General form of registration statement for all companies including face-amount certificate companies

4. DERIVATIVES

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4. DERIVATIVES
 3 Months Ended 12 Months Ended
Mar. 31, 2013
Dec. 31, 2012
Derivatives    
4. DERIVATIVES

The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices and interest rates. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results.

 

Commodity Risk – Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sale and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price for ethanol. In addition, the Company hedges anticipated sales of ethanol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the three months ended March 31, 2013 and 2012, the Company did not designate any of its derivatives as cash flow hedges.

 

Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and ethanol by entering into forward contracts for those commodities. These derivatives are not designated for special hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized losses of $5,000 and gains of $134,000 as the change in the fair value of these contracts for the three months ended March 31, 2013 and 2012, respectively.

 

Non Designated Derivative Instruments – The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follows (in thousands):

  

        Realized Losses  
        Three Months Ended March 31,  
Type of Instrument   Statements of Operations Location   2013     2012  
Commodity contracts   Cost of goods sold   $ (73 )   $ (102 )
                     
        Unrealized Gains  
        Three Months Ended March 31,  
Type of Instrument   Statements of Operations Location   2013     2012  
Commodity contracts   Cost of goods sold   $ 68     $ 236  

The business and activities of the Company expose it to a variety of market risks, including risks related to changes in commodity prices. The Company monitors and manages these financial exposures as an integral part of its risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results.

 

Commodity Risk – Cash Flow Hedges – The Company uses derivative instruments to protect cash flows from fluctuations caused by volatility in commodity prices for periods of up to twelve months in order to protect gross profit margins from potentially adverse effects of market and price volatility on ethanol sale and purchase commitments where the prices are set at a future date and/or if the contracts specify a floating or index-based price for ethanol. In addition, the Company hedges anticipated sales of ethanol to minimize its exposure to the potentially adverse effects of price volatility. These derivatives may be designated and documented as cash flow hedges and effectiveness is evaluated by assessing the probability of the anticipated transactions and regressing commodity futures prices against the Company’s purchase and sales prices. Ineffectiveness, which is defined as the degree to which the derivative does not offset the underlying exposure, is recognized immediately in cost of goods sold. For the years ended December 31, 2012 and 2011, the Company did not designate any of its derivatives as cash flow hedges.

 

Commodity Risk – Non-Designated Hedges – The Company uses derivative instruments to lock in prices for certain amounts of corn and ethanol by entering into forward contracts for those commodities. These derivatives are not designated for special hedge accounting treatment. The changes in fair value of these contracts are recorded on the balance sheet and recognized immediately in cost of goods sold. The Company recognized gains of $999,000 and $96,000 as the change in the fair value of these contracts for the years ended December 31, 2012 and 2011, respectively.

 

Non Designated Derivative Instruments – The classification and amounts of the Company’s derivatives not designated as hedging instruments are as follows (in thousands):

 

     As of December 31, 2012  
    Assets     Liabilities  
Type of Instrument   Balance Sheet Location   Fair Value     Balance Sheet Location   Fair Value  
                     
Commodity contracts   Other current assets   $ 189     Accrued liabilities   $ 167  
        $ 189         $ 167  

 

     As of December 31, 2011  
    Assets     Liabilities  
Type of Instrument   Balance Sheet Location   Fair Value     Balance Sheet Location   Fair Value  
                     
Commodity contracts   Other current assets   $ 244     Accrued liabilities   $ 500  
        $ 244         $ 500  

 

The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follows (in thousands):

 

        Realized Gains  
    For the Years Ended December 31,  

 

Type of Instrument

   Statements of Operations Location   2012     2011  
                 
Commodity contracts   Cost of goods sold   $ 720     $ 338  
        $ 720     $ 338  

 

        Unrealized Gains (Losses)  
    For the Years Ended December 31,  

 

Type of Instrument

   Statements of Operations Location   2012     2011  
                 
Commodity contracts   Cost of goods sold   $ 279     $ (242 )
        $ 279     $ (242 )