10-Q 1 btu_2015093010q.htm 10-Q 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 1-16463
____________________________________________
PEABODY ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
13-4004153
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
701 Market Street, St. Louis, Missouri
 
63101-1826
(Address of principal executive offices)
 
(Zip Code)
(314) 342-3400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ
 
 
 
 
 
Accelerated filer ¨
 
 
Non-accelerated filer ¨
 
 
 
 
 
Smaller reporting company ¨
 
 
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
There were 18.5 million shares of the registrant's common stock (par value of $0.01 per share) outstanding at October 30, 2015.




TABLE OF CONTENTS
 
Page
 
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014

Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014


 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in millions, except per share data)
Revenues
 
 

 
 
 
 
 
 
Sales
 
$
1,277.4

 
$
1,550.5

 
$
3,922.9

 
$
4,619.3

Other revenues
 
141.5

 
172.4

 
373.2

 
488.4

Total revenues
 
1,418.9

 
1,722.9

 
4,296.1

 
5,107.7

Costs and expenses
 
 
 
 
 

 
 
Operating costs and expenses (exclusive of items shown separately below)
 
1,254.0

 
1,453.3

 
3,774.4

 
4,315.7

Depreciation, depletion and amortization
 
136.0

 
163.6

 
430.6

 
483.9

Asset retirement obligation expenses
 
12.3

 
15.0

 
40.4

 
46.5

Selling and administrative expenses
 
37.8

 
52.9

 
128.8

 
171.6

Restructuring charges
 
1.8

 

 
23.0

 

Other operating (income) loss:
 
 
 
 
 
 
 
 
Net gain on disposal of assets
 
(7.9
)
 
(13.9
)
 
(20.2
)
 
(25.9
)
Asset impairment
 

 

 
900.8

 

Loss from equity affiliates
 
5.3

 
15.8

 
12.3

 
44.0

Operating (loss) profit

(20.4
)
 
36.2


(994.0
)
 
71.9

Interest expense
 
118.5

 
114.5

 
344.0

 
321.4

Loss on early debt extinguishment
 

 

 
67.8

 
1.6

Interest income
 
(1.4
)
 
(3.7
)
 
(6.6
)
 
(11.7
)
Loss from continuing operations before income taxes
 
(137.5
)
 
(74.6
)
 
(1,399.2
)
 
(239.4
)
Income tax provision (benefit)
 
6.9

 
79.4

 
(83.2
)
 
30.9

Loss from continuing operations, net of income taxes
 
(144.4
)
 
(154.0
)
 
(1,316.0
)
 
(270.3
)
(Loss) income from discontinued operations, net of income taxes
 
(157.5
)
 
5.0

 
(202.7
)
 
6.0

Net loss
 
(301.9
)
 
(149.0
)
 
(1,518.7
)
 
(264.3
)
Less: Net income attributable to noncontrolling interests
 
2.8

 
1.6

 
7.9

 
8.1

Net loss attributable to common stockholders
 
$
(304.7
)
 
$
(150.6
)
 
$
(1,526.6
)
 
$
(272.4
)
 
 
 
 
 
 
 
 
 
Loss from continuing operations:
 
 
 
 
 
 
 
 
Basic loss per share
 
$
(8.08
)
 
$
(8.72
)
 
$
(73.05
)
 
$
(15.62
)
Diluted loss per share
 
$
(8.08
)
 
$
(8.72
)
 
$
(73.05
)
 
$
(15.62
)
 
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders:
 
 
 
 
 
 
 
 
Basic loss per share
 
$
(16.73
)
 
$
(8.44
)
 
$
(84.23
)
 
$
(15.29
)
Diluted loss per share
 
$
(16.73
)
 
$
(8.44
)
 
$
(84.23
)
 
$
(15.29
)
 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$

 
$
1.275

 
$
0.075

 
$
3.825

See accompanying notes to unaudited condensed consolidated financial statements.


1



PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Dollars in millions)
Net loss
$
(301.9
)
 
$
(149.0
)
 
$
(1,518.7
)
 
$
(264.3
)
Other comprehensive (loss) income, net of income taxes:
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on available-for-sale securities (net of respective net tax provision (benefit) of $0.0, ($0.2), $(0.1) and ($1.0))
0.2

 
(0.4
)
 
0.2

 
(1.7
)
Net unrealized (losses) gains on cash flow hedges (net of respective net tax (benefit) provision of $(30.1), ($104.2), $49.8 and $1.9)
 
 
 
 
 
 
 
(Decrease) increase in fair value of cash flow hedges
(115.6
)
 
(180.6
)
 
(100.4
)
 
3.5

Reclassification for realized losses (gains) included in net loss
68.9

 
3.4

 
183.9

 
(1.6
)
Net unrealized (losses) gains on cash flow hedges
(46.7
)
 
(177.2
)
 
83.5

 
1.9

Postretirement plans and workers' compensation obligations
  (net of respective net tax provision of $1.8, $4.0, $11.2 and $1.8)
 
 
 
 
 
 
 
Prior service cost for the period

 

 

 
(17.4
)
Amortization of actuarial loss and prior service cost included in net loss
10.8

 
6.8

 
26.8

 
20.4

Postretirement plans and workers' compensation obligations
10.8

 
6.8

 
26.8

 
3.0

Foreign currency translation adjustment
(15.3
)
 
(36.8
)
 
(41.5
)
 
(10.4
)
Other comprehensive (loss) income, net of income taxes
(51.0
)
 
(207.6
)
 
69.0

 
(7.2
)
Comprehensive loss
(352.9
)
 
(356.6
)
 
(1,449.7
)
 
(271.5
)
Less: Comprehensive income attributable to noncontrolling interests
2.8

 
1.6

 
7.9

 
8.1

Comprehensive loss attributable to common stockholders
$
(355.7
)
 
$
(358.2
)
 
$
(1,457.6
)
 
$
(279.6
)
See accompanying notes to unaudited condensed consolidated financial statements.


