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. Our contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce our exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is our policy to offset on the Consolidated Balance Sheets the amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement.

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 apply contractually specified component hedging to all of our natural gas hedges. This allows 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 swaps as the counterparties are established financial institutions. The counterparties for the derivative agreements are rated BBB+ or better as of December 31, 2018, 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	2018		2017
Cash flow hedges:
Interest rate swaps	Prepaid and other current assets	$	1,425	$	—
Interest rate swaps	Other assets	—		646
Natural gas contracts	Prepaid and other current assets	226		—
Natural gas contracts	Other assets	39		—
Total designated		1,690		646
Derivatives not designated as hedging instruments:
Total undesignated		—		—
Total derivative assets		$	1,690	$	646

December 31, (dollars in thousands)		Fair Value of Derivative Liabilities
December 31, (dollars in thousands)	Balance Sheet Location	2018		2017
Cash flow hedges:
Interest rate swaps	Accrued liabilities	$	—	$	213
Interest rate swaps	Other long-term liabilities	5,713		—
Natural gas contracts	Accrued liabilities	—		220
Natural gas contracts	Other long-term liabilities	—		7
Total designated		5,713		440
Derivatives not designated as hedging instruments:
Natural gas contracts	Accrued liabilities	—		264
Natural gas contracts	Other long-term liabilities	—		12
Total undesignated		—		276
Total derivative liabilities		$	5,713	$	716

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



Year ended December 31, (dollars in thousands)	2018		2017
Natural gas contracts	$	426	$	(47	)
Interest rate swaps	159		(1,836		)
Total	$	585	$	(1,883	)

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	2018			2017
Cash flow hedges:
Effective portion of derivative gain (loss) recognized in OCI:
Natural gas contracts	OCI	$	1,194		$	(1,019	)
Interest rate swaps	OCI	(4,436		)	733
Total		$	(3,242	)	$	(286	)

Effective portion of derivative gain (loss) reclassified from accumulated OCI to current earnings:
Natural gas contracts	Cost of Sales	$	426		$	(45	)
Interest rate swaps	Interest expense	285			(1,735		)
Total		$	711		$	(1,780	)

Derivatives not designated as hedging instruments:
Gain (loss) recognized in current earnings:
Natural gas contracts	Other income (expense)	—			(1,036		)
Total		$	—		$	(1,036	)

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.

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



		Notional Amounts
Derivative Types	Unit of Measure	December 31, 2018	December 31, 2017
Natural gas contracts	Millions of British Thermal Units (MMBTUs)	3,150,000	2,480,000

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 Consolidated Statements 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 $0.2 million of gain to our Consolidated Statements of Operations.

Interest Rate Swaps

The table below lists the interest rate swaps we executed as part of our risk management strategy to mitigate the risks associated with the fluctuating interest rates under our Term Loan B. The interest rate swaps effectively convert a portion of our Term Loan B debt from a variable interest rate to a fixed interest rate, thus reducing the impact of interest rate changes on future income.



Swap execution date	Effective date	Expiration date	Notional amount	Fixed swap rate
April 1, 2015	January 11, 2016	January 9, 2020	$220.0 million	4.85	%
September 24, 2018	January 9, 2020	January 9, 2025	$200.0 million	6.19	%	⁽¹⁾

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⁽¹⁾	Upon refinancing our Term Loan B, the fixed interest rate will be 3.19 percent plus the new refinanced credit spread.

Our interest rate swaps are 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 swaps qualify and are designated as cash flow hedges at December 31, 2018, and are 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 $1.4 million will be reclassified into earnings over the next twelve months, resulting in a reduction to interest expense in our Consolidated Statements of Operations.