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Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to                     

 

Commission File Number:  001-34547

 

GRAPHIC

 

Cloud Peak Energy Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

26-3088162

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

505 S. Gillette Ave., Gillette, Wyoming

 

82716

(Address of principal executive offices)

 

(Zip Code)

 

(307) 687-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

Accelerated filer o

 

 

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

 

Number of shares outstanding of Cloud Peak Energy Inc.’s common stock, as of the latest practicable date: Common stock, $0.01 par value per share, 61,171,814 shares outstanding as of October 22, 2015.

 

 

 



Table of Contents

 

CLOUD PEAK ENERGY INC.

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

Page

Item 1

Financial Statements –

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014

1

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

2

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

 

Cautionary Notice Regarding Forward-Looking Statements

37

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

Item 3

Quantitative and Qualitative Disclosures About Market Risk

62

Item 4

Controls and Procedures

63

 

 

 

PART II — OTHER INFORMATION

Item 1

Legal Proceedings

64

Item 1A

Risk Factors

64

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

65

Item 3

Defaults Upon Senior Securities

65

Item 4

Mine Safety Disclosures

65

Item 5

Other Information

65

Item 6

Exhibits

65

 

Unless the context indicates otherwise, the terms “Cloud Peak Energy,” the “Company,” “we,” “us,” and “our” refer to Cloud Peak Energy Inc. (“CPE Inc.”) and its subsidiaries.

 

i



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.       Financial Statements.

 

CLOUD PEAK ENERGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF

OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenue

 

$

301,673

 

$

342,337

 

$

863,374

 

$

982,253

 

Costs and expenses

 

 

 

 

 

 

 

 

 

Cost of product sold (exclusive of depreciation, depletion, amortization, and accretion, shown separately)

 

248,500

 

288,345

 

735,258

 

830,405

 

Depreciation and depletion

 

7,896

 

25,815

 

51,742

 

81,944

 

Amortization of port access contract rights

 

928

 

 

2,783

 

 

Accretion

 

3,070

 

3,848

 

9,960

 

12,066

 

Derivative financial instruments

 

10,235

 

(515

)

17,781

 

(16,052

)

Selling, general and administrative expenses

 

12,940

 

12,163

 

36,701

 

37,086

 

Goodwill impairment

 

 

 

33,355

 

 

Other operating costs

 

646

 

1,099

 

1,163

 

1,671

 

Total costs and expenses

 

284,215

 

330,755

 

888,743

 

947,120

 

Gain on sale of Decker Mine interest

 

 

(74,262

)

 

(74,262

)

Operating income (loss)

 

17,458

 

85,844

 

(25,369

)

109,395

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

37

 

37

 

137

 

222

 

Interest expense

 

(10,985

)

(12,701

)

(36,274

)

(64,508

)

Tax agreement benefit

 

 

58,595

 

 

58,595

 

Other, net

 

253

 

(31

)

158

 

(262

)

Total other income (expense)

 

(10,695

)

45,900

 

(35,979

)

(5,953

)

Income (loss) before income tax provision and earnings from unconsolidated affiliates

 

6,763

 

131,744

 

(61,348

)

103,442

 

Income tax benefit (expense)

 

2,205

 

(40,688

)

12,350

 

(30,709

)

Income (loss) from unconsolidated affiliates, net of tax

 

(95

)

13

 

294

 

562

 

Net income (loss)

 

8,873

 

91,069

 

(48,704

)

73,295

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service costs

 

313

 

247

 

939

 

741

 

Write-off of prior service costs related to Decker Mine pension

 

 

3,183

 

 

3,183

 

Income tax on postretirement medical plan

 

(116

)

(1,235

)

(347

)

(1,413

)

Other comprehensive income (loss)

 

197

 

2,195

 

592

 

2,511

 

Total comprehensive income (loss)

 

$

9,070

 

$

93,264

 

$

(48,112

)

$

75,806

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

1.50

 

$

(0.80

)

$

1.21

 

Diluted

 

$

0.14

 

$

1.49

 

$

(0.80

)

$

1.20

 

Weighted-average shares outstanding - basic

 

61,074

 

60,850

 

61,013

 

60,803

 

Weighted-average shares outstanding - diluted

 

61,351

 

61,133

 

61,013

 

61,197

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1



Table of Contents

 

CLOUD PEAK ENERGY INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

123,519

 

$

168,745

 

Accounts receivable

 

62,029

 

86,838

 

Due from related parties

 

4,152

 

227

 

Inventories, net

 

75,503

 

79,802

 

Deferred income taxes

 

21,670

 

21,670

 

Derivative financial instruments

 

7,258

 

17,111

 

Prepaid taxes

 

9,388

 

3

 

Other assets

 

16,668

 

9,837

 

Total current assets

 

320,187

 

384,233

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

Property, plant and equipment, net

 

1,514,762

 

1,589,138

 

Port access contract rights, net

 

50,997

 

53,780

 

Goodwill

 

2,280

 

35,634

 

Deferred income taxes

 

65,918

 

56,468

 

Other assets

 

44,540

 

31,900

 

Total assets

 

$

1,998,684

 

$

2,151,153

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

54,189

 

$

52,035

 

Royalties and production taxes

 

126,139

 

126,212

 

Accrued expenses

 

45,989

 

52,213

 

Current portion of federal coal lease obligations

 

 

63,970

 

Other liabilities

 

1,803

 

1,632

 

Total current liabilities

 

228,120

 

296,062

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

Senior notes

 

490,792

 

489,715

 

Asset retirement obligations, net of current portion

 

167,790

 

216,241

 

Accumulated postretirement medical benefit obligation, net of current portion

 

55,401

 

50,276

 

Other liabilities

 

12,370

 

11,025

 

Total liabilities

 

954,473

 

1,063,319

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock ($0.01 par value; 200,000 shares authorized; 61,647 and 61,454 shares issued and 61,172 and 61,022 outstanding at September 30, 2015 and December 31, 2014, respectively)

 

612

 

610

 

Treasury stock, at cost (475 shares and 432 shares at September 30, 2015 and December 31, 2014, respectively)

 

(6,493

)

(6,243

)

Additional paid-in capital

 

572,758

 

568,022

 

Retained earnings

 

488,041

 

536,744

 

Accumulated other comprehensive income (loss)

 

(10,707

)

(11,299

)

Total equity

 

1,044,211

 

1,087,834

 

Total liabilities and equity

 

$

1,998,684

 

$

2,151,153

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2



Table of Contents

 

CLOUD PEAK ENERGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2015

 

2014

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

(48,704

)

$

73,295

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and depletion

 

51,742

 

81,944

 

Amortization of port access contract rights

 

2,783

 

 

Accretion

 

9,960

 

12,066

 

Goodwill impairment

 

33,355

 

 

Loss (income) from unconsolidated affiliates, net of tax

 

(294

)

(562

)

Distributions of income from unconsolidated affiliates

 

 

1,250

 

Deferred income taxes

 

(10,115

)

30,715

 

Gain on sale of Decker Mine interest

 

 

(74,262

)

Tax agreement benefit

 

 

(58,595

)

Equity-based compensation expense

 

4,819

 

5,819

 

Derivative mark-to-market (gains) losses

 

17,781

 

(16,052

)

Cash received (paid) on derivative financial instrument settlements

 

(1,618

)

16,905

 

Premium payments on derivative financial instruments

 

(5,813

)

 

Non-cash interest expense related to early retirement of debt and refinancings

 

 

7,338

 

Net periodic postretirement benefit costs

 

6,072

 

5,247

 

Other

 

1,953

 

4,021

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

25,614

 

(6,459

)

Inventories, net

 

4,300

 

(3,927

)

Due to or from related parties

 

(3,925

)

137

 

Other assets

 

(10,875

)

4,173

 

Accounts payable and accrued expenses

 

(14,191

)

4,850

 

Tax agreement liability

 

 

(45,000

)

Asset retirement obligations

 

(780

)

(788

)

Net cash provided by (used in) operating activities

 

62,064

 

42,115

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(28,125

)

(14,680

)