2



PEABODY ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
(Unaudited)
 
 
 
 
September 30, 2015
 
December 31, 2014
 
 
(Amounts in millions, except per share data)
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
334.3

 
$
298.0

Accounts receivable, net of allowance for doubtful accounts of $10.0 at September 30, 2015 and $5.8 at December 31, 2014
 
370.0

 
563.1

Inventories
 
348.1

 
406.5

Assets from coal trading activities, net
 
42.3

 
57.6

Deferred income taxes
 
76.5

 
80.0

Other current assets
 
382.4

 
305.8

Total current assets
 
1,553.6

 
1,711.0

Property, plant, equipment and mine development, net
 
9,475.4

 
10,577.3

Deferred income taxes
 
1.0

 
0.7

Investments and other assets
 
633.4

 
902.1

Total assets
 
$
11,663.4

 
$
13,191.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
19.5

 
$
21.2

Liabilities from coal trading activities, net
 
28.1

 
32.7

Accounts payable and accrued expenses
 
1,468.6

 
1,809.2

Total current liabilities
 
1,516.2

 
1,863.1

Long-term debt, less current portion
 
6,282.4

 
5,965.6

Deferred income taxes
 
101.1

 
89.1

Asset retirement obligations
 
738.4

 
722.3

Accrued postretirement benefit costs
 
782.1

 
781.9

Other noncurrent liabilities
 
932.8

 
1,042.6

Total liabilities
 
10,353.0

 
10,464.6

Stockholders’ equity
 
 
 
 
Preferred Stock — $0.01 per share par value; 10.0 shares authorized, no shares issued or outstanding as of September 30, 2015 or December 31, 2014
 

 

Perpetual Preferred Stock — 0.8 shares authorized, no shares issued or outstanding as of September 30, 2015 or December 31, 2014
 

 

Series Common Stock — $0.01 per share par value; 40.0 shares authorized, no shares issued or outstanding as of September 30, 2015 or December 31, 2014
 

 

Common Stock — $0.01 per share par value; 53.3 shares authorized; 19.3 shares issued and 18.5 shares outstanding as of September 30, 2015 and 19.0 shares issued and 18.1 shares outstanding as of December 31, 2014
 
0.2

 
0.2

Additional paid-in capital
 
2,406.6

 
2,386.0

Treasury stock, at cost — 0.8 shares as of September 30, 2015 and 0.9 shares as of December 31, 2014
 
(371.6
)
 
(467.1
)
(Accumulated deficit) retained earnings
 
(34.0
)
 
1,570.5

Accumulated other comprehensive loss
 
(695.8
)
 
(764.8
)
Peabody Energy Corporation stockholders’ equity
 
1,305.4

 
2,724.8

Noncontrolling interests
 
5.0

 
1.7

Total stockholders’ equity
 
1,310.4

 
2,726.5

Total liabilities and stockholders’ equity
 
$
11,663.4

 
$
13,191.1

See accompanying notes to unaudited condensed consolidated financial statements.


3



PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
 
(Dollars in millions)
Cash Flows From Operating Activities
 
 
 
 
Net loss
 
$
(1,518.7
)
 
$
(264.3
)
Loss (income) from discontinued operations, net of income taxes
 
202.7

 
(6.0
)
Loss from continuing operations, net of income taxes
 
(1,316.0
)
 
(270.3
)
Adjustments to reconcile loss from continuing operations, net of income taxes to net cash (used in) provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
 
430.6

 
483.9

Noncash interest expense
 
22.9

 
17.7

Deferred income taxes
 
(53.7
)
 
(44.3
)
Noncash share-based compensation
 
20.0

 
35.8

Asset impairment
 
900.8

 

Net gain on disposal of assets
 
(20.2
)
 
(25.9
)
Loss from equity affiliates
 
12.3

 
44.0

Gains on previously monetized foreign currency hedge positions
 
(14.9
)
 
(106.7
)
Changes in current assets and liabilities:
 
 
 
 
Accounts receivable
 
190.0

 
142.0

Change in receivable from accounts receivable securitization program
 
(5.0
)
 
(75.0
)
Inventories
 
55.2

 
20.5

Net assets from coal trading activities
 
(17.4
)
 
(14.6
)
Other current assets
 
7.6

 
4.4

Accounts payable and accrued expenses
 
(322.0
)
 
76.2

Asset retirement obligations
 
28.1

 
28.4

Accrued postretirement benefit costs
 
14.2

 
12.7

Accrued pension costs
 
21.1

 
14.6

Other, net
 
(15.6
)
 
2.4

Net cash (used in) provided by continuing operations
 
(62.0
)
 
345.8

Net cash used in discontinued operations
 
(28.6
)
 
(95.7
)
Net cash (used in) provided by operating activities
 
(90.6
)
 
250.1

Cash Flows From Investing Activities
 
 
 
 
Additions to property, plant, equipment and mine development
 
(76.9
)
 
(107.5
)
Changes in accrued expenses related to capital expenditures
 
(14.5
)
 
(22.8
)
Federal coal lease expenditures
 
(89.8
)
 
(89.4
)
Proceeds from disposal of assets, net of notes receivable
 
39.6

 
152.5

Purchases of debt and equity securities
 
(22.6
)
 
(6.0
)
Proceeds from sales and maturities of debt and equity securities
 
33.6

 
7.7

Contributions to joint ventures
 
(349.8
)
 
(410.4
)
Distributions from joint ventures
 
339.8

 
408.5

Advances to related parties
 
(3.6
)
 
(19.7
)
Other, net
 
(2.1
)
 
(2.5
)
Net cash used in investing activities
 
(146.3
)
 
(89.6
)
Cash Flows From Financing Activities
 
 
 
 
Proceeds from long-term debt
 
975.7

 
1.1

Repayments of long-term debt
 
(666.0
)
 
(15.6
)
Payment of deferred financing costs
 
(28.7
)
 
(10.1
)
Dividends paid
 
(1.4
)
 
(69.2
)
Restricted cash for distributions to noncontrolling interests
 

 
(42.5
)
Other, net
 
(6.4
)
 
(1.7
)
Net cash provided by (used in) financing activities
 
273.2

 
(138.0
)
Net change in cash and cash equivalents
 
36.3

 
22.5

Cash and cash equivalents at beginning of period
 
298.0

 
444.0

Cash and cash equivalents at end of period
 
$
334.3

 
$
466.5

See accompanying notes to unaudited condensed consolidated financial statements.


