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, 2010**

** **

**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 Resources LLC**

(Exactname of registrant as specified in its charter)

 

 

| **Delaware**                                | ** ** | **26-4073917**       |
|---------------------------------------------|------------|----------------------|
| (State  or other jurisdiction of            |       | (I.R.S.  Employer    |
| incorporation  or organization)             |       | Identification  No.) |
|                                        |       |                 |
| **505 S. Gillette Ave., Gillette, Wyoming** | ** ** | **82716**            |
| (Address  of principal executive offices)   |       | (Zip  Code)          |

 

**(307) 687-6000**

(Registrant’stelephone number, including area code*)*

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes o  No x

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted 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 registrantwas required to submit and post such files). Yes o  No o

 

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

 

| Large accelerated filer o                 |   | Accelerated filer o         |
|------------------------------------------------|--------|----------------------------------|
|                                           |   |                             |
| Non-accelerated filer x                   |   | Smaller reporting company o |
| (Do not check if a smaller reporting  company) |   |                             |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

Approximately 51.7% of themembership units of Cloud Peak Energy Resources LLC outstanding as of October 31,2010 are held by Cloud Peak Energy Inc. The remaining 48.3% are held by Rio Tinto Energy America and anaffiliate.

 

 

 

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**CLOUD PEAK ENERGY RESOURCES LLC**

 

TABLE OF CONTENTS

 
| ** ** | ** ** | ** **                                                                                                                       | ** ** | **Page** |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|       |       | PART I —  FINANCIAL INFORMATION                                                                                        |       |     |
|       |       |                                                                                                                             |       |     |
| Item 1     |       | Financial  Statements                                                                                                            |       |     |
|       |       |                                                                                                                             |       |     |
|       |       | Unaudited Condensed Consolidated Balance Sheets as of  September 30, 2010 and December 31, 2009                        |       | 1        |
|       |       |                                                                                                                             |       |     |
|       |       | Unaudited  Condensed Consolidated Statements of Operations for the Three and Nine Months  Ended September 30, 2010 and 2009 |       | 2        |
|       |       |                                                                                                                             |       |     |
|       |       | Unaudited  Condensed Consolidated Statement of Members’ Equity for the Nine Months Ended  September 30, 2010           |       | 3        |
|       |       |                                                                                                                             |       |     |
|       |       | Unaudited  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2010 and 2009           |       | 4        |
|       |       |                                                                                                                             |       |     |
|       |       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                  |       | 5        |
|       |       |                                                                                                                             |       |     |
| Item 2     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                      |       | 22       |
|       |       |                                                                                                                             |       |     |
| Item 3     |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                      |       | 32       |
|       |       |                                                                                                                             |       |     |
| Item  4    |       | Controls  and Procedures                                                                                                         |       | 33       |
|       |       |                                                                                                                             |       |     |
|       |       | PART II — OTHER INFORMATION                                                                                            |       |     |
|       |       |                                                                                                                             |       |     |
| Item  1    |       | Legal  Proceedings                                                                                                               |       | 35       |
|       |       |                                                                                                                             |       |     |
| Item 1A    |       | Risk  Factors                                                                                                                    |       | 35       |
|       |       |                                                                                                                             |       |     |
| Item 2     |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                     |       | 35       |
|       |       |                                                                                                                             |       |     |
| Item 3     |       | Defaults  Upon Senior Securities                                                                                                 |       | 35       |
|       |       |                                                                                                                             |       |     |
| Item  4    |       | (Removed  and Reserved)                                                                                                          |       | 35       |
|       |       |                                                                                                                             |       |     |
| Item  5    |       | Other  Information                                                                                                               |       | 35       |
|       |       |                                                                                                                             |       |     |
| Item 6     |       | Exhibits                                                                                                                         |       | 36       |

 

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**PART I— FINANCIAL INFORMATION**

** **

**Item 1.       *Financial Statements*.**

** **

**CLOUD PEAK ENERGY****RESOURCES LLC****ANDSUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

**(dollars in thousands)**

 
| ** **                                              | ** ** | **September 30,********2010** | ** ** | **December 31,********2009** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| **ASSETS**                                              |       |                               |       |                              |       |
| **Current assets**                                      |       |                               |       |                              |       |
| Cash  and cash equivalents                              |       | $                                  | 287,712    |                              | $          | 268,316 |   |
| Restricted  cash                                        |       | 218,397                            |       | 80,180                            |       |
| Accounts  receivable, net                               |       | 87,537                             |       | 82,809                            |       |
| Due  from related parties                               |       | —                             |       | 8,445                             |       |
| Inventories                                             |       | 66,706                             |       | 64,199                            |       |
| Deferred  income taxes                                  |       | 462                                |       | —                            |       |
| Other  assets                                           |       | 14,867                             |       | 6,431                             |       |
| Total  current assets                                   |       | 675,681                            |       | 510,380                           |       |
| **Non-****current assets**                              |       |                               |       |                              |       |
| Property,  plant and equipment, net                     |       | 965,130                            |       | 987,143                           |       |
| Intangible  assets, net                                 |       | —                             |       | 3,197                             |       |
| Goodwill                                                |       | 35,634                             |       | 35,634                            |       |
| Deferred  income taxes                                  |       | 2,699                              |       | —                            |       |
| Other  assets                                           |       | 38,762                             |       | 39,657                            |       |
| **Total assets**                                        |       | $                                  | 1,717,906  |                              | $          | 1,576,011 |   |
| **LIABILITIES AND EQUITY**                              |       |                               |       |                              |       |
| **Current liabilities**                                 |       |                               |       |                              |       |
| Accounts  payable                                       |       | $                                  | 51,652     |                              | $          | 57,304 |   |
| Royalties  and production taxes                         |       | 134,302                            |       | 102,912                           |       |
| Accrued  expenses                                       |       | 55,068                             |       | 47,596                            |       |
| Due  to related parties                                 |       | 6,232                              |       | —                            |       |
| Current  portion of federal coal lease obligations      |       | 54,394                             |       | 50,768                            |       |
| Other  liabilities                                      |       | 4,543                              |       | 4,514                             |       |
| Total  current liabilities                              |       | 306,191                            |       | 263,094                           |       |
| **Non-****current liabilities**                         |       |                               |       |                              |       |
| Senior  notes                                           |       | 595,592                            |       | 595,321                           |       |
| Federal  coal lease obligations, net of current portion |       | 67,387                             |       | 118,289                           |       |
| Asset  retirement obligations, net of current portion   |       | 181,437                            |       | 175,940                           |       |
| Other  liabilities                                      |       | 29,249                             |       | 24,798                            |       |
| Total  liabilities                                      |       | 1,179,856                          |       | 1,177,442                         |       |
| Commitments  and contingencies (Note 7)            |       |                               |       |                              |       |
| **Equity**                                              |       |                               |       |                              |       |
| Managing  member’s equity                          |       | 288,531                            |       | 216,857                           |       |
| Rio  Tinto member’s equity                         |       | 269,446                            |       | 202,728                           |       |
| Accumulated  other comprehensive loss                   |       | (19,927                            | )          | (21,016                           | )          |
| Total  members’ equity                             |       | 538,050                            |       | 398,569                           |       |
| **Total liabilities and members’ equity**          |       | $                                  | 1,717,906  |                              | $          | 1,576,011 |   |

 

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

 

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** **

**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(dollars in thousands)**

 
| ** **                                                                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenues**                                                                                                   |       | $                                                    | 372,364    |                                                | $          | 357,241 |   | $ | 1,024,960 |   | $ | 1,061,286 |   |
| **Costs  and expenses**                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Cost  of product sold (exclusive of depreciation, depletion, amortization and  accretion, shown separately)    |       | 262,166                                              |       | 228,906                                             |       | 719,007 |   | 703,725 |   |
| Depreciation  and depletion                                                                                    |       | 25,997                                               |       | 24,047                                              |       | 75,212 |   | 68,383 |   |
| Amortization                                                                                                   |       | —                                               |       | 8,519                                               |       | 3,197 |   | 24,770 |   |
| Accretion                                                                                                      |       | 3,337                                                |       | 2,945                                               |       | 9,903 |   | 8,402 |   |
| Selling,  general and administrative expenses                                                                  |       | 16,514                                               |       | 19,564                                              |       | 47,159 |   | 49,075 |   |
| **Total costs and expenses**                                                                                   |       | 308,014                                              |       | 283,981                                             |       | 854,478 |   | 854,355 |   |
| **Operating income**                                                                                           |       | 64,350                                               |       | 73,260                                              |       | 170,482 |   | 206,931 |   |
| **Other income (expense)**                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Interest  income                                                                                               |       | 184                                                  |       | 86                                                  |       | 411 |   | 228 |   |
| Interest  expense                                                                                              |       | (11,404                                              | )          | (61                                                 | )          | (36,186 | ) | (1,007 | ) |
| Other,  net                                                                                                    |       | 84                                                   |       | (50                                                 | )          | 123 |   | 15 |   |
| **Total other expense**                                                                                        |       | (11,136                                              | )          | (25                                                 | )          | (35,652 | ) | (764 | ) |
| **Income from continuing operations before income tax  provision and earnings from unconsolidated affiliates** |       | 53,214                                               |       | 73,235                                              |       | 134,830 |   | 206,167 |   |
| Income  tax benefit (provision)                                                                                |       | 1,266                                                |       | (21,256                                             | )          | 1,266 |   | (59,888 | ) |
| Earnings  from unconsolidated affiliates, net of tax                                                           |       | 838                                                  |       | 511                                                 |       | 3,070 |   | 989 |   |
| **Income from continuing operations**                                                                          |       | 55,318                                               |       | 52,490                                              |       | 139,166 |   | 147,268 |   |
| Income  from discontinued operations, net of tax                                                               |       | —                                               |       | 20,343                                              |       | — |   | 42,790 |   |
| **Net income**                                                                                                 |       | $                                                    | 55,318     |                                                | $          | 72,833 |   | $ | 139,166 |   | $ | 190,058 |   |

 

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

 

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**CLOUD PEAK ENERGY RESOURCES LLC****AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENT OF MEMBER’S EQUITY**

**(dollars in thousands)**

 
| ** **                                           | ** ** | **Managing  Member’s  Equity** | ** ** | **Rio Tinto  Member’s  Equity** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
| **Balances at December 31, 2009**               |       | $                                   | 216,857    |                                      | $          | 202,728                                                   |       | $         | (21,016    | ) | $ | 398,569 |   |
| Comprehensive  income                                |       |                                |       |                                      |       |                                                      |       |      |       |
| Net  income                                          |       | 71,963                              |       | 67,203                                    |       |                                                      |       | 139,166   |       |
| Postretirement  medical adjustment                   |       |                                |       |                                      |       | 1,089                                                     |       | 1,089     |       |
| **Total comprehensive income**                       |       |                                |       |                                      |       |                                                      |       | 140,255   |       |
| Adjustment  to beginning balance, deferred tax asset |       | 980                                 |       | 915                                       |       |                                                      |       | 1,895     |       |
| Distribution                                         |       | (1,380                              | )          | (1,289                                    | )          |                                                      |       | (2,669    | )          |
| Change  in ownership allocation                      |       | 111                                 |       | (111                                      | )          |                                                      |       | —    |       |
| **Balances at September 30, 2010**              |       | $                                   | 288,531    |                                      | $          | 269,446                                                   |       | $         | (19,927    | ) | $ | 538,050 |   |

 

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

 

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**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(dollars in thousands)**

 
| ** **                                                                                                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| **Cash flows from continuing operations**                                                                                             |       |                                                |       |   |   |
| **Operating activities**                                                                                                              |       |                                                |       |   |   |
| Income  from continuing operations                                                                                                    |       | $                                                   | 139,166    |   | $ | 147,268 |   |
| Adjustments  to reconcile income from continuing operations to net cash provided by  operating activities from continuing operations: |       |                                                |       |   |   |
| Depreciation  and depletion                                                                                                           |       | 75,212                                              |       | 68,383 |   |
| Amortization                                                                                                                          |       | 3,197                                               |       | 24,770 |   |
| Accretion                                                                                                                             |       | 9,903                                               |       | 8,402 |   |
| Earnings  from unconsolidated affiliates                                                                                              |       | (3,070                                              | )          | (989 | ) |
| Distributions  of income from equity investments                                                                                      |       | 15                                                  |       | 4,000 |   |
| Deferred  income taxes                                                                                                                |       | (1,266                                              | )          | (3,160 | ) |
| Stock  compensation expense                                                                                                           |       | —                                              |       | 548 |   |
| Other,  net                                                                                                                           |       | 2,850                                               |       | 226 |   |
| Changes  in operating assets and liabilities:                                                                                         |       |                                                |       |   |   |
| Accounts  receivable, net                                                                                                             |       | (4,728                                              | )          | (1,939 | ) |
| Inventories                                                                                                                           |       | (2,445                                              | )          | (7,473 | ) |
| Due  to or from related parties                                                                                                       |       | 14,677                                              |       | 93,128 |   |
| Other  assets                                                                                                                         |       | (8,329                                              | )          | (2,759 | ) |
| Accounts  payable and accrued expenses                                                                                                |       | 41,041                                              |       | 23,502 |   |
| Asset  retirement obligations                                                                                                         |       | (4,005                                              | )          | (2,942 | ) |
| **Net cash provided by operating activities from continuing  operations**                                                             |       | 262,218                                             |       | 350,965 |   |
| **Investing activities**                                                                                                              |       |                                                |       |   |   |
| Purchases  of property, plant and equipment                                                                                           |       | (56,129                                             | )          | (88,219 | ) |
| Return  of restricted cash                                                                                                            |       | 80,180                                              |       | — |   |
| Restricted  cash deposit                                                                                                              |       | (218,397                                            | )          | — |   |
| Proceeds  from sales of assets                                                                                                        |       | 1,469                                               |       | 143 |   |
| Cash  advances to affiliate                                                                                                           |       | —                                              |       | (259,660 | ) |
| **Net cash used in investing activities from continuing  operations**                                                                 |       | (192,877                                            | )          | (347,736 | ) |
| **Financing activities**                                                                                                              |       |                                                |       |   |   |
| Repayments  on other long-term debt                                                                                                   |       | (47,276                                             | )          | (65,313 | ) |
| Distributions  to Members                                                                                                             |       | (2,669                                              | )          | (241 | ) |
| **Net cash used in financing activities from continuing  operations**                                                                 |       | (49,945                                             | )          | (65,554 | ) |
| **Net cash provided by (used in) continuing operations**                                                                              |       | 19,396                                              |       | (62,325 | ) |
| **Cash flows from discontinued operations**                                                                                           |       |                                                |       |   |   |
| Net  cash from operating activities                                                                                                   |       | —                                              |       | 69,799 |   |
| Net  cash from investing activities                                                                                                   |       | —                                              |       | (5,090 | ) |
| **Net cash provided by discontinued operations**                                                                                      |       | —                                              |       | 64,709 |   |
| **Net increase in cash and cash equivalents**                                                                                         |       | 19,396                                              |       | 2,384 |   |
| **Cash and cash equivalents at beginning of period**                                                                                  |       | 268,316                                             |       | 15,935 |   |
| **Cash and cash equivalents at end of period**                                                                                        |       | $                                                   | 287,712    |   | $ | 18,319 |   |

 

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

 

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** **

**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.  Basis of Presentation**

*** ***

***Organization and Principles of Consolidation***

 

CloudPeak Energy Resources LLC (“CPE LLC”) is a 51.7% owned subsidiary of Cloud PeakEnergy Inc. (“Holdings”), our managing member. Holdings obtained its ownership interest in us from Rio Tinto EnergyAmerica (“RTEA”) on November 19, 2009, in connection with the initialpublic offering of Holdings’ common stock. Prior to the IPO, we were awholly-owned subsidiary of RTEA. As of September 30, 2010, RTEA and anaffiliate (collectively, the “Rio Tinto members”) held the remaining 48.3%noncontrolling interest in CPE LLC.