Cash paid for capitalized interest

 

(404

)

(4,066

)

Investments in marketable securities

 

 

(8,159

)

Maturity and redemption of investments

 

 

88,845

 

Investment in port access contract rights

 

 

(37,100

)

Investment in development projects

 

(1,526

)

(3,522

)

Investment in unconsolidated affiliates

 

(5,383

)

 

Payment of restricted cash

 

(6,500

)

 

Other

 

185

 

(1,830

)

Net cash provided by (used in) investing activities

 

(41,753

)

19,488

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Principal payments on federal coal leases

 

(63,970

)

(58,958

)

Issuance of senior notes

 

 

200,000

 

Repayment of senior notes

 

 

(300,000

)

Payment of deferred financing costs

 

(342

)

(14,683

)

Other

 

(1,225

)

(305

)

Net cash provided by (used in) financing activities

 

(65,537

)

(173,946

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(45,226

)

(112,343

)

Cash and cash equivalents at beginning of period

 

168,745

 

231,633

 

Cash and cash equivalents at end of period

 

$

123,519

 

$

119,290

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

Interest paid

 

$

32,827

 

$

37,017

 

Income taxes paid (refunded)

 

$

10,123

 

$

(5,798

)

Supplemental non-cash investing and financing activities:

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

6,401

 

$

1,816

 

Assets acquired under capital leases

 

$

 

$

1,209

 

Port access contract rights acquired in sale of Decker Mine interest

 

$

 

$

5,000

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Organization and Business

 

We are one of the largest producers of coal in the United States of America (“U.S.”) and the Powder River Basin (“PRB”), based on our 2014 coal sales.  We operate some of the safest mines in the coal industry.  According to the most current Mine Safety and Health Administration (“MSHA”) data, we have one of the lowest employee all injury incident rates among the largest U.S. coal producing companies.

 

We currently operate solely in the PRB, the lowest cost region of the major coal producing regions in the U.S., where we operate three 100% owned surface coal mines, the Antelope Mine, the Cordero Rojo Mine, and the Spring Creek Mine.

 

Our Antelope Mine and Cordero Rojo Mine are located in Wyoming and our Spring Creek Mine is located in Montana.  Our mines produce subbituminous thermal coal with low sulfur content, and we sell our coal primarily to domestic and foreign electric utilities.  We do not produce any metallurgical coal.  Thermal coal is primarily consumed by electric utilities and industrial consumers as fuel for electricity generation and steam output.  In 2014, the coal we produced generated approximately 4% of the electricity produced in the U.S.

 

On August 24, 2015, we entered into a surface rights agreement that provides us access to significant additional coal contained within a federal coal lease controlled by the Cordero Rojo Mine.  The agreement involved a land exchange and production payments from any future sales of the underlying coal, including certain recoupable advance production payments.

 

We also have two development projects, the Youngs Creek project and the Crow project.  The Youngs Creek project is a permitted but undeveloped surface mine project in the Northern PRB region located 13 miles north of Sheridan, Wyoming, contiguous with the Wyoming-Montana state line.  The Youngs Creek project is approximately seven miles south of our Spring Creek Mine and seven miles from the mainline railroad.  We have not been able to classify the Youngs Creek project mineral rights as proven and probable reserves as they remain subject to further exploration and evaluation based on market conditions.  We also have an option to lease agreement and a corresponding exploration agreement with the Crow Tribe of Indians (the “Crow project”).  The Crow project is located on the Crow Indian Reservation in southeast Montana and is near the Youngs Creek project.  We are in the process of evaluating development options for the Youngs Creek project and the Crow project and believe that their proximity to the Spring Creek Mine represents an opportunity to optimize our mine developments in the Northern PRB.  For purposes of this report, the term “Northern PRB” refers to the area within the PRB that lies within Montana and the northern part of Sheridan County, Wyoming.

 

We continue to manage our sales of PRB coal and delivery services business to Asian export customers.  In 2014, our logistics business was the largest U.S. exporter of thermal coal into South Korea.  Exports through the Westshore Terminals Limited Partnership port (“Westshore”) are currently forecast to be approximately 4.0 million tons for 2015.  We are contracted to ship approximately 4.3 million tons at Westshore for 2015.  This reflects our previously announced reduction of export shipments by approximately 1.9 million tons as compared to the originally contracted amount.  This reduction is part of our ongoing efforts to address the impact of low seaborne thermal coal prices for international coal sales and to mitigate our associated losses and take-or-pay exposure in our logistics business.  In addition, we are currently in discussions with our rail and port partners and expect to reduce our contracted export volumes in 2016 and beyond if weak pricing for seaborne thermal coal persists.

 

In addition to our committed capacity at Westshore, we hold option contracts to potentially increase our future export capacity through proposed Pacific Northwest export terminals.  We have a throughput option agreement with SSA Marine, which provides us with an option for up to 17.6 million tons of capacity per year through the planned dry bulk cargo Gateway Pacific Terminal (“GPT”) at Cherry Point in Washington State.

 

On August 13, 2015, we announced that we and the Crow Tribe are joining SSA Marine as 49% partners in GPT.  Under the new ownership structure, SSA Marine remains the majority owner, retaining 51% of the equity. The Crow Tribe has an option to secure up to 5%, with a corresponding reduction in our ownership.  For the 49% ownership interest, we paid $2 million upon signing and will pay all future permitting expenses up to $30 million, which we anticipate will cover such

 

4



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

expenses through 2019.  Thereafter, the owners will share any permitting expenses in excess of $30 million in proportion with their ownership interests.  As of September 30, 2015, we have paid $5.4 million toward permitting expenses as a partner in GPT.  We have the right to exit the partnership, at our discretion at any time during the permitting phase, with no further obligation.

 

We also have a throughput option for up to 7.7 million tons per year at the proposed Millennium Bulk Terminals coal export facility in Washington State.  Our options in each of these proposed terminals are exercisable following the successful completion of the ongoing permit process, each of which is currently in the environmental impact statement phase.  The timing and outcome of these permit processes, and therefore the construction of the terminals, are uncertain.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”).  In accordance with U.S. GAAP for interim financial statements, these unaudited condensed consolidated financial statements do not include certain information and note disclosures that are normally included in annual financial statements prepared in conformity with U.S. GAAP.  The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all footnote disclosures required to be included in annual financial statements by U.S. GAAP.  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2014 and 2013, and for each of the three years ended December 31, 2014, included in our Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”).  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2015, and the results of our operations, comprehensive income for the three and nine months ended September 30, 2015 and 2014, and cash flows for the nine months ended September 30, 2015 and 2014, in conformity with U.S. GAAP.  Our results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2015.

 

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods.  Significant estimates in these condensed consolidated financial statements include: assumptions about the amount and timing of future cash flows and related discount rates used in determining asset retirement obligations (“AROs”) and in testing long-lived assets and goodwill for impairment; the fair value of derivative financial instruments; the calculation of mineral reserves; equity-based compensation expense; workers’ compensation claims; reserves for contingencies and litigation; useful lives of long-lived assets; postretirement employee benefit obligations; the recognition and measurement of income tax benefits and related deferred tax asset valuation allowances; and allowances for inventory obsolescence and net realizable value.  Actual results could differ materially from those estimates.

 

Certain amounts in prior years have been reclassified to conform to the 2015 presentation and were not material to the financial statements.  Due to the tabular presentation of rounded amounts, certain tables reflect insignificant rounding differences.

 

2.  Accounting Policies and Standards Update

 

Recently Issued Accounting Pronouncements

 

From time to time, the Financial Accounting Standards Board (“FASB”) or other standard setting bodies issue new accounting pronouncements.  Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update (“ASU”).  Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to be material to our consolidated financial statements upon adoption.

 

5



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), as amended, requiring entities to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts.  The new guidance is effective for interim and annual periods beginning after December 15, 2017, although entities may adopt one year earlier if they choose.  We are considering the impact the adoption of ASU 2014-09 may have on our results of operations, financial condition, and cash flows.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), requiring entities to reevaluate whether they should consolidate certain legal entities.  The new guidance is effective for interim and annual periods beginning after December 15, 2015.  We do not expect any impact from the adoption of this standard on our results of operations, financial condition, or cash flows at this time.

