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EX-32.2 - EX-32.2 - CLOUD PEAK ENERGY INC.a17-13293_1ex32d2.htm
EX-32.1 - EX-32.1 - CLOUD PEAK ENERGY INC.a17-13293_1ex32d1.htm
EX-31.2 - EX-31.2 - CLOUD PEAK ENERGY INC.a17-13293_1ex31d2.htm
EX-31.1 - EX-31.1 - CLOUD PEAK ENERGY INC.a17-13293_1ex31d1.htm
EX-10.3 - EX-10.3 - CLOUD PEAK ENERGY INC.a17-13293_1ex10d3.htm

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 June 30, 2017

 

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

 

 

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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

 

Emerging growth
company

o

 

x

 

o

 

o

 

o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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, 75,138,958 shares outstanding as of July 19, 2017.

 

 

 



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 (Loss) for the Three and Six Months Ended June 30, 2017 and 2016

 

1

 

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

 

2

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

 

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

 

53

Item 4

Controls and Procedures

 

54

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

Item 1

Legal Proceedings

 

55

Item 1A

Risk Factors

 

55

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 

55

Item 3

Defaults Upon Senior Securities

 

55

Item 4

Mine Safety Disclosures

 

55

Item 5

Other Information

 

55

Item 6

Exhibits

 

55

 

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 (LOSS)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Revenue

 

$

229,201

 

$

174,188

 

$

424,930

 

$

355,437

 

Costs and expenses

 

 

 

 

 

 

 

 

 

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

 

194,370

 

140,616

 

363,309

 

305,650

 

Depreciation and depletion

 

19,249

 

(19,510

)

37,894

 

(408

)

Accretion

 

1,846

 

1,994

 

3,667

 

4,576

 

(Gain) loss on derivative financial instruments

 

1,595

 

(8,286

)

3,939

 

(6,325

)

Selling, general and administrative expenses

 

9,565

 

13,251

 

20,279

 

27,026

 

Impairments

 

 

34

 

 

4,187

 

Other operating costs

 

92

 

169

 

310

 

456

 

Total costs and expenses

 

226,717

 

128,268

 

429,398

 

335,162

 

Operating income (loss)

 

2,484

 

45,920

 

(4,468

)

20,275

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

118

 

33

 

157

 

70

 

Interest expense

 

(9,866

)

(11,286

)

(22,778

)

(22,338

)

Other, net

 

(138

)

(206

)

(448

)

(595

)

Total other income (expense)

 

(9,886

)

(11,459

)

(23,069

)

(22,863

)

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

 

(7,402

)

34,461

 

(27,537

)

(2,588

)

Income tax benefit (expense)

 

149

 

1,158

 

(151

)

2,580

 

Income (loss) from unconsolidated affiliates, net of tax

 

305

 

(330

)

632

 

(1,078

)

Net income (loss)

 

(6,948

)

35,289

 

(27,056

)

(1,086

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service costs

 

(1,821

)

(1,871

)

(3,642

)

(1,510

)

Postretirement medical plan change

 

 

42,851

 

 

42,851

 

Income tax on postretirement medical and pension changes

 

 

(974

)

 

(1,944

)

Other comprehensive income (loss)

 

(1,821

)

40,006

 

(3,642

)

39,397

 

Total comprehensive income (loss)

 

$

(8,769

)

$

75,295

 

$

(30,698

)

$

38,311

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.09

)

$

0.58

 

$

(0.38

)

$

(0.02

)

Diluted

 

$

(0.09

)

$

0.57

 

$

(0.38

)

$

(0.02

)

Weighted-average shares outstanding - basic

 

75,086

 

61,296

 

70,634

 

61,244

 

Weighted-average shares outstanding - diluted

 

75,086

 

61,971

 

70,634

 

61,244

 

 

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)

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

80,536

 

$

83,708

 

Accounts receivable

 

49,042

 

49,311

 

Due from related parties

 

478

 

 

Inventories, net

 

70,022

 

68,683

 

Derivative financial instruments

 

 

752

 

Income tax receivable

 

1,516

 

1,601

 

Other prepaid and deferred charges

 

33,438

 

20,361

 

Other assets

 

802

 

741

 

Total current assets

 

235,834

 

225,157

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

Property, plant and equipment, net

 

1,408,080

 

1,432,361

 

Goodwill

 

2,280

 

2,280

 

Other assets

 

43,732

 

54,978

 

Total assets

 

$

1,689,926

 

$

1,714,776

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

32,925

 

$

27,678

 

Royalties and production taxes

 

57,335

 

63,018

 

Accrued expenses

 

31,375

 

35,857

 

Due to related parties

 

 

71

 

Other liabilities

 

2,552

 

2,567

 

Total current liabilities

 

124,187

 

129,191

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

Senior notes

 

409,368

 

475,009

 

Asset retirement obligations, net of current portion

 

107,891

 

97,048

 

Accumulated postretirement medical benefit obligation, net of current portion

 

23,701

 

22,950

 

Royalties and production taxes

 

20,995

 

21,557

 

Other liabilities

 

15,276

 

17,360

 

Total liabilities

 

701,418

 

763,115

 

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock ($0.01 par value; 200,000 shares authorized; 75,611 and 61,942 shares issued and 75,134 and 61,465 outstanding as of June 30, 2017 and December 31, 2016, respectively)

 

751

 

615

 

Treasury stock, at cost (477 shares as of both June 30, 2017 and December 31, 2016)

 

(6,498

)

(6,498

)

Additional paid-in capital

 

649,382

 

581,975

 

Retained earnings

 

326,630

 

353,685

 

Accumulated other comprehensive income (loss)

 

18,243

 

21,884

 

Total equity

 

988,508

 

951,661

 

Total liabilities and equity

 

$

1,689,926

 

$

1,714,776

 

 

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)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

2016

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

(27,056

)

$

(1,086

)

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

 

 

 

 

 

Depreciation and depletion

 

37,894

 

(408

)

Accretion

 

3,667

 

4,576

 

Impairments

 

 

4,187

 

Loss (income) from unconsolidated affiliates, net of tax

 

(632

)

1,078

 

Distributions of income from unconsolidated affiliates

 

3,500

 

1,500

 

Deferred income taxes

 

