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, 2014

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.

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, 61,004,549 shares outstanding as of October 23, 2014.

Table of Contents

CLOUD PEAK ENERGY INC.

TABLE OF CONTENTS

Explanatory Note

On March 25, 2014, Cloud Peak Energy Resources LLC, Cloud Peak Energy Finance Corp. (together with Cloud Peak Energy Resources, the “Issuers”), Cloud Peak Energy Inc., Wilmington Trust Company, as trustee, and Citibank N.A., as securities administrator, entered into the fifth supplemental indenture (the “Fifth Supplemental Indenture”) to the indenture governing the Issuers’ 8.250% Senior Notes due 2017 (which are no longer outstanding) and 8.500% Senior Notes due 2019 (collectively, the “Notes”).  Pursuant to the Fifth Supplemental Indenture, Cloud Peak Energy Inc. has agreed to guarantee the Notes and to be bound by the terms of the indenture governing the Notes applicable to guarantors.  As a result of such guarantee, and pursuant to Rule 12h-5 promulgated under the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 3-10 of Regulation S-X, Cloud Peak Energy Resources LLC is no longer required to file reports under Section 15(d) of the Exchange Act and has filed a Form 15 in connection therewith.

Unless the context indicates otherwise, the terms “Cloud Peak Energy,” the “Company,” “we,” “us,” and “our” refer to Cloud Peak Energy 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.

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

Cloud Peak Energy is one of the largest producers of coal in the United States of America (“U.S.”) and the Powder River Basin (“PRB”), based on our 2013 coal sales.  We operate some of the safest mines in the coal industry.  According to Mine Safety and Health Administration (“MSHA”) data, in 2013, we had one of the lowest employee all injury incident rates among the largest U.S. coal producing companies.

We currently operate solely in the PRB, the lowest cost region of the major coal producing regions in the U.S., where we operate three wholly-owned surface coal mines, the Antelope Mine, the Cordero Rojo Mine and the Spring Creek Mine.  We also have two major development projects, the Youngs Creek project and the Crow project.  On September 12, 2014, we completed the sale of our 50% non-operating interest in Decker Coal Company (“Decker”) to an affiliate of Ambre Energy Limited (“Ambre Energy”).  For further information regarding this transaction, please see Note 3.

Our Antelope and Cordero Rojo mines are located in Wyoming and our Spring Creek Mine is located in Montana.  Our mines produce subbituminous thermal coal with low sulfur content, and we sell our coal primarily to domestic and foreign electric utilities.  We do not produce any metallurgical coal.  Thermal coal is primarily consumed by electric utilities and industrial consumers as fuel for electricity generation and steam output.  In 2013, the coal we produced generated approximately 4% of the electricity produced in the U.S.

In 2012, we acquired the Youngs Creek project.  This project contains substantial undeveloped coal and complementary surface assets in the Northern PRB adjacent to our Spring Creek Mine.  In 2013, we entered an option to lease agreement and a corresponding exploration agreement with the Crow Tribe of Indians.  This coal project (“Crow project”) is located on the Crow Indian Reservation in southeast Montana, near our Spring Creek Mine and Youngs Creek project.  We are in the process of evaluating the development options for the Youngs Creek project and the Crow project and believe that their proximity to the Spring Creek Mine represents an opportunity to optimize our mine developments in the Northern PRB.  For purposes of this report, the term “Northern PRB” refers to the area within the PRB that lies within Montana and the northern part of Sheridan County, Wyoming.  Our Spring Creek Mine, the Youngs Creek project, and the Crow project are located in the Northern PRB.

Since 2008, we have grown our sales of PRB coal into the Asian export market.  In 2013, our logistics business was the largest U.S. exporter of thermal coal into South Korea.  We continue to seek ways to increase our future export capacity through existing and proposed Pacific Northwest export terminals.  In August 2014, we paid $37.0 million to secure additional committed capacity at the fully-utilized Westshore Terminals Limited Partnership port (“Westshore”), in British Columbia.  As a result, we increased our long-term committed capacity from 2.8 million tons to 6.3 million tons initially and increasing to 7.2 million tons in 2019 and extended the term of our throughput agreement by two years through the end of 2024.  For further information regarding this transaction, please see Note 7.

As part of the Decker transaction, we were granted a throughput option for up to 7.7 million tons per year at the proposed Millennium Bulk Terminals coal export facility in Washington State.  The proposed new coal export facility is currently in the permitting stage and is planned to be developed in two phases.  Our option covers up to 3.3 million tons per year of capacity during the first phase of development and an additional 4.4 million tons per year once the second phase capacity is reached.  Our throughput capacity will have an initial term of 10 years, with four renewal options for five-year terms.  Our option is exercisable following the successful completion of the ongoing permit process for the terminal, the timing and outcome of which are uncertain.

We also have a throughput option agreement with SSA Marine, which provides us with an option for up to 17.6 million tons of capacity per year through the planned dry bulk cargo Gateway Pacific Terminal at Cherry Point in Washington State.  Our potential share of capacity will depend upon the ultimate capacity of the terminal and is subject to the terms of the option agreement.  The terminal will accommodate cape size vessels.  Our option is exercisable following the successful completion of the ongoing permit process for the terminal, the timing and outcome of which are uncertain.