 

On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability.  The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  We elected to early adopt ASU 2015-03 during the three months ended September 30, 2015 and have applied the new guidance to the debt issuance costs related to our senior notes.  The adoption of this guidance constitutes a change in accounting principle, and requires retrospective application.  As a result of implementing this guidance, our noncurrent Other assets and Senior notes liability were reduced by $7.9 million and $8.8 million as of September 30, 2015 and December 31, 2014, respectively.  See Note 8 for a discussion related to our senior notes.  Approximately $9.0 million of debt issuance costs related to the Credit Agreement and A/R Securitization Program were not subject to ASU 2015-03 and remain in noncurrent Other assets.  See Note 11.

 

3.  Goodwill

 

The carrying amounts of our mineral properties, equipment, goodwill and port access contract rights are sensitive to declines in domestic and international coal prices.  These assets are at risk of impairment if future prices continue to decline.  The cash flow models that we use to assess impairment includes numerous assumptions such as our current estimates of forecast coal production, market outlook on forward commodity prices, operating and development costs, and discount rates.  A decrease in forward prices alone could result in an impairment of our long-lived assets.  In addition, the denial of regulatory approval could also result in an impairment of certain of these assets.

 

Goodwill, which represents the excess of the amount paid over the fair value of net assets acquired in a business combination, relates to the mines included in our Owned and Operated Mines segment.  Each mine represents a reporting unit for purposes of our goodwill assessment.  We assess the goodwill in each reporting unit for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that the goodwill might be impaired.

 

We assess each reporting unit’s goodwill for impairment by comparing the carrying amount of each reporting unit to its fair value.  We determine the fair value of each reporting unit utilizing estimated future discounted cash flows based on estimates of proven and probable reserves, coal prices, and operating and equipment costs, consistent with assumptions that we believe marketplace participants would use in their estimates of fair value.  If the carrying amount of a reporting unit exceeds its fair value, we allocate the fair value to the reporting unit’s assets and liabilities in a manner similar to a purchase business combination, to determine the implied fair value of the reporting unit’s goodwill.  If the implied fair value of goodwill is less than the related carrying amount, we record an impairment charge to reduce the carrying amount to its implied fair value.

 

We generally do not view short-term declines in thermal coal prices as an indicator of impairment; however, we do view a sustained trend of adverse coal market pricing or unfavorable changes thereto as a potential indicator of impairment.  Due to the weak domestic coal market outlook, especially as it relates to 8400 Btu coal, coupled with our recent decision to reduce annual production at the Cordero Rojo Mine to 24 million tons, we determined that there was a potential indication of impairment of the Cordero Rojo Mine’s goodwill and performed an interim goodwill impairment assessment during the second quarter of 2015.  Based on the results of that assessment, we determined that the carrying amount of the Cordero Rojo Mine exceeded its estimated fair value and that the implied fair value of the related goodwill, which related to an acquisition completed in 1997, was $0 requiring a $33.4 million impairment charge which is reflected in the nine months ended

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2015.  The remaining $2.3 million balance in goodwill relates to our other mines in the Owned and Operated Mines segment.

 

4.  Sale of Decker Mine Interest

 

On September 12, 2014, we completed the sale of our 50% non-operating interest in the Decker Mine to an affiliate of Ambre Energy North America, Inc. (“Ambre Energy”), now known as Lighthouse Resources Inc.  Under the terms of the agreement, Ambre Energy acquired our 50% interest in the Decker Mine and related assets and assumed all reclamation and other liabilities, giving Ambre Energy 100% ownership of the Decker Mine.  As a result of this agreement, we recognized a gain on sale of the Decker Mine interest of $74.3 million during the three and nine months ended September 30, 2014.  We reported the results of our 50% interest in the Decker Mine in our Corporate and Other segment.  Results of operations for the Decker Mine included in the unaudited condensed consolidated statements of operations and comprehensive income consists of the following (in thousands):

 

 

 

Three Months
Ended

 

Nine Months
Ended

 

Decker Mine

 

September 30,
2014

 

September 30,
2014

 

Revenues

 

$

6,095

 

$

15,653

 

Costs and expenses

 

5,774

 

19,475

 

Operating income (loss)

 

321

 

(3,823

)

Other income (expense)

 

(13

)

(41

)

Income (loss) before income tax provision

 

$

309

 

$

(3,863

)

 

5.  Inventories

 

Inventories, net, consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Materials and supplies

 

$

74,050

 

$

77,736

 

Less: Obsolescence allowance

 

(1,050

)

(1,102

)

Material and supplies, net

 

73,000

 

76,634

 

Coal inventory

 

2,503

 

3,168

 

Inventories, net

 

$

75,503

 

$

79,802

 

 

6.  Fair Value of Financial Instruments

 

We use a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation.  The levels of the hierarchy, as defined below, give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

 

·                  Level 1 is defined as observable inputs such as quoted prices in active markets for identical assets.  Our Level 1 assets currently include money market funds.

 

·                  Level 2 is defined as observable inputs other than Level 1 prices.  These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Our Level 2 assets and liabilities include derivative financial

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

instruments with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.

 

·                  Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.  We had no Level 3 financial instruments as of September 30, 2015 or December 31, 2014.

 

The tables below set forth, by level, our financial assets and liabilities that are recorded at fair value in the accompanying condensed consolidated balance sheets (in thousands):

 

 

 

Fair Value at September 30, 2015

 

Description

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

81,822

 

$

 

$

81,822

 

Derivative financial instruments

 

$

 

$

7,258

 

$

7,258

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

4,106

 

$

4,106

 

 

 

 

Fair Value at December 31, 2014

 

Description

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

98,789

 

$

 

$

98,789

 

Derivative financial instruments

 

$

 

$

17,111

 

$

17,111

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

3,608

 

$

3,608

 

 


(1)                                 Included in Cash and cash equivalents in the condensed consolidated balance sheets along with $41.7 million and $70.0 million of demand deposits at September 30, 2015 and December 31, 2014, respectively.

 

We did not have any transfers between levels during the nine months ended September 30, 2015.  Our policy is to value all transfers between levels using the beginning of period valuation.

 

7.  Derivative Financial Instruments

 

Coal Contracts

 

We use derivative financial instruments to help manage our exposure to market changes in coal prices.  To manage our exposure in the international markets, we have international coal forward contracts and put options linked to forward Newcastle coal prices.  We use domestic coal futures contracts referenced to the 8800 Btu coal price sold from the PRB, as quoted on the Chicago Mercantile Exchange (“CME”), to help manage our exposure to market changes in domestic coal prices.

 

Under the international coal forward contracts, if the monthly average index price is lower than the contract price, we receive the difference, and if the monthly average index price is higher than the contract price, we pay the difference.  Under the international put options, if the monthly average index price is lower than the option price, we receive the difference, and if the monthly average index price is higher than the option price, we do not receive or pay anything.

 

Under the domestic coal futures contracts, if the monthly average index price is higher than the contract price, we receive the difference, and if the monthly average index price is lower than the contract price, we pay the difference.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Amounts due to us or to the CME as a result of changes in the market price of our open domestic coal futures contracts and to fulfill margin requirements are received or paid through our brokerage bank on a daily basis; therefore, there is no asset or liability on the condensed consolidated balance sheets.

 

At September 30, 2015, we held positions that are expected to settle in the following years (in thousands, except per ton amounts):

 

 

 

2015

 

2016

 

Total

 

International Coal Forward Contracts

 

 

 

 

 

 

 

Notional amount (tons)

 

172

 

132

 

304

 

Net asset position

 

$

4,117

 

$

7,032

 

$

11,149

 

Weighted-average per ton

 

$

99.53

 

$

100.13

 

$

99.90

 

 

 

 

 

 

 

 

 

International Coal Put Options

 

 

 

 

 

 

 

Notional amount (tons)

 

 

2,480

 

2,480

 

Net asset position

 

$

 

$

4,783

 

$

4,783

 

Weighted-average per ton

 

$

 

$

44.75

 

$

44.75

 

 

 

 

 

 

 

 

 

Domestic Coal Futures Contracts

 

 

 

 

 

 

 

Notional amount (tons)

 

360

 

120

 

480

 

Weighted-average per ton

 

$

13.10

 

$

14.70

 

$

13.50

 

 

WTI Derivatives

 

We use derivative financial instruments, such as collars and swaps, to help manage our exposure to market changes in diesel fuel prices.  The derivatives are indexed to the West Texas Intermediate (“WTI”) crude oil price as quoted on the New York Mercantile Exchange.  As such, the nature of the derivatives does not directly offset market changes to our diesel costs.

