Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v3.8.0.1
Financial Instruments
 9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments
Financial Instruments:
The Company uses interest rate related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments and uses commodity derivatives to manage its exposure to commodity price fluctuations. The Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates and commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates, currency exchange rates, or commodity prices. The market risk associated with interest rate and commodity price contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Use of Derivative Financial Instruments to Manage Commodity Price Risk. The Company is exposed to risks in energy costs due to fluctuations in energy prices, particularly natural gas. The Company has a hedging program in the United States which allows the Company to mitigate exposure to natural gas volatility with natural gas swap agreements. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices of comparable contracts. The respective current and non-current liabilities are recorded in accrued liabilities and other long-term liabilities and the respective current and non-current assets are recorded in prepaid and other current assets and other long-term assets, as applicable. As the derivatives are highly effective and are designated and qualify as cash-flow hedges, the related unrealized gains or losses are recorded in stockholders’ equity as a component of other comprehensive income (loss), net of tax. Realized gains and losses on natural gas hedges are included in production cost and subsequently charged to cost of goods sold in the consolidated statements of operations in the period in which inventory is sold. The Company’s natural gas swaps have a remaining notional quantity of 690,000 MMBTU to mitigate commodity price volatility through December 2018.
Use of Derivative Financial Instruments to Manage Interest Rate Risk. The Company is exposed to fluctuations in interest rates on its senior secured credit facilities and senior unsecured notes. Changes in interest rates will not affect the market value of such debt but will affect the amount of our interest payments over the term of the loans. Likewise, an increase in interest rates could have a material impact on the Company’s cash flow. The Company hedges the interest rate fluctuations on debt obligations through interest rate cap agreements. The Company records these agreements at fair value as assets or liabilities. As the derivatives are highly effective and are designated and qualify as cash-flow hedges, the related unrealized gains or losses are deferred in stockholders’ equity as a component of other comprehensive income (loss), net of tax. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices.
In July 2016, the Company entered into interest rate cap agreements, paying a premium of $1,551 to mitigate interest rate volatility from July 2016 through July 2020 by employing varying cap rates, ranging from 1.50% to 3.00% on $1,000,000 of notional variable-rate debt.
The fair values of derivative instruments held as of September 30, 2017 and December 31, 2016 are shown below:
 
Balance sheet location 
 
September 30, 2017
 
December 31, 2016
Asset derivatives:
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
Natural gas swaps
Current assets
 
$
—

 
$
573

Interest rate caps
Current assets
 
9

 
—

Natural gas swaps
Other long-term assets
 
7

 
58

Interest rate caps
Other long-term assets
 
1,082

 
5,803

Total asset derivatives
 
 
$
1,098

 
$
6,434

Liability derivatives:
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
Natural gas swaps
Accrued liabilities
 
$
58

 
$
—

Total liability derivatives
 
 
$
58

 
$
—


The following tables show the effect of the Company’s derivative instruments designated as hedges on other comprehensive income (loss) (“OCI”) and the statement of income for the three and nine months ended September 30, 2017 and 2016:
 
 
 
 
Three months ended September 30,
 
 
 
 
2017
 
2016
Derivatives designated as cash flow hedges: 
 
Location in Earnings
 
Amount of gain (loss) recognized in OCI on derivatives (effective portion)
 
Amount of gain (loss) reclassified from accumulated OCI into income (effective portion)
 
Amount of gain (loss) recognized in OCI on derivatives (effective portion)
 
Amount of gain (loss) reclassified from accumulated OCI into income (effective portion)
Interest rate caps
 
Interest expense
 
$
(1,842
)
 
$
13

 
$
212

 
$
(2
)
Natural gas swaps
 
Cost of goods sold
 
(28)

 
94

 
(306)

 
420

 
 
 
 
$
(1,870
)
 
$
107

 
$
(94
)
 
$
418

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
 
 
 
2017
 
2016
Derivatives designated as cash flow hedges: 
 
Location in Earnings
 
Amount of gain (loss) recognized in OCI on derivatives (effective portion)
 
Amount of gain (loss) reclassified from accumulated OCI into income (effective portion)
 
Amount of gain (loss) recognized in OCI on derivatives (effective portion)
 
Amount of gain (loss) reclassified from accumulated OCI into income (effective portion)
Interest rate caps
 
Interest expense
 
$
(4,712
)
 
$
22

 
$
212

 
$
(2
)
Natural gas swaps
 
Cost of goods sold
 
(787)

 
104

 
(1,723)

 
1,148

 
 
 
 
$
(5,499
)
 
$
126

 
$
(1,511
)
 
$
1,146

 
 
 
 
 
 
 
 
 
 
 
Amounts of unrealized losses in OCI that are expected to be reclassified to the consolidated statement of operations over the next twelve months are $241 as of September 30, 2017.