8.	Natural Gas Derivative Instruments

Natural gas is used to fire the kilns at the Company’s manufacturing plants. In an effort to mitigate potential volatility in the cost of natural gas purchases and reduce exposure to short-term spikes in the price of this commodity, from time to time, the Company enters into contracts to purchase a portion of the anticipated monthly natural gas requirements at specified prices. Contracts are geographic by plant location. Historically, the Company has taken delivery of all natural gas quantities under contract, which exempted the Company from accounting for the contracts as derivative instruments. However, due to the severe decline in industry activity beginning in early 2015, the Company significantly reduced production levels and consequently did not take delivery of all of the contracted natural gas quantities. As a result, the Company began to account for relevant contracts as derivative instruments.

Derivative accounting requires the natural gas contracts to be recognized as either assets or liabilities at fair value with an offsetting entry in earnings. The Company uses the income approach in determining the fair value of these derivative instruments. The model used considers the difference, as of each balance sheet date, between the contracted prices and the New York Mercantile Exchange (“NYMEX”) forward strip price for each contracted period. The estimated cash flows from these contracts are discounted using a discount rate of 8.0%, which reflects the nature of the contracts as well as the timing and risk of estimated cash flows associated with the contracts. The discount rate had an immaterial impact on the fair value of the contracts for the year ended December 31, 2017 and 2016. The last natural gas contract will expire in December 2018. As a result, during the year ended December 31, 2017 and 2016, the Company recognized a loss on derivative instruments of $917 and a gain on derivative instruments of $1,886, respectively in cost of sales. The cumulative present value of the losses on these natural gas derivative contracts as of December 31, 2017 and 2016 are presented as current and long-term liabilities, as applicable, in the Consolidated Balance Sheet.

At December 31, 2017, the Company has contracted for delivery a total of 1,800,000 MMBtu of natural gas at an average price of $4.40 per MMBtu through December 31, 2018. Contracts covering 1,680,000 MMBtu are subject to accounting as derivative instruments. Future decreases in the NYMEX forward strip prices will result in additional derivative losses while future increases in the NYMEX forward strip prices will result in derivative gains. Future gains or losses will approximate the change in NYMEX natural gas prices relative to the total quantity of natural gas under contracts now subject to accounting as derivatives. The historical average NYMEX natural gas contract settlement prices for the years ended December 31, 2017 and 2016 were $3.11 per MMBtu and $2.46 per MMBtu, respectively.