Cloud Peak Energy (CLD) Cuts FY14 Shipment, Adjusted EBITDA Outlook; Cautious on FY15 Expectations

Cloud Peak Energy Inc. (NYSE: CLD) updated its 2014 shipment and Adjusted EBITDA guidance ranges and provided its current medium term outlook.

Updated 2014 Guidance

The Company updated its guidance for 2014 coal shipments for its three owned and operated mines to between 83 million and 86 million tons, compared to its July 29, 2014 guidance of 85 million to 89 million tons. The Company also updated its guidance for 2014 Adjusted EBITDA to between $170 million and $200 million. On July 29, 2014, the Company issued 2014 Adjusted EBITDA guidance of $180 million to $210 million.

Colin Marshall, Cloud Peak Energy’s President and Chief Executive Officer said, “As we previously stated, our earlier guidance ranges were dependent upon an improvement in rail performance through the end of the year. While we believe the rail performance issues are being addressed, the reality is that the improvements have not taken place at a sufficiently robust pace to allow us to maintain our previous guidance. In addition, in late August our Cordero Rojo Mine was impacted by a significant rain storm causing flooding and damage to some equipment, which will slow shipments and cause us to incur some additional costs. Accordingly, we are updating our Adjusted EBITDA and shipment guidance ranges to reflect these impacts.”

Medium Term Outlook

Looking ahead to 2015 and 2016, the Company anticipates annual shipments to be between 78 million and 84 million tons from its three owned and operated mines, as the previously announced reductions take place in 8400 Btu production from the Company’s Cordero Rojo Mine.

For 2015, at August 22, 2014, the Company had committed to sell 65 million tons from its three owned and operated mines, or approximately 80 percent of its anticipated total 2015 shipments. Of this committed 2015 production, 51 million tons are under fixed-price contracts with a weighted-average price of $13.12 per ton.

As such, for 2015, the Company has approximately 30 million tons still to be priced between now and the end of 2015. Of these, approximately 14 million tons are under various index price mechanisms, which can result in a slight premium to market prices.

We continue to believe that current domestic and international prices are unsustainably low as they are not providing economic returns to a large number of major producers. Over the last few years, domestic and international prices have been volatile and have moved significantly in short time periods. We estimate that a near-term $1 per ton improvement in domestic pricing for 2015 deliveries would add approximately $21 million to 2015 Adjusted EBITDA based on our current open and indexed positions. Any increase in international prices from current low levels would result in a significant improvement to our Logistics and Related Activities segment results next year. We estimate that a $10 per tonne improvement in benchmark Newcastle prices would add approximately $34 million of Adjusted EBITDA in 2015.

Taking these pricing and volume factors into account, our preliminary estimates are that Adjusted EBITDA for 2015 could be approximately $120 million if coal prices were to remain at recent depressed levels through the end of next year. A $1 per ton improvement in domestic prices and a $10 per tonne improvement in Newcastle prices could result in Adjusted EBITDA for 2015 of approximately $180 million depending on the timing of improved prices and actual shipments.

In 2015, the Company expects to spend between $30 million and $50 million on capital expenditures to sustain the existing equipment fleet and a further $20 million on the repair and relocation of a dragline from the Cordero Rojo Mine to the Antelope Mine. The fifth and final installment of $69 million on the West Antelope II LBA will be paid in 2015, with no further LBA payments anticipated in 2016.

Cash taxes in 2015 are expected to be zero and no payments will be made under the now terminated Tax Receivable Agreement with Rio Tinto. In 2015, cash interest on the outstanding bonds is expected to be $40 million.

For 2016, the Company has approximately 48 million tons still to be priced, which we believe offer significant opportunity to be priced at higher and more sustainable levels than current depressed pricing, giving the potential of significant upside to 2016 revenue, Adjusted EBITDA, and cash flow, relative to 2015. In addition, as there are no further LBA installment payments anticipated in 2016, cash flow will benefit independent of the coal price environment.

Recent Developments

Last month, Cloud Peak Energy completed two opportunistic transactions to increase its ability to benefit from growth in Asian exports; and to eliminate a $103 million legacy liability.

First, the Company paid $37 million to expand its access to the growing Asian markets by securing additional port capacity at the fully utilized Westshore Terminal. The payment secured increased committed capacity of 6.3 to 7.1 million tons (compared to current long term committed capacity of 2.75 million tons), and extended the term of its throughput agreement with Westshore through 2024. As a result, the Company expects to increase its 2015 Asian exports to 6.0 to 6.5 million tons, compared to the 4.0 to 4.5 million tons currently forecasted for 2014. This opportunistic transaction allows us to increase near-term export sales at the existing, highly efficient Westshore port, further diversifying our customer base and markets.

Second, the Company paid $45 million to Rio Tinto to terminate the Tax Receivable Agreement (“TRA”) that was established at the time of our Initial Public Offering in 2009. This payment settled all future liabilities that would have been owed under the TRA, and eliminated the undiscounted liability of $103 million (as at June 30, 2014) in respect of estimated future obligations under the TRA. As a result, previously anticipated cash payments of approximately $14 million each year in 2014 and 2015 and additional payments in subsequent years were eliminated.

Colin Marshall continued, “In summary, with lower shipments and current weak coal pricing, 2015 results are expected to be lower than 2014 results. However, our 30 million ton unpriced position will allow us to benefit from any increases in domestic and international pricing in 2015. For 2016, with significant exposure to the potential of improving coal prices and no LBA payments, Adjusted EBITDA and cash flow have the opportunity to rebound.

In the context of the current coal markets, we have continued to focus on running our low-cost operations as efficiently as possible, controlling all aspects of our costs, and optimizing capital expenditures to maximize cash flow generation. We have also actively managed our balance sheet to position ourselves to weather the current environment and to take advantage of potential cyclical recoveries in domestic and international coal prices. We were pleased to be able to take advantage at this point in the market, of the opportunities to increase our near-term export terminal capacity and extinguish the TRA.”

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