Form 10-Q CLOUD PEAK ENERGY INC. For: Jun 30

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2016

or

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

For the transition period from                      to                   

Commission File Number:  001-34547

Cloud Peak Energy Inc.

(Exact name of registrant as specified in its charter)

(307) 687-6000

(Registrant’s telephone number, including area code)

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

x  Yes      o  No

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

x  Yes      o  No

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

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

o  Yes      x  No

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

Table of Contents

CLOUD PEAK ENERGY INC.

TABLE OF CONTENTS

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

i

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.       Financial Statements.

CLOUD PEAK ENERGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

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

1

Table of Contents

CLOUD PEAK ENERGY INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

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

2

Table of Contents

CLOUD PEAK ENERGY INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

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

3

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Organization and Business

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

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

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

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

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

Principles of Consolidation

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

4

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

2.  Accounting Policies and Standards Update

Recently Issued Accounting Pronouncements

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

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

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

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

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

5

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.  Inventories, Net

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

4.  Fair Value of Financial Instruments

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

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

·                  Level 2 is defined as observable inputs other than Level 1 prices.  These include quoted prices for similar assets or liabilities in an active market, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.  Our Level 2 assets and liabilities include derivative financial instruments with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.

·                  Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.  We had no Level 3 financial instruments as of June 30, 2016 or December 31, 2015.

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

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

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

6

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.  Derivative Financial Instruments

Coal Contracts

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

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

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

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

WTI Derivatives

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

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

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

7

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Offsetting and Balance Sheet Presentation

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

Derivative Gains and Losses

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

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

8

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6.  Impairments

Goodwill

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

Long-Lived Assets

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

7.  Senior Notes

Senior notes consisted of the following (in thousands):

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

9

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8.  Asset Retirement Obligations

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

Revisions to estimated future reclamation cash flows reflect our regular updates to our estimated costs of closure activities throughout the lives of the respective mines and reflect changes in estimates of closure volumes, disturbed acreages, the timing of the reclamation activities, and third-party unit costs as of June 30, 2016 and 2015.

Revisions during the six months ended June 30, 2016 related to our Antelope Mine, Cordero Rojo Mine and Spring Creek Mine were $25.8 million, $20.8 million, and $8.1 million, respectively.  These downward revisions were primarily due to extending each of the mine’s lives due to lower expected annual production rates, as well as updated equipment and fuel cost guidance issued by the State of Wyoming.  Reductions to asset retirement obligations resulting from such revisions generally result in a corresponding reduction to the related asset retirement costs in Property, plant and equipment, net, however, if the decrease to the asset retirement obligation exceeds the carrying amount of the related asset retirement costs, the resulting non-cash credit will reduce Depreciation and depletion expense on the condensed consolidated statements of operations.  As of June 30, 2016, these revisions reduced the related asset by $17.5 million.  The remaining $37.3 million reduced Depreciation and depletion expense for the three and six months ended June 30, 2016.

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

9.  Other Obligations

Capital Equipment Lease Obligations

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

10

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable Securitization

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

Credit Facility

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

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

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

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

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

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

11

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.  Commitments and Contingencies

Commitments

Purchase Commitments

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

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

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

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

Contingencies

Litigation

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

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

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

12

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

13

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

14

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

both been assigned to Judge Johnson of the District of Wyoming.  We believe WildEarth’s challenge is without merit.  Nevertheless, if WildEarth’s claims against OSM’s approval of the Antelope mine plan modification are successful, any court order granting the requested relief could have a material adverse impact on our shipments, financial results and liquidity, and could result in claims from third parties if we are unable to meet our commitments under pre-existing commercial agreements as a result of any required reductions or modifications to our mining activities.

Other Legal Proceedings

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

Tax Contingencies

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

Several non-income based production tax audits related to federal and state royalties and severance taxes, including periods back to 2008, are currently in progress.  The financial statements reflect our best estimate of taxes and related interest and penalties due for potential adjustments that may result from the resolution of such tax audits.  From time to time, we receive audit assessments and engage in settlement discussions with applicable tax authorities, which may result in adjustments to our estimates of taxes and related interest and penalties.

Concentrations of Risk and Major Customers

For the six months ended June 30, 2016, there was one customer that represented 10% or more of consolidated revenue.  For the six months ended June 30, 2015, there was no single customer that represented 10% or more of consolidated revenue.  We generally do not require collateral or other security on accounts receivable because our customers are comprised primarily of investment grade electric utilities.  The credit risk is controlled through credit approvals and monitoring procedures.

Guarantees and Off-Balance Sheet Risk

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

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

15

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

11.  Postretirement Medical Plan

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