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EX-31.2 - EX-31.2 - CLOUD PEAK ENERGY INC.a16-11506_1ex31d2.htm
EX-31.1 - EX-31.1 - CLOUD PEAK ENERGY INC.a16-11506_1ex31d1.htm
EX-10.2 - EX-10.2 - CLOUD PEAK ENERGY INC.a16-11506_1ex10d2.htm
EX-4.1 - EX-4.1 - CLOUD PEAK ENERGY INC.a16-11506_1ex4d1.htm
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Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2016

 

or

 

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

 

For the transition period from                      to                   

 

Commission File Number:  001-34547

 

 

Cloud Peak Energy Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

26-3088162

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

505 S. Gillette Ave., Gillette, Wyoming

 

82716

(Address of principal executive offices)

 

(Zip Code)

 

(307) 687-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

x  Yes      o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

x  Yes      o  No

 

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

 

Large
accelerated filer

 

Accelerated
filer

 

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

 

Smaller reporting
company

o

 

x

 

o

 

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

o  Yes      x  No

 

Number of shares outstanding of Cloud Peak Energy Inc.’s common stock, as of the latest practicable date: Common stock, $0.01 par value per share, 61,321,335shares outstanding as of July 20, 2016.

 

 

 



Table of Contents

 

CLOUD PEAK ENERGY INC.

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1

 

Financial Statements —

 

 

 

 

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

 

1

 

 

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

 

2

 

 

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

 

3

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

4

 

 

 

Cautionary Notice Regarding Forward-Looking Statements

 

32

 

 

 

Item 2

 

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

 

35

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

 

55

Item 4

 

Controls and Procedures

 

56

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 1

 

Legal Proceedings

 

57

Item 1A

 

Risk Factors

 

57

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

Item 3

 

Defaults Upon Senior Securities

 

58

Item 4

 

Mine Safety Disclosures

 

58

Item 5

 

Other Information

 

58

Item 6

 

Exhibits

 

58

 

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

 

i



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.       Financial Statements.

 

CLOUD PEAK ENERGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Revenue

 

$

174,188

 

$

244,148

 

$

355,437

 

$

561,701

 

Costs and expenses

 

 

 

 

 

 

 

 

 

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

 

140,616

 

222,443

 

305,650

 

486,760

 

Depreciation and depletion

 

(19,510

)

19,310

 

(408

)

43,846

 

Amortization of port access rights

 

 

928

 

 

1,855

 

Accretion

 

1,994

 

3,348

 

4,576

 

6,890

 

(Gain) loss on derivative financial instruments

 

(8,286

)

2,761

 

(6,325

)

7,546

 

Selling, general and administrative expenses

 

13,251

 

12,511

 

27,026

 

23,760

 

Impairments

 

34

 

33,355

 

4,187

 

33,355

 

Other operating costs

 

169

 

304

 

456

 

517

 

Total costs and expenses

 

128,268

 

294,960

 

335,162

 

604,529

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

45,920

 

(50,812

)

20,275

 

(42,828

)

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

33

 

50

 

70

 

99

 

Interest expense

 

(11,286

)

(12,621

)

(22,338

)

(25,289

)

Other, net

 

(206

)

244

 

(595

)

(93

)

Total other income (expense)

 

(11,459

)

(12,327

)

(22,863

)

(25,283

)

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

 

34,461

 

(63,139

)

(2,588

)

(68,111

)

Income tax benefit (expense)

 

1,158

 

9,866

 

2,580

 

10,146

 

Income (loss) from unconsolidated affiliates, net of tax

 

(330

)

376

 

(1,078

)

388

 

Net income (loss)

 

35,289

 

(52,897

)

(1,086

)

(57,577

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service costs

 

(1,871

)

313

 

(1,510

)

626

 

Postretirement medical plan change

 

42,851

 

 

42,851

 

 

Income tax on postretirement medical and pension changes

 

(974

)

(116

)

(1,944

)

(232

)

Other comprehensive income (loss)

 

40,006

 

197

 

39,397

 

394

 

Total comprehensive income (loss)

 

$

75,295

 

$

(52,700

)

$

38,311

 

$

(57,183

)

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58

 

$

(0.87

)

$

(0.02

)

$

(0.94

)

Diluted

 

$

0.57

 

$

(0.87

)

$

(0.02

)

$

(0.94

)

Weighted-average shares outstanding - basic

 

61,296

 

61,028

 

61,244

 

60,982

 

Weighted-average shares outstanding - diluted

 

61,971

 

61,028

 

61,244

 

60,982

 

 

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,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

64,127

 

$

89,313

 

Accounts receivable

 

34,859

 

43,248

 

Due from related parties

 

730

 

160

 

Inventories, net

 

74,818

 

76,763

 

Income tax receivable

 

6,665

 

8,659

 

Other prepaid and deferred charges

 

14,853

 

25,945

 

Other assets

 

4,265

 

98

 

Total current assets

 

200,317

 

244,186

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

Property, plant and equipment, net

 

1,443,962

 

1,488,371

 

Goodwill

 

2,280

 

2,280

 

Other assets

 

59,983

 

67,323

 

Total assets

 

$

1,706,542

 

$

1,802,160

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

23,493

 

$

44,385

 

Royalties and production taxes

 

70,894

 

74,054

 

Accrued expenses

 

36,219

 

42,317

 

Other liabilities

 

2,182

 

2,133

 

Total current liabilities

 

132,788

 

162,889

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

Senior notes

 

491,917

 

491,160

 

Asset retirement obligations, net of current portion

 

100,832

 

151,755

 

Accumulated postretirement medical benefit obligation, net of current portion

 

20,474

 

60,845

 

Royalties and production taxes

 

18,810

 

34,680

 

Other liabilities

 

12,126

 

12,950

 

Total liabilities

 

776,947

 

914,279

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock ($0.01 par value; 200,000 shares authorized; 61,798 and 61,647 shares issued and 61,321 and 61,170 outstanding as of June 30, 2016 and December 31, 2015, respectively)

 

613

 

612

 

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

 

(6,498

)

(6,498

)

Additional paid-in capital

 

578,275

 

574,874

 

Retained earnings

 

330,759

 

331,844

 

Accumulated other comprehensive income (loss)

 

26,446

 

(12,951

)

Total equity

 

929,595

 

887,881

 

Total liabilities and equity

 

$

1,706,542

 

$

1,802,160

 

 

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

 

2



Table of Contents

 

CLOUD PEAK ENERGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

(1,086

)

$

(57,577

)

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

 

 

 

 

 

Depreciation and depletion

 

(408

)

43,846

 

Amortization of port access rights

 

 

1,855

 

Accretion

 

4,576

 

6,890

 

Impairments

 

4,187

 

33,355

 

Loss (income) from unconsolidated affiliates, net of tax

 

1,078

 

(388

)

Distributions of income from unconsolidated affiliates

 

1,500

 

 

Deferred income taxes

 

(1,944

)

(10,146

)

Equity-based compensation expense

 

3,900

 

2,815

 

(Gain) loss on derivative financial instruments

 

(6,325

)

7,546

 

Cash received (paid) on derivative financial instrument settlements

 

(2,640

)

(894

)

Premium payments on derivative financial instruments

 

 

(5,813

)

Net periodic postretirement benefit costs

 

995

 

4,048

 

Non-cash logistic agreements expense

 

16,333

 

 

Three year amendment of logistics contracts

 

(7,500

)

 

Other

 

662

 

2,358

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

5,563

 

34,485

 

Inventories, net

 

2,019

 

1,089

 

Due to or from related parties

 

(570

)

(2,247

)

Other assets

 

10,813

 

(4,196

)

Accounts payable and accrued expenses

 

(42,654

)

(41,593

)

Asset retirement obligations

 

(712

)

(546

)

Net cash provided by (used in) operating activities

 

(12,213

)

14,887

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(12,075

)

(14,782

)

Cash paid for capitalized interest

 

(945

)

(228

)

Investment in development projects

 

(1,500

)

(1,500

)

Payment of restricted cash

 

 

(6,500

)

Recoveries from equipment loss

 

2,826

 

 

Other

 

45

 

44

 

Net cash provided by (used in) investing activities

 

(11,649

)

(22,966

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Principal payments on federal coal leases

 

 

(63,970

)

Payment of deferred financing costs

 

(191

)

(341

)

Other

 

(1,133

)

(817

)

Net cash provided by (used in) financing activities

 

(1,324

)

(65,128

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(25,186

)

(73,207

)

Cash and cash equivalents at beginning of period

 

89,313

 

168,745

 

Cash and cash equivalents at end of period

 

$

64,127

 

$

95,538

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

Interest paid

 

$

20,665

 

$

26,134

 

Income taxes paid (refunded)

 

$

(2,796

)

$

3,972

 

Supplemental non-cash investing and financing activities:

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

1,652

 

$

8,744

 

Assets acquired under capital leases

 

$

115

 

$

 

 

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

 

3



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Organization and Business

 

We are one of the largest producers of coal in the United States of America (“U.S.”) and the Powder River Basin (“PRB”), based on our 2015 coal sales.  We operate some of the safest mines in the coal industry.  According to the most current Mine Safety and Health Administration (“MSHA”) data, we have one of the lowest employee all injury incident rates among the largest U.S. coal producing companies.

 

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

 

Our Antelope Mine and Cordero Rojo Mine are located in Wyoming and our Spring Creek Mine is located in Montana.  Our mines produce subbituminous thermal coal with low sulfur content, and we sell our coal primarily to domestic electric utilities.  Thermal coal is primarily consumed by electric utilities and industrial consumers as fuel for electricity generation.  In 2015, the coal we produced generated approximately 3% of the electricity produced in the U.S.  We do not produce any metallurgical coal.

 

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

 

In 2015, we addressed the issue of low seaborne thermal coal prices for international coal sales by mitigating our associated losses and take-or-pay exposure.  We amended agreements with Westshore Terminals Limited Partnership (“Westshore”) and Burlington Northern Santa Fe Railway (“BNSF”) providing for reduced quarterly payments from 2016 through 2018.  We will continue to meet regularly with Westshore and BNSF during the next several years to discuss market conditions, potential shipments, and the terms for such shipments, if any.  We do not expect to export any tons at current market prices.

 

Principles of Consolidation

 

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

 

4



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Certain immaterial amounts in prior years have been reclassified to conform to the 2016 presentation.  Due to the tabular presentation of rounded amounts, certain tables reflect insignificant rounding differences.

 

2.  Accounting Policies and Standards Update

 

Recently Issued Accounting Pronouncements

 

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

 

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

 

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

 

From May 2014 through May 2016, the FASB issued several ASUs related to Revenue from Contracts with Customers.  These ASUs are intended to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts.  The new guidance is effective for interim and annual periods beginning after December 15, 2017, although entities may adopt one year earlier if they choose.  We are considering the impact the adoption of the new revenue recognition ASUs may have on our results of operations, financial condition, and cash flows.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements — Going Concern (“ASU 2014-15”), which would require disclosure of uncertainties about an entity’s ability to continue as a going concern.  The new guidance is effective for the annual period ending after December 15, 2016 and for interim periods thereafter.  Early application is permitted.  We began applying ASU 2014-15 in the fourth quarter of 2015 and have performed quarterly evaluations since that time.  We will comply with the new disclosure requirements should the evaluations indicate disclosure is necessary.

 

5



Table of Contents

 

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,

 

 

 

2016

 

2015

 

Materials and supplies

 

$

74,373

 

$

74,353

 

Less: Obsolescence allowance

 

(1,063

)

(988

)

Material and supplies, net

 

73,310

 

73,365

 

Coal inventory

 

1,508

 

3,398

 

Inventories, net

 

$

74,818

 

$

76,763

 

 

4.  Fair Value of Financial Instruments

 

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

 

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

 

·                  Level 2 is defined as observable inputs other than Level 1 prices.  These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Our Level 2 assets and liabilities include derivative financial 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, 2016 or December 31, 2015.

 

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

 

 

 

Fair Value as of June 30, 2016

 

Description

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

15,012

 

$

 

$

15,012

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

1,770

 

$

1,770

 

 

 

 

Fair Value as of December 31, 2015

 

Description

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

41,285

 

$

 

$

41,285

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

10,734

 

$

10,734

 

 


(1)                                 Included in Cash and cash equivalents in the unaudited condensed consolidated balance sheets along with $49.1 million and $48.0 million of demand deposits as of June 30, 2016 and December 31, 2015, respectively.

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5.  Derivative Financial Instruments

 

Coal Contracts

 

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

 

Under the international coal forward contracts, if the monthly average index price is lower than the contract price, we receive the difference, and if the monthly average index price is higher than the contract price, we pay the difference.  For our 2016 positions, we have executed offsetting contracts to lock in the amount we expect to receive each month.

 

Under the domestic coal futures contracts, if the monthly average index price is higher than the contract price, we receive the difference, and if the monthly average index price is lower than the contract price, we pay the difference.  Amounts due to us or to the CME as a result of changes in the market price of our open domestic coal futures contracts and to fulfill margin requirements are received or paid through our brokerage bank on a daily basis; therefore, there is no asset or liability on the unaudited condensed consolidated balance sheets.

 

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

 

 

 

2016

 

International Coal Forward Contracts

 

 

 

Notional amount (tons)

 

132

 

Net asset position

 

$

3,551

 

Weighted-average per ton

 

$

100.13

 

 

 

 

 

Domestic Coal Futures Contracts

 

 

 

Notional amount (tons)

 

50

 

Weighted-average per ton

 

$

14.70

 

 

WTI Derivatives

 

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

 

Under a collar agreement, we pay the difference between the monthly average index price and a floor price if the index price is below the floor, and we receive the difference between the ceiling price and the monthly average index price if the index price is above the ceiling price.  No amounts are paid or received if the index price is between the floor and ceiling prices.  While we would not receive the full benefit of price decreases beyond the floor price, the collars mitigate the risk of crude oil price increases and thereby increased diesel costs that would otherwise have a negative impact on our cash flow.  We used collar agreements to fix a portion of our forecasted diesel costs for 2016.

 

Under a swap agreement, if the monthly average index price is higher than the swap price, we receive the difference and if the monthly average index price is lower than the swap price, we pay the difference.  We used swap agreements to fix a portion of our forecasted diesel costs for 2016 and all our forecasted diesel costs for 2017.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Floor

 

Ceiling

 

Swaps

 

Settlement Period

 

Notional
Amount

 

Weighted-
Average per
Barrel

 

Notional
Amount

 

Weighted-
Average per
Barrel

 

Notional

Amount

 

Weighted-
Average per
Barrel

 

 

 

(barrels in
thousands)

 

 

 

(barrels in
thousands)

 

 

 

(barrels in
thousands)

 

 

 

2016 collar positions

 

171

 

$

54.95

 

171

 

$

73.73

 

 

$

 

2016 swap positions

 

 

$

 

 

$

 

171

 

$

64.38

 

2017 swap positions

 

 

$

 

 

$

 

636

 

$

55.00

 

Total

 

171

 

$

54.95

 

171

 

$

73.73

 

807

 

$

56.98

 

 

Offsetting and Balance Sheet Presentation

 

 

 

June 30, 2016

 

 

 

Gross Amounts
Recognized

 

Gross Amounts Offset in

the Consolidated Balance
Sheet

 

Net Amounts Presented in
the Consolidated Balance
Sheet

 

 

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

International coal forward contracts

 

$

3,551

 

$

 

$

(3,551

)

$

3,551

 

$

 

$

3,551

 

WTI derivative financial instruments

 

 

(5,321

)

 

 

 

(5,321

)

Total

 

$

3,551

 

$

(5,321

)

$

(3,551

)

$

3,551

 

$

 

$

(1,770

)

 

 

 

December 31, 2015

 

 

 

Gross Amounts
Recognized

 

Gross Amounts Offset in
the Consolidated Balance
Sheet

 

Net Amounts Presented in
the Consolidated Balance
Sheet

 

 

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

International coal forward contracts

 

$

7,462

 

$

(398

)

$

(7,462

)

$

7,462

 

$

 

$

7,064

 

WTI derivative financial instruments

 

 

(17,798

)

 

 

 

(17,798

)

Total

 

$

7,462

 

$

(18,196

)

$

(7,462

)

$

7,462

 

$

 

$

(10,734

)

 

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

 

Derivative Gains and Losses

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

International coal forward contracts

 

$

(10

)

$

1,263

 

$

(50

)

$

(705

)

International coal put options

 

 

5,053

 

 

5,053

 

Domestic coal futures contracts

 

(7

)

761

 

4

 

4,658

 

WTI derivative financial instruments

 

(8,269

)

(5,480

)

(6,279

)

(2,625

)

U.S. On-Highway Diesel derivative financial instruments

 

 

1,165

 

 

1,165

 

Net derivative financial instruments loss (gain)

 

$

(8,286

)

$

2,761

 

$

(6,325

)

$

7,546

 

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6.  Impairments

 

Goodwill

 

During the second quarter of 2015, due to the weak domestic coal market outlook, especially as it related to 8400 Btu coal, coupled with our decision to reduce annual production at the Cordero Rojo Mine, we performed a goodwill assessment.  We determined that the carrying amount of the Cordero Rojo Mine exceeded its estimated fair value.  The implied fair value of the related goodwill, which related to an acquisition completed in 1997, was $0 requiring a $33.4 million impairment charge related to our Owned and Operated Mines segment, which was recorded during the three months ended June 30, 2015.  The remaining $2.3 million balance in goodwill relates to our other mines in the Owned and Operated Mines segment.

