Natural Gas Derivative Instruments

12 Months Ended

Dec. 31, 2018

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Natural Gas Derivative Instruments

9. Natural Gas Derivative Instruments

Natural gas is used to fire the kilns at the Company’s manufacturing plants.  In an effort to mitigate volatility in the cost of natural gas purchases and reduce exposure to short term spikes in the price of this commodity, we contracted in advance for portions of our future natural gas requirements.  Due to the severe decline in industry activity beginning in early 2015, we significantly reduced production levels and consequently did not take delivery of all of the contracted natural gas quantities.  As a result, we had accounted for the relevant contracts as derivative instruments.  However, as of December 31, 2018, our last derivative contract expired and no future natural gas obligations existed.

The Company used 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 were 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.  During the year ended December 31, 2018 and 2017, the Company recognized a gain on derivative instruments of $1,195 and a loss on derivative instruments of $917, respectively, in cost of sales.  The cumulative present value of the natural gas derivative contracts as of December 31, 2017 were classified as current liabilities in the Consolidated Balance Sheet.  As a result of the expiration of the last natural gas contract on December 31, 2018, there is no remaining liability as of December 31, 2018.