3.	Natural Gas Derivative Instruments

Natural gas is used to fire the kilns at the Company’s domestic 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. As a result of the Company’s significantly reducing production levels and not taking delivery of all of the contracted natural gas quantities, the Company accounts 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 six months ended June 30, 2018. The last of these natural gas contracts will expire in December 2018. During the three months ended June 30, 2018 and 2017, the Company recognized a $412 gain and $309 loss, respectively, in cost of sales on derivative instruments. During the six months ended June 30, 2018 and 2017, the Company recognized a $630 gain and $1,200 loss, respectively, in cost of sales on derivative instruments. The cumulative present value of these natural gas derivative contracts as of June 30, 2018 are presented as current liabilities in the Consolidated Balance Sheet.

At June 30, 2018, the Company had contracted for delivery a total of 960,000 MMBtu of natural gas at an average price of $4.31 per MMBtu through December 31, 2018. Contracts covering 900,000 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 three months ended June 30, 2018 and 2017 were $2.80 per MMBtu and $3.18 per MMBtu, respectively.