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 10, “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 40 to 47 million gallons of diesel fuel for use in its operations during 2018. 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 and purchased heating oil call options. At March 31, 2018, the Company had protected the price of approximately 63% of its expected diesel fuel purchases for the remainder of 2018 at an average strike price of $1.88 per gallon. Additionally, the Company has protected approximately 34% of its expected first quarter 2019 purchases with call options with an average strike price of $2.14 per gallon. At March 31, 2018, the Company had outstanding heating oil call options for approximately 26 million gallons for the purpose of managing the price risk associated with future diesel purchases. 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, 2018, the Company held derivatives for risk management purposes that are expected to settle in the following years:



(Tons in thousands)	2018	2019	Total
Coal sales	1,601	1,124	2,725
Coal purchases	780	132	912

The Company has also entered into a nominal 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 $0.8 million of losses during the remainder of 2018 and $0.6 million of gains during 2019.

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, 2018								December 31, 2017
Fair Value of Derivatives	Asset			Liability					Asset			Liability
(In thousands)	Derivative			Derivative					Derivative			Derivative
Derivatives Designated as Hedging Instruments
Coal	$	4,796		$	(884	)			$	942		$	(2,146	)

Derivatives Not Designated as Hedging Instruments
Heating oil -- diesel purchases	4,927			—					5,354			—
Coal -- held for trading purposes	19,899			(20,082		)			44,088			(45,221		)
Coal -- risk management	3,140			(5,019		)			5,139			(9,892		)
Natural gas	—			—					27			—
Total	27,966			(25,101		)			54,608			(55,113		)
Total derivatives	32,762			(25,985		)			55,550			(57,259		)
Effect of counterparty netting	(25,199		)	25,199					(50,042		)	50,042
Net derivatives as classified in the balance sheets	$	7,563		$	(786	)	$	6,777	$	5,508		$	(7,217	)	$	(1,709	)



		March 31, 2018			December 31, 2017
Net derivatives as reflected on the balance sheets (in thousands)
Heating oil and coal	Other current assets	$	7,563		$	5,508
Coal	Accrued expenses and other current liabilities	(786		)	(7,217		)
		$	6,777		$	(1,709	)

The Company had a current asset for the right to reclaim cash collateral of $19.1 million and $16.2 million at March 31, 2018 and December 31, 2017, 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 (Effective Portion)						Gains (Losses) Reclassified from Other Comprehensive Income into Income (Effective Portion)
		2018			2017			2018		2017
Coal sales	(1)	$	5,231		$	220		$	—	$	—
Coal purchases	(2)	(542		)	(201		)	—		—
Totals		$	4,689		$	19		$	—	$	—

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, 2018 and 2017.

Based on fair values at March 31, 2018, 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 $1.8 million.

Derivatives Not Designated as Hedging Instruments (in thousands)

Three Months Ended March 31,



		Gain (Loss) Recognized
		2018			2017
Coal trading — realized and unrealized	(3)	$	558		$	(658	)
Coal risk management — unrealized	(3)	$	2,875		$	26
Natural gas trading— realized and unrealized	(3)	$	(19	)	$	(222	)
Change in fair value of coal derivatives and coal trading activities, net total		$	3,414		$	(854	)

Coal risk management— realized	(4)	$	(1,031	)	$	—
Heating oil — diesel purchases	(4)	$	18		$	(3,578	)

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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