Note 6 – Hedging

Derivative instruments are carried at fair value in the Condensed Consolidated Balance Sheets. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gains or losses is deferred as a component of "Accumulated other comprehensive income (loss)" and reclassified into net income in the same period during which the hedged transaction affects net income. Gains and losses on derivatives representing hedge ineffectiveness are recognized in net income currently. See further information regarding fair value measurements and balances of derivatives in Note 7.

Periodically, the company uses average rate euro put options, collars and forward contracts to manage its exposure to exchange rates on the conversion of euro-based revenue into U.S. dollars. Average rate euro put options require an upfront premium payment and reduce the risk of a decline in the value of the euro without limiting the benefit of an increase in the value of the euro. Collars (involving an average rate euro put and call option) reduce our net option premium expense, but limit the benefit from an increase in the value of the euro. Average rate forward contracts lock in the value of the euro and do not require an upfront premium. At March 31, 2012 there were no average rate euro put options, collars or forward contracts outstanding.

Most of the company's foreign operations use the U.S. dollar as their functional currency. As a result, balance sheet translation adjustments due to currency fluctuations are recognized currently in "Cost of sales." To minimize the resulting volatility, the company also enters into 30-day euro forward contracts each month to economically hedge the net monetary assets exposed to euro exchange rates. These 30-day euro forward contracts are not designated as hedging instruments, and gains and losses on these forward contracts are recognized currently in "Cost of sales." In the first quarter of 2012, the company recognized $5 million of losses on 30-day euro forward contracts and $6 million of gains from fluctuations in the value of the net monetary assets exposed to euro exchange rates. In the first quarter of 2011, the company recognized $7 million of losses on 30-day euro forward contracts and $9 million of gains from fluctuations in the value of the net monetary assets exposed to euro exchange rates.

The company also enters into bunker fuel forward contracts for its shipping operations, which permit it to lock in fuel purchase prices for up to three years and thereby minimize the volatility that changes in fuel prices could have on its operating results. These bunker fuel forward contracts are designated as cash flow hedging instruments. In 2011, the company reduced its expected total bunker fuel consumption and changed the ports where bunker fuel is purchased through the implementation of a new shipping configuration. These changes resulted in 2011 recognition of unrealized gains on positions that were originally intended to hedge bunker fuel purchases in future periods because the forecasted fuel purchases, as documented by the company, became probable not to occur. Cash flow hedging relationships of many of the affected bunker fuel forward contracts were reapplied to other bunker fuel purchases; however, accounting standards require these to be based on the market prices at the date the new hedging relationships were established, even though there is no change in the hedging instrument.

At March 31, 2012, the company's hedge portfolio was comprised of the following outstanding positions:



	Notional Amount	Contract Average Rate/Price	Settlement Period
Derivatives designated as hedging instruments:
3.5% Rotterdam Barge/Singapore 180 fuel derivatives:
Bunker fuel forward contracts¹	66,046 mt	$463/mt	2012
Bunker fuel forward contracts¹	76,701 mt	$497/mt	2013
Bunker fuel forward contracts¹	85,976 mt	$587/mt	2014
Derivatives not designated as hedging instruments:
30-day euro forward contracts	€81 million	$1.33/€	Apr. 2012


¹	As described in the paragraph above, new cash flow hedge relationships were established for certain bunker fuel forward contracts in 2011. These changes resulted in hedge rates for accounting purposes that are different from those in the hedge contract terms.

Activity related to the company's derivative assets and liabilities designated as hedging instruments is as follows:



	March 31, 2012						March 31, 2011
(In thousands)	Currency Hedge Portfolio			Bunker Fuel Forward Contracts			Currency Hedge Portfolio			Bunker Fuel Forward Contracts
Balance at beginning of year	$	5,232		$	14,754		$	293		$	27,314
Realized (gains) losses included in net income	(4,381		)	(5,514		)	1,586			(5,428		)
Purchases (sales), net ¹	—			—			5,013			—
Changes in fair value	(851		)	19,471			(2,688		)	37,938
Balance at March 31	$	—		$	28,711		$	4,204		$	59,824


¹	Purchases (sales) represent the cash premiums paid upon the purchase of euro put options or received upon the sale of euro call options in the currency hedge portfolio. Bunker fuel forward contracts require no up-front cash payment and have an initial fair value of zero; instead any gain or loss on the forward contracts (swaps) is settled in cash upon the maturity of the forward contracts.

Deferred net gains (losses) in "Accumulated other comprehensive income (loss)" at March 31, 2012 are expected to be reclassified into income as follows:



Expected Period of Recognition	Currency Hedge Portfolio		Bunker Fuel Forward Contracts		Total
2012	$	—	$	14,179	$	14,179
2013	—		9,849		9,849
2014	—		1,530		1,530
	$	—	$	25,558	$	25,558

The following table summarizes the effect of the company's derivatives designated as cash flow hedging instruments on OCI and earnings:



	Quarter ended March 31, 2012							Quarter ended March 31, 2011
(In thousands)	Currency Hedge Portfolio			Bunker Fuel Forward Contracts		Total		Currency Hedge Portfolio			Bunker Fuel Forward Contracts		Total
Gain (loss) recognized in OCI on derivative (effective portion)	$	(851	)	$	18,640	$	17,789	$	466		$	37,579	$	38,045
Gain (loss) reclassified from accumulated OCI into income (effective portion)¹	4,381			5,514		9,895		(18		)	5,428		5,410
Gain (loss) recognized in income on derivative (ineffective portion)¹	—			830		830		—			359		359


¹	Both the gain (loss) reclassified from accumulated OCI into income (effective portion) and the gain (loss) recognized in income on derivative (ineffective portion), if any, are included in "Net sales" for the currency hedge portfolio and "Cost of sales" for bunker fuel forward contracts.