Cloud Peak Energy's (CLD) CEO Collin Marshall on Q2 2016 Results - Earnings Call Transcript

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Cloud Peak Energy, Inc. (NYSE:CLD)

Q2 2016 Earnings Conference Call

July 28, 2016 17:00 ET

Executives

John Stranak - Vice President, Finance and Treasurer

Collin Marshall - President and Chief Executive Officer

Heath Hill - Chief Financial Officer

Gary Rivenes - Chief Operating Officer

Analysts

John Bridges - JPMorgan

Paul Forward - Stifel

Patrick Marshall - Cowen

Lucas Pipes - FBR & Company

Craig Shere - TuohyBrothers

Stephen Percoco - Lark Research

David Gagliano - BMO Capital Markets

Operator

Good day, ladies and gentlemen and welcome to the Cloud Peak Energy Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to John Stranak, Vice President of Finance and Treasurer. Please begin.

John Stranak

Good afternoon and thank you for joining us. With me today is Collin Marshall, Cloud Peak Energy’s President and CEO; Heath Hill, CFO; and Gary Rivenes, COO.

Today’s presentation may contain forward-looking statements regarding the outlook for our 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 2015 Form 10-K.

Today’s presentation also includes non-GAAP financial measures. Please refer to today’s earnings release for reconciliations and 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 Collin Marshall.

Collin Marshall

Thank you, John. Good afternoon and thank you for taking the time to listen into our Q2 2016 results call. As John mentioned, I am joined by Heath Hill, our CFO and Gary Rivenes, our Chief Operating Officer.

Our adjusted EBITDA of $19.3 million reflected the low shipments we expected during the quarter which were more than offset by the contributions from contract buyouts, which we will discuss later. For the full year, we have adjusted our shipment guidance down to reflect the buyouts, but not change our adjusted EBITDA range due to the buyout in our forecast for full year shipments.

During the quarter, there was one minor reportable injury among our 1,200 mine employees. This is our first reportable injury since October last year. There were 83 MSHA inspection days at our sites in the quarter with only four substantial and significant citations written. There were no environmental citations at any of our sites during the quarter and it is now over two years since our last environmental citation.

As we foreshadowed in the last call, we expected the second quarter to be slow and it was with high coal stockpiles, low natural gas prices and reduced electricity demand, we only shipped 3.2 million tons in April and 3.9 million in May. June shipments increased 4.7 million tons and so far in July we are shipping at a 5.5 million ton rate with an improved forecast for the rest of the quarter. Several of our customers took their coal plants offline last winter when demand was low and natural gas cheeked due to the mild winter and they only restarted them in June to meet predicted summer demand.

June starts are hot, which increased our customer’s nominations and we currently believe that shipments are being limited by rail capacity due to delay in bringing back cruise and trains back into service. If the summer remains hot, we will expect to see a meaningful reduction in stockpiles as burn initially exceeds shipments and then a steady monthly increase in shipments to give us a strong second half to the year. I have been very impressed with the way our employees have been prepared to work flexibly to allow us to manage cost of shipments load. This is reflected in our reduced cost per ton compared to Q2 last year even with much lower shipments.

On the regulatory front, we recently finalized ONRR rulemaking regarding the valuation of coal sold to affiliates that the administration’s effort to use all means available to reduce the amount of coal mined in the U.S. go on. While the rule does not prohibit exports of federal coal, the unprecedented and vague default provision along with the new netback calculations create significant uncertainty for any vertically integrated company. We are currently trying to evaluate the potential economic impact and formulating our response. On a more positive note, it was encouraging to see bipartisan support for the development of carbon capturing storage technology. Bipartisan bill was recently introduced in the U.S. Senate which would increase and extend the existing 45-Q carbon capture credit to a level where they could enable the deployment of carbon capture technology. This would help bring down the cost of this technology which has been identified by the IPCC as critical to reducing CO2 emissions meaningfully.

We continue to believe that there will be significant long-term demand for domestic and international thermal coal. This is why we are continuing to progress the Big Metal and Youngs Creek project adjacent to our Spring Creek mine. It is worth noting that neither of these projects is based on federal coal. We are currently targeting the development of the Big Metal and Youngs Creek mines to begin in few years as lead federal reserves declined across the PRB due to the current moratorium. You maybe aware that the Army Corps of Engineers recently decided to cancel work on the Gateway Pacific Terminal project in which we have a 49% interest. As they assess the project was a bit more than de minimis impact on the Lummi Tribe’s fishing rights. We are not spending anymore money on this project as we and SSA Marine evaluate our options.

I will now hand over to Heath to run through the financials before returning to cover the outlook.

