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Note 12 - Fuel Derivatives
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3 Months Ended |
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Sep. 30, 2011
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| Derivatives, Policy [Policy Text Block] |
12. 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 3.2 million gallons (210,000 gallons per month) or
approximately 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 September 30,
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 September 30, 2011 and the expected timing of the
purchases of the diesel hedged, we expect to reclassify $0.3
million of losses on derivative instruments from accumulated
other comprehensive income to the statement of income, as an
offset to fuel expense, during the next fifteen 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 September 30, 2011, there have
not been any adjustments made.
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