Derivatives and Fair Value Measurements

Risk Management — Non-Coal Trading Activities

The Company is exposed to several risks in the normal course of business, including (1) foreign currency exchange rate risk for non-U.S. dollar expenditures and balances, (2) price risk on commodities produced by and utilized in the Company's mining operations and (3) interest rate risk that has been partially mitigated by fixed rates on long-term debt. The Company manages a portion of its commodity price risk related to the sale of coal (excluding coal trading activities) using long-term coal supply agreements (those with terms longer than one year), rather than using derivative instruments. Derivative financial instruments are, or have been, used to manage the Company's risk exposure to prices of certain commodities used in production, foreign currency exchange rates and, from time to time, interest rates (collectively referred to as "Corporate Hedging"). These risks are actively monitored for compliance with the Company's risk management policies.

Foreign Currency Hedges. The Company is exposed to foreign currency exchange rate risk, primarily on Australian dollar expenditures made in its Australian mining platform. This risk has historically been managed using forward contracts and options designated as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted foreign currency expenditures. The Company intends to allow a substantial portion of its positions to settle without adding further positions of a comparable notional amount, but may, from time to time, continue to use forward contracts and options to hedge its foreign currency exchange rate risk.

Diesel Fuel Hedges. The Company is exposed to commodity price risk associated with diesel fuel utilized in production in the U.S. and Australia. This risk is managed using derivatives, such as swaps or options, and to a lesser extent using cost pass-through contracts. 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 purchases.

Notional Amounts and Fair Value. The following summarizes the Company’s foreign currency and commodity positions at September 30, 2015:



	Notional Amount by Year of Maturity
	Total		2015		2016		2017
Foreign Currency
A$:US$ hedge contracts (A$ millions)	$	1,839.0	$	309.0	$	1,007.0	$	523.0
Commodity Contracts
Diesel fuel hedge contracts (million gallons)	180.3		31.5		89.5		59.3



	Instrument Classification by
	Cash Flow Hedge		Fair Value Hedge		Economic Hedge		Fair Value of Net Liability
							(Dollars in millions)
Foreign Currency
A$:US$ hedge contracts (A$ millions)	$	1,839.0	$	—	$	—	$	(293.5	)
Commodity Contracts
Diesel fuel hedge contracts (million gallons)	180.3		—		—		(106.7		)

Based on the net fair value of the Company’s non-coal trading commodity contract hedge positions held in “Accumulated other comprehensive loss” at September 30, 2015, the Company expects to reclassify net unrealized losses associated with the Company's diesel fuel hedge programs of approximately $68 million from comprehensive income into earnings over the next 12 months. Based on the net fair value of the Company's foreign currency hedge contract portfolio, the net loss expected to be reclassified from comprehensive income to earnings over the next 12 months associated with that hedge program is approximately $204 million. As these realized and unrealized gains and losses are associated with derivative instruments that represent hedges of forecasted transactions, the amounts reclassified to earnings are expected to partially offset the effect of any changes in the hedged exposure related to the underlying transactions, when realized.

Hedge Ineffectiveness. A measure of ineffectiveness is inherent in hedging future diesel fuel purchases with derivative positions based on refined petroleum products as a result of location and/or product differences. Transportation surcharges, which may vary over time, for purchased diesel fuel in certain regions can also result in ineffectiveness, though such surcharges have historically changed infrequently and comprise a small portion of the total cost of delivered diesel.

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 Corporate Hedging derivatives during the three and nine months ended September 30, 2015 and 2014:




		Three Months Ended September 30, 2015
Financial Instrument	Income Statement Classification Losses - Realized	Gain recognized in income on non-designated derivatives		Loss recognized in other comprehensive income on derivatives (effective portion)			Loss reclassified from other comprehensive income into income (effective portion)⁽¹⁾			Loss reclassified from other comprehensive income into income (ineffective portion)
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	—	$	(63.1	)	$	(31.9	)	$	(0.5	)
Foreign currency forward contracts	Operating costs and expenses	—		(118.2		)	(84.5		)	—
Total		$	—	$	(181.3	)	$	(116.4	)	$	(0.5	)


⁽¹⁾	Includes the reclassification from "Accumulated other comprehensive loss" into earnings of $0.1 million of previously unrecognized gains on foreign currency cash flow hedge contracts monetized in the fourth quarter of 2012.




		Three Months Ended September 30, 2014
Financial Instrument	Income Statement Classification Gains (Losses) - Realized	Gain recognized in income on non-designated derivatives		Loss recognized in other comprehensive income on derivatives (effective portion)			(Loss) gain reclassified from other comprehensive income into income (effective portion)⁽¹⁾			Loss reclassified from other comprehensive income into income (ineffective portion)
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	—	$	(47.3	)	$	(1.0	)	$	(1.8	)
Foreign currency forward contracts	Operating costs and expenses	—		(227.7		)	9.6			—
Total		$	—	$	(275.0	)	$	8.6		$	(1.8	)


⁽¹⁾	Includes the reclassification from "Accumulated other comprehensive loss" into earnings of $31.9 million of previously unrecognized gains on foreign currency cash flow hedge contracts monetized in the fourth quarter of 2012.