 

(1,944

)

Equity-based compensation expense

 

2,506

 

3,900

 

(Gain) loss on derivative financial instruments

 

3,939

 

(6,325

)

Cash received (paid) on derivative financial instrument settlements

 

(1,147

)

(2,640

)

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

 

702

 

 

Net periodic postretirement benefit costs

 

(2,736

)

995

 

Payments for logistics contracts

 

(17,000

)

(7,500

)

Logistics throughput contract amortization expense

 

18,998

 

16,333

 

Other

 

4,296

 

662

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

269

 

5,563

 

Inventories, net

 

(1,395

)

2,019

 

Due to or from related parties

 

(478

)

(570

)

Other assets

 

(6,160

)

10,813

 

Accounts payable and accrued expenses

 

(6,100

)

(42,654

)

Asset retirement obligations

 

(520

)

(712

)

Net cash provided by (used in) operating activities

 

12,547

 

(12,213

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(7,896

)

(12,075

)

Cash paid for capitalized interest

 

 

(945

)

Investment in development projects

 

(2,110

)

(1,500

)

Insurance proceeds

 

 

2,826

 

Other

 

33

 

45

 

Net cash provided by (used in) investing activities

 

(9,973

)

(11,649

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Repayment of senior notes

 

(62,094

)

 

Payment of debt refinancing costs

 

(406

)

 

Payment of deferred financing costs

 

 

(191

)

Payment amortized to deferred gain

 

(6,294

)

 

Proceeds from issuance of common stock

 

68,850

 

 

Cash paid for equity offering

 

(4,490

)

 

Other

 

(1,312

)

(1,133

)

Net cash provided by (used in) financing activities

 

(5,746

)

(1,324

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(3,172

)

(25,186

)

Cash and cash equivalents at beginning of period

 

83,708

 

89,313

 

Cash and cash equivalents at end of period

 

$

80,536

 

$

64,127

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

Interest paid

 

$

18,605

 

$

20,665

 

Income taxes paid (refunded)

 

$

(85

)

$

(2,796

)

Supplemental non-cash investing and financing activities:

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

1,365

 

$

1,652

 

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 2016 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 and foreign electric utilities.  Thermal coal is primarily consumed by electric utilities and industrial consumers as fuel for electricity generation.  In 2016, 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, both located 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. The Youngs Creek project is an undeveloped surface mine project located in Wyoming, seven miles south of our Spring Creek Mine and contiguous with the Wyoming-Montana state line.  The Big Metal project is located near the Youngs Creek project on the Crow Indian Reservation in southeast Montana.

 

Our logistics business provides a variety of services designed to facilitate the sale and delivery of coal.  These services include the purchase of coal from third parties or from our owned and operated mines, coordination of the transportation and delivery of purchased coal, negotiation of take-or-pay rail agreements and take-or-pay port agreements and demurrage settlement with vessel operators.  See Note 7 for further discussion.

 

Equity Offering and 2019 Notes Redemption

 

On February 28, 2017, we issued 13.5 million shares of common stock through a registered underwritten public offering and received proceeds, net of underwriting discounts and commissions, of $64.7 million.  We used the net proceeds from the offering to fund the full redemption of our outstanding 8.50% Senior Notes due 2019 (the “2019 Notes”).  On March 31, 2017, we redeemed the 2019 Notes at a total cost of $64.5 million, reflecting a redemption price of 101.417% of the principal amount of $62.1 million, or $63.0 million, plus accrued and unpaid interest of $1.5 million.

 

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 the 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, 2016 and 2015, and for each of the three years ended December 31, 2016, included in our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 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 June 30, 2017, and the results of our operations, comprehensive income, and cash flows for the six months ended June 30, 2017 and 2016, in conformity with U.S. GAAP.  Our results of operations for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2017.

 

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

 

4



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 2017 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 will not be material to our consolidated financial statements upon adoption.

 

In May 2017, the FASB issued ASU 2017-09, Compensation — Stock Compensation — Scope of Modification Accounting (“ASU 2017-09”), which provides guidance about the types of changes to terms or conditions of a share-based payment award that would require an entity to apply modification accounting. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied prospectively to an award modified on or after the adoption date.

 

In March 2017, the FASB issued ASU 2017-07, Compensation — Retirement Benefits — Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost (“ASU 2017-07”), which requires separate presentation of service costs and all other components of net benefit costs on the income statement. Under ASU 2017-07, service cost is included in the same line item as other compensation costs arising from services rendered by employees during the period, with all other components of net benefit costs on the income statement outside of income from operations. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments in this update should be applied retrospectively.  We will adopt the new standard as of January 1, 2018.

 

In January 2017, the FASB issued ASU 2017-04, Goodwill — Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the second step in the goodwill impairment test whereby a company measures an impairment loss by calculating the implied fair value of goodwill of a reporting unit and comparing it against its carrying value. As a result, a goodwill impairment loss will be calculated by comparing the fair value of a reporting unit with its carrying amount. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted.  The amendments in this update should be applied prospectively, with added disclosure regarding the nature of and reason for the change in accounting principal.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows — Restricted Cash (“ASU 2016-18”), which requires the statement of cash flows to explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted.  The amendments in this update should be applied using a retrospective transition method to each period presented. We will adopt the new standard as of January 1, 2018.

 

5



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes — Intra-Entity Asset Transfers of Assets other than Inventory (“ASU 2016-16”), which would require the recognition of the tax expense from the sale of an asset other than inventory when the transfer occurs, rather than when the asset is sold to a third party or otherwise recovered through use. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted.  The amendments in this update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We will adopt the new standard as of January 1, 2018.

 

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.  The amendments in this update should be applied using a retrospective transition method to each period presented.  If impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable.  We will adopt the new standard as of January 1, 2018.

 

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.  We adopted this standard on January 1, 2017.  ASU 2016-09 allowed an accounting policy election to either estimate expected forfeitures, which was previously required under U.S. GAAP, or recognize forfeitures as they occurred, as of the adoption date of this ASU. We have elected a policy of estimating expected forfeitures, which is consistent with past practices.

