Derivatives

6 Months Ended

Jun. 30, 2011

Derivatives [Abstract]

Derivatives

9. 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. Most of these derivatives, except for certain natural gas contracts originally designated to hedge expected purchases at Syracuse China and the foreign currency contracts, 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. 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)	June 30, 2011			December 31, 2010
Derivatives designated as hedging	Balance Sheet	Fair		Balance Sheet	Fair
instruments under FASB ASC 815:	Location	Value		Location	Value
Interest rate contract	Derivative asset	$	3,334	Derivative asset	$	2,536
Natural gas contracts	Derivative asset		22	Derivative asset		53
Total designated		$	3,356		$	2,589
	Liability Derivatives:
(dollars in thousands)	June 30, 2011			December 31, 2010
Derivatives designated as hedging	Balance Sheet	Fair		Balance Sheet	Fair
instruments under FASB ASC 815:	Location	Value		Location	Value
Natural gas contracts	Derivative liability	$	1,679	Derivative liability	$	3,117
Total designated			1,679			3,117
Derivatives not designated as hedging instruments under FASB ASC 815:
Natural gas contracts	Derivative liability		64	Derivative liability		124
Currency contracts	Derivative liability		477	Derivative liability		151
Total undesignated			541			275
Total		$	2,220		$	3,392

Interest Rate Swaps as Fair Value Hedges

In the first quarter of 2010, we entered into an interest rate swap agreement with a notional amount of $100.0 million that is to mature in 2015. The swap was executed in order to convert a portion of the Senior Secured Note fixed rate debt into floating rate debt and maintain a capital structure containing appropriate amounts of fixed and floating rate debt. In August 2010, $10.0 million of the swap was called for a premium of $0.3 million. As of June 30, 2011 the notional amount of the interest rate swap agreement is $90.0 million.

Our fixed-to-floating interest rate swap is designated and qualifies 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), as well as the offsetting change in the fair value of the hedged long-term debt attributable to the hedged risk are recognized in current earnings. We include the gain or loss on the hedged long-term debt in other income on the Condensed Consolidated Statements of Operations along with the offsetting loss or gain on the related interest rate swap.

Amount of gain (loss) recognized in other income

	Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	2011			2010			2011			2010
Interest rate swap	$	(1,587	)	$	2,374		$	(2,231	)	$	1,489
Related long-term debt		1,443			(1,795	)		2,723			(1,073	)
Net impact on other income	$	(144	)	$	579		$	492		$	416

Commodity Future Contracts Designated as Cash Flow Hedges

We use commodity futures contracts related to forecasted future North American natural gas requirements. The objective of these futures contracts and other derivatives 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. Certain of our natural gas futures contracts are now classified as ineffective, as the forecasted transactions are not probable of occurring due to the closure of our Syracuse China facility in April 2009. Under FASB ASC 815, “Derivatives and Hedging”, when the forecasted transactions of a hedging relationship become not probable of occurring, the gains or losses that have been classified in accumulated other comprehensive loss in prior periods for those contracts affected should be reclassified into earnings. We recognized immaterial amounts for both three month periods and an immaterial amount and $0.1 million for the six months ended June 30, 2011 and 2010, respectively, in other income on the Condensed Consolidated Statements of Operations relating to these contracts. As of June 30, 2011, we had commodity contracts for 2,370,000 million British Thermal Units (BTUs) of natural gas. At December 31, 2010, we had commodity contracts for 3,090,000 million BTUs of natural gas.

Most of our natural gas derivatives qualify and are designated as cash flow hedges (except certain contracts originally designated to expected purchases at Syracuse China) at June 30, 2011. 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 current earnings. As the natural gas contracts mature, the accumulated gains (losses) for the respective contracts are reclassified from accumulated other comprehensive income to current expense in cost of sales in our Condensed Consolidated Statement of Operations. We paid additional cash of $1.2 million and $2.4 million in the three months ended June 30, 2011 and 2010, respectively, and $2.0 million and $3.1 million in the six months ended June 30, 2011 and 2010, 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 losses currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in $1.7 million of expense in our Condensed Consolidated Statement of Operations.

Amount of derivative gain/(loss) recognized in OCI (effective portion)

	Three months ended June 30,					Six months ended June 30,
(dollars in thousands)	2011			2010		2011			2010
Derivatives in Cash Flow Hedging relationships:
Natural gas contracts	$	(487	)	$	272	$	(636	)	$	(4,149	)
Total	$	(487	)	$	272	$	(636	)	$	(4,149	)

Gain / (loss) reclassified from Accumulated Other Comprehensive Loss
to Condensed Consolidated Statements of Operations (effective portion)

		Three months ended June 30,						Six months ended June 30,
(dollars in thousands)		2011			2010			2011			2010
Derivative:	Location:
Natural gas contracts	Cost of sales	$	(1,213	)	$	(2,357	)	$	(2,042	)	$	(3,116	)
Total impact on net (loss) income		$	(1,213	)	$	(2,357	)	$	(2,042	)	$	(3,116	)

The following table provides the impact on the Condensed Consolidated Statement of Operations from derivatives no longer designated as cash flow hedges, primarily related to the closure of our Syracuse China facility:

Gain (loss) recognized in income
(ineffective portion and amount excluded from effectiveness testing)

		Three months ended June 30,					Six months ended June 30,
(dollars in thousands)		2011			2010		2011			2010
Derivative:	Location:
Natural gas contracts	Other income	$	(4	)	$	29	$	(5	)	$	(101	)
Total		$	(4	)	$	29	$	(5	)	$	(101	)

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. 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. During 2010, we entered into a series of foreign currency contracts to sell Canadian dollars. As of June 30, 2011 and December 31, 2010 we had contracts for $15.1 million Canadian dollars and $18.7 million Canadian dollars, respectively.

Gains and losses for derivatives which were not designated as hedging instruments are recorded in current earnings as follows:

		Three months ended June 30,				Six months ended June 30,
(dollars in thousands)		2011		2010		2011			2010
Derivative:	Location:
Currency contracts	Other income	$	128	$	639	$	(326	)	$	639
Total		$	128	$	639	$	(326	)	$	639

We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate and natural gas hedges, as the counterparties are established financial institutions. The counterparty is rated AA- for the Interest Rate Agreement and BBB+ or better for the counterparties to the other derivative agreements as of June 30, 2011, by Standard and Poor’s.