Derivative Commodity Instruments

9 Months Ended

Sep. 30, 2011

Derivative Commodity Instruments [Abstract]

Derivative Commodity Instruments

8. Derivative Commodity Instruments

The Company uses derivative instruments to reduce price volatility risk on raw materials and products as a substantial portion of its raw materials and products are commodities whose prices fluctuate as market supply and demand fundamentals change. Business strategies to protect against such instability include ethylene product feedstock flexibility and moving downstream into the olefins and vinyls products where pricing is more stable. The Company does not use derivative instruments to engage in speculative activities.

For derivative instruments that are designated and qualify as fair value hedges, the gains or losses on the derivative instruments, as well as the offsetting losses or gains on the hedged items attributable to the hedged risk, were included in cost of sales in the consolidated statements of operations for the three and nine months ended September 30, 2011. As of September 30, 2011, the Company had 34,650,000 gallons of feedstock forward contracts designated as fair value hedges.

Gains and losses from changes in the fair value of derivative instruments that are not designated as hedging instruments were included in cost of sales in the consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010.

The exposure on commodity derivatives used for price risk management includes the risk that the counterparty will not pay if the market declines below the established fixed price. In such case, the Company would lose the benefit of the derivative differential on the volume of the commodities covered. In any event, the Company would continue to receive the market price on the actual volume hedged. The Company also bears the risk that it could lose the benefit of market improvements over the fixed derivative price for the term and volume of the derivative instruments (as such improvements would accrue to the benefit of the counterparty).

The fair values of derivative instruments in the Company's consolidated balance sheets were as follows:

	Asset Derivatives						Liability Derivatives
			Fair Value as of						Fair Value as of
	Balance Sheet Location		September 30, 2011		December 31, 2010		Balance Sheet Location		September 30, 2011		December 31, 2010
Designated as hedging instruments
Commodity forward contracts		Accounts receivable, net	$	68	$	—		Accrued liabilities	$	1,848	$	—
Not designated as hedging instruments
Commodity forward contracts		Accounts receivable, net	$	3,126	$	47		Accrued liabilities	$	1,658	$	46
Total derivatives			$	3,194	$	47			$	3,506	$	46

The following tables reflect the impact of derivative instruments designated as fair value hedges and the related hedged item on the Company's consolidated statements of operations. For the three and nine months ended September 30, 2011, there was no material ineffectiveness with regard to the Company's qualifying hedges.

	$(0,000)		$(0,000)			$(0,000)		$(0,000)			$(0,000)
Derivatives in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Derivative	Three Months Ended September 30,					Nine Months Ended September 30,
		2011			2010		2011			2010
Commodity forward contracts	Cost of sales	$	(1,780	)	$	—	$	(1,780	)	$	—
Hedged Items in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Hedged Items	Three Months Ended September 30,					Nine Months Ended September 30,
		2011			2010		2011			2010
Firm commitment designated as the hedged item	Cost of sales	$	1,780		$	—	$	1,780		$	—

The impact of derivative instruments that have not been designated as hedges on the Company's consolidated statements of operations were as follows:

	$(0,000)		$(0,000)		$(0,000)		$(0,000)		$(0,000)
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Three Months Ended September 30,				Nine Months Ended September 30,
		2011		2010		2011		2010
Commodity forward contracts	Cost of sales	$	371	$	531	$	838	$	(1,622	)

See Note 9 for the fair value of the Company's derivative instruments.