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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, 2016

 

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.  (Check one):

 

Large
accelerated filer

Accelerated
filer

Non-accelerated filer
(Do not check if a smaller reporting company)

Smaller reporting
company

o

x

o

o

 

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, 61,455,684 shares outstanding as of October 19, 2016.

 

 

 



Table of Contents

 

CLOUD PEAK ENERGY INC.

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements —

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015

1

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

2

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

 

 

Cautionary Notice Regarding Forward-Looking Statements

34

 

 

 

Item 2

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

37

Item 3

Quantitative and Qualitative Disclosures About Market Risk

58

Item 4

Controls and Procedures

59

 

 

 

 

PART II — OTHER INFORMATION

 

Item 1

Legal Proceedings

60

Item 1A

Risk Factors

60

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

61

Item 3

Defaults Upon Senior Securities

61

Item 4

Mine Safety Disclosures

61

Item 5

Other Information

61

Item 6

Exhibits

61

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenue

 

$

217,073

 

$

301,673

 

$

572,510

 

$

863,374

 

Costs and expenses

 

 

 

 

 

 

 

 

 

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

 

164,287

 

248,500

 

469,938

 

735,258

 

Depreciation and depletion

 

23,460

 

7,896

 

23,052

 

51,742

 

Amortization of port access rights

 

 

928

 

 

2,783

 

Accretion

 

1,065

 

3,070

 

5,641

 

9,960

 

(Gain) loss on derivative financial instruments

 

1,068

 

10,235

 

(5,257

)

17,781

 

Selling, general and administrative expenses

 

11,161

 

12,983

 

38,187

 

36,743

 

Impairments

 

312

 

 

4,499

 

33,355

 

Debt restructuring costs

 

4,499

 

 

4,499

 

 

Other operating costs

 

360

 

603

 

814

 

1,121

 

Total costs and expenses

 

206,212

 

284,215

 

541,373

 

888,743

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

10,861

 

17,458

 

31,137

 

(25,369

)

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

46

 

37

 

116

 

137

 

Interest expense

 

(13,032

)

(10,985

)

(35,371

)

(36,274

)

Other, net

 

(165

)

253

 

(760

)

158

 

Total other income (expense)

 

(13,151

)

(10,695

)

(36,015

)

(35,979

)

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

 

(2,290

)

6,763

 

(4,878

)

(61,348

)

Income tax benefit (expense)

 

647

 

2,205

 

3,226

 

12,350

 

Income (loss) from unconsolidated affiliates, net of tax

 

59

 

(95

)

(1,018

)

294

 

Net income (loss)

 

(1,584

)

8,873

 

(2,670

)

(48,704

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service costs

 

(1,872

)

313

 

(3,381

)

939

 

Postretirement medical plan change

 

 

 

42,851

 

 

Income tax on postretirement medical and pension changes

 

(831

)

(116

)

(2,776

)

(347

)

Other comprehensive income (loss)

 

(2,703

)

197

 

36,694

 

592

 

Total comprehensive income (loss)

 

$

(4,287

)

$

9,070

 

$

34,024

 

$

(48,112

)

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

$

0.15

 

$

(0.04

)

$

(0.80

)

Diluted

 

$

(0.03

)

$

0.14

 

$

(0.04

)

$

(0.80

)

Weighted-average shares outstanding - basic

 

61,365

 

61,074

 

61,285

 

61,013

 

Weighted-average shares outstanding - diluted

 

61,365

 

61,351

 

61,285

 

61,013

 

 

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,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

90,301

 

$

89,313

 

Accounts receivable

 

43,347

 

43,248

 

Due from related parties

 

79

 

160

 

Inventories, net

 

72,996

 

76,763

 

Income tax receivable

 

1,040

 

8,659

 

Other prepaid and deferred charges

 

16,758

 

25,945

 

Other assets

 

2,086

 

98

 

Total current assets

 

226,607

 

244,186

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

Property, plant and equipment, net

 

1,439,474

 

1,488,371

 

Goodwill

 

2,280

 

2,280

 

Other assets

 

58,558

 

67,323

 

Total assets

 

$

1,726,919

 

$

1,802,160

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

26,335

 

$

44,385

 

Royalties and production taxes

 

69,160

 

74,054

 

Accrued expenses

 

42,950

 

42,317

 

Other liabilities

 

2,139

 

2,133

 

Total current liabilities

 

140,584

 

162,889

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

Senior notes

 

492,308

 

491,160

 

Asset retirement obligations, net of current portion

 

102,579

 

151,755

 

Accumulated postretirement medical benefit obligation, net of current portion

 

20,876

 

60,845

 

Royalties and production taxes

 

27,708

 

34,680

 

Other liabilities

 

15,550

 

12,950

 

Total liabilities

 

799,605

 

914,279

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock ($0.01 par value; 200,000 shares authorized; 61,933 and 61,647 shares issued and 61,456 and 61,170 outstanding as of September 30, 2016 and December 31, 2015, respectively)

 

615

 

612

 

Treasury stock, at cost (477 shares as of both September 30, 2016 and December 31, 2015)

 

(6,498

)

(6,498

)

Additional paid-in capital

 

580,280

 

574,874

 

Retained earnings

 

329,174

 

331,844

 

Accumulated other comprehensive income (loss)

 

23,743

 

(12,951

)

Total equity

 

927,314

 

887,881

 

Total liabilities and equity

 

$

1,726,919

 

$

1,802,160

 

 

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,

 

 

 

2016

 

2015

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

(2,670

)

$

(48,704

)

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

 

 

 

 

 

Depreciation and depletion

 

23,052

 

51,742

 

Amortization of port access rights

 

 

2,783

 

Accretion

 

5,641

 

9,960

 

Impairments

 

4,499

 

33,355

 

Loss (income) from unconsolidated affiliates, net of tax

 

1,018

 

(294

)

Distributions of income from unconsolidated affiliates

 

1,500

 

 

Deferred income taxes

 

(2,775

)

(10,115

)

Equity-based compensation expense

 

9,250

 

4,819

 

(Gain) loss on derivative financial instruments

 

(5,257

)

17,781

 

Cash received (paid) on derivative financial instrument settlements

 

(3,195

)

(1,618

)

Premium payments on derivative financial instruments

 

 

(5,813

)

Non-cash interest expense related to the bank amendment and refinancing

 

1,254

 

 

Net periodic postretirement benefit costs

 

(423

)

6,072

 

Non-cash logistic agreements expense

 

24,500

 

 

Three year amendment of logistics contracts

 

(15,000

)

 

Other

 

1,918

 

