Quarterly Report (10-q)

Date : 10/18/2019 @ 10:07AM
Source : Edgar (US Regulatory)
Stock : Cloud Peak Energy Inc. (CLDPQ)
Quote : 0.0045  -0.00025 (-5.26%) @ 8:59PM

Quarterly Report (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 September 30, 2019

 

or

 

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

 

For the transition period from                      to                    

 

Commission File Number:  001-34547

 

 

Cloud Peak Energy Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

26-3088162

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

748 T-7 Road, Gillette, Wyoming

 

82718

(Address of principal executive offices)

 

(Zip Code)

 

(307) 687-6000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each Exchange on which registered

 

 

 

 

 

 

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 every Interactive Data File required to be submitted 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 such files).

 

x  Yes      o  No

 

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

o

x

o

x

o

 

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

 

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

 

o  Yes      x  No

 

Number of shares outstanding of Cloud Peak Energy Inc.’s common stock, as of the latest practicable date: Common stock, $0.01 par value per share, 76,508,294 shares outstanding as of October 11, 2019.

 

 

 


Table of Contents

 

CLOUD PEAK ENERGY INC.

 

TABLE OF CONTENTS

 

 

 

Page

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements —

 

 

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2019 and 2018

1

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

2

 

Unaudited Condensed Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2019 and 2018

3

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

5

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

Cautionary Notice Regarding Forward-Looking Statements

57

 

 

Item 2

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

61

Item 3

Quantitative and Qualitative Disclosures About Market Risk

91

Item 4

Controls and Procedures

92

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

94

Item 1A

Risk Factors

94

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

99

Item 3

Defaults Upon Senior Securities

99

Item 4

Mine Safety Disclosures

100

Item 5

Other Information

100

Item 6

Exhibits

100

 

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. (DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Revenue (Note 3)

 

$

220,227

 

$

233,080

 

$

533,755

 

$

655,087

 

Costs and expenses

 

 

 

 

 

 

 

 

 

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

 

194,999

 

208,504

 

517,805

 

597,448

 

Depreciation and depletion

 

(2,488

)

17,392

 

20,095

 

46,788

 

Accretion

 

1,699

 

1,947

 

4,796

 

5,359

 

(Gain) loss on derivative financial instruments

 

 

(730

)

(1,809

)

(730

)

Selling, general and administrative expenses

 

7,971

 

5,101

 

41,507

 

25,393

 

Impairments (Note 6)

 

 

 

621,005

 

800

 

Other operating costs

 

101

 

149

 

451

 

331

 

Total costs and expenses

 

202,282

 

232,363

 

1,203,850

 

675,389

 

Operating income (loss)

 

17,945

 

717

 

(670,095

)

(20,302

)

Other income (expense)

 

 

 

 

 

 

 

 

 

Net periodic postretirement benefit income (cost), excluding service cost

 

1,755

 

20,016

 

5,264

 

23,251

 

Interest income

 

241

 

304

 

634

 

841

 

Interest expense (contractual interest of $11.4 million and $32 million for the three and nine months ended September 30, 2019, respectively)

 

(2,027

)

(8,411

)

(14,801

)

(28,141

)

Reorganization items, net (Note 7)

 

(13,152

)

 

24,038

 

 

Other, net

 

(8

)

67

 

(505

)

(535

)

Total other income (expense)

 

(13,191

)

11,976

 

14,630

 

(4,584

)

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

 

4,754

 

12,693

 

(655,465

)

(24,886

)

Income tax benefit (expense)

 

(12

)

(5

)

(85

)

(302

)

Income (loss) from unconsolidated affiliates, net of tax

 

24

 

3

 

890

 

269

 

Net income (loss)

 

4,766

 

12,691

 

(654,660

)

(24,919

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Postretirement medical plan amortization of prior service costs

 

 

(612

)

 

(4,287

)

Postretirement medical plan change

 

 

24,659

 

 

24,659

 

Postretirement medical plan termination

 

(1,755

)

(19,477

)

(5,264

)

(19,477

)

Other comprehensive income (loss)

 

(1,755

)

4,570

 

(5,264

)

895

 

Total comprehensive income (loss)

 

$

3,011

 

$

17,261

 

$

(659,924

)

$

(24,024

)

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

$

0.17

 

$

(8.57

)

$

(0.33

)

Diluted

 

$

0.06

 

$

0.16

 

$

(8.57

)

$

(0.33

)

Weighted-average shares outstanding - basic

 

76,508

 

75,778

 

76,347

 

75,623

 

Weighted-average shares outstanding - diluted

 

77,017

 

77,283

 

76,347

 

75,623

 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

1


Table of Contents

 

CLOUD PEAK ENERGY INC. (DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

September 30,

 

December 31,

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

84,760

 

$

91,196

 

Restricted cash

 

40,023

 

725

 

Accounts receivable, net

 

41,676

 

33,527

 

Due from related parties

 

111

 

 

Inventories, net (Notes 6 and 13)

 

16,946

 

70,040

 

Income tax receivable

 

7,934

 

15,808

 

Other prepaid and deferred charges

 

28,349

 

27,527

 

Other assets

 

78

 

3,480

 

Total current assets

 

219,877

 

242,303

 

 

 

 

 

 

 

Noncurrent assets

 

 

 

 

 

Property, plant and equipment, net (Note 6)

 

67,454

 

654,372

 

Income tax receivable

 

7,884

 

15,768

 

Other assets

 

31,447

 

16,213

 

Total assets

 

$

326,662

 

$

928,656

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities not subject to compromise

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

43,536

 

$

34,210

 

Royalties and production and property taxes (Note 19)

 

22,194

 

53,232

 

Accrued expenses

 

27,732

 

26,385

 

Due to related parties

 

 

71

 

Current portion of federal coal lease obligations (Notes 15 and 19)

 

 

379

 

Debtor-in-possession financing

 

65,884

 

 

Other liabilities

 

1,205

 

4,019

 

Total current liabilities

 

160,551

 

118,296

 

 

 

 

 

 

 

Noncurrent liabilities

 

 

 

 

 

Senior notes (Notes 14 and 19)

 

 

396,373

 

Federal coal lease obligations, net of current portion (Notes 15 and 19)

 

 

1,404

 

Asset retirement obligations, net of current portion

 

96,940

 

92,591

 

Royalties and production and property taxes (Note 19)

 

10,232

 

20,587

 

Other liabilities

 

76

 

5,731

 

Total liabilities not subject to compromise

 

267,799

 

634,982

 

Liabilities subject to compromise (Note 19)

 

421,798

 

 

Total liabilities

 

689,597

 

634,982

 

Commitments and Contingencies (Notes 5 and 20)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock ($0.01 par value; 200,000 shares authorized; 76,985 and 76,283 shares issued and 76,508 and 75,806 outstanding as of September 30, 2019 and December 31, 2018, respectively)

 

765

 

758

 

Treasury stock, at cost (477 shares as of both September 30, 2019 and December 31, 2018)

 

(6,498

)

(6,498

)

Additional paid-in capital

 

659,989

 

656,925

 

Retained earnings (accumulated deficit)

 

(1,025,210

)

(370,795

)

Accumulated other comprehensive income (loss)

 

8,019

 

13,284

 

Total equity (deficit)

 

(362,935

)

293,674

 

Total liabilities and equity

 

$

326,662

 

$

928,656

 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

2


Table of Contents

 

CLOUD PEAK ENERGY INC. (DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Earnings/

 

Other

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Paid-In

 

(Accumulated

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit)

 

Income (Loss)

 

Total

 

Balances as of January 1, 2019

 

75,806

 

$

758

 

477

 

$

(6,498

)

$

656,925

 

$

(370,795

)

$

13,284

 

$

293,674

 

Net income (loss)

 

 

 

 

 

 

(49,748

)

 

(49,748

)

Adoption of new accounting standard

 

 

 

 

 

 

246

 

 

246

 

Postretirement benefit adjustment, net of tax

 

 

 

 

 

 

 

(1,755

)

(1,755

)

Equity-based compensation expense

 

 

 

 

 

1,106

 

 

 

1,106

 

Employee common stock withheld to cover withholding taxes

 

701

 

7

 

 

 

(232

)

 

 

(225

)

Balances as of March 31, 2019

 

76,507

 

$

765

 

477

 

$

(6,498

)

$

657,799

 

$

(420,297

)

$

11,529

 

$

243,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

(609,679

)

 

(609,679

)

Postretirement benefit adjustment, net of tax

 

 

 

 

 

 

 

(1,755

)

(1,755

)

Equity-based compensation expense

 

 

 

 

 

1,100

 

 

 

1,100

 

Employee common stock withheld to cover withholding taxes

 

1

 

 

 

 

 

 

 

 

Balances as of June 30, 2019

 

76,508

 

$

765

 

477

 

$

(6,498

)

$

658,899

 

$

(1,029,975

)

$

9,774

 

$

(367,035

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

4,766

 

 

4,766

 

Postretirement benefit adjustment, net of tax

 

 

 

 

 

 

 

(1,755

)

(1,755

)

Equity-based compensation expense

 

 

 

 

 

1,090

 

 

 

1,090

 

Balances as of September 30, 2019

 

76,508

 

$

765

 

477

 

$

(6,498

)

$

659,989

 

$

(1,025,210

)

$

8,019

 

$

(362,935

)

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

3


Table of Contents

 