 

“CloudPeak Energy,” “we,” “us,” “our” or the “Company” refer collectively toCPE LLC and its consolidated subsidiaries. Those terms also include RTEAwith respect to periods prior to the IPO, when RTEA was the parent company ofCPE LLC and other entities that operated its western U.S. coalbusiness.  “Rio Tinto” refers collectively to Rio Tinto America, Rio Tinto EnergyAmerica, and Rio Tinto plc.

 

Ourconsolidated financial statements present the financial position, results ofoperations and cash flows of our business, which was controlled by Rio Tinto,through RTEA, prior to the IPO and by CPE Inc. thereafter.  For dates and periods following the IPO, ourconsolidated financial statements include Rio Tinto’s remaining interest in CPEResources as a noncontrolling interest.

 

Weconsolidate the accounts of entities in which we have a controlling financialinterest under the voting control model and consolidate the accounts ofvariable interest entities for which we are the primary beneficiary.  We account for our 50% interest in DeckerCoal Company (“Decker”) using the proportionate consolidation method, wherebyour share of Decker’s assets, liabilities, revenues and expenses are includedin our consolidated financial statements. Investments in other entities that we do not control, but have theability to exercise significant influence over the investee’s operating andfinancial policies, are accounted for under the equity method.  All intercompany balances and transactionshave been eliminated in the consolidated financial statements.

*** ***

***Basis of Presentation***

 

Theseunaudited condensed consolidated financial statements of CPE LLC and itssubsidiaries have been prepared in conformity with accounting principles generallyaccepted in the United States of America (“U.S. GAAP”).  In accordance with U.S. GAAP for interimfinancial statements, these condensed consolidated financial statements do notinclude certain information and note disclosures that are normally included inannual financial statements prepared in conformity with U.S. GAAP.  Accordingly, these unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements as of December 31, 2009 and 2008,and for each of the three years ended December 31, 2009.  In the opinion of management, theaccompanying unaudited condensed consolidated financial statements contain alladjustments (which are of a normal, recurring nature) necessary to presentfairly in all material respects the financial position as of September 30,2010, and the results of operations and cash flows of the Company for the threeand nine months ended September 30, 2010 and 2009, in conformity withU.S. GAAP.  Interim results for thethree and nine months ended September 30, 2010, may not be indicative ofresults that will be realized for the full year ending December 31, 2010.

 

Our first quarter2010 operating results included a $3.4 million favorable adjustment to freightexpense for the write off of certain prior year accruals, which were consideredimmaterial.  This adjustment increasednet income and income attributable to the controlling interest by $2.8 millionand $1.1 million, respectively, and increased related basic and dilutedearnings per share amounts by $0.03 and $0.05, respectively, for the threemonths ended March 31, 2010.

*** ***

***Variable Interest Entities***

 

Avariable interest entity (“VIE”) generally is an entity that is designed tohave one or more of the following characteristics: (a) the total equityinvestment at risk is not sufficient to permit the entity to finance itsactivities without additional subordinated financial support; (b) as agroup, the holders of equity at risk do not have all the characteristics of a 

 

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**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

controlling financialinterest in the entity; or (c) the equity investors have voting rightsthat are not proportional to their economic interests and substantially all ofthe entity’s activities either involve, or are conducted on behalf of, aninvestor that has disproportionately few voting rights.  A VIE is required to be consolidated in thefinancial statements of the entity that is determined to hold a controllingfinancial interest in the VIE.  Acontrolling financial interest is defined as the power to direct the activitiesof a VIE that most significantly the VIE’s economic performance and theobligation to absorb losses of or receive benefits from the VIE that couldpotentially be significant to the VIE.

 

Priorto the IPO, RTEA was the primary beneficiary of Cloud Peak Energy ServicesCompany (“CPESC”), which was an indirect wholly-owned subsidiary of Rio TintoAmerica.  We determined that CPESC was aVIE, primarily because substantially all of CPESC’s activities were conductedon behalf of RTEA.  We determined thatRTEA was the primary beneficiary of CPESC, because RTEA was the Rio Tintoaffiliate that was most closely associated with CPESC.  As a result, RTEA included CPESC in itsconsolidated financial statements prior to the IPO.  In connection with the IPO structuringtransactions, Rio Tinto America contributed CPESC to CPE Resources and we nowconsolidate CPESC based on voting control.

*** ***

***Pre-IPO Expense Allocations***

 

Forthe three and nine months ended September 30, 2009, our unaudited condensedconsolidated financial statements included allocations of certain general andadministrative expenses incurred by Rio Tinto America and other Rio Tintoaffiliates.  Rio Tinto America providedvarious services and other support to the Company, including tax, treasury,corporate secretary, legal, procurement, information systems and technology,human resources, accounting and insurance/risk management in the ordinarycourse of business.  Our unauditedcondensed consolidated statements of operations for the three and nine monthsended September 30, 2009, included allocations of expenses incurred by RioTinto America and other Rio Tinto affiliates totaling $9.3 million and $19.8million, respectively.  Of this amount, $7.0million and $16.0 million was included in selling, general and administrativeexpenses and the remaining $2.4 million and $3.8 million was included in costof product sold for the three and nine month periods ended September 30, 2009,respectively.  Also included in selling,general and administrative expenses for the three and nine months endedSeptember 30, 2009, were costs of $4.1 million and $11.3 million, respectively,incurred as a result of actions to divest RTEA, either through a trade sale oran initial public offering.  For thethree and nine months ended September 30, 2010, other than the expensesincurred under the transition services agreement (see Note 9), we are no longerincurring costs for services provided by Rio Tinto.  However, we are now incurring costs throughthe addition of employees, consultants and other professional service providersto support the necessary functions of a stand-alone, public company.

*** ***

***Discontinued Operations***

 

Therewere no discontinued operations for the three or nine months ended September 30,2010.  On October 1, 2009, we completedthe sale of our membership interest in Jacobs Ranch Coal LLC, which ownedand operated the Jacobs Ranch mine, to Arch Coal, Inc.  The Jacobs Ranch mine was classified as heldfor sale and reported as discontinued operations as of March 1, 2009.  As a result, the unaudited condensedconsolidated financial statements report the results of operations and cashflows of the Jacobs Ranch mine as discontinued operations for the three andnine months ended September 30, 2009.

** **

**2.  Inventories**

 

Inventories,net as of September 30, 2010 and December 31, 2009 consisted of the following(in thousands):

 
| ** **                            | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Materials  and supplies               |       | $        | 63,584     |     | $          | 60,868 |   |
| Coal  stockpiles and finished product |       | 3,122    |       | 3,331    |       |
|                                  |       | $        | 66,706     |     | $          | 64,199 |   |

 

Materialsand supplies were stated net of an obsolescence allowance of $0.3 million and$1.3 million as of September 30, 2010 and December 31, 2009, respectively.  We recognized a provision to increase theallowance by $261,000 

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

and $658,000 for the three-and nine-month periods ended September 30, 2010.  We recorded inventory charge-offs of $1.3million and $1.7 million for the same periods.

 

Werecognized a provision to increase the allowance by $14,000 and $284,000 forthe three- and nine-month periods ended September 30, 2009.  We recorded inventory charge-offs of $405,000and $808,000 for the same periods, respectively.

** **

**3.  Fair Value ofFinancial Instruments**

 

Ourfinancial instruments included cash and cash equivalents, restricted cash,accounts receivable, amounts due from related parties, accounts payable andcertain current liabilities.  Due to theshort-term nature of these instruments, we believe that their carrying amountsapproximated fair value.  In addition, wehave long-term debt consisting primarily of the senior notes and federal coallease obligations.  The approximate fairvalues of our senior notes and federal coal lease obligations were $642.8million and $130.1 million, respectively, at September 30, 2010.  The fair value of the senior notes was basedon market prices as of September 30, 2010. The fair value estimates for the federal coal leases were determined bydiscounting the remaining lease payments using a current estimate of thecredit-adjusted, risk-free interest rate based on our current creditrating.  The fair value of otherlong-term debt approximated its carrying amount at September 30, 2010.

** **

**4.  Income Taxes**

 

Ourincome from continuing operations before income tax provision and earnings fromunconsolidated affiliates is earned solely in the U.S. For periods followingthe IPO, we are organized as a limited liability company and generally are notsubject to income taxes, although several of our subsidiaries file separatecorporate income tax returns and may incur minor amounts of income tax or mayincur losses that cannot benefit other entities included in the consolidatedfinancial results. Because we generally are not a taxable entity, our unauditedconsolidated financial statements for the three and nine months endedSeptember 30, 2010, reflect only income taxes on pre-tax incomeattributable to our corporate subsidiaries. For the three and nine months endedSeptember 30, 2009, which is prior to the IPO, our unaudited consolidatedfinancial statements reflect income taxes recognized by RTEA. RTEA was a memberof an affiliated federal tax group and was party to a federal income taxsharing agreement with the other members of the affiliated federal income taxgroup. However, for the purposes of our unaudited consolidated financialstatements, which were prepared on a carve-out basis, RTEA’s current anddeferred taxes were calculated on a stand-alone, separate return basis. RTEAprovided income taxes on substantially all pre-tax income reported in ourunaudited consolidated financial statements for such pre-IPO periods.

 

Oureffective tax rate for continuing operations is shown below for the three- andnine-month periods ended September 30, 2010 and 2009, as follows:

 
| ** **             | ** ** | **Three Months Ended********September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **             | ** ** | **2010**                                                   | ** ** | **2009**                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| Tax  (benefit) expense |       | $                                                          | (1,266     | )                                                         | $          | 21,256 |   | $ | (1,266 | ) | $ | 59,888 |   |
| Effective  tax rate    |       | (2.4                                                       | )%         | 29.0                                                      | %          | (0.9 | )% | 29.0 | % |
|                        |            |                                                            |            |                                                           |            |  |  |  |  |  |  |  |  |

 

The effective tax ratedecreased in the three and nine months ended September 30, 2010, compared withthe three and nine months ended September 30, 2009, because the majority of ourincome is not subject to income tax. For the three and nine month periods endedSeptember 30, 2010, we have recorded a small amount of income tax benefit fromthe losses generated by certain corporate subsidiaries that are subject toincome tax.

 

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** **

**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**5.  Commitments andContingencies**

*** ***

***Commitments***

* *

*Purchase Commitments*

 

Asof September 30, 2010, we had outstanding capital purchase commitments of $38.7million and coal purchase commitments of $15.1 million.

 

InApril 2008, we entered into an agreement to purchase land adjacent to ourAntelope mine, whereby the seller may require us to pay a purchase price of upto $23.7 million, which will close between April 2013 and April 2018.

* *

*LeaseCommitments*

 

In April 2010, we entered into a lease agreement foran office in Broomfield, Colorado.  Thelease commenced in August 2010 and has an initial term of 126 months (10.5years).  Total base rent, includingestimated operating expenses, for the entire initial term of the lease is $8.1 million, resulting in average annual rentexpense of $770,000.  This new leaseagreement replaced our prior sublease of office space in Greenwood Village,Colorado (see Note 9).

*** ***

***Tax-Related Obligations of Holdings***

 

Holdingsis required to pay federal and state income taxes on its share of our pre-taxincome. Also, in connection with the IPO, Holdings and RTEA entered into theTax Receivable Agreement, which generally requires Holdings to pay Rio Tinto85% of the income tax savings that Holdings realizes as a result of an increasein tax basis that Holdings received in connection with the IPO. Holdings doesnot maintain any significant cash balances and generally does not have anysources of cash other than distributions from us. We anticipate that Holdingswill cause us to make pro-rata distributions to our members in amountssufficient to fund these tax-related obligations. We estimate that Holdingswill pay Rio Tinto $68.3 million under the Tax Receivable Agreement. Thisestimate is based on forecasts of future taxable income over the anticipatedlife of our mining operations and reclamation activities, assuming noadditional coal reserves are acquired. The amounts to be paid will be determinedbased on a calculation of future income tax savings that Holdings actuallyrealizes as a result of the tax basis increase that resulted from the IPOstructuring transactions. Periodically, Holdings will adjust the estimatedliability to reflect an updated forecast of future taxable income, and theseadjustments will be reflected in Holdings’ operating results. The assumptionsused in our forecasts are subject to substantial uncertainty about our futurebusiness operations, and the actual payments that we are required to make underthe Tax Receivable Agreement could differ materially from our estimates.

 

Basedon our estimates as of September 30, 2010, we expect to make distributionsof approximately $3.4 million in 2010 and annual distributions averaging approximately$17.6 million during 2011 to 2014. We expect to make additional pro-ratadistributions to fund Holdings’ periodic federal and state income tax payments.The Rio Tinto members may reduce their ownership in us by exercising theircontractual redemption right. Such a decrease in ownership would reducesubsequent pro-rata distributions to the Rio Tinto members, but generally wouldincrease Holdings’ payment obligations and result in increased pro-ratadistributions to Holdings. Pro-rata distributions to our members also may beaffected by provisions in the Tax Receivable Agreement that require Holdings’payment obligations to increase or become accelerated as a result of certainasset transfers outside the ordinary course of business, a change in control ofthe Company or a default by Holdings.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

***Contingencies***

* *

*Litigation*

* *

*MMSLitigation — Decker*

 

The Minerals Management Service, or MMS, a federal agencywith responsibility for collecting royalties on coal produced from federal coalleases, issued two disputed assessments against Decker Coal Company: one forcoal produced from 1986-1992, and the other for coal produced from1993-2001.  Both assessments concern coalsold by Decker to Big Horn Coal Company, or Big Horn, and Black Butte CoalCompany, or Black Butte, and in turn resold by those entities to CommonwealthEdison Company to satisfy requirements under long-term contracts between thoseentities and Commonwealth Edison.  TheMMS maintained that Decker’s royalties should not be based on the prices atwhich Decker actually sold coal to Big Horn and Black Butte because MMS doesnot believe those prices represent the results of arm’s lengthnegotiation.  MMS based this conclusionon the facts that those entities were both affiliates of KCP, Inc., formerlyknown as Kiewit Coal Properties, Inc., which is also a 50% owner of Decker, andthat the sales were contingent on Big Horn’s and Black Butte’s ability toresell the coal to Commonwealth Edison, which did not leave Big Horn and BlackButte at market risk.  Instead, the MMSassessed Decker’s royalties based on the higher prices set under Big Horn’s andBlack Butte’s separate long-term contracts with Commonwealth Edison.

