Cloud Peak Energy filed for bankruptcy May 10, 2019, with a Financial Health Rating of 22, High Risk. Cloud Peak Energy is a coal producing and mining company. They suffered due to low natural gas prices and subsidized renewable energy, which depressed coal demands. Through 2018, Could Peak Energy found themselves in a defenseless position. Not only were they approximately $400M in debt with $634M in liabilities, they had nearly no available cash and sales were at an all-time low. After two months of extending debt payments, they voluntarily filed for Chapter 11 bankruptcy.
FHR at default; 22, High Risk
What the ratings tell you.
Cloud Peak Energy’s FHR dropped 20 points from 2017 – 2018 and continued to decline, signaling the need for risk mitigation. Their FHR is at the bottom of High Risk with an Estimated Probability of Default of 8.49%.
With a Very Poor Core Health Score (CHS) of 16 and High Risk FHR of 22, Cloud Peak Energy is placed in Quadrant C. These companies are riskiest as both medium-term efficiency and short-term resiliency outlooks are negative. Most of the Peer Group, Energy Miscellaneous, is in Quadrant A, which signals positive outlooks.
Where our analysis tells the story.
The performance scores outline the driving factors in our CHS and FHR and show Cloud Peak Energy was not performing in an efficient manner.
Our analysis showed consistently low scores in Operating Profitability and Net Profitability, which are key drivers in Core Health. As shown below in the Peer Benchmark Report, Cloud Peak Energy’s Operating Profit had decreased from $67M in 2016 to -$750M in 2019. Operating profit is used to over non-operating expenses, such as debt and interest. Since Cloud Peak Energy was operating at a loss, they had to dip into capital which decreased their assets and increased their debt. Debt increased so much that in 2018, leverage turned from adequate to weak and became a priority item of concern on the Financial Dialogue.
The Financial Dialogue also highlights Interest Coverage (Operating Profit/ Interest Expense) as a priority item of concern. The extended discussion mentions being able to cover Interest Expense with Operating Profit at least 1x is acceptable. The Sector can do so 2.75x, where Cloud Peak Energy had negative coverage at -19x.