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Signature Sponsor
July 27, 2017 - Cloud Peak Energy Inc. (NYSE:CLD), one of the largest U.S. coal producers and the only pure-play Powder River Basin (“PRB”) coal company, today announced results for the second quarter and first six months of 2017.
Highlights and Recent Developments
Colin Marshall, President and Chief Executive Officer, commented, “Second quarter shipments improved by 21 percent compared with the second quarter of 2016, as we exported 1.3 million tons and domestic customers took their contracted coal ratably. Improving volumes allowed us to deliver a solid operational and financial performance in the second quarter as the industry environment continued to improve.”
Health, Safety, and Environment
During the second quarter of 2017, among the Company’s approximately 1,150 full-time mine site employees, there were no reportable injuries. The year-to-date Mine Safety and Health Administration (“MSHA”) All Injury Frequency Rate (“AIFR”) is 0.17, compared to a rate of 0.16 through the second quarter of 2016. During the 39 MSHA inspector days at the mine sites in the quarter, the Company received one significant and substantial citation with an assessment totaling $4,632.
The Cordero Rojo Mine was awarded the 2016 Safe Sam Award, which is presented by the Wyoming Mining Association to the mining operation with the best safety record and the most work-hours across operations of all sizes. The Cordero Rojo Mine also received the Wyoming Governor’s Safety Award for the large mine category. This award recognizes safety excellence among Wyoming’s mine operators, chosen from approximately 350 active operators in the state.
In addition, Cloud Peak Energy’s Antelope Mine, located near Douglas, Wyoming, received the third place safety award for large surface mines from the Wyoming State Mine Inspector and the Wyoming Mining Association.
There were no reportable environmental incidents during the quarter.
Shipments during the second quarter of 2017 were over 21 percent higher than the second quarter of 2016, supported by increased exports and natural gas prices around $3.00 per MMBtu. Utility coal-fired power plants continued to run during the quarter and drew down coal inventories, although less than anticipated due to the slow start to summer.
Revenue from the Owned and Operated Mines segment increased 17 percent in the second quarter of 2017 compared to the second quarter of 2016 due to higher shipments, partially offset by lower average realized prices per ton. Cost per ton improved to $9.72 for the second quarter of 2017 compared with $10.50 for the second quarter of 2016. The year-over-year improvement was driven by increased shipments and the continued impact of measures taken to improve operational flexibility and efficiency. The operations team continued to successfully manage capital spend while keeping the equipment fleet in good condition.
Operating income decreased in the second quarter and year to date June 30, 2017 as compared to the same periods in 2016 primarily due to non-cash accounting income of $37.3 million for asset retirement obligation remeasurements in 2016.
Logistics and Related Activities
The Company exported 1.3 million tons during the second quarter of 2017 as Asian utility demand remains strong. Second quarter 2017 segment operating loss was $3.4 million, as compared to a loss of $8.2 million for the second quarter of 2016, as prior year contractual payments were partially mitigated by current year export sales activity. Adjusted EBITDA includes certain minimum payments pursuant to the Company’s rail and port agreements and unexpectedly high demurrage charges caused by rail delays as shipments ramped up. The Company has currently contracted 3.5 million tons to export during 2017 and expects to export approximately 4.5 million tons during 2017. This 0.5 million ton reduction from the 5 million tons of exports previously forecast is due to delays in ramping up rail service in the first quarter that will not be recovered during the remainder of the year. The Company believes these issues are now substantially resolved.
Cash, Liquidity, and Financial Position
Cash and cash equivalents as of June 30, 2017 were $80.5 million. During the second quarter, the cash used in operations totaled $7.1 million, while capital expenditures (excluding capitalized interest) were $3.8 million.
During the quarter, the Company reduced the amount outstanding on undrawn letters of credit used as collateral for reclamation bonds by nearly $16.9 million from the $67.5 million it reported as of March 31, 2017. As of the date of this release, Cloud Peak Energy has reduced the undrawn letters of credit by an additional $22 million from March 31, 2017 and now has a total of $28.6 million remaining in undrawn letters of credit used as collateral.
At June 30, 2017, the available borrowing capacity under the $400 million Credit Agreement was approximately $358 million. Including cash on hand and the availability under the A/R Securitization, the Company ended the quarter with total available liquidity of $453 million.
Government Affairs
During the first six months of the Trump Administration, there has been a significantly improved, near-term federal regulatory environment for the U.S. coal industry and utilities. The Administration’s stated policies seek to promote the use of America’s energy resources, including coal and other fossil fuels, and alleviate unnecessary regulatory burdens. The Environmental Protection Agency, Department of Interior, Department of Energy, and other agencies are reviewing existing regulations pursuant to these new policy directives.
