BTU_2013.03.31.10Q


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 March 31, 2013
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 269,629,245 shares of the registrant's common stock (par value of $0.01 per share) outstanding at May 3, 2013.



TABLE OF CONTENTS
 
Page
 
Item 1. Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

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

 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
(Dollars in millions)
Revenues
 
 
 
 
Sales
 
$
1,577.2

 
$
1,785.1

Other revenues
 
170.8

 
235.6

Total revenues
 
1,748.0

 
2,020.7

Costs and expenses
 

 
 
Operating costs and expenses
 
1,389.4

 
1,421.8

Depreciation, depletion and amortization
 
170.7

 
142.9

Asset retirement obligation expenses
 
19.0

 
15.0

Selling and administrative expenses
 
65.1

 
71.0

Other operating (income) loss:
 
 
 
 
Net gain on disposal or exchange of assets
 
(2.6
)
 
(4.0
)
Loss from equity affiliates
 
17.6

 
22.7

Operating profit

88.8


351.3

Interest expense
 
101.3

 
102.0

Interest income
 
(5.9
)
 
(8.1
)
(Loss) income from continuing operations before income taxes
 
(6.6
)
 
257.4

Income tax provision
 
3.7

 
74.4

(Loss) income from continuing operations, net of income taxes
 
(10.3
)
 
183.0

Loss from discontinued operations, net of income taxes
 
(9.1
)
 
(4.7
)
Net (loss) income
 
(19.4
)
 
178.3

Less: Net income attributable to noncontrolling interests
 
4.0

 
5.6

Net (loss) income attributable to common stockholders
 
$
(23.4
)
 
$
172.7

 
 
 
 
 
(Loss) income from continuing operations
 
 
 
 
Basic (loss) earnings per share
 
$
(0.05
)
 
$
0.65

Diluted (loss) earnings per share
 
$
(0.05
)
 
$
0.65

 
 
 
 
 
Net (loss) income attributable to common stockholders
 
 
 
 
Basic (loss) earnings per share
 
$
(0.09
)
 
$
0.63

Diluted (loss) earnings per share
 
$
(0.09
)
 
$
0.63

 
 
 
 
 
Dividends declared per share
 
$
0.085

 
$
0.085

See accompanying notes to unaudited condensed consolidated financial statements.


1

Table of Contents

PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended March 31,
 
2013
 
2012
 
(Dollars in millions)
Net (loss) income
$
(19.4
)
 
$
178.3

Other comprehensive (loss) income, net of income taxes:
 
 
 
Net change in unrealized holding losses on available-for-sale securities (net of $3.8 and $6.7 tax benefit for the three months ended March 31, 2013 and 2012, respectively)
 
 
 
Unrealized holding losses on available-for-sale securities
(6.2
)
 
(11.5
)
Less: Reclassification for realized gains included in net income
(0.1
)
 
—

Net change in unrealized losses on available-for-sale securities
(6.3
)
 
(11.5
)
Net unrealized (losses) gains on cash flow hedges (net of $10.9 tax benefit for the three months ended March 31, 2013 and $31.4 tax provision for the three months ended March 31, 2012)
 
 
 
Increase in fair value of cash flow hedges
68.7

 
147.8

Less: Reclassification for realized gains included in net income
(77.1
)
 
(84.2
)
Net unrealized (losses) gains on cash flow hedges
(8.4
)
 
63.6

Amortization of actuarial loss and prior service cost for postretirement plans and workers' compensation obligations (net of $8.3 and $8.1 tax provision for the three months ended March 31, 2013 and 2012, respectively)
14.2

 
13.9

Foreign currency translation adjustment
1.1

 
12.7

Other comprehensive income, net of income taxes
0.6

 
78.7

Comprehensive (loss) income
(18.8
)
 
257.0

Less: Comprehensive income attributable to noncontrolling interests
4.0

 
5.6

Comprehensive (loss) income attributable to common stockholders
$
(22.8
)
 
$
251.4

See accompanying notes to unaudited condensed consolidated financial statements.


2

Table of Contents

PEABODY ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
(Unaudited)
 
 
 
 
March 31, 2013
 
December 31, 2012
 
 
(In millions, except per share data)
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
629.5

 
$
558.8

Accounts receivable, net of allowance for doubtful accounts of $14.4 at March 31, 2013 and $13.7 at
   December 31, 2012
 
661.8

 
737.8

Inventories
 
566.0

 
548.4

Assets from coal trading activities, net
 
57.9

 
52.4

Deferred income taxes
 
33.6

 
56.4

Other current assets
 
503.3

 
621.7

Total current assets
 
2,452.1

 
2,575.5

Property, plant, equipment and mine development
 
 
 
 
Land and coal interests
 
10,947.6

 
10,947.7

Buildings and improvements
 
1,345.7

 
1,321.3

Machinery and equipment
 
3,109.3

 
3,162.2

Less: accumulated depreciation, depletion and amortization
 
(3,804.9
)
 
(3,629.5
)
Property, plant, equipment and mine development, net
 
11,597.7

 
11,801.7

Investments and other assets
 
1,422.1

 
1,431.8

Total assets
 
$
15,471.9

 
$
15,809.0

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities
 
 
 
 
Current maturities of long-term debt
 
$
139.5

 
$
47.8

Deferred income taxes
 
4.7

 
—

Liabilities from coal trading activities, net
 
21.9

 
19.4

Accounts payable and accrued expenses
 
1,494.1

 
1,606.9

Total current liabilities
 
1,660.2

 
1,674.1

 
 
 
 
 
Long-term debt, less current maturities
 
6,006.2

 
6,205.1

Deferred income taxes
 
477.6

 
577.3

Asset retirement obligations
 
692.7

 
687.5

Accrued postretirement benefit costs
 
958.9

 
960.7

Other noncurrent liabilities
 
772.3

 
765.5

Total liabilities
 
10,567.9

 
10,870.2

Stockholders’ equity
 
 
 
 
Preferred Stock — $0.01 per share par value; 10.0 shares authorized; no shares issued or outstanding as of March 31, 2013 or December 31, 2012
 
—

 
—

Perpetual Preferred Stock — 0.8 shares authorized, no shares issued or outstanding as of March 31, 2013 or December 31, 2012
 
—

 
—

Series Common Stock — $0.01 per share par value; 40.0 shares authorized, no shares issued or outstanding as of March 31, 2013 or December 31, 2012
 
—

 
—

Common Stock — $0.01 per share par value; 800.0 shares authorized, 283.4 shares issued and 269.6 shares outstanding as of March 31, 2013 and 282.3 shares issued and 268.6 shares outstanding as of December 31, 2012
 
2.8

 
2.8

Additional paid-in capital
 
2,297.6

 
2,286.3

Retained earnings
 
3,020.1

 
3,066.4

Accumulated other comprehensive income
 
11.6

 
11.0

Treasury shares, at cost: 13.8 shares as of March 31, 2013 and 13.7 shares as of December 31, 2012
 
(464.2
)
 
(461.6
)
Peabody Energy Corporation’s stockholders’ equity
 
4,867.9

 
4,904.9

Noncontrolling interests
 
36.1

 
33.9

Total stockholders’ equity
 
4,904.0

 
4,938.8

Total liabilities and stockholders’ equity
 
$
15,471.9

 
$
15,809.0

See accompanying notes to unaudited condensed consolidated financial statements.