1,953

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(2,925

)

25,614

 

Inventories, net

 

3,853

 

4,300

 

Due to or from related parties

 

81

 

(3,925

)

Other assets

 

16,774

 

(10,875

)

Accounts payable and accrued expenses

 

(23,717

)

(14,191

)

Asset retirement obligations

 

(1,048

)

(780

)

Net cash provided by (used in) operating activities

 

36,330

 

62,064

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(30,148

)

(28,125

)

Cash paid for capitalized interest

 

(1,272

)

(404

)

Investment in development projects

 

(1,500

)

(1,526

)

Investment in unconsolidated affiliates

 

 

(5,383

)

Payment of restricted cash

 

 

(6,500

)

Insurance proceeds

 

2,826

 

 

Other

 

46

 

185

 

Net cash provided by (used in) investing activities

 

(30,048

)

(41,753

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Principal payments on federal coal leases

 

 

(63,970

)

Payment of deferred financing costs

 

(3,581

)

(342

)

Other

 

(1,713

)

(1,225

)

Net cash provided by (used in) financing activities

 

(5,294

)

(65,537

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

988

 

(45,226

)

Cash and cash equivalents at beginning of period

 

89,313

 

168,745

 

Cash and cash equivalents at end of period

 

$

90,301

 

$

123,519

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

Interest paid

 

$

28,287

 

$

32,827

 

Income taxes paid (refunded)

 

$

(8,247

)

$

10,123

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

1,794

 

$

6,401

 

Assets acquired under capital leases

 

$

115

 

$

 

 

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 2015 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 own and operate three 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 electric utilities.  Thermal coal is primarily consumed by electric utilities and industrial consumers as fuel for electricity generation.  In 2015, the coal we produced generated approximately 3% of the electricity produced in the U.S.  We do not produce any metallurgical coal.

 

In addition, we have two development projects.  The Youngs Creek project, an undeveloped surface mine project in the Northern PRB region, is located in Wyoming, approximately 13 miles north of Sheridan, Wyoming, seven miles south of our Spring Creek Mine and seven miles from the mainline railroad, contiguous with the Wyoming-Montana state line.  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 “Big Metal project”).  The Big Metal 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 Big Metal 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.

 

In 2015, we amended agreements with Westshore Terminals Limited Partnership (“Westshore”) and Burlington Northern Santa Fe Railway (“BNSF”) providing for reduced quarterly take-or-pay payments from 2016 through 2018.  We meet regularly with Westshore and BNSF to discuss market conditions, potential shipments, and the terms for such shipments, if any.  The recent increase in seaborne thermal coal pricing has enabled us to begin contracting export shipments for delivery between November 2016 and February 2017.  Shipments will directly offset the amended take-or-pay obligations on a ton-for-ton basis.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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 footnote disclosures that are required to be included in annual financial statements prepared in conformity with U.S. GAAP.  The year-end unaudited condensed consolidated balance sheet data was derived from audited consolidated financial statements.  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2015 and 2014, and for each of the three years ended December 31, 2015, included in our Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 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 a fair statement of our financial position as of September 30, 2016, and the results of our operations, comprehensive income, and cash flows for the nine months ended September 30, 2016 and 2015, in conformity with U.S. GAAP.  Our results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2016.

 

4



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The preparation of our unaudited 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 unaudited 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 immaterial amounts in prior years have been reclassified to conform to the 2016 presentation.  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.

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which standardizes cash flow statement classification of certain transactions, including cash payments for debt prepayment or extinguishment, proceeds from insurance claim settlements, and distributions received from equity method investments. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Early adoption is permitted.  We are considering the impact the adoption of ASU 2016-15 may have on our presentation of cash flows.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Share Based Payment Accounting (“ASU 2016-09”), which simplifies the accounting for stock-based compensation transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  The new guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.  Early adoption is permitted.  We are considering the impact the adoption of ASU 2016-09 may have on our results of operations, financial condition, and cash flows.

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which would require the lessee to recognize the assets and liabilities on all leases that may have not been recognized in the past.  The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted.  We are considering the impact the adoption of ASU 2016-02 may have on our results of operations, financial condition, and cash flows.

 

From May 2014 through May 2016, the FASB issued several ASUs related to Revenue from Contracts with Customers.  These ASUs are intended 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 the new revenue recognition ASUs may have on our results of operations, financial condition, and cash flows.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern (“ASU 2014-15”), which would require disclosure of uncertainties about an entity’s ability to continue as a going concern.  The new

 

5



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

guidance is effective for the annual period ending after December 15, 2016 and for interim periods thereafter.  Early application is permitted.  We plan to adopt ASU 2014-15 begining December 31, 2016.

 

 

3.  Inventories, Net

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Materials and supplies

 

$

71,968

 

$

74,353

 

Less: Obsolescence allowance

 

(1,075

)

(988

)

Material and supplies, net

 

70,893

 

73,365

 

Coal inventory

 

2,103

 

3,398

 

Inventories, net

 

$

72,996

 

$

76,763

 

 

4.  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 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 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, 2016 or December 31, 2015.

 

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

 

 

 

Fair Value as of September 30, 2016

 

Description

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

14,040

 

$

 

$

14,040

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

2,282

 

$

2,282

 

 

6



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Fair Value as of December 31, 2015

 

Description

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

41,285

 

$

 

$

41,285

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

10,734

 

$

10,734

 

 


(1)                                 Included in Cash and cash equivalents in the unaudited condensed consolidated balance sheets along with $76.3 million and $48.0 million of demand deposits as of September 30, 2016 and December 31, 2015, respectively.

 

We did not have any transfers between levels during the nine months ended September 30, 2016.  Our policy is to value all transfers between levels using the beginning of period valuation.

 

5.  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 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.  For our 2016 positions, we have executed offsetting contracts to lock in the amount we expect to receive each month.

 

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.  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 unaudited condensed consolidated balance sheets.

 

As of September 30, 2016, we held positions that are expected to settle in 2016 (in thousands, except per ton amounts):

 

 

 

2016

 

International Coal Forward Contracts

 

 

 

Notional amount (tons)

 

66

 

Net asset position

 

$

1,775

 

Weighted-average per ton

 

$

100.13

 

 

 

 

 

Domestic Coal Futures Contracts

 

 

 

Notional amount (tons)

 

20

 

Weighted-average per ton

 

$

14.70

 

 

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.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.  We used collar agreements to fix a portion of our forecasted diesel costs for 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.  We used swap agreements to fix a portion of our forecasted diesel costs for 2016 and all our forecasted diesel costs for 2017.

