Derivative Instruments

12 Months Ended

Dec. 31, 2016

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. As of December 31, 2016, Piedmont was party to various interest rate swap agreements, all of which are designated as effective cash flow hedges, which fully hedge the variable cash flows associated with its $300 Million Unsecured 2011 Term Loan and its $300 Million Unsecured 2013 Term Loan. During the year ended December 31, 2016, Piedmont's forward starting interest rate swap agreements became effective to hedge the extension period of the $300 Million Unsecured 2011 Term Loan through January 2020. Additionally, during the year ended December 31, 2015, Piedmont settled various forward starting swaps with a total notional value of $250 million in conjunction with the issuance of the $160 Million Fixed-Rate Loan (see Note 5) for a net loss totaling $1.3 million, of which approximately $0.1 million was expensed immediately upon termination. The remaining loss was recorded as accumulated other comprehensive income and is being amortized as an increase to interest expense over the seven-year term of the $160 Million Fixed-Rate Loan. Also during the year ended December 31, 2015, Piedmont favorably settled four forward starting interest rate swaps with a total notional value of $250 million and recorded the net settlement value of approximately $0.1 million as an offsetting component to interest expense in the accompanying consolidated statements of income, as Piedmont chose not to issue debt within the timing prescribed by the forward starting swap agreements. This gain on settlement of swaps includes a charge for costs incurred to establish the swaps at inception. The maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 36 months.

A detail of Piedmont’s interest rate derivatives outstanding as of December 31, 2016 is as follows:

Interest Rate Derivatives:	Number of Swap Agreements	Associated Debt Instrument	Notional Amount (in millions)		Effective Date	Maturity Date
Interest rate swaps	4	$300 Million Unsecured 2013 Term Loan	200		1/30/2014	1/31/2019
Interest rate swaps	2	$300 Million Unsecured 2013 Term Loan	100		8/29/2014	1/31/2019
Interest rate swaps	3	$300 Million Unsecured 2011 Term Loan	300		11/22/2016	1/15/2020
Total			$	600

Piedmont presents its interest rate derivatives on its consolidated balance sheets on a gross basis as interest rate swap assets and interest rate swap liabilities. A detail of Piedmont’s interest rate derivatives on a gross and net basis as of December 31, 2016 and 2015, respectively, is as follows (in thousands):

Interest rate swaps classified as:	2016		2015
Gross derivative assets	$	—	$	—
Gross derivative liabilities	8,169		9,993
Net derivative liability	$	8,169	$	9,993

The effective portion of Piedmont's interest rate derivatives, including the gain/(loss) on settlement of forward swaps described above, that was recorded in the accompanying consolidated statements of income for the years ended December 31, 2016, 2015, and 2014, respectively, was as follows (in thousands):

Interest Rate Swaps in Cash Flow Hedging Relationships	2016			2015			2014
Amount of gain/(loss) recognized in OCI on derivatives	$	(4,126	)	$	(12,509	)	$	(17,122	)
Amount of previously recorded loss reclassified from accumulated OCI into interest expense	$	4,548		$	5,875		$	5,145

Piedmont estimates that an additional $4.1 million will be reclassified from accumulated other comprehensive loss to interest expense over the next twelve months. Piedmont recognized approximately $0, $37,000, and $0 of net loss related to hedge ineffectiveness and terminations of its cash flow hedges during the years ended December 31, 2016, 2015, and 2014, respectively.

Additionally, see Note 8 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 estimated fair values plus accrued interest, or approximately $8.4 million as of December 31, 2016. 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.