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Derivatives, Hedges, Financial Instruments and Carbon Credits
 12 Months Ended
Dec. 31, 2011
Derivatives, Hedges, Financial Instruments and Carbon Credits [Abstract]  
Derivatives, Hedges, Financial Instruments and Carbon Credits
12. Derivatives, Hedges, Financial Instruments and Carbon Credits
We have three classes of contracts that are accounted for on a fair value basis, which are commodities futures/forward contracts (“commodities contracts”), foreign exchange contracts and interest rate contracts as discussed below. All of these contracts are used as economic hedges for risk management purposes but are not designated as hedging instruments. In addition as discussed below, we are issued climate reserve tonnes (“carbon credits”), which a certain portion of the carbon credits are to be sold and the proceeds given to Bayer. The carbon credits are accounted for on a fair value basis as discussed below. Also the contractual obligations associated with these carbon credits are accounted for on a fair value basis (as discussed below) unless we enter into a firm sales commitment to sell the carbon credits as discussed in Note 1 — Summary of Significant Accounting Policies. The valuations of these assets and liabilities were determined based on quoted market prices or, in instances where market quotes are not available, other valuation techniques or models used to estimate fair values.
The valuations of contracts classified as Level 1 are based on quoted prices in active markets for identical contracts. The valuations of contracts classified as Level 2 are based on quoted prices for similar contracts and valuation inputs other than quoted prices that are observable for these contracts. At December 31, 2011, the valuations of contracts classified as Level 2 related to interest rate swap contracts. For interest rate swap contracts, we utilize valuation software and market data from a third-party provider. These interest rate contracts are valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the contracts and using market information for forward interest-rate yield curves. The valuation inputs included the total contractual weighted-average pay rate of 3.27% and the total estimated market weighted-average receive rate of 0.99%. No valuation input adjustments were considered necessary relating to nonperformance risk for the contracts.
The valuations of assets and liabilities classified as Level 3 are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. At December 31, 2011, the valuations ($3.15 per carbon credit) of the carbon credits and the contractual obligations associated with these carbon credits are classified as Level 3 and are based on the range of ask/bid prices ($1.00 to $3.00) per carbon credit obtained from a broker involved in this low volume market, the sales price of a December 2011 transaction and an offer received from a potential customer. At December 31, 2010, the valuations ($3.25 per carbon credit) of the carbon credits and the contractual obligations associated with these carbon credits are classified as Level 3 and are based on the range of ask/bid prices ($3.00 to $5.00) per carbon credit obtained from a broker involved in this low volume market, pricing terms included in a sales agreement being negotiated at December 31, 2010, and inquiries from market participants concerning our listed ask price through a broker. The valuations are using undiscounted cash flows based on management’s assumption that the carbon credits would be sold and the associated contractual obligations would be extinguished in the near term. In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for the carbon credits and associated contractual obligations.
Commodities Contracts
Raw materials for use in our manufacturing processes include copper used by our Climate Control Business and anhydrous ammonia and natural gas used by our Chemical Business. As part of our raw material price risk management, we periodically enter into futures/forward contracts for these materials, which contracts may be required to be accounted for on a mark-to-market basis. At December 31, 2010, our futures/forward copper contracts were for 750,000 pounds of copper through May 2011 at a weighted-average cost of $3.75 per pound. At December 31, 2011, our futures/forward copper contracts were for 375,000 pounds of copper through May 2012 at a weighted-average cost of $3.42 per pound. At December 31, 2010, our futures/forward natural gas contracts were for 800,000 MMBtu of natural gas through February 2011 at a weighted-average cost of $4.10 per MMBtu. At December 31, 2011, we did not have any futures/forward natural gas contracts requiring mark-to-market accounting. The cash flows relating to these contracts are included in cash flows from continuing operating activities.
Foreign Exchange Contracts
One of our business operations purchases industrial machinery and related components from vendors outside of the United States. As part of our foreign currency risk management, we periodically enter into foreign exchange contracts, which set the U.S. Dollar/Euro exchange rates. These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. At December 31, 2010, our foreign exchange contracts were for the receipt of approximately 783,000 Euros through June 2011 and for the payment of approximately 110,000 Euros through March 2011, at the total contractual weighted-average exchange rate of 1.26 (U.S. Dollar/Euro). At December 31, 2011, we did not have any foreign exchange contracts. The cash flows relating to these contracts are included in cash flows from continuing operating activities.
Interest Rate Contracts
As part of our interest rate risk management, we periodically purchase and/or enter into various interest rate contracts. In April 2008, we entered into an interest rate swap at no cost, which sets a fixed three-month LIBOR rate of 3.24% on $25 million and matures in April 2012. In September 2008, we acquired an interest rate swap at a cost basis of $0.4 million, which sets a fixed three-month LIBOR rate of 3.595% on $25 million and matures in April 2012. In February 2011, we entered into an interest rate swap at no cost, which sets a fixed three-month LIBOR rate of 3.23% on a declining balance (from $23.8 million to $18.8 million) for the period beginning in April 2012 through March 2016.
These contracts are free-standing derivatives and are accounted for on a mark-to-market basis. During each of the three years ended December 31, 2011, no cash flows occurred relating to the purchase or sale of interest rate contracts. The cash flows associated with the interest rate swap payments are included in cash flows from continuing operating activities.
Carbon Credits and Associated Contractual Obligation
During 2010 and 2011, we were issued carbon credits by the Climate Action Reserve in relation to a greenhouse gas reduction project (“Project”) performed at the Baytown Facility. Pursuant to the terms of the agreement with Bayer, a certain portion of the carbon credits are to be used to recover the costs of the Project, and any balance thereafter to be allocated between Bayer and EDN. We have no obligation to reimburse Bayer for their costs associated with the Project, except through the transfer or sale of the carbon credits when such credits are issued to us. The carbon credits are accounted for on a fair value basis and the contractual obligations associated with these carbon credits are also accounted for on a fair value basis (unless we enter into a firm sales commitment to sell the carbon credits). At December 31, 2010, we had approximately 198,000 carbon credits, all of which were subject to contractual obligations. At December 31, 2011, we had a minimal amount of carbon credits, all of which were subject to contractual obligations. The cash flows associated with the carbon credits and the associated contractual obligations are included in cash flows from continuing investing activities.
The following details our assets and liabilities that are measured at fair value on a recurring basis at December 31, 2011 and 2010:
                                         
