XNYS:CLD Cloud Peak Energy Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012

 

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

Commission File Number:  333-168639

 

GRAPHIC

 

Cloud Peak Energy Inc.

Cloud Peak Energy Resources LLC

(Exact name of registrant as specified in its charter)

 

Delaware

Delaware

 

26-3088162

26-4073917

(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.

 

Cloud Peak Energy Inc.

 

Yes x  o No

Cloud Peak Energy Resources LLC

 

Yes x  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).

 

Cloud Peak Energy Inc.

 

Yes x  o No

Cloud Peak Energy Resources LLC

 

Yes x  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

Cloud Peak Energy Inc.

 

x

 

o

 

o

 

o

Cloud Peak Energy Resources LLC

 

o

 

o

 

x

 

o

 

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

 

Cloud Peak Energy Inc.

 

o Yes  No x

Cloud Peak Energy Resources LLC

 

o Yes  No x

 

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, 61,042,020 shares outstanding as of July 25, 2012.  100% of the common membership units of Cloud Peak Energy Resources LLC outstanding as of July 25, 2012 are held by Cloud Peak Energy Inc.

 

This combined Form 10-Q is separately filed by Cloud Peak Energy Inc. and Cloud Peak Energy Resources LLC.  Cloud Peak Energy Resources LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.

 

 

 



Table of Contents

 

CLOUD PEAK ENERGY INC. AND

 

CLOUD PEAK ENERGY RESOURCES LLC

 

TABLE OF CONTENTS

 

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

Item 1

Financial Statements —

 

 

Cloud Peak Energy Inc.

 

 

Cloud Peak Energy Inc. Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011

1

 

Cloud Peak Energy Inc. Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 (Audited)

2

 

Cloud Peak Energy Inc. Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

3

 

 

 

 

Cloud Peak Energy Resources LLC

 

 

Cloud Peak Energy Resources LLC Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011

4

 

Cloud Peak Energy Resources LLC Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 (Audited)

5

 

Cloud Peak Energy Resources LLC Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

6

 

Notes to Unaudited Condensed Consolidated Financial Statements of Cloud Peak Energy Inc. and Cloud Peak Energy Resources LLC

7

 

 

 

 

Cautionary Notice Regarding Forward-Looking Statements

28

 

 

 

Item 2

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

30

Item 3

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4

Controls and Procedures

42

 

 

 

 

PART II — OTHER INFORMATION

 

Item 1

Legal Proceedings

43

Item 1A

Risk Factors

43

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3

Defaults Upon Senior Securities

43

Item 4

Mine Safety Disclosures

43

Item 5

Other Information

43

Item 6

Exhibits

43

 

Explanatory Note

 

This combined Form 10-Q is filed by Cloud Peak Energy Inc. and Cloud Peak Energy Resources LLC.  Each Registrant hereto is filing on its own behalf all of the information contained in this report that relates to such Registrant.  Each Registrant hereto is not filing any information that does not relate to such other Registrant, and therefore makes no representation as to any such information.  Cloud Peak Energy Resources LLC is the sole direct subsidiary of Cloud Peak Energy Inc., providing 100% of Cloud Peak Energy Inc.’s total consolidated revenue for the three and six months ended June 30, 2012 and constituting nearly 100% of Cloud Peak Energy Inc.’s total consolidated assets as of June 30, 2012.

 

Unless the context indicates otherwise, the terms the “Company,” “we,” “us,” and “our” refer to both Cloud Peak Energy Inc. and Cloud Peak Energy Resources LLC and their subsidiaries.  Discussions or areas of this report that either apply only to Cloud Peak Energy Inc. or Cloud Peak Energy Resources LLC are clearly noted in such sections.

 

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,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues

 

$

343,183

 

$

387,679

 

$

716,086

 

$

744,224

 

Costs and expenses

 

 

 

 

 

 

 

 

 

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

 

266,073

 

287,837

 

549,018

 

549,018

 

Depreciation and depletion

 

22,285

 

9,133

 

45,675

 

34,248

 

Accretion

 

3,422

 

3,096

 

6,070

 

6,436

 

Derivative financial instruments

 

(20,183

)

 

(18,127

)

 

Selling, general and administrative expenses

 

12,864

 

12,907

 

27,699

 

25,934

 

Total costs and expenses

 

284,461

 

312,973

 

610,335

 

615,636

 

Operating income

 

58,722

 

74,706

 

105,751

 

128,588

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

312

 

181

 

758

 

316

 

Interest expense

 

(7,936

)

(8,454

)

(13,786

)

(20,672

)

Tax agreement expense

 

 

(42,733

)

 

(42,733

)

Other, net

 

(111

)

(93

)

(53

)

69

 

Total other expense

 

(7,735

)

(51,099

)

(13,081

)

(63,020

)

Income before income tax provision and earnings from unconsolidated affiliates

 

50,987

 

23,607

 

92,670

 

65,568

 

Income tax (expense) benefit

 

(18,806

)

69,480

 

(33,908

)

54,187

 

Earnings from unconsolidated affiliates, net of tax

 

1,497

 

1,507

 

1,534

 

1,612

 

Net income

 

33,678

 

94,594

 

60,296

 

121,367

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Retiree medical plan amortization of prior service cost, net of tax

 

252

 

209

 

562

 

418

 

Other comprehensive income

 

252

 

209

 

562

 

418

 

Total comprehensive income

 

$

33,930

 

$

94,803

 

$

60,858

 

$

121,785

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.56

 

$

1.58

 

$

1.00

 

$

2.02

 

Diluted

 

$

0.55

 

$

1.56

 

$

0.99

 

$

2.00

 

Weighted-average shares outstanding - basic

 

60,015

 

60,002

 

60,011

 

60,001

 

Weighted-average shares outstanding - diluted

 

60,870

 