Heath Hill

Thank you, Collin. At the pace of shipments increased each month during the second quarter, we ended the period with 11.8 million tons of shipments. This is 26% lower than the 16 million tons shipped in the comparable period of 2015. When adjusting out the 1 million ton differential for reduced Asian export volumes, the domestic volumes were approximately 21% lower.

Our second quarter realized price per ton of $12.60 was $0.16 per ton lower than the $12.76 realized in the prior year. During the second quarter, we reduced our total mining cost by $47.3 million or nearly 28% as compared to 2015. Labor, diesel, repair and maintenance costs all decreased as a result of reduced equipment hours and the lower amounts of material moved. The alignment of cost to our lower shipment volumes is demonstrated in our $10.50 cost per ton for the second quarter, which was 2% lower than the prior year of $10.75. These factors resulted in a per ton margin of $2.10 being realized in our mining operations for the second quarter of 2016.

Workforce planning is the primary focus as our team aligns to the lower and varying production volumes. In an effort to manage labor costs, we have continued to cut over time reduced the use of contractors, reduced scheduled work hours and not fill vacant positions. Additionally, our voluntary separation program was taken up by 127 employees helping to bring our workforce in line with planned production. Further, 11 salaried positions were eliminated during the quarter. While these headcount reductions cost $3.3 million, the combined annual wage and benefit reduction for these employees will be $13 million.

Buyout revenue contributed significantly to earnings and cash flow during the second quarter. While each of our utility customer situations is unique, full sales agreements do provide for contract termination. We negotiated settlements during the second quarter with three customers for a reduction of 3.9 million tons in 2016. The $18.8 million of sales contract buyout revenues is included within our consolidated results, but not included within our owned and operated mine segment.

As communicated during the first quarter earnings call, we are seeking to voluntarily transition fully to third-party reclamation bonds. During the second quarter, we repositioned our reclamation bond providers and issued the previously disclosed 15% level of collateral totaling $66 million in the form of letters of credit under our credit agreement. In May, the State of Wyoming, Department of Environmental Quality, or DEQ issued a new equipment cost guideline to be used in bonding calculations. The lower equipment costs have been incorporated into our bonding calculations and will meaningfully reduce our bonding requirement in the near term. When these reduced calculations are approved by the Wyoming DEQ, we expect to exit self bonding.

In addition, the same lower equipment cost guideline, fuel price and production rate assumptions have been incorporated into our asset retirement obligation calculations thereby decreasing our liability by $54.8 million during the period. Of this decrease $37.3 million was recorded as an offset to depreciation expense during the quarter which positively impacted net income.

The loss during the second quarter within our logistics business was as expected given our amended port and rail contracts as the $8.2 million of take-or-pay expense was partially offset by the collection of $1.7 million of Newcastle hedge gain in the period. Our SG&A costs during the second quarter were impacted by a portion of the severance costs previously discussed. Due to certain one-off costs in the first half including severance, we expect the SG&A cost to be lower in the second half of this year.

Consolidated adjusted EBITDA for the second quarter, including the sales contract buyout revenue was $19.3 million as compared to $10.6 million reported for the second quarter of 2015. We ended the period with $64.1 million in cash and available borrowing capacity under our credit agreement of $434 million, which reflects the $66 million reduction for the letter of credit issuances during the quarter. When these are both combined with our $24.9 million AR securitization program, our total available liquidity at quarter end was $523 million.

As we look forward, we have adjusted our shipping guidance to reflect the canceled tonnage of the contract buyouts and now expect to ship between 55 million and 60 million tons in 2016. With the ongoing expectation of shipping our contracted tons, along with having maintained value through contract buyouts collected, we are maintaining our range of full year adjusted EBITDA guidance between $75 million and $95 million.

For capital expenditures, we have increased the guidance range to be between $35 million to $45 million this year. This $10 million increase to the range was necessary as the land agreement that was signed in 2008 was amended to move forward the payment by one year and reduced the overall payment amount. Our commitment for this attractive land neighboring our Antelope mine has been disclosed on our capital commitments table as a $23.7 million obligation that will now be extinguished in full during 2016. This acceleration of $11.5 million land payment allowed us to negotiate a reduction of the total acres and total contract commitment which will save us over $12 million.

Our CapEx guidance also includes the completion of the drag line move to our Antelope mine and well as maintaining the health of the equipment fleet across the mining operations. Because of the reduction of our asset retirement obligations resulted in an offset to depreciation expense, we now expect depreciation, depletion and amortization expense to be between $50 million and $60 million for the year. Cash interest for 2016 is expected to be approximately $41 million. As we look forward to the second half of the year, we will continue our focus on protecting liquidity and on managing costs in a time of varying shipment rates.

