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 March 18, 2019
The coal miner who bet everything on U.S. power markets and lost

 Eleven years ago, Cloud Peak Energy Inc. made an all-or-nothing bet its rivals were unwilling to match: that coal would remain indispensable to the U.S. power sector.

That gamble has now pushed it to the brink of bankruptcy.

The company anchored its operations on Wyoming and Montana strip mines, brimming with easy-to-access coal that it sold to electricity plants. For a time, Cloud Peak thrived, growing into the third largest U.S. miner as its competitors went bankrupt after loading up on debt. But as coal-fired power plants have continued to flicker out, Cloud Peak is running out of customers.

The story of Cloud Peak, which on Friday warned it may file for Chapter 11 within weeks, lays bare the inexorable decline of the coal industry -- and the limits of President Donald Trump's effort to save it. The fuel, once king of electric power, continues to be displaced by cleaner natural gas and renewables, even after Trump rolled back environmental rules. That leaves coal miners like Cloud Peak with few options.

"This is not a problem with a fix," said Jeremy Sussman, an analyst with Clarksons Platou Securities.

Today's coal industry is very different from when Cloud Peak formed as a spinoff from mining giant Rio Tinto Group more than a decade ago. U.S. production and consumption have both declined by more than a third, and the fuel that made up almost half of the U.S. power mix at the time is expected to supply less than 25 percent this year, according to the U.S. Energy Information Administration.

While Cloud Peak remained exclusively focused on thermal coal for power plants, rivals like Peabody Energy Corp. and Arch Coal Inc. took on debt, in part to expand production of metallurgical coal, the kind used in steelmaking.

For a while, it seemed Cloud Peak chose wisely. Peabody and Arch filed for bankruptcy in 2016, buried in debt as prices slumped. That same year, Cloud Peak reported a $21.8 million profit. Now the tables are turned.

Since emerging from Chapter 11, Peabody and Arch have kept their balance sheets healthy and are posting strong results. That's thanks in part to demand for metallurgical coal, which has doubled in price since 2016 to become a crucial source of revenue for miners. Cloud Peak, however, hasn't shared in it.

The other boom Cloud Peak has largely missed is exports, which were up 91 percent last year from 2016, according to the EIA. That's been a boon for miners in the Appalachians and the Illinois Basin. But Cloud Peak's massive strip mines on the grassy plains of the Powder River Basin of Wyoming and Montana are hundreds of miles from the ocean, with the Rocky Mountains in between.

The company does have a deal to ship coal from a terminal in Vancouver, and exported about 11 percent of its output in the third quarter. But the long haul from its mines eats into profits. And Washington, Oregon and California have all blocked efforts to ship coal from the U.S. West Coast, limiting Cloud Peak's options.

While there's little the company could do to resolve that problem, Cloud Peak should have tried to broaden its strategy by expanding into met coal, said Lucas Pipes, an analyst with B. Riley FBR Inc. When the company was in better financial shape, it could have been more proactive about looming changes in the market.

Cloud Peak didn't respond to calls and emails Friday. On Monday, the shares slumped as much as 24 percent to the lowest since November 2009.

Even help from the White House hasn't been enough to save Cloud Peak. In 2017, the Interior Department repealed an Obama-era rule that would have forced miners to pay millions more in royalties for coal extracted from federal lands.

But for Cloud Peak, that was too little, too late. On Friday, the company reported a $718 million loss for 2018, compared to a $6.6 million loss in 2017. Tons sold declined 14 percent, while the company's average cost per ton increased 13 percent.

The company's annual report includes a litany of potential pitfalls, ranging from bad weather hindering operations and environmental campaigns against coal to limited access to capital and falling prices. Cloud Peak opted to not pay a $1.8 million interest payment due Friday, according to the filing. If it decides not to make the payment by April 14 -- when a 30-day grace period expires -- Cloud Peak "may seek protection under Chapter 11."

"I don't fault them for not succeeding with U.S. West Coast terminal," Pipes said in an interview. "I fault them for not thinking out of the box."