60,598

 

60,826

 

60,605

 

 

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

 

1



Table of Contents

 

CLOUD PEAK ENERGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

(audited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

121,584

 

$

404,240

 

Investments in marketable securities

 

100,195

 

75,228

 

Restricted cash

 

 

71,245

 

Accounts receivable

 

91,441

 

95,247

 

Due from related parties

 

443

 

471

 

Inventories, net

 

78,058

 

71,648

 

Deferred income taxes

 

32,870

 

37,528

 

Derivative financial instruments

 

19,878

 

2,275

 

Other assets

 

25,756

 

13,019

 

Total current assets

 

470,225

 

770,901

 

Noncurrent assets

 

 

 

 

 

Property, plant and equipment, net

 

1,645,858

 

1,350,135

 

Goodwill

 

35,634

 

35,634

 

Deferred income taxes

 

112,627

 

132,828

 

Other assets

 

35,407

 

29,821

 

Total assets

 

$

2,299,751

 

$

2,319,319

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

52,347

 

$

71,427

 

Royalties and production taxes

 

126,445

 

136,072

 

Accrued expenses

 

50,809

 

65,928

 

Current portion of tax agreement liability

 

19,113

 

19,113

 

Current portion of federal coal lease obligations

 

108,709

 

102,198

 

Other liabilities

 

4,975

 

4,971

 

Total current liabilities

 

362,398

 

399,709

 

Noncurrent liabilities

 

 

 

 

 

Tax agreement liability, net of current portion

 

151,523

 

151,523

 

Senior notes

 

596,287

 

596,077

 

Federal coal lease obligations, net of current portion

 

130,649

 

186,119

 

Asset retirement obligations, net of current portion

 

196,330

 

192,707

 

Other liabilities

 

44,945

 

42,795

 

Total liabilities

 

1,482,132

 

1,568,930

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

Equity

 

 

 

 

 

Common stock ($0.01 par value; 200,000 shares authorized; 61,042 and 60,923 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively)

 

610

 

609

 

Additional paid-in capital

 

542,671

 

536,301

 

Retained earnings

 

292,390

 

232,093

 

Accumulated other comprehensive loss

 

(18,052

)

(18,614

)

Total equity

 

817,619

 

750,389

 

Total liabilities and equity

 

$

2,299,751

 

$

2,319,319

 

 

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,

 

 

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

60,296

 

$

121,367

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and depletion

 

45,675

 

34,248

 

Accretion

 

6,070

 

6,436

 

Earnings from unconsolidated affiliates

 

(1,534

)

(1,612

)

Distributions of income from unconsolidated affiliates

 

 

2,000

 

Deferred income taxes

 

23,679

 

(59,577

)

Tax agreement expense

 

 

42,733

 

Stock compensation expense

 

6,371

 

4,835

 

Unrealized derivative income

 

(18,127

)

 

Other

 

5,812

 

6,353

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

4,038

 

(8,486

)

Inventories

 

(6,171

)

(8,278

)

Due to or from related parties

 

28

 

(4,561

)

Other assets

 

(12,701

)

(10,909

)

Accounts payable and accrued expenses

 

(29,214

)

(2,491

)

Asset retirement obligations

 

(2,940

)

(3,255

)

Net cash provided by operating activities

 

81,282

 

118,803

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Acquisition of Youngs Creek and CX Ranch coal and land assets

 

(300,259

)

 

Purchases of property, plant and equipment

 

(21,875

)

(59,001

)

Cash paid for capitalized interest

 

(36,477

)

(12,018

)

Investments in marketable securities

 

(53,854

)

 

Maturity and redemption of investments

 

28,887

 

 

Initial payments on federal coal leases

 

 

(69,407

)

Return of restricted cash

 

71,244

 

21,321

 

Partnership escrow deposit

 

(4,470

)

 

Other

 

1,825

 

(3,534

)

Net cash used in investing activities

 

(314,979

)

(122,639

)

Financing activities

 

 

 

 

 

Principal payments on federal coal leases

 

(48,959

)

(7,496

)

Other

 

 

(2,060

)

Net cash used in financing activities

 

(48,959

)

(9,556

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(282,656

)

(13,392

)

Cash and cash equivalents at beginning of period

 

404,240

 

340,101

 

Cash and cash equivalents at end of period

 

$

121,584

 

$

326,709

 

 

 

 

 

 

 

Supplemental cash flow disclosures

 

 

 

 

 

Interest paid

 

$

46,616

 

$

28,901

 

Non-cash interest capitalized

 

$

9,635

 

$

4,868

 

Income taxes paid

 

$

20,788

 

$

95

 

 

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

 

3



Table of Contents

 

CLOUD PEAK ENERGY RESOURCES LLC

(SUBSIDIARY OF CLOUD PEAK ENERGY INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues

 

$

343,183

 

$

387,679

 

$

716,086

 

$

744,224

 

Costs and expenses

 

 

 

 

 

 

 

 

 

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

 

266,073

 

287,837

 

549,018

 

549,018

 

Depreciation and depletion

 

22,285

 

9,133

 

45,675

 

34,248

 

Accretion

 

3,422

 

3,096

 

6,070

 

6,436

 

Derivative financial instruments

 

(20,183

)

 

(18,127

)

 

Selling, general and administrative expenses

 

12,864

 

12,907

 

27,699

 

25,934

 

Total costs and expenses

 

284,461

 

312,973

 

610,335

 

615,636

 

Operating income

 

58,722

 

74,706

 

105,751

 

128,588

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Interest income

 

312

 

181

 

758

 

316

 

Interest expense

 

(7,936

)

(8,454

)

(13,786

)

(20,672

)

Other, net

 

(111

)

(93

)

(53

)

69

 

Total other expense

 

(7,735

)

(8,366

)

