Quarterly report pursuant to sections 13 or 15(d)

FAIR VALUE MEASUREMENTS

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FAIR VALUE MEASUREMENTS
3 Months Ended
Mar. 31, 2012
FAIR VALUE MEASUREMENTS [Abstract]  
FAIR VALUE MEASUREMENTS
8. FAIR VALUE MEASUREMENTS

The following items are measured at fair value on a recurring basis subject to disclosure requirements of ASC Topic 820 at March 31, 2012, and December 31, 2011:

Assets and Liabilities Measured at Fair Value on a Recurring Basis

         
Fair Value Measurements Using
   
March 31, 2012
   
Level 1
 
Level 2
Level 3
   
(thousands of dollars)
Assets:
               
Financial swaps on feedstock
  $ 925     $ 925      
                     
Liabilities:
                   
Interest rate swap
    1,024       -  $
1,024
       -

         
Fair Value Measurements Using
 
   
December 31, 2011
   
Level 1
   
Level 2
   
Level 3
 
   
(thousands of dollars)
 
Assets:
                       
Financial swaps on feedstock
  $ 393     $ 393       -       -  
                                 
Liabilities:
                               
Interest Rate Swap
    1,134       -     $ 1,134       -  


The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued interest, accrued liabilities, accrued liabilities in Saudi Arabia and other liabilities approximate the fair value due to the immediate or short-term maturity of these financial instruments. The fair value of variable rate long term debt and notes payable reflect recent market transactions and approximate carrying value.

Commodity Financial Instruments

We periodically enter into financial instruments to hedge the cost of natural gasoline (the primary feedstock) and natural gas (used as fuel to operate the plant).  South Hampton uses financial swaps on feedstock and options on natural gas to reduce the effect of significant raw material price increases on operating results.

We assess the fair value of the financial swaps on feedstock using quoted prices in active markets for identical assets or liabilities (Level 1 of fair value hierarchy).  At March 31, 2012, and December 31, 2011, no natural gas options were outstanding.

Interest Rate Swap

In March 2008 we entered into an interest rate swap agreement with Bank of America related to the $10.0 million term loan secured by plant, pipeline and equipment.  The interest rate swap was designed to minimize the effect of changes in the LIBOR rate.  We have designated the interest rate swap as a cash flow hedge under ASC Topic 815, Derivatives and Hedging.

South Hampton assesses the fair value of the interest rate swap using a present value model that includes quoted LIBOR rates and the nonperformance risk of the Company and Bank of America based on the Credit Default Swap Market (Level 2 of fair value hierarchy).

The Company has consistently applied valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds. See discussion of our derivative instruments in Note 9.