by Madalina Iacob, and Paunie Samreth
Cloud Peak has enlisted Centerview as financial advisor as the pure-play Powder River Basin (PRB) coal company is under pressure to renegotiate uneconomic take-or-pay railroad contracts amid dwindling earnings and increased regulatory pressure to cover coal mine reclamation costs, said two sources familiar with the matter.
Despite its revolver-based liquidity cushion and no immediate bond maturities until 2019, the company is under the gun to reduce capital expenditures and disadvantageous shipments at its three surface mines as coal prices continue to be challenged by low natural gas prices. The company expects to reduce its shipments this year to 60m – 65m tons from 75.1m tons in 2015, while completely curtailing its Asian exports, according to its latest presentation on 11 May.
Cloud Peak had USD 557m of liquidity at the end of 1Q16, comprising USD 79m of cash and cash equivalents and full availability under its USD 478m revolver credit. Under the revolver the company is subject to a maximum net secured leverage ratio of 4x. The company’s net leverage stood at 5.2x at the end of March based on USD 509m of total debt and USD 96.6m of TTM covenant adjusted EBITDA, according to the May presentation.
The liquidity war chest is expected to taper off this year as the coal producer is projected to generate negative USD 6m in free cash flow based on high-end 2016 EBITDA projections of USD 70m, USD 41m of interest expense, roughly USD 35m in capex, said the third source familiar. By comparison, the company reported USD 129m of adjusted EBITDA in 2015 and USD 210m in 2014.
However, uneconomic take-or-pay contracts with railroads coupled with self-bonding obligations are expected to exacerbate the cash burn to roughly USD 126m, said the sources. Self-bonding obligations are expected to amount to USD 90m this year while the company is estimated to pay USD 30m to cover the take-or-pay obligations.
“The take-or-pay [contracts] with the railroad companies are hurting them since operations are struggling. […] In 2016 only a portion of their coal will be contracted and given current market conditions they are probably unlikely to sell any uncommitted coal,” said the third source familiar.
To ease the financial strain, management could be prompted to explore delevering options, including a distressed exchange that capitalizes on low trading levels, the sources said. The issuer’s USD 300m 8.5% senior unsecured notes due 2019 last traded at 45 on 29 June while its USD 200m 6.375% senior unsecured notes due 2024 traded at 33.25 on 28 June, according to MarketAxess.
On the operational side, some investors expect coal extraction costs or the strip ratio to increase as PRB coal miners have to chase coal beds deeper to the west. In focus are the company’s Antelope and Cordero Rojo mines in Wyoming, a state with over USD 2bn reclamation liabilities stemming from recent bankruptcies in the coal sector. Senators are currently questioning the viability of the state’s self-bonding program wary that taxpayers would end up eventually covering the self-bonding liabilities as bankruptcies in the coal sector mount.
So far, Cloud Peak has received approval from the the Wyoming Department of Environmental Quality to renew its USD 90m reclamation self-bonds for the Antelope Mine in 1Q16, and USD 100m for the Cordero Rojo Mine in 2Q16. The company is also in discussions with surety bond providers to increase its bonding capacity and by offering roughly 15% collateral in the form of letters of credit under its revolving credit facility. The coal producers had 427m outstanding under the surety bonds at the end of 1Q16.
Calls to Cloud Peak and Centerview were not returned.
CLICK HERE to view Debtwire’s Distressed Tearsheet on Cloud Peak Energy.