Cloud Peak Energy : Announces Results for the Third Quarter and First Nine Months of 2014

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 third quarter and first nine months of 2014.

Highlights and Recent Developments

• Adjusted EBITDA of $45.7 million for the quarter, and $130.3 million for the first nine months of 2014, down compared to prior periods due to continuing rail service issues reducing 2014 shipments and the impact of a $7.5 million increase to our estimates for past production taxes.
• Strong operational cost performance during the quarter resulted in underlying cost per ton of $10.09. Total cost per ton was impacted by $0.35 for the production tax accrual increase, raising our cost per ton to $10.44.
• Raising the lower end of our full year 2014 Adjusted EBITDA and shipment guidance to new ranges of $180 - $200 million based on shipments of 84 - 86 million tons. Lowering capital expenditures guidance to $20 - $30 million.
• Completed three opportunistic transactions at this low point in the coal commodity cycle to position the Company for long-term growth and significantly reduce our liabilities:
  • Significantly increased our committed export capacity at the fully-utilized Westshore terminal, the lowest cost of the two existing cape-size ports in the Pacific Northwest.
  • Divested our 50 percent share of the Decker Mine, reducing asset retirement liabilities by $72.2 million, receiving an option for up to 7.7 million tons of export capacity at the proposed Millennium Bulk Terminal, resulting in a pre-tax gain of $74.3 million.
  • Terminated the Tax Receivable Agreement (“TRA”) with Rio Tinto and extinguished the undiscounted liability of $103.6 million for a payment of $45.0 million, resulting in a pre-tax gain of $58.6 million.
• Amended our $500 million revolving credit facility to relax certain financial covenants, including the net secured leverage ratio and net cash interest expense coverage ratio.
• Maintained a strong balance sheet with cash of $119.3 million and available liquidity of $660 million.

Colin Marshall, President and Chief Executive Officer, commented, “In such a challenging environment, we are proud to be able to deliver these operational and financial results for the quarter. During the quarter, we carried out several significant opportunistic transactions, which enhanced our export growth strategy, reduced our legacy liabilities, and further strengthened our balance sheet and financial flexibility.”

Health and Safety Record

During the third quarter of 2014, of our approximately 1,400 full-time mine site employees, three suffered reportable injuries resulting in a year-to-date MSHA All Injury Frequency Rate (“AIFR”) of 0.78, an increase from the full year 2013 rate of 0.59. During 42 MSHA inspector days at our mine sites in the third quarter, we were issued just four substantial and significant citations and total fines of $1,774.

Environment

The Company’s Cordero Rojo Mine recently received final bond release on more than 900 acres of permanently reclaimed land from the Wyoming Department of Environmental Quality. Lands must be reclaimed for a minimum of ten years before the third and final bond release can be granted. To achieve final bond release, Cordero Rojo’s reclaimed lands were restored to grazing and wildlife uses and have been actively grazed in partnership with adjacent landowners. Attaining final bond release is the ultimate demonstration of successful completion of land rehabilitation requirements. Currently, there are more than 10,000 acres across our three mines which have been reclaimed sufficiently to receive partial bond release.

Consolidated Business Results

Operating Segments

Owned and Operated Mines

Our Owned and Operated Mines segment comprises the results of mine site sales from our three owned and operated mines, primarily to domestic utility customers and also to our Logistics and Related Activities segment.

Demand for our coal continues to be strong; however, 2014 shipments have been reduced due to slow rail operations. Recently, there have been some improvements in rail deliveries, and we remain optimistic that the railroads will continue to steadily increase their performance through 2015.

In late August, the Cordero Rojo Mine was impacted by a significant rain storm causing flooding and damage to some equipment, which slowed shipments for several days and increased our costs. We have incurred $3.0 million of insurance deductible costs related to this incident and expect any remaining amounts will be covered by insurance. The additional one-off costs increased our average cost per ton by approximately $0.14 for the three months ended September 30, 2014.

Several production tax audits currently are in progress related to federal and state taxes including periods back to 2005. From time to time, we receive audit assessments, which may result in adjustments to our estimates of taxes and related interest and penalties. During the quarter, we revised our estimates and increased our accruals by $7.5 million. Although minor in comparison to the approximately $2.9 billion that we have paid in production taxes in the last nine years, the $7.5 million increased our average cost per ton sold by approximately $0.35 for the three months ended September 30, 2014.

Logistics and Related Activities

Our Logistics and Related Activities segment comprises the results of our logistics and transportation services to our domestic and international customers.

