CLD
#Good afternoon.
Thank you for joining us.
With me today is <UNK> <UNK>, Cloud Peak Energy Inc.
's, President and Chief Executive Officer; <UNK> <UNK>, Chief Financial Officer; and Gary Rivenes, Chief Operating Officer.
Today's presentation may contain forward-looking statements regarding our outlook for our company and industry; financial and operational guidance; volumes, prices and demand; the regulatory and political environment; growth strategies; capital resources; and other statements that are not historical facts.
Actual results may differ materially because of various risks and uncertainties, including those described in the cautionary statement in today's earnings release and in our most recent Form 10-K and Forms 10-Q.
Today's presentation also includes non-GAAP financial measures.
Please refer to today's earnings release for the reconciliations and related disclosures.
Our earnings release is available on the Investor Relations section of our website at cloudpeakenergy.com.
I'll now turn the call over to <UNK> <UNK>.
Thank you, <UNK>.
Good afternoon and thank you for taking the time to listen in to our Q1 2017 results call.
As <UNK> said, I'm joined by <UNK> and Gary.
After the drop in shipments we saw in Q1 last year, we were pleased to see shipments continue steadily through the first quarter.
We shipped 14 million tonnes as our customers took their contracted coal.
Unfortunately, while most of the country had a very mild winter, our shipments to Asian customers were limited to 500,000 tonnes by severe weather in the Pacific Northwest which impacted rail capacity.
In April, we've seen a marked improvement in export rail service.
Adjusted EBITDA of $20.4 million during the quarter was much better than last year when shipments were significantly below plan.
During the quarter, there was one report of medical injury at our Antelope Mine.
An employee required stitches after cutting his hand.
The one injury means our year-to-date All Injury Frequency Rate is 0.34.
There were 36 MSHA inspection days at our sites during the quarter with one significant and substantial citation issued.
There were no environmental citations at any of our sites during the quarter, and it is now over 3 years since our last environmental citation.
The operations ran well during the quarter, as we shipped our planned amount of coal.
To put this in context, last year we had contracted 65 million tonnes going into the year, but were shipping at a 51 million tonne rate at the end of Q1.
This year we've contracted 56 million tonnes but are currently shipping at a 58 million tonne rate.
Shipping at our planned rate helps operational efficiency greatly.
The cost reduction measures we put in place last year allowed us to keep our cost below $10 per tonne during the quarter.
We continue to increase our operating efficiency and improve our maintenance practice to help offset rising strip ratios and haul distances.
I continue to be impressed by the ability of our employees to find ways to improve our operation safety and efficiency.
The new administration has clearly brought a completely different approach to the fossil fuel industry and coal in particular.
Immediate actions such as those to halt the Stream Protection Rule, lift the moratorium on federal coal leasing and suspend the change to coal valuations are most welcome after years of anti-coal regulations.
While the immediate relief from new and pending rules is very important, we need to work with the administration to establish a framework where coal can have a stable, long-term future.
The first goal will be to establish an environment where utilities have the regulatory certainty they need to stop closing coal plants and then to consider building new ones.
Given the long-term nature of such decisions, achieving this will not be easy.
Reducing the massive subsidies to renewables and switching some portion to develop advanced coal technologies such as carbon capture and storage would also be a great first step.
I'll now hand over to <UNK> to run through the financials before returning to cover the outlook.
Thank you, <UNK>.
In contrast with the first quarter of last year, this year has started with customers taking their contracted coal.
In Q1, we shipped 14 million tonnes, which is 1 million tonnes greater than the first quarter of 2016.
This higher volume as well as the continuing effect of our prior year cost control efforts, supported our first quarter cost per tonne of $9.78.
This is a $1.37 per tonne improvement as compared to the cost per tonne in the first quarter of 2016.
With our realized price per tonne of $12.10 during the period we were able to record a first quarter cash margin of $2.32 per tonne.
And our owned and operated mine segment generated adjusted EBITDA of $33.7 million.
We also shipped 0.5 million export tonnes during the first quarter.
As this was fewer tonnes shipped in the period than we had contracted, we incurred a negative impact from the quarterly rail and port payments charged during the period.
We also incurred higher demurrage expense because of the adverse weather conditions for rail shipments.
The Logistics segment adjusted EBITDA loss was $2.6 million for the period.
While this compares favorably to the prior year loss of $6.9 million, it is not indicative of the expected full year results.