(13,081

)

(20,287

)

Income before income tax provision and earnings from unconsolidated affiliates

 

50,987

 

66,340

 

92,670

 

108,301

 

Income tax (expense) benefit

 

(18,806

)

54,096

 

(33,908

)

38,803

 

Earnings from unconsolidated affiliates, net of tax

 

1,497

 

1,507

 

1,534

 

1,612

 

Net income

 

33,678

 

121,943

 

60,296

 

148,716

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Retiree medical plan amortization of prior service cost, net of tax

 

252

 

209

 

562

 

418

 

Other comprehensive income

 

252

 

209

 

562

 

418

 

Total comprehensive income

 

$

33,930

 

$

122,152

 

$

60,858

 

$

149,134

 

 

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

 

4



Table of Contents

 

CLOUD PEAK ENERGY RESOURCES LLC

(SUBSIDIARY OF CLOUD PEAK ENERGY INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(unaudited)

 

(audited)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

121,584

 

$

404,240

 

Investments in marketable securities

 

100,195

 

75,228

 

Restricted cash

 

 

71,245

 

Accounts receivable

 

91,441

 

95,247

 

Inventories, net

 

78,058

 

71,648

 

Deferred income taxes

 

25,990

 

30,648

 

Derivative financial instruments

 

19,878

 

2,275

 

Other assets

 

23,886

 

12,610

 

Total current assets

 

461,032

 

763,141

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

Property, plant and equipment, net

 

1,645,858

 

1,350,135

 

Goodwill

 

35,634

 

35,634

 

Deferred income taxes

 

58,078

 

78,280

 

Other assets

 

35,360

 

29,773

 

Total assets

 

$

2,235,962

 

$

2,256,963

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

52,346

 

$

71,377

 

Royalties and production taxes

 

126,445

 

136,072

 

Accrued expenses

 

47,034

 

51,799

 

Due to related parties

 

21,956

 

27,420

 

Current portion of federal coal lease obligations

 

108,709

 

102,198

 

Other liabilities

 

4,975

 

4,971

 

Total current liabilities

 

361,465

 

393,837

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

Senior notes

 

596,287

 

596,077

 

Federal coal lease obligations, net of current portion

 

130,649

 

186,119

 

Asset retirement obligations, net of current portion

 

196,330

 

192,707

 

Other liabilities

 

44,945

 

42,795

 

Total liabilities

 

1,329,676

 

1,411,535

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Member’s equity

 

924,338

 

864,042

 

Accumulated other comprehensive loss

 

(18,052

)

(18,614

)

Total member’s equity

 

906,286

 

845,428

 

Total liabilities and member’s equity

 

$

2,235,962

 

$

2,256,963

 

 

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

 

5



Table of Contents

 

CLOUD PEAK ENERGY RESOURCES LLC

(SUBSIDIARY OF CLOUD PEAK ENERGY INC.)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

60,296

 

$

148,716

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and depletion

 

45,675

 

34,248

 

Accretion

 

6,070

 

6,436

 

Earnings from unconsolidated affiliates

 

(1,534

)

(1,612

)

Distributions of income from unconsolidated affiliates

 

 

2,000

 

Deferred income taxes

 

23,679

 

(44,257

)

Unrealized derivative income

 

(18,127

)

 

Other, net

 

5,812

 

6,353

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

4,038

 

(8,486

)

Inventories

 

(6,171

)

(8,278

)

Due to or from related parties

 

(5,465

)

3,088

 

Other assets

 

(11,241

)

(16,551

)

Accounts payable and accrued expenses

 

(18,810

)

564

 

Asset retirement obligations

 

(2,940

)

(3,255

)

Net cash provided by operating activities

 

81,282

 

118,966

 

Investing activities

 

 

 

 

 

Acquisition of Youngs Creek and CX Ranch coal and land assets

 

(300,259

)

 

Purchases of property, plant and equipment

 

(21,875

)

(59,001

)

Cash paid for capitalized interest

 

(36,477

)

(12,018

)

Investments in marketable securities

 

(53,854

)

 

Maturity and redemption of investments

 

28,887

 

 

Initial payments on federal coal leases

 

 

(69,407

)

Return of restricted cash

 

71,244

 

21,321

 

Partnership escrow deposit

 

(4,470

)

 

Other

 

1,825

 

(3,534

)

Net cash used in investing activities

 

(314,979

)

(122,639

)

Financing activities

 

 

 

 

 

Principal payments on federal coal leases

 

(48,959

)

(7,496

)

Member distributions

 

 

(162

)

Other

 

 

(2,060

)

Net cash used in financing activities

 

(48,959

)

(9,718

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(282,656

)

(13,391

)

Cash and cash equivalents at beginning of period

 

404,240

 

340,100

 

Cash and cash equivalents at end of period

 

$

121,584

 

$

326,709

 

 

 

 

 

 

 

Supplemental cash flow disclosures for continuing operations:

 

 

 

 

 

Interest paid

 

$

46,616

 

$

28,901

 

Non-cash interest capitalized

 

$

9,635

 

$

4,868

 

Income taxes paid

 

$

20,788

 

$

95

 

 

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

 

6



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CLOUD PEAK ENERGY INC. AND

CLOUD PEAK ENERGY RESOURCES LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Basis of Presentation

 

Business, Principles of Consolidation, and Use of Estimates

 

We are one of the largest producers of coal in the United States of America (“U.S.”) and in the Powder River Basin (“PRB”) based on 2011 coal sales.  We operate some of the safest mines in the coal industry.  According to Mine Safety and Health Administration (“MSHA”) data, in 2011, we had 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., and operate two of the four largest coal mines in the U.S.  Our operations include three wholly-owned surface coal mines, two of which, the Antelope mine and the Cordero Rojo mine, are in Wyoming and one of which, the Spring Creek mine, is in Montana.  We also own a 50% non-operating interest in a fourth surface coal mine in Montana, the Decker mine.  We also own rights to substantial undeveloped coal and complimentary surface assets in the Northern PRB, further building our long-term position to serve Asian export and domestic customers.  We produce subbituminous thermal coal with low sulfur content and sell our coal primarily to domestic and foreign electric utilities.