		Nine Months Ended September 30, 2015
Financial Instrument	Income Statement Classification Gains (Losses) - Realized	Gain recognized in income on non-designated derivatives		Loss recognized in other comprehensive income on derivatives (effective portion)			Loss reclassified from other comprehensive income into income (effective portion)⁽¹⁾			Gain reclassified from other comprehensive income into income (ineffective portion)
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	—	$	(27.3	)	$	(89.0	)	$	1.3
Foreign currency forward contracts	Operating costs and expenses	—		(137.2		)	(238.9		)	—
Total		$	—	$	(164.5	)	$	(327.9	)	$	1.3


⁽¹⁾	Includes the reclassification from "Accumulated other comprehensive loss" into earnings of $14.9 million of previously unrecognized gains on foreign currency cash flow hedge contracts monetized in the fourth quarter of 2012.




		Nine Months Ended September 30, 2014
Financial Instrument	Income Statement Classification Gains (Losses) - Realized	Gain recognized in income on non-designated derivatives		(Loss) gain recognized in other comprehensive income on derivatives (effective portion)			Loss reclassified from other comprehensive income into income (effective portion)⁽¹⁾			Loss reclassified from other comprehensive income into income (ineffective portion)
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	—	$	(38.1	)	$	(3.3	)	$	(1.0	)
Foreign currency forward contracts	Operating costs and expenses	—		48.7			(2.9		)	—
Total		$	—	$	10.6		$	(6.2	)	$	(1.0	)


⁽¹⁾	Includes the reclassification from "Accumulated other comprehensive loss" into earnings of $106.7 million of previously unrecognized gains on foreign currency cash flow hedge contracts monetized in the fourth quarter of 2012.

Cash Flow Presentation. The Company classifies the cash effects of its Corporate Hedging derivatives within the "Cash Flows From Operating Activities" section of the unaudited condensed consolidated statements of cash flows.

Offsetting and Balance Sheet Presentation

The Company's Corporate Hedging derivative financial instruments are transacted in over-the-counter (OTC) markets with financial institutions under International Swaps and Derivatives Association (ISDA) Master Agreements. Those agreements contain symmetrical default provisions which allow for the net settlement of amounts owed by either counterparty in the event of default or contract termination. The Company offsets its Corporate Hedging asset and liability derivative positions on a counterparty-by-counterparty basis in the condensed consolidated balance sheets, with the fair values of those respective derivatives reflected in “Other current assets,” “Investments and other assets,” “Accounts payable and accrued expenses” and “Other noncurrent liabilities." Though the symmetrical default provisions associated with the Company's Corporate Hedging derivatives exist at the overall counterparty level across its foreign currency and diesel fuel hedging strategy derivative contract portfolios, the Company's accounting policy is to apply counterparty offsetting separately within those derivative contract portfolios for presentation in the condensed consolidated balance sheets because that application is more consistent with the fact that the Company generally net settles its Corporate Hedging derivatives with each counterparty by derivative contract portfolio on a routine basis.

The classification and amount of Corporate Hedging derivative financial instruments presented on a gross and net basis as of September 30, 2015 and December 31, 2014 are presented in the tables that follow.



Financial Instrument	Fair Value of Liabilities Presented in the Condensed Consolidated Balance Sheet as of September 30, 2015 ⁽¹⁾
	(Dollars in millions)
Current Liabilities:
Commodity swap contracts	$	68.4
Foreign currency forward contracts	203.7
Total	$	272.1

Noncurrent Liabilities:
Commodity swap contracts	$	38.3
Foreign currency forward contracts	89.8
Total	$	128.1



Financial Instrument	Fair Value of Liabilities Presented in the Condensed Consolidated Balance Sheet as of December 31, 2014 ⁽¹⁾
	(Dollars in millions)
Current Liabilities:
Commodity swap contracts	$	100.1
Foreign currency forward contracts	241.0
Total	$	341.1

Noncurrent Liabilities:
Commodity swap contracts	$	67.0
Foreign currency forward contracts	169.0
Total	$	236.0


⁽¹⁾	All commodity swap contracts and foreign currency forward contracts were in a liability position as of September 30, 2015 and December 31, 2014.

The Company's Corporate Hedging derivative financial instruments are generally considered Swap Obligations, as that term is defined in the Company's secured credit agreement dated September 24, 2013 (as amended, the 2013 Credit Facility). Accordingly, such instruments, when in a liability position, are first lien obligations secured by the collateral and all of the property that is subject to liens under the 2013 Credit Facility. Refer to Note 12. "Long-term Debt" for additional information surrounding that collateral.