Total tons delivered for the quarter increased compared to last year as deliveries to our domestic customers increased; however, delivered shipments to our Asian customers were impacted by the ongoing rail disruptions. The international market prices for seaborne thermal coal have continued to weaken, which resulted in lower revenue for the quarter. However, we continue to have positive Adjusted EBITDA due to our hedge positions.

Recent Transactions

Increased Export Capacity

The Company amended and expanded its throughput agreement with Westshore Terminals to increase long-term committed capacity at the port from 2.8 million tons per year to 6.3 million tons initially and increasing to 7.2 million tons in 2019. The Company paid $37.0 million to Westmoreland Coal Company to terminate its existing throughput agreement with Westshore Terminals freeing up space at the fully-utilized port to allow this increase to occur.

“We were very pleased to be able to secure additional export capacity at the bottleneck in our export supply chain. These opportunities only come available at certain points in the cycle, and we were glad we were able to take advantage of the opportunity due to our sound balance sheet. We remain committed to our strategy of growth through increased West Coast exports. We are pleased to be able to increase our sales to South Korea, Japan, Taiwan, and other Asian countries who are keen to diversify their coal import suppliers,” said Marshall. “We continue to position Cloud Peak Energy to be a reliable long-term supplier of low-sulfur PRB coal to our domestic and international customers.”

Finalized Sale of Interest in Decker Mine

Cloud Peak Energy completed the sale of its 50 percent interest in the Decker Mine and related assets to Ambre Energy. As a result, the Company was able to reduce its asset retirement obligations by $72.2 million and obtained the release of approximately $67 million of outstanding reclamation and lease bonds.

Additionally, the Company received an option of up to 7.7 million tons of annual export capacity at the proposed Millennium Bulk Terminals facility in Washington State.

“This transaction further reinforces our balance sheet and positions us to benefit when the Millennium Bulk Terminal is hopefully permitted and operational in a few years’ time,” said Marshall.

Termination of Tax Receivable Agreement

Cloud Peak Energy terminated the TRA though a final payment of $45.0 million to Rio Tinto, which settled all future liabilities that would have been owed under the TRA. At June 30, 2014, the Company carried an undiscounted liability of $103.6 million in respect of its estimated future obligations under the TRA and anticipated making cash payments of approximately $14 million each year in 2014 and 2015 and additional payments in subsequent years.

Michael Barrett, Cloud Peak Energy’s Executive Vice President and Chief Financial Officer, commented, “This was an efficient and accretive use of capital at this time and a good opportunity to reduce our balance sheet liabilities.”

Amendment of Revolving Credit Facility

Cloud Peak Energy opportunistically amended its $500 million revolving credit facility to relax certain financial covenants, including the net secured leverage ratio and net cash interest expense coverage ratio.

“This amendment demonstrates our continued focus on actively managing our balance sheet to provide additional financial flexibility,” said Barrett.

Balance Sheet and Cash Flow

Cash flow from operations totaled $6.7 million, which included the $45 million payment to terminate the TRA, resulting in almost $52 million of cash generated by our core business activities in the third quarter of 2014. Capital expenditures (excluding capitalized interest) were $7.5 million, none of which was financed under capital leases.

For the first nine months of 2014, cash flow from operations totaled $42.1 million, which included $14 million of refinancing costs paid in the first quarter and $45 million paid to terminate the TRA in the third quarter, resulting in $101.1 million of cash generated by our core business activities. Capital expenditures were $15.9 million (including assets acquired under capital leases).

As of September 30, 2014, unrestricted cash and investments were $119.3 million and total available liquidity was $660.0 million.

Outlook

During the third quarter of 2014, the domestic coal market was negatively impacted by the continued poor performance of the railroads and the very mild summer weather. Slow shipments have forced some utilities to conserve coal to ensure they have adequate stockpiles going into the winter. Despite these efforts, stockpiles of PRB coal are at their lowest levels since 2006, which we believe will help prices recover once shipments improve. For the remainder of this year, we expect our utility customers to continue to focus on ensuring the delivery of their contracted coal.

Internationally, growing demand from Asia, including India, China, South Korea, Japan, Taiwan, and Vietnam, is currently being met by increased supply from international projects commissioned several years ago, leading to current weak pricing. During 2014, we continued to see strong interest in Spring Creek coal in our primary focused markets of South Korea, Japan, and Taiwan as they work to increase generation in the face of growing demand and reduced nuclear generation. These countries are moving ahead with numerous projects to build additional modern coal-fired generation, which will be designed to consume high-grade subbituminous coal, including our benchmark Spring Creek coal.