3

Table of Contents

PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
(Dollars in millions)
Cash Flows From Operating Activities
 
 
 
 
Net (loss) income
 
$
(19.4
)
 
$
178.3

Loss from discontinued operations, net of income taxes
 
9.1

 
4.7

(Loss) income from continuing operations, net of income taxes
 
(10.3
)
 
183.0

Adjustments to reconcile (loss) income from continuing operations, net of income taxes to net
   cash provided by operating activities:
 
 
 
 
Depreciation, depletion and amortization
 
170.7

 
142.9

Noncash interest expense
 
5.6

 
4.5

Deferred income taxes
 
(47.8
)
 
0.7

Share-based compensation
 
11.8

 
13.0

Net gain on disposal or exchange of assets
 
(2.6
)
 
(4.0
)
Loss from equity affiliates
 
17.6

 
22.7

Changes in current assets and liabilities:
 
 
 
 
Accounts receivable
 
77.5

 
261.6

Change in receivable from accounts receivable securitization program
 
—

 
(75.0
)
Inventories
 
(23.3
)
 
(78.8
)
Net assets from coal trading activities
 
25.3

 
31.6

Other current assets
 
7.1

 
6.2

Accounts payable and accrued expenses
 
41.7

 
(108.7
)
Asset retirement obligations
 
12.7

 
13.3

Accrued postretirement benefit costs
 
3.8

 
7.3

Pension costs
 
12.9

 
12.4

Contributions to pension plans
 
(0.4
)
 
(0.4
)
Other, net
 
(14.8
)
 
(1.9
)
Net cash provided by continuing operations
 
287.5

 
430.4

Net cash used in discontinued operations
 
(15.8
)
 
(34.9
)
Net cash provided by operating activities
 
271.7

 
395.5

Cash Flows From Investing Activities
 
 
 
 
Additions to property, plant, equipment and mine development
 
(74.0
)
 
(234.5
)
Changes in accrued expenses related to capital expenditures
 
(66.4
)
 
—

Investment in Prairie State Energy Campus
 
—

 
(3.3
)
Proceeds from disposal of assets, net of note receivable
 
53.0

 
4.6

Purchases of debt securities
 
(4.6
)
 
—

Proceeds from sales and maturities of debt securities
 
12.9

 
3.1

Contributions to joint ventures
 
(154.1
)
 
(208.9
)
Distributions from joint ventures
 
174.3

 
221.4

Advances to related parties
 
(23.1
)
 
(322.0
)
Repayment of loans from related parties
 
14.8

 
338.7

Other, net
 
(1.0
)
 
(0.5
)
Net cash used in continuing operations
 
(68.2
)
 
(201.4
)
Net cash used in discontinued operations
 
(0.1
)
 
(1.7
)
Net cash used in investing activities
 
(68.3
)
 
(203.1
)
Cash Flows From Financing Activities
 
 
 
 
Repayments of long-term debt
 
(108.5
)
 
(13.4
)
Dividends paid
 
(22.9
)
 
(23.2
)
Repurchase of employee common stock relinquished for tax withholding
 
(2.6
)
 
(7.9
)
Excess tax benefits related to share-based compensation
 
—

 
3.5

Other, net
 
1.3

 
1.9

Net cash used in financing activities
 
(132.7
)
 
(39.1
)
Net change in cash and cash equivalents
 
70.7

 
153.3

Cash and cash equivalents at beginning of period
 
558.8

 
799.1

Cash and cash equivalents at end of period
 
$
629.5

 
$
952.4

See accompanying notes to unaudited condensed consolidated financial statements.


4

Table of Contents

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

 
Peabody Energy Corporation’s Stockholders’ Equity
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Retained
Earnings
 
Accumulated
Other Comprehensive
Income
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
(Dollars in millions)
December 31, 2012
$
2.8

 
$
2,286.3

 
$
(461.6
)
 
$
3,066.4

 
$
11.0

 
$
33.9

 
$
4,938.8

Net (loss) income
—

 
—

 
—

 
(23.4
)
 
—

 
4.0

 
(19.4
)
Net change in unrealized losses on available-for-sale securities (net of $3.8 tax benefit)
—

 
—

 
—

 
—

 
(6.3
)
 
—

 
(6.3
)
Net unrealized losses on cash flow hedges (net of $10.9 tax benefit)
—

 
—

 
—

 
—

 
(8.4
)
 
—

 
(8.4
)
Postretirement plans and workers’ compensation obligations (net of $8.3 tax provision)
—

 
—

 
—

 
—

 
14.2

 
—

 
14.2

Foreign currency translation adjustment
—

 
—

 
—

 
—

 
1.1

 
—

 
1.1

Dividends paid
—

 
—

 
—

 
(22.9
)
 
—

 
—

 
(22.9
)
Share-based compensation
—

 
11.8

 
—

 
—

 
—

 
—

 
11.8

Write off of excess tax benefits related to share-based compensation
—

 
(3.9
)
 
—

 
—

 
—

 
—

 
(3.9
)
Employee stock purchases
—

 
3.4

 
—

 
—

 
—

 
—

 
3.4

Repurchase of employee common stock relinquished for tax withholding
—

 
—

 
(2.6
)
 
—

 
—

 
—

 
(2.6
)
Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(1.8
)
 
(1.8
)
March 31, 2013
$
2.8

 
$
2,297.6

 
$
(464.2
)
 
$
3,020.1

 
$
11.6

 
$
36.1

 
$
4,904.0

See accompanying notes to unaudited condensed consolidated financial statements.



