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Executives

Karla Kimrey - Vice President, Investor Relations

Colin Marshall - President and Chief Executive Officer

Michael Barrett - Executive Vice President and Chief Financial Officer

Analysts

Jim Rollyson - Raymond James

Brandon Blossman - Tudor, Pickering and Holt

David Gagliano - Barclays

Evan Kurtz - Morgan Stanley

Holly Stewart - Howard Weil

Lance Ettus - Tuohy Brothers

Caleb Dorfman - Simmons & Company

Neil Mehta - Goldman Sachs

Jeremy Sussman - Clarkson

Lucas Pipes - Brean Capital

Michael Goldenberg - Luminus

Mitesh Thakkar - FBR

Kristoffer Inton - Morningstar

Cloud Peak Energy Inc. (CLD) Q4 2013 Earnings Conference Call February 13, 2014 5:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Quarter Four 2013 Cloud Peak Energy Incorporated Earnings Conference Call. My name is Patrick and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Karla Kimrey, Vice President, Investor Relations. Please proceed.

Karla Kimrey - Vice President, Investor Relations

Thank you, Patrick. Good afternoon and we appreciate you joining us here today. With me is Colin Marshall, Cloud Peak Energy's President and CEO; and Michael Barrett, Cloud Peak Energy’s Executive Vice President and CFO.

Today’s presentation may contain forward-looking statements regarding our outlook and guidance, economic and industry conditions, volumes, prices and demand, LBAs, business development plans, regulation and energy policies, 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 2013 Form 10-K.

Today’s presentation also includes non-GAAP financial measures. Please refer to today’s earnings release for the required reconciliations and other related disclosures. Our earnings release is available on the Investor Relations site of our website at cloudpeakenergy.com.

I will now turn the call over to Colin Marshall.

Colin Marshall - President and Chief Executive Officer

Thanks Karla. Good afternoon and thank you for taking the time to listening to our fourth quarter and full year 2013 results. As usual, I will make some opening remarks before handing over to Michael Barrett, our CFO to cover the financials.

Overall, I believe our adjusted EBITDA of $219 million for full year was a notable achievement. After our preannouncement in January, you are aware that operations has a slow fourth quarter due to weather and rail holdups leaving us shipping 86 million tons for the year. We are able to produce the adjusted EBITDA by managing cost tightly across the operations throughout the year. Our increased cash balance reflects well on our measured approach to capital and our decision not to bid on the Maysdorf II LBA North tract.

First, I will cover our safety performance in 2013. During the year, we achieved a 28% reduction in our MSHA all injury frequency rate to 0.59 injuries per 200,000 employee hours worked. During the quarter, there were two MSHA reportable injuries giving a total of 9 for the year. There were 23 days of MSHA inspections in Q4 that resulted in one substantial and significant citation. Two of our mines, Spring Creek and Cordero Rojo, recently passed 1.2 million work hours without reportable injury, which is a significant achievement. It is also notable that we have not had a contract reportable injury in over two years. This reflects very well on the time and effort of Cloud Peak Energy and our contracted partners put into our safety programs. Once again, we successfully passed our third-party audits to retain our ISO 14001 environmental and OHSAS 18001 safety system certifications. Operationally, 2013 was not an easy year.

Looking back, there were four major factors that reduced our shipments. First, the year got off to a slow start due to damage to the Westshore terminal, which reduced shipment from Spring Creek. Second, in addition to the normal 1% or 2% of contracted tons that customers do not take, a long-term Cordero Rojo customer had significant ongoing plant issues that persisted throughout the year reducing shipments. Third, our operations had some equipment failures that impacted shipments and it was a very wet year, which made mining difficult throughout the summer. Then there was an early snowstorm in October which snarled things up in the PRB just as we are looking to increase our shipping rates.

Finally, the ongoing issues with the BNSF Railway, which increased later in the year reduced shipments. Normally, one or two of these factors would occur, but this year, we got enough of them together to reduce our shipments more than we expected. On a positive note, I have been impressed by the way operations have been able to reduce costs as shipments slowed. As always, we continue to work on improving our maintenance and condition monitoring programs, which enabled us to reduce our repair costs and capital spending without compromising in the integrity of our equipment. Overall, I think keeping our full year cost per ton to $10.23 was a notable achievement given the high fixed cost nature of our business and the lower than planned tonnages.

We exported 4.7 million tons through the Westshore terminal during the year, which was a good performance given the damage to the terminal just last year and the rail delays later on. Demand from our Asian customers remained strong as their imports continued to grow. Last year increased imports into India helped to absorb new supply from Australia and Indonesia, but they were not enough to allow the prices to increase. Currently new supply, the weak Australian dollar and low coking coal prices are holding international thermal coal prices down. The forward financial contrast we put in place in 2012 when prices were higher would help us this year if prices don’t increase. As previously reported we made two test run shipments to Japan. The test runs went well and could turn into long-term contracts when West Coast terminal capacity is built.

While it’s good that the environmental impact statement to the SSA Marine’s Pacific Gateway Terminal will soon start the scope defined by the states for their studies is far-reaching. It will be interesting how this process progresses as there are implications for the other larger export business across the U.S. and for other states. We are still optimistic that ports will be approved so that the U.S. can be a reliable long-term supplier of low sulfur PRB coal to its major Asian allies such as Korea and Japan.