 

As of September 30, 2016, we were fully hedged for 2016 and 2017 and held the following WTI derivative financial instruments:

 

 

 

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)

 

 

 

2016 collar positions

 

85

 

$

55.90

 

85

 

$

74.10

 

 

$

 

2016 swap positions

 

 

$

 

 

$

 

85

 

$

64.83

 

2017 swap positions

 

 

$

 

 

$

 

636

 

$

55.00

 

Total

 

85

 

$

55.90

 

85

 

$

74.10

 

721

 

$

56.16

 

 

Offsetting and Balance Sheet Presentation

 

 

 

September 30, 2016

 

 

 

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

 

$

1,775

 

$

 

$

(1,775

)

$

1,775

 

$

 

$

1,775

 

WTI derivative financial instruments

 

 

(4,057

)

 

 

 

(4,057

)

Total

 

$

1,775

 

$

(4,057

)

$

(1,775

)

$

1,775

 

$

 

$

(2,282

)

 

 

 

December 31, 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

 

$

7,462

 

$

(398

)

$

(7,462

)

$

7,462

 

$

 

$

7,064

 

WTI derivative financial instruments

 

 

(17,798

)

 

 

 

(17,798

)

Total

 

$

7,462

 

$

(18,196

)

$

(7,462

)

$

7,462

 

$

 

$

(10,734

)

 

Net amounts of derivative liabilities are included in Accrued expenses in the unaudited condensed consolidated balance sheets.  There were no cash collateral requirements as of September 30, 2016 or December 31, 2015.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Derivative Gains and Losses

 

(Gain) loss on derivative financial instruments recognized in the unaudited condensed consolidated statement of operations and comprehensive income were as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

International coal forward contracts

 

$

(4

)

$

(1,153

)

$

(54

)

$

(5,999

)

International coal put options

 

 

(4,039

)

 

5,155

 

Domestic coal futures contracts

 

(58

)

(564

)

(55

)

4,095

 

WTI derivative financial instruments

 

1,130

 

11,500

 

(5,148

)

8,875

 

U.S. On-Highway Diesel derivative financial instruments

 

 

4,491

 

 

5,656

 

Net derivative financial instruments loss (gain)

 

$

1,068

 

$

10,235

 

$

(5,257

)

$

17,781

 

 

See Note 4 for a discussion related to the fair value of derivative financial instruments.

 

6.  Impairments

 

Goodwill

 

During the second quarter of 2015, due to the weak domestic coal market outlook, especially as it related to 8400 Btu coal, coupled with our decision to reduce annual production at the Cordero Rojo Mine, we performed a goodwill impairment assessment.  We determined that the carrying amount of the Cordero Rojo Mine exceeded its estimated fair value.  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 related to our Owned and Operated Mines segment, which is reflected in the nine months ended September 30, 2015.  The remaining $2.3 million balance in goodwill relates to our other mines in the Owned and Operated Mines segment.

 

Long-Lived Assets

 

Due to lower planned production estimates as well as continued weak coal prices, management completed an impairment analysis with respect to each of the mines in our Owned and Operated Mines segment during the second quarter of 2016.  Although the impairment analysis did not indicate any impairment, if the prices of coal continue to remain depressed or if reserves become uneconomic for mining in the future, the long-lived assets in our Owned and Operated Mines segment are at risk for future impairments.  Management is also evaluating certain idled equipment to determine if the associated costs are recoverable during the life of the mine but presently believes that all costs are recoverable.  During the nine months ended September 30, 2016, we recorded impairments of $2.5 million in the Owned and Operated Mines segment, primarily for engineering costs related to the Overland Conveyor project at our Antelope Mine and $2.0 million related to a shovel that we no longer expect to use because of declining production that is part of Other.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7.  Senior Notes

 

Senior notes consisted of the following (in thousands):

 

 

 

September 30, 2016

 

 

 

Principal

 

Unamortized 
Discount and 
Debt Issuance 
Costs

 

Carrying 
Value

 

Fair
Value (1)

 

8.50% senior notes due 2019

 

$

300,000

 

$

(4,009

)

$

295,991

 

$

246,000

 

6.375% senior notes due 2024

 

200,000

 

(3,683

)

196,317

 

104,500

 

Total senior notes

 

$

500,000

 

$

(7,692

)

$

492,308

 

$

350,500

 

 

 

 

December 31, 2015

 

 

 

Principal

 

Unamortized 
Discount and 
Debt Issuance 
Costs

 

Carrying 
Value

 

Fair
Value (1)

 

8.50% senior notes due 2019

 

$

300,000

 

$

(4,785

)

$

295,215

 

$

151,500

 

6.375% senior notes due 2024

 

200,000

 

(4,055

)

195,945

 

61,000

 

Total senior notes

 

$

500,000

 

$

(8,840

)

$

491,160

 

$

212,500

 

 


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

 

Subsequent Event

 

On October 17, 2016, our direct and indirect wholly-owned subsidiaries, CPE Resources and Cloud Peak Energy Finance Corp. (collectively, the “Issuers”), completed offers to exchange (the “Exchange Offers”) up to $400 million aggregate principal amount of their outstanding 8.50% Senior Notes due 2019 (the “2019 Notes”) and 6.375% Senior Notes due 2024 (the “2024 Notes”, together with the 2019 Notes, the “Old Notes”) for new secured 12.00% Second Lien Notes due 2021 to be issued by the Issuers (the “New Secured Notes”) and, in some cases, cash consideration, subject to the terms and conditions of the Exchange Offers.  The primary purposes of the Exchange Offers were to extend the maturity of the 2019 Notes to November 2021, to reduce leverage by capturing the trading discounts on the Old Notes and to further our ongoing efforts to provide sufficient liquidity to manage through depressed industry conditions and better position the capital structure to help facilitate a future extension of the Credit Agreement or new bank facility or other line of credit before the Credit Agreement terminates in February 2019.

 

Holders of $237.9 million aggregate principal amount of the 2019 Notes and $143.6 million aggregate principal amount of the 2024 Notes tendered such notes pursuant to the Exchange Offers.  On October 17, 2016, the Issuers accepted for exchange all such Old Notes validly tendered, issued $290.4 million aggregate principal amount of New Secured Notes, and made cash payments of $26.0 million in the aggregate (including $7.7 million in accrued and unpaid interest) to tendering holders of the Old Notes.  The transaction resulted in recognition of $4.5 million in expenses for the three months ended September 30, 2016.  Upon completion of the Exchange Offers, $62.1 million aggregate principal amount of the 2019 Notes and $56.4 million aggregate principal amount of the 2024 Notes remain outstanding.

