Cloud Peak loses money in Q2 2014; holds the line on costs

Cloud Peak Energy (NYSE: CLD), one of the largest U.S. coal producers, said July 29 that strong cost controls resulted in second quarter Adjusted EBITDA of $45.2m, up 21% from $37.3m in the second quarter of 2013.

It also resulted in first half 2014 Adjusted EBITDA of $84.6m, in line with the first half of 2013, despite continuing rail service issues impacting 2014 shipments. The company ships only out of the Powder River Basin (PRB) of Wyoming and Montana, which is served by the BNSF and Union Pacific railroads. The company had a loss of $2.1m in the second quarter, against $4.7m in net income in the second quarter of last year.

Colin Marshall, President and Chief Executive Officer, said: “We were disappointed that rail service interruptions continued to impact our shipments in the second quarter. However, we controlled costs and capital expenditures, and we were pleased with the resulting financial performance. We are continuing to work diligently with the railroad to understand their plans for improvement. In the meantime, customer stockpiles of PRB coal are at low levels and PRB coal remains a lower cost fuel source compared to natural gas. We will continue to focus on controlling costs as we await improved rail service to allow us to ship our contracted tons through the rest of the year.”

While demand from customers was very strong, second quarter 2014 tons sold from the Owned and Operated Mines segment were limited by rail service interruptions which persisted throughout the quarter. The company sold 21 million tons in the second quarter, down from 20.9 million tons a year ago. It sold 41.7 million tons in the first half of this year, against 42.2 million tons in the first six months of 2013.

Revenue from the Owned and Operated Mines segment increased in the second quarter of 2014 compared to 2013 due to a slightly higher average realized price per ton sold and higher tons shipped. For the quarter, the total cost of product sold decreased slightly which, combined with slightly higher tons sold, led to a reduction in cost per ton.

Delivered shipments to domestic and Asian customers decreased slightly in the second quarter of 2014 compared to 2013 due to rail service issues on the northwest rail corridor. Along with weak international market prices for seaborne thermal coal, this resulted in lower revenue for the quarter.

Cloud Peak experienced increased demurrage costs so far this year as ships were delayed at the terminal waiting for coal. Recently, demurrage has been decreasing as it continued to work closely with customers, the BNSF and the Westshore Terminals rail-to-ship export facility in British Columbia to improve scheduling while rail delays continue.

During the second quarter, Cloud Peak received approval from the Wyoming Department of Environmental Quality to self-bond and release $200m of the surety bonds held to cover reclamation obligations in accordance with Wyoming regulations. The approval to release and self bond is a reflection of the company’s balance sheet strength and will also help save around $2m per year in surety premium costs.

Cloud Peak points to lower coal piles, higher coal burn

Based on data from the Energy Information Administration, through April 2014, U.S. electric generation from coal-fired power was up 7% and coal consumption was 291 million tons, up 18 million tons compared to last year. “We understand that inventory levels vary significantly from utility to utility, with some having very low levels forcing them to conserve their coal burn,” Cloud Peak noted. “Total electricity generation is up four percent while natural gas generation was down three percent, which emphasizes the importance of coal-fired generation as a reliable, low-cost energy source for the U.S.”

During the second quarter of 2014, domestic coal market fundamentals continued to be favorable, but performance issues with the western railroads have forced several utilities to conserve coal during the quarter in anticipation of normal summer burn requirements. Even with utilities conserving coal, inventories are at the lowest levels in many years. Due to a slow start to the summer cooling season and increased gas production, natural gas storage is recovering from the very low levels seen at the end of winter 2013-2014. Natural gas prices have remained consistently above $3.50/mmBtu, making PRB coal economic where it is available.

Domestic utility stockpiles of PRB coal are estimated to have fallen to 62 million tons at the end of June 2014, down 18% or 14 million tons from a year ago. So far this year, we have seen an increase in requests for additional coal for delivery this year. As Cloud Peak is fully sold out for 2014, it has not been bidding on these requests.

Cloud Peak continues to expect an improvement in deliveries in the second half of the year. With the planned improved deliveries, it believes that prices will be supported based on fundamentals of strong coal consumption, well below normal coal inventories and more sustainable natural gas prices.

Internationally, the company continues to see strong demand from Asian customers, which continues to be met by increased supply from projects commissioned several years ago leading to current weak pricing. During the first half of 2014, it saw strong interest in Spring Creek coal out of Montana in its primary focus markets of South Korea, Japan, and Taiwan as they work to increase generation in the face of growing demand and reduced nuclear generation. These countries are moving ahead with numerous projects to build modern coal-fired generation, which will be designed to consume high-grade subbituminous coal, including the Spring Creek coal.

For 2014, Cloud Peak has contracted to sell 89 million tons from its three owned and operated mines. Of this committed 2014 production, 86 million tons are under fixed-price contracts with a weighted-average price of $13.05 per ton. During the quarter, it fixed prices on about 3 million tons of previously contracted indexed coal for 2014 deliveries at an average price of approximately $11.93 per ton.

For 2015, it has currently committed to sell 61 million tons from the three owned and operated mines. Of this committed 2015 production, 48 million tons are under fixed-price contracts with a weighted-average price of $13.22 per ton. During the second quarter, Cloud Peak contracted about 10 million tons for 2015 delivery at an average price of $12.00 per ton reflecting the mix between 8,400 Btu/lb and 8,800 Btu/lb coal and prevailing market prices.

The company is continuing to forecast 2014 export shipments through Westshore of between 4.0 million and 4.5 million tons.

As a result of lower than expected second quarter shipments, it is reducing its 2014 shipment guidance by one million tons to 85 million to 89 million tons. This will still require an expected improvement in rail performance through the end of the year. Due to the strong cost control shown by the operations, Cloud Peak is maintaining its Adjusted EBITDA guidance range of $180m to $210m for the full year. It is reducing its capital expenditure range by approximately $15m to a new range of $30m to $40m.

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. 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.

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.