 

With respect to the period 1986-1992, Decker appealed theassessment through the administrative process with the MMS and that appeal wasunsuccessful.  A further appeal was filedbefore the United States District Court for the District of Montana.  In March 2009, the District Court set asidethe MMS assessment and entered judgment for Decker (“Decker I”).  The MMS did not appeal the ruling.

 

With respect to the period 1993-2001, the MMS has not issueda final decision concerning Decker’s challenge to the assessment.  On January 5, 2009, the Interior Boardof Land Appeals, or IBLA, issued a decision affirming the MMS’s decisionrequiring Decker to pay additional royalties. On February 16, 2010, the United StatesDistrict Court for the District of Montana vacated the IBLA decision and remanded the matter to the MMS for furtheradministrative review in light of the District Court’s holding in DeckerI.  As of September 30, 2010, theestimated additional assessed royalties (inclusive of interest) for the period1993-2001 were approximately $11 million. Decker estimates that even if the assessment for the 1993-2001 periodwere to be upheld, MMS’s eventual recovery may be nothing but could be up to$11 million.

 

We have not accrued aliability in our consolidated financial statements with respect to this matteras any potential losses are not considered to be probable and reasonablyestimable.  In addition to itssubstantive challenges to the assessments, Decker believes that it hascontractual price escalation protection from any increased assessments for 1993-2001;that, in addition, Commonwealth Edison has indemnified Black Butte with respectto the 1993-2001 assessment, and that in furtherance of that obligation,Commonwealth Edison or its parent company, Exelon Generation, Inc., hastherefore agreed to indemnify Decker directly for such matters.  If the assessment was upheld and theindemnities and/or price protections were ultimately not available to Decker,the resulting Decker liability could be material.  As a result of our 50% ownership interest inDecker, our financial results could in turn be materially adverselyaffected.  We consider those conclusions to be reasonable; however, we have notrelied upon this indemnification in reaching our decision that any potentiallosses are not considered probable and reasonably estimable.

* *

*CaballoCoal Company Litigation — Spring Creek*

 

In September 2009, CaballoCoal Company, or Caballo, a subsidiary of Peabody Energy Corporation, commencedan action in Wyoming state court against Spring Creek Coal Company, or SpringCreek, our subsidiary, asserting that Spring Creek repudiated its allegedlyremaining obligation under a 1987 agreement to purchase an additionalapproximately 1.6 million tons of coal, for which it seeks unspecifieddamages.  Spring Creek believes that ithas meritorious defenses to the claim, including that Caballo breached theagreement by failing to make required deliveries in 2006 and 2007.  Spring Creek also believes that it hasmeritorious counterclaims against Caballo. We have not accrued a liability in our consolidated financial statementswith respect to this matter as any potential losses are not considered to beprobable and reasonably estimable.  If,however, the case was determined in an adverse manner to us, the payment of anyjudgment could be material to our results of operations.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

*OtherLegal Proceedings*

 

We are involved in otherlegal proceedings arising in the ordinary course of business and may becomeinvolved in additional proceedings from time to time.  We believe that there are no other legalproceedings pending that are likely to have a material adverse effect on ourconsolidated financial condition, results of operations or cash flows.  Nevertheless, we cannot predict the impact offuture developments affecting our claims and lawsuits, and any resolution of aclaim or lawsuit or an accrual within a particular fiscal period may adverselyimpact our results of operations for that period.  In addition to claims and lawsuits againstus, our LBAs, permits and other industry regulatory processes and approvals mayalso be subject to legal challenges that may adversely impact our miningoperations and results.  For example, theWest Antelope II LBA, which we have nominated for lease with the Bureau of LandManagement, is subject to pending legal challenges filed in 2010 against theBureau of Land Management and the Secretary of the Interior by environmentalorganizations.

* *

*Tax Contingencies*

 

Ourincome tax calculations are based on application of the respective U.S. federalor state tax law.  Our tax filings,however, are subject to audit by the respective tax authorities.  Accordingly, we recognize tax benefits whenit is more likely than not a position will be upheld by the taxauthorities.  To the extent the final taxliabilities are different from the amounts originally accrued, the increases ordecreases are recorded as income tax expense. We are not potentially liable for income tax contingencies related toperiods prior to the IPO, as the income taxes recognized in our consolidatedfinancial statements for such periods were reported in Rio Tinto America’sconsolidated income tax returns, and Rio Tinto has agreed to indemnify us forany claims related to such income taxes.

 

Severalaudits involving our taxes, other than income taxes, currently are inprogress.  We have provided our bestestimate of taxes and related interest and penalties due for potentialadjustments that may result from the resolution of such tax audits.

*** ***

***Concentrations of Risk and MajorCustomers***

 

Approximately84% of our revenues for the nine-month period ended September 30, 2010, wereunder multi-year contracts that specify pricing terms, compared to 85% for thenine-month period ended September 30, 2009. While the majority of the contracts are fixed-price, certain contractshave adjustment provisions for determining periodic price changes.  For the three- and nine-month periods endedSeptember 30, 2010 and 2009, there was no single customer that represented morethan 10% of consolidated revenues.  Wegenerally do not require collateral or other security on accounts receivablebecause our customers are comprised primarily of investment grade electricutilities.  The credit risk is controlledthrough credit approvals and monitoring procedures.

*** ***

***Guarantees and Off-Balance SheetRisk***

 

Inthe normal course of business, we are party to guarantees and financialinstruments with off-balance sheet risk, such as bank letters of credit,performance or surety bonds and indemnities, which are not reflected on theconsolidated balance sheet.  In our pastexperience, virtually no claims have been made against these financialinstruments.  We do not expect anymaterial losses to result from these guarantees or off-balance-sheetinstruments.

 

UnitedStates federal and state laws require that we secure certain of our obligationsto reclaim lands used for mining and to secure coal lease obligations.  The primary method we have used to meet thesereclamation obligations and to secure coal lease obligations is to provide a third-partysurety bond, typically through an insurance company, or to provide a letter ofcredit, typically through a bank. Specific bond and or letter of credit amounts may change over time,depending on the activity at the respective site and any specific requirementsby federal or state laws.  As ofSeptember 30, 2010, we had $519.8 million of surety bonds and $10.5 million ofstandby letters of credit to secure certain of our obligations to reclaim landsused for mining and to secure coal lease obligations.  These surety bonds are collateralized by arestricted cash balance of $218.4 million. As restricted cash may be replaced by letters of credit at ourdiscretion and there is sufficient availability under our revolving creditfacility to do so, we have determined that the restricted cash balance isappropriately classified as a current asset. Total letters of credit issued under our revolving credit facility as ofSeptember 30, 2010 were $10.5 million, which reduced our borrowing capacityunder the facility to $389.5 million.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**6.  Retiree Medical Plan**

 

Inconnection with the IPO, effective January 1, 2010, we implemented apostretirement medical plan (the “Retiree Medical Plan”) to provide certainpostretirement medical benefits to eligible employees, which do not includeDecker employees.  Net periodic pensioncosts included the following components:

 
| ** **                          | ** ** | **Three  Months Ended  September 30,** | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **2010**                                    | ** ** | **2009**                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                       |       | $                                           | 579        |                                       | $          | — |   | $ | 1,737 |   | $ | — |   |
| Interest  cost                      |       | 247                                         |       | —                                     |       | 742 |   | — |   |
| Amortization  of prior service cost |       | 316                                         |       | —                                     |       | 1,089 |   | — |   |
| Net  periodic benefit cost          |       | $                                           | 1,142      |                                       | $          | — |   | $ | 3,568 |   | $ | — |   |

 

**7.  Related Party Transactions**

*** ***

***Transitional Support Services***

 

Followingthe IPO, Rio Tinto affiliates provided certain transitional support services tous pursuant to a transition services agreement, which expired in August 2010.  Costs incurred under this agreement wereincluded in selling general and administrative expenses and totaled $135,000and $1.1 million for the three and nine months ended September 30, 2010,respectively.

 

Webegan leasing office space from Rio Tinto America during 2007.  Rental expense for this lease was $76,000 and$245,000 for the three- and nine-month periods ended September 30, 2010,respectively, and $92,000 and $276,000 for the three- and nine-month periodsended September 30, 2009, respectively.

 

Followingthe distribution of our interest in Colowyo Coal Company, L.P. and a uraniummining venture, we provided certain transitional management and administrativesupport services to the distributed entities on a cost reimbursementbasis.  Fees for these transitionalsupport services, which terminated in March 2009, were included as areduction in operating expenses and totaled $1.4 million for the three and ninemonths ended September 30, 2009.

*** ***

***Credit Arrangements and GuaranteeFees***

 

Whilewe were a subsidiary of Rio Tinto, Rio Tinto served as guarantor of our suretybonds and certain letters of credit securing our obligations that were issuedon our behalf under Rio Tinto’s credit facilities.  In connection with the IPO structuringtransactions, we agreed to use our commercially reasonable efforts to obtainnew surety bonds, letters of credit or other credit arrangements and to obtainthe full release of Rio Tinto with respect to the existing arrangements.  As of December 31, 2009, with theexception of our obligations with respect to Decker, Rio Tinto remained theguarantor and we maintained $80.2 million in restricted cash as collateral forthe benefit of Rio Tinto.  As of September 30,2010, we had obtained replacement surety bonds for all of the $445.5 million inbonds for which Rio Tinto had been the guarantor.  Included in interest expense was $0 and$683,000 in fees Rio Tinto charged us in connection with transitional support ofour credit arrangements for the three and nine months ended September 30,2010, and $340,000 and $678,000 of guarantee fees for the three and nine monthsended September 30, 2009, respectively.

*** ***

***Coal Sales***

 

Revenuesincluded sales of coal to Venture Fuels Partnership, a 50% owned coal marketingcompany, of $11.1 million and $21.0 million for the three and nine months endedSeptember 30, 2010, respectively, compared to $8.5 million and $17.5million for the three- and nine-month periods ended September 30, 2009,respectively.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

***Other Commercial Transactions***

 

Fromtime to time, we enter into arms-length commercial arrangements in the ordinarycourse of business with Rio Tinto, including selling coal to Rio Tinto and engagingRio Tinto for agency services in connection with our export coal sales. Since the November 2009 IPO and through the nine months ended September 30,2010, we have paid approximately $0.3 million for agency services and received$0 million for export coal sales agreements. During calendar years 2011 and 2012, we expect to pay approximately $0.7million for agency services and receive approximately $26.0 million for exportcoal sales agreements based on currently proposed transactions.

** **

**8.  Segment Information**

 

Ourmanagement reviews, manages and operates our business as a single operatingsegment - the production of low sulfur, steam coal from surface mines, locatedin the Western region of the U.S. within the Powder River Basin (“PRB”), whichis sold to electric utilities and industrial customers.

 

Thefollowing table presents a summary of total domestic and foreign revenues fromexternal customers for the three and nine months ended September 30 (inthousands):

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| United  States                          |       | $                                                    | 318,579    |                                                | $          | 339,327 |   | $ | 895,571 |   | $ | 961,707 |   |
| Foreign                                 |       | 53,785                                               |       | 17,914                                              |       | 129,389 |   | 99,579 |   |
| Total  revenues from external customers |       | $                                                    | 372,364    |                                                | $          | 357,241 |   | $ | 1,024,960 |   | $ | 1,061,286 |   |

 

Weattribute revenue to foreign countries based on the customer’s shippinglocation.

 

Asof September 30, 2010, all of our long-lived assets were located in theU.S.  All of our revenues for the ninemonths ended September 30, 2010 and 2009 originated in the U.S.  Our segment revenue and segment total assetsequal the reported amounts in the condensed consolidated financial statements.

 

Thisreport includes the non-GAAP financial measure of Adjusted EBITDA, which isintended to provide additional information only and does not have any standardmeaning prescribed by generally accepted accounting principles in the U.S., orU.S. GAAP.  A quantitative reconciliation of Adjusted EBITDA to incomefrom continuing operations is found in the table below.

 

EBITDArepresents income from continuing operations before (1) interest income(expense) net, (2) income tax provision, (3) depreciation and depletion, (4) amortization,and (5) accretion. Adjusted EBITDA represents EBITDA as further adjustedto exclude specifically identified items that management believes do notdirectly reflect our core operations.  For the periods presented herein,the specifically identified item is the income statement impact of oursignificant broker contract that expired in the first quarter of 2010.

 

AdjustedEBITDA is an additional tool intended to assist our management in comparingour performance on a consistent basis for purposes of businessdecision-making by removing the impact of certain items that managementbelieves do not directly reflect our core operations. Adjusted EBITDA is ametric intended to assist management in evaluating operating performance,comparing performance across periods, planning and forecasting future businessoperations and helping determine levels of operating and capitalinvestments.  Period-to-period comparisons of Adjusted EBITDA are intendedto help our management identify and assess additional trends potentially impactingour company that may not be shown solely by period-to-period comparisons ofincome from continuing operations. Adjusted EBITDA may also be used as part ofour incentive compensation program for our executive officers and others.

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

Webelieve Adjusted EBITDA is also useful to investors, analysts and otherexternal users of our consolidated financial statements in evaluating ouroperating performance from period to period and comparing our performance tosimilar operating results of other relevant companies.  Adjusted EBITDAallows investors to measure a company’s operating performance without regard toitems such as interest expense, taxes, depreciation and depletion, amortizationand accretion and other specifically identified items that are not consideredto directly reflect our core operations.

 

Ourmanagement recognizes that using Adjusted EBITDA as a performance measure hasinherent limitations as compared to income from continuing operations or otherU.S. GAAP financial measures, as this non-GAAP measure excludes certain items,including items that are recurring in nature, which may be meaningful toinvestors.  Adjusted EBITDA excludesinterest expense and interest income; however, as we have historically borrowedmoney in order to finance transactions and operations, and have investedavailable cash to generate interest income, interest expense and interestincome are elements of our cost structure and influence our ability to generaterevenue and returns for shareholders. Adjusted EBITDA excludes depreciation anddepletion and amortization; however, as we use capital and intangible assets togenerate revenues, depreciation, depletion and amortization are necessaryelements of our costs and ability to generate revenue. Adjusted EBITDA also excludesaccretion expense; however, as we are legally obligated to pay for costsassociated with the reclamation and closure of our mine sites, the periodicaccretion expense relating to these reclamation costs is a necessary element ofour costs and ability to generate revenue. Adjusted EBITDA excludes incometaxes; however, as we are organized as a corporation, the payment of taxes is anecessary element of our operations. Finally, Adjusted EBITDA excludes incomestatement amounts attributable to our significant broker contract that expiredin the first quarter of 2010; however, this historically represented a positivecontribution to our operating results.

