Cloud Peak Energy's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Cloud Peak (CLD)

Cloud Peak Energy, Inc. (NYSE:CLD)

Q1 2014 Earnings Conference Call

April 29, 2014 5:00 pm ET

Executives

Karla Kimrey - VP, IR

Colin Marshall - President & CEO

Michael Barrett - CFO

Gary Rivenes - COO

Analysts

Clooney Chin - UBS

Brandon Blossman - Tudor, Pickering, Holt & Co.

Dave Gagliano - Barclays

Mitesh Thakkar - FBR

Neil Mehta - Goldman Sachs

Dave Katz - JPMorgan

Jeremy Sussman - Clarkson

Lucas Pipes - Brean Capital

Caleb Dorfman - Simmons & Company

Lance Ettus - Tuohy Brothers

Luke McFarlane - Macquarie

Paul Forward - Stifel

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2014 Cloud Peak Energy Incorporated Earnings Conference Call. My name is Venice and I will be the operator 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 turn the conference over to Karla Kimrey, Vice President, Investor Relations. Please proceed.

Karla Kimrey

Thank you. Good afternoon and thank you all for joining us. With me today is Colin Marshall, Cloud Peak Energy's President and CEO; Michael Barrett, Chief Financial Officer; and Gary Rivenes, Chief Operating Officer.

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, regulations and energy policies, capital resources, and other statements that are not historical facts. Actual results may differ materially because of 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 section of our website at cloudpeakenergy.com.

I will now turn the call over to Colin Marshall.

Colin Marshall

Thank you, Karla. Good afternoon and thank you for joining our Q1 results call. I will make some opening remarks before handing over to Michael Barrett, our CFO, to cover the financials. As Karla mentioned, we are joined today by Gary Rivenes, our Chief Operating Officer.

As usual I will start with our safety performance. During the quarter our 1400 mine site employees suffered four minor reportable injuries. During 74 days of MSHA inspections across our three mines, we issued 8 S&S citations. I'm pleased to report the Cordero Rojo Mine has now extended its time without a reportable injury to over 1.4 million workout and the Cordero was awarded the Wyoming State Mining Inspectors Large Mine safety awards in recognition of their 2013 safety performance.

As always we consider safety a value, and continue to work to reduce all safety and environmental incidents. We continue to believe that not only is this the right way to run our operations, but the safe operations are more productive.

Turning to our first quarter operational performance. Shipments from our three owned and operated mines was 20.4 million tons reduced due to some winter weather events including the hard freeze of the Great Lakes and ongoing rail delays. We've recently seen some improvement in rail performance from both the UP and BNSF as weather related issues have reduced. As you are aware the BNSF has announced they are making significant investments in locomotives and additional crude this year to improve their performance.

Unfortunately it will take some time for these investments to translate into increased shipment, which is the reason for the reduction in the top end of our shipments guidance.

Our mines ended the first quarter in good shape with healthy inventories and free shipping, which should allow us to meet our contracted tonnages through the rest of the year.

We have continued to focus on gaining benefits from our in-house condition monitoring and maintenance programs, which continue to deliver real cost and capital savings. I was recently asked by an investor if we had run out to places to improve performance and credit cost? I can let you know this will not happen. We are finding improved technologies is increasing and allowing us to identify and implement improvements across our operations.

During the quarter international prices continued to decline due to additional supply from Indonesia and Australia. Demand continues to be strong as our Asian customers are keen to increase U.S. coal imports to diversify the supply options. Even at current low prices, our logistics business continues to operate with small margins thanks to our hedging program. These earnings are in addition to our mine site margins.

There have been a couple of positive developments with our longer-term projects that I would like to mention. Firstly the results of cold dust air monitoring conducted by the Northwest Clean Air Agencies were published. The Independent Northwest Clean Air Agency is a government body, which monitors air quality in the northwest. Results of 20 months of air monitoring conducted near a rail crossing in Bellingham, Washington showed there were no days when dust was at a level that would be expected to cause issues for people who have high sensitivity to respiratory problems. This confirmed the findings of numerous other studies carried out over many years that have showed cold dust does not represent a health hazard to the public. It was good to see the facts of this monitoring refute one of the major objections promoted by opponents of the gateway Pacific terminal.

Secondly, as we reported last year, the U.S. Court of Appeals affirmed the lower Court's ruling rejecting challenges to the BLM's leasing process for West Antelope II LBA. The NGOs did not seek any further appeals concluding their challenge. It is good to get to the end of this legal challenge, which confirmed the BLM's leasing processes is conducted correctly.

With that, I will hand over to Mike before I turn to cover the current outlook.

Michael Barrett

Thank you, Colin. I would like to start with a review of the financing transactions that we are pleased to complete this quarter. We extended the maturity on our $500 million revolver to 2019 and relaxed various covenants. We issued $200 million of new 10-year bonds at a very competitive 6.38%, and we used these proceeds plus cash on hand to repay the $300 million of 8.25% notes.

The refinancings have resulted in the series of benefits. We have extended our earliest maturities from 2016 to 2019. We have increased our available capacity under the revolver. We have reduced our long-term debt by $100 million and we have secured long term 10-year notes at a very competitive interest rate. Overall this means we have reduced leverage on our balance sheet, increased our financial flexibility and security, and lowered our ongoing interest costs by around $12 million per year.