 

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.  Although early adoption is permitted, we anticipate adopting the new standard effective January 1, 2019.  The amendments in this update should be applied at the beginning of the earliest period presented using a modified retrospective approach. We are still evaluating the impact the adoption of ASU 2016-02 may have.  However, based upon our initial reviews and the future payments under operating leases disclosed in our 2016 Form 10-K, we do not currently anticipate that adoption of this standard will have a significant impact on our results of operations, financial condition, and cash flows.

 

From May 2014 through December 2016, the FASB issued several ASUs related to Revenue from Contracts with Customers (“ASC 606”).  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.  The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application.  During 2016 and throughout the second quarter of 2017, we have continued to evaluate our contracts with customers under ASC 606.  For the significant majority of our contracts related to our Owned and Operated Mines segment, we do not anticipate there would be any change to timing or method of recognizing revenue.  We have also tentatively determined that there would be no change to timing or method of recognizing revenue for our Logistics and Related Activities segment.  We are in the process of quantifying the full impact of adoption, however, we do not believe this new standard will have a material impact on our results of operations, financial condition or cash flows.  We will continue to conduct our contract review process throughout 2017.  We are planning to adopt the new standard as of January 1, 2018 and utilize the modified retrospective method.  This approach allows us to apply the new standard to (1) all new contracts entered into after January 1, 2018 and (2) all existing contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance as of January 1, 2018 through a cumulative adjustment to equity.  Consolidated revenue presented in our comparative financial statements for periods prior to January 1, 2018 would not be revised.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.  Inventories, Net

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

Materials and supplies

 

$

67,427

 

$

67,933

 

Less: Obsolescence allowance

 

(1,012

)

(956

)

Material and supplies, net

 

66,415

 

66,977

 

Coal inventory

 

3,607

 

1,706

 

Inventories, net

 

$

70,022

 

$

68,683

 

 

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 June 30, 2017 or December 31, 2016.

 

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 June 30, 2017

 

 

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

38,888

 

$

 

$

38,888

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

2,041

 

$

2,041

 

 

 

 

Fair Value as of December 31, 2016

 

 

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

12,997

 

$

 

$

12,997

 

Derivative financial instruments

 

$

 

$

752

 

$

752

 

 


(1)                                 Included in Cash and cash equivalents in the Unaudited Condensed Consolidated Balance Sheets along with $41.6 million and $70.7 million of demand deposits as of June 30, 2017 and December 31, 2016, respectively.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We did not have any transfers between levels during the six months ended June 30, 2017.  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 used international coal forward contracts linked to forward Newcastle coal prices.  We have used 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 executed offsetting contracts to lock in the amount we expected to receive each month.  We did not hold or enter into any international coal forward contracts for 2017 during the three and six months ended June 30, 2017.

 

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.  We did not hold or enter into any domestic coal futures contracts for 2017 during the three and six months ended June 30, 2017.

 

WTI Derivatives

 

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

 

Under a collar agreement, we pay the difference between the monthly average index price and a floor price if the index price is below the floor, and we receive the difference between the ceiling price and the monthly average index price if the index price is above the ceiling price.  No amounts are paid or received if the index price is between the floor and ceiling prices.  While we would not receive the full benefit of price decreases beyond the floor price, the collars mitigate the risk of crude oil price increases and thereby increased diesel costs that would otherwise have a negative impact on our cash flow.  We used collar agreements to fix a portion of our forecasted diesel costs for 2016. All collar agreements were settled as of December 31, 2016, and we did not hold or enter into any collar agreements for 2017 during the three and six months ended June 30, 2017.

 

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 June 30, 2017, we were fully hedged for the remainder of 2017 and held the following WTI derivative financial instruments (barrels in thousands):

 

Settlement Period

 

Notional
Amount

 

Weighted-
Average per
Barrel

 

2017 swap positions

 

242

 

$

55.00

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Offsetting and Balance Sheet Presentation

 

 

 

June 30, 2017

 

 

 

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

 

WTI derivative financial instruments

 

$

 

$

(2,041

)

$

 

$

 

$

 

$

(2,041

)

 

 

 

December 31, 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

 

WTI derivative financial instruments

 

$

752

 

$

 

$

 

$

 

$

752

 

$

 

 

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 June 30, 2017 or December 31, 2016.

 

Derivative Gains and Losses

 

(Gain) loss on derivative financial instruments recognized in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) were as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

International coal forward contracts

 

$

 

$

(10

)

$

 

$

(50

)

Domestic coal futures contracts

 

 

(7

)

 

4

 

WTI derivative financial instruments

 

1,595

 

(8,269

)

3,939

 

(6,279

)

Net derivative financial instruments loss (gain)

 

$

1,595

 

$

(8,286

)

$

3,939

 

$

(6,325

)

 

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

 

6.  Impairments

 

Long-Lived Assets

 

During the six months ended June 30, 2016, we recorded impairments of $2.2 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.  During the six months ended June 30, 2017, we had no such impairments.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7.  Transportation Agreements

 

To ensure export terminal capacity for export sales, we enter into multi-year throughput agreements with export terminal companies and railroads.  These types of take-or-pay agreements require us to pay for a minimum quantity of coal to be transported on the railway or through the terminal regardless of whether we sell any coal.  If we fail to make sufficient export sales to meet our minimum obligations under the take-or-pay agreements, we are still obligated to make payments to the export terminal company or railroad.

 

We have a throughput contract with Westshore Terminals Limited Partnership (“Westshore”) for our anticipated export sales through their export terminal in Vancouver, British Columbia, and a similar contact with Burlington Northern Santa Fe Railroad (“BNSF”).

 

Current Agreements

 

In December 2016, we terminated our previous agreement with Westshore and entered into a new agreement effective January 1, 2017.  In February 2017, we terminated our previous agreement with BNSF and entered into a new agreement effective April 1, 2017.  These new agreements provide for shipments in 2017 and 2018 and require minimum payments for those two years.  We have the right to terminate our commitments for 2017 and 2018 at any time in exchange for buyout payments.

 

The new agreements do not contain any commitments subsequent to the end of 2018, unless the parties elect to extend the agreements through 2019.  Additionally, after the new Westshore agreement terminates and through 2024, if we choose to ship to export customers, we are required to offer to ship through Westshore up to a specified annual tonnage on terms similar to the new agreement before shipping through any other export terminal.  Westshore has the right to accept or reject our offer in its sole discretion.

