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 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)	December 31, 2012			December 31, 2011
Derivatives designated as hedging instruments under FASB ASC 815:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate contract	Derivative asset	$	298	Derivative asset	$	3,606
Total designated		298			3,606
Derivatives not designated as hedging instruments under FASB ASC 815:
Currency contracts	Prepaid and other current assets	41		Prepaid and other current assets	107
Total undesignated		41			107
Total		$	339		$	3,713
	Liability Derivatives:
(dollars in thousands)	December 31, 2012			December 31, 2011
Derivatives designated as hedging instruments under FASB ASC 815:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Natural gas contracts	Derivative liability - current	$	420	Derivative liability - current	$	3,390
Natural gas contracts		—		Other long-term liabilities	298
Total designated		420			3,688
Total		$	420		$	3,688

Interest Rate Swaps as Fair Value Hedges

In 2010, we entered into an interest rate swap agreement (Old Rate Agreement) with a notional amount of $100.0 million that was to mature in 2015. 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. Until April 18, 2012, the notional amount of the Old Rate Agreement was $80.0 million. On April 18, 2012, the swap was called at fair value. We received proceeds of $3.6 million. During the second quarter, $0.1 million of the carrying value adjustment on debt related to the Old Rate Agreement was amortized into interest expense. Upon the refinancing of the Old Senior Secured Notes, the remaining unamortized balance of $3.5 million of the carrying value adjustment on debt related to the Old Rate Agreement was recognized as a gain in the loss on redemption of debt on the Consolidated Statements of Operations.

On June 18, 2012, we entered into an interest rate swap agreement (New Rate Agreement) with a notional amount of $45.0 million that is to mature in 2020. The swap was executed in order to convert a portion of the New Senior Secured Notes fixed rate debt into floating rate debt and maintain a capital structure containing fixed and floating rate debt.

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 (expense), along with the offsetting loss or gain on the related interest rate swap, on the Consolidated Statements of Operations.

The following table provides a summary of the gain (loss) recognized in the Consolidated Statements of Operations:



Year ended December 31, (dollars in thousands)	2012		2011			2010
Interest rate swap	$	147	$	1,070		$	2,536
Related long-term debt	3,635		(777		)	(3,266		)
Net impact	$	3,782	$	293		$	(730	)

The gain or loss on the hedged long-term debt netted with the offsetting loss or gain on the related interest rate swap was recorded on the Consolidated Statements of Operations as follows:



Year ended December 31, (dollars in thousands)	2012		2011		2010
Loss on redemption of debt	$	3,502	$	—	$	—
Other income (expense)	280		293		(730		)
Net impact	$	3,782	$	293	$	(730	)

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 December 31, 2012, we had commodity contracts for 2,400,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2011, we had commodity contracts for 3,070,000 million BTUs of natural gas.

All of our natural gas derivatives qualify and are designated as cash flow hedges at December 31, 2012. 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 Consolidated Statement of Operations. We paid additional cash of $4.7 million, $4.7 million and $8.6 million in the years ended December 31, 2012, 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 $0.4 million of expense in our Consolidated Statements of Operations.

The following table provides a summary of the effective portion of derivative gain (loss) recognized in other comprehensive income (loss):



Year ended December 31, (dollars in thousands)	2012			2011			2010
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	(1,439	)	$	(5,263	)	$	(6,362	)
Total	$	(1,439	)	$	(5,263	)	$	(6,362	)

The following table provides a summary of the effective portion of derivative gain (loss) reclassified from accumulated other comprehensive loss to the Consolidated Statements of Operations:



Year ended December 31, (dollars in thousands)	Location:	2012			2011			2010
Natural gas contracts	Cost of sales	$	(4,707	)	$	(4,639	)	$	(8,962	)
Total impact on net income (loss)		$	(4,707	)	$	(4,639	)	$	(8,962	)

Currency Contracts

Our foreign currency exposure arises from transactions denominated in a currency other than the U.S. dollar primarily associated with our Canadian dollar denominated accounts receivable. During 2010, we entered into a series of foreign currency contracts to sell Canadian dollars. As of December 31, 2012 and December 31, 2011, we had contracts for C$14.8 million and C$3.9 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 (losses) for derivatives that were not designated as hedging instruments are recorded in current earnings as follows:



Year ended December 31, (dollars in thousands)	Location:	2012			2011		2010
Currency contracts	Other income (expense)	$	(24	)	$	257	$	(150	)
Total		$	(24	)	$	257	$	(150	)

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 New Rate Agreement is rated A+ and the counterparties for the other derivative agreements are rated BBB+ or better as of December 31, 2012, by Standard and Poor’s.