 

Asa result of these exclusions, Adjusted EBITDA should not be considered inisolation and does not purport to be an alternative to income from continuingoperations or other U.S. GAAP financial measures as a measure of our operatingperformance.

 

Whenusing Adjusted EBITDA as a performance measure, management intends tocompensate for these limitations by comparing it to income from continuingoperations in each period, so as to allow for the comparison of the performanceof the underlying core operations with the overall performance of the companyon a full-cost, after-tax basis. Using Adjusted EBITDA and income fromcontinuing operations to evaluate the business allows management and investorsto (a) assess our relative performance against our competitors and (b) ultimatelymonitor our capacity to generate returns for shareholders.

 

Becausenot all companies use identical calculations, our presentations of AdjustedEBITDA may not be comparable to other similarly titled measures of othercompanies. Moreover, our presentation of Adjusted EBITDA is different thanEBITDA as defined in our debt financing agreements.

 

Thefollowing tables present a reconciliation of net income from continuingoperations to Adjusted EBITDA for the three and nine months ended September 30(in thousands):

 
| ** **                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income from continuing operations   |       | $                                                    | 55,318     |                                                | $          | 52,490 |   | $ | 139,166 |   | $ | 147,268 |   |
| Interest  income                         |       | (184                                                 | )          | (86                                                 | )          | (411 | ) | (228 | ) |
| Interest  expense                        |       | 11,404                                               |       | 61                                                  |       | 36,186 |   | 1,007 |   |
| Income  tax (benefit) provision          |       | (1,266                                               | )          | 21,256                                              |       | (1,266 | ) | 59,888 |   |
| Depreciation  and depletion              |       | 25,997                                               |       | 24,047                                              |       | 75,212 |   | 68,383 |   |
| Amortization  (1)                        |       | —                                               |       | 8,519                                               |       | 3,197 |   | 24,770 |   |
| Accretion                                |       | 3,337                                                |       | 2,945                                               |       | 9,903 |   | 8,402 |   |
| EBITDA                                   |       | $                                                    | 94,606     |                                                | $          | 109,232 |   | $ | 261,987 |   | $ | 309,490 |   |
| Expired  significant broker contract (1) |       | —                                               |       | (18,931                                             | )          | (8,324 | ) | (55,285 | ) |
| Adjusted  EBITDA                         |       | $                                                    | 94,606     |                                                | $          | 90,301 |   | $ | 253,663 |   | $ | 254,205 |   |

 

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(1)        The impact ofthe expired significant broker contract on the Statement of Operations is acombination of net income and the amortization expense related to thecontract.  All amortization expense forthe periods presented was attributable to the significant broker contract.

** **

**9. Supplemental Guarantor/Non-Guarantor Financial Information**

 

Inaccordance with the indentures governing the 2017 notes and the 2019 notes,certain wholly-owned U.S. subsidiaries of the Company have fully andunconditionally guaranteed these senior notes on a joint and several basis.Separate financial statements and other disclosures concerning the GuarantorSubsidiaries are not presented because management believes that suchinformation is not material to the senior note holders. The followinghistorical financial statement information is provided for the Guarantor/Non-GuarantorSubsidiaries (in thousands):

** **

**Unaudited Supplemental Condensed Consolidating Balance Sheet**

 
| ** **                                              | ** ** | **September 30, 2010********(in thousands)** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Parent  Company**                                         | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                              |       |                                                        |       |   |   |   |   |   |   |   |   |
| **Current assets**                                      |       |                                                        |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                              |       | $                                                           | 269,531    |   | $ | 3 |   | $ | 18,178 |   | $ | — |   | $ | 287,712 |   |
| Restricted  cash                                        |       | 218,397                                                     |       | — |   | — |   | — |   | 218,397 |   |
| Accounts  receivable, net                               |       | —                                                      |       | 83,836 |   | 3,701 |   | — |   | 87,537 |   |
| Due  from related parties                               |       | —                                                      |       | 109,203 |   | 2,413 |   | (111,616 | ) | — |   |
| Inventories,  net                                       |       | 5,301                                                       |       | 58,144 |   | 3,261 |   | — |   | 66,706 |   |
| Deferred  income taxes and other assets                 |       | 462                                                         |       | 14,726 |   | 141 |   | — |   | 15,329 |   |
| Total current assets                                    |       | 493,691                                                     |       | 265,912 |   | 27,694 |   | (111,616 | ) | 675,681 |   |
| Property,  plant and equipment, net                     |       | 5,435                                                       |       | 957,821 |   | 1,874 |   | — |   | 965,130 |   |
| Goodwill                                                |       | —                                                      |       | 35,634 |   | — |   | — |   | 35,634 |   |
| Investments  and other assets                           |       | 769,714                                                     |       | — |   | — |   | (728,253 | ) | 41,461 |   |
| **Total assets**                                        |       | $                                                           | 1,268,840  |   | $ | 1,259,367 |   | $ | 29,568 |   | $ | (839,869 | ) | $ | 1,717,906 |   |
|                                                    |       |                                                        |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                |       |                                                        |       |   |   |   |   |   |   |   |   |
| **Current liabilities**                                 |       |                                                        |       |   |   |   |   |   |   |   |   |
| Accounts payable and accrued expenses                   |       | $                                                           | 17,350     |   | $ | 81,333 |   | $ | 8,037 |   | $ | — |   | $ | 106,720 |   |
| Royalties and production taxes                          |       | —                                                      |       | 132,333 |   | 1,969 |   | — |   | 134,302 |   |
| Due to related parties                                  |       | 117,848                                                     |       | — |   | — |   | (111,616 | ) | 6,232 |   |
| Current portion of other long-term debt                 |       | —                                                      |       | 57,971 |   | 966 |   | — |   | 58,937 |   |
| Total current liabilities                               |       | 135,198                                                     |       | 271,637 |   | 10,972 |   | (111,616 | ) | 306,191 |   |
| Senior notes                                            |       | 595,592                                                     |       | — |   | — |   | — |   | 595,592 |   |
| Federal coal lease obligations, net of current  portion |       | —                                                      |       | 67,387 |   | — |   | — |   | 67,387 |   |
| Asset retirement obligations, net of current  portion   |       | —                                                      |       | 119,847 |   | 61,590 |   | — |   | 181,437 |   |
| Other liabilities                                       |       | —                                                      |       | 60,280 |   | 3,638 |   | (34,669 | ) | 29,249 |   |
| Total liabilities                                       |       | 730,790                                                     |       | 519,151 |   | 76,200 |   | (146,285 | ) | 1,179,856 |   |
| Commitments and contingencies (Note 5)                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| Total members’ equity                              |       | 538,050                                                     |       | 740,216 |   | (46,632 | ) | (693,584 | ) | 538,050 |   |
| **Total liabilities and members’ equity**          |       | $                                                           | 1,268,840  |   | $ | 1,259,367 |   | $ | 29,568 |   | $ | (839,869 | ) | $ | 1,717,906 |   |

 

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**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Unaudited Supplemental Condensed Consolidating Balance Sheet**

 
| ** **                                              | ** ** | **December 31, 2009********(in thousands)** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Parent  Company**                                        | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                              |       |                                                       |       |   |   |   |   |   |   |   |   |
| **Current assets**                                      |       |                                                       |       |   |   |   |   |   |   |   |   |
| Cash  and cash equivalents                              |       | $                                                          | 246,470    |   | $ | — |   | $ | 21,846 |   | $ | — |   | $ | 268,316 |   |
| Restricted  cash                                        |       | 80,180                                                     |       | — |   | — |   | — |   | 80,180 |   |
| Accounts  receivable, net                               |       | 9                                                          |       | 81,661 |   | 1,139 |   | — |   | 82,809 |   |
| Due  from related parties                               |       | 95,892                                                     |       | — |   | 2,413 |   | (89,860 | ) | 8,445 |   |
| Inventories,  net                                       |       | 4,508                                                      |       | 56,653 |   | 3,038 |   | — |   | 64,199 |   |
| Deferred  income taxes and other assets                 |       | —                                                     |       | 6,343 |   | 88 |   | — |   | 6,431 |   |
| Total current assets                                    |       | 427,059                                                    |       | 144,657 |   | 28,524 |   | (89,860 | ) | 510,380 |   |
| Property,  plant and equipment, net                     |       | 13,822                                                     |       | 970,356 |   | 2,965 |   | — |   | 987,143 |   |
| Intangible  assets, net                                 |       | —                                                     |       | 3,197 |   | — |   | — |   | 3,197 |   |
| Goodwill                                                |       | —                                                     |       | 35,634 |   | — |   | — |   | 35,634 |   |
| Investments  and other assets                           |       | 561,038                                                    |       | — |   | — |   | (521,381 | ) | 39,657 |   |
| **Total assets**                                        |       | $                                                          | 1,001,919  |   | $ | 1,153,844 |   | $ | 31,489 |   | $ | (611,241 | ) | $ | 1,576,011 |   |
|                                                    |       |                                                       |       |   |   |   |   |   |   |   |   |
| **LIABILITIES AND MEMBERS’ EQUITY**                |       |                                                       |       |   |   |   |   |   |   |   |   |
| **Current liabilities**                                 |       |                                                       |       |   |   |   |   |   |   |   |   |
| Accounts payable and accrued expenses                   |       | $                                                          | 8,029      |   | $ | 91,069 |   | $ | 5,802 |   | $ | — |   | $ | 104,900 |   |
| Royalties and production taxes                          |       | —                                                     |       | 100,374 |   | 2,538 |   | — |   | 102,912 |   |
| Due to related parties                                  |       | —                                                     |       | 89,860 |   | — |   | (89,860 | ) | — |   |
| Current portion of other long-term debt                 |       | —                                                     |       | 54,316 |   | 966 |   | — |   | 55,282 |   |
| Total current liabilities                               |       | 8,029                                                      |       | 335,619 |   | 9,306 |   | (89,860 | ) | 263,094 |   |
| Senior notes                                            |       | 595,321                                                    |       | — |   | — |   | — |   | 595,321 |   |
| Federal coal lease obligations, net of current  portion |       | —                                                     |       | 118,289 |   | — |   | — |   | 118,289 |   |
| Asset retirement obligations, net of current  portion   |       | —                                                     |       | 113,488 |   | 62,452 |   | — |   | 175,940 |   |
| Other liabilities                                       |       | —                                                     |       | 56,100 |   | 3,159 |   | (34,461 | ) | 24,798 |   |
| Total liabilities                                       |       | 603,350                                                    |       | 623,496 |   | 74,917 |   | (124,321 | ) | 1,177,442 |   |
| Commitments and contingencies (Note 5)                  |       |                                                       |       |   |   |   |   |   |   |   |   |
| Total members’ equity                              |       | 398,569                                                    |       | 530,348 |   | (43,428 | ) | (486,920 | ) | 398,569 |   |
| **Total liabilities and members’ equity**          |       | $                                                          | 1,001,919  |   | $ | 1,153,844 |   | $ | 31,489 |   | $ | (611,241 | ) | $ | 1,576,011 |   |

 

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**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Unaudited Supplemental Condensed Consolidating Statement ofOperations**

 
| ** **                                                                                                     | ** ** | **Three Months Ended September 30, 2010********(in thousands)** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **Parent  Company**                                                                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues**                                                                                                   |       | $                                                                                             | —     |   | $ | 366,574 |   | $ | 5,790 |   | $ | — |   | $ | 372,364 |   |
| **Costs and expenses**                                                                                         |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Cost  of product sold (exclusive of depreciation, depletion, amortization and  accretion, shown separately)    |       | —                                                                                        |       | 257,081 |   | 5,085 |   | — |   | 262,166 |   |
| Depreciation  and depletion                                                                                    |       | 546                                                                                           |       | 25,038 |   | 413 |   | — |   | 25,997 |   |
| Amortization  and accretion                                                                                    |       | —                                                                                        |       | 2,422 |   | 915 |   | — |   | 3,337 |   |
| Selling,  general and administrative expenses                                                                  |       | 8,202                                                                                         |       | 8,105 |   | 207 |   | — |   | 16,514 |   |
| **Total costs and expenses**                                                                                   |       | 8,748                                                                                         |       | 292,646 |   | 6,620 |   | — |   | 308,014 |   |
| **Operating income**                                                                                           |       | (8,748                                                                                        | )          | 72,928 |   | (830 | ) | — |   | 64,350 |   |
| **Other income (expense)**                                                                                     |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Interest  income and other, net                                                                                |       | 196                                                                                           |       | 70 |   | 2 |   | — |   | 268 |   |
| Interest  expense                                                                                              |       | (11,080                                                                                       | )          | (310 | ) | (14 | ) | — |   | (11,404 | ) |
| **Total other expense**                                                                                        |       | (10,884                                                                                       | )          | (240 | ) | (12 | ) | — |   | (11,136 | ) |
| **Income from continuing operations before income tax  provision and earnings from unconsolidated affiliates** |       | (19,632                                                                                       | )          | 73,688 |   | (842 | ) | — |   | 53,214 |   |
| Income  tax benefit                                                                                            |       | —                                                                                        |       | 1,266 |   | — |   | — |   | 1,266 |   |
| Earnings  from unconsolidated affiliates                                                                       |       | 18                                                                                            |       | 820 |   | — |   | — |   | 838 |   |
| Earnings  (losses) from consolidated affiliates                                                                |       | 74,932                                                                                        |       | (842 | ) | — |   | (74,090 | ) | — |   |
| **Net income**                                                                                                 |       | $                                                                                             | 53,318     |   | $ | 74,932 |   | $ | (842 | ) | $ | (74,090 | ) | $ | 55,318 |   |

 

