10-Q 1 a15-7815_110q.htm 10-Q

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 March 31, 2015

 

or

 

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

 

For the transition period from                      to                    

 

Commission File Number:  001-34547

 

GRAPHIC

 

Cloud Peak Energy Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

26-3088162

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

505 S. Gillette Ave., Gillette, Wyoming

 

82716

(Address of principal executive offices)

 

(Zip Code)

 

(307) 687-6000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

(Do not check if a smaller reporting company)

 

Smaller reporting company 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, 61,034,412 shares outstanding as of April 22, 2015.

 

 

 



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 Months Ended March 31, 2015 and 2014

1

 

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

2

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

3

 

Notes to Unaudited Condensed Consolidated Financial Statements

4

 

Cautionary Notice Regarding Forward-Looking Statements

29

Item 2

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

31

Item 3

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4

Controls and Procedures

46

 

 

 

 

PART II — OTHER INFORMATION

 

Item 1

Legal Proceedings

47

Item 1A

Risk Factors

47

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3

Defaults Upon Senior Securities

47

Item 4

Mine Safety Disclosures

47

Item 5

Other Information

47

Item 6

Exhibits

47

 

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

 

 

 

March 31,

 

 

 

2015

 

2014

 

Revenue

 

$

317,553

 

$

319,066

 

Costs and expenses

 

 

 

 

 

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

 

264,317

 

271,939

 

Depreciation and depletion

 

24,536

 

26,928

 

Amortization

 

928

 

 

Accretion

 

3,541

 

4,130

 

Derivative financial instruments

 

4,785

 

(12,734

)

Selling, general and administrative expenses

 

11,249

 

12,441

 

Other operating costs

 

213

 

238

 

Total costs and expenses

 

309,569

 

302,942

 

 

 

 

 

 

 

Operating income

 

7,984

 

16,124

 

Other income (expense)

 

 

 

 

 

Interest income

 

49

 

124

 

Interest expense

 

(12,668

)

(37,994

)

Other, net

 

(337

)

(465

)

Total other income (expense)

 

(12,956

)

(38,335

)

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

 

(4,972

)

(22,211

)

Income tax benefit (expense)

 

280

 

6,490

 

Earnings from unconsolidated affiliates, net of tax

 

12

 

95

 

Net income (loss)

 

(4,680

)

(15,626

)

Other comprehensive income (loss)

 

 

 

 

 

Postretirement medical plan amortization of prior service costs

 

313

 

247

 

Income tax on postretirement medical plan

 

(116

)

(89

)

Other comprehensive income (loss)

 

197

 

158

 

Total comprehensive income (loss)

 

$

(4,483

)

$

(15,468

)

Income (loss) per common share:

 

 

 

 

 

Basic

 

$

(0.08

)

$

(0.26

)

Diluted

 

$

(0.08

)

$

(0.26

)

Weighted-average shares outstanding - basic

 

60,935

 

60,741

 

Weighted-average shares outstanding - diluted

 

60,935

 

60,741

 

 

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)

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

186,232

 

$

168,745

 

Accounts receivable

 

70,192

 

86,838

 

Due from related parties

 

1,520

 

227

 

Inventories, net

 

77,975

 

79,802

 

Deferred income taxes

 

21,670

 

21,670

 

Derivative financial instruments

 

14,875

 

17,111

 

Other assets

 

24,178

 

9,840

 

Total current assets

 

396,642

 

384,233

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

Property, plant and equipment, net

 

1,557,331

 

1,589,138

 

Port access contract rights, net

 

52,852

 

53,780

 

Goodwill

 

35,634

 

35,634

 

Deferred income taxes

 

53,725

 

56,468

 

Other assets

 

47,457

 

40,665

 

Total assets

 

$

2,143,641

 

$

2,159,918

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

47,341

 

$

52,035

 

Royalties and production taxes

 

132,252

 

126,212

 

Accrued expenses

 

47,888

 

52,213

 

Current portion of federal coal lease obligations

 

63,970

 

63,970

 

Other liabilities

 

1,632

 

1,632

 

Total current liabilities

 

293,083

 

296,062

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

Senior notes

 

498,541

 

498,480

 

Asset retirement obligations, net of current portion

 

205,898

 

216,241

 

Accumulated postretirement medical benefit obligation, net of current portion

 

51,992

 

50,276

 

Other liabilities

 

10,699

 

11,025

 

Total liabilities

 

1,060,213

 

1,072,084

 

Commitments and Contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock ($0.01 par value; 200,000 shares authorized; 61,509 and 61,434 shares issued and 61,034 and 61,022 outstanding at March 31, 2015 and December 31, 2014, respectively)

 

610

 

610

 

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

 

(6,490

)

(6,243

)

Additional paid-in capital

 

568,346

 

568,022

 

Retained earnings

 

532,064

 