 

The exchanges of the Old Notes for the New Secured Notes were accounted for as a troubled debt restructuring.  As the future cash flows of the New Secured Notes were greater than the carrying amount of the Old Notes, no gain was recognized.  The amount of extinguished debt will be amortized over the remaining life of the New Secured Notes using the effective interest method and recognized as a reduction of interest expense.  As a result, our reported interest expense will be significantly less than the contractual cash interest payments throughout the term of the New Secured Notes.  Our current tax attributes are expected to offset any cash tax impacts from the Exchange Offers.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following tables reflect the impact the Exchange Offers had on our Senior notes:

 

 

 

September 
30, 2016 
Carrying 
Value

 

Exchanges

 

Deferred 
Gain on 
Forgiven 
Debt

 

Cash 
Premium 
Paid

 

Post-
transaction 
Adjusted 
Carrying 
Value

 

8.5% senior notes due 2019

 

$

295,991

 

$

(199,703

)

$

(35,024

)

$

 

$

61,264

 

6.375% senior notes due 2024

 

196,317

 

(90,663

)

(50,284

)

 

55,370

 

12.0% second lien senior notes due 2021

 

 

290,366

 

85,308

 

(18,335

)

357,339

 

Total senior notes

 

$

492,308

 

$

 

$

 

$

(18,335

)

$

473,973

 

 

 

 

Post-
transaction 
Adjusted 
Carrying 
Value

 

Unamortized 
Debt 
Issuance 
Costs and 
Cash
 Premium 
Paid

 

Unamortized 
Deferred 
Gain on 
Forgiven 
Debt

 

Post-
transaction 
Principal 
Balance

 

8.5% senior notes due 2019

 

$

61,264

 

$

830

 

$

 

$

62,094

 

6.375% senior notes due 2024

 

55,370

 

1,039

 

 

56,409

 

12.0% second lien senior notes due 2021

 

357,339

 

18,335

 

(85,308

)

290,366

 

Total senior notes

 

$

473,973

 

$

20,204

 

$

(85,308

)

$

408,869

 

 

8.  Asset Retirement Obligations

 

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

 

 

 

2016

 

2015

 

Balance as of January 1,

 

$

153,155

 

$

217,312

 

Accretion expense

 

5,641

 

9,960

 

Revisions to estimated future reclamation cash flows

 

(53,769

)

(57,631

)

Payments

 

(1,048

)

(780

)

Balance as of September 30,

 

103,979

 

168,861

 

Less: current portion

 

(1,400

)

(1,071

)

Asset retirement obligation, net of current portion

 

$

102,579

 

$

167,790

 

 

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, 2016 and 2015.

 

Revisions during the nine months ended September 30, 2016 related to our Antelope Mine, Cordero Rojo Mine and Spring Creek Mine were $ 24.9 million, $20.8 million, and $8.1 million, respectively.  These downward revisions were primarily due to extending each of the mine’s lives due to lower expected annual production rates, as well as updated equipment and fuel cost guidance issued by the State of Wyoming.  Reductions to asset retirement obligations resulting from such revisions generally result in a corresponding reduction to the related asset retirement costs in Property, plant and equipment, net, however, if the decrease to the asset retirement obligation exceeds the carrying amount of the related asset retirement costs, the resulting non-cash credit will reduce Depreciation and depletion on the unaudited condensed consolidated statements of operations and comprehensive income.  As of September 30, 2016, these revisions reduced the related asset by $17.5 million.  Depreciation and depletion was reduced by $36.3 million for the nine months ended September 30, 2016.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Downward revisions during the nine months ended September 30, 2015 related to our Antelope Mine, Cordero Rojo Mine, and Spring Creek Mine were $1.7 million, $44.0 million, and $11.9 million, respectively.  These revisions reduced the related asset by $40.8 million as of September 30, 2015.  Depreciation and depletion was reduced by $16.8 million for the nine months ended September 30, 2015.

 

9.  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.  Our capital equipment lease obligations are included in Other liabilities.  Future payments for these obligations are as follows (in thousands):

 

Year Ended December 31,

 

 

 

2016

 

$

586

 

2017

 

2,318

 

2018

 

2,234

 

2019

 

1,677

 

2020

 

878

 

Total

 

7,693

 

Less: interest

 

357

 

Total principal payments

 

7,336

 

Less: current portion

 

2,139

 

Capital equipment lease obligations, net of current portion

 

$

5,197

 

 

Accounts Receivable Securitization Program

 

As of September 30, 2016, we had $29.5 million of available receivable sale capacity under the Accounts Receivable Securitization Program (the “A/R Securitization Program”).  There were no borrowings outstanding under the A/R Securitization Program as of September 30, 2016 or December 31, 2015.

 

Senior Secured Revolving 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 and September 9, 2016 (as amended, the “Credit Agreement”).  The Credit Agreement provides us with a senior secured revolving credit facility with a capacity of up to $400 million that can be used to borrow funds or obtain letters of credit.  The borrowing capacity under the Credit Agreement is reduced by the undrawn face amount of letters of credit issued and outstanding, which may be up to $250 million at any time.

 

The September 9, 2016 Second Amendment to the Credit Agreement (the “Second Amendment”) replaced the quarterly EBITDA-based financial covenants that previously required us to (a) maintain defined minimum levels of interest coverage and (b) comply with a maximum net secured debt leverage ratio.  These financial covenants were replaced with a new monthly minimum liquidity covenant that requires us to maintain liquidity, as defined in the Credit Agreement, of not less than $125 million as of the last day of each month.  The Second Amendment reduced the maximum borrowing capacity under the Credit Agreement to $400 million, from the previous maximum capacity of $500 million.  It also revised the permitted debt covenant and permitted lien covenant to allow the issuance of second lien debt in an amount up to $350 million.  Additionally, it revised various negative covenants and baskets that would apply to, among other things, the incurrence of debt, making investments, asset dispositions and restricted payments.  Lastly, it established a requirement for deposit account control agreements with the administrative agent for certain of our deposit accounts.  The Second Amendment did not change the maturity of the Credit Agreement, which remains February 21, 2019.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Loans under the Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 3.50%.  We pay the lenders a commitment fee of 0.50% per year on the unused amount of the Credit Agreement.  Letters of credit issued under the Credit Agreement, unless drawn upon, will incur a per annum fee from the date at which they are issued of 3.50%.  Letters of credit that are drawn upon may be converted to loans at our request, subject to the conditions to borrowing set forth in the Credit Agreement.  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, 2016, we had no borrowings and the undrawn face amount of letters of credit outstanding under the Credit Agreement was $71.3 million.  As of December 31, 2015, there were no borrowings or letters of credit outstanding under the Credit Agreement.  We were in compliance with the covenants contained in the Credit Agreement as of September 30, 2016 and December 31, 2015.

