Derivative Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

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 nine months ended September 30, 2012 and 2011. As of September 30, 2012, the Company had 53,550,000 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, 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 and designate these Treasury locks as cash flow hedges.

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. The Company refinanced all $250,000 aggregate principal amount of the 2016 Notes through the issuance of $250,000 aggregate principal amount of the 2022 Notes in July 2012. Also in July 2012, the Company settled all Treasury lock agreements associated with the issuance of the 2022 Notes with an aggregate payment of $1,940 to the counterparties due to a decrease in the 10-year Treasury rates between inception and settlement of the Treasury lock agreements.

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
		September 30, 2012		December 31, 2011
Designated as hedging instruments
Commodity forward contracts	Accounts receivable, net	$	8,630	$	—
Not designated as hedging instruments
Commodity forward contracts	Accounts receivable, net	1,213		2,437
Total asset derivatives		$	9,843	$	2,437

	Liability Derivatives
	Balance Sheet Location	Fair Value as of
		September 30, 2012		December 31, 2011
Designated as hedging instruments
Commodity forward contracts	Accrued liabilities	$	1,019	$	3,262
Not designated as hedging instruments
Commodity forward contracts	Accrued liabilities	1,873		973
Total liability derivatives		$	2,892	$	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 nine months ended September 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 September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
Commodity forward contracts	Cost of sales	$	(515	)	$	(1,780	)	$	12,345		$	(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,
		2012			2011			2012			2011
Firm commitment designated as the    hedged item	Cost of sales	$	515		$	1,780		$	(13,546	)	$	1,780

The following table reflects the impact of derivative instruments designated as cash flow hedges on the Company’s consolidated statements of operations for the three and nine months ended September 30, 2012.

Derivatives in Cash Flow    Hedging Relationships	Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income	Three Months Ended September 30,					Nine Months Ended September 30,
		2012			2011		2012			2011
Treasury lock agreements	Interest expense	$	(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 September 30,				Nine Months Ended September 30,
		2012		2011		2012			2011
Commodity forward contracts	Cost of sales	$	249	$	371	$	(783	)	$	838

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