Cloud Peak: mild 2015-2016 winter came at wrong time for coal industry

Cloud Peak Energy (NYSE:CLD), one of the largest U.S. coal producers, said April 28 that its shipments for the first quarter of 2016 were 13.0 million tons, down from 19.7 million tons for the same period in 2015.

Cost per ton was $11.15 in the first quarter of 2016, increasing from $10.02 in the first quarter of 2015. Cash margin in the first quarter was $1.50 per ton compared to $3.03 per ton in the first quarter of 2015. The net loss last quarter was $36.4 million, against a loss of $4.7 million in the year-ago quarter.

Colin Marshall, President and Chief Executive Officer, commented: “Unfortunately, just when we did not need it, we have experienced one of the mildest winters on record. PRB coal shipments were down around 34 percent as our utility customers had full stockpiles, burned low price natural gas, and slowed shipments well below their contracted rates. Our sites did a very good job of controlling costs during the quarter, which is difficult to do in such a high-fixed cost business. While the second quarter is also expected to be slow, we do expect shipments to pick up significantly in the second half of the year as summer cooling demand increases coal burn.”

Last year ended with high customer coal stockpiles due to the mild start to winter, which reduced heating and electricity demand. Low heating demand reduced natural gas prices significantly allowing gas to reduce coal burn. During the fourth quarter of 2015, customers generally took their remaining 2015 contracted coal leading to a rapid buildup of stockpiles at the end of the year, the company said.

The continuation of the mild winter in the first quarter of 2016 led to greatly reduced shipments as utilities took advantage of sub $2/MMBtu natural gas in a quarter when U.S. electricity demand was down 5 percent and energy used in heating was down 34 percent from the first quarter of 2015.

Data from the U.S. Mine Safety and Health Administration indicates that U.S. coal production of 172 million tons for the first quarter of 2016 is down nearly 28 percent, or 67 million tons, compared to the first quarter of 2015.

The company is implementing a wide range of cost management measures to reduce costs as production declines. These include cutting overtime, reducing the use of contractors, reducing retiree medical benefits, reducing scheduled work hours, early retirement incentives, and not filling vacant positions.

As of March 31, 2016, cash and cash equivalents were $79.4 million and total available liquidity was $557.7 million. At March 31, 2016, there were no borrowings outstanding under the revolving credit facility or the accounts receivable securitization program.

In the first quarter of 2016, Cloud Peak said it received approval from the Wyoming Department of Environmental Quality to continue to self-bond $90 million of reclamation obligations at the Antelope Mine and in the second quarter of 2016, the self-bonding renewal for an additional $100 million was approved for the Cordero Rojo Mine.

The company said it is proactively working to address the ongoing regulatory uncertainties regarding self-bonding programs in Wyoming by seeking to voluntarily transition away from self-bonding. The company is in discussions with surety bond providers to potentially increase its bonding capacity by offering approximately 15% collateral in the form of letters of credit under the Credit Agreement. In addition, it has submitted applications to the Wyoming DEQ to reduce the bonding amount by incorporating recently completed reclamation, updated reclamation plans, and lower fuel price assumptions. Assuming these are accepted, it would reduce the required bonding amount, potentially eliminating the need for self-bonding. Although the company currently expects to be able to achieve its goal of transitioning away from self-bonding, it is dependent on its ability to increase surety bond capacity and the Wyoming DEQ’s approval of the new reclamation plans and is, therefore, uncertain.

The company’s financials are a critical measure at a time when major coal industry competitors (each of them with PRB mines) Peabody Energy, Alpha Natural Resources and Arch Coal are in bankruptcy protection.

Domestic Outlook

Cloud Peak said: “Shipments in the second quarter of 2016 are expected to continue at a slow rate in what is normally the lowest sales quarter of the year as energy demand is reduced between the winter heating and summer cooling seasons. Assuming normal summer cooling demand, coal shipments are expected to pick up significantly in the second half of the year as stockpiles are reduced and utility customers take their contracted coal. Low oil and natural gas prices have led to a significant slowdown in drilling in many U.S. oil and natural gas fields, which is bringing down oil production and appears to be starting to reduce natural gas production. The rapid decline rate of many of the wells drilled in recent years is projected to lead to a decline in production unless significant additional drilling occurs in the near term. When this occurs natural gas prices should rise to a level that allows greater dispatch of PRB burning coal plants and in turn increased coal shipments.

“For 2016, the Company is currently committed to sell 63 million tons from its three mines. This volume is nearly all committed under fixed-price contracts with a weighted-average price of $12.72 per ton. For 2017, there are currently 42 million tons committed to sell from the three mines. Of this committed production, 39 million tons are under fixed-price contracts with a weighted-average price of $12.53 per ton. During the first quarter of 2016, minimal volumes were sold, as customers continue to assess consumption levels in light of their high stockpiles and low natural gas prices. The Company has been approached by several customers requesting reductions in 2016 volume commitments and is evaluating each request independently with the goal of maintaining value in 2016 through contract buyouts. The level of full year 2016 shipments will largely depend on summer cooling demand and natural gas prices.”

International Outlook

“Demand and pricing for seaborne coal continues to remain weak due to the impact of China’s reduced imports and a strong U.S. dolla,” Cloud Peak said. “Import demand from China and India appears to have stabilized, which could help lead to a balancing of supply and demand as Indonesian exports are reduced. Demand from Vietnam, South Korea, Japan, and Taiwan continues to increase strongly as these countries build new coal power plants to meet their future energy needs.

“While the strong U.S. dollar has improved the economics for coal producers in Australia and Indonesia, we do not believe investments will be made in any new production capacity at current price levels. Given the large number of Asian utility plants currently being built to take imported coal, we believe current oversupply will be overcome by growing demand over time. We continue to receive new inquiries from Asian customers looking for long term supply from our Spring Creek Mine. Once prices return to profitable levels, we expect shipments to resume to many of these customers.

“No additional exports through the Westshore Terminal are projected until international prices rise sufficiently to make them economic.”

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 in Montana. In 2015, Cloud Peak Energy shipped approximately 75 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.