Walter Energy Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.20.14 | About: Walter Energy, (WLT)

Walter Energy (NYSE:WLT)

Q4 2013 Earnings Call

February 20, 2014 10:00 am ET

Executives

Mark H. Tubb - Former Vice President of Investor Relations & Strategic Planning

Walter J. Scheller - Chief Executive Officer, Director, Member of Executive Committee and Member of Special Committee

William G. Harvey - Chief Financial Officer and Senior Vice President

Richard Allen Donnelly - President of Jim Walter Resources, Inc.

Michael T. Madden - Chief Commercial Officer and Senior Vice President

Analysts

Evan L. Kurtz - Morgan Stanley, Research Division

Matthew Vittorioso - Barclays Capital, Research Division

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Jeffrey Cramer

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

Caleb M.J. Dorfman - Simmons & Company International, Research Division

Justine Fisher - Goldman Sachs Group Inc., Research Division

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Brian Yu - Citigroup Inc, Research Division

Paul S. Forward - Stifel, Nicolaus & Company, Incorporated, Research Division

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Lance Ettus - Tuohy Brothers Investment Research, Inc.

Lucas Pipes - Brean Capital LLC, Research Division

Matthew Farwell - Imperial Capital, LLC, Research Division

Frank Duplak

David A. Lipschitz - CLSA Limited, Research Division

Operator

Welcome to the Walter Energy's Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions]

I would like to turn the meeting over now to Mr. Mark Tubb, Vice President of Investor Relations. Sir, please begin.

Mark H. Tubb

Thank you, Wendy. Good morning, everyone, and thank you for joining us today. This morning's call is being webcast and a recording will be available on our website for up to 30 days. On this call, we may refer to forward-looking statements made in today's press release, and we may make those and other forward-looking statements during this call. For more information regarding the risks associated with forward-looking statements, please refer to the company's SEC filings.

Joining me on today's call are Walter Energy's CEO, Walt Scheller; CFO, Bill Harvey; and other members of management who will be available for Q&A.

At this time, I'll turn the call over to Walt.

Walter J. Scheller

Thanks, Mark. Good morning, everyone, and thank you for joining us. I think the takeaways from our Q4 and full year results are these: costs were lower, production was higher, sales were higher. Safety performance also improved, and we did all of this in the face of a very difficult market and met coal producers.

A year ago, I told you we were going to focus on controlling the controllables. And as we look back on our accomplishments over the past year, I believe we did just that. We continued to show improvements in safety performance in 2013. In addition, several of our Alabama mine rescue teams and individuals earned national recognition for excellence. In our Brule operation, we went the entire year without a reportable incident.

In terms of costs, we reduced cash costs of production on a per ton basis approximately 18%, better than our target of 15%. We also reached our target of reducing SG&A expenses to a run rate of $80 million annually, cutting SG&A by over $33 million compared to 2012. We continue to respond to weak met coal pricing by curtailing production and restricting spending across the company.

Despite cutting production at several of our mines in 2013, we grew met coal production and productivity improvements of 11.6 million metric tons, a slight increase over 2012 and higher than the 11 million tons targeted. The company sold just under 11 million tons of met coal in 2013, more than 5% higher than 2012. On the balance sheet, we took actions to improve our debt maturity profile and enhance our liquidity position. Our fourth quarter performance illustrates more of the same, our mines ran extremely well throughout the quarter with our met coal operations posting higher volumes compared to the fourth quarter of 2012. Production increases for the quarter were led by our Alabama low-end mid vol mines, with Mines 4 and 7 increasing production, a combined 660,000 tons compared to last year. Notwithstanding the fact that we had 2 longwall moves in Q4 of 2013 versus 1 longwall move in Q4 of 2012. So the Q4 production in the U.S. was 2.2 million tons, including over 1.2 million tons from Mine 7 and about 800,000 tons from Mine 4.

Fourth quarter production also improved in Canada, the volumes totaling 1 million tons on solid production performance in both Wolverine and Brazion. Our coke, gas and thermal businesses have continued to perform well. We completed production at our North River thermal mine in the fourth quarter as planned. I want to acknowledge and thank all of the employees at North River for the outstanding job they've done over the past several months, dealing with some very challenging circumstances, as they work to bring the operation to completion.

To sum up the quarter, our continued execution in reducing production costs and SG&A helped drive EBITDA higher by more than $50 million compared to last year, and that's in the face of a $14 per ton decline in average realized met coal prices, which by itself, would've produced EBITDA by $40 million.

Walter Energy finished 2013 a leaner, stronger company. We continue to focus on reducing costs and improving our balance sheet and financial condition. In addition, operating safety remains -- safely, remains our most important priority and guides every decision and every action throughout our company. Remaining focused on these areas puts us in the best position to benefit when the global coal market recovers.

I'll talk more about the operations later. But first, Bill will discuss our financial results.

William G. Harvey

Thanks, Walt. For the full year 2013, our net loss was $359 million, driven by $140 million valuation allowance reported against our deferred income tax assets in the fourth quarter. In the fourth quarter, we reported a net loss of $174 million or a loss of $2.79 per share. As previously mentioned, this was impacted by $140 million increase in the deferred tax asset valuation allowance. This allowance was due to the short-term time horizon of the testing period and the currently low met coal pricing. Excluding this item, our net loss for the quarter would have been $34 million.

