Derivatives and Fair Value Measurements

Risk Management — Corporate Hedging Activities

The Company is exposed to several risks in the normal course of business, including (1) foreign currency exchange rate risk for non-U.S. dollar expenditures and balances, (2) price risk on coal produced by and diesel fuel utilized in the Company’s mining operations and (3) interest rate risk that has been partially mitigated by fixed rates on long-term debt. The Company manages a portion of its price risk related to the sale of coal (excluding coal trading activities) using long-term coal supply agreements (those with terms longer than one year), rather than using derivative instruments. Derivative financial instruments have historically been used to manage the Company’s risk exposure to foreign currency exchange rate risk, primarily on Australian dollar expenditures made in its Australian mining platform. This risk was historically managed using forward contracts and options designated as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted foreign currency expenditures. The Company has also used derivative instruments to manage its exposure to the variability of diesel fuel prices used in production in the U.S. and Australia with swaps or options, which it has also designated as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted diesel fuel purchases. These risk management activities are collectively referred to as “Corporate Hedging” and are actively monitored for compliance with the Company’s risk management policies.

During the fourth quarter of 2015, the Company performed an assessment of its risk of nonperformance with respect to derivative financial instruments designated as cash flow hedges in light of three rating agencies downgrading the Company’s corporate credit rating during 2015 and declining financial results. The Company determined its hedging relationships were expected to be “highly effective” throughout 2015 based on its quarterly assessments. However, as a result of a deterioration in the Company’s credit profile, the Company could no longer conclude, as of December 31, 2015, that its hedging relationships were expected to be “highly effective” at offsetting the changes in the anticipated exposure of the hedged item. Therefore, the Company discontinued the application of cash flow hedge accounting subsequent to December 31, 2015 and changes in the fair value of derivative instruments have been recorded as operating costs and expenses in the accompanying consolidated statements of operations after that date. Previous fair value adjustments recorded in “Accumulated other comprehensive income (loss)” were frozen until the underlying transactions impacted the Company’s earnings.

The Company’s Bankruptcy Petitions constituted an event of default under the Company’s derivative financial instrument contracts and the counterparties terminated the agreements shortly thereafter in accordance with contractual terms. The terminated positions were first-lien obligations under the Company’s secured credit agreement dated September 24, 2013 (as amended, the 2013 Credit Facility). As of December 31, 2016, the resulting net settlement liability of $257.3 million was accounted for as a first lien prepetition liability subject to compromise without credit valuation adjustments. On the Effective Date, the net settlement liability was discharged in connection with the Plan, as further described in Note 2. “Emergence from the Chapter 11 Cases and Fresh Start Reporting.”

As of December 31, 2017, the Company had no diesel fuel derivatives in place. Subsequent to the Effective Date, the Company entered into a series of currency options and, as of December 31, 2017, had currency options outstanding with aggregate notional amount of $1,125.0 million Australian dollars to hedge currency risk associated with anticipated Australian dollar expenditures during the first nine months of 2018. The instruments are quarterly average rate options whereby the Company is entitled to receive payment on the notional amount should the quarterly average Australian dollar-to-U.S. dollar exchange rate exceed amounts ranging from $0.79 and $0.83 over the first nine months of 2018. The currency options are not expected to receive cash flow hedge accounting treatment and changes in fair value will be reflected in current earnings. At December 31, 2017, the currency options’ fair value of $4.2 million was included in “Other current assets” in the accompanying consolidated balance sheet.

The tables below show the classification and amounts of pre-tax gains and losses related to the Company’s Corporate Hedging derivatives during the period April 2 through December 31, 2017, January 1 through April 1, 2017 and the years ended December 31, 2016 and 2015:



		Successor
		April 2 through December 31, 2017
	Income Statement Classification	Total gain recognized in income		Gain realized in income on derivatives		Unrealized loss recognized in income on derivatives
Financial Instrument	Income Statement Classification	Total gain recognized in income		Gain realized in income on derivatives		Unrealized loss recognized in income on derivatives
		(Dollars in millions)
Foreign currency option contracts	Operating costs and expenses	$	1.8	$	3.3	$	(1.5	)
Total		$	1.8	$	3.3	$	(1.5	)



		Predecessor
		January 1 through April 1, 2017
	Income Statement Classification	Total loss recognized in income			Loss reclassified from other comprehensive loss into income
Financial Instrument	Income Statement Classification	Total loss recognized in income			Loss reclassified from other comprehensive loss into income
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	(11.0	)	$	(11.0	)
Foreign currency forward contracts	Operating costs and expenses	(16.6		)	(16.6		)
Total		$	(27.6	)	$	(27.6	)



