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At The Edge - How Cloud Peak's Problems Really Started At The Beginning

Nolan Behnke
A simple, non-statistical cartoon of Cloud Peak's Timeline Since '09.

2018 was not a good year for Cloud Peak Energy, one of the largest U.S. coal companies that employs 1,300 people with two mines in Wyoming. It sold 15 percent less coal, Asian markets had plummeted for the resource, and the value of its stock fell by half. All that happened by October. That month, executives held a call with stock analysts. In the recording, Cloud Peak CEO Colin Marshall focused the conversation on weather challenges.
"Yes, the issues to '18 is that we believe specific to this year. We'll look forward to updating you on the progress during Q4 and full year in February. And hopefully by then the issues we had at Antelope will be well behind us, and we'll be able to look forward to 2019 then," Marshall said.

But just a month later, it was clear Cloud Peak would not bounce back. 2018 was a bad year, but the company's problems did not start last year.

"This has been a decline and that's been a decade in the making," said Clark Williams-Derry, the director of energy finance at Sightline Institute, a think-tank focused on green energy.

He explained Cloud Peak's issues started at its very beginning when mining company Rio Tinto sold and separated Cloud Peak as a public corporation back in 2009.

"They actually pulled in about a $1.5 billion from spinning off Cloud Peak. But in the process, they wound up saddling Cloud Peak with a whole bunch of debt," Williams-Derry said.

Credit Morningstar
Cloud Peak's Long-Term Debt

Cloud Peak was left with nearly $600 million in long-term debt. Williams-Derry said that was the core problem. Since 2009, Cloud Peak has never generated enough cash to pay down its debt to a manageable level.

But it didn't feel the pain of that debt right away. The following few years were actually strong. Its share price hit an all-time high. Domestic coal markets were sturdy. And in 2012, Cloud Peak even began to expand. Williams-Derry said it invested big in exporting to Asian markets.

"It thought that exports were going to be the future for the company or least a big profit center. You know domestic demand at that point had had peaked, and Cloud Peak thought that, well, the best option that we've got is to look over the Pacific Ocean at some of the red-hot markets in Asia," he said.

Williams-Derry said it staked its financial futures on the ever-volatile Asian coal markets. For instance, in 2012, Cloud Peak spent $300 million on a Montana mine called Young's Creek. Months later, it paid to develop a mine owned by the Crow Tribe. Cloud Peak also locked itself into a long-term shipping agreement with an export terminal.

"But then Asian coal prices fell and they kept falling. And at some point, along in there, Cloud Peak stopped making money and then sort of losing a lot of money on his export projects," Williams-Derry said.

Credit Data compiled by Clark Williams-Derry from SEC Filings
A quarterly look at how many tons of coal Cloud Peak sold over the past decade.

The other side of Cloud Peak's business was not doing well either: domestically-sold coal. By 2016, the price per ton dropped over 10 percent, pushing all other major Powder River Basin coal producers into bankruptcy. Cloud Peak managed to avoid it, but not without a hit. It sold over 30 percent less coal.

Since then, Cloud Peak's available cash has just kept going down and down to nearly nothing today. With a looming debt payment and no way to pay for it, the company announced last November a review of strategic alternatives, a last-ditch effort to avoid bankruptcy. Ben Cook, University of Wyoming Professor with the Enhanced Oil Recovery Institute, explained, once you're in that hole, it's hard to dig yourself out.

"You can only negotiate so far before you just simply run out of cash. If you have high cost debt on your balance sheet and the macro factors driving your business don't change, there's really nothing you can do other than prepare for that time and try to do the best you can at managing that," Cook said.

Cloud Peak likely tried to rustle up cash by looking into a buy-out or selling its mines. Specifically, Sightline's Williams-Derry points to write-offs at the Big Metal Project, the Cordero Rojo Mine, and the Young's Creek mine. Write-offs are what a company sometimes has to do if an asset once thought to be valuable was actually worthless. Williams-Derry said it's possible a failed-attempt at a sale of some assets forced Cloud Peak's hands into a write-off. Plus, a report from Moody's Investor Service also found the two other major PRB players aren't interested in acquiring new assets.

With no sales, buy-outs, or new cash, the finish line with a banner screaming "bankruptcy" has come into sight.

"It's like swimming upstream. You know eventually you're just going to run out of energy and the tide is going to take over," Cook said.

Credit Morningstar
Free cash flow is what's left over after a company pays necessary expenses. It's a good measure of a company's ability to pay down other liabilities, like debt.

That tide washed up Cloud Peak right here, with mountains of debt, competing with companies that didn't have any debt, and fewer and fewer wanting their product.

Cook said it's management has been strong. "They've been actually impressive in the fact that they've been running and continuing to run with somewhat positive operating results for quite a while. Unfortunately, it's just caught up with them."

There is the question of Millennium Bulk Terminal, a potential export terminal in Washington. It could have opened the door for Cloud Peak to ship more of its product to Asian markets. But Sightline's Williams-Derry doesn't buy it.

"The problem is that Cloud Peak was actually losing money at its existing terminal in British Columbia," he said. "And frankly the costs of getting coal out of British Columbia is not that different from the cost of getting coal out of Washington."

Credit Compiled by UW Professor Ben Cook
Cloud Peak's coverage ratio — it measures a company's ability to pay interest rates based on earnings. A higher number shows a company has more flexibility.

So, on May 1, Cloud Peak faces a decision that could set off a chain of events ending in bankruptcy. Its senior lenders have already given them extensions on a debt-related interest payment. If the company decides it's too strapped for cash, it may not pay this time. A default on a loan could force a bankruptcy. 

"It's unfortunate for a company that has been for it has been well managed. But again, there's nothing that they can do," said Andy Blumenfeld, head of market analytics for Doyle Trading Partners, a boutique energy research firm.

Blumenfeld said what happens after bankruptcy is anyone's guess.

"It's up to them and the courts to decide ultimately what happens with the company. So, I mean, it could be it could be reorganized and kept as whole. It could be sold off could be sold off in pieces," Blumenfeld said.

After bankruptcy, he said Cloud Peak could explore sending coal to new regions or even explore mining a new resource.

Like the March and April 15 deadlines, Cloud Peak still has time to negotiate a deal or extension before its deadline May 1.

Before Wyoming, Cooper McKim has reported for NPR stations in Connecticut, Massachusetts, and South Carolina. He's reported breaking news segments and features for several national NPR news programs. Cooper is the host of the limited podcast series Carbon Valley. Cooper studied Environmental Policy and Music. He's an avid jazz piano player, backpacker, and podcast listener.
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