Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS

v3.3.0.814
DERIVATIVE INSTRUMENTS
9 Months Ended
Sep. 30, 2015
DERIVATIVE INSTRUMENTS [Abstract]  
DERIVATIVE INSTRUMENTS
10. DERIVATIVE INSTRUMENTS

Commodity Financial Contracts

Hydrocarbon based manufacturers, such as SHR, are significantly impacted by changes in feedstock and natural gas prices. Not considering derivative transactions, feedstock and natural gas used for the nine months ended September 30, 2015, and 2014, represented approximately 70.0% and 81.6% of our petrochemical operating expenses, respectively. The significant percentage decrease of petrochemical operating expenses illustrates the impact that feedstock price changes have on our operations.  During the first nine months of 2015, feedstock prices declined industry-wide.

We endeavor to acquire feedstock and natural gas at the lowest possible cost.  Our primary feedstock (natural gasoline) is traded over the counter and not on organized futures exchanges.  Financially settled instruments (fixed price swaps) are the principal vehicle used to give some predictability to feed prices. We do not purchase or hold any derivative financial instruments for trading or speculative purposes and hedging is limited by our risk management policy to a maximum of 40% of monthly feedstock requirements.

Typically, financial contracts are not designated as hedges.  As of September 30, 2015, we had no outstanding committed financial contracts.

The following tables detail (in thousands) the impact the agreements had on the financial statements:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Unrealized gain (loss)
  $ -     $ -     $ 180     $ (48 )
Realized gain (loss)
    -       -       (180 )     87  
Net gain
  $ -     $ -     $ -     $ 39  

 

 
   
September 30, 2015
   
December 31, 2014
 
             
Fair value of financial contracts – liability
  $ -     $ 180  

The realized and unrealized gains/(losses) are recorded in Cost of Sales and Processing for the periods ended September 30, 2015, and 2014.  As a percentage of Cost of Sales and Processing, realized and unrealized gains/(losses) accounted for 0% for the three and nine months ended September 30, 2015, and 2014.

Interest Rate Swap

In March 2008 we entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to a $10.0 million (later increased to $14 million) term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement was August 15, 2008, and terminates on December 15, 2017.  The notional amount of the interest rate swap was $3.00 million and $3.75 million at September 30, 2015, and December 31, 2014, respectively.  We receive credit for payments of variable rate interest made on the term loan at the loan’s variable rates, which are based upon the London InterBank Offered Rate (LIBOR), and pay Bank of America an interest rate of 5.83% less the credit on the interest rate swap.  We originally designated the transaction as a cash flow hedge according to ASC Topic 815, Derivatives and Hedging.  Beginning on August 15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within other comprehensive income (loss) in the Company’s Statement of Stockholders’ Equity.  We originally entered into the interest rate swap to minimize the effect of changes in the LIBOR rate.

The following tables detail (in thousands) the impact the agreement had on the financial statements:

   
September 30,
 
   
2015
   
2014
 
Other Comprehensive Loss
           
  Cumulative loss
  $ -     $ (382 )
  Deferred tax benefit
    -       134  
  Net cumulative loss
  $ -     $ (248 )
                 
Interest expense reclassified from other comprehensive loss
  $ -     $ 190  

   
September 30, 2015
   
December 31, 2014
 
             
Fair value of interest rate swap  - liability
  $ 227     $ 378  

Due to the ARC, we believe that the hedge is no longer entirely effective; therefore, we began treating the interest rate swap as ineffective at that point.  The changes in fair value are now recorded in the Statement of Income.  For the three months ended September 30, 2015, an unrealized loss of approximately $3,000 and a realized loss of approximately $46,000 were recorded.  For the nine months ended September 30, 2015, an unrealized gain of approximately $6,000 and a realized loss of approximately $147,000 were recorded.