Cloud Peak Energy (NYSE:CLD), a major coal producer in the Powder River Basin of Wyoming and Montana, said Feb. 13 that it had net income of $52m in 2013, down sharply from nearly $174m in 2012.
The company shipped 86 million tons of coal in 2013, down from 90.6 million tons in 2012. The company said it responded to 2013 market conditions by reducing production, focusing on controllable costs, and sustainably reducing capital expenditures.
Colin Marshall, President and Chief Executive Officer, said: “The combination of severe weather and weak rail service left us with lower shipments than we anticipated in the fourth quarter and full year. Despite the challenging external environment, our mines operated well, and we successfully contained controllable costs and reduced capital expenditures. As a result, we were still able to deliver Adjusted EBITDA in line with our third quarter guidance. We continued to incrementally expand our export sales into Asia, however, our 2013 results were impacted by lower international market prices. Nevertheless, we see positive fundamentals for pricing both domestically and internationally as supply and demand come back into balance.”
Fourth quarter 2013 tons sold from the owned and operated mines were impacted by a severe winter storm in October and weak rail service throughout the quarter. The lack of adequate rail service, which has continued in early 2014, to both domestic utility customers and international logistics customers was attributed to competing demands for rail crews from increased crude oil and grain railings.
Cloud Peak said it understands the railways are taking measures to improve service but that it will take some time to implement. An unusually wet summer, some production interruptions, and a series of operational issues at one of the long-term customers, resulted in the decrease in tons sold for the full year 2013 compared to 2012.
Revenue from the owned and operated mines segment decreased in 2013 compared to 2012 due to a slightly lower average realized price per ton sold and fewer tons shipped. Spot prices were lower for indexed tons sold during 2013 as a result of the weak coal market conditions throughout the year. With the reduced shipments, the operations focused on lowering variable costs in line with lower production and sustainably containing other controllable costs.
Shipments exported to Asian customers increased in 2013 to 4.7 million tons as Cloud Peak continued to work closely with the Westshore terminal on Canada’s West Coast to maximize vessel loadings and meet continuing strong demand from Asian customers.
With natural gas prices higher, Cloud Peak saw signs of life in the 2013 coal market
Throughout 2013, domestic coal market fundamentals improved, and Cloud Peak now estimates that total U.S. coal demand increased by approximately 35 million tons compared to 2012. The increase reflects a switch back to coal-fired electricity generation as a result of higher natural gas prices. At the same time, two years of low coal prices have caused producers to cut production capacity. Nationwide tockpiles of PRB coal are estimated to have fallen to 67 million tons at the end of December 2013 compared to 91 million tons in December 2012.
For 2014, Cloud Peak currently expects total U.S. coal burn to be higher than 2013 levels. 2014 has started with some dramatically cold temperatures across much of the country, which have increased coal burn. Through January 2014, heating degree days for the U.S. are up 17% over last year and 8% over the 10-year average. Some utilities have recently issued RFPs for delivery of coal this year, which the company believes is an indicator of strong recent burn reducing stockpiles more quickly than utilities expected. It anticipates that if natural gas stays above $3.50/mmBtu and stockpiles continue to decline, PRB coal pricing should continue to increase.
Cloud Peak said it is also seeing some new interest in PRB coal from domestic utilities who have traditionally not burned PRB coal. They are evaluating blending lower-Btu PRB coal with Central Appalachian and Illinois Basin coals to reduce their overall fuel costs. This will help offset the impact of the closure of some power plant units that currently burn PRB coal.
Internationally, Cloud Peak continues to see growing demand for PRB coal from Asian customers. In 2013 the major increase in seaborne thermal coal demand was from India, supported by continued growth in Chinese imports.
“While Asian demand for coal continues to grow it is interesting to see demand from Japan increasing as they are building new high efficiency coal units. We are also seeing new coal plants being built in Korea and Taiwan as they prepare to meet their future electricity demand. Cloud Peak Energy’s Spring Creek coal is increasingly well regarded in the Asian marketplace and due to its consistent quality is now considered equivalent to the best Indonesian coal brand many of these new plants are designed to burn,” said Marshall.
So far, 2014 coal commitments come in at 84 million tons
For 2014, Cloud Peak has committed to sell 84 million tons from its three owned and operated mines. Of this committed 2014 production, 77 million tons are under fixed-price contracts with a weighted-average price of $13.18 per ton. During the fourth quarter, the company contracted, fixed priced and carried over approximately 8 million tons for 2014 deliveries with an average price of approximately $12.66 per ton.
For 2015, it contracted approximately 5 million tons at an average price of $13.22 per ton. The pricing it received reflects the weak market prices during the quarter.
For 2015, Cloud Peak has currently committed to sell 47 million tons from the three owned and operated mines. Of this committed 2015 production, 33 million tons are under fixed-price contracts with a weighted-average price of $13.61 per ton.
Cloud Peak is forecasting export shipments through Westshore of approximately 4.5 million tons from its Logistics and Related Activities segment in 2014.
“Our strategy is to match our production to the market demand. This has proved to be a sensible policy in recent years which has allowed us to control our costs and optimize our mine plans. We see several indicators that a healthier coal market is returning. We anticipate domestic and international coal pricing will recover and believe that Cloud Peak Energy is well positioned financially and operationally to benefit when they do,” said Marshall.
Cloud Peak Energy is headquartered in Wyoming and is one of the largest U.S. coal producers and the only pure-play PRB coal company. 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 in Montana.