We were pleased to sign the exploration on option agreement with the Crow Tribe last year. We are now planning a conformational drilling program for this year that will allow us to finalize our mine plans. Support from the Crow Tribe has been very helpful in explaining the economic and social benefits the terminals would bring to the reservation and the Northwest. We are continuing with our mine design to the overall Spring Creek complex that includes Youngs Creek the Crow option coal and the existing Spring Creek mine and infrastructure. This will allow us to optimize the overall development when the additional port space becomes available.

While it was disappointing that Ambre were are not able to close their purchase of our 50% interest in the Decker mine, we will continue to work with them to minimize negative cash flows over the next few years. This will hopefully allow time for international markets to improve enough for them to be able to finance the purchase of our interest in the mine. It was good to see the U.S. Court of appeals reject the legal challenges of NGOs to the BLM’s leasing process for the West Antelope II LBAs. Fortunately, the process of applying for our mining permits was not held up by the legal challenges and the permits we recently issued allowing us to commence mining.

Our decision not to bid on the Maysdorf II, North LBA Tract reflects the realities of the current domestic market for 8400 BTU coal and the capital and operating costs of developed in that particular mining area. Hopefully the decision by the BLM to delay the bid on the South Maysdorf LBA will allow time for domestic prices to improve enough to justify competitive bid in a few years. The immediate benefit in not bidding can be seen in our increased year end cash position and CapEx guidance. We are still planning on reducing production in Cordero Rojo by around 10 million tons per year from 2015 due to weak market conditions. The planning to this reduction has identified the opportunity to redeploy mobile equipment to our other mines and possibly drag line to Antelope which will significantly reduce capital expenditures for a couple of years.

Michael will now run you through the financials.

Michael Barrett - Executive Vice President and Chief Financial Officer

Thank you, Colin. I will go straight into our fourth quarter and year end results. In the fourth quarter we made adjusted EBITDA of $62 million. This is an excellent result in a quarter hit by low shipments. With the lower shipments, we focused on controllable costs and we were pleased to be able to manage labor, repairs and maintenance and outside services carefully to keep cost per ton for the quarter to $10.04. For the full year adjusted EBITDA was $219 million on shipments of 86 million tons. Throughout the year, we focused on matching costs with the lower than planned shipments. Costs per ton for the full year were $10.23 compared to $9.57 for 2012 when we shipped almost 91 million tons. The increase in unit costs was driven by spreading fixed costs over fewer tons and by the expected rise in work load as strip ratios increased.

We also saw are larger than normal rise in the price of explosives which is linked to ammonia supply and natural gas prices. Offsetting these increases we controlled costs such as labor, outside services and repairs and sought to run the operations as efficiently as possible without compromising the integrity of our activities or equipment. Particular initiatives included increasing use of our internal rebuild shop where we are able to manufacture certain components in-house at lower cost and high quality. We also used extensive condition monitoring of our plant and equipment to help us understand that things are running properly. This enables us to monitor major components and continue operating them until the data indicates they need maintenance. It’s a credit to everybody in the business to have controlled costs as successfully as we have in a challenging year. Average realized prices for the full year were $13.08 per ton, a slight decline compared to $13.19 in 2012. This resulted in a full year margin for our owned and operated mine segments of $2.85 per ton compared to $3.62 in 2012.

For our logistics segment, despite the rail interruptions at the end of the year and the Westshore port outage at the start of the year, we were pleased to increase our export shipments to 4.7 million tons compared to 4.4 million tons last year. We continued to see robust Asian demand for the consistent high-quality coal from our Spring Creek mine. However, international pricing remained subdued in 2013 significantly reducing the contribution from our exports. Adjusted EBITDA for our logistics business was $5.2 million in the fourth quarter and $11.4 million for the full year compared to $57 million in 2012. These figures include $13 million of forward hedging sales gains realized in 2013 and $11 million realized in 2012.

Turning now to our balance sheet and cash flow. In the fourth quarter, we generated cash flow from operations of $36 million and spent $11 million in capital expenditures. For the full year, we generated cash flows of $181 million and spent $57 million on capital, of which $10 million was financed under capital leases. $57 million in capital expenditures compares to the midpoint of our original guidance of $95 million, a saving of almost $40 million in the year. Three main factors helped us achieve this reduction. Our in-house rebuild shop personnel completed field repairs and rebuilds internally at lower cost. We extended equipment lives with comprehensive maintenance and asset health programs and we purchased good quality second hand equipment that we could refurbish to high standards. This meant that after CapEx and paying $79 million in LBA installments, we generated significant positive cash flow.

Visibility to generate positive cash flow even in such a challenging year demonstrates the resilience of our business. We finished 2013 with a cash on investment balance of $312 million. We are currently in the process of refinancing our revolving credit facility. Whilst it remains subject to closing, we expect to extend the maturity and relax key covenants that will further increase our available liquidity.

Switching to our coal reserves for a moment, we have a strong existing reserve base with 1.2 billion tons of reported reserves at year end. In addition, we have ownership or access to approximately 1.7 billion tons of additional coal that is not yet classified as reserves via our growth projects at Youngs Creek and on the Crow Indian Reservation. So we have a strong development pipeline. As our existing LBA payments end in two years, this will further free up additional positive cash flow in future years.