We finished the quarter with cash and investments totaling $208 million, net debt of $292 million, and EBITDA to net debt leverage ratio of just 1.4 times, and total available liquidity of $756 million. This means that our balance sheet is in excellent shape.

Moving on to our first quarter results. In the first quarter we made adjusted EBITDA of $39 million compared to $48 million in the first quarter of 2013. This was in line with our expectations and reflects the typically solid start for the year that we normally experience. The result was lower than the first quarter of 2013. Our shipments were impacted by rail issues, realized prices were basically flat, and costs were slightly higher due to the normal progression of the mines.

After the first quarter rail issues, we have slightly lowered the top-end of our tonnage on adjusted EBITDA guidance ranges. We continue to expect to see improving result over the remaining quarters of this year.

Our focused cost control measures continue to pay dividends with improvements in equipment lives, production, and SG&A costs, and savings in capital expenditures. All of these measures mean that the operations remain cash flow positive and that we have been able to use cash from the balance sheet to pay down $100 billion of debt this quarter.

The earned and operated mine segment, averaged realized prices were $13.02 per ton compared to $13.09 last year. Average costs were $10.63 per ton compared to $10.37 last year, an increase of just 2.5%. In absolute terms, total costs were held almost flat even with higher trending strip ratios and the 2.5% increase in per ton costs largely reflects spreading those costs over fewer tons.

On an underlying basis, we saw some increases in diesel prices and explosives costs as we expected, but the mines continue our strategy of tight cost control in the faith of normal increases in workload. As we expect higher shipment rates in later quarters, we will expect to see our average cost per ton improve as the year progresses.

The earned and operated segment generated margins of $2.39 per ton in the first quarter compared to $2.72 last year.

For our logistics segment we delivered 1.2 million tons in the quarter compared to 1.4 million tons last year, as rail services interrupted some of the deliveries that we had planned. Low international coal prices also reduced revenues.

Physical sales revenue was $58.5 million and realized hedges were $3.4 million for a total of $62 million compared to $66 million last year.

Costs were $61.6 million to give an adjusted EBITDA $0.4 million for the quarter, which was $1 million lower than this time last year. So whilst the contribution from our logistics segment is currently limited it remains positive.

The current low Newcastle prices we have not layered in any additional hedging for 2014 or further out years, and our existing hedge book remains significantly positive.

At the end of the quarter, the mark-to-market value of our open hedge position for the remainder of 2014 was $20 million.

Couple of other points on the income statement. You'll notice that our SG&A costs are 8.5% or $1.2 million lower than this quarter last year. This reflects the SG&A costs review we initiated last year as we continue to scrutinize all aspects of our costs. And you will notice the unusually high interest expense figure this quarter. This includes the one-time costs associated with the refinancings in the quarter, particularly the $14 million of premium on early redemption of our 2017 notes and the non-cash write-offs totaling $8 million of previously deferred financing fees on the 2017 notes and the old revolver.

Turning now to our balance sheet and cash flow. In the first quarter we generated cash flow from operations of $13 million. This includes the one-off payments for the early tender premium that I just mentioned to redeem the 2017 notes. So the more normalized cash flow from operations would have been closer to $27 million for the quarter.

We continue to focus closely on spending the right amounts on capital expenditures. In the quarter we spent $6 million in capital expenditures almost entirely associated with the ongoing integrity of our equipment.

We financed one capital purchase for $1.2 million under our capital lease program and we anticipate limited additional equipment financing through the rest of the year as we continue to focus on getting the best possible use form our existing equipment fees.

As you know, last year we took the decision not to bid on the north Maysdorf II LBA tract at Cordero Rojo and to reduce production at Cordero by around 10 million tons in 2015.

I want to summarize some of the savings that we now anticipate. Overall we estimate capital expenditure savings of well over $200 million form this position. The savings include not bidding on the 150 million ton LDA, avoiding a new truck and shovel fleet at Cordero that would have been needed for the extra overburden, redeploying surplus trucks and support equipment to Antelope and Spring Creek, and relocating one of Cordero's drag lines to Antelope, which will avoid Antelope needing a new larger truck and shovel fleet.

Reducing production also fits with the reduced market demand for 8400 BTU coal.

With savings of this magnitude you can understand that the economics of reducing production are compelling. We don't see a situation where a rife in 8400 BTU prices would be enough to justify allocating this level of capital to bring back production.

I will now touch on the update for our full year 2014 guidance. After the interruptions to the first quarter shipments we longer expect that we can achieve the top-end of our previous tonnage range. As a result we are reducing the top-end by 2 million tons. This gives us a new range of 86 million tons to 90 million tons for the year.

Correspondingly we have reduced the top-end of our adjusted EBITDA range by $10 million, which gives us a new range of $180 million to $210 million for the year.

Finally, we have updated the interest expense guidance to approximately $77 million for the year to reflect the impact of the increased financings. To take you through the detail the $77 million comprises cash interest on the bonds and undrawn revolver fees of approximately $43 million, the early tender premium on the redeemed bond of $14 million, non-cash normal amortization of deferred financing costs of $4 million, the one-time non-cash write-off of deferred financing costs on the old revolver and bonds of $8 million, and finally imputed interest costs on our LBA payments of $8 million.

So in summary the operations continued to generate positive cash flows, we are controlling costs and capital expenditures tightly, we are rationalizing supply to better meet market conditions, and our balance sheet is in good shape to give us financial security and flexibility.

