DERIVATIVE INSTRUMENTS |
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| DERIVATIVE INSTRUMENTS |
9. DERIVATIVE INSTRUMENTS
Commodity Financial Instruments
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, 2011, and 2010, represented approximately 82.5% and 81.2% 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.
The derivative agreements currently in place are not designated as hedges per ASC Topic 815, Derivatives and Hedging. As of September 30, 2011, South Hampton had committed to derivative contracts with settlement dates through November 2011.
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, 2011, and 2010.
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 $7,000,000 at September 30, 2011. 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 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. 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, 2011, predicted to be reclassified into earnings within the next 12 months is approximately $355,000. See further discussion of the fair value of the derivative instruments in Note 8.
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