I will now cover our guidance for the full year 2014. We expect the 2014 shipments will be 86 million and 92 million tons. This represents a slight recovery over 2013 levels, which were impacted by several discrete events and returns us to a more normalized production levels. From these total shipments, exports will be approximately 4.5 million tons. At current international prices, we make little additional logistics margin. However, we continue to make margin at Spring Creek and we remain a long way from triggering take-or-pay obligations. We are also fortunate to have locked in prices for approximately 40% of 2014 deliveries using financial contracts that were valued at $16 million at year end. This gain will be realized ratably through 2014 assuming that Newcastle prices remain at year end levels.

With our committed in price tonnages for 2014, we anticipate similar overall realizations for 2013. We will seek to limit absolute cost increases as much as possible. And as a result, we expect adjusted EBITDA of between $180 million and $220 million. We will continue to tightly control capital expenditures and expect to spend between $40 million and $60 million. We believe this lower run rate of capital expenditure is sustainable for both 2014 and 2015 as we avoid purchasing mobile equipment that would have been needed at Cordero Rojo if we were trying to maintain production of 38 million tons per year. By reducing Cordero Rojo production to around 28 million tons in 2015 we also freed up equipment that we would be able to redeploy to other sites, avoiding further capital spend. We have two remaining years of committed LBA installment payments and will pay $69 million in each of 2014 and ‘15. After capital expenditures and LBA payments, we project to remain cash flow positive. We expect interest expense of approximately $70 million. This is an increase over 2013 as we do not expect to capitalize any interest on projects under development in 2014.

From this, cash interest will be approximately the same as 2013 at around $55 million. Depreciation, depletion, and accretion expense will increase to be between $125 million and $135 million as we mine into increasingly expensive leases. And finally, we expect cash tax payments to Rio Tinto under the tax receivable agreement of approximately $14 million.

With that, I will hand back to Colin.

Colin Marshall - President and Chief Executive Officer

Thanks Mike. Now while it’s been tough couple of years for the U.S. coal industry, fundamentals of supply and demand continued to move in the right direction. As natural gas prices remained above $3.50, generation has moved back to coal, which made up 39% of the U.S. electricity generation last year. Reduced production and rail disruptions have helped to bring utility stockpiles down considerably. EVA reported December PRB stockpiles of 67 million tons down from 91 million tons a year ago. This equates to 57 days of burn and should reduce further with recent cold weather.

As utilities appeared set by quite a bit of cold in the year, we hope to see a continuation of recent increases in prices over the next few months. Hopefully, the recent cold weather across much of the U.S., and volatile natural gas prices will remind utilities and regulators of the importance of coal generation in providing low cost, reliable electricity and of the need to have coal stockpiles at power plants. We understand the BNSF are increasing their capital spending and recruiting extra crews to help overcome their recent capacity issues brought on by an increase in all their businesses, particularly oil. While there will be no quick fixes, we are hopeful that they will have fuel issues this year.

Since our last call, we sold 2.7 million tons at an average price of $11.80 per ton for 2014 deliveries, which is in line with the prevailing market. In total, new sales, carryover, and index tons of fixing during the period increased our fixed contracted position by approximately 8 million ton at an average price of $12.66.We now have 84 million tons contracted for this year, 77 million tons of which are fixed at weighted average prices of $13.18.

For 2015, we currently have 46 million tons committed, 32.5 million tons of which are under fixed price agreements with weighted average price of $13.61. We will look for opportunity to contract more coal through the year as utilities send out RFPs. I should add that recently we have seen increase in RFPs from utilities for 2014 coal, which would be expected with the cold weather and increased burn. While some analysts are pessimistic on the outlook for international markets, I believe the strong demand growth we have seen from Asian countries particularly China and India will continue, and will overcome the excess supply that has come on from Indonesia and Australia in recent years. While recent exchange rate moves do not help, international prices will have to move significantly to allow new projects to develop to meet future demand.

In summary, we are well placed for 2014 with efficient operations, a good solid to position, and strong balance sheet. We should be in a good position to benefit when markets improve. Hopefully domestic markets are already doing so.

With that, now I would be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jim Rollyson with Raymond James. Please proceed.

Jim Rollyson - Raymond James

Good afternoon everyone.

Colin Marshall

Hi, Jim.

Jim Rollyson - Raymond James

Colin, I realize this is embedded in your guidance for EBITDA, but when you look at the logistics business, it sounds like, from what Michael said, your hedges are more or less similar to what you had last year. When you look at the breakout of EBITDA, you did a little over $5 million in EBITDA this quarter versus $11.4 million for the entire year. Just curious what drove the fourth quarter performance and is that something that can carry through into 2014 performance for logistics specifically?

Michael Barrett

Jim, it’s Mike here. I can take that one. The rail rate in the fourth quarter stepped up a little as we actually had a slightly high hedge position in the fourth quarter, so that really helped the overall results for the fourth quarter. In terms of the underlying business, it is very similar across each of the quarters, but the slightly higher hedge position helped the fourth quarter results for the year.

Jim Rollyson - Raymond James

And you said hedges for ‘14 or more spread across the year?

Michael Barrett

Yes, they are a little bit more ratable.

Jim Rollyson - Raymond James

Okay, perfect. And Colin, you mentioned in the press release you had some new interest in PRB coal not just from your traditional customers in the cold weather, but guys that are looking at burning a bit more PRB coal, have you got to the point of doing – have an interest in test burns yet and any thought on maybe what kind of volume that could amount to if things go well?

