PEABODY ENERGY CORP 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk. Coal Pricing Risk The Company predominantly manages its commodity price risk for its non-trading, long-term coal contract portfolio through the use of long-term coal supply agreements (those with terms longer than one year) to the extent possible, rather than through the use of derivative instruments. As of March 31, 2023, the Company had approximately 109 million tons of U.S. thermal coal priced and committed for 2023. This includes approximately 91 million tons of PRB coal and 18 million tons of other U.S. thermal coal. The Company has the flexibility to increase volumes should demand warrant. Peabody is estimating full year 2023 thermal coal sales volumes from its Seaborne Thermal Mining segment of 14.5 million to 15.5 million tons comprised of thermal export volume of 9.0 million to 10.0 million tons and domestic volume of 5.5 million tons. Peabody is estimating full year 2023 metallurgical coal sales from its Seaborne Metallurgical Mining segment of 7.0 million to 8.0 million tons. Sales commitments in the metallurgical coal market are typically not long-term in nature, and the Company is therefore subject to fluctuations in market pricing. The Company’s sensitivity to market pricing in thermal coal markets is dependent on the duration of contracts. As of March 31, 2023, the Company held coal derivative contracts related to a portion of its forecasted sales with an aggregate notional volume of 0.3 million tonnes. Such financial contracts may include futures, forwards and options. The notional volume is related predominately to financial derivatives entered to support the profitability of the Wambo Underground Mine as part of a strategy to extend the mine’s life. All such tonnes will settle in 2023. The Newcastle thermal coal index was $178.53 per tonne on March 31, 2023, and the Company had posted $48.8 million of variation margin for the related derivative contracts at such date. A change in the Newcastle forward curve of $100 per tonne would increase or decrease the Company’s variation margin requirement by approximately $26 million and result in comparable unrealized gains or losses. Foreign Currency Risk The Company has historically utilized currency forwards and options to hedge currency risk associated with anticipated Australian dollar expenditures. The accounting for these derivatives is discussed in Note 5. “Derivatives and Fair Value Measurements” to the accompanying unaudited condensed consolidated financial statements. As of March 31, 2023, the Company had currency options outstanding with an aggregate notional amount of $632.0 million Australian dollars to hedge currency risk associated with anticipated Australian dollar expenditures over the nine-month period ending December 31, 2023. As of March 31, 2023, the Company also had purchased collars with an aggregate notional amount of $350.0 million Australian dollars related to the third and fourth quarters of 2023. Assuming the Company had no foreign currency hedging instruments in place, its exposure in operating costs and expenses due to a $0.10 change in the Australian dollar/U.S. dollar exchange rate is approximately $205 million for the next twelve months. Based upon the Australian dollar/U.S. dollar exchange rate at March 31, 2023, the currency option contracts outstanding at that date would limit the Company’s exposure to approximately $167 million with respect to a $0.10 increase in the exchange rate and approximately $184 million with respect to a $0.10 decrease in the exchange rate for the next twelve months. Diesel Fuel Price Risk The Company expects to consume 100 to 110 million gallons of diesel fuel during the next twelve months. A $10 per barrel change in the price of crude oil (the primary component of a refined diesel fuel product) would increase or decrease its annual diesel fuel costs by approximately $25 million based on its expected usage. As of March 31, 2023, the Company did not have any diesel fuel derivative instruments in place. The Company partially manages the price risk of diesel fuel through the use of cost pass-through contacts with certain customers.