With that we will hand the conversation back to Collin.

Collin Marshall

Thank you, Heath. Now I will just cover the international outlook before we turn to the domestic. While international thermal coal markets continued to be over supplied, they are showing signs of coming into balance. The supply is reduced and demand continues to grow. We have seen near-term Newcastle price increase in recent months, particularly in out years, where they have risen by over 25% so far this year. Imports into China have risen in recent months, the domestic production continues to decline. With strong import growth from South Korea, Vietnam and Taiwan, we expected is now occurring as new plants are commissioned. Indian imports have reduced recently due to the increased domestic production. However, Indian coal-fired generation increased by around 14% so far this year as nuclear and hydro declined. Coal India’s production growth has slowed in recent months which may bring down coal stockpiles.

While we do not target supply in China and India directly, we will be watching them closely as they drive international demand. On the supply side we have seen Indonesian exports reduce significantly while U.S. exports have dropped – Australian exports have stabilized. Overall seaborne thermal supply and demand is becoming – continued to move into balance and prices are rising to reflect this. We are optimistic this trend will continue and we will look to resume exports through West Shore when they are once again economic.

Turning to the domestic environment, so far this year U.S. coal shipments are down by around 26% with PRB down 33%. While these reductions are less than at the end of Q1, they are clearly significant. Thank fully this summer started and is focused to be hot. We have seen gas prices move about $2.50 which is also encouraging. The forecast continues to be for hot summer which should lead to strong electricity demand with high utilization of coal and gas plants. As I previously said the amount of PRB coal burnt is down – the amount of PRB coal burn is down for full year will depend on the summer cooling bond and the price of natural gas when electricity demand drops in the full.

This will be the time when utilities dispatch their plants on an economic basis and the price of gas will be important. Recent conversations with several of our major customers reaffirmed that our coal is economic with gas in the $2.50 to $3 range. We are focused on in PRB demand from 405 million tons last year to around 300 million to 320 million tons in 2016, the stock piles are reduced. In 2017, PRB coal demand is expected to rebound with growth of 20 million to 30 million tons over 2016 with – assuming normalized weather stockpiles stabilize and natural gas prices rise to more sustainable levels.

During Q2 we reduced our contracted position for 2016 by 3.9 million tons through the buyer Heath discussed. The only sales in the quarter for our 2016 delivery which was Spring Creek customer who identified additional reserve requirements this year, we now have 61 million tons contracted for 2016 at an average price of $12.41 per ton. The drop in average contracted price was caused by higher priced contracts being involved in the buyouts. Due to low prices and lack of RFPs, we only contracted initial 3 million tons for 2017 delivery during the quarter and fixed the price on 0.5 million tons of index coal. The average price of these transactions was just under $12 per ton.

For 2017, we have currently committed to sell 45 million tons. Of this committed production 42 million are in the fixed price contracts with the weighted average price of $12.48 per ton. Utilities are continuing to delay their contracting activity for next year as they monitor their stock pile levels and natural gas prices through the summer. If PRB prices increased from current levels and we would expect more RFP activity as utilities move to cover their expected 2017 burn. We will update you on 2017 contracting during our next call in October.

To sum up before we take your questions, the quarter has played out as we expected with very low shipments in April and May which have increased significantly in June as we ended the summer cooling season. Shipments are on track to continue to increase through the summer as rail capacity is brought back online. Our operations have adapted well and the measures we have taken to control cost and reduce our workforce mean we are well positioned in the first of the year. Our liquidity is strong and we expect to build cash back in the second half of the year as our shipments increase. Our plan to exit self bonding in Wyoming and concentrate on a supportive group of surety providers is on track. We are currently waiting for the Wyoming DEQ to process our recently submitting bonding calculations.

With that, we can now take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from John Bridges of JPMorgan. Your line is open.

John Bridges

Good evening, Collin and everybody. Many thanks for the release. Lots of interesting information. You have applied $37.7 million of the adjustment to your retirement obligations to again show your [indiscernible] number, what’s the background to that?

Heath Hill

The background on that it’s just a technical accounting point, John, in the sense that when you do asset retirement accounting, you typically establish a liability and you establish an asset that gets depreciated over time and as this asset has really been fully depreciated when you have a further reduction to the liability, you have a process to record the credit. We just wanted to clarify that, that’s a non-cash accounting charge inside net income. We just wanted to be very transparent that really it’s the driver of it, it’s the reduction on the balance sheet and that’s the $54 million in the period and then the offset just happens to go there. We just wanted to really highlight that, so you take that out. That certainly is one-time kind of re-measurement effect of reducing that liability.

