Derivatives and Fair Value Measurements

9 Months Ended

Sep. 30, 2023

Derivatives

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, 2023.

Foreign Currency Option Contracts

The Company has historically utilized currency forwards and options to hedge currency risk associated with anticipated Australian dollar operating expenditures. As of September 30, 2023, the Company held average rate options with an aggregate notional amount of $615.0 million Australian dollars to hedge currency risk associated with anticipated Australian dollar operating expenditures over the nine-month period ending June 30, 2024. The instruments 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 $0.70 to $0.72 over the nine-month period ending June 30, 2024. As of September 30, 2023, the Company also held purchased collars with an aggregate notional amount of $339.0 million Australian dollars related to anticipated Australian dollar operating expenditures during the six-month period ending March 31, 2024. The purchased collars have a floor and ceiling of approximately $0.60 and $0.75, respectively, whereby the Company will incur a loss on the instruments for rates below the floor and a gain for rates above the ceiling.

Derivative Contracts Related to Forecasted Sales

As of September 30, 2023, the Company had no coal derivative contracts related to its forecasted sales. Historically, such financial contracts have included futures, forwards and options. 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, 2023, the Company recorded no unrealized mark-to-market gains or losses on coal derivative contracts. During the three months ended September 30, 2022, the Company recorded a net unrealized mark-to-market gain of $90.4 million on coal derivative contracts, which included approximately $49 million of unrealized mark-to-market gains on financial derivatives and approximately $41 million of unrealized mark-to-market gains on physical forward sales contracts.

During the nine months ended September 30, 2023, the Company recorded a net unrealized mark-to-market gain of $159.0 million on financial coal derivative contracts and no unrealized mark-to-market gains or losses on physical forward sales contracts. During the nine months ended September 30, 2022, the Company recorded a net unrealized mark-to-market loss of $235.1 million on coal derivative contracts, which included approximately $257 million of unrealized mark-to-market losses on financial derivatives and approximately $22 million of unrealized mark-to-market gains on physical forward sales contracts.

Financial Trading 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, 2023.

Tabular Derivatives Disclosures

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, 2023				December 31, 2022
	Asset Derivative		Liability Derivative		Asset Derivative		Liability Derivative
	(Dollars in millions)
Foreign currency option contracts	$	0.1	$	—	$	3.0	$	—
Derivative contracts related to forecasted sales	—		—		100.6		(310.3)
Financial trading contracts	—		—		11.7		—
Total derivatives	0.1		—		115.3		(310.3)
Effect of counterparty netting	—		—		(100.6)		100.6
Variation margin (received) posted	—		—		(11.7)		209.7
Net derivatives and variation margin as classified in the balance sheets	$	0.1	$	—	$	3.0	$	—

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, 2023, the Company had no margin cash posted. As of December 31, 2022, the Company had posted $255.5 million aggregate margin cash, consisting of $198.0 million variation margin cash and $57.5 million initial margin.

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.

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 pretax 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, 2023
		Total loss recognized in income		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	$	(2.7)	$	(2.2)	$	(0.5)

Financial trading contracts	Revenue	(0.1)		(19.7)		19.6
Total		$	(2.8)	$	(21.9)	$	19.1

		Three Months Ended September 30, 2022
		Total (loss) gain recognized in income		(Loss) gain 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	$	(3.0)	$	(1.6)	$	(1.4)
Derivative contracts related to forecasted sales	Revenue	(27.0)		(117.4)		90.4
Financial trading contracts	Revenue	0.3		0.5		(0.2)
Total		$	(29.7)	$	(118.5)	$	88.8

		Nine Months Ended September 30, 2023
		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	$	(7.8)	$	(7.9)	$	0.1
Derivative contracts related to forecasted sales	Revenue	78.1		(80.9)		159.0
Financial trading contracts	Revenue	—		11.5		(11.5)
Total		$	70.3	$	(77.3)	$	147.6

		Nine Months Ended September 30, 2022
		Total (loss) gain recognized in income		(Loss) gain 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	$	(8.2)	$	(3.8)	$	(4.4)
Derivative contracts related to forecasted sales	Revenue	(543.1)		(308.0)		(235.1)
Financial trading contracts	Revenue	10.7		0.6		10.1
Total		$	(540.6)	$	(311.2)	$	(229.4)

The Company classifies the cash effects of its derivatives within the “Cash Flows From Operating Activities” section of the unaudited condensed consolidated statements of cash flows.

Fair Value Measurements

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 asset (liability) positions for which fair value is measured on a recurring basis. Variation margin cash associated with the derivative balances is excluded from this table.


	September 30, 2023
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Foreign currency option contracts	$	—	$	0.1	$	—	$	0.1
Derivative contracts related to forecasted sales	—		—		—		—
Financial trading contracts	—		—		—		—
Equity securities	0.2		—		—		0.2
Total net assets	$	0.2	$	0.1	$	—	$	0.3

	December 31, 2022
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Foreign currency option contracts	$	—	$	3.0	$	—	$	3.0
Derivative contracts related to forecasted sales	—		(209.7)		—		(209.7)
Financial trading contracts	—		11.7		—		11.7
Equity securities	—		—		2.5		2.5
Total net (liabilities) assets	$	—	$	(195.0)	$	2.5	$	(192.5)

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.

•Investments in equity securities are currently based on unadjusted quoted prices in active markets (Level 1).

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, 2023 and December 31, 2022:

•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.

•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, 2023		December 31, 2022
	(Dollars in millions)
Total debt at par value	$	342.1	$	343.6
Less: Unamortized debt issuance costs	(8.5)		(9.8)
Net carrying amount	$	333.6	$	333.8

Estimated fair value	$	506.2	$	560.0

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 to credit risk is substantially with electric utilities, energy marketers, steel producers and nonfinancial trading houses.

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.

During the nine months ended September 30, 2023, the entity in which the Company held a Level 3 investment in equity securities completed a merger transaction and its shares were exchanged for the shares of the newly-combined entity, which are publicly traded. The Company recorded an impairment loss of $2.0 million upon the exchange of shares.

The Company had no transfers between Levels 1, 2 and 3 during the three and nine months ended September 30, 2023 and 2022. The Company’s policy is to value all transfers between levels using the beginning of period valuation.