Colin Marshall

Yes. We are seeing people looking domestically looking to take PRB coal, particularly as they work out how they address, what they are going to do in ‘15 with the MATS regulations coming through. So, I think overall Jim, what we will see is some of these people have burned PRB coal before or done test burns years ago and others would not probably line up new ones. But I think it goes to the position that we take that we think overall PRB coal will – burn will remain relatively flat through 2015 as the MATS stuff come in, but within that, some utilities will close down to burn a bit of PRB, but we will also – that maybe balanced by increased utilization at others and by people taking PRB into that makes us a new way of meeting the MATS regulations. Once again overall, we still of the view that flat is our best prediction in terms of PRB demand even though MATS will push down overall the coal demand.

Jim Rollyson - Raymond James

It makes sense. And last just one quick thing, you mentioned weather and rail performance in 4Q and some of that carried into 1Q, are you thinking the impacts of that will be as bad at 1Q or do you think that starts to improve as we get through the quarter?

Colin Marshall

Well, in our discussions with the railway, it’s been – there is no real light switch quick fix, unfortunately. It will take some time for them to get things back where they want them to be and we want them to be. So, I think we will get off to a slow start. And quite frankly, the recent weather in the center and south of the region has pushed them back a bit when they got off to good start in January maybe. So, overall, I think I will say that we should see a steady improvement through the year, but it’s – we will carry on working with them and see how we go unfortunately, because of the increased demand they have got there, they are under some pressure, but they are very conscious as they need to get things going again.

Jim Rollyson - Raymond James

Great, thank you guys.

Karla Kimrey

Next question?

Operator

Your next question comes from the line of Brandon Blossman with Tudor, Pickering and Holt. Please proceed.

Brandon Blossman - Tudor, Pickering and Holt

Good afternoon, everybody.

Colin Marshall

Good afternoon.

Brandon Blossman - Tudor, Pickering and Holt

This will be a bit of a fishing expedition, but directionally, if you will, year-over-year guidance ‘14 versus ‘13 feels a little light given that all the variables or many of the variables on a year-over-year basis look to be better ‘14 to ‘13. Is there any breakout or kind of nuances there that I am missing that may contribute to perhaps a little slightly lower number than expected on ‘14?

Colin Marshall

I think what we’d see the price is down a touch that we are expecting to get. Currently on the contracted tons and on the indexed ones, we are still – prices whilst they moved up have an overall leave us lower than last year. But if you sense and then obviously we always talk about the ongoing cost increases as Mike explained with strip ratios and haul distances. So, you put those things together and we came up with a guidance range we are looking at and obviously the middle range of our guidance is 89 million tons. So that’s the sort of positive, but when we put it altogether that’s where we ended up and that’s how it looks at the moment.

Brandon Blossman - Tudor, Pickering and Holt

Okay. And then I guess from same kind of topic, but rolling to a specific question, cost per ton Q4 actually was pretty good considering the volumes directionally where should we expect that to go through as we move through ‘14?

Colin Marshall

Well, I think 2000 – the Q4 was a good result. And I was very impressed with the ability of the mine sites to manage their cost. I think overall we will wait and see. Our costs normally go up. The big driver on that will be the tons and we will see how that goes, but I think we have got more work to do and as Mike said some of our inputs are going to be more expensive. So, that’s what we’re always sort of trying to overcome with the efficiency measures. So, not wildly different, but we will want and see how comes out quarter-by-quarter, but there is plenty of pressure to push up costs that we’re always trying to overcome.

Brandon Blossman - Tudor, Pickering and Holt

Okay, fair enough. Thank you very much.

Karla Kimrey

Thanks, Brandon.

Operator

Your next question comes from the line of David Gagliano with Barclays. Please proceed.

David Gagliano - Barclays

I have just a couple of questions similar to the last two. I’m trying just to reconcile the 2014 guidance with the – what I think are the two missing pieces. In that $180 million to $220 million range, obviously, let’s say we assume the midpoint on the volume side. What are you assuming for cash costs, unit costs and also what are you assuming for the adjusted EBITDA contributions from the export business including the $16 million gain?

Colin Marshall

We’re not going to go into specifics of cash costs, I am delighted to say we’ll try and manage them as close as we can, and there’s normally pressure on them going up with and on the exports we said we’re expecting similar to this year in the little margin given where prices are at the moment so something similar to this year, I think to the last year.

David Gagliano - Barclays

Similar to this year including the $16 million gain, right, is that correct?

Colin Marshall

Yes.

David Gagliano – Barclays

Okay. And then on the – just on the hedges what exactly – what are you doing when you are hedging the export business, are you selling forward? Is that basically all you are doing or is there or anything else?

Colin Marshall

Yeah, we’re not trying to speculate anything like that, what we’re trying to do is basically effect of sale or create the sale when we would choose rather than when the Asian customers tend to want to picks the pricing of the tons, which is late in the year. So, when we see prices that we like them, yes, we affect the forward sale to look in that price and then when we actually do pick the price with the customers we can lock the price by putting in the opposite transaction and then that gives us the fact that we sold the coal when we chose rather when the customer wanted to fix price.

David Gagliano – Barclays

Okay. And how much of your volume is hedged for ‘14 again on the export?

Colin Marshall

We said 40% of the...

David Gagliano – Barclays

40%, alright, perfect.

Colin Marshall

Yes.

David Gagliano – Barclays

Alright, thank you.