		Predecessor
		Year Ended December 31, 2016
	Income Statement Classification	Total realized loss recognized in income			Loss reclassified from other comprehensive income into income (effective portion) ⁽¹⁾			(Loss) gain reclassified from other comprehensive income into income (ineffective portion)
Financial Instrument	Income Statement Classification	Total realized loss recognized in income
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	(98.0	)	$	(86.1	)	$	(11.9	)
Commodity swap contracts	Reorganization items, net	(38.8		)	—			(38.8		)
Foreign currency forward contracts	Operating costs and expenses	(142.9		)	(145.6		)	2.7
Foreign currency forward contracts	Reorganization items, net	(36.4		)	—			(36.4		)
Total		$	(316.1	)	$	(231.7	)	$	(84.4	)


⁽¹⁾	Includes the reclassification from "Accumulated other comprehensive loss" into earnings of $13.6 million and $9.0 million of previously unrecognized losses on foreign currency and fuel contracts, respectively, monetized in the first quarter of 2016.



		Predecessor
		Year Ended December 31, 2015
	Income Statement Classification	Loss recognized in other comprehensive income on derivative (effective portion)			Loss reclassified from other comprehensive income into income (effective portion) ⁽¹⁾			Gain reclassified from other comprehensive income into income (ineffective portion)
Financial Instrument	Income Statement Classification
		(Dollars in millions)
Commodity swap contracts	Operating costs and expenses	$	(77.0	)	$	(122.0	)	$	1.6
Foreign currency forward contracts	Operating costs and expenses	(122.0		)	(316.4		)	—
Total		$	(199.0	)	$	(438.4	)	$	1.6


⁽¹⁾	Includes the reclassification from "Accumulated other comprehensive loss" into earnings of $14.9 million of previously unrecognized gains on foreign currency cash flow hedge contracts monetized in the fourth quarter of 2012.

Cash Flow Presentation. The Company classifies the cash effects of its Corporate Hedging derivatives within the “Cash Flows From Operating Activities” section of the 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.

Financial Instruments Measured on a Recurring Basis. The following tables set forth the hierarchy of the Company’s net financial asset positions for which fair value is measured on a recurring basis:



	Successor
	December 31, 2017
	Level 1		Level 2		Level 3		Total
	(Dollars in millions)
Foreign currency option contracts	$	—	$	4.2	$	—	$	4.2
Total net financial assets	$	—	$	4.2	$	—	$	4.2

As of December 31, 2016, the Company had no outstanding financial positions.

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:


•	Commodity swap contracts: valued based on 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, then the Company classifies such contracts as Level 3.


•	Foreign currency forward and option contracts: 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.

The following table summarizes the changes related to the Company’s Corporate Hedging derivative financial instruments recurring Level 3 financial liabilities:



		Predecessor
		December 31, 2016
		Commodity Contracts			Foreign Currency Contracts			Total
	(Dollars in millions)
Beginning of period		$	123.7		$	200.7		$	324.4
Total net losses realized/unrealized:
Included in earnings		15.7			(48.0		)	(32.3		)
Settlements / terminations		(139.4		)	(152.7		)	(292.1		)
End of period		$	—		$	—		$	—

Other Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values for other financial instruments as of December 31, 2017 and 2016:


•	Cash and cash equivalents, restricted cash, accounts receivable, including those within the Company’s accounts receivable securitization program, 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 with an active trading market when available (Level 2), and otherwise on estimated borrowing rates to discount the cash flows to their present value (Level 3).

The estimated fair value of the Company’s current and long-term debt as of December 31, 2016 is unable to be determined given it was subject to compromise in connection with the Plan. The carrying amount and estimated fair value of the Company’s current and long-term debt as of December 31, 2017 are summarized as follows:



	Successor
	December 31, 2017
	Carrying Amount		Estimated Fair Value
	(Dollars in millions)
Current and Long-term debt	$	1,460.8	$	1,547.4

The Company had no transfers between Levels 1, 2 and 3 for either financial instruments measured on a recurring basis or other financial instruments during the Successor period April 2 through December 31, 2017, the Predecessor period January 1 through April 1, 2017 or the year ended December 31, 2016. The Company’s policy is to value all transfers between levels using the beginning of period valuation.