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 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.

Fair Values

The following table provides the fair values of our derivative financial instruments for the periods presented:



	Asset Derivatives:
(dollars in thousands)	March 31, 2017			December 31, 2016
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	$	239	Prepaid and other current assets	$	702
Natural gas contracts	Other assets	—		Other assets	45
Interest rate contract	Other assets	131		Other assets	—
Total designated		370			747
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Prepaid and other current assets	230		Prepaid and other current assets	732
Natural gas contracts	Other assets	—		Other assets	29
Total undesignated		230			761
Total		$	600		$	1,508

	Liability Derivatives:
(dollars in thousands)	March 31, 2017			December 31, 2016
Derivatives designated as hedging instruments under FASB ASC 815:	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Natural gas contracts	Other long-term liabilities	$	29	Other long-term liabilities	$	—
Interest rate contract	Derivative liability - current	1,377		Derivative liability - current	1,928
Interest rate contract	Other long-term liabilities	—		Other long-term liabilities	107
Total designated		1,406			2,035
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Other long-term liabilities	52		Other long-term liabilities	—
Total undesignated		52			—
Total		$	1,458		$	2,035

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 March 31, 2017, we had commodity contracts for 2,170,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2016, we had commodity contracts for 2,590,000 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 March 31, 2017. 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 reflected in other income (expense).

We (received) paid additional cash related to natural gas derivative settlements of $(0.1) million and $1.2 million in the three months ended March 31, 2017 and 2016, 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 $0.2 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 March 31,
(dollars in thousands)	2017			2016
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	(470	)	$	(616	)
Total	$	(470	)	$	(616	)

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



		Three months ended March 31,
(dollars in thousands)		2017		2016
Derivative:	Location:
Natural gas contracts	Cost of sales	$	67	$	(540	)
Total impact on net income (loss)		$	67	$	(540	)

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 in Mexico:



	Three months ended March 31,
(dollars in thousands)	2017			2016
Contracts where hedge accounting was not elected	$	(583	)	$	370
Total	$	(583	)	$	370

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 March 31, 2017 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 (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 $1.4 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 March 31,
(dollars in thousands)	2017		2016
Derivatives in Cash Flow Hedging relationships:
Interest rate swap	$	204	$	(3,219	)
Total	$	204	$	(3,219	)

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



		Three months ended March 31,
(dollars in thousands)		2017			2016
Derivative:	Location:
Interest rate swap	Interest expense	$	(585	)	$	(391	)
Total impact on net income (loss)		$	(585	)	$	(391	)

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 March 31, 2017 and December 31, 2016, we had no foreign currency contracts outstanding. 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 March 31,
(dollars in thousands)		2017		2016
Derivative:	Location:
Currency contracts	Other income (expense)	$	—	$	(418	)
Total		$	—	$	(418	)

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 March 31, 2017, by Standard and Poor’s.