 

Under a collar agreement, we pay the difference between the monthly average index price and a floor price if the index price is below the floor, and we receive the difference between the ceiling price and the monthly average index price if the index price is above the ceiling price.  No amounts are paid or received if the index price is between the floor and ceiling prices.  While we would not receive the full benefit of price decreases beyond the floor price, the collars mitigate the risk of crude oil price increases and thereby increased diesel costs that would otherwise have a negative impact on our cash flow.

 

Under a swap agreement, if the monthly average index price is higher than the swap price, we receive the difference and if the monthly average index price is lower than the swap price, we pay the difference.  We use swap agreements to help fix a portion of our diesel costs for 2015 and 2016.

 

During the nine months ended September 30, 2015, we settled a portion of our 2015 call options by either closing out those positions or entering into offsetting call option positions.  We also entered into new 2015 swap positions.  In addition, we entered into new collar arrangements and swap positions for 2016.  At September 30, 2015, we held the following WTI derivative financial instruments:

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Floor

 

Ceiling

 

Swaps

 

Settlement Period

 

Notional
Amount

 

Weighted-
Average
per Barrel

 

Notional
Amount

 

Weighted-
Average
per Barrel

 

Notional
Amount

 

Weighted-
Average
per Barrel

 

 

 

(barrels in
thousands)

 

 

 

(barrels in
thousands)

 

 

 

(barrels in
thousands)

 

 

 

2015 swap positions (1)

 

 

$

 

 

$

 

173

 

$

53.20

 

2016 collar positions (2)

 

342

 

$

53.94

 

342

 

$

72.88

 

 

$

 

2016 swap positions (2)

 

 

$

 

 

$

 

342

 

$

63.39

 

Total

 

342

 

$

53.94

 

342

 

$

72.88

 

515

 

$

59.96

 

 


(1)                                 Represents 100% of expected diesel consumption for the fourth quarter of 2015.

(2)                                 Represents 50% of expected diesel consumption for 2016.

 

U.S. On-Highway Diesel Derivatives

 

A portion of our rail transportation cost for coal shipments to Westshore, the rail fuel surcharge, is priced using the Department of Energy’s U.S. On-Highway Diesel Fuel Prices (“U.S. On-Highway Diesel”).  During the nine months ended September 30, 2015, we entered into new swap positions indexed to the U.S. On-Highway Diesel prices to help fix a portion of the rail fuel surcharge for 2015 and 2016.  Under a swap agreement, if the monthly average index price is higher than the swap price, we receive the difference, and if the monthly average index price is lower than the swap price, we pay the difference.

 

At September 30, 2015, we held the following U.S. On-Highway Diesel derivative financial instruments:

 

 

 

Swaps

 

Settlement Period

 

Notional
Amount

 

Weighted-
Average per
Gallon

 

 

 

(gallons in
thousands)

 

 

 

2015 swap positions

 

2,650

 

$

3.10

 

2016 swap positions

 

6,400

 

$

3.18

 

Total

 

9,050

 

$

3.16

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Offsetting and Balance Sheet Presentation

 

 

 

September 30, 2015

 

 

 

Gross Amounts
Recognized

 

Gross Amounts Offset in
the Consolidated Balance
Sheet

 

Net Amounts Presented
in the Consolidated
Balance Sheet

 

 

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

International coal forward contracts

 

$

11,149

 

$

 

$

 

$

 

$

11,149

 

$

 

International coal put options

 

4,783

 

 

 

 

4,783

 

 

WTI derivative financial instruments

 

 

(8,351

)

(4,246

)

4,246

 

(4,246

)

(4,106

)

U.S. On-Highway Diesel derivative financial instruments

 

 

(4,429

)

(4,429

)

4,429

 

(4,429

)

 

Total

 

$

15,932

 

$

(12,780

)

$

(8,675

)

$

8,675

 

$

7,258

 

$

(4,106

)

 

 

 

December 31, 2014

 

 

 

Gross Amounts
Recognized

 

Gross Amounts Offset in
the Consolidated Balance
Sheet

 

Net Amounts Presented
in the Consolidated
Balance Sheet

 

 

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

International coal forward contracts

 

$

20,861

 

$

(129

)

$

(129

)

$

129

 

$

20,732

 

$

 

WTI derivative financial instruments

 

 

(7,228

)

(3,620

)

3,620

 

(3,620

)

(3,608

)

Total

 

$

20,861

 

$

(7,357

)

$

(3,749

)

$

3,749

 

$

17,111

 

$

(3,608

)

 

Net amounts of derivative assets are included in Derivative financial instruments and net amounts of derivative liabilities are included in Accrued expenses in the condensed consolidated balance sheets.  There were no cash collateral requirements at September 30, 2015 or December 31, 2014.

 

Derivative Gains and Losses

 

Derivative mark-to-market (gains) and losses recognized in the condensed consolidated statement of operations and comprehensive income were as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

International coal forward contracts

 

$

(1,153

)

$

(3,989

)

$

(5,999

)

$

(18,071

)

International coal put options

 

(4,039

)

 

5,155

 

 

Domestic coal futures contracts

 

(564

)

2,946

 

4,095

 

1,958

 

WTI derivative financial instruments

 

11,500

 

526

 

8,875

 

60

 

U.S. On-Highway Diesel derivative financial instruments

 

4,491

 

 

5,656

 

 

Net derivative financial instruments loss (gain)

 

$

10,235

 

$

(515

)

$

17,781

 

$

(16,052

)

 

See Note 6 for a discussion related to the fair value of derivative financial instruments.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.  Senior Notes

 

Senior notes consisted of the following (in thousands):

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Principal

 

Carrying
Value

 

Fair
Value (1)

 

Principal

 

Carrying
Value

 

Fair
Value (1)

 

8.50% senior notes due 2019, net of unamortized discount and debt issuance costs

 

$

300,000

 

$

294,970

 

$

197,250

 

$

300,000

 

$

294,259

 

$

315,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.375% senior notes due 2024, net of unamortized debt issuance costs

 

200,000

 

195,822

 

112,000

 

200,000

 

195,457

 

189,500

 

Total senior notes

 

$

500,000

 

$

490,792

 

$

309,250

 

$

500,000

 

$

489,715

 

$

504,500

 

 


(1)                                 The fair value of the senior notes was based on observable market inputs, which are considered Level 2 in the fair value hierarchy.

 

Debt issuance costs of approximately $12 million were incurred in connection with the issuance of the 2019 Notes and 2024 Notes.  These costs were deferred and are being amortized to interest expense over the respective terms of the senior notes using the effective interest method.  During the three months ended September 30, 2015, we implemented ASU 2015-03, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability.  Historically, the unamortized debt issuance costs related to the senior notes were included in noncurrent Other assets.

