Derivative Financial Instruments

9 Months Ended

Sep. 30, 2015

Derivatives

Derivatives

7. Derivative Financial Instruments

Coal Contracts

We use derivative financial instruments to help manage our exposure to market changes in coal prices. To manage our exposure in the international markets, we have international coal forward contracts and put options linked to forward Newcastle coal prices. We use domestic coal futures contracts referenced to the 8800 Btu coal price sold from the PRB, as quoted on the Chicago Mercantile Exchange (“CME”), to help manage our exposure to market changes in domestic coal prices.

Under the international coal forward contracts, if the monthly average index price is lower than the contract price, we receive the difference, and if the monthly average index price is higher than the contract price, we pay the difference. Under the international put options, if the monthly average index price is lower than the option price, we receive the difference, and if the monthly average index price is higher than the option price, we do not receive or pay anything.

Under the domestic coal futures contracts, if the monthly average index price is higher than the contract price, we receive the difference, and if the monthly average index price is lower than the contract price, we pay the difference. Amounts due to us or to the CME as a result of changes in the market price of our open domestic coal futures contracts and to fulfill margin requirements are received or paid through our brokerage bank on a daily basis; therefore, there is no asset or liability on the condensed consolidated balance sheets.

At September 30,2015, we held positions that are expected to settle in the following years (in thousands, except per ton amounts):

	2015		2016		Total
International Coal Forward Contracts
Notional amount (tons)		172		132		304
Net asset position	$	4,117	$	7,032	$	11,149
Weighted-average per ton	$	99.53	$	100.13	$	99.90
International Coal Put Options
Notional amount (tons)		—		2,480		2,480
Net asset position	$	—	$	4,783	$	4,783
Weighted-average per ton	$	—	$	44.75	$	44.75
Domestic Coal Futures Contracts
Notional amount (tons)		360		120		480
Weighted-average per ton	$	13.10	$	14.70	$	13.50

WTI Derivatives

We use derivative financial instruments, such as collars and swaps, to help manage our exposure to market changes in diesel fuel prices. The derivatives are indexed to the West Texas Intermediate (“WTI”) crude oil price as quoted on the New York Mercantile Exchange. As such, the nature of the derivatives does not directly offset market changes to our diesel costs.

Under a collar agreement, we pay the difference between the monthly average index price and a floor price if the index price is below the floor, and we receive the difference between the ceiling priceand the monthly average index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices. While we would not receive the full benefit of price decreases beyond the floor price, the collars mitigate the risk of crude oil price increases and thereby increased diesel costs that would otherwise have a negative impact on our cash flow.

Under a swap agreement, if the monthly average index price is higher than the swap price, we receive the difference and if the monthly average index price is lower than the swap price, we pay the difference. We use swap agreements to help fix a portion of our diesel costs for 2015 and 2016.

During the nine months endedSeptember 30,2015, we settled a portion of our 2015 call options by either closing out those positions or entering into offsetting call option positions. We also entered into new 2015 swap positions.  In addition, we entered into new collar arrangements and swap positions for 2016. At September 30,2015, we held the following WTI derivative financial instruments:

	Floor			Ceiling			Swaps
Settlement Period	Notional Amount	Weighted-Average per Barrel		Notional Amount	Weighted-Average per Barrel		Notional Amount	Weighted-Average per Barrel
	(barrels in thousands)			(barrels in thousands)			(barrels in thousands)
2015 swap positions (1)	—	$	—	—	$	—	173	$	53.20
2016 collar positions (2)	342	$	53.94	342	$	72.88	—	$	—
2016 swap positions (2)	—	$	—	—	$	—	342	$	63.39
Total	342	$	53.94	342	$	72.88	515	$	59.96

• Represents 100% of expected diesel consumption for the fourth quarter of 2015.
• Represents 50% of expected diesel consumption for 2016.

U.S. On-Highway Diesel Derivatives

A portion of our rail transportation cost for coal shipments to Westshore, the rail fuel surcharge, is priced using the Department of Energy’s U.S. On-Highway Diesel Fuel Prices (“U.S. On-Highway Diesel”). During the nine months ended September 30,2015, we entered into new swap positions indexed to the U.S. On-Highway Diesel prices to help fix a portion of the rail fuel surcharge for 2015 and 2016. Under a swap agreement, if the monthly average index price is higher than the swap price, we receive the difference, and if the monthly average index price is lower than the swap price, we pay the difference.

At September 30,2015, we held the following U.S. On-Highway Diesel derivative financial instruments:

	Swaps
Settlement Period	Notional Amount	Weighted-Average per Gallon
	(gallons in thousands)
2015 swap positions	2,650	$	3.10
2016 swap positions	6,400	$	3.18
Total	9,050	$	3.16

Offsetting and Balance Sheet Presentation

		September 30, 2015
		Gross Amounts Recognized				Gross Amounts Offset in the Consolidated Balance Sheet				Net Amounts Presented in the Consolidated Balance Sheet
		Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
International coal forward contracts		$	11,149	$	—	$	—	$	—	$	11,149	$	—
International coal put options			4,783		—		—		—		4,783		—
WTI derivative financial instruments			—		(8,351)		(4,246)		4,246		(4,246)		(4,106)
U.S. On-Highway Diesel derivative
	financial instruments		—		(4,429)		(4,429)		4,429		(4,429)		—
Total		$	15,932	$	(12,780)	$	(8,675)	$	8,675	$	7,258	$	(4,106)

	December 31, 2014
	Gross Amounts Recognized				Gross Amounts Offset in the Consolidated Balance Sheet				Net Amounts Presented in the Consolidated Balance Sheet
	Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
International coal forward contracts	$	20,861	$	(129)	$	(129)	$	129	$	20,732	$	—
WTI derivative financial instruments		—		(7,228)		(3,620)		3,620		(3,620)		(3,608)
Total	$	20,861	$	(7,357)	$	(3,749)	$	3,749	$	17,111	$	(3,608)

Net amounts of derivative assets are included in Derivative financial instruments and net amounts of derivative liabilities are included in Accrued expenses in the condensed consolidated balance sheets. There were no cash collateral requirements at September 30,2015 or December 31, 2014.

Derivative Gains and Losses

Derivative mark-to-market (gains) and losses recognized in the condensed consolidated statement of operations and comprehensive income were as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
International coal forward contracts	$	(1,153)	$	(3,989)	$	(5,999)	$	(18,071)
International coal put options		(4,039)		—		5,155		—
Domestic coal futures contracts		(564)		2,946		4,095		1,958
WTI derivative financial instruments		11,500		526		8,875		60
U.S. On-Highway Diesel derivative financial instruments		4,491		—		5,656		—
Net derivative financial instruments loss (gain)	$	10,235	$	(515)	$	17,781	$	(16,052)

See Note 6 for a discussion related to the fair value of derivative financial instruments.