 

Liquidity

 

Our aggregate availability for borrowing under the Credit Agreement and the A/R Securitization Program was approximately $358.2 million as of September 30, 2016.  Our total liquidity, which includes cash and cash equivalents and amounts available under both our Credit Agreement and the A/R Securitization Program, was $448.5 million as of September 30, 2016.

 

Debt Issuance Costs

 

Debt issuance costs of $1.3 million related to the decrease in the Credit Agreement’s borrowing capacity were written off in the three and nine months ended September 30, 2016.  Debt issuance costs of $3.6 million were incurred in connection with the Second Amendment.  These costs were deferred and are being amortized to Interest expense over the remaining term of the Credit Agreement.  There were $8.6 million and $8.3 million of unamortized debt issuance costs as of September 30, 2016 and December 31, 2015, respectively, related to the A/R Securitization Program and the Credit Agreement included in noncurrent Other assets.

 

10.  Commitments and Contingencies

 

Commitments

 

Purchase Commitments

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Capital Commitments

 

 

 

 

 

Equipment

 

$

4,423

 

$

10,226

 

Land (1)

 

$

 

$

23,678

 

 

 

 

 

 

 

Supplies and Services

 

 

 

 

 

Coal purchase commitments

 

$

846

 

$

 

Transportation agreements (2)(3)

 

$

528,670

 

$

549,053

 

 


(1)                                 This land transaction was completed during the three months ended September 30, 2016.  The contract was modified to reduce the number of acres and related total payment to $11.5 million.

(2)                                 Includes undiscounted port take-or-pay commitments through the remaining term of the agreement in 2024.  Reflects the 2016-2018 amendment entered in the fourth quarter of 2015.  Assumes we do not ship any export tons, and does not include throughput or other charges based on any actual shipments.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(3)                                 Includes undiscounted rail take-or-pay commitments, if we exercise our contractual buyout option in 2019, which requires one year’s notice plus a lump sum payment.  Reflects the 2016-2018 amendment entered in the fourth quarter of 2015.  Assumes we do not ship any export tons, and does not include transportation or other charges based on any actual shipments.  The full term of the agreement continues through 2024.  Assuming we did not exercise our buyout option in 2019 and did not meet minimum shipment requirements, we would owe additional take-or-pay amounts through the remaining term of the agreement.

 

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 Montana District 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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 Montana 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 analysis.  The mining plan for the Spring Creek Mine would not be vacated unless OSM failed to complete its supplemental analysis within 180 days.

 

On November 6, 2015, Spring Creek Coal, the National Mining Association and the State of Montana filed objections to the Magistrate’s findings and recommendations.  The federal defendants filed limited objections on that same day.  WildEarth and Northern Plains filed responses to these objections on November 17, 2015 and November 20, 2015, respectively.  On January 21, 2016, the Montana District Court issued an order adopting most of the Magistrate’s findings and recommendations, but provided OSM 240 days (rather than 180 days) to prepare a supplemental environmental analysis.  Under the Montana District Court’s order, mining at the Spring Creek mine would proceed unabated during the time OSM is undertaking its supplemental analysis and OSM was ordered to submit monthly status reports informing the court and the parties of OSM’s progress in preparing the analysis.  The mining plan for the Spring Creek Mine would not be vacated unless OSM fails to complete its supplemental analysis within 240 days.  The order provides that OSM may request and obtain additional time to prepare its analysis “for good cause.”  On June 27, 2016, the Montana District Court granted a joint motion by Plaintiff Northern Plains and OSM to extend the compliance deadline from 240 days to 256 days.  On October 3, 2016, OSM notified the Montana District Court that OSM had completed its supplemental environmental analysis and issued a new decision on October 3, 2016 re-approving the 2012 mine plan for the Spring Creek Mine.  OSM’s decision and accompanying environmental assessment satisfies the Court’s January 21, 2016 remedy order.  On October 19, 2016, the Court found that OSM had complied with the Court’s January 21, 2016 remedy order and entered a final judgment in the case.

 

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’s 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.  On September 2, 2016, WildEarth filed a Notice of Supplemental Authority indicating that decisions in three unrelated IBLA appeals call into question whether BLM’s decision record approving the WAII South LBM was signed by the appropriate BLM official.  In response to a September 12, 2016 Show Cause Order from the IBLA, BLM filed a response brief on September 26, 2016 representing that the High Plains District Manager had properly signed the decision record approving the WAII South LBM.  Antelope Coal and the State of Wyoming filed briefs in support of BLM’s response on September 27, 2016 and September 30, 2016 respectively.  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.  We are unable to estimate a loss or range of loss for this contingency because (1) the challenge does not

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

seek monetary relief, (2) the nature of the relief sought is to require the regulatory agency to address alleged deficiencies in complying with applicable regulatory and legal requirements and (3) even if the challenges are successful in whole or in part, the IBLA has broad discretion in determining the nature of the relief ultimately granted.

 

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 Department of Interior’s and Office of Surface Mining Reclamation and Enforcement’s (collectively, “OSM”) 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.

 

Intervention by Cloud Peak Energy and Others—The State of Wyoming and all the operators of the mines whose mine plans are being challenged have moved to intervene as Defendants to defend the challenged mine plans.  The prospective intervenors filed their motions on the following dates:  State of Wyoming (November 12, 2015), Antelope Coal LLC (November 13, 2015), New Mexico Coal Resources, LLC (November 16, 2015), Bowie Resources, LLC (November 24, 2015), Thunder Basin Coal, L.L.C. (December 4, 2015).

