Cloud Peak Energy's (CLD) CEO Colin Marshall on Q4 2014 Results - Earnings Call Transcript

Cloud Peak Energy Inc. (CLD) Q4 2014 Results Earnings Conference Call February 17, 2015 5:00 PM ET

Executives

Karla Kimrey - Vice President, Investor Relations

Colin Marshall - President and Chief Executive Officer

Michael Barrett - Executive Vice President, Chief Financial Officer

Heath Hill - Vice President and Chief Accounting Officer

Gary Rivenes - Executive Vice President, Chief Operating Officer

Analysts

Paul Forward - Stifel Nicolaus

Michael Goldenberg - Luminus Management

Wayne Cooperman - Cobalt Capital Management

Lucas Pipes - Brean Capital, LLC

Matthew Horn - Barclays Capital

David Gagliano - Bank of Montreal

Brandon Blossman - Tudor, Pickering & Holt

Matt Murphy - UBS

Jonathon Fite - KMF Investments

Operator

Good day ladies and gentlemen and welcome to the Q4 and Full Year 2014 Cloud Peak Energy Incorporated Earnings Conference Call. My name is Courtney and I’ll be your operator for today. [Operator Instructions]

I would now like to turn the conference over to host for today, Ms. Karla Kimrey. Please proceed.

Karla Kimrey

Thank you, Courtney. Good afternoon and thank you all for joining us.

Today's presentation may contain forward-looking statements regarding our outlook for the company and the industry, financial and operational guidance, volumes, prices and demand, the regulatory and political environment, growth strategies, 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 Form 10-K of 2014, which we expect to file later today.

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

I'll now turn the call over to Colin Marshall.

Colin Marshall

Thank you, Karla. Good afternoon and thank you for taking the time to listening to our fourth quarter and full year 2014 results. As usual, I’ll make some opening remarks before handing over to Michael Barrett, our CFO, to cover the financials. You may remember that we announced in September that Mike is leaving at the end of Q1 to take his family back to Australia. So while Mike will cover 2014, Heath Hill, his replacement as CFO, is here to cover our 2015 guidance. To make sure we have all your questions covered, Gary Rivenes, our Chief Operating Officer, is also here.

With the introduction over, I will turn to our results. Overall, I believe, our adjusted EBITDA of $202 million for the full year was a notable achievement, given the tough market conditions we faced. Q4 adjusted EBITDA of $72 million was our highest for the year, driven by increased shipments from all our mines, falling diesel prices and very good cost control across the business.

Before we get into the operational and financial details, I would like to cover our safety and environmental performance. During the year, we achieved an MSHA All Injury Frequency Rate of 0.79 injuries per 200,000 employee hours worked. During the quarter, there were 3 MSHA reportable injuries, giving a total of 12 for the year. It is notable that we've not had a contract to reportable injury in over three years. This reflects very well on the time and effort 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 systems certifications. During the year, we were able to reclaim 943 acres of land, very close to the amount we disturbed, as we continue our program of reclaiming as we go. We were also able to obtain final bond release on 937 acres of reclaimed land, which is a significant milestone given it takes a minimum 10 years after mining is complete to achieve full bond release.

Now, operationally, 2014 was not an easy year for a number of reasons. While we have contracted to sell over 90 million tons of coal, which our customers were keen to take, rail delays restricted our shipments to just under 86 million tons. As you know, the railway has been investing heavily in crews and equipment to improve their service. We did see an improvement in shipments in the last quarter, which was by far the strongest of the year. While the railways still have further investments to make, we are optimistic that they will continue to improve their performance in 2015.

Our mining operations ran well during the year with very good cost control. This was particularly impressive given the slow shipments in the first three quarters and then the significant increase in Q4. As we have previously said, varying production rates at our mines does not help cost. On top of that, we had the significant storm events at Cordero Rojo in late August which flooded all three active pits and submerged a shovel and three trucks. I was admired that how the mine was able to recover from the flood. Remarkably the shovel which was submerged up to its camp and could not be recovered for six weeks was back in production in late November. This is a great credit to our asset management and maintenance teams.

During the year, the operations team managed the 10 million ton per year reduction at the Cordero Rojo mine as we continued to take steps to match our production to market demand. It is pleasing that by working with our employees it is impossible to complete this reduction without any forced layoffs. A surplus shovel from Cordero Rojo has already been moved to Antelope, and later this year a dragline will be moved to Antelope to overcome increased stripping in 2016.

