Cloud Peak ships less coal, but swings to net income in Q2 2016

Cloud Peak Energy (NYSE: CLD), one of the largest U.S. coal producers, said July 28 that it has second quarter 2016 net income of $35.3 million, which includes non-cash accounting income of $37.3 million for asset retirement obligation remeasurements, compared to a net loss of $52.9 million for the second quarter of 2015.

Adjusted EBITDA for the second quarter of 2016 was $19.3 million, including sales contract buyout revenue of $18.8 million, compared to Adjusted EBITDA of $10.6 million for the second quarter of 2015.

Shipments for the second quarter of 2016 were 11.8 million tons, down from 16.0 million tons for the same period in 2015. Cost per ton was $10.50 in the second quarter of 2016, down from $10.75 in the second quarter of 2015. Cash margin in the second quarter was $2.10 per ton compared to $2.01 per ton in the second quarter of 2015.

Colin Marshall, President and Chief Executive Officer, commented: “Increasing natural gas prices and a warm start to summer are beginning to improve the overall outlook towards the coal industry. After very low shipments in April and May, we started to see improved shipments in June and are optimistic that this trend will continue during the second half of the year. Our financial performance during the quarter benefited from buyouts by three customers and the impact of reduced reclamation cost assumptions on our asset retirement obligations. Once again our sites did a very good job of controlling costs during the quarter as we reacted to very low shipments.”

As expected, shipments remained low during much of the second quarter, resulting in the company’s production being 26% lower than the second quarter of 2015. Data from MSHA indicates that the second quarter and year-to-date coal production in the U.S. was down 24% and 26%, respectively, compared to the same periods in 2015. Through April 2016, electric generation was down 3.9%.

In the first five months of the year, utilities burned low-cost natural gas and deferred contracted coal shipments. With the start of the summer cooling season in June utilities have increased their coal burn and coal shipments to meet increased electricity demand. As shipments were initially constrained by delays in bringing back rail capacity, Cloud Peak said it expects utility coal inventories to reduce in June and July while shipments steadily increase.

Cost per ton decreased 2% to $10.50 for the second quarter of 2016 despite fewer tons shipped. Total cost of product sold decreased 26% in the second quarter of 2016 compared to the same period in 2015. In line with reduced revenue, there were large decreases in production taxes and royalties.

The company said it continues to focus on reducing costs as production volumes decline. Labor, diesel, repair and maintenance costs decreased as a result of reduced equipment hours and the lower amount of material moved. During the quarter, the company offered a severance incentive to all hourly employees which resulted in 127 employees leaving. Additionally, 11 salaried positions were eliminated during the quarter. Additionally, the company has continued to cut overtime, reduce the use of contractors, reduce scheduled work hours, and not fill vacant positions to manage labor costs and match capacity to shipment levels.

In the second quarter of 2016, the self-bonding renewal for $100 million was approved for the company’s Cordero Rojo Mine by the Wyoming Department of Environmental Quality (DEQ). When combined with the first quarter of 2016 approval to continue to self-bond $90 million of reclamation obligations at the Antelope Mine, the company ended the second quarter with $190 million of reclamation self-bonding capacity.

The company continues to proactively address the ongoing regulatory uncertainties regarding self-bonding programs in Wyoming by seeking to voluntarily transition away from self-bonding. Troubled coal producers like Peabody Energy have also run into self-bonding problems. During the second quarter, Cloud Peak submitted applications to the DEQ to reduce the bonding amount by incorporating recently issued equipment cost guidelines, completed reclamation, updated reclamation plans, and lower fuel price assumptions. These applications are currently being reviewed by Wyoming DEQ.

During the second quarter, Cloud Peak also reallocated its surety underwriters to position the portfolio to those that the company believes are supportive of the coal industry. Currently the company has $440 million of reclamation bonds with these underwriters backed by collateral of 15%, or $66 million, in the form of letters of credit under its credit agreement. Although the company currently expects to be able to achieve its goal of transitioning away from self-bonding, it is dependent on the Wyoming DEQ’s approval of the company’s updated reclamation bonding applications, and is therefore, uncertain.

Domestic Outlook

“Shipment pace increased during the month of June as the summer cooling season started,” the company said. “Management continues to expect stronger shipments in the third quarter of 2016 as customers increase delivery of their contracted volumes and as the railroads bring equipment and crews back to meet these commitments. Assuming normal summer cooling demand remains throughout the third quarter, the Company expects utility coal stockpiles to decrease. The price of natural gas and coal stockpile levels when electricity demand decreases in the fall will be critical to coal shipments for the full year. It is encouraging to see natural gas prices currently above $2.50 MMBtu where PRB coal can better compete at many utilities. If summer burn is strong, utilities are expected to rebuild their stockpiles in anticipation of winter demand. This scenario creates the potential for strong shipments and increasing sales this fall.

“During the second 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 before the summer. The Company was approached by three customers requesting reductions in 2016 volume commitments. Buyout revenue of $18.8 million was recorded and 3.9 million tons of contracted coal principally due for delivery in 2016 were cancelled. For 2016, the Company is currently committed to sell 61 million tons from its three mines. Nearly all of this volume is committed under fixed-price contracts with a weighted-average price of $12.41 per ton. For 2017, there are currently 45 million tons committed to sell from the three mines. Of this committed production, 42 million tons are under fixed-price contracts with a weighted-average price of $12.48 per ton.”

International Outlook

“Recently, we have begun to see stability in international supply and demand and a significant increase in prices for both near- term and out-year seaborne thermal coal. While it is too early to say the trend will continue, Chinese thermal coal imports have recently increased and demand continues to grow in Vietnam, South Korea, Japan, and Taiwan. At the same time, Indonesian supply has been reducing and Australian supply has been stabilizing. At current price levels, the Company does not believe investments will be made in any new production capacity. Given the large number of Asian utility plants currently being built to take imported coal, the Company believes the current oversupply will be overcome by growing demand over time. While prices are not yet at levels that would make exports from the Spring Creek Mine economic, the Company continues to receive inquiries from Asian customers looking for long-term supply. No additional exports through the Westshore Terminals are projected until international prices rise to the point of being economic.”

“Due to the compensation we received for contract buyouts in the second quarter, recent increased shipment rates, and improved burn outlook, we are maintaining our Adjusted EBITDA guidance for the full year. Shipments are reduced to reflect the contract buyouts. I am optimistic that the very difficult market conditions we have faced in the last 12 months due to greatly reduced coal demand are behind us, and we will see increased coal burn and shipments going forward,” said Marshall.

Updated assumptions for selected 2016 consolidated financial and operational metrics include:

  • Coal shipments from Cloud Peak’s three mines – 55 million-60 million tons;
  • Committed sales with fixed prices – About 61 million tons; and
  • Expected realized price of produced coal with fixed prices – About $12.41/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. Cloud Peak 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 in Wyoming and the Spring Creek Mine is located 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.