536,744

 

Accumulated other comprehensive income (loss)

 

(11,102

)

(11,299

)

Total equity

 

1,083,428

 

1,087,834

 

Total liabilities and equity

 

$

2,143,641

 

$

2,159,918

 

 

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

(4,680

)

$

(15,626

)

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

 

 

 

 

 

Depreciation and depletion

 

24,536

 

26,928

 

Amortization

 

928

 

 

Accretion

 

3,541

 

4,130

 

Earnings from unconsolidated affiliates, net of tax

 

(12

)

(95

)

Distributions of income from unconsolidated affiliates

 

 

1,250

 

Deferred income taxes

 

(280

)

(6,490

)

Equity-based compensation expense

 

988

 

1,783

 

Derivative mark-to-market (gains) losses

 

4,785

 

(12,734

)

Cash received (paid) on derivative financial instrument settlements

 

(2,029

)

5,270

 

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

 

 

7,338

 

Other

 

3,233

 

2,964

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

16,488

 

(5,626

)

Inventories, net

 

1,828

 

(805

)

Due to or from related parties

 

(1,293

)

54

 

Other assets

 

(5,759

)

(6,042

)

Accounts payable and accrued expenses

 

(10,037

)

10,788

 

Asset retirement obligations

 

(298

)

(276

)

Net cash provided by (used in) operating activities

 

31,939

 

12,811

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(6,405

)

(4,519

)

Investments in marketable securities

 

 

(8,159

)

Maturity and redemption of investments

 

 

88,845

 

Investment in development projects

 

(750

)

(750

)

Payment of restricted cash

 

(6,500

)

 

Other

 

(75

)

201

 

Net cash provided by (used in) investing activities

 

(13,730

)

75,618

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Issuance of senior notes

 

 

200,000

 

Repayment of senior notes

 

 

(300,000

)

Payment of deferred financing costs

 

(314

)

(12,100

)

Other

 

(408

)

215

 

Net cash provided by (used in) financing activities

 

(722

)

(111,885

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

17,487

 

(23,456

)

Cash and cash equivalents at beginning of period

 

168,745

 

231,633

 

Cash and cash equivalents at end of period

 

$

186,232

 

$

208,177

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

Interest paid

 

$

7,469

 

$

6,358

 

Income taxes paid (refunded)

 

$

3,972

 

$

(5,970

)

Supplemental noncash investing and financing activities:

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

1,969

 

$

2,028

 

Assets acquired under capital leases

 

$

 

$

1,209

 

 

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

 

3



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Organization and Business

 

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

 

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

 

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

 

In 2012, we acquired the Youngs Creek project.  It is a permitted but undeveloped surface mine project in the Northern PRB region located 13 miles north of Sheridan, Wyoming, contiguous with the Wyoming-Montana state line.  The Youngs Creek project is approximately seven miles south of our Spring Creek Mine and seven miles from the mainline railroad, and is near the Crow project.  We have not yet been able to classify the Youngs Creek project mineral rights as proven and probable reserves as they remain subject to further exploration and evaluation.  In 2013, we entered an option to lease agreement and a corresponding exploration agreement with the Crow Tribe of Indians.  This coal project (“Crow project”) is located on the Crow Indian Reservation in southeast Montana.  We are in the process of evaluating the development options for the Youngs Creek project and the Crow project and believe that their proximity to the Spring Creek Mine represents an opportunity to optimize our mine developments in the Northern PRB.  For purposes of this report, the term “Northern PRB” refers to the area within the PRB that lies within Montana and the northern part of Sheridan County, Wyoming.

 

We continue to develop our sales of PRB coal and delivery services business to Asian export customers.  In 2014, our logistics business was the largest U.S. exporter of thermal coal into South Korea.  Exports at the Westshore Terminals Limited Partnership port (“Westshore”) for 2015 are forecast to be approximately 5.2 million tons, increasing to 6.6 million tons annually in 2016 through 2018, and increasing further to 7.2 million tons annually in 2019 through 2024.  This reflects our previously announced reduction of our export shipments by 0.5 million tons in the second quarter of 2015 and recently reached agreement in principle to reduce our 2015 second half shipments by another 0.5 million tons.  During the three months ended March 31, 2015, we funded an additional $6.5 million escrow account associated with our increased Westshore capacity.  We will continue to work with our rail and port partners to potentially reduce our commitments and corresponding expenses during this period of depressed export prices.

 

In addition to our committed capacity at Westshore, we hold option contracts to potentially increase our future export capacity through proposed Pacific Northwest export terminals.  We have a throughput option agreement with SSA Marine, which provides us with an option for up to 17.6 million tons of capacity per year through the planned dry bulk cargo Gateway Pacific Terminal at Cherry Point in Washington State.  We also have a throughput option for up to 7.7 million tons per year at the proposed Millennium Bulk Terminals coal export facility in Washington State.  Our options in each of these proposed terminals are exercisable following the successful completion of the ongoing permit process, each of which is currently in the environmental impact statement phase.  The timing and outcome of these permit processes, and therefore the construction of the terminals, are uncertain.