Although these policy changes are a welcome shorter-term improvement, Cloud Peak Energy remains hopeful that Congress and the Trump Administration will also implement longer-term energy policies that recognize the substantial benefits of safe, reliable, and affordable baseload electricity generated from coal by providing utilities the certainty and incentives to invest in the nation’s coal power plant fleet. In particular, Cloud Peak Energy continues to advocate for the development and commercialization of advanced fossil fuel technologies, including carbon capture. It is encouraging to see bi-partisan support for the recently introduced Senate FUTURE Act that aims to amend the existing 45Q tax credit in order to promote the deployment of carbon capture and utilization technology on a significant scale.
In British Columbia, Canada (“B.C.”), following earlier statements from former B.C. Premier Clark that she would respond to U.S. tariffs on Canadian softwood lumber by potentially banning or imposing taxes or other levies on U.S. thermal coal transshipments through B.C, former Premier Clark’s Liberal Party lost a vote of confidence following recent provincial elections and a new government has been formed by the New Democratic Party (“NDP”) with the support of the Green Party. The new NDP-led government officially assumed power on July 18, 2017 and Mr. John Horgan, NDP leader, became B.C.’s Premier. Cloud Peak Energy is not aware of the new government seeking to impose any similar anti-coal measures. The Company will continue to monitor the political situation in B.C. and work with its business partners and other stakeholders to help ensure the U.S. remains a supplier of coal to Asian trading partners, meeting their need for reliable and affordable electricity.
Domestic Outlook
Mine shipments to domestic customers for the second quarter of 2017 were 13.0 million tons, as compared to 13.5 million tons shipped to domestic customers in the first quarter of 2017. Typically, the second quarter is the slowest of the year by a larger margin as customers take units offline for planned maintenance before the summer cooling season increases demand. With natural gas prices around $3.00 per MMBtu during 2017, utilities have maintained their consumption of PRB coal. The latest data from the U.S. Energy Information Administration shows that natural gas inventories have declined by 9 percent, compared to 2016 levels. Energy Ventures Analysis estimates there were 78 million tons of PRB coal inventories at utilities at the end of June 2017, a decline of 13 million tons from second quarter 2016 levels. The slow start to summer prevented PRB stockpiles from declining further. Full year shipments will now largely depend on the level of summer cooling demand, natural gas prices, and associated coal burn. These factors will dictate the level of third quarter coal buying and shipments utilities require in preparation for winter. If the summer is mild, it is possible that there will be few new purchases for delivery in 2017. This would result in Cloud Peak Energy’s first and second half domestic shipments being relatively equal, which would be unusual. Many utilities appear to be continuing to delay purchasing coal to have flexibility to switch between coal and gas electricity generation based on near term pricing. While this maximizes their flexibility, it could lead to some price support for coal during periods of increased natural gas prices and electricity demand.
For 2017, the Company currently plans to ship between 56 and 59 million tons, with current commitments to sell 56 million tons, which includes 3.5 million tons contracted with export customers. Nearly all of the 56 million tons are under fixed-price contracts with a weighted-average price of $12.18 per ton. The approximately 1 million tons for 2017 that were priced during the second quarter of 2017 averaged $11.63 per ton, in line with prevailing prices at that time.
The Company is currently contracted to sell 34 million tons in 2018. Of this committed production, 32 million tons are under fixed-price contracts with a weighted-average price of $12.49 per ton. For 2018, there were 5 million tons contracted during the second quarter of 2017 at an average of $12.38 per ton.
International Outlook
International thermal coal prices softened during the second quarter of 2017 with import demand growth led by China, South Korea, and southeast Asia countries. China has led the growth in imports of thermal coal (includes bituminous, sub-bituminous and lignite) increasing 20 million tonnes or 37 percent over the first six months of 2016. Year to date, Chinese domestic production rebounded during the second quarter of 2017 with an increase of almost 60 million tonnes, or 4 percent, from a relatively flat first quarter of 2017. China’s strong domestic production and imports were driven by a year-to-date increase in electric generation of over 7 percent, which was mostly supplied by coal-fired generation. In South Korea, the commissioning of several new coal-fired units in 2016 increased imports of thermal coal by over 7 million tonnes, or 20 percent, through May 2017.
During the quarter, no new additional export sales were booked as the Company managed and adjusted shipment volumes to be delivered in the second and third quarters due to the slower than planned rail ramp up. The Company has reduced its full-year export forecast from 5 million tons to 4.5 million tons, of which 3.5 million tons are currently committed. Industry benchmark pricing for export tons softened but remained within an economic range during the second quarter of 2017 on very few trades. Activity has recently increased and international coal prices have firmed as Asian utilities have begun making purchases for the second half of the year. The Company’s remaining uncommitted export volumes are for fourth quarter shipments, and those sales are expected to be contracted during the third quarter.
2017 Guidance – Financial and Operational Estimates
“Second quarter shipments showed a marked improvement over the second quarter of 2016, with solid demand from both domestic and international customers. We are now looking ahead to steady demand over the remainder of the summer and normalized export rail performance. The actions we took in 2016 to control our costs and improve our financial position mean we are well placed to successfully manage through the current environment and prosper as it improves,” commented Marshall. |
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