Derivative Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 exchange of the underlying notional amount.

During the nine months ended September 30, 2020, Piedmont entered into four forward starting interest rate swap agreements with a total notional value of $200 million to hedge the risk of changes in the interest-related cash flows associated with an expected issuance of long-term debt. In conjunction with the issuance of the $300 Million Unsecured Senior Notes (see Note 4), Piedmont settled these forward starting swap agreements for a loss of approximately $19.9 million. The loss was recorded as accumulated other comprehensive income and is being amortized as additional interest expense over the ten-year term of the $300 Million Unsecured Senior Notes. Further, as of September 30, 2020, Piedmont was party to two other interest rate swap agreements, which are designated as effective cash flow hedges and hedge the variable cash flows covering $100 million of the $250 Million Unsecured 2018 Term Loan. The maximum length of time over which Piedmont is hedging its exposure to the variability in future cash flows for forecasted transactions is 54 months.

A detail of Piedmont’s interest rate derivatives outstanding as of September 30, 2020 is as follows:

Interest Rate Derivatives:

Number of Swap Agreements

Associated Debt Instrument

Total Notional Amount
(in millions)

Effective Date

Maturity Date

Interest rate swaps

$250 Million Unsecured 2018 Term Loan

100

3/29/2018

3/31/2025

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 September 30, 2020 and December 31, 2019, respectively, is as follows (in thousands):


Interest rate swaps classified as:	September 30, 2020		December 31, 2019
Gross derivative assets	$	—	$	—
Gross derivative liabilities	(10,618)		(5,121)
Net derivative liability	$	(10,618)	$	(5,121)

The loss on Piedmont's interest rate derivatives, including previously settled forward swaps, that was recorded in other comprehensive income ("OCI") and the accompanying consolidated statements of income as a component of interest expense for the three and nine months ended September 30, 2020 and 2019, respectively, was as follows (in thousands):


	Three Months Ended				Nine Months Ended
Interest Rate Swaps in Cash Flow Hedging Relationships	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Amount of loss recognized in OCI	$	(2,443)	$	(1,386)	$	(26,949)	$	(6,874)
Amount of previously recorded gain/(loss) reclassified from OCI into Interest Expense	$	(810)	$	427	$	(989)	$	1,871


Total amount of Interest Expense presented in the consolidated statements of income	$	(12,725)	$	(16,145)	$	(41,942)	$	(46,750)

Piedmont estimates that approximately $2.9 million will be reclassified from OCI as an increase in interest expense over the next twelve months. Piedmont recognized no hedge ineffectiveness on its cash flow hedges during the three and nine months ended September 30, 2020 and 2019, respectively.

Additionally, see Note 6 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 could be required to settle its liability obligations under the agreements at their termination value of the estimated fair values plus accrued interest, or approximately $11.0 million as of September 30, 2020. 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.