 

Principles of Consolidation

 

The interim period unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”).  In accordance with U.S. GAAP for interim financial statements, these unaudited condensed consolidated financial statements do not include certain information and note

 

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Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), requiring entities to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts.  The new guidance is effective for interim and annual periods beginning after December 15, 2016, although on April 1, 2015, the FASB voted to propose a deferral of the effective date of the new revenue standard by one year, but to permit entities to adopt one year earlier if they choose.  We are considering the impact the adoption of ASU 2014-09 may have on our results of operations, financial condition, and cash flows.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), requiring entities to reevaluate whether they should consolidate certain legal entities.  The new guidance is effective for interim and annual periods beginning after December 15, 2015.  We are considering the impact the adoption of ASU 2015-02 may have on our results of operations, financial condition, and cash flows.

 

On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We are considering the impact the adoption of ASU 2015-03 may have on our results of operations, financial condition, and cash flows.

 

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Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.  Sale of Decker Mine Interest

 

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

 

 

 

Three Months
Ended

 

Decker Mine

 

March 31, 2014

 

Revenues

 

$

3,965

 

Costs and expenses

 

5,972

 

Operating income (loss)

 

(2,007

)

Other income (expense)

 

(14

)

Income (loss) before income tax provision

 

$

(2,021

)

 

4.  Inventories

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Materials and supplies

 

$

77,868

 

$

77,736

 

Less: Obsolescence allowance

 

(1,126

)

(1,102

)

Material and supplies, net

 

76,742

 

76,634

 

Coal inventory

 

1,232

 

3,168

 

Inventories, net

 

$

77,975

 

$

79,802

 

 

5.  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 investments as of March 31, 2015 or December 31, 2014.

 

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Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

Fair Value at March 31, 2015

 

Description

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

107,631

 

$

 

$

107,631

 

Derivative financial instruments

 

$

 

$

14,875

 

$

14,875

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

4,128

 

$

4,128

 

 

 

 

Fair Value at December 31, 2014

 

Description

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

98,789

 

$

 

$

98,789

 

Derivative financial instruments

 

$

 

$

17,111

 

$

17,111

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

3,608

 

$

3,608

 

 


(1)                                 Included in cash and cash equivalents in the condensed consolidated balance sheets along with $78.6 million and $70.0 million of demand deposits at March 31, 2015 and December 31, 2014, respectively.

 

We did not have any transfers between levels during the three months ended March 31, 2015.  Our policy is to value all transfers between levels using the beginning of period valuation.

 

6.  Derivative Financial Instruments

 

Coal Contracts

 

We use international coal forward contracts linked to forward Newcastle coal prices to help manage our exposure to variability in international 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. At March 31, 2015, we held positions that are expected to settle in the following years (in thousands):

 

 

 

2015

 

2016

 

Total

 

International Coal Forward Contracts

 

 

 

 

 

 

 

Notional amount (tons)

 

344

 

132

 

476

 

Net asset position

 

$

12,408

 

$

6,698

 

$

19,106

 

 

 

 

 

 

 

 

 

Domestic Coal Futures Contracts

 

 

 

 

 

 

 

Notional amount (tons)

 

1,440

 

120

 

1,560

 

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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, or put option, if the index price is below the floor, and we receive the difference between the ceiling price, or call option, 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 collars, the collars mitigate the risk of crude oil price increases and thereby increased diesel costs that would otherwise have a negative impact on our cash flow.

 

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

 

During the three months ended March 31, 2015, we settled a portion of our 2015 call options by either closing out those positions or entering into offsetting call option positions.  We also entered into new 2015 swap positions.  In addition, we entered into new collar arrangements and swap positions for 2016.  At March 31, 2015, we 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)

 

 

 

2015 collar positions (1)

 

264

 

$

74.14

 

264

 

$

80.00

 

 

$

 

2015 swap positions (2)

 

 

 

 

 

255

 

52.18

 

2016 collar positions (3)

 

342

 

53.94

 

342

 

72.88

 

 

 

2016 swap positions (3)

 

 

 

 

 

342

 

63.39

 

Total

 

606

 

$

64.80

 

606

 

$

76.46

 

597

 

$

58.59

 

 


(1)                                 Represents 75% of expected diesel consumption for the second and third quarters of 2015.

(2)                                 Represents 25% of expected diesel consumption for the second and third quarters of 2015 and 100% of expected diesel consumption for the fourth quarter of 2015.