We continue to expect full year export volumes of approximately 5 million tonnes and positive full year segment adjusted EBITD<UNK>
SG&A costs were $10.7 million for the period, which is $3 million lower than the first quarter of 2016.
This continues to show the impact of our work to reduce labor and benefit cost across the company.
Our consolidated adjusted EBITDA for the first quarter was $20.4 million as compared to the $1.3 million adjusted EBITDA loss reported for the first quarter of 2016.
We ended the first quarter with $100.5 million in cash.
Our total available liquidity at March 31, was approximately $455 million, which is the aggregate amount of our cash balance and available borrowing capacity on our credit agreement and our AR securitization program.
Throughout 2016 and early 2017, we made considerable progress improving our financial position.
We exited reclamation self-bonding and reduced total reclamation bonding by over $190 million.
We completed an exchange offer on our senior notes that reduced our debt by over $90 million.
We renegotiated our throughput contracts with Westshore and BNSF that removed over $480 million of contractual commitments, while retaining the access to ship to our seaborne thermal coal customers.
In continuation of those efforts, during the first quarter we issued 13.5 million shares of common stock for net proceeds of $64.7 million.
The equity proceeds allowed us to retire the remaining 2019 senior notes for $64.5 million.
The combined transactions have reduced our outstanding debt by over $150 million and we now have no debt maturities until 2021.
As we look forward, we are able to reaffirm our range of 55 million to 60 million tonnes of shipments for 2017.
Even with the challenging ramp up and weather interruptions to our export business, we continue to anticipate exporting approximately 5 million tonnes during 2017.
As we explained during our February call, reaching the top of our adjusted EBTIDA range would require an increase in the price of our export sales from then prevailing levels.
As this has not yet occurred and to reflect sales during the quarter, we are lowering the top end of our adjusted EBITDA guidance range by $10 million.
Our 2017 adjusted EBITDA guidance range is between $80 million and $110 million.
The midpoint of our adjusted EBITDA range does assume some improvement on export prices for the remaining unpriced export volumes or some incremental in-year domestic sales.
With the focus on necessary capital repairs to maintain the health of our equipment, along with anticipated land purchases, the guidance range for capital expenditures remains between $20 million and $30 million.
Depreciation, depletion and amortization expense is expected to be between $70 million and $80 million for the year.
And cash interest for 2017 as updated for the impact of the 2019 bond retirement, will be approximately $45 million.
With that, I will hand the conversation back to <UNK>.
Thank you, <UNK>.
I'll now cover the international outlook before moving to domestic.
Since mid-2016 we have seen international coal prices rise rapidly, largely driven by increased Chinese imports and then retreat, before Cyclone Debbie disrupted Australian coal exports in late March.
The main impact of the cyclone appears to be in a disruption to the rail infrastructure that served met coal mines in Queensland.
The supply disruption pushed up met coal prices sharply and helped firm thermal coal pricing.
Even as the rail lines come back into service, I think the full impact of the cyclone will not be clear for some months.
Overall, any reduction in supply should help all pricing.
We are encouraged by the 7% electricity demand growth in China, their reduced domestic production and the large increase in Chinese thermal coal imports since last year.
Our coal mainly competes with Indonesian suppliers of subbituminous coal who have not had any major supply disruptions recently.
However, our Asian customers continue to tell us that Indonesian coal quality is deteriorating and quite variable from ship to ship.
Cyclone Debbie also reinforced to many of our customers the benefits of having a diverse supply base.
Given this background, we are continuing to receive strong interest from our Asian utility customers.
We've currently contracted 3.3 million tonnes to deliver in 2017, and are planning to export 5 million tonnes for the full year.
To reach 5 million tonnes, we will need to see the recent improvement in rail service continue for the rest of the year.
As I'm sure you're aware, yesterday Premier Clark of British Columbia sent a letter to Canadian Prime Minister Trudeau urging him to ban US coal export through British Columbia in response to US duties on Canadian softwood lumber.
We value our Canadian trading partners and hope the decision makers will act in the best interest of all involved.
And we will continue to monitor any further developments.
On the domestic front, it is encouraging that utilities are taking their contracted coal after a second extremely mild winter.
The impact of $3 gas prices on PRB coal burn is clearly shown by PRB coal burn being up 16% in Q1 this year compared to last year when gas was below $2, even with a milder winter.
PRB stockpiles of 82 million tonnes do remain at elevated levels after the mild winter, though they are down from 97 million tonnes last year.
While there was very little buying going on in Q1, we have recently seen an increase in RFPs as utilities look to contract coal for the second half of the year.