What the improved shipments in Q4 did demonstrate was that our business still works, well as shown by the low cost per ton and strong financial performance. I think this is worth remembering as we can lose sight of the underlying economics of our business and their ability to generate good cash flow even in tough markets. I would like to thank all our employees for their contribution to our performance last year.

We exported 4 million tons from the Westshore Terminal during the year, which was down 700,000 tons on 2013. Once again, increased imports into India helped absorb new supply from Australia and Indonesia, but they were not enough to allow prices to increase.

The environmental impact statements for the Gateway Pacific and Millennium Bulk terminals are underway, but we are expecting the process to be drawn out and subject to litigation from opponents of coal exports. We are still optimistic that these ports will be approved by the US – though the US can be a reliable long-term supplier of low salt PRB coal to its major Asian allies such as South Korea and Japan.

We also have completed most of our conformational drilling program on the Crow Reservation and we will be compiling the results so we can analyze the best way to develop these resources. We will let you know how we go once our plans are finalized. Michael and Heath will now run through the financials and guidance.

Michael Barrett

Thank you, Colin. I’ll go straight into our fourth quarter and year-end results. In the fourth quarter, we made adjusted EBITDA of $72 million, our best quarter this year. Cost per ton was $9.32 for the quarter, as we spread fixed costs over more tons, execute on our mine plan at Cordero Rojo to reduce production from the higher cost north pit and benefited from lower diesel costs in line with the falling oil price. This resulted in a margin for the quarter of $3.54, the highest since the fourth quarter of 2012.

For the full year, adjusted EBITDA was $202 million on shipments of 86 million tons. This was an excellent result in a challenging year. It reflected the mines’ ability to reduce costs in line with reduced shipments due to the poor rail service. Cost savings at the mines resulted in a lower cost per ton of $10.19 compared to $10.23 in 2013. Underlying costs were even better at $10.10 without the third quarter non-cash accrual of $7.5 million for past production taxes.

The mines achieved this excellent cost results by their continuous focus on all aspects of cost control. We were able to reduce overburden movement in line with the reduced coal shipments; we brought more contract to work in-house; we idled and parked trucks during the year; we worked with our suppliers to reduce costs; we refined explosives and diesel consumption with a focus on blast design and pit design; and we continued to focus on plant preventative maintenance and asset condition monitoring. Every aspect contributed to the excellent cost performance for the year.

In another year of depressed prices, our average realized price for the full year was $13.01 per ton, a slight decline compared to $13.08 in 2013. This resulted in a full year margin for our owned and operated mines of $2.82 per ton compared to $2.85 in 2013.

For our logistics segment, in the current low price environment, we focused on delivering our committed tonnages, but not seeking to make additional export sales. As a result, we delivered 4 million export tons and did not incur any take or pay obligations. We also focused on mitigating the impact of the falling Newcastle index price. In 2013, the pumped Newcastle price averaged $85. In 2014, it averaged $71, a drop of $14 or 16.5%.

As you know, our delivered export coal has historically been priced in the range of 60% to 75% of the Newcastle index. As Newcastle has fallen, we have been able to price towards the higher end of this range. At the same time, we have worked with our logistics providers to manage transportation and port costs. With these actions, we have mitigated some of our business sensitivity to the falling Newcastle price.

As a result, adjusted EBITDA for the logistics segment was $4 million for 2014 compared to $11 million last year. The 2014 adjusted EBITDA includes realized gains on hedges of $27 million compared to $13 million in 2013. And at the end of the year, the mark to market value of our open hedge position for 2015 was almost $21 million.

On the corporate side, we continue to drive down SG&A costs. We have achieved this by a continuous focus on efficiency, costs and processes. This steady approach has enabled us to reduce SG&A costs by $5 million or 10% over the last two years, without any corresponding one-off costs.

Turning to our balance sheet and cash flow, cash flow from operations totaled $98 billion for 2014. This included $14 million of financing costs related to the issue of our 2024 bonds and $45 million to terminate the tax receivable agreement. Adding back these non-operating items, our core business operations generated almost $160 million of cash in 2014. Capital expenditures were reduced to just $20 million. In a tough industry, its worth emphasizing the strong positive cash flow generation of our business and its worth noting that it gives us significant coverage over our reduced interest expense.