 

Current Schedule—On November 25, 2015, the OSM filed a motion to sever WildEarth’s complaint and transfer those claims against the two Wyoming mines (Antelope and Black Thunder) to the District of Wyoming and the New Mexico mine (El Segundo) to the District of New Mexico.  Each of the prospective intervenors filed conditional responses in support of OSM’s transfer motion.  On January 7, 2016, WildEarth filed its opposition to OSM’s transfer motion.  On January 29, 2016, WildEarth and OSM filed a Joint Motion to Stay all proceedings for 60 days in order for the parties to pursue settlement discussions.  On February 1, 2016, the prospective intervenors filed a proposed response to the stay motion in which they asked the Colorado District Court to grant (1) the pending intervention motions, and (2) the pending motion to sever transfer, before staying the portion of the case that remained in the District of Colorado.  On February 3, 2016, WildEarth and OSM filed separate reply briefs in support of their stay motion.  On February 16, 2016, the court granted the motion to stay the case for 60 days, and on February 18, 2016, the court granted the pending motions to intervene by Antelope, the State of Wyoming, and the other coal producers.  The stay expired on April 1, 2016 after the parties were unable to reach a voluntary settlement and OSM filed its reply brief in support of its motion to sever and transfer on April 11, 2016.  On June 17, 2016, the Colorado District Court granted OSM’s motion to sever and transfer WildEarth’s claims against the Antelope and Black Thunder mine plans to the District of Wyoming and the El Segundo mine plan to the District of New Mexico.  The challenges against the Antelope and Black Thunder mine plans, which are docketed as separate cases, have both been assigned to Judge Johnson of the District of Wyoming.  On October 7, 2016, BLM filed its administrative record for the case challenging the Antelope mine plan.  On October 21, 2016, WildEarth filed a motion to supplement the administrative record with three administrative documents prepared by other federal agencies.  OSM has until November 4, 2016 to file its opposition brief and WildEarth has until November 11, 2016 to file its reply brief.  After briefing is completed, the Court will either order OSM to supplement the administrative record with one or more of the three documents requested by WildEarth, or will deny the motion in its entirety.  WildEarth’s opening merits brief will be due 45 days after either (a) an amended administrative record is filed by OSM, or (b) the Court denies WildEarth’s motion to supplement.  Opposition briefs by OSM and Antelope Coal would be due 45 days after WildEarth’s opening merits brief is filed.

 

We believe WildEarth’s challenge is without merit.  Nevertheless, if WildEarth’s claims against OSM’s approval of the Antelope mine plan modification 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.  We are unable to estimate a loss or range of loss for this contingency because (1) the challenge does not seek monetary relief, (2) the nature of the relief sought is to require the regulatory agency to address alleged deficiencies in complying with applicable regulatory and legal requirements and (3) even if the challenges are successful in whole or in part, the court has broad discretion in determining the nature of the relief ultimately granted.

 

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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 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 such required reductions or modifications to our mining activities.

 

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 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, 2016, there was one customer that represented 10% or more of consolidated revenue.  For the nine months ended September 30, 2015, 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 unaudited condensed consolidated balance sheets.  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.  We currently use self-bonding to secure performance of certain obligations in Wyoming.  Self-bonding has allowed us to use the strength of our financial positions as security rather than obtaining a traditional surety bond.  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, 2016, we were self-bonded for $190 million and had $448.9 million of reclamation bonds backed by collateral of $71.3 million in the form of letters of credit under our Credit Agreement used for mining, secure coal lease obligations, and for other operating requirements.  We have received approval from the Land Quality Division of the Wyoming Department of Environmental Quality to lower the total bonding

 

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CLOUD PEAK ENERGY INC.

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requirements by $154 million.  Although we currently expect to be able to achieve our goal of exiting self-bonding by January 2017, the timing of its completion is dependent on the State of Wyoming’s processing and approval of our applications, and is therefore, uncertain.

 

11.  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,

 

 

 

2016

 

2015

 

2016

 

2015

 

Service cost

 

$

269

 

$

1,229

 

$

1,956

 

$

3,687

 

Interest cost

 

185

 

482

 

1,002

 

1,446

 

Amortization of prior service cost (credit)

 

(1,872

)

313

 

(3,381

)

939

 

Net periodic benefit cost (credit)

 

$

(1,418

)

$

2,024

 

$

(423

)

$

6,072

 

 

In April 2016, we communicated a change in our Retiree Medical Plan to employees that becomes effective January 1, 2017.  Changes include a decrease in the number of active employees that are eligible for the plan as well as moving to a defined contribution plan away from a defined benefit plan.  These plan changes reduced our accumulated postretirement benefit obligation by $47.7 million during the second quarter of 2016.  The plan changes eliminated the old prior service cost base and established a new negative prior service cost base of approximately $41.1 million, which will be amortized to income over 4.2 years.

 

12.  Income Taxes

 

As of September 30, 2016 and December 31, 2015, we had deferred tax assets principally arising from: ARO, alternative minimum tax credits, pension and postretirement benefits, contract rights, and net operating loss carry-forwards for income tax purposes multiplied by an expected rate of 37%.  As management cannot determine that it is more likely than not that we will realize the benefit of the deferred tax assets, a valuation allowance equal to the net deferred tax asset has been established at September 30, 2016 and December 31, 2015.  The difference between our effective tax rate and the statutory rate is due to the impact of percentage depletion, income tax in the states in which we do business, changes in our valuation allowance and the impact of out of period adjustments.  In addition, the adjustments to ARO and the retiree medical plan, while incurring a loss during the period, substantially impacted our effective rate for 2016. Our effective tax rate for the three months ended September 30, 2016 was 28.3%.  Our effective tax rate for the nine months ended September 30, 2016 was 66.1%.

 

As of September 30, 2016 and December 31, 2015, we had no material unrecognized tax benefits. There was no change in the amount of unrecognized tax benefits as a result of tax positions taken during the year or in prior periods or due to settlements with taxing authorities or lapses of applicable statues of limitations.  We are open to federal and state tax audits until the applicable statutes of limitations expire.

 

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13.  Accumulated Other Comprehensive Income (Loss)

 

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

 

 

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

Beginning balance, January 1,

 

$

(12,951

)

$

(11,299

)

Other comprehensive income (loss) before reclassifications

 

26,996

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

9,698

 

591

 

Net current period other comprehensive income (loss)

 

36,694

 

591

 

Ending balance, September 30,

 

$

23,743

 

$

(10,707

)

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Postretirement Medical Plan (1)

 

 

 

 

 

 

 

 

 

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

 

$

(1,566

)

$

264

 

$

(2,828

)

$

792

 

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

 

(306

)

49

 

(553

)

147

 

Postretirement medical plan changes

 

 

 

42,851

 

 

Total before tax

 

(1,872

)

313

 

39,470

 

939

 

Tax expense (benefit)

 

(831

)

(116

)

(2,776

)

(347

)

Amounts reclassified from AOCI

 

$

(2,703

)

$

197

 

$

36,694

 

$

592

 

 


(1)         See Note 11 for the components of our net periodic postretirement benefit costs.

