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Note 11 - Fuel Derivatives
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6 Months Ended |
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Dec. 31, 2011
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| Note 11 - Fuel Derivatives Disclosure | |
| Note 11 - Fuel Derivatives |
11. Fuel
Derivatives
In
the Company’s day to day business activities we are exposed
to certain market risks, including the effects of changes in fuel
prices. The company continually reviews new ways to
reduce the potentially adverse effects that the volatility of
fuel markets may have on operating results. In an
effort to reduce the variability of the ultimate cash flows
associated with fluctuations in diesel fuel prices, the company
has begun to enter into futures contracts. These
instruments will be heating oil futures contracts as the related
index, New York Mercantile Exchange ("NYMEX"), generally exhibits
high correlation with the changes in the dollars of the
forecasted purchase of diesel fuel. The Company does not engage
in speculative transactions, nor does it hold or issue financial
instruments for trading purposes.
In
fiscal 2012, we entered into futures contracts, which pertain to
5.0 million gallons (up to 378,000 gallons per month) or
approximately 11% of our monthly projected fuel requirements
through August 2012 and 7% of our monthly projected fuel
requirements through December 2012. Under these
contracts, we pay a fixed rate per gallon of heating oil and
receive the monthly average price of New York heating oil per the
NYMEX. The Company has done retrospective and prospective
regression analyses that showed the changes in the prices of
diesel fuel and heating oil were deemed to be highly effective
based on the relevant authoritative
guidance. Accordingly, we have designated the
respective hedges as cash flow hedges.
We
perform both a prospective and retrospective assessment of the
effectiveness of our hedge contracts at inception and
quarterly. If our analysis shows that the derivatives
are not highly effective as hedges, we will discontinue hedge
accounting for the period and prospectively recognize changes in
the fair value of the derivative being recognized through
earnings. As a result of our effectiveness assessment
at inception and at December 31, 2011, we believe our hedge
contracts have been and will continue to be highly effective in
offsetting changes in cash flows attributable to the hedged
risk.
We
recognize all derivative instruments at fair value on our
consolidated condensed balance sheets in other assets or other
accrued expenses. The Company's derivative instruments
are designated as cash flow hedges, thus the effective portion of
the gain or loss on the derivative is reported as a component of
accumulated other comprehensive income and will be reclassified
into earnings in the same period during which the hedged
transactions affect earnings. The effective portion of
the derivative represents the change in fair value of the hedge
that offsets the change in fair value of the hedged
item. To the extent the change in the fair value of
the hedge does not perfectly offset the change in the fair value
of the hedged item, the ineffective portion of the hedge is
immediately recognized in other income or expense on our
consolidated condensed statements of operations. The
ineffective portion of the hedge for the quarter was immaterial
and therefore not recognized through earnings.
Based
on the amounts in accumulated other comprehensive income as of
December 31, 2011 and the expected timing of the purchases of the
diesel hedged, we expect to reclassify $0.2 million of income on
derivative instruments from accumulated other comprehensive
income to the statement of income, as an offset to fuel expense,
during the next twelve months due to the actual diesel fuel
purchases. The amounts actually realized will be
dependent on the fair values as of the date of settlement.
Outstanding
financial derivative instruments expose us to credit loss in the
event of nonperformance by the companies with which we have these
agreements. Our credit exposure related to these
financial instruments is represented by the fair value of
contracts reported as assets. To evaluate credit risk,
we review each counterparty's audited financial statements and
credit ratings and obtain references. Any credit
valuation adjustments deemed necessary would be reflected in the
fair value of the instrument. As of December 31, 2011,
there have not been any adjustments made.
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