4





PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 
Peabody Energy Corporation Stockholders’ Equity
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
(Accumulated Deficit) Retained
Earnings
 
Accumulated
Other Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
(Dollars in millions)
December 31, 2014
$
0.2

 
$
2,386.0

 
$
(467.1
)
 
$
1,570.5

 
$
(764.8
)
 
$
1.7

 
$
2,726.5

Net (loss) income

 

 

 
(1,526.6
)
 

 
7.9

 
(1,518.7
)
Net change in unrealized gains on available-for-sale securities (net of $0.1 net tax benefit)

 

 

 

 
0.2

 

 
0.2

Net unrealized gains on cash flow hedges (net of $49.8 net tax provision)

 

 

 

 
83.5

 

 
83.5

Postretirement plans and workers’ compensation obligations (net of $11.2 net tax provision)

 

 

 

 
26.8

 

 
26.8

Foreign currency translation adjustment

 

 

 

 
(41.5
)
 

 
(41.5
)
Dividends paid

 

 

 
(1.4
)
 

 

 
(1.4
)
Share-based compensation for equity-classified awards

 
18.6

 

 

 

 

 
18.6

Employee stock purchases

 
3.4

 

 

 

 

 
3.4

Repurchase of employee common stock relinquished for tax withholding

 

 
(2.0
)
 

 

 

 
(2.0
)
Defined contribution plan share contribution

 
(1.4
)
 
97.5

 
(76.5
)
 

 

 
19.6

Consolidation of noncontrolling interests

 

 

 

 

 
1.6

 
1.6

Distributions to noncontrolling interests

 

 

 

 

 
(6.2
)
 
(6.2
)
September 30, 2015
$
0.2

 
$
2,406.6

 
$
(371.6
)
 
$
(34.0
)
 
$
(695.8
)
 
$
5.0

 
$
1,310.4

See accompanying notes to unaudited condensed consolidated financial statements.



5



PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated financial statements include the accounts of Peabody Energy Corporation (the Company) and its affiliates. Interests in subsidiaries controlled by the Company are consolidated and any outside shareholder interests are reflected as noncontrolling interests, except when the Company has an undivided interest in an unincorporated joint venture. In those cases, the Company includes its proportionate share in the assets, liabilities, revenues and expenses of the jointly controlled entities within each applicable line item of the unaudited condensed consolidated financial statements.  All intercompany transactions, profits and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with the 2015 presentation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. In the opinion of management, these financial statements reflect all normal, recurring adjustments necessary for a fair presentation. Balance sheet information presented herein as of December 31, 2014 has been derived from the Company’s audited consolidated balance sheet at that date. The Company's results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2015.
Pursuant to the authorization provided at a special meeting of the Company's stockholders held on September 16, 2015, the Company completed a 1-for-15 reverse stock split of the shares of the Company’s common stock on September 30, 2015 (the Reverse Stock Split). As a result of the Reverse Stock Split, every 15 shares of issued and outstanding common stock were combined into one issued and outstanding share of Common Stock, without any change in the par value per share. No fractional shares were issued as a result of the Reverse Stock Split and any fractional shares that would otherwise have resulted from the Reverse Stock Split were paid in cash. The Reverse Stock Split reduced the number of shares of common stock outstanding from approximately 278 million shares to approximately 19 million shares. The number of authorized shares of common stock was also decreased from 800 million shares to 53.3 million shares. The Company's common stock began trading on a reverse stock split-adjusted basis on the New York Stock Exchange on October 1, 2015. All share and per share data included in this report has been retroactively restated to reflect the Reverse Stock Split. Since the par value of the common stock remained at $0.01 per share, the value for "Common stock" recorded to the Company's condensed consolidated balance sheets has been retroactively reduced to reflect the par value of restated outstanding shares, with a corresponding increase to "Additional paid-in capital."
The Company has classified items within discontinued operations in the unaudited condensed consolidated financial statements for disposals (by sale or otherwise) that have occurred prior to January 1, 2015 when the operations and cash flows of a disposed component of the Company were eliminated from the ongoing operations of the Company as a result of the disposal and the Company no longer had any significant continuing involvement in the operation of that component.
(2)    Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented
Newly Adopted Accounting Standards
Discontinued Operations. In April 2014, the Financial Accounting Standards Board (FASB) issued accounting guidance that raised the threshold for disposals to qualify as discontinued operations to a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. Such a strategic shift may include the disposal of (1) a major geographical area of operations, (2) a major line of business, (3) a major equity method investment or (4) other major parts of an entity. Provided that the major strategic shift criterion is met, the new guidance does allow entities to have significant continuing involvement and continuing cash flows with the discontinued operation, unlike prior U.S. GAAP. The new standard also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The new guidance became effective prospectively for disposals that occur in interim and annual periods beginning on or after December 31, 2014 (January 1, 2015 for the Company). The adoption of the guidance beginning January 1, 2015 had no material effect on the Company's results of operations, financial condition, cash flows or financial statement presentation at that time. The ultimate impact on the Company's financial statements will depend on any prospective disposal activity.


6


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Accounting Standards Not Yet Implemented
Revenue Recognition. In May 2014, the FASB issued a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The new standard provides a single principles-based, five-step model to be applied to all contracts with customers, which steps are to (1) identify the contract(s) with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when each performance obligation is satisfied. More specifically, revenue will be recognized when promised goods or services are transferred to the customer in an amount that reflects the consideration expected in exchange for those goods or services. The standard also requires entities to disclose sufficient qualitative and quantitative information to enable financial statement users to understand the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers.
Under the originally issued standard, the new guidance will be effective for interim and annual periods beginning after December 15, 2016 (January 1, 2017 for the Company). On July 9, 2015, the FASB decided to delay the effective date of the new revenue recognition standard by one year with early adoption permitted, but not before the original effective date. The standard allows for either a full retrospective adoption or a modified retrospective adoption. The Company is in the process of evaluating the impact that the adoption of this guidance will have on its results of operations, financial condition, cash flows and financial statement presentation.
Going Concern. In August 2014, the FASB issued disclosure guidance that requires management to evaluate, at each annual and interim reporting period, whether substantial doubt exists about an entity's ability to continue as a going concern and, if applicable, to provide related disclosures. As outlined by that guidance, substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or are available to be issued). The new guidance will be effective for annual reporting periods ending after December 15, 2016 (the year ending December 31, 2016 for the Company) and interim periods thereafter, with early adoption permitted.
Deferred Financing Costs. On April 7, 2015, the FASB issued accounting guidance that requires deferred financing costs to be presented as a direct reduction from the related debt liability in the financial statements rather than as a separately recognized asset, as is the current requirement under U.S. GAAP. Under the new guidance, amortization of such costs will continue to be reported as interest expense. In August 2015, an update was issued that clarified that debt issuance costs associated with line-of-credit arrangements may continue to be reported as an asset. The new guidance will be effective for interim and annual periods beginning after December 15, 2015 (January 1, 2016 for the Company) and must be adopted on a retrospective basis. While the Company does not anticipate an impact to its results of operations, financial condition or cash flows in connection with the adoption of the guidance, there will be an impact on the presentation of the Company's condensed consolidated balance sheets. More specifically, the Company's condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 includes $75.9 million and $64.7 million, respectively, of deferred financing cost assets (excluding $20.9 million and $14.0 million, respectively, related to line-of-credit arrangements) that would, under the new guidance, be presented as a direct reduction to liabilities.
(3)    Asset Impairment
The following costs are reflected in "Asset impairment" in the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2015:
 
