Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments

Derivative Financial Instruments

Note 9—Derivative Financial Instruments

Interest Rate Swaps

        On June 27, 2011, the Company entered into an interest rate swap agreement with a notional value of $450.0 million (2011 Interest Rate Swap). The objective of the swap is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate related to interest payments required under the 2011 Walter Credit Agreement. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of 3-month LIBOR. The structure of the hedge is a three year amortizing interest rate swap based on a 1.17% fixed rate with fixed rate and floating rate payment dates effective beginning July 18, 2011. The hedge will be settled upon maturity and is being accounted for as a cash flow hedge. Changes in the fair value of the hedge that take place through the date of maturity are reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods which the forecasted transaction affects earnings.

        On December 30, 2008, the Company entered into an interest rate hedge agreement with a notional value of $31.5 million (2008 Interest Rate Swap). The objective of the hedge is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate related to 62 of the 64 monthly interest payments required under an equipment financing arrangement for a new longwall shield system entered into on October 21, 2008. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of 1-month LIBOR. The structure of the hedge is a 62 month amortizing interest rate swap based on a 5.59% fixed rate with fixed rate and floating rate payment dates effective February 1, 2009. The hedge will be settled upon maturity and is being accounted for as a cash flow hedge. Changes in the fair value of the hedge that take place through the date of maturity are reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods which the forecasted transaction affects earnings.

Interest Rate Cap

        On June 27, 2011, the Company entered into an interest rate cap related to interest payments required under the 2011 Walter Credit Agreement with a notional value of $255.0 million. The objective of the cap is to protect against the variability in expected future cash flows attributable to changes in the benchmark interest rate above 2.00%. The interest rate on the debt is subject to change due to fluctuations in the benchmark interest rate of 3-month LIBOR. The structure of the hedge is a three year amortizing interest rate cap based on a strike price of 2.00% with fixed rate and floating rate payment dates effective beginning July 7, 2011. The hedge will be settled upon maturity and is being accounted for as a cash flow hedge. Changes in the fair value of the hedge that take place through the date of maturity are reported in accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods which the forecasted transaction affects earnings.

Natural Gas Hedge

        The Company sells natural gas. The revenues derived from the sale of natural gas subject to volatility based on price changes. In order to reduce that risk associated with natural gas price volatility, on June 7, 2011 the Company entered into a one year swap contract to hedge 4.2 million MMBTUs of natural gas beginning in July 2011 and ending June 2012, at a price of $5.00 per MMBTU. The swap agreement will hedge approximately 35% of anticipated natural gas production from July 2011 to December 2011. This hedge is designated as a cash flow hedge.

        The following table presents the fair values and location of the Company's derivative instruments designated as cash flow hedges within the Company's Condensed Consolidated Balance Sheets (in thousands). See Note 10 for additional information related to the fair values of our derivative instruments.

		June 30, 2011		December 31, 2010
Asset derivatives designated as cash flow hedging instruments:
	Natural gas hedge(1)	$	1,523	$	—
Liability derivatives designated as cash flow hedging instruments:
	Interest rate swaps(2)	$	634	$	386
	Interest rate cap(3)		2,154		—
	Total liability derivatives	$	2,788	$	386

(1)

Included in other long-term assets in the Condensed Consolidated Balance Sheets as of June 30, 2011.

(2)

As of June 30, 2011 $97 is included in other current liabilities and $537 is included in other long-term liabilities in the Condensed Consolidated Balance Sheets. As of December 31, 2010 the balance is included in other long-term liabilities.

(3)

As of June 30, 2011 $711 is included in other current liabilities and $1, 443 is included in other long-term liabilities in the Condensed Consolidated Balance Sheets.

        The following tables present the gains and losses from derivative instruments for the three and six months ended June 30, 2011 and 2010 and their location within the Condensed Consolidated Financial Statements (in thousands). The Company utilizes only cash flow hedges that are considered highly effective.

	Gain (loss) recognized in accumulated other comprehensive income, net of tax						Gain (loss) reclassified from accumulated other comprehensive income (loss) to earnings						Gain (loss) recognized in earnings
	Three months ended June 30,						Three months ended June 30,						Three months ended June 30,
Derivatives designated as cash flow hedging instruments	2011			2010			2011			2010			2011		2010
Natural gas hedges(1)	$	947		$	(710	)	$	—		$	879		$	—	$	—
Interest rate swaps(2)		(202	)		(111	)		(76	)		(95	)		—		—
Interest rate cap		(1,340	)		—			—			—			—		—
Total	$	(595	)	$	(821	)	$	(76	)	$	784		$	—	$	—

(1)

Amounts recorded in miscellaneous income in the Condensed Consolidated Statements of Operations

(2)

Amounts recorded in interest expense in the Condensed Consolidated Statements of Operations

	Gain (loss) recognized in accumulated other comprehensive income, net of tax						Gain (loss) reclassified from accumulated other comprehensive income (loss) to earnings						Gain (loss) recognized in earnings
	Six months ended June 30,						Six months ended June 30,						Six months ended June 30,
Derivatives designated as cash flow hedging instruments	2011			2010			2011			2010			2011		2010
Natural gas hedges(1)	$	781		$	346		$	—		$	1,270		$	—	$	—
Interest rate swaps(2)		(154	)		(215	)		(153	)		(195	)		—		—
Interest rate cap		(1,340	)		—			—			—			—		—
Total	$	(713	)	$	131		$	(153	)	$	1,075		$	—	$	—

(1)

Amounts recorded in miscellaneous income in the Condensed Consolidated Statements of Operations

(2)

Amounts recorded in interest expense in the Condensed Consolidated Statements of Operations