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

 

Offsetting and Balance Sheet Presentation

 

 

 

March 31, 2015

 

 

 

Gross Amounts of
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

 

$

19,470

 

$

(364

)

$

(364

)

$

364

 

$

19,106

 

$

 

WTI derivative financial instruments

 

 

(8,360

)

(4,232

)

4,232

 

(4,232

)

(4,128

)

Total

 

$

19,470

 

$

(8,724

)

$

(4,596

)

$

4,596

 

$

14,875

 

$

(4,128

)

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

December 31, 2014

 

 

 

Gross Amounts of
Recognized

 

Gross Amounts Offset in
the Consolidated Balance
Sheet

 

Net Amounts Presented
in the Consolidated
Balance Sheet

 

 

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

International coal forward contracts

 

$

20,861

 

$

(129

)

$

(129

)

$

129

 

$

20,732

 

$

 

WTI derivative financial instruments

 

 

(7,228

)

(3,620

)

3,620

 

(3,620

)

(3,608

)

Total

 

$

20,861

 

$

(7,357

)

$

(3,749

)

$

3,749

 

$

17,111

 

$

(3,608

)

 

Net amounts of international coal forward contracts and WTI derivative assets are included in the Derivative financial instruments line and net amounts of WTI derivative liabilities are included in Accrued expenses in the condensed consolidated balance sheets.  There were no cash collateral requirements at March 31, 2015 or December 31, 2014.

 

Derivative Gains and Losses

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

International coal forward contracts

 

$

(1,968

)

$

(10,592

)

Domestic coal futures contracts

 

3,898

 

(1,833

)

WTI derivative financial instruments

 

2,855

 

(309

)

Total

 

$

4,785

 

$

(12,734

)

 

See Note 5 for a discussion related to the fair value of derivative financial instruments.

 

7.  Senior Notes

 

Senior notes consisted of the following (in thousands):

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Principal

 

Carrying
Value

 

Fair
Value (1)

 

Principal

 

Carrying
Value

 

Fair
Value (1)

 

8.50% senior notes due 2019, net of unamortized discount

 

300,000

 

298,541

 

303,750

 

300,000

 

298,480

 

315,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.375% senior notes due 2024

 

200,000

 

200,000

 

177,000

 

200,000

 

200,000

 

189,500

 

Total senior notes

 

$

500,000

 

$

498,541

 

$

480,750

 

$

500,000

 

$

498,480

 

$

504,500

 

 


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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.  Federal Coal Lease Obligations

 

Federal coal lease obligations consisted of the following (in thousands): 

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Federal coal lease obligations, current

 

$

63,970

 

$

63,970

 

Federal coal lease obligations, noncurrent

 

 

 

Total federal coal lease obligations

 

$

63,970

 

$

63,970

 

 

Our federal coal lease obligations, as reflected in the condensed consolidated balance sheets, consist of discounted obligations payable to the Bureau of Land Management of the U.S. Department of the Interior (the “BLM”) discounted at an imputed interest rate.  Imputed interest is included in accrued expenses.  We have no further committed LBA payments after 2015.

 

As of March 31, 2015, we have the following federal coal lease payments (dollars in thousands):

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Annual

 

Imputed

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Payment Dates

 

Payment

 

Interest Rate

 

Value

 

Value (1)

 

Value

 

Value (1)

 

July 1, 2015

 

$

59,545

 

8.50

%

54,880

 

59,246

 

54,880

 

58,976

 

September 1, 2015

 

$

9,862

 

8.50

%

9,090

 

9,780

 

9,090

 

9,736

 

 

 

 

 

 

 

$

63,970

 

$

69,026

 

$

63,970

 

$

68,712

 

 


(1)                                 The fair value of estimates for federal coal lease obligations was determined by discounting the remaining lease payments using the then current estimate of the credit-adjusted, risk-free rate based on our then current credit rating, which is considered Level 2 in the fair value hierarchy.

 

9.  Asset Retirement Obligations

 

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

 

 

 

2015

 

2014

 

Balance at January 1,

 

$

217,312

 

$

247,329

 

Accretion expense

 

3,541

 

4,130

 

Revisions to estimated future reclamation cash flows

 

(13,586

)

(3,410

)

Payments

 

(298

)

(276

)

Balance at March 31,

 

206,969

 

247,773

 

Less: current portion

 

(1,071

)

(1,118

)

Asset retirement obligation, net of current portion

 

$

205,898

 

$

246,655

 

 

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 March 31, 2015 and 2014.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

10.  Other Obligations

 

Capital Equipment Lease Obligations

 

From time to time, we enter into capital leases on equipment under various lease schedules, which are subject to a master lease agreement, and are pre-payable at our option.  Interest on the leases is based on the one-month London Interbank Offered Rate (“LIBOR”) plus 1.95% for a current rate of 2.13% as of March 31, 2015.  The gross value of property, plant and equipment under capital leases was $11.4 million as of March 31, 2015 and related primarily to mining equipment. The accumulated depreciation for these items was $2.2 million at March 31, 2015, and changes thereto have been included in Depreciation and depletion in the condensed consolidated statements of operations.  Due to the variable nature of the imputed interest, fair value is equal to carrying value.