CLOUD PEAK ENERGY INC. (DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands)

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Earnings/

 

Other

 

 

 

 

 

Common Stock

 

Treasury Stock

 

Paid-In

 

(Accumulated

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit)

 

Income (Loss)

 

Total

 

Balances as of January 1, 2018

 

75,167

 

$

752

 

477

 

$

(6,498

)

$

652,702

 

$

347,046

 

$

13,807

 

$

1,007,809

 

Net income (loss)

 

 

 

 

 

 

(7,738

)

 

(7,738

)

Adoption of new accounting standard

 

 

 

 

 

 

121

 

 

121

 

Postretirement benefit adjustment, net of tax

 

 

 

 

 

 

 

(1,837

)

(1,837

)

Equity-based compensation expense

 

 

 

 

 

1,644

 

 

 

1,644

 

Restricted stock issuance, net of forfeitures

 

502

 

5

 

 

 

(5

)

 

 

 

Employee common stock withheld to cover withholding taxes

 

 

 

 

 

(1,165

)

 

 

(1,165

)

Balances as of March 31, 2018

 

75,669

 

$

757

 

477

 

$

(6,498

)

$

653,176

 

$

339,429

 

$

11,970

 

$

998,834

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

(29,872

)

 

(29,872

)

Postretirement benefit adjustment, net of tax

 

 

 

 

 

 

 

(1,837

)

(1,837

)

RSU/PSU terminations & retirements

 

109

 

1

 

 

 

 

 

 

1

 

Restricted stock issuance, net of forfeitures

 

 

 

 

 

1,235

 

 

 

1,235

 

Exercise of stock options

 

 

 

 

 

(218

)

 

 

(218

)

Balances as of June 30, 2018

 

75,778

 

$

758

 

477

 

$

(6,498

)

$

654,193

 

$

309,557

 

$

10,133

 

$

968,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

12,691

 

 

12,691

 

Postretirement benefit adjustment, net of tax

 

 

 

 

 

 

 

4,569

 

4,569

 

Equity-based compensation expense

 

 

 

 

 

1,412

 

 

 

1,412

 

Balances as of September 30, 2018

 

75,778

 

$

758

 

477

 

$

(6,498

)

$

655,605

 

$

322,248

 

$

14,702

 

$

986,815

 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

4


Table of Contents

 

CLOUD PEAK ENERGY INC. (DEBTOR-IN-POSSESSION)

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

2018

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

(654,660

)

$

(24,919

)

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

 

 

 

 

 

Depreciation and depletion

 

20,095

 

46,788

 

Accretion

 

4,796

 

5,359

 

Impairments

 

621,005

 

800

 

Loss (income) from unconsolidated affiliates, net of tax

 

(890

)

(269

)

Distributions of income from unconsolidated affiliates

 

2,250

 

1,000

 

Gain on sale of assets

 

(962

)

 

Equity-based compensation expense

 

3,295

 

(1,648

)

(Gain) loss on derivative financial instruments

 

(1,809

)

(730

)

Non-cash interest expense related to refinancings

 

216

 

1,611

 

Non-cash reorganization items

 

(44,615

)

 

Payment of deferred financing costs

 

 

(3,640

)

Net periodic postretirement benefit cost (credit)

 

(5,264

)

(22,792

)

Payments for logistics contracts

 

(7,500

)

(7,500

)

Logistics throughput contract amortization expense

 

11,331

 

12,099

 

Other

 

1,655

 

5,296

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(8,149

)

(12,192

)

Inventories, net

 

3,559

 

3,398

 

Due to or from related parties

 

(183

)

(1,488

)

Other assets

 

(1,590

)

8,698

 

AMT tax refund

 

15,768

 

 

Accounts payable and accrued expenses

 

61,468

 

15,013

 

Asset retirement obligations

 

(1,098

)

(816

)

Net cash provided by (used in) operating activities

 

18,718

 

24,068

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchases of property, plant and equipment

 

(3,338

)

(7,165

)

Investment in development projects

 

 

(1,894

)

Proceeds from the sale of assets

 

3,208

 

69

 

Net cash provided by (used in) investing activities

 

(130

)

(8,990

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Principal payments on federal coal leases

 

(379

)

(574

)

Principal payments on finance leases

 

(1,224

)

(1,952

)

Borrowings on debtor-in-possession financing

 

35,000

 

 

Payment of deferred financing costs

 

(500

)

(936

)

Payment amortized to deferred gain

 

 

(6,298

)

Net cash provided by (used in) financing activities

 

32,897

 

(9,760

)

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

51,485

 

5,318

 

Cash, cash equivalents, and restricted cash at beginning of period

 

92,128

 

108,673

 

Cash, cash equivalents, and restricted cash at end of period

 

$

143,613

 

$

113,991

 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

 

5


Table of Contents

 

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Organization and Business

 

Organization

 

In connection with Cloud Peak Energy Inc.’s and substantially all of its wholly owned domestic subsidiaries’ ongoing cases under Chapter 11 (“Chapter 11”) of Title 11 of the U.S. Code (the “Bankruptcy Code”), on October 2, 2019, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) entered an Order (I) Approving Sale of the Debtors’ Assets Free and Clear of Liens, (II) Approving Assumption and Assignment of Executory Contracts and Unexpired Leases, and (III) Granting Related Relief [Docket No. 674] (the “Sale Order”), pursuant to which the Bankruptcy Court approved the sale of substantially all of the Company’s operating assets, including the Company’s Spring Creek, Cordero Rojo and Antelope mines, to Navajo Transitional Energy Company, LLC (“NTEC”) pursuant to that certain Asset Purchase Agreement dated as of August 19, 2019 (as amended, the “Asset Purchase Agreement”).

 

Subject to the satisfaction of certain closing conditions, the transactions contemplated by the Asset Purchase Agreement are expected to close in October 2019.

 

On October 4, 2019, the Debtors (as defined below) filed the Joint Chapter 11 Plan of Cloud Peak Energy Inc. and Certain of its Debtor Affiliates [Docket No. 680].  On October 14, 2019, the Debtors filed the First Amended Joint Chapter 11 Plan of Cloud Peak Energy Inc, and Certain of its Debtor Affiliates [Docket No. 711] (the “Plan”).  The Debtors anticipate seeking confirmation of the Plan by the Bankruptcy Court at a hearing to be held with the Bankruptcy Court on December 5, 2019 at 9:30 a.m. (Eastern Time).  See “History of Filing under Chapter 11 of the United States Bankruptcy Code” for further discussion on the Debtors’ bankruptcy filing, the Asset Purchase Agreement, and the Plan.

 

These financial statements and disclosures have been prepared on a going concern basis.  The results of the operations for the three and nine month periods are provided.  See “Liquidity and Ability to Continue as a Going Concern” below for more detail.

 

Since the Company will sell substantially all of its operating assets to NTEC, it was concluded that neither Assets Held for Sale nor Discontinued Operations presentation in these financial statements would be appropriate.

 

Business

 

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

 

Our Antelope Mine and Cordero Rojo Mine are located in Wyoming and our Spring Creek Mine is located in Montana.  Our mines produce subbituminous thermal coal with low sulfur content, and we sell our coal primarily to domestic and foreign electric utilities.  Thermal coal is primarily consumed by electric utilities and industrial consumers as fuel for electricity generation.  In 2018, the coal we produced generated approximately 2% of the electricity produced in the U.S.  We do not produce any metallurgical coal.  Our Cordero Rojo Mine was impaired down to the estimated fair value of associated land and certain mining equipment in the fourth quarter of 2018.  We also impaired our Antelope Mine assets during the second quarter of 2019 as a result of the Winning Bid (as defined below) received during the sale process that is part of our Chapter 11 filing.  See Note 6 of this Form 10-Q and Note 7 of Notes to Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2018 (our “2018 Form 10-K”) for further details.

 

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In addition, we have two development projects, both located in the Northern PRB.  For purposes of this report, the term “Northern PRB” refers to the area in the PRB that lies within Montana and the northern part of Sheridan County, Wyoming.  The Youngs Creek project is an undeveloped surface mine project located in Wyoming, seven miles south of our Spring Creek Mine and contiguous with the Wyoming-Montana state line.  The Big Metal project is located near the Youngs Creek project on the Crow Indian Reservation in southeast Montana.  Any future development and coal production from these two projects remains subject to significant risk and uncertainty.  These two development projects were fully impaired in the fourth quarter of 2018, other than the estimated fair value of associated land.  Our Spring Creek Mine assets were also significantly impaired in the second quarter of 2019 as a result of the Winning Bid (as defined below) received during the sale process that is part of our Chapter 11 filing.  See Note 6 of this Form 10-Q and Note 7 of Notes to Consolidated Financial Statements in Item 8 of our 2018 Form 10-K for further details.

 

Our logistics business provides a variety of services designed to facilitate the sale and delivery of coal.  These services include the purchase of coal from third parties or from our owned and operated mines, coordination of the transportation and delivery of purchased coal, negotiation of take-or-pay rail agreements and take-or-pay port agreements and demurrage settlement with vessel operators.  See Note 5 for further discussion.