 

We consolidate the accounts of entities in which we have a controlling financial interest under the voting control model.  We account for our 50% non-operating interest in Decker Coal Company (“Decker”) using the proportionate consolidation method, whereby our share of Decker’s assets, liabilities, revenues and expenses are included in our consolidated financial statements.  Investments in other entities that we do not control but have the ability to exercise significant influence over the investee’s operating and financial policies, are accounted for under the equity method.  All intercompany balances and transactions have been eliminated in the consolidated financial statements.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”).  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 three months and six months ended June 30, 2012 are not necessarily indicative of results that can be expected for 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 Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Form 10-K”) for a discussion of our critical accounting policies and estimates.

 

“Cloud Peak Energy,” “we,” “us,” “our” or the “Company” refer collectively to Cloud Peak Energy Inc. (“CPE Inc.”), Cloud Peak Energy Resources LLC (“CPE Resources”) and their consolidated subsidiaries.  Unless separately stated, the notes herein relate to both CPE Inc. and CPE Resources.

 

Basis of Presentation

 

CPE Inc. conducts all of its business through CPE Resources and its subsidiaries.  CPE Inc.’s consolidated financial statements are substantially identical to CPE Resources’s consolidated financial statements, with the following exceptions:

 

·                  Tax Receivable Agreement (see Note 10) and deferred tax assets relating thereto (see Note 9)

 

·                  Earnings per share (see Note 12)

 

·                  Equity-based compensation (see Note 14)

 

·                  Supplemental guarantor information (see Note 15)

 

The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all footnote disclosures required by U.S. GAAP.  In accordance with U.S. GAAP for interim financial statements, these unaudited condensed consolidated financial statements do not include certain information and note disclosures that are normally included in annual financial statements prepared in conformity with U.S. GAAP.  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2011 and 2010, and for each of the three years ended December 31, 2011, included in our 2011 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 the financial position as of June 30, 2012, and the results of operations and comprehensive income for the three and six months ended June 30, 2012 and 2011, and the cash flows for the six months ended June 30, 2012 and 2011, in conformity with U.S. GAAP.

 

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Table of Contents

 

CLOUD PEAK ENERGY INC. AND

CLOUD PEAK ENERGY RESOURCES LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Due to the tabular presentation of rounded amounts, certain tables reflect insignificant rounding differences.

 

2.  Accounting Policies and Standards Update

 

Recently Issued Accounting Pronouncements

 

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

 

Other Comprehensive Income

 

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which amends current comprehensive income guidance.  The update eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity.  Instead, an entity is required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The guidance is now effective for us.  The guidance impacts our disclosures, but it does not impact our results of operations, financial condition, or cash flows.

 

3.  Asset Acquisitions

 

On June 29, 2012, we completed our acquisition of the Youngs Creek Mining Company, LLC (“Youngs Creek”) joint venture and other related coal and surface assets, including CX Ranch, from Chevron U.S.A. Inc. (“Chevron”) and CONSOL Energy Inc. (“CONSOL”) for $300 million.  The acquisition expands our mineral assets to serve the domestic and international markets.  This was an asset acquisition.  The full amount of the consideration paid will be recorded within the Land, Surface Rights, and Mineral Rights line item of Property, Plant, and Equipment.  We utilized available cash on hand to fund the acquisition.

 

Future development timing and production levels are expected to depend largely on the availability of additional export terminal capacity on the West Coast and continued strong Asian demand for thermal coal.

 

Securities and Exchange Commission Industry Guide 7 provides guidance for economic modeling to support classification of coal assets as reserves.  The completion of such a model for Youngs Creek will require additional exploration and market factors to support a definitive mine plan for the development of the property.  At present, there are a number of alternatives we are considering with respect to the development of this property.  Consequently, we are unable to complete a definitive mine plan for the property at this time.  As a result, we are not able to classify the coal assets as reserves; we are not in a position to reasonably estimate any additional taxable income attributable to the development and operation of a mine; and no update was made to the tax agreement liability during the three months ended June 30, 2012 (see Note 10).  We will continue to evaluate the many development options for these assets and expect to update our reserves and the tax agreement liability when definitive mine plans are sufficiently advanced.

 

As Youngs Creek is an undeveloped, greenfield surface mine project, there are no revenues or income related to the acquired properties.

 

8



Table of Contents

 

CLOUD PEAK ENERGY INC. AND

CLOUD PEAK ENERGY RESOURCES LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4.  Inventories

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Materials and supplies

 

$

72,867

 

$

67,461

 

Less: Obsolescence allowance

 

(728

)

(643

)

Material and supplies, net

 

72,139

 

66,818

 

Coal inventory

 

5,919

 

4,830

 

Inventories, net

 

$

78,058

 

$

71,648

 

 

5.  Derivatives

 

We are exposed to various types of risk in the normal course of business, including fluctuations in commodity prices.  During 2011, we commenced the use of commodity contracts to manage certain exposures to international coal prices.

 

In addition, during the second quarter of 2012, we commenced the use of costless collars to manage certain exposures to diesel fuel prices.  The collars are indexed to the West Texas Intermediate (“WTI”) crude oil price as quoted on the New York Mercantile Exchange.  Under a collar agreement, we pay the difference between the index price and a floor price if the index price is below the floor.  We receive the difference between the ceiling price and the index price only 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 extreme price decreases, the collars mitigate the risk of extreme crude oil price increases and thereby increased diesel costs that would have a negative impact on cash flow.