So with that I will hand back to Colin.

Colin Marshall

Thanks, Mike. As we come out of the prolonged cold winter the outlook for domestic coal markets is positive. Natural gas and storage is greatly depleted and we will need refilling before next winter. Coal inventories are low due to increased coal burn and low shipments through the winter.

Utilities should now be less confident there will be low natural gas readily available to meet big demand. What is interesting to note with some analyst are questioning the ability of gas and coal producers to rebuild inventories before next winter, particularly if we have a hot summer. We believe that this change in outlook is causing some utilities to reconsider the value of their forward contract position. For few years now, utilities have not contracted their full annual cold burn bringing down their contract positions. While this made sense in the price increasing gas supply and regulatory uncertainty we now believe many utilities are looking to rebuild their physical coal stockpiles and forward positions.

We have seen a marked increase in the press for coal we delivered this year. Interest is moving up near-term PRB prices as available capacity is increasingly contracted. We are now effectively sold out for this year and we will be concentrating on fulfilling existing contracts rather than on making additional 2014 sales.

During the first quarter we contracted around 5 million tons for 2014 and fixed pricing on 2 million index tons, increasing our fixed price position to 84 million tons at an average price of $13.09. This takes us to slightly over 89 million tons contracted for the year. So as I previously mentioned we are effecting fully contracted in line with our shipment guidance. The average price for the 7 million ton was priced during the quarter with $12.10 which were not great; it's a lot better than $9.80 we achieved last year.

With 2015, we currently have 51 million tons contracted of which 38 million tons are in the fixed price agreements with weighted average price of $13.54. The average price for the 5 million tons of contract fixed during the quarter was around $13.08. Once again this is up from around the $11 per ton last year. We will continue to contract steadily to ensure we get to a position that allows us to run our mines efficiently next year.

As Mike explained we are now committed to reducing production at Cordero Rojo by around 10 million tons next year and are planning to move one drag line to the Antelope mine. We continue to work to minimize the impact of this decision on our employees. By offering positions at our other mines, and through natural attrition, we currently do not plan to make any layoffs related to this reduction.

We will be targeting total production of around 80 million tons next year and as the drag line moved to Antelope we will be needed to overcome increased strip ratios. We are not planning to increase production at Antelope significantly when it is commissioned in 2016.

The international outlook continues to be characterized by strong agent demand, but it's currently being overcome by new supply coming online from projects starting and pricing is considerably higher. All our analysis indicate that Asian demand will continue to grow strongly. We are continued to build our supplier relationships with utility in Japan, Taiwan, and South Korea.

We are building new high efficiency coal fired power stations in the phase of growing electricity demand and we want to diversify their energy supplies. While we think it will take until at least 2015 for international prices to move significantly, we continue to be confident that demand growth will over connect the supply allowing prices to return to more sustainable level. In the meantime, our hedge position and mine margin continue to make these sales profitable.

We are expecting to export between 4 million tons and 4.5 million tons this year to our Asian customers. We will try to balance the benefit to maximize in shipments with potentially demurrage charges.

To sum up, we were impacted by low shipments during the quarter due to weather and rail interruptions, but we're pleased with our ability to manage costs. The mines are now well placed to reduce our cost per ton in shipments increase particularly in the second half of the year. We will continue to run the mines steadily to maximize efficiency and we will make sure we keep up with maintenance to reduce operating and capital costs.

As we effectively sold out for 2014 we will focus on working with our customers and as always to maximize delivery to contracted coal this year.

With that Mike, Gary, and I will be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Clooney Chin with UBS. Please proceed.

Clooney Chin - UBS

Can you give us a little bit more color around the PRB rail issues? I guess some of your other peers more situated towards the southern ends don't seem to be as affected. If you could just give us some more color there and just talk about sequentially how you would expect the volumes to recover going forward?

Colin Marshall

Okay. There's has been a lot talked about the rail issues and the PRB. I think what we've experienced through the winter -- through the end of the last year and now through Q1 is that weather impacted both railroads and then the BNSF also had some constraints on their capital in their crews, which meant that they were slightly more impacted than by the UP.

Our mines the Spring Creek mine is 100% BNSF and we believe that will take -- we've been told that it will take longer to sort out the northern corridor than the southern. What we have seen is that the shipments from Antelope mines to the southern end of the basin were actually up on Q1 last year and the service there has set a fair bit below -- it's still below where we like it to be.

Cordero Rojo, which is in the middle of the basin, did seem to have slightly more rail hold ups during the quarter. And as our mines the Cordero and Antelope are both basically 50:50 UP and BNSF. We are expecting things certainly in the south to pickup during the next quarter and hopefully be in decent shape for the second half of the year.

Clooney Chin - UBS

Okay. All right that's helpful. On the Supreme Court, there was some news that came out on Casper, potentially that's a positive for PRB over the next couple of years, just wanted to see if you had any reaction or thoughts to that?

Colin Marshall

Our real reaction -- our first reaction to that was well we will have to see how it plays out. Obviously the question about when it will actually be implanted. The analysis that we certainly before did indicate that low sulfur coal from the PRB could benefit. But there are also a lot of moving parts including impact of the math legislation that will come in. So I think in a moment it's probably too early to tell but overall it certainly I'm comfortable with our overall view that the PRB demand will be relatively stable and it's probably one of the things that underpins that.

