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)" ("AOCI") 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 (loss) currently. See further information regarding fair value measurements of derivatives in Note 9.

To manage its exposure to exchange rates on the conversion of euro-based revenue into U.S. dollars, we use average rate euro put options, average rate collars (a purchased average rate euro put option paired with a sold average rate euro call option) and average rate euro forward contracts. In some cases, we may enter into an average rate euro put and an average rate euro call at the same strike rate (a "synthetic average rate forward") to effectively lock in the exchange rate of the notional amount similar to an average rate euro forward. 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. Average rate euro call options sold by us require an upfront premium payment to be received from the counterparty and limit the benefit of an increase in the value of the euro without limiting the risk of a decline in the value of the euro. Average rate forward contracts lock in the value of the euro and do not require an upfront premium. These instruments are designated as cash flow hedges. At March 31, 2014, the amount of unrealized net losses on our currency hedging portfolio that would be reclassified to net income, if realized in the next twelve months, is $5 million; these net losses were deferred in "AOCI".

In connection with the February 2013 debt refinancing further discussed in Note 7, certain of our hedging counterparties that were members of the previous Credit Facility were no longer participants in the ABL Facility. Upon consummation of the ABL Facility on February 5, 2013, we transferred all outstanding hedge positions with former Credit Facility members to lenders under the ABL Facility. The transferred positions included approximately €71 million notional amount of euro call and put options that matured during the first three quarters of 2013. The change in counterparty is a change in a critical term resulting in termination of hedge accounting at the transfer date. Due to technical accounting requirements, these specific option contracts did not qualify to be re-designated as cash flow hedges at the transfer date. Therefore, the decline in fair value of these options through the transfer date was deferred in AOCI until the hedged transaction occurred because the related hedged cash flows remained probable of occurrence. However, unrealized changes in fair value after the transfer date were recognized currently in "Net sales."

Loss of hedge accounting did not affect the put and call options' purpose of reducing the volatility inherent in exchanging euro-based revenue into U.S. dollars or change the ultimate earnings or cash flow recognized upon settlement of each position. However, loss of hedge accounting resulted in unintended volatility of earnings for the first, second and third quarters of 2013 as the fair market value adjustments after the transfer date was recognized in "Net sales." Ultimately, for the year ended December 31, 2013, the effect on earnings was the same as if we had maintained hedge accounting. Activity related to the transferred positions at March 31, 2013 was as follows:



	Quarter ended March 31, 2013
(In thousands)	Realized Gains (Losses) Recorded in "Net sales"			Unrealized Gains (Losses) Recorded in "Net sales"			(Losses) Deferred in AOCI at March 31, 2013
€25 million purchased euro put option settled in Q1 2013	$	—		$	—		$	—
€25 million sold euro call option settled in Q1 2013	(620		)	—			—
€19 million purchased euro put option to settle in Q2 2013	—			(7		)	(928		)
€19 million sold euro call option to settle in Q2 2013	—			1,586			(1,059		)
€27 million purchased euro put options to settle in Q3 2013	—			76			(1,447		)
€27 million sold euro call options to settle in Q3 2013	—			1,754			(1,083		)
	$	(620	)	$	3,409		$	(4,517	)

Most of our 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 reduce the resulting volatility, we also enter 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" as follows:



	Quarter ended March 31,
(In thousands)	2014			2013
Gains (losses) on 30-day euro forward contracts	$	(212	)	$	1,942
Gains (losses) from fluctuations in the value of the net monetary assets exposed to euro exchange rates	(2,351		)	(4,222		)

We also enter into bunker fuel forward contracts for our shipping operations, which permit us to lock in fuel purchase prices for up to three years and thereby minimize the volatility that changes in fuel prices could have on our operating results. These bunker fuel forward contracts are designated as cash flow hedging instruments. At March 31, 2014, the amount of unrealized net losses on our bunker fuel hedging portfolio that would be reclassified to net income, if realized, in the next twelve months is $1 million; these net losses were deferred in "Accumulated other comprehensive income (loss)."

At March 31, 2014, our hedge portfolio was comprised of the following outstanding positions:



	Notional Amount	Contract Average Rate/Price	Settlement Period
Derivatives designated as hedging instruments:
Currency derivatives:
Purchased euro put options	€131 million	$1.33/€	2014
Sold euro call options	€131 million	$1.39/€	2014
Average rate forward contracts	€118 million	$1.36/€	2014
Purchased euro put options	€113 million	$1.36/€	2015¹
Sold euro call options	€113 million	$1.40/€	2015¹
Average rate forward contracts	€14 million	$1.38/€	2015¹

3.5% Rotterdam Barge fuel derivatives:
Bunker fuel forward contracts	66,885 mt	$586/mt	2014
Bunker fuel forward contracts	59,800 mt	$556/mt	2015¹

Derivatives not designated as hedging instruments:
30-day euro forward contracts	€52 million	$1.37/€	April 2014


¹	Settlement periods for bunker fuel forward contracts and currency derivatives are through September 2015 and June 2015, respectively.

Activity related to our derivative assets and liabilities designated as hedging instruments is as follows:



	2014						2013
(In thousands)	Currency Hedge Portfolio			Bunker Fuel Forward Contracts			Currency Hedge Portfolio			Bunker Fuel Forward Contracts
Balance at beginning of year	$	(5,014	)	$	988		$	(23,215	)	$	8,572
Realized (gains) losses included in net income	1,229			(175		)	8,722			(2,839		)
Transfers¹	—			—			7,638			—
Purchases, net²	277			—			541			—
Changes in fair value	(323		)	(1,447		)	3,189			1,888
Balance at March 31	$	(3,831	)	$	(634	)	$	(3,125	)	$	7,621


¹	Represents the fair value at the transfer date of positions where hedge accounting was terminated. See discussion above.


²	Purchases (sales) represent the cash premiums paid upon the purchase of euro put options or received upon the sale of euro call options. Bunker fuel and currency forward contracts require no up-front cash payment and have an initial fair value of zero; settlements on the forward contracts (swaps) occur upon their maturity.

Deferred net gains (losses) in "Accumulated other comprehensive income (loss)" at March 31, 2014 are expected to be reclassified into income as follows (in thousands):



Expected Period of Recognition	Currency Hedge Portfolio			Bunker Fuel Forward Contracts			Total
2014	$	(4,413	)	$	(971	)	$	(5,384	)
2015	(661		)	197			(464		)
	$	(5,074	)	$	(774	)	$	(5,848	)

The following tables summarize the effect of our derivatives designated as cash flow hedging instruments on OCI and earnings:



	Quarter ended March 31, 2014									Quarter ended March 31, 2013
(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)	$	80		$	(1,126	)	$	(1,046	)	$	6,564		$	2,498		$	9,062
Gain (loss) reclassified from accumulated OCI into income (effective portion)¹	(1,027		)	175			(852		)	(8,632		)	2,839			(5,793		)
Loss recognized in income on derivative (ineffective portion)¹	$	—		$	(321	)	$	(321	)	$	—		$	(610	)	$	(610	)


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.