We are currently contracted to sell 56 million tonnes this year.
Of this committed production, 55 million tonnes are in the fixed price contracts with a weighted average price of $12.19 per tonne.
The 2 million tonnes we contracted or priced since our last call were at a weighted average price of $11.39 per tonne, reflecting the mix of 88 and 8400 coal and prevailing prices.
Currently we've contracted 29 million tonnes to delivery in 2018.
And of this committed production, 27 million tonnes are under fixed price contracts with a weighted average price of $12.51.
To sum up before we take your questions.
2017 appears to be playing out as we planned, with customers taking their contracted coal.
It would appear that the large drop in domestic demand we have seen in recent years has leveled off, as coal plant closures have slowed and gas prices increased.
We are currently expecting coal production to remain relatively flat this year, though a hot summer could cause an increase in second half demand.
Our exports are picking up after a slow start due to weather-related rail delays.
We continue to see strong interest from Asian customers who want to take all the coal we can get to the port.
While we would like international prices to be a bit higher, we are encouraged by strong import growth into China this year.
With that, we can now take your questions.
So just to refresh, when we talked in February at the earnings call, we talked about 5 million tonnes at about a $5 margin.
And we only shipped 500,000 tonnes.
We still are reaffirming the 5 million tonnes, though.
Clearly, the margins we incurred some loss there.
So if you back into maybe a range of expected results of backing off, we came down $10 million off the high end of the range.
But if you attribute maybe some of ---+ it's a component of that.
So if we were $25 million at February and with the tonnes that we priced at prevailing prices, we're probably saying it's in the $15 million to $20 million range of contribution coming from Logistics.
So we'd need $5 million to $7 million a quarter going forward.
I think really, <UNK>, it's probably about 24 hours since the letter went out, it really is too early to give any specifics.
So I'm sorry, we don't have any further comments other than say obviously we're very watchful.
I think really, <UNK>, the impact was that we only shipped 0.5 million tonnes and, therefore, that ---+ and we also incurred some demurrage.
So it's all in there.
I think <UNK>'s guidance that we expect it to maybe come out to $15 million to $20 million for the full year.
Hopefully we'll get some of the prepayments on some of the shipments back.
We have seen a marked improvement in April.
I think we might have loaded 4 ships already, so that's great to see.
And I think to go into the specifics any further really is just going to get us all confused.
No, no.
If we carry on, on the rate we're going in April, we'll be comfortably there.
And, no, it's looking good.
There was some very bad weather in the Pacific Northwest even while the rest of us had this extraordinary mild winter.
So we've been very pleased with the way things have stepped up in April.
And as we said in the remarks, as long as we continue at that pace, then we're comfortable that the rail import system can handle 5 million tonnes.
Okay.
Well, I think if you actually go back over our comments over the last few years, in terms of the development of the Spring Creek Complex, which is obviously our big export ---+ or our big opportunity, we've been pointing out more and more that we see the domestic market for that coal, which we've been talking to customers about and developing.
So obviously exports are important to us.
We want to develop the 5 million.
But whatever you do, don't ---+ well, first of all, certainly I'm very optimistic that we will continue to be able to export, as we are at the moment, and that there is also a domestic market for those development projects, particularly because of the cost of leasing high quality reserves in the Southern Powder River Basin and as existing reserves run down.
So, yes, don't get ahead of yourself on the potential impact on the Spring Creek Complex.
Yes.
So we've sold ---+ well, contracted 27 million tonnes with ---+ sorry.
We've contracted total of 29 million, of which 27 million are the fixed price of 12 ---+ weighted fixed average price of $12.51.
Absolutely.
And, Luke, you can see that it's roughly at the, you know, roundabout the way the OTC's been bouncing around in that quarter.
As normal, our contracting is not too far away from where the OTC is.
Well, I think we should acknowledge that obviously Canada exports a lot of coal out through Vancouver through the Neptune and the Westshore terminal.
US coal is only a small, maybe ---+ I'm not sure exactly what percentage.
I'll say 20% of that.
We believe, as we saw the response from Westshore to the Premier's letter that it's valuable business, it's important, and supports a lot of economic wealth and jobs in Vancouver.
So we think it is important.
We also think that Canada is a minerals resource-based company and so certainly [plan to export].
There's no indication to me that there's a want of ban of coal exports.
It was more specific than that.
And I think that that's the important thing I took from that.
And hopefully that's why it will be possible to resolve the actual issue.
And of course there's a lot of things going on at the moment between the US and Canada; this is one small part of it.