Internationally, there have been a number of coal regulatory developments in various Asian countries, including in China. Although it is difficult to predict the ultimate impact of these new regulations on demand for PRB coal and international pricing, we believe the overall direction of these regulatory developments is positive for higher quality coals and will not diminish the need for coal-fired generation to support growing and developing economies. While international coal markets are currently oversupplied, we remain optimistic that the addition of new coal-fired generation in Asia, along with tightening regulatory initiatives to focus on higher quality coal supplies, will support longer term pricing and demand for PRB coal.

For 2014, we have contracted to sell 89 million tons from our three owned and operated mines. Of this committed 2014 production, 89 million tons are under fixed-price contracts with a weighted-average price of $13.00 per ton. During the quarter, we fixed prices on approximately 2 million tons of previously contracted indexed coal for 2014 deliveries at an average price of approximately $10.82 per ton.

For 2015, we have currently committed to sell 70 million tons from our three owned and operated mines. Of this committed 2015 production, 58 million tons are under fixed-price contracts with a weighted-average price of $13.10 per ton. During the quarter, we priced approximately 10 million tons for 2015 delivery at an average price of $12.52 per ton reflecting the mix between 8,400 Btu and 8,800 Btu coal and prevailing market prices.

For 2016, we have currently committed to sell 46 million tons from our three owned and operated mines. Of this committed 2016 production, 36 million tons are under fixed-price contracts with a weighted-average price of $13.80 per ton.

We are continuing 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 our contracted capacity at Westshore while working to minimize demurrage costs due to rail interruptions delaying ship loadings. At current international pricing levels, we are experiencing negative physical Logistics and Related Activities margins on our export sales. However, we have positive Adjusted EBITDA due to our hedge positions, and we continue to benefit from the margins realized by our Owned and Operated Mines segment.

We have raised the lower end of our 2014 shipment guidance to a new range of 84 - 86 million tons. This will require the recent improvement in rail performance to continue through the end of the year. Due to the strong cost control shown by our operations, we are also raising the lower end of our Adjusted EBITDA guidance range to a new range of $180 - $200 million for the full year and reducing our expected capital expenditures to $20 - $30 million.

Marshall commented, “Throughout this challenging year we have successfully managed costs while operating in an environment of weak shipments, which has resulted in our solid Adjusted EBITDA performance. We have further strengthened our balance sheet and liquidity to better position ourselves against the risk of a delayed market improvement. We continue to be optimistic that the recent improvement in rail performance will continue as we see ongoing strong demand from utilities. Railroad interruptions are causing many utilities to reevaluate their target stockpile levels. We believe that as rail performance improves, utilities will take the opportunity to replenish their stockpiles, and in some cases increase them to higher levels, which will hopefully improve pricing. We have reviewed our forecast of international demand and supply and continue to believe that demand growth will exceed supply over the coming years and lead to a return to higher international prices. We continue to position Cloud Peak Energy to weather current weak domestic and international markets and to benefit from a recovery when it occurs.”

2014 Guidance – Financial and Operational Estimates

The following table provides our current outlook and assumptions for selected 2014 consolidated financial and operational metrics:

Conference Call Details

A conference call with management is scheduled at 5:00 p.m. ET on October 29, 2014 to review the results and current business conditions. The call will be webcast live over the Internet from our website at www.cloudpeakenergy.com under “Investor Relations”. Participants should follow the instructions provided on the website for downloading and installing the audio applications necessary to join the webcast. Interested individuals also can access the live conference call via telephone at 877.474.9505 (domestic) or 857.244.7558 (international) and entering pass code 35997129.

Following the live webcast, a replay will be available at the same URL on our website for seven days. A telephonic replay will also be available approximately two hours after the call and can be accessed by dialing 888.286.8010 (domestic) or 617.801.6888 (international) and entering pass code 72780840. The telephonic replay will be available for seven days.

About Cloud Peak Energy^®

Cloud Peak Energy Inc. (NYSE:CLD) is headquartered in Wyoming and is one of the largest U.S. coal producers and the only pure-play Powder River Basin (PRB) coal company. As one of the safest coal producers in the nation, Cloud Peak Energy 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 located in Wyoming and the Spring Creek mine is located in Montana. In 2013, Cloud Peak Energy shipped 86.0 million tons from its three mines to customers located throughout the U.S. and around the world. Cloud Peak Energy also owns rights to substantial undeveloped coal and complimentary surface assets in the Northern PRB, further building the Company’s long-term position to serve Asian export and domestic customers. With approximately 1,700 total employees, the Company is widely recognized for its exemplary performance in its safety and environmental programs. Cloud Peak Energy is a sustainable fuel supplier for approximately four percent of the nation’s electricity.