Operator

Your next question comes from the line of Evan Kurtz with Morgan Stanley. Please proceed.

Evan Kurtz - Morgan Stanley

Hi, good afternoon guys.

Colin Marshall

Good morning.

Evan Kurtz - Morgan Stanley

Just a question on your ability to ramp-up, it seems like we’re finally seeing a little bit of a light at the end of the tunnel for PRB coal. I know you guys used to do above $100 million a year. What would it take to move to that sort of level if you thought the market was there just logistically and similarly, what sort of market conditions would you need to see make a decision to actually keep tons up at Cordero Rojo next year?

Colin Marshall

Okay. In terms our ability to increase then it’s really within that guidance range so for the middle range is 89 and 92 would be a good result. And quite frankly, we need few things to lineup like the rail would have to go very smoothly, I think to easily get out of that. So, there is no – we’re certainly not professing will this in a light switch for us to get a significant amount more sales or more production this year. And quite frankly we’ve always said, we will produce what we think and the mines can produce efficiently, we won’t go chasing extra tons because they can get quite expensive quite quickly if you’re trying to push them to us. So, we will try and run the business optimally and match our production to demand and we’d much rather see the price go up and go chase an extra million tons or too.

In terms of Cordero Rojo, the move we’ve looked at it and actually look at where the market is, the – as we said at the time that we first announced that we were looking at reducing production in 2015, one of the major factors as well as we were going to have to invest in the new truck/shovel fleet to maintain production of 50 million tons and in that particular area, the north area the mine, it was quite an expensive mining area. So, when we put all that together we actually look at it now and because we’ve – we can put off that 50 million bucks for truck/shovel fleet and save a fair bit of money by moving some of the surplus equipment around to offset other capital and potentially moving the drag line out, I guess really it would take very large movement in prices to make that an obvious thing to do.

Evan Kurtz - Morgan Stanley

Okay, thank you. And then may be just one more follow-up. I noticed there was a few permits issued on the Port of Morrow earlier this week by the Oregon DQ and I guess the opposition to the port were happy about the water quality certification requirement under those permits. I was wondering if you have any thoughts on whether or not that’s the stumbling block for Ambre or a big deal for them or just something that they can maneuver around fairly easily and then also just kind of on that subject, if assuming that permits come through quickly on Port of Morrow, what does that mean for maybe resuscitating the Ambre deal and moving tons out of Decker through that port.

Colin Marshall

Okay, well, first of all, we’re obviously not actually directly involved in the Port of Morrow while we’re not involved in the Port of Morrow at project, that’s Amber’s and then I will take the good news that the process is actually going forward and permits are being issued as a good thing, the exact details of them and how it plays out, we’ll have to wait and see, but I think it’s good to there is actually process is going forward obviously we’re putting a lot of effort into the alliance for Northwest jobs and exports and trying to make sure people are aware of benefits of the exports with the view for the specific gateway terminal that we are involved in. As far as improved – I suppose – overall, I’d say that any improvement in terms of international markets for those who can get call out would be favorable for all exporters, Ambre included, and therefore, presumably would increase the changes then being able to complete the purchase of our interest so, I think let’s wait and see.

Evan Kurtz - Morgan Stanley

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Holly Stewart with Howard Weil. Please proceed.

Holly Stewart - Howard Weil

Good afternoon everyone. Just two questions. First, you mentioned several RFPs, any commentary on 88 versus 8400 requests it seems the 8400 price hasn’t really responded much in the OTC market?

Colin Marshall

Yeah, we are seeing the same obviously the RFPs, the big ones we’re talking about a pretty public and at the moment there that it’s great to see those coming out for in-year coal, we certainly haven’t seen those sorts of levels this early in the year for several years. Initially what we normally see in the market starts improving is at 8800 moves up first and then that as a gap widens – and it’s wide at the moment, sort of $2.50 or whatever then once people bid up 8800 then 8400 starts looking economic to buys and then they start moving that up. The one thing that might be slightly different going forward is depending on how many utilities maybe go up new reset rail rates because obviously that can impact the difference between 88 and 84, but overall it’s quite normal for 88 to go up first and 84 to follow. It’s a positive sign if 88 going up and let’s see that market is tightened and people start running out of coal then hopefully it will be a move to increase price of 8400 so, things seem to be going in the right direction, but it’s all question of supply and demand.

Holly Stewart - Howard Weil

Sure, okay. And then, Colin, maybe one that’s a little unfair at this point since you just gave 2014 guidance, but volume is obviously always a big driver of costs and given your reduction plans at Cordero Rojo. Is there any way at this point for us to talk about the impact on costs going forward?

Colin Marshall

To this year, it shouldn’t be much impact I guess because we’re still going to produce sort of – we’re aiming for them round about 89, 90 million ton range. Going forward, we’ll give more information on that as you work out the details so, I think the – obviously that the two things that made – decision make sense were that the capital savings, which are detailed and also the fact that area was going to high cost mining area. So, it’s not all mining areas across our operations and across our pits. Each pits are the same so, it shouldn’t be too dramatic, but will give you – will give you the details as they are actually finalized really through the end of this year’s budgeting process.

Holly Stewart - Howard Weil

Okay, guys, Appreciate it.

Karla Kimrey

Thanks Holly.

Operator

Your next question comes from the line of Lance Ettus with Tuohy Brothers. Please proceed.