 

In exchange for the termination of the previous agreements, we made termination payments.  These amounts have been deferred and will be amortized, along with the previous amendment payments made in 2015 and 2016, over the two-year life of the new agreement.  As of June 30, 2017 and December 31, 2016, there was $33.3 million and $35.3 million, respectively, recorded as a deferred asset for these agreements, included in Other assets in the Unaudited Condensed Consolidated Balance Sheets. We incurred $47.6 million and $8.2 million in costs under our logistics agreements with Westshore and BNSF, including amortization of $8.4 million and $8.2 million, during the three months ended June 30, 2017 and 2016, respectively. We incurred $71.6 million and $24.5 million in costs under our logistics agreements with Westshore and BNSF, including amortization of $19.0 million and $16.3 million, during the six months ended June 30, 2017 and 2016, respectively.   These costs are included in Cost of product sold in the Unaudited Condensed Statements of Operations and Comprehensive Income (Loss).

 

Historical Agreements

 

In the fourth quarter of 2015, we announced amended agreements with both Westshore and BNSF, whereby the previously committed volumes for 2016 through 2018 were reduced to zero in exchange for an upfront payment, plus quarterly payments during 2016 through 2018, as specified in the amended agreement.  We made upfront payments totaling $37.5 million during the fourth quarter of 2015 relating to these two amendments.  We capitalized the $37.5 million in payments made to Westshore and BNSF as a deferred asset and amortized these costs throughout 2016, and will continue to amortize the costs through 2018.

 

In November 2016, due to the improvement in export coal prices, we entered into agreements with Westshore and BNSF to ship coal during the fourth quarter of 2016.  These agreements were effective for the fourth quarter of 2016 only, and did not change the aforementioned amended agreements discussed above, or the terms of the previous throughput or transportation agreements.  Under the fourth quarter agreements, we received a partial credit against current charges for the quarterly payments made under the previous agreements.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We had outstanding purchase commitments related to transportation agreements consisting of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

Services

 

 

 

 

 

Transportation agreements (1)(2)

 

$

43,887

 

$

127,123

 

 


(1)                                 Includes undiscounted port take-or-pay commitments as agreed to in the fourth quarter of 2016 for 2017-2018.  The new agreement does not contain any commitments subsequent to the end of 2018, unless we elect to exercise an option to extend the agreement through 2019.  We have the right to terminate our commitments for 2017 and 2018 at any time in exchange for a buyout payment.  All prior agreements, including the previous take-or-pay commitments through 2024, have been terminated.  These amounts when paid under the new agreement are considered minimum payments on services.  The per tonne loading charges through 2018 reflect these advance payments.

 

(2)                                 Includes undiscounted rail take-or-pay commitments as agreed to in February 2017 and effective April 1, 2017.  The new agreement does not contain any commitments subsequent to the end of 2018, unless the parties agree to extend the agreement. We have the right to terminate our commitments for 2017 and 2018 at any time in exchange for a buyout payment.  If we do not meet the required portion of our future nominated tons, there would be incremental liquidated damages due under the new agreement.  Activity during the period includes decreases for payments made partially offset by the impact of nominations, which have potential future liquidated damages if we do not ship the nominated tons through 2017.  All prior agreements, including the previous take-or-pay commitments through 2024, have been terminated.

 

8.  Equity Method Investments

 

Equity method investments include our 50% equity investment in Venture Fuels Partnership, a coal marketing company.  We have received distributions of $3.5 million and $1.5 million from the Venture Fuels Partnership during the six months ended June 30, 2017 and 2016, respectively.  We also had a minority ownership interest in the joint venture that was seeking to develop the Gateway Pacific Terminals (“GPT”) in Washington State. SSA Marine, the majority interest holder and project developer, notified us of its intention to no longer pursue a coal terminal.  As a result, in January 2017, we abandoned our ownership interest in the joint venture, and we no longer have any ownership interest or associated funding obligations for the joint venture.  We had previously written off our $6.0 million investment in GPT in the fourth quarter of 2015.  Our equity method investments are included in noncurrent Other assets on the Unaudited Condensed Consolidated Balance Sheets and had a carrying amount of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

Venture Fuels Partnership

 

$

4,698

 

$

7,575

 

Other

 

1,014

 

1,006

 

Total equity method investments

 

$

5,712

 

$

8,581

 

 

9.  Senior Notes and Equity

 

On February 28, 2017, we issued 13.5 million shares of common stock through a registered underwritten public offering and received proceeds, net of underwriting discounts and commissions, of $64.7 million. We used the net proceeds from the offering to fund the full redemption of our outstanding 2019 Notes.  On March 31, 2017, we redeemed the 2019 Notes at a total cost of $64.5 million, reflecting a redemption price of 101.417% of the principal amount of $62.1 million, or $63.0 million, plus accrued and unpaid interest of $1.5 million.  In addition, we wrote off $0.7 million in deferred financing costs and original issue discount as of the redemption date.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Senior notes consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

 

Carrying
Value

 

Unamortized
Discount and
Debt Issuance
Costs

 

Unamortized
Deferred Gain
on Forgiven
Debt

 

Principal

 

Fair
Value (1)

 

12.00% second lien senior notes due 2021

 

$

353,889

 

$

15,545

 

$

(79,068

)

$

290,366

 

$

301,981

 

6.375% senior notes due 2024

 

55,479

 

929

 

 

56,408

 

43,716

 

Total senior notes

 

$

409,368

 

$

16,474

 

$

(79,068

)

$

346,774

 

$

345,697

 

 

 

 

December 31, 2016

 

 

 

Carrying
Value

 

Unamortized
Discount and
Debt Issuance
Costs

 

Unamortized
Deferred Gain
on Forgiven
Debt

 

Principal

 

Fair
Value (1)

 

8.50% senior notes due 2019

 

$

61,383

 

$

711

 

$

 

$

62,094

 

$

57,903

 

12.00% second lien senior notes due 2021

 

358,217

 

17,511

 

(85,362

)

290,366

 

306,336

 

6.375% senior notes due 2024

 

55,410

 

998

 

 

56,408

 

42,306

 

Total senior notes

 

$

475,009

 

$

19,220

 

$

(85,362

)

$

408,868

 

$

406,545

 

 


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

 

10.  Asset Retirement Obligations

 

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

 

 

 

2017

 

2016

 

Balance as of January 1,

 

$

98,166

 

$

153,155

 

Accretion expense

 

3,667

 

4,576

 

Revisions to estimated future reclamation cash flows

 

7,695

 

(54,787

)

Payments

 

(520

)

(712

)

Balance as of June 30,

 

109,008

 

102,232

 

Less: current portion

 

(1,117

)

(1,400

)

Asset retirement obligation, net of current portion

 

$

107,891

 

$

100,832

 

 

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 June 30, 2017.