 

Long-Lived Assets

 

Due to lower planned production estimates as well as continued weak coal prices, during the second quarter of 2016, management completed an impairment analysis with respect to each of the mines in our Owned and Operated Mines segment.  Although the impairment analysis did not indicate any impairment, if the prices of coal continue to remain depressed or if reserves become uneconomic for mining in the future, the long-lived assets in our Owned and Operated Mines segment are at risk for future impairments.  During the six months ended June 30, 2016, we recorded impairments of $2.2 million of engineering costs related to the Overland Conveyor project at our Antelope Mine in the Owned and Operated Mines segment and $2.0 million related to Other for a shovel that we no longer expect to use because of declining production.

 

7.  Senior Notes

 

Senior notes consisted of the following (in thousands):

 

 

 

June 30, 2016

 

 

 

Principal

 

Unamortized
Discount and
Debt Issuance
Costs

 

Carrying
Value

 

Fair
Value (1)

 

8.50% senior notes due 2019

 

$

300,000

 

$

(4,275

)

$

295,725

 

$

135,750

 

6.375% senior notes due 2024

 

200,000

 

(3,808

)

196,192

 

68,000

 

Total senior notes

 

$

500,000

 

$

(8,083

)

$

491,917

 

$

203,750

 

 

 

 

December 31, 2015

 

 

 

Principal

 

Unamortized
Discount and
Debt Issuance
Costs

 

Carrying
Value

 

Fair
Value (1)

 

8.50% senior notes due 2019

 

$

300,000

 

$

(4,785

)

$

295,215

 

$

151,500

 

6.375% senior notes due 2024

 

200,000

 

(4,055

)

195,945

 

61,000

 

Total senior notes

 

$

500,000

 

$

(8,840

)

$

491,160

 

$

212,500

 

 


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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.  Asset Retirement Obligations

 

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

 

 

 

2016

 

2015

 

Balance as of January 1,

 

$

153,155

 

$

217,312

 

Accretion expense

 

4,576

 

6,890

 

Revisions to estimated future reclamation cash flows

 

(54,787

)

(22,410

)

Payments

 

(712

)

(546

)

Balance as of June 30,

 

102,232

 

201,246

 

Less: current portion

 

(1,400

)

(1,071

)

Asset retirement obligation, net of current portion

 

$

100,832

 

$

200,175

 

 

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, 2016 and 2015.

 

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 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 expense on the condensed consolidated statements of operations.  As of June 30, 2016, these revisions reduced the related asset by $17.5 million.  The remaining $37.3 million reduced Depreciation and depletion expense for the three and six months ended June 30, 2016.

 

Downward revisions during the six months ended June 30, 2015 related to our Antelope Mine, Cordero Rojo Mine, and Spring Creek Mine were $1.7 million, $8.8 million, and $11.9 million, respectively.  These revisions reduced the related asset by $22.4 million as of June 30, 2015.

 

9.  Other Obligations

 

Capital Equipment Lease Obligations

 

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

 

Year Ended December 31,

 

 

 

2016

 

$

1,217

 

2017

 

2,313

 

2018

 

2,231

 

2019

 

1,675

 

2020

 

880

 

Total

 

8,316

 

Less: interest

 

401

 

Total principal payments

 

7,915

 

Less: current portion

 

2,182

 

Capital equipment lease obligations, net of current portion

 

$

5,733

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable Securitization

 

As of June 30, 2016, the A/R Securitization Program would have allowed for $24.9 million of borrowing capacity.  There were no borrowings outstanding under the A/R Securitization Program as of June 30, 2016 or December 31, 2015.

 

Credit Facility

 

We have a senior secured revolving credit facility, (as amended, the “Credit Agreement”), which provides us with a capacity of up to $500 million that can be used to borrow funds or issue letters of credit.  The borrowing capacity under the Credit Agreement is reduced by the amount of letters of credit issued, which may be up to $250 million.

 

The financial covenants under the Credit Agreement require us to maintain (a) a ratio of EBITDA (as defined in the Credit Agreement) for the preceding four fiscal quarters to consolidated net cash interest expense equal to or greater than 1.50 to 1 and (b) a ratio of secured funded debt less unrestricted cash and marketable securities (net secured debt) to EBITDA for the preceding four fiscal quarters equal to or less than 4.00 to 1.

 

Our ability to access the available funds under the Credit Agreement may be prohibited in the event that we do not comply with the covenant requirements or if we default on our obligations under the Credit Agreement.  Full availability under the Credit Agreement requires a trailing twelve month EBITDA plus unrestricted cash less capital leases of at least $125 million.  As of June 30, 2016, our total capacity under the Credit Agreement was $500 million.  If our trailing twelve month EBITDA were to decline and we were unable to negotiate an amendment with the bank group, our actual borrowing capacity under the Credit Agreement would be reduced or eliminated entirely depending on the extent of the decline in trailing twelve month EBITDA.

 

As of June 30, 2016, we had no borrowings, but there were $66 million of undrawn letters of credit outstanding under the Credit Agreement.  As of December 31, 2015, no borrowings or letters of credit were outstanding under the Credit Agreement.  We were in compliance with the covenants contained in the Credit Agreement.

 

Our aggregate availability under the Credit Agreement and the A/R Securitization Program was approximately $458.9 million as of June 30, 2016.

 

There were $7.2 million and $8.3 million of unamortized debt issuance costs as of June 30, 2016 and December 31, 2015, respectively, related to the A/R Securitization Program and the Credit Agreement included in noncurrent Other assets.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10.  Commitments and Contingencies

 

Commitments

 

Purchase Commitments

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

Capital Commitments

 

 

 

 

 

Equipment

 

$

9,112

 

$

10,226

 

Land (1)

 

$

11,500

 

$

23,678

 

 

 

 

 

 

 

Supplies and Services

 

 

 

 

 

Coal purchase commitments

 

$

1,692

 

$

 

Transportation agreements (2)(3)

 

$

535,777

 

$

549,053

 

 


(1)                                 As of June 30, 2016, the land commitment contract was modified to reduce the number of acres and related total payment due.

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

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

 

Contingencies

 

Litigation

 

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

 

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

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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

 

Current Schedule—On October 28, 2014, the Montana District Court consolidated the WildEarth and Northern Plains cases and set a briefing schedule for resolution of all of WildEarth’s and Northern Plains’ claims through motions for summary judgment.  Plaintiffs filed their opening briefs on December 8, 2014, and under a revised schedule, briefing by all parties was completed on May 7, 2015.  The Montana District Court held an oral argument on July 31, 2015 before a Magistrate Judge in Billings, Montana.  At the conclusion of the oral argument, the Magistrate Judge ordered the parties to negotiate and attempt to resolve this dispute by agreement of the parties.  In October 2015, the parties jointly submitted a status report to the Montana District Court stating they were unable to reach a settlement.  On October 23, 2015, the Magistrate Judge issued her findings and recommendations to the District Court Judge.  In this order, the Magistrate found that OSM had failed to follow the procedural requirements of the National Environmental Policy Act by failing to provide notice to the public when the agency had completed its environmental analysis and by failing to explain how OSM concluded that its approval of the 2012 mining plan would have no significant environmental impacts.  Based on these findings, the Magistrate further recommended that OSM be directed to prepare a supplemental environmental analysis within 180 days from the date the Montana District Court issues a final judgment.  Under the Magistrate’s recommendation, mining at the Spring Creek mine would proceed unabated during the time OSM is undertaking its supplemental analysis.  The mining plan for the Spring Creek Mine would not be vacated unless OSM failed to complete its supplemental analysis within 180 days.

 

On November 6, 2015, Spring Creek Coal, the National Mining Association and the State of Montana filed objections to the Magistrate’s findings and recommendations.  The federal defendants filed limited objections on that same day.  WildEarth and Northern Plains filed responses to these objections on November 17, 2015 and November 20, 2015, respectively.  On January 21, 2016, the Montana District Court issued an order adopting most of the Magistrate’s findings and recommendations, but provided OSM 240 days (rather than 180 days) to prepare a supplemental environmental analysis.  Under the Montana District Court’s order, mining at the Spring Creek mine would proceed unabated during the time OSM is undertaking its supplemental analysis and OSM was ordered to submit monthly status reports informing the court and the parties of OSM’s progress in preparing the analysis.  The mining plan for the Spring Creek Mine would not be vacated unless OSM fails to complete its supplemental analysis within 240 days.  The order provides that OSM may request and obtain additional time to prepare its analysis “for good cause.”  On June 27, 2016, the Montana District Court granted a joint motion by Plaintiff Northern Plains and OSM to extend the compliance deadline from 240 days to 256 days.  OSM is now required to complete its supplemental environmental analysis and related mining plan decision by October 3, 2016.  On June 30, 2016, OSM filed its monthly status report indicating that it was on track to complete its supplemental environmental analysis by the October 3, 2016 deadline.  We continue to believe WildEarth’s challenge and the related Northern Plains’ challenge against OSM are without merit.  Nevertheless, if OSM is unable to prepare its supplemental environmental analysis by the court’s deadline (or longer, if OSM obtains an extension from the court), the mining plan could be vacated.  The impact of any such vacatur could have a material adverse effect on our shipments, financial results and liquidity, and could result in claims from third parties if we are unable to meet our commitments under pre-existing commercial agreements as a result of any required reductions or modifications to our mining activities.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Current Schedule—On November 25, 2015, the OSM filed a motion to sever WildEarth’s complaint and transfer those claims against the two Wyoming mines (Antelope and Black Thunder) to the District of Wyoming and the New Mexico mine (El Segundo) to the District of New Mexico.  Each of the prospective intervenors filed conditional responses in support of OSM’s transfer motion.  On January 7, 2016, WildEarth filed its opposition to OSM’s transfer motion.  On January 29, 2016, WildEarth and OSM filed a Joint Motion to Stay all proceedings for 60 days in order for the parties to pursue settlement discussions.  On February 1, 2016, the prospective intervenors filed a proposed response to the stay motion in which they asked the Colorado District Court to grant (1) the pending intervention motions, and (2) the pending motion to sever transfer, before staying the portion of the case that remained in the District of Colorado.  On February 3, 2016, WildEarth and OSM filed separate reply briefs in support of their stay motion.  On February 16, 2016, the court granted the motion to stay the case for 60 days, and on February 18, 2016, the court granted the pending motions to intervene by Antelope, the State of Wyoming, and the other coal producers.  The stay expired on April 1, 2016 after the parties were unable to reach a voluntary settlement and OSM filed its reply brief in support of its motion to sever and transfer on April 11, 2016.  On June 17, 2016, the Colorado District Court granted OSM’s motion to sever and transfer WildEarth’s claims against the Antelope and Black Thunder mine plans to the District of Wyoming and the El Segundo mine plan to the District of New Mexico.  The challenges against the Antelope and Black Thunder mine plans, which are docketed as separate cases, have

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

both been assigned to Judge Johnson of the District of Wyoming.  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.

 

Other Legal Proceedings

 

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

 

Tax Contingencies

 

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

 

Several non-income based production tax audits related to federal and state royalties and severance taxes, including periods back to 2008, 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, 2016, there was one customer that represented 10% or more of consolidated revenue.  For the six months ended June 30, 2015, there was no single customer that represented 10% or more of consolidated revenue.  We generally do not require collateral or other security on accounts receivable because our customers are comprised primarily of investment grade electric utilities.  The credit risk is controlled through credit approvals and monitoring procedures.

 

Guarantees and Off-Balance Sheet Risk

 

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

 

U.S. federal and state laws require we secure certain of our obligations to reclaim lands used for mining and to secure coal lease obligations.  We currently use self-bonding to secure performance of certain obligations in Wyoming.  Self-

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

bonding allows us to use the strength of our financial positions as security rather than obtaining a traditional surety bond.  Specific bond and/or letter of credit amounts may change over time, depending on the activity at the respective site and any specific requirements by federal or state laws.  As of June 30, 2016, we were self-bonded for $190 million and had $439.2 million of reclamation bonds backed by collateral of $66 million in the form of letters of credit under our Credit Agreement used for mining, secure coal lease obligations, and for other operating requirements.

 

11.  Postretirement Medical Plan

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Service cost

 

$

269

 

$

1,229

 

$

1,687

 

$

2,458

 

Interest cost

 

185

 

482

 

817

 

964

 

Amortization of prior service cost (credit)

 

(1,871

)

313

 

(1,510

)

626

 

Net periodic benefit cost (credit)

 

$

(1,417

)

$

2,024

 

$

994

 

$

4,048

 

 

In April 2016, we communicated a change in our Retiree Medical Plan to employees that becomes effective January 1, 2017.  Changes include a decrease in the number of active employees that are eligible for the plan as well as moving to a defined contribution plan away from a defined benefit plan.  These plan changes reduced our accumulated postretirement benefit obligation by $47.7 million as of June 30, 2016.  The plan changes eliminated the old prior service cost base and established a new negative prior service cost base of approximately $41.1 million, which will be amortized to income over 4.2 years.

 

12.  Income Taxes

 

As of June 30, 2016 and December 31, 2015, we had deferred tax assets principally arising from: ARO, alternative minimum tax credits, pension and postretirement benefits, contract rights, and net operating loss carry-forwards for income tax purposes multiplied by an expected rate of 37%.  As management cannot determine that it is more likely than not that we will realize the benefit of the deferred tax assets, a valuation allowance equal to the net deferred tax asset has been established at June 30, 2016 and December 31, 2015.  The difference between our effective tax rate and the statutory rate is due to the impact of percentage depletion, income tax in the states in which we do business, changes in our valuation allowance and the impact of out of period adjustments.  In addition, the adjustments to ARO and the retiree medical plan, while incurring a loss during the period, substantially impacted our effective rate for 2016.  Our effective tax rate for the three months ended June 30, 2016 was (3.4)%.  Our effective tax rate for the six months ended June 30, 2016 was 99.7%.

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

13.  Accumulated Other Comprehensive Income (Loss)

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

Beginning balance, January 1

 

$

(12,951

)

$

(11,299

)

Other comprehensive income (loss) before reclassifications

 

26,996

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

12,401

 

394

 

Net current period other comprehensive income (loss)

 

39,397

 

394

 

Ending balance, June 30,

 

$

26,446

 

$

(10,905

)

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Postretirement Medical Plan (1)

 

 

 

 

 

 

 

 

 

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

 

$

(1,565

)

$

264

 

$

(1,263

)

$

528

 

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

 

(306

)

49

 

(247

)

98

 

Postretirement medical plan changes

 

42,851

 

 

42,851

 

 

Total before tax

 

40,980

 

313

 

41,341

 

626

 

Tax expense (benefit)

 

(974

)

(116

)

(1,944

)

(232

)

Amounts reclassified from AOCI

 

$

40,006

 

$

197

 

$

39,397

 

$

394

 

 


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

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

 

14.  Earnings (Loss) per Share

 

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

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

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

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

35,289

 

$

(52,897

)

$

(1,086

)

$

(57,577

)

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

 

61,296

 

61,028

 

61,244

 

60,982

 

Dilutive effect of stock equivalents

 

675

 

 

 

 

Denominator for diluted earnings (loss) per share

 

61,971

 

61,028

 

61,244

 

60,982

 

Diluted earnings (loss) per share

 

$

0.57

 

$

(0.87

)

$

(0.02

)

$

(0.94

)

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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,

 

 

 

2016

 

2015

 

2016

 

2015

 

Anti-dilutive stock equivalents

 

 

2,199

 

2,587

 

2,005

 

 

15.  Segment Information

 

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

 

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

 

Our Logistics and Related Activities segment is characterized by the services we provide to our international and certain of our domestic customers where we deliver coal to the customer at a terminal or the customer’s plant or other delivery point, remote from our mine site.  Services provided include the purchase of coal from third parties or from our Owned and Operated Mines segment, at market prices, as well as the contracting and coordination of the transportation and other handling services from third-party operators, which are typically rail and terminal companies.  Title and risk of loss are retained by the Logistics and Related Activities segment through the transportation and delivery process.  Title and risk of loss pass to the customer in accordance with the contract and typically occur at a vessel loading terminal, a vessel unloading terminal or an end use facility.  Risk associated with rail and terminal take-or-pay agreements is also borne by the Logistics and Related Activities segment.  During 2016, we do not plan to sell coal to international customers due to current low prices.  The gains and losses resulting from our international coal forward contracts and international coal put options are reported within this segment.  Amortization related to port access rights prior to the fourth quarter 2015 impairment and the amended port and rail take-or-pay agreements are also included in this segment.  Losses associated with our investment in the Gateway Pacific Terminal are included in our Logistics and Related Activities segment.

