Tuesday, February 17, 2015

Walter Energy Q4 and 2014 Results

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Walter Energy reported a net loss in 2014 of $470.6 million , or $7.10 per diluted share, compared with a net loss of $359.0 million , or $5.74 per diluted share, in 2013. Included in the Company's financial results are non-cash income tax charges and credits, restructuring and asset impairment costs, transportation take-or-pay costs, gains on the early extinguishment of debt and other items. Excluding these items, the adjusted net loss for 2014 was $449.8 million , or $6.79 per diluted share. The adjusted net loss for 2013 totaled $237.3 million, or $3.79 per diluted share.

Walter Energy reported a net loss of $128.1 million , or $1.83 per diluted share, in the fourth quarter of 2014 compared with a net loss of $174.3 million , or $2.79 per diluted share, in the fourth quarter of 2013. Adjusted net loss for the fourth quarter of 2014 was $137.6 million , or $1.97 per diluted share, as compared with an adjusted net loss for the prior-year period of $63.6 million , or $1.02 per diluted share. A reconciliation of net loss to adjusted net loss is provided in the Company’s “Reconciliation of Non-GAAP Financial Measures” included with this release.

Consolidated revenues totaled $285.6 million , compared with $472.0 million in the fourth quarter of 2013, reflecting a decrease in average met coal selling prices of $25.19 per metric ton (“MT”) and a decline in met coal sales of 0.9 million metric tons (“MMTs”). Fourth quarter results also reflected a reduction in met coal cash cost of sales of $6.15 per ton and a 23% reduction in selling, general and administrative (“SG&A”) expenses.

Cost of sales in the fourth quarter of 2014 includes costs associated with idling the Company's Canadian mining operations of $8.5 million , representing idle mine costs of $6.5 million and transportation take-or-pay charges of $2.0 million , and $7.1 million of lower of cost or market charges as a result of changes in estimates, which includes haulage and washing costs associated with inventories at our Canadian operations.

In November 2014, the Company issued 3.9 million shares of common stock and paid $5.2 million in cash in exchange for $52.0 million principal amount of 9.875% Senior Notes due 2020, resulting in a net gain of $32.8 million. This debt retirement will reduce annual interest expense by approximately $5.1 million.

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the quarter was a loss of $15.0 million , and adjusted EBITDA was a loss of $24.3 million , compared with EBITDA of $59.9 million and adjusted EBITDA of $59.2 million for the fourth quarter 2013. A reconciliation of net loss to EBITDA and adjusted EBITDA is provided in the Company’s “Reconciliation of Non-GAAP Financial Measures” included with this release.
 
Met coal sales volumes, including both hard coking coal (“HCC”) and low-volatility (“low-vol”) pulverized coal injection product (“PCI”), totaled 2.0 MMTs, compared with 2.9 MMTs in the prior-year comparable quarter. The decline in met coal sales volumes was primarily due to reduced sales of coal from the idled Canadian mining operations.

HCC sales volumes totaled 1.8 MMTs, compared with 2.4 MMTs in 2013. The average selling price for HCC was $109.92 per MT, down from $137.39 per MT in 2013.

Low-vol PCI sales volumes totaled 0.2 MMTs, down 0.4 MMTs from the prior-year comparable quarter. The selling price for low-vol PCI averaged $99.64 per MT, compared with $118.63 per MT in 2013.
 
Met coal cash cost of sales for the quarter averaged $101.37 per MT, an improvement of $6.15 per MT, or 5.7% , compared with 2013. Performance in the quarter was driven primarily by continued reductions in mining costs, partially offset by the impact of higher than expected costs related to long wall moves.

Full-year cash cost of sales in the Company's underground Alabama operations averaged $94.92 per MT, slightly better than the previous full-year 2014 target of $96.00 per MT.

Met coal production was 1.8 MMTs in the quarter, compared with 3.2 MMTs in the prior-year period, with the decrease primarily resulting from the idling of the Canadian mining operations. Met coal production in Canada for the prior-year quarter totaled 1.0 MMTs. Production volumes were also lower in the Company's Alabama underground operation due to the unfavorable effect of longwall moves in the current-year-period.

Met coal cash cost of production averaged $72.51 per MT, compared with $68.02 per MT in the prior-year comparable quarter, with the increase in the current-year period primarily the result of increased costs due to longwall moves.

SG&A expenses totaled $15.6 million , compared with $20.3 million in the prior-year quarter reflecting our continued focus on cost reduction.

Interest expense, net totaled $77.8 million compared with $64.3 million in the prior-year period. The increase was primarily due to an increase in long-term debt and higher interest rates.

Capital expenditures totaled $23.3 million , compared with $45.2 million in the prior-year period, which reflects the Company’s continued focus on disciplined spending in light of ongoing weak market conditions. Capital expenditures for the full-year 2014 totaled $93.0 million , compared with $153.9 million for 2013.

Available liquidity was $481.2 million at the end of 2014, consisting of cash and cash equivalents of $468.5 million plus $12.7 million in availability under the Company’s $76.9 million revolving credit facilities, net of outstanding letters of credit of $64.2 million.

The Company expects met coal sales to total 8.5 to 9.0 MMTs in 2015. Capital expenditures in 2015 are expected to be in line with 2014, and the Company expects to further reduce SG&A expenses by 10%. Cash interest expense is expected to approximate $265 million for the year.
Starting with $468.5 million in cash and subtracting $265 million interest and $90 million capex in 2015 would leave only $113.5 million cash by the end of the year. If you assume that they sell coal at about a cash cost breakeven, $70 million in SG&A expense would bring cash down to $43.5 million by end of year. Of course, they are generating some cash from working capital (inventory and A/R liquidation), but it does look like by the end of this year the cash situation is going to seem very tight. In particular, people will be wondering how they are going to pay 2016s gigantic interest bill. This is why the current yield on the bonds is 60 percent.

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