John Bridges

Yes. I just wanted to get our hands around that. And then Collin, you are pointing to the improvement in Newcastle price as it was just great, I think previously you have said your trigger is up in the 80s and maybe with these lower mining costs low oil prices that number has come down? What sort of number would you feel brings you back into profits for exports now?

Collin Marshall

John, with our exports, there has always been a few moving parts. I think we have sort of said $75 to $80 obviously the main factors will be where Newcastle price is, the $75 to $80, but then what percentage of that we get and that has varied in a significant range over the years we have exported depending on market conditions. And then obviously we also are trying to get our minds around the recently announced ONRR rule with this netback calculation which was we feel it’s completely inappropriate and extends the severance tax to logistics business. We are obviously going to have to account for that. We don’t think it’s a showstopper, but it will be an extra, meanwhile need an $1 or $2 of Newcastle price to be able to export. So, I don’t think at the moment, we are obviously looking to export. The other thing we will be doing is talking to the rail report and see if there is any ability for them to enable us to sell at lower price. And obviously, we will let you know as soon as things click into place, but obviously it looks a lot better when prices approaching $65 than when they were approaching $40.

John Bridges

Yes, great. And then finally maybe a question maybe some observation, but we have been hearing from some of the other coal companies that they have been doing some more contracting for next year on the Houston side, but you have not been able to squeeze out yet on your side, any thoughts on that?

Collin Marshall

I would say give it a bit of time. What we will see is the stockpiles come down, in Q2 it’s very quiet. I think the utilities are watching how the summer develops and particularly where gas prices will be when – as they enter the fall and what their thoughts on the winter are. So, I think we have plenty of time for them to need to contract for 2017 and I believe that will happen based upon the outlook at the moment, but maybe not yet.

John Bridges

Okay, many thanks and best of luck.

Collin Marshall

Thanks.

Operator

Thank you. And the next question is from Paul Forward of Stifel. Your line is open.

Paul Forward

Hi, good afternoon.

Collin Marshall

Hi, Paul.

Paul Forward

Collin, I think you mentioned the rail capacity has been constrained by crew shortages or other factors I just wanted to ask how significant are these constraints? And then gas holds near or above $3 as the year goes along, is that going to be something we hear more about in the second half of this year as you see how the rails are responding to these constraints?

Collin Marshall

Sure, Paul. In terms of rail, we see it is very much as a temporary constraint. What it could is obviously until June basically the utilities just went off taking any coal and just as we managed our both the railways load staff and part of cranes that’s all over the place. As the utility started – customers started nominating significantly more trains for June and now in July, there is a time lag to sort of school up those operations, the rail operations. And we see that is very temporary. You got to remember that they have got an awful lot of gear parked around at the moment. So there was no shortage of train sets. And also there isn’t the competition from crude rail that we saw in 2014, so it’s we say just as a limiting factor for a month or six weeks. And I think the latest information we got in the last day or two is that we expected sort of being effectively removed as we go into August. So, I see that as it will drag down the inventory a bit more than otherwise would have occurred, but we certainly don’t see it as limiting factor sort of from August onwards.

Paul Forward

Okay. I think you talked about PRB demand being up next year somewhere around like 20 million or 30 million tons, I am just wondering if you could talk a little bit about the mix within the PRB, is 8,400 going to – how is the rotation between 8,800 and 8,400 going to be are we going to see kind of the overall normal content of that mix go up next year or do you see 8,400 recovery?

Collin Marshall

Well, I think first of all obviously we did 405 million tons of coal last year, so to go down close to 300 million this year is a significant change or a reduction to mange. Going back to 330 million, 350 million that’s partial recovery, but I think if you look long-term we have seen that as you would expect 8,400 coal has gone down more than the 8,800. And at different time the gap was opened up. And I think that makes sense given the weak market. But I think in our view is that 8,400 is not going to go away. So, there are several customers who for quite clear reasons it makes sense to burn 8,400 coal. So, we don’t see that disappearing from the basin. But we have – it’s always been the lower percentage of sales and as the markets declined it’s become a smaller proportion. Its proportion is being reduced in recent years. So that trend will continue, but not to zero to only ship 8,800 coal and we don’t think that makes sense. So the continuation of the current trend, but some recovery will be both for 8,400 and 8,800 coal.

Paul Forward

Okay, great. And I guess also you had mentioned obviously you are not economic yet on the exports, I think you had mentioned that you would had some customer inquiries, I just want to ask kind of following up on your previous comments, how is the regulatory uncertainty or the net back charge uncertainty coming from the administration, how is that effective discussions or is that really as you said $1.02 per ton and maybe not that important relative to the kind of the overall revenues that you are talking about or is that uncertainty significant when it comes to customer discussions?

