What To Expect With Approaching Cloud Peak Energy Auction

Jul 24, 2019

Cloud Peak Energy's Antelope Mine customers
Credit IEEFA

Tomorrow, July 25, is the last day Cloud Peak Energy will accept new bids to purchase its assets, which include Cordero Rojo and Antelope mines. The coal company filed for bankruptcy in May after cash difficulties that stem back to 2009.

Cloud Peak has struggled to find interested parties to buy its assets since it began looking. Last November, the company used investment bank J.P. Morgan to find potential buyers. It found 21, but ended with only one proposal which did not work out.

After a Chapter 11 filing in May, a bid deadline was set for June 21 with an auction a few days after. The company has since delayed twice with an auction now set for August 1.

After the first delay, on June 18, Eric Snyder, a bankruptcy expert and partner at Wilk Auslander law firm, said the delay could be related to an executive bonus plan.

"It keeps them through the sale, they have a financial upside depending on how the sale does," Snyder said.

The delays could also be related to objections from the U.S. Trustee, shareholders, and reclamation bondholders. A trustee is someone assigned to the case to supervise and ensure bankruptcy laws are being followed. Delays could also be related to a lack of interest in the company's assets.

Arch Coal and Peabody Energy might be obvious choices to pick up the mines. It's possible, but that prospect dimmed last month as the companies' combined forces in hopes of saving around $800 million and competing better with natural gas. The companies have already been scaled back supply, and the deal, if approved, would likely mean even less production - not promising for the addition of another coal mine.

In June, Taylor Kuykendall, a coal reporter for S & P Global Market Intelligence, said the said this consolidation could make the sale process even tougher on Cloud Peak now.

"If you were thinking about buying Cloud Peak's mines, and then last week you saw in the news that two of your potential future competitors just merged into a huge competitor... I don't think that that bodes well for anybody that might have been interested," Kuykendall said.

Antelope vs. Cordero Rojo
Rob Godby, University of Wyoming energy economist, said, of the company's assets, Antelope mine is the most attractive. He pointed to its lower mining costs, higher quality coal, and more diversified contracts.

"Antelope is bigger. It really comes down to that," Godby said.

He said Cordero Rojo has also been more exposed to its coal plant customers retiring. While Cordero served 19 customers in 2018, Antelope served 51.

"It's like watching an hour glass, the sand is moving out, but its slow," Godby said, "versus with Cordero, they had far fewer [customers] and relied on much larger plants. When those plants go, it takes a good chunk of the customer base with it."

One of Cordero Rojo's major customers was CPS Energy's J.T. Deely plant which stopped generating energy on December 31, 2018.

Higher quality coal is also a part of the discussion. Antelope mines a higher heat quality resource than Cordero Rojo. Kuykendall with S & P Global Market Intelligence said in an interview this month that matters.

"With overall demand down, I think most people are just you see more people leaning towards the higher quality end of the product."

An Untraditional Auction
The structure of Cloud Peak's auction is also unclear. Court filings leave room for assets to be sold piecemeal or as a whole. Plus, debtors still have the ability to refuse any and all bids given they have yet to choose a stalking horse bidder.

"[Debtors] could claim they're all too low. That may be one of the reasons not having a stalking horse says something too. [They] couldn't find anyone that's making a bid they effectively couldn't refuse," Godby explained.

Secured lenders also negotiated a credit bid for themselves. That means it could assume ownership of the company if the auction doesn't turn out how it likes.

Impacts

Lien priority list, not including Campbell County
Credit Prime Clerk

Currently, Cloud Peak Energy has $8.3 million in outstanding tax payments to Campbell County. An environmental advocate said the county stands to lose closer to $30 million considering the tax revenue from all 2019 production.

Josh Macey, visiting assistant professor of law at Cornell University , said it will be difficult for the company to see that money, though not impossible. The county tried unsuccessfully to stop its position from declining in debt collection.

"That's normal but it will definitely lower their chance of getting a payout," said Macey.

A payout will be based on how much Cloud Peak pulls in from its auction. But it sits somewhere below the top six entities currently listed to get its debt paid back in full before anyone else.

With few questions answered, Cloud Peak's auction is set for August 1 at 11 a.m. EST in New York City. A hearing approving the sale to the winning bidder will take place before the court on August 7 at 2 p.m. EST.