 

All of our derivative financial instruments are recognized in the balance sheet at fair value.  Changes in the fair value of the derivative financial instruments are included in “Operating income” on the condensed consolidated statements of operations and comprehensive income each period using mark-to-market accounting.

 

We held derivative financial instruments for risk management purposes as follows (in thousands except per barrel amounts):

 

International Coal Forward Contracts

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Notional

 

 

 

 

 

Notional

 

 

 

 

 

Year of Settlement

 

Amount

 

Asset

 

Liability

 

Amount

 

Asset

 

Liability

 

 

 

(tons)

 

 

 

 

 

(tons)

 

 

 

 

 

2012

 

281

 

$

5,327

 

$

 

215

 

$

1,090

 

$

 

2013

 

686

 

11,250

 

 

322

 

1,185

 

 

2014

 

198

 

2,178

 

 

 

 

 

2015

 

132

 

1,060

 

 

 

 

 

Total

 

1,297

 

$

19,814

 

$

 

537

 

$

2,275

 

$

 

 

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Table of Contents

 

CLOUD PEAK ENERGY INC. AND

CLOUD PEAK ENERGY RESOURCES LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

WTI Collars

 

 

 

June 30, 2012

 

 

 

Notional

 

Weighted-Average

 

 

 

 

 

Period

 

Amount

 

Floor

 

Ceiling

 

Asset

 

Liability

 

 

 

(barrels)

 

 

 

 

 

 

 

 

 

July 2012 to March 2013

 

387

 

$

66.24

 

$

105.47

 

$

64

 

$

 

 

As of December 31, 2011, there were no WTI collars.

 

Unrealized and realized gains (losses) on derivative financial instruments consisted of the following (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Unrealized gains (losses)

 

$

20,183

 

$

 

$

18,127

 

$

 

 

 

 

 

 

 

 

 

 

 

Realized gains (losses)

 

$

 

$

 

$

524

 

$

 

 

There were no derivative financial instruments as of June 30, 2011.  See Note 6 for a discussion related to the fair value of derivative financial instruments.

 

6.  Fair Value of Financial Instruments

 

Due to the short term nature of certain of our financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, amounts due from related parties, accounts payable, and certain current liabilities, we believe that their historical cost approximated fair value.

 

We also held investments in marketable securities and derivative financial instruments that we assessed and reported on our balance sheet at fair value as of June 30, 2012 and December 31, 2011.  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.  Level 1 assets include investments in trading securities, primarily asset-backed securities.

 

·                  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 June 30, 2012 or December 31, 2011.

 

10



Table of Contents

 

CLOUD PEAK ENERGY INC. AND

CLOUD PEAK ENERGY RESOURCES LLC

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 June 30, 2012

 

Description

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

95,272

 

$

 

$

 

$

95,272

 

Commercial paper and short-term marketable securities(1)

 

$

 

$

 

$

 

$

 

Derivative financial instruments

 

$

 

$

19,878

 

$

 

$

19,878

 

Investments in marketable securities

 

$

 

$

100,195

 

$

 

$

100,195

 

 

 

 

Fair Value at December 31, 2011

 

Description

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

238,812

 

$

 

$

 

$

238,812

 

Commercial paper and short-term marketable securities(1)

 

$

 

$

45,897

 

$

 

$

45,897

 

Derivative financial instruments

 

$

 

$

2,275

 

$

 

$

2,275

 

Investments in marketable securities

 

$

 

$

75,228

 

$

 

$

75,228

 

 


(1)                                  Included in cash and cash equivalents in the consolidated balance sheets along with $26.3 million and $119.5 million of demand deposits at June 30, 2012 and December 31, 2011, respectively.

 

We did not have any transfers between levels during the three and six months ended June 30, 2012.  Our policy is to value all transfers between levels using the beginning of period valuation.

 

7.  Long-Term Debt

 

Long-term debt consisted of the following (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Principal

 

Carrying
Value

 

Fair
Value(1)

 

Principal

 

Carrying
Value

 

Fair
Value(1)

 

8.25% Senior Notes due 2017, net of unamortized discount

 

$

300,000

 

$

298,351

 

$

311,400

 

$

300,000

 

$

298,237

 

$

327,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8.50% Senior Notes due 2019, net of unamortized discount

 

300,000

 

297,936

 

313,500

 

300,000

 

297,841

 

327,750

 

Total long-term debt

 

$

600,000

 

$

596,287

 

$

624,900

 

$

600,000

 

$

596,077

 

$

655,500

 

 


(1)                            The fair value of the senior notes was based on observable market inputs.

 

11



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CLOUD PEAK ENERGY INC. AND

CLOUD PEAK ENERGY RESOURCES LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.  Other Long-Term Obligations

 

Federal Coal Lease Obligations

 

Federal coal lease obligations consisted of (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Federal coal lease obligations, current

 

$

108,709

 

$

102,198

 

Federal coal lease obligations, noncurrent

 

130,649

 

186,119

 

Total federal coal lease obligations

 

$

239,358

 

$

288,317

 

 

Our federal coal leases, as reflected in the consolidated balance sheets, consist of discounted obligations payable to the Bureau of Land Management of the U.S. Department of the Interior (the “BLM”).  Imputed interest is included in accrued expenses.