            Fair Value Measurements at        
            December 31, 2011 Using        
            Quoted Prices     Significant              
    Total Fair     in Active     Other     Significant     Total Fair  
    Value at     Markets for     Observable     Unobservable     Value at  
    December 31,     Identical Assets     Inputs     Inputs     December 31,  
    2011     (Level 1)     (Level 2)     (Level 3)     2010  
Description   (In Thousands)  
 
                                       
Assets — Supplies, prepaid items and other:
                                       
Commodities contracts
  $ 11     $ 11     $ —     $ —     $ 761  
Carbon credits
    42       —       —       42       644  
Foreign exchange contracts
    —       —       —       —       49  
 
                             
Total
  $ 53     $ 11     $ —     $ 42     $ 1,454  
 
                             
 
                                       
Liabilities — Current and noncurrent accrued and other liabilities:
                                       
Contractual obligations — carbon credits
  $ 42     $ —     $ —     $ 42     $ 644  
Interest rate contracts
    2,241       —       2,241       —       1,895  
 
                             
Total
  $ 2,283     $ —     $ 2,241     $ 42     $ 2,539  
 
                             
During 2011 and 2010, none of our assets or liabilities measured at fair value on a recurring basis transferred between Level 1 and Level 2 classifications. In addition, the following is a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):
                                                 
    Assets     Liabilities  
    2011     2010     2009     2011     2010     2009  
    (In Thousands)  
Beginning balance
  $ 644     $ —     $ —     $ (644 )   $ —     $ (1,388 )
Transfers into Level 3
    —       —       —       —       —       —  
Transfers out of Level 3
    —       —       —       —       —       —  
Total realized and unrealized gains (losses) included in earnings
    1,995       644       —       (1,844 )     (644 )     493  
Purchases
    —       —       —       —       —       —  
Issuances
    —       —       —       —       —       —  
Sales
    (2,597 )     —       —       —       —       —  
Settlements
    —       —       —       2,446       —       895  
 