5

Table of Contents

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 with any outside shareholder interests 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.
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 2012 Annual Report on Form 10-K. 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, 2012 has been derived from the Company’s audited consolidated balance sheet at that date. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2013.
The Company classifies items within discontinued operations in the unaudited condensed consolidated financial statements when the operations and cash flows of a particular component of the Company have been (or will be) eliminated from the ongoing operations of the Company as a result of a disposal (by sale or otherwise) and the Company will no longer have any significant continuing involvement in the operation of that component.
(2)    Newly Adopted Accounting Standards
Balance Sheet Offsetting
In December 2011, the Financial Accounting Standards Board (FASB) issued accounting guidance, which was further clarified in January 2013, requiring additional information intended to help reconcile existing differences in balance sheet offsetting requirements under U.S. GAAP and International Financial Reporting Standards. While this standard leaves existing guidance surrounding the offsetting of financial assets and liabilities unchanged, it requires several additional disclosures, including gross and net information about instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to a master netting arrangement or a similar agreement. The guidance applies to the Company's derivatives, which include both non-coal trading derivative financial instruments held for risk management purposes and derivative contracts associated with the Company's trading and brokerage activities. The guidance became effective for the Company for interim and annual reporting periods beginning on or after January 1, 2013. While the adoption of this guidance impacted the Company's disclosures, it did not affect the Company's results of operations, financial condition or cash flows.
Non-Coal Trading Derivatives. The Company's non-coal trading 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 non-coal trading 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 non-coal trading derivatives exist at the overall counterparty level across its foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios, it is the Company's accounting policy 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 non-coal trading derivatives with each counterparty by derivative contract portfolio on a routine basis.


6

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



Coal Trading Derivatives. 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 is required to post cash collateral, known as variation margin, on exchange-cleared positions that are in a net liability position and entitled to receive 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, 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."
Refer to Note 6. "Derivatives and Fair Value Measurements" and Note 7. "Coal Trading" herein for the additional quantitative disclosures related to this guidance.
Accumulated Other Comprehensive Income
In June 2011, the FASB issued accounting guidance, which was finalized in February 2013, that introduced new disclosure requirements requesting that entities provide additional information about reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant reclassification items. The new disclosure requirements became effective for interim and annual reporting periods beginning after December 15, 2012 (January 1, 2013 for the Company). While the adoption of this guidance impacted the Company's disclosures, it did not affect the Company's results of operations, financial condition or cash flows. Refer to Note 12. "Accumulated Other Comprehensive Income" herein for the additional disclosures related to this guidance.
(3)    Discontinued Operations
Discontinued operations include certain non-strategic former Midwestern U.S. and Australian Mining segment assets held for sale which the Company has committed to divest, former Midwestern U.S. Mining segment assets that have ceased production and other previously divested operations.
Results from discontinued operations were as follows during the three months ended March 31, 2013 and 2012:     
 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
(Dollars in millions)
Total revenues
 
$
32.1

 
$
66.5

 
 
 
 
 
Loss from discontinued operations before income taxes
 
$
(16.6
)
 
$
(9.1
)
Income tax benefit
 
7.5

 
4.4

Loss from discontinued operations, net of income taxes
 
$
(9.1
)
 
$
(4.7
)


7

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



Assets and liabilities classified as discontinued operations included in the Company's condensed consolidated balance sheets were as follows:
 
 
March 31, 2013
 
December 31, 2012
 
 
(Dollars in millions)
Assets:
 
 
 
 
Other current assets
 
$
31.2

 
$
37.5

Investments and other assets
 
142.3

 
140.8

Total assets classified as discontinued operations
 
$
173.5

 
$
178.3

 
 
 
 
 
Liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
29.3

 
$
33.3

Other noncurrent liabilities
 
40.0

 
27.1

Total liabilities classified as discontinued operations
 
$
69.3

 
$
60.4

(4)     Investments
The Company’s short-term investments are defined as those investments with original maturities of greater than three months and up to one year included in "Other current assets" in the condensed consolidated balance sheets. Long-term investments are defined as those investments with original maturities greater than one year included in "Investments and other assets" in the condensed consolidated balance sheets.
The Company classifies its investments in debt securities as either held-to-maturity or available-for-sale at the time of purchase and periodically reevaluates such designations. Such investments are classified as held-to-maturity when the Company has the intent and ability to hold the securities to maturity.
Investments in debt securities not classified as held-to-maturity and investments in marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of income taxes, reported in “Accumulated other comprehensive income” in the condensed consolidated balance sheets. Realized gains and losses, determined on a specific identification method, are included in “Interest income” in the unaudited condensed consolidated statements of income.
Investments in available-for-sale securities at March 31, 2013 were as follows:
Available-for-sale securities
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
(Dollars in millions)
Current:
 
 
 
 
 
 
 
 
Federal government securities
 
$
1.9

 
$
—

 
$
—

 
$
1.9

     U.S. corporate bonds
 
2.0

 
—

 
—

 
2.0

Noncurrent:
 
 
 
 
 
 
 
 
     Marketable equity securities
 
32.4

 
—

 
(10.0
)
 
22.4

     Federal government securities
 
26.4

 
0.2

 
—

 
26.6

     U.S. corporate bonds
 
16.9

 
0.1

 
—

 
17.0

Total
 
$
79.6

 
$
0.3

 
$
(10.0
)
 
$
69.9



8

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



Investments in available-for-sale securities at December 31, 2012 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
 
$
4.1

 
$
—

 
$
—

 
$
4.1

Noncurrent:
 
 
 
 
 
 
 
 
     Marketable equity securities
 
32.4

 
—

 
—

 
32.4

     Federal government securities
 
32.0

 
0.2

 
—

 
32.2

     U.S. corporate bonds
 
19.5

 
0.2

 
—

 
19.7

Total
 
$
88.0

 
$
0.4

 
$
—

 
$
88.4

The Company’s investments in marketable equity securities consist of an investment in Winsway Coking Coal Holdings Limited (Winsway).
Contractual maturities for available-for-sale investments in debt securities at March 31, 2013 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 securities
 
