Derivatives and Fair Value Measurements

Risk Management — Non-Coal Trading Activities

The Company is exposed to various types of risk in the normal course of business, including price risk on commodities utilized in the Company's operations, interest rate risk on long-term debt, and foreign currency exchange rate risk for non-U.S. dollar expenditures. In most cases, commodity price risk (excluding coal trading activities) related to the sale of coal is mitigated through the use of long-term, fixed-price contracts rather than through the use of financial instruments. For the price risk exposure on other commodities, as well as for the interest rate risk and foreign currency exchange rate risk, the Company utilizes financial derivative instruments to manage the risks related to these fluctuations. All of these risks are actively monitored in an effort to ensure compliance with the risk management policies of the Company.

Interest Rate Swaps. The Company is exposed to interest rate risk on its fixed rate and variable rate long-term debt. From time to time, the Company manages the interest rate risk associated with the fair value of its fixed rate borrowings using fixed-to-floating interest rate swaps to effectively convert a portion of the underlying cash flows on the debt into variable rate cash flows. The Company designates these swaps as fair value hedges, with the objective of hedging against changes in the fair value of the fixed rate debt that results from market interest rate changes. From time to time, the interest rate risk associated with the Company’s variable rate borrowings is managed using floating-to-fixed interest rate swaps. The Company designates these swaps as cash flow hedges, with the objective of reducing the variability of cash flows associated with market interest rate changes. As of September 30, 2011, the Company had no interest rate swaps in place.

Foreign Currency Hedges. The Company is exposed to foreign currency exchange rate risk, primarily on Australian dollar expenditures made in its Australian Mining segment. This risk is managed by entering into forward contracts and options that the Company designates as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted foreign currency expenditures.

Diesel Fuel and Explosives Hedges. The Company is exposed to commodity price risk associated with diesel fuel and explosives in the U.S. and Australia. This risk is managed through the use of cost pass-through contracts and derivatives, primarily swaps. The Company generally designates the swap contracts as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted diesel fuel and explosives purchases. In Australia, the explosives costs and a portion of the diesel fuel costs are not hedged as they are usually included in the fees paid to the Company’s contract miners.

Notional Amounts and Fair Value. The following summarizes the Company’s foreign currency and commodity positions at September 30, 2011:



	Notional Amount by Year of Maturity
	Total		2011		2012		2013		2014		2015		2016 and thereafter
Foreign Currency
A$:US$ hedge contracts (A$ millions)	$	3,977.9	$	391.3	$	1,605.5	$	1,210.6	$	770.5	$	—	$	—
GBP£:US$ hedge contracts (GBP millions)	£	6.5	£	—	£	6.5	£	—	£	—	£	—	£	—
Commodity Contracts
Diesel fuel hedge contracts (million gallons)	188.9		21.4		83.9		57.9		25.7		—		—
U.S. explosives hedge contracts (million MMBtu)	8.8		1.1		3.9		2.6		1.2		—		—



	Account Classification by
	Cash Flow Hedge		Fair Value Hedge		Economic Hedge		Fair Value Asset (Liability)
							(Dollars in millions)
Foreign Currency
A$:US$ hedge contracts (A$ millions)	$	3,977.9	$	—	$	—	$	412.5
GBP£:US$ hedge contracts (GBP millions)	£	6.5	£	—	£	—	$	(0.6	)
Commodity Contracts
Diesel fuel hedge contracts (million gallons)	188.9		—		—		$	38.0
U.S. explosives hedge contracts (million MMBtu)	8.8		—		—		$	(4.9	)

Hedge Ineffectiveness. The Company assesses, both at inception and at least quarterly thereafter, whether the derivatives used in hedging activities are highly effective at offsetting the changes in the anticipated cash flows of the hedged item. The effective portion of the change in the fair value is recorded in “Accumulated other comprehensive loss” until the hedged transaction impacts reported earnings, at which time any gain or loss is reclassified to the consolidated statements of operations. To the extent that the periodic changes in the fair value of the derivatives exceed the changes in the hedged item, the ineffective portion of the periodic non-cash changes are recorded in the consolidated statements of operations in the period of the change. If the hedge ceases to qualify for hedge accounting, the Company prospectively recognizes the mark-to-market movements in the consolidated statements of operations in the period of the change.

A measure of ineffectiveness is inherent in hedging future diesel fuel purchases with derivative positions based on crude oil and refined petroleum products as a result of location and product differences.

The Company’s derivative positions for the hedging of future explosives purchases are based on natural gas, which is the primary price component of explosives. However, a small measure of ineffectiveness exists as the contractual purchase price includes manufacturing fees that are subject to periodic adjustments. In addition, other fees, such as transportation surcharges, can result in ineffectiveness, but have historically changed infrequently and comprise a small portion of the total explosives cost.

