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. These derivatives, except for the foreign currency contracts and the natural gas contracts used in our Mexican manufacturing facilities, 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 (as is the case for natural gas contracts used in our Mexico manufacturing facility) 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, 2015			December 31, 2014
Derivatives not designated as hedging instruments under FASB ASC 815:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Currency contracts	Prepaid and other current assets	$	250	Prepaid and other current assets	$	403
Total undesignated		250			403
Total		$	250		$	403

	Liability Derivatives:
(dollars in thousands)	September 30, 2015			December 31, 2014
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	$	1,066	Derivative liability - current	$	1,222
Natural gas contracts	Other long-term liabilities	56		Other long-term liabilities	103
Interest rate contract	Derivative liability - current	1,557		Derivative liability - current	—
Interest rate contract	Other long-term liabilities	1,665		Other long-term liabilities	—
Total designated		4,344			1,325
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Derivative liability - current	1,194		Derivative liability - current	1,431
Natural gas contracts	Other long-term liabilities	25		Other long-term liabilities	112
Total undesignated		1,219			1,543
Total		$	5,563		$	2,868

Natural Gas Contracts

We use natural gas swap contracts related to forecasted future North American natural gas requirements. The objective of these commodity 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 September 30, 2015, we had commodity contracts for 3,120,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2014, we had commodity contracts for 3,850,000 million BTUs of natural gas.

All of our derivatives for natural gas in the U.S. qualify and are designated as cash flow hedges at September 30, 2015. 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.

In the three and nine months ended September 30, 2015, we recognized a gain of $0.2 million and $0.6 million, respectively, in other income (expense) in the Condensed Consolidated Statements of Operations related to the marked-to-market change in our de-designated Mexico natural gas derivatives. These natural gas derivatives were de-designated in the fourth quarter of 2014 due to ineffectiveness created by changes in the natural gas price resulting from a fluctuating surcharge initiated by the Mexican government on the price of natural gas. As instructed under FASB ASC 815 "Derivatives and Hedging", all marked-to-market changes on these derivatives are being reflected in current earnings. The accumulated balance in other comprehensive income (loss) for these de-designated contracts will remain until the hedging contracts are utilized or expire. Since we have not elected hedge accounting for any new Mexico natural gas contracts entered into beginning October 1, 2014, all marked-to-market changes on these derivatives are being reflected in other income (expense) in current earnings. We recognized a loss of $(0.2) million and $(0.5) million in other income (expense) in the three and nine months ended September 30, 2015, respectively, related to the natural gas contracts where hedge accounting was not elected.

We received (paid) additional cash of $(1.0) million and $(0.1) million in the three months ended September 30, 2015 and September 30, 2014, respectively, and $(3.2) million and $0.8 million in the nine months ended September 30, 2015 and September 30, 2014, 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 $1.1 million of loss in our Condensed Consolidated Statements of Operations.

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



	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2015			2014			2015			2014
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	(489	)	$	(670	)	$	(1,265	)	$	(164	)
Total	$	(489	)	$	(670	)	$	(1,265	)	$	(164	)

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



		Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)		2015			2014			2015			2014
Derivative:	Location:
Natural gas contracts	Cost of sales	$	(448	)	$	(58	)	$	(1,468	)	$	756
Total impact on net income (loss)		$	(448	)	$	(58	)	$	(1,468	)	$	756

The ineffective portion of derivative loss related to the de-designated Mexico contracts reclassified from accumulated other comprehensive loss to cost of sales in the Condensed Consolidated Statements of Operations was immaterial.

The following table provides a summary of the gain (loss) recognized in other income (expense) in the Condensed Consolidated Statements of Operations from our natural gas contracts:



	Three months ended September 30,					Nine months ended September 30,
(dollars in thousands)	2015			2014		2015			2014
De-designated contracts	$	180		$	—	$	584		$	—
Contracts where hedge accounting was not elected	(222		)	—		(459		)	—
Total	$	(42	)	$	—	$	125		$	—

Interest Rate Swap

On April 1, 2015, we executed an interest rate swap on our Term Loan B as part of our risk management strategy to mitigate the risks involved with fluctuating interest rates. The interest rate swap will effectively convert $220.0 million of our Term Loan B debt from a variable interest rate to a 4.85 percent fixed interest rate, thus reducing the impact of interest rate changes on future income. The fixed rate swap will be effective January 2016 through January 2020. This interest rate swap is valued using the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves.

Our interest rate swap qualifies and is designated as a cash flow hedge at September 30, 2015 and accounted for under FASB ASC 815 "Derivatives and Hedging". 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, if any, of the change in the fair value of a derivative designated as a cash flow hedge is recognized in current earnings.

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



	Three months ended September 30,					Nine months ended September 30,
(dollars in thousands)	2015			2014		2015			2014
Derivatives in Cash Flow Hedging relationships:
Interest Rate Swap	$	(3,211	)	$	—	$	(3,222	)	$	—
Total	$	(3,211	)	$	—	$	(3,222	)	$	—

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. At September 30, 2015 and December 31, 2014, we had C$6.3 million in foreign currency contracts. 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) on currency 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)		2015		2014		2015			2014
Derivative:	Location:
Currency contracts	Other income (expense)	$	135	$	461	$	(152	)	$	274
Total		$	135	$	461	$	(152	)	$	274

We do not believe we are exposed to more than a nominal amount of credit risk in our natural gas hedges, interest rate swap and currency contracts as the counterparties are established financial institutions. The counterparties for the derivative agreements are rated BBB+ or better as of September 30, 2015, by Standard and Poor’s.