For the quarter, EBITDA was $60 million. EBITDA, as reported under our credit agreement, was approximately $80 million, as it excludes certain noncash and nonrecurring items. Fourth quarter revenues were $471 million, a slight increase from the $456 million in the third quarter. Our cost performance in the fourth quarter was strong and in line with our expectations. Average cash cost of production for met coal was roughly $10 per ton less than the third quarter and $26 per ton lower than the fourth quarter of 2012. Compared to the third quarter of 2013, our met coal average cash costs to sales improved by $10 per ton and has improved $28 per ton compared to the fourth quarter of 2012. This was a result of strong cost performance across our operation.

I should note that at our Wolverine mine it was negatively impacted in the quarter by an $11 per ton onetime supplies and material direct charge to cost of sales. SG&A for the current quarter was $20 million. We have reached our annualized run rate of $80 million, and in 2014, we expect to modestly lower the SG&A number further.

Our coke and gas businesses improved slightly from the third quarter. The overall improvement in unit production cost and SG&A, compared to the third quarter, totaled some $35 million of savings, depreciation and depletion of $79 million at the level we previously indicated. We expect depreciation and depletion to run in the $70 million to $75 million range now that the North River mine has been closed.

Interest expense for the fourth quarter was $64 million, including $10 million of noncash items, which includes the amortization of debt issuance charge. We recorded a tax charge for the quarter of $90 million primarily as a result of increasing the deferred tax income valuation allowance. The increase in this allowance will have no impact on either Walter's future operating performance or cash generation. As the met coal market improves, we believe we'll be able to place greater weight on our long-term earnings forecast, which would support the realization from an accounting perspective of all our deferred tax assets. We do not expect to lose any tax attributes, and on a cash basis, do not expect to be paying meaningful income taxes in the near term. Accounts receivables decreased by some $24 million as a result of tightening our days sales outstanding from 33 days to 29 days and the reclassification of a $10.3 million income tax receivable.

Our capital spending in the quarter was $45 million and was $154 million for 2013 compared to $391 million for 2012, a decrease of some 60%. For the full year 2014, we are focused on maintaining capital spending under $150 million. We ended the quarter with liquidity of $587 million, consisting of cash and cash equivalents of $261 million, plus $326 million of availability under our revolving credit facility.

Our company remains committed to maintaining and improving its financial flexibility. In the current quarter, we are not subject to a financial covenant test under our credit facility. However, as of June 30, 2014, we'll be subject to a net secured debt to EBITDA test. If this covenant was in place at the end of the fourth quarter, we would have been in compliance.

We have targeted asset sale proceeds of $250 million, either through divestitures or joint ventures as appropriate. We have made progress on this initiative, however, our timing to reach targeted proceeds has been impacted by the current met coal market. We remain focused on reaching our goal. Our strong production costs in the fourth quarter and our expectations of continued strong cost performance makes us optimistic that although pricing in the met coal market has been volatile, we do expect to hold in place and improve the operational improvements we've made.

I'll now turn it back to Walt.

Walter J. Scheller

Thanks, Bill. Looking ahead to 2014 and our operations, we expect production in our met coal mines to remain strong, with production estimated at 11 million to 12 million tons. Mine 7 is expected to produce between 4.8 million and 5 million metric tons. Mine 4 is expected to produce between 2.4 million and 2.7 million tons in 2014.

As we've noted in recent quarters, Mine No. 4 has transitioned the longer and wider panels, driving higher volumes and lower costs on a per ton basis. In Canada, production at our Wolverine mine is expected to be 1.7 million to 1.9 million tons in 2014. And our Brazion operation is expected to generate 1.5 million to 1.7 million tons. Our remaining met coal operations in Alabama and West Virginia are expected to produce around 500,000 tons in 2014.

Turning to our thermal coal operations with the closure of our North River mine at the end of 2013, thermal coal production will decline to around 300,000 tons in 2014. Our focus is to ensure each mine has in place cost structures, so that they can be cash flow positive in the current environment, and we will curtail production further if necessary.

Met coal sales volumes for 2014 are expected to modestly exceed 2013 tons sold, and we expect to sell more than we produce, reflecting a reduction of low-vol PCI inventory in Canada.

Looking at the current met coal market, demand has remained steady. However, continued oversupply of met coal has kept pressure on prices. We expect sales volumes for the first quarter to exceed the fourth quarter of 2013. The pricing has weakened with the first quarter benchmark price declining versus Q4.

Turning to the market. Global met coal supply was impacted in 2013 by additional production from Australia. Global met coal demand has continued to modestly grow and is projected to continue. Global steel demand grew by 3.5% last year and is expected to grow an additional 3.3% this year. In line with a projected steel demand growth, demand for metallurgical coal is expected to grow by close to 30 million tons.

Looking at the markets we serve. Steel consumption in Europe is expected to grow a little over 2% according to the World Steel Association, following a 2% decline in 2013 and a 9.5% decline in 2012. Production estimates for Europe are still below historical levels, but they're trending in the right direction. We continue to see Brazil stabilizing, and current projections show met coal demand improving slightly in 2014.