Collin Marshall

Well, I think with the customers that it’s a non-issue for them there will be a price that we will sell. And they are very keen to get us back into mix. Some of these South Korean utilities for a long time did everything they could to keep us in supplying and we obviously responded to that. But there comes a point when you well out of the money where that just doesn’t work and we obviously reached that point. But there we were in – some of our representatives were in Korea I think last week or the week before and once again they reported back from all the customers they visited that are interested in getting – maintaining the relationship, understanding, talking about when we can come back in is what they want to do. They would much rather quite frankly take hold from us than Russia, then if the price is the same and they want some diversity of supply. They also see the Indonesian demand coming off and domestic demand in Indonesia growing. So they would like to – as they previously said the position that they want us a long-term supplier from the U.S. and the Powder River Basin remains.

In terms of the actual finalized ONRR rule, it’s more that we have got to wrestle with getting our mine drowned. And I think it did introduce is a lot of uncertainty because it really is not clear exactly how it – exactly what we included and what not. And the – so we’ve got to work through that and then its got this default rule there. I mean, cynically, you could if they don't like the answer they can pluck any number out of the air because that’s sort of what it said. So we’ve got to work through that draft. There are some opportunities to actually discuss the mechanics of it with the ONRR to try and get a better understanding. And we will have to make sure that we've got our best view and we decide on the economics of exporting. But it’s the sort of impediment it was intended to be, would be my view and we got to deal with that.

Paul Forward

Okay, great. Last question, you had adjusted EBITDA for the quarter $19.3 million and but that included this contract by a revenue of $18.8 million and I guess year-to-date operating cash flow is negative $12 million. Just wanted to ask is that of the $18.8 million was that cash all received during the quarter or is that – or is there cash B received later on or is that, how did that all work and I guess you know obviously as a follow up to that with the midpoint of $85 million to be EBITDA for the second half or for the full year $41 million of cash interest. We would expect that second-half operating cash flows would be significant reversal what you saw in the first half or there any kind of moving parts in there that we need to look at as far as working capital items?

Heath Hill

Paul, this is Heath. Just wanted to confirm, first, the cash was received, so we do have that. That is included in our accounts as we reported in. With the midpoint of $85 million and the cash interest and the CapEx, I think your question is more just reaffirming that we expect in the second half of the year as Collin commented in the script that the cash should grow assuming that the EBITDA midpoint is breached. So we have confidence that that second half of the year, the operating cash flows will be the opposite, yes hey should be positive in the second half of the year.

Collin Marshall

And I think, pull this thing, this drives maybe you look at it either way, gosh, you’ve got lot to do in the second half. As long as we get the shipments, the mines is set there to do it. If you look at our historic performance when we’ve had volumes there you know between 5 million and 6 million tons, we’ve generated plenty of cash. It’s just that the the first half of the year, the shipments are being slow – so low that it’s being, you know, the fact we’ve only drained that much. I think, it’s a testament to Gary and his team and how they’ve managed the cost. So the business, there is no reason why it can’t return to performing like it used to as long as we actually get the customer’s trains turning up.

Paul Forward

Okay great, thanks very much.

Operator

Thank you. The next question is from Chris Shade [ph] of Goldman Sachs. Your line is open.

Unidentified Analyst

Just had one quick follow-up around the buyout revenues, do you have eyes for a ballpark number about what the EBITDA impact of that $18.8 million was?

Heath Hill

It actually, it doesn't have a cost associated with it so it’s pretty direct.

Unidentified Analyst

Okay, alright. Thank you.

Operator

Thank you. The next question is from Patrick Marshall of Cowen. Your line is open.

Patrick Marshall

Hi, I just had a quick question on the – on you tonnage position. So your guidance is for 55 million to 60 million tons but it also says you have fixed price tonnage of 61 million tons. Are you baking in further contract buyouts?

Heath Hill

What we – well Patrick what I was wondering you didn’t notice that. What we are actually baking in is the normal sorts of things that happened towards the end of the year. Given where we stand today, we normally don't deliver on all the contracts. But this year might be different on that. And we will wait and see. So I think what I would say is the guidance range is right. The contract position is absolutely right. But there is an awful lot of different moving parts whether those contract buyouts, deferrals, swaps of contracts, lots of things can happen.

Patrick Marshall

Okay.

Heath Hill

And yes, so there is plenty of time for that. We will update you in October and we should have a pretty good handle on it by then.

