8. Derivatives

The Company generally utilizes derivative financial instruments to manage exposures to commodity prices. Additionally, the Company may hold certain coal derivative financial instruments for trading purposes.

All derivative financial instruments are recognized in the balance sheet at fair value. In a fair value hedge, the Company hedges the risk of changes in the fair value of a firm commitment, typically a fixed-price coal sales contract. Changes in both the hedged firm commitment and the fair value of a derivative used as a hedge instrument in a fair value hedge are recorded in earnings. In a cash flow hedge, the Company hedges the risk of changes in future cash flows related to a forecasted purchase or sale. Changes in the fair value of the derivative instrument used as a hedge instrument in a cash flow hedge are recorded in other comprehensive income. Amounts in other comprehensive income are reclassified to earnings when the hedged transaction affects earnings and are classified in a manner consistent with the transaction being hedged. The Company formally documents the relationships between hedging instruments and the respective hedged items, as well as its risk management objectives for hedge transactions.

The Company evaluates the effectiveness of its hedging relationships both at the hedge's inception and on an ongoing basis. Any ineffective portion of the change in fair value of a derivative instrument used as a hedge instrument in a fair value or cash flow hedge is recognized immediately in earnings. The ineffective portion is based on the extent to which exact offset is not achieved between the change in fair value of the hedge instrument and the cumulative change in expected future cash flows on the hedged transaction from inception of the hedge in a cash flow hedge or the change in the fair value of the firm commitment in a fair value hedge.

Diesel fuel price risk management

The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company purchases approximately 75 to 85 million gallons of diesel fuel annually in its operations. To reduce the volatility in the price of diesel fuel for its operations, the Company uses forward physical diesel purchase contracts, as well as heating oil swaps and purchased call options. At June 30, 2011, the Company had protected the price of approximately 70% of its expected purchases for the remainder of fiscal year 2011 and 41% for fiscal year 2012.

At June 30, 2011, the Company held heating oil swaps and purchased call options for approximately 66.8 million gallons for the purpose of managing the price risk associated with future diesel purchases. Since the changes in the price of heating oil highly correlate to changes in the price of the hedged diesel fuel purchases, the heating oil swaps and purchased call options qualify for cash flow hedge accounting.

Coal risk management positions

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.

At June 30, 2011, the Company held derivatives for risk management purposes totaling 1.3 million tons of coal sales and 0.6 million tons of coal purchases that are expected to settle during the remainder of 2011, 1.3 million tons of coal sales and 0.2 million tons of coal purchases that are expected to settle in 2012, 0.7 million tons of coal sales that are expected to settle in 2013, 1.4 million tons of coal sales that are expected to settle in 2014 and 0.7 million tons of coal sales that are expected to settle in 2015.

Coal trading positions

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market for trading purposes. The Company is exposed to the risk of changes in coal prices on the value of its coal trading portfolio. The timing of the estimated future realization of the value of the trading portfolio is 50% for the remainder of 2011 and 50% in 2012.

Tabular derivatives disclosures

The Company's contracts with certain of its counterparties allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce the Company's credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the condensed consolidated balance sheets. The amounts shown in the table below represent the fair value position of individual contracts, regardless of the net position presented in the accompanying condensed consolidated balance sheets. The fair value and location of derivatives reflected in the accompanying condensed consolidated balance sheets are as follows:

Fair Value of Derivatives

(in thousands)


	June 30, 2011			December 31, 2010
	Asset Derivative	Liability Derivative		Asset Derivative	Liability Derivative
Derivatives Designated as Hedging Instruments
Heating oil	$ 18,101	$ —		$ 13,475	$ —
Coal	3,273	(1,924)		2,009	(2,350)
Total	21,374	(1,924)		15,484	(2,350)
Derivatives Not Designated as Hedging Instruments
Coal — held for trading purposes	18,780	(9,788)		34,445	(24,087)
Coal	1,352	(4,704)		1,139	(912)
Total	20,132	(14,492)		35,584	(24,999)
Total derivatives	41,506	(16,416)		51,068	(27,349)
Effect of counterparty netting	(10,625)	10,625		(22,402)	22,402
Net derivatives as classified in the balance sheets	$ 30,881	$ (5,791)	$ 25,090	$ 28,666	$ (4,947)	$ 23,719