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**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Unaudited Supplemental Condensed Consolidating Statement ofOperations**

 
| ** **                                                                                                              | ** ** | **Three Months Ended September 30, 2009********(in thousands)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **Parent  Company**                                                                           | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues**                                                                                                            |       | $                                                                                             | —     |   | $ | 349,832 |   | $ | 7,409 |   | $ | — |   | $ | 357,241 |   |
| **Costs and expenses**                                                                                                  |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Cost  of product sold (exclusive of depreciation, depletion, amortization and  accretion, shown separately)             |       | —                                                                                        |       | 222,477 |   | 6,429 |   | — |   | 228,906 |   |
| Depreciation  and depletion                                                                                             |       | 1,448                                                                                         |       | 22,423 |   | 176 |   | — |   | 24,047 |   |
| Amortization  and accretion                                                                                             |       | —                                                                                        |       | 10,727 |   | 737 |   | — |   | 11,464 |   |
| Selling,  general and administrative expenses                                                                           |       | 11,481                                                                                        |       | 7,759 |   | 324 |   | — |   | 19,564 |   |
| **Total costs and expenses**                                                                                            |       | 12,929                                                                                        |       | 263,386 |   | 7,666 |   | — |   | 283,981 |   |
| **Operating income**                                                                                                    |       | (12,929                                                                                       | )          | 86,446 |   | (257 | ) | — |   | 73,260 |   |
| **Other income (expense)**                                                                                              |       |                                                                                          |       |   |   |   |   |   |   |   |   |
| Interest  income and other, net                                                                                         |       | 80                                                                                            |       | (47 | ) | 3 |   | — |   | 36 |   |
| Interest  expense                                                                                                       |       | (31                                                                                           | )          | (21 | ) | (9 | ) | — |   | (61 | ) |
| **Total other expense**                                                                                                 |       | 49                                                                                            |       | (68 | ) | (6 | ) | — |   | (25 | ) |
| **Income from continuing operations before income tax  provision and earnings (losses) from unconsolidated affiliates** |       | (12,880                                                                                       | )          | 86,378 |   | (263 | ) | — |   | 73,235 |   |
| Income  tax benefit (provision)                                                                                         |       | 3,769                                                                                         |       | (25,102 | ) | 77 |   | — |   | (21,256 | ) |
| Earnings  (losses) from unconsolidated affiliates, net of tax                                                           |       | (287                                                                                          | )          | 798 |   | — |   | — |   | 511 |   |
| Earnings  (losses) from consolidated affiliates, net of tax                                                             |       | 83,240                                                                                        |       | (186 | ) | — |   | (83,054 | ) | — |   |
| **Income from continuing operations**                                                                                   |       | 73,842                                                                                        |       | 61,888 |   | (186 | ) | (83,054 | ) | 52,490 |   |
| Income  from discontinued operations, net of tax                                                                        |       | (1,009                                                                                        | )          | 3,070 |   | 18,282 |   | — |   | 20,343 |   |
| **Net income**                                                                                                          |       | $                                                                                             | 72,833     |   | $ | 64,958 |   | $ | 18,096 |   | $ | (83,054 | ) | $ | 72,833 |   |

 

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**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Unaudited Supplemental Condensed Consolidating Statement ofOperations**

 
| ** **                                                                                                     | ** ** | **Nine Months Ended September 30, 2010********(in thousands)** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **Parent  Company**                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues**                                                                                                   |       | $                                                                                            | 78         |   | $ | 1,009,051 |   | $ | 15,831 |   | $ | — |   | $ | 1,024,960 |   |
| **Costs and expenses**                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Cost  of product sold (exclusive of depreciation, depletion, amortization and  accretion, shown separately)    |       | (11                                                                                          | )          | 704,547 |   | 14,471 |   | — |   | 719,007 |   |
| Depreciation  and depletion                                                                                    |       | 1,581                                                                                        |       | 72,451 |   | 1,180 |   | — |   | 75,212 |   |
| Amortization  and accretion                                                                                    |       | —                                                                                       |       | 10,317 |   | 2,783 |   | — |   | 13,100 |   |
| Selling,  general and administrative expenses                                                                  |       | 21,154                                                                                       |       | 25,444 |   | 561 |   | — |   | 47,159 |   |
| **Total costs and expenses**                                                                                   |       | 22,724                                                                                       |       | 812,759 |   | 18,995 |   | — |   | 854,478 |   |
| **Operating income**                                                                                           |       | (22,646                                                                                      | )          | 196,292 |   | (3,164 | ) | — |   | 170,482 |   |
| **Other income (expense)**                                                                                     |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Interest  income and other, net                                                                                |       | 435                                                                                          |       | 95 |   | 4 |   | — |   | 534 |   |
| Interest  expense                                                                                              |       | (35,216                                                                                      | )          | (927 | ) | (43 | ) | — |   | (36,186 | ) |
| **Total other expense**                                                                                        |       | (34,781                                                                                      | )          | (832 | ) | (39 | ) | — |   | (35,652 | ) |
| **Income from continuing operations before income tax  provision and earnings from unconsolidated affiliates** |       | (57,427                                                                                      | )          | 195,460 |   | (3,203 | ) | — |   | 134,830 |   |
| Income  tax benefit                                                                                            |       | —                                                                                       |       | 1,266 |   | — |   | — |   | 1,266 |   |
| Earnings  from unconsolidated affiliates                                                                       |       | 28                                                                                           |       | 3,042 |   | — |   | — |   | 3,070 |   |
| Earnings  (losses) from consolidated affiliates                                                                |       | 196,565                                                                                      |       | (3,203 | ) | — |   | (193,362 | ) | — |   |
| **Net income**                                                                                                 |       | $                                                                                            | 139,166    |   | $ | 196,565 |   | $ | (3,203 | ) | $ | (193,362 | ) | $ | 139,166 |   |

 

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** **

**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Unaudited Supplemental Condensed Consolidating Statement ofOperations**

 
| ** **                                                                                                              | ** ** | **Nine Months Ended September 30, 2009********(in thousands)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **Parent  Company**                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Revenues**                                                                                                            |       | $                                                                                            | —     |   | $ | 1,040,223 |   | $ | 21,063 |   | $ | — |   | $ | 1,061,286 |   |
| **Costs and expenses**                                                                                                  |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Cost  of product sold                                                                                                   |       | —                                                                                       |       | 683,151 |   | 20,574 |   | — |   | 703,725 |   |
| Depreciation  and depletion                                                                                             |       | 3,818                                                                                        |       | 63,936 |   | 629 |   | — |   | 68,383 |   |
| Amortization  and accretion                                                                                             |       | —                                                                                       |       | 30,988 |   | 2,184 |   | — |   | 33,172 |   |
| Selling,  general and administrative expenses                                                                           |       | 18,297                                                                                       |       | 29,817 |   | 961 |   | — |   | 49,075 |   |
| **Total costs and expenses**                                                                                            |       | 22,115                                                                                       |       | 807,892 |   | 24,348 |   | — |   | 854,355 |   |
| **Operating income**                                                                                                    |       | (22,115                                                                                      | )          | 232,331 |   | (3,285 | ) | — |   | 206,931 |   |
| **Other income (expense)**                                                                                              |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Interest  income and other, net                                                                                         |       | 187                                                                                          |       | 25 |   | 31 |   | — |   | 243 |   |
| Interest  expense                                                                                                       |       | (911                                                                                         | )          | (58 | ) | (38 | ) | — |   | (1,007 | ) |
| **Total other expense**                                                                                                 |       | (724                                                                                         | )          | (33 | ) | (7 | ) | — |   | (764 | ) |
| **Income from continuing operations before income tax  provision and earnings (losses) from unconsolidated affiliates** |       | (22,839                                                                                      | )          | 232,298 |   | (3,292 | ) | — |   | 206,167 |   |
| Income  tax benefit (provision)                                                                                         |       | 6,663                                                                                        |       | (67,508 | ) | 957 |   | — |   | (59,888 | ) |
| Earnings  (losses) from unconsolidated affiliates, net of tax                                                           |       | (556                                                                                         | )          | 1,545 |   | — |   | — |   | 989 |   |
| Earnings  (losses) from consolidated affiliates, net of tax                                                             |       | 209,894                                                                                      |       | (2,335 | ) | — |   | (207,559 | ) | — |   |
| **Income from continuing operations**                                                                                   |       | 193,162                                                                                      |       | 164,000 |   | (2,335 | ) | (207,559 | ) | 147,268 |   |
| Income  (loss) from discontinued operations, net of tax                                                                 |       | (3,104                                                                                       | )          | 8,989 |   | 36,905 |   | — |   | 42,790 |   |
| **Net income**                                                                                                          |       | $                                                                                            | 190,058    |   | $ | 172,989 |   | $ | 34,570 |   | $ | (207,559 | ) | $ | 190,058 |   |

 

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**CLOUD PEAK ENERGY RESOURCESLLC****AND SUBSIDIARIES**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Unaudited Supplemental Condensed Consolidating Statement ofCash Flows**

 
| ** **                                              | ** ** | **Nine Months Ended September 30, 2010********(in thousands)** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **Parent  Company**                                                                          | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
| **Net cash provided by (used in) operating activities** |       | $                                                                                            | 165,859    |   | $ | 99,946 |   | $ | (3,587 | ) | $ | 262,218 |   |
| ** **                                              |       |                                                                                         |       |   |   |   |   |   |   |
| **Investing activities**                                |       |                                                                                         |       |   |   |   |   |   |   |
| Purchases  of property plant and equipment              |       | (1,909                                                                                       | )          | (54,071 | ) | (149 | ) | (56,129 | ) |
| Proceeds  from sales of assets                          |       | —                                                                                       |       | 1,401 |   | 68 |   | 1,469 |   |
| Return  of restricted cash                              |       | 80,180                                                                                       |       | — |   | — |   | 80,180 |   |
| Restricted  cash deposit                                |       | (218,397                                                                                     | )          | — |   | — |   | (218,397 | ) |
| Net cash used in investing activities                   |       | (140,216                                                                                     | )          | (52,670 | ) | (81 | ) | (192,877 | ) |
|                                                    |       |                                                                                         |       |   |   |   |   |   |   |
| **Financing activities**                                |       |                                                                                         |       |   |   |   |   |   |   |
| Repayments  on other long-term debt                     |       | —                                                                                       |       | (47,276 | ) | — |   | (47,276 | ) |
| Distributions  to Rio Tinto America                     |       | (2,669                                                                                       | )          | — |   | — |   | (2,669 | ) |
| Net cash used in financing activities                   |       | (2,669                                                                                       | )          | (47,276 | ) | — |   | (49,945 | ) |
|                                                    |       |                                                                                         |       |   |   |   |   |   |   |
| **Net decrease in cash and cash equivalents**           |       | 23,064                                                                                       |       | — |   | (3,668 | ) | 19,396 |   |
| ** **                                              |       |                                                                                         |       |   |   |   |   |   |   |
| **Cash  and cash equivalents at beginning of period**   |       | 246,470                                                                                      |       | — |   | 21,846 |   | 268,316 |   |
| **Cash and cash equivalents at the end of period**      |       | $                                                                                            | 269,534    |   | $ | — |   | $ | 18,178 |   | $ | 287,712 |   |

 

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**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 
| ** **                                               | ** ** | **Nine Months Ended June 30, 2009********(in thousands)** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Parent  Company**                                                                     | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
| **Net cash provided by (used in) operating activities**  |       | $                                                                                       | 261,462    |   | $ | 150,712 |   | $ | (61,209 | ) | $ | 350,965 |   |
| ** **                                               |       |                                                                                    |       |   |   |   |   |   |   |
| **Investing activities**                                 |       |                                                                                    |       |   |   |   |   |   |   |
| Purchases  of property plant and equipment               |       | (1,802                                                                                  | )          | (85,503 | ) | (914 | ) | (88,219 | ) |
| Proceeds  from sales of assets                           |       | —                                                                                  |       | 141 |   | 2 |   | 143 |   |
| Change  in cash advances to affiliate                    |       | (259,660                                                                                | )          | — |   | — |   | (259,660 | ) |
| Net cash used in investing activities                    |       | (261,462                                                                                | )          | (85,362 | ) | (912 | ) | (347,736 | ) |
|                                                     |       |                                                                                    |       |   |   |   |   |   |   |
| **Financing activities**                                 |       |                                                                                    |       |   |   |   |   |   |   |
| Repayments  on other long-term debt                      |       | —                                                                                  |       | (65,313 | ) | — |   | (65,313 | ) |
| Distributions  to Members                                |       | —                                                                                  |       | — |   | (241 | ) | (241 | ) |
| Net cash used in financing activities                    |       | —                                                                                  |       | (65,313 | ) | (241 | ) | (65,554 | ) |
| **Net cash provided by (used in) continuing operations** |       | —                                                                                  |       | 37 |   | (62,362 | ) | (62,325 | ) |
| **Cash flows from discounted operations**                |       |                                                                                    |       |   |   |   |   |   |   |
| Net  cash from operating activities                      |       | —                                                                                  |       | — |   | 69,799 |   | 69,799 |   |
| Net  cash from investing activities                      |       | —                                                                                  |       | — |   | (5,090 | ) | (5,090 | ) |
| Net  cash from financing activities                      |       | —                                                                                  |       | — |   | — |   | — |   |
| Net cash provided by discontinued operations             |       | —                                                                                  |       | — |   | 64,709 |   | 64,709 |   |
|                                                     |       |                                                                                    |       |   |   |   |   |   |   |
| **Net increase in cash and cash equivalents**            |       | —                                                                                  |       | 37 |   | 2,347 |   | 2,384 |   |
| ** **                                               |       |                                                                                    |       |   |   |   |   |   |   |
| **Cash  and cash equivalents at beginning of period**    |       | —                                                                                  |       | (99 | ) | 16,034 |   | 15,935 |   |
| **Cash and cash equivalents at the end of period**       |       | $                                                                                       | —     |   | $ | (62 | ) | $ | 18,381 |   | $ | 18,319 |   |

 

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**Item 2.  *Management’sDiscussion and Analysis of Financial Condition and Results of Operations.***

** **

**CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

This report containsforward-looking statements that involve substantial risks anduncertainties.  You can identify thesestatements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,”“expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “would” orsimilar words.  You should readstatements that contain these words carefully, because they discuss our plans,strategies, prospects and expectations concerning our business, operatingresults, financial condition and other similar matters.  There may be events in the future, however,that we are not able to predict accurately or control.  The factors listed under Item 1A of ourAnnual Report on Form 10-K for the year ended December 31, 2009 (“2009 Form10-K”), as well as any cautionary language in this report, provide examples ofrisks, uncertainties and events that may cause our actual results to differmaterially from the expectations we describe in our forward-looking statements.  Additional factors or events that could causeour actual results to differ may emerge from time to time, and it is notpossible for us to predict all of them. We undertake no obligation to update or revise publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise,except as required by law.  The followingfactors are among those that may cause actual results to differ materially fromour forward-looking statements:

 

·                  future economic conditions;

 

·                  the contract prices we receive for coal andour customers’ ability to honor contract terms;

 

·                  market demand for domestic and foreign coal,electricity and steel;

 

·                  safety and environmental laws andregulations, including those directly affecting our coal mining and production,and those affecting our customers’ coal usage, gaseous emissions, resource use,or ash handling, as well as related costs and liabilities;

 

·                  future legislation, changes in regulations orgovernmental policies or changes in interpretations thereof, and third-partyregulatory legal challenges, including with respect to carbon emissions, safetystandards and regulatory processes and approvals required to lease and obtainpermits for coal mining operations;

 

·                  our ability to produce coal at existing andplanned volumes and costs;

 

·                  the availability and cost of coal reserveacquisitions and surface rights and our ability to successfully acquire newcoal reserves and surface rights at attractive prices and in a timely manner;

 

·                  the impact of our recent initial publicoffering and related transactions, including resulting tax implications andchanges to our valuation allowance on our deferred tax assets;

 

·                  our assumptions regarding payments arisingunder the Tax Receivable Agreement and other agreements related to our initialpublic offering;

 

·                  our plans and objectives for futureoperations and the development of additional coal reserves or acquisitionopportunities;

 

·                  our relationships with, and other conditionsaffecting, our customers, including economic conditions and the creditperformance and credit risks associated with our customers;

 

·                  timing of reductions or increases in customercoal inventories;

 

·                  risks inherent to surface coal mining;

 

·                  weather conditions or catastrophicweather-related damage;

 

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·                  changes in energy policy;

 

·                  competition;

 

·                  the availability and cost of competing energyresources, including changes in the price of crude oil and natural gasgenerally, as well as subsidies to encourage use of alternative energy sources;

 

·                  railroad and other transportation performanceand costs;

 

·                  disruptions in delivery or changes in pricingfrom third-party vendors of raw materials and other consumables that arenecessary for our operations, such as explosives, petroleum-based fuel, tires,steel and rubber;

 

·                  our assumptions concerning coal reserveestimates;

 

·                  the terms of Cloud Peak Energy Resources LLC’sindebtedness;

 

·                  changes in costs that we incur as astand-alone, public company as compared to our expectations;

 

·                  inaccurately estimating the costs or timingof our reclamation and mine closure obligations;

 

·                  liquidity constraints, including thoseresulting from the cost or unavailability of financing due to credit marketconditions;

 

·                  our liquidity, results of operations andfinancial condition, including amounts of working capital that are available;and

 

·                  other factors, including those discussed inItem 1A of Holdings’ 2009 Form 10-K.