Cautionary Note Regarding Forward-Looking Statements

This release and our related presentation contain “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are not statements of historical facts and often contain words such as “may,” “will,” “expect,” “believe,” “anticipate,” “plan,” “estimate,” “seek,” “could,” “should,” “intend,” “potential,” or words of similar meaning. Forward-looking statements are based on management’s current expectations, beliefs, assumptions and estimates regarding our company, industry, economic conditions, government regulations, energy policies and other factors. Forward-looking statements may include, for example: (1) our outlook for 2014 and future periods for our company, the PRB and the industry in general, and our operational, financial and export guidance; (2) expected development of future export terminal capacity and increased access to existing or future capacity; (3) anticipated demand by domestic and Asian utilities for PRB coal, including the impact of regulatory developments and uncertainties and climate change concerns; (4) the impact of competition from other domestic and international coal producers, natural gas supplies and other alternative sources of energy used to generate electricity; (5) coal stockpile and natural gas storage levels and the impacts on future demand and pricing; (6) our plans to replenish and/or increase our coal tons and extend our mine lives; (7) business development and growth initiatives; (8) operational plans for our mines; (9) our cost management efforts; (10) industry estimates of the EIA and other third party sources; (11) our estimates of the quality and quantity of economic coal associated with our development projects, the potential development of our Youngs Creek and other NPRB assets, and our potential exercise of options for Crow Tribal coal; (12) our future liquidity; (13) anticipated improvements in rail performance; and (14) other statements regarding our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and other matters that do not relate strictly to historical facts. These statements are subject to significant risks, uncertainties, and assumptions that are difficult to predict and could cause actual results to differ materially and adversely from those expressed or implied in the forward-looking statements. Factors that could adversely affect our future results include, for example, (a) future economic and weather conditions that impact electricity demand, demand for thermal coal, available coal supplies or transportation logistics infrastructure; (b) existing and future coal-fired power plant capacity and utilization, demand for our coal by the domestic electric generation industry, Asian export demand and terminal capacity and the prices we receive for our coal and our logistics services; (c) reductions or deferrals of purchases by major customers and our ability to renew sales contracts; (d) competition from other coal producers, natural gas producers and other sources of energy, domestically and internationally, including the effects of governmental energy and tax policies and currency exchange rates; (e) environmental, health, safety, endangered species or other legislation, regulations, treaties, court decisions or government actions, or related third-party legal challenges or changes in interpretations, including new requirements or uncertainties affecting the use, demand or price for coal or imposing additional costs, liabilities or restrictions on our mining operations, the utility industry or the logistics, transportation and terminal industries; (f) public perceptions, third-party legal challenges or governmental actions and energy policies relating to concerns about climate change, air and water quality or other environmental considerations, including emissions restrictions (for example, EPA carbon regulations for power plants under the Clean Air Act) and governmental subsidies or mandates that make natural gas, wind, solar or other alternative fuel sources more cost-effective and competitive with coal; (g) operational, geological, equipment, permit, labor, weather-related and other risks inherent in surface coal mining; (h) our ability to efficiently and safely conduct our mining operations; (i) transportation and export terminal availability, performance and costs; (j) availability, timing of delivery and costs of key supplies, capital equipment or commodities such as diesel fuel, steel, explosives and tires; (k) our ability to acquire future coal tons through the federal LBA process and necessary surface rights and permits in a timely and cost-effective manner and the impact of third-party legal challenges; (l) access to capital and credit markets and availability and costs of credit, surety bonds, letters of credit, and insurance; (m) litigation and other contingent liabilities; (n) proposed Pacific Northwest export terminals are not developed in a timely manner or at all, or are developed at a smaller capacity than planned, or we are unable to finalize and enter into definitive throughput agreements for potential future capacity at proposed terminals, including the Gateway Pacific Terminal and Millennium Bulk Terminal; (o) future development and operating costs for our development projects significantly exceed our expectations; and (p) other risk factors described from time to time in the reports and registration statements we file with the Securities and Exchange Commission, including those in Item 1A - Risk Factors in our most recent Form 10-K and any updates thereto in our Forms 10-Q and Forms 8-K. There may be other risks and uncertainties that are not currently known to us or that we currently believe are not material. We make forward-looking statements based on currently available information, and we assume no obligation to, and expressly disclaim any obligation to, update or revise publicly any forward-looking statements made in this release or our related presentation, whether as a result of new information, future events or otherwise, except as required by law.

