Quarterly earnings calls generally offer some of the best insight into the thinking of energy executives. But even by those standards, Cloud Peak Energy's first quarter call last week was particularly notable.
The news the Gillette-based firm is transitioning away from self-bonds would, under normal circumstances, generate enough headlines on its own.
But when you add Cloud Peak CEO Colin Marshall's comment that the coal industry is "permanently changed" to the mix, and, well, people take notice.
So let's start with a little bit of background. The big debate in the coal industry right now is whether the current downturn is a short-term event born of market conditions or a long-term shift in how the world gets its electricity.
I wrote a story about this a little while back. Basically, the short-termers argue that gas prices can't stay low forever, coal stockpiles will fall and demand will eventually improve. The permanent shift camp essentially believes the technological advancements in fracking, along with concerns over climate change, mean that cheap natural gas is here to stay, and that coal will have difficulty competing.
Which brings us to Marshall's comments. The Cloud Peak CEO said: "As we look forward, it is clear that the dynamics of the coal industry have permanently changed, where coal used to provide base load generation, it is now much more variable depending on power demand, renewable output and the price of natural gas."
Now a couple caveats here. Cloud Peak is projecting the market to improve over the second half of 2016, as sharp decline rates in natural gas wells begin to work off the glut in that sector.
Also, of note: Cloud Peak is sufficiently bullish on long-term prospects for exports to continue the pursuit of its Big Metal project on the Crow Reservation in Montana.
So should we read Marhsall's comments as throwing in the towel? Hardly. But it does signal a shift in how coal companies talk about the future of the industry.
What about the self-bonding?
As for self-bonding, I touched on Cloud Peak's attempts to transition away from self-bonds in my Sunday story about the change in Wyoming's reclamation policies.
The long and short of it: The company decided it would be a good idea to pursue surety bonds given the deteriorating market and mounting debate over allowing companies to self-bond.
An interesting tidbit that didn't make it into the Sunday story was an exchange between Heath Hill, the company's chief financial officer, and an analyst. Hill was asked directly if he had any indication of a policy shift on self-bonding.
This is how he responded: "It was absolutely being proactive. Wyoming had been very supportive. It actually – I think it’s pass through this – well, it’s a regulation that they pass. That’s a change, it would be a big deal, it have to go through the Legislature. But now we are trying to be proactive. And also, yes, we are conscious that as some of our – it’s done against financial tests and on a trailing 12-month basis. And as time goes on, as we weather through this, obviously our finance's are getting weaker before they get stronger in terms of the some of the trailing 12-month numbers."
Self-bonds are calculated on an annual basis. So it's telling that the company wants to secure its bonds during what is expected to be a very difficult year. Yet it is also interesting to see Cloud Peak take a preemptive step in attempts to get ahead of a growing political debate over self-bonding. We haven't seen that from another Wyoming coal company yet.