 

History of Filing under Chapter 11 of the United States Bankruptcy Code

 

During the fourth quarter of 2018 and through the filing date of our Quarterly Report on Form 10-Q for the period ended March 31, 2019, we made a number of announcements regarding our engagement of various advisors to assist in reviewing alternatives including the potential sale of the Company and/or its assets and to assist in reviewing our capital structure and strategic restructuring alternatives.  During that time, we experienced a number of adverse events that negatively impacted our financial results, liquidity and future prospects, which raised substantial doubt about our ability to continue as a going concern, and resulted in our decision to seek Chapter 11 bankruptcy protection.

 

On May 10, 2019 (the “Petition Date”), Cloud Peak Energy Inc. (“CPE,” the “Company” or “we”) and substantially all of its wholly owned domestic subsidiaries (the “Filing Subsidiaries” and, together with CPE, the “Debtors”) filed voluntary petitions (collectively, the “Bankruptcy Petitions”) under Chapter 11 in the Bankruptcy Court.  Pursuant to an order entered by the Bankruptcy Court the Chapter 11 cases (collectively, the “Chapter 11 Cases”) are being jointly administered under the caption In re Cloud Peak Energy Inc., et al., Case No. 19-11047.  Each Debtor continues to operate its business as a “debtor in possession” (“DIP”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

 

The filing of the Bankruptcy Petitions constituted an event of default that accelerated our obligations under the documents governing each of our 12.00% second lien senior notes due 2021 (the “2021 Notes”) and the 6.375% senior notes due 2024 (the “2024 Notes” and together with the 2021 Notes, the “Notes”).  Immediately after filing the Bankruptcy Petitions, the Company began notifying all known current or potential creditors of the Debtors of the bankruptcy filings.

 

Pursuant to Section 362 of the Bankruptcy Code, the filing of the Bankruptcy Petitions automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date or to exercise control over the Debtors’ property.  Subject to certain exceptions under the Bankruptcy Code, the filing of the Debtors’ Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against or on behalf of the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless the Bankruptcy Court modifies or lifts the automatic stay as to any such claim.  Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

 

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On the Petition Date, the Debtors filed a number of motions with the Bankruptcy Court generally designed to stabilize their operations and facilitate the Debtors’ transition into Chapter 11.  Certain of these motions seek authority from the Bankruptcy Court for the Debtors to make payments upon, or otherwise honor, certain obligations that arose prior to the Petition Date, including obligations related to employee wages, salaries and benefits, taxes, and certain vendors and other providers essential to the Debtors’ businesses.  On May 14, 2019, the Bankruptcy Court approved the relief sought in these motions on an interim basis.

 

The Debtors sought to sell all or substantially all of their operating assets pursuant to Section 363 of the Bankruptcy Code.  To facilitate their marketing and sales process, the Debtors conducted an auction (the “Auction”) on August 15, 2019 and August 16, 2019, pursuant to bidding procedures approved by the Bankruptcy Court.  Following the completion of the Auction, on August 16, 2019, the Debtors announced that the bid submitted by Navajo Transitional Energy Company, LLC (“NTEC”) was the winning bid (the “Winning Bid”), and the bid submitted by Aspen Coal & Energy, LLC was the backup bid.  On August 19, 2019, the Debtors and NTEC entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) providing for the acquisition by NTEC of substantially all of the Debtors’ operating assets, including the Spring Creek, Cordero Rojo and Antelope mines (the “Assets”), in exchange for the payment of $15.7 million of cash at closing, a $40.0 million first lien promissory note secured by a first lien on all assets of NTEC (including the Assets), but subordinated to collateral for certain permitted senior lien debt (not to exceed $120 million) (the “Purchaser Take-Back Note”) and a $0.15/ton royalty, payable quarterly for a period of five years, on all tons produced and sold at the Antelope and Spring Creek mines, and on all tons produced and sold in excess of 10 million tons per year at the Cordero Rojo mine (the “Royalty”), as well as the assumption of coal production-related pre- and post-petition tax liabilities and coal royalty payments in an amount estimated to be approximately $87.5 million as of September 30, 2019, all reclamation obligations, up to $20 million in post-petition accounts payables, and cash to fund approximately $1 million in cure costs.  Following the sale of substantially all of its operating assets, the Company will have certain real estate assets, expected proceeds from the Royalty, and certain debts not settled by the sale.  In connection with the closing of the sale, the Company agreed to terminate substantially all of its employees, and NTEC agreed to make offers of employment to substantially all of the terminated employees of the Company.

 

On August 19, 2019, the Bankruptcy Court approved the transactions contemplated by the Asset Purchase Agreement, subject to the Debtors finalizing and submitting a proposed sale order under Section 363 of the Bankruptcy Code that must be entered by the Bankruptcy Court.  On September 30, 2019, the Asset Purchase Agreement was amended to, among other things, provide for NTEC to acquire certain additional assets and assume certain additional liabilities, to modify NTEC’s assumption and rejection of certain contracts and leases, to provide that the Company bear certain expenses, including with respect to certain cure costs and administrative liabilities related to the Purchaser Take-Back Note, and to modify certain negative covenant terms of the Purchaser Take-Back Note.  On October 2, 2019, the Bankruptcy Court entered the Sale Order, pursuant to which the Bankruptcy Court approved the sale of substantially all of the Company’s operating assets, including the Company’s Spring Creek, Cordero Rojo and Antelope mines, to NTEC pursuant to the Asset Purchase Agreement.

 

Subject to the satisfaction of certain closing conditions, the transactions contemplated by the Asset Purchase Agreement are expected to close in October 2019.

 

On October 4, 2019, the Debtors filed the Joint Chapter 11 Plan of Cloud Peak Energy Inc. and Certain of its Debtor Affiliates [Docket No. 680].  On October 14, 2019, the Debtors filed the First Amended Joint Chapter 11 Plan of Cloud Peak Energy Inc, and Certain of its Debtor Affiliates [Docket No. 711].  The Debtors anticipate seeking confirmation of the Plan at a hearing to be held with the Bankruptcy Court on December 5, 2019 at 9:30 a.m. (Eastern Time).

 

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The Plan contemplates the following treatment of claims against and interests in the Debtors:

 

·                  Holders of priority claims and secured claims (other than those arising under the prepetition 2021 Notes), including amounts outstanding under the DIP Credit Agreement (as defined below), will be unimpaired;

 

·                  Holders of claims under the prepetition 2021 Notes will be impaired and will receive their pro rata proportionate share of (i) the Purchaser Take-Back Note, (ii) the New Parent Equity (as defined in the Plan), representing 100% of the common stock in the reorganized Company, (iii) $34.5 million in reinstated prepetition 2021 Notes, as amended pursuant to an amended indenture, and (iv) a cash distribution;

 

·                  Holders of general unsecured claims will be impaired and will receive their pro rata share of an aggregate cash distribution of up to $1.25 million; and

 

·                  Holders of the Company’s existing common stock will be impaired and will not receive any recovery. All of the Company’s existing common stock with be extinguished by the Plan.

 

Unless otherwise specified, the treatment set forth in the Plan will be in full satisfaction of all claims against and interests in the Debtors, which will be discharged on the effective date of the Plan.

 

Under the Bankruptcy Code, only holders of claims or interests in “impaired” classes are entitled to vote on a plan.  Under section 1124 of the Bankruptcy Code, a class of claims or interests is deemed to be “impaired” under a plan unless (i) the plan leaves unaltered the legal, equitable, and contractual rights to which such claim or interest entitles the holder thereof or (ii) notwithstanding any legal right to an accelerated payment of such claim or interest, the plan cures all existing defaults (other than defaults resulting from the occurrence of events of bankruptcy) and reinstates the maturity of such claim or interest as it existed before the default.  If, however, the holder of an impaired claim or interest will not receive or retain any distribution under the plan on account of such claim or interest, the Bankruptcy Code deems such holder to have rejected the plan, and, accordingly, holders of such claims and interests do not actually vote on the plan.  If a claim or interest is not impaired by the plan, the Bankruptcy Code deems the holder of such claim or interest to have accepted the plan and, accordingly, holders of such claims and interests are not entitled to vote on the plan.  A vote may be disregarded if the Bankruptcy Court determines, pursuant to section 1126(e) of the Bankruptcy Code, that it was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code.  The Bankruptcy Code defines “acceptance” of a plan by a class of claims as acceptance by creditors in that class that hold at least two-thirds (2/3) in dollar amount and more than one-half (1/2) in number of the claims that cast ballots for acceptance or rejection of the plan.  Only the holders of claims under the prepetition 2021 Notes and general unsecured claims (the “Voting Classes”) are entitled to vote to accept or reject the Plan.  The holders of claims in the Voting Classes are impaired under the Plan and may, in certain circumstances, receive a distribution under the Plan.  Accordingly, holders of claims in the Voting Classes have the right to vote to accept or reject the Plan.

 

The Plan provides certain releases and exculpations in favor of, among others, (i) the Debtors and each of their respective directors, officers, and managers as of the Petition Date and at any time thereafter through the effective date of the Plan, (ii) the DIP Lenders (as defined in the Plan), (iii) the DIP Agent (as defined in the Plan), (iv) the consenting noteholders, (v) the Committee (as defined in the Plan) and the members thereof, (vi) the general unsecured claims administrator, (vii) the prepetition 2021 Notes Indenture Trustee (as defined in the Plan), (viii) the prepetition Unsecured Notes Indenture Trustee (as defined in the Plan), and (ix) with respect to each of the foregoing, such entity and its Associated Entities (as defined in the Plan).  The Debtors intend to present evidence at the confirmation hearing to demonstrate the basis for and propriety of the release and exculpation provisions pursuant to section 1123(b) of the Bankruptcy Code and Bankruptcy Rule 9019.