** **

**Overview**

 

This Item 2 is intended tohelp the reader understand our results of operations and financialcondition.  This discussion should beread in conjunction with our unaudited condensed consolidated financialstatements in Item 1 of this report and in our other Securities and ExchangeCommission (“SEC”) filings, including our audited consolidated financialstatements in Item 8 and Risk Factors in Item 1A of our 2009 Form 10-K.

 

We are the third largestproducer of coal in the U.S. and in the Powder River Basin (“PRB”) based on2009 coal production.  We operate some ofthe safest mines in the coal industry. For 2009, Mine Safety and Health Administration (“MSHA”) data foremployee injuries showed our mines had the lowest employee all injury incidentrate among the ten largest U.S. coal producing companies.  We operate solely in the PRB, the lowest costcoal producing region of the major coal producing regions in the U.S., andoperate two of the four largest coal mines in the region and in the U.S.  Our operations include three wholly-ownedsurface coal mines, two of which, the Antelope Coal mine and the Cordero Rojomine, are in Wyoming and one of which, the Spring Creek Coal mine, is inMontana.  We also own a 50% non-operatinginterest in a fourth surface coal mine in Montana, the Decker mine.  We produce sub-bituminous steam coal with lowsulfur content and sell our coal primarily to domestic electric utilities.

 

As of December 31,2009, we controlled approximately one billion tons of proven and probablecoal reserves.  For the year endedDecember 31, 2009 and nine months ended September 30, 2010 and 2009, we produced93.3 million tons, 71.4 million tons and 69.7 million tons of coal andsold 103.3 million tons, 72.8 million tons and 77.7 million tons of coal,respectively.  The difference betweentons produced and tons sold primarily represents tons of coal we purchased andresold.  Tons of coal we purchased andresold significantly declined in 2010 as the result of the expiration in thefirst quarter of 2010 of our significant broker sales contract furtherdiscussed below.

 

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Ourkey business drivers include the following:

 

·                  the price forwhich we sell our coal;

 

·                  the volume ofcoal produced and shipped;

 

·                  the costs ofmining, including labor, repairs and maintenance, fuel, explosives,depreciation of capital equipment, depletion of coal leases, payments toacquire coal and necessary surface rights, and regulatory compliance; and

 

·      additionalexpenses associated with our transition and ongoing operation as a stand-alone,public company.

 

Historically, costs relatedto the acquisition of federal coal leases have increased.  This results in higher depletion expense aswe increase our mining activities at more recently acquired federal coalleases.  As is common in the PRB, coalseams at our existing mines naturally deepen at a gradient ranging up toapproximately 3%; consequently, our mining costs per ton will correspondinglyincrease as mining advances.

 

Third quarter 2010 shipmentsfrom our owned and operated mines increased over the prior year from 24.0million tons to 25.1 million tons due to three primary factors. Deliveries to domestic customers increased due to stronger demand forelectricity after lower demand for the same period last year.  Sales ofcoal from our Spring Creek mine to the Asian export market increased. Stockpiles of PRB coal at utilities have continued to be drawn down, supportingthe forward price for coal.  Total third quarter 2010 shipments includingour share of the Decker mine and broker sales are down from 27.4 million tonsin the third quarter 2009 to 26.1 million tons in 2010.  This decrease isprimarily due to the expiration of our significant long-term broker salescontract in early 2010.

 

As a result of our remainingunsold and index priced position for 2011 through 2013, we believe we are wellpositioned to benefit from continued near-term demand and pricing.  If,however, the U.S. and international coal markets return to the depressed levelsexperienced in 2009, our revenues could be adversely affected.

 

We had a long-term brokersales contract under which our subsidiary, Spring Creek Coal LLC, sold coal toa wholesale power generation company. Due to the nature of the broker sales contract and the market conditionsat the time Spring Creek Coal LLC executed the purchase contract, our sellingprice for the coal was higher than our purchase price.  The contract expired following finaldeliveries made under the contract in the first quarter of 2010, and therelated contract rights intangible asset has been fully amortized.  This broker sales contract contributed $0 and$36.0 million of revenues for the three months ended September 30, 2010and 2009, respectively.  Income beforetax related to this contract was $0 and $10.4 million for those sameperiods, respectively.  This broker salescontract contributed $14.4 million and $103.1 million of revenues for thenine months ended September 30, 2010 and 2009, respectively.  Income before tax related to this contractwas $5.1 million and $30.5 million for those same periods,respectively.  Our revenues and operatingincome will continue to be negatively impacted in future periods as a result ofthe expiration of this contract.

** **

**Basis of Presentation**

*** ***

***Initial Public Offering and IPO Structuring Transactions***

 

OnNovember 19, 2009, Cloud Peak Energy Inc. became a publicly owned holdingcompany through the completion of an initial public offering of its commonstock (the “IPO”), and simultaneous acquisition of 51% of the common membershipunits in CPE Resources.  Prior to the IPOand the related structuring transactions, CPE Resources was a wholly-ownedsubsidiary of RTEA, which is our predecessor for financial reportingpurposes.  For additional details of thistransaction, please see Note 2 of Notes to Consolidated Financial Statements inHoldings’ 2009 Form 10-K.

 

Forperiods prior to November 20, 2009, our consolidated financial statementsinclude the accounts of RTEA, which was our parent company prior to the IPOstructuring transactions and is our predecessor for financial reportingpurposes. As a result of the IPO structuring transactions, our consolidatedfinancial statements no longer include the accounts of RTEA, our former parentcompany.

 

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TheIPO structuring transactions and related agreements were entered into by CloudPeak Energy Inc., CPE Resources, RTEA and other Rio Tinto affiliates while theywere under common control by Rio Tinto. In accordance with U.S. GAAP, we did not adjust the historical financialreporting carrying amounts of our assets and liabilities in connection with theIPO structuring transactions.

 

TheIPO and the related structuring transactions had significant effects on thecomparability of our condensed consolidated results of operations for the threeand nine months ended September 30, 2010, and our condensed consolidated cashflows for the nine months ended September 30, 2010, compared to theserespective periods ended September 30, 2009. These effects include the following:

 

·                  *CostStructure:*  Prior to theIPO, we prepared our financial statements on a carve-out basis.  Accordingly, our operating results for thethree and nine months ended September 30, 2009, included allocations ofexpenses incurred on our behalf by Rio Tinto affiliates related to thedivestiture of $4.1 million and $11.3 million, respectively.  Our operating results for the three and ninemonths ended September 30, 2010, are no longer affected by Rio Tinto expenseallocations related to divestiture expenses.

 

·                  *IncomeTaxes:*  Prior to the IPO, our taxableincome was included in Rio Tinto America’s consolidated federal income taxreturn and we recognized income tax expense in our carve-out consolidatedfinancial statements on a stand-alone, separate-return basis.  As a result of the IPO and relatedstructuring transactions, we no longer recognize any income taxes incurred byRio Tinto in our consolidated financial statements. As a limited liabilitycompany, we generally are not subject to income taxes, except for income taxesthat may be incurred by certain corporate subsidiaries. Accordingly, wegenerally do not recognize income taxes in our operating results for periodsfollowing the IPO and have eliminated RTEA’s deferred income tax accounts fromour consolidated balance sheet.

*** ***

***Discontinued Operations***

 

Therewere no discontinued operations for the 2010 period.  In March 2009, CPE Resources enteredinto an agreement to sell its membership interest in the Jacobs Ranch mine, acoal mine in Wyoming, to Arch Coal, Inc. This transaction closed on October 1, 2009, and the proceeds fromthis sale were distributed to Rio Tinto America.  Our condensed consolidated results ofoperations for the three and nine months, and cash flows for the nine monthsended September 30, 2009, include discontinued operations related to the JacobsRanch mine.  Consequently, the discussionof our results of operations below focuses on continuing operations as reportedin our historical consolidated financial statements.  Any forward-looking statements exclude thediscontinued operations.

*** ***

***Decker Mine***

 

Wehold a 50% non-operating interest in the Decker mine in Montana through ajoint-venture agreement.  Under the termsof our joint-venture agreement, a third-party mine operator manages the day-to-dayoperations of the Decker mine.  Weaccount for our pro-rata share of assets and liabilities in our undividedinterest in the joint venture using the proportionate consolidation method,whereby our share of assets, liabilities, revenues and expenses are included inthe appropriate classification in our consolidated financial statements.

 

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** **

**Results of Operations**

 

Thefollowing table presents our operating results for the three and nine monthsended September 30, 2010 and 2009 (in thousands; unaudited):

 
| ** **                                                                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2010**                                             | ** ** | **2009**                                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenues**                                                                                                   |       | $                                                    | 372,364    |                                                | $          | 357,241 |   | $ | 1,024,960 |   | $ | 1,061,286 |   |
| **Costs and expenses**                                                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Cost  of product sold                                                                                          |       | 262,166                                              |       | 228,906                                             |       | 719,007 |   | 703,725 |   |
| Depreciation  and depletion                                                                                    |       | 25,997                                               |       | 24,047                                              |       | 75,212 |   | 68,383 |   |
| Amortization                                                                                                   |       | —                                               |       | 8,519                                               |       | 3,197 |   | 24,770 |   |
| Accretion                                                                                                      |       | 3,337                                                |       | 2,945                                               |       | 9,903 |   | 8,402 |   |
| Selling,  general and administrative expenses                                                                  |       | 16,514                                               |       | 19,564                                              |       | 47,159 |   | 49,075 |   |
| **Total costs and expenses**                                                                                   |       | 308,014                                              |       | 283,981                                             |       | 854,478 |   | 854,355 |   |
| **Operating income**                                                                                           |       | 64,350                                               |       | 73,260                                              |       | 170,482 |   | 206,931 |   |
| **Other income (expense)**                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Interest  income                                                                                               |       | 184                                                  |       | 86                                                  |       | 411 |   | 228 |   |
| Interest  expense                                                                                              |       | (11,404                                              | )          | (61                                                 | )          | (36,186 | ) | (1,007 | ) |
| Other,  net                                                                                                    |       | 84                                                   |       | (50                                                 | )          | 123 |   | 15 |   |
| **Total other expense**                                                                                        |       | (11,136                                              | )          | (25                                                 | )          | (35,652 | ) | (764 | ) |
| **Income from continuing operations before income tax  provision and earnings from unconsolidated affiliates** |       | 53,214                                               |       | 73,235                                              |       | 134,830 |   | 206,167 |   |
| Income  tax benefit (provision)                                                                                |       | 1,266                                                |       | (21,256                                             | )          | 1,266 |   | (59,888 | ) |
| Earnings  from unconsolidated affiliates, net of tax                                                           |       | 838                                                  |       | 511                                                 |       | 3,070 |   | 989 |   |
| **Income from continuing operations**                                                                          |       | 55,318                                               |       | 52,490                                              |       | 139,166 |   | 147,268 |   |
| Income  from discontinued operations, net of tax                                                               |       | —                                               |       | 20,343                                              |       | — |   | 42,790 |   |
| **Net income**                                                                                                 |       | $                                                    | 55,318     |                                                | $          | 72,833 |   | $ | 139,166 |   | $ | 190,058 |   |

 

***Three Months Ended September 30, 2010,Compared to the Three Months Ended September 30, 2009***

*** ***

***Revenues***

 

Revenueswere approximately $372.4 million for the three months ended September 30,2010, compared to approximately $357.2 million for the three months endedSeptember 30, 2009, an increase of $15.2 million or 4.3%.

 

Revenuesfrom the sale of coal produced at the three mines that we own and operate isthe largest portion of our revenue, and totaled $310.1 million for the threemonths ended September 30, 2010, compared to $286.5 million for the threemonths ended September 30, 2009.  This $23.6million or 8.2% increase reflects a 3.7% increase in the average price per tonof coal sold, to $12.36 in 2010, from $11.92 in 2009, plus a 4.6% increase inshipments, to 25.1 million tons in 2010, from 24.0 million tons in 2009.

 

Ourshare of revenues from coal produced at the Decker mine decreased by $1.7million or 23.0% to $5.7 million for the three months ended September 30, 2010,compared to the three months ended September 30, 2009, reflecting a decline inshipments partially offset by a higher average sales price per ton.  In April 2010, Decker entered into a salescontract that will extend production and mine life into 2013.

 

Theremaining balance of our revenues, which consist primarily of broker coal salesand billings for transportation and delivery services, totaled $56.6 millionand $63.3 million for the three months ended September 30, 2010 and 2009,respectively.  This decrease is primarilythe result of the expiration of a long-term broker sales contract in the firstquarter of

 

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2010 (see “—Overview” above)offset by stronger export revenues and contract buyout settlements.  Other revenues in the three months endedSeptember 30, 2010, included $560,000 from a contract buyout settlement.

 

***Cost of Product Sold***

 

Costof product sold, excluding depreciation, depletion, amortization and accretion,was $262.2 million for the three months ended September 30, 2010, compared to$228.9 million for the three months ended September 30, 2009, a $33.3 millionor 14.5% increase.  Cost of product soldwas 70.4% and 64.1% of revenues for those same periods, respectively.

 

Thelargest component of cost of product sold is the cost of coal produced at thethree mines that we own and operate, which totaled $209.8 million in 2010,compared to $184.8 million in 2009, an increase of approximately 13.5%.  This increase reflects a 4.6% increase intons shipped from our mines and an 8.7% increase in the cost per ton of coalproduced, to $8.36 in 2010 from $7.69 in 2009. The increase in the cost per ton of coal produced is primarily theresult of increases in costs related to royalties and taxes, the price ofdiesel fuel and lubricants, and a higher strip ratio in 2010 compared to 2009as our mines move into deeper mining areas. Our share of the cost of coal produced by the Decker mine decreased $0.4million in 2010, reflecting lower production volumes offset by higher fixed productioncosts.