Clooney Chin - UBS

One last one real quick and I'll turn it over. Just on the interest expense bridge, you went through some of the components there that add up to the full year interest expense. Can you just bridge the first quarter of that $38 million and back out the other one-time items?

Michael Barrett

Yes, certainly Clooney. The normal interest expense for the first quarter ran at about $16.5 million and that compares to about $18 million in the first quarter of the previous year and then the one-time costs that impacted to get us to the $37 million with an additional $21.5 million. And that's made up of the $14 million premium that we paid on the early redemption of 2017 bonds plus about $8 million worth of other deferred financing costs.

Karla Kimrey

Thank you, Clooney. Next question please?

Operator

Our next question comes from Brandon Blossman with Tudor, Pickering, Holt & Co. Please proceed.

Brandon Blossman - Tudor, Pickering, Holt & Co.

My quick question on the Q1 CapEx. Did I hear you there was incremental $1.2 million of financing CapEx piece, which I think brings the total to seven? And then the follow-on question to that is how does that compare to balance year CapEx on a quarter-by-quarter basis?

Colin Marshall

The financing costs or the equipment that we financed in the year was actually included in the $6.5 million worth of CapEx that we spent. So that the total was $6.5 million that included about $1.2 million of those that was financed. We still maintain the same guidance for the rest of the year of $40 million to $60 million for the full year. The majority of that will be around maintenance CapEx and obviously the spending of that can be fairly lumpy as we're doing particular jobs through the other quarters. It tends to also focus on the summer time quarters, which is obviously a preferable time for doing that maintenance work.

Brandon Blossman - Tudor, Pickering, Holt & Co.

Fair enough. So you expect some lumpiness? It feels like there might be some room for a downward revision there but we'll wait and see. On 2015, hopefully this is not the case but if (inaudible) internal pricing doesn't improve is the hedge book sufficient to keep kind of reasonable -- reasonably close to zero margins in that logistics business? And then how do you balance that kind of -- or charges versus what you actually want to move?

Colin Marshall

So Brandon did you ask about 2015 or 2014?

Brandon Blossman - Tudor, Pickering, Holt & Co.

2015?

Colin Marshall

2015. We are about 20% hedged in 2015. So we have not layered in any additional hedge positions from where we have been over the course of the last few quarters and given where the Newcastle prices are at the moment obviously we're not keen to layer in those additional hedges at these prices. So at the moment we will look to see where Newcastle prices flow out for 2015 based on the forward curve at the moment and based on the hedge positions, we certainly expect that we will have some contribution from the logistics business in 2015 and it will continue to be an area that we will be supporting and making sure that we are completing on our contracts with our customers in 2015.

Karla Kimrey

Thank you. Next question please.

Operator

Our next question comes from David Gagliano with Barclays. Please proceed.

Dave Gagliano - Barclays

I just have three quick questions. First of all what was the quality of the 5 million tons sold for 2015 delivery in the first quarter and when were those volumes sold?

Colin Marshall

Well, let's say it's sold during the quarter, I will say relatively, because it wasn't like it was all on the first or the last and the quality was a mixture between three sites. I think it was a little bit extra 84 and Spring Creek but basically flat. So it was a reasonable mix shift.

Dave Gagliano - Barclays

So just a mix. Okay, okay. And then just in terms of the -- along the same lines, what's the quality mix of the remaining unpriced volumes for 2015 delivery?

Colin Marshall

I think we've got for this, well we're basically sold out for this year. Really you're asking about the indexed ones which is --.

David Gagliano - Barclays

That's right. I was asking about 2015?

Colin Marshall

Oh I'm sorry for '15. I think it's normally predominately this time of the year Spring Creek because of the export stuff that's not contracted much later even though and then probably little bit more Cordero than Antelope that's normally the way it is. Remember next year we're taking Antelope down, sorry Spring, sorry Cordero down 28 million tons. So we've got a bit less to sell.

David Gagliano - Barclays

Okay. All right. And last question, where would you like your committed and priced position for 2015 to be by the end of 2014? How much do you want to leave open for 2015?

Colin Marshall

I like it to be a little bit oversold at very firm prices. I will do with the prices in the market as they come up and this is sort of minimum level that we -- prices are low, we need to get within a reasonable shot of where we're planning to produce. So we can run the -- we don't run the risk of not having enough productions to run the mines properly.

If you go back to the days 2011 things were priced a lot higher, we would happily over commit by a few tons to be fully sold going to the year, because if you remember that's the policy that served us well and we believe by doing that there is better chance of grabbing the prices in the forward curve going up for future sale then trying to hold back a few tons for year-end sales that's we haven't changed that policy over the last five years. So that's where we like to be. It will depend upon the prices.

Karla Kimrey

Thank you. Next question please?

Operator

Our next question comes from Mitesh Thakkar with FBR. Please proceed.

Karla Kimrey

Mitesh?

Mitesh Thakkar - FBR

Well, sorry. It was on mute, I apologize for that. Good afternoon. My first question is just on the shipment volume side. It looks like you're contracted to sell 89 million tons for 2014, and your guidance at the midpoint kind of implies a little bit below that. What happens to that contracted volume as far as logistic issues, you can't ship it? And does it increase your 2015 outlook, or is it just going to be you're going to ship those tons but your production won't change at all?

