Equity-Based Compensation (CPE Inc. only)

3 Months Ended

Mar. 31, 2013

Equity-Based Compensation (CPE Inc. only)

Equity-Based Compensation (CPE Inc. only)

15.  Equity-Based Compensation (CPE Inc. only)

The Cloud Peak Energy Inc. 2009 Long Term Incentive Plan (“LTIP”) permits awards to our employees and eligible non-employee directors.  The LTIP allows for the issuance of equity-based compensation in the form of restricted stock, restricted stock units, options, stock appreciation rights, dividend equivalent rights, performance awards, and share awards.  Equity-based compensation expense is charged to CPE Resources through a management fee and is recorded primarily within selling, general, and administrative expenses in our consolidated statements of operations.  As of March 31, 2013, unrecognized compensation cost related equity-based compensation was $15.5 million, which will be recognized over a weighted-average period of 2.3 years prior to vesting.

Restricted Stock and Restricted Stock Units

We granted restricted stock and restricted stock units under the LTIP to eligible employees and directors.  Generally, the related agreements provide that full vesting will occur on the third anniversary of the grant date.  However, pro-rata vesting will be sooner if a grantee terminates employment with or stops providing services to us because of death, disability, redundancy or retirement.  Full vesting will occur if an employee is terminated without cause within two years after a change in control occurs (as such term is defined in the LTIP).  Restricted stock units are granted to our directors and generally vest upon their resignation or retirement.  They will pro-rata vest if a director resigns or retires within one year of the date of grant.

A summary of restricted stock and restricted stock unit award activity is as follows (in thousands, except per share data):

			Weighted
			Average
			Grant-Date
	Number		Fair Value
			(per share)
Non-vested shares at January 1, 2013	304		$	18.46
Granted	146		17.77
Forfeited	(1	)	18.76
Vested	(55	)	16.22
Non-vested shares at March 31, 2013	394		$	18.52

Performance-Based Share Units

The LTIP allows for the award of performance share units which cliff vest after three years, subject to continued employment (with accelerated vesting upon a change in control).  Performance-based share units granted represent the number of shares of common stock to be awarded based on the achievement of targeted performance levels related to pre-established total stockholder return goals over a three year period and may range from 0% to 200% of the targeted amount.  The grant date fair value of the awards is based upon a Monte Carlo simulation and is amortized over the performance period.

A summary of performance-based share unit award activity is as follows (in thousands, except per share data):

			Weighted
			Average
			Grant-Date
	Number		Fair Value
			(per share)
Non-vested units at January 1, 2013	376		$	18.66
Granted	228		20.24
Forfeited	(1	)	18.71
Vested	—		—
Non-vested units at March 31, 2013	603		$	19.26

The assumptions used to estimate the fair value of the performance-based share units are as follows:

Risk-free interest rate	0.4		%
Expected volatility	42.54		%
Term	3 years
Fair value (per share)	$	20.24

Non-Qualified Stock Options

Annually, we grant non-qualified stock options under the LTIP to certain employees.  Generally, the agreements provide that any option awarded will become exercisable in three years.  However, the option will become pro-rata exercisable sooner if a grantee terminates employment because of death, disability, redundancy or retirement.  The option award will fully vest if an employee is terminated without cause within two years after a change in control occurs (as such term is defined in the LTIP).  No option can be exercised more than ten years after the date of grant.  Each award will be forfeited if the grantee terminates employment with or stops providing services to us for any reason other than those reasons noted above.

A summary of non-qualified stock option activity is as follows (in thousands, except per option and year amounts):

					Weighted-
			Weighted-		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Number		Price		Term	Value (1)
			(per option)		(years)
Options outstanding at January 1, 2013	1,332		$	15.95	7.38	$	4,720
Granted	229		17.50		10.00
Exercised	—		—
Forfeited	(3	)	16.35
Options outstanding at March 31, 2013	1,558		$	16.18	7.55	$	4,344
Exercisable at March 31, 2013	992		$	15.06	6.65	$	3,687
Vested and expected to vest at March 31, 2013	1,534		$	16.16	7.52	$	4,309

(1) The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option at period-end.

We used the Black-Scholes option pricing model to determine the fair value of stock options.  Determining the fair value of equity-based awards requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, and the associated volatility.  As we have no historical exercise history, expected option life assumptions were developed using the simplified method as outlined in Topic 14, Share-Based Payment, of the Staff Accounting Bulletin Series.  We utilized U.S. Treasury yields as of the grant date for our risk-free interest rate assumption, matching the treasury yield terms to the expected life of the option.  We utilized a 6.5 year peer historical lookback to develop our expected volatility.

The assumptions used to estimate the fair value of options granted on March 11, 2013 are as follows:

Risk-free interest rate	1.4		%
Expected option life	6.5 years
Expected volatility	49.7		%
Fair value (per option)	$	8.72