The Company’s derivative positions for the hedging of forecasted foreign currency expenditures contain a small measure of ineffectiveness due to timing differences between the hedge settlement and the purchase transaction, which could differ by less than a day and up to a maximum of 30 days.

The tables below show the classification and amounts of pre-tax gains and losses related to the Company’s non-trading hedges during the three and nine months ended September 30, 2011 and 2010:



		Three Months Ended September 30, 2011
Financial Instrument	Statement of Operations Classification Gains (Losses) - Realized	Gain (loss) recognized in income on non-designated derivatives		Gain (loss) recognized in other comprehensive income on derivative (effective portion)			Gain (loss) reclassified from other comprehensive income into income (effective portion)		Gain (loss) reclassified from other comprehensive income into income (ineffective portion)
		(Dollars in millions)
Diesel fuel cash flow hedge contracts	Operating costs and expenses	$	—	$	(47.9	)	$	8.4	$	(1.0	)
Explosives cash flow hedge contracts	Operating costs and expenses	—		(3.3		)	0.1		(0.2		)
Foreign currency cash flow hedge contracts:
— Operating costs	Operating costs and expenses	—		(269.1		)	92.2		—
— Capital expenditures	Depreciation, depletion and amortization	—		(0.5		)	—		—
Total		$	—	$	(320.8	)	$	100.7	$	(1.2	)



		Three Months Ended September 30, 2010
Financial Instrument	Statement of Operations Classification Gains (Losses) - Realized	Gain (loss) recognized in income on non-designated derivatives		Gain (loss) recognized in other comprehensive income on derivative (effective portion)			Gain (loss) reclassified from other comprehensive income into income (effective portion)			Gain (loss) reclassified from other comprehensive income into income (ineffective portion)
		(Dollars in millions)
Diesel fuel cash flow hedge contracts	Operating costs and expenses	$	—	$	22.3		$	(10.9	)	$	0.7
Explosives cash flow hedge contracts	Operating costs and expenses	—		(1.1		)	(2.5		)	—
Foreign currency cash flow hedge contracts	Operating costs and expenses	—		434.7			38.5			—
Total		$	—	$	455.9		$	25.1		$	0.7



		Nine Months Ended September 30, 2011
Financial Instrument	Statement of Operations Classification Gains (Losses) - Realized	Gain (loss) recognized in income on non-designated derivatives		Gain (loss) recognized in other comprehensive income on derivative (effective portion)			Gain (loss) reclassified from other comprehensive income into income (effective portion)		Gain (loss) reclassified from other comprehensive income into income (ineffective portion)
		(Dollars in millions)
Diesel fuel cash flow hedge contracts	Operating costs and expenses	$	—	$	25.0		$	28.4	$	1.1
Explosives cash flow hedge contracts	Operating costs and expenses	—		(4.1		)	—		(0.7		)
Foreign currency cash flow hedge contracts:
— Operating costs	Operating costs and expenses	—		33.8			261.1		—
— Capital expenditures	Depreciation, depletion and amortization	—		(0.7		)	—		—
Total		$	—	$	54.0		$	289.5	$	0.4



		Nine Months Ended September 30, 2010
Financial Instrument	Statement of Operations Classification Gains (Losses) - Realized	Gain (loss) recognized in income on non-designated derivatives⁽¹⁾			Gain (loss) recognized in other comprehensive income on derivative (effective portion)			Gain (loss) reclassified from other comprehensive income into income (effective portion)			Gain (loss) reclassified from other comprehensive income into income (ineffective portion)
		(Dollars in millions)
Interest rate swaps cash flow hedge contracts	Interest expense	$	(8.5	)	$	0.8		$	(0.5	)	$	—
Diesel fuel cash flow hedge contracts	Operating costs and expenses	—			(7.5		)	(27.3		)	—
Explosives cash flow hedge contracts	Operating costs and expenses	—			(4.7		)	(7.4		)	—
Foreign currency cash flow hedge contracts	Operating costs and expenses	—			355.3			104.4			—
Total		$	(8.5	)	$	343.9		$	69.2		$	—


⁽¹⁾	Amounts relate to swaps that were de-designated and terminated in conjunction with the refinancing of the Company’s previous credit facility.

Based on the net fair value of the Company’s non-coal trading positions held in “Accumulated other comprehensive loss” at September 30, 2011, unrealized gains to be reclassified from comprehensive income to earnings over the next 12 months associated with the Company’s foreign currency and diesel fuel hedge programs are expected to be approximately $230 million and $36 million, respectively. The unrealized losses to be realized under the explosives hedge program are expected to be approximately $3 million. As these unrealized gains are associated with derivative instruments that represent hedges of forecasted transactions, the amounts reclassified to earnings will partially offset the realized transactions, while the unrealized losses will add incremental expense to the condensed consolidated statements of operations.