 

For the duration of the Chapter 11 Cases, the Company’s operations and its ability to develop and execute its business plan are subject to risks and uncertainties associated with the Chapter 11 Cases. As a result

 

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of these risks and uncertainties, the Company’s assets, liabilities, officers and/or directors are expected to be significantly different following the sale pursuant to the Asset Purchase Agreement and the outcome of the Chapter 11 Cases, and the description of its operations, properties and capital plans included in these financial statements is not expected to accurately reflect its operations, properties and capital plans following the sale pursuant to the Asset Purchase Agreement and the Chapter 11 Cases.  If we are not able to confirm a Chapter 11 plan, we could be forced to liquidate under Chapter 7 of the Bankruptcy Code.

 

As previously disclosed, we were notified by the New York Stock Exchange (“NYSE”) that they had determined our common stock was no longer suitable for listing on the NYSE based on “abnormally low” price levels, pursuant to Section 802.01D of the NYSE Listed Company Manual, and commenced proceedings to delist our common stock.  Trading in our common stock was suspended immediately.  Our common stock began trading on the OTC Pink on March 27, 2019, and trades under the symbol “CLDPQ”. Under the terms of the Plan submitted to the Bankruptcy Court, our existing common stock will be extinguished following confirmation of a Chapter 11 plan, and existing equity holders will not receive any consideration in respect of their equity interests.

 

For periods subsequent to filing the Bankruptcy Petitions, the Company will apply the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, “Reorganizations”, in preparing its consolidated financial statements.  ASC 852 requires that financial statements distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred in the bankruptcy proceedings have been recorded in Reorganization items, net on the Unaudited Condensed Consolidated Statement of Operations.  In addition, the Unaudited Condensed Consolidated Balance Sheet has distinguished pre-petition liabilities subject to compromise from those that are not and post-petition liabilities.  Obligations that may be impacted by the bankruptcy reorganization process have been classified as Liabilities subject to compromise.  These liabilities are reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts.

 

Potential Claims

 

The Debtors have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to certain assumptions filed in connection therewith.  These schedules and statements remain subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by the deadline for general claims, which was on August 1, 2019 (the “Bar Date”).  The Debtors’ have received approximately 442 proofs of claim as of October 11, 2019 for an amount of approximately $1.8 billion.  Such amount includes duplicate claims across multiple debtor legal entities.  These claims will be reconciled to amounts recorded in the Company’s accounting records.  Differences in amounts recorded and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate.  The Bankruptcy Court does not allow for claims that have been acknowledged as duplicates.  In addition, the Company may ask the Bankruptcy Court to disallow claims that the Company believes have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons.  In addition, as a result of this process, the Company may identify additional liabilities that will need to be recorded or reclassified to Liabilities subject to compromise.  In light of the substantial number of claims filed, and expected to be filed, the claims resolution process may take considerable time to complete and likely will continue after the effective date of any Chapter 11 plan.

 

Sale and Plan Support Agreement

 

Prior to filing the Bankruptcy Petitions, on May 6, 2019, the Company and the Filing Subsidiaries entered into the Sale and Plan Support Agreement (the “Support Agreement”) with holders of approximately 62% in principal amount of the 2021 Notes and holders of more than 50% in principal amount of the 2024 Notes.  The Support Agreement provides that the holders of Notes party thereto will, among other things, support a marketing

 

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and sale process to be conducted by the Company in Chapter 11 and vote in favor of an orderly plan of liquidation that complies with certain provisions of the Support Agreement.

 

Subsequently, on May 9, 2019, the Company and the Filing Subsidiaries entered into an Amended and Restated Sale and Plan Support Agreement (the “Amended and Restated Support Agreement”) with holders of approximately 62% in principal amount of the 2021 Notes and holders of more than 50% in principal amount of the 2024 Notes.

 

The Amended and Restated Support Agreement provides, among other things, that:

 

·                  the holders of the Notes party thereto (the “Noteholders”) will support the sale process the Debtors will conduct during their Chapter 11 Cases;

 

·                  the Noteholders will vote in favor of an orderly plan of liquidation that complies with certain provisions of the Amended and Restated Support Agreement;

 

·                  the holders of 2021 Notes will consent to priming liens and the use of cash collateral in connection with the DIP Credit Agreement (described below);

 

·                  certain of the Noteholders have provided the DIP Credit Agreement;

 

·                  the Noteholders consent to receiving distributions of any sale proceeds after the payment of certain administrative and priority claims;

 

·                  the Company and the subsidiary guarantors under the indenture governing the 2021 Notes reaffirm the guarantees under the 2021 Notes and stipulate to the validity of liens held by the secured parties under the 2021 Notes; and

 

·                  the Company and the subsidiary guarantors under the indenture governing the 2024 Notes reaffirm the guarantees under the 2024 Notes.

 

On July 16, 2019, the Company and the Filing Subsidiaries and holders of approximately 62% in principal amount of the 2021 Notes and holders of more than 50% in principal amount of the 2024 Notes entered into Amendment No. 1 to the Support Agreement (“Support Agreement Amendment”).

 

The Support Agreement Amendment amended the definition of “Plan” (i.e., the Chapter 11 plan of liquidation that the parties to the Support Agreement agree to support) to include (i) a release of avoidance actions against holders of general unsecured claims, (ii) the payment of fees of the 2024 Notes trustee, (iii) the appointment of a general unsecured claims administrator and (iv) the effectuation of the Unsecured Creditor Sharing Agreement (as defined below).

 

The Support Agreement Amendment also provides consent by the parties thereto of certain uses of cash on hand by the Company and certain of its subsidiaries prior to any sale, including to pay “Critical Vendor Payments” (as defined in the Support Agreement Amendment), certain administrative expense and priority claims, expenses arising under certain executory contracts and unexpired leases in connection with a sale, and certain professional fees and expenses relating to key employee incentive and retention plans.

 

The Support Agreement Amendment also provides that the Plan shall include an agreement to share certain proceeds between the holders of Contingent Roll-Up Loans (as defined in the DIP Credit Agreement) under the DIP Credit Agreement and holders of 2021 Notes, on the one hand, and holders of unsecured claims, on the other (the “Unsecured Creditor Sharing Agreement”).  The Unsecured Creditor Sharing Agreement provides that, upon recovery by the holders of 2021 Notes and Contingent Roll-Up Loans of at least 50% of their

 

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total claims, excess amounts up to 75% of such total claims will be distributed 90% to holders of such claims and 10% to holders of unsecured claims.  Distributions in excess of 75% of the total claims of the holders of 2021 Notes and Contingent Roll-Up Loans will be paid 80% to holders of such claims and 20% to holders of unsecured claims.  Following the Auction and entry of the Sale Order approving the NTEC sale, the Official Unsecured Creditors’ Committee agreed to a compromise and settlement, as set forth in the Plan as filed on October 4, 2019, under which holders of Allowed General Unsecured Claims (as defined in the Plan) will be entitled to share pro rata in the “General Unsecured Claims Cash Distribution Amount” (as defined in the Plan), which is an amount of $1.25 million, in full and final satisfaction of such claims.  As a result of the satisfaction of the Specified Tax Condition (as defined in the DIP Credit Agreement) prior to the date of the Second Borrowing (as defined in the DIP Credit Agreement), no Contingent Roll-Up Loans were issued pursuant to the DIP Credit Agreement.

 

On July 18, 2019, the Bankruptcy Court entered an Order (Approving) (I) Authorizing the Debtors to Assume the Amended and Restated Sale and Plan Support Agreement, (II) Approving the Lien and Guaranty Settlement Contained in the Amended and Restated Sale and Support Agreement, (III) Modifying the Automatic Stay, and (IV) Granting Related Relief [Docket No. 478] pursuant to which the Bankruptcy Court approved the Support Agreement, as amended.

 

Debtor-In-Possession Financing

 

On May 15, 2019, the Debtors entered into a Superpriority Senior Secured Priming Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”) by and among Cloud Peak Energy Inc. and the other Debtors, as borrowers, the various lenders from time to time party thereto (the “Lenders”) and Ankura Trust Company, LLC, as administrative agent and collateral agent providing for a debtor-in-possession term loan facility  in an amount not to exceed (i) $35 million (as may be increased to give effect to any fees or interest that are paid in kind and to give effect to any incremental loans described below) (the “New Money Loans”) plus (ii) subject to the entry of a final order of the Bankruptcy Court approving the financing under the DIP Credit Agreement (the “Final DIP Order”), Roll-Up Loans (as defined below) on terms and conditions set forth in the DIP Credit Agreement.  On May 15, 2019, the Bankruptcy Court granted interim approval of the motion to approve the DIP Credit Agreement (the “Interim DIP Order”) and borrowing of up to $10 million of the New Money Loans thereunder.

