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 coal produced by, and diesel fuel 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 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 have historically been used to manage the Company's risk exposure 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 has also used derivative instruments to manage its exposure to the variability of diesel fuel prices used in production in the U.S. and Australia with swaps or options, which it has also designated as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted diesel fuel purchases. These risk management activities are collectively referred to as "Corporate Hedging" and are actively monitored for compliance with the Company's risk management policies.

During the fourth quarter of 2015, the Company performed an assessment of its risk of nonperformance with respect to derivative financial instruments designated as cash flow hedges in light of three rating agencies downgrading the Company's corporate credit rating during 2015 and declining financial results. The Company determined its hedging relationships were expected to be "highly effective" throughout 2015 based on its quarterly assessments. However, as a result of a deterioration in the Company's credit profile, the Company could no longer conclude, as of December 31, 2015, that its hedging relationships were expected to be "highly effective" at offseting the changes in the anticipated exposure of the hedged item. Therefore, the Company discontinued the application of cash flow hedge accounting subsequent to December 31, 2015 and changes in the fair value of derivative instruments have been recorded as operating costs and expenses in the accompanying unaudited condensed consolidated statements of operations. Previous fair value adjustments recorded in "Accumulated other comprehensive loss" will be frozen until the underlying transactions impact the Company's earnings.

The Company's Bankruptcy Petitions constituted an event of default under the Company's derivative financial instrument contracts and the counterparties terminated the agreements shortly thereafter in accordance with contractual terms. The terminated positions are first-lien obligations under the Company's secured credit agreement dated September 24, 2013 (as amended, the 2013 Credit Facility). The net settlement liability was accounted for as a prepetition liability subject to compromise without credit valuation adjustments. As of September 30, 2016, the Company had no derivative financial instruments in place in relation to diesel fuel or foreign currency exchange rate.

Based on the previous fair value adjustments of the Company's foreign currency hedge contract portfolio recorded in "Accumulated other comprehensive loss", the net loss expected to be reclassified from comprehensive income to earnings over the next 12 months associated with that hedge program is approximately $68 million. Based on the previous fair value adjustments of the Company’s diesel fuel hedge contract portfolio recorded in “Accumulated other comprehensive loss”, the net loss expected to be reclassified from comprehensive income to earnings over the next 12 months associated with that hedge program is approximately $50 million.

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, 2016 and 2015:




		Three Months Ended September 30, 2016
Financial Instrument	Income Statement Classification of (Losses) Gains	Total realized loss recognized in income			Loss reclassified from other comprehensive loss into income			(Loss) gain recognized in income on derivatives		Unrealized gain (loss)recognized in income on non- designated derivatives
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	(19.4	)	$	(19.4	)	$	—	$	—
Foreign currency forward contracts	Operating costs and expenses	(28.0		)	(28.0		)	—		—
Total		$	(47.4	)	$	(47.4	)	$	—	$	—




			Three Months Ended September 30, 2015
Financial Instrument	Income Statement Classification of (Losses) Gains		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.




		Nine Months Ended September 30, 2016
Financial Instrument	Income Statement Classification of (Losses) Gains	Total realized loss recognized in income			Loss reclassified from other comprehensive income into income ⁽¹⁾			(Loss) gain recognized in income on derivatives			Unrealized (loss) gain recognized in income on non- designated derivatives
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	(78.4	)	$	(66.4	)	$	(11.9	)	$	—
Commodity swap contracts	Reorganization items	(38.8		)	—			(38.8		)	—
Foreign currency forward contracts	Operating costs and expenses	(119.4		)	(122.1		)	2.7			—
Foreign currency forward contracts	Reorganization items	(36.4		)	—			(36.4		)	—
Total		$	(273.0	)	$	(188.5	)	$	(84.4	)	$	—


⁽¹⁾	Includes the reclassification from "Accumulated other comprehensive loss" into earnings of $13.6 million and $9.0 million of previously unrecognized losses on foreign currency and fuel contracts, respectively, monetized in the first quarter of 2016.




			Nine Months Ended September 30, 2015
Financial Instrument	Income Statement Classification of (Losses) Gains		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.

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 were 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 December 31, 2015 are presented in the table that follows.



Financial Instrument	Fair Value of Liabilities Presented in the Condensed Consolidated Balance Sheet as of December 31, 2015 ⁽¹⁾
	(Dollars in millions)
Current Liabilities:
Commodity swap contracts	$	86.1
Foreign currency forward contracts	145.6
Total	$	231.7

Noncurrent Liabilities:
Commodity swap contracts	$	37.6
Foreign currency forward contracts	55.1
Total	$	92.7


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

See Note 9. "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 liability positions for which fair value is measured on a recurring basis:



	December 31, 2015
	Level 1		Level 2		Level 3			Total
	(Dollars in millions)
Commodity swap contracts	—		—		(123.7		)	(123.7		)
Foreign currency contracts	—		—		(200.7		)	(200.7		)
Total net financial liabilities	$	—	$	—	$	(324.4	)	$	(324.4	)

As of September 30, 2016, the Company no longer had any outstanding financial positions.

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:


•	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.

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



	Nine Months Ended
	September 30, 2016
	Commodity Contracts			Foreign Currency Contracts			Total
	(Dollars in millions)
Beginning of period	$	123.7		$	200.7		$	324.4
Total net losses realized/unrealized:
Included in earnings ⁽¹⁾	15.7			(48.0		)	(32.3		)
Settlements / terminations	(139.4		)	(152.7		)	(292.1		)
End of period	$	—		$	—		$	—


⁽¹⁾	Includes reorganization items and realized gains (losses)

The Company had no transfers between Levels 1, 2 and 3 during the three and nine months ended September 30, 2016 or 2015. Transfers into Level 3 of liabilities previously classified in Level 2 during the year ended December 31, 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.

Other Financial Instruments. The Company used the following methods and assumptions in estimating fair values for other financial instruments as of September 30, 2016 and December 31, 2015:


•	Cash and cash equivalents, restricted cash, 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 estimated fair value of the Company’s current and long-term debt as of September 30, 2016 is subject to compromise in connection with the Company's plan of reorganization and as such has been excluded from the table below. The carrying amount and estimated fair value of the Company's current and long-term debt as of December 31, 2015 are summarized as follows:



	December 31, 2015
	Carrying Amount		Estimated Fair Value
	(Dollars in millions)
Current and Long-term debt	$	6,241.2	$	1,372.7