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How Long Can Cloud Peak Energy’s Balance Sheet Stay Clean?

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Cloud Peak Energy’s leverage

According to latest company filings, Cloud Peak Energy (CLD) has ~$701 million in book value of debt. This debt includes senior notes worth ~$409 million, consisting of 12.0% second-lien senior notes worth $353.8 million due in 2021 and 6.4% senior notes worth $55 million due in 2024.

In fiscal 2016, CLD improved its financial position by exiting self-bonds, completing exchange offers on its senior notes, and renegotiating throughput contracts with Westshore Terminals and BNSF Railway.

CLD’s leverage, or average net debt divided by EBITDA (earnings before interest, tax, depreciation, and amortization), has been consistently on the rise since 2011. As of December 31, 2016, CLD’s leverage stood at 4.15x, compared with 3.56x at the end of 2015.

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CLD’s interest expenses

In 2Q17, Cloud Peak’s interest expenses were $9.9 million, compared with $11.3 million in 2Q16 and $12.9 million in 1Q17. Cloud Peak has a net interest expense guidance of ~$40 million for fiscal 2017.

CLD’s interest expenses have remained consistent, with the exception of 2014. Its interest expenses peaked in 2014 due to the realization of expenses associated with the early retirement of debt and refinancing transactions. The company’s interest expenses came in at $47.6 million and $47.4 million in 2015 and 2016, respectively.

As of June 30, 2017, CLD had an interest coverage ratio (which refers to the number of times interest expenses can be paid with a company’s current earnings) of 0.41x for 2Q17, compared with major coal (KOL) peers CNX Coal Resources’ (CNXC), whose ratio is 5.79x, Alliance Resource Partners (ARLP), whose ratio is 7.42x, and CONSOL Energy (CNX), whose ratio is 6.55x.

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