 

We have federal coal lease payments, as follows (in thousands):

 

 

 

 

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Annual

 

Imputed

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Payment Dates

 

Payment

 

Interest Rate

 

Value

 

Value(1)

 

Value

 

Value(1)

 

August 1, 2008 – 2012

 

$

50,160

 

7.50

%

$

46,661

 

$

50,017

 

$

46,661

 

$

48,867

 

May 1, 2009 – 2013

 

$

9,620

 

8.70

%

8,852

 

9,361

 

16,998

 

18,517

 

July 1, 2011 – 2015

 

$

59,545

 

8.50

%

152,079

 

167,442

 

192,892

 

215,796

 

September 1, 2011 – 2015

 

$

9,862

 

8.50

%

31,766

 

37,246

 

31,766

 

35,293

 

 

 

 

 

 

 

$

239,358

 

$

264,066

 

$

288,317

 

$

318,473

 

 


(1)                                  The fair value of estimates for federal coal lease obligations were 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.

 

Future payments on federal coal leases are as follows (in thousands):

 

Year Ended December 31,

 

 

 

2012

 

$

60,022

 

2013

 

79,027

 

2014

 

69,407

 

2015

 

69,407

 

Total

 

277,863

 

Less: imputed interest

 

38,505

 

Total principal payments

 

239,358

 

Less: current portion

 

108,709

 

Long-term federal coal leases payable

 

$

130,649

 

 

12



Table of Contents

 

CLOUD PEAK ENERGY INC. AND

CLOUD PEAK ENERGY RESOURCES LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Other

 

Other long-term obligations include liabilities incurred in connection with the acquisition of land and mineral rights.  We had the following purchase obligations with parties other than the BLM (dollars in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Purchase obligations, total

 

$

6,567

 

$

6,567

 

Interest rate

 

6% - 8%

 

6% - 8%

 

 

The fair value of other long-term obligations approximated its carrying amount at June 30, 2012 and December 31, 2011.

 

9.  Income Taxes

 

Our income from continuing operations 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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Income tax benefit (expense) (CPE Inc.)

 

$

(18,806

)

$

69,480

 

$

(33,908

)

$

54,187

 

Effective tax rate (CPE Inc.)

 

36.9

%

(294.3

)%

36.6

%

(82.6

)%

 

 

 

 

 

 

 

 

 

 

Income tax benefit (expense) (CPE Resources)

 

$

(18,806

)

$

54,096

 

$

(33,908

)

$

38,803

 

Effective tax rate (CPE Resources)

 

36.9

%

(81.5

)%

36.6

%

(35.8

)%

 

Our statutory income tax rate, including state income taxes, is 36%, which approximates our tax expense for the three and six months ended June 30, 2012.  During the three and six months ended June 30, 2011, our successful bids on the West Antelope II coal tracts increased our estimate of future taxable income; therefore, we expected to be able to realize the benefit of an additional $78.2 million of our deferred tax assets, against which we had previously recorded a valuation allowance.

 

10.  Commitments and Contingencies

 

Commitments

 

Purchase Commitments

 

As of June 30, 2012, we had outstanding capital purchase commitments which consisted of (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Capital commitments

 

 

 

 

 

Equipment

 

$

26,489

 

$

8,637

 

Land

 

23,700

 

23,700

 

 

 

 

 

 

 

Supplies and services

 

 

 

 

 

Coal purchase commitments

 

$

35,074

 

$

5,652

 

Transportation agreements

 

134,831

 

135,080

 

Materials and supplies

 

25,128

 

29,641

 

 

13



Table of Contents

 

CLOUD PEAK ENERGY INC. AND

CLOUD PEAK ENERGY RESOURCES LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Tax Receivable Agreement (CPE Inc. only)

 

During 2009, in connection with the initial public offering (“IPO”), CPE Inc. entered into a Tax Receivable Agreement with Rio Tinto Energy America Inc. (“Rio Tinto”), our former parent, and recognized a liability for the undiscounted amounts that CPE Inc. estimated will be paid to Rio Tinto under this agreement.  The amounts to be paid will be determined based on a calculation of future income tax savings that CPE Inc. actually realizes as a result of the tax basis increase that resulted from the IPO and Secondary Offering transactions.  Generally, CPE Inc. retains 15% of the realized tax savings generated from the tax basis step-up and Rio Tinto is entitled to the remaining 85%.  Periodically, CPE Inc. adjusts the estimated liability to reflect updated forecasts of future taxable income, and these adjustments, which could be significant, are reflected in CPE Inc.’s operating results.  The assumptions reflected in CPE Inc.’s estimates involve significant judgment and are subject to substantial uncertainty about future business operations.  As such, the actual amount and timing of payments that are required to be made under the Tax Receivable Agreement could differ materially from our estimates.

 

As of June 30, 2012, CPE Inc. recognized a total $170.6 million undiscounted liability for its estimated payments owed to Rio Tinto under the Tax Receivable Agreement, of which $19.1 million and $151.5 million were classified as current and noncurrent, respectively.  The estimated liability was based on forecasts of future taxable income over the anticipated life of the mining operations and reclamation activities, assuming no additional coal reserves are acquired.  The amounts to be paid will be determined based on a calculation of future income tax savings that CPE Inc. actually realizes as a result of the tax basis increase that resulted from the IPO and Secondary Offering transactions.  The Youngs Creek coal acquired, as discussed in Note 3, is not anticipated to be classified as reserve coal deposits at December 31, 2012; therefore, no adjustment was made to the liability in the current period for this coal asset acquisition as we are unable to make a reasonable estimate of the expected additional taxable income resulting from the development of these assets until definitive mine plans are sufficiently advanced.

 

Based on our estimates as of June 30, 2012, CPE Inc. is expected to make payments to Rio Tinto of $19.1 million in 2012, payments averaging approximately $19 million each year during 2013 to 2016, and additional payments in subsequent years. CPE Inc. is obligated to make these payments and expects to obtain funding for these payments by causing CPE Resources to distribute cash to CPE Inc. CPE Inc.’s payments under the Tax Receivable Agreement would be greater if CPE Resources generates taxable income significantly in excess of its current estimated future taxable income over the anticipated life of its mines; for example, if CPE Resources acquires additional coal reserves beyond its existing proven and probable reserve tonnage and, as a result, CPE Inc. realizes the full tax benefit of such increased tax bases (or an increased portion thereof). Required payments under the Tax Receivable Agreement also may increase or become accelerated as a result of certain asset transfers outside the ordinary course of business, a change in control of CPE Resources, or a default by CPE Inc.