In Japan, steel production in 2013 increased 3% to 110 million tons, driven by post-earthquake construction and a strong automotive industry. Steel output in South Korea declined about 4% in 2013. However, production began to turn around in late September, with the start-up of Hyundai's third blast furnace. Although China is not directly an important market for us, China is the primary unknown variable in the global demand equation. After posting steel production growth of 10% in 2013, the speculation is that China's growth could moderate. Yet over the past 4 years, China's consistently posted strong coke and coal import numbers.

In terms of short-term supply, availability of met coal is abundant at this time. However, following the significant growth in supply we saw in 2013, supply growth is expected to slow, especially as mines that ramped up last year reached capacity and as producers limit capital spending. In addition, given the prolonged period of significant pricing pressure, we believe we'll continue to see further production cuts. Irrespective of the market, I'll say again that Walter Energy is committed to making our operations safer and more productive and our company stronger. And while our bottom line currently reflects continued low met coal prices, I believe the global markets will improve. And when they do, Walter Energy will again be positioned to create significant value for our shareholders.

This concludes our prepared remarks. I'll now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question today is from Evan Kurtz with Morgan Stanley.

Evan L. Kurtz - Morgan Stanley, Research Division

I was hoping you could maybe delve into that a little bit more actually. You'd always kind of said that long term you had hoped to get to 100 at 7 and maybe kind of the 110-ish region at 4, and you've obviously gone way below that. What happened? How sustainable is that? Maybe you can just provide some more color there?

Walter J. Scheller

Rich Donnelly, the President of our Alabama operations, is with us. So I'll ask Rich to address that.

Richard Allen Donnelly

Evan, just to touch on both of them. I think at 7 Mine what happened was the mines produced very well. The longwalls produced a little more than we expected them to. So overall, our tons were up. The guys at the mines are working hard to control costs, and I think we've seen a lot of the growth [ph] there. So I would expect the cost at 7 to remain around 100, maybe a little bit lower than 100 on our cash cost to sell. At 4 Mine, as we've been talking about for several calls now, as we transition into wider longwall faces and into longer panels, we'll see production improve there. So we began that last year. We'll continue it this year. And I'd expect though the cost at 4, it's probably be down around 100 mark, maybe plus or minus $1 or $2. I think those numbers are sustainable for the immediate future.

Evan L. Kurtz - Morgan Stanley, Research Division

Okay. And then maybe just a question for Bill. What's the latest on Term Loan A? I know you were thinking of perhaps doing some refinancing there at some point?

William G. Harvey

Yes. No, I know there's a lot of dialogue about covenants and things, and I -- and we talked a little bit or -- talked a little about that in my prepared notes. But again, I reiterate, I feel comfortable with the financial covenants. We would have been in compliance if they were in place right now. And I believe and I know that we have very supportive bank group and term lenders. I also believe we have access to capital right now, and the question is more on moving ahead with the right financing that addresses the Term Loan A installments that begin to amortize in mid-2015, as you mentioned. Rather than go down hypothetical road, I'd just say ask everyone to stay tuned. We have an extremely, as Rich mentioned, high-quality, low-cost mines. And if you look at our cash flow generation capabilities, it's very meaningful. Our liquidity is sound. And again, we have access to capital right now, I believe, and stay tuned.

Operator

The next question is from Matt Vittorioso with Barclays.

Matthew Vittorioso - Barclays Capital, Research Division

Just wondering if you could talk high level about how you sort of look at Canadian assets today, and how you decide whether to keep producing? I know you've shut down Willow, but as we look at Wolverine and Brule in the quarter running at negative margins and met coal prices continuing to be weak, just wondering, how do you approach those decisions longer term? Is there a time horizon under which you need to start making some decisions as to whether you want to keep producing there? Just a little more detail on how you're thinking about Canada.

Walter J. Scheller

This is Walt. The Canadian operations, if you look at the -- historically, how the Canadian operations have improved their cost structure, I think you'll see a steady progression. Now we did have some issues for a part of the year at Wolverine last year. But the targets that we've stated internally is that they have to -- we have to see them getting -- being cash flow positive or getting to cash flow positive in the short term. And that's kind of the direction we've given the operations and how we've continued to monitor it. As the prices come down, we've seen our costs come down just about in line with it. We're not quite where we want to be yet. But the other thing that's impacting that, as you look at across the sales number is, again, the -- what you're seeing at Brule or Brazion is that it's about a 2-quarter lag between production costs showing up in cost of sales given the inventory level. So what you haven't seen is the continued progression of their cost reductions over the last couple of quarters. At Wolverine, again, we had some issues in the second half of the year, but our expectation is that if we see PCI pricing being above the $115 level, we believe that mine can be cash flow positive in that area. If we thought prices were dropping below that and for a significant period of time, again, we would take action. At Wolverine, our expectation is that. Given their mine plan for 2014, they should be in the $120s.

William G. Harvey

It's Bill Harvey. I'd like to add. Just on the -- you mentioned the cash flow and negative margins, I would -- we do, of course, look at it from a lot of different angles here. And at the fourth quarter pricing, frankly, they were cash-neutral and if you exclude some of the onetime charge we talked about, which was just an accounting charge and some noncash items. But we've raised our thin margins. So we take your point.

