Bankruptcy hurts, but it has its advantages. Cloud Peak Energy was one of the few larger coal companies in Wyoming to avoid filing for Ch. 11 when the market was rocked by a “perfect storm” two years ago. It was the lucky one, or the responsible one, depending on who you asked, and has maintained a good reputation as a smart operator in the Powder River Basin.
But in the new normal that is Wyoming coal post-downturn, Cloud Peak is facing some debt challenges that larger firms have simply put behind them.
The company, which operates the Cordero Rojo and Antelope mines, says it’s well placed to survive as demand for coal declines and cheap natural gas and renewable generation force coal-fired plants into early retirement. Others are more skeptical; the smart business decision of years’ past may put the firm at a disadvantage when it needs it least.
“That’s the first thing to remember about Cloud Peak, (that) they were careful,” said Clark Williams-Derry, a financial analyst for the Sightline Institute, a Seattle-based think tank advocating for a move to renewable fuels. “The problem is that the other companies eventually were able to write off that debt.”
The coal sector huddled around Gillette is stronger than it could’ve hoped to be 18 months ago. Companies are adjusting to a world where mines dig less coal, have fewer long-term contracts, and ultimately a smaller workforce. About 900 people lost their jobs in the downturn. About 300 came back. The industry, and the community around it, have only just begun to stabilize. Cloud Peak’s debt is a reminder that the outlook for coal is still difficult, some analysts say. Mines like Cordero Rojo and coal towns like Wright still have headwinds to weather.
Playing it safe
Alpha was the first company with mines in Wyoming to give in. Heavy with debt, the firm that operated the Belle Ayr and Eagle Butte mines in Campbell County filed for bankruptcy late summer of 2015. Arch Coal and Peabody Energy followed suit months later, laying off about 500 miners in a single day between the two companies.
Four years earlier, all three firms had jumped on the rise in metallurgical coal, a higher quality coal found in Appalachia used to make steel. They took on debt hoping to make big returns off insatiable Chinese demand.
“The whole industry was high on China and high on the idea that China was going to be this major boon,” said Williams-Derry of Sightline.
But it was a bubble, and it burst, he said.
The last two years have been a period of restructuring for Alpha, Peabody and Arch. Alpha moved out of Wyoming, unloading its PRB mines on a newly formed company, Contura Energy
Cloud Peak made it through the downturn without laying off any of its miners, and it has cut operations costs like all the mines. But it didn’t get that key benefit of bankruptcy: debt-shedding.
The market has improved since the downturn; Wyoming coal can compete at current gas prices. And the advantage of operating tight and lean with a clean balance sheet has, at least in part, benefited the companies that have emerged from bankruptcy.
Peabody has reported nearly $500 million in earnings.
Cloud Peak, at the same time, is at a net loss of $24.7 million so far this year.
Surviving in the new normal for coal is going to be about tight operating and good assets, analysts say.
One of Cloud Peak’s advantages is that they have a record of sound management, said Vania Dimova, a credit analyst with S&P Global.
The firm has given Cloud Peak a B-minus, grade, a ranking that estimates the stability of the company over the short term.
“They will be able to cover their obligations in the next 12 months,” Dimova said. “No major drops or upsides, definitely no upsides.”
One modest offset to declines for the firm is its ability to send some coal overseas, she said.
The company’s debt, however, does make them more vulnerable than some competitors who recently shed liabilities through restructuring, she said.
Williams-Derry is critical of the firm a little farther out.
Cloud Peak refinanced its debt last year at a high interest rate, something it will have to face in 2021, he said. With the coal market and revenue visible today, it’s hard to see the company finding cash to pay that off, he said.
It’s not a great time to be vulnerable in coal or find debt financing if Cloud Peak can’t afford to pay in four years, he said.
The company’s take
Cloud Peak argues that there is a flip side to this narrative.
The refinancing that pushed their debt out to 2021 helped them shave off $150 million of their total debt. While post-bankrupt companies benefited from cleaning their balance sheets, Cloud Peak’s competitors have the same cost-structure they did previously. That’s where Cloud Peak finds an advantage, said John Stranak, Vice President of Finance and Treasurer, in a statement to the Star-Tribune.
“Cloud Peak Energy remains one of the lowest cost providers across the PRB due to the quality of our resources and workforce, maintaining one of our key advantages,” he said.
During the downturn, Cloud Peak made some choices that helped them become leaner, he said.
The company cut its take-or-pay contracts, saving nearly $500 million dollars.
“While we see a new normal for the PRB with lower production from the highs of 2011, our strong operations allow Cloud Peak Energy to compete moving forward,” Stranak said.
All the mines in Wyoming are dealing with power plant closures and thin margins today. This is coal’s new normal, and the long-term outlook includes more challenges not less. To Derry of Sightline, the competition within the PRB, and for Cloud Peak, will only get more intense.
With fewer customers that buy Wyoming coal, every mine in the state, and all the miners that work in them, are facing uncertainties.