Colin Marshall

Mitesh, I think we -- the answer is, within a million tons or so it can get lost in the wash or few tons can be carried over or somebody like will have a forced major event. So I consider that that's fully sold out within where we're ranging for our production. There is no -- just as people, as customers carried over some, we in fact carried over some tons into this year. In previous years, we carried a few tons. Overall we have -- tons have gone away with force (inaudible). This flexibility around that position and we're very comfortable that we're effectively sold out. And in line with where we think the production will be.

Mitesh Thakkar - FBR

Fair enough. And just to follow-up on the cost side, I think Michael pointed out that when you look at the aggregate cost during the quarter they were flat compared to last year. And if I remember it correctly, I think you mentioned that you typically see 5% to 8% inflation on the aggregate number. So where does that number stand today with the first quarter performance and how should we think about it for the balance of the year?

Michael Barrett

I think overall, for the full year, we are in decent range. I'll ask Gary to give his comments on how is the outlook for the rest of the year.

Gary Rivenes

Yes, this is Gary. As far as our costs go with reduced tons that the cost per ton was up a little bit for this quarter. But we are well within our guidance that will come back in range throughout the course of the year. We have -- we do have increased diesel and explosive cost this year. We are probably the biggest outliners for the annual cost. But for the most part, our guidance is going to be pretty close.

Colin Marshall

If we get addition, yes the extra tons we are running at higher rate then obviously that helps the better ton cost and that's all in the way we are looking at the full year.

Mitesh Thakkar - FBR

Okay. So just to clarify, do you expect your aggregate cost to stay flat versus last year?

Gary Rivenes

Yes. We will be not -- we will just over our cost per ton from last year. There are some ins and out sir.

Karla Kimrey

Well, next question please?

Operator

Our next question comes from Neil Mehta with Goldman Sachs. Please proceed.

Neil Mehta - Goldman Sachs

Colin, how competitive is the bidding behavior in the PRB right now? On the last call you mentioned that is one of the factors that was suppressing pricing relative to your view of the intrinsic value. I'm curious on how that dynamic is changing.

Colin Marshall

Well, I guess I would say some tons have been contract in the first quarter. And as I said we contract few 5 million tons. So we are effectively sold out for the year.

Bidding, it's always a very competitive process, but it's all about supply and demand. And what will be interesting is to see how many utility keep coming out for coal in a year, because at some stage it will be fully contracted. But we will wait and see that will be reflected in the OTC prices going up. We can all sort of watch that when it occurs. But I can assure you it's a very competitive market, always has been.

Neil Mehta - Goldman Sachs

And on the rail side, if the rail issues continue past 2Q, which again is not your or our base case, what would have gone wrong? What's the most likely reason that would have happened?

Colin Marshall

I -- I mean, I think it will just be that it's taking longer to deploy the assets and filled up the cruise that you need and get everything sort of working steadily, which is what I think you need at the rail way to actually get the tons through it. At the moment it's -- there obviously there is a lot of scrambling going on to try and make move as many shipments as they can. And I think we need to get those assets, BNSF needs to get those assets deployed, get the weather right behind them, and then they will be able to run their railroads steadily, which is I think when it looks best for everybody.

Neil Mehta - Goldman Sachs

And just on PRB debt backs, what Newcastle price do you need to make it to be -- PRB in the money relative to Asian coal, or is it for Asian customers? Is it north of $90 bucks?

Colin Marshall

No, I think we said before its south of 90 bucks. So it's probably -- it's between $80 and $90 I think and may be $85 is a good a number as any. We think it's below that at the moment and we're benefiting from the hedges we've got on some of the tons to make the sort of wash. So I think it's between that $80 and $90 level that means that we can at least retain our domestic margin at the Spring Creek mine.

Karla Kimrey

Thank you. Next question.

Operator

Our next question comes from Dave Katz with JPMorgan. Please proceed.

Dave Katz - JPMorgan

Good afternoon. I was hoping to dive more into the Cordero Rojo effects on 2015. You gave us a lot of facts, greatly appreciated, but I just wanted to make sure I was understanding them correctly. 10 million tons down that allows you to move one drag line to Antelope. You had said that the production in 2015 should be 80 million tons or thereabouts, that you didn't expect a pickup in 2016 when the new drag line was commissioned. I didn't quite catch as why you didn't expect a pickup in 2016, and then also I was looking to get some clarification on where you expect the overall costs to go on the per ton basis with the reduction in volume?

Gary Rivenes

This is Gary. The dragline will shut down shortly after this year, depending on when it finishes a pit or not. It will probably take a year or so, may be a year-and-a-half to move down there. And it's being taken to Antelope to help us do some additional stripping as their increased -- ratio increases going forward. As far as the cost go, we will have to put in those cost to operate that dragline at that time at Antelope.

Colin Marshall

I think the important point is that if we were to maintain the production at Antelope, we would have been putting to -- looking to putting in a $70 million truck shovel plate, moving the dragline for considerably less than that and actually it produces lower cost of ton.

So I -- in terms of the detail of how old as we work out, the -- we are keen to actually wait until we've actually done our detailed planning for 2015 and working all that. But I think the point we're trying to get across is its compelling based upon the capital that we've got. If you reckon -- if we made that decision today would we want to spend $200 million to have 10 million tons of Cordero Rojo production, I think that would be tested tough to justify and that's effectively the way we are looking at this decision.