 

Unamortized debt issuance costs included in senior notes in the accompanying condensed consolidated balance sheets were as follows (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Unamortized debt issuance costs

 

$

7,876

 

$

8,765

 

 

9.  Federal Coal Lease Obligations

 

As of September 30, 2015, we have no further committed lease by application (“LBA”) payments.  Federal coal lease obligations consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Federal coal lease obligations, current

 

$

 

$

63,970

 

 

Our federal coal lease obligations, as reflected in the condensed consolidated balance sheets, consisted of obligations payable to the Bureau of Land Management of the U.S. Department of the Interior (the “BLM”) discounted at an imputed interest rate.  Imputed interest was included in Accrued expenses.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10.  Asset Retirement Obligations

 

Changes in the carrying amount of our asset retirement obligations were as follows (in thousands):

 

 

 

2015

 

2014

 

Balance at January 1,

 

$

217,312

 

$

247,329

 

Reduction in asset retirement obligation attributable to sale of Decker Mine interest

 

 

(72,175

)

Accretion expense

 

9,960

 

12,066

 

Revisions to estimated future reclamation cash flows

 

(57,631

)

(9,852

)

Payments

 

(780

)

(788

)

Balance at September 30,

 

168,861

 

176,580

 

Less: current portion

 

(1,071

)

(1,118

)

Asset retirement obligation, net of current portion

 

$

167,790

 

$

175,462

 

 

Revisions to estimated future reclamation cash flows reflect our regular updates to our estimated costs of closure activities throughout the lives of the respective mines and reflect changes in estimates of closure volumes, disturbed acreages, the timing of the reclamation activities, and third-party unit costs as of September 30, 2015 and 2014.  The land acquired during the three months ended September 30, 2015 near our Cordero Rojo Mine has been included in the revisions to estimated future reclamation cash flows as the mine life for Cordero Rojo Mine is now expected to be approximately four years longer.  Also included were modifications to the Cordero Rojo Mine reclamation plan that resulted in significantly less soil movement to achieve the required post mining topography.  Both of these factors have combined to reduce the discounted value of our future liability by $35.2 million.  Reductions to asset retirement obligations resulting from such revisions generally result in a corresponding reduction to the related asset retirement cost in Property, plant and equipment, net.  However, these factors caused a decrease to the asset retirement obligation that exceeded the carrying amount of the related asset retirement cost of $18.4 million.  The resulting non-cash credit reduced Depreciation and depletion expense on the condensed consolidated statements of operations by $16.8 million for the three and nine months ended September 30, 2015.

 

11.  Other Obligations

 

Capital Equipment Lease Obligations

 

From time to time, we enter into capital leases on equipment under various lease schedules, which are subject to a master lease agreement, and are pre-payable at our option.  Interest on the leases is based on the one-month London Interbank Offered Rate (“LIBOR”) plus 1.95% for a current rate of 2.16% as of September 30, 2015.  The gross value of property, plant and equipment under capital leases was $11.4 million as of September 30, 2015 and related primarily to mining equipment.  The accumulated depreciation for these items was $2.8 million as of September 30, 2015, and changes have been included in Depreciation and depletion in the condensed consolidated statements of operations.  Due to the variable nature of the imputed interest, fair value is equal to carrying value.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Future payments on capital equipment lease obligations are as follows (in thousands):

 

Year Ended December 31,

 

 

 

2015

 

$

449

 

2016

 

1,777

 

2017

 

1,741

 

2018

 

1,706

 

2019

 

1,670

 

Thereafter

 

879

 

Total

 

8,223

 

Less: interest

 

411

 

Total principal payments

 

7,812

 

Less: current portion

 

1,632

 

Capital equipment lease obligations, net of current portion

 

$

6,179

 

 

Accounts Receivable Securitization

 

On February 11, 2013, we executed an Accounts Receivable Securitization Facility (“A/R Securitization Program”) with a committed capacity of up to $75.0 million, which was due to expire on February 11, 2015.  On January 23, 2015, we entered into an agreement extending the term of the A/R Securitization Program to January 23, 2018.  All other terms of the program have remained substantially the same.  Certain of our subsidiaries are parties to the A/R Securitization Program.  In January 2013, we formed Cloud Peak Energy Receivables LLC (the “SPE”), a special purpose, bankruptcy-remote 100% owned subsidiary, to purchase, subject to certain exclusions, in a true sale, trade receivables generated by certain of our subsidiaries without recourse (other than customary indemnification obligations for breaches of specific representations and warranties) and then transfer undivided interests in up to $75.0 million of those accounts receivable to a financial institution for cash borrowings for our ultimate benefit.  The total borrowings are limited by eligible accounts receivable, as defined under the terms of the A/R Securitization Program.  As of September 30, 2015, the A/R Securitization Program would have allowed for $45.2 million of borrowing capacity.  There were no borrowings outstanding from the A/R Securitization Program as of September 30, 2015.  The SPE is consolidated into our financial statements.

 

Credit Facility

 

On February 21, 2014, Cloud Peak Energy Resources LLC entered into a five-year Credit Agreement with PNC Bank, National Association, as administrative agent, and a syndicate of lenders, which was amended on September 5, 2014 (as amended, the “Credit Agreement”).  The Credit Agreement provides us with a senior secured revolving credit facility with a capacity of up to $500 million that can be used to borrow funds or issue letters of credit.  The borrowing capacity under the Credit Agreement is reduced by the amount of letters of credit issued, which may be up to $250 million.  Subject to the satisfaction of certain conditions, we may elect to increase the size of the revolving credit facility and/or request the addition of one or more new tranches of term loans in an amount up to the greater of (i) $200 million or (ii) our EBITDA (which is defined in the Credit Agreement) for the preceding four fiscal quarters.  The Credit Agreement provides for the designation of a foreign restricted subsidiary as a borrower, subject to certain conditions and approvals.

 

The financial covenants under the Credit Agreement require us to maintain (a) a ratio of EBITDA (as defined in the Credit Agreement) for the preceding four fiscal quarters to consolidated net cash interest expense equal to or greater than 1.50 to 1 and (b) a ratio of secured funded debt less unrestricted cash and marketable securities (net secured debt) to EBITDA for the preceding four fiscal quarters equal to or less than 4.00 to 1.  The credit facility and capital leases are considered secured funded debt under the covenant calculations whereas federal coal lease obligations, accounts receivable securitizations, and senior notes are not considered secured funded debt.  The Credit Agreement also contains other non-financial covenants, including covenants related to our ability to incur additional debt or take other corporate actions.  The Credit Agreement also contains customary events of default with customary grace periods and thresholds.  Our ability to

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

access the available funds under the credit facility may be prohibited in the event that we do not comply with the covenant requirements or if we default on our obligations under the Credit Agreement.  If our trailing twelve month EBITDA were to continue to decline and we were unable to negotiate an amendment with the bank group, our actual borrowing capacity under the Credit Agreement may be reduced or eliminated entirely depending on the extent of the decline in trailing twelve month EBITDA.

 

Loans under the Credit Agreement bear interest at LIBOR plus an applicable margin of 2.00% to 2.75%, depending on our net total leverage to EBITDA ratio.  We pay the lenders a commitment fee between 0.375% and 0.50% per year, depending on our net total leverage to EBITDA ratio, on the unused amount of the credit facility.  Letters of credit issued under the credit facility, unless drawn upon, will incur a per annum fee from the date at which they are issued between 2.00% and 2.75% depending on our net total leverage to EBITDA ratio.  Letters of credit that are drawn upon are converted to loans.  In addition, in connection with the issuance of a letter of credit, we are required to pay the issuing bank a fronting fee of 0.125% per annum.

 

As of September 30, 2015, no borrowings or letters of credit were outstanding under the credit facility, and we were in compliance with the covenants contained in the Credit Agreement.  Our aggregate borrowing capacity under the Credit Agreement and the A/R Securitization Program was approximately $545.2 million as of September 30, 2015.