Coming back to our capital expenditures, we spent just $20 million in 2014, which compares to the midpoint of our original guidance of $50 million, making a saving of $30 million or 60%. We achieved this reduction in a number of ways. Continuing to invest in our in-house capability to complete field repairs and rebuilds at lower cost and higher quality, continuing to extend equipment lives with comprehensive maintenance and asset health programs, and by redeploying equipment from Cordero Rojo to the other mine sites.

We remain confident that we’re investing the right amount of capital in our business and as Heath will discuss, we anticipate needing to spend more in coming years. We also paid $37 million to acquire additional port capacity at Westshore and made the penultimate payment of $69 million on the West Antelope coal lease, with the final payment obligation in 2015.

We finished 2014 with a cash balance of $169 million and available liquidity of $721 million. We completed a number of transactions in 2014 which further strengthened our balance sheet. We refinanced our 2017 bonds at a favorable interest rate, reduced the debt by $100 million and extended the term to 2024.

With the termination of the tax receivable agreement and disposal of our 50% interest in the Decker Mine, we reduced other liabilities by a further $175 million. We also refinanced our $500 million credit facility for another five years. In January 2015, we extended the term of our accounts receivable securitization facility for a further three years and the facility now matures in January 2018.

We have not debt maturities before 2019, with adjusted EBITDA at over $200 million and debt at approximately $500 million; we have a gross leverage ratio of just 2.5 times and net leverage of 1.65 times. Our interest coverage ratio is 5 times. This represents one of the healthiest balance sheets in the industry.

Finally, I would like to say thank you for the time that I have spent with Cloud Peak Energy and the tremendous opportunities and support that I've received while I've been here. I'm very much looking forward to following the continued success of the business.

Now, I’ll hand over to Heath to cover our outlook and guidance for 2015.

Heath Hill

Thank you, Mike. Last September, we provided adjusted EBITDA guidance for 2015 in the range of $120 million to $180 million. Since that time, we have continued to work on our mine plans to identify opportunities for further efficiencies and updated our revenue and cost budget assumptions. The recent market conditions have also provided two significant drivers that partially offset each other; the crude oil price declines benefit the costs in our operations, while the Newcastle index decline challenges the near-term profitability of our logistics business.

In consideration of these points, on a consolidated basis, we expect 2015 adjusted EBITDA in the range between $110 million and $160 million. The primary variables driving this range are the total volumes sold and the market price for open coal positions both domestically and internationally.

We now expect that 2015 shipments will be between 78 million and 82 million tons. These amounts do reflect our previously communicated production decrease at our 8400 Btu Cordero Rojo mine and the top of the range represents our current maximum production rate.

As a result of the lower production volumes, we will be relocating a dragline from our Cordero Rojo mine to our Antelope mine, which is scheduled to be completed next year. This project accounts for approximately $20 million of our planned capital expenditures. When combined with the capital expenditures for maintaining our existing equipment and for land acquisitions, we expect to spend between $50 million and $70 million in total during 2015.

Separately, we will make our final committed LBA payments this year in a combined amount of $69 million. We have no scheduled LBA payments beyond 2015. With the significant decrease in the WTI index since the timing of our September medium-term outlook, we have taken the opportunity to modify our belated hedge positions. For 2015, including further modifications executed last month, we have approximately 55% of our diesel fuel usage hedged with a collar and approximately 45% fixed with forward instruments resulting in an expected weighted average cost per barrel of approximately $64.

Lower diesel costs are forecasted to benefit our owned and operated segment adjusted EBITDA in 2015 by approximately $24 million as compared to 2014. Separately, earlier this month, we have looked forward to 2016 and hedged 50% of our forecasted diesel fuel costs using forward instruments with a weighted average WTI cost per barrel of approximately $63.

Within the total shipments range of 2015 are the export volumes which will be just under 6 million tons. This reflects our newly increased capacity at the Westshore Terminal that was acquired during 2014. As our contracted capacity is approximately 2 million tons greater than 2014 volumes, we've been working with the terminal and the BNSF Railway to manage the higher pace and our exposure to the current low international prices. Given the current market, we have recently reduced our shipping volumes by approximately 550,000 tons for the second quarter of this year.

Newcastle prices have declined approximately $18 since our medium-term outlook in September when we gave certain sensitivities. However, due to a number of factors, the effect of lower Newcastle index prices has been reduced. These factors include: pricing for our Spring Creek coal has been more resilient than other seaborne thermal coal in the international markets; the recent reduction in annual shipments; as well as lower rail fuel surcharges. The realized price for our exports in the first quarter is now fixed and accounted for in our guidance. As you point out at the middle of our EBITDA guidance range assumes export pricing at similar levels to our first quarter deliveries.

