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Note 10 - Fuel Derivatives
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9 Months Ended |
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Mar. 31, 2013
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| Derivative Instruments and Hedging Activities Disclosure [Text Block] |
10. 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 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.
As
of March 31, 2013, we had entered into futures contracts,
which pertain to 1,134,000 gallons in heating oil through
December 2013 (on average 126,000 gallons per month). 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. We have 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 March 31, 2013,
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. Our 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 was immaterial at March 31, 2013.
Based
on the amounts in accumulated other comprehensive income as
of March 31, 2013 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.
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