Derivative Financial Instruments

9 Months Ended

Sep. 30, 2012

Derivative Financial Instruments

Derivative Financial Instruments

Note 12—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. 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 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 quarterly fixed rate and floating rate payment dates beginning on 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 during which the hedged transactions affect earnings.

        On December 30, 2008, the Company entered into an interest rate hedge agreement with a notional value of $31.5 million. 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 1.84% fixed rate with monthly fixed rate and floating rate payment dates beginning on 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 during which the hedged transactions affect earnings.

Interest Rate Cap

        On June 27, 2011, the Company entered into an interest rate cap agreement related to interest payments required under the 2011 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 quarterly fixed rate and floating rate payment dates beginning on 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 during which the hedged transactions affect earnings.

Natural Gas Hedge

        Revenues derived from the sale of natural gas are subject to volatility based on changes in market prices. In order to reduce the 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 sales beginning in July 2011 and ending June 2012, at a price of $5.00 per MMBTU. The swap agreement hedged approximately 35% of anticipated natural gas sales from July 2011 until June 2012. The hedge was settled upon maturity and was accounted for as a cash flow hedge. The Company did not have any commodity hedges outstanding at September 30, 2012.

        The following table presents the fair values of the Company's derivative instruments as well as the classification on the Condensed Consolidated Balance Sheets (in thousands). See Note 13 for additional information related to the fair values of our derivative instruments.

	September 30, 2012		December 31, 2011
Asset derivatives designated as cash flow hedging instruments:
Natural gas hedge(1)	$	—	$	4,050
Interest rate cap(2)		22		432
Total asset derivatives	$	22	$	4,482
Liability derivatives designated as cash flow hedging instruments:
Interest rate swaps(3)	$	7,419	$	5,683
Total liability derivatives	$	7,419	$	5,683

(1)

Included within other current assets at December 31, 2011.

(2)

$12,000 and $143,000 is included in other current assets and $10,000 and $289,000 is included in other long-term assets within the Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, respectively.

(3)

$4.0 million and $1.8 million is included within other current liabilities and $3.4 million and $3.9 million is included within other long-term liabilities in the Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011, respectively.

        The following tables present the gains and losses from derivative instruments for the three and nine months ended September 30, 2012 and 2011 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 to earnings, net of tax(1)(2)						Ineffective portion of Gain (loss) recognized in earnings
	Three months ended September 30,						Three months ended September 30,						Three months ended September 30,
Derivatives designated as cash flow hedging instruments	2012			2011			2012			2011			2012		2011
Natural gas hedges	$	—		$	464		$	—		$	520		$	—	$	—
Interest rate swaps		9			(4,008	)		(518	)		(45	)		—		—
Interest rate cap		(36	)		1,635			—			—			—		—
Total	$	(27	)	$	(1,909	)	$	(518	)	$	475		$	—	$	—

	Gain (loss) recognized in accumulated other comprehensive income, net of tax						Gain (loss) reclassified from accumulated other comprehensive income to earnings, net of tax(1)(2)						Ineffective portion of Gain (loss) recognized in earnings
	Nine months ended September 30,						Nine months ended September 30,						Nine months ended September 30,
Derivatives designated as cash flow hedging instruments	2012			2011			2012			2011			2012		2011
Natural gas hedges	$	(5,798	)	$	1,245		$	3,279		$	520		$	—	$	—
Interest rate swaps		502			(4,068	)		(1,543	)		(139	)		—		—
Interest rate cap		(255	)		295			—			—			—		—
Total	$	(5,551	)	$	(2,528	)	$	1,736		$	381		$	—	$	—

(1)

Natural gas hedge amounts recorded in miscellaneous income in the Condensed Consolidated Statements of Operations and Comprehensive Income.

(2)

Interest rate swap amounts recorded in interest expense in the Condensed Consolidated Statements of Operations and Comprehensive Income.