With the reduction in outstanding bonds resulting from our 2014 transactions, interest expense will decrease as compared to prior year. Cash interest expense for 2015 is expected to be approximately $41 million. We do not expect a significant amount of capitalized interest during the coming year. Depreciation, depletion and accretion expense will decrease to between $115 million and $125 million, in line with the lower production volumes.

Given the strong end to 2014, we now expect to make a small cash income tax payment of approximately $5 million during 2015. As we have closed out TRA with Rio Tinto during 2014, there will be no impact of this legacy agreement going forward.

With that, I will hand back to Colin.

Colin Marshall

Thanks, Mike and Heath. Now, turning to the outlook for 2015, our mines are in good shape to meet our forecast shipments around 80 million tons for this year. As I previously mentioned, we have moved a surplus shovel from Cordero Rojo to Antelope that will help maintain production and strip ratios increase. Hopefully, rail performance will be less of an issue than in 2014.

Our expectation is that the improved performance we saw in Q4 will continue into 2015. We understand there may be some delays due to further rail improvement work that is planned during this summer; we’re expecting to work around these. Any drop off in other rail business such as reduced oil traffic could also reduce the strain on the system. The current mixed weather and ample gas supply have pushed down coal prices in recent weeks, which will impact the price on our index tons and if low gas prices persist will incentivize some utilities to increase their gas burn.

It is not clear that this will be as pronounced as in 2012 due to the need to rebuild utilities stock pile and utilities having already closed many higher cost coal plants that were more susceptible to switching. However, if natural gas prices remain low and/or we have a cool summer, then there is the potential for customers to reduce their coal burn. We’re going to have to see how things develop through the year.

Since our last call, we sold 8 million tons for 2015 delivery at an average price of $11.62 per ton. In total, new sales, carryover and index tons fixing during the period increased our fixed contracted position by approximately 14 million tons at an average price of $12.17. We now have approximately 80 million tons contracted for this year, 72 million of which are fixed at a weighted average price of $12.92. For 2016, we currently have 47 million tons committed, 38 million tons of which are under fixed price agreements with a weighted average price of $13.75.

With regard to international markets, as you know, we increased our committed capacity at the Westshore terminal last year, so we could increase our exposure to growing seaborne thermal market. While the current prices are depressed due to increased supply from Australia and Indonesia and the strong US dollar, we believe prices will recover as growing demand overcome slowing supply growth. We are seeing continued strong demand growth in India, South Korea and Japan as these countries built state of the art power plants to meet their growing power needs.

In China, we’re seeing the government managing support for their existing coal industry with a need to improve air quality in major cities. Incentives for domestic producers seem to be offering them some protection from low international prices, while incentivizing them to mine higher quality low ash and low sulfur coal.

While the Chinese electricity demand increased 5% last year, thermal coal demand was relatively flat, as the growth was met by increased hydropower. We believe that the Chinese will continue to need to import high quality thermal coal to supply their large number of coastal power plants. We will continue to manage our international exposure closely and are encouraged by continued strong demand for our low sulfur subbituminous coal and recent near-term price increases. However, this remains a large exposure for us while international thermal prices have depressed, so this offers a significant upside when they improve.

Looking back to 2014, I’m very pleased with the transactions we completed to reduce our debt and liabilities, which strengthened our balance sheet. The mines performed very well to control costs, the shipment rate varied. As we believe in the long-term strength in the international markets, we will increase our capacity at the Westshore terminal. Obviously, we understood we were taking on the risk of losses as long as international thermal coal markets remain oversupplied.

In summary, Cloud Peak Energy is well placed for 2015, with efficient operations, a good solitary position and a strong balance sheet. We are in a good position to wait out a period of weak domestic and international markets and to benefit when they improve.

With that, we'll be happy to answer your questions

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Paul Forward from Stifel.

Paul Forward

Just wanted to ask about the $9.32 per ton cost number you reported in the fourth, obviously that was a big step down, it appears that the volumes were the primary driver there, I just want to confirm that there wasn’t any one-time benefits that wouldn’t be repeated in future quarters that were in that or was it just primarily just a volume issue in the quarter?