 

Contingencies

 

Litigation

 

On July 9, 2012, our wholly-owned indirect subsidiary, Western Minerals LLC (“Western Minerals”), filed a lawsuit in the U.S. District Court for the District of Montana (Billings Division), against KCP Inc. (“KCP”), its 50% joint-venture partner in the Decker mine in Montana.  Western Minerals also named as defendants, KCP’s parent companies, Ambre Energy North America, Inc. and Ambre Energy Limited (collectively “Ambre”).  In its complaint, Western Minerals alleges that KCP and Ambre are engaging in self-dealing and other wrongful conduct in breach of the Decker joint venture agreement and other legal duties owed to the joint venture and its 50/50 owners.  Western Minerals asserts claims for breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, civil conspiracy, and a request for an accounting of, among other things, unauthorized Decker Coal Company expenditures and Ambre’s proposed self-dealing transactions concerning sales of Decker coal to Ambre and its affiliates.  Western Minerals seeks both unspecified monetary damages and injunctive relief.

 

On July 30, 2012, KCP and Ambre N.A. filed their answer to Western Minerals’ complaint.  In their answer, KCP and Ambre N.A. deny the principal allegations of Western Minerals.  Additionally, KCP asserted five counterclaims against Western Minerals: breach of contract, breach of the covenant of good faith and fair dealing, breach of fiduciary duty, dissolution of the joint venture and civil conspiracy.  KCP also asserted the third-party claim for civil conspiracy against Cloud Peak Energy Inc. and five unnamed “John Does.”  In general, KCP alleges that Western Minerals is frustrating the operation of the Decker mine to benefit Cloud Peak Energy’s Spring Creek mine and export opportunities.  Aside from the request that the court disassociate and expel Western Minerals from the Decker mine joint venture, KCP seeks only unspecified monetary damages in its counterclaims.   Western Minerals and Cloud Peak Energy believe KCP’s claims are without merit and intend to vigorously defend them.

 

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

 

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and lawsuits against us, our leases by application (“LBAs”), permits and other industry regulatory processes and approvals may also be subject to legal challenges that may adversely impact our mining operations and results.  For example, the leases we acquired for the West Antelope II LBAs are subject to pending legal challenges filed against the BLM and the Secretary of the Interior by environmental organizations.

 

Tax Contingencies

 

Our income tax calculations are based on application of the respective U.S. federal or state tax law.  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 or benefit.

 

Several audits involving our non-income based taxes currently are in progress.  We have provided our best estimate of taxes and related interest and penalties due for potential adjustments that may result from the resolution of such tax audits.

 

Concentrations of Risk and Major Customers

 

Approximately 88% of our revenues for the six months ended June 30, 2012 was under multi-year contracts that specify pricing terms compared to 81% for the six months ended June 30, 2011.  While the majority of the contracts are fixed-price, certain contracts have adjustment provisions for determining periodic price changes.  For the six months ended June 30, 2012 and 2011, there was no single customer that represented more than 10% of consolidated revenues.  We generally do not require collateral or other security on accounts receivable because our customers are comprised primarily of investment grade electric utilities.  We seek to mitigate credit risk 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.  The primary method we have used to meet these reclamation obligations and to secure coal lease obligations is to provide a third-party surety bond, typically through an insurance company, or provide a letter of credit, typically through a bank.  Specific bond and/or letter of credit amounts may change over time, depending on the activity at the respective site and any specific requirements under federal or state laws.  As of June 30, 2012, we had no standby letters of credit and $573.8 million of performance bonds outstanding (including our proportional share of the Decker mine) to secure certain of our obligations to reclaim lands used for mining and to secure coal lease obligations.

 

Amended Credit Agreement

 

On June 3, 2011, CPE Resources entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) which establishes a commitment to provide us with a $500 million senior secured revolving credit facility that can be used to borrow funds or issue letters of credit.  The Amended Credit Agreement matures on June 3, 2016.  We may request incremental term loans or increase the revolving commitments in an aggregate amount of up to $200 million subject to compliance with certain conditions. The Amended Credit Agreement imposes limitations on the ability of CPE Resources and its subsidiaries to make distributions and/or extend loans to CPE Inc. 

 

On June 14, 2012, CPE Resources entered into Amendment No. 1 to the Amended Credit Agreement, which provides for amendments to certain covenants to provide CPE Resources with incremental flexibility regarding foreign subsidiaries, among other things.  For additional information about the terms and conditions of this Amendment, please refer to Exhibit 10.1 to this Form 10-Q.

 

11.  Related Party Transactions

 

Related party activity consists of coal sales to our 50% owned coal marketing company and equity method investment, Venture Fuels Partnership.

 

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Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Related party transactions:

 

 

 

 

 

 

 

 

 

Sales of coal to Venture Fuels Partnership

 

$

3,503

 

$

7,820

 

$

4,690

 

$

9,588

 

 

12.  Earnings per Share (CPE Inc. only)

 

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

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator for calculation of diluted earnings per share:

 

 

 

 

 

 

 

 

 

Net income

 

$

33,678

 

$

94,594

 

$

60,296

 

$

121,367

 

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

 

60,015

 

60,002

 

60,011

 

60,001

 

Dilutive effect of stock equivalents

 

855

 

596

 

815

 

604

 

Denominator for diluted earnings per share

 

60,870

 

60,598

 

60,826

 

60,605

 

Diluted earnings per share

 

$

0.55

 

$

1.56

 

$

0.99

 

$

2.00

 

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Restricted stock

 

6

 

17

 

110

 

16

 

Options outstanding

 

 

60

 

 

146

 

Employee stock purchase plan

 

7

 

 

3

 

 

 

13.  Segment Information

 

Our management reviews, manages, and operates our business as a single operating segment - the production of low sulfur, thermal coal from surface mines, located in the Western region of the U.S. within the PRB, which is sold to electric utilities and industrial customers.