 

The Debtors’ obligations under the DIP Credit Agreement are secured by first priority priming liens on substantially all of the Debtors’ assets, subject to certain permitted liens and agreed exclusions, including the exclusion of assets that secure obligations under the A/R Securitization Program.   The DIP Credit Agreement terminates on the earliest of: (a) February 15, 2020; (b) the date that without prior written consent of the requisite Lenders, any of the Chapter 11 Cases are converted to cases under chapter 7 of the Bankruptcy Code; (c) the date of dismissal of any of the Chapter 11 Cases without the prior written consent of the requisite Lenders; (d) the date of appointment in any Chapter 11 Case of a trustee without the prior written consent of the requisite Lenders; (e) the date of appointment in any of the Chapter 11 Cases of an examiner with expanded powers without prior written consent of the requisite Lenders; (f) consummation of a sale of all or substantially all of the Debtors’ assets, whether under Section 363 of the Bankruptcy Code or otherwise; (g) the consummation date of any plan under Chapter 11; (h) the termination in whole of the commitments following an event of default under the DIP Credit Agreement; or (i) thirty-five days after entry of the Interim DIP Order (or such later date as agreed by the Lenders), if the Final DIP Order has not been entered.

 

Proceeds of the New Money Loans are used only in connection with an approved budget (adjusted for agreed variances), for the purposes of: (i) general corporate and working capital purposes; (ii) costs of the administration of the Chapter 11 Cases; and (iii) payment of transaction costs, fees and expenses with respect to the DIP Credit Agreement.  New Money Loans were made available in two or, if the Specified Tax Condition was not satisfied at the time of the Second Borrowing, three draws, each subject to the satisfaction of certain conditions under the DIP Credit Agreement, including compliance with a Borrowing Base (as defined in the DIP Credit Agreement).  Borrowings under the DIP Credit Agreement are funded by the Lenders into an escrow account.  The Debtors may request draws of funds from the escrow account on a weekly basis, subject to satisfaction of certain conditions, including the absence of defaults, that the draw is in accordance with the

 

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approved budget, that the SAPSA (as defined in the DIP Credit Agreement) remain in full force and effect and other customary conditions.  Amounts that remain in the escrow account upon termination of the DIP Credit Agreement are returned to the collateral agent to pay off obligations outstanding in respect of the DIP Credit Agreement in the order provided therein.  The Debtors borrowed $10 million for the first borrowing and $25 million for the second borrowing under the DIP Credit Agreement on May 16, 2019 and August 1, 2019, respectively, which were funded into the escrow account.  There was no third borrowing as the Specified Tax Condition was satisfied at the time of the Second Borrowing.

 

On June 12, 2019, the Company launched a tender offer providing eligible holders of 2021 Notes the opportunity to participate as a lender under the DIP Credit Agreement on a pro rata basis up to such holder’s percentage ownership of the outstanding 2021 Notes, and to exchange, or “roll-up” a principal amount of their 2021 Notes equal to 80% of the $35 million New Money Loans provided by such Lender for an equal amount of loans incurred under the DIP Credit Agreement (all such loans, the “Roll-Up Loans”).  The transactions contemplated by the tender offer closed on August 1, 2019.  The tender offer participants that were not existing lenders under the DIP Credit Agreement (the “Non-Backstop Lenders”) subscribed for the assignment from the existing lenders (the “Backstop Lenders”) of approximately $3.8 million of New Money Loans, and the Non-Backstop Lenders and Backstop Lenders exchanged a total of $28 million of their 2021 Notes for Roll-Up Loans.

 

New Money Loans bear interest at a rate equal to, at our option, (a) the alternate base rate (subject to a 2% floor) plus 8% per annum or (b) the adjusted LIBOR rate (subject to a 1% floor) plus 9% annum.  Roll-Up Loans bear interest at the adjusted LIBOR rate (subject to a 1% floor) plus 9% per annum rate.  The Debtors will pay certain other agreed fees to the Lenders and the agents under the DIP Credit Agreement.  Fees and interest are paid-in-kind and added to the principal amount of loans outstanding under the DIP Credit Agreement.

 

The DIP Credit Agreement contains usual and customary affirmative and negative covenants and events of default for transactions of this type. In addition, the Debtors are required to maintain a minimum liquidity of $12 million at all times, $6 million of which must be held at all times in a segregated escrow account.

 

On June 19, 2019, the DIP Credit Agreement was amended to extend the date by which the DIP Credit Agreement would otherwise terminate if the Final DIP Order were not entered and other milestone dates.

 

On June 25, 2019, the DIP Credit Agreement was further amended to, among other things, provide that upon entry of the Final DIP Order, the DIP Credit Agreement will be amended to accommodate and provide for the borrowing and roll-up mechanics described in the tender offer documentation.

 

On July 16, 2019, the Debtors entered into a Limited Waiver and Amendment No. 3 to the DIP Credit Agreement (the “DIP Limited Waiver”).  The DIP Limited Waiver, among other things, waived the events of default arising under the DIP Credit Agreement as a result of the non-commencement of an auction for substantially all assets of the Debtors and the non-occurrence of a sale order under Section 363 of Title 11 of the U.S. Code by the Bankruptcy Court by the respective milestone dates set forth in the DIP Credit Agreement and amends the milestones for these and other events in the auction process.

 

On July 18, 2019, the Bankruptcy Court entered a Final Order (I) Authorizing the Debtors to (A) Obtain Postpetition Financing Secured by Senior Priming Liens and (B) Use Cash Collateral, (II) Granting Liens and Providing Superpriority Administrative Expense Status, (III) Granting Adequate Protection, (IV) Modifying the Automatic Stay and (V) Granting Related Relief [Docket No. 407] pursuant to which the Bankruptcy Court approved the DIP Credit Agreement, as amended.

 

On August 8, 2019, the DIP Credit Agreement was further amended to, among other things extend the milestone dates by which (i) an auction must commence for substantially all assets of the Debtors and (ii) a sale order under Section 363 of the Bankruptcy Code by the Bankruptcy Court must be entered.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On August 19, 2019, August 23, 2019, August 29, 2019, and September 6, 2019, the DIP Credit Agreement was further amended to, among other things, extend the milestone dates by which a sale order under Section 363 of the Bankruptcy Code by the Bankruptcy Court must be entered.

 

On September 13, 2019, the DIP Credit Agreement was further amended to, among other things, (i) extend the milestone dates set forth in the DIP Credit Agreement by which a sale order under Section 363 of the Bankruptcy Code by the Bankruptcy Court must be entered and (ii) waive the event of default that had occurred and was continuing, under the DIP Credit Agreement as a result of non-compliance with the Approved Budget (as defined in the DIP Credit Agreement) due to an Unpermitted Variance (as defined in the DIP Credit Agreement) with respect to receipts for the week ending on September 6, 2019.

 

On September 20, 2019 and September 27, 2019, the DIP Credit Agreement was further amended to, among other things, extend the milestone dates by which a sale order under Section 363 of the Bankruptcy Code by the Bankruptcy Court must be entered.

 

Amendment to A/R Securitization Program

 

Cloud Peak Energy Resources LLC (“CPE Resources”), a wholly owned subsidiary of the Company, is party to an Accounts Receivable Securitization Program (the “A/R Securitization Program”) with PNC Bank, National Association, as administrator.  On May 15, 2019, we entered into a Second Amended and Restated Receivables Purchase Agreement (the “Receivables Purchase Agreement Amendment”), by and among Cloud Peak Energy Receivables LLC (“CPE Receivables”), CPE Resources, the various Conduit Purchasers and Related Committed Purchasers (collectively, the “Purchasers”), LC Participants and Purchaser Agents from time to time party thereto, PNC Bank, National Association, as Administrator (the “Administrator”), and PNC Capital Markets LLC, as Structuring Agent.  Prior to entering into the Receivables Purchase Agreement Amendment, it was approved by the Bankruptcy Court on May 14, 2019.

 

Under the terms of the A/R Securitization Program, eligible trade receivables consist of certain trade receivables from certain of the Company’s operating subsidiaries.  The amount available with respect to the receivables sold into the A/R Securitization Program is subject to customary limits and reserves, including reserves based on customer concentration and prior past due balances.  Of the eligible pool of receivables sold to CPE Receivables, undivided interests in only a portion of the pool are sold to the Purchasers under the facility, subject to a $35 million purchase limit, which was reduced from $70 million under the A/R Securitization Program prior to the Receivables Purchase Agreement Amendment.  Although the Purchasers in the program bear the risk of non-payment of purchased receivables, CPE Resources has agreed to indemnify the Purchasers, Purchaser Agents, Administrator and other secured parties with respect to various matters, including any defaults by CPE Resources or its operating subsidiaries under the documents relating to the A/R Securitization Program, and may be required to repurchase receivables which do not comply with the requirements of the program.  CPE Resources services the receivables sold into the A/R Securitization Program.

 

The Purchasers under the A/R Securitization Program will be entitled to receive payments reflecting a specified discount on amounts funded thereunder calculated on the basis of the commercial paper rate or alternate rate, as applicable.  The commercial paper rate, which is applicable to the extent a Purchaser issues commercial paper to fund its purchases of receivables, is a rate equivalent to the weighted average cost incurred in connection with the issuance of such commercial paper.  If the commercial paper rate is not applicable, the alternate rate will apply.  The alternate rate is equal to 2.00% plus (i) one month LIBOR (subject to a 0% floor) or, (ii) if LIBOR is unavailable, the daily average base rate which is defined as the higher of either the prime rate or the federal funds rate plus 50 basis points.  CPE Receivables will pay fees to the Administrator and Purchaser, including paying (i) the Administrator a structuring fee, (ii) each of the Purchasers facility fees and program fees and (iii) letter of credit fees to each letter of credit participants.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Receivables Purchase Agreement Amendment contains representations and warranties and affirmative, negative and financial covenants customary for financings of this type. The Receivables Purchase Agreement Amendment includes customary termination events for facilities of this type (with customary grace periods, if applicable), including termination events that relate specifically to certain aspects of the Chapter 11 Cases.