 

Other

 

Other long-term obligations include liabilities incurred in connection with the August 24, 2015 acquisition of land.  We had the following purchase obligations with parties other than the BLM (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Purchase obligations, total

 

$

2,527

 

$

 

Interest rate

 

12

%

 

 

The fair value of other long-term obligations approximated its carrying amount at September 30, 2015.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12.  Interest Expense

 

Interest expense consisted of the following (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Senior notes

 

$

9,563

 

$

9,563

 

$

28,688

 

$

31,140

 

Credit facility unutilized fee

 

643

 

614

 

2,027

 

1,836

 

Federal coal lease obligations imputed interest

 

35

 

1,478

 

2,883

 

6,702

 

Amortization of deferred financing costs and original issue discount

 

1,040

 

1,021

 

3,133

 

3,185

 

Other

 

44

 

64

 

137

 

209

 

Subtotal

 

11,325

 

12,740

 

36,868

 

43,072

 

 

 

 

 

 

 

 

 

 

 

Premium on early retirement of debt

 

 

 

 

13,837

 

Write-off of deferred financing costs and original issue discount

 

 

 

 

7,338

 

Other

 

 

 

 

364

 

Total cost of early retirement of debt and refinancings

 

 

 

 

21,538

 

Total interest expense

 

11,325

 

12,740

 

36,868

 

64,610

 

Less interest capitalized

 

(340

)

(39

)

(594

)

(102

)

Net interest expense

 

$

10,985

 

$

12,701

 

$

36,274

 

$

64,508

 

 

13.  Commitments and Contingencies

 

Commitments

 

Purchase Commitments

 

We had outstanding purchase commitments consisting of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2015

 

2014

 

Capital Commitments

 

 

 

 

 

Equipment

 

$

10,007

 

$

11,751

 

Land

 

$

23,678

 

$

24,663

 

 

 

 

 

 

 

Supplies and Services

 

 

 

 

 

Coal purchase commitments

 

$

1,458

 

$

2,592

 

Port throughput agreement (1)

 

$

553,970

 

$

604,750

 

Rail transportation agreements (2)

 

$

82,713

 

$

86,780

 

Materials and supplies

 

$

 

$

12,185

 

 


(1)                                 Represents undiscounted take-or-pay commitments through the remaining term of the agreement if we do not ship any export tons.

(2)                                 Represents undiscounted take-or-pay commitments through the remaining term of the agreements if we do not transport any export tons by rail or fulfill any of our other rail commitments.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Contingencies

 

Litigation

 

WildEarth Guardians’ and Northern Plains Resource Council’s Regulatory Challenge to OSM’s Approval Process for Mine Plans

 

Background—On February 27, 2013, WildEarth Guardians (“WildEarth”) filed a complaint in the United States District Court for the District of Colorado (“Colorado District Court”) challenging the federal Office of Surface Mining’s (“OSM”) approvals of mine plans for seven different coal mines located in four different states.  The challenged approvals included two that were issued to subsidiaries of Cloud Peak Energy: one for the Cordero Rojo Mine in Wyoming and one for the Spring Creek Mine in Montana.

 

On February 7, 2014, the Colorado District Court severed the claims in WildEarth’s complaint and transferred all the claims pertaining to non-Colorado mines to the federal district courts for the states in which the mines were located.  Pursuant to this order, the challenge to Cordero Rojo’s mine plan approval (along with challenges to two other OSM approvals) was transferred to the United States District Court in Wyoming (“Wyoming District Court”) and the challenge to Spring Creek’s mine plan approval was transferred to the United States District Court for the District of Montana (“Montana District Court”).  On February 14, 2014, WildEarth voluntarily dismissed the case pending in the Wyoming District Court, thereby concluding its challenge to OSM’s approval of the Cordero Rojo mine plan.  WildEarth has continued to pursue its challenges to mine plan approvals pending in district courts in Colorado, New Mexico, and Montana.

 

On March 14, 2014, WildEarth amended its complaint in the Montana District Court to reflect the transfer order from the Colorado District Court.  WildEarth has asked the Montana District Court to vacate OSM’s 2012 approval of the Spring Creek mine plan and enjoin mining operations at the Spring Creek Mine until OSM undertakes additional environmental analysis and related public process requested by WildEarth.

 

On August 14, 2014, Northern Plains Resource Council and the Western Organization of Resource Councils (collectively “Northern Plains”) filed a complaint in the Montana District Court challenging the same OSM approval of Spring Creek’s mine plan.  Northern Plains, like WildEarth, requested that the Montana District Court vacate OSM’s 2012 approval of the Spring Creek mine plan and enjoin mining operations at the Spring Creek Mine until OSM undertakes the additional analysis requested by Northern Plains.

 

Intervention by Cloud Peak Energy and Others—By orders dated May 30, 2014, May 9, 2014, and April 28, 2014, the Montana District Court granted intervention to the State of Montana, the National Mining Association, and Spring Creek Coal LLC, a 100% owned subsidiary of Cloud Peak Energy, respectively.  Each of these parties intervened on the side of OSM.

 

Current Schedule— On October 28, 2014, the Montana District Court consolidated the WildEarth and Northern Plains cases and set a briefing schedule for resolution of all of WildEarth’s and Northern Plains’ claims through motions for summary judgment.  Plaintiffs filed their opening briefs on December 8, 2014, and under a revised schedule, briefing by all parties was completed on May 7, 2015.  The Montana District Court held an oral argument on July 31, 2015 before a Magistrate Judge in Billings, Montana.  At the conclusion of the oral argument, the Magistrate Judge ordered the parties to negotiate and attempt to resolve this dispute by agreement of the parties.  In October 2015, the parties jointly submitted a status report to the Court stating they were unable to reach a settlement.  On October 23, 2015, the Magistrate Judge issued her findings and recommendations to the District Court Judge.  In this order, the Magistrate found that OSM had failed to follow the procedural requirements of the National Environmental Policy Act by failing to provide notice to the public when the agency had completed its environmental analysis and by failing to explain how OSM concluded that its approval of the 2012 mining plan would have no significant environmental impacts.  Based on these findings, the Magistrate further recommended that OSM be directed to prepare a supplemental environmental analysis within 180 days from the date the District Court issues a final judgment.  Under the Magistrate’s recommendation, mining at the Spring Creek mine would proceed unabated during the time OSM is undertaking its supplemental environmental analysis.  The mining plan for the Spring Creek Mine would not be vacated unless OSM failed to complete its supplemental analysis within 180 days.  The parties have until November 6, 2015 to file objections to the Magistrate’s findings and recommendations.  Those parties which support the Magistrate’s order have until November 20, 2015 to file their responses to these objections.  The District Court judge has complete discretion to adopt, reject, or modify the Magistrate’s findings and recommendations before entering a final judgment on the parties’ pending cross-motions for summary judgment. We continue to believe WildEarth’s challenge and the related Northern Plains’ challenge against OSM are without merit.  Nevertheless, the plaintiffs seek in their underlying complaints to vacate existing, required regulatory approvals and to enjoin mining operations at Spring Creek Mine.  If the District Judge were to grant the Plaintiffs’ requested relief or enter an order which goes beyond even the Magistrate’s proposed remedy, the impact of any such court order could have a material adverse effect on our shipments, financial results and liquidity, and could result in claims from third parties if we are unable to meet our commitments under pre-existing commercial agreements as a result of any required reductions or modifications to our mining activities.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Administrative Appeals of the BLM’s Approval of the Potential West Antelope II South Lease Modification

 

Background—On September 5, 2014, WildEarth filed an appeal with the Interior Board of Land Appeals (“IBLA”) challenging the BLM August 15, 2014 decision to approve Antelope Coal LLC’s proposed modification of Antelope Coal’s West Antelope II South (“WAII South”) lease.  Antelope Coal is a 100% owned subsidiary of Cloud Peak Energy.  On September 12, 2014, Powder River Basin Resource Council and Sierra Club (collectively “PRBRC”) filed an appeal with the IBLA challenging this same BLM decision.  The BLM’s decision that is the subject of both appeals approves the proposed amendment of WAII South lease.  If the lease modification is entered into, it would add approximately 15.8 million tons of coal underlying nearly 857 surface acres.  WildEarth and PRBRC have asked the IBLA to vacate the proposed WAII South lease modification and direct the BLM to prepare additional environmental analysis on the impacts of the lease modification.

 

Intervention by Cloud Peak Energy and State of Wyoming—On September 24, 2014 and October 6, 2014, Antelope Coal and the State of Wyoming, respectively, moved to intervene in the WildEarth and PRBRC appeals as respondents to defend the BLM’s lease modification decision.  The IBLA granted these intervention motions.

