A Potential Company Sale, Exec Bonuses, Cut Benefits: What's Going On With Cloud Peak?

Nov 16, 2018

Cloud Peak Energy has announced it will review "strategic alternatives". Basically, that means the coal producer is open to major changes, including a potential sale of the company in order to improve its financial situation. The move was announced alongside bonuses to executives encouraging them to stay on.

A graph showing Cloud Peak profits declining.
Credit Sightline Institute

Cloud Peak Energy is one of the largest coal producers in the U.S. with two mines in Wyoming: the Cordero Rojo and the Antelope. It employs approximately 1,300 people. In 2015, the company avoided risky bets in a new coal market and along with it, bankruptcy. But it hasn't avoided the tough headwinds facing coal everywhere.

On November 13, Cloud Peak Energy saw its share prices drop to a 52-week low: $1.32. It's seeing customers move away from coal in the near-future with declining profit margins and production. Its shipments this past quarter were down 15 percent from last year connected to weather issues. Perhaps most importantly, Cloud Peak faces a massive looming debt payment of over $290 million in two years.

"The bottom line here is that Cloud Peak probably sees the handwriting on the wall," said Clark Williams-Derry, the director of energy finance at Sightline Institute, an environmental research center.

He said this pursuit of strategic alternatives is one of the most disruptive decisions a company can make.

"This really looks like a desperation move by a company that's having a real hard time making a go of it in today's market. And the best plan may be just to sell itself," he said.

A graph showing Cloud Peak's production in decline.
Credit Sightline Institute

Williams-Derry said the announcement shows Cloud Peak is receptive to becoming a different company, selling off, or even breaking up into parts. He said it could also mean refinancing its debt or selling off its mines.

"If you have a mine that's underperforming, the sale might be a time when those kinds of mines might get cut back or closed," Williams-Derry said.

He pointed to the Cordero Rojo mine, which sells a cheaper kind of coal that's struggling in today's markets. A financial analyst called the mine's value "negligible at best," in an S & P Global Market Intelligence article.

In its announcement, Cloud Peak said it's also possible no transactions could occur. But with the company's current trajectory, Williams-Derry said it's hard to imagine how else Cloud Peak will pay off its hundreds of millions of dollars in debt.

This isn't the first sign Cloud Peak has been hurting. The company announced earlier this year it would move its headquarters from Gillette to the Cordero Rojo mine in order to save money. At the end of October, the company made a controversial decision to end medical benefits for retirees to save the company money.

Image taken from a Cloud Peak investor presentation.
Credit Cloud Peak Energy

Benefits will end by 2019, then retirees will receive a lump sum of the next year's benefits. The company maintains unfunded medical benefits to certain eligible retirees. It's unclear how many retirees the company provides benefits for overall. But the business decision isn't taken lightly by the people it affects most.

"I did my part. I worked safely for twenty years. And, four months after I retire, this is what's done. It's maddening," said Anne Zollinger.

She was a Cloud Peak Energy employee working mostly as a warehouse technician. She retired this past May at age 55. She expected $600/month to help pay her insurance bills until she was eligible for Medicare at 65.

"This is what I was promised. And worked for and now it's gone by no cause of my own. I feel very powerless to change this. This is a decision that they made in spite of the number of retirees that they had," she said.

Cloud Peak Energy logo.
Credit Cloud Peak Energy

The company didn't respond to requests for comment. But University of Wyoming energy economist Rob Godby helped explain the health care decision. He said cutting post-retirement health makes the company look more valuable, especially given its rough short-term earnings. It provides them with $19.5 million in net income reflected in Q3 of 2018, and $8.2 million for next year. Godby said you can't cut production if the goal is to keep looking attractive to investors, so this was low-hanging fruit.

"They're looking at any sorts of financial obligations or fixed costs that they can avoid and they're trying to cut that their off-balance sheet just to make themselves more profitable," he said.

Yet, filings on the day of Cloud Peak's announcement to change strategies show bonuses to six corporate executives - called retention agreements. In five payments over two years, the bonuses would provide up to 100percent of each person's base salary in order to keep them on through "ongoing challenges". Using 2017 government-filed numbers that add up to over $2 million. It sends a message to people like Zollinger.

"This is the first I've heard but it seems so unjust." She said, "The people that are in the trenches doing the work get the shaft and the people at the top of the food chain are making out like bandits."

If you take those salary numbers and add stock awards and other compensations for five of the six executive positions from 2017 it adds up to over $10.5 million. That number is likely lower this year.

Cloud Peak's problems come down to a tough market with a lot of supply and increasingly few customers with no sign things will get better. Godby, the UW economist, said selling its company or even just assets, like mines, could help get them out of a financial hole. It could allow Cloud Peak to get rid of its liabilities while finding the money to pay off its huge debts.

"And they may be that the hoping the value they can get in those sales is greater than say the sum of the profits they would get if they continued to operate over time," Godby said.

In Cloud Peak's announcement, it said there's no timeline for this process and that it would not release updates until it finds further disclosure is necessary. The company has canceled its credit agreement, avoiding $3 million in additional administrative and commitment fees. As of June, Cloud Peak held over $400 million in surety bonds to pay for reclamation. The question now being batted around by market analysts and economists is who could acquire Cloud Peak.