Dave Katz - JPMorgan

Okay. Thank you for that. I was curious, in your prepared comments it seemed that you were indicating that utilities are still reluctant to come to the table for longer data contracts, which is a shift of pace from where they were a couple years ago but consistent with where they've been over the last year or so. What do you think that it would take to bring them back to the table? Does it have to be outages? Does it have to be a hot summer? What do you think could cause a change of opinion?

Colin Marshall

I think what we're seeing Dave is that for several years now the utilities have not been buying what they have been earning. And I think that made a lot of sense given the regulatory uncertainty as they weren't sure what they would be allowed to run in few years. So going from may be that previously would have purchased for five years that certainly been reduced to three.

I think what we're seeing now is there is a realization that may be is going to go from three years to two years. And a several utilities who clearly left coal unbought for 2014 and now actually out in the market trying to buy quite substantial quantity of coal, delivery this year. And I think clearly the gas situation is part of that and they were -- they will be comfortably to run down or go into a year, with coal to buy because previously gas may have been available at low cost.

So I think there is clearly the winter gas prices I think it's causing some of them to rethink. But the uncertainty of what the rails run in year or two has not gone away. So I think that what they're drawing they're having to think about where they are in terms of that full book. My belief is that they are going to have to buy a year's worth of coal at some stage and probably this is the year. And if there's nothing else they need to get the delivery of the coal they have contracted so they can build up their stock files. And I think that is depending on how the summer plays that out. Clearly if it's a hot summer then it's going to be very difficult to rebuild the stock files of gas and coal going into the winter and I think that will be -- that would certainly have some of them quite concerned.

Karla Kimrey

Thank you. Next question please.

Operator

Our next question comes from Jeremy Sussman with Clarkson. Please proceed.

Jeremy Sussman - Clarkson

Hi. When I think about costs right now at Antelope versus Cordero, do you have a sense -- can you give us a sense of which is lower cost?

Colin Marshall

We don't actually split out by mine which costs are. We've got the overall cost there the 1057 whatever it was for the quarter. 63, sorry but no we don't split out by cost. We have said that the -- one of the considerations with the area we're reducing production at Cordero Rojo in effecting the north pit. Just that pit was higher cost and we could see that continuing so that was one factor in the decision.

Jeremy Sussman - Clarkson

Sure. Okay. Now, that's helpful. And just my follow-up, so I think the Powder River Basin saw about 430 million tons or so produced last year. When you look at the whole supply chain and whatnot, including the rails, obviously, what do you think kind of true production capacity is right now and say very optimistic pricing scenario?

Colin Marshall

I hate to speak for everyone else. So I'll say that we've got our range sort of 86 million tons to 90 million tons, I don't see it's been mostly that range we talked about. We don't see that it will be more than 90 million tons. So my general belief is that it's certainly for '14, it's going to be hard for people to suddenly dial up production. It does depend what we have actually got capable of producing the moment. I don't know to get this other mines or the other companies.

But for us 90 million tons from where we are today is actually means go to go pretty well for the rest of the year. So I would suspect that after a slow start for most of the producers situation might be similar.

Operator

Our next question …

Karla Kimrey

Next question, please.

Operator

Sure. It comes from the line of Lucas Pipes with Brean Capital. Please proceed.

Lucas Pipes - Brean Capital

So in the past when you spoke about M&A opportunities there seemed to be more of a focus on the export side. Kind of going internationally. And I wondered with the domestic market looking a lot stronger in comparison if that thinking has evolved?

Colin Marshall

No, that thinking is pretty much the same. If we look at the landscape of opportunities, we would still -- the thing we're most focused on is trying to facilitate getting a terminal built. We think -- with our Young Creek assets and the agreement we have with the Crow Tribe, we have a great position there that we really like to develop. So that's our first port of call.

After that we are still looking around at the export opportunities out in surface mines, with Western U.S. Canada whatever it really still make sense. I think the way I characterized the domestic businesses, yes it's recovering but it's recovering to a level of what actually make it a sustainable business. I have just couple of years of clearly not being, judging by the returns we've all made. So I think we now -- the domestic market is going back to sustainable business, it could certainly overshoot for a while this market tend to but overall it's doing what we would expect. And we say it is a very good proposition that may be with the PRB mine was a very strong base on which to develop an export business.

That will be cyclical, we will go up and down because the nature of that but we will offer very good return in the good times. And if we can manage it to sort of no cold losses in the slow times then I think that's a great addition to a domestic business group. Our view of the domestic is that PRB demand is like to be flat and prices will also later around and hopefully they'll go up a further bit now but it does not suddenly change that overview of the coal business we develop over the next 10 to 15 years.

Lucas Pipes - Brean Capital

That's helpful. Thank you. And to maybe look a little bit closer at the near-term outlook domestic versus exports, you have these derivative hedges on the export side. At what level would it maybe make more sense to sell the Spring Creek coal domestically and still take that gain on the derivatives?

Colin Marshall

Well that would -- that would -- when would that be? I don't think that would make much sense quite frankly because we can't actually sell, there's a finite market for Spring Creek coal domestically. So we would not obviously be able to sell it. And there are also a take or pay commitments with the rail and the pool, so that wouldn't actually be an option.

Lucas Pipes - Brean Capital

Could you may be elaborate a little bit on the take or pay commitment? And may be help us a little bit to quantify them especially if the market stills a little bit weaker in 2015?

