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Cloud Peak Energy, Inc. (CLD) Misses Q1 EPS by 10c, Comments on Outlook

April 29, 2014 4:18 PM EDT
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Cloud Peak Energy, Inc. (NYSE: CLD) reported Q1 EPS of ($0.11), $0.10 worse than the analyst estimate of ($0.01).

Outlook

During the first quarter of 2014, domestic coal market fundamentals continued to strengthen. Coal burn increased due to the cold winter across much of the U.S. and higher natural gas prices. With the high burn rates and rail supply interruptions coal inventories at utilities reduced to their lowest levels for many years.

Based on data from the Energy Information Administration, through February 2014 electric generation from coal-fired power was up 15%, and coal consumption was 160 million tons, up 18 million tons compared to last year. Through March 2014, heating degree days for the U.S. were up 11% over last year and 13% over the 10-year average greatly increasing the burn of both coal and natural gas which reduced inventories of both.

Customer stockpiles of PRB coal are estimated to have fallen to 53 million tons at the end of March 2014, down 13 million tons since the start of the year. Our customers’ immediate focus is currently on ensuring the rail delivery of their contracted coal. Nonetheless, we have seen a significant increase in requests for additional coal to be delivered this year. After several years of utilities reducing their forward contracted position we believe they are more likely to contract a full year’s consumption of coal in 2014 to ensure they have confidence in their future supply.

With winter weather behind us we are optimistic that rail performance will steadily improve throughout 2014 as new equipment and crews are brought into service. This should allow shipments to increase through the rest of the year to meet our existing contracts. The recent increases in PRB coal prices should be maintained due to low natural gas storage levels and coal inventories going into the summer cooling season. It is possible that, if there is a normal summer cooling demand, it will be difficult to rebuild coal and natural gas inventories ready for next winter.

Internationally, we continue to see strong demand for PRB coal from our Asian customers. In 2013, the major increase in seaborne thermal coal demand came from India, supported by continued growth in Chinese imports. “While Asian demand for coal continues to grow it is interesting to see demand from Japan increasing as they build new clean, highly efficient coal units. We are also seeing similar new coal plants being built in South Korea and Taiwan as they prepare to meet their future electricity demand. It is encouraging that Cloud Peak Energy’s Spring Creek coal is increasingly well regarded in the Asian marketplace due to its consistent high quality. We believe it is now considered equivalent to the best Indonesian coal brands that many of these new plants are designed to burn,” said Jim Orchard, Senior Vice President Marketing.

For 2014 we are essentially fully sold out. We have contracted to sell 89 million tons from our three owned and operated mines. Of this committed 2014 production, 84 million tons are under fixed-price contracts with a weighted-average price of $13.09 per ton. During the quarter, we contracted, fixed-prices, and finalized carryover, on approximately 7 million tons of coal for 2014 deliveries at an average price of approximately $12.10 per ton.

For 2015, we have currently committed to sell 51 million tons from our three owned and operated mines. Of this committed 2015 production, 38 million tons are under fixed-price contracts with a weighted-average price of $13.54 per ton. During the quarter, we contracted approximately 5 million tons for 2015 delivery at an average price of $13.08 per ton.

While our first quarter export shipments were lower than planned we continue to forecast 2014 export shipments through Westshore of between 4.0 and 4.5 million tons. Demand from our international customers continues to be strong, and we continue to seek to fill all available capacity at Westshore while working to minimize demurrage costs due to delayed shipments. At current international pricing levels, there is little logistics margin available on our export sales. However, we continue to benefit from the domestic sales margin recognized in our Owned and Operated Mines segment and through our hedge positions.

As a result of our reduced first quarter shipments and the expectation that it will take some time to resolve the rail issues we are reducing the top end of our 2014 shipment and Adjusted EBITDA guidance ranges slightly.

“Our strategy continues to be to match our production to market demand. This has proved to be a sensible policy in recent years which has allowed us to control our costs and optimize our mine plans. Consistent with this strategy, we are committed to the 10 million tons per year reduction of production at our 8400 Btu Cordero Rojo Mine, which will reduce its production to around 28 million tons next year. As a result Cloud Peak Energy’s 2015 total production from our three mines is currently expected to be around 80 million tons. In combination with this supply response, we see several indicators that a healthier coal market is returning; most importantly, increased customer demand and rising contracting prices. We anticipate coal pricing will continue to recover and believe that Cloud Peak Energy is well positioned financially and operationally to benefit,” commented Marshall.

For earnings history and earnings-related data on Cloud Peak Energy, Inc. (CLD) click here.



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