 

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

 

Year Ended December 31,

 

 

 

2015

 

$

1,354

 

2016

 

1,774

 

2017

 

1,740

 

2018

 

1,705

 

2019

 

1,670

 

Thereafter

 

879

 

Total

 

9,122

 

Less: interest

 

493

 

Total principal payments

 

8,629

 

Less: current portion

 

1,633

 

Capital equipment lease obligations, net of current portion

 

$

6,996

 

 

Accounts Receivable Securitization

 

On February 11, 2013, we executed an Accounts Receivable Securitization Facility (“A/R Securitization Program”) with a committed capacity of up to $75.0 million, which was due to expire on February 11, 2015.  On January 23, 2015, we entered into an agreement extending the term of the A/R Securitization Program until January 23, 2018.  All other terms of the program have remained substantially the same.  Certain of our subsidiaries are parties to the A/R Securitization Program.  In January 2013, we formed Cloud Peak Energy Receivables LLC (the “SPE”), a special purpose, bankruptcy-remote 100% owned subsidiary, to purchase, subject to certain exclusions, in a true sale, trade receivables generated by certain of our subsidiaries without recourse (other than customary indemnification obligations for breaches of specific representations and warranties) and then transfer undivided interests in up to $75.0 million of those accounts receivable to a financial institution for cash borrowings for our ultimate benefit.  The total borrowings are limited by eligible accounts receivable, as defined under the terms of the A/R Securitization Program.  At March 31, 2015, the A/R Securitization Program would have allowed for $39.9 million of borrowing capacity.  There were no borrowings outstanding from the A/R Securitization Program at March 31, 2015.  The SPE is consolidated into our financial statements.

 

Credit Facility

 

On February 21, 2014, Cloud Peak Energy Resources LLC entered into a five-year Credit Agreement with PNC Bank, National Association, as administrative agent, and a syndicate of lenders, which was amended on September 5, 2014 (as amended, the “Credit Agreement”).  The Credit Agreement provides us with a senior secured revolving credit facility with a capacity of up to $500 million that can be used to borrow funds or issue letters of credit.  The borrowing capacity under the Credit Agreement is reduced by the amount of letters of credit issued, which may be up to $250 million. Subject to the satisfaction of certain conditions, we may elect to increase the size of the revolving credit facility and/or request the

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.  This credit facility and capital leases are considered secured funded debt under the covenant calculations whereas federal coal lease obligations, accounts receivable securitizations, and senior notes are not considered secured funded debt.  The Credit Agreement also contains other non-financial covenants, including covenants related to our ability to incur additional debt or take other corporate actions.  The Credit Agreement also contains customary events of default with customary grace periods and thresholds.  Our ability to access the available funds under the credit facility may be prohibited in the event that we do not comply with the covenant requirements or if we default on our obligations under the Credit Agreement.

 

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

 

As of March 31, 2015, no borrowings or letters of credit were outstanding under the credit facility, and we were in compliance with the covenants contained in the Credit Agreement.  Our aggregate borrowing capacity under the Credit Agreement and the A/R Securitization Program was approximately $539.9 million at March 31, 2015.

 

11.  Interest Expense

 

Interest expense consisted of the following (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Senior notes

 

$

9,563

 

$

12,015

 

Credit facility unutilized fee

 

735

 

661

 

Federal coal lease obligations imputed interest

 

1,359

 

2,612

 

Amortization of deferred financing costs and original issue discount

 

1,064

 

1,137

 

Other

 

47

 

75

 

Subtotal

 

12,768

 

16,500

 

Premium on early retirement of debt

 

 

13,837

 

Write-off of deferred financing costs and original issue discount

 

 

7,338

 

Other

 

 

348

 

Total cost of early retirement of debt and refinancings

 

 

21,522

 

Total interest expense

 

12,768

 

38,022

 

Less interest capitalized

 

(100

)

(28

)

Net interest expense

 

$

12,668

 

$

37,994

 

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

12.  Commitments and Contingencies

 

Commitments

 

Purchase Commitments

 

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

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Capital Commitments

 

 

 

 

 

Equipment

 

$

30,973

 

$

11,751

 

Land

 

23,678

 

24,663

 

 

 

 

 

 

 

Supplies and Services

 

 

 

 

 

Coal purchase commitments

 

$

2,589

 

$

2,592

 

Transportation agreements

 

673,644

 

691,530

 

Materials and supplies

 

11,237

 

12,185

 

 

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 mine plan.  WildEarth has continued to pursue its challenges to mine plan approvals pending in district courts in Colorado, New Mexico, and Montana.