Colin Marshall

What we've said in the take or pay is we haven't actually disclosed what they are. But we have said we are very -- we are substantially clear with them at current prices, new cost of prices. So we're not having to contemplate unless new cost of prices go down a long way. We are not concerned about getting into those.

Karla Kimrey

Thank you. Next question please.

Operator

Our next question comes from Caleb Dorfman with Simmons & Company. Please proceed.

Caleb Dorfman - Simmons & Company

I guess Colin, it seems like you're pretty hesitant to ramp up production yet you're really bullish on the domestic thermal market. What would cause you to rethink your strategy may be consider spending that $70 million to ramp up production at the Antelope mine?

Colin Marshall

Well, it wasn't $70 million it was --

Caleb Dorfman - Simmons & Company

Well prices are how high would we need?

Colin Marshall

Okay, Caleb. It wasn't $70 million it would be sort of $200 million to go back. It's Cordero Rojo. And well as prices -- prices are going up, they are going up to a level that will hopefully will give us a normalized return that will actually pay for the investments we've already made. We have always said, since we've been Cloud Peak Energy, we would much rather take a dollar on the price than take on 80 million tons or 90 million tons and take $3 or so on an extra million tons of production. So that hasn't changed.

We just like to see the prices go up so that we can actually do -- take that profit across the tons we're selling. And actually doing -- in doing that is the reason why we actually had a strong sales position from 2011 that we enjoyed in -- certainly in '12 and '13. And now obviously that those higher price sales go away, we need to sell some now coal on high prices. And well we believe the way to do that is not to rush for extra production which is quite expensive if you got to pull capital in it. But to actually be prepared to let the price go up.

Caleb Dorfman - Simmons & Company

I think that you indicated earlier today that you would have to purchase the new fleet at the Antelope mine if you wanted to increase production. I think you said $70 million. What type of price would you require to see for I guess 2017 through 2019 to consider to get to that point where you buy that fleet?

Colin Marshall

Okay. So I can't have been clear. That $70 million is what we need to invest to maintain production at Antelope because of the increasing strip ratio, thereby moving the drag line down there, we are -- we don't -- we can instead of buying a truck shovel fleet we can use the drag line, we will be increasing over that. So once again it's -- the price should actually go up an awful long way and actually quite frankly, we are probably pretty constrained by the big faces of the Antelope mine. So increasing production significantly is not an obvious option and we believe there is much more potential for the price to go up and do the hard work for us rather than just try and get lots of extra tons, in what I still believe is going to be a relatively flat PRB market.

Caleb Dorfman - Simmons & Company

Okay. That's helpful. And then, a question for Gary. I know in the press release you mentioned there was some major maintenance during the quarter. Can you touch on how large of a cost impact that major maintenance combined with whatever type of mine set inefficiencies you realized because of the inconsistent rail service you had?

Gary Rivenes

Yes. It -- that really didn't impact the rail service. We have a lot of schedule drawn throughout the course of the year, some of them capital, some of them operating expense. But we try to schedule those out when they are needed. And we obviously like to do those in the best weather we can. This quarter, we did have a couple that we needed to get done. But as far as any delay in the rail or anything, no impact that's -- that season obviously ramps up here when the weather gets better as well. So we do have some other jobs scheduled.

Colin Marshall

Yes. And I think Caleb, if you remember back the last few, we did have one quarter where we did a major maintenance on major equipment and something else filed, that's the sort of time that we would actually get into our production plan. It's -- the job schedule is planned and we make sure we got coal and we got other equipments to do the job, it's certainly when something else happens that we would normally be caught out.

Karla Kimrey

Next question please.

Operator

Our next question comes from line Lance Ettus with Tuohy Brothers. Please proceed.

Lance Ettus - Tuohy Brothers

I know you cooled on Met Coal acquisitions but there's been a couple of shut downs in Western (inaudible) -- Western Canada, and I'm just wondering even if you guys didn't bid on those products or inquire about those, what's kind of the expected or implied long-term Met Coal price you think on mines being sold, I guess, or attempted to be sold?

Colin Marshall

Well Lance, I would have to say I never realized I was hot on met coal. We've always said, we will look at anything and see if we can identify value and if we can then we are not to -- we are not bothered whether it's metal thermal. I think the fact that there is mine are closing down, tells you something about current pricing. But I would have to say, at the moment we are comfortable in the -- with the thermal stuff we've looked at. And everything I see about met coal for this is earlier on that's a very tough market and it's not obvious that the mines will closed down now the ones you would want to own.

Lance Ettus - Tuohy Brothers

Okay.

Karla Kimrey

Anything else? I think that Lance is gone. Venice next question please?

Operator

Our next question is from Luke McFarlane with Macquarie. Please proceed.

Luke McFarlane - Macquarie

Can you talk a little bit about the discipline in the PRB with respect to contracting? Are people actually putting in bids for these RFPs somewhere near the forward curve at the minute or can you may be elaborate on your successful bids versus how many not successful bids that you've had?

Colin Marshall

Okay, I'll be very careful how I talk about that. The overall thing, look, it's a very competitive business. Generally, quite frankly, OTC is a good lagging indicator where the prices are going. It's going to reflect the RFP market. If prices are going down then people are bidding slightly under the OTC to win and if price is going up they're bidding slightly over and winning. And clearly where or whatever it is 30% or 40% or 30% of the southern PRB market we only need to be winning 3 in 10 RFPs to sell out -- take our share of the market. So we bid as we feel fit at the time depending on how many times we looked to any mine and where the prices are. It is very competitive and we see we don't get much information apart from the public thing about what winning bids are but I'm pretty sure that sometimes we miss by $0.05 and sometimes we win by $0.05, but let's say it's very competitive. But the OTC is a pretty good indicator certainly where the market has been recently.

