|9 Months Ended|
Sep. 30, 2012
|DERIVATIVE INSTRUMENTS [Abstract]|
Commodity Financial Contracts
Hydrocarbon based manufacturers, such as the Company, 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, 2012, and 2011, represented approximately 82.1% and 82.5% of our operating expenses, respectively.
The Company endeavors to acquire feedstock and natural gas at the lowest possible cost. The 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. The Company does not purchase or hold any derivative financial instruments for trading or speculative purposes and is limited by its risk management policy to hedging a maximum of 40% of monthly feedstock requirements.
The financial contracts currently in place are not designated as hedges. As of September 30, 2012, South Hampton had committed to financial contracts with settlement dates through December 2012.
The following tables detail (in thousands) the impact the agreements had on the financial statements:
The realized and unrealized gains/(losses) are recorded in Cost of Sales and Processing for the periods ended September 30, 2012, and 2011. As a percentage of Cost of Sales and Processing, realized and unrealized gains/(losses) accounted for 0% and 0.1% for the three months and 1.2% and 0% for the nine months ended September 30, 2012, and 2011, respectively. Due to the natural gasoline price decline during the second quarter, we purchased positions to fix our losses on our outstanding positions going forward; therefore, there will be no further effect on earnings unless additional positions are purchased.
With the drop in natural gasoline prices during the second quarter of 2012, margin calls were made on our outstanding financial contracts in the amount of $1.5 million. As of September 30, 2012, $1.0 million had been refunded leaving a balance of $0.5 million. These payments are reflected in prepaid derivative settlements at September 30, 2012.
Interest Rate Swap
On March 21, 2008, we entered into a pay-fixed, receive-variable interest rate swap agreement with Bank of America related to $10.0 million of our $14 million term loan secured by plant, pipeline and equipment. The effective date of the interest rate swap agreement is August 15, 2008, and terminates on December 15, 2017. The notional amount of the interest rate swap was $6,000,000 at September 30, 2012. South Hampton receives credit for payments of variable interest made on the term loan's variable rates, which are based upon the London InterBank Offered Rate (LIBOR), and pays Bank of America an interest rate of 5.83% less the credit on the interest rate swap. We have designated the transaction as a cash flow hedge. Beginning on August 15, 2008, the derivative instrument was reported at fair value with any changes in fair value reported within the Company's Statement of Comprehensive Income. The Company 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:
The cumulative loss from the changes in the swap contract's fair value that is included in other comprehensive loss will be reclassified into income when interest is paid. The net amount of pre-tax loss in other comprehensive income (loss) as of September 30, 2012, predicted to be reclassified into earnings within the next 12 months is approximately $316,000. See further discussion of the fair value of the derivative instruments in Note 8.
The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.
Reference 1: http://www.xbrl.org/2003/role/presentationRef