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4. DERIVATIVES | 9 Months Ended | 12 Months Ended
--- | --- | ---
Sep. 30, 2012 | Dec. 31, 2011
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 nine months ended September 30, 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 $202,000 and $334,000 as the change in the fair value of these contracts for the nine months ended September 30, 2012 and 2011, respectively. The notional balances remaining on these contracts were $24,102,000 and $9,186,000 as of September 30, 2012 and December 31, 2011, respectively. Non-Designated Derivative Instruments – The Company classified its derivative instruments not designated as hedging instruments of $514,000 and $291,000 in other assets and accrued liabilities as of September 30, 2012, respectively, and $244,000 and $500,000 in other assets and accrued liabilities as of December 31, 2011, respectively. The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follow (in thousands):
|  |  |  | Realized Gains |
|  |  |  | Nine Months Ended September 30, |
Type of Instrument |  | Statements of Operations Location |  | 2012 |  |  | 2011 |
Commodity contracts |  | Cost of goods sold |  | $ | 277 |  |  | $ | 460 |
|  |  |  | Unrealized Losses |
|  |  |  | Nine Months Ended September 30, |
Type of Instrument |  | Statements of Operations Location |  | 2012 |  |  | 2011 |
Commodity contracts |  | Cost of goods sold |  | $ | (479 | ) |  | $ | (126 | )
| 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):
|  | 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 |
|  | As of December 31, 2010 |
|  | Assets |  |  | Liabilities |
Type of Instrument |  | Balance Sheet Location |  | Fair Value |  |  | Balance Sheet Location |  | Fair Value |
Commodity contracts |  | Other current assets |  | $ | — |  |  | Accrued liabilities |  | $ | 15 |
|  |  |  | $ | — |  |  |  |  | $ | 15 |
The classification and amounts of the Company’s recognized gains (losses) for its derivatives not designated as hedging instruments are as follow (in thousands):
|  |  |  | Realized Gain (Loss) |
|  |  |  | For the Years Ended December 31, |
Type of Instrument |  | Statements of Operations Location |  | 2011 |  |  | 2010 |
Commodity contracts |  | Cost of goods sold |  | $ | 338 |  |  | $ | (163 | )
|  |  |  | $ | 338 |  |  | $ | (163 | )
|  |  |  | Unrealized Gain (Loss) |
|  |  |  | For the Years Ended December 31, |
Type of Instrument |  | Statements of Operations Location |  | 2011 |  |  | 2010 |
Commodity contracts |  | Cost of goods sold |  | $ | (242 | ) |  | $ | (15 | )
Interest rate contracts |  | Interest expense, net |  |  | — |  |  |  | 1,227 |
|  |  |  | $ | (242 | ) |  | $ | 1,212 |

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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