From time to time, the Company may utilize various types of derivative instruments to manage its exposure to risks in the normal course of business, including (1) foreign currency exchange rate risk and the variability of cash flows associated with forecasted Australian dollar expenditures made in its Australian mining platform, (2) price risk of fluctuating coal prices related to forecasted sales or purchases of coal, or changes in the fair value of a fixed price physical sales contract, (3) price risk and the variability of cash flows related to forecasted diesel fuel purchased for use in its operations and (4) interest rate risk on long-term debt. These risk management activities are actively monitored for compliance with the Company’s risk management policies.

On a limited basis, the Company engages in the direct and brokered trading of coal and freight-related contracts. 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. The Company had no diesel fuel or interest rate derivatives in place as of September 30, 2021.

As of September 30, 2021, the Company had currency options outstanding with an aggregate notional amount of $595.0 million Australian dollars to hedge currency risk associated with anticipated Australian dollar expenditures over the nine-month period ending June 30, 2022. The instruments are quarterly average rate options which entitle the Company to receive payment on the notional amount should the quarterly average Australian dollar-to-U.S. dollar exchange rate exceed amounts ranging from $0.77 to $0.81 over the nine-month period ending June 30, 2022.

As of September 30, 2021, the Company held coal derivative contracts related to a portion of its forecasted sales with an aggregate notional volume of 2.9 million tonnes. Such financial contracts may include futures, forwards and options. Included in this total are 2.1 million tonnes related to financial derivatives entered to support the profitability of the Wambo Underground Mine as part of a strategy to extend the mine life through mid-2023. Of this total, 1.4 million tonnes will settle in 2022 and 0.7 million tonnes will settle in 2023 at expected average pricing of approximately $84 per tonne (Newcastle index). The remaining 0.8 million tonnes aggregate notional volume related to other coal financial contracts will settle in the fourth quarter of 2021 (0.2 million tonnes) and 2022 (0.6 million tonnes). Additionally, the Company classifies certain physical forward sales contracts as derivatives for which the normal purchase, normal sales exception does not apply.

During the three months ended September 30, 2021, the Company recorded an unrealized mark-to-market loss of $238.4 million on these coal derivative contracts, which includes approximately $183 million of unrealized mark-to-market losses on financial derivatives, and approximately $55 million on physical forward sales contracts.

On a limited basis, the Company may enter coal or freight derivative contracts for trading purposes. Such financial contracts may include futures, forwards and options. The Company held nominal financial trading contracts as of September 30, 2021.

The Company has master netting agreements with certain 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 fair value of derivatives reflected in the accompanying condensed consolidated balance sheets are set forth in the table below.


	September 30, 2021				December 31, 2020 (1)
	Asset Derivative		Liability Derivative		Asset Derivative		Liability Derivative
	(Dollars in millions)
Foreign currency option contracts	$	1.1	$	—	$	10.3	$	—
Derivative contracts related to forecasted sales	113.0		(385.2)		16.7		(24.7)
Financial trading contracts	1.5		—		0.4		—
Total derivatives	115.6		(385.2)		27.4		(24.7)
Effect of counterparty netting	(113.0)		113.0		(16.2)		16.2
Variation margin (received) posted	(1.5)		215.8		(0.3)		6.8
Net derivatives and variation margin as classified in the balance sheets	$	1.1	$	(56.4)	$	10.9	$	(1.7)

(1) Certain comparative amounts have been reclassified to conform with the 2021 presentation. The reclassifications do not impact the prior year presentation of the accompanying condensed consolidated balance sheets.

The Company generally posts or receives variation margin cash with its clearing broker on the majority of its financial derivatives as market values of the financial derivatives fluctuate. As of September 30, 2021, the Company had posted $239.6 million aggregate margin cash, consisting of $214.3 million variation margin cash and $25.3 million initial margin. As of December 31, 2020, the Company had posted $9.5 million aggregate margin cash, consisting of $6.5 million variation margin cash and $3.0 million initial margin.

The net amount of asset derivatives, net of variation margin, are included in “Other current assets” and the net amount of liability derivatives, net of variation margin, are included in “Accounts payable and accrued expenses” in the accompanying condensed consolidated balance sheets. The amounts of initial margin are not included with the derivatives presented in the tabular disclosures above and are included in “Other current assets” in the accompanying condensed consolidated balance sheets.

Currently, the Company does not seek cash flow hedge accounting treatment for its derivative financial instruments and thus changes in fair value are reflected in current earnings. The tables below show the amounts of pre-tax gains and losses related to the Company’s derivatives and their classification within the accompanying unaudited condensed consolidated statements of operations.