4

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation

We consolidate the accounts of entities in which we have a controlling financial interest under the voting control model.  We accounted for our 50% non-operating interest in Decker, which was sold on September 12, 2014, using the proportionate consolidation method, whereby our share of Decker’s assets, liabilities, revenue and expenses were included in our condensed consolidated financial statements through the date of the sale.  Investments in other entities that we do not control but have the ability to exercise significant influence over the investee’s operating and financial policies are accounted for under the equity method.  All intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.

The interim period unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”).  In accordance with U.S. GAAP for interim financial statements, these unaudited condensed consolidated financial statements do not include certain information and note disclosures that are normally included in annual financial statements prepared in conformity with U.S. GAAP.  The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all footnote disclosures required to be included in annual financial statements by U.S. GAAP.  Accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of December 31, 2013 and 2012 and for each of the three years ended December 31, 2013 included in our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”).  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position as of September 30, 2014, the results of operations and comprehensive income for the three and nine months ended September 30, 2014 and 2013, and the cash flows for the nine months ended September 30, 2014 and 2013, in conformity with U.S. GAAP.  Our results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2014.

The preparation of our condensed consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods.  Significant estimates in these condensed consolidated financial statements include: assumptions about the amount and timing of future cash flows and related discount rates used in determining asset retirement obligations (“AROs”) and in testing long-lived assets and goodwill for impairment; the fair value of 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; allowances for inventory obsolescence; and assumptions about the timing of future cash flows used in determining the tax agreement liability for periods before its termination in August 2014.  Actual results could differ materially from those estimates.

Certain amounts have been reclassified to conform to current period 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 will not be material to our consolidated financial statements upon adoption.

In April 2014, FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) (“ASU 2014-08”), which changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. The standard requires that we report as a discontinued operation only

5

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

those disposals that represent a strategic shift and have a major effect on our operations and financial results.  ASU 2014-08 is effective prospectively for new disposals that occur within annual periods beginning on or after December 15, 2014 with early adoption permitted.  We elected to adopt ASU 2014-08 during the three months ended September 30, 2014 and have applied the new guidance to the sale of our 50% non-operating interest in the Decker Mine described in Note 3.  The sale of our ownership interest does not represent a strategic shift that has a major impact on our operations or financial results; therefore, the transaction is being reported as a disposal of a significant component and not as a discontinued operation.

In July 2013, FASB issued ASU 2013-11, Presentation of Unrecognized Tax Benefits (“ASU 2013-11”) requiring entities to present unrecognized tax benefits as a reduction to any related deferred tax assets for net operating losses, similar tax losses or tax credit carryforwards if such settlement is required or expected in the event an uncertain tax position is disallowed.  The new presentation guidance is effective for interim and annual periods beginning January 1, 2014.  The adoption of ASU 2013-11 did not affect our results of operations, financial condition or cash flows.

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) requiring entities to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts.  The new guidance is effective for interim and annual periods beginning after December 15, 2016.  We are considering the impact of the adoption of ASU 2014-09 on our results of operations, financial condition and cash flows.

3.  Sale of Decker Mine Interest

On September 12, 2014, we completed the sale of our 50% non-operating interest in the Decker Mine to Ambre Energy.  Under the terms of the agreement, Ambre Energy acquired our 50% interest in the Decker Mine and related assets and assumed all reclamation and other liabilities, giving Ambre Energy 100% ownership of the Decker Mine.  Ambre Energy also fully replaced our $66.7 million in outstanding reclamation and lease bonds relating to our 50% interest in Decker’s reclamation and lease liabilities.  As we no longer have any ownership interest and all Decker liabilities have been assumed by Ambre Energy, Ambre Energy is now fully responsible for reclamation at the end of the Decker Mine’s life.  As a result, we released the related $72.2 million of asset retirement obligation.

In addition, an affiliate of Ambre Energy granted us an option for up to 7.7 million tons per year of its throughput capacity at the proposed Millennium Bulk Terminals coal export facility.  The proposed new coal export facility at Millennium Bulk Terminals in Washington State, which is owned 62% by an affiliate of Ambre Energy and 38% by Arch Coal, is currently in the permitting stage.  It is planned to be developed in two phases: the first phase is planned to have capacity of 27.6 million tons per year with the second phase taking annual capacity to 48.5 million tons.  Our option covers up to 3.3 million tons per year of Ambre Energy’s share of the first phase and 4.4 million tons per year of its share of the second phase.  Our throughput capacity will have an initial term of 10 years, with four renewal options for five-year terms.  Our option is exercisable following the successful completion of the ongoing permit process for the terminal, the timing and outcome of which are uncertain.  We valued the option using a discounted cash flow analysis based on comparable agreements, the terms of the agreement and general market data.