 

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

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 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 is scheduled to be completed by May 7, 2015.  Cloud Peak Energy believes WildEarth’s challenge and the related Northern Plains’ challenge against OSM are without merit.

 

Administrative Appeals of 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 Bureau of Land Management’s (“BLM”) August 15, 2014 decision to approve Antelope Coal LLC’s proposed modification of Antelope Coal’s West Antelope II South 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 decision that is the subject of both appeals approves the proposed amendment of Antelope Coal’s West Antelope II 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 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 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.  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. Cloud Peak Energy believes the WildEarth and PRBRC appeals challenging BLM’s West Antelope II South lease modification decision are without merit.

 

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 adversely impact our results of operations for that period.  In addition to claims and lawsuits against us, our LBAs, LBMs, permits, and other industry regulatory processes and approvals, including those applicable to the utility and coal logistics and transportation industries, may also be subject to legal challenges that could adversely impact our mining operations and results.

 

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.

 

14



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

Concentrations of Risk and Major Customers

 

For the three months ended March 31, 2015 and 2014, there was no single customer that represented 10% or more of consolidated revenue.  We generally do not require collateral or other security on accounts receivable because our customers are comprised primarily of investment grade electric utilities.  The credit risk is controlled through credit approvals and monitoring procedures.

 

Guarantees and Off-Balance Sheet Risk

 

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

 

U.S. federal and state laws require we secure certain of our obligations to reclaim lands used for mining and to secure coal lease obligations.  Prior to 2014, the method we used to meet these reclamation obligations and to secure coal lease obligations was to provide a third-party surety bond, typically through an insurance company, or provide a letter of credit, typically through a bank.  In 2014, we were granted approval from the state of Wyoming to self-bond $200 million of our reclamation obligations within the state, subject to annual renewal requirements.  We received approval to continue self-bonding on April 14, 2015.  Specific bond and/or letter of credit amounts may change over time, depending on the activity at the respective site and any specific requirements by federal or state laws.  As of March 31, 2015, we were self-bonded for $200 million and had $443.4 million of surety bonds outstanding to secure certain of our obligations to reclaim lands used for mining, secure coal lease obligations, and for other operating requirements.

 

13.  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

 

 

 

March 31,

 

 

 

2015

 

2014

 

Service cost

 

$

1,229

 

$

1,038

 

Interest cost

 

482

 

464

 

Amortization of prior service cost

 

313

 

247

 

Net periodic benefit cost

 

$

2,024

 

$

1,749

 

 

15



Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14.  Income Taxes

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Income tax benefit (expense)

 

$

280

 

$

6,490

 

Effective tax rate

 

5.6

%

29.2

%

 

Our statutory income tax rate, including state income taxes, is 37%.  The difference between the statutory income tax rate and our effective tax rate for the three months ended March 31, 2015 is due primarily to the impact of the lower equity-based compensation tax deduction for shares that vested during the period.

 

15.  Accumulated Other Comprehensive Income (Loss)

 

The changes in Accumulated Other Comprehensive Income (Loss) (“AOCI”) by component, net of tax are as follows (in thousands): 

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

Post-
retirement
Medical
Plan

 

Post-
retirement
Medical
Plan

 

Decker
Defined
Benefit
Pension

 

Total

 

Beginning balance, January 1

 

$

(11,299

)

$

(6,517

)

$

(3,763

)

$

(10,279

)

Other comprehensive income (loss) before reclassifications

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

197

 

158

 

 

158

 

Net current period other comprehensive income (loss)

 

197

 

158

 

 

158

 

Ending balance, March 31

 

$

(11,102

)

$

(6,359

)

$

(3,763

)

$

(10,121

)

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Postretirement Medical Plan (1)

 

 

 

 

 

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

 

$

264

 

$

209

 

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

 

49

 

38

 

Total before tax

 

313

 

247

 

Tax benefit

 

(116

)

(89

)

Amounts reclassified from accumulated other comprehensive income (loss)

 

$

197

 

$

158

 

 


(1)                                 See Note 13 for the components of our net periodic postretirement benefit costs.

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

 

16



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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

16.  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

 

 

 

March 31,

 

 

 

2015

 

2014

 

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

 

 

 

 

 

Net income (loss)

 

$

(4,680

)

$

(15,626

)

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

 

60,935

 

60,741

 

Dilutive effect of stock equivalents

 

 

 

Denominator for diluted earnings (loss) per share

 

60,935

 

60,741

 

Diluted earnings (loss) per share

 

$

(0.08

)

$

(0.26

)

 

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

 

 

 

March 31,

 

 

 

2015

 

2014

 

Anti-dilutive stock equivalents

 

2,146

 

1,384

 

 

17.  Segment Information

 

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

 

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

 

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

 

17



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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

instruments are reported within this segment.  Port access contract rights and related amortization are also included in this segment.