 

Revisions during the six months ended June 30, 2017 were related to our Antelope Mine and Cordero Rojo Mine.  The increase of $10.3 million at our Cordero Rojo Mine was the result of an agreement with the State of Wyoming to reevaluate the mine plan submitted in 2016.  Partially offsetting that increase was the downward revision of $2.6 million at our Antelope Mine due to the annual mine plan evaluation.

 

Revisions during the six months ended June 30, 2016 related to our Antelope Mine, Cordero Rojo Mine and Spring Creek Mine were $25.8 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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 (Loss).  As of June 30, 2016, these revisions reduced the related asset by $17.5 million.  The remaining $37.3 million reduced Depreciation and depletion for the three and six months ended June 30, 2016.

 

11.  Other Obligations

 

Capital Equipment Lease Obligations

 

From time to time, we enter into capital leases on equipment under various lease schedules, which are subject to a master lease agreement, and are pre-payable at our option.  Our capital equipment lease obligations are included in Other liabilities.  Future payments for these obligations are as follows (in thousands):

 

Year Ended December 31,

 

 

 

2017

 

$

1,595

 

2018

 

2,341

 

2019

 

1,689

 

2020

 

882

 

2021

 

 

Total

 

6,507

 

Less: interest

 

271

 

Total principal payments

 

6,235

 

Less: current portion

 

2,552

 

Capital equipment lease obligations, net of current portion

 

$

3,684

 

 

Accounts Receivable Securitization Program

 

On January 31, 2017, the Accounts Receivable Securitization Program (“A/R Securitization Program”) was amended to extend the term of the A/R Securitization Program to January 23, 2020, allow for the ability to issue letters of credit, and reduce the maximum borrowing capacity for both cash and letters of credit from $75 million to $70 million.  All other terms of the program remained substantially the same.  The borrowing capacity under the A/R Securitization Program is reduced by the undrawn face amount of letters of credit issued and outstanding.  As of June 30, 2017, we had $22.9 million of borrowing capacity under the A/R Securitization Program, of which $14.3 million was available.  The undrawn face amount of letters of credit outstanding under the A/R Securitization Program was $8.6 million as of June 30, 2017.  There were no borrowings outstanding under the A/R Securitization Program as of June 30, 2017 or December 31, 2016.

 

Credit Agreement

 

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.  As of June 30, 2017, we had no borrowings and the undrawn face amount of letters of credit outstanding under the Credit Agreement was $42.0 million.  We were in compliance with the covenants contained in the Credit Agreement as of June 30, 2017 and December 31, 2016.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Liquidity

 

Our aggregate availability for borrowing under the Credit Agreement and the A/R Securitization Program was approximately $372.3 million as of June 30, 2017.  Our total liquidity, which includes cash and cash equivalents and amounts available under both our Credit Agreement and the A/R Securitization Program, was $452.8 million as of June 30, 2017.  As of June 30, 2017,  the undrawn face amount of letters of credit outstanding under the A/R Securitization Program and Credit Agreement have decreased by $16.9 million from March 31, 2017, due to a decrease in the collateral required for bonding.  As of July 27, 2017, we have reduced the undrawn face amount of all letters of credit by a total of $38.9 million and now have $28.6 million remaining in undrawn letters of credit.

 

Debt Issuance Costs

 

There were $6.2 million and $7.7 million of unamortized debt issuance costs as of June 30, 2017 and December 31, 2016, respectively, related to the A/R Securitization Program and the Credit Agreement included in noncurrent Other assets.

 

12.  Interest Expense

 

Interest expense consisted of the following (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Senior notes

 

$

6,582

 

$

9,563

 

$

14,568

 

$

19,125

 

Credit facility unutilized fee

 

1,197

 

1,059

 

2,380

 

1,827

 

Federal coal lease obligations imputed interest

 

86

 

84

 

171

 

166

 

Amortization of deferred financing costs and original issue discount

 

1,946

 

1,051

 

3,932

 

2,102

 

Other

 

55

 

75

 

145

 

135

 

Subtotal

 

9,866

 

11,831

 

21,196

 

23,354

 

Premium on early retirement of debt

 

 

 

880

 

 

Write-off of deferred financing costs and original issue discount

 

 

 

702

 

 

Total cost of early retirement of debt and refinancings

 

 

 

1,582

 

 

Total interest expense

 

9,866

 

11,831

 

22,778

 

23,354

 

Less interest capitalized

 

 

(545

)

 

(1,016

)

Net interest expense

 

$

9,866

 

$

11,286

 

$

22,778

 

$

22,338

 

 

In connection with the public offering previously discussed in Note 1, upon redemption of the 2019 Notes, we paid $1.5 million in accrued and unpaid interest, $0.9 million in premium on the early retirement of debt, and wrote off $0.7 million in deferred financing and original issue discount in the six months ended June 30, 2017.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13.  Commitments and Contingencies

 

Commitments

 

Purchase Commitments

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

Capital Commitments

 

 

 

 

 

Equipment

 

$

6,207

 

$

3,222

 

 

 

 

 

 

 

Supplies and Services(1)

 

 

 

 

 

Coal purchase commitments

 

$

2,124

 

$

4,248

 

 


(1)           Refer to Note 7 for information regarding Transportation Commitments.