Cost
 
Fair Value
 
 
(Dollars in millions)
Due in one year or less
 
$
3.9

 
$
3.9

Due in one to five years
 
43.3

 
43.6

Total
 
$
47.2

 
$
47.5

Proceeds from sales and maturities of debt securities shown in the tables above amounted to $12.9 million and $1.7 million for the three months ended March 31, 2013 and 2012, respectively. The Company realized net gains of less than $0.1 million during the three months ended March 31, 2013 associated with those sales and maturities. There were no gains or losses on the sales for the three months ended March 31, 2012. Purchases of debt securities amounted to $4.6 million for the three months ended March 31, 2013. No purchases of debt securities occurred for the three months ended March 31, 2012.
In addition to the securities described above, the Company held investments in debt securities related to the Company's pro-rata share of funding in the Newcastle Coal Infrastructure Group (NCIG). These debt securities were recorded at cost, which approximated fair value and were denominated in U.S. dollars. During the three months ended March 31, 2012, the Company sold $1.4 million of the debt securities related to NCIG, with no realized gains or losses on the sale. The Company did not hold any NCIG securities during 2013.
At each reporting date, the Company performs separate evaluations of debt and equity securities to determine if any unrealized losses are other-than-temporary. In December 2012, the Company performed its quarterly evaluation of debt and equity securities for impairment. The Company concluded that its investment in Winsway equity securities was other-than-temporarily impaired and, as such, recognized a $35.5 million impairment loss on the investment in the quarter ended December 31, 2012, resetting the Company's cost basis in the investment. The fair market value of those securities again decreased during the three months ended March 31, 2013 and the Company assessed the securities for impairment as of that date. As a result of that analysis, the Company deemed the unrealized losses incurred during the three months ended March 31, 2013 associated with its investment in Winsway equity securities to be temporary and the changes in market value thereto during that period to be generally consistent with the trends of equity securities across the coal mining industry. The Company has the ability to hold the securities until recovery and has no current intention to divest the securities. Accordingly, the Company did not recognize other-than-temporary losses on its investments in debt and equity securities during the three months ended March 31, 2013.
In November 2012, the Company purchased $4.8 million of time deposits denominated in Chinese Renminbi with six month maturities. These investments are classified as held-to-maturity investments which are recorded at amortized cost, which approximates fair value, and are included in "Other current assets" in the condensed consolidated balance sheets at March 31, 2013 and December 31, 2012.


9

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



(5)     Inventories
Inventories consisted of the following:
 
March 31, 2013
 
December 31, 2012
 
(Dollars in millions)
Materials and supplies
$
156.8

 
$
157.6

Raw coal
125.3

 
164.3

Saleable coal
283.9

 
226.5

Total
$
566.0

 
$
548.4

(6)     Derivatives and Fair Value Measurements
Risk Management — Non-Coal Trading Activities
The Company is exposed to various types of risk in the normal course of business, including foreign currency exchange rate risk for non-U.S. dollar expenditures and balances, price risk on commodities utilized in the Company's mining operations and interest rate risk on long-term debt. The Company predominantly manages commodity price risk (excluding coal trading activities) related to the sale of coal through the use of long-term, fixed-price contracts, rather than through the use of derivative instruments. In order to manage its exposure related to price risk on certain commodities used in production, as well as for foreign currency exchange rate and interest rate risk, the Company utilizes derivative financial instruments. These risks are actively monitored in an effort to ensure compliance with the risk management policies of the Company.
Foreign Currency Hedges. The Company is exposed to foreign currency exchange rate risk, primarily on Australian dollar expenditures made in its Australian Mining segment. This risk is managed through the use of forward contracts and options that the Company designates as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted foreign currency expenditures.
Diesel Fuel and Explosives Hedges. The Company is exposed to commodity price risk associated with diesel fuel and explosives utilized in production in the U.S. and Australia. This risk is managed through the use of derivatives, primarily swaps, and to a lesser extent through the use of 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 and explosives purchases.
Interest Rate Swaps. The Company is exposed to interest rate risk on its fixed rate and variable rate long-term debt. From time to time, the Company manages the interest rate risk associated with the fair value of its fixed rate borrowings using fixed-to-floating interest rate swaps to effectively convert a portion of the underlying cash flows on the debt into variable rate cash flows. The Company designates these swaps as fair value hedges, with the objective of hedging against adverse changes in the fair value of the fixed rate debt that results from market interest rate changes. In addition, from time to time, interest rate risk associated with the Company’s variable rate borrowings is managed using floating-to-fixed interest rate swaps. The Company designates these swaps as cash flow hedges, with the objective of reducing the variability of cash flows associated with market interest rate changes. As of March 31, 2013, the Company had no interest rate swaps in place.


10

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



Notional Amounts and Fair Value. The following summarizes the Company’s foreign currency and commodity positions at March 31, 2013:
 
Notional Amount by Year of Maturity
 
Total
 
2013
 
2014
 
2015
 
2016
Foreign Currency
 
 
 

 
 

 
 

 
 

A$:US$ hedge contracts (A$ millions)
$
4,466.1

 
$
1,510.5

 
$
1,688.5

 
$
1,097.1

 
$
170.0

Commodity Contracts
 
 
 
 
 
 
 
 
 
Diesel fuel hedge contracts (million gallons)
194.4

 
76.7

 
73.4

 
44.3

 
—

U.S. explosives hedge contracts (million MMBtu)
3.1

 
1.9

 
1.2

 
—

 
—

 
Account Classification by
 
 
 
Cash Flow
Hedge
 
Fair Value
Hedge
 
Economic
Hedge
 
Fair Value Asset
(Liability)
 
 
 
 
 
 
 
(Dollars in millions)
Foreign Currency
 
 
 
 
 
 
 
A$:US$ hedge contracts (A$ millions)
$
4,466.1

 
$
—

 
$
—

 
$
240.5

Commodity Contracts
 
 
 
 
 
 
 
Diesel fuel hedge contracts (million gallons)
194.4

 
—

 
—

 
6.0

U.S. explosives hedge contracts (million MMBtu)
3.1

 
—

 
—

 
(3.0
)
Based on the net fair value of the Company’s non-coal trading positions held in “Accumulated other comprehensive income” at March 31, 2013, unrealized gains to be reclassified from comprehensive income to earnings over the next 12 months associated with the Company’s foreign currency and diesel fuel hedge programs are expected to be approximately $205 million and $8 million, respectively. The unrealized losses to be realized under the explosives hedge program are expected to be approximately $2 million. As these unrealized gains and losses are associated with derivative instruments that represent hedges of forecasted transactions, the amounts reclassified to earnings will partially offset the realized transactions.
Hedge Ineffectiveness. The Company assesses, both at inception and at least quarterly thereafter, whether the derivatives used in hedging activities are highly effective at offsetting the changes in the anticipated cash flows of the hedged item. The effective portion of the change in the fair value is recorded in “Accumulated other comprehensive income” until the hedged transaction impacts reported earnings, at which time any gain or loss is reclassified to earnings. To the extent that periodic changes in the fair value of derivatives deemed highly effective exceeds such changes in the hedged item, the ineffective portion of the periodic non-cash changes are recorded in earnings in the period of the change. If the hedge ceases to qualify for hedge accounting, the Company prospectively recognizes changes in the fair value of the instrument in earnings in the period of the change.
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.
The Company’s derivative positions for the hedging of future explosives purchases are based on natural gas, which is the primary price component of explosives. However, a small measure of ineffectiveness exists as the contractual purchase price includes manufacturing fees that are subject to periodic adjustments. In addition, other fees, such as transportation surcharges, can result in ineffectiveness, but have historically changed infrequently and comprise a small portion of the total explosives cost.
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.