So hopefully it'll all move forward.
And the thing I'd say is it was only 24 hours ago and our ships are still going.
So we've seen no impact yet.
Let's see how this plays out.
Well, I'd say there was two things, actually, that he said on the guidance.
One is we'd like a few more bucks on the export coal or a few more domestic tonnes.
And I think we haven't seen the increase in the thermal, maybe the Indonesian pricing that we generally sell against, which has been a pretty decent level, but we'd like a few bucks more on that.
There's still plenty of time for that to play out.
And I think as we said, the increase in Chinese imports has really been quite large this year.
So I think there's still plenty of time for that to play out in terms of pricing for that coal, for the Indonesian coal that we sell against; so I think there's opportunity there.
But compared to 3 months ago, I'm more optimistic that we'll sell additional tonnes in year.
I'm not sure what price they'll be at, but I think domestically if there's any sort of summer, then it does appear that with gas staying above $3, the people are burning the PRB coal and they're starting to get interested in buying a bit more.
So I think there's those two levers to get us further up the guidance range.
But obviously we'd like both to occur.
I'm sorry, we can't go into that.
It would, as I'm sure you [can work out], it would depend on an awful lot of maybes on exactly how something happened.
At the moment, we're planning to export that coal.
We've got it contracted and we're going to continue contracting other coal.
As I said ---+ well, if you read the letter, it was a request.
It wasn't actually ---+ and we don't know of any trains that have been turned back at the border yet.
So I think we've got a long way for this one to run.
Thanks for the question, <UNK>, and thank you very much for the kind comments about the way we managed to sort of navigate this pretty tough time for the coal industry.
So thank you for that.
In terms of as we look going forward, I think it's 2 things that strike me.
One is, at $3 gas, PRB goal is being burned by our customers and it sort of ---+ so that's where I talked about the leveling off in the rapid decrease we've seen.
We've seen lots of plant closures.
We've seen them slow up.
And now we've actually seen at $3 gas, that people are burning a lot of coal.
It will bounce around, I think, the actual demand from year-to-year depending on gas prices and weather and how they interplay, and obviously demand, industrial demand and GDP.
But and so I think it's, as we look forward at the moment, it looks a lot better than the last 4 or 5 years of just demand being driven down, which has been very, very tough for us to handle.
So I think there might be some stability appearing.
Within that, at the moment I think pricing for the coal doesn't actually determine its value against $3 gas, but rather the fact that there is overcapacity in the basin.
I don't know when that overcapacity will be used up.
But I know that pretty soon, if we're an example, then if we want to increase production, we either have to go into high strip ratio areas or take on more employees.
And once we actually have to look at those decisions, then we actually we're going to need incentive pricing to make it worthwhile doing that.
And we're also using up reserves.
So as you look at those things, I think there will come a point, hopefully soon, when the price will go up because we'll get off the sort of cost basin and look more at the price we need to actually make sure it's viable to mine the next tonne.
And hopefully we're moving towards that.
As that happens, then we'll find out where the true value of the coal is against $3 gas.
Obviously, gas above $3 is good.
If you really believe it's down at $2, we saw what happened long term at $2, then we saw what happened last year when people burned a lot more gas.
But I think all the indications are that many drillers need $3 gas to make money.
So that gives me some comfort.
In terms of the further on possible consolidation, M&A, then I'm sure you understand I can't talk about or speculate about any of the specifics.
I absolutely understand where you're coming from, and that if you look at a large fixed cost heavy capital business that's going through some structural changes where demand is being driven down to a new level, then you'd expect there to be economic drivers consolidation.
And I would absolutely agree I see those.
How something might play out, obviously, I'm not able to comment on, though.
Obviously, I think anyone who looks at the business can see what you're seeing in terms of potential efficiency.
So I think we'll have to wait and see.
But the first thing is, if you look at the Powder River Basin now, we've actually got producers who have come out of Chapter 11, we've got maybe a floor on demand, we've got gas settling out.
So we're in a whole lot better shape than we were for the last year or 2 years.
So I think with those things, we can actually now all start looking forward and looking to what might be the next rational moves in terms of increasing the economics and productivity of the basin.
But I think the important thing is that people are burning the PRB coal and we've got a stable business as we go forward.
Well, thank you very much for your interest in Cloud Peak Energy Inc.
Obviously, we'll look forward to see how the summer plays out and to talking to you in July when we do our Q2 call.
So with that, we'll leave it there.
Thanks.
