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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, 2015

or

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

For the transition period from                       to                     

Commission File Number:  001-34547

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, 61,171,814 shares outstanding as of October 22, 2015.

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CLOUD PEAK ENERGY INC.

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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.

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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.

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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.

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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.

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Organization and Business

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

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

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

On August 24, 2015, we entered into a surface rights agreement that provides us access to significant additional coal contained within a federal coal lease controlled by the Cordero Rojo Mine.  The agreement involved a land exchange and production payments from any future sales of the underlying coal, including certain recoupable advance production payments.

We also have two development projects, the Youngs Creek project and the Crow project.  The Youngs Creek project is a permitted but undeveloped surface mine project in the Northern PRB region located 13 miles north of Sheridan, Wyoming, contiguous with the Wyoming-Montana state line.  The Youngs Creek project is approximately seven miles south of our Spring Creek Mine and seven miles from the mainline railroad.  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 “Crow project”).  The Crow 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 Crow project and believe that their proximity to the Spring Creek Mine represents an opportunity to optimize our mine developments in the Northern PRB.  For purposes of this report, the term “Northern PRB” refers to the area within the PRB that lies within Montana and the northern part of Sheridan County, Wyoming.

We continue to manage our sales of PRB coal and delivery services business to Asian export customers.  In 2014, our logistics business was the largest U.S. exporter of thermal coal into South Korea.  Exports through the Westshore Terminals Limited Partnership port (“Westshore”) are currently forecast to be approximately 4.0 million tons for 2015.  We are contracted to ship approximately 4.3 million tons at Westshore for 2015.  This reflects our previously announced reduction of export shipments by approximately 1.9 million tons as compared to the originally contracted amount.  This reduction is part of our ongoing efforts to address the impact of low seaborne thermal coal prices for international coal sales and to mitigate our associated losses and take-or-pay exposure in our logistics business.  In addition, we are currently in discussions with our rail and port partners and expect to reduce our contracted export volumes in 2016 and beyond if weak pricing for seaborne thermal coal persists.

In addition to our committed capacity at Westshore, we hold option contracts to potentially increase our future export capacity through proposed Pacific Northwest export terminals.  We have a throughput option agreement with SSA Marine, which provides us with an option for up to 17.6 million tons of capacity per year through the planned dry bulk cargo Gateway Pacific Terminal (“GPT”) at Cherry Point in Washington State.

On August 13, 2015, we announced that we and the Crow Tribe are joining SSA Marine as 49% partners in GPT.  Under the new ownership structure, SSA Marine remains the majority owner, retaining 51% of the equity. The Crow Tribe has an option to secure up to 5%, with a corresponding reduction in our ownership.  For the 49% ownership interest, we paid $2 million upon signing and will pay all future permitting expenses up to $30 million, which we anticipate will cover such

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

expenses through 2019.  Thereafter, the owners will share any permitting expenses in excess of $30 million in proportion with their ownership interests.  As of September 30, 2015, we have paid $5.4 million toward permitting expenses as a partner in GPT.  We have the right to exit the partnership, at our discretion at any time during the permitting phase, with no further obligation.

We also have a throughput option for up to 7.7 million tons per year at the proposed Millennium Bulk Terminals coal export facility in Washington State.  Our options in each of these proposed terminals are exercisable following the successful completion of the ongoing permit process, each of which is currently in the environmental impact statement phase.  The timing and outcome of these permit processes, and therefore the construction of the terminals, are uncertain.

Principles of Consolidation

The accompanying 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, 2014 and 2013, and for each of the three years ended December 31, 2014, included in our Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K”).  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly our financial position as of September 30, 2015, and the results of our operations, comprehensive income for the three and nine months ended September 30, 2015 and 2014, and cash flows for the nine months ended September 30, 2015 and 2014, in conformity with U.S. GAAP.  Our results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2015.

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

Certain amounts in prior years have been reclassified to conform to the 2015 presentation and were not material to the financial statements.  Due to the tabular presentation of rounded amounts, certain tables reflect insignificant rounding differences.

