Coal producer Cloud Peak Energy makes some money in Q3 2015

Powder River Basin coal producer Cloud Peak Energy (NYSE: CLD) on Oct. 27 reported that it had third quarter 2015 Adjusted EBITDA of $39.0 million compared to $45.7 million for the third quarter of 2014, and that shipments for the third quarter of 2015 were 20.8 million tons, down from 21.5 million tons for the same period in 2014.

The cost per ton was $9.15 in the third quarter of 2015, decreasing from $10.44 in the third quarter of 2014. Cash margin in the third quarter was $3.47 per ton compared to $2.68 per ton in the third quarter of 2014.

Another third quarter highlight for the company was that it obtained access to approximately 95 million tons of coal at the Cordero Rojo Mine in Wyoming. This additional tonnage is expected to enhance the flexibility for future development of the mine and adds approximately four years of production to the mine at current rates.

The company also entered into a flexible ownership agreement with SSA Marine and the Crow Tribe, supporting the development of the Gateway Pacific Terminal in Washington State, a key facility for export of PRB coal into the Pacific Rim market.

Colin Marshall, Cloud Peak President and Chief Executive Officer, said: “We were able to deliver a strong quarter both operationally and financially as customers took their contracted coal after a very slow second quarter. Unfortunately, international prices continue to be negatively impacted by a decline in Chinese thermal coal imports and the strong U.S. dollar. Cloud Peak Energy is actively managing its exposure through these tough conditions.”

The company sold 20.8 million tons in the third quarter, down from 22 million tons in the year-ago quarter, and it sold 56.6 million tons in the first nine months of this year, down from 63.7 million tons in the same period last year.

It had net income of $8.9 million this past quarter, down from net income of $91.1 million in the year-ago quarter. But, Cloud Peak lost $48.7 million in the first nine months of this year, against $73.3 million in net income in the same nine months of 2014.




During the third quarter of 2015, domestic coal shipments were the strongest of the year due to steady rail performance and customers taking their contracted volumes. Overall, power demand for the first nine months is slightly higher compared to 2014 but competition from low priced natural gas and increased renewable generation capacity continues to reduce coal consumption, which has allowed customers to rebuild inventories this year.

Revenue from the Owned and Operated Mines segment decreased in the third quarter of 2015 compared to the third quarter of 2014 due to fewer shipments and lower average realized prices per ton sold. Cost per ton was $9.15 for the third quarter of 2015. The combination of steady shipments, lower diesel prices, and good overall cost control allowed the company to reduce unit costs.

The asset retirement obligation for the Cordero Rojo Mine was reduced by $35.2 million due to an optimization of the reclamation plan and additional mining life resulting from the recent surface rights agreement, which is expected to add approximately four years of production to the mine. The decrease in the asset retirement obligation exceeded the carrying value of the related asset retirement cost of $18.4 million and the resulting non-cash credit reduced Depreciation and depletion expense in the quarter by $16.8 million.

Cloud Peak’s Asian export deliveries through Westshore Terminal in British Columbia were 0.9 million tons in the third quarter of 2015, which reflects the planned reduction in shipments announced earlier in the year in consideration of the currently low seaborne thermal coal prices. The company’s forward sales hedging program mitigated some of the impact of lower spot prices with a realized gain of $2.8 million in the third quarter of 2015, and it further benefitted from lower fuel surcharges in the rail freight component of costs in the period.

Capital expenditures (excluding capitalized interest) for the first nine months of 2015 were $28.1 million, which includes $15.9 million for the dragline move from the Cordero Rojo Mine to the Antelope Mine, which is progressing as planned. Both mines are in Wyoming. Antelope produces a higher-Btu coal that is more desirable in the market.

Cash and cash equivalents as of Sept. 30 were $123.5 million and total available liquidity increased during the period to $668.7 million. At Sept. 30, there were no borrowings outstanding under a revolving credit facility or the accounts receivable securitization program.

Domestic Outlook

“Shipments for the quarter improved significantly and are expected to continue this trend for the remainder of the year,” said the company. “Our mines continue to be well positioned with the equipment, manpower, and inventory to meet anticipated 2015 demand.

