Cloud Peak suffers major coal output drop in 2015; swings to loss for the year

Cloud Peak Energy (NYSE: CLD), one of the largest U.S. coal producers, said in a Feb. 17 earnings report that shipments for the fourth quarter of 2015 were 18.6 million tons, down from 23.3 million tons for the same period in 2014.

Shipments for the full year of 2015 were 75.1 million tons, down from 85.9 million tons last year as production was reduced at the Cordero Rojo mine in the Wyoming Powder River Basin to match customer demand. Cordero Rojo gets backed down first, due to its lower-Btu coal, while Cloud Peak’s Antelope mine, also located in the Wyoming PRB, with its higher-Btu coal runs better in soft markets like this one.

Cost per ton in 2015 was $9.81, decreasing from $10.19 last year as lower diesel prices and operational cost reductions overcame the impact on fixed costs of reduced shipments. Cash margin in 2015 was $2.98 per ton compared to $2.82 per ton in 2014.

The company had a net loss of $156.2 million in the fourth quarter of 2015, against net income of $5.7 million in the year-ago quarter. It posted a net loss of $204.9 million in all of 2015, against net income of $79 million in 2014.

The company noted that it has reached an agreement with a landowner near the Cordero Rojo Mine that provides Cordero Rojo with access to approximately 95 million tons of additional coal and enhances flexibility for the future development of the mine.

The company recorded a non-cash impairment charge to the port access rights related to Westshore, Millennium Bulk Terminal, and Gateway Pacific Terminal and to the equity investment in Gateway Pacific Terminal in response to continued weak international pricing. Also, it recorded a non-cash valuation allowance adjustment on the company’s deferred tax assets in the fourth quarter of 2015 due to lower forecasted taxable earnings. The total charges were $170 million.

Colin Marshall, President and Chief Executive Officer, said: “Our financial and operational execution in the quarter was notable given the weak external environment. Reducing costs enough to increase our full-year operating margin demonstrated our ability to adjust our business to address the drop in realized prices and tons shipped. As international coal prices remain very weak, we were pleased to be able to negotiate reduced take-or-pay rail and port commitments for the next three years. We believe that growing coal burn in Asia will drive up demand and prices over the medium to long term, and we will look to restart exports as soon as they are economic.

During the fourth quarter of 2015, domestic coal shipments were steady at the beginning of the quarter but weakened towards year end. Overall, power demand for 2015 was slightly higher compared to 2014, but competition from low priced natural gas and subsidized renewable generation, and the impact of anti-coal regulations continued to reduce coal consumption. The very mild weather late in the year reduced coal burn significantly and led to a rapid increase in utility coal inventories in the final quarter.

Revenue from the Owned and Operated Mines segment decreased in the fourth quarter of 2015 compared to the fourth quarter of 2014 due to fewer shipments and lower average realized prices per ton sold. Cost per ton was $9.54 for the fourth quarter of 2015 and $9.81 for the full year 2015. For 2015, the combination of lower diesel prices and good overall cost control allowed us to reduce unit costs even in the face of lower total shipments.

The company’s Asian export deliveries through Westshore Terminals in British Columbia were 0.3 million tons in the fourth quarter of 2015, which reflects the planned reduction in shipments announced in 2015 in consideration of the currently low international thermal coal prices. As previously announced, the company entered amendments to the agreements with Westshore Terminals and BNSF Railway to reduce take-or-pay commitments for contracted export tons for 2016-2018. The company does not anticipate any tons being exported in 2016, but said the relevant parties will meet regularly to discuss market conditions and potential shipments if market conditions were to strengthen sufficiently.

Domestic Outlook

The company said: “Shipments for the quarter declined as mild weather, low natural gas pricing, and increasing utility coal inventories slowed shipments in December. High natural gas production and a mild winter 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.