Non-GAAP Financial Measures

This release and our related presentation include the non-GAAP financial measures of (1) Adjusted EBITDA (on a consolidated basis and for our reporting segments) and (2) Adjusted Earnings Per Share (“Adjusted EPS”). Adjusted EBITDA and Adjusted EPS are intended to provide additional information only and do not have any standard meaning prescribed by generally accepted accounting principles in the U.S. (“GAAP”). A quantitative reconciliation of historical net income (loss) to Adjusted EBITDA and EPS (as defined below) to Adjusted EPS is found in the tables accompanying this release.

EBITDA represents net income (loss) or income (loss) from continuing operations, as applicable, before (1) interest income (expense) net, (2) income tax provision, (3) depreciation and depletion, (4) amortization, and (5) accretion. Adjusted EBITDA represents EBITDA as further adjusted for specifically identified items that management believes do not directly reflect our core operations. For the periods presented herein, the specifically identified items are: (1) adjustments to exclude the updates to the tax agreement liability, including tax impacts of our 2009 initial public offering and 2010 secondary offering and the termination of the TRA in August 2014, (2) adjustments for derivative financial instruments, excluding fair value mark-to-market gains or losses and including cash amounts received or paid, (3) adjustments to exclude the gain from the sale of our 50% non-operating interest in the Decker Mine, and (4) adjustments to exclude a significant broker contract that expired in the first quarter of 2010. Because of the inherent uncertainty related to the items identified above, management does not believe it is able to provide a meaningful forecast of the comparable GAAP measures or reconciliation to any forecasted GAAP measures.

Adjusted EPS represents diluted earnings (loss) per common share attributable to controlling interest, or diluted earnings (loss) per common share attributable to controlling interest from continuing operations, as applicable (“EPS”), adjusted to exclude (i) the estimated per share impact of the same specifically identified items used to calculate Adjusted EBITDA as described above, and (ii) the cash and non-cash interest expense associated with the early retirement of debt and refinancing transactions. All items are adjusted at the statutory tax rate of approximately 36 percent.

Adjusted EBITDA is an additional tool intended to assist our management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations. Adjusted EBITDA is a metric intended to assist management in evaluating operating performance, comparing performance across periods, planning and forecasting future business operations and helping determine levels of operating and capital investments. Period-to-period comparisons of Adjusted EBITDA are intended to help our management identify and assess additional trends potentially impacting our company that may not be shown solely by period-to-period comparisons of net income (loss) or income (loss) from continuing operations. Our chief operating decision maker uses Adjusted EBITDA as a measure of segment performance. Consolidated Adjusted EBITDA is also used as part of our incentive compensation program for our executive officers and others.

We believe Adjusted EBITDA and Adjusted EPS are also useful to investors, analysts and other external users of our consolidated financial statements in evaluating our operating performance from period to period and comparing our performance to similar operating results of other relevant companies. Adjusted EBITDA allows investors to measure a company’s operating performance without regard to items such as interest expense, taxes, depreciation and depletion, amortization and accretion and other specifically identified items that are not considered to directly reflect our core operations. Similarly, we believe our use of Adjusted EPS provides an appropriate measure to use in assessing our performance across periods given that this measure provides an adjustment for certain specifically identified significant items that are not considered to directly reflect our core operations, the magnitude of which may vary significantly from period to period and, thereby, have a disproportionate effect on the earnings per share reported for a given period.

Our management recognizes that using Adjusted EBITDA and Adjusted EPS as performance measures has inherent limitations as compared to net income (loss), income (loss) from continuing operations, EPS or other GAAP financial measures, as these non-GAAP measures exclude certain items, including items that are recurring in nature, which may be meaningful to investors. Adjusted EBITDA and Adjusted EPS should not be considered in isolation and do not purport to be alternatives to net income (loss), income (loss) from continuing operations, EPS or other GAAP financial measures as a measure of our operating performance. Because not all companies use identical calculations, our presentations of Adjusted EBITDA and Adjusted EPS may not be comparable to other similarly titled measures of other companies. Moreover, our presentation of Adjusted EBITDA is different than EBITDA as defined in our debt financing agreements.