 

Liquidity and Ability to Continue as a Going Concern

 

Our liquidity outlook has continued to decline since the fourth quarter of 2018, which included the termination of our Amended Credit Agreement in November 2018.  Severe weather and train unavailability further compounded operational issues in the first quarter of 2019, affecting production at all three of our mines.  As a result of severe weather and flooding in the first quarter of 2019, the railroads serving the PRB were forced to reroute trains and repair and rebuild significant portions of their infrastructure.  The impacts of these conditions carried over into the second quarter of 2019 and were exacerbated by further flooding.  Further, lower export prices and lower demand overall, are expected to result in significantly lower levels of cash flow from operating activities in the future and have limited our ability to access capital markets.  These factors raise substantial doubt about our ability to continue as a going concern.

 

Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates continuity of operations, realization of assets and the satisfaction of liabilities in the normal course of business.  As such, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and their carrying amounts, or the amount and classification of liabilities that may result should we be unable to continue as a going concern.  See “Filing under Chapter 11 of the United States Bankruptcy Code” above for information on our Bankruptcy Petitions.

 

Principles of Consolidation

 

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  In accordance with U.S. GAAP for interim financial statements, these Unaudited Condensed Consolidated Financial Statements do not include certain information and footnote disclosures that are required to be included in annual financial statements prepared in conformity with U.S. GAAP.  The year-end Unaudited Condensed Consolidated Balance Sheet data was derived from the Audited Consolidated Financial Statements.  Accordingly, these Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Audited Consolidated Financial Statements as of December 31, 2018 and 2017, and for each of the three years ended December 31, 2018, included in our 2018 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 for a fair statement of our financial position as of September 30, 2019, and the results of our operations, comprehensive income (loss), equity, and cash flows for the nine months ended September 30, 2019 and 2018, in conformity with U.S. GAAP.  Our results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2019.

 

The preparation of our Unaudited Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods.  Significant estimates in these Unaudited Condensed Consolidated Financial Statements include: assumptions about the amount and timing of future cash flows and related discount rates used in determining asset retirement obligations (“AROs”) and in testing long-lived assets 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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

measurement of income tax benefits and related deferred tax asset valuation allowances; and allowances for inventory obsolescence and net realizable value.  Actual results could differ materially from those estimates.

 

Certain prior period amounts have been reclassified to conform to the current year presentation. Such reclassifications had no impact on our reported net income, current assets, total assets, current liabilities, total liabilities or equity.

 

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 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”).

 

Recently Adopted Accounting Pronouncements

 

In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows companies to make a one-time reclassification of the stranded tax effects (as defined by ASU 2018-02) from accumulated other comprehensive income to retained earnings as a result of the tax legislation enacted in December 2017, commonly known as the “Tax Cuts and Jobs Act” (“TCJA”), and requires certain disclosures about stranded tax effects.  The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The amendments in this update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effects of the change in the U.S. federal corporate income tax rate in the TCJA is recognized.  We adopted this standard as of January 1, 2019.  As a result of our full valuation allowance on our net deferred tax asset, there was no revaluation impact due to the TCJA.  As such, there was no stranded tax impact to accumulated other comprehensive income (loss) (“AOCI”) as a result of the change in tax law.

 

From February 2016 through March 2019, the FASB issued several ASUs related to Leases (“ASC 842”), which required the lessee to recognize the assets and liabilities on all leases that may have not been recognized in the past, specifically, leases classified as operating leases under current U.S. GAAP (“ASC 840”).  The core principle of ASC 842 is that a lessee should recognize both a lease liability for its obligation to make lease payments to the lessor and a right-of-use asset reflecting its right to use the underlying asset during the term of the lease.  Under ASC 842, a lessee recognizes either an operating or a finance lease, with the pattern of expense recognition in the income statement differing depending on classification of the lease. There are also additional disclosure requirements under ASC 842, including expanded quantitative disclosures regarding the location and amounts related to operating and finance leases included in the financial statements, as well as qualitative disclosures about the nature of an entity’s leases.

 

The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  We adopted the new standard effective January 1, 2019 and elected the optional transition practical expedient, which allows us to adopt the standard on the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We will not retrospectively adjust prior periods, which will continue to be reported under ASC 840. Further, disclosures related to prior periods will also be reported under ASC 840.  We also elected the transitional package of practical expedients available within the new standard, which, among other things, allows a lessee to carry forward existing lease classification.  ASC 842 also includes an accounting policy election whereby a lessee may choose not to apply ASC 842 to leases with terms of one year or less. Instead, a lessee recognizes the lease payments in the statement of operations on a straight-line basis over the term of the lease. We have made this policy election and leases of this nature will not be included on our Unaudited Condensed Consolidated Balance Sheets.  Lastly, we elected the practical expedient whereby a lessee may include both lease and non-lease components in the calculation of the lease liability and right-of-use asset.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During 2017 and 2018, we evaluated our contracts with vendors under ASC 842.  Based upon our review, the adoption of this standard did not have a material impact on our results of operations, financial position, and cash flows.  The impact of ASC 842 is not material to our results due to our ownership of substantially all of our equipment and the fact that we have entered into very few operating leases. Additionally, the result of our review of our contracts with vendors yielded no change to our initial conclusion that these contracts did not contain a lease, as there were either no identified assets, or we did not obtain the right to control the use of an identified asset over a period of time. The adoption of ASC 842 did not have an impact on our accounting for capital leases, which are classified as finance leases under ASC 842.  In addition, the adoption of ASC 842 did not have an impact on our liquidity.

 

The following table reflects the adoption of ASC 842 on our Condensed Consolidated Balance Sheets as of January 1, 2019 (in thousands):

 

 

 

Balance as
of December
31, 2018

 

Adjustment
Due to ASC
842

 

Balance as
of January 1,
2019

 

Assets

 

 

 

 

 

 

 

Other assets (noncurrent)

 

$

16,213

 

$

1,785

 

$

17,998

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Accrued expenses

 

$

26,385

 

$

(106

)

$

26,279

 

Other liabilities (current)

 

 

937

 

937

 

Other liabilities (noncurrent)

 

5,731

 

708

 

6,439

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

Retained earnings

 

$

(370,795

)

$

246

 

$

(370,549

)

 

3.  Revenue

 

Disaggregation of Revenue

 

In the following table, Revenue is disaggregated by primary geographic markets, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

United States (1)

 

$

156,103

 

$

143,963

 

$

399,488

 

$

411,060

 

South Korea (2)

 

58,951

 

73,642

 

123,657

 

210,176

 

Other (2)

 

5,173

 

15,475

 

10,610

 

33,851

 

Total revenue from external customers

 

$

220,227

 

$

233,080

 

$

533,755

 

$

655,087

 

 


(1)                                 The majority of our domestic revenue is attributable to the Owned and Operated Mines segment.

(2)                                 All South Korean revenue and the majority of Other geographical revenue is attributable to our Logistics and Related Activities segment.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We attribute revenue to individual countries based on the location of the physical delivery of the coal.  All of our revenue for the nine months ended September 30, 2019 and 2018 originated in the United States.

 

Performance Obligations

 

In our Owned and Operated Mines segment, we have remaining performance obligations relating to fixed priced contracts of approximately $719 million, which represents the average fixed prices on our committed contracts as of September 30, 2019.  We expect to recognize approximately 74% of this revenue through 2020, with the remainder recognized thereafter.  We have remaining performance obligations relating to index priced contracts or contracts with price reopeners of approximately $162 million, which represents the average re-opener/indexed price on committed contracts as of September 30, 2019.  We expect to recognize approximately 44% of this revenue through 2020, with the remainder recognized thereafter.  In our Logistics and Related Activities segment, we have remaining performance obligations relating to our fixed price contracts of approximately $49 million, which represents the average fixed prices on our committed contracts as of September 30, 2019.  We expect to recognize approximately 80% of this revenue in 2019, and the remainder in 2020.

 

The tons used to determine the remaining performance obligations are subject to adjustment in instances of force majeure and exercise of customer options to either take additional tons, or reduce tonnage, if such option exists in the customer contract.  Furthermore, export tons are subject to adjustment upon loading of vessels at the port and therefore represent the estimated tons we anticipate shipping.  The elimination of the purchase and sale of coal between reportable segments is not reflected above.

 

Contract Balances

 

Accounts receivable, net consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2019

 

2018

 

Trade accounts receivable

 

$

41,201

 

$

33,062

 

Other receivables

 

475

 

464

 

Accounts receivable, net

 

$

41,676

 

$

33,527

 

 

4.  Segment Information

 

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

 

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

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 any international coal forward contracts and international coal put options are reported within this segment.  Amortization related to the amended port and rail take-or-pay agreements are also included in this segment.  See Note 5 for additional information about the amended transportation agreements.  Incremental production taxes and royalties associated with the sales made by our Logistics and Related Activities segment are also included in this segment.