 

Theremaining portion of cost of product sold consists of $46.6 million and $38.0million as of September 30, 2010 and 2009, respectively, an increase of22.6%.  This change is due to higherfreight and handling fees due to increased international sales partially offsetby a decrease in costs associated with the expiration of our significant brokersales contract in the first quarter of 2010.

*** ***

***Depreciation andDepletion***

 

Depreciationand depletion expense was $26.0 million for the three months ended September30, 2010, compared to $24.0 million for the three months ended September30, 2009, an increase of $2.0 million, or 8.3%.  The increase is primarily attributable to a$0.8 million increase in depreciation as a result of a higher capital basefollowing increased investment and capital expenditures in recent years and a$0.8 million increase in depletion of mineral rights and mine developmentcosts.

*** ***

***Amortization***

 

Amortizationexpense was $0 and $8.5 million for the three months ended September 30,2010 and 2009, respectively.  As theintangible asset (contract rights), which was our only intangible asset thatwas being amortized, was fully amortized in March 2010, there was no expenseincurred in the three months ended September 30, 2010.

*** ***

***Accretion***

 

Accretionexpense, related to asset retirement obligations, was $3.3 million and$2.9 million for the three months ended September 30, 2010 and 2009,respectively.  The increase of $0.4million or 13.8% is consistent with the progression of the lives of our mines.

*** ***

***Selling, Generaland Administrative Expenses***

 

Selling,general and administrative expenses were $16.5 million for the three monthsended September 30, 2010, compared to $19.6 million for the three monthsended September 30, 2009.  This $3.1million or 15.8% decrease reflects costs incurred in 2009 associated with ourseparation from Rio Tinto that were not incurred in 2010 offset by the costs tooperate as a stand-alone public entity.

*** ***

***Other Income (Expense)***

 

Interestincome was $0.2 million for the three months ended September 30, 2010, comparedto $0.1 million for the three months ended September 30, 2009 and consisted ofinterest earned on short-term investments. Interest expense increased to $11.4 million during the three monthsended September 30, 2010, from $0.1 million for the three months endedSeptember 30, 2009.  This increaseresulted from the issuance of our senior notes on November 25, 2009, includingaccretion of original issue discount and amortization of deferred financingcosts.  Interest expense is net ofcapitalized interest of $6.1

 

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million and $3.6 million forthe three months ended September 30, 2010 and 2009, respectively.  See “—Liquidity and Capital Resources—SeniorUnsecured Notes” below.

 

***Income TaxProvision***

 

Because we generally are nota taxable entity, our unaudited consolidated financial statements for the threeand nine months ended September 30, 2010, reflect only income taxes onpre-tax income attributable to our corporate subsidiaries. For the three andnine months ended September 30, 2009, which is prior to the IPO, ourunaudited consolidated financial statements reflect income taxes recognized byRTEA.  The provision for income taxes forthe three months ended September 30, 2010, and September 30, 2009, was abenefit $1.3 million and expense of $21.3 million, respectively. The decreaseis primarily due to the fact that most of the entity’s income is no longertaxable due to our non-tax paying status as well as deferred tax benefitrecognized on the corporate tax returns as filed in September 2010. See “Note4. Income Taxes” of Notes to Unaudited Condensed Consolidated FinancialStatements in Item 1.

 

***Discontinued Operations***

 

Therewere no discontinued operations for the three months ended September 30,2010.  Income from discontinuedoperations, net of income tax, of $20.3 million for the three months endedSeptember 30, 2009, represented the results from the Jacobs Ranch mine, whichwas sold on October 1, 2009.

*** ***

***Net Income***

 

Asa result of the factors discussed above, net income for the three months endedSeptember 30, 2010 was $55.3 million compared to $72.8 million for the threemonths ended September 30, 2009.

*** ***

***Nine Months Ended September 30, 2010,Compared to the Nine Months Ended September 30, 2009***

*** ***

***Revenues***

 

Revenueswere approximately $1,025.0 million for the nine months ended September 30,2010, compared to approximately $1,061.0 million for the nine months endedSeptember 30, 2009, a decrease of $36.0 million or 3.4%.

 

Revenuesfrom the sale of coal produced at the three mines that we own and operate isthe largest portion of our revenue, and totaled $866.9 million for the ninemonths ended September 30, 2010, compared to $813.1 million for the nine monthsended September 30, 2009.  This $53.8million or 6.6% increase reflects a 2.9% increase in the average price per tonof coal sold, to $12.31 in 2010, from $11.96 in 2009, plus a 3.5% increase inshipments, to 70.4 million tons in 2010, from 68.0 million tons in 2009.

 

Ourshare of revenues from coal produced at the Decker mine decreased by $5.2million or 24.8% to $15.8 million for the nine months ended September 30, 2010,compared to the nine months ended September 30, 2009.  In April 2010, Decker entered into a salescontract that will extend production and mine life into 2013.  Shipment volumes for the nine months endedSeptember 30, 2010, reflected a decline compared to the nine months endedSeptember 30, 2009, prior to deliveries starting under the new contract.

 

Theremaining balance of our revenues, which consist primarily of broker coal salesand billings for transportation and delivery services, totaled $142.3 millionand $226.9 million for the nine months ended September 30, 2010 and 2009,respectively.  This decrease is primarilythe result of the expiration of a long-term broker sales contract in the firstquarter of 2010 (see “—Overview” above), offset by stronger export revenues andcontract buyouts.  Other revenues in thenine months ended September 30, 2010, included $7.1 million from contractbuyout settlements.

*** ***

***Cost of Product Sold***

 

Costof product sold, excluding depreciation, depletion, amortization and accretion,was $719.0 million for the first nine months of 2010, compared to$703.7 million for the nine months ended September 30, 2009, a $15.3million or 2.2% increase.  Cost ofproduct sold was 70.1% and 66.3% of revenues for those same periods,respectively.

 

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Thelargest component of cost of product sold is the cost of coal produced at thethree mines that we own and operate, which totaled $592.3 million for the ninemonths ended September 30, 2010, compared to $539.9 million for the nine monthsended September 30, 2009, an increase of approximately 9.7%.  This increase reflects a 3.6% increase intons shipped from our mines and a 5.9% increase in the cost per ton of coalproduced, to $8.41 in 2010, from $7.94 in 2009. The increase in the cost per ton of coal produced is primarily the resultof increases in royalties and taxes, the cost of diesel fuel and lubricants,and a higher strip ratio in 2010 compared to 2009, as our mines move intodeeper mining areas.  Our share of thecost of coal produced by the Decker mine decreased $3.7 million in 2010,reflecting lower production volumes partially offset by higher unit productioncosts.

 

Theremaining portion of cost of product sold consists of $110.6 million and $144.0million as of September 30, 2010 and 2009, respectively, a decrease of23.2%.  This change is due to a decreasein costs associated with the expiration of a long-term broker sales contract inthe first quarter of 2010 partially offset by higher freight and handling feesdue to increased international sales.  Inaddition, we recorded a $3.4 million favorable adjustment to freight costs inthe first quarter of 2010 for the write off of certain prior year accruals,which were considered immaterial.

*** ***

***Depreciation andDepletion***

 

Depreciationand depletion expense was $75.2 million for the nine months ended September 30,2010, compared to $68.4 million for the nine months ended September 30,2009, an increase of $6.8 million, or 9.9%. The increase is primarily attributable to a $3.9 million increase indepreciation as a result of a higher capital base following increased investmentand capital expenditures in recent years and a $2.2 million increase indepletion of mineral rights and mine development costs.

*** ***

***Amortization***

 

Amortizationexpense was $3.2 and $24.8 million for the nine months ended September 30,2010 and 2009, respectively.  The$3.2 million in amortization expense was recorded in the first quarter andrepresents the final amortization related to a long-term broker sales contractthat expired in March 2010, and decreased from 2009 correspondingly with thedecrease in revenue related to that contract (see “—Overview” above).

*** ***

***Accretion***

 

Accretionexpense, related to asset retirement obligations, was $9.9 million and$8.4 million for the nine months ended September 30, 2010 and 2009,respectively.  The $1.5 million or 17.9%increase is consistent with the progression of the lives of our mines.

*** ***

***Selling, Generaland Administrative Expenses***

 

Selling,general and administrative expenses were $47.2 million for the nine monthsended September 30, 2010, compared to $49.1 million for the nine monthsended September 30, 2009.  This $1.9million or 3.9% decrease reflects costs incurred in 2009 associated with ourseparation from Rio Tinto that were not incurred in 2010 offset by the costs tooperate as a stand-alone public entity.

*** ***

***Other Income (Expense)***

 

Interestincome was $0.4 million and $0.2 million for the nine months ended September30, 2010 and 2009, respectively, and consisted of interest earned on short-terminvestments.  Interest expense increasedto $36.2 million during the nine months ended September 30, 2010, from $1.0million for the nine months ended September 30, 2009.  This increase resulted from the issuance ofour senior notes on November 25, 2009, including accretion of original issuediscount and amortization of deferred financing costs.  Interest expense is net of capitalizedinterest of $18.0 million and $11.2 million for the nine months ended September30, 2010 and 2009, respectively.  See “—Liquidityand Capital Resources—Senior Unsecured Notes” below.

 

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***Income TaxProvision***

 

Because we generally are nota taxable entity, our unaudited consolidated financial statements for the threeand nine months ended September 30, 2010, reflect only income taxes onpre-tax income attributable to our corporate subsidiaries. For the three andnine months ended September 30, 2009, which is prior to the IPO, our unauditedconsolidated financial statements reflect income taxes recognized by RTEA.  The provision for income taxes for the ninemonths ended September 30, 2010, and September 30, 2009, were benefit of $1.3million and expense of $59.9 million, respectively. The decrease is primarilydue to the fact that most of the entity’s income is no longer taxable due toour non-tax paying status as well as deferred tax benefit recognized on thecorporate tax returns as filed in September 2010.  See “Note 4. Income Taxes” of Notes to UnauditedCondensed Consolidated Financial Statements in Item 1.

*** ***

***DiscontinuedOperations***

 

Therewere no discontinued operations for the nine months ended September 30,2010.  Income from discontinuedoperations, net of income tax, of $42.8 million for the first nine months endedSeptember 30, 2009, represented the results from the Jacobs Ranch mine, whichwas sold on October 1, 2009.

*** ***

***Net Income***

 

Asa result of the factors discussed above, net income for the nine months endedSeptember 30, 2010, was $139.2 million, compared to net income of$190.1 million for the nine months ended September 30, 2009.

** **

**Liquidity and Capital Resources**

 

Totalunrestricted cash and cash equivalents as of September 30, 2010, andDecember 31, 2009, was $287.7 million and $268.3 million,respectively.  We also maintained $218.4million and $80.2 million in restricted cash accounts as of those same dates,respectively, which collateralize outstanding surety bonds securing ourobligations to reclaim lands used for mining and also secure coal leaseobligations.  In October 2010,approximately $36.4 million of our restricted cash was released due toreductions in collateral requirements under our surety agreements.

 

Inaddition to our cash and cash equivalents, our primary sources of liquidity arecash from our operations and borrowing capacity under our $400 millionrevolving credit facility.  As ofSeptember 30, 2010, our borrowing capacity under the revolving credit facilitywas $389.5 million as a result of letters of credit issued under thefacility.  Our ability to borrow underour revolving credit facility is subject to the terms and conditions of thefacility, including our compliance with financial and non-financial covenants.  As of September 30, 2010, we were incompliance with the required terms and conditions of the facility.

 

Ourprimary uses of cash include our cash costs of coal production, planned capitalexpenditures, interest payments on our senior notes, federal coal leaseinstallment payments, and on-going payments to RTEA under the Tax ReceivableAgreement and pro-rata distributions to the Rio Tinto members of CPE Resources.

 

Webelieve the above sources will be sufficient to fund our primary uses of cashfor the next 12 months.

*** ***

***ContinuingOperations***

 

Netcash provided by operating activities from continuing operations was $262.2million for the nine months ended September 30, 2010, compared to $351.0million for the nine months ended September 30, 2009.  This $88.8 million decrease reflects adecrease in net income of $8.1 million, an increase in non-cash expenses andother adjustments before changes in working capital of $15.4 million and a$65.3 million decrease in working capital. The increase from adjustments before changes in working capital waslargely due to a change in amortization. The decrease in working capital was largely driven by a reduction inrelated party receivables as a result of changes in our relationship with RioTinto through the IPO structuring transactions.

 

Netcash used in investing activities from continuing operations was $192.9 millionfor the nine months ended September 30, 2010, compared to $347.7 millionfor the nine months ended September 30, 2009. The $154.8 million

 

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decrease in cash used ininvesting activities from continuing operations was primarily the result of a$259.7 million decrease in cash advances to affiliates as a result of the cessationof the cash management program we were under with Rio Tinto prior to the IPOstructuring transactions and a $ 32.1 million decrease in the cash paid forproperty, plant and equipment, including capitalized interest.  Year-to-date property, plant, and equipmentpurchases include the acquisition of the lease by modification at the SpringCreek mine and the purchase of approximately 11 million tons of privately heldcoal.  These decreases were partiallyoffset by a $138.2 million increase in restricted cash to collateralize suretybonds obligations.  See “—Off-BalanceSheet Arrangements” below.

 

Netcash used in financing activities from continuing operations was $49.9 millionfor the nine months ended September 30, 2010, compared to $65.6 million for thenine months ended September 30, 2009. This decrease in cash used in financing activities from continuingoperations was primarily attributable to a $18.0 million reduction inrepayments of other long-term debt.

*** ***

***DiscontinuedOperations***

 

Therewere no discontinued operations for the 2010 period.  Net cash provided from discontinuedoperations of $64.7 million for the nine months ended September 30, 2009, was aresult of cash provided from the Jacobs Ranch mine, which was sold on October1, 2009.

*** ***

***Senior Unsecured Notes***

 

Our senior notes due in 2017(the “2017 Notes”) and senior notes due in 2019 (the “2019 Notes”), which werefer to collectively as the senior notes, were registered on September 23,2010 and each have an outstanding aggregate principal amount of $300 million asof September 30, 2010.  Net of originalissue discounts, the aggregate balance reflected on the balance sheet as ofSeptember 30, 2010, was $595.6 million. The 2017 Notes and 2019 Notes bear interest at fixed annual rates of8.25% and 8.50%, respectively, and mature on December 15, 2017 and 2019,respectively.  There are no mandatoryredemption or sinking fund payments for the senior notes and interest paymentsare due semi-annually on June 15 and December 15.  The initial interest payments of $27.9million for the period covering November 25, 2009 to June 1, 2010 were made onJune 15, 2010.

 

The indenture governing thesenior notes, among other things, limits our ability and the ability of ourrestricted subsidiaries to incur additional indebtedness and issue preferredequity; pay dividends or distributions; repurchase equity or repay subordinatedindebtedness; make investments or certain other restricted payments; createliens; sell assets; enter into agreements that restrict dividends,distributions or other payments from restricted subsidiaries; enter intotransactions with affiliates; and consolidate, merge or transfer all orsubstantially all of their assets and the assets of their restrictedsubsidiaries on a combined basis.  Wewere in compliance with its required terms and conditions as of September 30,2010.