11

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



The tables below show the classification and amounts of pre-tax gains and losses related to the Company’s non-coal trading hedges during the three months ended March 31, 2013 and 2012:        
 
 
 
 
Three Months Ended March 31, 2013
Financial Instrument
 
Income Statement
Classification Gains (Losses) -
Realized
 
Gain recognized in income
on non-designated
derivatives
 
Gain recognized in other
comprehensive
income on derivatives
(effective portion)
 
Gain reclassified from
other comprehensive
income into income
(effective portion)
 
Gain reclassified from
other comprehensive
income into income
(ineffective portion)
 
 
 
 
(Dollars in millions)
Commodity swap contracts
 
Operating costs and expenses
 
$
—

 
$
5.9

 
$
6.7

 
$
0.2

Foreign currency forward contracts
 
Operating costs and expenses
 
—

 
38.7

 
85.1

 
—

Total
 
 
 
$
—

 
$
44.6

 
$
91.8

 
$
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2012
Financial Instrument
 
Income Statement
Classification Gains (Losses) -
Realized
 
Gain recognized in income
on non-designated
derivatives
 
Gain recognized in other
comprehensive
income on derivatives
(effective portion)
 
Gain reclassified from
other comprehensive
income into income
(effective portion)
 
Gain reclassified from
other comprehensive
income into income
(ineffective portion)
 
 
 
 
(Dollars in millions)
Commodity swap contracts
 
Operating costs and expenses
 
$
—

 
$
58.1

 
$
17.3

 
$
4.6

Foreign currency forward contracts
 
Operating costs and expenses
 
—

 
140.3

 
113.0

 
—

Total
 
 
 
$
—

 
$
198.4

 
$
130.3

 
$
4.6

The Company classifies the cash effects of its non-coal trading derivatives within the "Cash Flows From Operating Activities" section of the unaudited condensed consolidated statements of cash flows during the period of settlement for those instruments.


12

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



Offsetting and Balance Sheet Presentation
The classification and amount of non-coal trading derivative financial instruments presented on a gross and net basis as of March 31, 2013 and December 31, 2012 are presented in the tables that follow.
 
 
Fair Value of Assets as of March 31, 2013
Financial Instrument
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet
 
Derivatives Not Offset in the Condensed Consolidated Balance Sheet(1)
 
Net Amount
 
 
(Dollars in millions)
Current Assets:
 
 
 
 
 
 
 
 
 
 
Commodity swap contracts
 
$
12.7

 
$
(4.4
)
 
$
8.3

 
n.a.

 
n.a.

Foreign currency forward contracts
 
204.9

 
—

 
204.9

 
n.a.

 
n.a.

Total
 
$
217.6

 
$
(4.4
)
 
$
213.2

 
$
(4.2
)
 
$
209.0

 
 
 
 
 
 
 
 
 
 
 
Noncurrent Assets:
 
 
 
 
 
 
 
 
 
 
Commodity swap contracts
 
$
3.6

 
$
(1.6
)
 
$
2.0

 
n.a.

 
n.a.

Foreign currency forward contracts
 
35.7

 
(0.1
)
 
35.6

 
n.a.

 
n.a.

Total
 
$
39.3

 
$
(1.7
)
 
$
37.6

 
$
(2.9
)
 
$
34.7

(1)  
Adjustments relate to the further netting of derivative contracts with a common counterparty across the Company's foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios that would be contractually enforceable in the event of default.
 
 
Fair Value of Liabilities as of March 31, 2013
Financial Instrument
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Derivatives Not Offset in the Condensed Consolidated Balance Sheet(1)
 
Net Amount
 
 
(Dollars in millions)
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity swap contracts
 
$
7.0

 
$
(3.9
)
 
$
3.1

 
n.a.

 
n.a.

Foreign currency forward contracts
 
—

 
—

 
—

 
n.a.

 
n.a.

Total
 
$
7.0

 
$
(3.9
)
 
$
3.1

 
$
(2.9
)
 
$
0.2

 
 
 
 
 
 
 
 
 
 
 
Noncurrent Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity swap contracts
 
$
6.3

 
$
(2.1
)
 
$
4.2

 
n.a.

 
n.a.

Foreign currency forward contracts
 
0.1

 
(0.1
)
 
—

 
n.a.

 
n.a.

Total
 
$
6.4

 
$
(2.2
)
 
$
4.2

 
$
(4.2
)
 
$
—

(1)  
Adjustments relate to the further netting of derivative contracts with a common counterparty across the Company's foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios that would be contractually enforceable in the event of default.



13

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



 
 
Fair Value of Assets as of December 31, 2012
Financial Instrument
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet
 
Derivatives Not Offset in the Condensed Consolidated Balance Sheet(1)
 
Net Amount
 
 
(Dollars in millions)
Current Assets:
 
 
 
 
 
 
 
 
 
 
Commodity swap contracts
 
$
18.3

 
$
(3.8
)
 
$
14.5

 
n.a.

 
n.a.

Foreign currency forward contracts
 
260.1

 
—

 
260.1

 
n.a.

 
n.a.

Total
 
$
278.4

 
$
(3.8
)
 
$
274.6

 
$
(8.0
)
 
$
266.6

 
 
 
 
 
 
 
 
 
 
 
Noncurrent Assets:
 
 
 
 
 
 
 
 
 
 
Commodity swap contracts
 
$
2.5

 
$
(1.4
)
 
$
1.1

 
n.a.

 
n.a.

Foreign currency forward contracts
 
27.6

 
(0.8
)
 
26.8

 
n.a.

 
n.a.

Total
 
$
30.1

 
$
(2.2
)
 
$
27.9

 
$
(3.4
)
 
$
24.5

(1)  
Adjustments relate to the further netting of derivative contracts with a common counterparty across the Company's foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios that would be contractually enforceable in the event of default.
 
