Cloud Peak Energy Inc. Announces Results for the First Quarter 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 first quarter of 2014.

First Quarter 2014 Highlights and Recent Developments

(1) Non-GAAP financial measure; please see definition and reconciliation below in this release and the attached tables.

• Strengthening positive domestic fundamentals for PRB coal with reduced customer stockpiles, high utility burn rates, favorable supply-side trends and reduced natural gas in storage.
• Cloud Peak Energy’s first quarter 2014 shipments were impacted by winter weather, freezing of the Great Lakes and continuing rail service issues. Our mines controlled total operating costs well with the increase in costs per ton being primarily volume related.
• The Company completed its previously announced refinancing transactions, including a new $500 million credit facility, and the issuance of $200 million of 6.375% senior unsecured notes due 2024. The proceeds, plus cash on hand, were used to tender and repurchase the Company’s $300 million 8.25% senior unsecured notes due 2017.
• The refinancings extended maturities, relaxed covenants, and will reduce future interest costs by approximately $12 million per year. One-time refinancing related charges totaling $21.5 million for the tender premium and write off of deferred financing charges impacted interest expense for the quarter. Adjusted EPS of $(0.11) for the quarter excludes the $(0.22) impact of these charges.

Colin Marshall, President and Chief Executive Officer, commented, “Winter weather and rail service interruptions in the first quarter continued to impact our shipments. As a result, we are reducing the top end of our tonnage and Adjusted EBITDA guidance ranges, which leaves us essentially fully sold out for 2014. We are now focused on selling into the improving markets for 2015.”

Health and Safety Record

During the first quarter of 2014, of our approximately 1,400 full-time mine site employees, four suffered reportable injuries resulting in a year-to-date Mine Safety and Health Administration (“MSHA”) All Injury Frequency Rate (“AIFR”) of 1.03, an increase from the full year 2013 rate of 0.59. Two of these injuries were caused by employees slipping on ice and uneven ground. During 74 MSHA inspector days at our mine sites in the first quarter, we were issued eight substantial and significant citations. Fines due on the citations have not been assessed at this time.

In recognition of our commitment to safety, the Cordero Rojo Mine was notified that it won first place for the 2013 Wyoming State Mine Inspector safety award. We are proud to be able to report that Cordero Rojo has now operated for over 1.4 million work hours without a reportable injury.

Consolidated Business Results

⁽¹⁾ Non-GAAP financial measure; please see definition and reconciliation below in this release and the attached tables.

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 our domestic utility customers and also to our Logistics and Related Activities segment.

⁽¹⁾ Non-GAAP financial measure; please see definition and reconciliation below in this release and the attached tables.

First quarter 2014 tons sold from our Owned and Operated mines segment were reduced by weather and rail service interruptions, which persisted through the quarter. Shipments from Spring Creek Mine were also reduced by the freezing of the Great Lakes which was unusually severe this winter. We understand the BNSF railway is taking measures to improve service but that it will take some time to implement. We are working with the railways and our customers to maximize shipments of contracted 2014 tons.

Revenue from our Owned and Operated Mines segment decreased in the first quarter of 2014 compared to 2013 due to a slightly lower average realized price per ton sold and fewer tons shipped. During the quarter, we completed several major maintenance outages and continued to achieve significant cost and capital savings from our in house condition monitoring and repair work. Cost of product sold was held at a similar level to the first quarter last year with the increase in cost per ton being largely due to the effect of reduced shipments. This reflects well on our mines’ ability to control costs in the face of rising strip ratios and increased explosives and diesel prices. We continue to plan for higher shipment rates in later quarters, which we expect will correspondingly reduce our costs per ton as the year progresses.

Encouragingly, the environmental groups who had unsuccessfully challenged the BLM’s leasing process for our West Antelope II LBA’s did not seek any further appeals and their challenge has finally been concluded and rejected by the courts.

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.

⁽¹⁾ Non-GAAP financial measure; please see definition and reconciliation below in this release and the attached tables.

Shipments exported to Asian customers decreased slightly in the first quarter of 2014 compared to 2013 due to rail service issues on the northwest rail corridor. We experienced increased demurrage costs as ships were delayed at the terminal waiting for coal. Cloud Peak Energy continued to work closely with the BNSF railway and Westshore Terminals to maximize vessel loadings and meet continuing strong demand from our Asian customers. Revenue from the Logistics and Related Activities segment decreased primarily as a result of weak international market prices for seaborne thermal coal. Our forward sales hedging program mitigated some of the impact of lower spot prices with a realized gain of $3.4 million in the first quarter.

