All The Takeaways From Cloud Peak's First Week Of Bankruptcy

May 17, 2019

Back in November, Cloud Peak Energy announced it would consider significant changes to its business. At the time, it was weighted down by nearly $400 million in debt and weakening coal sales. The company was open to a buy-out, a sale of one or all of its coal mines, or finding a way to push back its debt. But nothing worked out. So, on May 10, Cloud Peak had no choice but to go bankrupt.

Take-Aways

  • Cloud Peak delays to its bankruptcy filing primarily stem from a dispute with secured debt-holders. Those debt-holders now can take ownership of the company's assets if the auction doesn't result in a bid it likes.
  • Cloud Peak would have run out of cash by May -- it's lack of cash pushed the company to review strategic alternatives back in November.
  • The company went through two sales processes with only one proposal, and it was rejected.
  • It set an aggressive new sale schedule with an auction on June 26.
  • The company gave bonuses to its executive team totaling $10.7 million already, with $5.4 million still left to be paid this year.
  • Cloud Peak owes Wyoming counties $14.5 million in ad valorem taxes and fees, according to its own figures.
  • Cloud Peak's surety bondholders, the ones who ensure reclamation costs, are pushing the company to provide more collateral.

"You know some bankruptcies aren't really emergencies there. I think bankruptcy really was a crisis as an emergency," said Clark Williams-Derry, director of energy finance at Sightline Institute, an environmentally-focused think-tank.

"They were bleeding cash. It was really, really a desperate situation for the company based on the projections that they presented in their bankruptcy filings. It looked to me as though they were gonna be out of cash this May," he said.

Even so, the company put off bankruptcy longer than many expected. It extended the deadline for an interest payment on 2024 debt four times.

"It was pretty clear once you read the bankruptcy filings that Cloud Peak was doing everything it could to figure out how to get through its crisis," Williams-Derry said.

In November, Cloud Peak tasked investment bank, J.P. Morgan, to find potential buyers. It found 21, but ended with only one proposal. It didn't pan out. Another sale process began in December. Documents also show Cloud Peak looked at debt restructuring, though that had been an ongoing effort for years.
 

Historic and Projected PRB Coal Demand
Credit MSHA, Doyle Trading Consultants

Williams-Derry explained Cloud Peak may have had better luck with both attempts when coal markets were healthy.

"These are not seen as prime assets anymore. They're not seen as takeover targets," he said.

What really pushed Cloud Peak's timeline back was an internal dispute with its secured debt-holders.

"There's a confusing, complicated dispute over whether bond holders actually had a secured interest in the assets of Cloud Peak and it sounds like a technicality, but it was really a major issue," Williams-Derry said.

Basically, the people Cloud Peak owes money to wanted a better guarantee it would get paid back. Eventually, they agreed to provide post-bankruptcy financing if it got another guarantee: a credit-bid promising ownership of the company if the auction doesn't turn out how it likes. On May 10, Cloud Peak voluntarily filed for Chapter 11 bankruptcy.

Bankruptcy documents also included assurances important to the state. Cloud Peak filed motions to keep employees working with normal benefits, to pay off millions in county taxes it's already missed, and pay its reclamation obligations.

Gillette Senator Michael Von Flatern doesn't feel comforted and neither do constituents who've called him. He's heard of Cloud Peak employees already quitting.

"You really think your job is somewhat safe if you have any seniority at all. But there has to be some that are trying to get on with one of the other coal mines," Von Flatern said.

Campbell County is nervous it's on the hook for millions of dollar in yet-unpaid taxes from Cloud Peak. Not to mention hundreds of millions of dollars in reclamation obligations. That could still change in future court dates.
 

Comparison of Cloud Peak's Unpaid Ad Valorem Tax Value to bonuses its given executives.
Credit Data from SEC Filings, Prepared by Cooper McKim

Bankruptcy documents do show what Cloud Peak's next steps are, at least for now. Instead of debt holders becoming the owners immediately, like some expected, they laid out an aggressive schedule to sell their assets. Cloud Peak's debt holders will try again to sell off its mines and get its money back, all by June 26.

It's possible that all is not lost. Von Flatern is hopeful nearby major coal companies could take over the mines so the state isn't stuck with reclamation costs.

"We're hoping it's a Peabody or a Arch Coal, which probably has the bonding ability, now they've shown profits for the last three quarters, the bonding ability to take over the reclamation and Cloud Peak," Von Flatern said.

Despite Cloud Peak trying and failing to sell before, Debtwire credit analyst Michael Coleman said it could have more luck this time.

"There are certain liabilities that would be wiped away in the bankruptcy process, which would make it more advantageous now for someone like Arch or Peabody's to buy them," Coleman said.

He said that would be the best case scenario for Cloud Peak, much like Von Flatern's hope, if a big company comes in and scoops them up.

"Certain synergies may be produced which may make the mines more economical in that respect," Coleman said.

Questions remain on how employment and benefits will look after the auction next month. Senator Von Flatern said he's holding his breath.

"Hopefully they'll keep the jobs going and they'll find that no white knight that'll ride in and buy their properties and keep at least a majority of the jobs going," he said.

Potential buyers have to alert Cloud Peak of their interest as soon as June 5 with the possible auction on the June 26.