 
 
 
 
 
 
Australian Metallurgical
Mining
 
Australian Thermal Mining
 
Corporate
and Other
 
Consolidated
 
 
(Dollars in millions)
Asset impairment charges:
 
 
 
 
 
 
 
 
Long-lived assets
 
$
527.0

 
$
8.2

 
$
182.2

 
$
717.4

Equity method investments
 

 

 
183.4

 
183.4

Total
 
$
527.0

 
$
8.2

 
$
365.6

 
$
900.8



7


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Australian Metallurgical and Thermal Mining
The Company generally does not view short-term declines in metallurgical and thermal coal prices in the markets in which it sells its products as an indicator of impairment. However, due to the severity of the decline in seaborne metallurgical and thermal coal pricing observed during the first half of 2015 and other adverse market conditions noted during that period that drove an unfavorable change in the expected timing of eventual seaborne market rebalancing, the Company concluded that indicators of impairment existed surrounding its Australian mining platform as of June 30, 2015. Accordingly, the Company reviewed its Australian mining assets for recoverability at that date. Based on that review, the Company determined that the carrying values of three of its active mines that produce metallurgical coal were not recoverable and correspondingly recognized an aggregate impairment charge of $230.5 million to write those assets down from their carrying value to their estimated fair value in the second quarter.
Also during the second quarter of 2015, the Company reviewed its portfolio of mining tenements and surface lands to identify non-strategic assets that could be monetized. In connection with that review, certain of such assets were deemed to meet held-for-sale accounting criteria or were otherwise deemed more likely to generate cash flows through divestiture rather than development, with the long-term plans for certain adjacent assets also consequently affected. Accordingly, the Company recognized an aggregate impairment charge of $304.7 million to write down the targeted divestiture assets and abandoned assets from their carrying value to their estimated fair value.
Corporate and Other
Long-lived Assets. In connection with a similar review of the Company's asset portfolio conducted during the second quarter of 2015 to identify non-strategic domestic assets that could be monetized, the Company identified non-strategic, non-coal-supplying assets as held-for-sale rather than held-for-use as of June 30, 2015. Accordingly, the Company recognized an impairment charge of $182.2 million to write the assets down from their carrying value to estimated fair value.
Equity Method Investments. Due to the impairment indicators noted above surrounding the Company's Australian platform, the Company similarly reviewed its total investment in Middlemount Coal Pty Ltd. (Middlemount), which owns the Middlemount Mine in Queensland, Australia, as of June 30, 2015. As a result of that review, the Company determined that the carrying value of its equity investment in Middlemount was other-than-temporarily impaired and recorded a charge of $46.6 million to write-off the investment.
The Company, along with the other equity interest holder, also periodically makes loans to Middlemount pursuant to the related shareholders’ agreement for purposes of funding capital expenditures and working capital requirements. Prior to an impairment adjustment, the aggregate carrying value of such loans totaled $299.3 million. Of that amount, a total of $65.5 million (the Priority Loans) had seniority over the remainder (the Subordinated Loans) as of June 30, 2015. The Subordinated Loans are provided on an equal and shared basis with the other equity interest holder, and the Company's and the other equity interest holder's claims under the Subordinated Loans are on equal footing. The Company also reviewed the loans for impairment and recorded a charge of $136.8 million to write down the carrying value of the Subordinated Loans.
The fair value estimates made during the Company's impairment assessments were determined in accordance with the methods outlined in Note 1. "Summary of Significant Accounting Policies" to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, except in certain instances where indicative bids were received related to non-strategic assets being marketed for divestiture. In those instances, the indicative bids were also considered in estimating fair value.
The Company believes the impairment charges recorded during the nine months ended September 30, 2015 adequately address the realization risks disclosed in Note 3. "Asset Realization" to its Quarterly Report on Form 10-Q for the period ended March 31, 2015.
(4)    Discontinued Operations
Discontinued operations include certain former Australian Thermal Mining and Midwestern U.S. Mining segment assets that have ceased production and other previously divested legacy operations.


8


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Summarized Results of Discontinued Operations
Results from discontinued operations were as follows during the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in millions)
(Loss) income from discontinued operations before income taxes
 
$
(157.5
)
 
$
7.6

 
$
(202.7
)
 
$
8.6

Income tax provision
 

 
2.6

 

 
2.6

(Loss) income from discontinued operations, net of income taxes
 
$
(157.5
)
 
$
5.0

 
$
(202.7
)
 
$
6.0

Assets and Liabilities of Discontinued Operations
The carrying amounts of assets and liabilities classified as discontinued operations included in the Company's condensed consolidated balance sheets were as follows:
 
 
September 30, 2015
 
December 31, 2014
 
 
(Dollars in millions)
Assets:
 
 
 
 
Other current assets
 
$
0.3

 
$
0.3

Investments and other assets
 
15.9

 
16.3

Total assets classified as discontinued operations
 
$
16.2

 
$
16.6

 
 
 
 
 
Liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
78.2

 
$
12.5

Other noncurrent liabilities
 
218.0

 
109.8

Total liabilities classified as discontinued operations
 
$
296.2

 
$
122.3

Patriot-Related Matters. Refer to Note 19. "Matters Related to the Patriot Bankruptcy" for information surrounding charges recorded during the three and nine months ended September 30, 2015 associated with the bankruptcy of Patriot Coal Corporation and certain of its wholly-owned subsidiaries (Patriot).
Wilkie Creek Mine. In December 2013, the Company ceased production and started reclamation of the Wilkie Creek Mine in Queensland, Australia. On June 30, 2014, Queensland Bulk Handling Pty Ltd (QBH) commenced litigation against Peabody (Wilkie Creek) Pty Limited, the indirect wholly-owned subsidiary of the Company that owns the Wilkie Creek Mine, alleging breach of a Coal Port Services Agreement (CPSA) between the parties. Included in "(Loss) income from discontinued operations, net of income taxes" for the nine months ended September 30, 2015 is a $7.6 million charge related to that litigation. Refer to Note 18. "Commitments and Contingencies" for additional information surrounding the QBH matter.
In June 2015, the Company entered into an agreement to sell the Wilkie Creek Mine in exchange for potential cash proceeds of up to $20 million and the assumption of certain liabilities, including asset retirement obligations. That agreement was subsequently terminated in October 2015 in conjunction with entering into a new agreement with similar terms. The closing of the sale remains subject to certain conditions.