 

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

 

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

 

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

 

EBITDA represents net income (loss) before: (1) interest income (expense) net, (2) income tax provision, (3) depreciation and depletion, and (4) amortization.  Adjusted EBITDA represents EBITDA as further adjusted for accretion, which represents non-cash increases in asset retirement obligation liabilities resulting from the passage of time, and specifically identified items that management believes do not directly reflect our core operations.  For the periods presented herein, the specifically identified items are:  (1) adjustments to exclude non-cash impairment charges and (2) adjustments for derivative financial instruments, excluding fair value mark-to-market gains or losses and including cash amounts received or

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

paid.  We enter into certain derivative financial instruments such as put options that require the payment of premiums at contract inception.  The reduction in the premium value over time is reflected in the mark-to-market gains or losses.  Our calculation of Adjusted EBITDA does not include premiums paid for derivative financial instruments; either at contract inception, as these payments pertain to future settlement periods, or in the period of contract settlement, as the payment occurred in a preceding period.

 

Adjusted EBITDA

 

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

 

 

 

Three Months Ended June 30,

 

 

 

2016

 

2015

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

 

 

$

20,564

 

 

 

$

29,651

 

Logistics and Related Activities

 

 

 

(7,363

)

 

 

(6,579

)

Other(1)

 

 

 

6,138

 

 

 

(11,971

)

Eliminations

 

 

 

(55

)

 

 

(456

)

 

 

 

 

19,284

 

 

 

10,645

 

Adjustments to Net income

 

 

 

 

 

 

 

 

 

Depreciation and depletion

 

 

 

19,510

 

 

 

(19,310

)

Amortization of port access rights

 

 

 

 

 

 

(928

)

Accretion

 

 

 

(1,994

)

 

 

(3,348

)

Impairments

 

 

 

(34

)

 

 

(33,355

)

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

8,286

 

 

 

$

(2,761

)

 

 

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

 

331

 

 

 

(1,135

)

 

 

Total derivative financial instruments

 

 

 

8,617

 

 

 

(3,896

)

Interest expense, net

 

 

 

(11,253

)

 

 

(12,571

)

Income tax benefit (expense)

 

 

 

1,158

 

 

 

9,866

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

$

35,289

 

 

 

$

(52,897

)

 


(1)                                 Includes $18,823 of sales contract buyout revenue in the three months ended June 30, 2016.

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

(3)                                 Cash amounts received and paid reflected within operating cash flows.

(4)                                 Excludes premiums paid at option contract inception of $992 during the three months ended June 30, 2015, for original settlement dates in subsequent periods.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Six Months Ended June 30,

 

 

 

2016

 

2015

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

 

 

$

36,033

 

 

 

$

84,354

 

Logistics and Related Activities

 

 

 

(14,301

)

 

 

(14,362

)

Other(1)

 

 

 

(3,626

)

 

 

(18,815

)

Eliminations

 

 

 

(113

)

 

 

(1,112

)

 

 

 

 

17,993

 

 

 

50,065

 

Adjustments to Net income

 

 

 

 

 

 

 

 

 

Depreciation and depletion

 

 

 

408

 

 

 

(43,846

)

Amortization

 

 

 

 

 

 

(1,855

)

Accretion

 

 

 

(4,576

)

 

 

(6,890

)

Impairments

 

 

 

(4,187

)

 

 

(33,355

)

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

6,325

 

 

 

$

(7,546

)

 

 

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

 

2,640

 

 

 

894

 

 

 

Total derivative financial instruments

 

 

 

8,965

 

 

 

(6,652

)

Interest expense, net

 

 

 

(22,268

)

 

 

(25,190

)

Income tax benefit (expense)

 

 

 

2,580

 

 

 

10,146

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

$

(1,086

)

 

 

$

(57,577

)

 


(1)                                 Includes $22,754 and $4,318 of sales contract buyouts for the six months ended June 30, 2016 and 2015, respectively.

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

(3)                                 Cash amounts received and paid reflected within operating cash flows.

(4)                                 Excludes premiums paid at option contract inception of $2,976 during the six months ended June 30, 2015, for original settlement dates in subsequent periods.

 

Revenue

 

The following table presents revenue (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Owned and Operated Mines

 

$

152,105

 

$

206,279

 

$

319,269

 

$

468,078

 

Logistics and Related Activities

 

3,200

 

48,591

 

17,218

 

118,031

 

Other

 

19,684

 

1,219

 

23,617

 

6,450

 

Eliminations

 

(801

)

(11,941

)

(4,667

)

(30,858

)

Consolidated

 

$

174,188

 

$

244,148

 

$

355,437

 

$

561,701

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Capital Expenditures

 

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

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

2015

 

Owned and Operated Mines

 

$

13,978

 

$

22,841

 

Logistics and Related Activities

 

 

 

Other

 

1,364

 

2,185

 

Consolidated

 

$

15,342

 

$

25,026

 

 

16.  Equity-Based Compensation

 

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

 

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

 

Restricted Stock Units

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Number

 

Weighted-
Average
Grant-Date
Fair Value

 

 

 

 

 

(per share)

 

Non-vested units as of January 1, 2016

 

732

 

$

11.61

 

Granted

 

1,952

 

$

1.95

 

Forfeited

 

(220

)

$

2.88

 

Vested

 

(149

)

$

14.53

 

Non-vested units as of June 30, 2016

 

2,315

 

$

4.11

 

 

As of June 30, 2016, unrecognized compensation cost related to restricted stock awards was $4.4 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 previous years, the performance-based units were settled in shares of common stock and the grant date fair value of the awards was calculated using a Monte Carlo simulation and amortized over the performance period.  The 2016 grants are expected to be settled in cash and therefore, will be accounted for as a liability and marked to market on a quarterly basis.  The weighted-average grant date fair values of the performance share units granted during the six months ended June 30, 2016 and the year ended December 31, 2015 were $1.95 and $9.66 per share, respectively.  As of June 30, 2016, $6.5 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 2.1 years.

 

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

 

 

 

Number

 

Weighted-Average
Grant-Date
Fair Value

 

 

 

 

 

(per share)

 

Non-vested units as of January 1, 2016

 

911

 

$

14.57

 

Granted

 

2,493

 

$

1.95

 

Forfeited

 

(254

)

$

3.35

 

Canceled

 

(99

)

$

20.24

 

Vested

 

(74

)

$

20.24

 

Non-vested units as of June 30, 2016

 

2,977

 

$

4.63

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

17.  Supplemental Guarantor/Non-Guarantor Financial Information

 

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

 

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

 

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

 

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

 

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

 

·                  defeasance or discharge of such series of senior notes; or

 

·                  the release, other than the discharge through payment by the Guarantor Subsidiaries, of all other guarantees by such Restricted Subsidiary of Debt (as defined in the applicable indenture) of either issuer of the senior notes or (in the case of the indenture for the $200 million senior notes due March 15, 2024) the debt of another Guarantor Subsidiary under the Credit Agreement.

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations and Comprehensive Income

(in thousands)

 

 

 

Three Months Ended June 30, 2016

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

1,998

 

$

 

$

174,188

 

$

 

$

(1,998

)

174,188

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

77

 

140,539

 

 

 

140,616

 

Depreciation and depletion

 

 

343

 

(19,854

)

 

1

 

(19,510

)

Accretion

 

 

 

1,994

 

 

 

1,994

 

(Gain) loss on derivative financial instruments

 

 

 

(8,286

)

 

 

(8,286

)

Selling, general and administrative expenses

 

 

15,249

 

 

 

(1,998

)

13,251

 

Impairments

 

 

66

 

(32

)

 

 

34

 

Other operating costs

 

 

 

169

 

 

 

169

 

Total costs and expenses

 

 

15,735

 

114,530

 

 

(1,997

)

128,268

 

Operating income (loss)

 

1,998

 

(15,735

)

59,658

 

 

(1

)

45,920

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2

 

31

 

 

 

 

33

 

Interest expense

 

(17

)

(11,007

)

(176

)

(86

)

 

(11,286

)

Other, net

 

 

(66

)

(206

)

66

 

 

(206

)

Total other income (expense)

 

(15

)

(11,042

)

(382

)

(20

)

 

(11,459

)

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

 

1,983

 

(26,777

)

59,276

 

(20

)

(1

)

34,461

 

Income tax benefit (expense)

 

185

 

 

973

 

 

 

1,158

 

Income (loss) from unconsolidated affiliates, net of tax

 

 

6

 

(336

)

 

 

(330

)

Income (loss) from consolidated affiliates, net of tax

 

33,121

 

59,893

 

(20

)

 

(92,994

)

 

Net income (loss)

 

35,289

 

33,122

 

59,893

 

(20

)

(92,995

)

35,289

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service cost

 

(1,871

)

(1,871

)

(1,871

)

 

3,742

 

(1,871

)

Postretirement medical plan change

 

42,851

 

42,851

 

42,851

 

 

(85,702

)

42,851

 

Income tax on postretirement medical plan and pension changes

 

(974

)

(974

)

(974

)

 

1,948

 

(974

)

Other comprehensive income (loss)

 

40,006

 

40,006

 

40,006

 

 

(80,012

)

40,006

 

Total comprehensive income (loss)

 

$

75,295

 

$

73,128

 

$

99,899

 

$

(20

)

$

(173,007

)

$

75,295

 

 

24



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations and Comprehensive Income

(in thousands)

 

 

 

Three Months Ended June 30, 2015

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

2,155

 

$

 

$

244,148

 

$

 

$

(2,155

)

244,148

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

10

 

222,433

 

 

 

222,443

 

Depreciation and depletion

 

 

645

 

18,665

 

 

 

19,310

 

Amortization of port access rights

 

 

 

928

 

 

 

928

 

Accretion

 

 

 

3,348

 

 

 

3,348

 

(Gain) loss on derivative financial instruments

 

 

 

2,761

 

 

 

2,761

 

Selling, general and administrative expenses

 

 

14,666

 

 

 

(2,155

)

12,511

 

Impairments

 

 

 

33,355

 

 

 

33,355

 

Other operating costs

 

 

 

304

 

 

 

304

 

Total costs and expenses

 

 

15,321

 

281,795

 

 

(2,155

)

294,960

 

Operating income (loss)

 

2,155

 

(15,321

)

(37,647

)

 

 

(50,812

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

50

 

 

 

 

50

 

Interest expense

 

 

(10,967

)

(1,568

)

(86

)

 

(12,621

)

Other, net

 

 

(44

)

244

 

44

 

 

244

 

Total other income (expense)

 

 

(10,961

)

(1,324

)

(42

)

 

(12,327

)

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

 

2,155

 

(26,282

)

(38,970

)

(42

)

 

(63,139

)

Income tax benefit (expense)

 

1

 

2,876

 

6,983

 

6

 

 

9,866

 

Income (loss) from unconsolidated affiliates, net of tax

 

 

 

376

 

 

 

376

 

Income (loss) from consolidated affiliates, net of tax

 

(55,053

)

(31,647

)

(36

)

 

86,736

 

 

Net income (loss)

 

(52,897

)

(55,053

)

(31,647

)

(36

)

86,736

 

(52,897

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service cost

 

313

 

313

 

313

 

 

(626

)

313

 

Income tax on postretirement medical plan and pension changes

 

(116

)

(116

)

(116

)

 

232

 

(116

)

Other comprehensive income (loss)

 

197

 

197

 

197

 

 

(394

)

197

 

Total comprehensive income (loss)

 

$

(52,700

)

$

(54,856

)

$

(31,450

)

$

(36

)

$

86,342

 

$

(52,700

)

 

25



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations and Comprehensive Income

(in thousands)

 

 

 

Six Months Ended June 30, 2016

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

4,143

 

$

 

$

355,437

 

$

 

$

(4,143

)

355,437

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

98

 

305,552

 

 

 

305,650

 

Depreciation and depletion

 

 

663

 

(1,071

)

 

 

(408

)

Accretion

 

 

 

4,576

 

 

 

4,576

 

(Gain) loss on derivative financial instruments

 

 

 

(6,325

)

 

 

(6,325

)

Selling, general and administrative expenses

 

 

31,169

 

 

 

(4,143

)

27,026

 

Impairments

 

 

2,048

 

2,139

 

 

 

4,187

 

Other operating costs

 

 

 

456

 

 

 

456

 

Total costs and expenses

 

 

33,978

 

305,327

 

 

(4,143

)

335,162

 

Operating income (loss)

 

4,143

 

(33,978

)

50,110

 

 

 

20,275

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2

 

69

 

 

 

(1

)

70

 

Interest expense

 

(223

)

(21,798

)

(145

)

(172

)

 

(22,338

)

Other, net

 

 

(84

)

(595

)

84

 

 

(595

)

Total other income (expense)

 

(221

)

(21,813

)

(740

)

(88

)

(1

)

(22,863

)

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

 

3,922

 

(55,791

)

49,370

 

(88

)

(1

)

(2,588

)

Income tax benefit (expense)

 

635

 

 

1,944

 

 

1

 

2,580

 

Income (loss) from unconsolidated affiliates, net of tax

 

 

9

 

(1,087

)

 

 

(1,078

)

Income (loss) from consolidated affiliates, net of tax

 

(5,643

)

50,139

 

(88

)

 

(44,408

)

 

Net income (loss)

 

(1,086

)

(5,643

)

50,139

 

(88

)

(44,408

)

(1,086

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service cost

 

(1,510

)

(1,510

)

(1,510

)

 

3,020

 

(1,510

)

Postretirement medical plan change

 

42,851

 

42,851

 

42,851

 

 

(85,702

)

42,851

 

Income tax on postretirement medical plan and pension changes

 

(1,944

)

(1,944

)

(1,944

)

 

3,888

 

(1,944

)

Other comprehensive income (loss)

 

39,397

 

39,397

 

39,397

 

 

(78,794

)

39,397

 

Total comprehensive income (loss)

 

$

38,311

 

$

33,754

 

$

89,536

 

$

(88

)

$

(123,202

)

$

38,311

 

 

26



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations and Comprehensive Income

(in thousands)

 

 

 

Six Months Ended June 30, 2015

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing 
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

4,275

 

$

 

$

561,701

 

$

 

$

(4,275

)

561,701

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

18

 

486,742

 

 

 

486,760

 

Depreciation and depletion

 

 

1,292

 

42,554

 

 

 

43,846

 

Amortization of port access rights

 

 

 

1,855

 

 

 

1,855

 

Accretion

 

 

 

6,890

 

 

 

6,890

 

(Gain) loss on derivative financial instruments

 

 

 

7,546

 

 

 

7,546

 

Selling, general and administrative expenses

 

 

28,035

 

 

 

(4,275

)

23,760

 

Impairments

 

 

 

33,355

 

 

 

33,355

 

Other operating costs

 

 

 

517

 

 

 

517

 

Total costs and expenses

 

 

29,345

 

579,459

 

 

(4,275

)

604,529

 

Operating income (loss)

 

4,275

 

(29,345

)

(17,758

)

 

 

(42,828

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

99

 

 

 

 

99

 

Interest expense

 

 

(22,070

)

(3,049

)

(171

)

1

 

(25,289

)

Other, net

 

 

(131

)

(93

)

131

 

 

(93

)

Total other income (expense)

 

 

(22,102

)

(3,142

)

(40

)

1

 

(25,283

)

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

 