                                   
Ending balance
  $ 42     $ 644     $ —     $ (42 )   $ (644 )   $ —  
 
                                   
Total gains (losses) for the period included in earnings attributed to the change in unrealized gains or losses on assets and liabilities still held at the reporting date
  $ 42     $ 644     $ —     $ (42 )   $ (644 )   $ —  
 
                                   
Realized and unrealized net losses included in earnings and the income statement classifications are as follows:
                         
    2011     2010     2009  
    (In Thousands)  
Total net gains (losses) included in earnings:
                       
Cost of sales — Commodities contracts
  $ (523 )   $ (59 )   $ (1,312 )
Cost of sales — Foreign exchange contracts
    46       25       (32 )
Other income — Carbon credits
    1,995       644       —  
Other expense — Contractual obligations relating to carbon credits
    (1,844 )     (644 )     —  
Interest expense — Interest rate contracts
    (1,925 )     (1,527 )     (729 )
 
                 
 
  $ (2,251 )   $ (1,561 )   $ (2,073 )
 
                 
 
                       
Change in unrealized gains (losses) relating to contracts still held at year end:
                       
Cost of sales — Commodities contracts
  $ 11     $ 761     $ 138  
Cost of sales — Foreign exchange contracts
    —       49       —  
Other income — Carbon credits
    42       644       —  
Other expense — Contractual obligations relating to carbon credits
    (42 )     (644 )     —  
Interest expense — Interest rate contracts
    (346 )     34       508  
 
                 
 
  $ (335 )   $ 844     $ 646  
 
                 
The following discussion of fair values is not indicative of the overall fair value of our assets and liabilities since it does not include all assets, including intangibles.
Our long-term debt agreements are the only financial instruments with fair values significantly different from their carrying amounts. At December 31, 2011 and 2010, the fair value for variable interest rate debt (excluding the secured term loan at December 31, 2010) approximates their carrying value. At December 31, 2010, the estimated fair value of the secured term loan is based on defined LIBOR rates plus 6% utilizing information obtained from the lender. The fair values of fixed interest rate borrowings, other than the 2007 Debentures, are estimated using a discounted cash flow analysis that applies interest rates currently being offered on borrowings of similar amounts and terms to those currently outstanding while also taking into consideration our current credit worthiness. At December 31, 2010, the estimated fair value of the 2007 Debentures is based on quoted prices obtained from a broker for these debentures. The estimated fair value and carrying value of our long-term debt are as follows:
                                 
    December 31, 2011     December 31, 2010  
    Estimated     Carrying     Estimated     Carrying  
    Fair Value     Value     Fair Value     Value  
    (In Thousands)  
Variable Interest Rate:
                               
Secured Term Loan (1)
  $ 72,188     $ 72,188     $ 26,721     $ 48,773  
Working Capital Revolver Loan
    —       —       —       —  
Other debt (2)
    —       —       2,437       2,437  
 
Fixed Interest Rate:
                               
5.5% Convertible Senior Subordinated Notes
    —       —       27,976       26,900  
Other bank debt and equipment financing
    7,211       7,272       17,251       17,282  
 
                       
 
  $ 79,399     $ 79,460     $ 74,385     $ 95,392  
 
                       
     
(1)  
Includes a fixed interest rate of 5.15% on the principal amount of $24.1 million at December 31, 2011.
 
(2)  
At December 31, 2010, the balance includes a variable interest rate debt agreement with a minimum interest rate of 6%, which interest rate was 6%.
Other
In 1997, we entered into an interest rate forward agreement to effectively fix the interest rate of a long-term lease commitment (not for trading purposes). In 1999, we executed a long-term lease agreement (initial lease term of ten years) and terminated the forward agreement at a net cost of $2.8 million. We historically accounted for this cash flow hedge under the deferral method (as an adjustment of the initial term lease rentals). As the result of accounting principles becoming effective in 2001, the remaining deferred cost amount was reclassified from other assets to accumulated other comprehensive loss and was being amortized to operations over the term of the lease arrangement, which expired in 2009. The amount amortized to operations was $120,000 for 2009 and (none in 2010 and 2011). The associated income tax benefits were minimal in 2009.