Derivative Financial Instruments

9 Months Ended

Sep. 30, 2012

Derivative Financial Instruments

Derivative Financial Instruments

7. Derivative Financial Instruments

        We purchase natural gas at market prices to meet production requirements at our manufacturing facility. Natural gas market prices are volatile, and we hedge a portion of our natural gas production requirements through the use of financial derivative contracts that reference physical natural gas prices or approximate NYMEX futures contract prices.

        The natural gas derivatives that we currently use are natural gas swap contracts. This type of swap is a contract with a third party to exchange cash based on the difference between a fixed price and a designated index price in the future. Generally, an increase in the price of natural gas will result in a gain on a purchased swap, while a decline in natural gas prices will result on a loss on a purchased swap.

        Natural gas derivative contract prices are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, we purchase natural gas for our manufacturing facility at locations other than Henry Hub, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset changes in the market price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.

        We report derivatives on our consolidated balance sheet at fair value with changes in fair value recognized immediately in earnings, unless the normal purchase and sale exemption applies. We use natural gas derivatives primarily as an economic hedge of gas price risk, but without the application of hedge accounting. Accordingly, changes in the fair value of the derivatives are recorded in cost of sales as the changes occur. Cash flows related to natural gas derivatives are reported as operating activities.

        The effect of derivatives in our consolidated statements of operations is shown below. All amounts arise from natural gas derivatives that are not designated as hedging instruments, with resulting gains and losses recorded in cost of goods sold.

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
	(in millions)
Realized losses	$	(5.7	)	$	(3.8	)	$	(22.2	)	$	(5.4	)
Unrealized mark-to-market gains (losses)		7.1			(1.8	)		9.6			(4.4	)
Net derivative gains (losses)	$	1.4		$	(5.6	)	$	(12.6	)	$	(9.8	)

        The fair values of derivatives on our consolidated balance sheets are shown below. All amounts arise from natural gas derivatives that are not designated as hedging instruments. For additional information on derivative fair values, see Note 8—Fair Value Measurements included herein.

	September 30, 2012			December 31, 2011
	(in millions)
Unrealized gains in other current assets	$	0.2		$	—
Unrealized losses in other current liabilities		(2.6	)		(12.0	)
Net unrealized derivative losses	$	(2.4	)	$	(12.0	)

        As of September 30, 2012 and December 31, 2011, we had open derivative contracts for 7.0 million MMBtus and 27.0 million MMBtus, respectively, of natural gas. For the nine months ended September 30, 2012, we used derivatives to cover approximately 67% of our natural gas consumption.

        Natural gas derivatives involve the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to our natural gas derivatives are either large oil and gas companies or large financial institutions. Cash collateral is deposited or received when predetermined unrealized gain or loss thresholds are exceeded. At both September 30, 2012 and December 31, 2011, we had no cash collateral on deposit for derivative contracts.

        As of September 30, 2012 and December 31, 2011, the aggregate fair value of the derivative instruments with credit-risk-related contingent features in a net liability position was $2.4 million and $12.0 million, respectively, for which we had no cash collateral on deposit.

        For derivatives that are in net asset positions, we are exposed to credit loss from nonperformance by the counterparties. At September 30, 2012 and December 31, 2011, our exposure to credit loss from nonperformance by counterparties to derivative instruments was insignificant. Our credit risk is controlled through the use of multiple counterparties, individual credit limits, monitoring procedures, cash collateral requirements and master netting arrangements.

        Our derivatives do not have significant credit risk related contingent features that would require us to settle the derivatives or post collateral upon the occurrence of a credit event.