Derivative Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instruments

Derivative Instruments

7. 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.

As of June 30, 2020, we had interest rate swap agreements in place with an aggregate notional amount of $700 million. The forward swap agreements effectively fix the interest rate on $700 million of term loan borrowings, $225 million of swaps allocated to Term Loan A, $225 million allocated to Term Loan B and $250 million allocated to Term Loan C, through the current maturity dates of the respective term loans.

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 June 30, 2020 and December 31, 2019, the fair value of interest rate swaps represented an aggregate liability of $58.3 million and $19.9 million, respectively.

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 as an increase to interest expense on the consolidated statements of operations was $2.7 million and $3.5 million for the three and six months ended June 30, 2020, respectively. The amount reclassified from other comprehensive income as a reduction in interest expense on the consolidated statements of operations was $0.5 million and $1.0 million for the three and six months ended June 30, 2019, respectively. There was no ineffectiveness recognized for the three and six months ended June 30, 2020, and 2019. During the subsequent twelve months, beginning July 1, 2020, we estimate that $2.0 million will be reclassified from other comprehensive income as an increase to interest expense.

Interest rate derivatives and their fair values as of June 30, 2020 and December 31, 2019 were as follows (unaudited and in thousands):

				Fixed One Month
Notional Amount				LIBOR rate per			Fair Value
June 30, 2020		December 31, 2019		annum	Effective Date	Expiration Date	June 30, 2020		December 31, 2019
$	25,000	$	25,000	1.989%	January 2, 2018	December 17, 2021	$	(672)	$	(209)
	100,000		100,000	1.989%	January 2, 2018	December 17, 2021		(2,689)		(837)
	75,000		75,000	1.989%	January 2, 2018	December 17, 2021		(2,017)		(627)
	50,000		50,000	2.033%	January 2, 2018	April 27, 2022		(1,703)		(545)
	100,000		100,000	2.029%	January 2, 2018	April 27, 2022		(3,400)		(1,081)
	50,000		50,000	2.033%	January 2, 2018	April 27, 2022		(1,704)		(545)
	100,000		100,000	2.617%	January 2, 2020	December 17, 2023		(8,502)		(4,007)
	100,000		100,000	2.621%	January 2, 2020	April 27, 2024		(9,331)		(4,324)
	70,000		—	0.968%	March 2, 2020	October 18, 2026		(2,818)		—
	30,000		—	0.973%	March 2, 2020	October 18, 2026		(1,215)		—
	200,000		200,000	2.636%	December 17, 2021	December 17, 2023		(9,783)		(3,939)
	200,000		200,000	2.642%	April 27, 2022	April 27, 2024		(9,653)		(3,802)
	125,000		—	1.014%	December 17, 2023	December 17, 2024		(799)		—
	100,000		—	1.035%	December 17, 2023	December 17, 2024		(658)		—
	75,000		—	1.110%	December 17, 2023	October 18, 2026		(1,187)		—
	100,000		—	1.088%	April 27, 2024	April 27, 2025		(639)		—
	125,000		—	1.082%	April 27, 2024	April 27, 2025		(790)		—
	75,000		—	0.977%	April 27, 2024	October 18, 2026		(730)		—
							$	(58,290)	$	(19,916)

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 as an increase to utilities expense on the consolidated statements of operations was $0.4 million and $0.8 million for the three and six months ended June 30, 2020. 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 June 30, 2020 and December 31, 2019 were as follows (unaudited and in thousands):

				Fair Value
Counterparty	Facility	Effective Date	Expiration Date	June 30, 2020		December 31, 2019
Calpine Energy Solutions, LLC	Piscataway	3/8/2019	2/28/2029	$	(3,105)	$	(2,919)
Calpine Energy Solutions, LLC	Chicago	3/8/2019	2/28/2029		(3,902)		(3,774)
				$	(7,007)	$	(6,693)