Derivative Instruments

3 Months Ended

Mar. 31, 2017

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 $596.3 million and $619.7 million of our borrowings at March 31, 2017 and December 31, 2016, respectively, at variable rates. As a matter of policy, we do not use derivatives for speculative purposes. During 2016, we entered into one interest rate swap agreement which has notional outstanding amount of $100.0 million, with remaining terms of 49 months. The fair value of the swap at March 31, 2017 was $0.4 million representing a net asset for us. We recorded a $0.2 million and nil expense to net finance costs during the three months ended March 31, 2017 and 2016,  respectively, from derivative instruments.

The Company estimates the fair value of derivative instruments using a discounted cash flow technique and has used creditworthiness inputs that corroborate 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. Management believes it has applied assumptions consistently during the period. 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 Statements of Income

The following table provides information about the income effects of our cash flow hedging relationships for the March 31, 2017 and 2016:

		Amount of Loss (Gain) Recognized on
		Derivatives in the Statements of Income
Derivatives in Cash Flow Hedging	Location of Loss (Gain) Recognized on	Three Months Ended March 31,
Relationships	Derivatives in the Statements of Income	2017		2016
		(in thousands)
Interest rate contracts	Interest expense	$	226	$	—
Total		$	226	$	—

Effect of Cash Flow Hedge Derivative Instruments

The following tables provide additional information about the financial statement effects related to our cash flow hedges for the years ended March 31, 2017 and 2016:

	Amount of Gain (Loss) Recognized				Location of Loss (Gain)	Amount of Loss (Gain) Recognized
	in OCI on Derivatives				Reclassified from	from Accumulated OCI into Income
Derivatives in	(Effective Portion)				Accumulated OCI into	(Effective Portion)
Cash Flow Hedging	Three Months Ended March 31,				Income	Three Months Ended March 31,
Relationships	2017		2016		(Effective Portion)	2017		2016
	(in thousands)					(in thousands)
Interest rate contracts	$	335	$	—	Interest expense	$	226	$	—
Total	$	335	$	—	Total	$	226	$	—

The effective portion of the change in fair value on a derivative instrument designated as a cash flow hedge is reported as a component of 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. The ineffective portion of the hedges is recorded in earnings in the current period. However, these are highly effective hedges and no significant ineffectiveness occurred in the periods presented.

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 2017 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 did not require the counterparty to provide collateral or other security to the Company.