 

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

 

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

 

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

 

Revenue

 

The following table presents revenue (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Owned and Operated Mines

 

$

261,799

 

$

269,599

 

Logistics and Related Activities

 

69,439

 

58,514

 

Corporate and Other

 

5,231

 

4,373

 

Eliminations of intersegment sales

 

(18,917

)

(13,420

)

Consolidated revenue

 

$

317,553

 

$

319,066

 

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

United States

 

$

258,134

 

$

267,230

 

South Korea

 

50,011

 

50,943

 

Other

 

9,408

 

893

 

Total revenue from external customers

 

$

317,553

 

$

319,066

 

 

We attribute revenue to individual countries based on the location of the physical delivery of the coal.  All of our revenue for the three months ended March 31, 2015 and 2014 originated in the U.S.

 

18



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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Adjusted EBITDA

 

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

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

 

 

$

44,296

 

 

 

$

41,196

 

Logistics and Related Activities

 

 

 

(8,338

)

 

 

371

 

Corporate and Other

 

 

 

4,119

 

 

 

(1,868

)

Subtotal reportable segments

 

 

 

40,077

 

 

 

39,699

 

Eliminations

 

 

 

(656

)

 

 

(351

)

Interest expense, net

 

 

 

(12,619

)

 

 

(37,870

)

Depreciation and depletion

 

 

 

(24,536

)

 

 

(26,928

)

Amortization

 

 

 

(928

)

 

 

 

Accretion

 

 

 

(3,541

)

 

 

(4,130

)

Income tax benefit (expense)

 

 

 

280

 

 

 

6,490

 

Tax agreement (expense) benefit (1)

 

 

 

 

 

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

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

 

$

(4,785

)

 

 

$

12,734

 

 

 

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

 

2,029

 

 

 

(5,270

)

 

 

Total derivative financial instruments

 

 

 

(2,756

)

 

 

7,464

 

Gain on sale of Decker Mine interest

 

 

 

 

 

 

 

Net income (loss)

 

 

 

$

(4,680

)

 

 

$

(15,626

)

 


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

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

(4)                                 Excludes premiums paid in prior periods for contracts settled during the period

 

$

1,984

 

 

 

$

 

 

Total Assets

 

The following table presents total assets (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Owned and Operated Mines

 

$

1,680,946

 

$

1,704,267

 

Logistics and Related Activities

 

100,205

 

92,347

 

Corporate and Other

 

362,572

 

363,611

 

Eliminations

 

(82

)

(307

)

Consolidated assets

 

$

2,143,641

 

$

2,159,918

 

 

As of March 31, 2015 and December 31, 2014, all of our long-lived assets were located in the U.S.

 

19



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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, port access contract rights, and assets acquired under capital leases (in thousands):

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Owned and Operated Mines

 

$

6,452

 

$

5,645

 

Logistics and Related Activities

 

 

 

Corporate and Other

 

703

 

833

 

Consolidated

 

$

7,155

 

$

6,478

 

 

18.  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.  In May 2011, the stockholders approved increasing the pool of shares of CPE Inc.’s common stock authorized for issuance in connection with equity-based awards under the LTIP from 3.4 million shares to 5.5 million shares.  As of March 31, 2015, approximately 1.6 million shares were available for grant, depending on the actual performance and vesting of then-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 for any other reason 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 and Restricted Stock Units

 

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

 

A summary of restricted stock award activity is as follows (in thousands):

 

 

 

Number

 

Weighted-
Average
Grant-Date
Fair Value

 

 

 

 

 

(per share)

 

Non-vested shares at January 1, 2015

 

407

 

$

18.14

 

Granted

 

460

 

8.05

 

Forfeited

 

(24

)

18.34

 

Vested

 

(102

)

17.00

 

Non-vested shares at March 31, 2015

 

741

 

$

12.03

 

 

20



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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of March 31, 2015, unrecognized compensation cost related to restricted stock awards was $5.4 million, which will be recognized over a weighted-average period of 2.4 years prior to vesting.

 

Performance-Based Share Units

 

Performance-based share units granted represent the number of shares of common stock to be awarded based on the achievement of targeted performance levels related to pre-established total stockholder return goals over a three-year period and may range from 0% to 200% of the targeted amount.  The grant date fair value of the awards is based upon a Monte Carlo simulation and is amortized over the performance period.

