Derivative Financial Instruments

Prior to the June 12, 2018 retirement of our Term Loan, we were exposed to interest rate risk that we managed to some extent using derivative instruments. We terminated these instruments in conjunction with the repayment of the Term Loan described in Note 4. Under our April 2015 interest rate swap contracts, we received interest calculated using 3-month LIBOR, subject to a floor of 0.75%, and paid fixed interest at 2.341%, on an aggregate notional amount of $150.0 million. These swap contracts effectively fixed the cash interest rate on $150.0 million of our borrowings under the Term Loan at 4.841% from September 30, 2016 through September 30, 2021.

Upon termination of the interest rate swaps, we reclassified all associated amounts from accumulated other comprehensive loss to earnings, which resulted in a cash gain of $2.4 million in the quarter ended June 30, 2018.

We had designated our interest rate swap contracts as cash flow hedges of our future interest payments and elected to apply the “shortcut” method of assessing hedge effectiveness. As a result, the gains and losses on the swap contracts had been reported as a component of other comprehensive loss and were reclassified into interest expense as the related interest payments were made. Excluding the settlement gain described above, we included $0.0 million and $0.5 million of such interest expense in income from continuing operations during the quarters ended June 30, 2018 and June 30, 2017, respectively, and $0.6 million and $1.5 million during the nine months ended June 30, 2018 and June 30, 2017, respectively.

In connection with the acquisition of Singer Valve, Mueller Water Products, Inc. loaned U.S. dollars to one of our Canadian subsidiaries. Although this intercompany loan has no direct effect on our consolidated financial statements, it creates exposure to currency risk for the Canadian subsidiary. To reduce this exposure, we entered into a U.S. dollar-Canadian dollar swap contract with the Canadian subsidiary and an offsetting Canadian dollar-U.S. dollar swap with a domestic bank. We have not designated these swaps as hedges and the changes in their fair value are included in earnings, where they offset the currency gains and losses associated with the intercompany loan.

The fair values of the swap contracts are presented below.



	June 30,		September 30,
	2018		2017
	(in millions)
Interest rate swap contracts, designated as cash flow hedges:
Other current liabilities	$	—	$	1.2
Other noncurrent liabilities	—		1.3
	$	—	$	2.5

Currency swap contracts, not designated as hedges:
Other noncurrent liabilities	$	0.6	$	1.3

The fair values of the interest rate swaps and the classification of the fair values between current and noncurrent portions were based on calculated cash flows using publicly available interest rate forward rate yield curve information.