Pension and Savings Plans

One of the Company’s subsidiaries, Peabody Investments Corp. (PIC), sponsors a defined benefit pension plan covering certain U.S. salaried employees and eligible hourly employees at certain PIC subsidiaries (the Peabody Plan). A PIC subsidiary also has a defined benefit pension plan covering eligible employees who are represented by the United Mine Workers of America (UMWA) under the Western Surface Agreement (the Western Plan). PIC also sponsors an unfunded supplemental retirement plan to provide senior management with benefits in excess of limits under the federal tax law (collectively, the Plans).

Effective May 31, 2008, the Peabody Plan was frozen in its entirety for both participation and benefit accrual purposes. The Company adopted an enhanced savings plan contribution structure in lieu of benefits formerly accrued under the Peabody Plan.

Net periodic pension cost included the following components:



	Year Ended December 31,
	2012			2011			2010
	(Dollars in millions)
Service cost for benefits earned	$	2.0		$	1.7		$	1.5
Interest cost on projected benefit obligation	46.7			49.8			50.5
Expected return on plan assets	(63.7		)	(64.4		)	(58.3		)
Amortization of prior service cost	1.0			1.0			1.4
Amortization of actuarial losses	48.6			30.1			21.9
Total net periodic pension cost	$	34.6		$	18.2		$	17.0

The following includes pre-tax amounts recorded in "Accumulated other comprehensive income (loss)":



	Year Ended December 31,
	2012			2011			2010
	(Dollars in millions)
Net actuarial loss arising during year	$	67.6		$	144.2		$	13.1
Amortization:
Actuarial loss	(48.6		)	(30.1		)	(21.9		)
Prior service cost	(1.0		)	(1.0		)	(1.4		)
Total recorded in other comprehensive loss (income)	18.0			113.1			(10.2		)
Net periodic pension cost	34.6			18.2			17.0
Net periodic pension cost, net of amounts recorded in other comprehensive loss (income)	$	52.6		$	131.3		$	6.8

The Company amortizes actuarial gain and loss using a 5% corridor with a five-year amortization period. The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost during the year ending December 31, 2013 are $65.7 million and $1.0 million, respectively.

The following summarizes the change in benefit obligation, change in plan assets and funded status of the Plans:



	December 31,
	2012			2011
	(Dollars in millions)
Change in benefit obligation:
Projected benefit obligation at beginning of period	$	963.6		$	881.0
Service cost	2.0			1.7
Interest cost	46.7			49.8
Benefits paid	(54.1		)	(52.8		)
Actuarial loss	100.4			83.9
Projected benefit obligation at end of period	1,058.6			963.6
Change in plan assets:
Fair value of plan assets at beginning of period	769.6			771.6
Actual return on plan assets	96.5			4.1
Employer contributions	1.7			46.7
Benefits paid	(54.1		)	(52.8		)
Fair value of plan assets at end of period	813.7			769.6
Funded status at end of year	$	(244.9	)	$	(194.0	)
Amounts recognized in the consolidated balance sheets:
Current obligation (included in "Accounts payable and accrued expenses")	$	(1.7	)	$	(1.7	)
Noncurrent obligation (included in "Other noncurrent liabilities")	(243.2		)	(192.3		)
Net amount recognized	$	(244.9	)	$	(194.0	)

The weighted-average assumptions used to determine the benefit obligations as of the end of each year were as follows:



	December 31,
	2012		2011
Discount rate	4.10	%	5.00	%
Measurement date	December 31, 2012		December 31, 2011

The weighted-average assumptions used to determine net periodic benefit cost during each year were as follows:



	Year Ended December 31,
	2012		2011		2010
Discount rate	5.00	%	5.84	%	6.19	%
Expected long-term return on plan assets	8.00	%	8.25	%	8.25	%
Measurement date	December 31, 2011		December 31, 2010		December 31, 2009

The expected rate of return on plan assets is determined by taking into consideration expected long-term returns associated with each major asset class (net of inflation) based on long-term historical ranges, inflation assumptions and the expected net value from active management of the assets based on actual results. Effective January 1, 2013, the Company lowered its expected rate of return on plan assets from 8.00% to 7.75% reflecting the impact of the current global economic outlook on expected long-term returns and the Company's asset allocation.

The projected benefit obligation and the accumulated benefit obligation exceeded plan assets for all plans as of December 31, 2012 and 2011. The accumulated benefit obligation for all pension plans was $1,058.6 million and $963.6 million as of December 31, 2012 and 2011, respectively.