Matthew Vittorioso - Barclays Capital, Research Division

Fair enough. Just one quick follow-up, more of a modeling question. As I kind of look through the pricing, I had expected a little bit higher realizations at No. 4 and Wolverine. Have the mid-vol realizations relative to the benchmark fallen a little bit? Or is that just my math coming in a little bit off?

Walter J. Scheller

Mike Madden's with us, and I'll ask Mike to address that.

Michael T. Madden

What we've seen is, first of all, our No. 4 Mine is in an area right now where the vol is running at higher than what we want, and therefore, it's putting us into a little bit of a lower category. So we've had to accept their water delta because of that, but we will come out of that in '15 and then be into a much better, probably a Tier 1 or 2 coal going forward on that. And then on Wolverine, we've always had a delta for Wolverine coal off the benchmark of anywhere from about $8 to $10.

Matthew Vittorioso - Barclays Capital, Research Division

Okay, that's fair. So No. 4 though, for 2014, the realization relative to the benchmark will look kind of like 4Q, just for a little while?

Michael T. Madden

Yes, it'll start to improve because we will be developing the area that we're going to move into probably starting April. So the vol will improve as we go through the year and then the pricing should [indiscernible] as we follow through.

Operator

The next question is from Michael Dudas with Sterne Agee.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

Continuing with Mike, could you maybe talk a little bit about inventory levels in the chain, whether it's from you guys or producers or consumers? And for your qualities of coal, do you sense that the market is better than overall or worse than overall?

Michael T. Madden

Well, I think first of all, I think everyone is fighting an inventory issue right now because of the oversupply versus the demand picture. Obviously, demand still is running pretty good for the hybrid coals, mainly the 7, our No. 7 Mine, and to a degree, No. 4. We've been -- I mean, frankly speaking, we've been offered additional tons from traditional customers. But some of the price levels that they're proposing based on what's out there on a spot basis, we've declined. So we've been a little bit more selective on what we will take for the coal at this point.

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

That is encouraging. And my follow-up would be talking about the asset sale target and timing, do you get the sense it's just because the market has dropped so hard here in the last few weeks to a couple of months, or is there a rethink about structurally the value of the assets in North America relative to what the world's and requirements are from a coking coal standpoint?

William G. Harvey

It's Bill Harvey here. I don't think -- the rethink is really relative to making sure we get fair value on things. And it's not -- we're not at the point where we're -- there's a -- what would I call -- how would I term it, we're not at the point where there's a log jam, but the reality is that the interest is there and that reflects, I don't think that reflects no rethink about the value of the assets from the point of your long term. The question is, is that the current met coal market does not make it easy for 2 sides to come together.

Operator

The next question is from Jeff Cramer with Morgan Stanley.

Jeffrey Cramer

Just to revisit the covenants and whatnot, I'm just curious, you think that's going to be able to meet that covenant in June? How far ahead of that would you want to get, not play it too close? And just following up on the asset sales, is it still the $250 million that's being contemplated? And would that be part of addressing that covenant if it would become an issue?

William G. Harvey

Well, the asset sales are not linked directly to the covenant. We think it's the right thing to do, and it's a goal we want to obtain. I think, as I mentioned, we met the covenant if we would have -- if it would have been in place at the end of the year. I think if you look at the EBITDA for last year for the first half of the year, it was no great EBITDA. So when you do the math, I think you'll see there is cushion. As a finance person, I always want more cushion, frankly, that's my job. But there is cushion and with the way the cost structure is and even looking at the current price of met coal, we believe that we were comfortable with the covenant level. That being said, as I mentioned to Evan earlier in the call, we do have Term Loan A coming due mid next year and we're taking a -- and stay tuned.

Jeffrey Cramer

Okay. And then just on the cost at No. 4 -- or I'm sorry Mine No. 7 during the quarter, I believe there were 2 longwall moves during the quarter. So that -- I would've thought that has impacted costs a little bit more. So just given that, or were there indeed still 2 longwall moves during the quarter, and do you think that maybe $100 is still a little bit high on the cost side, that there is room to beat there?

Richard Allen Donnelly

Yes, this is Rich again. There were 2 longwall moves at 7. Both longwall moves went very well. The moves were a little bit shorter than we planned. They did a good job of getting it done and the start-ups went a lot better than they normally did. So from that standpoint, the moves didn't hurt us quite as badly as they usually do. In addition to that, though, outside of the moves, both longwalls ran exceptionally well, so they overcame that shortage of tons. I think looking forward at the cost at 7, again, $100 is our target. It's very possible we could be $4, $5 lower than that. But it just depends on how well we perform during the year.

Operator

The next question is from Mitesh Thakkar with FBR Capital Markets.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Just a quick question for Bill. What kind of met prices are you looking at the kind of cash breakeven? One point, I think that number was $150 million, but then you guys did a really good job on the cost side, the U.S. cost, probably below what your target levels were. How should we think about your cash breakeven met price and what gets you there?

William G. Harvey

Yes. No, Mitesh, there's a lot of moving parts in that equation. And again, how we define cash breakeven is really which way the bank account is moving. So it's cash from operations minus CapEx, however, you want to do it and EBITDA. With our EBITDA, of course, we have some noncash items. But I think with the improvements we made in operations, we've lowered below the $150 million. And the other thing that helps us this year, and this is more of a onetime event, is that we have surplus inventory that we're starting to wind down. And that's -- it's not an immaterial amount. When you look at the company, our met inventory at the end of Q4 was almost 2.2 million tons. And we think we can squeeze out almost 500,000, 600,000 tons of that. Not overnight, but through the year, and we'll be focused on that.

