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 March 31, 2022.

As of March 31, 2022, the Company had currency options outstanding with an aggregate notional amount of $705.0 million Australian dollars to hedge currency risk associated with anticipated Australian dollar expenditures over the nine-month period ending December 31, 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 $0.76 to $0.80 over the nine-month period ending December 31, 2022.

As of March 31, 2022, the Company held coal derivative contracts related to a portion of its forecasted sales with an aggregate notional volume of 1.6 million tonnes. Such financial contracts may include futures, forwards and options. Included in this total are 1.3 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, 0.6 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 0.3 million tonnes aggregate notional volume related to other coal financial contracts will settle in 2022. 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 March 31, 2022, the Company recorded an unrealized mark-to-market loss of $301.0 million on these coal derivative contracts, which includes approximately $237 million of unrealized mark-to-market losses on financial derivatives, and approximately $64 million on physical forward sales contracts.

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.


	March 31, 2022				December 31, 2021
	Asset Derivative		Liability Derivative		Asset Derivative		Liability Derivative
	(Dollars in millions)
Foreign currency option contracts	$	6.3	$	—	$	1.4	$	—
Derivative contracts related to forecasted sales	133.2		(558.1)		59.5		(184.2)
Financial trading contracts	13.5		—		3.4		—
Total derivatives	153.0		(558.1)		64.3		(184.2)
Effect of counterparty netting	(133.2)		133.2		(59.5)		59.5
Variation margin (received) posted	(13.5)		360.6		(3.4)		95.2
Net derivatives and variation margin as classified in the balance sheets	$	6.3	$	(64.3)	$	1.4	$	(29.5)

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 March 31, 2022, the Company had posted $481.7 million aggregate margin cash, consisting of $347.1 million variation margin cash and $134.6 million initial margin. As of December 31, 2021, the Company had posted $130.1 million aggregate margin cash, consisting of $91.8 million variation margin cash and $38.3 million initial margin.

To reduce exposure to additional margin requirements, subsequent to March 31, 2022, the Company converted 0.8 million metric tons of financial hedges into fixed price physical sales over the next 12 months, eliminating further margin requirements on these tons. With these transactions, 1.4 million metric tons remain outstanding with 0.9 million metric tons projected to settle over the remainder of 2022.

The net amount of asset derivatives, net of variation margin, is included in “Other current assets” and the net amount of liability derivatives, net of variation margin, is 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 March 31, 2022
		Total gain (loss) recognized in income		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	$	2.3	$	(1.0)	$	3.3
Derivative contracts related to forecasted sales	Revenue	(369.0)		(68.0)		(301.0)
Financial trading contracts	Revenue	10.1		(0.7)		10.8
Total		$	(356.6)	$	(69.7)	$	(286.9)

		Three Months Ended March 31, 2021 (1)
		Total loss recognized in income		Gain (loss) realized in income on derivatives		Unrealized loss recognized in income on derivatives
Derivative Instrument	Classification
		(Dollars in millions)
Foreign currency option contracts	Operating costs and expenses	$	(2.9)	$	4.7	$	(7.6)
Derivative contracts related to forecasted sales	Revenue	(9.7)		(7.9)		(1.8)
Financial trading contracts	Revenue	(0.7)		2.4		(3.1)
Total		$	(13.3)	$	(0.8)	$	(12.5)

(1) ‘Results realized in income on derivatives’ has been revised to exclude revenue arising from coal deliveries earned by the Company’s trading and brokerage function of $17.9 million for the three months ended March 31, 2021, to be comparable to the presentation of the 2022 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.


	March 31, 2022
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Foreign currency option contracts	$	—	$	6.3	$	—	$	6.3
Derivative contracts related to forecasted sales	—		(424.9)		—		(424.9)
Financial trading contracts	—		13.5		—		13.5
Equity securities	—		—		4.0		4.0
Total net (liabilities) assets	$	—	$	(405.1)	$	4.0	$	(401.1)

	December 31, 2021
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Foreign currency option contracts	$	—	$	1.4	$	—	$	1.4
Derivative contracts related to forecasted sales	—		(124.7)		—		(124.7)
Financial trading contracts	—		3.4		—		3.4
Equity securities	—		—		4.0		4.0
Total net (liabilities) assets	$	—	$	(119.9)	$	4.0	$	(115.9)

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:

•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.

•Cash and cash equivalents, restricted cash, 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.

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.


	March 31, 2022		December 31, 2021
	(Dollars in millions)
Total debt at par value	$	1,129.9	$	1,173.2
Less: Unamortized debt issuance costs and original issue discount	(31.8)		(35.4)
Net carrying amount	$	1,098.1	$	1,137.8

Estimated fair value	$	1,277.3	$	1,136.5

Generally, the Company’s Level 3 instruments or contracts are valued using bid/ask price quotations and other market assessments obtained from multiple, independent third-party brokers or other transactional data incorporated into internally-generated discounted cash flow models. Decreases in the number of third-party brokers or market liquidity could erode the quality of market information and therefore the valuation of the Company’s market positions. The Company’s valuation techniques include basis adjustments to the foregoing price inputs for quality, such as sulfur and ash content, location differentials, expressed as port and freight costs, and credit risk. The Company’s risk management function independently validates the Company’s valuation inputs, including unobservable inputs, with third-party information and settlement prices from other sources where available. A daily process is performed to analyze market price changes and changes to the portfolio. Further periodic validation occurs at the time contracts are settled with the counterparty. These valuation techniques have been consistently applied in all periods presented, and the Company believes it has obtained the most accurate information available for the types of derivative contracts held.

Significant increases or decreases in the inputs in isolation could result in a significantly higher or lower fair value measurement. The unobservable inputs do not have a direct interrelationship; therefore, a change in one unobservable input would not necessarily correspond with a change in another unobservable input.