4,275

 

(51,447

)

(20,900

)

(40

)

1

 

(68,111

)

Income tax benefit (expense)

 

1

 

3,555

 

6,584

 

6

 

 

10,146

 

Income (loss) from unconsolidated affiliates, net of tax

 

 

(1

)

390

 

 

(1

)

388

 

Income (loss) from consolidated affiliates, net of tax

 

(61,853

)

(13,960

)

(34

)

 

75,847

 

 

Net income (loss)

 

(57,577

)

(61,853

)

(13,960

)

(34

)

75,847

 

(57,577

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service cost

 

626

 

626

 

626

 

 

(1,252

)

626

 

Income tax on postretirement medical plan and pension changes

 

(232

)

(232

)

(232

)

 

464

 

(232

)

Other comprehensive income (loss)

 

394

 

394

 

394

 

 

(788

)

394

 

Total comprehensive income (loss)

 

$

(57,183

)

$

(61,459

)

$

(13,566

)

$

(34

)

$

75,059

 

$

(57,183

)

 

27



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Balance Sheet

(in thousands)

 

 

 

June 30, 2016

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

63,830

 

$

297

 

$

 

$

 

$

64,127

 

Accounts receivable

 

 

 

31

 

34,828

 

 

34,859

 

Due from related parties

 

 

 

559,289

 

 

(558,559

)

730

 

Inventories, net

 

 

(358

)

75,176

 

 

 

74,818

 

Income tax receivable

 

6,665

 

 

 

 

 

6,665

 

Other prepaid and deferred charges

 

675

 

 

14,178

 

 

 

14,853

 

Other assets

 

155

 

 

4,111

 

 

(1

)

4,265

 

Total current assets

 

7,495

 

63,472

 

653,082

 

34,828

 

(558,560

)

200,317

 

Noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

3,008

 

1,440,955

 

 

(1

)

1,443,962

 

Goodwill

 

 

 

2,280

 

 

 

2,280

 

Other assets

 

998,145

 

1,886,703

 

58,547

 

 

(2,883,412

)

59,983

 

Total assets

 

$

1,005,640

 

$

1,953,183

 

$

2,154,864

 

$

34,828

 

$

(3,441,973

)

$

1,706,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1

 

$

1,520

 

$

21,971

 

$

1

 

$

 

$

23,493

 

Royalties and production taxes

 

 

 

70,894

 

 

 

70,894

 

Accrued expenses

 

1,621

 

5,414

 

29,184

 

 

 

36,219

 

Due to related parties

 

74,077

 

456,234

 

 

28,248

 

(558,559

)

 

Other liabilities

 

 

 

2,182

 

 

 

2,182

 

Total current liabilities

 

75,699

 

463,168

 

124,231

 

28,249

 

(558,559

)

132,788

 

Noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

 

491,917

 

 

 

 

491,917

 

Asset retirement obligations, net of current portion

 

 

 

100,832

 

 

 

100,832

 

Accumulated postretirement medical benefit obligation, net of current portion

 

 

 

20,474

 

 

 

20,474

 

Royalties and production taxes

 

 

 

18,810

 

 

 

18,810

 

Other liabilities

 

347

 

 

11,779

 

 

 

12,126

 

Total liabilities

 

76,046

 

955,085

 

276,126

 

28,249

 

(558,559

)

776,947

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

929,594

 

998,098

 

1,878,738

 

6,579

 

(2,883,414

)

929,595

 

Total liabilities and equity

 

$

1,005,640

 

$

1,953,183

 

$

2,154,864

 

$

34,828

 

$

(3,441,973

)

$

1,706,542

 

 

28



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Balance Sheet

(in thousands)

 

 

 

December 31, 2015

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

87,054

 

$

2,259

 

$

 

$

 

$

89,313

 

Accounts receivable

 

 

 

4,327

 

38,921

 

 

43,248

 

Due from related parties

 

 

 

595,742

 

 

(595,582

)

160

 

Inventories, net

 

 

6,659

 

70,104

 

 

 

76,763

 

Income tax receivable

 

8,659

 

 

 

 

 

8,659

 

Other prepaid and deferred charges

 

291

 

47

 

25,607

 

 

 

25,945

 

Other assets

 

 

 

98

 

 

 

98

 

Total current assets

 

8,950

 

93,760

 

698,137

 

38,921

 

(595,582

)

244,186

 

Noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

5,035

 

1,483,336

 

 

 

1,488,371

 

Goodwill

 

 

 

2,280

 

 

 

2,280

 

Other assets

 

956,296

 

1,844,033

 

64,401

 

 

(2,797,407

)

67,323

 

Total assets

 

$

965,246

 

$

1,942,827

 

$

2,248,154

 

$

38,921

 

$

(3,392,988

)

$

1,802,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

2,228

 

$

42,145

 

$

12

 

$

 

$

44,385

 

Royalties and production taxes

 

 

 

74,054

 

 

 

74,054

 

Accrued expenses

 

2,296

 

5,420

 

34,601

 

 

 

42,317

 

Due to related parties

 

75,068

 

487,772

 

 

32,742

 

(595,582

)

 

Other liabilities

 

 

 

2,133

 

 

 

2,133

 

Total current liabilities

 

77,364

 

495,420

 

152,933

 

32,754

 

(595,582

)

162,889

 

Noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior notes

 

 

491,160

 

 

 

 

491,160

 

Asset retirement obligations, net of current portion

 

 

 

151,755

 

 

 

151,755

 

Accumulated postretirement medical benefit obligation, net of current portion

 

 

 

60,845

 

 

 

60,845

 

Royalties and production taxes

 

 

 

34,680

 

 

 

34,680

 

Other liabilities

 

 

 

12,950

 

 

 

12,950

 

Total liabilities

 

77,364

 

986,580

 

413,162

 

32,754

 

(595,581

)

914,279

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

887,881

 

956,248

 

1,834,992

 

6,167

 

(2,797,407

)

887,881

 

Total liabilities and equity

 

$

965,246

 

$

1,942,827

 

$

2,248,154

 

$

38,921

 

$

(3,392,988

)

$

1,802,160

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30, 2016

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

 

$

(21,908

)

$

9,695

 

$

 

$

 

$

(12,213

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(1,184

)

(10,891

)

 

 

(12,075

)

Cash paid for capitalized interest

 

 

 

(945

)

 

 

(945

)

Investment in development projects

 

 

 

(1,500

)

 

 

(1,500

)

Recoveries from equipment loss

 

 

 

2,826

 

 

 

2,826

 

Other

 

 

 

45

 

 

 

45

 

Net cash provided by (used in) investing activities

 

 

(1,184

)

(10,465

)

 

 

(11,649

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Payment of deferred financing costs

 

 

(134

)

(57

)

 

 

(191

)

Other

 

 

 

(1,133

)

 

 

(1,133

)

Net cash provided by (used in) financing activities

 

 

(134

)

(1,190

)

 

 

(1,324

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(23,224

)

(1,962

)

 

 

(25,186

)

Cash and cash equivalents at beginning of period

 

 

87,054

 

2,259

 

 

 

89,313

 

Cash and cash equivalents at the end of period

 

$

 

$

63,830

 

$

297

 

$

 

$

 

$

64,127

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Cash Flows

(in thousands)

 

 

 

Six Months Ended June 30, 2015

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Net cash provided by (used in) operating activities

 

$

 

$

(71,307

)

$

86,194

 

$

 

$

 

$

14,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(2,123

)

(12,659

)

 

 

(14,782

)

Cash paid for capitalized interest

 

 

 

(228

)

 

 

(228

)

Investment in development projects

 

 

 

(1,500

)

 

 

(1,500

)

Payment of restricted cash

 

 

 

(6,500

)

 

 

(6,500

)

Other

 

 

 

44

 

 

 

44

 

Net cash provided by (used in) investing activities

 

 

(2,123

)

(20,843

)

 

 

(22,966

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments of federal coal leases

 

 

 

(63,970

)

 

 

(63,970

)

Payment of deferred financing costs

 

 

(2

)

(339

)

 

 

(341

)

Other

 

 

 

(817

)

 

 

(817

)

Net cash provided by (used in) financing activities

 

 

(2

)

(65,126

)

 

 

(65,128

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

(73,432

)

225

 

 

 

(73,207

)

Cash and cash equivalents at beginning of period

 

 

167,532

 

1,213

 

 

 

168,745

 

Cash and cash equivalents at the end of period

 

$

 

$

94,100

 

$

1,438

 

$

 

$

 

$

95,538

 

 

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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements that involve substantial risks and uncertainties.  You can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would,” or similar words.  You should read statements that contain these words carefully because they discuss our current plans, strategies, prospects, and expectations concerning our business, operating results, financial condition, and other similar matters.  While we believe that these forward-looking statements are reasonable as and when made, there may be events in the future that we are not able to predict accurately or control, and there can be no assurance that future developments affecting our business will be those that we anticipate.  Additionally, all statements concerning our expectations regarding future operating results are based on current forecasts for our existing operations and do not include the potential impact of any future acquisitions.  The factors listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 (our “2015 Form 10-K”) and Item 1A of Part II of this report, as well as any other cautionary language in this report, describe the known material risks, uncertainties, and events that may cause our actual results to differ materially and adversely from the expectations we describe in our forward-looking statements.  Additional factors or events that may emerge from time to time, or those that we currently deem to be immaterial, could cause our actual results to differ, and it is not possible for us to predict all of them.  You are cautioned not to place undue reliance on the forward-looking statements contained herein.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.  The following factors are among those that may cause actual results to differ materially and adversely from our forward-looking statements:

 

·                  the timing and extent of any recovery of the currently depressed coal industry, domestically and internationally, and the impact of ongoing or further depressed industry conditions on our financial performance, liquidity and financial covenant compliance;

 

·                  the prices we receive for our coal and logistics services, our ability to effectively execute our forward sales strategy, and changes in utility purchasing patterns resulting in decreased long term purchases of coal;

 

·                  timing of reductions or increases in customer coal inventories;

 

·                  our ability to renew sales contracts on favorable terms and to resolve customer requests for reductions or deferrals and respond to cancellations of their committed volumes on terms that preserve the amount and timing of our forecasted economic value;

 

·                  the impact of increasingly variable and less predictable demand for thermal coal based on summer cooling demand, winter heating demand, economic growth rates and other factors that impact overall demand for electricity;

 

·                  our ability to efficiently and safely conduct our mining operations and to adjust our planned production levels to respond to market conditions and effectively manage the costs of our operations;

 

·                  competition with other producers of coal and with traders and re-sellers of coal, including the current oversupply of thermal coal in the marketplace, the impacts of currency exchange rate fluctuations and the strong U.S. dollar, and government environmental, energy and tax policies and regulations that make foreign coal producers more competitive for international transactions;

 

·                  the impact of coal industry bankruptcies on our competitive position relative to other companies who may emerge from bankruptcy with potentially reduced leverage and operating costs;

 

·                  competition with natural gas, wind, solar and other non-coal energy resources, which may continue to increase as a result of low domestic natural gas prices and due to environmental, energy and tax policies, regulations, subsidies and other government actions that encourage or mandate use of alternative energy sources;

 

·                  coal-fired power plant capacity and utilization, including the impact of climate change and other environmental regulations and initiatives, energy policies, political pressures, NGO activities, international treaties or agreements and other factors that may cause domestic and international electric utilities to continue to phase out or close

 

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existing coal-fired power plants, reduce or eliminate construction of any new coal-fired power plants, or reduce consumption of coal from the PRB;

 

·                  the failure of economic, commercially available carbon capture technology to be developed and adopted by utilities in a timely manner;

 

·                  the impact of “keep coal in the ground” campaigns and other well-funded, anti-coal initiatives by environmental activist groups and others targeting substantially all aspects of our industry;

 

·                  our ability to offset declining U.S. demand for coal and achieve longer term growth in our business through our logistics revenue and export sales, including the significant impact of Chinese and Indian thermal coal import demand on overall seaborne coal prices;

 

·                  railroad, export terminal and other transportation performance, costs and availability, including the availability of sufficient and reliable rail capacity to transport PRB coal, the development of future export terminal capacity and our ability to access capacity on commercially reasonable terms;

 

·                  the impact of our substantial rail and terminal take-or-pay commitments and other contractual obligations if we do not meet our required export shipment obligations;

 

·                  weather conditions and weather-related damage that impact our mining operations, our customers, or transportation infrastructure;

 

·                  operational, geological, equipment, permit, labor, weather-related and other risks inherent in surface coal mining;

 

·                  future development or operating costs for our development projects;

 

·                  our ability to successfully acquire coal and appropriate land access rights at economic prices and in a timely manner and our ability to effectively resolve issues with conflicting mineral development that may impact our mine plans;

 

·                  the impact of asset impairment charges if required as a result of challenging industry conditions or other factors;

 

·                  our plans and objectives for future operations and the development of additional coal reserves, including risks associated with acquisitions;

 

·                  the impact of current and future environmental, health, safety, endangered species and other laws, regulations, treaties, executive orders, court decisions or governmental policies, or changes in interpretations thereof and third-party regulatory challenges, including additional requirements, uncertainties, costs, liabilities or restrictions adversely affecting the use, demand or price for coal, our mining operations or the logistics, transportation, or terminal industries;

 

·                  the impact of required regulatory processes and approvals to lease coal and obtain permits for coal mining operations or to transport coal to domestic and foreign customers, including third-party legal challenges to regulatory approvals that are required for some or all of our current or planned mining activities and the recent moratorium on federal coal leasing or other unfavorable regulatory changes to the LBA and coal permitting processes;

 

·                  any increases in rates or changes in regulatory interpretations or assessment methodologies with respect to royalties or severance and production taxes and the potential impact of associated interest and penalties, including the impact of recently finalized federal royalty rule changes for non-arm’s length sales;

 

·                  inaccurately estimating the costs or timing of our reclamation and mine closure obligations and our assumptions underlying reclamation and mine closure obligations;

 

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·                  our ability to obtain required surety bonds and provide any associated collateral on commercially reasonable terms and our ability to continue to self-bond;

 

·                  availability, disruptions in delivery or increases in pricing from third-party vendors of raw materials, capital equipment and consumables which are necessary for our operations, such as explosives, petroleum-based fuel, tires, steel, and rubber;

 

·                  our assumptions concerning coal reserve estimates;

 

·                  our relationships with, and other conditions affecting, our customers (including our largest customers who account for a significant portion of our total revenue) and other counterparties, including economic conditions and the credit performance and credit risks associated with our customers and other counterparties, such as traders, brokers, and lenders under our credit agreement and financial institutions with whom we maintain accounts or enter hedging arrangements;

 

·                  the results of our hedging programs for domestic and international coal sales and diesel fuel costs and changes in the fair value of derivative financial instruments that are not accounted for as a hedge;

 

·                  the terms and restrictions of our indebtedness;

 

·                  liquidity constraints, access to capital and credit markets and availability and costs of credit, surety bonds, letters of credit, and insurance, including risks resulting from the cost or unavailability of financing due to debt and equity capital and credit market conditions for the coal sector or in general, changes in our credit rating, our compliance with the covenants in our debt agreements, the increasing credit pressures on our industry due to depressed conditions, or any demands for increased collateral by our surety bond providers;

 

·                  volatility and decline in the price of our common stock, including the impact of any delisting of our stock from the New York Stock Exchange if we fail to meet the minimum average closing price listing standard;

 

·                  our liquidity, results of operations, and financial condition generally, including amounts of working capital that are available;

 

·                  litigation and other contingencies;

 

·                  the authority of federal and state regulatory authorities to order any of our mines to be temporarily or permanently closed under certain circumstances; and

 

·                  other risk factors or cautionary language described from time to time in the reports and registration statements we file with the Securities and Exchange Commission, including those in Item 1A - Risk Factors in our 2015 Form 10-K and any updates thereto in our Forms 10-Q and Forms 8-K, including Item 1A of Part II of this report.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Explanatory Note

 

This Item 2 may contain forward-looking statements that involve substantial risks and uncertainties.  When considering these forward-looking statements, you should keep in mind the cautionary statements in this report and our other Securities and Exchange Commission (“SEC”) filings, including the Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”) and Item 1A of Part II of this report.  Please see “Cautionary Notice Regarding Forward-Looking Statements” in Item 1 above.

 

This Item 2 is intended to help the reader understand our results of operations and financial condition.  This discussion should be read in conjunction with our unaudited condensed consolidated financial statements in Item 1 of this report and our other SEC filings, including our audited consolidated financial statements in Item 8 of our 2015 Form 10-K.

