Coal Trading

The Company engages in the direct and brokered trading of coal and freight-related contracts (coal trading). Except those contracts 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. Coal brokering is conducted both as principal and agent in support of various coal production-related activities that may involve coal produced from the Company's mines, coal sourcing arrangements with third-party mining companies or offtake agreements with other coal producers. The Company’s Trading and Brokerage segment also provides transportation-related services, which involve both financial derivative contracts and physical contracts. Collectively, coal and freight-related hedging activities include both economic hedging and, from time to time, cash flow hedging in support of the Company's coal trading strategy.

The Company includes 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 disclosure of its coal trading activities.

Trading revenues (losses) recognized during the periods presented below were as follows:



	Successor			Predecessor
Trading Revenues by Type of Instrument	Three Months Ended March 31, 2018			Three Months Ended March 31, 2017
	(Dollars in millions)
Futures, swaps and options	$	(16.9	)	$	(10.2	)
Physical purchase/sale contracts	37.0			25.2
Total trading revenues	$	20.1		$	15.0

Offsetting and Balance Sheet Presentation

The Company’s coal trading assets and liabilities include financial instruments, such as swaps, futures and options, cleared through various exchanges, which involve the daily net settlement of open positions. The Company must post cash collateral in the form of initial margin, in addition to variation margin, on exchange-cleared positions that are in a net liability position and receives variation margin when in a net asset position. The Company also transacts in coal trading financial swaps and options through over-the-counter (OTC) markets with financial institutions and other non-financial trading entities under International Swaps and Derivatives Association 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.”

The fair value of assets and liabilities from coal trading activities presented on a gross and net basis as of March 31, 2018 and December 31, 2017 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 Posted ⁽¹⁾		Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets
	(Dollars in millions)
	Fair Value as of March 31, 2018
Assets from coal trading activities, net	$	53.6		$	(42.4	)	$	—	$	11.2
Liabilities from coal trading activities, net	(57.9		)	42.4			6.7		(8.8		)
Total, net	$	(4.3	)	$	—		$	6.7	$	2.4

	Fair Value as of December 31, 2017
Assets from coal trading activities, net	$	77.1		$	(74.5	)	$	—	$	2.6
Liabilities from coal trading activities, net	(122.0		)	74.5			35.8		(11.7		)
Total, net	$	(44.9	)	$	—		$	35.8	$	(9.1	)


⁽¹⁾	None of the net variation margin posted at March 31, 2018 and December 31, 2017 related to cash flow hedges.

Fair Value Measurements

The following tables set forth the hierarchy of the Company’s net financial asset (liability) coal trading positions for which fair value is measured on a recurring basis as of March 31, 2018 and December 31, 2017:



	March 31, 2018
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Futures, swaps and options	$	0.2	$	—	$	—	$	0.2
Physical purchase/sale contracts	—		2.2		—		2.2
Total net financial assets	$	0.2	$	2.2	$	—	$	2.4



	December 31, 2017
	Level 1			Level 2			Level 3		Total
	(Dollars in millions)
Futures, swaps and options	$	(3.0	)	$	(4.2	)	$	—	$	(7.2	)
Physical purchase/sale contracts	—			(1.9		)	—		(1.9		)
Total net financial liabilities	$	(3.0	)	$	(6.1	)	$	—	$	(9.1	)

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 Group, Intercontinental Exchange, Baltic Exchange and Singapore Exchange contract prices; 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:


•	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) except when credit and non-performance risk is considered to be a significant input (greater than 10% of fair value), then the Company classifies as Level 3.


•	Physical purchase/sale contracts: purchases and sales at locations with significant market activity corroborated by market-based information (Level 2) except when credit and non-performance risk is considered to be a significant input (greater than 10% of fair value), then the Company classifies as Level 3.

As of March 31, 2018, 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
2018	83	%
2019	25	%
2020	(8	)%
	100	%

Credit and Non-performance Risk. The fair value of the Company’s coal derivative assets and liabilities reflects adjustments for credit risk. The Company’s exposure is substantially with electric utilities, energy marketers, steel producers and nonfinancial trading houses. 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, the Company will post or receive margin amounts associated with exchange-cleared and certain OTC positions. The Company also continually monitors counterparty and contract non-performance risk, if present, on a case-by-case basis.

At March 31, 2018, 55% of the Company’s credit exposure related to coal trading activities was with investment grade counterparties, while 1% was with non-investment grade counterparties and 44% was with counterparties that are not rated.

Performance Assurances and Collateral

The Company is required to post variation margin on positions that are in a net liability position and is entitled to receive and hold 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, 2018 and December 31, 2017, the Company posted a net variation margin of $6.7 million and $35.8 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. The Company posted initial margin of $18.5 million as of March 31, 2018, compared to $18.8 million as of December 31, 2017, which is reflected in “Other current assets” in the condensed consolidated balance sheets. As of March 31, 2018 and December 31, 2017, the Company was in receipt of $4.6 million and $1.8 million, respectively, of the required variation and initial margin.

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, 2018 and December 31, 2017, would have amounted to collateral postings to counterparties of approximately $1.1 million and $7.0 million, respectively. As of March 31, 2018, the Company was not required to post collateral, whereas on December 31, 2017, the Company was required to post approximately $0.4 million in collateral to counterparties for such positions

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. During the first quarter of 2018, one major rating agency upgraded the Company’s corporate credit rating, thus improving the Company’s credit position with its counterparties. The Company’s collateral requirement owed to its counterparties for these ratings based derivative trading instruments for March 31, 2018 remained at zero, consistent with December 31, 2017. As of March 31, 2018 and December 31, 2017, no collateral was posted to counterparties to support such derivative trading instruments.