Cloud Peak Energy (NYSE: CLD), one of the largest U.S. coal producers, said April 29 that it suffered a net loss of $15.6m in the first quarter, against positive net income of $15.4m in the year-ago quarter.
The company, which operates three Powder River Basin (PRB) mines in Wyoming and Montana, had coal shipments of 20.4 million tons from its three owned and operated mines in the first quarter, against 21.1 million tons in the first quarter of 2013. Cloud Peak’s first quarter 2014 shipments were impacted by winter weather, freezing of the Great Lakes and continuing rail service issues. Its mines controlled total operating costs well with the increase in costs per ton being primarily volume related.
Colin Marshall, President and Chief Executive Officer, commented: “Winter weather and rail service interruptions in the first quarter continued to impact our shipments. As a result, we are reducing the top end of our tonnage and Adjusted EBITDA guidance ranges, which leaves us essentially fully sold out for 2014. We are now focused on selling into the improving markets for 2015.”
Shipments from the Spring Creek mine in Montana were also reduced by the freezing of the Great Lakes which was unusually severe this winter. Cloud Peak said it understands that the BNSF Railway is taking measures to improve service but that it will take some time to implement.
Revenue from the owned and operated mines segment decreased in the first quarter of 2014 compared to 2013 due to a slightly lower average realized price per ton sold and fewer tons shipped. During the quarter, the company completed several major maintenance outages and continued to achieve significant cost and capital savings from its in house condition monitoring and repair work.
Cost of product sold was held at a similar level to the first quarter last year with the increase in cost per ton being largely due to the effect of reduced shipments. This reflects well on an ability to control costs in the face of rising strip ratios and increased explosives and diesel prices. Cloud Peak continues to plan for higher shipment rates in later quarters, which it expects will correspondingly reduce its costs per ton as the year progresses.
Encouragingly, the environmental groups who had unsuccessfully challenged the U.S. Bureau of Land Management’s leasing process for the West Antelope II LBA coal tract did not seek any further appeals and their challenge has finally been concluded and rejected by the courts, the company noted.
Export shipments down a bit to begin the year
Shipments exported to Asian customers decreased slightly in the first quarter of 2014 compared to 2013 due to rail service issues on the northwest rail corridor. Cloud Peak experienced increased demurrage costs as ships were delayed at the terminal waiting for coal. Cloud Peak Energy continued to work closely with the BNSF and Westshore Terminals in British Columbia to maximize vessel loadings and meet continuing strong demand from Asian customers.
Two encouraging pieces of news were announced regarding SSA Marine’s Gateway Pacific Terminal project in the Pacific Northwest, where Cloud Peak has the option for up to 16 million tonnes of capacity once the port is developed.
- First, SSA Marine commenced work on the Environmental Impact Study.
- Second, the Northwest Clean Air Agency, an air quality control agency in Washington State responsible for enforcing air pollution regulations in its region, issued the results of its 20-month air quality study monitoring coal dust by rail tracks in Washington State. The study found no evidence of air quality issues caused by coal dust. “While we do not expect opposition to the terminal development to end, it is encouraging when fact-based studies so clearly counter some of our opponent’s main allegations,” Cloud Peak said.
During the first quarter of 2014, domestic coal market fundamentals continued to strengthen. Coal burn increased due to the cold winter across much of the U.S. and higher natural gas prices. With the high burn rates and rail supply interruptions coal inventories at utilities reduced to their lowest levels for many years.
Based on data from the U.S, Energy Information Administration, through February 2014 electric generation from coal-fired power was up 15%, and coal consumption was 160 million tons, up 18 million tons compared to last year. Through March 2014, heating degree days for the U.S. were up 11% over last year and 13% over the 10-year average greatly increasing the burn of both coal and natural gas which reduced inventories of both.
Customer stockpiles of PRB coal are estimated to have fallen to 53 million tons at the end of March 2014, down 13 million tons since the start of the year, the company added. “Our customers’ immediate focus is currently on ensuring the rail delivery of their contracted coal. Nonetheless, we have seen a significant increase in requests for additional coal to be delivered this year. After several years of utilities reducing their forward contracted position we believe they are more likely to contract a full year’s consumption of coal in 2014 to ensure they have confidence in their future supply.”
With the 2013-2014 winter now behind it, Cloud Peak is optimistic that rail performance will steadily improve throughout 2014 as new equipment and crews are brought into service. This should allow shipments to increase through the rest of the year to meet existing contracts. The recent increases in PRB coal prices should be maintained due to low natural gas storage levels and coal inventories going into the summer cooling season. It is possible that, if there is a normal summer cooling demand, it will be difficult to rebuild coal and natural gas inventories ahead of next winter.
With Pacific Rim coal plants being built, export market looks solid
Internationally, Cloud Peak continues to see strong demand for PRB coal from Asian customers. In 2013, the major increase in seaborne thermal coal demand came 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 build new clean, highly efficient coal units. We are also seeing similar new coal plants being built in South Korea and Taiwan as they prepare to meet their future electricity demand. It is encouraging that Cloud Peak Energy’s Spring Creek coal is increasingly well regarded in the Asian marketplace due to its consistent high quality. We believe it is now considered equivalent to the best Indonesian coal brands that many of these new plants are designed to burn,” said Jim Orchard, the company’s Senior Vice President Marketing.
For 2014, Cloud Peak is essentially fully sold out. It has contracted to sell 89 million tons from the three owned and operated mines. Of this committed 2014 production, 84 million tons are under fixed-price contracts with a weighted-average price of $13.09 per ton. During the quarter, it contracted, fixed-prices, and finalized carryover, on approximately 7 million tons of coal for 2014 deliveries at an average price of about $12.10 per ton.
For 2015, Cloud Peak has currently committed to sell 51 million tons from the three owned and operated mines. Of this committed 2015 production, 38 million tons are under fixed-price contracts with a weighted-average price of $13.54 per ton. During the quarter, it contracted about 5 million tons for 2015 delivery at an average price of $13.08 per ton.
While first quarter export shipments were lower than planned the company continues to forecast 2014 export shipments through Westshore of between 4.0 million and 4.5 million tons. Demand from international customers continues to be strong, and the company continues to seek to fill all available capacity at Westshore while working to minimize demurrage costs due to delayed shipments. At current international pricing levels, there is little logistics margin available on export sales. However, Cloud Peak said it continues to benefit from the domestic sales margin recognized in the owned and operated mines segment and through hedge positions.
As a result of reduced first quarter shipments and the expectation that it will take some time to resolve the rail issues Cloud Peak is reducing the top end of its 2014 shipment and Adjusted EBITDA guidance ranges slightly.
“Our strategy continues to be to match our production to 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. Consistent with this strategy, we are committed to the 10 million tons per year reduction of production at our 8400 Btu Cordero Rojo Mine, which will reduce its production to around 28 million tons next year. As a result Cloud Peak Energy’s 2015 total production from our three mines is currently expected to be around 80 million tons. In combination with this supply response, we see several indicators that a healthier coal market is returning; most importantly, increased customer demand and rising contracting prices. We anticipate coal pricing will continue to recover and believe that Cloud Peak Energy is well positioned financially and operationally to benefit,” said Marshall.
The current outlook and assumptions for selected 2014 consolidated financial and operational metrics include coal shipments for owned and operated mines of 86 million to 90 million tons.
Cloud Peak Energy is headquartered in Wyoming and it 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 in Montana. In 2013, Cloud Peak Energy shipped 86 million tons from its three mines to customers located throughout the U.S. and around the world.