Cloud Peak Energy (NYSE: CLD), one of the largest U.S. coal producers, said Feb. 17 that it had net income in the fourth quarter of $5.7 million, against net income of $13.9 million on the year-ago quarter.
For all of 2014, the Powder River Basin producer said it had net income of $79 million, up from $52 million in 2013.
Improved shipments for the fourth quarter of 23.3 million tons resulted in full year shipments of 85.9 million tons as mine operations were able to increase production as rail service improved. Operating cost controls resulted in a reduction in full year cost per ton to $10.19 in 2014 from $10.23 in 2013. Fourth quarter cost per ton was $9.32 for 2014 compared to $10.04 for 2013.
In 2014, the company divested its 50% share of the Decker Mine in Montana, which reduced its asset retirement liabilities by $72.2 million. In that deal is also received an option for up to 7.7 million tons of export capacity at the proposed Millennium Bulk Terminal.
The company has also increased its committed export capacity at the fully-utilized Westshore Terminal in British Columbia, the lowest cost of the two existing cape-size ports in the Pacific Northwest for PRB exports to Asia.
Colin Marshall, President and Chief Executive Officer, commented: “I am pleased with our financial and operational performance this year in the face of a challenging external environment. Particularly impressive was the mines’ ability to reduce costs and control capital expenditures despite rail constraints, which reduced our shipments throughout the year. As a result, we were able to deliver Adjusted EBITDA slightly above our updated third quarter guidance and finish the year with a strong cash position. While 2015 will hold challenges for U.S. coal producers, I am confident Cloud Peak Energy is well positioned to successfully navigate this environment.”
Throughout 2014, Cloud Peak’s domestic coal shipments were negatively impacted by the performance of the railroads, which reduced shipments to 85.9 million tons compared to a contracted position of over 90 million tons. In the fourth quarter, Cloud Peak said it started to see some improvement in railroad performance, particularly in the Southern PRB in Wyoming, resulting in shipments of 23.3 million tons for the quarter compared to 21.7 million tons in 2013. Customers are continuing to rebuild their stockpiles from low inventories resulting in improved shipments early in 2015.
Execution of a plan to reduce production at Cordero Rojo Mine in Wyoming proceeded well during 2014. Cordero Rojo has started 2015 running at its new annual rate of approximately 28 million tons with a reduced workforce and smaller equipment base. Mobile equipment is being redeployed, a shovel has been transferred from Cordero Rojo to the Antelope Mine, and a dragline is planned to be moved soon. Transfers of employees between sites and normal attrition have allowed the company to complete the reduction without any layoffs. Cordero Rojo produces a lower-Btu coal than Antelope that doesn’t sell as easily in down markets.
During the fourth quarter of 2014, Cloud Peak saw improved performance from the railroads, and is optimistic the investments the railways are making will allow this improvement to continue in 2015. Its mines are well positioned with equipment, manpower, and inventory to meet demand. Customers are continuing to rebuild low coal inventories and with recovering rail performance, Cloud Peak is hoping to see improvement in market fundamentals later in 2015. Because of the low shipments in 2014, approximately 3 million tons of contracted sales will be carried over to the first half of 2015.
“The increased natural gas production and current mixed winter have led to a drop in natural gas prices and an increase in coal and gas inventories,” the company added. “This has recently put downward pressure on coal and gas prices. However, we are experiencing some help with fuel costs due to the large drop in oil prices and would expect the rapid slowdown in drilling that is occurring in many U.S. oil and gas fields could lead to increased pricing for gas. The level of cooling demand this summer will also have an impact on coal and gas pricing in the second half of the year.
“For 2015, we currently expect total U.S. coal demand to be lower than 2014 due to low natural gas prices and some plant closures resulting from the Mercury and Air Toxics Standards (‘MATS’) regulation. Customers rebuilding inventories and increased utilization from existing operating units will partially offset these declines. Additionally, our customers will benefit from lower oil prices through reduced rail fuel surcharges, which should make their coal burning plants more economical. While we expect total U.S. demand to decline, we are forecasting that PRB demand should be relatively stable for 2015 compared to 2014.
“For 2015, we have committed to sell 80 million tons from our three mines. Of this committed production, 72 million tons are under fixed-price contracts with a weighted-average price of $12.92 per ton. During the fourth quarter, we contracted, fixed prices on, and carried over approximately 14 million tons for 2015 deliveries with an average price of approximately $12.17 per ton. The pricing we received reflects product mix and the weak market prices during the quarter.
“For 2016, we have currently committed to sell 47 million tons from our three mines. Of this committed production, 38 million tons are under fixed-price contracts with a weighted-average price of $13.75 per ton.
“Internationally, we continue to see growing demand for PRB coal and logistics services from our Asian customers. For 2014, China’s electric generation grew an estimated 5 percent, with all of the growth coming from hydroelectric and nuclear power while thermal generation remained flat for the year. Thermal coal imports into China, which includes lignite, were 175 million tonnes for 2014, up 2 million tonnes over 2013 levels. Although uncertainty regarding China’s economic growth rates, environmental regulations, and the strong U.S. dollar are creating headwinds, we expect growing demand in Asia for coal, together with reduced capital investments by producers, will eventually overcome the current oversupply. However, current international prices remain low, and as a result, we have worked with our logistics partners to reduce expected second quarter exports by approximately 550,000 tons. Consequently we now expect full year export shipments through Westshore Terminal of approximately 5.8 million tons. For 2015, a key driver of our Adjusted EBITDA will be the price we achieve for our export sales and logistics services. We are working to maximize our sales price relative to the Newcastle index, minimizing our take or pay exposure, recognizing lower fuel surcharges on rail rates, and realizing our hedge position to minimize our logistics loss.
“We anticipate that capital expenditures will be higher in 2015 than 2014. The dragline move from our Cordero Rojo Mine to our Antelope Mine will cost approximately $20 million in 2015. The final West Antelope II LBA installment payment of $69 million will be made in 2015. Cash interest is expected to normalize at approximately $41 million and total interest expense is expected to be approximately $46 million.”
2015 Guidance – Operational Estimates
The following table provides Cloud Peak’s current outlook and assumptions for selected 2015 consolidated operational metrics:
- Coal shipments from three mines – 78 million-82 million tons;
- Committed sales with fixed prices – about 72 million tons; and
- Expected realized price of coal with fixed prices – about $12.92/ton.
Cloud Peak Energy is headquartered in Wyoming and is one of the largest U.S. coal producers and the only pure-play Powder River Basin coal company. As one of the safest coal producers in the U.S., Cloud Peak Energy mines low sulfur, subbituminous coal and provides logistics supply services. 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 located in Montana. In 2014, Cloud Peak Energy shipped approximately 86 million tons from its three mines to customers located throughout the U.S. and around the world.