Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments [Abstract]

Derivative Instruments

Note 14.  Derivative Instruments

We use derivative instruments to manage certain foreign currency and interest rate risk exposures. We do not use derivative instruments for speculative trading purposes.  All derivative instruments are recorded on the balance sheet at fair value.  For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded to other comprehensive income and is reclassified to earnings when the derivative instrument is settled.  Any ineffective portion of changes in the fair value of the derivative is reported in earnings.  None of our derivative contracts contain credit-risk related contingent features that would require us to settle the contract upon the occurrence of such contingency.  However, all of our contracts contain clauses specifying events of default under specified circumstances, including failure to pay, breach of agreement, default under the specific agreement to which the hedge relates, bankruptcy, misrepresentation and the occurrence of certain transactions.  The remedy for default is settlement in entirety or payment of the fair value of the contracts, which was $4.5 million in the aggregate for all of our contracts, with $342,000 of posted collateral as of September 30, 2013.  The unrealized loss related to our derivative instruments included in accumulated other comprehensive loss, net of taxes, was $5.1 million as of September 30, 2013 and $7.4 million as of December 31, 2012.

The notional and fair value amounts of our derivative instruments as of September 30, 2013 were as follows (in thousands):

			Asset Derivatives			Liability Derivatives
			2013			2013
		Current Notional	Balance Sheet		Fair Value	Balance Sheet		Fair Value
As of September 30, 2013		Amount	Location			Location
Interest Rate Swaps - L/T*	$	51,140		$	-	Other Liabilities	$	(4,239)
Foreign Exchange Contracts		300	Other Current Assets		34
Foreign Exchange Contracts		1,200	Other Assets		21			-
Foreign Exchange Contracts		2,400				Current Liabilities		(337)
Total Derivatives designated as hedging instruments	$	55,040	-	$	55	-	$	(4,576)

*We have outstanding a variable-to-fixed interest rate swap with respect to a Yen-based facility for the financing of a PCTC delivered in March 2010.   The notional amount under this contract is $51,140,065 (based on a Yen to USD exchange rate of 98.24 as of September 30, 2013).  With the bank exercising its option to reduce the underlying Yen loan from 80% to 65% funding of the vessel’s delivery cost, the 15% reduction represents the ineffective portion of this swap, which consists of the portion of the derivative instrument that is no longer supported by underlying borrowings.  The change in fair value related to the ineffective portion of this swap was a $17,000 loss for the quarter ended September 30, 2013 and this amount was reflected in earnings. The fair value balance as of September 30, 2013, includes a negative $717,151 balance related to an interest rate swap from our 25% investment in Oslo Bulk AS.

The effect of derivative instruments designated as cash flow hedges on our condensed consolidated statement of income for the nine months ended September 30, 2013 was as follows:

		Gain(Loss) Recognized in OCI	Location of Gain(Loss) Reclassified from AOCI to Income		Amount of Gain(Loss) Reclassified from AOCI to Income		Loss Recognized in Income from Ineffective portion
		2013			2013		2013
Interest Rate Swaps	$	2,461	Interest Expense	$	1,309	$	486
Foreign Exchange Contracts		(172)	Other Revenues		(14)		-
Total	$	2,289		$	1,295	$	486

Interest Rate Swap Agreements

We enter into interest rate swap agreements to manage well-defined interest rate risks. We record the fair value of the interest rate swaps as an asset or liability on the balance sheet. Currently, our interest rate swap is accounted for as an effective cash flow hedge.  Accordingly, the effective portion of the change in fair value of the swap is recorded in Other Comprehensive Income. In July 2013, we settled and terminated an interest rate swap contract which was in conjunction with an early pay-off at the closing of our new US Flag Credit Facility. The settlement amount that we paid was approximately $757,000 and is included in the net loss number of $486,000 noted above.

As of September 30, 2013, we had the following interest rate swap contract outstanding:

Effective	Termination		Current
Date	Date		Notional Amount	Swap Rate		Type
3/15/2009	9/15/2020		51,140,065	2.065	%	Variable-to-Fixed
Total:		$	51,140,065

*Notional amount converted from Yen at September 30, 2013 at a Yen to USD exchange rate of 98.24

Foreign Exchange Rate Risk 

In May 2012, we entered into a foreign exchange contract to hedge certain firm foreign currency purchase commitments. The first was for Mexican Pesos for $700,000 U.S. Dollar equivalents at an exchange rate of 14.5700 which expires in December, 2013. In August, 2013, we entered into a forward purchase Mexican Peso contract which expires in 2014. The contract was for $1,200,000 U.S. Dollar equivalents at an exchange rate of 13.6103.   Our Mexican Peso foreign exchange contracts represent 50% of our projected Peso exposure. Our estimated monthly exposure is equivalent to approximately $200,000 in U. S. Dollars.

In December, 2012 we entered into two forward purchase Yen contracts which expires at the end of 2013. The first contract was for Japanese Yen for $1.5 million U.S. Dollar equivalents at an exchange rate of 85.27 which expired in September, 2013 and the second was for Japanese Yen for $1.5 million U.S. Dollar equivalents at an exchange rate of 85.16 which expires in December, 2013. Our Japanese Yen foreign exchange contract represents approximately 3.76% of our projected Yen exposure.

In January 2013, we entered into a forward purchase Indonesian Rupiah contract which expires in December 2013. The contract was for $3,300,000 U.S. Dollar equivalents at an exchange rate of 9910.  Our Indonesian Rupiah foreign exchange contract represents approximately 80% of our projected Rupiah exposure. Our estimated monthly exposure is equivalent to approximately $350,000 to $375,000 in U. S. Dollars.

The following table summarizes the notional current values as of September 30, 2013, of these contracts: 

Transaction Date	Type of Currency		Amount Available in Dollars	Effective Date	Expiration Date
May-12	Peso	$	300	Jan-13	Dec-13
Dec-12	Yen		1,500	Dec-12	Dec-13
Jan-13	Rupiah		900	Jan-13	Dec-13
Aug-13	Peso		1,200	Jan-14	Dec-14
		$	3,900