Unpacking The Sale Of Cloud Peak's Mines

Aug 19, 2019

After more than nine months of searching for a buyer, Cloud Peak Energy has chosen its winning bidder. U.S. Bankruptcy Court for the District of Delaware Judge Kevin Gross approved the sale today with NTEC taking on all of Cloud Peak's assets including its Antelope and Cordero Rojo mines. 

Navajo Transitional Energy Company, LLC (NTEC) came out on top after an August 15 auction. Aspen Coal & Energy, LLC was deemed the back-up bidder with interest from Lighthouse Resources as well. 

"We have achieved an outcome that we believe supports the interests of all our stakeholders," wrote Colin Marshall, president and CEO of Cloud Peak Energy. "As we finalize this process, Cloud Peak Energy's mines continue to operate as normal and the Company remains focused on safely and efficiently meeting our customer commitments."

NTEC's winning bid includes $15.7 million in cash, a five-year commitment to royalty payments on tons of coal produced, assumption of $40 million in high-priority debt plus $20 million in post-petition payments.

Investment Banker Marc Puntus with Centerview Partners clarified NTEC is the best option to take over Cloud Peak's assets.

"I do not believe that a further continuation of the Auction would have resulted in a feasible bid that was more valuable than the Winning Bid," he said.

The sale comes nearly two months after the original auction date was set: June 26. It had been delayed several times since then.

Why Navajo Transitional Energy Company, LCC

NTEC is a coal mining corporation owned by the Navajo Nation located near Farmington, New Mexico. It employees about 350 people and operates the Navajo mine.

Centerview Partners LLC, the investment banking firm for Cloud Peak, reported NTEC was chosen, in addition to its bid, for its low credit risk, demonstration of performance, and capability to pay without third-party financing. It was also the only bidder with committed surety bonding, meaning it could handle reclamation responsibilities. The company will also assume outstanding tax liabilities and royalties.

In a statement today, NTEC pointed to the mines solid performance as a rationale for buying them. Without much debt, it hopes to refocus operations to mining and marketing fundamentals in order to achieve success. 

Clark Moseley, the CEO of NTEC, said, "with this purchase, NTEC becomes the third largest coal producer in the United States. This growth will allow NTEC to support the Navajo Nation and its members as well as other local economies throughout the West. NTEC will continue its efforts to lead conscientious energy development while striving to balance job growth and protecting the environment for future generations.”

The companies annual revenue from all four mines is project to increase to over $1 billion dollars, according to the release.

The release also pointed to the financial resources the acquisition will provide to the Navajo Nation. Andy Blumenfeld, head of market analytics for Doyle Trading Consultants, said that's needed to the closing of another mine and coal plant. According to Navajo Times, the Kayenta mine, located on the Navajo Nation in northern Arizona, provides about 20 percent of county sales tax revenue. The Navajo Generating Station is also in the process of being decommissioned.

Cloud Peak's Long Term Debt
Credit Morningstar

"They're looking for any and all new opportunities that they could invest in to replace that revenue." Blumenfeld said, pointing to Navajo ownership of the coal company, "they're facing a situation right now that they need to have an immediate investment. I think this fits the bill."

NTEC had previously sought to acquire both the Kayenta Mine and Navajo Generating Station.

Rob Godby, University of Wyoming energy economist, said these mines could be a good choice for NTEC given its expertise in mining western coal.

He imagines their line of thinking: "'Let's take the wealth that we generated in previous operations and let's invest it in other western coal.' If any western coal basin is ever going to make money again, it's probably going to be in the Wyoming [Powder River Basin]."

Seth Feaster, data analyst with Institute for Energy Economics and Financial Analysis, said Cloud Peak's coal assets are, arguably, superior to those of other recently bankrupt coal companies. It had solid production and revenue in 2018. But, he said, it's hard to imagine how sustainable business could be with the industry itself in decline.
 

"For the bondholders, [this sale] has got to be a disappointment."

"It's tough to see what the future really holds here because the future of production there is going to be cut quite a bit this year, production is probably going to be going down for the next few years," Feaster said.