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

 

14.  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.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

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

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,584

)

$

8,873

 

$

(2,670

)

$

(48,704

)

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

 

61,365

 

61,074

 

61,285

 

61,013

 

Dilutive effect of stock equivalents

 

 

277

 

 

 

Denominator for diluted earnings (loss) per share

 

61,365

 

61,351

 

61,285

 

61,013

 

Diluted earnings (loss) per share

 

$

(0.03

)

$

0.14

 

$

(0.04

)

$

(0.80

)

 

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
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Anti-dilutive stock equivalents

 

2,286

 

2,165

 

2,804

 

2,071

 

 

15.  Segment Information

 

We have two reportable segments; our Owned and Operated Mines segment and our Logistics and Related Activities segment.

 

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 may be 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 and international coal put options are reported within this segment.  Amortization related to port access rights prior to the fourth quarter 2015 impairment and the amended port and rail take-or-pay agreements are also included in this segment.  Losses associated with our investment in the Gateway Pacific Terminal are included in our Logistics and Related Activities segment.

 

Our business activities that are not considered operating segments are included in Other although they are not required to be included in this footnote.  They are provided for reconciliation purposes and include Selling, general and administrative expenses (“SG&A”) as well as results relating to broker activity.

 

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

 

Segment results for the three and nine months ended September 30, 2015 have been retrospectively revised to reflect our new measure of segment profitability first presented in our 2015 Form 10-K.

 

EBITDA represents net income (loss) 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 non-cash impairment charges, (2) adjustments for derivative financial instruments, excluding fair value mark-to-market gains or losses and including cash amounts received or paid, and (3) adjustments to exclude debt restructuring costs.  We enter into certain derivative financial instruments such as put options that require the payment of premiums at contract inception.  The reduction in the premium value over time is reflected in the mark-to-market gains or losses.  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.

 

Adjusted EBITDA

 

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

 

 

 

Three Months Ended September 30,

 

 

 

2016

 

2015

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

 

 

$

55,971

 

 

 

$

68,648

 

Logistics and Related Activities

 

 

 

(6,024

)

 

 

(17,717

)

Other

 

 

 

(9,305

)

 

 

(11,673

)

Eliminations

 

 

 

(38

)

 

 

(237

)

 

 

 

 

40,604

 

 

 

39,021

 

Adjustments to Net income

 

 

 

 

 

 

 

 

 

Depreciation and depletion

 

 

 

(23,460

)

 

 

(7,896

)

Amortization of port access rights

 

 

 

 

 

 

(928

)

Accretion

 

 

 

(1,065

)

 

 

(3,070

)

Impairments

 

 

 

(312

)

 

 

 

Debt restructuring costs

 

 

 

(4,499

)

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Exclusion of fair value mark-to-market gains (losses) (1)

 

$

(1,068

)

 

 

$

(10,235

)

 

 

Inclusion of cash amounts paid (received) (2)

 

555

 

 

 

724

 

 

 

Total derivative financial instruments

 

 

 

(513

)

 

 

(9,511

)

Interest expense, net

 

 

 

(12,986

)

 

 

(10,948

)

Income tax benefit (expense)

 

 

 

647

 

 

 

2,205

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

$

(1,584

)

 

 

$

8,873

 

 


(1)

Fair value mark-to-market (gains) losses reflected on the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

(2)

Cash amounts received and paid reflected within operating cash flows in the Unaudited Condensed Consolidated Statements of Cash Flows.

 

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Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

 

 

$

92,004

 

 

 

$

153,002

 

Logistics and Related Activities

 

 

 

(20,325

)

 

 

(32,079

)

Other(1)

 

 

 

(12,930

)

 

 

(30,488

)

Eliminations

 

 

 

(151

)

 

 

(1,349

)

 

 

 

 

58,598

 

 

 

89,086

 

Adjustments to Net income

 

 

 

 

 

 

 

 

 

Depreciation and depletion

 

 

 

(23,052

)

 

 

(51,742

)

Amortization of port access rights

 

 

 

 

 

 

(2,783

)

Accretion

 

 

 

(5,641

)

 

 

(9,960

)

Impairments

 

 

 

(4,499

)

 

 

(33,355

)

Debt restructuring costs

 

 

 

(4,499

)

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

5,257

 

 

 

$

(17,781

)

 

 

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

 

3,195

 

 

 

1,618

 

 

 

Total derivative financial instruments

 

 

 

8,452

 

 

 

(16,164

)

Interest expense, net

 

 

 

(35,255

)

 

 

(36,137

)

Income tax benefit (expense)

 

 

 

3,226

 

 

 

12,350

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

$

(2,670

)

 

 

$

(48,704

)

 


(1)

Includes $24,349 and $5,318 of sales contract buyouts for the nine months ended September 30, 2016 and 2015, respectively.

(2)

Fair value mark-to-market (gains) losses reflected on the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income.

(3)

Cash amounts received and paid reflected within operating cash flows in the Unaudited Condensed Consolidated Statements of Cash Flow.

(4)

Excludes premiums paid at option contract inception of $5,813 during the nine months ended September 30, 2015, for original settlement dates in subsequent periods.

 

Revenue

 

The following table presents Revenue (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Owned and Operated Mines

 

$

212,010

 

$

265,657

 

$

531,278

 

$

733,735

 

Logistics and Related Activities

 

3,375

 

44,772

 

20,594

 

162,802

 

Other

 

2,514

 

2,176

 

26,131

 

8,626

 

Eliminations

 

(826

)

(10,931

)

(5,493

)

(41,789

)

Consolidated

 

$

217,073

 

$

301,673

 

$

572,510

 

$

863,374

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Capital Expenditures

 

The following table presents purchases of property, plant and equipment, investment in development projects, and capital expenditures included in Property, plant and equipment, net, Other assets, and Accounts payable (in thousands):

 

 

 

Nine Months Ended
September 30,

 

 

 

2016

 

2015

 

Owned and Operated Mines

 

$

31,800

 

$

32,854

 

Logistics and Related Activities

 

 

 

Other

 

1,758

 

3,198

 

Consolidated

 

$

33,558

 

$

36,052

 

 

16.  Equity-Based Compensation

 

Our LTIP permits awards to our employees and eligible non-employee directors, which we generally grant in the first quarter of each year.  The LTIP allows for the issuance of equity-based compensation in the form of restricted stock, restricted stock units, options, stock appreciation rights, dividend equivalent rights, performance awards, and share awards.  At our 2016 annual meeting, shareholders approved an additional 1.6 million shares available for issuance under the LTIP.  As of September 30, 2016, approximately 1.7 million shares were available for grant, depending on the actual performance and vesting of outstanding awards.