2.  Accounting Policies and Standards Update

Recently Issued Accounting Pronouncements

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

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CLOUD PEAK ENERGY INC.

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In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), as amended, 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, 2017, although entities may adopt one year earlier if they choose.  We are considering the impact the adoption of ASU 2014-09 may have on our results of operations, financial condition, and cash flows.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), requiring entities to reevaluate whether they should consolidate certain legal entities.  The new guidance is effective for interim and annual periods beginning after December 15, 2015.  We do not expect any impact from the adoption of this standard on our results of operations, financial condition, or cash flows at this time.

On April 7, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability.  The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  We elected to early adopt ASU 2015-03 during the three months ended September 30, 2015 and have applied the new guidance to the debt issuance costs related to our senior notes.  The adoption of this guidance constitutes a change in accounting principle, and requires retrospective application.  As a result of implementing this guidance, our noncurrent Other assets and Senior notes liability were reduced by $7.9 million and $8.8 million as of September 30, 2015 and December 31, 2014, respectively.  See Note 8 for a discussion related to our senior notes.  Approximately $9.0 million of debt issuance costs related to the Credit Agreement and A/R Securitization Program were not subject to ASU 2015-03 and remain in noncurrent Other assets.  See Note 11.

3.  Goodwill

The carrying amounts of our mineral properties, equipment, goodwill and port access contract rights are sensitive to declines in domestic and international coal prices.  These assets are at risk of impairment if future prices continue to decline.  The cash flow models that we use to assess impairment includes numerous assumptions such as our current estimates of forecast coal production, market outlook on forward commodity prices, operating and development costs, and discount rates.  A decrease in forward prices alone could result in an impairment of our long-lived assets.  In addition, the denial of regulatory approval could also result in an impairment of certain of these assets.

Goodwill, which represents the excess of the amount paid over the fair value of net assets acquired in a business combination, relates to the mines included in our Owned and Operated Mines segment.  Each mine represents a reporting unit for purposes of our goodwill assessment.  We assess the goodwill in each reporting unit for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that the goodwill might be impaired.

We assess each reporting unit’s goodwill for impairment by comparing the carrying amount of each reporting unit to its fair value.  We determine the fair value of each reporting unit utilizing estimated future discounted cash flows based on estimates of proven and probable reserves, coal prices, and operating and equipment costs, consistent with assumptions that we believe marketplace participants would use in their estimates of fair value.  If the carrying amount of a reporting unit exceeds its fair value, we allocate the fair value to the reporting unit’s assets and liabilities in a manner similar to a purchase business combination, to determine the implied fair value of the reporting unit’s goodwill.  If the implied fair value of goodwill is less than the related carrying amount, we record an impairment charge to reduce the carrying amount to its implied fair value.

We generally do not view short-term declines in thermal coal prices as an indicator of impairment; however, we do view a sustained trend of adverse coal market pricing or unfavorable changes thereto as a potential indicator of impairment.  Due to the weak domestic coal market outlook, especially as it relates to 8400 Btu coal, coupled with our recent decision to reduce annual production at the Cordero Rojo Mine to 24 million tons, we determined that there was a potential indication of impairment of the Cordero Rojo Mine’s goodwill and performed an interim goodwill impairment assessment during the second quarter of 2015.  Based on the results of that assessment, we determined that the carrying amount of the Cordero Rojo Mine exceeded its estimated fair value and that 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 which is reflected in the nine months ended

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015.  The remaining $2.3 million balance in goodwill relates to our other mines in the Owned and Operated Mines segment.

4.  Sale of Decker Mine Interest

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

5.  Inventories

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

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 derivative financial

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2015 or December 31, 2014.

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 condensed consolidated balance sheets along with $41.7 million and $70.0 million of demand deposits at September 30, 2015 and December 31, 2014, respectively.

We did not have any transfers between levels during the nine months ended September 30, 2015.  Our policy is to value all transfers between levels using the beginning of period valuation.

7.  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 and put options 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.  Under the international put options, if the monthly average index price is lower than the option price, we receive the difference, and if the monthly average index price is higher than the option price, we do not receive or pay anything.

