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 73 to 78 million gallons of diesel fuel for use in its operations during 2012. To protect the Company’s cash flows from increases 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, 2012, the Company had protected the price of approximately 80% of its expected purchases for the remainder of fiscal year 2012 and 50% of its 2013 purchases. At June 30, 2012, the Company had purchased heating oil call options for approximately 71 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 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 June 30, 2012, the Company held purchased call options for approximately 18.0 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 June 30, 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	3,821	3,517	3,240	720
Coal purchases	1,168	420	720	-

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 $0.6 million of gains in the remainder of 2012 and $2.1 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, and not 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:


	June 30, 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	5,156	(1,284)		1,109	-
Total	5,156	(1,284)		10,106	-
Derivatives Not Designated as Hedging Instruments
Heating oil — diesel purchases	5,534	-		-	-
Heating oil — fuel surcharges	1,310	-		1,797	-
Coal — held for trading purposes	37,492	(38,921)		15,505	(19,927)
Coal – risk management	56,125	(12,307)		14,855	(6,035)
Total	100,461	(51,228)		32,157	(25,962)
Total derivatives	105,617	(52,512)		42,263	(25,962)
Effect of counterparty netting	(45,422)	45,422		(18,134)	18,134
Net derivatives as classified in the balance sheets	$ 60,195	$ (7,090)	$ 53,105	$ 24,129	$ (7,828)	$ 16,301


		June 30,	December 31,
		2012	2011
Net derivatives as reflected on the balance sheets
Heating oil	Other current assets	$ 6,844	$ 10,794
Coal	Coal derivative assets	53,351	13,335
	Coal derivative liabilities	(7,090)	(7,828)
		$ 53,105	$ 16,301

The Company had a current liability for the obligation to post cash collateral of $25.2 million at June 30, 2012 and a current asset for the right to reclaim cash collateral of $12.4 million at December 31, 2011. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities” and “other current assets”, respectively, in the accompanying condensed consolidated balance sheets.

The effects of derivatives on measures of financial performance are as follows for the three month periods ended June 30:


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	$	-	$	(6,337)	$	-	$	6,654	(2)
Coal sales		2,231		1,344		809		237	(1)
Coal purchases		(742)		97		-		—	(2)
Totals	$	1,489	$	(4,896)	$	809	$	6,891

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended June 30, 2012 and 2011.


Derivatives Not Designated as Hedging Instruments (in thousands)
		Gain (Loss) Recognized
		2012		2011
Coal — unrealized	$	27,446	$	(374)	(3)
Coal — realized		8,671		147	(4)
Heating oil — diesel purchases		(22,509)		-	(4)
Heating oil — fuel surcharges	$	(2,599)	$	-	(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 effects of derivatives on measures of financial performance are as follows for the six month periods ended June 30:

Derivatives used in Cash Flow Hedging Relationships (in thousands)


						Gains (Losses) Reclassified from
		Gain (Loss) Recognized in OCI				OCI into Income
		(Effective Portion)				(Effective Portion)
		2012		2011		2012		2011
Heating oil — diesel purchases	$	-	$	7,921	$	-	$	9,824	(2)
Coal sales		4,724		2,750		1,010		324	(1)
Coal purchases		(944)		(779)		-		—	(2)
Totals	$	3,780	$	9,892	$	1,010	$	10,148


Derivatives Not Designated as Hedging Instruments (in thousands)
		Gain (Loss) Recognized
		2012		2011
Coal — unrealized	$	34,998	$	(1,419)	(3)
Coal — realized		11,829		147	(4)
Heating oil — diesel purchases		(22,086)		-	(4)
Heating oil — fuel surcharges	$	(2,232)	$	-	(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 gains of 4.6 million and $2.3 million during the three months ended June 30, 2012 and 2011, respectively, related to its trading portfolio. The Company recognized net unrealized and realized gains of $0.7 million $0.5 million during the six months ended June 30, 2012 and 2011, respectively, related to its trading portfolio, which are included in the caption “Change in fair value of coal derivatives and coal trading activities, net” in the accompanying condensed consolidated statements of operations, and are not included in the previous tables reflecting the effects of derivatives on measures of financial performance.

Based on fair values at June 30, 2012, gains on derivative contracts designated as hedge instruments in cash flow hedges of approximately $4.0 million are expected to be reclassified from other comprehensive income into earnings during the next twelve months.