 
Fair Value of Liabilities as of December 31, 2012
Financial Instrument
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Derivatives Not Offset in the Condensed Consolidated Balance Sheet(1)
 
Net Amount
 
 
(Dollars in millions)
Current Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity swap contracts
 
$
8.5

 
$
(2.8
)
 
$
5.7

 
n.a.

 
n.a.

Foreign currency forward contracts
 
—

 
—

 
—

 
n.a.

 
n.a.

Total
 
$
8.5

 
$
(2.8
)
 
$
5.7

 
$
(5.7
)
 
$
—

 
 
 
 
 
 
 
 
 
 
 
Noncurrent Liabilities:
 
 
 
 
 
 
 
 
 
 
Commodity swap contracts
 
$
8.3

 
$
(2.4
)
 
$
5.9

 
n.a.

 
n.a.

Foreign currency forward contracts
 
0.8

 
(0.8
)
 
—

 
n.a.

 
n.a.

Total
 
$
9.1

 
$
(3.2
)
 
$
5.9

 
$
(5.7
)
 
$
0.2

(1)  
Adjustments relate to the further netting of derivative contracts with a common counterparty across the Company's foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios that would be contractually enforceable in the event of default.
See Note 7. "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.


14

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



Financial Instruments Measured on a Recurring Basis. The following tables set forth the hierarchy of the Company’s net financial asset positions for which fair value is measured on a recurring basis:
 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Investments in debt and equity securities
$
59.0

 
$
10.9

 
$
—

 
$
69.9

Commodity swap contracts
—

 
3.0

 
—

 
3.0

Foreign currency forward contracts
—

 
240.5

 
—

 
240.5

Total net financial assets
$
59.0

 
$
254.4

 
$
—

 
$
313.4

 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Investments in debt and equity securities
$
75.4

 
$
13.0

 
$
—

 
$
88.4

Commodity swap contracts
—

 
4.0

 
—

 
4.0

Foreign currency forward contracts
—

 
286.9

 
—

 
286.9

Total net financial assets
$
75.4

 
$
303.9

 
$
—

 
$
379.3

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 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:
•
Investments in debt and equity securities: corporate bonds and U.S. government treasury instruments and marketable equity securities are valued based on quoted prices in active markets (Level 1) and U.S. government agency securities are valued based on derived prices in active markets (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).
•
Foreign currency forward and option contracts: valued utilizing inputs obtained in quoted public markets (Level 2).
The Company did not have any transfers between levels during the three months ended March 31, 2013 or 2012 for its non-coal trading positions. The Company’s policy is to value transfers between levels using the beginning of period valuation.
Other Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values for other financial instruments as of March 31, 2013 and December 31, 2012:
•
Cash and cash equivalents, accounts receivable, including those within the Company’s accounts receivable securitization program, and accounts payable and accrued expenses have carrying values which approximate fair value due to the short maturity or the liquid nature of these instruments.
•
Held-to-maturity investments in time deposits denominated in Chinese Renminbi of $4.8 million have carrying values based on amortized cost which approximates fair value due to the short maturity of these investments.
•
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 of the 7.875% Senior Notes due December 2026 and the Convertible Junior Subordinated Debentures due 2066 (the Debentures) are net of the respective unamortized note discounts.
The carrying amounts and estimated fair values of the Company’s debt are summarized as follows:
 
March 31, 2013
 
December 31, 2012
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(Dollars in millions)
Long-term debt
$
6,145.7

 
$
6,385.0

 
$
6,252.9

 
$
6,583.9



15

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



Nonperformance and Credit Risk
The fair value of the Company’s non-coal trading derivative assets and liabilities reflects adjustments for nonperformance and 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.
(7)     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's policy is to include 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 disclosures related to its coal trading activities.
Trading revenues recognized during the three months ended March 31, 2013 and 2012 were as follows:
 
 
Three Months Ended
 
 
March 31,
Trading Revenues by Type of Instrument
 
2013
 
2012
 
 
(Dollars in millions)
Commodity futures, swaps and options
 
$
51.0

 
$
10.8

Physical commodity purchase/sale contracts
 
(25.1
)
 
9.1

Total trading revenues
 
$
25.9

 
$
19.9

Risk Management
Hedge Ineffectiveness. The Company assesses, both at inception and at least quarterly thereafter, whether the derivatives used in cash flow hedging activities are highly effective at offsetting the changes in the anticipated cash flows of the hedged item. The effective portion of the change in the fair value is recorded in “Accumulated other comprehensive income” until the hedged transaction impacts reported earnings, at which time gains and losses are also reclassified to earnings. To the extent that periodic changes in the fair value of a derivative exceeds the changes in the hedged item to which it has been designated, the ineffective portion is recorded in earnings in the period of the change. If the hedge ceases to qualify for hedge accounting, the Company prospectively recognizes the changes in fair value of the instrument in earnings in the period of the change.
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.


16

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



The gross fair value of coal trading positions designated as cash flow hedges of forecasted sales was an asset of $181.7 million and $153.1 million as of March 31, 2013 and December 31, 2012, respectively. The increase in the fair value of coal trading positions designated as cash flow hedges of forecasted sales was predominantly driven by a decrease in the associated price levels in international thermal coal markets during the period. Based on the net fair value of the Company’s coal trading positions held in “Accumulated other comprehensive income” at March 31, 2013, unrealized gains to be reclassified from comprehensive income to earnings over the next 12 months are expected to be approximately $163 million. As these unrealized gains are associated with derivative instruments that represent hedges of forecasted transactions, the amounts reclassified to earnings may partially offset the realized transactions in the unaudited condensed consolidated statements of operations.
Offsetting and Balance Sheet Presentation
The fair value of assets and liabilities from coal trading activities presented on a gross and net basis as of March 31, 2013 and December 31, 2012 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 March 31, 2013
Assets from coal trading activities, net
 
$
565.6

 
$
(342.4
)
 
$
(165.3
)
 
$
57.9

Liabilities from coal trading activities, net
 
(364.9
)
 
342.4

 
0.6

 
(21.9
)
Total, Net
 
$
200.7

 
$
—

 
$
(164.7
)
 
$
36.0

 
 
 
 
 
 
 
 
 
 
 
Fair Value as of December 31, 2012
Assets from coal trading activities, net
 
$
380.4

 
$
(170.8
)
 
$
(157.2
)
 
$
52.4

Liabilities from coal trading activities, net
 
(190.5
)
 
170.8

 
0.3

 
(19.4
)
Total, Net
 
$
189.9

 
$
—

 
$
(156.9
)
 
