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SEC Filings

10-Q
ARCH COAL INC filed this Form 10-Q on 10/31/2017
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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
We manage our commodity price risk for our non-trading, thermal coal sales through the use of long-term coal supply agreements, and to a limited extent, through the use of derivative instruments.  Sales commitments in the metallurgical coal market are typically not long term in nature, and we are therefore subject to fluctuations in market pricing. 
 
Our sales commitments for 2017 and 2018 were as follows as of October 31, 2017 :
 
 
 
2017
 
2018
 
 
Tons
 
$ per ton
 
Tons
 
$ per ton
Metallurgical
 
(in millions)
 
 

 
(in millions)
 
 

Committed, Priced Coking
 
6.0

 
$
100.20

 
0.5

 
$
105.00

Committed, Unpriced Coking
 
0.6

 
 

 
2.4

 
 

 
 
 
 
 
 
 
 
 
Committed, Priced Thermal
 
0.9

 
$
24.86

 
0.4

 
$
30.45

Committed, Unpriced Thermal
 

 
 
 

 
 
 
 
 
 
 
 
 
 
 
Powder River Basin
 
 

 
 

 
 

 
 

Committed, Priced
 
81.1

 
$
12.47

 
47.5

 
$
12.05

Committed, Unpriced
 
0.9

 
 

 
2.8

 
 

 
 
 
 
 
 
 
 
 
Other Thermal
 
 

 
 

 
 

Committed, Priced
 
9.3

 
$
34.74

 
5.0

 
$
35.26

Committed, Unpriced
 

 
 

 

 
 

 
We are also exposed to commodity price risk in our coal trading activities, which represents the potential future loss that could be caused by an adverse change in the market value of coal. Our coal trading portfolio included swap and put and call option contracts at September 30, 2017. The estimated future realization of the value of the trading portfolio is $0.5 million of losses during the remainder of 2017 and 1.5 million of losses during the remainder of 2018.

We monitor and manage market price risk for our trading activities with a variety of tools, including Value at Risk (VaR), position limits, management alerts for mark to market monitoring and loss limits, scenario analysis, sensitivity analysis and review of daily changes in market dynamics. Management believes that presenting high, low, end of year and average VaR is the best available method to give investors insight into the level of commodity risk of our trading positions. Illiquid positions, such as long-dated trades that are not quoted by brokers or exchanges, are not included in VaR.
 
VaR is a statistical one-tail confidence interval and down side risk estimate that relies on recent history to estimate how the value of the portfolio of positions will change if markets behave in the same way as they have in the recent past. The level of confidence is 95%. The time across which these possible value changes are being estimated is through the end of the next business day. A closed-form delta-neutral method used throughout the finance and energy sectors is employed to calculate this VaR. VaR is back tested to verify its usefulness.
 
On average, portfolio value should not fall more than VaR on 95 out of 100 business days. Conversely, portfolio value declines of more than VaR should be expected, on average, 5 out of 100 business days. When more value than VaR is lost due to market price changes, VaR is not representative of how much value beyond VaR will be lost.

While presenting VaR will provide a similar framework for discussing risk across companies, VaR estimates from two independent sources are rarely calculated in the same way. Without a thorough understanding of how each VaR model was calculated, it would be difficult to compare two different VaR calculations from different sources.

During the nine months ended September 30, 2017, VaR for our coal trading positions that are recorded at fair value through earnings ranged from under $0.1 million to $0.5 million. The linear mean of each daily VaR was $0.2 million. The final VaR at September 30, 2017 was $0.5 million.
 

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