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Coal Trading | 6 Months Ended
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Jun. 30, 2017
Coal Trading [Abstract] |
Coal Trading | 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. 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 recognized during the Successor period April 2 through June 30, 2017 and the Predecessor periods January 1 through April 1, 2017, and the three and six months ended June 30, 2016 were as follows:
|  | Successor | Predecessor |  | Successor | Predecessor
Trading Revenues by Type of Instrument |  | April 2 through June 30, 2017 | Three Months Ended June 30, 2016 |  | April 2 through June 30, 2017 | January 1 through April 1, 2017 | Six Months Ended June 30, 2016
|  | (Dollars in millions)
Futures, swaps and options |  | $ | (7.3 | ) | $ | (19.3 | ) |  | $ | (7.3 | ) | $ | (10.2 | ) | $ | (23.1 | )
Physical purchase/sale contracts |  | 12.5 |  | 36.8 |  |  | 12.5 |  | 25.2 |  | 36.9 |
Total trading revenues |  | $ | 5.2 |  | $ | 17.5 |  |  | $ | 5.2 |  | $ | 15.0 |  | $ | 13.8 |
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 (ISDA) 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 June 30, 2017 and December 31, 2016 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)
|  | Successor
|  | Fair Value as of June 30, 2017
Assets from coal trading activities, net |  | $ | 145.5 |  |  | $ | (144.9 | ) |  | $ | — |  |  | $ | 0.6 |
Liabilities from coal trading activities, net |  | (162.1 | ) |  | 144.9 |  |  | 16.0 |  |  | (1.2 | )
Total, net |  | $ | (16.6 | ) |  | $ | — |  |  | $ | 16.0 |  |  | $ | (0.6 | )
|  | Predecessor
|  | Fair Value as of December 31, 2016
Assets from coal trading activities, net |  | $ | 191.2 |  |  | $ | (190.5 | ) |  | $ | — |  |  | $ | 0.7 |
Liabilities from coal trading activities, net |  | (249.1 | ) |  | 190.5 |  |  | 57.4 |  |  | (1.2 | )
Total, net |  | $ | (57.9 | ) |  | $ | — |  |  | $ | 57.4 |  |  | $ | (0.5 | )
(1) | None of the net variation margin posted at June 30, 2017 and December 31, 2016, respectively, related to cash flow hedges.
See Note 7. "Derivatives and Fair Value Measurements" for information on balance sheet offsetting related to the Company’s Corporate Hedging activities. 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 June 30, 2017 and December 31, 2016:
| Successor
| June 30, 2017
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (Dollars in millions)
Physical purchase/sale contracts | $ | — |  |  | $ | (0.6 | ) |  | $ | — |  |  | $ | (0.6 | )
Total net financial liabilities | $ | — |  |  | $ | (0.6 | ) |  | $ | — |  |  | $ | (0.6 | )
| Predecessor
| December 31, 2016
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (Dollars in millions)
Futures, swaps and options | $ | — |  |  | $ | (0.1 | ) |  | $ | — |  |  | $ | (0.1 | )
Physical purchase/sale contracts | — |  |  | 0.7 |  |  | (1.1 | ) |  | (0.4 | )
Total net financial assets (liabilities) | $ | — |  |  | $ | 0.6 |  |  | $ | (1.1 | ) |  | $ | (0.5 | )
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 (CME) Group, Intercontinental Exchange (ICE), LCH.Clearnet (formerly known as the London Clearing House), NOS Clearing ASA and Singapore Exchange (SGX) 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.
