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 facility, 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)	December 31, 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	245		Prepaid and other current assets	403
Total undesignated		245			403
Total		$	245		$	403
	Liability Derivatives:
(dollars in thousands)	December 31, 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	$	1,069	Derivative liability - current	$	1,222
Natural gas contracts	Other long-term liabilities	34		Other long-term liabilities	103
Interest rate contract	Derivative liability - current	2,132		Derivative liability - current	—
Interest rate contract	Other long-term liabilities	246		Other long-term liabilities	—
Total designated		3,481			1,325
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Derivative liability - current	1,064		Derivative liability - current	1,431
Natural gas contracts	Other long-term liabilities	35		Other long-term liabilities	112
Total undesignated		1,099			1,543
Total		$	4,580		$	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 December 31, 2015, we had commodity contracts for 3,000,000 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 December 31, 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 other income. 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 Statements of Operations.

In the years ended December 31, 2015 and 2014, we recognized a gain (loss) of $0.9 million and $(1.2) million, respectively, in other income in the 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 other income. The accumulated balance in other comprehensive income (loss) for these de-designated contracts remained until the hedging contracts were utilized or expired. 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. We recognized a loss of $0.7 million and $0.1 million in other income in the year ended December 31, 2015 and 2014, respectively, related to the contracts where hedge accounting was not elected. In the year ended December 31, 2013, we recognized a loss of $0.3 million in other income in the Consolidated Statements of Operations for certain contracts at our Mexico facility related to ineffectiveness caused by the fluctuating surcharge on the Mexican natural gas price.

We received (paid) additional cash of $(4.6) million, $0.6 million and $(0.1) million in the years ended December 31, 2015, 2014 and 2013, 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 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)	2015			2014			2013
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	(1,909	)	$	(1,392	)	$	777
Total	$	(1,909	)	$	(1,392	)	$	777

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:	2015		2014		2013
Natural gas contracts	Cost of sales	$	2,131	$	573	$	(57	)
Total impact on net income (loss)		$	2,131	$	573	$	(57	)

The ineffective portion of derivative gain (loss) related to the de-designated Mexico contracts reclassified from accumulated other comprehensive loss to cost of sales in the Consolidated Statements of Operations was $0.2 million of income and an immaterial amount in the years ended December 31, 2015 and 2014, respectively.

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



Year ended December 31, (dollars in thousands)	2015			2014			2013
Designated contracts with ineffectiveness	$	—		$	—		$	(276	)
De-designated contracts	932			(1,236		)	—
Contracts where hedge accounting was not elected	(714		)	(81		)	—
Total	$	218		$	(1,317	)	$	(276	)

Interest Rate Swaps as Cash Flow Hedges

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 December 31, 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 other income. 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 $2.1 million of additional interest 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)	2015			2014		2013
Derivatives in Cash Flow Hedging relationships:
Interest Rate Swap	$	(2,378	)	$	—	$	—
Total	$	(2,378	)	$	—	$	—

Interest Rate Swaps as Fair Value Hedges

On June 18, 2012, we entered into an interest rate swap agreement with a notional amount of $45.0 million that was to mature in 2020. The swap agreement was executed in order to convert a portion of the fixed rate debt under the Senior Secured Notes into floating rate debt and maintain a capital structure containing fixed and floating rate debt. Upon the refinancing of the Senior Secured Notes, the swap was settled at fair value on May 9, 2014, resulting in a payment of $1.1 million. The remaining balance of the carrying value adjustment on debt related to the interest rate swap agreement was recognized as a loss in loss on redemption of debt on the Consolidated Statements of Operations. See note 6 for further discussion.

Prior to the 2014 refinancing of the Senior Secured Notes, $40.5 million of our interest rate swap agreement was designated and qualified 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) and the offsetting change in the fair value of the hedged long-term debt attributable to the hedged risk were recognized in other income. We included 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, on the Consolidated Statements of Operations.

As of July 1, 2013, we de-designated 10 percent, or $4.5 million, of our interest rate swap. As a result, the mark-to-market of the $4.5 million portion of the swap was recorded in other income on the Consolidated Statement of Operations.

The following table provides a summary of the gain (loss) recognized in the Consolidated Statements of Operations from the de-designated portion of our interest rate swap agreement:



Year ended December 31, (dollars in thousands)	2014			2013
Interest rate swap	$	140		$	(208	)
Related long-term debt	(589		)	—
Net impact	$	(449	)	$	(208	)

The following table provides a summary of the gain (loss) recognized in the Consolidated Statements of Operations from the designated portion of our interest rate swap agreement:



Year ended December 31, (dollars in thousands)	2014			2013
Interest rate swap	$	497		$	1,732
Related long-term debt	(735		)	(2,164		)
Net impact	$	(238	)	$	(432	)

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



Year ended December 31, (dollars in thousands)	2014			2013
Loss on redemption of debt	$	(757	)	$	—
Other income (expense)	70			(640		)
Net impact	$	(687	)	$	(640	)

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. From time to time, we enter into a series of foreign currency contracts to sell Canadian dollars. We had contracts for C$6.2 million and C$6.3 million at December 31, 2015 and 2014, 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) on currency derivatives that were not designated as hedging instruments are recorded in other income as follows:



Year ended December 31, (dollars in thousands)	Location:	2015			2014		2013
Currency contracts	Other income (expense)	$	(158	)	$	403	$	(41	)
Total		$	(158	)	$	403	$	(41	)

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 counterparties for the derivative agreements are rated BBB+ or better as of December 31, 2015, by Standard and Poor’s.