As a result of this agreement, we recognized a gain on sale, after tax, of the Decker Mine interest of $46.8 million as follows (in thousands):

6

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

We reported the results of our 50% interest in the Decker Mine in our Corporate and Other segment.  Results of operations, up to the date of sale, for the Decker Mine included in the consolidated statements of operations and comprehensive income consist of the following (in thousands):

The table below summarizes the assets and the liabilities of the Decker Mine immediately prior to the completion of the sale of our 50% ownership interest (in thousands):

7

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.  Inventories

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

5.  Derivatives

Coal Contracts

We use international coal forward contracts linked to forward Newcastle coal prices to help manage our exposure to variability in international coal prices. We use domestic coal futures contracts referenced to the 8800 Btu coal price sold from the PRB, as quoted on the Chicago Mercantile Exchange (“CME”), to help manage our exposure to market changes in domestic coal prices. At September 30, 2014, we held coal derivative positions that are expected to settle in the following years (in thousands):

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 consolidated balance sheets.

WTI Collars

We use collars to help manage our exposure to market changes in diesel fuel prices.  The collars 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 collar 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 collars, the collars mitigate the risk of crude oil price increases and thereby increased diesel costs that would otherwise have a negative impact on our cash flow.

8

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

At September 30, 2014, we held the following WTI collars:

Offsetting and Balance Sheet Presentation

Net amounts of international coal forward contracts and WTI collar assets are included in the Derivative financial instruments line and net amounts of WTI collar liabilities are included in Other current liabilities in the consolidated balance sheets.  There were no cash collateral requirements at September 30, 2014 or December 31, 2013.

Derivative Gains and Losses

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

See Note 6 for a discussion related to the fair value of derivative financial instruments.

9

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6.  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 investments in marketable securities, primarily asset-backed securities, and derivative financial instruments with fair values derived from quoted prices in over-the-counter markets or from prices received from direct broker quotes.

·                  Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.  We had no Level 3 investments as of September 30, 2014 or December 31, 2013.

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

(1)                                 Included in cash and cash equivalents in the consolidated balance sheets along with $75.0 million and $91.2 million of demand deposits at September 30, 2014 and December 31, 2013, respectively.

We did not have any transfers between levels during the nine months ended September 30, 2014.  Our policy is to value all transfers between levels using the beginning of period valuation.

7.  Port Access Contract Rights

In August 2014, we paid $37.0 million to Coal Valley Resources, Inc. (“CVRI”), a recently acquired unit of Westmoreland Coal Company, to terminate its throughput agreement with Westshore.  In a related transaction, we amended our agreement with Westshore to increase our committed capacity from 2.8 million tons to 6.3 million tons initially and

10

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

increasing to 7.2 million tons in 2019 and extend the term of our throughput agreement from the end of 2022 through the end of 2024.  We have capitalized the $37.0 million payment as an intangible asset.

Other port access contract rights include $9.5 million related to the SSA Marine throughput option agreement and $5.0 million for the Millennium Bulk Terminals throughput option.  See below and Note 1 for further information on these agreements.

(1)                                 From date developer certifies port is available to Cloud Peak Energy.

(2)                                 From date of first Cloud Peak Energy shipment.

Port access contract rights, net consisted of the following (in thousands):

We will amortize the costs on a straight line basis over the performance period of the contracts.  As none of those periods have yet begun, there was no amortization expense for the nine months ended September 30, 2014.  Future amortization expense related to the port access contract rights is currently expected to be $3.7 million per year beginning January 1, 2015 through 2018 with additional amounts in later years.

8.  Tax Agreement Liability

In connection with the 2009 initial public offering (“IPO”), we entered into a Tax Receivable Agreement (“TRA”) with Rio Tinto Energy America Inc. (“Rio Tinto”), our former parent, and recognized a liability for the undiscounted amounts that we estimated would be paid to Rio Tinto under this agreement.  The amounts to be paid were determined based on an annual calculation of future income tax savings that we actually realized as a result of the tax basis increase that resulted from the 2009 IPO and 2010 Secondary Offering transactions.  Generally, we retained 15% of the realized tax savings generated from the tax basis step-up and Rio Tinto was entitled to the remaining 85%.

In August 2014, we entered into an acceleration and release agreement with Rio Tinto whereby we agreed to pay $45.0 million to Rio Tinto to terminate the TRA.  This payment settles all existing and future liabilities that were or would have been owed under the TRA.  At the date of signing, we carried an undiscounted liability of $103.6 million in respect of our estimated future obligations under the TRA and anticipated making cash payments of approximately $14 million each year in 2014 and 2015 and additional payments in subsequent years.

The termination of the TRA resulted in a non-cash gain during the third quarter of 2014 of $58.6 million before tax and $37.1 million after adjustments to the associated deferred tax assets.  We continue to retain the deferred tax assets related

11

Table of Contents

CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

to the step up in tax basis as a result of the 2009 IPO and 2010 Secondary Offering transactions.  As such, we now expect to benefit from 100% of the increased tax depreciation.

9.  Senior Notes

Senior notes consisted of the following (in thousands):