9


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(5)     Investments
Investments in available-for-sale securities at September 30, 2015 were as follows:
Available-for-sale securities
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
(Dollars in millions)
Noncurrent:
 
 
 
 
 
 
 
 
     Federal government securities
 
$
31.3

 
$
0.2

 
$

 
$
31.5

     U.S. corporate bonds
 
19.4

 
0.1

 
(0.1
)
 
19.4

Total
 
$
50.7

 
$
0.3

 
$
(0.1
)
 
$
50.9

Investments in available-for-sale securities at December 31, 2014 were as follows:
Available-for-sale securities
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
 
(Dollars in millions)
 
 
Current:
 
 
 
 
 
 
 
 
     U.S. corporate bonds
 
$
11.2

 
$

 
$

 
$
11.2

Noncurrent:
 
 
 
 
 
 
 
 
     Marketable equity securities
 
6.2

 

 

 
6.2

     Federal government securities
 
32.0

 

 

 
32.0

     U.S. corporate bonds
 
12.4

 

 

 
12.4

Total
 
$
61.8

 
$

 
$

 
$
61.8

The Company classifies its investments as short-term if, at the time of purchase, remaining maturities are greater than three months and up to one year. Such investments are included in "Other current assets" in the condensed consolidated balance sheets. Investments with remaining maturities of greater than one year are classified as long-term and are included in "Investments and other assets" in the condensed consolidated balance sheets. The Company’s previous investments in marketable equity securities consisted of an investment in Winsway Enterprises Holdings Limited. That investment was disposed of during the nine months ended September 30, 2015, resulting in an immaterial gain compared to the adjusted cost basis of the securities.
Contractual maturities for available-for-sale investments in debt securities at September 30, 2015 were as shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Contractual maturities for available-for-sale debt securities
 
Cost
 
Fair Value
 
 
(Dollars in millions)
Due in one to five years
 
$
50.7

 
$
50.9

(6)     Inventories
Inventories as of September 30, 2015 and December 31, 2014 consisted of the following:
 
September 30, 2015
 
December 31, 2014
 
(Dollars in millions)
Materials and supplies
$
121.2

 
$
143.6

Raw coal
68.3

 
115.0

Saleable coal
158.6

 
147.9

Total
$
348.1

 
$
406.5

Materials and supplies inventories presented above have been shown net of reserves of $4.8 million and $4.6 million as of September 30, 2015 and December 31, 2014, respectively.


10


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(7)     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.


11


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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.


12


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



13


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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
)


14


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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.


15


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



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.
(8)     Coal Trading
The Company engages in the direct and brokered trading of coal and freight-related contracts (coal trading). Except those for which the Company has elected to apply a normal purchases and normal sales exception, all derivative coal trading contracts are accounted for at fair value.
The Company includes instruments associated with coal trading transactions as a part of its trading book. Trading revenues from such transactions are recorded in “Other revenues” in the unaudited condensed consolidated statements of operations and include realized and unrealized gains and losses on derivative instruments, including those that arise from coal deliveries related to contracts accounted for on an accrual basis under the normal purchases and normal sales exception. Therefore, the Company has elected the trading exemption surrounding disclosure of its coal trading activities.


16


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Trading revenues recognized during the three and nine months ended September 30, 2015 and 2014 were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Trading Revenues by Type of Instrument
 
2015
 
2014
 
2015
 
2014
 
 
(Dollars in millions)
Commodity futures, swaps and options
 
$
47.7

 
$
10.7

 
$
89.4

 
$
69.0

Physical commodity purchase/sale contracts
 
(23.2
)
 
4.3

 
(46.7
)
 
(22.7
)
Total trading revenues
 
$
24.5

 
$
15.0

 
$
42.7

 
$
46.3

Risk Management
Hedge Ineffectiveness. In some instances, the Company has designated an existing coal trading derivative as a hedge and, thus, the derivative has a non-zero fair value at hedge inception. The “off-market” nature of these derivatives, which is best described as an embedded financing element within the derivative, is a source of ineffectiveness. In other instances, the Company uses a coal trading derivative that settles at a different time, has different quality specifications or has a different location basis than the occurrence of the cash flow being hedged. These collectively yield ineffectiveness to the extent that the derivative hedge contract does not exactly offset changes in the fair value or expected cash flows of the hedged item.
The gross fair value of coal trading positions designated as cash flow hedges of forecasted sales was an asset of $16.2 million and $44.3 million as of September 30, 2015 and December 31, 2014, respectively. Based on the net fair value of the Company’s coal trading positions held in “Accumulated other comprehensive loss” at September 30, 2015, unrealized gains to be reclassified from comprehensive income to earnings through the end of the year are expected to be approximately $16 million, at which point, all unrealized gains will have been reclassified. As these unrealized gains are associated with derivative instruments that represent hedges of forecasted transactions, the amounts reclassified to earnings may partially offset the effect of the realized underlying transactions in the unaudited condensed consolidated statements of operations.
Offsetting and Balance Sheet Presentation
The Company's coal trading assets and liabilities include financial instruments, such as swaps, futures and options, cleared through various commodities exchanges, which involve the daily net settlement of closed positions. The Company must post cash collateral, known as variation margin, on exchange-cleared positions that are in a net liability position and receives variation margin when in a net asset position. The Company also transacts in coal trading financial swaps and options through OTC markets with financial institutions and other non-financial trading entities under ISDA Master Agreements, which contain symmetrical default provisions. Certain of the Company's coal trading agreements with OTC counterparties also contain credit support provisions that may periodically require the Company to post, or entitle the Company to receive, initial and variation margin. Physical coal and freight-related purchase and sale contracts included in the Company's coal trading assets and liabilities are executed pursuant to master purchase and sale agreements that also contain symmetrical default provisions and allow for the netting and setoff of receivables and payables that arise during the same time period. The Company offsets its coal trading asset and liability derivative positions, and variation margin related to those positions, on a counterparty-by-counterparty basis in the condensed consolidated balance sheets, with the fair values of those respective derivatives reflected in “Assets from coal trading activities, net” and “Liabilities from coal trading activities, net."


