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5. DERIVATIVES.
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Dec. 31, 2011
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| Derivative Instruments and Hedging Activities Disclosure [Text Block] |
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 years ended December 31, 2011
and 2010, 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 a gain of $96,000 and a loss of
$178,000 as the change in the fair value of these contracts
for the years ended December 31, 2011 and 2010, respectively.
The notional balances remaining on these contracts as of
December 31, 2011 and 2010 were $9,186,000 and $237,000,
respectively.
Interest
Rate Risk – The Company has historically used
derivative instruments to minimize significant unanticipated
income fluctuations that may arise from rising variable
interest rate costs associated with existing and anticipated
borrowings. The Company purchased interest rate caps and
swaps to meet these objectives. During the year ended
December 31, 2010, through both divesture of its investment
and resulting deconsolidation of Front Range, and the
emergence of the Plant Owners from bankruptcy, all interest
rate caps and swaps were removed from the Company’s
consolidated statement of position as of December 31,
2010.
These
derivatives were, at times, designated and documented as cash
flow hedges, with effectiveness evaluated by assessing the
probability of anticipated interest expense and regressing
the historical value of the rates against the historical
value in the existing and anticipated debt. The Company
recognized gains from undesignated hedges of $0 and
$1,227,000 in interest expense, net, for the years ended
December 31, 2011 and 2010, respectively. These gains
resulted primarily from the Company’s efforts to
restructure its indebtedness prior to the Plant Owners’
Chapter 11 Filings, therefore making it not probable that the
related borrowings would be paid as designated. As such, the
Company de-designated certain of its interest rate caps and
swaps.
Non
Designated Derivative Instruments – The
classification and amounts of the Company’s derivatives
not designated as hedging instruments are as follows (in
thousands):
The
classification and amounts of the Company’s recognized
gains (losses) for its derivatives not designated as hedging
instruments are as follow (in thousands):
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