 

A summary of performance-based share unit award activity is as follows (in thousands):

 

 

 

Number

 

Weighted-
Average
Grant-Date
Fair Value

 

 

 

 

 

(per share)

 

Non-vested units at January 1, 2015

 

497

 

$

21.84

 

Granted

 

601

 

9.66

 

Forfeited

 

(47

)

22.73

 

Vested

 

(97

)

17.61

 

Non-vested units at March 31, 2015

 

954

 

$

14.56

 

 

The assumptions used to estimate the fair value of the performance-based share units granted on March 2, 2015 are as follows:

 

Risk-free interest rate

 

1.0

%

Expected volatility

 

37.7

%

Term

 

2.8 years

 

Fair value (per share)

 

$

9.66

 

 

19.  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 Subsidiary or the sale or disposition of all or substantially all the assets of the Guarantor Subsidiary (other than to CPE Inc. or a Restricted Subsidiary (as defined in the applicable indenture) of CPE Inc.) otherwise 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,

 

21



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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

·                  the release, other than the discharge through payment by the Guarantor Subsidiary, of all other guarantees by such Restricted Subsidiary of Debt (as defined in the applicable indenture) of either issuer of the senior notes or (in the case of the indenture for the 2024 Notes) 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:

 

22



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 March 31, 2015

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

2,120

 

$

 

$

317,553

 

$

 

$

(2,120

)

317,553

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

8

 

264,309

 

 

 

264,317

 

Depreciation and depletion

 

 

647

 

23,889

 

 

 

24,536

 

Amortization

 

 

 

928

 

 

 

928

 

Accretion

 

 

 

3,541

 

 

 

3,541

 

Derivative financial instruments

 

 

 

4,785

 

 

 

4,785

 

Selling, general and administrative expenses

 

2,120

 

288

 

10,961

 

 

(2,120

)

11,249

 

Other operating costs

 

 

 

213

 

 

 

213

 

Total costs and expenses

 

2,120

 

943

 

308,626

 

 

(2,120

)

309,569

 

Operating income (loss)

 

 

(943

)

8,927

 

 

 

7,984

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

49

 

 

 

 

49

 

Interest expense

 

 

(11,102

)

(1,481

)

(85

)

 

(12,668

)

Other, net

 

 

(87

)

(337

)

87

 

 

(337

)

Total other income (expense)

 

 

(11,140

)

(1,818

)

2

 

 

(12,956

)

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

 

 

(12,083

)

7,109

 

2

 

 

(4,972

)

Income tax benefit (expense)

 

 

679

 

(399

)

 

 

280

 

Earnings from unconsolidated affiliates, net of tax

 

 

(1

)

13

 

 

 

12

 

Earnings (losses) from consolidated affiliates, net of tax

 

(4,680

)

6,725

 

2

 

 

(2,047

)

 

Net income (loss)

 

(4,680

)

(4,680

)

6,725

 

2

 

(2,047

)

(4,680

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service cost

 

313

 

313

 

313

 

 

(626

)

313

 

Income tax on postretirement medical plan adjustments

 

(116

)

(116

)

(116

)

 

232

 

(116

)

Other comprehensive income (loss)

 

197

 

197

 

197

 

 

(394

)

197

 

Total comprehensive income (loss)

 

$

(4,483

)

$

(4,483

)

$

6,922

 

$

2

 

$

(2,441

)

$

(4,483

)

 

23



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 March 31, 2014

 

 

 

Parent
Guarantor
(CPE Inc.)

 

Issuing
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Revenue

 

$

1,900

 

$

 

$

315,101

 

$

3,965

 

$

(1,900

)

319,066

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

169

 

266,596

 

5,174

 

 

271,939

 

Depreciation and depletion

 

 

757

 

26,389

 

(218

)

 

26,928

 

Accretion

 

 

 

3,114

 

1,016

 

 

4,130

 

Derivative financial instruments

 

 

 

(12,734

)

 

 

(12,734

)

Selling, general and administrative expenses

 

1,900

 

198

 

12,243

 

 

(1,900

)

12,441

 

Other operating costs

 

 

45

 

193

 

 

 

238

 

Total costs and expenses

 

1,900

 

1,169

 

295,801

 

5,972

 

(1,900

)

302,942

 

Operating income (loss)

 

 

(1,169

)

19,300

 

(2,007

)

 

16,124

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

124

 

 

 

 

124

 

Interest expense

 

 

(35,116

)

(2,779

)

(99

)

 

(37,994

)

Other, net

 

 

(664

)

113

 

87

 

 

(465

)

Total other income (expense)

 

 

(35,656

)

(2,666

)

(12

)

 

(38,335

)

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

 

 

(36,825

)

16,634

 

(2,019

)

 

(22,211

)

Income tax benefit (expense)

 

 

9,129

 

(3,291

)

652

 

 

6,490

 

Earnings from unconsolidated affiliates, net of tax

 

 

(16

)

110

 

 

 

95

 

Earnings (losses) from consolidated affiliates, net of tax

 

(15,626

)

12,086

 

(1,367

)

 

4,907

 

 

Net income (loss)

 

(15,626

)

(15,626

)

12,086

 

(1,367

)

4,907

 

(15,626

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service cost

 

247

 

247

 

247

 

 

(494

)

247

 

Income tax on postretirement medical plan and pension adjustments