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Derivative Instruments

12 Months Ended

Dec. 31, 2019

10. Derivative Instruments

From time to time, we enter into derivative financial instruments to manage certain cash flow risks.

Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges.

Interest Rate Swaps

Our objectives in using interest rate swaps are to reduce variability in interest expense and to manage exposure to adverse interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

On April 5, 2017, we entered into forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to Term Loan A and $200 million allocated to Term Loan B, from January 2, 2018 through December 17, 2021 and April 27, 2022, respectively.

On December 20, 2018, we entered into additional forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to Term Loan A and $200 million allocated to Term Loan B, from December 17, 2021 through December 17, 2023 and April 27, 2022 through April 27, 2024, respectively. On December 20, 2018, we entered into additional forward interest rate swap agreements with an aggregate notional amount of $200 million. The forward swap agreements effectively fix the interest rate on $100 million of additional term loan borrowings from January 2, 2020 through December 17, 2023 as well as $100 million of additional term loan borrowings from January 2, 2020 through April 27, 2024.

We reflect our interest rate swap agreements, which are designated as cash flow hedges, at fair value as either assets or liabilities on the consolidated balance sheets within the “Other assets, net” or “Derivative liabilities” line items, as applicable. As of December 31, 2019, the fair value of interest rates swaps represented an aggregate $19.9 million liability. As of December 31, 2018, the fair value of interest rate swaps included an asset of $5.3 million as well was a liability of $3.0 million.

The forward interest rate swap agreements are derivatives that currently qualify for hedge accounting whereby we record the effective portion of changes in fair value of the interest rate swaps in accumulated other comprehensive income or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of a derivative's change in fair value is immediately recognized within net income. The amount reclassified from other comprehensive income to interest expense on the consolidated statements of operations was a reduction to interest expense of $1.0 million and an increase to interest expense of $0.1 million for the years ended December 31, 2019 and 2018, respectively. No amounts were reclassified from other comprehensive income to interest expense on the consolidated statements of operations for the year ended December 31, 2017. There was no ineffectiveness recognized for the years ended December 31, 2019, 2018 and 2017. During the subsequent twelve months, beginning January 1, 2020, we estimate that $3.6 million will be reclassified from other comprehensive income as an increase to interest expense.

Interest rate derivatives and their fair values as of December 31, 2019 and December 31, 2018 were as follows (in thousands):


				Fixed One Month
Notional Amount				LIBOR rate per			Fair Value ⁽¹⁾
December 31, 2019		December 31, 2018		annum	Effective Date	Expiration Date	December 31, 2019		December 31, 2018
$	25,000	$	25,000	1.989%	January 2, 2018	December 17, 2021	$	(209)	$	331
	100,000		100,000	1.989%	January 2, 2018	December 17, 2021		(837)		1,318
	75,000		75,000	1.989%	January 2, 2018	December 17, 2021		(627)		990
	50,000		50,000	2.033%	January 2, 2018	April 27, 2022		(545)		667
	100,000		100,000	2.029%	January 2, 2018	April 27, 2022		(1,081)		1,341
	50,000		50,000	2.033%	January 2, 2018	April 27, 2022		(545)		666
	100,000		100,000	2.617%	January 2, 2020	December 17, 2023		(4,007)		(782)
	100,000		100,000	2.621%	January 2, 2020	April 27, 2024		(4,324)		(818)
	200,000		200,000	2.636%	December 17, 2021	December 17, 2023		(3,939)		(722)
	200,000		200,000	2.642%	April 27, 2022	April 27, 2024		(3,802)		(648)
							$	(19,916)	$	2,343

Power Purchase Agreements

In March 2019, we entered into two 10 year agreements to purchase renewable energy equal to the expected electricity needs of our datacenters in Chicago, Illinois and Piscataway, New Jersey. These arrangements currently qualify for hedge accounting whereby we record the changes in fair value of the instruments in “Accumulated other comprehensive income” or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The amount reclassified from other comprehensive income to utility expense on the consolidated statements of operations was an increase to utilities expense of $0.7 million for the year ended December 31, 2019. There was no amount reclassified from other comprehensive income to utilities expense for the years ended December 31, 2018 or 2017. We currently reflect these agreements, which are designated as cash flow hedges, at fair value as liabilities on the consolidated balance sheets within the “Derivative liabilities” line item.

Power purchase agreement derivatives and their fair values as of December 31, 2019 and December 31, 2018 were as follows (in thousands):


				Fair Value
Counterparty	Facility	Effective Date	Expiration Date	December 31, 2019		December 31, 2018
Calpine Energy Solutions, LLC	Piscataway	3/8/2019	2/28/2029	$	(2,919)	$	—
Calpine Energy Solutions, LLC	Chicago	3/8/2019	2/28/2029		(3,774)		—
				$	(6,693)	$	—