Luke McFarlane - Macquarie

Okay, cool. So do you think you're losing more than half of the RPs you're bidding on?

Colin Marshall

Absolutely. If we won more then we would be sold out in no time given our relative size compared to the rest of the players in the basin, yes.

Luke McFarlane - Macquarie

That's good. And then lastly, in terms of the demurrage up at the west shore, I mean, is there land or sort of something that calls out to the port that you get to it, you can actually stockpile some of these tons to reduce that demurrage or I mean have you ever looked at something like that?

Colin Marshall

There really isn't an opportunity. I mean, the demurrage comes from the northern rail corridor not working well. Since we've only had a problem with demurrage since there has been hiccups on that and we know that the Burlington northern committed to sorting that out. But given the route, the amount of space and stockpile space we're assured as long as the rail -- the trains are cycling back and forwards we can schedule the shifts and we can actually manage to do demurrage. And so to me, it's pretty clearly the hiccups we've had in northern corridor suddenly increased the demurrage and previously when we were running at similar levels earlier last year and the year before there was no problem. But in terms of stockpiling coal out there I think that would not be a possibility.

Luke McFarlane - Macquarie

Okay. And lastly on the safety issues, the citations that you had during the quarter, can you just comment on what sort of impact the fines might have, if they're material or not?

Colin Marshall

I'll hand those to Gary.

Gary Rivenes

Yes, as far as the impact on dollars it's not material. We don't obviously like to pay fines and stuff like that but we in the grand scheme of things perform pretty well, but we're still trying to eliminate all conditions.

Colin Marshall

Yes, just typically our fines if you look over get to be a few thousand dollars. And for 74 days of inspections I think they're broken life holes or something that's considered right and we'll have fines, et cetera. We'll tell you once they come out next time what they are but typically they are a few tens of thousands of dollars for all year.

Gary Rivenes

I'm sure I'll publish those numbers for you.

Operator

Our last question comes from Paul Forward with Stifel. Please proceed.

Paul Forward - Stifel

Thanks for taking my question. On the customer stockpile situation, I was just wondering I guess two points. One, do you have any -- you gave us the information on where you think PRB stockpiles are now. Any kind of characterization that you could make about customer concern levels about how low their stockpiles have become with these rail services issues? And as a follow-up to that I would ask on your plans to subtract 10 million tons out of the 8400 market in 2015, can you talk about any customer concerns expressed over those tons now that 2015 is getting closer those tons being missing from the market?

Colin Marshall

Okay. In terms of our customer, I think the way I would characterize it is it has to be seen in different, the ports coming back and they were down to about 53 million tons of PRB stockpiles and 45 of burn, one thing we are sure of is there has to be a range of different stockpiles for different customers but what is consistent is the desire of the utilities to have their contracted coal delivered and people coming out additional year sales. So they're very keen to have this coal delivered and are very focused on that.

The second, in terms of where the 8400 is at the moment, it's come up slightly but it's not obvious yet that those people stand around and you've got to remember that there's really the ability to switch at some price between 8400 and 8800. The gap is quite wide at the moment $2 bucks, $3 bucks or whatever. At some stage that incentivize people to burn 8400 rather than 8800 but at the moment the focus is on actually getting coal delivered rather than where we are in '15 and '16 I think for many utilities.

Paul Forward - Stifel

And just may be to follow-up on the range you got that 86 million to 90 million ton range this year, could you talk a little bit about this is going to be one of those years when if you got any sort of wiggle room in the contracts what the customers want to maximize whatever whether if there is a plus or minus in the contract they will want to take the plus instead of the minus this here. Can you talk about kind of variability within your volume commitments to customers and whether that is an issue here?

Colin Marshall

I'd say that's not an issue. As you said, it's a bit of wiggle room but we've been very focused for many years in not giving away free options in terms of plus or minus 20% of the utilities option. Somebody wants that from us we'd like them to pay for it because in a time like this it could be of value. So that -- those contracted numbers are pretty solid. There isn't much wiggle room and there will be ups and downs between people who will have may be force majure operational issues and there will be different ways that you'll work out but we think 86 million to 90 million ton range looks right. The customers definitely want the coal and we've got the coal, the mines are in good shape. So we're all obviously looking to work with the railroad to maximize the deliveries.

Paul Forward - Stifel

All right, thanks a lot.

Colin Marshall

Okay, thank you. Okay, I think that's the last question. Thank you very much for taking the time to listening to the call. I think the first quarter came out in terms of earnings pretty well the EBITA pretty well where we expected and I think we're in good shape for the rest of the year. As I've said and obviously as you picked up from everyone else the key focus at the moment is on rebuilding stockpiles and delivering contracted tons and we'll be working with the utilities and customers and the railroads to do that. But hopefully also the cold winter and the rising gas prices has actually put some decent pressure on prices to go up. We're expecting to go up steadily as they have done before and we're optimistic they will continue going up through the next few months.

So we look forward to speaking to you with our Q2 results in a few months' time. Thank you very much.

Operator

This concludes today's conference. You may now disconnect. Have a great day.

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