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Derivatives

3 Months Ended

Mar. 31, 2020

9. Derivatives

Interest rate risk management

The Company has entered into interest rate swaps to reduce the variability of cash outflows associated with interest payments on its variable rate term loan. These swaps have been designated as cash flow hedges. For additional information on these arrangements, see Note 11, “Debt and Financing Arrangements,” in the Condensed Consolidated Financial Statements.

Diesel fuel price risk management

The Company is exposed to price risk with respect to diesel fuel purchased for use in its operations. The Company anticipates purchasing approximately 30 to 35 million gallons of diesel fuel for use in its operations annually. To protect the Company’s cash flows from increases in the price of diesel fuel for its operations, the Company uses forward physical diesel purchase contracts, purchased heating oil call options and New York Mercantile Exchange (“NYMEX”) gulf coast diesel swaps and options. At March 31, 2020, the Company had protected the price on the majority of its expected diesel fuel purchases for the remainder of 2020 with approximately 15 million gallons of heating oil call options with an average strike price of $1.80 per gallon and 4 million gallons of NYMEX gulf coast diesel swaps at an average price of approximately $1.03 per gallon. These positions are not designated as hedges for accounting purposes, and therefore, changes in the fair value are recorded immediately to earnings.

Coal price risk management positions

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices. The Company has exposure to the risk of fluctuating coal prices related to forecasted, index-priced sales or purchases of coal or to the risk of changes in the fair value of a fixed price physical sales contract. Certain derivative contracts may be designated as hedges of these risks.

At March 31, 2020, the Company held derivatives for risk management purposes that are expected to settle in the following years:


(Tons in thousands)		2020
Coal sales		685
Coal purchases		480

The Company has also entered into a minimal quantity of natural gas put options to protect the Company from decreases in natural gas prices, which could impact thermal coal demand. These options are not designated as hedges.

Coal trading positions

The Company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market for trading purposes. The Company is exposed to the risk of changes in coal prices on the value of its coal trading portfolio. The estimated future realization of the value of the trading portfolio is $0.4 million of losses during the remainder of 2020 and $0.3 million of gains during 2021.

Tabular derivatives disclosures

The Company has master netting agreements with all of its counterparties which allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce the Company’s credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the Condensed Consolidated Balance Sheets. The amounts shown in the table below represent the fair value position of individual contracts, and not the net position presented in the accompanying Condensed Consolidated Balance Sheets.

The fair value and location of derivatives reflected in the accompanying Condensed Consolidated Balance Sheets are as follows:


	March 31, 2020						December 31, 2019
Fair Value of Derivatives	Asset		Liability				Asset		Liability
(In thousands)	Derivative		Derivative				Derivative		Derivative
Derivatives Designated as Hedging Instruments
Coal	$	1,132	$	(839)			$	1,351	$	(962)

Derivatives Not Designated as Hedging Instruments
Heating oil -- diesel purchases		201		(1)				133		(112)
Coal -- held for trading purposes		19,565		(19,667)				18,467		(18,940)
Coal -- risk management		10,466		(5,699)				11,662		(5,856)
Natural gas		—		—				3		—
Total	$	30,232	$	(25,367)			$	30,265	$	(24,908)
Total derivatives	$	31,364	$	(26,206)			$	31,616	$	(25,870)
Effect of counterparty netting		(26,205)		26,205				(25,759)		25,759
Net derivatives as classified in the balance sheets	$	5,159	$	(1)	$	5,158	$	5,857	$	(111)	$	5,746


		March 31,		December 31,
		2020		2019
Net derivatives as reflected on the balance sheets (in thousands)
Heating oil and coal	Other current assets	$	5,159	$	5,857
Coal	Accrued expenses and other current liabilities		(1)		(111)
		$	5,158	$	5,746

The Company had a current liability representing cash collateral owed to a margin account for derivative positions primarily related to coal derivatives of $1.8 million and $4.4 million at March 31, 2020 and December 31, 2019, respectively. These amounts are not included with the derivatives presented in the table above and are included in “other current assets” in the accompanying Condensed Consolidated Balance Sheets.

The effects of derivatives on measures of financial performance are as follows:

Derivatives used in Cash Flow Hedging Relationships (in thousands)

Three Months Ended March 31,


		Gain (Loss) Recognized in Other Comprehensive Income				Gains (Losses) Reclassified from Other Comprehensive Income into Income
		2020		2019		2020		2019
Coal sales	⁽¹⁾	$	159	$	5,237	$	—	$	1,044
Coal purchases	⁽²⁾		(156)		(566)		—		(683)
Totals		$	3	$	4,671	$	—	$	361

No ineffectiveness or amounts excluded from effectiveness testing relating to the Company’s cash flow hedging relationships were recognized in the results of operations in the three month periods ended March 31, 2020 and 2019.

Derivatives Not Designated as Hedging Instruments (in thousands)

Three Months Ended March 31,


		Gain (Loss) Recognized
			2020		2019
Coal trading — realized and unrealized	⁽³⁾	$	221	$	(383)
Coal risk management — unrealized	⁽³⁾		(1,040)		13,425
Natural gas trading— realized and unrealized	⁽³⁾		76		(61)
Change in fair value of coal derivatives and coal trading activities, net total		$	(743)	$	12,981

Coal risk management— realized	⁽⁴⁾	$	1,601	$	(4,411)
Heating oil — diesel purchases	⁽⁴⁾	$	(1,033)	$	637

Location in statement of operations:

(1)	— Revenues

(2)	— Cost of sales

(3)	— Change in fair value of coal derivatives and coal trading activities, net

(4)	— Other operating (income) expense, net

Based on fair values at March 31, 2020, amounts on derivative contracts designated as hedge instruments in cash flow hedges to be reclassified from other comprehensive income into earnings during the next twelve months are gains of approximately $0.3 million.