 

Overview

 

We are one of the largest producers of coal in the United States of America (“U.S.”) and the Powder River Basin (“PRB”), based on our 2015 coal sales.  We operate some of the safest mines in the coal industry.  According to the most current Mine Safety and Health Administration (“MSHA”) data, we have one of the lowest employee all injury incident rates among the largest U.S. coal producing companies.  We currently operate solely in the PRB, the lowest cost region of the major coal producing regions in the U.S., where we own and operate three surface coal mines: the Antelope Mine, the Cordero Rojo Mine, and the Spring Creek Mine.

 

Our Antelope Mine and Cordero Rojo Mine are located in Wyoming and our Spring Creek Mine is located in Montana.  Our mines produce subbituminous thermal coal with low sulfur content, and we sell our coal primarily to domestic electric utilities.  Thermal coal is primarily consumed by electric utilities and industrial consumers as fuel for electricity generation.  In 2015, the coal we produced generated approximately 3% of the electricity produced in the U.S.  We do not produce any metallurgical coal.  As of December 31, 2015, we controlled approximately 1.1 billion tons of proven and probable reserves.

 

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

 

In 2015, we addressed the issue of low seaborne thermal coal prices for international coal sales by mitigating our associated losses and take-or-pay exposure.  We amended agreements with Westshore Terminals Limited Partnership (“Westshore”) and Burlington Northern Santa Fe Railway (“BNSF”) providing for reduced quarterly payments from 2016 through 2018.  We will continue to meet regularly with Westshore and BNSF during the next several years to discuss market conditions, potential shipments, and the terms for such shipments.  We do not expect to export any tons at current market prices.

 

Segment Information

 

Our reportable segments include Owned and Operated Mines and Logistics and Related Activities.  For a discussion of these segments, please see Note 15 of Notes to Unaudited Condensed Consolidated Financial Statements in Item 1.

 

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Core Business Operations

 

Our key business drivers include the following:

 

·                  the volume of coal sold by our Owned and Operated Mines segment;

 

·                  the price for which we sell our coal;

 

·                  the costs of mining, including labor, repairs and maintenance, fuel, explosives, depreciation of capital equipment, and depletion of coal leases;

 

·                  capital expenditures to acquire property, plant and equipment;

 

·                  the volume of deliveries coordinated by our Logistics and Related Activities segment to customer contracted destinations;

 

·                  the revenue we receive for our logistics services;

 

·                  the costs for logistics services, rail and port charges for coal sales made on a delivered basis, including demurrage and any take-or-pay charges; and

 

·                  the results of our derivative financial instruments.

 

The volume of coal that we sell in any given year is driven by global and domestic demand for coal-generated electric power.  Demand for coal-generated electric power may be affected by many factors including weather patterns, natural gas prices, railroad performance, the availability of coal-fired and alternative generating capacity and utilization, environmental and legal challenges, political and regulatory factors, energy policies, international and domestic economic conditions, currency exchange rate fluctuations, and other factors discussed in this Item 2 and in our 2015 Form 10-K.

 

The price at which we sell our coal is a function of the demand for coal relative to the supply.  We typically enter into multi-year contracts with our customers, which helps mitigate the risks associated with any short-term imbalance in supply and demand.  We typically seek to enter each year with expected production effectively fully sold.  This strategy helps us run our mines at predictable production rates, which improves control of operating costs.

 

As is common in the PRB, coal seams at our existing mines naturally deepen, resulting in additional overburden to be removed at additional cost.  We have experienced increased operating costs for longer haul distances, maintenance and supplies, and employee wages and salaries.  We use derivative financial instruments to help manage our exposure to diesel fuel prices.

 

We incur significant capital expenditures to maintain, update and expand our mining equipment, surface land holdings and coal reserves.  As the costs of acquiring federal coal leases and associated surface rights increase, our depletion costs also increase.

 

The volume of coal sold on a delivered basis is influenced by international and domestic market conditions.  Coal sold on a delivered basis to customer contracted destinations, including sales to Asian customers, involves us arranging and paying for logistics services, which can include rail, rail car hire, and port charges, including any demurrage incurred and other costs.  These logistics costs are affected by volume, various scheduling considerations, and negotiated rates for rail and port services.  We have exposure to take-or-pay obligations for our rail and port committed capacities.  We are also incurring costs to investigate and pursue development of additional port opportunities.  During the fourth quarter of 2015, we amended our port and rail take-or-pay contracts in light of depressed international conditions and currently do not plan to make any international sales during the remainder of 2016.

 

We entered into coal forward and futures contracts that are scheduled to settle at various dates through 2016 to hedge a portion of our export and domestic coal sales prices.  We have also entered into WTI derivative financial instruments to hedge our diesel fuel costs.

 

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Current Considerations

 

Owned and Operated Mines Segment

 

During the second quarter of 2016, minimal volumes were sold as customers continue to assess consumptions levels in light of their high stockpiles and low natural gas prices before the summer.  We were approached by three customers requesting reductions in 2016 volume commitments.  Buyout revenue of $18.8 million was recorded and 3.9 million tons of contracted coal principally due for delivery in 2016 were cancelled.

 

Shipment pace increased during the month of June as the summer cooling season started.  We continue to expect stronger shipments in the third quarter of 2016 as customers increase delivery of their contracted volumes and as the railroads bring equipment and crews back to meet those commitments.  Assuming normal summer cooling demand remains throughout the third quarter, we expect utility coal stockpiles to decrease.  The price of natural gas and coal stockpile levels when electricity demand decreases in the fall will be critical to coal shipments for the full year.  It is encouraging to see natural gas prices currently above $2.50 MMBtu where PRB coal can better compete at many utilities.  If summer burn is strong, utilities are expected to rebuild their stockpiles in anticipation of winter demand.  This scenario creates the potential for strong shipments and increasing sales this fall.

 

Management also continues to focus on reducing costs as production volumes decline.  Labor, diesel and repair and maintenance costs decreased as a result of reduced equipment hours and the lower amount of material moved.  During the quarter, we offered severance incentives to all hourly employees which resulted in 127 employees leaving.  Additionally, 11 salaried positions were eliminated during the quarter.  These headcount reductions cost $3.3 million during the quarter.  The combined annual wages and benefits costs for these employees was $13 million.  Additionally, we have continued to cut overtime, reduce the use of contractors, reduce scheduled work hours, and not fill vacant positions to manage labor costs and match capacity to shipment levels.

 

Logistics and Related Activities Segment

 

Recently we have begun to see stability in international supply and demand and a significant increase in prices for both near-term and out-year seaborne thermal coal.  While it is too early to say the trend will continue, Chinese thermal coal imports have recently increased and demand continues to grow in Vietnam, South Korea, Japan, and Taiwan.  At the same time, Indonesian supply has been reducing and Australian supply has been stabilizing.  At current price levels, we do not believe investments will be made in any new production capacity.  Given the large number of Asian utility plants currently being built to take imported coal, we believe the current oversupply will be overcome by growing demand over time.  While prices are not yet at levels that would make exports from the Spring Creek Mine economic, we continue to receive inquiries from Asian customers looking for long-term supply.  No additional exports through Westshore Terminals are projected until international prices rise to the point of being economic.

 

Potential for Asset Impairments

 

The carrying value of our mineral properties, equipment, and other long-lived assets are sensitive to declines in domestic and international coal prices.  These assets are at risk of impairment if prices remain at current levels for an extended period of time or do not recover as anticipated, or if regulatory changes adversely impact coal-fired electricity generation.  The cash flow model that we use to assess impairment includes numerous assumptions, such as our current estimates of forecast coal production, market outlook on forward commodity prices, operating and development costs, and discount rates.  All inputs to the cash flow model must be evaluated at each date of estimate.  Forward commodity prices in mid-July 2016 have remained relatively flat subsequent to the test for impairment as of June 30, 2016.  If forward prices remain at these levels, or further decline, we have long-lived assets at risk for impairment.  The actual amount of impairment incurred, if any, for our properties will depend on a variety of factors including, but not limited to, subsequent forward price curve changes, the additional risk-adjusted value of proven and probable reserves, weighted-average cost of capital, operating cost estimates and future capital expenditure estimates.

 

Environmental and Other Regulatory Matters

 

Federal, state and local authorities regulate the U.S. coal mining industry with respect to various matters, including air quality standards, water pollution, plant and wildlife protection, the discharge of materials into the environment and the effects of mining on surface and groundwater quality and availability.  These laws and regulations have had, and will

 

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continue to have, a significant adverse effect on our production costs and our competitive position relative to certain other sources of electricity generation.  Future laws, regulations or orders, including those relating to global climate change, may cause coal to become a less attractive fuel source, thereby further reducing coal’s share of the market for fuels and other energy sources used to generate electricity.  For example, on June 29, 2016, President Barack Obama, Canadian Prime Minister Justin Trudeau, and Mexican President Enrique Peña Nieto made a trilateral energy and climate announcement during the North American Leadership Summit in Ottawa, which included the North American Climate, Clean Energy, and Environment Partnership Action Plan. This Plan includes goals, such as striving to achieve 50% clean power generation by 2025 for North America, and reducing black carbon (soot). At this time, we cannot predict what steps, if any, these countries will take towards meeting these goals.  If this Plan results in additional regulations of our business, or results in policies favoring other forms of energy, then our business could be adversely impacted.  See “Climate Change Regulatory Environment” below and Part I—Item I. Business “Environmental and Other Regulatory Matters” in our 2015 Form 10-K for additional climate disclosures.

 

In August 2015, the EPA issued its final CPP rules that establish carbon pollution standards for power plants, called CO2 emission performance rates.  The EPA expects each state to develop implementation plans for power plants in its state to meet the individual state targets established in the CPP.  The EPA has given states the option to develop compliance plans for annual rate-based reductions (pounds per megawatt hour) or mass-based tonnage limits for CO2.  The EPA also proposed a federal compliance plan to implement the CPP in the event that an approvable state plan is not submitted to the EPA.  Judicial challenges have been filed. On February 9, 2016, the U.S. Supreme Court granted a stay of the implementation of the CPP before the United States Court of Appeals for the District of Columbia (“Circuit Court”) issued a final decision.  By its terms, this stay will remain in effect throughout the pendency of the appeals process including at the Circuit Court and the Supreme Court if any certiorari petition is granted.   The stay suspends the rule, including the requirement that states submit their initial plans by September 2016.  The Supreme Court’s stay applies only to EPA’s regulations for CO2 emissions from existing power plants and will not affect EPA’s standards for new power plants.  It is not yet clear how either the Circuit Court or the Supreme Court will rule on the legality of the CPP.  If the rules were upheld at the conclusion of this appellate process and are implemented in their current form, then demand for coal will likely be further decreased, potentially significantly, and adversely impact our business.

 

During the stay, EPA has continued to move forward with certain aspects of the program. For example, on June 16, 2016, the EPA proposed certain design details for the optional Clean Energy Incentive Program (“CEIP”), which would reward early investments in renewable energy generation and demand-side energy efficiency measures that generate carbon-free megawatt hours or reduce end-use energy demand during 2020 and/or 2021. Once finalized, EPA intends these design elements to help guide states and tribes that choose to participate in the CEIP should the CPP become effective at the conclusion of the various legal challenges. State participation in the program would be optional. If the CPP is upheld and states decide to participate in the CEIP, then it could create a competitive advantage for other forms of energy used for electric generation relative to our business.

 

On January 15, 2016, the Secretary of the DOI announced a moratorium on the issuance of new leases for coal resources on federally-owned lands in order to allow for a “comprehensive review” of the federal coal programs.  The terms of this moratorium preclude the BLM from accepting new applications for thermal coal sales or modifying existing leases subject to certain exceptions.  This moratorium could adversely impact members of the coal industry, including our company.

 

On July 1, 2016 the US Department of the Interior published the final Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform Rule.  This rule was developed by the Office of Natural Resources Revenue to significantly change the manner in which non-arm’s length sales of natural resources from federal lands are valued for royalty purposes by mandating a net-back calculation from the first third-party sale and introducing a default rule that will require substantial judgment.  The new rule eliminates the benchmarks which have been consistently and successfully utilized by the energy industry since the late 1980’s to ensure that the royalty amount paid is based on the value of the coal severed.  We are analyzing the impacts of the new rule on our current operations and future business decisions.

 

Federal and state laws require us to obtain surety bonds or post letters of credit to secure performance or payment of certain long-term obligations, such as mine closure or reclamation costs.  We currently use self-bonding to secure performance of certain obligations in Wyoming.  Self-bonding allows us to use the strength of our financial position as security rather than obtaining a traditional surety bond.  As of June 30, 2016, we have self-bonded $190 million in the State of Wyoming.  The Land Quality Division of the Wyoming Department of Environmental Quality (the “Wyoming DEQ”) periodically re-evaluates the amount of the security required, our performance, and our eligibility for self-bonding.  There can be no assurance that the Wyoming DEQ will continue to qualify us for self-bonding.  To the extent we are unable to maintain

 

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our current level of self-bonding due to changes in legislation, regulations, or their interpretation by state agencies, or in our financial condition, we may be required to obtain surety bonds at commercial terms, which could cause our costs to increase and could have a material adverse effect on our liquidity and financial condition.

 

We are proactively addressing the ongoing regulatory uncertainties regarding self-bonding programs in Wyoming by seeking to voluntarily transition away from self-bonding.  During the second quarter, we submitted applications to the DEQ to reduce the bonding amount by incorporating recently issued equipment cost guidelines, completed reclamation, updated reclamation plans, and lower fuel price assumptions.  These applications are currently being reviewed by Wyoming DEQ.  During the second quarter, we also reallocated our surety underwriters to position the portfolio to those that we believe are supportive of the coal industry.  As of June 30, 2016, we have $439.2 million of reclamation bonds with these underwriters backed by collateral of 15%, or $66 million, in the form of letters of credit under our Credit Agreement.  Although we currently expect to be able to achieve our goal of transitioning away from self-bonding, it is dependent on the Wyoming DEQ’s approval of our updated reclamation bonding applications, and is therefore, uncertain.

 

Adjusted EBITDA and Adjusted EPS

 

EBITDA, Adjusted EBITDA and Adjusted EPS are intended to provide additional information only and do not have any standard meaning prescribed by accounting principles generally accepted in the United States (“U.S. GAAP”).  A quantitative reconciliation of historical net income (loss) to Adjusted EBITDA and EPS (as defined below) to Adjusted EPS is found in the tables below.

 

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 and (2) adjustments for derivative financial instruments, excluding fair value mark-to-market gains or losses and including cash amounts received or paid.  We enter into certain derivative financial instruments such as put options that require the payment of premiums at contract inception.  The reduction in the premium value over time is reflected in the mark-to-market gains or losses.  Our calculation of Adjusted EBITDA does not include premiums paid for derivative financial instruments; either at contract inception, as these payments pertain to future settlement periods, or in the period of contract settlement, as the payment occurred in a preceding period.

 

Adjusted EPS represents diluted earnings (loss) per common share (“EPS”) adjusted to exclude the estimated per share impact of the same specifically identified non-core items used to calculate Adjusted EBITDA as described above.  All items are adjusted at the statutory tax rate of approximately 37% and exclude the impact of any valuation allowance.

 

Because not all companies use identical calculations, our presentations of Adjusted EBITDA and Adjusted EPS may not be comparable to other similarly titled measures of other companies.  Moreover, our presentation of Adjusted EBITDA is different than EBITDA as defined in our debt financing agreements.  We recognize that using Adjusted EBITDA and Adjusted EPS as performance measures has inherent limitations as compared to net income (loss), EPS, or other U.S. GAAP financial measures, as these non-GAAP measures exclude certain items, including items that are recurring in nature, which may be meaningful to investors.  As a result of the exclusions, Adjusted EBITDA and Adjusted EPS should not be considered in isolation and do not purport to be alternatives to net income (loss), EPS, or other U.S. GAAP financial measures as a measure of our operating performance.  See Part II—Item 6 “Selected Financial Data” of our 2015 Form 10-K for additional information regarding Adjusted EBITDA and Adjusted EPS and their limitations compared to U.S. GAAP financial measures.

 

A quantitative reconciliation for each of the periods presented of net income (loss) to Adjusted EBITDA and EPS to Adjusted EPS is found within this Item 2.