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Okay, great. And when you look at the spread between the spot and the benchmark prices and you highlighted before about some customers trying to give you prices which you're not willing to accept at this point. How should we think about going forward in terms of how much of their volume is kind of committed to the benchmark levels, and how much is the spot level?

Michael T. Madden

Yes, this is Mike. Obviously, that's going to be driven by the oversupply issue. The more oversupply we have in the market, the more and more pressures on buyers to capture more on the additional pricing, the real versus the benchmark. So that's -- it's all going to be a product of -- as along as we've got that oversupply out there, you're going to see that spread.

Operator

The next question is from Curt Woodworth with Nomura.

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

Walt, I just wanted to clarify the kind of guidance around the Canadian asset. Did you say that Brule will be running at $115 million cash cost and Wolverine will be in the $120 million, kind of starting this quarter?

Walter J. Scheller

That's cash cost to sales. That's where they're expected to be. But again, you have to remember that as we look at the cash cost of sales, that lag at Brule or at Brazion by about 1.5 quarters or so. And at Wolverine, right now, given their inventory level, it probably lags about 1 quarter. So you're going to see Q1 cash cost of sales are going to be reflected -- reflective of their cost of production in Q4.

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

Okay. And then just on the asset sale front, can you provide an update on where you stand in that process, how far along you are regarding either asset sales or JVs, and are you contemplating a JV for any of your U.S. operations?

Walter J. Scheller

Well, as we said before, everything's on the table. We have quite a bit of activity going on and I really don't want to get into details about what specifically it's forming. It's -- we're working hard at it. We've got a lot of dialogue going on, but that's all I can say at this point.

Operator

The next question is from Caleb Dorfman with Simmons & Company.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

First question's for Bill. So the Canadian dollar's at $0.90 right now, have you taken that fully into account in your Canadian cost projections? And I guess, Bill, could you sort of give us an idea of how much of your Canadian costs are really tied to Canadian dollar exposure, versus tied to U.S. dollar exposure? And how long it takes for, I guess, Canadian dollar decline start to actually roll into the cost structure?

William G. Harvey

Yes. No, it's about 70% of our costs in Canada are Canadian dollar costs. And it comes back a little bit with what Walt had talked about earlier that and it goes into inventory in 1 quarter and comes out the next quarter, except for the cost that we -- with the Brule mine where it's been -- it takes about 2 quarters. I believe that for every 0.01 change in the Canadian dollar, it's almost $600,000 of lower costs for us across our company, running at the pace we're running right now.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

So what type of, I guess, FX rate are you incorporating in your cost targets for 2014 right now?

William G. Harvey

Well, in our costs, we assumed it was flat. So we actually assumed it was more to the high-90s when we did our forecast. But if you look at the cost of production for the fourth quarter in both Wolverine and the Brazion group, you'll notice that their cost of productions was pretty good and we expect that to continue both from a productivity point of view, production and tons, but also by the fact that their -- a lot of their spend is denominated in Canadian dollars.

Caleb M.J. Dorfman - Simmons & Company International, Research Division

That's helpful. And I guess the next question is for Mike. So when you're actually talking with your customers, how much of the price problem right now is that the steel mills can't deal with the input costs because their margins are compressed versus there are so many other producers and traders out there offering so much tonnage in the market at fairly competitive price?

Michael T. Madden

Well, they're being very open with us that they are getting numerous offers from all directions. And obviously, they're under great pressure with their management to do the best job they can on the purchasing side. So they're trying to support us as much as they can. They're giving us the opportunity on these additional tons that they're being pushed to buy on our open market. But as I said earlier, some of the prices we've elected not to participate on.

Operator

[Operator Instructions] The next question is from Justine Fisher with Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc., Research Division

I had one additional question, sorry, on the same topic, on asset sales. I'm not going to ask how it's progressing, but I do want to ask if you guys can give us a short list of the types of assets that you're looking to sell? I think when we think about what's on the cards, the assets that caught the most are the Canadian mines, obviously. But I know there are the coke assets and the gas assets, so for people who are looking at what the opportunity set is even if they think that there may not be a buyer or you may not reach the right price on a coal mine, what else is out there for you to sell?

William G. Harvey

I think you've highlighted a few, which is both the Canadian assets, which we've talked about in the past would be more linked to a joint venture, et cetera, specific aspects of that. As well, to add your list that we talked to the past about the Port of Mobile. We have a terminal there, or an undeveloped terminal that we, frankly, would like a throughput to -- from. But for our new mine, when we develop it, but that would be about it. We have other things such as rail load outs and prep plans, but we're really focusing on a long list with the highlights being the Canadian assets as we've discussed in the terminal.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then my follow-up question is on this issue of lots of offers coming into the mills and you guys not participating in some of the deals where there are just other producers that are trying to undercut on pricing. Do you think that this is kind of a Hail Mary from those producers and that they just are trying to sell anything at lower prices? Eventually they'll come out of the market, and that gives you the opportunity? Or is it a concern of yours that you guys may be building some inventory and then you may be ceding some share to those other producers over the longer term as they kind of continue to win business? And maybe another way to phrase it is, do you think that this is a short-term, last-ditch effort by some small producers before they actually take their production out of the market as most of the observers have been hoping or more a longer-term trend?