		Three Months Ended September 30, 2021
		Total (loss) gain recognized in income		(Loss) gain realized in income on derivatives		Unrealized gain (loss) recognized in income on derivatives
Derivative Instrument	Classification
		(Dollars in millions)
Foreign currency option contracts	Operating costs and expenses	$	(1.0)	$	(1.6)	$	0.6
Derivative contracts related to forecasted sales	Revenues	(251.5)		(13.1)		(238.4)
Financial trading contracts	Revenues	0.7		0.7		—
Total		$	(251.8)	$	(14.0)	$	(237.8)

		Three Months Ended September 30, 2020 (1)
		Total gain (loss) recognized in income		Gain (loss) realized in income on derivatives		Unrealized gain (loss) recognized in income on derivatives
Derivative Instrument	Classification
		(Dollars in millions)
Foreign currency option contracts	Operating costs and expenses	$	3.9	$	3.2	$	0.7
Derivative contracts related to forecasted sales	Revenues	(3.3)		12.8		(16.1)
Financial trading contracts	Revenues	(0.2)		(0.2)		—
Total		$	0.4	$	15.8	$	(15.4)


		Nine Months Ended September 30, 2021
		Total (loss) gain recognized in income		Gain (loss) realized in income on derivatives		Unrealized (loss) gain recognized in income on derivatives
Derivative Instrument	Classification
		(Dollars in millions)
Foreign currency option contracts	Operating costs and expenses	$	(5.3)	$	3.0	$	(8.3)
Derivative contracts related to forecasted sales	Revenues	(292.1)		(28.1)		(264.0)
Financial trading contracts	Revenues	1.4		0.6		0.8
Total		$	(296.0)	$	(24.5)	$	(271.5)

		Nine Months Ended September 30, 2020 (1)
		Total gain (loss) recognized in income		Gain realized in income on derivatives		Unrealized gain (loss) recognized in income on derivatives
Derivative Instrument	Classification
		(Dollars in millions)
Foreign currency option contracts	Operating costs and expenses	$	5.2	$	1.6	$	3.6
Derivative contracts related to forecasted sales	Revenues	19.6		30.9		(11.3)
Financial trading contracts	Revenues	(0.5)		1.9		(2.4)
Total		$	24.3	$	34.4	$	(10.1)

(1) 2020 ‘gain/(loss) realized in income on derivatives’ has been revised to exclude revenues arising from coal deliveries earned by the Company’s trading and brokerage function of ($13.0) million and ($32.1) million for the three and nine month periods ending September 30, 2020, respectively, to be comparable to the presentation of the 2021 amounts.

The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. These levels include: Level 1 - inputs are quoted prices in active markets for the identical assets or liabilities; Level 2 - inputs are other than quoted prices included in Level 1 that are directly or indirectly observable through market-corroborated inputs; and Level 3 - inputs are unobservable, or observable but cannot be market-corroborated, requiring the Company to make assumptions about pricing by market participants.

The following tables set forth the hierarchy of the Company’s net (liability) asset positions for which fair value is measured on a recurring basis. As noted below, variation margin cash associated with the derivative balances is excluded from this table.


	September 30, 2021
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Foreign currency option contracts	$	—	$	1.1	$	—	$	1.1
Derivative contracts related to forecasted sales	—		(272.2)		—		(272.2)
Financial trading contracts	—		1.5		—		1.5
Equity securities	—		—		4.0		4.0
Total net (liabilities) assets	$	—	$	(269.6)	$	4.0	$	(265.6)

	December 31, 2020 (1)
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Foreign currency option contracts	$	—	$	10.3	$	—	$	10.3
Derivative contracts related to forecasted sales	—		(7.9)		—		(7.9)
Financial trading contracts	—		0.4		—		0.4
Equity securities	—		—		4.0		4.0
Total net assets	$	—	$	2.8	$	4.0	$	6.8

(1) December 31, 2020 ‘total net assets’ has been revised to exclude $6.5 million variation margin cash for comparability to 2021 presentation. Variation margin cash was $214.3 million as of September 30, 2021.

For Level 1 and 2 financial assets and liabilities, the Company utilizes both direct and indirect observable price quotes, including interest rate yield curves, exchange indices, broker/dealer quotes, published indices, issuer spreads, benchmark securities and other market quotes. In the case of certain debt securities, fair value is provided by a third-party pricing service. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:

•Foreign currency option contracts are valued utilizing inputs obtained in quoted public markets (Level 2) except when credit and non-performance risk is considered to be a significant input, then the Company classifies such contracts as Level 3.

•Derivative contracts related to forecasted sales and financial trading contracts are 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.

Other Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values for other financial instruments as of September 30, 2021 and December 31, 2020:

•Cash and cash equivalents, accounts receivable, including those within the Company’s accounts receivable securitization program, margining cash, notes receivable and accounts payable have carrying values which approximate fair value due to the short maturity or the liquid nature of these instruments.

•Long-term debt fair value estimates are based on observed prices for securities when available (Level 2), and otherwise on estimated borrowing rates to discount the cash flows to their present value (Level 3).

Market risk associated with the Company’s fixed- and variable-rate long-term debt relates to the potential reduction in the fair value and negative impact to future earnings, respectively, from an increase in interest rates. The fair value of debt, shown below, is principally based on reported market values and estimates based on interest rates, maturities, credit risk, underlying collateral and completed market transactions.


	September 30, 2021		December 31, 2020
	(Dollars in millions)
Total debt at par value	$	1,373.8	$	1,591.3
Less: Unamortized debt issuance costs and original issue discount	(45.6)		(43.5)
Net carrying amount	$	1,328.2	$	1,547.8

Estimated fair value	$	1,236.3	$	987.6

The Company’s risk management function, which is independent of the Company’s coal trading function, is responsible for valuation policies and procedures, with oversight from executive management. 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 had no transfers between Levels 1, 2 and 3 during the three and nine months ended September 30, 2021 and 2020. The Company’s policy is to value all transfers between levels using the beginning of period valuation.