Michael Barrett

You’re absolutely right; we certainly saw some benefit from spreading fixed costs over our higher production rate for the quarter. We also benefited with the oil price coming down and hopefully that is a longer-term benefit, so not a one-off, and obviously with the hedging program that we’ve put in place that Heath talked about for 2015 that will help to lock in those benefits. We saw a little bit of benefit as we came out of the higher cost pit at Cordero Rojo. So there is some one-off element to that. But overall, I think, I’m very, very pleased with that fourth quarter performance.

Paul Forward

And you’ve given us the outlook on Cordero, just wondering about if you could talk a little bit about Antelope at 9 million tons in the quarter, Spring Creek at 5 million tons in the quarter, now Antelope has got the benefit of shovel I guess first and then the dragline later on, but of course the strip ratio is arising. I was just wondering if you could talk a little bit about 2015 and 2016 whether those fourth quarter volume levels might be repeatable at either Antelope or Spring Creek.

Gary Rivenes

Yeah, so the dragline is going to start moving early this year, it’ll be in operation about mid 2016, that’s being put in place to offset some increasing strip ratios as well as help us with some cost control versus some other methods of mining. That’s about the rate we want to run those mines at for a quarter. So we have that capacity now and 2016 that dragline will be in operation down there.

Colin Marshall

The thing I’d add to that though is that obviously if you look back historically, the quarters tend to vary with the first quarter being slower, then we have the shoulder season, typically we’re stronger in the second half. So quite often the fourth quarter is our best quarter. But I think overall our guidance is for about 80 million tons and so we said we were taking 10 out of Cordero, so we’ll aim for that for the whole year and there will be variation between the quarters as normal.

Paul Forward

Just lastly on your guidance you’ve given for the financial performance in 2015, obviously Newcastle pricing has been way down and it’s shown some signs of life lately, I was just wondering if you could talk about was there – either is there a price that you got baked into the midpoint of that forecast and might you be able to talk about is there an overall contribution that you have baked into that forecast for logistics segment in 2015?

Colin Marshall

Obviously, we’ve been encouraged recently by the Newcastle prices recovering which is a good sign, even though we got a way to go. In terms of what’s in the forecast, Heath said that we’d assumed pricing similar to what we’re achieving in the first quarter. So the reality is there’s quite a few factors in what price, there isn’t a direct link with Newcastle, even though it’s obviously better at Newcastle’s high, but we basically used – we assumed we get the same prices through the whole year as we achieved in Q1. And yes, there will be, at those levels, with the level of hedging, we’re assuming there would be some loss from the logistics that will come through for the whole year. But obviously, we’d like Newcastle to improve a bit more and so that we can improve on those numbers. But we baked in those Q1 numbers into – what we achieved in Q1 into the forecast.

Operator

Your next question comes from the line of Michael Goldenberg from Luminus Management.

Michael Goldenberg

I had a question about capex beyond 2015, can you give us a sense where that will be going for 2016, 2017?

Heath Hill

Certainly. So what we’ve talked about is kind of on a sustaining basis, about $50 million might be the right way to look at it as a sustaining capital. We had a particularly low year in 2014. We have an incremental $20 million for this coming year and there is part of that project that will be incurred in 2015. But again really we don’t give guidance beyond 2015 and clearly $50 million to $70 million is the right way to look at it this year.

Michael Goldenberg

And then if I understand correctly, your fuel costs in 2016 right now looking about equal to 2015?

Heath Hill

Again, you’re probably referring in the script I talked about. But again, 50% of the volume in 2016, which we’re still hoping.

Michael Goldenberg

If we mark to market, nothing else happen, would they be comparable?

Heath Hill

If you mark to market where we’re now, yeah, I think so, the forward curve is about 63, somewhere around that.

Michael Goldenberg

And then finally, what did you say about the tax payment, the small tax payment, 2014 or 2015, I apologize; I didn’t quite catch it up?

Heath Hill

That will be incurred in 2015, but again it’s a factor of our strong performance ending out 2014.

Michael Goldenberg

I assume when you say small, under $10 million?

Heath Hill

No, I said about $5 million.

Operator

Your next question comes from the line of Wayne Cooperman from Cobalt Capital.

Wayne Cooperman

What’s your attitude here about making acquisitions? I know, a lot of the other coal companies, they are in a lot worse shape that you are and really desperate for cash and there’s probably lot of assets out there, just curious to your thoughts about...?