17


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The fair value of assets and liabilities from coal trading activities presented on a gross and net basis as of September 30, 2015 and December 31, 2014 is set forth below:
Affected line item in the condensed consolidated balance sheets
 
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Variation margin (held) posted (1)
 
Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets
 
 
(Dollars in millions)
 
 
Fair Value as of September 30, 2015
Assets from coal trading activities, net
 
$
203.4

 
$
(123.4
)
 
$
(37.7
)
 
$
42.3

Liabilities from coal trading activities, net
 
(156.8
)
 
123.4

 
5.3

 
(28.1
)
Total, net
 
$
46.6

 
$

 
$
(32.4
)
 
$
14.2

 
 
 
 
 
 
 
 
 
 
 
Fair Value as of December 31, 2014
Assets from coal trading activities, net
 
$
342.5

 
$
(248.3
)
 
$
(36.6
)
 
$
57.6

Liabilities from coal trading activities, net
 
(285.0
)
 
248.3

 
4.0

 
(32.7
)
Total, net
 
$
57.5

 
$

 
$
(32.6
)
 
$
24.9

(1) 
A total of $0.7 million of the net variation margin held at September 30, 2015 related to cash flow hedges.
See Note 7. "Derivatives and Fair Value Measurements" for information on balance sheet offsetting related to the Company’s Corporate Hedging activities.
Fair Value Measurements
The following tables set forth the hierarchy of the Company’s net financial asset (liability) coal trading positions for which fair value is measured on a recurring basis as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Commodity futures, swaps and options
$
(7.0
)
 
$
19.0

 
$

 
$
12.0

Physical commodity purchase/sale contracts

 
0.9

 
1.3

 
2.2

Total net financial (liabilities) assets
$
(7.0
)
 
$
19.9

 
$
1.3

 
$
14.2

 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Commodity futures, swaps and options
$
(0.2
)
 
$
32.6

 
$

 
$
32.4

Physical commodity purchase/sale contracts

 
(9.6
)
 
2.1

 
(7.5
)
Total net financial (liabilities) assets
$
(0.2
)
 
$
23.0

 
$
2.1

 
$
24.9

For Level 1 and 2 financial assets and liabilities, the Company utilizes both direct and indirect observable price quotes, including U.S. interest rate curves; LIBOR yield curves; Chicago Mercantile Exchange (CME) Group, Intercontinental Exchange (ICE), LCH.Clearnet (formerly known as the London Clearing House), NOS Clearing ASA and Singapore Exchange (SGX) contract prices; broker quotes; published indices and other market quotes. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:
Commodity futures, swaps and options: generally valued based on unadjusted quoted prices in active markets (Level 1) or a valuation that is corroborated by the use of market-based pricing (Level 2).
Physical commodity purchase/sale contracts: purchases and sales at locations with significant market activity corroborated by market-based information (Level 2).
Physical commodity purchase/sale contracts transacted in less liquid markets or contracts, such as long-term arrangements with limited price availability, are classified in Level 3. Indicators of less liquid markets are those with periods of low trade activity or wide pricing spreads between broker quotes.


18


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The Company's risk management function, which is independent of the Company's commercial trading function, is responsible for valuation policies and procedures, with oversight from executive management. Generally, the Company's Level 3 instruments or contracts are valued using bid/ask price quotations and other market assessments obtained from multiple, independent third-party brokers or other transactional data incorporated into internally-generated discounted cash flow models. While the Company does not anticipate any decrease in the number of third-party brokers or market liquidity, the occurrence of such events could erode the quality of market information and therefore the valuation of its market positions. The Company's valuation techniques include basis adjustments to the foregoing price inputs for quality, such as heat rate and sulfur and ash content; location differentials, expressed as port and freight costs, and credit risk. The Company's risk management function independently validates the Company's valuation inputs, including unobservable inputs, with third-party information and settlement prices from other sources where available. A daily process is performed to analyze market price changes and changes to the portfolio. Further periodic validation occurs at the time contracts are settled with the counterparty. These valuation techniques have been consistently applied in all periods presented, and the Company believes it has obtained the most accurate information available for the types of derivative contracts held.
The fair value of the Company's coal trading positions classified in Level 3, and changes thereto, was not material to the periods presented. Additionally, the Company did not have any significant transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2015 or 2014, nor were there any transfers in or out of Level 3 during those periods. The Company’s policy is to value all transfers between levels using the beginning of period valuation.
As of September 30, 2015, the Company's trading portfolio was expected to have positive net cash realizations in 2015 and 2016, reaching substantial maturity in 2016 on a fair value basis.
Credit and Nonperformance Risk. The fair value of the Company’s coal derivative assets and liabilities reflects adjustments for credit risk. The Company’s exposure is substantially with electric utilities, energy marketers, steel producers and nonfinancial trading houses. The Company’s policy is to independently evaluate each customer’s creditworthiness prior to entering into transactions and to regularly monitor the credit extended. If the Company engages in a transaction with a counterparty that does not meet its credit standards, the Company seeks to protect its position by requiring the counterparty to provide an appropriate credit enhancement. Also, when appropriate (as determined by its credit management function), the Company has taken steps to reduce its exposure to customers or counterparties whose credit has deteriorated and who may pose a higher risk of failure to perform under their contractual obligations. These steps include obtaining letters of credit or cash collateral (margin), requiring prepayments for shipments or the creation of customer trust accounts held for the Company’s benefit to serve as collateral in the event of a failure to pay or perform. To reduce its credit exposure related to trading and brokerage activities, the Company seeks to enter into netting agreements with counterparties that permit the Company to offset asset and liability positions with such counterparties and, to the extent required, the Company will post or receive margin amounts associated with exchange-cleared and certain OTC positions. The Company also continually monitors counterparty and contract nonperformance risk, if present, on a case-by-case basis.
At September 30, 2015, 86% of the Company’s credit exposure related to coal trading activities with investment grade counterparties, while 1% was with non-investment grade counterparties and 13% was with counterparties that are not rated.
Performance Assurances and Collateral
Certain of the Company’s derivative trading instruments require the parties to provide additional performance assurances whenever a material adverse event jeopardizes one party’s ability to perform under the instrument. If the Company was to sustain a material adverse event (using commercially reasonable standards), its counterparties could request collateralization on derivative trading instruments in net liability positions which, based on an aggregate fair value at September 30, 2015 and December 31, 2014, would have amounted to collateral postings to counterparties of approximately $26 million and $31 million, respectively. As of September 30, 2015 and December 31, 2014, no collateral was posted to counterparties for such positions.
Certain of the Company’s other derivative trading instruments require the parties to provide additional performance assurances whenever a credit downgrade occurs below a certain level, as specified in each underlying contract. The terms of such derivative trading instruments typically require additional collateralization, which is commensurate with the severity of the credit downgrade. In 2015, each of the three agencies downgraded our corporate credit rating. The credit downgrades were, in part, due to continued weakness in seaborne coal prices. The Company was not required to post additional collateral as a direct result of these downgrades for its derivative trading instruments. Even if a credit downgrade were to have occurred below contractually specified levels, the Company’s additional collateral requirement owed to its counterparties for these derivative trading instruments would have been zero at September 30, 2015 and December 31, 2014 based on the aggregate fair value of all derivative trading instruments with such features. As of September 30, 2015 and December 31, 2014, no collateral was posted to counterparties to support such derivative trading instruments.