$
33.0

(1) 
Approximately $97 million and $76 million of the net variation margin held at March 31, 2013 and December 31, 2012, respectively, related to cash flow hedges.
See Note 6. "Derivatives and Fair Value Measurements" for information on balance sheet offsetting related to the Company’s non-coal trading activities.
Fair Value Measurements
The following tables set forth the hierarchy of the Company’s net financial asset coal trading positions for which fair value is measured on a recurring basis as of March 31, 2013 and December 31, 2012:
 
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Commodity futures, swaps and options
$
—

 
$
33.1

 
$
—

 
$
33.1

Physical commodity purchase/sale contracts
—

 
1.5

 
1.4

 
2.9

Total net financial assets
$
—

 
$
34.6

 
$
1.4

 
$
36.0

 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in millions)
Commodity futures, swaps and options
$
1.2

 
$
24.4

 
$
—

 
$
25.6

Physical commodity purchase/sale contracts
—

 
2.2

 
5.2

 
7.4

Total net financial assets
$
1.2

 
$
26.6

 
$
5.2

 
$
33.0



17

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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 U.S. interest rate curves, LIBOR yield curves, Chicago Mercantile Exchange (CME), Intercontinental Exchange indices (ICE), NOS Clearing ASA, LCH.Clearnet (formerly known as the London Clearing House), Singapore Exchange (SGX), 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.
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 and nonperformance 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 following table summarizes the quantitative unobservable inputs utilized in the Company's internally-developed valuation models for physical commodity purchase/sale contracts classified as Level 3 as of March 31, 2013:
 
 
Range
 
Weighted
Input
 
Low
 
High
 
Average
Quality adjustments
 
2
%
 
21
%
 
18
%
Location differentials
 
17
%
 
17
%
 
17
%
Non-performance adjustments
 
4
%
 
4
%
 
4
%
Significant increases or decreases in the inputs in isolation could result in a significantly higher or lower fair value measurement. The unobservable inputs do not have a direct interrelationship; therefore, a change in one unobservable input would not necessarily correspond with a change in another unobservable input.
The following table summarizes the changes in the Company’s recurring Level 3 net financial assets:
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
(Dollars in millions)
Beginning of period
 
$
5.2

 
$
8.7

Total net (losses) gains realized/unrealized:
 
 
 
 
Included in earnings
 
(4.1
)
 
1.5

Settlements
 
0.3

 
(1.3
)
End of period
 
$
1.4

 
$
8.9



18

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



The following table summarizes the changes in net unrealized (losses) gains relating to Level 3 net financial assets held both as of the beginning and the end of the period:
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
(Dollars in millions)
Changes in net unrealized (losses) gains (1)
 
$
(3.2
)
 
$
1.9

(1) 
Within the unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of comprehensive income for the periods presented, unrealized gains and 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.
The Company did not have any significant transfers in its coal trading positions between Level 1 and Level 2 during the three months ended March 31, 2013 or 2012. There were also no transfers in or out of Level 3 during the three months ended March 31, 2013 or 2012. The Company’s policy is to value transfers between levels using the beginning of period valuation.
As of March 31, 2013, the timing of the estimated future realization of the value of the Company’s trading portfolio was as follows:
 
 
Percentage of
Year of Expiration
 
Portfolio Total
2013
 
48
%
2014
 
37
%
2015
 
14
%
2016
 
1
%
 
 
100
%
Nonperformance and Credit Risk. The fair value of the Company’s coal derivative assets and liabilities reflects adjustments for nonperformance and credit risk. The Company’s exposure is substantially with electric utilities, steel producers and energy marketers. 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, will post or receive margin amounts associated with exchange-cleared and certain OTC positions.
At March 31, 2013, 77% of the Company’s credit exposure related to coal trading activities was with investment grade counterparties while 16% was with non-investment grade counterparties and 7% 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 March 31, 2013 and December 31, 2012, would have amounted to collateral postings to counterparties of approximately $9 million and $8 million, respectively. As of March 31, 2013 and December 31, 2012, no collateral was posted to counterparties for such positions.


19

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



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. If a credit downgrade were to have occurred below contractually specified levels, the Company’s additional collateral requirement owed to its counterparties would have been zero at March 31, 2013 and December 31, 2012 based on the aggregate fair value of all derivative trading instruments with such features. Accordingly, the Company had posted no margin related to such features as of March 31, 2013 or December 31, 2012.
The Company is required to post variation margin on positions that are in a net liability position and is entitled to receive variation margin on positions that are in a net asset position with an exchange and certain of its OTC derivative contract counterparties. At March 31, 2013 and December 31, 2012, the Company held net variation margin of $164.7 million and $156.9 million, respectively.
In addition to the requirements surrounding variation margin, the Company is required by the exchanges upon which it transacts 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 March 31, 2013 and December 31, 2012, the Company had posted initial margin of $19.0 million and $23.2 million, respectively, which is reflected in “Other current assets” in the condensed consolidated balance sheets. The Company also had posted $0.5 million of margin in excess of the exchange-required variation and initial margin discussed above as of December 31, 2012, which is also reflected in “Other current assets."
(8)     Financing Receivables
The Company had total financing receivables of $412.5 million and $391.7 million at March 31, 2013 and December 31, 2012, respectively, which consisted of the following:
Balance Sheet Classification
 
March 31, 2013
 
December 31, 2012
 
(Dollars in millions)
Accounts receivable, net
$
1.8

 
$
0.7

Investments and other assets
410.7

 
391.0

Total financing receivables
$
412.5

 
$
391.7

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 at March 31, 2013.
Codrilla Mine Project. In 2011, a wholly owned subsidiary of PEA-PCI, then Macarthur Coal Limited, completed the sale of its 85% interest in the Codrilla Mine Project to participants of the Coppabella Moorvale Joint Venture (CMJV) where PEA-PCI sold down its interest in the Codrilla project to the CMJV (Codrilla sell down) so that, following completion of the sale, ownership of the Codrilla Mine Project reflected the existing ownership of the Coppabella and Moorvale mines with PEA-PCI retaining a 73.3% ownership. Prior to the acquisition of PEA-PCI by the Company, consideration of $15.0 million Australian dollars was received by PEA-PCI upon completion of the Codrilla sell down, representing 20% of the agreed price. Two installments, for which the Company holds non-interest-bearing receivables, are due upon the completion of certain milestones. The first installment, with 40% due on the granting of the related mining lease, was received during the three months ended September 30, 2012. The final 40% is due upon the mine's first coal shipment. There are currently no indications of impairment on the remaining installment and the Company expects to receive full payment upon the mine's first shipment. The remaining balance associated with these receivables is recorded in "Investments and other assets" which was $34.2 million and $33.6 million at March 31, 2013 and December 31, 2012, respectively, in the condensed consolidated balance sheets.