Colin Marshall

Well, Wayne, I think I’ve got to say what we always say, is that we’re always keen to look at things, but we’re also very cautious to make sure that we believe some which add value. Obviously, the other point is that at the bottom of the cycle, you have to be very protective of the financial health of the business. So we’ll continue to look at everything and we’ll also continue to be very cautious about looking for – only being interested in things that we believe what really add value and strengthen our business.

Wayne Cooperman

Nothing has really changed as some of the other coal companies have gotten pretty distressed now?

Colin Marshall

Nothing that I’d want to comment on, we’re all just making sure we weather these markets and I’m very pleased with the things we did last year in terms of the balance sheet to make sure we strengthened things that got reliability. So we’ve got ourselves in a good shape, I guess.

Wayne Cooperman

I guess that’s why I was asking, because you did get yourself in good shape, while other guys failed to. Good luck.

Operator

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

Lucas Pipes

Just a few follow-ups here. If I remember correctly, you said you had about $21 million in gains in the Newcastle hedging program and I wondered if they are evenly distributed over the course of the year or is it little bit higher first half of the year and then started to roll off, if you could break that down I would appreciate that.

Heath Hill

I would think of that ratably through the year, that would be the right way to look at it.

Lucas Pipes

And then may be to switch over to the domestic pricing side, of course, there has been some pressure recently and you still have some coal to sell, could you maybe give us an update on what you are seeing in the market today when you are trying to go out and put those tons to bed and then also how you think about 2016?

Colin Marshall

Lucas, obviously there has been significant weakening in prices in the last month or two, that’s in a very thin markets, there isn’t actually much being transacted. And as we normally say on these calls, there aren’t many RFPs around at this time of the year, we’re expecting other ones to come out later, which typically will be a few in here, depending on how the year pans out in terms of coal bid and then there’ll be many more for 2016 and we’ll obviously bid on them as we always do with a view to making sure that we are fully sold going into the year if possible, but obviously if prices are being less keying than if they were higher, I guess. So we’ll carry on looking at that.

In terms of this year, the impact will be on our index tons if prices stay lower, but we’re optimistic that actually this is a sort of an odd time in the market with that being so thin and then the mixed weather, I would have to say across America, so hopefully the spot prices will come up to bid and then will benefit the index ones for 2015. But there’s overall no real change in our domestic sales pattern that we’ve followed for several years now.

Lucas Pipes

And given your view that you think the market is a little bit liquid right now, could you give us a sense for what sort of pricing is embedded in your guidance?

Heath Hill

I think it's higher than it is today, so it is a few bucks up. But $72 million of the AT is actually at fixed prices, the change of a dollar or so is not that marked. But it's higher than it is just at the moment.

Lucas Pipes

And then maybe last question here, couple of pluses and minuses on the cost side, and I wondered if you could maybe help us in our modeling here by providing a cost range on a per ton basis, I would appreciate that.

Heath Hill

Probably we don't do that in terms of giving you straight cost guidance. We give you the EBITDA and the tons and the capital. So hopefully you got enough to know where we're heading.

Operator

Your next question comes from the line of Matthew Horn from Barclays.

Matthew Horn

A question on your discussion on the export tons, logistics partners, you discussed that you're aiming for some flexibility there looking to pull some levers given the pricing, are you looking to stretch out your shipments, are there options that you can do given the committed tons there? And secondly, when you're thinking about the costs for these shipments, are there any leverage you can pull to kind of reduce that per ton amount, any scale from the increase next year, from freight, I mean, you touched a little been on it, I wanted to see any more detail you could offer?

Colin Marshall

There are quite a few moving parts in that. The biggest thing that's actually reduced our tie with Newcastle is that we've actually had favorable pricing and Newcastle has gone down a bit more on our percentage that we've achieved, against Newcastle's actually improved since September certainly. The other sort of levers we can pull, obviously, we can talk to our partners at the railways and the port and our customers to make sure that we try and schedule shipments to actually meet what we can clearly ship, because we obviously don't want to do is have ships turning out for coal, low price coal that we're actually struggling to get to the port. So through that process, we removed 0.5 tons from Q2 which obviously had some benefits to us.

The other things that we're sort of seeing are the lower diesel prices coming through in terms of the rail future surcharges gone down, and then obviously that is meaningful. So all those things are going in the right direction and those are the sorts of things we're working on, we'll carry on working with our partners in this to make sure that we minimize any losses we couldn't get whilst prices are low, but equally we want to make sure that the system works well so that we can benefit when the prices go up. So there's a fair bit of talking going on as you'd imagine.

