Former IEEFA Transition Policy Analyst Karl Cates has been an editor for Bloomberg LP, an editor for the New York Times, and a consultant to the Treasury Department-sanctioned community development financial institution (CDFI) industry.
August 27, 2019 (The Hill) ‒ A push by a Navajo Nation-owned company to purchase the Montana and Wyoming assets of bankrupt Cloud Peak Energy comes at the worst possible time to buy into the U.S. coal industry — a sector that is sinking fast.
Several holes in logic within the proposal by the Navajo Transitional Energy Company (NTEC) to buy Cloud Peak need to be addressed.
THE CENTRAL PROBLEM IS THE MINDSET DRIVING THE PROPOSAL. The management team at NTEC — made up of three non-Navajo executives who come from previous careers in U.S. coal mining — appears trapped in an outdated fixation on coal.
NTEC’s leadership appears fixated on coal
The NTEC executive team would have the Navajo Nation, through NTEC, become owners of three bankrupt coal mines located almost 900 miles away. The plan, which was recently approved by a U.S. bankruptcy court but has not been finalized, is an ill-timed gamble, to say the least.
It’s also reminiscent of a campaign by NTEC to buy the failing coal-fired Navajo Generating Station in Arizona and its fuel-source Kayenta Mine. That campaign failed because Navajo Nation leaders refused demands that the tribal government backstop NTEC and acquire reclamation liabilities. Navajo Generating Station will close in December and Kayenta Mine is ceasing operations this month.
This deal — for Navajo acquisition of Cloud Peak assets — can and should draw similar skepticism from tribal leaders.
While NTEC’s position appears to be that it is independent of tribal oversight and can do whatever it wants, the proposed acquisition of Cloud Peak’s assets clearly contradicts tribal policy announced in April naming “clean renewable energy development as the Navajo Nation’s top energy priority.”
BEYOND POLICY QUESTIONS, NTEC’S PLAN COMES WITH SEVERAL ADDITIONAL RED FLAGS.
Cloud Peak’s mines attracted only three bidders, at least one of which appears to be unqualified and none of which are stable major coal industry players. In other words, NTEC is seeking to buy a company that almost nobody else wants.
If NTEC were to close the deal, it would be putting hundreds of millions of tribal dollars at risk through massive reclamation liabilities.
NTEC would be buying a company that is being battered by market forces — competition from larger producers is fierce and Cloud Peak’s customer base is shrinking because utilities are moving to cheaper and cleaner electricity-generation sources.
Revenue forecasts are based on past production rather than likely future levels
NTEC’s revenue forecasts around the proposed deal are suspect. While NTEC says the deal would push its annual revenues past $1 billion, that figure seems wildly optimistic based on the current financial condition of the mines and projected future output for the mines in question.
The company bases its projections on past Cloud Peak production and revenues rather than on likely future ones, and ignores the fact that Cloud Peak’s revenues have fallen off a cliff over the past four years.
THERE IS NOT MUCH OF A BUSINESS CASE for how NTEC would gain by buying, at any price, a distant and bankrupt coal company facing many difficulties ahead.
A more forward-looking approach would have the company invest in the ongoing energy-sector shift that favors other, more sustainable forms of power generation — wind and solar, for instance, both of which are rapidly gaining market share regionally and nationally.
Karl Cates is a research editor for the Institute for Energy Economics and Financial Analysis, which published a report on the Navajo Transitional Energy Company proposal.
This commentary first appeared in The Hill: Navajo Nation’s very risky bet on coal