Premium metallurgical coal producer and exporter Walter Energy Inc. (WLT) announced its operating earnings for the third-quarter 2010 of $2.57 per share, slightly below the Zacks Consensus Estimate of $2.59. However, the company’s results were better than 45 cents earned in the year-ago quarter.

Revenue

Walter Energy’s total revenue in third-quarter 2010 of $464.3 million was below the Zacks Consensus Estimate of $482 million. Revenues, however, increased 67% from $278.3 million in the year-ago period, due to higher coking coal pricing in the underground mining segment.

Segment-wise Results

Underground Mining: Total segment revenue for third-quarter 2010 was $404.2 million versus $233.1 million in third-quarter 2009, reflecting a growth of 73.4%. The growth was due to significantly higher contract pricing compared with last year.

Coking coal sales during the quarter totaled 1.9 million tons, almost in sync with tons sold in the prior year period. The average selling price per short ton FOB port increased 69.8% to $206.62 compared with $121.66 per ton in the prior-year period.

The natural gas sold was 3.5 billion cubic feet (bcf) of gas at an average price of $4.61 per thousand cubic feet versus 1.5 bcf at an average price of $3.29 per thousand cubic feet in the prior-year period.

Surface Mining: Total segment revenue for third-quarter 2010 was $34.2 million versus $25.2 million in the year-ago quarter, reflecting a growth of 35.5%. The growth was driven by increased sales volume and pricing.

Surface mining sales during the quarter improved by 21.9% year over year to 368,000 tons mainly due to coal blending opportunities and inventory availability.

Walter Coke: Total segment revenue for third-quarter 2010 was $47.9 million versus $23.3 million last year, reflecting a growth of 105.6%. The growth was driven by improved metallurgical coke sales volumes and pricing over the year-ago period.

Metallurgical coke sold in the quarter was 111,000 tons at an average price of $385.04 per ton versus 38,000 tons at an average price of $361.95 per ton in the prior-year period. The year-over-year growth in volume as well as pricing was driven by a strengthening in the U.S. steel markets.

Other and Intercorporate Elimination: The revenue from “Other” was $0.8 million in the third quarter of 2010 versus $0.9 million in the year-ago period.

Intercorpoarte elimination was $22.8 million for the third-quarter 2010 versus $4.2 million in the year-ago period.

Operational Update

Operating expenses during the quarter increased by 8.7% to $256.5 million from $236.0 million in the year-ago period. However, as a percentage of total revenue, operating expenses during the reported quarter decreased significantly year over year.

The positive impact of the relative decline in operating expenses as a percentage of revenue was reflected in the year-over-year growth in operating income. Operating income in the quarter was $207.8 million versus $42.4 million in the third quarter of 2009, reflecting a substantial growth of 390.1%.

Interest expenses at the end of the third-quarter 2010 were $4.2 million versus $4.8 million in the prior-year period, down 12.5% year over year.  The cut in expenses reflected a decline in long-term debt levels over the past one year.

Financial Update

Walter Energy’s liquidity at quarter-end was $458.2 million, which included $218.4 million in cash and $239.8 million available under its credit facility.

Capital expenditures were $35.2 million in the quarter compared with $14.9 million a year ago. During the quarter, sums of $29.8 million, $4.8 million, $0.5 million and $0.04 million were spent on Underground Mining, Surface Mining, Walter Coke and Other segments, respectively.

Dividend

On October 20, 2010, the board of directors of Walter Energy announced a quarterly dividend of 12.5 cents per share. The dividend will be payable on December 3, 2010, to shareholders of record as on November 5, 2010.

Guidance

Walter Energy expects coal sales from the Underground Mining segment (coking coal) in the range of 1.7–2.0 million tons, in the fourth quarter, with an expected average operating income per ton in the range of $84–$87.

Walter Energy expects coal sales from the Surface Mining segment in the range 382,000–403,000 tons, in the fourth quarter, with an expected average operating income per ton in the range of $13 to $17.

Walter Energy expects coal sales from Walter Coke (coking coke) in the range 85,000–88,000 tons, in the fourth quarter, with an expected average operating income per ton in the range of $44 to $58.

For 2011, the company has re-affirmed its previous coking coal production and sales expectation of 8.5 – 9.0 million tons.

 
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