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, 2013			December 31, 2012
Derivatives designated as hedging instruments under FASB ASC 815:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate contract	Derivative asset	$	—	Derivative asset	$	298
Natural gas contracts	Prepaid and other current assets	394		Prepaid and other current assets	—
Natural gas contracts	Derivative asset	19		Derivative asset	—
Total designated		413			298
Derivatives not designated as hedging instruments under FASB ASC 815:
Currency contracts	Prepaid and other current assets	—		Prepaid and other current assets	41
Total undesignated		—			41
Total		$	413		$	339
	Liability Derivatives:
(dollars in thousands)	December 31, 2013			December 31, 2012
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	$	—	Derivative liability - current	$	420
Interest rate contract	Other long-term liabilities	1,866		Other long-term liabilities	—
Total designated		1,866			420
Derivatives not designated as hedging instruments under FASB ASC 815:
Interest rate contract	Other long-term liabilities	207		Other long-term liabilities	—
Total undesignated		207			—
Total		$	2,073		$	420

Interest Rate Swaps as Fair Value Hedges

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 Senior Secured Notes fixed rate debt into floating rate debt and maintain a capital structure containing fixed and floating rate debt.

Upon the refinance of the former Senior Secured Notes, the remaining unamortized balance 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. Refer to the Borrowing footnote for further discussion.

$40.5 million of our New Rate Agreement 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, along with the offsetting loss or gain on the related interest rate swap, in other income (expense), on the Consolidated Statements of Operations.

As of July 1, 2013, we de-designated 10 percent, or $4.5 million, of our New Rate Agreement. As a result, the mark-to-market of the $4.5 million portion of the New Rate Agreement is recorded in other income (expense) on the Consolidated Statement of Operations. For the year 2013, the mark-to-market adjustment was expense of $(0.2) million.

The following table provides a summary of the gain (loss) recognized in the Consolidated Statements of Operations from the designated portion of our New Rate Agreement:



Year ended December 31, (dollars in thousands)	2013			2012		2011
Interest rate swap - designated	$	1,732		$	147	$	1,070
Related long-term debt	(2,164		)	3,635		(777		)
Net impact	$	(432	)	$	3,782	$	293

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



Year ended December 31, (dollars in thousands)	2013			2012		2011
Loss on redemption of debt	$	—		$	3,502	$	—
Other income (expense)	(432		)	280		293
Net impact	$	(432	)	$	3,782	$	293

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 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, 2013, we had commodity contracts for 1,520,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2012, we had commodity contracts for 2,400,000 million BTUs of natural gas.

All of our natural gas derivatives qualify and are designated as cash flow hedges at December 31, 2013. 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. In the year ended December 31, 2013, we recognized a loss of $0.3 million for ineffectiveness in other income (expense) in the Consolidated Statements of Operations for certain contracts at our Mexico facility. This ineffectiveness was related to a change in pricing caused by the Mexican government instituting a fixed surcharge. The ineffectiveness is not expected to continue so we have continued to consider the contracts effective as appropriate under FASB ASC 815 "Derivatives and Hedging." We paid additional cash of $0.1 million, $4.7 million and $4.7 million in the years ended December 31, 2013, 2012 and 2011, 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 gains 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 income 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)	2013		2012			2011
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	777	$	(1,439	)	$	(5,263	)
Total	$	777	$	(1,439	)	$	(5,263	)

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:	2013			2012			2011
Natural gas contracts	Cost of sales	$	(57	)	$	(4,707	)	$	(4,639	)
Total impact on net income (loss)		$	(57	)	$	(4,707	)	$	(4,639	)

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. We enter into a series of foreign currency contracts to sell Canadian dollars. Although we had no contracts at December 31, 2013, we had contracts for C$14.8 million at December 31, 2012. 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:	2013			2012			2011
Currency contracts	Other income (expense)	$	(41	)	$	(24	)	$	257
Total		$	(41	)	$	(24	)	$	257

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, 2013, by Standard and Poor’s.