Net derivatives as reflected on the balance sheets

		June 30, 2011	December 31, 2010
Heating oil	Other current assets	$ 18,101	$ 13,475
Coal	Coal derivative assets	12,780	15,191
	Coal derivative liabilities	(5,791)	(4,947)
		$ 25,090	$ 23,719

The Company had a current asset for the right to reclaim cash collateral of $9.2 million and $10.3 million at June 30, 2011 and December 31, 2010, respectively. These amounts are not included with the derivatives presented in the table above and are included in "other current assets" in the accompanying condensed consolidated balance sheets.

The effects of derivatives on measures of financial performance are as follows:

Three Months Ended June 30

(in thousands)


Derivatives used in Cash Flow Hedging	Gain (Loss) Recognized in OCI (Effective Portion)						Gains (Losses) Reclassified from OCI into Income (Effective Portion)						Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Relationships	2011			2010			2011			2010			2011		2010
Heating oil	$	(6,337	)	$	(8,572	)	$	6,654	(2)	$	1,925	(2)	$	—	$	—
Coal sales	1,344			(7,237		)	237		(1)	(1,201		)(1)	—		—
Coal purchases	97			7,167			—		(2)	—		(2)	—		—
Totals	$	(4,896	)	$	(8,642	)	$	6,891		$	724		$	—	$	—


Derivatives Not Designated as	Gain (Loss)
Hedging Instruments	2011			2010
Coal — unrealized	$	(374	)(3)	$	(3,466	)(3)
Coal — realized	$	147	(4)	$	1,252	(4)

Location in Statement of Income:

(1) Coal sales

(2) Cost of coal sales

(3) Change in fair value of coal derivatives and coal trading activities, net

(4) Other operating income, net

During the three months ended June 30, 2011 and 2010, the Company recognized net unrealized and realized losses of $2.3 million and $1.1 million, respectively, related to its trading portfolio (including derivative and non-derivative contracts). These balances are included in the caption "Change in fair value of coal derivatives and coal trading activities, net" in the accompanying condensed consolidated statements of income and are not included in the previous table.

Six Months Ended June 30

(in thousands)


Derivatives used in Cash Flow Hedging	Gain (Loss) Recognized in OCI (Effective Portion)						Gains (Losses) Reclassified from OCI into Income (Effective Portion)						Gain (Loss) Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Relationships	2011			2010			2011			2010			2011		2010
Heating oil	$	7,921		$	(8,560	)	$	9,824	(2)	$	(304	)(2)	$	—	$	—
Coal sales	2,750			(7,638		)	324		(1)	(1,330		)(1)	—		—
Coal purchases	(779		)	8,069			—		(2)	(336		)(2)	—		—
Totals	$	9,892		$	(8,129	)	$	10,148		$	(1,970	)	$	—	$	—


Derivatives Not Designated as	Gain (Loss)
Hedging Instruments	2011			2010
Coal — unrealized	$	(1,419	)(3)	$	(8,388	)(3)
Coal — realized	$	147	(4)	$	2,852	(4)

Location in Statement of Income:

1- Coal sales

2- Cost of coal sales

3- Change in fair value of coal derivatives and coal trading activities, net

4- Other operating income, net

The Company recognized net unrealized and realized gains of $0.5 million during the six months ended June 30, 2011 and net unrealized and realized losses of $2.1 million during the six months ended June 30, 2010 related to its trading portfolio (including derivative and non-derivative contracts). These balances are included in the caption "Change in fair value of coal derivatives and coal trading activities, net" in the accompanying condensed consolidated statements of income and are not included in the previous table.

During the next twelve months, based on fair values at June 30, 2011, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $17.9 million are expected to be reclassified from other comprehensive income into earnings.