 

Current Schedule.  WildEarth filed its Statement of Reasons (opening brief) on October 6, 2014, and PRBRC filed its Statement of Reasons on October 10, 2014.  The BLM filed its Answer (opposition brief) on January 12, 2015 and moved for the two appeals to be consolidated.  Antelope Coal and State of Wyoming filed their respective Answers on January 20, 2015.  Briefing has been completed in both appeals.  The parties are awaiting a decision from the IBLA.  We believe the WildEarth and PRBRC appeals challenging the BLM’s West Antelope II South lease modification decision are without merit.  Nevertheless, if the plaintiff’s claims are successful, the timing and ability of Cloud Peak Energy to lease and mine the coal underlying the applicable surface acres would be materially adversely impacted.

 

WildEarth Guardians’ Regulatory Challenge to OSM’s Approval Process for Antelope Mine Plan

 

Background—On September 15, 2015, WildEarth filed a complaint in the Colorado District Court challenging the OSM’s approvals of mine plans for four different coal mines, one of which is located in Colorado and three of which are located in Wyoming.  The challenged approvals included one mine plan modification that was issued to Antelope Coal LLC, a subsidiary of Cloud Peak Energy, for the Antelope Mine in Wyoming. The plaintiff seeks to vacate existing, required regulatory approvals and to enjoin mining operations at Antelope Mine.

 

Current Schedule—The OSM’s answer to WildEarth’s complaint is currently due November 27, 2015.  We believe WildEarth’s challenge is without merit.  Nevertheless, if the plaintiff’s claims are successful, any court order granting the requested relief could have a material adverse impact on our shipments, financial results and liquidity, and could result in claims from third parties if we are unable to meet our commitments under pre-existing commercial agreements as a result of any required reductions or modifications to our mining activities.

 

Other Legal Proceedings

 

We are involved in other legal proceedings arising in the ordinary course of business and may become involved in additional proceedings from time to time.  We believe that there are no other legal proceedings pending that are likely to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.  Nevertheless, we cannot predict the impact of future developments affecting our claims and lawsuits, and any resolution of a claim or lawsuit or an accrual within a particular fiscal period may materially and adversely impact our results of operations for that period.  In addition to claims and lawsuits against us, our LBAs, lease by modifications, permits, and other industry regulatory processes and approvals, including those applicable to the utility and coal logistics and transportation industries, may also continue to be subject to legal challenges that could materially and adversely impact our mining operations, results and liquidity.  These regulatory challenges may seek to vacate prior regulatory decisions and authorizations that are legally required for some or all of our current or planned mining activities.  If we are required to reduce or modify our mining activities as a result of these challenges, the impact could have a material adverse effect on Cloud Peak Energy’s shipments, financial results and liquidity, and could result in claims from third parties if we are unable to meet our commitments under pre-existing commercial agreements as a result of any such required reductions or modifications to our mining activities.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Tax Contingencies

 

Our income tax calculations are based on application of the respective U.S. federal or state tax laws.  Our tax filings, however, are subject to audit by the respective tax authorities.  Accordingly, we recognize tax benefits when it is more likely than not a position will be upheld by the tax authorities.  To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense.

 

Several non-income based production tax audits related to federal and state royalties and severance taxes, including periods back to 2005, are currently in progress.  The financial statements reflect our best estimate of taxes and related interest and penalties due for potential adjustments that may result from the resolution of such tax audits.  From time to time, we receive audit assessments and engage in settlement discussions with applicable tax authorities, which may result in adjustments to our estimates of taxes and related interest and penalties.

 

Concentrations of Risk and Major Customers

 

For the nine months ended September 30, 2015 and 2014, there was no single customer that represented 10% or more of consolidated revenue.  We generally do not require collateral or other security on accounts receivable because our customers are comprised primarily of investment grade electric utilities.  The credit risk is controlled through credit approvals and monitoring procedures.

 

Guarantees and Off-Balance Sheet Risk

 

In the normal course of business, we are party to guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit, performance or surety bonds and indemnities, which are not reflected on the consolidated balance sheet.  In our past experience, virtually no claims have been made against these financial instruments.  Management does not expect any material losses to result from these guarantees or off-balance sheet instruments.

 

U.S. federal and state laws require we secure certain of our obligations to reclaim lands used for mining and to secure coal lease obligations.  Prior to 2014, the method we used to meet these reclamation obligations and to secure coal lease obligations was to provide a third-party surety bond, typically through an insurance company, or provide a letter of credit, typically through a bank.  In 2014, we were granted approval from the state of Wyoming to self-bond $200 million of our reclamation obligations within the state, subject to annual renewal requirements.  We received approval to continue self-bonding on April 14, 2015.  Specific bond and/or letter of credit amounts may change over time, depending on the activity at the respective site and any specific requirements by federal or state laws.  As of September 30, 2015, we were self-bonded for $200 million and had $441.2 million of surety bonds outstanding to secure certain of our obligations to reclaim lands used for mining, secure coal lease obligations, and for other operating requirements.

 

14.  Postretirement Medical Plan

 

We maintain an unfunded postretirement medical plan to provide certain postretirement medical benefits to eligible employees.  Net periodic postretirement benefit costs included the following components (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Service cost

 

$

1,229

 

$

1,038

 

$

3,687

 

$

3,113

 

Interest cost

 

482

 

464

 

1,446

 

1,393

 

Amortization of prior service cost

 

313

 

247

 

939

 

741

 

Net periodic benefit cost

 

$

2,024

 

$

1,749

 

$

6,072

 

$

5,247

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

15.  Income Taxes

 

Our Income (loss) before income tax provision and earnings from unconsolidated affiliates is earned solely in the U.S.  The following table summarizes income taxes (dollars in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Income tax benefit (expense)

 

$

2,205

 

$

(40,688

)

$

12,350

 

$

(30,709

)

Effective tax rate

 

(32.6

)%

30.9

%

20.1

%

29.7

%

 

Our statutory income tax rate, including state income taxes, is 37%.  The difference between the statutory income tax rate and our effective tax rate for the three and nine months ended September 30, 2015 is due primarily to the impact of the lower equity-based compensation tax deduction for shares that vested during the period, the impact of the goodwill impairment, which is not deductible for tax purposes, and permanent differences between book and tax treatments.

 

16.  Accumulated Other Comprehensive Income (Loss)

 

The changes in Accumulated other comprehensive income (loss) (“AOCI”) by component, net of tax are as follows (in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

 

 

Post-
retirement
Medical
Plan

 

Post-
retirement
Medical
Plan

 

Decker
Defined
Benefit
Pension

 

Total

 

Beginning balance, January 1

 

$

(11,299

)

$

(8,242

)

$

(2,038

)

$

(10,279

)

Other comprehensive income (loss) before reclassifications

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

591

 

474

 

2,038

 

2,511

 

Net current period other comprehensive income (loss)

 

591

 

474

 

2,038

 

2,511

 

Ending balance, September 30

 

$

(10,707

)

$

(7,768

)

$

 

$

(7,768

)

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The reclassifications out of AOCI are as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Postretirement Medical Plan (1)

 

 

 

 

 

 

 

 

 

Amortization of prior service costs included in Cost of product sold (2)

 

$

264

 

$

209

 

$

792

 

$

626

 

Amortization of prior service costs included in Selling, general and administrative expenses (2)

 

49

 

38

 

147

 

115

 

Write-off of Decker Mine pension prior service costs included in gain on sale of Decker Mine interest

 

 

3,183

 

 

3,183

 

Total before tax

 

313

 

3,430

 

939

 

3,924

 

Tax benefit

 

(116

)

(1,235

)

(347

)

(1,413

)

Amounts reclassified from AOCI

 

$

197

 

$

2,195

 

$

592

 

$

2,511

 

 


(1)                                 See Note 14 for the components of our net periodic postretirement benefit costs.

(2)                                 Presented on the condensed consolidated statements of operations and comprehensive income.

 

17.  Earnings (Loss) per Share

 

Dilutive potential shares of common stock may include restricted stock and units, options, and performance units issued under our Long Term Incentive Plan (“LTIP”).  We apply the treasury stock method to determine dilution from restricted stock and units, options, and performance units.