*** ***

***Senior Secured Revolving Credit Facility***

 

Asof September 30, 2010, no amounts had been drawn under our $400 million creditfacility although $10.5 million was committed in connection with the issuanceof letters of credit.  The letters ofcredit are used as collateral to secure our obligations to reclaim lands usedfor mining.  See “—Off-Balance SheetArrangements” below.

 

We are subject to financialmaintenance covenants based on EBITDA (which is defined in the credit agreementand may not be the same as EBITDA presented elsewhere in this report or ourother public disclosures), as well as non-financial covenants that restrictcertain corporate activities and certain of our subsidiaries.  The credit agreement contains customaryevents of default with customary grace periods and thresholds.  We were in compliance with its required termsand conditions as of September 30, 2010.

*** ***

***Federal Coal Lease Obligations***

 

Ourfederal coal lease obligations consist of amounts payable to the Bureau of LandManagement, each of which require five equal annual payments.  The remaining aggregate annual payments underour existing federal coal lease obligations total $137.1 million, with $4.0million due in the remainder of 2010.  Wemade total payments of $59.8 million during the nine months ended September 30,2010.  The outstanding principal balanceof our federal coal lease obligations

 

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was $121.8 million as ofSeptember 30, 2010.  The $15.3 milliondifference between the total payments and the principal balance reflected onour balance sheet represents imputed interest, which will be recognized overthe remainder of the lease terms.

 

**Off-Balance Sheet Arrangements**

 

Inthe normal course of business, we are party to a number of arrangements thatsecure our performance under certain legal obligations.  These arrangements include letters of creditand surety bonds.  We use thesearrangements primarily to comply with federal and state laws that require us tosecure the performance of certain long-term obligations, such as mine closureor reclamation costs, coal lease obligations, state workers’ compensation andfederal black lung liabilities.  Thesearrangements are typically renewable annually.

 

Asof September 30, 2010, we had $519.8 million in surety bonds and $10.5 millionin outstanding letters of credit to secure certain of our obligations toreclaim lands used for mining and to secure coal lease obligations that are notreflected in our unaudited condensed consolidated balance sheet.  Thesesurety bonds are collateralized by a restricted cash balance of $218.4million.  Our surety bonds are usedprimarily to secure reclamation obligations, which include amounts to secureperformance related to our outstanding obligations to reclaim areas disturbedby our mining activities and are a requirement under our state mining permits;lease obligations, which are generally required as a condition to state orfederal coal leases; and other obligations, which include exploration permits,water well construction and monitoring and other miscellaneous items asmandated by the applicable governing agencies.  Our outstanding letters ofcredit issued under our revolving credit facility secure our share ofadditional Decker reclamation obligations.

** **

**Item 3.  *Quantitative andQualitative Disclosures About Market Risk.***

 

Wedefine market risk as the risk of economic loss as a consequence of the adversemovement of market rates and prices.  Webelieve our principal market risks are commodity price risk and interest raterisk.

*** ***

***Commodity Price Risks***

 

Marketrisk includes the potential for changes in the market value of our coalcontract portfolio.  All of our planned2010 production is fully committed and a significant portion of our planned2011 production is committed.  Due to thelong-term nature of our forward sales position, we are not able to quantify ourmarket risk relative to current quoted market prices.  In addition, assuming our customers take andpay for the coal volumes as set forth in our contracts, our 2010 commodityprice risk is limited to the committed and unpriced agreements.  Historically, we have principally managed thecommodity price risk for our coal contract portfolio through the use oflong-term coal supply agreements of varying terms and durations, rather thanthrough the use of derivative instruments.

 

Wealso face price risk involving other commodities used in our productionprocess.  We believe that price risksassociated with diesel fuel and explosives are significant because of therecent price fluctuations for these commodities.  Based on our projections of our usage ofthese commodities for the next 12 months, and assuming that the average cost ofdiesel fuel and explosives increase by 10%, respectively, we would incuradditional fuel and explosive costs of approximately $7 million and $5 million,respectively, over the next twelve months. Historically, we have not hedged commodities such as diesel fuel andnatural gas.  We may enter into hedgingarrangements in the future.

*** ***

***Interest Rate Risk***

 

Ourcredit facility is subject to an adjustable interest rate.  See Item 2 “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and CapitalResources—Senior Secured Revolving Credit Facility.” We had no outstandingborrowings under our credit facility as of September 30, 2010.  To the extent that we borrow under therevolving credit facility, we may be subject to increased sensitivity tointerest rate movements as they relate to CPE Resources’ ability to repayits debt.  Any future debt arrangementsthat we enter into may also require borrowings at adjustable interest ratesthat may increase our sensitivity to interest rate movements.

 

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**Item 4.  *Controls and Procedures.***

** **

**Disclosure Controls andProcedures**

 

In the process of preparingour consolidated financial statements for prior periods in connection with the2009 IPO, we identified material weaknesses in our internal controls overfinancial reporting that contributed to a restatement of our 2005, 2006 and2007 consolidated financial statements and September 30, 2008, interimcondensed consolidated financial statements. Prior to the IPO, as an indirect wholly-owned subsidiary of Rio Tinto,we were not required to and we did not maintain a sufficient complement ofpersonnel with an appropriate level of accounting, taxation and financial reportingknowledge, experience and training in the application of U.S. GAAP commensuratewith our financial reporting requirements on a stand-alone basis and thecomplexity of our operations and transactions. We also did not maintain an adequate system of processes and internalcontrols sufficient to support our financial reporting requirements and producetimely and accurate U.S. GAAP consolidated financial statements consistent withbeing a stand-alone, public company.

 

A material weakness is adeficiency, or a combination of deficiencies, in internal control overfinancial reporting, such that there is a reasonable possibility that amaterial misstatement of our annual or interim financial statements will not beprevented or detected on a timely basis. A deficiency in internal control over financial reporting exists whenthe design or operation of a control does not allow management or employees, inthe normal course of performing their assigned functions, to prevent or detectmisstatements on a timely basis.

 

In preparation for thefiling of our 2009 Form 10-K, management performed an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures as of December 31, 2009, and concluded that the previouslyidentified material weaknesses were not yet remediated.  As a result, during the three months endedSeptember 30, 2010, we continued to identify and implement changes andimprovements in our internal control over financial reporting to remediate thecontrol deficiencies that gave rise to the material weaknesses.  These changes include:

 

·                  additional personnel changes in theaccounting and financial reporting areas;

 

·                  continuing policy and procedure changes aspart of our on-going program to strengthen the organization structure,financial reporting procedures and system of internal control over financialreporting; and

 

·                  continuing to make other changes to improvethe effectiveness of our internal control over financial reporting, includingdocumenting and starting to test and remediate our key internal controls.

 

These remedial steps willneed to be placed in operation for a sufficient period of time before we canevaluate the overall effectiveness of our remediation plan and be able toconclude that the material weaknesses have been remediated.  As such, our management, under the supervisionand with the participation of our Chief Executive Officer and Chief FinancialOfficer, has concluded that our disclosure controls and procedures, which aredesigned to provide reasonable assurance that information required to bedisclosed in reports filed under the Securities and Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within the specifiedtime periods and accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure, were ineffective as ofSeptember 30, 2010.

 

Notwithstanding theidentified material weaknesses, management concluded that the financialstatements and other financial information included in this Quarterly Report onForm 10-Q fairly present, in all material respects, the financial condition,results of operations and cash flows of Cloud Peak Energy Resources LLC as ofand for the periods presented in conformity with U.S. GAAP.

 

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect thatour disclosure controls and procedures or our internal controls will preventall error and all fraud.  A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system are met.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance thatall control issues and instances of fraud, if any, within the Company have beendetected.

 

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** **

**Changes in Internal Control OverFinancial Reporting**

 

As described above, therewere changes in our internal control over financial reporting during the threemonths ended September 30, 2010, that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II**

** **

**OTHER INFORMATION**

** **

**Item 1.  *Legal Proceedings.***

 

SeeNote 7 to the unaudited condensed consolidated financial statements included inPart I, Item 1 of this report relating to certain legal proceedings, whichinformation is incorporated by reference herein.

** **

**Item 1A.  *Risk Factors.***

 

Inaddition to the other information set forth in this report, you shouldcarefully consider the risks and uncertainties described in Item 1A of our 2009Form 10-K.  The risks described in our2009 Form 10-K are not the only risks we may face.  If any of those risk factors, as well asother risks and uncertainties that are not currently known to us or that wecurrently believe are not material, actually occur, our business, financialcondition, results of operations and cash flows could be materially andadversely affected.  In our judgment,there were no material changes in the risk factors as previously disclosed inItem 1A of our 2009 Form 10-K.

** **

**Item2.  *Unregistered Sales ofEquity Securities and Use of Proceeds.***

 

None.

 

**Item3.  *Defaults Upon SeniorSecurities.***

 

None.

** **

**Item4.  *(Removed and Reserved).***

** **

**Item5.  *Other Information.***

** **

**StrongSafety Performance**

 

Weoperate three wholly-owned surface coal mines.  The Antelope mine andCordero Rojo mine are in northeast Wyoming, and the Spring Creek mine is insouth east Montana.  We also own, but do not operate, a 50% interest in afourth surface coal mine in southeast Montana, Decker mine.

 

Oneof our most important values is ensuring the safety of our employees andcontractors by operating in a safe and responsible manner and protecting theenvironment in which we live and work.  We have extensive safety systemsthat have been developed over many years.  We continue to focus ondeveloping these systems and the safety leadership skills of our frontlinesupervisors.  We spend considerable time working in collaboration with ourcontractors to improve their safety performance while on our sites.  Weuse external audits to maintain certifications of our Health, Safety andEnvironment Management System.  A subset of this system is ourcertification under ISO-14001 and OHSAS-18001 programs, which cover EnvironmentManagement Systems and Occupational Health and Safety.  Our mines are alsoregularly inspected by the Mine Safety and Health Administration (MSHA) andstate mine inspectors as part of their normal programs.

 

Wehad a strong safety performance in 2009.  According to MSHA data for ourthree owned and operated mines, we had the lowest 2009 all injury frequencyrate (AIFR) among the ten largest U.S. coal producers of 0.66.  The AIFRis the number of reportable injuries suffered by employees per 200,000 hoursworked.  We substantially outperformed our 2009 safety target of 0.88AIFR.  Notably, the Antelope mine reached four million man-hours without alost time incident at the end of 2009, and the Spring Creek mine was arunner-up in 2009 in the esteemed national Sentinels of Safety award for largesurface coal groups.

 

Forthe first nine months of 2010, the AIFR for our three owned and operated mineswas 0.66 (calculated internally based on MSHA methodology).

 

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**Quarterly Reporting Pursuant to Wall Street Reform andConsumer Protection Act Section 1503**

 

Asprovided by Section 1503 of the Wall Street Reform and Consumer Protection Act,Cloud Peak Energy provides the following safety-related information for ourthree operated mines for the third quarter of 2010:

 
| **Item**                                                                                                  | ** ** | **Antelope Mine** | ** ** | **Cordero Rojo  Mine**                      | ** ** | **Spring Creek  Mine** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------------------------|------------|-----------------------------|------------|
| Section 104 S&S citations (#)(1)                                                                      |       | —                 |       | 3                                                |       | —                      |       |
| Section 104(b) orders (#)(2)                                                                              |       | —                 |       | —                                           |       | —                      |       |
| Section 104(d) citations and orders (#)(3)                                                                |       | —                 |       | —                                           |       | —                      |       |
| Section 110(b)(2) violations (#)(4)                                                                       |       | —                 |       | —                                           |       | —                      |       |
| Section 107(a) orders (#)(5)                                                                              |       | —                 |       | —                                           |       | —                      |       |
| Proposed MSHA assessments ($)(6)                                                                          |       | —                 |       | $                                                | 2,395      |                        | —     |   |
| Fatalities (#)(7)                                                                                         |       | —                 |       | —                                           |       | —                      |       |
| Section 104(e) notices(8)                                                                                 |       | —                 |       | —                                           |       | —                      |       |
| Pending Mine Safety Commission legal actions  (including any contested penalties for citations issued)(9) |       | —                 |       | One pending proceeding under Section 105(c) (10) |       | —                      |       |
|                                                                                                           |            |                        |            |                                                  |            |                             |            |  |

 

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(1)                      Total number of violationsof mandatory health or safety standards that could significantly andsubstantially contribute to the cause and effect of a coal mine safety orhealth hazard under section 104 of the Federal Mine Safety and Health Act of1977 (30 U.S.C. 814) (the Act) for which we received a citation from MSHA.

 

(2)                      Total number of ordersissued under section 104(b) of the Act (30 U.S.C. 814(b)).

 

(3)                      Total number of citationsand orders for unwarrantable failure of Cloud Peak Energy to comply withmandatory health or safety standards under section 104(d) of the Act (30 U.S.C.814(d)).

 

(4)                      Total number of flagrantviolations under section 110(b)(2) of the Act (30 U.S.C. 820(b)(2)).

 

(5)                      Total number of imminentdanger orders issued under section 107(a) of the Act (30 U.S.C. 817(a)).

 

(6)                      Total dollar value ofproposed assessments from MSHA under the Act (30 U.S.C. 801 et seq.).

 

(7)                      Total number ofmining-related fatalities.

 

(8)                      Any mines owned and operatedby us that received written notice from MSHA of (A) a pattern of violations ofmandatory health or safety standards that are of such nature as could havesignificantly and substantially contributed to the cause and effect of coalmine health or safety hazards under section 104(e) of such Act (30 U.S.C.814(e)); or (B) the potential to have such a pattern.

 

(9)                      Any pending legal actionbefore the Federal Mine Safety and Health Review Commission involving a coalmine owned and operated by us.

 

(10)                 Docket No. WEST 2010-1314-Din which a terminated employee claims that such termination constitutedunlawful retaliation for alleged safety-related statements made to the company.

 

**Item 6.  *Exhibits.***

 

See Exhibit Index at page 38 of this report.

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                          |   | CLOUD  PEAK ENERGY INC.                                                                                           |
|-------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|
|                          |   |                                                                                                              |
|                          | By:    | /s/  MICHAEL BARRETT                                                                                              |
| Date:  November 10, 2010 |   | Michael  Barrett                                                                                                  |
|                          |   | *Executive Vice President and Chief Financial Officer  (Principal Financial Officer and Duly Authorized Officer)* |

 

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**EXHIBIT INDEX**

 

Theexhibits below are numbered in accordance with the Exhibit Table ofItem 601 of Regulation S-K.

 
| **Exhibit  Number** | ** ** | **Description of Documents**                                                                   |
|---------------------|------------|----------------------------------------------------------------------------------------------------------|
| 31.1*               |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2*               |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1*               |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2*               |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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* Filed or furnishedherewith

 

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