Assets of the Plans

Assets of the PIC Master Trust (the Master Trust) are invested in accordance with investment guidelines established by the Peabody Plan Retirement Committee and the Western Plan Retirement Committee (collectively, the Retirement Committees) after consultation with outside investment advisors and actuaries.

The asset allocation targets have been set with the expectation that the assets of the Master Trust will be managed with an appropriate level of risk to fund each Plan’s expected liabilities. To determine the appropriate target asset allocations, the Retirement Committees consider the demographics of each Plan’s participants, the funding status of each Plan, the business and financial profile of the Company and other associated risk preferences. These allocation targets are reviewed by the Retirement Committees on a regular basis and revised as necessary. The current target allocations for assets of the Master Trust are 55% equity securities and 45% fixed income investments. Master Trust assets include real estate investments representing approximately 3% of total Master Trust assets. The Company is in the process of liquidating these real estate holdings.

Assets of the Master Trust are either under active management by third-party investment advisors or in index funds, all selected and monitored by the Retirement Committees. The Retirement Committees have established specific investment guidelines for each major asset class including performance benchmarks, allowable and prohibited investment types and concentration limits. In general, investment guidelines do not permit leveraging the assets held in the Master Trust. The investment managers in the Master Trust, however, may employ various strategies and derivative instruments in establishing overall portfolio characteristics consistent with the guidelines and investment objectives for their portfolios. Equity investment guidelines do not permit entering into put or call options (except as deemed appropriate to manage currency risk), and futures contracts are permitted only to the extent necessary to facilitate liquidity management.

A financial instrument’s level within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Following is a description of the valuation techniques and inputs used for investments measured at fair value, including the general classification of such investments pursuant to the valuation hierarchy.

U.S. equity securities. The Plans invest in U.S. equity securities for growth and diversification. Investment vehicles include a mutual fund that invests in large-cap publicly traded common stocks and a common/collective trust that invests in small-cap publicly traded common stocks. The mutual fund, which is traded on a national securities exchange in an active market, is valued using daily publicly quoted net asset value (NAV) prices and accordingly classified within Level 1 of the valuation hierarchy. The common/collective trust investment, which is not publicly traded on a national securities exchange, is valued using a NAV that is based on a derived price in an active market and accordingly classified within Level 2 of the valuation hierarchy. U.S. equity securities are not subject to liquidity redemption restrictions.

International equity securities. The Plans invest in international equity securities for growth and diversification. Investment vehicles include a common/collective trust that primarily invests in equity securities of companies located in countries other than the U.S. and an exchange traded mutual fund that invests in equity securities of companies in global emerging markets. The common/collective trust is valued on the basis of quotations from the primary market in which they are traded and translated at each valuation date from local currency into U.S. dollars using the mean between the bid and asked market rates for such currencies. The NAV of the common/collective trust, as well as the calculation of the NAV of each underlying investment, are determined in U.S. dollars. The common/collective trust is classified within the Level 2 valuation hierarchy since the NAV is based on a derived price in an active market and is not traded on a national securities exchange. Redemptions for the common/collective trust can only occur on the first business day of each month subject to a notification period and minimum withdrawal limits. The exchange-traded mutual fund is traded on a national securities exchange and valued at quoted market prices in active markets and is classified within Level 1 of the valuation hierarchy. The exchange-traded mutual fund has no liquidity redemption restrictions.

Debt securities. The Plans invest in debt securities for diversification and volatility reduction of equity securities. Investment vehicles include U.S. government and agency securities and various institutional mutual funds that hold mortgage-backed debt securities, U.S. debt securities, international debt securities and corporate debt securities. U.S. government treasury bills are classified within the Level 1 valuation hierarchy since fair value is based on public price quotations in active markets. U.S. government agency securities are classified within the Level 2 valuation hierarchy since fair value inputs are derived prices in active markets. Institutional mutual funds are invested in various diversified portfolios of fixed-income instruments, and the NAV for each institutional mutual fund is calculated daily in actively traded markets by an independent custodian for the investment manager. The institutional mutual funds are classified within the Level 2 valuation hierarchy since fair value inputs are derived prices in active markets and the institutional mutual funds are not traded on a national securities exchange. Debt securities are not subject to liquidity redemption restrictions.

Short-term investments. The Plans invest in short-term investments to manage liquidity and for transaction settlement purposes. Investment vehicles primarily include a non-interest bearing cash fund with an earnings credit allowance feature and an institutional mutual fund consisting of diversified portfolios of liquid, short-term instruments of varying maturities. The non-interest bearing cash fund is classified within the Level 1 valuation hierarchy. The institutional mutual fund is classified within the Level 2 valuation hierarchy since fair value inputs are derived prices in active markets and the fund is not traded on a national securities exchange. Short-term investments are not subject to liquidity redemption restrictions.

