DERIVATIVE INSTRUMENTS AND HEDGES

12 Months Ended

Dec. 31, 2011

DERIVATIVE INSTRUMENTS AND HEDGES

13.    DERIVATIVE INSTRUMENTS AND HEDGES

In the normal course of business, we utilize derivatives contracts as part of our risk management strategy to manage our exposure to market fluctuations in energy prices and interest rates.  These instruments are subject to credit and market risks in excess of the amount recorded on the balance sheet in accordance with generally accepted accounting principles.  Controls and monitoring procedures for these instruments have been established and are routinely reevaluated.  Credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract.  The measure of credit exposure is the replacement cost of contracts with a positive fair value.  We manage credit risk by entering into financial instrument transactions only through approved counterparties.  Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in commodity prices.  We manage market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken.

Derivative instruments are recorded on the balance sheet as other assets or other liabilities measured at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters.  Where observable prices or inputs are not available, valuation models may be applied.  For a cash flow hedge accounted for under ASC Topic 815, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income.  Any ineffective portion of a cash flow hedge is recognized currently in earnings.  Cash flows from derivative contracts are reported as operating activities on the consolidated statements of cash flows.

We enter into fixed-price energy swaps as hedges designed to mitigate the risk of changes in commodity prices for future purchase commitments.  These fixed-price swaps involve he exchange of net cash settlements, based on changes in the price of the underlying commodity index compared to the fixed price offering, at specified intervals without the exchange of any underlying principal.  Historically, we have designated our energy hedging relationships as cash flow hedges under ASC Topic 815 with net gains or losses attributable to effective hedging recorded in Accumulated other comprehensive income and any ineffectiveness recognized in Cost of products sold.  Amounts recorded in Accumulated other comprehensive income are expected to be reclassified into Cost of products sold in the period in which the hedged cash flows affect earnings.  In 2011, we de-designated certain energy-related cash flow hedges which ceased to achieve high correlation.  The amount in Accumulated other comprehensive income at the time the contracts were de-designated is transferred to earnings when the contracts settle, or sooner if management determines that the forecasted transaction is probable of not occurring.  For these contracts and for all similar contracts initiated after we no longer achieved high correlation, gains or losses attributable to changes in fair value are recognized in current earnings. These derivative instruments continue to be utilized as economic hedges designed to mitigate the risk of changes in commodity prices for future energy purchase and sale commitments.

In February 2008, we entered into a $250 million notional value receive-variable, pay-fixed interest rate swap hedging the cash flow exposure of the quarterly variable-rate interest payments due to changes in the benchmark interest rate (three-month LIBOR) on our second priority senior secured floating-rate notes.  During 2009, we repurchased $69.8 million of the hedged notes and de-designated the interest-rate swap hedging the interest payments on the debt.  During 2010 and 2009, $0.3 million and $0.3 million of losses, respectively, were recognized in Other income, net in the consolidated statement of operations.  The swap expired on February 1, 2010.

The following table presents information about the volume and fair value amounts of our derivative instruments:

	December 31, 2011							December 31, 2010
			Fair Value Measurements							Fair Value Measurements					Balance
	Notional		Derivative		Derivative			Notional		Derivative		Derivative			Sheet
(Dollars in thousands)	Amount		Asset		Liability			Amount		Asset		Liability			Location
Derivatives contracts designated as
hedging instruments
Fixed price energy swaps - MMBtu's		2,988,107	$	-	$	(4,680	)		5,748,733	$	142	$	(2,505	)	Other assets/ Accrued liabilties
Derivatives contracts not designated
as hedging instruments
Fixed price energy swaps - MMBtu's		4,891,187	$	-	$	(7,663	)		-	$	-	$	-		Accrued liabilties

The following tables present information about the effect of our derivative instruments on Accumulated other comprehensive income and the consolidated statements of operations:

	Loss Recognized						Loss Reclassified									Location of
	in Accumulated OCI						from Accumulated OCI									Loss on
	December 31,						Year Ended December 31,									Statements
(Dollars in thousands)	2011			2010			2011			2010			2009			of Operations
Derivatives contracts designated as
hedging instruments
Fixed price energy swaps(1)	$	(4,826	)	$	(2,476	)	$	(2,838	)	$	(8,505	)	$	(36,723	)	(2)
Interest rate swaps, receive-variable, pay-fixed		-			-			-			(281	)		(3,511	)	(3)
(1) Net losses at December 31, 2011, are expected to be reclassified from Accumulated other comprehensive income into earnings within the next 23 months.
(2) Location of loss reclassified from Accumulated OCI to earnings is included in Cost of products sold.
(3) Location of loss reclassified from Accumulated OCI to earnings is included in Interest expense.

										Loss Recognized
	Loss Recognized									on Derivative Contracts									Location of
	on Derivative Contracts									(Ineffective Portion)									Loss on
	Year Ended December 31,																		Statements
(Dollars in thousands)	2011			2010			2009			2011			2010			2009			of Operations
Derivatives contracts designated as
hedging instruments
Fixed price energy swaps(1)	$	(1,121	)	$	(921	)	$	(4,652	)	$	(68	)	$	(132	)	$	(92	)	(1)
Derivatives contracts not designated
as hedging instruments
Fixed price energy swaps	$	(8,643	)	$	-		$	-											(1)
Interest rate swaps, receive-variable, pay-fixed		-			-			(1,257	)										(2)
(1) Location of loss recognized in earnings is included in Cost of products sold.
(2) Location of loss recognized in earnings is included in Interest expense and Other income, net.