Lance Ettus - Tuohy Brothers

Hi guys. Just had a follow-up on the Morrow Port, I know you guys aren’t involved currently, but with your – the most logical competitors, kind of little more financially (indiscernible) and more financial stress on you. And at current coal prices, I don’t think that their coal would be exported economically versus certainly not versus yours. Do you see any opportunity to jump back in there given that the short timeframe these guys are talking about before they get that operational?

Colin Marshall

I don’t think I should talk about any specifics with individual ports other than the ones that we’ve actually got agreements with. So I wouldn’t want to comment on that.

Lance Ettus - Tuohy Brothers

Okay. Thank you.

Karla Kimrey

Thanks, Lance. Next question please?

Operator

Your next question comes from the line of Caleb Dorfman with Simmons & Company. Please proceed.

Caleb Dorfman - Simmons & Company

Sort of going back to Holly’s question, I know that you can’t give actual firm indication to how costs are, but you always sort of talk about costs in terms of explosive bucket or labor bucket or repairs bucket. How should we think about the individual impacts I guess, ratably on each of those buckets? Is it right to think that the less tonnage will decrease the explosives cost ratably, is that a okay assumption?

Colin Marshall

Yes, within the accuracy, it will actually probably be slightly more on it say explosives because it is higher strip ratio whereas you use a bit, but we’re really talking down to splitting hairs in terms of the overall business. So yes I think the way you look at it ratably is probably right.

Caleb Dorfman - Simmons & Company

Okay. And then I guess when you are actually thinking about potentially adding back production obviously you probably had a little bit of excess capacity at Antelope or Spring Creek? If the market conditions actually got better, would you think about increasing production at those mines before actually adding production at the higher cost at Cordero and if so what would the equipment lead times be if you needed more equipment?

Colin Marshall

Obviously once every dollar we decided to put into capital across the business we should put it where we think it makes more sense. So just - if we take Cordero down there is no reason why it should go back unless that dollar or the investment makes more sense and elsewhere. So we’ll look at things in that light. And obviously the place I’d really like to crank up would be the Spring Creek complex and that’s how we’re working with the export terminal is try and make sure we get space there because I think that’s where this potential for big returns for us. The other thing I would add is domestically we’re never in any great rush to add capacity because we’d much rather see $1 on 90 million tons then $1 on a couple of extra million tons.

Caleb Dorfman - Simmons & Company

That makes sense. So, how long would it take to get new equipment if you needed new equipment to add capacity at let’s say Spring Creek? Is it like a year now?

Colin Marshall

Spring Creek I think you’re going to have a couple of years but we got plenty of time. One of the things that actually is helpful to us in terms of the timing of export terminals and the rest of it, it gives us plenty of time to make sure that we match Spring Creek any capital spend with ongoing terminal capacity. So that we can reduce any risk of sort of having a mine but no market for it. So I think that’s always been a positive with that particular project.

Caleb Dorfman - Simmons & Company

Thank you, Colin.

Karla Kimrey

Thanks, Caleb. Next question.

Operator

Your next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed.

Neil Mehta - Goldman Sachs

Good afternoon.

Colin Marshall

Good afternoon, Neil.

Neil Mehta - Goldman Sachs

Colin, how do you think about M&A with the long-term free cash flow because that will be either going to roll off. If you’re going to start drilling of a decent amount of cash and you’ll have some options. And as you think about potential areas to pursue acquisitions were sort of – what’s on the table and then what’s not on the table. I would imagine Eastern and Illinois Basin some of this underground stuff would be off the table, but I was curious for your thoughts on that?

Colin Marshall

Okay, well, Neil on that we’ve been pretty consistent with sort of and what we said in it. We’ll look at everything, but obviously things that are sort of more to the West surface operations with export potential would make more sense than something underground in the East. So that’s not changed. The obvious priority for us I think as we said out in our presentation is you want to run the business as well as we can to get to generate cash and make sure we’re looking to optimizing that. We want to make sure we got the reserves which we’re doing then we do have this tremendous opportunity with the Spring Creek complex that we put together.

So one of the things it’s actually quite interesting when we look at it is that if we can just – the most valuable thing that we could do is anything to promote a port being built because that would give us the most upside and when we look at M&A assume you got a port it’s – the developing Spring Creek is a very, very attractive option we’ve created by buying the Youngs Creek reserve and by negotiating the deal with the Crow Tribe. So we’ve got a great position there, we need the ports for other M&A then it comes behind that. We’ll look at things but we got to find something that will make sense and that we believe we could operate successfully.

Neil Mehta - Goldman Sachs

And then one of the bare arguments around PRB had been the level of latent supply in the basin and the lack of supply discipline. But based on what you’re hearing so far in terms of 2014 guidance from some of your peers in the basin. Do you think there – we’re starting to see a little bit more supply discipline being exercised here?

Colin Marshall

I hope so. I’m optimistic that the terms that have come off, they don’t – we have said many times that if you take 5 million tons of production out two years later you can’t just dial 5 million tons of production back, strip ratios go up, people tend to stop their equipment that would need money spent on it. So all those things are barriers to coming – production coming straight back. And certainly from my interpretation of other calls then I think most people are warning that there is a fair bit of effort varying amounts I guess depending on different operators required to bring back production.