Interests in real estate. The Plans invest in real estate interests for diversification. Investments in real estate represent interests in several limited partnerships, which invest in various real estate properties. They are valued using various methodologies, including independent third party appraisals. For some investments, little market activity may exist and determination of fair value is then based on the best information available in the circumstances. This involves a significant degree of judgment by taking into consideration a combination of internal and external factors. Accordingly, interests in real estate are classified within the Level 3 valuation hierarchy. Some limited partnerships issue dividends to their investors in the form of cash distributions that the Plans invest elsewhere within the Master Trust. Certain interests in real estate are subject to liquidity redemption restrictions and voluntary redemptions are generally not permitted. Upon liquidation of the limited partnerships, redemptions will generally be in the form of cash distributions and invested elsewhere within the Master Trust.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments.

The following tables present the fair value of assets in the Master Trust by asset category and by fair value hierarchy:



	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
U.S. equity securities	$	255.6	$	83.6	$	—	$	339.2
International equity securities	43.0		83.1		—		126.1
Mortgage-backed debt securities	—		115.5		—		115.5
U.S. debt securities	5.7		94.6		—		100.3
International debt securities	—		35.4		—		35.4
Corporate debt securities	—		54.9		—		54.9
Short-term investments	8.1		6.4		—		14.5
Interests in real estate	—		—		27.8		27.8
Total assets at fair value	$	312.4	$	473.5	$	27.8	$	813.7



	December 31, 2011
	Level 1 ⁽¹⁾		Level 2 ⁽¹⁾		Level 3		Total
	(Dollars in millions)
U.S. equity securities	$	260.9	$	79.5	$	—	$	340.4
International equity securities	36.4		71.4		—		107.8
Mortgage-backed debt securities	—		98.9		—		98.9
U.S. debt securities	17.0		83.3		—		100.3
International debt securities	—		32.0		—		32.0
Corporate debt securities	—		45.8		—		45.8
Short-term investments	13.5		5.6		—		19.1
Interests in real estate	—		—		25.3		25.3
Total assets at fair value	$	327.8	$	416.5	$	25.3	$	769.6


⁽¹⁾	Certain amounts have been revised from a Level 2 to a Level 1 fair value hierarchy classification to conform to the current year presentation, which had no effect on previously reported consolidated results and was not material to the footnotes to the consolidated financial statements.

The table below sets forth a summary of changes in the fair value of the Master Trust’s Level 3 investments:



	Year Ended December 31,
	2012		2011
	(Dollars in millions)
Balance, beginning of year	$	25.3	$	47.7
Realized losses	—		(8.9		)
Unrealized gains relating to investments still held at the reporting date	2.5		11.4
Purchases, sales and settlements, net	—		(24.9		)
Balance, end of year	$	27.8	$	25.3

Contributions

Annual contributions to the qualified plans are made in accordance with minimum funding standards and the Company's agreement with the Pension Benefit Guaranty Corporation (PBGC). Funding decisions also consider certain funded status thresholds defined by the Pension Protection Act of 2006 (generally 80%). On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21), a highway reauthorization and student loan bill that included both pension funding stabilization provisions and PBGC premium increases, was signed into law. The pension funding stabilization provisions temporarily increased the discount rates used to determine pension liabilities for purposes of minimum funding requirements. MAP-21 is not expected to change the Company's total required cash contributions over the long term, but is expected to reduce the Company's required cash contributions through 2015 relative to prior law if current interest rate levels persist and the qualified plans' asset returns are in line with expectations. As of December 31, 2012, the Company's qualified plans are expected to be at or above the Pension Protection Act thresholds and will therefore avoid benefit restrictions and at-risk penalties for 2013. The Company expects to contribute approximately $5 million to its pension plans to meet minimum funding requirements for its qualified plans and benefit payments for its non-qualified plans in 2013.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the Master Trust:



	Pension Benefits
	(Dollars in millions)
2013	$	56.6
2014	58.5
2015	60.2
2016	61.8
2017	63.3
Years 2018-2022	328.0

Defined Contribution Plans

The Company sponsors employee retirement accounts under three 401(k) plans for eligible U.S. employees. The Company matches voluntary contributions to each plan up to specified levels. The expense for these plans was $51.1 million, $54.5 million and $51.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. A performance contribution feature in one of the plans allows for additional contributions from the Company based upon meeting specified Company performance targets. Performance contributions paid during the years ended December 31, 2012, 2011 and 2010 were $22.5 million, $20.0 million and $19.8 million, respectively.