 

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

 

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

 

Revenue

 

The following table presents Revenue (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Owned and Operated Mines

 

$

173,693

 

$

161,977

 

$

431,630

 

$

459,570

 

Logistics and Related Activities

 

65,831

 

90,982

 

140,731

 

249,951

 

Other

 

 

3

 

 

8

 

Eliminations

 

(19,297

)

(19,882

)

(38,606

)

(54,442

)

Consolidated

 

$

220,227

 

$

233,080

 

$

533,755

 

$

655,087

 

 

Total Assets

 

The following table presents Total assets (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2019

 

2018

 

Owned and Operated Mines

 

$

104,039

 

$

735,022

 

Logistics and Related Activities

 

31,863

 

29,327

 

Other

 

192,413

 

164,879

 

Eliminations

 

(1,653

)

(572

)

Consolidated

 

$

326,662

 

$

928,656

 

 

As of September 30, 2019 and December 31, 2018, all of our long-lived assets were located in the U.S.  The change in Total assets, from December 31, 2018 to September 30, 2019, is primarily due to the impairment charge as described in Note 6.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Capital Expenditures

 

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2019

 

2018

 

Owned and Operated Mines

 

$

3,434

 

$

14,224

 

Logistics and Related Activities

 

 

 

Other

 

108

 

299

 

Consolidated

 

$

3,542

 

$

14,523

 

 

Adjusted EBITDA

 

EBITDA represents net income (loss) before: (1) interest income (expense) net, (2) income tax provision, (3) depreciation and depletion, and (4) amortization.  Adjusted EBITDA represents EBITDA as further adjusted for accretion, which represents non-cash increases in asset retirement obligation liabilities resulting from the passage of time, and specifically identified items that management believes do not directly reflect our core operations.  The specifically identified items that we routinely adjust for are:  (1) adjustments to exclude non-cash impairment charges, (2) adjustments for derivative financial instruments, excluding fair value mark-to-market gains or losses and including derivative settlements, (3) adjustments to exclude debt restructuring costs, (4) non-cash amortization expense related to transportation agreements with BNSF and Westshore, and (5) reorganization items incurred since our filing for Chapter 11.

 

Adjusted EBITDA is an additional tool intended to assist our management in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect our core operations.  Adjusted EBITDA is a metric intended to assist management in evaluating operating performance, compensation decisions, comparing performance across periods, planning and forecasting future business operations and helping determine levels of operating and capital investments.

 

The following table reconciles segment Adjusted EBITDA to Income (loss) before income tax provision and earnings from unconsolidated affiliates (in thousands):

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Adjusted EBITDA

 

 

 

 

 

 

 

 

 

Owned and Operated Mines

 

$

31,499

 

$

32,289

 

$

37,665

 

$

56,195

 

Logistics and Related Activities

 

(2,679

)

10,471

 

(11,217

)

24,858

 

Total Adjusted EBITDA for reportable segments

 

28,820

 

42,760

 

26,448

 

81,053

 

 

 

 

 

 

 

 

 

 

 

Unallocated net expenses

 

(8,605

)

(2,059

)

(41,133

)

(21,487

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation and depletion

 

2,488

 

(17,392

)

(20,095

)

(46,788

)

Accretion

 

(1,699

)

(1,947

)

(4,796

)

(5,359

)

Impairments

 

 

 

(621,005

)

(800

)

Reorganization items, net

 

(13,152

)

 

24,038

 

 

Derivative financial instruments:

 

 

 

 

 

 

 

 

 

Gain (loss) on derivative financial instruments (1)

 

 

730

 

1,809

 

730

 

Settlement of derivative financial instruments

 

 

 

(1,809

)

 

Total derivative financial instruments

 

 

730

 

 

730

 

Interest expense, net

 

(1,787

)

(8,107

)

(14,167

)

(27,300

)

(Income) loss from unconsolidated affiliates, net of tax

 

(24

)

(3

)

(890

)

(269

)

Non-cash throughput amortization expense and contract termination payments

 

(1,288

)

(1,288

)

(3,865

)

(4,668

)

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

 

$

4,753

 

$

12,693

 

$

(655,466

)

$

(24,886

)

 


(1)                                 (Gain) loss on derivative financial instruments reflected in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

5.  Transportation Agreements

 

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

 

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

 

Current Agreements

 

Our current agreement with Westshore extends through 2022 and allows for greater capacity in 2021 and 2022 to 10.5 million total annual throughput tons.  We retain the right to terminate our commitments at any time in exchange for a buyout payment.  The termination payment varies throughout the period based upon an agreed schedule.  Additionally, after this Westshore agreement terminates and through 2024, if we ship to export customers, we are required to offer to ship through Westshore up to a specified annual tonnage on terms similar

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

to the agreement before shipping through any other export terminal.  Westshore has the right to accept or reject our offer in its sole discretion.

 

Our current agreement with BNSF extends through the end of 2020 with minimum payment commitments for each year.  We have the right to terminate our commitments for the remaining years at any time in exchange for buyout payments.  We have initiated discussions with BNSF regarding an extension through December 2022 to support our increased port capacity for our Asian export business.

 

In arriving at our current agreements, certain termination payments were made in prior years related to prior agreements.  These termination payments have been deferred and are being amortized over the remaining life of the current agreements.  As of September 30, 2019, there was $12.7 million recorded as a deferred asset for these agreements, of which $11.9 million and $0.8 million, were included in Other prepaid and deferred charges and Other assets, respectively, in the Unaudited Condensed Consolidated Balance Sheets.  As of December 31, 2018, there was $16.6 million recorded as a deferred asset for these agreements, of which $13.4 million and $3.2 million, were included in Other prepaid and deferred charges and Other assets, respectively, in the Unaudited Condensed Consolidated Balance Sheets.  We incurred $48.1 million and $58.4 million in costs under our export logistics agreements with Westshore and BNSF, including amortization of $3.7 million and $3.8 million, during the three months ended September 30, 2019 and 2018, respectively.  We incurred $110.0 million and $161.1 million in costs under our export logistics agreements with Westshore and BNSF, including amortization of $17.1 million and $12.1 million, during the nine months ended September 30, 2019 and 2018, respectively.  These costs are included in Cost of product sold in the Unaudited Condensed Statements of Operations and Comprehensive Income (Loss).

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2019

 

2018

 

Services

 

 

 

 

 

Transportation agreements (1)(2)

 

$

71,632

 

$

80,768

 

 


(1)                                 Includes undiscounted port take-or-pay commitments as agreed to in July 2018 for 2019-2022.  We have the right to terminate our commitments at any time in exchange for a buyout payment.  These amounts are considered minimum payments on services.  The per tonne loading charges reflect these advance payments.

(2)                                 Includes undiscounted rail take-or-pay commitments as agreed to in January 2018 for 2019-2020.  We have the right to terminate our commitments at any time in exchange for a buyout payment.  If we do not meet the required portion of our future nominated tons, there would be incremental liquidated damages due under the agreement.

 

6.  Impairments

 

To facilitate the sale of all or substantially all of their operating assets pursuant to Section 363 of the Bankruptcy Code, the Debtors filed a motion with the Bankruptcy Court to approve a marketing and bidding procedures process, including milestones by which interested parties were required to submit indications of interest and bids for all or a portion of the Debtors’ assets.

 

This motion was approved by the Bankruptcy Court in June 2019 and during July 2019, the Debtors received indicative bids, all of which indicated that the market value of the Debtor’s assets were significantly lower than their current book value.  On August 15, 2019 and August 16, 2019, the Auction was held, and on August 19, 2019, the Bankruptcy Court approved the sale to NTEC subject to the Debtors finalizing and submitting a proposed sale order.  See Note 1 for details of the Asset Purchase Agreement and the Winning Bid.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As a result of the Winning Bid, which was the primary basis for estimating the forecasted cash flows under the income approach to determine the fair market value of our assets, we recorded an impairment of approximately $621 million.  $618.4 million of the impairment is related to the Owned and Operated Mines segment, while the Logistics and Related Activities segment accounted for $0.5 million of the impairment.  The remaining $2.1 million is related to Other.  The impairment was comprised of $568 million of long-lived assets and mineral rights, primarily at our Antelope and Spring Creek mines as well as $49.5 million in materials and supplies inventory.  The remaining $3.5 million is related to project development costs and right-of-use assets.

 

7.  Reorganization items, net

 

In accordance with ASC 852, the statement of operations shall portray the results of operations of the reporting entity while it is in Chapter 11.  Revenues, expenses (including professional fees), realized gains and losses, and provisions for losses resulting from reorganization and restructuring of the business shall be reported separately as reorganization items.

 

The following table presents Reorganization items, net (in thousands):

 

 

 

Three Months

 

Nine Months

 

 

 

Ended

 

Ended

 

 

 

September 30,

 

September 30,

 

 

 

2019

 

2019

 

Write-off of deferred gain on 2021 Notes(1)

 

$

 

$

53,455

 

Gain on settlement of liabilities subject to compromise (2)

 

286

 

363

 

Interest income

 

67

 

73

 

Write-off of debt issuance costs on debt subject to compromise

 

 

(9,203

)

Professional fees

 

(12,066

)

(19,153

)

Other reorganization expenses

 

(1,439

)

(1,497

)

Reorganization items, net

 

$

(13,152

)

$

24,038

 

 


(1)                                 See Note 14 for information on the deferred gain.

(2)                                 See Note 19 for information on liabilities subject to compromise.

 

During the third quarter of 2019, we identified and recorded an out-of-period adjustment related to the accounting for US Trustee fees. We concluded that this adjustment was not material to our consolidated financial statements for any of the current or prior periods presented. The adjustment was reflected as a $0.7 million increase of our Reorganization Items, net in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2019.