Michael T. Madden

This is Mike. I think a lot of it is last-ditch stuff, particularly if it's a low -- a smaller operator. But as some of the numbers that are being thrown out there, it's not going to keep them above water very long. And even some of the 6 months earnings that we start to see coming out of Australia, it's having an impact even on the Australian producers.

Justine Fisher - Goldman Sachs Group Inc., Research Division

And how many tons do you think in the U.S. are currently underwater? If you could just give a round number of guess?

Michael T. Madden

That's not an easy answer there. The domestic business in the U.S. rolled off in January, and then you've got some folks who have some business that rolls off the end of March. But you have to keep in mind, most of the production out of the U.S. is what we consider high-vol coal, and that's where the biggest hit will come from. To put a number on it though, I couldn't do that for you today.

Operator

The next question is from Brandon Blossman with Tudor, Pickering Holt & Company.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

A couple of quick ones. Any color on longwall moves for 4 and 7 throughout '14, kind of quarter-by-quarter?

Walter J. Scheller

Sure. The -- we'll have 2 moves at the No. 4 Mine, the first one will be in the first half of the year. The second one will be in the second half of the year. Both of those kind of straddle the quarter. So there will be one either right at the end of Q1 or beginning of Q2. The other one will be right at end of Q3 or beginning of Q4. 7 East -- or 7 will have 2 moves, one in the third quarter, one in the fourth quarter.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

And then, just on net contracting kind of progress year-to-date and what the market looks like, any changes from customer mix demand or by product on a year-over-year basis, or kind of what you're seeing out there as far as willingness to buy, again on a year-to-year basis from where we were last year at this time?

Michael T. Madden

This is Mike. Well, we don't really jump around on the customer arena. We pretty much have a steady stable in that respect. I guess, the tendency we see is that some of the delta between the high-grade coal and the lower-grade coals is -- they're better off if they purchase on the high-grade from a recovery in the coke productions. So I would say they're still leaning towards the high-grade coals if there at a pretty attractive price, which some of them have been.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

So a net benefit for you?

Michael T. Madden

Yes, it's just going to take some supplies to come off, where things will really improve.

Operator

The next question is from Brian Yu with Citi.

Brian Yu - Citigroup Inc, Research Division

My question is a bit of a follow up on -- the question is a bit of a follow up on what others asked before. If we were to look at your contract versus spot, so what percentage of volumes should be sold at benchmark versus spot? Is that changing in 2014? If you can you give us the breakout? And then does that breakout vary between U.S. versus Canadian sales?

Michael T. Madden

Yes, this is Mike. I guess, with the supply situation that we're seeing and carrying over into '14, there is a definite tendency by the buyers to offer to us additional tons after a contract is made on the base tons. So I would suspect that we would probably begin to go into this not necessarily what we call spot sales, but these additional offers. We'll take them up on a case-by-case basis depending on what the pricing structure looks like at the time.

Brian Yu - Citigroup Inc, Research Division

Maybe if you could tell us what your -- how much mines do you have committed that would be sold under the benchmark?

William G. Harvey

I think the easiest way if you're looking -- this is Bill, if you're looking at our realizations, if you take the fourth quarter and go back to the change in benchmark, you'll get very -- you'll get close. There'll be some volatility around that, but we still are predominantly benchmark-driven. It doesn't -- the change from quarter-to-quarter can be significant. But the benchmark there is most of the change in our realizations even in the first, second, third quarter of this year.

Operator

The next question is from Paul Forward with Stifel.

Paul S. Forward - Stifel, Nicolaus & Company, Incorporated, Research Division

I wanted to ask about the gas business. Can you give us a number on what the volumes were in 2013, and any expectation for changes from that number in 2014?

Walter J. Scheller

The volume should be pretty flat year-on-year and -- our 2 gas companies combined are about 12 Bcf.

Paul S. Forward - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And on the -- I think, Bill, you have talked about 2.2 million tons of inventory and a plan to cut that by 500,000 or 600,000 tons in '14. I was just wondering, why not a more aggressive inventory reduction target? I know it's obviously -- you're not going to get any kind of pricing for it, but why not take a more proactive kind of stance in trying to reduce the overhang?

William G. Harvey

I think one simple thing, underpromise and overdeliver. I think we'd like to put that number out there, but we hear you. We do like -- we want to bring our inventory down in the right manner, and we want to be aggressive about it. And so what I focused on with that number was primarily the Canadian PCI inventory. But you can be assured that we're looking at the whole picture, and we'll try to exceed that aggressively.

Operator

The next question is from David Olkovetsky with Jefferies.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

My first question relates to your liquidity and the other covenants that you guys were mentioning. If I'm not mistaken, there's going to be a 5.5x senior secured leverage covenant as of June 30. And right now, you have a $225 million liquidity block...

William G. Harvey

I did not -- I apologize, you broke in and out. I could not hear your question.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Sorry about that. Can you hear me now?

