Derivatives

We utilize derivative financial instruments to hedge certain interest rate risks associated with our long-term debt, commodity price risks associated with forecasted future natural gas requirements and foreign exchange rate risks associated with transactions denominated in a currency other than the U.S. dollar. Most of these derivatives, except for certain natural gas contracts originally designated to hedge expected purchases at Syracuse China and the foreign currency contracts, qualify for hedge accounting since the hedges are highly effective, and we have designated and documented contemporaneously the hedging relationships involving these derivative instruments. While we intend to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective or if we do not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be reflected in our earnings. All of these contracts were accounted for under FASB ASC 815 “Derivatives and Hedging.”

Fair Values

The following table provides the fair values of our derivative financial instruments for the periods presented:



	Asset Derivatives:
(dollars in thousands)	September 30, 2011			December 31, 2010
Derivatives designated as hedging instruments under FASB ASC 815:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate contract	Derivative asset	$	4,075	Derivative asset	$	2,536
Natural gas contracts	Derivative asset	—		Derivative asset	53
Total designated		4,075			2,589
Derivatives not designated as hedging instruments under FASB ASC 815:
Currency contracts	Prepaid and other current assets	458		Prepaid and other current assets	—
Total undesignated		458			—
Total		$	4,533		$	2,589

	Liability Derivatives:
(dollars in thousands)	September 30, 2011			December 31, 2010
Derivatives designated as hedging instruments under FASB ASC 815:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Natural gas contracts	Derivative liability	$	1,891	Derivative liability	$	3,117
Natural gas contracts	Other long-term liabilities	81		Other long-term liabilities	—
Total designated		1,972			3,117
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Derivative liability	—		Derivative liability	124
Currency contracts	Derivative liability	—		Derivative liability	151
Total undesignated		—			275
Total		$	1,972		$	3,392

Interest Rate Swaps as Fair Value Hedges

In the first quarter of 2010, we entered into an interest rate swap agreement with a notional amount of $100.0 million that is to mature in 2015. The swap was executed in order to convert a portion of the Senior Secured Note fixed rate debt into floating rate debt and maintain a capital structure containing appropriate amounts of fixed and floating rate debt. In August 2010, $10.0 million of the swap was called for a premium of $0.3 million. In August 2011, an additional $10.0 million of the swap was called for a premium of $0.3 million. As of September 30, 2011, the notional amount of the interest rate swap agreement is $80.0 million.

Our fixed-to-floating interest rate swap is designated and qualifies as a fair value hedge. The change in the fair value of the derivative instrument related to the future cash flows (gain or loss on the derivative), as well as the offsetting change in the fair value of the hedged long-term debt attributable to the hedged risk, are recognized in current earnings. We include the gain or loss on the hedged long-term debt in other income, along with the offsetting loss or gain on the related interest rate swap, on the Condensed Consolidated Statements of Operations.

Amount of gain (loss) recognized in other income



	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2011			2010			2011			2010
Interest rate swap	$	740		$	1,740		$	1,539		$	3,229
Related long-term debt	(535		)	(1,977		)	(842		)	(3,050		)
Net impact on other income	$	205		$	(237	)	$	697		$	179

Commodity Future Contracts Designated as Cash Flow Hedges

We use commodity futures contracts related to forecasted future North American natural gas requirements. The objective of these futures contracts and other derivatives is to limit the fluctuations in prices paid due to price movements in the underlying commodity. We consider our forecasted natural gas requirements in determining the quantity of natural gas to hedge. We combine the forecasts with historical observations to establish the percentage of forecast eligible to be hedged, typically ranging from 40 percent to 70 percent of our anticipated requirements, up to eighteen months in the future. The fair values of these instruments are determined from market quotes. As of September 30, 2011, we had commodity contracts for 2,640,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2010, we had commodity contracts for 3,090,000 million BTUs of natural gas.

All of our natural gas derivatives qualify and are designated as cash flow hedges at September 30, 2011. Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses would be recorded to earnings immediately. Changes in the effective portion of the fair value of these hedges are recorded in other comprehensive income (loss). The ineffective portion of the change in the fair value of a derivative designated as a cash flow hedge is recognized in current earnings. As the natural gas contracts mature, the accumulated gains (losses) for the respective contracts are reclassified from accumulated other comprehensive loss to current expense in cost of sales in our Condensed Consolidated Statement of Operations. We paid additional cash of $1.3 million and $2.1 million in the three months ended September 30, 2011 and 2010, respectively, and $3.4 million and $5.2 million in the nine months ended September 30, 2011 and 2010, respectively, due to the difference between the fixed unit rate of our natural gas contracts and the variable unit rate of our natural gas cost from suppliers. Based on our current valuation, we estimate that accumulated losses currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in $1.9 million of expense in our Condensed Consolidated Statement of Operations.

Amount of derivative gain/(loss) recognized in OCI (effective portion)



	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2011			2010			2011			2010
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	(1,587	)	$	(2,667	)	$	(2,223	)	$	(6,816	)
Total	$	(1,587	)	$	(2,667	)	$	(2,223	)	$	(6,816	)

Gain / (loss) reclassified from Accumulated Other Comprehensive Loss

to Condensed Consolidated Statements of Operations (effective portion)



		Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)		2011			2010			2011			2010
Derivative:	Location:
Natural gas contracts	Cost of sales	$	(1,340	)	$	(2,097	)	$	(3,382	)	$	(5,213	)
Total impact on net (loss) income		$	(1,340	)	$	(2,097	)	$	(3,382	)	$	(5,213	)

Currency Contracts

Our foreign currency exposure arises from transactions denominated in a currency other than the U.S. dollar. During 2010, we entered into a series of foreign currency contracts to sell Canadian dollars. As of September 30, 2011 and December 31, 2010, we had contracts for C$8.2 million and C$18.7 million, respectively. The fair values of these instruments are determined from market quotes. The values of these derivatives will change over time as cash receipts and payments are made and as market conditions change.

Gains and losses for derivatives that were not designated as hedging instruments are recorded in current earnings as follows:



		Three months ended September 30,					Nine months ended September 30,
(dollars in thousands)		2011		2010			2011		2010
Derivative:	Location:
Currency contracts	Other income	$	934	$	(491	)	$	608	$	148
Total		$	934	$	(491	)	$	608	$	148

We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap, natural gas hedges and currency contracts as the counterparties are established financial institutions. The counterparty for the Interest Rate Agreement is rated AA and the counterparties for the other derivative agreements are rated BBB+ or better as of September 30, 2011, by Standard and Poor’s.