“The ongoing regulatory burden on coal-fired electricity generation and the subsidies for renewable energy continue to decrease overall coal demand. Many industry experts believe these will likely lead to increased electricity prices for consumers over time. Estimated U.S. thermal coal demand from electric generators in 2015 was approximately 750 million tons, down over 100 million tons compared to 2014. In 2016, coal burn for electricity generation is forecast to be approximately 720 million tons, which would be a much smaller decrease as compared to the prior year. However, coal shipments are expected to be reduced further as utilities reduce their currently high stockpiles.”

In January, the U.S. Department of the Interior announced a review of the federal coal leasing program and a moratorium on new federal coal leases until the review is completed. “We continue to be frustrated with the overall anti-coal sentiment of this administration of which this moratorium is the latest part,” said Marshall. “While it is unclear what impact the moratorium will have on the coal industry, we have reserves of 1.1 billion tons at year-end 2015 and rights to additional non-federal coal development projects. Unfortunately, the administration is focusing on reducing coal burn as its political response to climate change rather than supporting the development and commercialization of carbon capture and storage technology which the Intergovernmental Panel on Climate Change says is critical to significantly reducing global carbon emissions.”

For 2016, Cloud Peak is planning to ship between 64 million and 70 million tons and has currently committed to sell 65 million tons from its three mines. Of this committed production, 64 million tons are under fixed-price contracts with a weighted-average price of $12.71 per ton. The approximately 2 million committed tons for 2016 that the company priced during the fourth quarter of 2015 were at an average price of $10.87 per ton in line with the prevailing market. The overall 2016 sales position declined during the quarter due to the removal of unpriced international sales and a small amount of domestic volumes which has been shifted into 2017. For 2017, the company has currently committed to sell 41 million tons from its three mines. Of this committed production, 37 million tons are under fixed-price contracts with a weighted-average price of $12.59 per ton.

“We expect 2016 to be another difficult year for U.S. thermal coal producers. It’s important to remember that there will be a significant amount of coal burned in America for many years to come and that the PRB will provide a large portion of it. We are optimistic that coal demand will begin to stabilize in 2016, which would allow us to operate in a more certain environment. We have substantial coal resources, efficient operations and an excellent work force. We will continue to work to meet the demand of our customers, providing some of the world’s cleanest coal that generates low cost, safe, and reliable electricity across the U.S.,” said Marshall.

International Outlook

“In 2015, international thermal coal demand declined approximately 50 million tonnes due to significantly reduced Chinese imports, which more than offset demand growth from other Asian countries,” said the compay.

“Chinese thermal coal imports in 2015 were down approximately 60 million tonnes or about 35 percent from 2014. Reduced Chinese demand and the strong U.S. dollar were the main reasons for current weak international prices. It remains unclear whether near-term China demand will stabilize at current levels and what India’s import demand will be for the next few years.

“As a result of this oversupply and uncertainty around China’s demand and the ability of India’s domestic coal industry to increase production, the Company has renegotiated its export throughput agreements and is not planning on any exports sales in 2016 unless pricing improves sufficiently to make them economic. Cloud Peak Energy will continue to meet regularly with its rail and port partners to discuss market conditions and potential shipments if market conditions were to strengthen sufficiently.

“The strong U.S. dollar has improved the economics for coal producers in Australia, Russia, and Indonesia. However, the Company does not believe coal producers in these countries will be able to invest in new production capacity at current price levels. Given the large number of Asian utility plants currently being built to take imported coal and the projected growth in Indian imports, the Company still believes the current oversupply of seaborne thermal coal will be overcome by growing demand over time.”

Marshall noted: “While both the domestic and international external environments continue to be challenging, we will maintain our focus on producing coal in a safe and efficient manner. Our cost control efforts have been effective, and we intend to match our production to market demand. We continue to be optimistic that domestic and international prices will improve as supply is rationalized. While we are not sure when prices will recover, we believe our low-cost operations and current financial position will enable us to manage through these difficult times.”

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. 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.

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.