 

Generally, each form of equity-based compensation awarded to eligible employees cliff vests on the third anniversary of the grant date, subject to meeting any applicable performance criteria for the award.  However, the awards will pro-rata vest sooner if an employee terminates employment with or stops providing services to us because of death, “disability,” “redundancy” or “retirement” (as such terms are defined in the award agreement or the LTIP, as applicable), or if an employee subject to an employment agreement is terminated by us for any reason other than for “cause” or leaves for “good reason” (as such terms are defined in the relevant employment agreement).  In addition, the awards will fully vest if an employee is terminated without cause (or leaves for good reason, if the employee is subject to an employment agreement) within two years after a “change in control” (as such term is defined in the LTIP) occurs.

 

Restricted Stock Units

 

We have granted restricted stock units under the LTIP to eligible employees and non-employee directors.  The restricted stock units granted to our directors generally vest upon their resignation or retirement (except for a removal for cause) or upon certain events constituting a “change in control” (as such term is defined in the award agreement).  They will pro-rata vest if a director resigns or retires within one year of the date of grant.

 

A summary of restricted stock unit award activity is as follows (in thousands, except per share amounts):

 

 

 

Number

 

Weighted-
Average
Grant-Date
Fair Value

 

 

 

 

 

(per share)

 

Non-vested units as of January 1, 2016

 

732

 

$

11.61

 

Granted

 

1,999

 

$

1.96

 

Forfeited

 

(230

)

$

2.94

 

Vested

 

(149

)

$

14.52

 

Non-vested units as of September 30, 2016

 

2,352

 

$

4.07

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of September 30, 2016, unrecognized compensation cost related to restricted stock awards was $3.8 million, which will be recognized over a weighted-average period of 1.9 years prior to vesting.

 

Performance Share Units

 

Performance share units represent the right to receive a number of shares of common stock (or the equivalent cash value thereof) based on the achievement of targeted performance levels related to pre-established total stockholder return goals over a three-year period, and pay out may range from 0% to 200% of the targeted share number.

 

In previous years, the performance-based units were settled in shares of common stock and the grant date fair value of the awards was calculated using a Monte Carlo simulation and amortized over the performance period.  The 2016 grants are expected to be settled in cash and therefore, will be accounted for as a liability and marked to market on a quarterly basis.

 

The weighted-average grant date fair values of the performance share units granted during the nine months ended September 30, 2016 and the year ended December 31, 2015 were $1.95 and $9.66 per share, respectively. As of September 30, 2016, $20.3 million of unrecognized compensation cost, which represents the unvested portion of the fair market value of performance share units granted, is expected to be recognized over a weighted-average vesting period of 2.3 years.

 

A summary of performance share unit award activity is as follows (in thousands, except per share amounts):

 

 

 

Number

 

Weighted-
Average
Grant-Date
Fair Value

 

 

 

 

 

(per share)

 

Non-vested units as of January 1, 2016

 

911

 

$

14.57

 

Granted

 

2,493

 

$

1.95

 

Forfeited

 

(268

)

$

3.43

 

Canceled

 

(99

)

$

20.24

 

Vested

 

(74

)

$

20.24

 

Non-vested units as of September 30, 2016

 

2,963

 

$

4.63

 

 

17.  Supplemental Guarantor/Non-Guarantor Financial Information

 

In accordance with the indentures governing the senior notes outstanding at September 30, 2016, CPE Inc. and certain of our 100% owned U.S. subsidiaries (the “Guarantor Subsidiaries”) have fully and unconditionally guaranteed the senior notes on a joint and several basis.  These guarantees of either series of senior notes are subject to release in the following customary circumstances:

 

 

·

a sale or other disposition (including by way of consolidation or merger or otherwise) of the Guarantor Subsidiaries or the sale or disposition of all or substantially all the assets of the Guarantor Subsidiaries (other than to CPE Inc. or a Restricted Subsidiary (as defined in the applicable indenture) of CPE Inc.) otherwise permitted by the applicable indenture,

 

 

·

a disposition of the majority of the capital stock of a Guarantor Subsidiary to a third person otherwise permitted by the applicable indenture, after which the applicable Guarantor Subsidiary is no longer a Restricted Subsidiary,

 

 

·

upon a liquidation or dissolution of a Guarantor Subsidiary so long as no default under the applicable indenture occurs as a result thereof,

 

 

·

the designation in accordance with the applicable indenture of the Guarantor Subsidiaries as an Unrestricted Subsidiary or the Guarantor Subsidiaries otherwise ceases to be a Restricted Subsidiary of CPE Inc. in accordance with the applicable indenture,

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

·

defeasance or discharge of such series of senior notes; or

 

 

·

the release, other than the discharge through payment by the Guarantor Subsidiaries, of all other guarantees by such Restricted Subsidiary of Debt (as defined in the applicable indenture) of either issuer of the senior notes or (in the case of the indenture for the 2024 Notes) the debt of another Guarantor Subsidiary under the Credit Agreement.

 

This note does not reflect the effects of the Exchange Offers, which were completed after quarter-end on October 17, 2016 and are described further in Note 7.

 

The following historical financial statement information is provided for CPE Inc. and the Guarantor/Non-Guarantor Subsidiaries:

 

25



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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations and Comprehensive Income

(in thousands)

 

 

 

Three Months Ended September 30, 2016

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE

Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

2,438

 

$

 

$

217,073

 

$

 

$

(2,438

)

217,073

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

22

 

164,265

 

 

 

164,287

 

Depreciation and depletion

 

 

285

 

23,175

 

 

 

23,460

 

Accretion

 

 

 

1,065

 

 

 

1,065

 

(Gain) loss on derivative financial instruments

 

 

 

1,068

 

 

 

1,068

 

Selling, general and administrative expenses

 

 

13,599

 

 

 

(2,438

)

11,161

 

Impairments

 

 

 

312

 

 

 

312

 

Debt restructuring costs

 

 

4,499

 

 

 

 

4,499

 

Other operating costs

 

 

 

360

 

 

 

360

 

Total costs and expenses

 

 

18,405

 

190,245

 

 

(2,438

)

206,212

 

Operating income (loss)

 

2,438

 

(18,405

)

26,828

 

 

 

10,861

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

26

 

20

 

 

 

 

46

 

Interest expense

 

(22

)

(12,718

)

(173

)

(119

)

 

(13,032

)

Other, net

 

 

(29

)

(165

)

29

 

 

(165

)

Total other income (expense)

 

4

 

(12,727

)

(338

)

(90

)

 

(13,151

)

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

 

2,442

 

(31,132

)

26,490

 

(90

)

 

(2,290

)

Income tax benefit (expense)

 

(185

)

 

832

 

 

 

647

 

Income (loss) from unconsolidated affiliates, net of tax

 

 

6