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 historical 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.

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

Fair Values

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



December 31, (dollars in thousands)		Fair Value of Derivative Assets
December 31, (dollars in thousands)	Balance Sheet Location	2017		2016
Cash flow hedges:
Interest rate swap	Other assets	$	646	$	—
Natural gas contracts	Prepaid and other current assets	—		702
Natural gas contracts	Other assets	—		45
Total designated		646		747
Derivatives not designated as hedging instruments:
Natural gas contracts	Prepaid and other current assets	—		732
Natural gas contracts	Other assets	—		29
Total undesignated		—		761
Total derivative assets		$	646	$	1,508



December 31, (dollars in thousands)		Fair Value of Derivative Liabilities
December 31, (dollars in thousands)	Balance Sheet Location	2017		2016
Cash flow hedges:
Interest rate swap	Derivative liability	$	213	$	1,928
Interest rate swap	Other long-term liabilities	—		107
Natural gas contracts	Derivative liability	220		—
Natural gas contracts	Other long-term liabilities	7		—
Total designated		440		2,035
Derivatives not designated as hedging instruments:
Natural gas contracts	Derivative liability	264		—
Natural gas contracts	Other long-term liabilities	12		—
Total undesignated		276		—
Total derivative liabilities		$	716	$	2,035

The following table presents the notional amount of derivatives on the Consolidated Balance Sheets:



		Notional Amounts
Derivative Types	Unit of Measure	December 31, 2017		December 31, 2016
Natural gas contracts	Millions of British Thermal Units (MMBTUs)	2,480,000		2,590,000
Interest rate swap	Thousands of U.S. dollars	$	220,000	$	220,000
Currency contracts	Thousands of Canadian dollars	C$	—	C$	—

The following table presents cash settlements (paid) received related to the below derivatives:



Year ended December 31, (dollars in thousands)	2017			2016			2015
Natural gas contracts	$	(47	)	$	(2,345	)	$	(4,567	)
Interest rate swap	(1,836		)	(2,244		)	—
Total	$	(1,883	)	$	(4,589	)	$	(4,567	)

The following table provides a summary of the impacts of derivative gain (loss) on the Consolidated Statements of Operations and other comprehensive income (OCI):



Year ended December 31, (dollars in thousands)	Location	2017			2016			2015
Cash flow hedges:
Effective portion of derivative gain (loss) recognized in OCI:
Natural gas contracts	OCI	$	(1,019	)	$	721		$	(1,909	)
Interest rate swap	OCI	733			(2,056		)	(2,378		)
Total		$	(286	)	$	(1,335	)	$	(4,287	)

Effective portion of derivative gain (loss) reclassified from accumulated OCI to current earnings:
Natural gas contracts	Cost of Sales	$	(45	)	$	(1,129	)	$	(2,131	)
Interest rate swap	Interest expense	(1,735		)	(2,399		)	—
Total		$	(1,780	)	$	(3,528	)	$	(2,131	)

Derivatives not designated as hedging instruments:
Gain (loss) recognized in current earnings:
Currency contracts	Other income (expense)	$	—		$	(245	)	$	(158	)
Natural gas contracts	Other income (expense)	(1,036		)	1,860			218
Total		$	(1,036	)	$	1,615		$	60

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.

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 Consolidated Statements 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).

Based on our current valuation, we estimate that accumulated losses for natural gas currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in $0.2 million of loss in our Consolidated Statements of Operations.

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 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, 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 $0.2 million of additional interest expense in our Consolidated Statements of Operations.

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 mitigate this exposure. 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.