Derivative Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments

Derivative Instruments

6.  Derivative Instruments

We periodically hold interest rate derivative instruments to mitigate exposure to changes in interest rates, in particular one-month LIBOR, with $383.4 million and $392.0 million of our borrowings at September 30, 2014 and December 31, 2013, respectively, at variable rates. As a matter of policy, we do not use derivatives for speculative purposes. We currently havenointerest rate swap agreements in place. During 2013 we were a party to one interest rate swap agreement with a notional outstanding amount of $100.0 million with a fixed rate of 2.10%. The swap agreement expired in November 2013.  The remaining effective portion of these hedges at the swap expiration date is being amortized into earnings over the term of the underlying borrowings.  We recorded a ($0.4 million) benefit and $1.1 million expense to net finance costs during the nine month periods ended September 30, 2014 and September 30, 2013 respectively.

The Company estimates the fair value of derivative instruments using a discounted cash flow technique and uses creditworthiness inputs that can be corroborated by observable market data evaluating the Company’s and counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. We apply hedge accounting and account for the change in fair value of our cash flow hedges through other comprehensive income for all derivative instruments.

Earnings Effects of Derivative Instruments on the Consolidated Statements of Income

The following table provides information about the income effects of our cash flow hedging relationships for the three months ended September 30, 2014 and 2013:

		Amount of (Gain) Loss Recognized
		on Derivatives in the
		Statements of Income
	Location of (Gain) Loss	Three Months Ended				Nine Months Ended
Derivatives in Cash Flow	Recognized on Derivatives in the	September 30,				September 30,
Hedging Relationships	Statements of Income	2014		2013		2014		2013
		(in thousands)
Interest rate contracts	Interest expense	$	(122)	$	390	$	(371)	$	1,149
Total		$	(122)	$	390	$	(371)	$	1,149

Our derivatives are designated in a cash flow hedging relationship with the effective portion of the change in fair value of the derivative reported in the cash flow hedges subaccount of accumulated other comprehensive income.

Effect of Derivative Instruments on Cash Flow Hedging

The following tables provide additional information about the financial statement effects related to our cash flow hedges for the three and nine months ended September 30, 2014 and 2013:

						Amount of Gain (Loss) Reclassified
						from
	Amount of Gain Recognized in OCI on					Accumulated OCI into
	Derivatives				Location of Gain (Loss)	Income
	(Effective Portion)				Reclassified	(Effective Portion)
	Three Months Ended				from Accumulated OCI into	Three Months Ended
Derivatives in Cash Flow	September 30,				Income	September 30,
Hedging Relationships	2014		2013		(Effective Portion)	2014		2013
	(in thousands)					(in thousands)
Interest rate contracts*	$	—	$	(480)	Interest expense	$	122	$	(390)
Total	$	—	$	(480)	Total	$	122	$	(390)
						Amount of Gain (Loss) Reclassified
						from
	Amount of Gain Recognized in OCI on					Accumulated OCI into
	Derivatives				Location of Gain (Loss)	Income
	(Effective Portion)				Reclassified	(Effective Portion)
	Nine Months Ended				from Accumulated OCI into	Nine Months Ended
Derivatives in Cash Flow	September 30,				Income	September 30,
Hedging Relationships	2014		2013		(Effective Portion)	2014		2013
	(in thousands)					(in thousands)
Interest rate contracts**	$	—	$	(1,389)	Interest expense	$	371	$	(1,149)
Total	$	—	$	(1,389)	Total	$	371	$	(1,149)

*      These amounts are shown net of $0 and $0.5 million of other comprehensive income reclassified to the income statement during the three months ended September 30, 2014 and 2013, respectively.

**    These amounts are shown net of $0 and $1.4 million of other comprehensive income reclassified to the income statement during the nine months ended September 30, 2014 and 2013, respectively.

We hold interest rate derivative instruments from time to time to mitigate exposure to changes in interest rates, in particular one-month LIBOR, with $383.4 million of our borrowings at September 30, 2014 at variable rates. The last of our interest rate derivatives terminated on November 25, 2013, at which time the liabilities under derivative instruments decreased to nil.  

The change in fair value on a derivative instrument designated as a cash flow hedge is reported as a component of accumulated other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings or it is probable that the forecasted transaction will not occur.

As of September 30, 2014, we held $127,000 in accumulated other comprehensive income related to a previously held derivative instrument designated as a cash flow hedge. This amount is being reclassified into interest expense through December 2014, the remaining term of the associated debt. For the quarter ended September 30, 2014 and September 30, 2013, interest expense was reduced (increased) by $122,000 and ($390,000) respectively, as a result of this reclassification out of a accumulated comprehensive income.

Counterparty Credit Risk

The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The swap counterparty for the interest rate swap in place during the first eleven months of 2013 was a large financial institution in the United States that possessed an investment grade credit rating. Based on this rating, the Company believes that the counterparty was creditworthy and that their continuing performance under the hedging agreement was probable, and had not required the counterparty to provide collateral or other security to the Company.