Cloud Peak watches U.S. thermal coal demand wilt in the winter heat

Propped up by the growing coal export market, Cloud Peak Energy (NYSE: CLD) weathered the first quarter of this year pretty well, though it did see, like many other coal producers, a big sag in U.S. thermal coal demand and pricing.

Cloud Peak, the only pure-play Powder River Basin (PRB) coal company, today announced results for the first quarter of 2012, said April 30 that it had adjusted EBITDA of $75.7m in the first quarter of 2012 compared with $82.6m in the first quarter of 2011. It had net income of $26.6m compared to net income of $26.8m in the year-ago quarter.

“Given the challenging domestic environment facing the industry, we are pleased with our strong balance sheet position and our operational and financial performance in the first quarter,” said Colin Marshall, President and CEO. “Our strategy to enter a calendar year with our production essentially fully sold has again proven to be a prudent approach that enables us to plan our business and manage our costs. The Asian export market continues to be strong and we were able to incrementally increase our exports even while our main shipping terminal at Westshore completed a scheduled outage associated with its expansion work.”

Westshore is a coal export terminal in British Columbia, Canada, that Cloud Peak has to use due to a lack of coal export terminal capacity along the Pacific Coast of the U.S. Several export terminal projects are underway in Oregon and Washington, but they are running into environmental opposition, causing significant delays in the permitting processes for each of them.

For the first quarter, sales from Cloud Peak’s three company-operated mines were 22.5 million tons, down from 23.1 million tons in the year-ago quarter due primarily to reduced domestic demand for electricity caused by a warmer-than-average winter. The reduced electricity and home heating demand depressed the near-term price of coal and natural gas allowing some utilities to increase their generation from natural gas while stockpiling contracted coal.

Realized price per ton increased to $13.31. Average cost of product sold per ton was in line with expectations at $9.78, up from last year primarily due to higher royalties and severance taxes resulting from the higher sales prices, higher diesel prices and the impact of fixed costs on fewer tons sold.

Coal exports strong, but terminal capacity a big limiting factor

International demand for its coal continues to grow, and international thermal coal prices remain robust. Cloud Peak’s total 2012 Asian exports are expected to be about 4.3 million tons. While demand from Asian customers remains strong, this year’s exports will again be limited by available terminal capacity out of the Pacific Northwest.

During the first quarter, Cloud Peak shipped about 971,000 tons to Asian customers, up nearly 10% from 887,000 tons shipped in the first quarter 2011. This was achieved while the Westshore Terminal was undergoing one-of-two expansion shutdowns scheduled this year. Cloud Peak has shipped one vessel out of the Ridley terminal in British Columbia in the first quarter of 2012 and expects one in the second quarter. As exports through the Ridley terminal incur significantly higher rail costs than through Westshore due to a longer multi-railroad haul, Cloud Peak will only make additional sales through Ridley when they are economic.

Warm winter puts big chill on coal consumption

Warmer-than-average temperatures since December led to the fourth warmest winter on record for the contiguous U.S., according to the U.S. Energy Information Administration. Heating degree days for the 2011/2012 winter season were down 16% from the 30-year norm and down nearly 20% from the 2010/2011 winter season, Cloud Peak noted. During the winter season for 2011/2012, electric generation was down 5% from the norm and down nearly 6.5% from the prior year’s winter season.

The warm winter led to both reduced electricity and gas demand for commercial and residential heating. The reduced demand, together with increased supplies of natural gas, has depressed near-term gas prices significantly and has allowed some utilities to increase their generation from gas. During this short-term period, coal burn has been significantly reduced and utility coal stockpiles have increased rapidly. However, the level of coal-to-gas switching appears to currently be limited by infrastructure constraints, Cloud Peak said. In March, shipments of coal from its mines slowed as some utility stockpiles approached full capacity and utilities reduced their immediate shipment schedules.

Shipments are expected to continue to be slow in the second quarter which is traditionally the lowest shipment quarter of the year due to normal mild spring weather reducing electricity and gas demand combined with the customary power plant maintenance outages. As a result of these conditions, a small number of customers have contacted Cloud Peak to discuss potential options to reduce 2012 tonnage commitments. At this early stage, no deferrals have been agreed.

While the outlook for coal demand for the rest of the year will depend on summer temperatures, economic growth and the level of gas production and gas prices, the warm and dry conditions during the 2011/2012 winter season limited snowfall for many locations. Consequently hydroelectric generation is expected to be significantly reduced, which should support incremental demand for both natural gas and coal generated electricity in the coming months, Cloud Peak said.

For 2012, Cloud Peak Energy has contracted to sell 94.3 million tons, of which 90.5 million tons are under fixed-price contracts with a weighted-average price of $13.41/ton. Assuming current low over-the-counter prices for the contracted but unpriced tons in 2012, Cloud Peak’s weighted-average price would be $13.20/ton.

“We are not expecting to make any significant additional sales for delivery in 2012 and will be focusing on working with our customers to help ensure delivery of contracted tonnages,” Cloud Peak said. “During the first quarter of 2012, our contracted position for 2013 only increased by 1.5 million tons to 74.8 million tons due to limited activity in the markets. Of this committed 2013 production, 61.7 million tons are under fixed-price contracts with a weighted-average price of $14.18 per ton.”

U.S. Environmental Protection Agency rules dampen coal prospects

The current regulatory environment is making it increasingly difficult for utilities to operate existing, or invest in new, coal plants. The regulations include the Cross-State Air Pollution Rule, Utility MATS, coal ash regulation and the proposed CO2 new source performance standard, the combined impacts of which are highly uncertain. It is possible some of the regulations will increase demand for low-sulfur PRB coal, such as from Cloud Peak’s Antelope mine in Wyoming. “However, we believe the cumulative effect will be to decrease U.S. demand for coal and significantly increase the cost of domestic electricity,” Cloud Peak added.

In the company’s updated guidance for 2012, it forecasts 90 million to 95 million tons of shipments from its three owned mines (excluding the 50%-owned Decker mine in Montana).

Cloud Peak is headquartered in Wyoming and is one of the largest U.S. coal producers. The company owns and operates three surface coal mines in the PRB, the lowest cost major coal producing region in the nation. The Antelope and Cordero Rojo mines are located in Wyoming and the Spring Creek mine is located near Decker, Mont.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.