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Derivatives and Fair Value Measurements | 3 Months Ended
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Mar. 31, 2020
Fair Value Disclosures [Abstract] |
Derivatives and Fair Value [Text Block] | Derivatives and Fair Value Measurements Derivatives Corporate Risk Management Activities 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. As of March 31, 2020, the Company had currency options outstanding with an aggregate notional amount of $550.0 million Australian dollars to hedge currency risk associated with anticipated Australian dollar expenditures over the six-month period ending September 30, 2020. 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 $0.73 to $0.75 over the six-month period ending September 30, 2020. As of March 31, 2020, the Company held coal-related financial contracts related to a portion of its forecasted sales for an aggregate notional volume of 1.6 million tonnes. Such financial contracts include futures, forwards and options. Of the aggregate notional volume, 1.3 million tonnes will settle in 2020 and the remainder will settle in 2021. The Company had no diesel fuel or interest rate derivatives in place as of March 31, 2020. Coal Trading Activities On a limited basis, 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. Coal brokering is conducted both as principal and agent in support of various coal production-related activities that may involve coal produced from the Company’s mines, coal sourcing arrangements with third-party mining companies or offtake agreements with other coal producers. The Company also provides transportation-related services, which involve both financial derivative contracts and physical contracts. Collectively, coal and freight-related hedging activities include both economic hedging and, from time to time, cash flow hedging in support of the Company’s coal trading strategy. Revenues from such transactions 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. Offsetting and Balance Sheet Presentation 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 Company’s coal trading assets and liabilities include financial instruments 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. The fair value of derivatives reflected in the accompanying condensed consolidated balance sheets are set forth in the table below.
| March 31, 2020 |  | December 31, 2019
| Asset Derivative |  | Liability Derivative |  | Asset Derivative |  | Liability Derivative
| (Dollars in millions)
Foreign currency option contracts | $ | 0.2 |  |  | $ | — |  |  | $ | 1.1 |  |  | $ | — |
Coal contracts related to forecasted sales | 18.9 |  |  | (0.8 | ) |  | 20.1 |  |  | (0.1 | )
Coal trading contracts | 71.8 |  |  | (69.6 | ) |  | 81.1 |  |  | (74.2 | )
Total derivatives | 90.9 |  |  | (70.4 | ) |  | 102.3 |  |  | (74.3 | )
Effect of counterparty netting | (69.6 | ) |  | 69.6 |  |  | (74.3 | ) |  | 74.3 |
Variation margin (held) posted | (16.8 | ) |  | — |  |  | (22.1 | ) |  | — |
Net derivatives and margin as classified in the balance sheets | $ | 4.5 |  |  | $ | (0.8 | ) |  | $ | 5.9 |  |  | $ | — |
The net amount of asset derivatives, net of margin, are included in “Other current assets” and the net amount of liability derivatives, net of margin, are included in “Accounts payable and accrued expenses” in the accompanying condensed consolidated balance sheets. Effects of Derivatives on Measures of Financial Performance Currently, the Company does not seek cash flow hedge accounting treatment for its currency- or coal-related 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.
| Three Months Ended March 31, 2020
| Total loss recognized in income |  | (Loss) gain realized in income on derivatives |  | Unrealized gain (loss) recognized in income on derivatives
Financial Instrument |  |
| (Dollars in millions)
Foreign currency option contracts | $ | (0.9 | ) |  | $ | (1.0 | ) |  | $ | 0.1 |
Coal contracts related to forecasted sales | (8.6 | ) |  | (6.4 | ) |  | (2.2 | )
Coal trading contracts | (0.1 | ) |  | 4.1 |  |  | (4.2 | )
Total | $ | (9.6 | ) |  | $ | (3.3 | ) |  | $ | (6.3 | )
| Three Months Ended March 31, 2019
| Total (loss) gain recognized in income |  | (Loss) gain realized in income on derivatives |  | Unrealized gain recognized in income on derivatives
Financial Instrument |  |
| (Dollars in millions)
Foreign currency option contracts | $ | (1.1 | ) |  | $ | (1.3 | ) |  | $ | 0.2 |
Coal contracts related to forecasted sales | 50.7 |  |  | 10.9 |  |  | 39.8 |
Coal trading contracts | (1.1 | ) |  | (4.8 | ) |  | 3.7 |
Total | $ | 48.5 |  |  | $ | 4.8 |  |  | $ | 43.7 |
During the three months ended March 31, 2020 and 2019, gains and losses on foreign currency option contracts were included in “Operating costs and expenses,” and gains and losses on coal contracts related to forecasted sales and those related to coal trading contracts were included in “Revenues” in the accompanying unaudited condensed consolidated statements of operations. 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 financial asset positions for which fair value is measured on a recurring basis:
| March 31, 2020
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (Dollars in millions)
Foreign currency option contracts | $ | — |  |  | $ | 0.2 |  |  | $ | — |  |  | $ | 0.2 |
Coal contracts related to forecasted sales | — |  |  | 20.0 |  |  | — |  |  | 20.0 |
Coal trading contracts | — |  |  | (16.5 | ) |  | — |  |  | (16.5 | )
Equity securities | — |  |  | — |  |  | 4.0 |  |  | 4.0 |
Total net financial assets | $ | — |  |  | $ | 3.7 |  |  | $ | 4.0 |  |  | $ | 7.7 |
| December 31, 2019
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (Dollars in millions)
Foreign currency option contracts | $ | — |  |  | $ | 1.1 |  |  | $ | — |  |  | $ | 1.1 |
Coal contracts related to forecasted sales | — |  |  | 21.2 |  |  | — |  |  | 21.2 |
Coal trading contracts | — |  |  | (16.4 | ) |  | — |  |  | (16.4 | )
Equity securities | — |  |  | — |  |  | 4.0 |  |  | 4.0 |
Total net financial assets | $ | — |  |  | $ | 5.9 |  |  | $ | 4.0 |  |  | $ | 9.9 |
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:
• | 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.
• | Coal contracts related to forecasted sales and coal 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 based on observed prices in an inactive market (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 March 31, 2020 and December 31, 2019:
• | 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).
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, which have been limited in recent history.
| March 31, 2020 | December 31, 2019
| (Dollars in millions)
Total debt at par value | $ | 1,360.1 |  |  | $ | 1,367.2 |
Less: Unamortized debt issuance costs and original issue discount | (53.2 | ) |  | (56.4 | )
Net carrying amount | $ | 1,306.9 |  |  | $ | 1,310.8 |
Estimated fair value | $ | 793.5 |  |  | $ | 1,271.1 |
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. 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 Company had no transfers between Levels 1, 2 and 3 during the three months ended March 31, 2020 and 2019. The Company’s policy is to value all transfers between levels using the beginning of period valuation. Credit and Nonperformance 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. Performance Assurances and Collateral 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. The Company posted initial margin of $5.6 million and $7.9 million as of March 31, 2020 and December 31, 2019, respectively, which is reflected in “Other current assets” in the condensed consolidated balance sheets. As of March 31, 2020 and December 31, 2019, respectively, the Company had posted $2.8 million and $1.3 million in excess of margin requirements. 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. As of March 31, 2020 and December 31, 2019, respectively, the Company was in receipt of $16.8 million and $22.1 million in variation margin. 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 which the Company holds a net liability position. Based on the aggregate fair values of such net liability positions at March 31, 2020 and December 31, 2019, the Company would have been required to post additional collateral of $0.8 million and approximately $0.0 million, respectively. As of March 31, 2020 and December 31, 2019, the Company was not required to post collateral to counterparties for such positions.

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