Derivatives

We utilize derivative financial instruments to hedge certain interest rate risks associated with our long-term debt and commodity price risks associated with forecasted future natural gas requirements. These derivatives, except for the natural gas contracts used in our Mexican manufacturing facilities prior to 2018, 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.

Prior to January 1, 2018, our derivatives used to reduce economic volatility of natural gas prices in Mexico were not designated as cash flow hedges. All mark-to-market changes on these derivatives were reflected in other income (expense). On January 1, 2018, we adopted ASU 2017-12 for hedge accounting. Under this new guidance, we are now applying contractually specified component hedging to all of our natural gas hedges. This has allowed us to record changes in fair value for outstanding natural gas derivatives to other comprehensive income (loss) beginning January 1, 2018. See note 2 for additional details on the adoption of ASU 2017-12.

We do not believe we are exposed to more than a nominal amount of credit risk in our natural gas hedges and interest rate swap as the counterparties are established financial institutions. The counterparties for the derivative agreements are rated BBB+ or better as of June 30, 2018, by Standard and Poor’s.

Fair Values

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



(dollars in thousands)		Fair Value of Derivative Assets
(dollars in thousands)	Balance Sheet Location	June 30, 2018		December 31, 2017
Cash flow hedges:
Interest rate swap	Prepaid and other current assets	$	1,098	$	—
Interest rate swap	Other assets	1,171		646
Natural gas contracts	Prepaid and other current assets	90		—
Total designated		2,359		646
Total derivative assets		$	2,359	$	646

		Fair Value of Derivative Liabilities
		June 30, 2018		December 31, 2017
Cash flow hedges:
Interest rate swap	Derivative liability	$	—	$	213
Natural gas contracts	Derivative liability	—		220
Natural gas contracts	Other long-term liabilities	25		7
Total designated		25		440
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		$	25	$	716

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



		Notional Amounts
Derivative Types	Unit of Measure	June 30, 2018		December 31, 2017
Natural gas contracts	Millions of British Thermal Units (MMBTUs)	2,740,000		2,480,000
Interest rate swap	Thousands of U.S. dollars	$	220,000	$	220,000

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



	Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	2018			2017			2018			2017
Natural gas contracts	$	(36	)	$	182		$	(234	)	$	298
Interest rate swap	(3		)	(510		)	(181		)	(1,110		)
Total	$	(39	)	$	(328	)	$	(415	)	$	(812	)

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



		Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	Location	2018			2017			2018			2017
Cash flow hedges:
Effective portion of derivative gain (loss) recognized into OCI:
Natural gas contracts	OCI	$	123		$	(239	)	$	334		$	(709	)
Interest rate swap	OCI	480			(619		)	1,733			(415		)
Total		$	603		$	(858	)	$	2,067		$	(1,124	)

Effective portion of derivative gain (loss) reclassified from accumulated OCI to current earnings:
Natural gas contracts	Cost of Sales	$	(36	)	$	90		$	(234	)	$	157
Interest rate swap	Interest expense	40			(472		)	(103		)	(1,057		)
Total		$	4		$	(382	)	$	(337	)	$	(900	)

Derivatives not designated as hedging instruments:
Gain (loss) recognized in current earnings:
Natural gas contracts	Other income (expense)	$	—		$	(236	)	$	—		$	(819	)
Total		$	—		$	(236	)	$	—		$	(819	)

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, 18 months in the future, or more, depending on market conditions. 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 fair value of these hedges are recorded in other comprehensive income (loss). 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.

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 $0.1 million of gain to our Condensed Consolidated Statements of Operations.

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 June 30, 2018, and is 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 are recorded to earnings immediately. Changes in the fair value of these hedges are recorded in other comprehensive income (loss). 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 a reduction to interest expense of $1.1 million in our Condensed Consolidated Statements of Operations.