Premium metallurgical coal producer and exporter Walter Energy Inc. (WLT) announced its operating results for the fourth quarter and full-year 2010. Walter Energy’s operating earnings for the fourth-quarter came in at $1.72 per share, way below the Zacks Consensus Estimate of $1.98. However, the company’s results were better than 54 cents earned in the year-ago quarter.
Full-year 2010 earnings at Walter Energy were $7.18 per share, which lagged the Zacks Consensus Estimate of $7.61 and outperformed the full-year 2009 earnings of $2.55.
Positive year-over-year comparisons for both the quarter and the full year were a result of robust revenues earned during the periods.
Revenues
Walter Energy’s total revenue of $400.8 million in the fourth quarter was below the Zacks Consensus Estimate of $435 million. Revenues, however, increased 70% from $236.3 million in the year-ago period, due to higher coking coal sales volumes and pricing in the underground mining segment.
For full-year 2010, total revenue was $1.59 billion, below the Zacks Consensus Estimate of $1.66 billion but better than the year-ago revenue of $966.8 million.
Segment Results in Synopsis
Underground Mining: Total segment revenue for fourth-quarter 2010 was $350.9 million versus $179.7 million in fourth-quarter 2009, reflecting a growth of 95%. The growth was due to significantly higher contract pricing along with higher sales volumes compared with last year. Full-year 2010 segment revenue totaled $1.3 billion, up 71% from 2009 levels.
Coking coal volumes sold during the quarter increased 25.1% compared to the year-ago period to 1.7 million tons, with an average selling price of $196.47 per short ton (up 55.3% from last year). In 2010, the company sold a record 7.2 million tons of coking coal at $180.80 per short ton, recording an 18% growth in volumes and a 45% growth in realized prices.
The natural gas sold was 3.4 billion cubic feet (Bcf) at an average price of $4.06 per thousand cubic feet (Mcf) versus 1.4 Bcf sold at an average price of $4.09 per Mcf in the prior-year period. The increased volumes in the quarter resulted from the company’s Walter Black Warrior Basin natural gas subsidiary acquired in May 2010. Natural gas sold in 2010 totaled 10.6 Bcf at an average price of $4.52 per Mcf.
Surface Mining: Total segment revenue for fourth-quarter 2010 was $35.9 million versus $26.0 million in the year-ago quarter, reflecting a growth of 38%. The growth was driven by increased sales volume and pricing. Net segment revenue in 2010 was $133.7 million, up 34% from last year.
Surface mining sales during the quarter improved by 6.7% year over year to 348,000 tons mainly due to incremental sales growth from the recently opened Reid School metallurgical coal mine. Segmental sales volumes in 2010 were 1.5 million tons compared to 1.2 million tons in 2009.
Walter Coke: Total segment revenue for fourth-quarter 2010 was $37.9 million versus $37.4 million last year, reflecting a growth of 1.3%. The growth was driven primarily by price increases and improved plant efficiencies.
Metallurgical coke sold in the quarter was 87,000 tons at an average price of $381.96 versus 88,000 tons at an average price of $312.11 in the prior-year period. Pricing increases were primarily attributable to improved demand in the domestic automotive and steel markets. Total coke sales in 2010 increased 117% from last year to 434,000 tons at an average price of $372.76 (up 13.4%).
Other and Intercorporate Elimination: The revenue from “Other” was $846,000 in the fourth quarter versus $430,000 in the year-ago period. For the full-year segment revenue totaled $3.0 million versus $2.5 million last year.
Intercorporate Adjustment was $24.8 million for the fourth-quarter 2010 versus $7.2 million in the year-ago period. For the full-year total adjustments were $80.7 million compared to $23.8 million in 2009.
Financial Update
Walter Energy’s liquidity as of December 31, 2010, was $533.5 million, which included $293.4 million in cash and $240.1 million available under its credit facility.
Capital expenditures were $77.2 million in the fourth quarter, reaching $157.5 million in 2010. During the quarter, sums of $65.9 million, $5.6 million, $4.7 million and $1.0 million were spent on Underground Mining, Surface Mining, Walter Coke and Other segments, respectively.
Walter Energy said that it continues to make excellent progress on the acquisition of Western Coal, which will make the company a leading, publicly traded ‘pure play’ coking coal producer in the world. The company expects to close the acquisition on April 1, 2011.
Also, the company recently acquired a river terminal facility at the Port of Mobile to ensure unconstrained shipping capacity for its long-term coking coal production plans from the mines in Alabama.
Guidance
Given the continued difficult mining conditions at the company’s underground mines and the planned first quarter 2011 longwall moves, Walter Energy expects coal sales from the Underground Mining segment (coking coal) in the range of 1.6 – 1.8 million tons, in the first quarter of 2011, with an expected average operating income per ton in the range of $83 – $87.
Given the loss of production through mid-February 2011, the company estimates full-year 2011 coking coal sales to be about 8.5 million tons, with up to 500,000 tons of the total coming from purchased coal opportunities.
Walter Energy expects coal sales from the Surface Mining segment in the range of 406,000 – 426,000 tons in the first quarter, with an expected average operating income per ton in the range of $10 to $14.
Walter Energy expects coal sales from Walter Coke (coking coke) in the range of 99,000 – 101,000 tons in the first quarter, with an expected average operating income per ton in the range of $41 to $51.
Our View
Going forward, we expect Walter Energy to gain from the completion of the Western Coal acquisition in April 2011. We expect the merged company to gain from the synergies of elevated production and reserves along with the anticipated strength in the global metallurgical coal markets. We also note that Walter has positioned itself to increase exports to Asian steel makers through the acquisition of the new Mobile port.
Walter Energy’s rivals are Arch Coal Inc. (ACI) and Massey Energy Co. (MEE). Compared to its peers, the net margin of the company fared better in the trailing twelve months.
Walter Energy currently retains a Zacks #3 Rank (short-term Hold rating). We maintain our long-tern Neutral rating on the stock.
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