 

The following table summarizes the calculation of diluted earnings (loss) per share (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Numerator for calculation of diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

8,873

 

$

91,069

 

$

(48,704

)

$

73,295

 

Denominator for basic income (loss) per share – weighted-average shares outstanding

 

61,074

 

60,850

 

61,013

 

60,803

 

Dilutive effect of stock equivalents

 

277

 

283

 

 

394

 

Denominator for diluted earnings (loss) per share

 

61,351

 

61,133

 

61,013

 

61,197

 

Diluted earnings (loss) per share

 

$

0.14

 

$

1.49

 

$

(0.80

)

$

1.20

 

 

For the periods presented, the following items were excluded from the diluted earnings (loss) per share calculation because they were anti-dilutive (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Anti-dilutive stock equivalents

 

2,165

 

1,036

 

2,071

 

888

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

18.  Segment Information

 

We have reportable segments of Owned and Operated Mines, Logistics and Related Activities, and Corporate and Other.

 

Our Owned and Operated Mines segment is characterized by the predominant focus on thermal coal production where the sale occurs at the mine site and where title and risk of loss generally pass to the customer at that point.  This segment includes our Antelope Mine, Cordero Rojo Mine, and Spring Creek Mine.  Sales in this segment are primarily to domestic electric utilities, although a portion is made to our Logistics and Related Activities segment.  Sales between reportable segments are priced based on prevailing market prices for arm’s length transactions.  Our mines utilize surface mining extraction processes and are all located in the PRB.  The gains and losses resulting from our domestic coal futures contracts and WTI derivative financial instruments are reported within this segment.

 

Our Logistics and Related Activities segment is characterized by the services we provide to our international and certain of our domestic customers where we deliver coal to the customer at a terminal or the customer’s plant or other delivery point, remote from our mine site.  Services provided include the purchase of coal from third parties or from our Owned and Operated Mines segment, at market prices, as well as the contracting and coordination of the transportation and other handling services from third-party operators, which are typically rail and terminal companies.  Title and risk of loss are retained by the Logistics and Related Activities segment through the transportation and delivery process.  Title and risk of loss pass to the customer in accordance with the contract and typically occur at a vessel loading terminal, a vessel unloading terminal or an end use facility.  Risk associated with rail and terminal take-or-pay agreements is also borne by the Logistics and Related Activities segment.  The gains and losses resulting from our international coal forward contracts, international coal put options, and U.S. On-Highway Diesel derivative financial instruments are reported within this segment.  Port access contract rights and related amortization are also included in this segment.

 

Our Corporate and Other segment includes results relating to broker activity, our previous share of the Decker Mine operations (which was sold in September 2014), and unallocated corporate costs and assets.  All corporate costs, except Board of Directors related expenses, are allocated to the segments based upon their relative percentage of certain financial metrics.

 

Eliminations represent the purchase and sale of coal between reportable segments and the associated elimination of intercompany profit or loss in inventory.

 

Our chief operating decision maker uses Adjusted EBITDA as the primary measure of segment reporting performance.  EBITDA represents income (loss) from continuing operations, or net income (loss), as applicable, before: (1) interest income (expense) net, (2) income tax provision, (3) depreciation and depletion, and (4) amortization.  Adjusted EBITDA represents EBITDA as further adjusted for accretion, which represents non-cash increases in asset retirement obligation liabilities resulting from the passage of time, and specifically identified items that management believes do not directly reflect our core operations.  For the periods presented herein, the specifically identified items are:  (1) adjustments to exclude the updates to the tax agreement liability, including tax impacts of the IPO and Secondary Offering and the termination of the Tax Receivable Agreement in August 2014, (2) adjustments for derivative financial instruments, excluding fair value mark-to-market gains or losses and including cash amounts received or paid, (3) adjustments to exclude non-cash goodwill impairment charges, and (4) adjustments to exclude the gain from the sale of our 50% non-operating interest in the Decker Mine in September 2014.  Our calculation of Adjusted EBITDA does not include premiums paid for derivative financial instruments; either at contract inception, as these payments pertain to future settlement periods, or in the period of contract settlement, as the payment occurred in a preceding period.

 

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Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Revenue

 

The following table presents revenue (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Owned and Operated Mines

 

$

265,657

 

$

285,983

 

$

733,735

 

$

827,680

 

Logistics and Related Activities

 

44,772

 

65,640

 

162,802

 

178,836

 

Corporate and Other

 

2,176

 

7,789

 

8,626

 

20,429

 

Eliminations of intersegment sales

 

(10,931

)

(17,075

)

(41,789

)

(44,692

)

Consolidated revenue

 

$

301,673

 

$

342,337

 

$

863,374

 

$

982,253

 

 

The following table presents revenue from external customers by geographic region (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

United States

 

$

265,531

 

$

284,843

 

$

726,340

 

$

819,562

 

South Korea

 

29,252

 

48,945

 

114,734

 

127,370

 

Other

 

6,890

 

8,549

 

22,300

 

35,321

 

Total revenue from external customers

 

$

301,673

 

$

342,337

 

$

863,374

 

$

982,253

 

 

We attribute revenue to individual countries based on the location of the physical delivery of the coal.  All of our revenue for the nine months ended September 30, 2015 and 2014 originated in the U.S.

 

23



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Adjusted EBITDA

 

The following table reconciles segment Adjusted EBITDA to net income (loss) (in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

2015

 

2014

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

 

 

$

57,795

 

 

 

$

43,589

 

Logistics and Related Activities

 

 

 

(19,050

)

 

 

1,394

 

Corporate and Other

 

 

 

512

 

 

 

1,040

 

Subtotal reportable segments

 

 

 

39,257

 

 

 

46,023

 

Eliminations

 

 

 

(237

)

 

 

(304

)

Interest expense, net

 

 

 

(10,947

)

 

 

(12,664

)

Depreciation and depletion

 

 

 

(7,896

)

 

 

(25,815

)

Amortization

 

 

 

(928

)

 

 

 

Accretion

 

 

 

(3,070

)

 

 

(3,848

)

Income tax benefit (expense)

 

 

 

2,205

 

 

 

(40,688

)

Tax agreement benefit (1)

 

 

 

 

 

 

58,595

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Exclusion of fair value mark-to-market gains (losses) (2)

 

$

(10,235

)

 

 

$

515

 

 

 

Inclusion of cash amounts paid (received) (3)(4)

 

724

 

 

 

(5,007

)

 

 

Total derivative financial instruments

 

 

 

(9,511

)

 

 

(4,492

)

Goodwill impairment

 

 

 

 

 

 

 

Gain on sale of Decker Mine interest

 

 

 

 

 

 

74,262

 

Net income (loss)

 

 

 

$

8,873

 

 

 

$

91,069

 

 


(1)                                 Changes to related deferred taxes are included in income tax benefit (expense).

(2)                                 Fair value mark-to-market (gains) losses reflected on the statement of operations.

(3)                                 Cash gains and losses reflected within operating cash flows.

(4)                                 Excludes $991 of premiums paid in prior periods for contracts settled during the three months ended September 30, 2015.

 

24



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

2014

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

 

 

$

119,221

 

 

 

$

126,741

 

Logistics and Related Activities

 

 

 

(33,780

)

 

 

4,465

 

Corporate and Other

 

 

 

4,994

 

 

 

593

 

Subtotal reportable segments

 

 

 

90,435

 

 

 

131,799

 

Eliminations

 

 

 

(1,349

)

 

 

(1,503

)

Interest expense, net

 

 

 

(36,137

)

 

 

(64,286

)

Depreciation and depletion

 

 

 

(51,742

)

 

 

(81,944

)

Amortization

 

 

 

(2,783

)

 

 

 

Accretion

 

 

 

(9,960

)

 

 

(12,066

)

Income tax benefit (expense)

 

 

 

12,350

 

 

 

(30,709

)

Tax agreement benefit (1)

 

 

 

 

 

 

58,595

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Exclusion of fair value mark-to-market gains (losses) (2)

 

$

(17,781

)

 

 

$

16,052

 

 

 

Inclusion of cash amounts paid (received) (3)(4)(5)

 

1,618

 

 

 

(16,905

)