“Increasing natural gas production and mixed regional and seasonal summer weather have continued downward pressure on natural gas prices and led to an increase in coal and natural gas inventories. Low oil and natural gas prices have led to a significant slowdown in drilling in many U.S. oil and natural gas fields. However, due to a large inventory of drilled wells and increased productivity, natural gas production continues to increase, keeping natural gas prices depressed, which in turn puts pressure on coal prices.

“In the near term, weather-related demand and natural gas prices are the largest factors impacting coal demand. At the same time, the ongoing regulatory burden on coal-fired electricity generation and the subsidies for renewable energy continue to decrease overall coal demand and are likely to lead to increased electricity prices for consumers. Currently, U.S. thermal demand for the nine months ended September 30, 2015 from electric generators is estimated to be down 67 million tons from 654 million tons compared to the same period in 2014. Shipments from the PRB are down only six million tons from 313 million tons over the same period, which demonstrates the PRB’s competitiveness even in this challenging market environment.

“For 2015, we have currently committed to sell 78 million tons from our three mines. This volume is nearly all committed under fixed-price contracts with a weighted-average price of $12.73 per ton. For 2016, we have currently committed to sell 67 million tons from our three mines. Of this committed production, 57 million tons are under fixed-price contracts with a weighted-average price of $12.95 per ton. The approximate 6 million tons we sold for 2016 during the quarter was at an average price of $11.17 per ton in line with the prevailing market. For 2017, we have currently committed to sell 40 million tons from our three mines. Of this committed production, 29 million tons are under fixed-price contracts with a weighted-average price of $13.14 per ton.”

International Outlook

“The international thermal coal market is very weak due to significantly reduced Chinese coal imports throughout 2015 and a strong U.S. dollar, which have depressed prices significantly even as demand from other Asian countries continues to grow,” said Cloud Peak.

“Chinese thermal coal imports this year are expected to be down over 60 million tonnes from 2014. This is the main driver for current weak international prices. It remains unclear whether near term Chinese thermal import demand will stabilize at current levels.

“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 growth in Indian imports, we still believe current oversupply will be overcome by growing demand over time. We continue to see interest in demand for PRB coal and our logistics services from our Asian customers and continue to have successful test burns in our target markets.

“Exports through the Westshore Terminal for 2015 are currently forecast to be approximately 4.0 million tons. We are currently contracted to ship approximately 4.3 million tons at Westshore in 2015, which reflects our previously announced reduction of 2015 export shipments by approximately one million tons and an additional amendment with Westshore to further reduce our contracted shipments in the second half of 2015 by approximately 900,000 tons. In addition, we are currently in discussions with our rail and port partners and expect to reduce our contracted export volumes in 2016 and beyond if weak pricing for seaborne thermal coal persists.”

2015 Updated Guidance – Financial and Operational Estimates

The following table provides the current outlook and assumptions for selected 2015 consolidated financial and operational metrics:













 

 

 

 

 

 

 

 

 

 

 

Estimate or Estimated Range

Coal shipments for the three mines (1)

 

 

 

 

75 – 77 million tons

Committed sales with fixed prices

       

Approximately 78 million tons

Anticipated realized price of produced coal with fixed prices

       

Approximately $12.73 per ton

Adjusted EBITDA (2)

       

$115 – $135 million

Net interest expense

       

Approximately $45 million

Depreciation, depletion, amortization, and accretion

       

Approximately $95 million

Capital expenditures (3)

       

$40 – $50 million

Committed federal coal lease payments

 

 

 

 

$69 million – PAID

(1) Inclusive of intersegment sales. (2) Non-GAAP financial measure; please see definition below in this release. (3) Excluding federal coal lease payments.

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. 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 2014, Cloud Peak Energy shipped approximately 86 million tons from its three mines to customers located throughout the U.S. and around the world. Cloud Peak Energy is a sustainable fuel supplier for approximately 4% of the nation’s electricity.

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.