Patrick Marshall

Right. And I am sorry if you already said this but was it – how much tonnage was associated with the buyouts was it 2 million tons?

Heath Hill

3.9 million

Patrick Marshall

3.9 million

Heath Hill

3.9 million tons, yes because we did make a small sale of half a million tons or whatever for the 2016 delivers Spring Creek as I mentioned, so that sort of balances it up.

Patrick Marshall

Got it. Okay, that’s it from me, thank you.

Heath Hill

Alright. Thanks, Patrick.

Operator

Thank you. The next question is from Lucas Pipes of FBR & Company. Your line is open.

Lucas Pipes

Hi, good afternoon everybody.

Collin Marshall

Hi, Lucas.

Lucas Pipes

I wanted to follow-up a little bit on the cost side, so quarter-over-quarter, it looks like your shipments were down based on MSHA production was down as well and cost also came down, which is a little unusual. So, I wondered if you could share with us kind of what were the drivers in the second quarter versus the first quarter of this year? Thank you.

Collin Marshall

Well, the guys did a really good job of making sure that the coal ship was matched or the over burn production was matched to the needed coal to ship. So, that’s one of the key drivers that we had. As a result of that, we have had to slow a few things down. We have done most of our own maintenance with our own labor for us. We did have to cancel some ships and make sure the labor costs come in line. But our gear is in really good shape. So, we are able to make sure that we are repairing it properly and not spending money that we don’t need to. When you give these really tight times, you really scrutinize a lot of different things and our active business improvement program left a lot of savings out there. So, we are pretty happy with that.

Heath Hill

It goes to a sort of wider thing that Gary and his team has done an amazing job in the last year or two of actually changing the way we run the business and that’s being impacted everybody. But now the reality is that during the second quarter, the slow quarter of the quarter, it’s quite likely we will be canceling ships going forward, because we certainly did this. That’s never happened in the past and to make the business flexible, because we are going to have to respond to more variable demand now that coal is no longer base load as it used to be because of the changes in the market, it’s good to see. I have been really impressed with the way the team has done – being able to actually change what was a very high fixed cost business into one with remarkably variable costs in short time.

Lucas Pipes

That’s very interesting. And then I think I read on the release that there were also some unfortunate layoffs during the second quarter. And I wondered kind of how are you thinking about the capacity at your mine? So, if there continues to be a little bit of an improvement, I believe more than a little bit, where could production go? I would appreciate your thoughts on that.

Heath Hill

As far as concerning the reduction on workforce that we had earlier in the quarter, we had a pretty significant drop in tonnage through some of the buyouts in just the demand side of that. So, we got our workforce down to a very comfortable level now. And with the picking up now, we are able to work some more over time bringing in some outside services if needed. And also, there is always hire people back if we need to. And we will be very cautious about that. We are, as Collin mentioned in his script, we will be watching that coal demand in those sort of things in making sure that we do the right things to stay profitable, but we do – we are doing a good job of being able to bring our number up for the second half as demand picks up and we will continue to watch it.

Collin Marshall

And I think the important point there, Lucas, well, there is two points I would make. One is the 127 people left they weren’t made redundant, we are able to offer voluntary severance that was they took up which I think is important. We have been able to manage the sites without actually having to ask people leave at the site, but we are 11 salaried positions that we actually had to ask people leave which is no fun, but I think people understood what was going on and what we are trying to do. The other point is that in the second half of the year to get to around 60 million tons of demand after an annualized rate, the mine will have to run at about 70 million ton rate for 6 months. I think when you are asking obviously the question that a lot of you are wondering is what was our capacity? I guess, it’s round about that 70 million ton rate, not massively more and that’s about what we did 75 last year. So, that’s where we are setup and Gary and his team have got the mines in good shape to deliver that. Obviously, prices go higher than you look of what we can do at Cordero and for the moment, we are planning on having that capacity and having the flexibility to deliver 60 million tons profitably.

Lucas Pipes

That’s very helpful. Thank you. And then maybe if I could squeeze in the last one, just housekeeping in terms of that ARO liability decreasing 54.8 million and then depreciation offset there of 37.3 million, does that 37.3 million, does that capture all of the moving pieces on the income statement or is anything else?

Heath Hill

That is the one piece on the income statement. You have got that correct, Lucas.

Collin Marshall

Just Lucas I fully heard you say that one went up and so again both ARO and the liability both went down.

Lucas Pipes

Yes, yes, no, that’s right, great, thank you.

Operator

Thank you. The next question is from Craig Shere of TuohyBrothers. Your line is open.

Craig Shere

Good afternoon.

Heath Hill

Hi.