 

8.  Income Taxes

 

Our statutory income tax rate including state income taxes, for the three and nine months ended September 30, 2019 and 2018 was approximately 23%.  Our effective tax rate for the three months ended September 30, 2019 and 2018 was 0.3% and 0.0%, respectively.  Our effective tax rate for the nine months ended September 30, 2019 and 2018 was 0.0% and (1.2)%, respectively.  The difference between our statutory income tax rates and our effective income tax rates for the three and nine months ended September 30, 2019 and 2018 is primarily the result of the impact of percentage depletion, income tax in the states in which we do business and changes in our valuation allowance.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The elimination of the Alternative Minimum Tax (“AMT”) and the ability to offset our regular tax liability or claim refunds for taxable years 2018 through 2021 for our AMT credits carried forward from prior periods, was a material impact of the TCJA.  In May 2019, we received $15.8 million in AMT credit refunds.  We currently anticipate receipt of an additional approximately $15.8 million in AMT credit refunds over the next three years with approximately half of this value realized in 2020.

 

As of September 30, 2019, we had deferred tax assets principally arising from: AROs, postretirement benefits, contract rights, property, plant and equipment, mineral rights, and net operating loss carry-forwards.  As of December 31, 2018, we had deferred tax assets principally arising from: AROs, postretirement benefits, contract rights, interest deduction carry-forwards, and net operating loss carry-forwards.  As management cannot determine that it is more likely than not that we will realize the benefit of the deferred tax assets, a valuation allowance equal to the net deferred tax asset has been established.

 

As of September 30, 2019 and December 31, 2018, we had no uncertain tax positions that we expect to have a material impact on the Unaudited Condensed Consolidated Financial Statements as a result of tax deductions taken during the year or in prior periods or due to settlements with taxing authorities or lapses of applicable statues of limitations.  We are open to federal and state tax audits until the applicable statutes of limitations expire.  The statute of limitations has expired for all federal and state returns filed for periods ending before 2012.

 

9.  Equity Method Investments

 

Equity method investments include our 50% equity investment in Venture Fuels Partnership, a coal marketing company.  We have received distributions of $2.3 million and $1.0 million from the Venture Fuels Partnership during the nine months ended September 30, 2019 and 2018, respectively.  Our equity method investments are included in noncurrent Other assets on the Unaudited Condensed Consolidated Balance Sheets and had a carrying amount of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2019

 

2018

 

Venture Fuels Partnership

 

$

1,671

 

$

3,040

 

Other

 

991

 

982

 

Total equity method investments

 

$

2,662

 

$

4,022

 

 

10.  Common Stock and Earnings (Loss) per Share

 

Common Stock

 

Under the terms of the Plan submitted to the Bankruptcy Court, our existing common stock will be extinguished following confirmation of the Plan, and existing equity holders will not receive any consideration in respect of their equity interests.

 

On March 26, 2019, we were notified by the NYSE that they had determined our common stock was no longer suitable for listing on the NYSE based on “abnormally low” price levels, pursuant to Section 802.01D of the NYSE Listed Company Manual, and commenced proceedings to delist our common stock.  Trading in our common stock was suspended immediately.  Our common stock began trading on the OTC Pink on March 27, 2019 and trades under the symbol “CLDPQ”.

 

To be quoted on the OTC Pink, a market maker must have sponsored the security and comply with SEC Rule 15c2-11 before it can initiate a quote in a specific security.  The OTC Pink is a significantly more limited market than the NYSE, and the quotation of our common stock on the OTC Pink may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock.  This could further depress

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

the trading price of our common stock and could also have a long-term adverse effect on our ability to raise capital. There can be no assurance that any public market for our common stock will exist in the future or that we will be able to relist our common stock on a national securities exchange.  In connection with the delisting of our common stock, there may also be other negative implications, including the potential loss of confidence in the Company by suppliers, customers and employees and the loss of institutional investor interest in our common stock.

 

Earnings (Loss) per Share

 

Potential dilutive shares of common stock may include restricted stock units, options, and performance share units issued under our Long Term Incentive Plan (“LTIP”).  See Note 18.  We apply the treasury stock method to determine dilution from restricted stock units, options, and performance share units.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

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

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,766

 

$

12,691

 

$

(654,660

)

$

(24,919

)

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

 

76,508

 

75,778

 

76,347

 

75,623

 

Dilutive effect of stock equivalents

 

509

 

1,505

 

 

 

Denominator for diluted earnings (loss) per share

 

77,017

 

77,283

 

76,347

 

75,623

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.06

 

$

0.17

 

$

(8.57

)

$

(0.33

)

Diluted earnings (loss) per share

 

$

0.06

 

$

0.16

 

$

(8.57

)

$

(0.33

)

 

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

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

Anti-dilutive stock equivalents

 

2,446

 

2,075

 

2,681

 

3,239

 

 

11.  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, including quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Our Level 2 assets and liabilities include derivative financial instruments with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.

 

·                  Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.  We had no Level 3 financial instruments as of September 30, 2019 or December 31, 2018.

 

The tables below set forth, by level, our financial assets and liabilities that are recorded at fair value in the accompanying Unaudited Condensed Consolidated Balance Sheets (in thousands):

 

 

 

Fair Value as of September 30, 2019

 

 

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

4,936

 

$

 

$

4,936

 

 

 

 

Fair Value as of December 31, 2018

 

 

 

Level 1

 

Level 2

 

Total

 

Assets

 

 

 

 

 

 

 

Money market funds (1)

 

$

28,740

 

$

 

$

28,740

 

Liabilities

 

 

 

 

 

 

 

Derivative financial instruments (2)

 

$

 

$

2,386

 

$

2,386

 

 


(1)                                 Included in Cash and cash equivalents in the Unaudited Condensed Consolidated Balance Sheets along with $79.8 million and $62.5 million of demand deposits as of September 30, 2019 and December 31, 2018, respectively.

(2)                                 See Note 12 for information on the (Gain) loss on derivative financial instruments recognized in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

 

12.  Derivative Financial Instruments

 

WTI Derivatives

 

We use derivative financial instruments, such as swaps and collars, 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 did not directly offset market changes to our diesel costs.

 

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 currently do not hold any swap agreements.

 

In July 2018, we entered into collar agreements to fix a portion of our forecasted diesel costs for the remainder of 2018 and all of 2019. Under a collar agreement, we pay the difference between the monthly average index price and a floor price if the index price is below the floor, and we receive the difference between the ceiling price and the monthly average index price if the index price is above the ceiling price.  No amounts are paid or received if the index price is between the floor and ceiling prices.  While we would not receive the full benefit of price decreases beyond the floor price, the collars mitigate the risk of crude oil price increases and thereby increased diesel costs that would otherwise have a negative impact on our cash flow.  During the first quarter of 2019, we closed out our collar agreements.  We currently do not hold any collar agreements.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Offsetting and Balance Sheet Presentation

 

 

 

September 30, 2019

 

 

 

Gross Amounts
Recognized

 

Gross Amounts Offset
in the Consolidated
Balance Sheet

 

Net Amounts Presented
in the Consolidated
Balance Sheet

 

 

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

WTI derivative financial instruments

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

December 31, 2018

 

 

 

Gross Amounts
Recognized

 

Gross Amounts Offset
in the Consolidated
Balance Sheet

 

Net Amounts Presented
in the Consolidated
Balance Sheet

 

 

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

WTI derivative financial instruments

 

$

 

$

2,642

 

$

 

$

 

$

 

$

2,642

 

 

Derivative Gains and Losses

 

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

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 

 

 

2019

 

2018

 

2019

 

2018

 

WTI derivative financial instruments

 

$

 

$

(730

)

$

(1,809

)

$

(730

)

 

See Note 11 for a discussion related to the fair value of derivative financial instruments.

 

13.  Inventories, Net

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2019

 

2018

 

Materials and supplies

 

$

64,424

 

$

68,519

 

Less: Obsolescence allowance

 

(49,154

)

(1,089

)

Material and supplies, net

 

15,270

 

67,430

 

Coal inventory

 

1,676

 

2,610

 

Inventories, net

 

$

16,946

 

$

70,040

 

 

During the second quarter of 2019, we increased our obsolescence allowance to reflect the fair value of our inventory as determined under the income approach based primarily on cash flows from the Winning Bid.  The increase in this allowance was recorded as part of the overall asset impairment taken during the second quarter of 2019.  See Note 6 for further details on the asset impairment.

 

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

14.  Senior Notes

 

Senior notes consisted of the following (in thousands):

 

 

 

September 30, 2019

 

 

 

Carrying
Value (1)

 

Unamortized
Discount and
Debt
Issuance
Costs

 

Unamortized
Deferred Gain
on Forgiven
Debt (2)

 

Principal (3)

 

Fair
Value (4)

 

12.00% second lien senior notes due 2021

 

$

262,366

 

$

 

$

 

$

262,366

 

$

70,839

 

6.375% senior notes due 2024

 

56,408

 

 

 

56,408

 

1,692

 

Total senior notes

 

$

318,774

 

$

 

$

 

$

318,774

 

$

72,531

 

 

 

 

December 31, 2018

 

 

 

Carrying
Value

 

Unamortized
Discount and
Debt
Issuance
Costs