2019 will be a pivotal year for Cloud Peak Energy

GILLETTE — Cloud Peak Energy Corp.’s New Year’s resolution list for 2019 is short — survive.

Resolutions can run the gambit of clichés from advancing one’s career to losing weight to finally popping the question to a significant partner. It’s the same in business: expand, open new markets, develop new products and technologies, or all at once.

On the financial bottom line, they all have one common denominator — make more money.

That would be a good start for the Gillette-based thermal coal producer coming off a rocky 2018 that has the company on the brink of bankruptcy or possibly even insolvency.

“It’s been a horrible year operationally and a really hard year for the coal markets in general,” said Robert Godby, director of the Department of Economics and Finance at the University of Wyoming.

In the last 10 weeks, Cloud Peak has announced it’s exploring its financial “strategic alternatives,” including selling the company, to deal with a bottom line that’s bled nearly $215 million since 2015. Add a $400 million anvil of debt dangling overhead that’s coming due in the next few years and the only Powder River Basin-only coal producer was on shaky ground before a disastrous 2018 put Cloud Peak on the canvas for a possible 10-count.

“It’s definitely going to be a pivotal year for Cloud Peak Energy,” Godby said. “Then, if they get through this one, next year is also going to be a pivotal year. It’s going to be chewing the fingernails right up until the debt comes due.”

Mother nature’s war on coal

Many in the industry dubbed President Barack Obama’s administration as an eight-year “war on coal,” but Cloud Peak could consider 2018 as Mother Nature picking up where the Obama administration left off.

The first hit came early in the year when a group of nesting golden eagles delayed a crucial dragline move at the company’s flagship Antelope mine south of Wright. At 28.5 million tons of coal, Antelope alone accounted for nearly half of the 57.8 million tons Cloud Peak produced as a company in 2017.

Instead of taking four weeks, the dragline move took nine weeks, putting the mine behind schedule to meet its production and contract goals.

Then an unusually rainy spring caused spoil failure at the Antelope mine, putting it behind even more.

Between the eagles and mine repair, Antelope produced 23.1 million tons of coal last year, a 19 percent drop from 2017. Add a 23 percent decline in production at Cordero Rojo, its other Wyoming PRB mine, and profit margins that continue to narrow due to market conditions, many analysts are speculating if it’s game over for Cloud Peak.

“They’ve got a little bit of time to maneuver,” Godby said about the company’s outlook. “There’s a possibility they can do something with their creditors to gain some time. The way you might avoid bankruptcy is to try and arrange some kind of debt-equity swap. If that’s the case, then the mines keep running.

“They also basically need the market to turn around. They’re not generating income like they thought they would. The bottom line is they’ve done everything they can to consolidate their earnings.”

Those cost-saving moves have included terminating retirement health benefits and closing the Gillette administrative office and moving those operations to the Cordero Rojo mine site, Also, both Cordero Rojo and Antelope have been consolidated to run as a single operation.

Since spinning off from Rio Tinto Energy America in 2009, Cloud Peak’s financials read like a roller coaster: a steady, pleasant ride up a steep slope, then a scary plunge down.

From 2010, the company’s first full year as Cloud Peak, through 2014, it made a net profit of $611.7 million.

Then came a crash in 2015 that devastated thermal coal and pushed three of the Powder River Basin’s largest producers — Alpha Natural Resources, Arch Coal and Peabody Energy — into bankruptcy.

From 2015 through the first three quarters of 2018, Cloud Peak has lost $213.7 million, including a huge $204.5 million hit in 2015 alone. It’s $24 million in the red through the first nine months of last year.

Along with the company’s financial filings, including one Jan. 14 that moves to guard against any potential hostile takeover bids, there’s a lot to concern a community that relies on coal to drive its economy and Cloud Peak’s 1,224 employees.

Beyond the bottom line

Two years ago, the Boys & Girls Club of Campbell County was at a crossroads. Having installed a new board of directors and hiring a new director, the club was beginning to rebuild itself into a stable, and eventually thriving, organization.

Already on shaky ground financially, it was the worst time for the club’s boiler to conk out. That’s when the club reached out to Cloud Peak Energy, which came through with a $20,000 donation that not only put the youth service group back in operation, it showed others in the business community that the Boys & Girls Club is worthwhile.

“They took a chance on us and we owe Cloud Peak a lot because of that,” said Noamie Niemitalo, the club’s board president. “If they hadn’t have taken the risk on us … we may not be still going and have turned it around.”

That $20,000 was hardly a one-time donation for the company. Cloud Peak paid for remodeling the club’s gymnasium and employees volunteered their time to paint the outside of the building, the former Lakeway Elementary School.

While Cloud Peak Energy generates headlines through its place as a major Powder River Basin coal producer, it’s also a major contributor to dozens of local nonprofits. It’s an impact that goes well beyond the more than 950 jobs it provides at its two Campbell County mines.

Cloud Peak gave $20,000 to the Donkey Creek festival to build a large concrete pad for the festival’s permanent stage. At the annual Charity Chili Cook-off, it regularly has teams entered in every category of the competition. And once a month, Cloud Peak feeds the patrons at the Campbell County Senior Center.

“That’s something they’ve been doing since the company used to be Rio Tinto,” said Ann Rossi, the senior center’s director. “They’ve been a huge support to the center, and not only the center but to the community.”

Cloud Peak has regularly bought animals raised by 4-H Club youth at the Campbell County Fair, then donated the animals to the Senior Center.