The classification and amount of derivatives presented on a gross basis as of September 30, 2011 and December 31, 2010 are as follows:



	Fair Value as of September 30, 2011
Financial Instrument	Current Assets		Noncurrent Assets		Current Liabilities		Noncurrent Liabilities
	(Dollars in millions)
Diesel fuel cash flow hedge contracts	$	37.1	$	14.3	$	1.1	$	12.3
Explosives cash flow hedge contracts	—		—		3.1		1.8
Foreign currency cash flow hedge contracts	243.2		203.2		13.0		21.5
Total	$	280.3	$	217.5	$	17.2	$	35.6



	Fair Value as of December 31, 2010
Financial Instrument	Current Assets		Noncurrent Assets		Current Liabilities		Noncurrent Liabilities
	(Dollars in millions)
Diesel fuel cash flow hedge contracts	$	25.3	$	26.9	$	11.9	$	—
Explosives cash flow hedge contracts	0.5		0.1		0.1		0.6
Foreign currency cash flow hedge contracts	273.5		366.6		—		—
Total	$	299.3	$	393.6	$	12.0	$	0.6

After netting by counterparty where permitted, the fair values of the respective derivatives are reflected in “Other current assets,” “Investments and other assets,” “Accounts payable and accrued expenses” and “Other noncurrent liabilities” in the condensed consolidated balance sheets.

See Note 6 for information related to the Company’s coal trading activities.

Fair Value Measurements

The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. These levels include: Level 1, inputs are quoted prices in active markets for the identical assets or liabilities; Level 2, inputs other than quoted prices included in Level 1 that are directly or indirectly observable through market-corroborated inputs; and Level 3, inputs are unobservable, or observable but cannot be market-corroborated, requiring the Company to make assumptions about pricing by market participants.

Financial Instruments Measured on a Recurring Basis. The following tables set forth the hierarchy of the Company’s net financial asset (liability) positions for which fair value is measured on a recurring basis:



	September 30, 2011
	Level 1		Level 2			Level 3		Total
	(Dollars in millions)
Investment in debt and equity securities	$	79.5	$	—		$	—	$	79.5
Commodity swaps and options — diesel fuel	—		38.0			—		38.0
Commodity swaps and options — explosives	—		(4.9		)	—		(4.9		)
Foreign currency hedge contracts	—		411.9			—		411.9
Total net financial assets	$	79.5	$	445.0		$	—	$	524.5



	December 31, 2010
	Level 1		Level 2			Level 3		Total
	(Dollars in millions)
Investment in debt securities	$	17.9	$	—		$	—	$	17.9
Commodity swaps and options — diesel fuel	—		40.3			—		40.3
Commodity swaps and options — explosives	—		(0.1		)	—		(0.1		)
Foreign currency hedge contracts	—		640.1			—		640.1
Total net financial assets	$	17.9	$	680.3		$	—	$	698.2

For Level 1 and 2 financial assets and liabilities, the Company utilizes both direct and indirect observable price quotes, including interest rate yield curves, exchange indices, broker quotes, published indices and other market quotes. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:


•	Investment in debt and equity securities: valued based on quoted prices in active markets (Level 1).


•	Commodity swaps and options — diesel fuel and explosives: generally based on a valuation that is corroborated by the use of market-based pricing (Level 2).


•	Foreign currency hedge contracts: valued utilizing inputs obtained in quoted public markets (Level 2).

The Company did not have any transfers between levels during the three or nine months ended September 30, 2011 or 2010 for its non-coal trading positions. The Company’s policy is to value all transfers between levels using the beginning of period valuation.

Other Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values for other financial instruments as of September 30, 2011 and December 31, 2010:


•	Cash and cash equivalents, accounts receivable, including those within the Company’s accounts receivable securitization program, and accounts payable and accrued expenses have carrying values which approximate fair value due to the short maturity or the liquid nature of these instruments.


•	The Company’s investments in debt and equity securities related to the Company’s pro-rata share of funding in NCIG are included in “Investments and other assets” in the condensed consolidated balance sheets. The debt securities are recorded at cost, which approximates fair value.

•

Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available, and otherwise on estimated borrowing rates to discount the cash flows to their present value. The carrying amounts of the 7.875% Senior Notes due 2026 and the Convertible Junior Subordinated Debentures due 2066 (the Debentures) are net of the respective unamortized note discounts.

The carrying amounts and estimated fair values of the Company’s debt are summarized as follows:



	September 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in millions)
Long-term debt	$	2,502.4	$	2,645.3	$	2,750.0	$	2,960.0

Nonperformance and Credit Risk

The fair value of the Company’s non-coal trading derivative assets and liabilities reflects adjustments for nonperformance and credit risk. The Company manages its counterparty risk through established credit standards, diversification of counterparties, utilizing investment grade commercial banks and continuous monitoring of counterparty creditworthiness. To reduce its credit exposure for these hedging activities, the Company seeks to enter into netting agreements with counterparties that permit the Company to offset asset and liability positions with such counterparties.