 

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Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

 

Summary

 

The following table summarizes key results (in millions, except per share amounts and percentages):

 

 

 

Three Months Ended

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Total tons sold

 

11.9

 

16.0

 

(4.1

)

(25.6

)

Total revenue

 

$

174.2

 

$

244.1

 

$

(69.9

)

(28.6

)

Net income (loss)

 

$

35.3

 

$

(52.9

)

$

88.2

 

166.7

 

Diluted EPS

 

$

0.57

 

$

(0.87

)

$

1.44

 

165.5

 

Adjusted EBITDA (1)

 

$

19.3

 

$

10.6

 

$

8.7

 

82.1

 

Adjusted EPS (1)

 

$

0.48

 

$

(0.28

)

$

0.76

 

*

 

 


*                                   Not meaningful.

(1)                           Non-GAAP measure; please see definition above and reconciliation below.

 

Adjusted EBITDA and Adjusted EPS

 

The following tables present a reconciliation of net income (loss) to Adjusted EBITDA, diluted earnings (loss) per common share to Adjusted EPS, and segment Adjusted EBITDA to net income (loss) (in millions, except per share amounts):

 

Adjusted EBITDA

 

 

 

Three Months Ended
June 30,

 

 

 

2016

 

2015

 

Net income (loss)

 

 

 

$

35.3

 

 

 

$

(52.9

)

Interest expense

 

 

 

11.3

 

 

 

12.6

 

Income tax (benefit) expense

 

 

 

(1.2

)

 

 

(9.9

)

Depreciation and depletion

 

 

 

(19.5

)

 

 

19.3

 

Amortization of port access rights

 

 

 

 

 

 

0.9

 

EBITDA

 

 

 

25.9

 

 

 

(30.0

)

Accretion

 

 

 

2.0

 

 

 

3.3

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

(8.3

)

 

 

$

2.8

 

 

 

Inclusion of cash amounts received (paid) (2)(3)

 

(0.3

)

 

 

1.1

 

 

 

Total derivative financial instruments

 

 

 

(8.6

)

 

 

3.9

 

Impairments

 

 

 

 

 

 

33.4

 

Adjusted EBITDA

 

 

 

$

19.3

 

 

 

$

10.6

 

 


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

(2)                                 Cash amounts received and paid reflected within operating cash flows.

(3)                                 Excludes premiums paid at option contract inception of $1.0 during the three months ended June 30, 2015, for original settlement dates in subsequent periods.

 

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Adjusted EBITDA by Segment

 

 

 

Three Months Ended
June 30,

 

 

 

2016

 

2015

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

$

20.6

 

 

 

$

29.7

 

Depreciation and depletion

 

 

 

19.9

 

 

 

(18.7

)

Accretion

 

 

 

(1.9

)

 

 

(3.2

)

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

8.3

 

 

 

$

4.7

 

 

 

Inclusion of cash amounts (received) paid (1)

 

2.1

 

 

 

2.7

 

 

 

Total derivative financial instruments

 

 

 

10.4

 

 

 

7.4

 

Impairments

 

 

 

 

 

 

(33.4

)

Other

 

 

 

0.2

 

 

 

(0.2

)

Operating income (loss)

 

 

 

49.2

 

 

 

(18.4

)

 

 

 

 

 

 

 

 

 

 

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

(7.4

)

 

 

(6.6

)

Amortization of port access rights

 

 

 

 

 

 

(0.9

)

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

 

 

 

(7.5

)

 

 

Inclusion of cash amounts (received) paid

 

(1.8

)

 

 

(3.9

)

 

 

Total derivative financial instruments

 

 

 

(1.8

)

 

 

(11.4

)

Other

 

 

 

1.0

 

 

 

 

Operating income (loss)

 

 

 

(8.2

)

 

 

(18.9

)

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(2)

 

 

 

6.1

 

 

 

(12.0

)

Depreciation and depletion

 

 

 

(0.3

)

 

 

(0.6

)

Accretion

 

 

 

(0.1

)

 

 

(0.1

)

Impairment

 

 

 

(0.1

)

 

 

 

Other

 

 

 

(0.5

)

 

 

(0.4

)

Operating income (loss)

 

 

 

5.1

 

 

 

(13.1

)

 

 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

(0.1

)

 

 

(0.5

)

Operating loss

 

 

 

(0.1

)

 

 

(0.5

)

Consolidated operating income (loss)

 

 

 

45.9

 

 

 

(50.8

)

Interest expense

 

 

 

(11.3

)

 

 

(12.6

)

Other, net

 

 

 

(0.2

)

 

 

0.2

 

Income tax (expense) benefit

 

 

 

1.2

 

 

 

9.9

 

Income (loss) from unconsolidated affiliates, net of tax

 

 

 

(0.3

)

 

 

0.4

 

Net income (loss)

 

 

 

$

35.3

 

 

 

$

(52.9

)

 


(1)                                 Excludes premiums paid at option contract inception of $1.0 during the three months ended June 30, 2015, for original settlement dates in subsequent periods.

(2)                                 Includes $18.8 of sales contract buyout revenue in the three months ended June 30, 2016.

 

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Adjusted EPS

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2016

 

2015

 

Diluted earnings (loss) per common share

 

 

 

$

0.57

 

 

 

$

(0.87

)

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

(0.13

)

 

 

$

0.05

 

 

 

Inclusion of cash amounts received (paid) (1)

 

(0.01

)

 

 

0.02

 

 

 

Total derivative financial instruments

 

 

 

(0.14

)

 

 

0.07

 

Impairments

 

 

 

 

 

 

0.55

 

Tax impact of adjustments

 

 

 

0.05

 

 

 

(0.03

)

Adjusted EPS

 

 

 

$

0.48

 

 

 

$

(0.28

)

Weighted-average dilutive shares outstanding (in millions)

 

 

 

62.0

 

 

 

61.0

 

 


(1)                                 Excludes per share impact of premiums paid at option contract inception of $0.02 during the three months ended June 30, 2015, for original settlement dates in subsequent periods.

 

Results of Operations

 

Revenue

 

The following table presents revenue and tons sold (in millions except per ton amounts and percentages):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Realized price per ton sold

 

$

12.60

 

$

12.76

 

$

(0.16

)

(1.3

)

Tons sold

 

11.8

 

16.0

 

(4.2

)

(26.3

)

Coal revenue

 

$

149.0

 

$

203.7

 

$

(54.7

)

(26.9

)

Other revenue

 

$

3.1

 

$

2.6

 

$

0.5

 

19.2

 

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Total tons delivered

 

0.1

 

1.4

 

(1.3

)

(92.9

)

Asian export tons

 

 

1.0

 

(1.0

)

(100.0

)

Revenue

 

$

3.2

 

$

48.6

 

$

(45.4

)

(93.4

)

Other

 

 

 

 

 

 

 

 

 

Revenue

 

$

19.7

 

$

1.2

 

$

18.5

 

*

 

Eliminations of Intersegment Sales

 

 

 

 

 

 

 

 

 

Revenue

 

$

(0.8

)

$

(12.0

)

$

11.2

 

93.3

 

Total Consolidated

 

 

 

 

 

 

 

 

 

Revenue

 

$

174.2

 

$

244.1

 

$

(69.9

)

(28.6

)

 


*            Not meaningful.

 

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Owned and Operated Mines Segment

 

The following table shows volume and price related changes to coal revenue for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 (in millions):

 

Three months ended June 30, 2015

 

$

203.7

 

Changes associated with volumes

 

(52.7

)

Changes associated with prices

 

(2.0

)

Three months ended June 30, 2016

 

$

149.0

 

 

Revenue decreased for the three months ended June 30, 2016 compared to the same period in 2015 primarily due to fewer tons sold.  Volumes decreased as a result of low natural gas prices and higher customer stockpiles.  Realized prices for the three months ended June 30, 2016 also decreased revenue compared to the same period in 2015 as the domestic coal market continues to be depressed.

 

Logistics and Related Activities Segment

 

Revenue decreased for the three months ended June 30, 2016 compared to the same period in 2015 as a result of continued weak international prices for seaborne thermal coal and our previously announced decision regarding international shipments.  No international sales are currently scheduled for the remainder of 2016.

 

Other

 

Revenue for other includes buyouts of customer coal contracts of $18.8 million for the three months ended June 30, 2016 related to three different customers.  See “Risk Factors” in Item 1A of Part II of this report.

 

Cost of Product Sold

 

The following table presents cost of product sold (in millions, except per ton amounts and percentages):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Average cost per ton sold

 

$

10.50

 

$

10.75

 

$

(0.25

)

(2.3

)

Cost of product sold (produced coal)

 

124.2

 

171.5

 

(47.3

)

(27.6

)

Other cost of product sold

 

4.8

 

2.3

 

2.5

 

108.7

 

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Cost of product sold

 

11.5

 

59.0

 

(47.5

)

(80.5

)

Other

 

 

 

 

 

 

 

 

 

Cost of product sold

 

0.9

 

1.1

 

(0.2

)

(18.2

)

Eliminations of Intersegment Sales

 

 

 

 

 

 

 

 

 

Cost of product sold

 

(0.8

)

(11.5

)

10.7

 

93.0

 

Total Consolidated

 

 

 

 

 

 

 

 

 

Cost of product sold

 

$

140.6

 

$

222.4

 

$

(81.8

)

(36.8

)

 

Owned and Operated Mines Segment

 

Cost of product sold decreased primarily as a result of fewer tons of coal sold in the three months ended June 30, 2016 as compared to the same period in 2015, which resulted in lower direct operating costs.  We saw significant decreases

 

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in production taxes and royalties, labor, diesel costs, and repairs and maintenance.  Repairs and maintenance decreased as a result of lower equipment hours, condition monitoring, and in-house repairs completed at our rebuild center.  The average cost per ton sold decreased primarily as a result of the lower direct operating costs.  Other cost of product sold increased in the three months ended June 30, 2016 as compared to the same period in 2015 due to $3.3 million of severance costs.  We offered an incentive for early retirement and termination to all hourly employees, which resulted in 127 employees accepting this incentive.  Additionally, 11 salaried positions were eliminated during the quarter.  This increase was partially offset by a decrease in freight costs.

 

Logistics and Related Activities Segment

 

Cost of product sold decreased in the three months ended June 30, 2016 as compared to the same period in 2015 due to a reduction in the volume of Asia tons delivered.  Three vessels from 2015 were not loaded until 2016.  Aside from these shipments, we do not expect any further international shipments in 2016.

 

Operating Income (Loss)

 

The following table presents operating income (loss) (in millions, except for percentages):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

49.2

 

$

(18.3

)

$

67.5

 

*

 

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(8.2

)

(18.9

)

10.7

 

56.6

 

Other

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

5.1

 

(13.1

)

18.2

 

138.9

 

Eliminations of Intersegment Sales

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(0.1

)

(0.5

)

0.4

 

80.0

 

Total Consolidated

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

45.9

 

$

(50.8

)

$

96.7

 

190.4

 

 


*            Not meaningful.

 

Owned and Operated Mines Segment

 

In addition to the revenue and cost of product sold factors previously discussed, operating income increased due to a credit to depreciation associated with a decrease in the ARO liability at all three mine sites, reducing depreciation and depletion by $38.5 million in the three months ended June 30, 2016 as compared to the same period in 2015.  Additionally, the three months ended June 30, 2015 included a goodwill impairment charge of $33.4 million.

 

Logistics and Related Activities Segment

 

In addition to the revenue and cost of product sold factors previously discussed, the operating loss decreased due to fewer derivative losses and decreased amortization during the three months ended June 30, 2016 as compared to the same period in 2015.

 

Other

 

The increase to operating income for Other during the three months ended June 30, 2016 as compared to the same period in 2015 is primarily addressed by the revenue factors previously discussed.

 

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Other Income (Expense)

 

The following table presents other income (expense) (in millions, except for percentages):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Other income (expense)

 

$

(11.5

)

$

(12.3

)

$

0.8

 

6.5

 

 

Other expense for the three months ended June 30, 2016 as compared to the same period in 2015 decreased primarily as a result of lower interest expense due to the absence of imputed interest on our federal coal lease obligations in 2016 as there were no outstanding balances during the year.

 

Income Tax Provision

 

As of June 30, 2016 and December 31, 2015, we had deferred tax assets principally arising from: ARO, alternative minimum tax credits, pension and postretirement benefits, contract rights and net operating loss carry-forwards for income tax purposes multiplied by an expected rate of 37%. As management cannot determine that it is more likely than not that we will realize the benefit of the deferred tax assets, a valuation allowance equal to the net deferred tax asset has been established at June 30, 2016 and December 31, 2015.  The difference between our effective tax rate and the statutory rate is due primarily to the impact of percentage depletion, income tax in the states in which we do business, changes in our valuation allowance and the impact of out of period adjustments.  In addition, our effective tax rate for the six months ended June 30, 2016 is materially impacted by the intraperiod tax allocation required as a result of the adjustments to ARO and the retiree medical plan while incurring a loss for that period.  Our effective tax rate for the three months ended June 30, 2016 was (3.4%).

 

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

 

Summary

 

The following table summarizes key results (in millions, except per share amounts):

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Total tons sold

 

24.9

 

35.8

 

(10.9

)

(30.4

)

Total revenue

 

$

355.4

 

$

561.7

 

$

(206.3

)

(36.7

)

Net income (loss)

 

$

(1.1

)

$

(57.6

)

$

56.5

 

98.1

 

Diluted EPS

 

$

(0.02

)

$

(0.94

)

$

0.92

 

97.9

 

Adjusted EBITDA (1)

 

$

18.0

 

$

50.1

 

$

(32.1

)

(64.1

)

Adjusted EPS (1)

 

$

(0.04

)

$

(0.33

)

$

0.29

 

87.9

 

 


(1)                                 Non-GAAP measure; please see definition in Adjusted EBITDA and Adjusted EPS section above and reconciliation below.

 

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Table of Contents

 

Adjusted EBITDA and Adjusted EPS

 

The following tables present a reconciliation of net income to Adjusted EBITDA, diluted earnings per common share to Adjusted EPS, and segment Adjusted EBITDA to net income (in millions, except per share amounts):

 

Adjusted EBITDA

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

2015

 

Net income (loss)

 

 

 

$

(1.1

)

 

 

$

(57.6

)

Interest income

 

 

 

(0.1

)

 

 

(0.1

)

Interest expense

 

 

 

22.3

 

 

 

25.3

 

Income tax (benefit) expense

 

 

 

(2.6

)

 

 

(10.1

)

Depreciation and depletion

 

 

 

(0.4

)

 

 

43.8

 

Amortization

 

 

 

 

 

 

1.9

 

EBITDA

 

 

 

18.2

 

 

 

3.2

 

Accretion

 

 

 

4.6

 

 

 

6.9

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

(6.3

)

 

 

$

7.5

 

 

 

Inclusion of cash amounts received (paid) (2)(3)

 

(2.6

)

 

 

(0.9

)

 

 

Total derivative financial instruments

 

 

 

(8.9

)

 

 

6.6

 

Impairments

 

 

 

4.1

 

 

 

33.4

 

Adjusted EBITDA

 

 

 

$

18.0

 

 

 

$

50.1

 

 


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

(2)                                 Cash amounts received and paid reflected within operating cash flows.

(3)                                 Excludes premiums paid at option contract inception of $3.0 during the six months ended June 30, 2015, for original settlement dates in subsequent periods.