Physical purchase/sale contracts include a credit valuation adjustment based on credit and non-performance risk (Level 3). The credit valuation adjustment has not historically had a material impact on the valuation of the contracts resulting in Level 2 classification. However, due to the Company's corporate credit rating downgrades in 2016, the credit valuation adjustment as of December 31, 2016 is considered to be significant unobservable inputs in the valuation of the contracts resulting in Level 3 classification. During the second quarter of 2017, two of the major rating agencies upgraded the Company's corporate credit rating upon emergence from the Chapter 11 proceedings. With the credit rating upgrade, the credit valuation adjustment as of June 30, 2017 no longer has a material impact on the valuation of contracts and is in line with the Company’s historical range. The Company's risk management function, which is independent of the Company's commercial trading function, is responsible for valuation policies and procedures, with oversight from executive management. 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. The following table summarizes the changes in the Company’s recurring Level 3 net financial assets:
| Successor | Predecessor |  | Successor | Predecessor
| April 2 through June 30, 2017 | Three Months Ended June 30, 2016 |  | April 2 through June 30, 2017 | January 1 through April 1, 2017 | Six Months Ended June 30, 2016
| (Dollars in millions)
Beginning of period | $ | (0.7 | ) | $ | (3.9 | ) |  | $ | (0.7 | ) | $ | (1.1 | ) | $ | (15.6 | )
Transfers into Level 3 | — |  | 0.4 |  |  | — |  | — |  | 0.4 |
Transfers out of Level 3 | 0.7 |  | — |  |  | 0.7 |  | 0.2 |  | 10.7 |
Total gains realized/unrealized: |  |  |  |  |  |  |  |
Included in earnings | — |  | (1.3 | ) |  | — |  | 0.2 |  | (1.4 | )
Sales | — |  | — |  |  | — |  | — |  | (0.1 | )
Settlements | — |  | 3.7 |  |  | — |  | — |  | 4.9 |
End of period | $ | — |  | $ | (1.1 | ) |  | $ | — |  | $ | (0.7 | ) | $ | (1.1 | )
The Company had no transfers between Levels 1 and 2 during the Successor period April 2 through June 30, 2017 or the Predecessor periods January 1 through April 1, 2017, and the three and six months ended June 30, 2016. Transfers of liabilities into/out of Level 3 from/to Level 2 during the Successor period April 2 through June 30, 2017, and the Predecessor periods January 1 through April 1, 2017, and the three and six months ended June 30, 2016 were due to the relative value of unobservable inputs to the total fair value measurement of certain derivative contracts falling below, or in the case of transfers in rising above, the 10% threshold. The Company’s policy is to value all transfers between levels using the beginning of period valuation. The following table summarizes the changes in net unrealized (losses) gains relating to Level 3 net financial assets held both as of the beginning and the end of the period:
| Successor | Predecessor |  | Successor | Predecessor
| April 2 through June 30, 2017 | Three Months Ended June 30, 2016 |  | April 2 through June 30, 2017 | January 1 through April 1, 2017 | Six Months Ended June 30, 2016
| (Dollars in millions)
Changes in unrealized (losses) gains (1) | $ | — |  | $ | (0.1 | ) |  | $ | — |  | $ | 0.3 |  | $ | (0.2 | )
(1) | Within the unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of comprehensive income for the periods presented, unrealized gains and losses from Level 3 items are combined with unrealized gains and losses on positions classified in Level 1 or 2, as well as other positions that have been realized during the applicable periods.
As of June 30, 2017, future net cash realizations of the Company's trading portfolio are expected to be immaterial. 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 June 30, 2017, 59% of the Company’s credit exposure related to coal trading activities was with investment grade counterparties, while 32% was with non-investment grade counterparties and 9% 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 June 30, 2017 and December 31, 2016, the Company posted a net variation margin of $16.0 million and $57.4 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. During the quarter, the Company’s initial margin requirement was reduced, and as a result the Company posted initial margin of $8.6 million as of June 30, 2017, compared to $16.2 million as of December 31, 2016, which is reflected in “Other current assets” in the condensed consolidated balance sheets. As of June 30, 2017, the Company had posted $1.5 million in excess of the required variation and initial margin, while at December 31, 2016, the Company was in receipt of $2.0 million of this required amount. 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 June 30, 2017 and December 31, 2016, would have amounted to collateral postings to counterparties of approximately $1 million and $2 million, respectively. As of June 30, 2017, the Company was required to post no collateral to counterparties for such positions. Approximately $1 million collateral was required to be posted to counterparties as of December 31, 2016. 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 second quarter of 2017, two of the major rating agencies upgraded the Company's corporate credit rating upon emergence from the Chapter 11 proceedings. The Company’s collateral requirement owed to its counterparties for these ratings based derivative trading instruments for June 30, 2017 remained at zero, consistent with December 31, 2016. As of June 30, 2017 and December 31, 2016, no collateral was posted to counterparties to support such derivative trading instruments.

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