 

Contingencies

 

Litigation

 

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

 

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

 

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

 

Current Schedule.  WildEarth filed its Statement of Reasons (opening brief) on October 6, 2014, and PRBRC filed its Statement of Reasons on October 10, 2014.  The BLM filed its Answer (opposition brief) on January 12, 2015 and moved for the two appeals to be consolidated.  Antelope Coal and State of Wyoming filed their respective Answers on January 20, 2015.  Briefing has been completed in both appeals.  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 lease modification 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 lease modification.  Antelope Coal and the State of Wyoming filed briefs in support of BLM’s response on September 27, 2016 and September 30, 2016, respectively.  WildEarth filed a brief in response to BLM’s and Antelope Coal’s response briefs on September 29, 2016.  On February 7, 2017, the IBLA issued  a decision setting aside BLM’s decision to issue the WAII South lease modification and remanding that decision to BLM on the ground that the Wyoming High Plains District Manager lacked the appropriate delegation of authority to approve such a leasing decision.  The IBLA specifically declined to address the merits of WildEarth’s and PRBRC’s claims challenging whether BLM’s underlying environmental analysis was sufficient to support

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

the agency’s lease modification decision.  On April 10, 2017, BLM filed a petition with the Director of the Department of Interior’s Office of Hearings and Appeals (the “OHA Director”) asking the OHA Director to reverse the IBLA’s February 7, 2017 decision and remand to the IBLA with instructions to decide the merits of the underlying WildEarth and PRBRC appeals.  On April 19, 2017, the OHA Director issued a notice to docket the petition and set a briefing schedule for BLM’s petition.  On April 21, 2017 and May 18, 2017, PRBRC and WildEarth, respectively, filed briefs in opposition to BLM’s petition.  On May 12, 2017, Antelope Coal filed a brief in support of BLM’s petition.  On June 16, 2017, the State of Wyoming filed a response in opposition to WildEarth’s brief.  On June 19, 2017, BLM filed a reply in support of its petition.  The briefing has been completed and the OHA Director must now decide whether to review the IBLA’s February 7, 2017 decision.

 

We believe the WildEarth and PRBRC appeals challenging the BLM’s WAII South lease modification decision are without merit.  Nevertheless, if the OHA Director denies BLM’s petition for review or if, after the IBLA or BLM reconsiders the issue on remand, the plaintiffs are ultimately successful in frustrating or delaying the approval of the WAII South lease modification, 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 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) the OHA Director may grant BLM’s petition and direct the IBLA to decide the merits of the underlying appeals, in which case the IBLA could reject the appeals or, alternatively, direct BLM to undertake additional environmental review before issuing the WAII South lease modification.

 

WildEarth’s 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, one of which is located in New Mexico, and two 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 the 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 and 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 Coal, 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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

administrative record with three administrative documents prepared by other federal agencies.  On November 4, 2016, OSM and Antelope Coal each filed opposition briefs.  On November 11, 2016, WildEarth filed its reply brief.  On December 1, 2016, the court denied WildEarth’s motion to supplement the record.  WildEarth filed its opening merits brief on January 27, 2017.  Opposition briefs by OSM, Antelope Coal, and the State of Wyoming were filed April 5, 2017.  On June 2, 2017, WildEarth filed its reply brief.  The briefing has been completed and the parties are awaiting a decision from the court.

 

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.

 

WildEarth’s Regulatory Challenge to OSM’s Approval Process for Spring Creek Mine Plan

 

Background—On June 8, 2017, WildEarth and the Montana Environmental Information Center (“MEIC”) filed a complaint in the Montana District Court challenging OSM’s approval of a mine plan modification that was issued to Cloud Peak Energy for the Spring Creek Mine in Montana.  WildEarth and MEIC seek to vacate existing, required regulatory approvals and to enjoin mining operations at the Spring Creek Mine.

 

Current Schedule—The OSM’s answer to the plaintiffs’ complaint is currently due August 11, 2017.  We believe WildEarth’s and MEIC’s challenge is without merit.  Nevertheless, if WildEarth’s and MEIC’s claims against OSM’s approval of the Spring Creek 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.

 

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 leases by application, leases by modification, 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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 six months ended June 30, 2017, there was no single customer that represented 10% or more of consolidated revenue.  For the six months ended June 30, 2016, there was one 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.  The primary method we have used to meet these reclamation obligations and to secure coal lease obligations is to provide a third-party surety bond, typically through an insurance company.  Specific bond amounts may change over time, depending on the activity at the respective site and any specific requirements by federal or state laws.  We also previously used self-bonding to secure performance of certain obligations in Wyoming.  In January 2017, we received approval to remove the final $10 million of self-bonding that existed as of December 31, 2016 and exited self-bonding during the first quarter of 2017.  As of June 30, 2017, we had $435.4 million of reclamation and lease bonds backed by collateral of $50.6 million in the form of letters of credit under our Credit Agreement and A/R Securitization Program used for mining, securing coal lease obligations, and for other operating requirements.  As of July 27, 2017, we have reduced the undrawn face amount of all letters of credit by a total of $38.9 million from March 31, 2017 and now have $28.6 million remaining in undrawn letters of credit.

 

14.  Postretirement Medical Plan

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Service cost

 

$

223

 

$

269

 

$

447

 

$

1,687

 

Interest cost

 

230

 

185

 

459

 

817

 

Amortization of prior service cost (credit)

 

(1,821

)

(1,871

)

(3,642

)

(1,510

)

Net periodic benefit cost (credit)

 

$

(1,368

)

$

(1,417

)

$

(2,736

)

$

994

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In April 2016, we communicated a change in our Retiree Medical Plan to employees that became 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 is being amortized to income over 4.2 years.

 

15.  Income Taxes

 

As of June 30, 2017 and December 31, 2016, we had deferred tax assets principally arising from: AROs, alternative minimum tax credits, postretirement benefits, contract rights, and net operating loss carry-forwards.  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 as of June 30, 2017 and December 31, 2016.

 

Our statutory income tax rate including state income taxes, for the three and six months ended June 30, 2017 and 2016, was approximately 37%.  Our effective tax rate for the three and six months ended June 30, 2017 was 2.0% and (0.5)%, respectively.  Our effective tax rate for the three and six months ended June 30, 2016 was (3.4)% and 99.7%, respectively.  The difference between our statutory income tax rate and our effective income tax rate for the three and six months ended June 30, 2017 is primarily the result of the impact of percentage depletion, income tax in the states in which we do business and changes in our valuation allowance. In addition to the items just described, the difference between our statutory income tax rate and our effective income tax rate for the three and six months ended June 30, 2016 is the result of the impact of out of period adjustments and intraperiod tax allocation required as a result of the adjustments to ARO and the retiree medical plan, while incurring a loss during the period.

