By Greg Johnson

July 1, 2019 - A group of shareholders who represent about 24% of Cloud Peak Energy Corp.’s common stockholders is accusing the company of intentionally undervaluing its assets and striking back-door deals with creditors to manipulate its Chapter 11 bankruptcy process.

“To put it bluntly, shareholders believe there is a high probability of improprieties between certain creditors and the debtor (Cloud Peak) in this case,” says a letter to the bankruptcy court submitted by Massachusetts resident William Crawford on behalf of a group of 99 shareholders. “There is no reasonable way to expect creditors to sufficiently represent shareholder interests.”

The shareholders, who have no seniority claims and their shares are basically worth nothing, allege company officials conspired with major bond holders of Cloud Peak debt to exploit the bankruptcy reorganization process. They want Delaware federal judge Kevin Gross to appoint a committee of equity shareholders to have a seat at the table to look out for their interests.

The letter makes some strong allegations, which was intentional, said Crawford when contacted by the News Record.

“We would gladly use the word ‘colluded,’” he said of what shareholders allege is happening with Cloud Peak Energy and its creditors. “We think it definitely has shown through in their own filings that they have engaged in a very long course of negotiations with the creditors which should’ve been at least filed as material events with the SEC.”

The letter says that through information gleaned from company Securities and Exchange Commission and court filings, Cloud Peak puts its assets at $928.7 million and its liabilities as $635 million. That makes other attempts to “write down” the value of the company suspect, including taking a more than $700 million loss in 2018.

It specifically says Cloud Peak intentionally valued its mining rights to its dormant Big Metal and Young’s Creek mines as having zero value instead of counting the value of the coal attached to the mines.

“The debtor and its officers have engaged in a pattern of behavior that leave shareholders concerned over the debtor intentionally devaluing the company and its stock price,” according to the letter.

Asked to respond to the shareholders’ letter filed Wednesday with the bankruptcy court, Cloud Peak Energy Corp. declined to comment.

Big Claims, Little Substance

On the surface, the allegations against Cloud Peak Energy and its executive officers are damning, but the letter to the court offers nothing to back up the claims, said Rob Godby, director of the Center for Energy, Economics and Public Policy at the University of Wyoming.

“My first reaction to the letter when I read it is, ‘Wow, these are inflammatory accusations, but they provide absolutely no evidence,’” he said.

While every claim in the letter may be true, it doesn’t mean much to a court without proof, he said.

“It’s all pure speculation, and there are several reasons they might do this,” Godby said. “First, there have been (similar) allegations in the previous (coal company) bankruptcies. You have shareholders here who know they have zero value. They’re putting this in front of the judge and asking for him to hear this.”

He also said that while the claim about inflating the value of Cloud Peak’s assets can be interpreted as one the shareholders have from a certain point of view, their argument doesn’t take into account the market conditions for valuing Big Metal and Young’s Creek.

“The argument that the company has (that much) value ignores current market conditions,” Godby said.

While on paper the coal attached to those mines may be worth something, in reality it’s only worth what someone is willing to pay for it, he said. In this case, it appears there isn’t much interest from anyone in buying those assets.

Because the shareholders stand to recover little, if any, money through the Chapter 11 process, the letter to the court is “a relatively low-cost strategy, and if you possibly do get the ear of the judge you may be able to use that to leverage something.”

That’s what the shareholders want, Crawford said.

“We hope this will get noticed by the SEC. That’s our hope,” he said. “The best option here would be to extend the auction process and bidding process to try and realize a fair market value (for the company).”

Whether the court will respond to or act on the letter from the shareholders group is anyone’s guess, Godby said, but it may be unlikely unless there’s other evidence to prove the claims made in the letter.

He said that at this point, “They may be yelling fire, but the question is, is there really a fire?”