William G. Harvey

Yes, that's much better.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay, sorry. The question is regarding the 5.5x senior secured leverage covenant that comes into play in the June 30, 2014 quarter. I think you guys mentioned to one of the earlier questioners that you would have been in compliance with that. Can you walk me through the math? Because the way I'm thinking about it is that you have about $1.8 billion in secured debt versus LTM EBITDA of $150 million. Just -- I'm not sure I understand how you would be in compliance?

William G. Harvey

Well, I think there -- a couple of things. One is that the covenant that comes into play on June 30, 2014, is 8:1, and it's net secured debt to EBITDA. Net secured debt, you subtract cash from that. And that'll lower your debt number. The $150 million is the number of costs on EBITDA. But as an example -- there's a difference between bank EBITDA and the EBITDA we report out. Primary difference is some things we report out, there's some noncash items in there. When you back out and just look at cash, the EBITDA from the bank that we report on the bank EBITDA is about $15 million to even sometimes $20 million higher than that. So for instance, in the fourth quarter, although we reported out $59 million of EBITDA, $59.9 million, the bank EBITDA is roughly $80 million. So that -- there's that cushion. And we have filed the document. You can see it, but I'll just pick out some points from the credit agreement on the net secured leverage ratio. It's 8x in June 30. It does go down, and that may have been the hiccup. It does go down to 5.5x at March 31, 2015. And that may be the data point that was missing. That's 2015, not 2014.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

I got you, okay. So with the 8x, I mean, you guys have been running sort of cash flow negative, I mean from your cash from ops, it's been about -- let's call it, neutral, and you're spending about $150 million in CapEx. Presumably, that would, I guess, rollover into 2015 as well given that pricing is so challenging right now. Would you anticipate, on a -- let's say you're free cash flow negative by $150 million in 2015, would you anticipate still being in compliance with that covenant?

William G. Harvey

Well, we don't -- we don't expect -- I mean, for the forecast [ph] of cash flow negative that we don't necessarily expect. And then everybody will have their pricing forecast, et cetera. So excluding that, with our forecast that we look at and the way we run it, we expect to be in compliance. And we ran -- and initially I'll go back at when we put in place this -- when we put the amendment in place was last year, midyear, the price at that time met coal was $145 and we built it off of that with some cushion. I'm not going to tell you there isn't a scenario with pricing that you can't -- or would not break a covenant, there always is. I think I also would point, if you go low enough, you can mathematically produce any answer you want. And frankly, and our job is to generate the EBITDA, work on the cost bringing down and the market will be where it is. I think the high-margin mines we have in the south and the support of term loan and bank facility gives me some comfort as well that if we could not make the covenant, I don't think there'd be an issue. But we're not in that position now. We look at where we are. We look at that we would've been in compliance at year end. And again, that's using Q1 and Q2 of last year, which were not great EBITDA quarters. So it's not like we're losing good quarters going forward either. On cash flow generation, I think if you look at the fourth quarter, we did build some inventory, about over 200,000 tons. That is our heavy interest payment quarter. So if you step back and look at it, I'm optimistic that you're going to see an improvement on the cash as well in the first quarter. And I'll let the second quarter be what it will be.

Operator

The next question is from Lance Ettus with Tuohy Brothers.

Lance Ettus - Tuohy Brothers Investment Research, Inc.

Just a question. You kind of implied that SG&A could be below plan in 2014. I guess, can you give me any idea of the magnitude of that?

William G. Harvey

The -- well, we said that SG&A we'd expect to get it lower. It's a lot more difficult now. We were running at -- meaning that we've taken a lot of big cuts but we'd like to -- and so, you should be thinking of the improvement being more modest than you've seen in the past, maybe a 5% type of thing off of the 80% run rate. So again, that's more -- much lesser of a percentage than you saw year-over-year. And so we'd call it a slight improvement. But 5% is -- that's not immaterial either, $3 million to $4 million, and we're going to work on it.

Operator

The next question is from Lucas Pipes with Brean Capital.

Lucas Pipes - Brean Capital LLC, Research Division

Bill, my first question is that some of your peers did -- especially in hindsight, attractive refinancings in December. Could you maybe elaborate on why you decided not to follow suit at that time, and when we maybe could look forward to such a development?

William G. Harvey

I think there was a lot of moving parts in December for us and other things and we want to move forward with the right financing. You should -- I think, as you know, in our capital structure, we're not trying to put cash on the balance sheet. We're trying to address the term loan coming due in the mid-2015, so we'd like to make some steps to do that in a combined financing. So I'm not -- my job is to look forward, not backward. And we're going to get things done, and stay tuned.

Lucas Pipes - Brean Capital LLC, Research Division

Could you maybe elaborate on some of the options that you're looking at in that regard?

William G. Harvey

I think, as I said, I believe we have access to capital across-the-board both in the senior secured note. I know, Lucas, you're aware we did one of those in September, as well as junior capital, be it second lien or otherwise. So nothing's off the table. I think we do have access to capital. We do believe that the -- that a financing is -- can be done. And what we'd like to do is do the right one.

Lucas Pipes - Brean Capital LLC, Research Division

That's helpful. And really quickly, there are some EBITDA from gas assets at the coke plant, and it's very hard to build a detailed forecast based on the disclosures you provide. Could you maybe give us a rough estimate for 2014 EBITDA from the other operations?

