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Derivatives
6 Months Ended
Jun. 30, 2020
Derivatives  
Derivatives

10. 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 12, “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 June 30, 2020, the Company had protected the price on the majority of its expected diesel fuel purchases for the remainder of 2020 with approximately 6 million gallons of heating oil call options with an average strike price of $1.74 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 June 30, 2020, the Company held derivatives for risk management purposes that are expected to settle in the following years:

(Tons in thousands)

    

2020

    

2021

    

Total

Coal sales

 

542

 

 

542

Coal purchases

 

377

 

 

377

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 $0.3 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:

June 30, 2020

    

December 31, 2019

    

Fair Value of Derivatives

    

Asset

Liability

Asset

Liability

    

(In thousands)

Derivative

Derivative

Derivative

Derivative

Derivatives Designated as Hedging Instruments

 

  

 

  

 

  

 

  

 

  

 

  

Coal

$

1,047

$

(851)

 

  

$

1,351

$

(962)

 

  

Derivatives Not Designated as Hedging Instruments

 

  

 

  

 

  

 

  

 

  

 

  

Heating oil -- diesel purchases

 

528

 

 

  

 

133

 

(112)

 

  

Coal -- held for trading purposes

 

12,910

 

(12,870)

 

  

 

18,467

 

(18,940)

 

  

Coal -- risk management

 

11,554

 

(6,659)

 

  

 

11,662

 

(5,856)

 

  

Natural gas

 

 

 

  

 

3

 

 

  

Total

$

24,992

$

(19,529)

 

  

$

30,265

$

(24,908)

 

  

Total derivatives

$

26,039

$

(20,380)

 

  

$

31,616

$

(25,870)

 

  

Effect of counterparty netting

 

(20,380)

 

20,380

 

  

 

(25,759)

 

25,759

 

  

Net derivatives as classified in the balance sheets

$

5,659

$

$

5,659

$

5,857

$

(111)

$

5,746

    

    

    

June 30, 

    

December 31, 

2020

2019

Net derivatives as reflected on the balance sheets (in thousands)

 

  

 

  

 

  

Heating oil and coal

 

Other current assets

$

5,659

$

5,857

Coal

 

Accrued expenses and other current liabilities

 

 

(111)

$

5,659

$

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 $3.9 million and $4.4 million at June 30, 2020 and December 31, 2019, respectively. These amounts are not included with the derivatives presented in the table above and are included in “accrued expenses and other current liabilities” 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 June 30,

Gain (Loss) Recognized in Other Comprehensive Income

Gains (Losses) Reclassified from Other Comprehensive Income into Income

2020

2019

2020

2019

Coal sales

(1)

$

440

$

4,010

$

(902)

$

1,743

Coal purchases

(2)

 

(439)

 

(340)

 

706

 

Totals

$

1

$

3,670

$

(196)

$

1,743

Derivatives Not Designated as Hedging Instruments (in thousands)

Three Months Ended June 30,

Gain (Loss) Recognized

2020

2019

Coal  trading — realized and unrealized

(3)

$

$

(718)

Coal risk management — unrealized

(3)

129

 

9,137

Natural gas  trading— realized and unrealized

(3)

 

(19)

Change in fair value of coal derivatives and coal trading activities, net total

  

$

129

$

8,400

Coal risk management— realized

(4)

$

2,756

$

(881)

Heating oil — diesel purchases

(4)

$

328

$

(1,369)

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

Derivatives used in Cash Flow Hedging Relationships (in thousands)

Six Months Ended June 30,

Gain (Loss) Recognized in Other Comprehensive Income

Gains (Losses) Reclassified from Other Comprehensive Income into Income

2020

2019

2020

2019

Coal sales

(1)

$

599

$

9,247

$

(902)

$

2,787

Coal purchases

(2)

 

(595)

 

(906)

 

706

 

(686)

Totals

$

4

$

8,341

$

(196)

$

2,101

Derivatives Not Designated as Hedging Instruments (in thousands)

Six Months Ended June 30,

Six Months Ended June 30,Six Months Ended June 30,Six Months Ended June 30,

Gain (Loss) Recognized

    

2020

    

2019

Coal trading— realized and unrealized

(3)

$

221

$

(1,101)

Coal risk management— unrealized

(3)

 

(911)

 

22,562

Natural gas trading — realized and unrealized

(3)

 

76

 

(80)

Change in fair value of coal derivatives and coal trading activities, net total

$

(614)

$

21,381

Coal risk management — realized

(4)

$

4,357

$

(5,292)

Heating oil — diesel purchases

(4)

$

(705)

$

(732)

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

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 and six month periods ended June 30, 2020 and 2019

Based on fair values at June 30, 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 $0.2 million.