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This excerpt taken from the ACI 10-K filed Mar 1, 2010. Derivative
Instruments
The Company generally utilizes derivative instruments to manage
exposures to commodity prices. Additionally, the Company may
hold certain coal derivative instruments for trading purposes.
Derivative financial instruments are recognized in the balance
sheet at fair value. Certain coal contracts may meet the
definition of a derivative instrument, but because they provide
for the physical purchase or sale of coal in quantities expected
to be used or sold by the Company over a reasonable period in
the normal course of business, they are not recognized on the
balance sheet.
Certain derivative instruments are designated as the hedge
instrument in a hedging relationship. In a fair value hedge, the
Company hedges the risk of changes in the fair value of a firm
commitment, typically a fixed-price coal sales contract. Changes
in both the hedged firm commitment and the fair value of a
derivative used as a hedge instrument in a fair value hedge are
recorded in earnings. In a cash flow hedge, the Company hedges
the risk of changes in future cash flows related to a forecasted
purchase or sale. Changes in the fair value of the derivative
instrument used as a hedge instrument in a cash flow hedge are
recorded in other comprehensive income. Amounts in other
comprehensive income are reclassified to earnings when the
hedged transaction affects earnings and are classified in a
manner consistent with the transaction being hedged. The Company
formally documents the relationships between hedging instruments
and the respective hedged items, as well as its risk management
objectives for hedge transactions.
The Company evaluates the effectiveness of its hedging
relationships both at the hedge’s inception and on an
ongoing basis. Any ineffective portion of the change in fair
value of a derivative instrument used as a hedge instrument in a
fair value or cash flow hedge is recognized immediately in
earnings. The ineffective portion is based on the extent to
which exact offset is not achieved between the change in fair
value of the hedge instrument and the cumulative change in
expected future cash flows on the hedged transaction from
inception of the hedge in a cash flow hedge or the change in the
fair value. The amount of ineffectiveness recognized in other
operating income, net in the accompanying consolidated
statements of income resulting from heating oil derivatives was
a gain of $1.4 million for the year ended December 31,
2007. Ineffectiveness was insignificant for the years ended
December 31, 2009 and 2008.
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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