William G. Harvey

They typically run at the -- in a quarterly basis, on a quarter about $5 million a quarter. Hopefully, with gas prices, there may be more, but that's been where they've been running.

Operator

The next question is from Matt Farwell with Imperial Capital.

Matthew Farwell - Imperial Capital, LLC, Research Division

Are there any restrictions on asset sales in the credit agreement or any mandatory requirements for the use of proceeds?

William G. Harvey

There is mandatory requirements. We could -- an asset sale of -- can be used to reinvest in the business. So in essence, if we -- modest asset sale could be used to reinvest in the business. And that's linked, as you're probably aware, in other agreements to capital investments over in the period. So the restrictions are, if it's above that, you would use it to repay the secured debt.

Matthew Farwell - Imperial Capital, LLC, Research Division

Okay. And also, on the CapEx guidance, $150 million in 2014, is there a split between maintenance and growth? I assume it's mostly maintenance? And is there anyway that, that could come down given the issues with pricing this year?

Walter J. Scheller

There's less than $10 million in the -- on the growth side of the budget, and that's just working on a few small things here in Alabama and up in Northeast BC. And while there's opportunity to squeeze the capital a little harder, and naturally, we'll look at each and every project as we go forward and see if there are want to have or must haves and we'll squeeze it accordingly.

Matthew Farwell - Imperial Capital, LLC, Research Division

Is there any deferred CapEx in the Alabama mines that may prevent these cash costs from being sustainable over the long term?

Walter J. Scheller

No, that's when -- we're feeding the Alabama mines, the capital they need to maintain their cost structure and production volumes.

Operator

The next question is from Frank Duplak with Prudential.

Frank Duplak

A couple of questions for Bill. Bill, can you talk about just what the covenant level of EBITDA was for 2013? I'm guessing with the ad backs, that number would have been right around $200 million, but can you give us what that number is?

William G. Harvey

Yes, you mean the bank EBITDA for 2013?

Frank Duplak

Bank agreements, yes.

William G. Harvey

Yes, it was roughly -- I just got it in front of me, yes -- now, it's approximately $200 million. I don't -- a little over $200 million, Frank, excuse me. More -- closer to $210 million to -- just over $210 million.

Frank Duplak

Okay. So that $15 million per quarter add-back is pretty consistent then, so you guys did an adjusted number of $149 million and then the bank agreement was $61 million higher, so that $15 million number is pretty consistent?

William G. Harvey

It's pretty consistent. And again, the main component of that is through EBITDA run some post-retirement medical charges that are noncash, that are being accrued. And that's a very consistent number through the year.

Frank Duplak

And then, any reason that number would step up or down in 2014?

William G. Harvey

Only driven off of an unusual event that I can't think -- there's nothing planned for that to occur. But if you -- there could be something, but I don't have any expectation that, that would occur.

Frank Duplak

So if I do the calculation, I get a rough number of about 7.4x for the bank agreement. Would that be about right? Versus the 8x covenant level in June of '14?

William G. Harvey

Around those -- that type of number.

Frank Duplak

Okay. And then just -- I know we talked -- there's been a lot of questions about timing of asset sales, are you guys saying you sort of moved the timing to the right and it's a 2014 event? Because I thought it was kind of a first half '14 event, given the difficulties and maybe coming together on price, should we think about this more as a second half event? Or any color would be great.

William G. Harvey

Yes. No, I think, to get to the full $250 million is probably a second half event. I'd like to move it quicker and get it done quicker. And you may see pieces of it, because again, this is not one asset sale, but that's a realistic scenario.

Operator

Our final question today is from David Lipschitz with CLSA.

David A. Lipschitz - CLSA Limited, Research Division

Just a quick couple of questions. I don't know if you answered it, but Mine 4 cash cost, I know you said Mine 7, $100 million. Did you say what Mine 4 was going to be?

William G. Harvey

Somewhere between $100 million and $105 million.

David A. Lipschitz - CLSA Limited, Research Division

And then 2 quick housekeeping. In terms of interest expense in 2014 should be around and what should be the tax -- should be a benefit, a tax rate, what are you expecting in '14?

William G. Harvey

Interest expense will more or less be $220 million on a cash basis. There is some noncash items in there, amortization, et cetera, that will drive the number up by about $30 million on a, I think, from the point of view of the accounting statements. But $220 million of that is cash.

David A. Lipschitz - CLSA Limited, Research Division

And then the tax rate?

William G. Harvey

Tax rate will be less than 20%, because of the valuation allowance.

David A. Lipschitz - CLSA Limited, Research Division

So there won't be any benefit, just -- you'll actually pay taxes?

William G. Harvey

Plus, it's -- from an accounting point of view, it will be less than 20%. But there won't be any cash taxes paid.

Walter J. Scheller

That concludes our call this morning. Thank you again for joining us today. We appreciate your interest in Walter Energy.

Operator

Thank you. This does conclude today's conference. Thank you very much for joining. You may disconnect at this time.

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Walter Energy, Inc. (WLT): Q4 EPS of -$0.55 beats by $0.29. Revenue of $472M (-1.4% Y/Y) misses by $5.44M.