v2.4.0.8
Financial Instruments And Risk Management
 9 Months Ended
Sep. 30, 2013
Financial Instruments And Risk Management [Abstract]  
Financial Instruments And Risk Management

 

Note I — Financial Instruments and Risk Management

 

DERIVATIVE INSTRUMENTS — The Company makes limited use of derivative instruments to manage certain risks related to commodity prices. The use of derivative instruments for risk management is covered by operating policies and is closely monitored by the Company’s senior management. The Company does not hold any derivatives for speculative purposes and it does not use derivatives with leveraged or complex features. Derivative instruments are traded primarily with creditworthy major financial institutions or over national exchanges such as the New York Mercantile Exchange (“NYMEX”). To qualify for hedge accounting, the changes in the market value of a derivative instrument must historically have been, and would be expected to continue to be, highly effective at offsetting changes in the prices of the hedged item. To the extent that the change in fair value of a derivative instrument has less than perfect correlation with the change in the fair value of the hedged item, a portion of the change in fair value of the derivative instrument is considered ineffective and would normally be recorded in earnings during the affected period.

 

The Company is subject to commodity price risk related to corn that it will purchase in the future for feedstock and DDGS and WDGS that it will sell in the future at its ethanol production facilities in the United States. At September 30, 2013 and 2012, the Company had open physical delivery commitment contracts for purchase of approximately 10.6 million and 32.3 million bushels of corn, respectively, for processing at its ethanol plants. For the periods ended September 30, 2013 and 2012, the Company had open physical delivery commitment contracts for sale of approximately 5.0 million and 1.5 million equivalent bushels, respectively, of DDGS and WDGS. To manage the price risk associated with certain of these physical delivery commitments which have fixed prices, at September 30, 2013 and 2012, the Company had outstanding derivative contracts with a net long volume of approximately 2.2 million bushels and net short volume of 6.9 million bushels, respectively, that mature at future prices in effect on the expected date of delivery under the physical delivery commitment contracts. Additionally, at September 30, 2013 and 2012, the Company had outstanding derivative contracts with a net short volume of 1.4 and 3.4 million bushels of corn to buy back when certain corn inventories are expected to be processed at the Hankinson, North Dakota, and Hereford, Texas facilities. The impact of marking to market these commodity derivative contracts decreased income before taxes by $4.1 million and increased income before taxes by $6.3 million for the nine months ended September 30, 2013 and 2012, respectively.

 

At September 30, 2013 and December 31, 2012, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

December 31, 2012

 

 

Balance

 

 

 

 

Balance

 

 

 

 

Balance

 

 

 

 

Balance

 

 

 

 

 

Sheet

 

Fair

 

Sheet

 

Fair

 

Sheet

 

Fair

 

Sheet

 

Fair

(Thousands of dollars)

 

Location

 

Value

 

Location

 

Value

 

Location

 

Value

 

Location

 

Value

Commodity derivative contracts

 

Accounts

 

 

 

 

Accounts

 

 

 

 

Accounts

 

 

 

 

Accounts

 

 

 

 

 

Receivable

 

$
1,567 

 

Payable

 

$
5,684 

 

Receivable

 

$
3,043 

 

Payable

 

$
102 

 

For the three-month and nine-month periods ended September 30, 2013 and 2012, the gains and losses recognized in the consolidated and combined Statements of Income for derivative instruments not designated as hedging instruments are presented in the following table.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss)

 

 

 

 

Three Months

 

Nine Months

 

 

 

 

Ended

 

Ended

(Thousands of dollars)

 

Statement of Income

 

September 30,

 

September 30,

Type of Derivative Contract

 

Location

 

2013

 

2012

 

2013

 

2012

Commodity

 

Fuel and ethanol costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

of goods sold

 

$
4,281 

 

$
(40,241)

 

$
2,905 

 

$
(37,978)

 

The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists. Derivative assets and liabilities which have offsetting positions at September 30, 2013 and December 31, 2012 are presented in the following tables: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Net Amounts of

 

 

Gross Amounts

 

Offset in the

 

Assets Presented in

 

 

of Recognized

 

Combined

 

the Combined

(Thousands of dollars)

 

Assets

 

Balance Sheet

 

Balance Sheet

At September 30, 2013

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$
2,868 

 

$
(1,301)

 

$
1,567 

 

 

 

 

 

 

 

 

 

 

At December 31, 2012

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$
6,727 

 

$
(3,684)

 

$
3,043 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts

 

Net Amounts of

 

 

Gross Amounts

 

Offset in the

 

Liabilities Presented

 

 

of Recognized

 

Consolidated

 

in the Consolidated

 

 

Liabilities

 

Balance Sheet

 

Balance Sheet

At September 30, 2013

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$
6,985 

 

$
(1,301)

 

$
5,684 

 

 

 

 

 

 

 

 

 

 

At December 31, 2012

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$
3,786 

 

$
(3,684)

 

$
102 

 

All commodity derivatives above are corn-based contracts associated with the Company’s two U.S. ethanol plants. Net derivative assets are included in Accounts Receivable presented in the table on the prior page and are included in Accounts Receivable on the Consolidated and Combined Balance Sheets; likewise, net derivative liabilities in the above table are included in Accounts Payable in the table above and are included in Accounts Payable and Accrued Liabilities on the Consolidated and Combined Balance Sheets. Separate derivative agreements exist for each of the ethanol plants and at September 30, 2013 one plant had a net receivable and the other had a net payable for derivative contracts. These contracts permit net settlement on a plant-specific basis and the Company generally avails itself of this right to settle net. At September 30, 2013 cash deposits of $2.7 million related to commodity derivative contracts were reported in Prepaid Expenses in the Consolidated and Combined Balance Sheets. These cash deposits have not been used to reduce the reported net liabilities on the corn-based derivative contracts at September 30, 2013.