Matthew Horn

Let me follow that up with maybe a bigger picture question. Chinese coal demand, growth there is clearly slowing down, statistics are overall consumption is essentially flat year over year, and you are the producers, there's talk like other markets, India, Vietnam, other Southeast Asians kind of take up the demand growth. Is there anything that Cloud can do as far as market development, like on the ground, at the utilities, can you say, look, comp our stuff versus Indonesian, talk to our partners about our ability to deliver, is that something you should do or that you can do more of?

Colin Marshall

Certainly in terms of our ability to work with, I would say, the customers we choose, yes, and we've been in with the Korean utilities who are very keen to diversify their supply from Indonesia, because I remember in 2011, when the lights were going out because there is struggling with supply from them, so they're very keen to support the Powder River Basin, particularly Spring Creek coal into that market. They do like the consistent quality and the reliability to supply we've demonstrated over the years. So we've been supplying them.

The other thing we've been doing is selling more into Japan and I think we did three test burns last year and we've got another couple in the first half of this year. And those customers do tend to pay a slight premium for the coal, which is handy as well. So we're able to pick or work with the best quality customers for the long term during this period.

The other thing I would say on the Chinese demand is clearly overall imports went down, but thermal imports were remarkably flat actually through last year, because the power plants are still running and there is a period of change going on there. We're actually in our projections not looking for any significant growth in Chinese import demand, but we really are seeing – we do believe in the Indian story and absolutely the Korean and Japanese story where they're building the power plants that will go on. So there's going to be very strong demand from those areas.

The other thing we are encouraged by is the slow up in investments in new mines, which is actually meaning that supply is slowing up, coming on even [indiscernible] taking a long time for that to happen. So we're encouraged with the markets, but obviously we'll be more encouraged when Newcastle prices got up a bit more and we can go back to where we were 18 months ago.

Operator

Your next question comes from the line of David Gagliano from Bank of Montreal.

David Gagliano

My first question, what was the quality split of the 8 million tons that were sold at $11.62; I think it was $11.62 in the quarter?

Colin Marshall

It was pretty even, I'm just [indiscernible] yeah, it was pretty much in the ratio to what we dig up through the year, so there's no great sprint or divergence between 84 or anything like that.

David Gagliano

And I guess the real question, what price did you get, say for example, for the 8800 Btu coal versus the 8400 Btu coal, what's the spread there and what was the price?

Heath Hill

David, you know I’m not going to tell you that. We’ve given the $11.62, which is a pretty good average. We were pricing round about where the market was. And unfortunately it’s a tough market, but actually looking to the prices now, they are obviously better than where they are this week. But that’s hopefully just a temporary aberration in the market.

David Gagliano

And then just one other question on the logistics, obviously there’s a few moving parts here, between the hedges, the rail surcharges et cetera, so I actually had a two-part question on this one. I was wondering, first of all, if you could just tell us what you’re assuming for EBITDA contribution from that business within your low and high range, what EBITDA contributions are you assuming for that business? And then – that’s part A. And then part B, what’s the – again, I’m sorry if I missed this, but what’s the benefit from the hedges going through 2015 results, just explain that and when do those roll off?

Colin Marshall

For 2015, that $21 million, you will see that in the 10-K and everything, so that's there. And look, there will be a loss in the logistics, what, $35 million over that sort of order. So it's significant, we know that, but I think we've always said we wanted to build – we knew we're building an export business that would go up and down because it's a volatile market, but we're building it on the very strong domestic business which obviously is - the EBITDA from that is going to be significantly stronger to give us that overall net result of somewhere between $110 million and $160 million is the best guidance we got at the moment. And the biggest variance in that range is price. The rest of the things, the production, the diesel, everything is pretty well locked down, so it's the variable in international and domestic prices will see. I mean, that really is the whole story.

David Gagliano

So the $35 million loss includes this $21 million hedge benefit or...?

Colin Marshall

Yes. 6 million tons, that’s – we’ve got – but equally we go back to – not longer, we made $50 million out of that part of the business. So we’ve got an exposure there, we’re not hiding from it, we just want to make sure we manage it and do everything we can to run the business properly. But it’s the same strategy we’ve been running for several years as we built this position and we’re optimistic that prices will go up and it will work, but we’ve got the balance sheet in the business and the domestic business to support it whilst prices are low.

David Gagliano

I fully appreciate that and I understand the position. Just the other part of that question, when do those hedges roll off?