See Note 8. "Coal Trading" for information on balance sheet offsetting 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 are 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, 2015
	Level 1		Level 2		Level 3			Total
	(Dollars in millions)
Investments in debt and equity securities	$	20.2	$	30.7	$	—		$	50.9
Commodity swap contracts	—		—		(106.7		)	(106.7		)
Foreign currency contracts	—		—		(293.5		)	(293.5		)
Total net financial assets (liabilities)	$	20.2	$	30.7	$	(400.2	)	$	(349.3	)



	December 31, 2014
	Level 1		Level 2			Level 3		Total
	(Dollars in millions)
Investments in debt and equity securities	$	26.1	$	35.7		$	—	$	61.8
Commodity swap contracts	—		(167.1		)	—		(167.1		)
Foreign currency contracts	—		(410.0		)	—		(410.0		)
Total net financial assets (liabilities)	$	26.1	$	(541.4	)	$	—	$	(515.3	)

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/dealer quotes, published indices, issuer spreads, benchmark securities and other market quotes. In the case of certain debt securities, fair value is provided by a third-party pricing service. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:


•	Investments in debt and equity securities: U.S. government securities and marketable equity securities are valued based on quoted prices in active markets (Level 1) and investment-grade corporate bonds and U.S. government agency securities are valued based on the various inputs listed above that may preclude the security from being measured using an identical asset in an active market (Level 2).


•	Commodity swap contracts — diesel fuel and explosives: valued based on a valuation that is corroborated by the use of market-based pricing (Level 2) except when credit and non-performance risk is considered to be a significant input, then the Company classifies such contracts as Level 3.


•	Foreign currency forward and option contracts: valued utilizing inputs obtained in quoted public markets (Level 2) except when credit and non-performance risk is considered to be a significant input, then the Company classifies such contracts as Level 3.

Foreign currency and commodity purchase/sale contracts include a credit valuation adjustment based on credit and non-performance risk (Level 3). The credit valuation adjustment has not historically had a material impact on the valuation of the contracts resulting in Level 2 classification. However, due to the Company's corporate credit rating downgrades in 2015, the credit valuation adjustments as of September 30, 2015 are considered to be significant unobservable inputs in the valuation of the contracts resulting in Level 3 classification.

The following table summarizes the quantitative unobservable input utilized in the Company's internally-developed valuation models for foreign currency and commodity purchase/sale contracts classified as Level 3 as of September 30, 2015:



	Range				Weighted
Input	Low		High		Average
Credit and non-performance risk	26	%	39	%	31	%

Significant increases or decreases in the credit and non-performance risk adjustment could result in a significantly higher or lower fair value measurement.

The following table summarizes the changes related to the Company’s Corporate Hedging derivative financial instruments recurring Level 3 financial liabilities:



	Three Months Ended									Nine Months Ended
	September 30, 2015									September 30, 2015
	Commodity Contracts			Foreign Currency Contracts			Total			Commodity Contracts			Foreign Currency Contracts			Total
	(Dollars in millions)
Beginning of period	$	—		$	—		$	—		$	—		$	—		$	—
Transfers into Level 3	76.0			259.8			335.8			76.0			259.8			335.8
Total net losses realized/unrealized:
Included in earnings	(0.5		)	—			(0.5		)	(0.5		)	—			(0.5		)
Included in other comprehensive income	63.1			118.2			181.3			63.1			118.2			181.3
Settlements	(31.9		)	(84.5		)	(116.4		)	(31.9		)	(84.5		)	(116.4		)
End of period	$	106.7		$	293.5		$	400.2		$	106.7		$	293.5		$	400.2

The Company had no transfers between Levels 1 and 2 or transfers out of Level 3 during the three and nine months ended September 30, 2015 or 2014 or transfers into Level 3 for the three and nine months ended September 30, 2014. Transfers into Level 3 of liabilities previously classified in Level 2 during the three and nine months ended September 30, 2015 were due to the relative value of unobservable inputs to the total fair value measurement of certain derivative contracts rising above the 10% threshold. The Company’s policy is to value all transfers between levels using the beginning of period valuation.

The following table summarizes the changes in net unrealized losses relating to Level 3 financial liabilities held both as of the beginning and the end of the period:



	Three Months Ended						Nine Months Ended
	September 30, 2015						September 30, 2015
	Commodity Contracts		Foreign Currency Contracts		Total		Commodity Contracts		Foreign Currency Contracts		Total
	(Dollars in millions)
Changes in net unrealized losses ⁽¹⁾	$	15.5	$	52.9	$	68.4	$	15.5	$	52.9	$	68.4


⁽¹⁾	Within the unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of comprehensive income for the periods presented, unrealized losses from Level 3 items are combined with unrealized gains and losses on positions classified in Level 1 or 2, as well as other positions that have been realized during the applicable periods.

Other Financial Instruments. The Company used the following methods and assumptions in estimating fair values for other financial instruments as of September 30, 2015 and December 31, 2014:


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


•	Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2), and otherwise on estimated borrowing rates to discount the cash flows to their present value (Level 3).

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



	September 30, 2015				December 31, 2014
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in millions)
Long-term debt	$	6,301.9	$	2,126.3	$	5,986.8	$	5,227.9

Credit and Nonperformance Risk

The fair value of the Company’s Corporate Hedging derivative assets and liabilities reflects adjustments for credit risk. The Company manages its counterparty risk through established credit standards, diversification of counterparties, utilization of investment grade commercial banks, adherence to established tenor limits based on counterparty creditworthiness and continuous monitoring of that 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 in the event of default. The Company also continually monitors counterparties for nonperformance risk, if present, on a case-by-case basis.