consolidated Financial Statements."


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