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 are 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, 2016			December 31, 2015
Derivatives designated as hedging instruments under FASB ASC 815:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Natural gas contracts	Prepaid and other current assets	$	60	Prepaid and other current assets	$	—
Total designated		60			—
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Prepaid and other current assets	75		Prepaid and other current assets	—
Currency contracts	Prepaid and other current assets	—		Prepaid and other current assets	245
Total undesignated		75			245
Total		$	135		$	245

	Liability Derivatives:
(dollars in thousands)	September 30, 2016			December 31, 2015
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	$	1,069
Natural gas contracts	Other long-term liabilities	8		Other long-term liabilities	34
Interest rate contract	Derivative liability - current	2,257		Derivative liability - current	2,132
Interest rate contract	Other long-term liabilities	3,159		Other long-term liabilities	246
Total designated		5,424			3,481
Derivatives not designated as hedging instruments under FASB ASC 815:
Currency contracts	Derivative liability - current	36		Derivative liability - current	—
Natural gas contracts	Derivative liability - current	—		Derivative liability - current	1,064
Natural gas contracts	Other long-term liabilities	24		Other long-term liabilities	35
Total undesignated		60			1,099
Total		$	5,484		$	4,580

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, 2016, we had commodity contracts for 2,510,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2015, we had commodity contracts for 3,000,000 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, 2016. 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 (expense). 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.

Since October 1, 2014, our derivatives for natural gas in Mexico have not been designated as cash flow hedges. All mark-to-market changes on these derivatives are being reflected in other income (expense). We recognized an immaterial gain and a loss of $(0.2) million in other income (expense) in the three months ended September 30, 2016 and 2015, respectively, and a gain (loss) of $1.2 million and $(0.5) million in other income (expense) in the nine months ended September 30, 2016 and 2015, respectively, related to the natural gas contracts where hedge accounting was not elected. Mexico natural gas contracts de-designated in the fourth quarter of 2014 were primarily all utilized by December 31, 2015.

We paid additional cash related to natural gas derivative settlements of $0.1 million and $1.0 million in the three months ended September 30, 2016 and 2015, respectively, and $2.3 million and $3.2 million in the nine months ended September 30, 2016 and 2015, 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 for natural gas currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in a $0.1 million gain 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) from our natural gas contracts:



	Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)	2016			2015			2016		2015
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	(35	)	$	(489	)	$	59	$	(1,265	)
Total	$	(35	)	$	(489	)	$	59	$	(1,265	)

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



		Three months ended September 30,						Nine months ended September 30,
(dollars in thousands)		2016			2015			2016			2015
Derivative:	Location:
Natural gas contracts	Cost of sales	$	(41	)	$	(448	)	$	(1,096	)	$	(1,468	)
Total impact on net income (loss)		$	(41	)	$	(448	)	$	(1,096	)	$	(1,468	)

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 Condensed Consolidated Statements of Operations was immaterial for the three and nine months ended September 30, 2015.

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)	2016		2015			2016		2015
De-designated contracts	$	—	$	180		$	—	$	584
Contracts where hedge accounting was not elected	11		(222		)	1,150		(459		)
Total	$	11	$	(42	)	$	1,150	$	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 effectively converts $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 became effective in January 2016 and expires in 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, 2016 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 would be 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 (expense). 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 $2.3 million of additional interest expense 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) from our interest rate swap:



	Three months ended September 30,					Nine months ended September 30,
(dollars in thousands)	2016		2015			2016			2015
Derivatives in Cash Flow Hedging relationships:
Interest rate swap	$	6	$	(3,211	)	$	(4,816	)	$	(3,222	)
Total	$	6	$	(3,211	)	$	(4,816	)	$	(3,222	)

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



		Three months ended September 30,					Nine months ended September 30,
(dollars in thousands)		2016			2015		2016			2015
Derivative:	Location:
Interest rate swap	Interest expense	$	(767	)	$	—	$	(1,778	)	$	—
Total impact on net income (loss)		$	(767	)	$	—	$	(1,778	)	$	—

Currency Contracts

Our foreign currency exposure arises from transactions denominated in a currency other than the U.S. dollar and is 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. At September 30, 2016 and December 31, 2015, we had C$3.9 million and C$6.2 million in foreign currency contracts, 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 (expense) as follows:



		Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)		2016		2015		2016			2015
Derivative:	Location:
Currency contracts	Other income (expense)	$	106	$	135	$	(281	)	$	(152	)
Total		$	106	$	135	$	(281	)	$	(152	)

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, 2016, by Standard and Poor’s.