Proposed Navajo acquisition of bankrupt U.S. Coal company is an ill-timed gamble
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Key Findings
Navajo Transitional Energy Company has agreed to buy Cloud Peak Energy, a bankrupt coal company that owns three mines in the Powder River Basin of Montana and Wyoming. The deal was approved by the bankruptcy court Aug. 19, but has not yet closed.
The move would entail a high-risk acquisition of assets concentrated in only one region and one type of coal—thermal coal—both of which have been under severe and increasing financial pressure for some time, the result of a fading customer base that has led to intense competition, extremely low margins and numerous bankruptcies as the U.S. coal industry declines across the board.
Executive Summary
The pending acquisition by Navajo Transitional Energy Company (NTEC) of Cloud Peak Energy’s core assets appears every bit as ill-advised as NTEC’s aborted attempt earlier this year to buy the failing Navajo Generating Station and its coal. source, the Kayenta Mine.
NTEC is aggressively pressing ahead nonetheless, acting essentially as an independent company working at arm’s length from the tribal government, even though NTEC is wholly owned by the Navajo Nation.
The agreement NTEC has put forth on Cloud Peak is fraught with financial risk, as NTEC would be buying into a sector in steep decline and a company badly battered by market forces. Cloud Peak is bankrupt because competition from larger producers is fierce and utilities are shifting rapidly away from coal-fired electricity generation, causing both its existing and potential customer base to shrivel drastically in recent years.
Cloud Peak’s mines attracted only three bidders, at least one of which appears to be clearly unqualified. So NTEC is seeking to buy a company that few companies or investors want. If it were to complete the transaction, it would be putting hundreds of millions of tribal dollars at risk.
While NTEC says the deal would push its annual revenues past $1 billion, that figure is suspect. 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 revenue fell by $500 million over the past four years.
The proposed deal seems at its core to be the product of an outdated mindset among NTEC executives whose energy market expertise is increasingly limited, dictated as it is mainly by coal. The pending purchase of Cloud Peak may present an opportunity to reexamine the suitability of NTEC’s current leadership.
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Press release: IEEFA: Proposed Navajo acquisition of bankrupt U.S. coal company is an ill-timed gamble
