Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

Risk Management Objective of Using Derivatives

In addition to operational risks which arise in the normal course of business, Piedmont is exposed to economic risks such as interest rate, liquidity, and credit risk. In certain situations, Piedmont has entered into derivative financial instruments such as interest rate swap agreements and other similar agreements to manage interest rate risk exposure arising from current or future variable rate debt transactions. Interest rate swap agreements involve the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Piedmont’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements.

Cash Flow Hedges of Interest Rate Risk

Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for Piedmont making fixed-rate payments over the life of the agreements without changing the underlying notional amount. During the nine months endedSeptember 30, 2013, Piedmont used four interest rate swap agreements with a total notional value of $300 million to hedge the variable cash flows associated with its $300 Million Unsecured Term Loan.

Additionally, over the course of the twelve months ended September 30, 2013, Piedmont entered into six forward starting interest rate swap agreements with a total notional value of $530 million to hedge the risk of changes in the interest-related cash flows associated with various potential issuances of long-term debt. In conjunction with the issuance of the Senior Notes (see Note 4), Piedmont settled two of the forward starting swap agreements with a total notional value of $250 million for a gain of approximately $0.7 million. The gain was recorded as accumulated other comprehensive income and is being amortized as an offset to interest expense over the ten-year term of the Senior Notes. Piedmont continues to hold the remaining $280 million of forward starting interest rate swaps to hedge its exposure to the variability in future cash flows for additional potential future debt issuances over a maximum period of 126 months.

A detail of Piedmont’s interest rate derivatives outstanding as of September 30, 2013 is as follows:

Interest Rate Derivative	Notional Amount (in millions)		Effective Date	Maturity Date
Interest rate swap	$	125	11/22/2011	11/22/2016
Interest rate swap	75		11/22/2011	11/22/2016
Interest rate swap	50		11/22/2011	11/22/2016
Interest rate swap	50		11/22/2011	11/22/2016
Forward starting interest rate swap	70		3/3/2014	3/3/2024
Forward starting interest rate swap	70		3/3/2014	3/3/2024
Forward starting interest rate swap	70		3/3/2014	3/3/2024
Forward starting interest rate swap	70		3/3/2014	3/3/2024
Total	$	580

Piedmont has elected to present its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap asset and interest rate swap liabilities. A detail of Piedmont’s interest rate derivatives on a gross and net basis as of September 30, 2013 and December 31, 2012, respectively, is as follows (in thousands):

Interest rate swaps classified as:	September 30, 2013			December 31, 2012
Gross derivative assets	$	19,192		$	1,075
Gross derivative liabilities	(5,010		)	(8,235		)
Net derivative asset/(liability)	$	14,182		$	(7,160	)

All of Piedmont's interest rate derivative agreements outstanding for the periods presented were designated as cash flow hedges of interest rate risk. As such, the effective portion of changes in the fair value of these derivatives designated as, and that qualify as, cash flow hedges is recorded in other comprehensive income ("OCI") and is reclassified into earnings as interest expense in the period that the hedged forecasted transaction affects earnings. The effective portion of Piedmont's interest rate derivatives that was recorded in the accompanying consolidated statements of income for the three and nine months endedSeptember 30, 2013 and 2012, respectively, is as follows:

	Three Months Ended						Nine Months Ended
Derivative in Cash Flow Hedging Relationships (Interest Rate Swaps) (in thousands)	September 30, 2013			September 30, 2012			September 30, 2013		September 30, 2012
Amount of gain/(loss) recognized in OCI on derivative	$	(2,201	)	$	(2,756	)	$	19,659	$	(8,628	)
Amount of previously recorded loss reclassified from accumulated OCI into interest expense	$	783		$	762		$	2,328	$	2,249

Piedmont estimates that approximately $5.9 million will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months. No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on Piedmont’s cash flow hedges during the three and nine months endedSeptember 30, 2013 or 2012.

Additionally, see Note 7 for fair value disclosures of Piedmont's derivative instruments.

Credit-risk-related Contingent Features

Piedmont has agreements with its derivative counterparties that contain a provision whereby if Piedmont defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Piedmont could also be declared in default on its derivative obligations. If Piedmont were to breach any of the contractual provisions of the derivative contracts, it would be required to settle its obligations under the agreements at their termination value of the fair values plus accrued interest, or approximately $5.1 million. Additionally, Piedmont has rights of set-off under certain of its derivative agreements related to potential termination fees and amounts payable under the agreements, if a termination were to occur.