19


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The Company is required to post variation margin on positions that are in a net liability position and is entitled to receive and hold variation margin on positions that are in a net asset position with an exchange and certain of its OTC derivative contract counterparties. At September 30, 2015 and December 31, 2014, the Company held net variation margin of $32.4 million and $32.6 million, respectively.
In addition to the requirements surrounding variation margin, the Company is required by the exchanges upon which it transacts and by certain of its OTC arrangements to post certain additional collateral, known as initial margin, which represents an estimate of potential future adverse price movements across the Company’s portfolio under normal market conditions. As of September 30, 2015 and December 31, 2014, the Company had posted initial margin of $17.7 million and $15.2 million, respectively, which is reflected in “Other current assets” in the condensed consolidated balance sheets. The Company had posted $4.1 million of margin in excess of the required variation and initial margin as of September 30, 2015, while it had posted $6.1 million of excess margin as of December 31, 2014.
(9)     Financing Receivables
The Company's total financing receivables as of September 30, 2015 and December 31, 2014 consisted of the following:
Balance Sheet Classification
 
September 30, 2015
 
December 31, 2014
 
(Dollars in millions)
Other current assets
$
24.6

 
$

Investments and other assets
153.0

 
347.2

Total financing receivables
$
177.6

 
$
347.2

The Company periodically assesses the collectability of accounts and loans receivable by considering factors such as specific evaluation of collectability, historical collection experience, the age of the receivable and other available evidence. Below is a description of the Company's financing receivables outstanding as of September 30, 2015.
Codrilla Mine Project. In 2011, a wholly-owned subsidiary of PEA-PCI, then Macarthur Coal Limited, completed the sale of a portion of its 85% interest in the Codrilla Mine Project to the other participants of the Coppabella Moorvale Joint Venture, afterward retaining 73.3% ownership.The final outstanding installment payment of 40% of the sale price is due upon the earlier of the mine's first coal shipment or a specified date. The sales agreement was amended in the second quarter of 2013 to delay the specified date from March 31, 2015 to June 30, 2016. There are currently no indications of impairment on the remaining installment and the Company expects to receive full payment by June 30, 2016. The remaining balance associated with these receivables totaled $24.6 million and $27.6 million at September 30, 2015 and December 31, 2014, respectively, and was recorded in "Other current assets" and "Investments and other assets" in the condensed consolidated balance sheets, respectively.
Middlemount. The Company periodically makes loans to Middlemount, in which the Company owns a 50% equity interest, pursuant to the related shareholders’ agreement for purposes of funding capital expenditures and working capital requirements. Middlemount is required to pay down the loans as excess cash is generated pursuant to its shareholders’ agreement. The Priority Loans bear interest at a rate equal to the monthly average 30-day Australian Bank Bill Swap Reference Rate plus 3.5%, while the Subordinated Loans presently do not bear interest. The loans expire on December 31, 2016. Based on the expected timing of repayment of these loans, which is projected to extend beyond the stated expiration date, the Company considers these loans to be of a long-term nature. As a result, (1) the foreign currency impact related to the shareholder loans is included in foreign currency translation adjustment in the condensed consolidated balance sheets and the unaudited condensed consolidated statements of comprehensive income and (2) interest income on the Priority Loans is recognized when cash is received. Refer to Note 3. "Asset Impairment" for background surrounding an impairment charge of $136.8 million recognized during the nine months ended September 30, 2015. The carrying value of these loans of $153.0 million and $319.6 million was reflected in "Investments and other assets" in the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.


20


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(10)
Property, Plant, Equipment and Mine Development
Property, plant, equipment and mine development, net, as of September 30, 2015 and December 31, 2014 consisted of the following:
 
September 30, 2015
 
December 31, 2014
 
(Dollars in millions)
Land and coal interests
$
10,637.5

 
$
11,021.1

Buildings and improvements
1,536.9

 
1,569.1

Machinery and equipment
2,341.9

 
2,685.7

Less: Accumulated depreciation, depletion and amortization
(5,040.9
)
 
(4,698.6
)
Total, net
$
9,475.4

 
$
10,577.3

(11)  Income Taxes
The Company’s income tax provision of $6.9 million and $79.4 million for the three months ended September 30, 2015 and 2014, respectively, included a tax benefit of $0.8 million and $1.2 million related to the remeasurement of foreign income tax accounts for the same respective periods. The Company’s income tax benefit of $83.2 million and provision of $30.9 million for the nine months ended September 30, 2015 and 2014, respectively, included tax benefits of $1.0 million and $3.9 million related to the remeasurement of foreign income tax accounts, respectively. The Company's effective tax rate before remeasurement for the three and nine months ended September 30, 2015 is based on the Company’s estimated full year effective tax rate, comprised of expected statutory tax expense more than offset by reductions from percentage depletion, foreign rate differential and changes in valuation allowance. The Company wrote-off deferred tax assets due to the repeal of the Australian Minerals Rent Resource Tax (MRRT) of $70.1 million and $16.1 million for the three and nine months ended September 30, 2014, respectively.
The income tax expense and tax benefit recorded for the three and nine months ended September 30, 2015 are primarily comprised of a tax allocation to results from continuing operations related to the tax effects of items credited directly to "Other comprehensive income". Generally, the amount of tax provision or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as "Other comprehensive income." However, an exception applies in periods in which there is a year-to-date loss from continuing operations before taxes and income in other categories of earnings before taxes. Under this exception, and notwithstanding the continuing valuation allowance on the Company's net deferred tax assets in the U.S. and Australia, the tax provision is first allocated to the other categories of earnings and a related tax benefit is recorded in results from continuing operations. There was no similar activity recorded for the three or nine months ended September 30, 2014.
During the three and nine months ended September 30, 2015, the Company decreased its unrecognized tax benefits, including interest and penalties related thereto, by $25.0 million due to finalization of IRS audits on the 2009 through 2013 tax years.