 

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Adjusted EBITDA by Segment

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

2015

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

$

36.0

 

 

 

$

84.4

 

Depreciation and depletion

 

 

 

1.1

 

 

 

(42.5

)

Accretion

 

 

 

(4.3

)

 

 

(6.6

)

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

6.3

 

 

 

$

(2.0

)

 

 

Inclusion of cash amounts (received) paid

 

6.2

 

 

 

8.3

 

 

 

Total derivative financial instruments

 

 

 

12.5

 

 

 

6.3

 

Goodwill impairment

 

 

 

(2.1

)

 

 

(33.4

)

Other

 

 

 

0.5

 

 

 

0.1

 

Operating income (loss)

 

 

 

43.7

 

 

 

8.3

 

 

 

 

 

 

 

 

 

 

 

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

(14.3

)

 

 

(14.4

)

Amortization

 

 

 

 

 

 

(1.9

)

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

 

 

 

(5.5

)

 

 

Inclusion of cash amounts (received) paid (1)

 

(3.6

)

 

 

(7.5

)

 

 

Total derivative financial instruments

 

 

 

(3.6

)

 

 

(13.0

)

Other

 

 

 

1.8

 

 

 

0.1

 

Operating income (loss)

 

 

 

(16.1

)

 

 

(29.2

)

 

 

 

 

 

 

 

 

 

 

Corporate and Other

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(2)

 

 

 

(3.6

)

 

 

(18.8

)

Depreciation and depletion

 

 

 

(0.7

)

 

 

(1.3

)

Accretion

 

 

 

(0.3

)

 

 

(0.3

)

Impairment

 

 

 

(2.0

)

 

 

 

Other

 

 

 

(0.7

)

 

 

(0.4

)

Operating income (loss)

 

 

 

(7.3

)

 

 

(20.8

)

 

 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

(0.1

)

 

 

(1.1

)

Operating loss

 

 

 

(0.1

)

 

 

(1.1

)

Consolidated operating income (loss)

 

 

 

20.3

 

 

 

(42.8

)

Interest income

 

 

 

0.1

 

 

 

0.1

 

Interest expense

 

 

 

(22.3

)

 

 

(25.3

)

Other, net

 

 

 

(0.6

)

 

 

(0.1

)

Income tax (expense) benefit

 

 

 

2.6

 

 

 

10.1

 

Income (loss) from unconsolidated affiliates, net of tax

 

 

 

(1.1

)

 

 

0.4

 

Net income (loss)

 

 

 

$

(1.1

)

 

 

$

(57.6

)

 


(1)                                 Excludes premiums at option contract inception of $3.0, related to our Logistics and Related Activities segment, during the six months ended June 30, 2015, for settlement dates in subsequent periods.

(2)                                 Includes $22.8 and $4.3 of sales contract buyouts for the six months ended June 30, 2016 and 2015, respectively.

 

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Adjusted EPS

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2016

 

2015

 

Diluted earnings (loss) per common share

 

 

 

$

(0.02

)

 

 

$

(0.94

)

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

(0.10

)

 

 

$

0.12

 

 

 

Inclusion of cash amounts received (paid) (1)

 

(0.04

)

 

 

(0.01

)

 

 

Total derivative financial instruments

 

 

 

(0.14

)

 

 

0.11

 

Impairments

 

 

 

0.06

 

 

 

0.55

 

Tax impact of adjustments

 

 

 

0.06

 

 

 

(0.05

)

Adjusted EPS

 

 

 

$

(0.04

)

 

 

$

(0.33

)

Weighted-average dilutive shares outstanding (in millions)

 

 

 

61.2

 

 

 

61.0

 

 


(1)         Excludes per share impact of premiums paid at option contract inception of $0.05 during the six months ended June 30, 2015, for original settlement dates in subsequent periods.

 

Results of Operations

 

Revenue

 

The following table presents revenue and tons sold (in millions except per ton amounts):

 

 

 

Six Months Ended

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Realized price per ton sold

 

$

12.62

 

$

12.92

 

$

(0.30

)

(2.3

)

Tons sold

 

24.8

 

35.7

 

(10.9

)

(30.5

)

 

 

 

 

 

 

 

 

 

 

Coal revenue

 

$

312.9

 

$

460.9

 

$

(148.0

)

(32.1

)

Other revenue

 

$

6.4

 

$

7.2

 

$

(0.8

)

(11.1

)

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Total tons delivered

 

0.4

 

3.1

 

(2.7

)

(87.1

)

Asian export tons

 

0.2

 

2.4

 

(2.2

)

(91.7

)

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

17.2

 

$

118.0

 

$

(100.8

)

(85.4

)

Other

 

 

 

 

 

 

 

 

 

Revenue

 

$

23.6

 

$

6.5

 

$

17.1

 

*

 

Eliminations of Intersegment Sales

 

 

 

 

 

 

 

 

 

Revenue

 

$

(4.7

)

$

(30.9

)

$

26.2

 

84.8

 

Total Consolidated

 

 

 

 

 

 

 

 

 

Revenue

 

$

355.4

 

$

561.7

 

$

(206.3

)

(36.7

)

 


*            Not meaningful.

 

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Owned and Operated Mines Segment

 

The following table shows volume and price related changes to coal revenue for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 (in millions):

 

Six months ended June 30, 2015

 

$

460.9

 

Changes associated with volumes

 

(140.5

)

Changes associated with prices

 

(7.5

)

Six months ended June 30, 2016

 

$

312.9

 

 

Revenue decreased for the six months ended June 30, 2016 compared to the same period in 2015 primarily due to fewer tons sold.  Volumes decreased as a result of the mild winter weather, low natural gas prices, and higher customer stockpiles.  Realized prices for the six months ended June 30, 2016 decreased compared to the same period in 2015 as the domestic coal market continues to be depressed.

 

Logistics and Related Activities Segment

 

Revenue decreased for the six months ended June 30, 2016 compared to the same period in 2015 due to significantly lower international shipments as a result of continued weak international prices for seaborne thermal coal.  While we had three vessels carry over from 2015 into the first quarter of 2016, as previously announced, no international sales are currently scheduled for the remainder of 2016.

 

Other

 

Revenue for other includes buyouts of customer coal contracts of $22.8 million for the six months ended June 30, 2016 compared to $4.3 million for the same period in 2015.  See “Risk Factors” in Item 1A of Part II of this report.

 

Cost of Product Sold

 

The following table presents cost of product sold (in millions, except per ton amounts):

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Average cost per ton sold

 

$

10.84

 

$

10.34

 

$

0.50

 

4.8

 

 

 

 

 

 

 

 

 

 

 

Cost of product sold (produced coal)

 

$

268.7

 

$

368.9

 

$

(100.2

)

(27.2

)

Other cost of product sold

 

7.3

 

5.9

 

1.4

 

23.7

 

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Cost of product sold

 

33.3

 

139.8

 

(106.5

)

(76.2

)

Other

 

 

 

 

 

 

 

 

 

Cost of product sold

 

0.9

 

1.9

 

(1.0

)

(52.6

)

Eliminations of Intersegment Sales

 

 

 

 

 

 

 

 

 

Cost of product sold

 

(4.5

)

(29.7

)

25.2

 

84.8

 

Total Consolidated

 

 

 

 

 

 

 

 

 

Cost of product sold

 

$

305.7

 

$

486.8

 

$

(181.1

)

(37.2

)

 

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Owned and Operated Mines Segment

 

Cost of product sold decreased primarily as a result of fewer tons of coal sold in the six months ended June 30, 2016 as compared to the same period in 2015, which resulted in lower direct operating costs.  We saw significant decreases in production taxes and royalties, labor, diesel costs, and repairs and maintenance.  Repairs and maintenance decreased as a result of lower equipment hours, condition monitoring, and in-house repairs completed at our rebuild center.  Our production costs increased compared to the prior year primarily due to the fewer tons sold.  Other cost of product sold increased in the six months ended June 30, 2016 as compared to the same period in 2015 due to $3.3 million of severance costs.  We offered an incentive for early retirement and termination to all hourly employees, which resulted in 127 employees accepting this incentive.  Additionally, 11 salaried positions were eliminated during the quarter.  This increase was partially offset by a decrease in freight costs.

 

Logistics and Related Activities Segment

 

Cost of product sold decreased in the six months ended June 30, 2016 as compared to the same period in 2015 primarily due to a reduction in the volume of Asia tons delivered.  Three vessels from 2015 were not loaded until 2016.  Aside from these shipments, we do not expect any further international shipments in 2016.

 

Operating Income (Loss)

 

The following table presents operating income (loss) (in millions):

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Owned and Operated Mines

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

43.7

 

$

8.3

 

$

35.4

 

*

 

Logistics and Related Activities

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(16.1

)

(29.2

)

13.1

 

44.9

 

Other

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(7.3

)

(20.8

)

13.5

 

64.9

 

Eliminations of Intersegment Sales

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

(0.1

)

(1.1

)

1.0

 

90.9

 

Total Consolidated

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

$

20.3

 

$

(42.8

)

$

63.1

 

147.4

 

 


*            Not meaningful.

 

Owned and Operated Mines Segment

 

In addition to the revenue and cost of product sold factors previously discussed, operating income increased due to a credit to depreciation associated with a decrease in the ARO liability at all three mine sites, reducing depreciation and depletion by $43.6 million in the six months ended June 30, 2016 as compared to the same period in 2015.  Additionally, the six months ended June 30, 2015 included a goodwill impairment charge of $33.4 million compared to impairments of $2.1 million in the same period in 2016.  Finally, we recognized mark-to-market gains of $6.3 million in the six months ended June 30, 2016 as compared to losses of $2.0 million for the same period in 2015.

 

Logistics and Related Activities Segment

 

In addition to the revenue and cost of product sold factors previously discussed, the operating loss decreased due to fewer derivative losses and decreased amortization during the six months ended June 30, 2016 as compared to the same period in 2015.

 

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Other

 

In addition to the revenue factors previously discussed, the decrease in operating loss for the six months ended June 30, 2016 as compared to the same period in 2015 was partially offset by an increase in SG&A costs of $3.3 million due to higher medical claims and an impairment of $2.0 million for a shovel that we no longer expect to use due to declining production.

 

Other Income (Expense)

 

The following table presents other income (expense) (in millions):

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

Other income (expense)

 

$

(22.9

)

$

(25.3

)

$

2.4

 

9.5

 

 

Other expense for the six months ended June 30, 2016 as compared to the same period in 2015 decreased primarily as a result of lower interest expense due to lower imputed interest on our federal coal lease obligations as well as lower outstanding balances.

 

Income Tax Provision

 

As of June 30, 2016 and December 31, 2015, we had deferred tax assets principally arising from: ARO, AMT credits, pension and postretirement benefits, contract rights and net operating loss carry-forwards for income tax purposes multiplied by an expected rate of 37%. As management cannot determine that it is more likely than not that we will realize the benefit of the deferred tax assets, a valuation allowance equal to the net deferred tax asset has been established at June 30, 2016 and December 31, 2015.  The difference between our effective tax rate and the statutory rate is due to the impact of percentage depletion, income tax in the states in which we do business, changes in our valuation allowance and the impact of out of period adjustments.  In addition, the adjustments to ARO and the retiree medical plan, while incurring a loss during the period, substantially impacted our effective rate for 2016.  Our effective tax rate for the six months ended June 30, 2016 was 99.7%.

 

Liquidity and Capital Resources

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

 

 

(in millions)

 

Cash and cash equivalents

 

$

64.1

 

$

89.3

 

 

In addition to our cash and cash equivalents, our primary sources of liquidity are cash from our operations and borrowing capacity under our Credit Agreement (as defined below) and Accounts Receivable Securitization Facility (“A/R Securitization Program”).  We also have a capital leasing program for some of our capital equipment purchases.  These programs provide flexibility and liquidity to our capital structure.

 

Cash balances depend on a number of factors, such as the volume of coal sold by our Owned and Operated Mines segment; the price for which we sell our coal; the costs of mining, including labor, repairs and maintenance, fuel and explosives; capital expenditures to acquire property, plant and equipment; the volume of deliveries coordinated by our Logistics and Related Activities segment to customer contracted destinations; the revenue we receive for our logistics services; demurrage and any take-or-pay charges; the results of our derivative financial instruments; coal-fired electricity demand, regulatory changes and energy policies impacting our business; and other risks and uncertainties, including those risk factors discussed in Item 1A in our 2015 Form 10-K and in Item 1A of Part II of this report.  Ongoing depressed industry conditions and recent coal producer bankruptcy filings have resulted in increased credit pressures on the coal industry.  Any credit demands by third parties or refusals by banks, surety bond providers, investors or others to extend, renew or refinance

 

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credit on commercially reasonable terms may adversely impact our business, financial condition, results of operations, cash flows and liquidity.

 

Capital expenditures are necessary to keep our equipment fleets updated to maintain our mining productivity and competitive position and to add new equipment as necessary.  Cash payments for capital expenditures (excluding capitalized interest) for the six months ended June 30, 2016 and 2015 were $12.1 million and $14.8 million, respectively.  Capital expenditures for the six months ended June 30, 2016 include $4.5 million for the dragline move from the Cordero Rojo Mine to the Antelope Mine, which is progressing as planned.  Our anticipated capital expenditures are expected to be between $35 million and $45 million in 2016.

 

Overview of Cash Transactions

 

We started 2016 with $89.3 million of unrestricted cash and cash equivalents.  After capital expenditures and cash used in our operating activities, we concluded the six months ended June 30, 2016 with cash and cash equivalents of $64.1 million.  The following table represents cash flows (in millions, except percentages):

 

 

 

Six Months Ended

 

 

 

 

 

 

 

June 30,

 

Change

 

 

 

2016

 

2015

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Beginning balance - cash and cash equivalents

 

$

89.3

 

$

168.7

 

 

 

 

 

Net cash provided by (used in) operating activities

 

(12.2

)

14.9

 

$

(27.1

)

(181.9

)

Net cash provided by (used in) investing activities

 

(11.6

)

(23.0

)

$

11.4

 

49.6

 

Net cash provided by (used in) financing activities

 

(1.3

)

(65.1

)

$

63.8

 

98.0

 

Ending balance - cash and cash equivalents

 

$

64.1

 

$

95.5

 

 

 

 

 

 

Net cash used in operating activities increased for the six months ended June 30, 2016 as compared to the same period in 2015 primarily due to decreases in working capital of $20 million, due to lower Accounts payable and Accrued expenses as a result of reduced spending and lower production tax liabilities, as well as lower earnings adjusted for non-cash items of $11.1 million which included unrealized gains on derivative financial instruments of $6.3 million compared to losses of $7.5 million in 2015.

 

The decrease in cash used in investing activities for the six months ended June 30, 2016 as compared to the same period in 2015 was primarily related to a $6.5 million payment of restricted cash in 2015, which was used to fund an escrow account associated with our Westshore capacity.  In addition, we received $2.8 million in 2016 related to an insurance settlement on a flood at our Cordero Rojo Mine in 2014.  Finally, purchases of property, plant and equipment decreased by $2.7 million in the six months ended June 30, 2016 as compared to the same period in 2015.

 

The decrease in cash used in financing activities for the six months ended June 30, 2016 as compared to the same period in 2015 was due to payments of $64.0 million made on the principal portion of our federal coal lease obligations in 2015.

 

Senior Notes

 

We refer to the $300 million senior notes due December 15, 2019 (the “2019 Notes”) and the $200 million senior notes due March 15, 2024 (the “2024 Notes”) collectively as the “Senior Notes.”  The 2019 Notes and 2024 Notes bear interest at fixed annual rates of 8.50% and 6.375%, respectively.  There are no mandatory redemption or sinking fund payments for the Senior Notes.  Interest payments are due semi-annually on June 15 and December 15 for the 2019 Notes and semi-annually on March 15 and September 15 for the 2024 Notes.  Subject to certain limitations, we may redeem the 2019 Notes by paying specified redemption prices in excess of their principal amount prior to December 15, 2017, or by paying their principal amount thereafter.  We may redeem some or all of the 2024 Notes by paying specified redemption prices in excess of their principal amount, plus accrued and unpaid interest, if any, prior to March 15, 2022, or by paying their principal amount thereafter, plus accrued and unpaid interest, if any.

 

The Senior Notes are jointly and severally guaranteed by Cloud Peak Energy Inc. and all of our existing and future restricted subsidiaries that guarantee our debt under our Credit Agreement.  See “—Senior Secured Revolving Credit

 

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Table of Contents

 

Facility” below.  Substantially all of our consolidated subsidiaries, excluding Cloud Peak Energy Receivables LLC, are considered to be restricted subsidiaries and guarantee the Senior Notes.

 

The indentures governing the Senior Notes, among other things, limit our ability and the ability of our restricted subsidiaries to incur additional indebtedness and issue preferred equity; pay dividends or distributions; repurchase equity or repay subordinated indebtedness; make investments or certain other restricted payments; create liens; sell assets; enter into agreements that restrict dividends, distributions, or other payments from restricted subsidiaries; enter into transactions with affiliates; and consolidate, merge, or transfer all or substantially all of their assets and the assets of their restricted subsidiaries on a combined basis.

 

Upon the occurrence of certain transactions constituting a “change in control” as defined in the indentures, holders of our notes could require us to repurchase all outstanding notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase.

 

A/R Securitization Program

 

Certain of our subsidiaries are parties to the A/R Securitization Program.  In January 2013, we formed Cloud Peak Energy Receivables LLC, a special purpose, bankruptcy-remote wholly-owned subsidiary to purchase, subject to certain exclusions, in a true sale, trade receivables generated by certain of our subsidiaries without recourse (other than customary indemnification obligations for breaches of specific representations and warranties), and then transfer undivided interests in up to $75.0 million of those accounts receivable to a financial institution for cash borrowings for our ultimate benefit.  The total borrowings are limited by eligible accounts receivable, as defined under the terms of the A/R Securitization Program.  The A/R Securitization Program will terminate on January 23, 2018.  As of June 30, 2016, the A/R Securitization Program would have allowed for $24.9 million of borrowing capacity.  There were no borrowings outstanding under the A/R Securitization Program as of June 30, 2016.