With increasing competition from the Arch-Peabody merger, volatility of the export market, and declining domestic coal market, Feaster said, "to me, it's not clear what their long-term strategy is."

Cloud Peak's CEO and President Colin Marshall was pleased with the auction's result saying, "NTEC has a highly experienced management team with a strong track record as owner of the Navajo mine."

Cloud Peak has kept its mines open and operational since its bankruptcy filing on May 10. In fact, the company has increased its coal shipments according to Blumenfeld. That bodes well for NTEC who can assume the pre-existing coal contracts and customers.

A Good Deal vs. A Bad Deal

The sale of Cloud Peak Energy's assets is good and bad depending on who you ask. On the surface, Doyle Trading Consultant's Blumenfeld said it's a big deal the company is able to remain whole through the reorganization process.

"It's probably good news, I guess for not only the miners that work at the mines, but potentially for the management team that's overseeing the operations right now," Blumenfeld said.

But, Clark Williams-Derry, director of energy finance at Sightline Institute, argued bondholders are getting pennies on the dollar with this sale. Cloud Peak owes its highest priority debtors $290 million, not to mention another approximately $50 million in unsecured debt.

With well over $300 million in debt, Cloud Peak debtors are receiving $15.7 million plus $40 million in debt assumption plus royalty payments.

"For the bondholders, it's got to be a disappointment. Maybe it's just that [they] feel lucky they got anything at all," Williams-Derry said.

On the other hand, NTEC is expected to assume many other liabilities like county taxes and reclamation obligations. In Wyoming, Cloud Peak owes over $14 million in county ad valorem taxes. Its surety bonds are also valued at $395 million.

For NTEC, the price could be right. Godby said it's likely the coal company was interested prior to bankruptcy.

"It's kind of like a fire sale: you weren't interested when it was on sale when the store was open. Suddenly they have a bankruptcy sale, then flash prices even more, then, 'Huh, if we can get a really good deal on it, maybe we'll think about it,'" Godby said.

The question all have: will coal markets be strong enough for NTEC to become profitable and cash-flow positive?

"I think [it's] certainly possible," Blumenfeld said.

A Tough Environment

Location of the Four Corners Power Plant and associated facilities in New Mexico
Credit OSMRE

Cloud Peak's auction to a company interested in long-term operation of its assets stands in contrast to the recently bankrupt Blackjewel LLC. Blackjewel was not able to find a bidder other than its previous owners Contura, which does not have long-term goals for those western assets.

UW's Godby said there are a few reasons for that. First, Cloud Peak had a lot more time to build relationships with potential bidders, while providing them access to their books.

"These people have time to think about these opportunities for eight months. Blackjewel just showed up," Godby explained, adding, "a million dollar deal is not something you decide to do in a week."

He said another big difference is that Cloud Peak's mines were intact. Employees kept the mines running, customers kept buying their coal, and vendors kept supplying services. With Blackjewel, he said things have been less organized. Workers were indefinitely furloughed, some customers left or threatened to leave, and vendor's debts fell to the wayside.

Godby said all that made Blackjewel a less attractive target.

He imagines a potential buyer's perspective: "'What bridges were burned and how hard am I going to have to work to rebuild the relationships to conduct a profitable business?' Cloud Peak has been the opposite. That's what the DIP [debtor in possesion] financing was. They could still employ their employees and maintain their critical vendors."

Next Steps

Cloud Peak's 1,250 employees are expected to continue on as normal. Doyle Trading Consultant's Andy Blumenfeld said there is likely an evaluation of who in management will stay or go. He said he expects most of management to stay on, though.

"This is completely different from what they're doing down in New Mexico on a scale wise. This is much larger, a bigger workforce, and they already have their hands full in New Mexico," Blumenfeld said.

Common stock shareholders have long fought for a seat at the table in Cloud Peak's bankruptcy. Both Blumenfeld and Sightline's Williams-Derry said it's unlikely NTEC's bid price will allow shareholders to get paid back. Williams-Derry says the price point will likely only pay off super-priority expenses, like legal costs and DIP funding, and high-priority bondholders.

While there was court approval of the transaction, the deal isn't expected to be closed until October of this year.