Derivative Instruments

6 Months Ended

Jun. 30, 2012

Derivative Instruments

8. Derivative Instruments

Commodity Risk Management

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 six months ended June 30, 2012. There were no derivative instruments designated by the Company as fair value hedges for the three and six months ended June 30, 2011. As of June 30, 2012, the Company had 45,360,000 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 six months ended June 30, 2012 and 2011.

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).

Interest Rate Risk Management

In order to manage its interest rate risk, the Company may enter into Treasury lock agreements to fix the Treasury yield component of the interest cost associated with anticipated financings. During June and July 2012, the Company entered into several Treasury lock agreements to fix the Treasury yield component of the interest cost of financing the issuance of senior notes. These Treasury locks were designated as cash flow hedges. The Company refinanced all $250,000 aggregate principal amount of its 6 ⁵/8% senior notes due 2016 (the “2016 Notes”) through the issuance of $250,000 aggregate principal amount of its 3.60% senior notes due 2022 (the “2022 Notes”) in July 2012.

The changes in fair value on these hedges are included in accumulated other comprehensive income (loss) to the extent effective, and will be reclassified into interest expense over the term of the senior notes.

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

	Asset Derivatives
	Balance Sheet Location		Fair Value as of
			June 30, 2012		December 31, 2011
Designated as hedging instruments
Commodity forward contracts		Accounts receivable, net	$	8,670	$	—
Not designated as hedging instruments
Commodity forward contracts		Accounts receivable, net		1,379		2,437
Total asset derivatives			$	10,049	$	2,437

	Liability Derivatives
	Balance Sheet                                  Location		Fair Value as of
			June 30, 2012		December 31, 2011
Designated as hedging instruments
Commodity forward contracts		Accrued liabilities	$	544	$	3,262
Treasury lock agreements		Accrued liabilities		813		—
Not designated as hedging instruments
Commodity forward contracts		Accrued liabilities		2,340		973
Total liability derivatives			$	3,697	$	4,235

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 six months ended June 30, 2012, there was no material ineffectiveness with regard to the Company’s qualifying fair value hedges.

Derivatives in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on  Derivative	Three Months Ended June 30,					Six Months Ended June 30,
		2012			2011		2012			2011
Commodity forward contracts	Cost of sales	$	2,397		$	—	$	12,860		$	—
Hedged Items in Fair Value Hedging Relationships	Location of Gain (Loss) Recognized in Income on Hedged  Items	Three Months Ended June 30,					Six Months Ended June 30,
		2012			2011		2012			2011
Firm commitment designated as the hedged item	Cost of sales	$	(2,397	)	$	—	$	(14,061	)	$	—

The following table reflects the impact of derivative instruments designated as cash flow hedges on the Company’s consolidated statements of comprehensive income. There was no ineffectiveness recognized in the Company’s consolidated statements of operations with regard to the Company’s qualifying cash flow hedges for the three and six months ended June 30, 2012.

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)
	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Treasury lock agreements	$	(813	)	$	—	$	(813	)	$	—

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

Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on  Derivative	Three Months Ended June 30,					Six Months Ended June 30,
		2012			2011		2012			2011
Commodity forward contracts	Cost of sales	$	(1,592	)	$	483	$	(1,031	)	$	467

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