And certainly for us we’re not looking to charge up with production up to 92 maybe if we have a good year, but we want to run our operations efficiently and not just chase tons because as I said before that actually gets quite expensive to try and crank up too quickly. And we believe that there is more value in running the operations at sort of I’ll say an optimum level, but one that lets them run efficiently.

Neil Mehta - Goldman Sachs

And last question what are seeing in terms of the competitive bidding dynamics in the PRB? So one of the reasons PRB prices might have not rallied more than we’ve seen is that there has been talk of a price war when it comes to RFPs. Are you seeing any change in bidding behavior?

Colin Marshall

Well if you ever want to see a competitive market then the PRB coal prices seems to be very competitive. And so obviously that’s not changed and people respond to RFPs generally the OTC price gives you a good indication of where things are being transacted. It’s a competitive market and there is people – it’s a high fixed cost business and certainly when you had – when you got oversupply it’s super-competitive and that’s what we’ve seen for the last few years. The real driver will be supply and demand and when somebody puts out an RFP and nobody has gotten the easy coal then the price can go up.

Neil Mehta - Goldman Sachs

Fair enough. Thank you very much, Colin.

Karla Kimrey

Thank you.

Operator

Your next question comes from the line of Jeremy Sussman with Clarkson. Please proceed.

Jeremy Sussman - Clarkson

Hi good afternoon everyone.

Karla Kimrey

Hi, Jeremy.

Jeremy Sussman - Clarkson

Colin for 2015 only about I think 33 million tons are under fixed price contracts in seemingly a rising market how should we think about your strategy in terms of contracting?

Colin Marshall

I trust you’ll remain the same and that we’re not brave enough to say what will hold out because the prices definitely go enough. We will carry on bidding on RFPs and opportunities that come up, clearly looking at our amount of production; we’re never intending to win all the RFPs because we’re only a 80 – 90 million tons or 80 million tons next year out of the 450 million tons from the Powder River Basin. So but we do look to make sure that we’ve laid in, we win our share of RFPs as they go that we build the position and we’re optimistic that if we do that – if the fundamentals are there then the price can go up but we’re not – I’d say we’re not brave enough to say well we’ll just not reply to RFP for six months.

Jeremy Sussman - Clarkson

Makes sense. And then just my follow-up. You mentioned that you’d rather see prices go up than bring on an extra couple million tons which certainly makes sense. Do you sense that that’s the thought process in general out West?

Colin Marshall

Let’s wait and see. I’m certainly only speak for anyone else, but let’s wait and see.

Jeremy Sussman - Clarkson

Okay. Thanks very much.

Operator

Your next question comes from the line of Lucas Pipes with Brean Capital. Please proceed.

Lucas Pipes - Brean Capital

Good afternoon everybody.

Karla Kimrey

Hi, Lucas.

Lucas Pipes - Brean Capital

My first question is the high end of your shipment guidance is 92 million tons. Would you say this is also the high end of your current capacity?

Colin Marshall

Yes.

Lucas Pipes - Brean Capital

That’s helpful. Thank you. And then on Decker unfortunately the deal didn’t go through. Could you give us a sense on what the reclamation liability is for that asset and if it could have any impact on your cash flows over the coming years and to what degree?

Michael Barrett

Lucas, its Mike here. The reclamation liability, the ARO for decades approximately $70 million, that’s up from 50% share of it. There is some ongoing reclamation that gets done as contemporaneous reclamation each year, but they are relatively small amounts. So that reclamation model really only comes into play once we get to the point of the mine, stopping production and then going through a cessation period and we are some years from that yet.

Lucas Pipes - Brean Capital

That’s helpful. And then on the domestic side, you mentioned PRB burn in 2014 should increase, do you have a sense on the kind of the level of magnitude year-over-year versus ‘13 by how much PRB consumption domestic consumption should increase?

Colin Marshall

Okay, no. We’ve always going to be careful with giving consumption and production. Production certainly, we will see it go 35 million tons or so just because stockpiles have come down. Consumption, I think where it can be flat to up a bit whether that’s 10 or 15 I don’t know, we will have to wait and see, but I think the big difference will be actually in the amount that is shipped, because you can’t carry on drawing down the stockpiles at the rate that they were last year. So even if consumption stay flat, then we are going to need to ship more coal.

Lucas Pipes - Brean Capital

So the best guess is kind of flat to just up a little bit?

Colin Marshall

Yes, we got off to a good start, but there is an awful long way to go and the difference between the hot and the cold summer is significant.

Lucas Pipes - Brean Capital

Yes, I appreciate that then. Do you have a sense for the quality of your un-priced coal, 88 to 84?

Colin Marshall

Well, okay, the un-priced cold, most of it at this time of the year is actually the Spring Creek export sales. So, it’s actually the majority of it is Spring Creek, the rest is I think slightly more at Antelope, but there is not much in it.

Lucas Pipes - Brean Capital

Great, thank you very much.

Karla Kimrey

Thanks Lucas.

Operator

Your next question comes from the line of (indiscernible). Please proceed.

Unidentified Analyst

Good afternoon. For your CapEx guidance for 2014 of $40 million to $60 million, how much do you expect would be financed with capital leases?

Colin Marshall

Hello, (Laurent), that’s a good question. I don’t know off the top of my head, that’s one that we will work our way through as we go through the course of the year. It will depend on the individual pieces of equipment that we are purchasing. We have got a good capital leasing program in place, but it would certainly be looked at as we go through the course of the year.

