7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. The Company does not speculate using derivative instruments.

As of September 30, 2018 and December 31, 2017, the Company did not have any derivatives outstanding that were not designated in hedge accounting relationships.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. During the three and nine months ended September 30, 2018 and 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

As of September 30, 2018, the Company has five Interest Rate Swap Agreements that mature on May 14, 2020, which effectively fix the interest rate on LIBOR-indexed interest payments associated with $1.0 billion of SEA’s outstanding long-term debt.

The interest rate swap agreements are designated as cash flow hedges of interest rate risk. The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $2.8 million will be reclassified as interest income.

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the unaudited condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017:

Asset Derivatives

Liability Derivatives

As of September 30, 2018

As of December 31, 2017

Balance Sheet

Location

Fair Value

Balance Sheet

Location

Fair Value

Derivatives designated as hedging instruments:

(In thousands)

Interest rate swap agreements

Other assets

6,774

Other liabilities

8,455

Total derivatives designated as hedging instruments

6,774

8,455

Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Comprehensive Income (Loss)

The table below presents the pretax effect of the Company’s derivative financial instruments on the unaudited condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Derivatives in Cash Flow Hedging Relationships:	(In thousands)
Gain related to effective portion of derivatives recognized in accumulated other comprehensive income (loss)	$	1,875		$	6,298		$	17,768		$	16,066
(Loss) related to effective portion of derivatives reclassified from accumulated other comprehensive income (loss) to interest expense	$	(301	)	$	(2,957	)	$	(2,535	)	$	(9,897	)

Credit Risk-Related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

Changes in Accumulated Other Comprehensive Income (Loss)

The following table reflects the changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2018, net of tax:

			Gains (Losses) on Cash Flow Hedges
Accumulated other comprehensive income (loss):			(In thousands)
Accumulated other comprehensive loss at December 31, 2017			$	(5,076	)
Effects of adoption of ASU 2018-02				(1,094	)
Other comprehensive income before reclassifications	12,966
Amounts reclassified from accumulated other comprehensive income to interest expense	(1,850	)
Unrealized gain on derivatives, net of tax				11,116
Accumulated other comprehensive income at September 30, 2018			$	4,946