“When you ask, they find a way to make it happen,” Rossi said. “It makes you want to support them in return. They’ve gone through some tough times and you have to respect that they’re still trying to reach out and support the community even through all the challenges they have.”

If Cloud Peak were to have to shut down or were sold, “there would be a big void in our community,” Rossi said.

Cloud Peak denied a request for an interview for this story, but there were plenty of people willing to speak about its favorable influence in the community.

Campbell County Commission Chairman Rusty Bell agrees, saying Cloud Peak means more to the county than just the hundreds of jobs it provides.

“These are good people with good employment and these are high-paying jobs,” he said. “But they also support Gillette College and are just a good partner for everybody. They are just a really good company … and really care about people.

“We hope and pray they have a better year and they see some light at the end of the tunnel and things pick back up.”

The thought of Campbell County without Cloud Peak Energy is something Gillette Mayor Louise Carter-King said she’s just not ready to consider.

“I don’t feel like going there,” she said. “I just can’t imagine them shutting their doors, because it would trickle down to every facet (of life and business here). I just can’t dwell on what might happen.”

Not all gloom and doom

The inevitable demise of Cloud Peak also isn’t something a number of energy analysts are ready to admit.

Bob Burnham is the founder of Colorado-based Burnham Coal LLC and is a longtime observer of the Powder River Basin. Although the company is teetering, he’s not convinced it’s reached a tipping point.

“You can’t hide it if things are really bad,” he said, adding that they are for Cloud Peak Energy. Still, “I’m not ready to write them off just yet. They had a really bad streak of luck last year from that eagle’s nest to the rain. It’s just a bad string of luck.

“I hear through the rumor mill they think they’ve fought their way through that. Hopefully, that bad luck streak is finished.”

Asked if he can see any scenarios where Cloud Peak survives, Burnham said there are “a number of things that can happen.”

One is bankruptcy, which Burnham said may not be such a bad thing. He uses Arch, Alpha and Peabody as examples. Each were able to get rid of and regulate billions of dollars of debt and are now showing strong financials even as the market conditions continue to tighten for thermal coal.

“They can turn it around and I’m not ready to write that off, but I don’t think they can handle another year like 2018,” he said. “But,I think they can survive it and continue as a going entity.”

One of those pivotal points in 2019 will be Cloud Peak’s year-end report and earnings call for 2018, which hasn’t yet been announced. That’s where the company will give more insight into its ongoing financial struggles and outlook for the rest of the year.

After what Campbell County and the rest of Wyoming experienced a couple of years ago with the collapse of the coal market, Burnham said he can understand why Campbell County residents “would be really concerned.”

The company’s failure “would have a real bad impact on Gillette and Campbell County, and probably down into Douglas and Converse County,” he said.

How Cloud Peak survives

One thing the company and community shouldn’t do now is panic, Godby said. Cloud Peak isn’t likely to close suddenly one morning without warning.

“They have a little bit of time and there’s no need to rush it,” Godby said, adding a number of undecided elements could help the company. “Will there be a big change in the market? Could there be a coal bailout from the federal government with a Trump administration still in power? People still have hope.”

Ultimately, Cloud Peak’s future is tied to the thermal coal market, he said. With production now around 300 million tons a year in the Powder River Basin, the question becomes into how many pieces can you cut a steadily shrinking pie that’s about 33 percent smaller than a decade ago.

“That’s the big question looming over the basin — what’s going to happen to the capacity out there?” Godby said.

He used the example of a hunt on the African plains, where predators look for the weakest animal in a pack.

“The lions are circling the herd looking for the weakest to take advantage of. The expectation is Cloud Peak is currently the weak one,” he said. “Without that, they could probably hunker through the storm and hope that something turns around.”

Whether Cloud Peak Energy’s shareholders will be willing to hunker down as well is another question, Godby said. The company’s stock closed at 41 cents a share Friday and continues a streak of consecutive weeks trading below $1 going back to November. At this time last year, Cloud Peak was trading at more than $5.20 a share.

“The people who are most at risk with Cloud Peak (financially) now are the common shareholders,” he said. “If they didn’t get off the train before, it’s too late now. The market is basically pricing the company at a bankruptcy.”

Acquiring the company also can be problematic for potential buyers, he said. The most likely candidates would seem to be Arch Coal and Peabody Energy, two of the largest coal producers in the world that also operate mines adjacent to Cloud Peak’s in the PRB. But both companies are relatively fresh out of their own bankruptcies and the demand for thermal coal may not warrant the move.

“If you take over Cloud Peak right now, you have to take over their debt,” Godby said. “It’s not very likely anybody’s going to want to buy them with that given the fact you just wait a couple of years and see if those assets come on the market a lot cheaper anyway.

“It’s been a horrible year operationally and a really hard year for the coal markets in general, and then you’re a year closer to that deadline when the debt is due. Right now, it looks like with the cash (Cloud Peak) is generating, it can be really problematic.”

Around for the evolution?

As Cloud Peak Energy fights for its financial survival, Bell said he’s hopeful the company can hang on long enough to take advantage of some of the potential breakthroughs and carbon-based industries that are in the future for the Powder River Basin.

“That’s really important,” Bell said about the research to diversify the carbon industry. “Cloud Peak has been a great community member and the employees are great people in Campbell County.”

With efforts like the carbon capture and reuse research happening at the Integrated Test Center to other initiatives to develop other products and uses for the area’s abundant carbon resources, Bell said digging coal in the PRB could someday fuel much more than power plants.

He just hopes Cloud Peak can weather the storm to see those sunnier days.