Colin Marshall

The $21 million is 2015, I think if you look at the 10-K, there’s some hedges for 2016, but not many.

Operator

[Operator Instructions] And your next question comes from the line of Brandon Blossman from Tudor, Pickering & Holt.

Brandon Blossman

I’m going to go ahead and beat this to death, the $35 million in logistics and the $15 million guidance, does that represent kind of the midpoint of the range?

Heath Hill

Yes, they’re the midpoint of the range, yes, that’s our estimate.

Brandon Blossman

You said the $15 million oil hedges, diesel hedges are collared and your expose for about half of 2016, do you have on hand sensitivities by EBITDA and price move for diesel in 2015 and 2016?

Heath Hill

2015, the collars are very narrow, it’s more just a factual point that we didn’t get rid of the position that we had previously when we moved into the fall. So really that’s a pretty good awareness on the $64. And again, we gave you the net $24 million benefit on diesel costs for 2015 and really don’t want to get into as much specifics on 2016.

Brandon Blossman

Just remind me what diesel burn is in 2015?

Heath Hill

We’re right around 29 million gallons.

Operator

Your next question comes from the line of Matt Murphy from UBS.

Matt Murphy

So hoping Newcastle prices stay strong, the forward strip doesn’t quite hold the same story and presuming we don’t see an improvement there, I’m just wondering if you can comment on how you see your port positioning and what you can do to minimize take or pay and maybe sort of medium to long term point of view, can you shift tons meaningfully?

Colin Marshall

First of all, I would say one thing is remarkable at the forward strip for Newcastle is it just seems to move up and down with sort of 2015 numbers. When prices were $130, it was $130 going forward forever. Now, they’re $60, at $60 going forward forever, so I wouldn’t – its fundamental supply and demand that will drive that. I wouldn’t read too much into the strip, because we watched it for a few years and it doesn’t seem to be too informative further out.

In terms of what we do, we believe prices will go up, they are going up now, if not we will obviously talk with our partners and manage the business. We will work with that as we go forward, but I think the main thing is we set the business up to be able to run through the cycle and that’s what we’re doing.

Matt Murphy

Just a question on your transportation and handling number in your quarterly, is that present value or is that like a simple sum of obligation going out ten years?

Colin Marshall

That’s the full 10 years, the maximum number you can possibly come out with.

Operator

The next question comes from Jonathon Fite from KMF Investments.

Jonathon Fite

I just had a quick question on your view of the price of equity versus the underlying value of the assets or cash flow generative power of the business, obviously I’m talking about future forecast or anything, but your personal perceptions of the price versus the value of the business today?

Colin Marshall

Jonathon, I’d say I’m very careful to steer away given any prediction of where our share price should be. I don’t think I will tell you about or will tell you about how we’re running the business and how we think it looks. Really it’s up to you guys to work out if the shares are cheaper or overvalued. I wouldn’t want to have a view on that, that’s your job. We’ll try and run the business.

Jonathon Fite

Normally I would absolutely appreciate that, but in the context of an opportunity where the price may be reflective of a deeply undervalued company, obviously the first job as a management team is to focus on running the business, but if there is an opportunity from a capital allocation perspective to exploit short term fears in the marketplace in relation to long term value of the business, capital allocation is the most important decision of a CEO. And so just wondering within an opportunity is presented to you, how would you...

Colin Marshall

Sorry, Jonathon, we’ve lost you. But I think in terms of capital allocation, we’ll continue to look at that, we’ll work with our board and we’ll – I think I understand where you’re getting to, but we’ll – the main thing for us at the moment is to make sure we maintained a balance sheet and a strong liquidity and that’s what we wanted to do. If any other opportunities come up, whatever they might be with capital allocation, then we’ll look at that. But we’ll run the business to make sure it’s sound now and that’s what we’re doing.

Operator

Your last question is a follow-up question from Lucas Pipes from Brean Capital.

Colin Marshall

Hello, Lucas?

Operator

Lucas did drop off, I’m sorry about that. And that is all the questions that we have at this time.

Colin Marshall

Okay, I can’t guess what Lucas was going to ask, but maybe we’ll find out some day. But I’d say, first of all, thank you very much for your interest in Cloud Peak and for listening in today. I just like to add a final thank you and best wishes to Mike and his move to Australia, also we’ll miss him at Cloud Peak Energy, and appreciate his contribution over the last five years. With Heath, Gary and I will be looking forward to speaking to you again in April during our Q1 earnings call. Thank you very much.