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 anticipates purchasing approximately 75 to 80 million gallons of diesel fuel for use in its operations during 2012. 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 March 31, 2012, the Company had protected the price of approximately 85% of its expected purchases for the remainder of fiscal year 2012 and 55% of its first quarter of 2013 purchases.

At March 31, 2012, the Company had purchased heating oil call options for approximately 59 million gallons for the purpose of managing the price risk associated with future diesel purchases. During the first quarter of 2012, the Company determined the effectiveness of the heating oil options could not be established as of December 31, 2011 and on an ongoing basis. As a result, the amount remaining in accumulated other comprehensive income of $8.2 million, or $5.2 net of income taxes, was recorded in earnings, in the “other income, net” line on the condensed consolidated statement of income. The out of period adjustment is not deemed material to prior period results, the expected results of the full 2012 fiscal year or for the trend of earnings of the Company.

The Company also purchased heating oil call options to hedge the fuel surcharges on its barge and rail shipments that cover increases in diesel fuel prices. These positions reduce the Company’s risk of cash flow fluctuations related to these surcharges but the positions are not accounted for as hedges. At March 31, 2012, Company held purchased call options for approximately 15.5 million gallons for the purpose of managing the fluctuations in cash flows associated with fuel surcharges on future shipments.

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 March 31, 2012, the Company held derivatives for risk management purposes that are expected to settle in the following years :


(Tons in thousands)
	2012	2013	2014	2015
Coal sales	(3,025)	(1,117)	(1,440)	(720)
Coal purchases	417	-	-	-

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 estimated future realization of the value of the trading portfolio is $4.3 million of losses in 2012 and $2.2 million of losses in 2013.

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 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 consolidated balance sheets. The fair value and location of derivatives reflected in the accompanying consolidated balance sheets are as follows:


	March 31, 2012			December 31, 2011
Fair Value of Derivatives	Asset	Liability		Asset	Liability
(In thousands)	Derivative	Derivative		Derivative	Derivative
Derivatives Designated as Hedging Instruments
Heating oil — diesel purchases	$ -	$ -		$ 8,997	$ -
Coal	3,256	(218)		1,109	-
Total	3,256	(218)		10,106	-
Derivatives Not Designated as Hedging Instruments
Heating oil — diesel purchases	12,869	-		-	-
Heating oil — fuel surcharges	2,837	-		1,797	-
Coal — held for trading purposes	26,945	(33,411)		15,505	(19,927)
Coal	22,491	(6,119)		14,855	(6,035)
Total	65,142	(39,530)		32,157	(25,962)
Total derivatives	68,398	(39,748)		42,263	(25,962)
Effect of counterparty netting	(30,648)	30,648		(18,134)	18,134
Net derivatives as classified in the balance sheets	$ 37,750	$ (9,100)	$ 28,650	$ 24,129	$ (7,828)	$ 16,301


		March 31,	December 31,
		2012	2011
Net derivatives as reflected on the balance sheets
Heating oil	Other current assets	$ 15,707	$ 10,794
Coal	Coal derivative assets	22,043	13,335
	Coal derivative liabilities	(9,100)	(7,828)
		$ 28,650	$ 16,301

The Company had a current asset for the right to reclaim cash collateral of $15.0 million and $12.4 million at March 31, 2012 and December 31, 2011, respectively. These amounts are not included with the derivatives presented in the table above and are included in “other current assets” in the accompanying consolidated balance sheets.

The effects of derivatives on measures of financial performance are as follows for the three month periods ended March 31:

Three Months Ended March 31

Derivatives used in Fair Value Hedging

Hedged Items in Fair Value

Loss on Hedged Items In Fair

Relationships (in thousands)

Hedge Relationships

Value Hedge Relationships

2012

2011

2012

2011

Coal

Firm commitments


Derivatives used in Cash Flow Hedging Relationships
(in thousands)						Gains (Losses) Reclassified
		Gain (Loss) Recognized in OCI				from OCI into Income
		(Effective Portion)				(Effective Portion)
		2012		2011		2012		2011
Heating oil — diesel purchases	$	-	$	14,258	$	-	$	3,170	(2)
Coal sales		2,493		1,406		201		87	(1)
Coal purchases		(202)		(876)		-		—	(2)
Totals	$	2,291	$	14,788	$	201	$	3,257


		Gain (Loss) Recognized in
		Income (Ineffective Portion
		and Amount Excluded from
		Effectiveness Testing)
		2012		2011
Heating oil — diesel purchases	$	-	$	-
Coal sales		-		-
Coal purchases		-		-
Totals	$	-	$	-


		Derivatives Not Designated as
		Hedging Instruments
		2012		2011
Coal — unrealized	$	7,552	$	(1,045)	(3)
Coal — realized		3,158		-	(4)
Heating oil — diesel purchases		423		-	(4)
Heating oil — fuel surcharges — unrealized	$	367	$	-	(4)

Location in Statement of Income:

(1) — Revenues

(2) — Cost of 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 losses of $3.9 million and net unrealized and realized gains of $2.8 million during the three months ended March 31, 2012 and 2011, 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 consolidated statements of income and are not included in the previous table.

During the next twelve months, based on fair values at March 31, 2012, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $3.2 million are expected to be reclassified from other comprehensive income into earnings.