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A medium term outlook: Cloud Peak Energy

World Coal,

Cloud Peak Energy, one of the largest US coal producers and the only pure play Powder River Basin (PRB) coal company has updated its 2014 shipment and adjusted EBITDA guidance ranges, as well as providing its current medium-term outlook.

Updated 2014 guidance

The company has reduced expected coal output from its three owned and operated mines to between 83 million – 86 million t, compared to its 29 July 2014 guidance of 85 million – 89 million t. The company also updated its guidance for 2014 Adjusted EBITDA to between US$ 170 million and US$ 200 million. This is also lower than the previous Adjusted EBITDA guidance of US$ 180 million to US$ 210 million.

Colin Marshall, Cloud Peak Energy’s president and CEO 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 rainstorm, 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

In a statement, the company said 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. Cloud Peak Energy estimates that a near-term US$ 1/t improvement in domestic pricing for 2015 deliveries would add approximately US$ 21 million to 2015 Adjusted EBITDA, based on current open and indexed positions. Any increase in international prices from current low levels would result in a significant improvement to the company’s logistics and related activities segment results next year. A US$ 10/t improvement in benchmark Newcastle prices could add approximately US$ 34 million of Adjusted EBITDA in 2015.

Prices of coal are therefore likely to be watched closer than ever before, with such huge differences in EBITDA resulting from such fluctuations.

Recent developments

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

First, the company paid US$ 37 million to secure additional port capacity at the Westshore Terminal. The payment secured increased committed capacity of 6.3 to 7.1 million t (compared to current long term committed capacity of 2.75 million t), 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 t, compared to the 4.0 to 4.5 million t currently forecasted for 2014. The company said this was part of its strategy to diversify its markets and customer base.

Second, the company paid US$ 45 million to Rio Tinto to terminate the Tax Receivable Agreement (“TRA”) that was established at the time of Cloud Peak’s 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 US$ 103 million respect of estimated future obligations under the TRA. As a result, previously anticipated cash payments of approximately US$ 14 million each year in 2014 and 2015 and additional payments in subsequent years were eliminated.

Colin Marshall said, “In summary, with lower shipments and current weak coal pricing, 2015 results are expected to be lower than 2014 results. However, our 30 million t 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 optimising capital expenditures to maximise 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,” Marshall concluded.

Written by Sam Dodson

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