21


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



(12)     Long-term Debt 
The Company’s total indebtedness as of September 30, 2015 and December 31, 2014 consisted of the following:
 
September 30, 2015
 
December 31, 2014
 
(Dollars in millions)
2013 Term Loan Facility due September 2020
$
1,167.4

 
$
1,175.1

7.375% Senior Notes due November 2016

 
650.0

6.00% Senior Notes due November 2018
1,518.8

 
1,518.8

6.50% Senior Notes due September 2020
650.0

 
650.0

6.25% Senior Notes due November 2021
1,339.6

 
1,339.6

10.00% Senior Secured Second Lien Notes due March 2022
977.5

 

7.875% Senior Notes due November 2026
247.7

 
247.6

Convertible Junior Subordinated Debentures due December 2066
384.5

 
382.3

Capital lease obligations
15.7

 
22.2

Other
0.7

 
1.2

Total
$
6,301.9

 
$
5,986.8

The carrying amounts of the 2013 Term Loan Facility due September 2020, the 10.00% Senior Secured Second Lien Notes due March 2022 (the Senior Secured Second Lien Notes), the 7.875% Senior Notes due November 2026 and the Convertible Junior Subordinated Debentures due December 2066 (the Debentures) have been presented above net of the respective unamortized original issue discounts.
Other than as described in the following section, there were no significant changes to the Company's long-term debt subsequent to December 31, 2014. Information regarding the Company's long-term debt is outlined in Note 12 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2014.
2013 Credit Facility Amendment
On February 5, 2015, the Company entered into the Omnibus Amendment Agreement (the First Amendment) related to its 2013 Credit Facility. The 2013 Credit Facility provides for a $1.65 billion revolving credit facility (the 2013 Revolver) and a $1.20 billion term loan facility (the 2013 Term Loan Facility).
The Company's obligations under the 2013 Credit Facility are guaranteed by the Company and substantially all of its domestic subsidiaries and are secured by (1) a pledge of 65% of the stock of Peabody Investments (Gibraltar) Limited, a holding company for the Company's Australian operations, (2) a pledge of the stock of Peabody IC Funding Corp., whose assets are substantially comprised of intercompany debt owed to it by Peabody IC Holdings, LLC, a holding company whose sole asset is intercompany debt, which had a book value of $5.4 billion at September 30, 2015, owed to it by the top-level Gibraltar subsidiary of the Company’s Australian platform, an entity which previously owed such debt directly to Peabody IC Funding Corp., and (3) after the effectiveness of the First Amendment, substantially all of the Company’s U.S. assets and 65% of the equity interests of its first-tier foreign subsidiaries, subject to certain exceptions. Under the 2013 Credit Facility, the amount of such obligations that are secured by Principal Property and Capital Stock (each as is defined in the indentures for the Company's 6.00%, 6.25%, 6.50% and 7.875% Senior Notes (collectively, the Senior Notes)) is limited in order for the Company to utilize the general liens basket in the Company's Senior Notes indentures.


22


PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)



In addition to the pledge of certain collateral, among other things, the First Amendment:
amended the financial maintenance covenants to provide the Company with greater financial flexibility by lowering the minimum interest coverage ratio and increasing the maximum net secured first lien leverage ratio for the term of the 2013 Credit Facility;
amended the liens covenant to allow for second lien debt issuances, so long as the Company remains in compliance with the 2013 Credit Facility;
amended certain other negative covenants to (1) reduce the annual cash dividend payments basket to a maximum of $27.5 million (with carryforward permitted), (2) reduce the additional general restricted payments basket, which includes dividends, stock repurchases and certain investments, to a maximum of $100.0 million (though the Company may also make restricted payments using another basket whose size is based on, among other things, positive earnings during the term of the agreement) and (3) further limit the Company’s ability to incur liens, incur debt and make investments; and
provided for certain additional mandatory prepayments including with the net cash proceeds of certain asset sales, subject to customary reinvestment rights.
The Company paid aggregate modification costs of $11.8 million related to the First Amendment during the nine months ended September 30, 2015, which will be amortized over the remaining terms of the 2013 Revolver and the 2013 Term Loan Facility.
Under the Credit Facility, the secured obligations include: term loans outstanding, revolver borrowings, letters of credit outstanding, and Swap Obligations and Cash Management Obligations, as defined in the Company's secured credit agreement dated September 24, 2013.
Senior Secured Second Lien Notes Offering
On March 16, 2015, the Company completed the offering of $1.0 billion aggregate principal amount of the Senior Secured Second Lien Notes. The notes were offered to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the Securities Act), and to non-U.S. persons in transactions outside the U.S. under Regulation S of the Securities Act.
The Senior Secured Second Lien Notes are secured by a second-priority lien on all of the assets that secure the Company's obligations under the 2013 Credit Facility on a first-lien basis, subject to permitted liens and other limitations. The Company's Senior Secured Second Lien Notes indenture contains a limit, consistent with the 2013 Credit Facility, on the amount of debt that may be secured by Principal Property and Capital Stock. For purposes of calculating the Principal Property limit, 15% of Specified Consolidated Net Tangible Assets (as that term is used in the related indenture) was approximately $1.5 billion as of September 30, 2015. Additionally, as of September 30, 2015, the book value of Principal Property was approximately $3.0 billion, the book value of property that did not constitute Principal Property was approximately $2.4 billion and the book value of 65% of the capital stock in the Company's first-tier foreign subsidiaries and 65% of the capital stock in Peabody Investments (Gibraltar) Limited was approximately $2.9 billion.
The Company used the net proceeds from the sale of the notes, in part, to fund the tender offer to purchase its 7.375% Senior Notes due November 2016 (the 2016 Senior Notes) and to redeem the aggregate principal amount of the 2016 Senior Notes that was not tendered in the tender offer. Additionally, the remaining proceeds were intended for general corporate purposes, which may include the payment of federal coal lease expenditures.
The Company must pay interest on the notes semi-annually on March 15 and September 15 of each year until maturity on March 15, 2022. The Company may redeem the Senior Secured Second Lien Notes at any time on or after March 15, 2018 at the redemption prices specified in the related indenture and, prior to that date, at a redemption price equal to 100% of the principal amount of the notes being redeemed plus a make whole premium, in addition to any accrued and unpaid interest. Prior to March 15, 2018, the Company may also redeem up to 35% of the aggregate principal amount of the Senior Secured Second Lien Notes with the net cash proceeds from certain equity offerings.
The notes were issued at an issue price of 97.566% of principal amount, resulting in an original issue discount of $24.3 million that will be amortized through maturity. The Company also paid aggregate de