20

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



Middlemount Mine. The Company periodically makes loans to the Middlemount Mine joint venture (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 intends to pay down the loans as excess cash is generated as required by the shareholders’ agreement. The loans bear interest at a rate equal to the monthly average 30-day Australian Bank Bill Swap Reference Rate plus 3.5% and expire December 24, 2015. Based on the expected timing of repayment on these loans, the Company now considers these loans to be of a long-term nature. As a result, the foreign currency impact related to the shareholder loans for the three month period ended March 31, 2013 is included in foreign currency translation adjustment in the unaudited condensed consolidated balance sheet as of March 31, 2013 and the unaudited condensed consolidated statement of comprehensive income for the three months then ended. "Investments and other assets" included $376.5 million and $357.4 million at March 31, 2013 and December 31, 2012, respectively, related to these loans in the condensed consolidated balance sheets.
Other Financing Receivables. From time to time, the Company may enter into transactions resulting in accounts or notes receivable held by the Company, which have been reflected in "Accounts receivable, net." These notes are generally short term in nature with positive historical collection experience and do not represent a material credit risk to the Company. During the three months ended March 31, 2013, the Company collected all such receivables outstanding as of December 31, 2012.
(9)  Income Taxes
The Company's tax expense of $3.7 million and $74.4 million for the three months ended March 31, 2013 and 2012 included remeasurement expense related to foreign tax accounts of $1.6 million and $8.9 million, respectively. The 2013 effective tax rate before remeasurement is based on the Company's estimated full year effective tax rate, which is comprised of the expected statutory tax expense, more than offset by reductions from percentage depletion, foreign rate differential and the Australian minerals resource rent tax.
The Company's Australian income tax returns for the tax years 2004 through 2010 are under examination by the Australian Tax Office (ATO). In April 2013, the ATO issued a final assessment challenging certain financing transactions with a total assessment of $78.9 million, comprised of additional taxes of $54.8 million plus interest and penalties of $24.1 million. The Company plans to proceed with litigation and may be required to make a deposit payment of up to 50% of the assessment during the second quarter of 2013.
(10)    Long-term Debt 
The Company’s total indebtedness as of March 31, 2013 and December 31, 2012 consisted of the following:
 
March 31, 2013
 
December 31, 2012
 
(Dollars in millions)
Term Loan
$
368.8

 
$
418.8

2011 Term Loan Facility
862.5

 
912.5

7.375% Senior Notes due November 2016
650.0

 
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

7.875% Senior Notes due November 2026
247.4

 
247.4

Convertible Junior Subordinated Debentures due December 2066
377.9

 
377.4

Capital lease obligations
96.9

 
104.6

Other
33.8

 
33.8

Total Debt
$
6,145.7

 
$
6,252.9

First Quarter 2013 Voluntary Prepayments
During the first quarter of 2013, the Company voluntarily prepaid $100.0 million in aggregate principal amount of its Term Loan and 2011 Term Loan Facility with existing cash on hand. That voluntary repayment represented all of the contractual 2014 quarterly principal repayments associated with those facilities and a portion of the contractual 2015 principal repayments related to the Term Loan. The Company recognized a loss on debt extinguishment of $0.9 million associated with these prepayments. The loss is classified in "Interest expense" in the unaudited condensed consolidated statement of operations for the three months ended March 31, 2013.


21

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



Subsequent Events
In April 2013, the Company committed to voluntarily prepay an additional $67.0 million in aggregate principal amount of its Term Loan and $32.4 million of certain Australian private placement bonds (presented in "Other" in the above schedule) during the second quarter of 2013 with existing cash on hand. Because the Company had the intention to prepay those amounts within the next twelve months as of March 31, 2013, those amounts have been included in "Current maturities of long-term debt" in the unaudited condensed consolidated balance sheet at that date.
Other Long-Term Debt
Other than the foregoing, there were no significant changes to the Company's long-term debt subsequent to December 31, 2012. Information regarding the Company's 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, 2012.
(11) Pension and Postretirement Benefit Costs
Net periodic pension costs included the following components:
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
 
(Dollars in millions)
Service cost for benefits earned
 
$
0.6

 
$
0.5

Interest cost on projected benefit obligation
 
10.6

 
11.7

Expected return on plan assets
 
(14.9
)
 
(15.9
)
Amortization of prior service cost
 
0.2

 
0.2

Amortization of actuarial loss
 
16.4

 
12.2

Net periodic pension costs
 
$
12.9

 
$
8.7

Annual contributions to the qualified plans are made in accordance with minimum funding standards and the Company's agreement with the Pension Benefit Guaranty Corporation (PBGC). Funding decisions also consider certain funded status thresholds defined by the Pension Protection Act of 2006 (generally 80%). The Company currently expects its qualified plans to be at or above the Pension Protection Act thresholds and will therefore avoid benefit restrictions and at-risk penalties for 2013. Based upon minimum funding requirements in accordance with the Moving Ahead for Progress in the 21st Century Act (MAP-21) issued in July 2012, the Company expects to contribute approximately $5.0 million in 2013 to meet minimum funding requirements for its qualified plans and benefit payments for its non-qualified plans.
Net periodic postretirement benefit costs included the following components:
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
 
 
(Dollars in millions)
Service cost for benefits earned
 
$
3.9

 
$
3.6

Interest cost on accumulated postretirement benefit obligation
 
10.5

 
13.7

Amortization of prior service cost
 
(0.4
)
 
0.7

Amortization of actuarial loss
 
6.0

 
8.1

Net periodic postretirement benefit costs
 
$
20.0

 
$
26.1



22

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



(12) Accumulated Other Comprehensive Income
The following table sets forth the after-tax components of accumulated other comprehensive income and changes thereto recorded during the three months ended March 31, 2013:
 
Foreign
Currency
Translation
Adjustment
 
Net
Actuarial Loss
Associated with
Postretirement
Plans and
Workers’
Compensation
Obligations
 
Prior Service
Cost Associated
with
Postretirement
Plans
 
Cash Flow
Hedges
 
Available-For-Sale Securities
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
 
(Dollars in millions)
December 31, 2012
$
22.2

 
$
(411.7
)
 
$