Unidentified Analyst

Okay. And just two other quick – I am a credit analyst, so I apologize for these questions. Your liquidity disclosure at year end of $481 million, I just want to confirm that’s cash of $312 million and then the balance that bridges you to the $481 million is the availability. And the reason that’s much lower than the committed amount on the revolver is simply the leverage covenant that’s in place?

Michael Barrett

That’s exactly correct, yes.

Unidentified Analyst

Okay. And as you amend that that would naturally free up if successful would free up a bunch of availability, correct?

Michael Barrett

That’s our expectation, yes.

Unidentified Analyst

Okay. And then finally again sort of nitpicky so I apologize, your cash interest paid in 2013 of $69 million, which is on the bottom of your cash flow statement. I would have thought it would have been closer to like $55 million, which is simply the coupon on the bonds, could you help bridge the difference there?

Michael Barrett

Yes, the difference is the imputed interest that we – from an accounting perspective that we allocate from the LBA installment payments. So because the LBA is paid over five years, we are required to impute interest and a portion of that, that will go through interest expense.

Unidentified Analyst

Thank you very much.

Operator

Your next question comes from the line of Michael Goldenberg with Luminus. Please proceed.

Michael Goldenberg - Luminus

Good afternoon.

Colin Marshall

Good afternoon.

Michael Goldenberg - Luminus

Just a couple of quick questions. You said in your remarks that the LBA payment of this year totaled $79 million. However, on the cash flow statement I only see $63 million. Am I missing something?

Michael Barrett

No, not at all. Again that’s exactly the same as the point that (Laurent) just brought up, the difference is the imputed interest. So, on the cash flow statement, you are seeing what we classify as the principal portion and then the additional portion goes through interest expense.

Michael Goldenberg - Luminus

Understood. And then secondly, can you go over again over what you have hedged in the export markets for 2014 and ‘15? If I am not mistaken at the end of Q3, you had $17 million hedged over 1.2 million tons, you made some remarks, but I didn’t quite catch what the numbers were?

Michael Barrett

Yes, the position at the end of the year is very similar to where it was at the end of the third quarter. We have got $16 million worth of assets that we except to realize during the course of 2014. And then a further $7 million that we expect through 2015, so 2015, yes, 2014 we are approximately 40% hedged.

Michael Goldenberg - Luminus

40% of expectation of 5 million tons?

Michael Barrett

4.5 million tons, yes.

Michael Goldenberg - Luminus

4.5, okay and that’s all in the EBITDA guidance so the $60 million of hedges in the EBITDA guidance?

Michael Barrett

That’s correct, yes.

Michael Goldenberg - Luminus

Got it, okay. Thank you very much.

Operator

Your next question comes from the line of Mitesh Thakkar with FBR. Please proceed.

Mitesh Thakkar - FBR

Thank you very much guys. Most of my questions have been answered. I appreciate it.

Operator

And we have a follow-up question from the line of Kristoffer Inton with Morningstar. Please proceed.

Kristoffer Inton - Morningstar

Thanks guys. I just wanted to ask regarding the comment you made for you are seeing plants exploring increasing PRB fuel blend, are you seeing anyone is thinking about a pure basins switch at all?

Colin Marshall

No, not that I am aware of, I would have to go – you got to follow it boiler by boiler and all the rest of it, but not a complete switch gets generally boilers if you are burning Eastern coal boiler is setup to burn that sort of coal. So to switch it completely will be quite tricky but maybe to switch some of it to PRB is a lot easier.

Kristoffer Inton - Morningstar

Right and then I guess as a follow-up where are you seeing that generally in terms of states or what regions are you seeing those people exploring a fuel blend increase?

Colin Marshall

Well basically across the east where you start getting the border between where our coal is burned, Illinois Basin’s coal is burned in the Central App. So it’s the guys who can obviously easily take from either place. Once again it’s a few customers. I think the important point is for us it goes to the fact that for the overall, the view that we have got that things should stay flat and there will be some – we will win, some lose and some increased utilization of different plants should lead to PRB at least flat as we go forward through ‘14 and ’15 seems to make sense.

Kristoffer Inton - Morningstar

Okay, thank you.

Operator

And your last question is a follow-up question from the line of Lucas Pipes with Brean Capital. Please proceed.

Lucas Pipes - Brean Capital

Thank you for taking my follow-up question. Michael actually, just to ask from you, but since I have got another shot at it. Could you give us a rough kind of production breakdown between Cordero, Caballo and then also Spring Creek?

Michael Barrett

For 2014?

Lucas Pipes - Brean Capital

Yes, sorry for ’14.

Michael Barrett

Yes, I think they will be very much in line with some kind of ratios we were for 2013. So we would expect to round about 18 million tons at Spring Creek. I think it’s about 34 million tons, 35 million tons out of Antelope and the balance from Cordero.

Lucas Pipes - Brean Capital

Excellent, great, thank you very much.

Michael Barrett

Thank you.

Colin Marshall

Thank you.

Colin Marshall - President and Chief Executive Officer

Okay, I think that’s all the questions. Just to say thank you very much for your interest in Cloud Peak Energy. Also I would like to thank our employees and everyone involved in producing and getting what I think was a pretty good result of 2013. Obviously, we will look forward to speaking to you again in April during our Q1 earnings call when hopefully the impact of the cold weather will further improve demand and prices. So we will look forward to speaking to you again. Bye.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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