Cloud Peak sees uptick in coal burn due to summer heat

While the impact of the very warm winter on coal stockpiles and low natural gas prices will take some time to work through, the hot start to the summer is beginning to have a positive impact on coal burn and therefore demand, said Powder River Basin coal producer Cloud Peak Energy (NYSE: CLD).

Coal shipments have picked up since April and increased significantly in July as utilities take their contracted coal, Cloud Peak said in its July 31 earnings statement. Shipments are expected to continue to increase throughout the third quarter. The outlook for coal demand for the rest of the year will depend on how hot the summer stays, economic growth and the level of gas production and prices, Cloud Peak noted.

For 2012, Cloud Peak Energy has contracted to sell 92.6 million tons, of which 90.5 million tons are under fixed-price contracts with a weighted-average price of $13.34 per ton. Assuming current low OTC prices for contracted but unpriced 2012 tons, the company’s weighted-average price would be $13.23 per ton.

As reported last quarter, a small number of customers contacted the company to discuss reducing 2012 shipments. At this time, Cloud Peak said it has renegotiated 1.7 million tons, mostly deferred to 2013, and continues discussions with a few customers.

“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 added. “During the second quarter of 2012, our contracted position for 2013 only increased by 6.4 million tons to 81.2 million tons due to limited activity in the markets. Of this committed 2013 production, 68.6 million tons are under fixed-price contracts with a weighted-average price of $13.83 per ton. No additional export sales were contracted during the second quarter as international coal prices weakened.”

Cloud Peak works to hold down costs in poor market

“We are pleased with our operational and financial performance during what we knew would be a very challenging second quarter,” said Colin Marshall, President and CEO. “As expected, shipments were unusually slow as some customers continued to substitute low price natural gas for coal at a time when they had high coal stockpiles and low electricity demand. During the second quarter, the operations did a good job of controlling costs as we managed our business in line with the reduced demand. We were very pleased to announce our successful acquisition of the significant Youngs Creek coal and land assets. This transaction builds our Northern PRB asset base to allow us to meet anticipated strong international demand for our coal.”

For the second quarter, sales from Cloud Peak’s three company-operated mines were 20.1 million tons, down from 23 million tons in the second quarter of 2011. Reduced sales were driven by the high utility stockpiles built up after the very warm winter and related low natural gas prices. This compounded the impact of the second quarter “shoulder season” when low demand for electricity allows utilities to do annual plant maintenance.

Shipments from the Spring Creek mine in Montana were further reduced by flooding at the MERC rail-to-ship terminal on Lake Superior in mid-June that delayed about 400,000 tons of shipments to the second half of the year.

Cloud Peak Energy in June acquired the Youngs Creek Mining Co. LLC joint venture and other related coal and surface assets for $300m. Of this purchase price, $195m is allocated to the lease of approximately 450 million tons of in-place coal, of which the undeveloped Youngs Creek mine permit includes 291 million recoverable tons, and $105m to the purchase and lease of 38,800 acres of land. The coal and land are well suited to support potential increased exports through the Pacific Northwest to Asian customers.

Youngs Creek is a permitted but undeveloped surface mine project in the Northern Powder River Basin located 13 miles north of Sheridan, Wyo., contiguous with the Wyoming-Montana state line. It is seven miles south of Cloud Peak’s Spring Creek mine and seven miles from the BNSF mainline railroad. “There are a number of alternatives we are considering with respect to the potential development of this property, and until we have a definitive mine plan for the property, we are not able to classify the coal assets as reserves,” the company said.

In addition, on July 23, Cloud Peak announced that it reached tentative agreements with the Crow Tribe regarding exploration rights and exclusive options to lease and develop up to an estimated 1.4 billion tons of in-place Northern Powder River Basin coal on the Crow reservation in southeast Montana, near the Spring Creek mine. These tentative agreements have not been executed and have been submitted to the Crow Tribal Legislature for review.

Cloud Peak said it continues to expect to export about 4.3 million tons for the full year 2012. During the second quarter, Cloud Peak Energy shipped about 1 million tons to Asian customers, bringing the six-month total to 2 million tons. This expected slight reduction in export shipments was due to the completion of low margin contracts through the Ridley Terminal in British Columbia and reduced capacity at the Westshore Terminal in British Columbia, which successfully completed one of two expansion shutdowns scheduled this year early in the quarter.

Cloud Peak says EPA rules hurting coal demand

The current regulatory environment is making it increasingly difficult for coal-burning utilities to operate existing, or to invest in new, coal-fired power plants, Cloud Peak noted.

“The regulations include the Cross-State Air Pollution Rule, Utility MATS, coal ash regulation and the proposed carbon dioxide new source performance standard, the combined impacts of which are highly uncertain,” the company said. “It is possible some of the regulations will increase demand for low sulfur PRB coal, such as from our Antelope mine; however, we believe the cumulative effect will be to decrease U.S. demand for coal and significantly increase the cost of domestic electricity.”

Antelope in Wyoming, the southernmost of the operating PRB mines, produces a particularly low-sulfur coal that could be desirable to some utilities looking to reduce SO2 emissions without installing expensive SO2-control systems.

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.