 

Senior Secured Revolving Credit Facility

 

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

 

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

 

Our ability to access the available funds under the Credit Agreement may be prohibited in the event that we do not comply with the covenant requirements or if we default on our obligations under the Credit Agreement.  Full availability under the Credit Agreement requires a trailing twelve month EBITDA plus unrestricted cash less capital leases of at least $125 million.  As of June 30, 2016, our total capacity under the Credit Agreement was $500 million.  If our trailing twelve month EBITDA were to decline and we were unable to negotiate an amendment with the bank group, our actual borrowing capacity under the Credit Agreement would be reduced or eliminated entirely depending on the extent of the decline in trailing twelve month EBITDA.

 

Loans under the Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 2.00% to 2.75%, depending on our net total leverage to EBITDA ratio.  We pay the lenders a commitment fee between 0.375% and 0.50% per year, depending on our net total leverage to EBITDA ratio, on the unused amount of the

 

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Credit Agreement.  Letters of credit issued under the Credit Agreement, unless drawn upon, will incur a per annum fee from the date at which they are issued between 2.00% and 2.75% depending on our net total leverage to EBITDA ratio.  Letters of credit that are drawn upon are converted to loans.  In addition, in connection with the issuance of a letter of credit, we are required to pay the issuing bank a fronting fee of 0.125% per annum.

 

Our obligations under the Credit Agreement are secured by substantially all of our assets and substantially all of the assets of certain of our subsidiaries, subject to certain permitted liens and customary exceptions for similar coal financings.  Our obligations under the Credit Agreement are also supported by a guarantee by CPE Inc. and our domestic restricted subsidiaries.

 

Under the Credit Agreement, the subsidiaries of CPE Inc. are permitted to make distributions to CPE Inc. to enable it to pay federal, state and local income and certain other taxes it incurs that are attributable to the business and operations of its subsidiaries.  In addition, as long as no default under the Credit Agreement exists, the subsidiaries of CPE Inc. also may make annual distributions to CPE Inc. to fund dividends or repurchases of CPE Inc.’s stock and additional distributions in accordance with certain distribution limits in the Credit Agreement.  Finally, the subsidiaries of CPE Inc. may make loans to CPE Inc. subject to certain limitations in the Credit Agreement.

 

As of June 30, 2016, we had no borrowings, but there were $66 million of undrawn letters of credit outstanding under the Credit Agreement.  As of December 31, 2015, no borrowings or letters of credit were outstanding under the Credit Agreement.  We were in compliance with the covenants contained in the Credit Agreement.  Our aggregate availability for borrowing under the Credit Agreement and the A/R Securitization Program was approximately $458.9 million as of June 30, 2016.

 

We believe our sources of liquidity will be sufficient to fund our primary ordinary course uses of cash for the next twelve months, which include our costs of coal production and logistics services, capital expenditures, and interest on our debt.

 

If we do not have sufficient resources from ongoing operations to satisfy our obligations or the timing of payments on our obligations does not coincide with cash inflows from operations, we may need to use our cash on hand or borrow under our line of credit.  If the obligation is in excess of these amounts, we may need to seek additional borrowing sources or take other actions.  Depending upon existing circumstances at the time, we may not be able to obtain additional funding on acceptable terms or at all.  In addition, our existing debt instruments contain restrictive covenants, which may prohibit us from borrowing under our revolving Credit Agreement or pursuing certain alternatives to obtain additional funding.

 

We regularly monitor the capital and bank credit markets for opportunities that we believe will improve our balance sheet, and may engage, from time to time, in financing or refinancing transactions as market conditions permit. Future activities may include, but are not limited to, public or private debt or equity offerings, the purchase of our outstanding debt for cash in open market purchases or privately negotiated refinancing, extension and exchange transactions or public or private exchange offers or tender offers.  Any financing or refinancing transaction may occur on a stand-alone basis or in connection with, or immediately following, other transactions.  Our ability to access the debt or equity capital markets on economic terms in the future will be affected by general economic conditions, the domestic and global financial markets, our operational and financial performance, the value and performance of our debt or equity securities, prevailing commodity prices, and other macroeconomic factors outside of our control.

 

Off-Balance Sheet Arrangements

 

In the normal course of business, we are party to guarantees and financial instruments with off-balance sheet risk, such as bank letters of credit, performance or surety bonds and indemnities, which are not reflected on the consolidated balance sheet.   These instruments are used to secure certain of our obligations to reclaim lands used for mining, secure coal lease obligations, and for other operating requirements.  We are proactively addressing the ongoing regulatory uncertainties regarding self-bonding programs in Wyoming by seeking to voluntarily transition away from self-bonding.  During the second quarter, we submitted applications to the DEQ to reduce the bonding amount by incorporating recently issued equipment cost guidelines, completed reclamation, updated reclamation plans, and lower fuel price assumptions.  These applications are currently being reviewed by Wyoming DEQ.  During the second quarter, we also reallocated our surety underwriters to position the portfolio to those that we believe are supportive of the coal industry.

 

As of June 30, 2016, we were self-bonded for $190 million and had $439.2 million of reclamation bonds with these underwriters backed by collateral of 15%, or $66 million, in the form of letters of credit under our Credit Agreement.  The

 

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terms and conditions with the issuers of the surety bonds allow for collateral calls to mitigate their exposure.  The amount of collateral that could be required would be based on the underlying bonded assets and their risks, our credit profile, and overall market conditions.  Should further collateral for these obligations be called, this could utilize a significant portion or our existing liquidity.  Although we currently expect to be able to achieve our goal of transitioning away from self-bonding, it is dependent on the Wyoming DEQ’s approval of our updated reclamation bonding applications, and is therefore, uncertain.

 

Climate Change Regulatory Environment

 

Enactment of current, proposed, or future laws or regulations regarding emissions from the combustion of coal by the U.S. or some of its states or by other countries, or other actions to limit such emissions, like the creation of mandatory use requirements for renewable fuel sources, will likely result in electricity generators further switching from coal to other fuel sources.  Public concern and the political environment may also continue to materially and adversely impact future coal demand and usage to generate electricity, regardless of applicable legal and regulatory requirements.  Additionally, the creation and issuance of subsidies designed to encourage use of alternative energy sources could further decrease the demand of coal as an energy source.  The potential financial impact on us as a result of these factors will depend upon the degree to which electricity generators diminish their reliance on coal as a fuel source as a result thereof.  That, in turn, will depend on a number of factors, including the appeal and design of the subsidies being offered, the specific requirements imposed by any such laws or regulations such as mandating use by utilities of renewable fuel sources, the time periods over which those laws or regulations would be phased in and the state of any commercial development and deployment of carbon capture technologies, including storage, conversion, or other commercial use for captured carbon.  In view of the significant uncertainty surrounding each of these factors, it is not possible for us to reasonably predict the impact that any such laws or regulations may have on our results of operations, financial condition, or cash flows, however, such impacts may be significant.  See Item 1 “Business—Environmental and Other Regulatory Matters—Global Climate Change” and Item 1A “Risk Factors” of our 2015 Form 10-K for additional discussion regarding how climate change and other environmental regulatory matters may materially adversely impact our business.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts.  These estimates and assumptions are based on information available as of the date of the financial statements.  Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end.  The results of operations for the six months ended June 30, 2016 are not necessarily indicative of results that can be expected for future quarters or the full year.  Please refer to the section entitled “Critical Accounting Policies and Estimates” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Form 10-K for a discussion of our critical accounting policies and estimates.

 

Newly Adopted Accounting Standards and Recently Issued Accounting Pronouncements

 

See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements in Item 1 for a discussion of newly adopted accounting standards and recently issued accounting pronouncements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

We define market risk as the risk of economic loss as a consequence of the adverse movement of market rates and prices or credit standings.  We believe our principal market risks are commodity price risk, interest rate risk, and credit risk.

 

Commodity Price Risk

 

Historically, we have principally managed the commodity price risk for our coal contract portfolio through the use of long-term coal supply agreements of varying terms and durations.  Market risk includes the potential for changes in the market value of our coal portfolio, which includes index sales, export pricing, and PRB derivative financial instruments.  As of June 30, 2016, we had committed to sell approximately 60.7 million tons during 2016, of which 60.1 million tons are under fixed-price contracts.  A $1 change to the average coal sales price per ton for these 0.6 million unpriced tons would result in an approximate $0.6 million change to the coal revenue.  In addition, we entered into certain forward financial contracts linked to Newcastle coal prices to help manage our exposure to variability in future international coal prices.  As of June 30, 2016, we held coal forward contracts for approximately 0.1 million tons which will settle in 2016, of which all have been fixed under offsetting contracts.  As of June 30, 2016, we held domestic coal futures contracts for approximately 0.1

 

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million tons, which will settle in 2016.  A $1 change to the market index price per ton for these futures contracts would result in an approximate $0.1 million change to operating income (expense).

 

We also face price risk involving other commodities used in our production process, primarily diesel fuel.  Based on our projections of our usage of diesel fuel for the next 12 months, and assuming that the average cost of diesel fuel increases by 10%, we would incur additional fuel costs of approximately $4.1 million over the next 12 months.  In addition, we use WTI derivative financial instruments to manage certain exposures to diesel fuel prices.  If WTI decreases by 10%, we would incur additional costs of $3.6 million.  The terms of the program are disclosed in Note 5 to our Notes to Unaudited Condensed Consolidated Financial Statements in Item 1.

 

Interest Rate Risk

 

Our Credit Agreement and A/R Securitization Program are subject to an adjustable interest rate.  See Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”  We had no outstanding borrowings under our Credit Agreement or A/R Securitization Program as of June 30, 2016.  If we borrow funds under the Credit Agreement or A/R Securitization Program, we may be subject to increased sensitivity to interest rate movements.

 

The $7.9 million of borrowings under the capital leasing program are also subject to variable interest rates although any change to the rate would not have a significant impact on cash flow.  Any future debt arrangements that we enter into may also have adjustable interest rates that may increase our sensitivity to interest rate movements.

 

Credit Risk

 

We are exposed to credit loss in the event of non-performance by our counterparties, which may include end-use customers, trading houses, brokers, and financial institutions that serve as counterparties to our derivative financial instruments and hold our investments. We attempt to manage this exposure by entering into agreements with counterparties that meet our credit standards and that are expected to fully satisfy their obligations under the contracts. These steps may not always be effective in addressing counterparty credit risk.

 

When appropriate (as determined by our credit management function), we have taken steps to reduce our credit exposure to customers that do not meet our credit standards or whose credit has deteriorated. These steps include obtaining letters of credit and requiring prepayments for shipments. See Item 1A “Risk Factors—Risks Related to Our Business and Industry—We are exposed to counterparty risk with our customers, trading partners, financial institutions, and other parties with whom we conduct business.” in our 2015 Form 10-K.

 

Item 4.  Controls and Procedures.

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to senior management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2016, and has concluded that such disclosure controls and procedures are effective at the reasonable assurance level.

 

Internal Control over Financial Reporting

 

During the most recent fiscal quarter, there have been no changes to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

 

OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

See Note 10 of Notes to Unaudited Condensed Consolidated Financial Statements in Part I, Item 1, of this report relating to certain legal proceedings, which information is incorporated by reference herein.

 

Item 1A.  Risk Factors.

 

In addition to the other information set forth in this report, including the risk factors set forth below, you should carefully consider the additional risks and uncertainties described in Item 1A of our 2015 Form 10-K.  The risks described herein and in our 2015 Form 10-K are not the only risks we may face.  If any of those risk factors, as well as other risks and uncertainties that are not currently known to us or that we currently believe are not material, actually occur, our business, financial condition, results of operations, cash flows, and liquidity could be materially and adversely affected.  In our judgment, other than as set forth below, there were no material changes in the risk factors as previously disclosed in Item 1A of our 2015 Form 10-K.

 

As a result of ongoing depressed coal demand and competition from low priced natural gas, we are receiving more requests from customers to renegotiate, defer or cancel committed purchases under existing agreements.  If we are unable to resolve these customer requests on terms that preserve the amount and timing of our forecasted economic value, our anticipated cash flows, results and liquidity may be materially adversely impacted.

 

From time to time in the ordinary course of our business, customers may seek to renegotiate the terms of our coal supply agreements to reallocate certain committed volumes into future time periods, reduce or cancel committed volumes or make other adjustments to our coal supply agreements. We address these requests on a case-by-case basis and seek to reach mutually agreed resolutions of these requested modifications as part of managing our long term customer relationships.  As a result of ongoing depressed coal demand and competition from low priced natural gas, we are receiving more requests from customers to renegotiate, defer or cancel committed purchases under existing agreements. We continue to address these requests on a case-by-case basis.  If we are unable to resolve these customer requests on terms that preserve the amount and timing of our forecasted economic value, our anticipated cash flows, results and liquidity may be materially adversely impacted.

 

Demand for U.S. thermal coal has declined significantly in recent years and is increasingly subject to fluctuations due to summer cooling demand, winter heating demand, economic growth rates and other factors that impact demand for electricity. This has resulted in a reduction in long term sales, less visibility into future shipment volumes and increased fluctuations in shipments and associated financial results from period to period.

 

As a result of regulatory, political and public pressures against using coal to generate electricity, increased competition with low-cost natural gas, increased competition with taxpayer subsidized solar and wind generation and other factors, demand for U.S. thermal coal has declined significantly in recent years, supporting a lower percentage of baseload electricity demand, and is increasingly subject to fluctuations due to summer cooling demand, winter heating demand, economic growth rates and other factors that impact demand for electricity.  This has resulted in a reduction in long term sales of thermal coal, less visibility into future shipment volumes and increased fluctuations in shipments and associated financial results from period to period.  Although we are seeking to adjust our business and cost structure to reflect lower and more variable demand for thermal coal and to address the adverse impact of these changing conditions on our financial performance, our business requires substantial fixed costs and long lead-time investment decisions and we may not be successful in adjusting to these changing conditions.

 

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Mine Safety Disclosures.

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Form 10-Q.

 

Item 5.  Other Information.

 

None.

 

Item 6.  Exhibits.

 

See Exhibit Index at page 60 of this report.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CLOUD PEAK ENERGY INC.

 

 

 

 

 

 

 

By:

/s/ HEATH A. HILL

Date: July 28, 2016

 

Heath A. Hill  

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer and Duly Authorized Officer)

 

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EXHIBIT INDEX

 

The exhibits below are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.

 

Exhibit 
Number

 

Description of Documents

3.1

 

Amended and Restated Certificate of Incorporation of Cloud Peak Energy Inc. effective as of November 25, 2009 (incorporated by reference to Exhibit 3.1 to Cloud Peak Energy Inc.’s Annual Report on Form 10-K filed on February 14, 2014 (File No. 001-34547))

 

 

 

3.2*

 

Amended and Restated Bylaws of Cloud Peak Energy Inc., effective July 28, 2016

 

 

 

4.1*

 

Agreement of Resignation, Appointment and Acceptance, dated as of May 24, 2016, among Cloud Peak Energy Resources LLC, Cloud Peak Energy Finance Corp., Wells Fargo Bank, National Association, as resigning trustee, and Wilmington Trust, National Association, as successor trustee

 

 

 

10.1

 

First Amendment to the Cloud Peak Energy Inc. 2009 Long Term Incentive Plan (as amended and restated effective March 12, 2016), effective May 11, 2016 (incorporated by reference to Exhibit 10.1 to Cloud Peak Energy Inc.’s Current Report on Form 8-K filed on May 13, 2016)

 

 

 

10.2*

 

Amended and Restated Deferred Compensation Plan for Cloud Peak Energy Resources LLC, effective April 1, 2016

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2*

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1*

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2*

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

95.1*

 

Mine Safety Disclosure

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL*

 

XBRL Taxonomy Calculation Linkbase Document

 

 

 

101.LAB*

 

XBRL Taxonomy Label Linkbase Document

 

 

 

101.PRE*

 

XBRL Taxonomy Presentation Linkbase Document

 

 

 

101.DEF*

 

XBRL Taxonomy Definition Document

 


* Filed or furnished herewith, as applicable

 

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