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, 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	$	702	Prepaid and other current assets	$	—
Natural gas contracts	Other assets	45		Other assets	—
Total designated		747			—
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Prepaid and other current assets	732		Prepaid and other current assets	—
Natural gas contracts	Other assets	29		Other assets	—
Currency contracts	Prepaid and other current assets	—		Prepaid and other current assets	245
Total undesignated		761			245
Total		$	1,508		$	245



	Liability Derivatives:
(dollars in thousands)	December 31, 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	—		Other long-term liabilities	34
Interest rate contract	Derivative liability - current	1,928		Derivative liability - current	2,132
Interest rate contract	Other long-term liabilities	107		Other long-term liabilities	246
Total designated		2,035			3,481
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Derivative liability - current	—		Derivative liability - current	1,064
Natural gas contracts	Other long-term liabilities	—		Other long-term liabilities	35
Total undesignated		—			1,099
Total		$	2,035		$	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 December 31, 2016, we had commodity contracts for 2,590,000 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 December 31, 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. 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.

During the first nine months of 2014, our natural gas contracts in Mexico were designated and effective cash flow hedges. Since October 1, 2014, we have not designated our derivatives for natural gas in Mexico as cash flow hedges. All mark-to-market changes relating to these derivatives are being reflected in other income as depicted in the third table below.

We received (paid) additional cash of $(2.3) million, $(4.6) million and $0.6 million in the years ended December 31, 2016, 2015 and 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 gains currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in $0.7 million of gain 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) from our natural gas contracts:



Year ended December 31, (dollars in thousands)	2016		2015			2014
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	721	$	(1,909	)	$	(1,392	)
Total	$	721	$	(1,909	)	$	(1,392	)

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



Year ended December 31, (dollars in thousands)	Location:	2016			2015			2014
Natural gas contracts	Cost of sales	$	(1,129	)	$	(2,131	)	$	573
Total impact on net income (loss)		$	(1,129	)	$	(2,131	)	$	573

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 in Mexico since October 1, 2014:



Year ended December 31, (dollars in thousands)	2016		2015			2014
De-designated contracts	$	—	$	932		$	(1,236	)
Contracts where hedge accounting was not elected	1,860		(714		)	(81		)
Total	$	1,860	$	218		$	(1,317	)

Interest Rate Swap as Cash Flow Hedge

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, or approximately half, 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 December 31, 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 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 $1.9 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) from our interest rate swap:



Year ended December 31, (dollars in thousands)	2016			2015
Derivatives in Cash Flow Hedging relationships:
Interest rate swap	$	(2,056	)	$	(2,378	)
Total	$	(2,056	)	$	(2,378	)



Year ended December 31, (dollars in thousands)	Location:	2016			2015
Interest rate swap	Interest expense	$	(2,399	)	$	—
Total impact on net income (loss)		$	(2,399	)	$	—

Interest Rate Swap as Fair Value Hedge

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 subsequent mark-to-market of the $4.5 million portion of the swap was recorded in other income on the Consolidated Statement of Operations until settled on May 9, 2014.

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
Loss on redemption of debt	$	(757	)
Other income (expense)	70
Net impact	$	(687	)

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 no contracts outstanding at December 31, 2016 and C$6.2 million at December 31, 2015. 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:	2016			2015			2014
Currency contracts	Other income (expense)	$	(245	)	$	(158	)	$	403
Total		$	(245	)	$	(158	)	$	403

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, 2016, by Standard and Poor’s.