Craig Shere

Picking up on Patrick’s question about the volumetric guidance versus the contracted position, was there any assumptions about specific buyouts and the EBITDA guidance being maintained?

Heath Hill

No.

Craig Shere

Okay. And on the logistic side, is there any way that you could repurpose some of your contracted terminal rights and rail positions to mitigate some of the losses and fill eventual export market recovery?

Heath Hill

Not that we are aware of. Obviously we look at that but yes if you know anyone who wants to move assuming from the Spring Creek mine to Westshore and they need a train and surely please send him through to us. But I am afraid we haven’t been able to find anything and I think the reality is that we managed to get those contracts down or to take a pay commitments by working with the rail and port last year. And now the more exciting thing is to see the international markets coming back and particular pricing. But I am afraid that there isn’t any sort of obvious way we could subcontract them – someone else at the moment, I am afraid.

Craig Shere

Understood. And I am sorry, I may have missed this in the prepared comments. What is the status of that dragline move thing completed?

Collin Marshall

We are right in the middle of electrical testing. It has gone real well. We anticipate it coming up in the next month or so. And pretty excited to have it because that will help us control cost even better than we have so far, so it’s coming right along.

Craig Shere

Okay, so great, so after that’s completed your CapEx ongoing CapEx cost should be coming down and then in addition your operating cost should come down?

Heath Hill

It might be. I think the CapEx will give you the number for next year because there will be puts and takes but we don’t have that major project. In terms of the operating cost, little bit you will see at Antelope, remember we always have the rising strip ratio, so yes they will come down at one end but not enough, so you will say, wow look, here is – but they will – it will make a significant difference sort of in the pit, it’s working compared to the truck shoveled. But by the time you multiplied across all the sites, I am afraid it’s – it won’t be going in the right direction and a significant one. But there is plenty of other things going against this as well. So don’t expect suddenly a $0.50 drop in the price per ton or in the cost per ton.

Craig Shere

Understood, okay. Appreciate all the feedback.

Heath Hill

Thanks Craig.

Operator

Thank you. The next question is from Stephen Percoco of Lark Research. Your line is open.

Stephen Percoco

Thank you. Could you give us a little bit more clarity on the cancellation of contract income specifically does a 3.9 million tons effect volumes in this current year or is it in future years and is that the majority of the decline in guidance for volumes or is it more related to the decline in guidance for volume more related to the low volumes that you’ve had in the first half of the year. And also with that for those customers that canceled, will they be effectively are they dropping out of the picture or are they going to be buying spot now instead of under the contract prices. Any additional color you can give us there would be helpful.

Heath Hill

Okay, in terms of that, the 3.9 million tons of contract buyout is almost old for this year.

Collin Marshall

Exclusively for this year, yes.

Heath Hill

Right. And that is the major reason why we brought our guidance down on production. In terms of those customers, there is a variety of reasons, some of them are, those plants are closing. And so they will not be coming back but just as many other plants have closed, this is one reason why if you go back to 2011 we shipped 96 million tons and how we are looking at 60 million. So throughout the year there is less coal being burnt in the U.S. and we are adjusting to that. So, yes, some customers are going away permanently. Other ones, well let’s wait and see but they wanted to manage their profile either this time based on their particular outlook, some of the plants and try to think of the three. One of them is going to be buying more coal in the future and we will wait and see when they come back into the market.

Stephen Percoco

Okay. And I just have one more question here. The difference between the reduction in the ARO liability and what was taken through depreciation is that effectively going to be amortized over time, should we make that assumption so that the ARO amortization that was typically included in depreciation expense, I assume it was included in depreciation expense would bounce back up in future quarters, is that the way to think about this or am I thinking about it clearly?

Heath Hill

Where we started on the first question with John we expressed that you have an ARO liability typically you had an ARO asset that gets depreciated. We had $17 million delta between the $54 million and $37 million. We did have a small amount of asset there that was removed so that won’t have depreciation going forward. So I wouldn’t factor in any further depreciation relative to the ARO. There is accretion which is just ARO growing over time that’s the time value component that is disclosed in a separate line item. But the depreciation of the asset retirement costs there aren’t any at this point.

Stephen Percoco

And that relative – going forward relative to where it’s been in the past the accretion of that is that going to be similar or slightly reduced as far as the reduction related to the reduction in the $37 million depreciation?

Heath Hill

It’s the later in the sense that we have a smaller liability that will take more time to accrete up to its full value. So the accretion will decline.

Stephen Percoco

Can you give us an idea for how much that will decline?

Heath Hill

No, maybe ballpark about 25%.

Stephen Percoco

Okay, that’s it. Thank you.

Heath Hill

Okay.