 

As of June 30, 2017 and December 31, 2016, we had no uncertain tax positions that we expect to have a material impact on the financial statements as a result of tax deductions 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.  The statute of limitations has expired for all state returns filed for periods ending before 2012, and all federal returns for periods ending before 2013.

 

16.  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):

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

 

 

2016

 

 

 

2017

 

As previously
reported

 

Adjustments(1)

 

As revised

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, January 1,

 

$

21,884

 

$

(12,951

)

$

 

$

(12,951

)

Other comprehensive income (loss) before reclassifications

 

 

26,996

 

15,855

 

42,851

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

(3,642

)

12,401

 

(15,855

)

(3,454

)

Net current period other comprehensive income (loss)

 

(3,642

)

39,397

 

 

39,397

 

Ending balance, June 30,

 

$

18,243

 

$

26,446

 

$

 

$

26,446

 

 


(1)                                 The amounts shown for the six months ended June 30, 2016 have been revised to correct errors in previously reported amounts.  Other comprehensive income (loss) before reclassifications has been increased by $15,855, while the Amounts reclassified from AOCI have decreased by the same amount.  There was no impact on Net current period other comprehensive income (loss) or AOCI.  The correction had no impact on our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), Balance Sheets, or Statements of Cash Flows.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

 

 

2016

 

 

 

2016

 

 

 

2017

 

As revised

 

2017

 

As revised

 

Postretirement Medical Plan (1)

 

 

 

 

 

 

 

 

 

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

 

$

(1,522

)

$

(1,565

)

$

(3,043

)

$

(1,263

)

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

 

(299

)

(306

)

(598

)

(247

)

Total before tax

 

(1,821

)

(1,871

)

(3,642

)

(1,510

)

Tax expense (benefit)

 

 

(974

)

 

(1,944

)

Amounts reclassified from AOCI

 

$

(1,821

)

$

(2,845

)

$

(3,642

)

$

(3,454

)

 


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

(2)                                 Presented on the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2016

 

June 30, 2016

 

 

 

As
previously
reported

 

Adjustment

 

As revised

 

As
previously
reported

 

Adjustment

 

As revised

 

Postretirement Medical Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service costs (credits) included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product sold

 

$

(1,565

)

$

 

(1,565

)

$

(1,263

)

$

 

(1,263

)

SG&A

 

(306

)

 

(306

)

(247

)

 

(247

)

Postretirement medical plan changes (1)

 

42,851

 

(42,851

)

 

42,851

 

(42,851

)

 

Total before tax

 

40,980

 

(42,851

)

(1,871

)

41,341

 

(42,851

)

(1,510

)

Tax expense (benefit)

 

(974

)

 

(974

)

(1,944

)

 

(1,944

)

Amounts reclassified from AOCI

 

$

40,006

 

$

(42,851

)

$

(2,845

)

$

39,397

 

$

(42,851

)

$

(3,454

)

 


(1)                                 Amounts reclassified from AOCI for the three and six months ended June 30, 2016 have been revised to correct errors in previously reported amounts.  Amounts reclassified from AOCI have been decreased to exclude Postretirement medical plan changes of $42,851 that were previously included in error.  This correction has no impact on our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), Balance Sheets, or Statements of Cash Flows.

 

17.  Earnings (Loss) per Share

 

Potential dilutive 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.  On February 28, 2017, we issued 13.5 million shares of common stock through a registered underwritten public offering.

 

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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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

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

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(6,948

)

$

35,289

 

$

(27,056

)

$

(1,086

)

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

 

75,086

 

61,296

 

70,634

 

61,244

 

Dilutive effect of stock equivalents

 

 

675

 

 

 

Denominator for diluted earnings (loss) per share

 

75,086

 

61,971

 

70,634

 

61,244

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

(0.09

)

$

0.58

 

$

(0.38

)

$

(0.02

)

Diluted earnings (loss) per share

 

$

(0.09

)

$

0.57

 

$

(0.38

)

$

(0.02

)

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Anti-dilutive stock equivalents

 

3,423

 

 

3,133

 

2,587

 

 

18.  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 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.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

 

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.

 

Revenue

 

The following table presents Revenue (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Owned and Operated Mines

 

$

178,644

 

$

152,105

 

$

352,254

 

$

319,269

 

Logistics and Related Activities

 

65,977

 

3,200

 

94,225

 

17,218

 

Other

 

1,141

 

19,684

 

2,434

 

23,617

 

Eliminations

 

(16,561

)

(801

)

(23,983

)

(4,667

)

Consolidated

 

$

229,201

 

$

174,188

 

$

424,930

 

$

355,437

 

 

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):

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

2016

 

Owned and Operated Mines

 

$

10,536

 

$

13,978

 

Logistics and Related Activities

 

 

 

Other

 

836

 

1,364

 

Consolidated

 

$

11,372

 

$

15,342

 

 

Adjusted EBITDA

 

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, (3) adjustments to exclude debt restructuring costs, and (4) non-cash throughput amortization expense and contract termination payments made to amend the BNSF and Westshore agreements.  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.  In prior years the amortization of port and rail contract termination payments were included as part of EBITDA and Adjusted EBITDA because the cash payments approximated the amount of amortization being taken during the year.  During 2017, management determined that the non-cash portion of amortization arising from payments made in prior years as well as the amortization of contract termination payments should be adjusted out of EBITDA because the ongoing cash payments are now significantly smaller than the overall amortization of these payments and no longer reflect the transactional results.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Adjusted EBITDA by Segment

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Net income (loss)

 

$

(6,948

)

$

35,289

 

$

(27,056

)

$

(1,086

)

Interest income

 

(118

)

(33

)

(157

)

(70

)

Interest expense

 

9,866

 

11,286

 

22,778

 

22,338

 

Other, net

 

138

 

206

 

448

 

595

 

Income tax expense (benefit)

 

(149

)

(1,158

)

151

 

(2,580

)

(Income) loss from unconsolidated affiliates, net of tax

 

