Cloud Peak financials slip in Q3 2014 due in part to rail service issues

Cloud Peak Energy (NYSE: CLD), one of the largest U.S. coal producers, said Oct. 29 that its adjusted EBITDA was $45.7m for the third quarter, and $130.3m for the first nine months of 2014.

This was down compared to prior periods due to continuing rail service issues reducing 2014 shipments and the impact of a $7.5m increase to estimates for past production taxes.

The company shipped 21.5 million tons in the third quarter from owned and operated mines, against, down from 23.1 million tons in the year-ago quarter. The shipments were 62.6 million tons in the first nine months of this year, against 64.3 million tons in the year-ago period.

Strong operational cost performance during the quarter resulted in underlying cost per ton of $10.09. Total cost per ton was impacted by $0.35 for the production tax accrual increase, raising the cost per ton to $10.44.

Colin Marshall, President and Chief Executive Officer, said: “In such a challenging environment, we are proud to be able to deliver these operational and financial results for the quarter. During the quarter, we carried out several significant opportunistic transactions, which enhanced our export growth strategy, reduced our legacy liabilities, and further strengthened our balance sheet and financial flexibility.”

Demand for coal continues to be strong, but 2014 shipments have been reduced due to slow rail operations. Recently, there have been some improvements in rail deliveries, and Cloud Peak said it remains optimistic that the railroads will continue to steadily increase their performance through 2015.

In late August, the Cordero Rojo Mine in the Wyoming end of the Powder River Basin was impacted by a significant rain storm causing flooding and damage to some equipment, which slowed shipments for several days and increased costs. Cloud Peak incurred $3m of insurance deductible costs related to this incident and expect any remaining amounts will be covered by insurance.

The company has amended and expanded its throughput agreement with Westshore Terminals in British Columbia, Canada, to increase long-term committed capacity at the port from 2.8 million tons per year to 6.3 million tons initially and increasing to 7.2 million tons in 2019. The company paid $37m to Westmoreland Coal to terminate its existing throughput agreement with Westshore Terminals freeing up space at the fully-utilized port to allow this increase to occur.

“We were very pleased to be able to secure additional export capacity at the bottleneck in our export supply chain. These opportunities only come available at certain points in the cycle, and we were glad we were able to take advantage of the opportunity due to our sound balance sheet. We remain committed to our strategy of growth through increased West Coast exports. We are pleased to be able to increase our sales to South Korea, Japan, Taiwan, and other Asian countries who are keen to diversify their coal import suppliers,” said Marshall. “We continue to position Cloud Peak Energy to be a reliable long-term supplier of low-sulfur PRB coal to our domestic and international customers.”

Cloud Peak Energy completed the sale of its 50% interest in the Decker Mine in Montana and related assets to mine co-owner Ambre Energy.

Additionally, the company received an option of up to 7.7 million tons of annual export capacity at the proposed Millennium Bulk Terminals facility in Washington State. “This transaction further reinforces our balance sheet and positions us to benefit when the Millennium Bulk Terminal is hopefully permitted and operational in a few years’ time,” said Marshall.

Outlook

The company said: “During the third quarter of 2014, the domestic coal market was negatively impacted by the continued poor performance of the railroads and the very mild summer weather. Slow shipments have forced some utilities to conserve coal to ensure they have adequate stockpiles going into the winter. Despite these efforts, stockpiles of PRB coal are at their lowest levels since 2006, which we believe will help prices recover once shipments improve. For the remainder of this year, we expect our utility customers to continue to focus on ensuring the delivery of their contracted coal.

“Internationally, growing demand from Asia, including India, China, South Korea, Japan, Taiwan, and Vietnam, is currently being met by increased supply from international projects commissioned several years ago, leading to current weak pricing. During 2014, we continued to see strong interest in Spring Creek coal in our primary focused 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 additional modern coal-fired generation, which will be designed to consume high-grade subbituminous coal, including our benchmark Spring Creek coal.

“Internationally, there have been a number of coal regulatory developments in various Asian countries, including in China. Although it is difficult to predict the ultimate impact of these new regulations on demand for PRB coal and international pricing, we believe the overall direction of these regulatory developments is positive for higher quality coals and will not diminish the need for coal-fired generation to support growing and developing economies. While international coal markets are currently oversupplied, we remain optimistic that the addition of new coal-fired generation in Asia, along with tightening regulatory initiatives to focus on higher quality coal supplies, will support longer term pricing and demand for PRB coal.

“For 2014, we have contracted to sell 89 million tons from our three owned and operated mines. Of this committed 2014 production, 89 million tons are under fixed-price contracts with a weighted-average price of $13.00 per ton. During the quarter, we fixed prices on approximately 2 million tons of previously contracted indexed coal for 2014 deliveries at an average price of approximately $10.82 per ton.

“For 2015, we have currently committed to sell 70 million tons from our three owned and operated mines. Of this committed 2015 production, 58 million tons are under fixed-price contracts with a weighted-average price of $13.10 per ton. During the quarter, we priced approximately 10 million tons for 2015 delivery at an average price of $12.52 per ton reflecting the mix between 8,400 Btu and 8,800 Btu coal and prevailing market prices.

“For 2016, we have currently committed to sell 46 million tons from our three owned and operated mines. Of this committed 2016 production, 36 million tons are under fixed-price contracts with a weighted-average price of $13.80 per ton.

“We are continuing to forecast 2014 export shipments through Westshore of between 4.0 and 4.5 million tons. Demand from our international customers continues to be strong, and we continue to seek to fill our contracted capacity at Westshore while working to minimize demurrage costs due to rail interruptions delaying ship loadings. At current international pricing levels, we are experiencing negative physical Logistics and Related Activities margins on our export sales. However, we have positive Adjusted EBITDA due to our hedge positions, and we continue to benefit from the margins realized by our Owned and Operated Mines segment.

“We have raised the lower end of our 2014 shipment guidance to a new range of 84 – 86 million tons. This will require the recent improvement in rail performance to continue through the end of the year. Due to the strong cost control shown by our operations, we are also raising the lower end of our Adjusted EBITDA guidance range to a new range of $180 – $200 million for the full year and reducing our expected capital expenditures to $20 – $30 million.”

Cloud Peak is headquartered in Wyoming and is one of the largest U.S. coal producers and the only pure-play Powder River Basin coal company. Its Antelope and Cordero Rojo mines are located in Wyoming and the Spring Creek mine is in Montana. In 2013, Cloud Peak 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.