Operator

Thank you. The next question is from David Gagliano of BMO Capital Markets. Your line is open.

David Gagliano

Hi. Thanks for taking my question. Just a quick check on the typical question that I have asked in the past, just saw the numbers in 2017 your contracted position went up 3 million tons, implied price of $11.80 roughly and I am wondering is that deferrals or is that actually contract and how much of that is in each bucket?

Collin Marshall

I will see if I can answer this question for you. Most of that was new contracts and then new contracts and an index contract that fixed during the year. So it wasn’t anything to do with the contract biopsy or anything carrying over from this year.

David Gagliano

So you sold coal for 2017 delivery at roughly $11.80 is that correct?

Collin Marshall

That plus an index contract that fixed, which was higher price, which is what you are actually getting at, that was above the average to drag the others up but the net of $11.80, you are right.

David Gagliano

Okay. And so I guess really what I am getting at is where is like if you were sell a decent amount, I think you have it all depends on your volumes next year, but let’s say it’s 15 million tons or something like that left to price for 2017, where is that, can you give us a sense to what – where you could sell that for today like just as they own or something like that?

Collin Marshall

Well, there isn’t much going on as I sort of alluded to in terms of our pace. Certain utilities really are waiting to see where they are coming out of the summer and looking forward through the winter. But the best guide is I think I will say is look at where the OTC, reported OTC stuff is that certainly for next year that is where any conversations would start and that hasn’t changed. Obviously, it’s very competitive, but you have seen that rise significantly last month or two months with the warmer weather and gas prices rising. So it’s more positive but still it is nice to see a couple of more dollars on it, so you get to a level that gives us proper margin.

David Gagliano

Okay, that’s helpful. Thank you.

Operator

Thank you. [Operator Instructions] The next question is from Lucas Pipes of FBR & Company. Your line is open.

Lucas Pipes

Thank you very much for taking my follow-up question. I think an important point that has really not come up in the Q&A is your reclamation bonding and what you intend to do there going forward, so if I think about kind of the reduction in ARO and then my understanding that I have $190 million or so in self bonding capacity, how much more if you were to shift that to private surety providers, how much capacity would that take up on your balance sheet, what’s your best estimate at this time?

Collin Marshall

Listen, I think the way to look at it and what we are trying to get across in the prepared remarks is we have got about 400 – the 15% $66 million letter of credit that’s collateral with the new group of surety providers, that comes back to $440 million bonding. With the calculations we have submitted to Wyoming DEQ assuming they go through and that is certainly our expectation. Then as soon as those go through we are effectively out of self bonding and we won’t need any of the $190 million and that is – that’s the plan, the track we are on and we are waiting to hear from the Wyoming DEQ.

Lucas Pipes

Okay. So I am not sure if I fully understand all of that, does that mean that you do not have to put down additional collateral?

Collin Marshall

We have got the bonding in place now with the new group of sureties and now what we are waiting for is to the calculations to be accepted, the calculations that include Wyoming DEQ’s news setting the numbers they issued their numbers. When they invested those and made sure they to come to with them, then we should find out as the bonding coming down to $440 million level that we have already bonded to.

Lucas Pipes

I understand. Okay, that makes sense. Thank you for that. And then if I recall correctly this bonding reassessment was kind of a stepping stone to maybe greater things to do on your balance sheet that repurchase is something comes up frequently, how do you think about that?

Collin Marshall

Well, we think about all of those things for a lot and obviously it’s very – let’s get this bonding thing done and obviously when anything – we have got anything to report we obviously will.

Lucas Pipes

So maybe to try another way, how do you think about your priorities following the completion of the bonding, the bonding requirements there?

Collin Marshall

To try and answer it in the same way, I was to say that I will look at all – once we got the bonding in, we will look at the financial opportunities available to us and the different things we are able to do. And we will let you know since we got something concrete to report.

Lucas Pipes

Alright. Well, good luck with everything.

Collin Marshall

Thanks a lot. The other thing I should always say with that is we are not idle we are some very busy people, because we want to do the right things for the business and taking the opportunity as we can, but obviously we can’t speculate anything until we have got some in complete report.

Operator

Thank you. There are no further questions in the queue at this time. I will turn the call back over to Collin for closing remarks.

Collin Marshall

Well, thank you very much for taking the time to listen in. And obviously while 2016 is going to be a difficult year for coal producers, the hot start to summer has greatly improved the outlook after very slow first half. And – but I will say I am proud of the way our employees have adopted the realities of market which will help us considerably going forward. So with that, I would like to thank you for taking the time to listening and we will look forward to updating you again in Q3 after hopefully a sustained hot summer. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Good day.

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