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.

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

At September 30, 2015, we held positions that are expected to settle in the following years (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.

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

During the nine months ended September 30, 2015, we settled a portion of our 2015 call options by either closing out those positions or entering into offsetting call option positions.  We also entered into new 2015 swap positions.  In addition, we entered into new collar arrangements and swap positions for 2016.  At September 30, 2015, we held the following WTI derivative financial instruments:

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(1)                                 Represents 100% of expected diesel consumption for the fourth quarter of 2015.

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

U.S. On-Highway Diesel Derivatives

A portion of our rail transportation cost for coal shipments to Westshore, the rail fuel surcharge, is priced using the Department of Energy’s U.S. On-Highway Diesel Fuel Prices (“U.S. On-Highway Diesel”).  During the nine months ended September 30, 2015, we entered into new swap positions indexed to the U.S. On-Highway Diesel prices to help fix a portion of the rail fuel surcharge for 2015 and 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.

At September 30, 2015, we held the following U.S. On-Highway Diesel derivative financial instruments:

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CLOUD PEAK ENERGY INC.

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Offsetting and Balance Sheet Presentation

Net amounts of derivative assets are included in Derivative financial instruments and net amounts of derivative liabilities are included in Accrued expenses in the condensed consolidated balance sheets.  There were no cash collateral requirements at September 30, 2015 or December 31, 2014.

Derivative Gains and Losses

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

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

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CLOUD PEAK ENERGY INC.

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8.  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.

Debt issuance costs of approximately $12 million were incurred in connection with the issuance of the 2019 Notes and 2024 Notes.  These costs were deferred and are being amortized to interest expense over the respective terms of the senior notes using the effective interest method.  During the three months ended September 30, 2015, we implemented ASU 2015-03, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability.  Historically, the unamortized debt issuance costs related to the senior notes were included in noncurrent Other assets.

Unamortized debt issuance costs included in senior notes in the accompanying condensed consolidated balance sheets were as follows (in thousands):

9.  Federal Coal Lease Obligations

As of September 30, 2015, we have no further committed lease by application (“LBA”) payments.  Federal coal lease obligations consisted of the following (in thousands):

Our federal coal lease obligations, as reflected in the condensed consolidated balance sheets, consisted of obligations payable to the Bureau of Land Management of the U.S. Department of the Interior (the “BLM”) discounted at an imputed interest rate.  Imputed interest was included in Accrued expenses.

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.  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 September 30, 2015 and 2014.  The land acquired during the three months ended September 30, 2015 near our Cordero Rojo Mine has been included in the revisions to estimated future reclamation cash flows as the mine life for Cordero Rojo Mine is now expected to be approximately four years longer.  Also included were modifications to the Cordero Rojo Mine reclamation plan that resulted in significantly less soil movement to achieve the required post mining topography.  Both of these factors have combined to reduce the discounted value of our future liability by $35.2 million.  Reductions to asset retirement obligations resulting from such revisions generally result in a corresponding reduction to the related asset retirement cost in Property, plant and equipment, net.  However, these factors caused a decrease to the asset retirement obligation that exceeded the carrying amount of the related asset retirement cost of $18.4 million.  The resulting non-cash credit reduced Depreciation and depletion expense on the condensed consolidated statements of operations by $16.8 million for the three and nine months ended September 30, 2015.

11.  Other Obligations

Capital Equipment Lease Obligations

From time to time, we enter into capital leases on equipment under various lease schedules, which are subject to a master lease agreement, and are pre-payable at our option.  Interest on the leases is based on the one-month London Interbank Offered Rate (“LIBOR”) plus 1.95% for a current rate of 2.16% as of September 30, 2015.  The gross value of property, plant and equipment under capital leases was $11.4 million as of September 30, 2015 and related primarily to mining equipment.  The accumulated depreciation for these items was $2.8 million as of September 30, 2015, and changes have been included in Depreciation and depletion in the condensed consolidated statements of operations.  Due to the variable nature of the imputed interest, fair value is equal to carrying value.

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CLOUD PEAK ENERGY INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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