Two encouraging pieces of news were announced regarding SSA Marine’s Gateway Pacific Terminal project, where we have the option for up to 16 million tonnes of capacity once the port is developed. Firstly, SSA Marine commenced work on the Environmental Impact Study. Secondly, Northwest Clean Air Agency, an air quality control agency in Washington State responsible for enforcing air pollution regulations in its region, issued the results of their 20-month air quality study monitoring coal dust by rail tracks in Washington State. The study found no evidence of air quality issues caused by coal dust. While we do not expect opposition to the terminal development to end, it is encouraging when fact-based studies so clearly counter some of our opponent’s main allegations.

Balance Sheet and Cash Flow

Cash flow from operations totaled $12.8 million for the first quarter of 2014. This includes the one-time cash payment of $14.2 million for the early tender of the 2017 notes, which primarily accounts for the decrease compared to $37.3 million for the first quarter of 2013. Capital expenditures (excluding capitalized interest) were $5.7 million, of which $1.2 million was financed under capital leases.

In the first quarter of 2014, we completed a number of previously announced financing transactions to extend maturities, relax covenants, repay debt, and reduce on-going interest costs. We entered into a new $500 million senior secured revolving credit facility, which matures in 2019 and relaxes certain covenants. We issued $200 million of 6.375% senior unsecured notes due 2024. We used these proceeds and cash on hand to repurchase and redeem our previously outstanding $300 million 8.25% senior unsecured notes due 2017. As a result, the debt on our senior unsecured notes decreased from $600 million as of December 31, 2013 to $500 million as of March 31, 2014. As of March 31, 2014, unrestricted cash and investments were $208 million, and total available liquidity was $756 million.

These refinancings extended our earliest maturities from 2016 to 2019. The $100 million reduction of debt on our senior unsecured notes, and the lower interest rate on the new 6.375% notes, will reduce cash interest costs by approximately $12 million per year on a full-year basis, with a proportional benefit this year.

Because of these financing transactions, our interest expense for the quarter was impacted by a number of one-time cash and non-cash items totaling $21.5 million, comprising the tender premium and write off of deferred financing costs related to the 2017 notes and previous credit facility. The after-tax impact on Diluted EPS of these one-time charges was $(0.22), which is excluded from Adjusted EPS.

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.

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 April 29, 2014 to review the results and current business conditions. The call will be webcast live over the internet from our Web site at www.cloudpeakenergy.com under “Investor Relations”. Participants should follow the instructions provided on the Web site for downloading and installing the audio applications necessary to join the webcast. Interested individuals also can access the live conference call via telephone at 866.825.1709 (domestic) or 617.213.8060 (international) and entering pass code 95881077.

Following the live webcast, a replay will be available at the same URL on our Web site 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 78612686. 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 4 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, including any development of future terminal capacity or increased access to existing or future capacity; (2) anticipated economic conditions and demand by domestic and Asian utilities, including the anticipated impact on demand driven by regulatory developments and uncertainties; (3) the impact of competition from natural gas and other alternative sources of energy used to generate electricity; (4) coal stockpile and natural gas storage levels and the impacts on future demand and pricing; (5) our plans to replace and/or grow our coal tons; (6) business development and growth initiatives; (7) operational plans for our mines, including potential production decreases at our Cordero Rojo Mine; (8) our cost management efforts; (9) industry estimates of the EIA and other third party sources; (10) estimated Tax Receivable Agreement liabilities; (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; (b) 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, (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 and governmental subsidies or mandates that make 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, (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 (“SEC”), 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 to exclude 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, (2) adjustments for derivative financial instruments, excluding fair value mark-to-market gains or losses and including cash amounts received or paid, and (3) 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 the estimated per share impact of the same specifically identified items used to calculate Adjusted EBITDA as described above, plus adjustments to exclude the cash and non-cash interest expense associated with refinancing transactions. All items are adjusted at the statutory tax rate of 36%.

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.

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Cloud Peak Energy Inc.
Karla Kimrey, 720-566-2932
Vice President, Investor Relations