(305

)

330

 

(632

)

1,078

 

Consolidated operating income (loss)

 

$

2,484

 

$

45,920

 

$

(4,468

)

$

20,275

 

 

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

15,319

 

$

49,154

 

$

27,237

 

$

43,719

 

Depreciation and depletion

 

19,061

 

(19,854

)

37,513

 

(1,071

)

Accretion

 

1,695

 

1,891

 

3,365

 

4,318

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

1,595

 

(8,276

)

3,939

 

(6,275

)

Inclusion of cash amounts received (paid)

 

(811

)

(2,112

)

(1,147

)

(6,202

)

Total derivative financial instruments

 

784

 

(10,388

)

2,792

 

(12,477

)

Impairments

 

 

(32

)

 

2,139

 

Other

 

(138

)

(207

)

(448

)

(595

)

Adjusted EBITDA

 

$

36,721

 

$

20,564

 

$

70,459

 

$

36,033

 

 

 

 

 

 

 

 

 

 

 

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

(3,440

)

$

(8,240

)

$

(10,855

)

$

(16,061

)

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

 

(10

)

 

(50

)

Inclusion of cash amounts received (paid)

 

 

1,781

 

 

3,563

 

Total derivative financial instruments

 

 

1,771

 

 

3,513

 

Non-cash throughput amortization expense and contract termination payments

 

5,069

 

 

9,920

 

 

Other

 

 

(894

)

 

(1,753

)

Adjusted EBITDA

 

$

1,629

 

$

(7,363

)

$

(935

)

$

(14,301

)

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

(9,855

)

$

5,062

 

$

(20,868

)

$

(7,270

)

Depreciation and depletion

 

188

 

343

 

380

 

663

 

Accretion

 

151

 

103

 

302

 

258

 

Impairment

 

 

66

 

 

2,048

 

Debt restructuring costs

 

(17

)

 

23

 

 

Other

 

305

 

565

 

632

 

676

 

Adjusted EBITDA(1) (2)

 

$

(9,228

)

$

6,139

 

$

(19,531

)

$

(3,625

)

 

 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

460

 

$

(55

)

$

18

 

$

(113

)

Adjusted EBITDA

 

$

460

 

$

(55

)

$

18

 

$

(113

)

 


(1)                                 Includes $48 and $18,823 of sales contract buyouts for the three months ended June 30, 2017 and 2016, respectively.

 

(2)                                 Includes $96 and $22,754 of sales contract buyouts for the six months ended June 30, 2017 and 2016, respectively.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

19.  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 2017 annual meeting, stockholders approved an additional 1.4 million shares for issuance under the LTIP.  As of June 30, 2017, shares available for issuance under the LTIP were approximately 1.8 million shares.

 

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.

 

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.

 

Restricted Stock Units

 

We have granted restricted stock units under the LTIP to eligible employees and non-employee directors.  A summary of restricted stock unit award activity is as follows (in thousands, except per share amounts):

 

 

 

Number of
Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

 

 

 

 

(per share)

 

Non-vested units as of January 1, 2017

 

2,338

 

$

4.02

 

Granted

 

780

 

$

4.71

 

Forfeited

 

(80

)

$

3.65

 

Vested

 

(153

)

$

12.72

 

Non-vested units as of June 30, 2017

 

2,885

 

$

3.75

 

 

As of June 30, 2017, unrecognized compensation cost related to restricted stock awards was $4.5 million, which will be recognized over a weighted-average period of 2.1 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 most years, including 2017, the performance-based units are expected to be settled in shares of common stock and the grant date fair value of the awards is calculated using a Monte Carlo simulation and amortized over the performance period.  The 2016 grants are currently expected to be settled in cash upon any vesting in 2019, and therefore, are accounted for as a liability and marked to market on a quarterly basis.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The weighted-average grant date fair values of the performance share units granted during the six months ended June 30, 2017 and the year ended December 31, 2016 were $5.85 and $1.95 per share, respectively. As of June 30, 2017, $11.9 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 2.0 years.

 

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

 

 

 

Number of
Shares

 

Weighted-
Average
Grant-Date
Fair Value

 

 

 

 

 

(per share)

 

Non-vested units as of January 1, 2017

 

2,958

 

$

4.63

 

Granted

 

1,012

 

$

5.85

 

Forfeited

 

(89

)

$

3.87

 

Canceled

 

(78

)

$

25.63

 

Vested

 

(82

)

$

25.63

 

Non-vested units as of June 30, 2017

 

3,721

 

$

4.08

 

 

The assumptions used to estimate the fair value of the performance-based share units granted on March 3, 2017 are as follows:

 

Risk-free interest rate

 

1.5

%

Expected volatility

 

76.3

%

Term

 

2.8 years

 

Fair value (per share)

 

$

5.85

 

 

20.  Supplemental Guarantor/Non-Guarantor Financial Information

 

In accordance with the indentures governing the senior notes outstanding as of June 30, 2017, 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 Subsidiary or the sale or other disposition of all or substantially all the assets of the Guarantor Subsidiary (other than to CPE Inc. or a Restricted Subsidiary (as defined in the applicable indenture) of CPE Inc. otherwise not in violation of  the applicable indenture;

 

·                  a disposition of the majority of the capital stock of a Guarantor Subsidiary to a third person otherwise not in violation of 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 Subsidiary as an Unrestricted Subsidiary or the Guarantor Subsidiary otherwise ceases to be a Restricted Subsidiary of CPE Inc. in accordance with the applicable indenture;

 

·                  defeasance or discharge of such series of senior notes;

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

·                  in the case of the indenture for the 12% Second Lien Senior Notes due 2021, as set forth in the First Lien/Second Lien Intercreditor Agreement, dated October 17, 2016, among Cloud Peak Energy Resources LLC, Cloud Peak Energy Finance Corp., PNC Bank, National Association, as Senior Representative for the First Lien Credit Agreement Secured Parties and Wilmington Trust, National Association, as the Second Priority Representative for the Second Lien Indenture Secured Parties.

 

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

 

Supplemental Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)

(in thousands)

 

 

 

Three Months Ended June 30, 2017

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

1,842

 

$

 

$

229,201

 

$

 

$

(1,842

)

229,201

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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