Cloud Peak sees lower coal sales and net loss in Q1 2015

Cloud Peak Energy (NYSE: CLD), one of the largest U.S. coal producers and the only pure-play Powder River Basin coal company, said April 30 that shipments for the first quarter of 2015 were 19.7 million tons, down slightly as the Cordero Rojo Mine in the Wyoming end of the PRB transitions to lower production rates.

Cost per ton was reduced to $10.02 in the first quarter of 2015 from $10.63 in the first quarter of 2014. The cost improvement was primarily due to a decrease of over 40% in diesel costs. The company sold 19.7 million tons in the first quarter, down from 20.7 million tons in the year-ago quarter. It recorded a net loss of $4.7 million in this past quarter, down from a net loss of $15.6 million in the first three months of 2014.

Colin Marshall, President and Chief Executive Officer, said: “I am very pleased with our financial and operational performance during the quarter. The mines operated well, and we were able to decrease costs and control capital expenditures as production declined. Given the mild winter, improved rail performance, and low natural gas prices, we believe domestic coal prices will remain subdued this year. International prices continue to be negatively impacted by oversupply and also by uncertainty over Chinese 2015 thermal coal imports. Cloud Peak Energy is actively managing its exposure to these tough markets and has a strong balance sheet and good operations that we believe will help carry us through this cycle.”

During the first quarter of 2015, domestic coal shipments were down slightly due to a planned reduction at the Cordero Rojo Mine. Mild winter weather in many of customer locations, low natural gas prices and improved rail performance allowed utilities to rebuild their stockpiles. Low natural gas prices and reduced coal burn put pressure on coal prices in early January as stockpiles grew along with expectations for a mild winter.

The company said it has successfully executed a plan to reduce capacity at the Cordero Rojo Mine from 38 million tons to 28 million tons. During the first quarter, demand for its 8,400 Btu/lb coal softened further and two of customers indicated they did not plan to take their contracted 2015 tonnage. Cloud Peak said it collected $3.3 million under a letter of credit for one of these unnamed customers who defaulted on contracts for 2.9 million tons as part of its bankruptcy proceeding. Another customer will not take one million tons under force-majeure provisions in its contract due to a plant failure. As a result, Cloud Peak lowered its expected 2015 production at the Cordero Rojo Mine from 28 million tons to 24 million tons this year, which is reflected in updated guidance range.

Notable is that Energy Future Holdings subsidiary Luminant recently asked its bankruptcy court to let it reject a master coal purchase contract with Cloud Peak. That may be the bankrupt customer Cloud Peak was referring to.

Cloud Peak’s Asian export deliveries through Westshore Terminal in British Columbia, Canada, increased to 1.4 million tons in the first quarter of 2015 as expected with the throughput increase announced during 2014. The company’s forward sales hedging program mitigated some of the impact of lower spot prices with a realized gain of $3.6 million in the first quarter of 2015, and it further benefitted from lower fuel surcharges in the rail freight component of costs in the period.

Forecasted capital expenditures for the full year have been reduced to between $45 million and $55 million as a significant land transaction has been delayed to 2017 and equipment budgets have been refined. The range includes the dragline move from the Cordero Rojo Mine to the Antelope Mine in Wyoming (with its more desirable 8,800-Btu/lb coal), which is expected to cost approximately $20 million in 2015. The final West Antelope II lease by application (LBA) installment payment to the federal government of $69 million will be made this year. Under federal rules, a coal company has to pay one-fifth of the bonus payment at the time the property is leased, with four annual payments to follow.

Domestic Outlook

“Our mines are well positioned with the equipment, manpower, and inventory to meet anticipated 2015 demand. We are not expecting rail performance to limit shipments this year due to the capital investments made by the railroad and reduced oil and coal shipments.

“Significantly increased natural gas production and a relatively mild winter have led to a drop in natural gas prices and an increase in coal and natural gas inventories. This has put downward pressure on coal and natural gas prices. We expect the rapid slowdown in drilling that is occurring in many U.S. oil and natural gas fields to lead to reduced production and increased pricing for natural gas later in the year. The level of cooling demand this summer will also have an impact on natural gas and coal pricing in the second half of the year.

“For 2015, we continue to 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 are continuing to rebuild inventories and increased utilization from existing operating units is expected to partially offset these declines. Additionally, our customers are benefitting 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 currently committed to sell 79 million tons from our three mines. Of this committed production, 73 million tons are under fixed-price contracts with a weighted-average price of $12.88 per ton. During the first quarter, we contracted approximately 2 million tons with an average price of $10.70 for 2015 delivery. For 2016, we have currently committed to sell 50 million tons from our three mines. Of this committed production, 41 million tons are under fixed-price contracts with a weighted-average price of $13.61 per ton.”

International Outlook

“The international thermal coal environment continues to be characterized by strong Asian demand growth and continued oversupply with the recent introduction of uncertainty over Chinese thermal coal import demand. We continue to see growing demand for PRB coal and logistics services from our Asian customers, and we continue to have successful test burns in our target markets.

“While the strong U.S. dollar has improved the economics for coal producers in Australia and Indonesia, we do not believe new production capacity will be built at current price levels. Given the large number of Asian plants currently being built to take imported coal and the rapid growth in Indian imports, we still believe the current oversupply will be overcome by growing demand.

“The level of Chinese thermal coal imports this year is unclear and will have a significant impact on the international supply demand balance and a direct impact on pricing. As international prices have fallen, China has moved to protect its domestic coal producers by raising import taxes and restricting imports of lower quality coals. While electricity demand grew by 5 percent last year, this was met by a large increase in hydro generation due to new projects being commissioned and unusually heavy rainfall. While first quarter 2015 imports are down significantly compared to last year, it is currently not clear if this is a temporary or longer term change.

“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. As we previously announced, we have worked with our rail and port partners to reduce our export shipments by 0.5 million tons in the second quarter and have recently reached an agreement in principle to reduce our second half shipments by another 0.5 million tons. Exports for 2015 are now forecast to be around 5.2 million tons. We will continue to work to potentially reduce our exposure to low international prices in 2016.”

Said Marshall: “In what are clearly tough domestic and international conditions, we will stay focused on matching our supply to demand while controlling costs across the business. We are optimistic that the markets will rebound due to the significant reduction in U.S. oil and natural gas drilling and continued Asian demand growth. However, we are not sure when this will occur and are pleased that we have the strong financial position and low cost operations that we believe are necessary to get through these difficult times.”

2015 Updated Guidance – Financial and Operational Estimates

This table provides the company’s current outlook and assumptions for selected 2015 consolidated financial and operational metrics:













 

 

 

 

 

 

 

 

 

Estimate or Estimated Range

Coal shipments for its three mines (1)

 

 

 

75–79 million tons

Committed sales with fixed prices

     

Approximately 73 million tons

Anticipated realized price of produced coal with fixed prices

     

Approximately $12.88 per ton

Adjusted EBITDA (2)

     

$110–$150 million

Net interest expense

     

Approximately $46 million

Depreciation, depletion and accretion

     

$115–$125 million

Capital expenditures (3)

     

$45–$55 million

Committed federal coal lease payments

 

 

 

$69 million

(1) Inclusive of intersegment sales. (2) Non-GAAP financial measure. (3) Excluding federal coal lease payments.

Cloud Peak Energy, headquartered in Wyoming, is one of the largest U.S. coal producers and the only pure-play Powder River Basin coal company. It 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.

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.