 

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CLOUD PEAK ENERGY RESOURCES LLC

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents a summary of total revenues from external customers by geographic location (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

United States

 

$

267,602

 

$

298,552

 

$

571,630

 

$

604,754

 

Asia

 

74,491

 

86,764

 

143,153

 

135,735

 

Other

 

1,090

 

2,363

 

1,303

 

3,735

 

Total revenues from external customers

 

$

343,183

 

$

387,679

 

$

716,086

 

$

744,224

 

 

All of our revenues originated in the U.S.  We attribute revenue to individual countries based on the location of the customer.  Our sales to customers located outside of the U.S. are made primarily to customers in Asia and Canada.

 

As of June 30, 2012 and December 31, 2011, all of our long-lived assets were located in the U.S.

 

14.  Equity-Based Compensation (CPE Inc. only)

 

During the first quarter of each year, we grant restricted stock, restricted stock units, performance-based share units, and/or non-qualified stock options (“shares”) to eligible employees and directors.  Generally, these shares fully vest on the third anniversary of the grant date.  In addition, performance-based share units include a stock performance vesting criteria.  However, they will pro-rata vest sooner if a grantee terminates employment or stops providing services because of death, disability, redundancy or retirement.  Shares will fully vest if an employee is terminated without cause within two years after a change in control occurs, as such term is defined in the LTIP. Restricted stock units granted to our directors vest upon their resignation or retirement.  All other shares will be forfeited if the grantee terminates employment for any other reason than those noted above and non-qualified stock options expire if not exercised within ten years of the date of grant.

 

Restricted Stock

 

Restricted stock activity for the six months ended June 30, 2012 is as follows (in thousands, except per share amounts):

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant-Date

 

 

 

Number

 

Fair Value

 

 

 

 

 

(per share)

 

Non-vested shares at January 1, 2012

 

936

 

$

15.75

 

Granted

 

153

 

17.41

 

Forfeited

 

(8

)

15.17

 

Vested

 

(14

)

18.16

 

Non-vested shares at June 30, 2012

 

1,067

 

$

15.96

 

 

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.  We utilized U.S. Treasury yields as of the grant date for our risk-free interest rate assumption, matching the treasury yield terms to the expected life of the performance-based share units.

 

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Performance-based share unit award activity for the six months ended June 30, 2012 is as follows (in thousands, except per unit amounts):

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant-Date

 

 

 

Number

 

Fair Value

 

 

 

 

 

(per unit)

 

Non-vested units at January 1, 2012

 

159

 

$

20.12

 

Granted

 

220

 

17.61

 

Forfeited

 

 

 

Vested

 

 

 

Non-vested units at June 30, 2012

 

379

 

$

18.66

 

 

The assumptions used to estimate the fair value of the performance-based share units are as follows:

 

Risk-free interest rate

 

0.5

%

Expected volatility

 

48.2

%

Term

 

3 years

 

 

 

 

 

Fair value

 

$

17.61

 

 

Non-Qualified Stock Options

 

Non-qualified stock option activity for the six months ended June 30, 2012 is as follows (in thousands, except per option amounts):

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Number

 

Price

 

Term

 

Value (1)

 

 

 

 

 

(per option)

 

(years)

 

 

 

Options outstanding at January 1, 2012

 

1,138

 

$

15.77

 

8.06

 

$

4,240

 

Granted

 

207

 

17.00

 

10.00

 

 

 

Forfeited

 

 

 

 

 

 

 

Options outstanding at June 30, 2012

 

1,345

 

$

15.95

 

8.14

 

$

879

 

Exercisable at June 30, 2012

 

 

 

 

 

 

 

 

 


(1)                                 The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option at period-end.

 

We used the Black-Scholes option pricing model to determine the fair value of stock options.  Determining the fair value of equity-based awards requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, and the associated volatility.  As we have no historical exercise history, expected option life assumptions were developed using the simplified method as outlined in Topic 14, Share-Based Payment, of the Staff Accounting Bulletin Series.  We utilized U.S. Treasury yields as of the grant date for our risk-free interest rate assumption, matching the treasury yield terms to the expected life of the option.  We utilized a 6.5 year peer historical lookback, weighted with our own volatility since the IPO, to develop our expected volatility.

 

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The assumptions used to estimate the fair value of options granted on March 15, 2012 are as follows:

 

Risk-free interest rate

 

1.7

%

Expected option life

 

6.5 years

 

Expected volatility

 

53.6

%

 

 

 

 

Fair value (per option)

 

$

9.05

 

 

15.  Supplemental Guarantor/Non-Guarantor Financial Information (CPE Resources only)

 

In accordance with the indentures governing the 8.25% Senior Notes due 2017 (“2017 notes”) and the 8.50% Senior Notes due 2019 (“2019 notes”), collectively the “senior notes,” certain wholly-owned U.S. subsidiaries of CPE Resources (the “Guarantor Subsidiaries”) have fully and unconditionally guaranteed these senior notes on a joint and several basis.  Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management believes that such information is not material to the senior note holders.  The following historical financial statement information is provided for the Guarantor/Non-Guarantor Subsidiaries:

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Supplemental Condensed Consolidating Statement of Operations and Comprehensive Income

(in thousands)

 

 

 

Three Months Ended June 30, 2012

 

 

 

Parent
Company
(CPE
Resources)

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated