Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS

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DERIVATIVE INSTRUMENTS
 6 Months Ended
Jun. 30, 2014
DERIVATIVE INSTRUMENTS [Abstract]  
DERIVATIVE INSTRUMENTS
9. DERIVATIVE INSTRUMENTS

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 six months ended June 30, 2014, and 2013, represented approximately 81.8% and 79.7% of our operating expenses, respectively.

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 are limited by our risk management policy to hedging a maximum of 40% of monthly feedstock requirements.

Generally, financial contracts are not designated as hedges.  As of June 30, 2014, South Hampton had no outstanding committed financial contracts.

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

   
Three Months Ended
    
Six Months Ended
  
   
June 30,
    
June 30,
  
   
2014
    
2013
    
2014
    
2013
  
                         
Unrealized loss
   $ -     $ -     $ (48 )   $ -  
Realized gain
     -       -       87       -  
Net gain
   $ -     $ -     $ 39     $ -  

   
June 30, 2014
    
December 31, 2013
  
             
Fair value of financial contracts – liability
   $ -     $ 48  

The realized and unrealized gains/(losses) are recorded in Cost of Sales and Processing for the periods ended June 30, 2014, and 2013.  As a percentage of Cost of Sales and Processing, realized and unrealized gains/(losses) accounted for 0% and 0% for the three months and 0% and 0% for the six months ended June 30, 2014, and 2013, respectively.

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 $3.75 million at June 30, 2014.  South Hampton receives credit for payments of variable interest made on the term loan’s variable rates, which are based upon 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 other comprehensive income (loss) in the Company’s Statement of Comprehensive Income. We 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:

   
June 30,
  
   
2014
    
2013
  
Other Comprehensive Loss
            
  Cumulative loss
   $ (466 )   $ (696 )
  Deferred tax benefit
     163       243  
  Net cumulative loss
   $ (303 )   $ (453 )
                 
Interest expense reclassified from other comprehensive loss
   $ 130     $ 158  

   
June 30, 2014
    
December 31, 2013
  
             
Fair value of interest rate swap  - liability
   $ 466     $ 563  
 
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 June 30, 2014, predicted to be reclassified into earnings within the next 12 months is approximately $215,000. See further discussion of the fair value of the derivative instruments in Note 8.