Derivative Financial Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company’s New Zealand JV uses derivative financial instruments to mitigate the financial impact of exposure to these risks. The Company also uses derivative financial instruments to mitigate exposure to foreign currency risk due to the translation of the investment in Rayonier’s New Zealand-based operations from New Zealand dollars to U.S. dollars.

Accounting for derivative financial instruments is governed by ASC Topic 815, Derivatives and Hedging (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of AOCI and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the Company’s investment in New Zealand is partially or completely liquidated. The ineffective portion of any hedge as well as changes in the fair value of derivatives not designated as hedging instruments (primarily New Zealand interest rate swaps) and those which are no longer effective as hedging instruments, are recognized immediately in earnings. The Company's hedge ineffectiveness was de minimis for all periods presented.

Foreign Currency Exchange and Option Contracts

The functional currency of RNZ and the New Zealand JV is the New Zealand dollar. These operations are exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in US dollars. The New Zealand JV typically hedges 50 percent to 90 percent of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 50 percent to 75 percent of forecasted sales and purchases for the forward three to 12 months and up to 50 percent of the forward 12 to 18 months. As of December 31, 2014, foreign currency exchange contracts and foreign currency option contracts had maturity dates through April 2016.

Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments that were entered into subsequent to the Company’s acquisition of a majority interest in the New Zealand JV qualify for cash flow hedge accounting. The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.

In December 2014, the Company entered into a foreign currency exchange contract to mitigate the risk of fluctuations in foreign currency exchange rates when translating RNZ’s balance sheet to U.S. dollars. This contract hedges a portion of the Company’s net investment in New Zealand and qualifies as a net investment hedge. The fair value of the foreign currency exchange contract is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The ineffectiveness of the foreign currency exchange contract is measured using the spot rate method, whereby the change in the fair value of the contract, other than the change attributable to movements in the spot rate, is excluded from the measure of hedge ineffectiveness and is reported directly in earnings. The Company does not expect any ineffectiveness or changes other than those attributable to movements in the spot rate as the critical risks of the forward contract and the net investment in RNZ coincide.

Interest Rate Swaps

The Company uses interest rate swaps to manage the New Zealand JV’s exposure to interest rate movements on its variable rate debt attributable to changes in the New Zealand Bank bill rate. By converting a portion of these borrowings from floating rates to fixed rates, the Company has reduced the impact of interest rate changes on its expected future cash outflows. As of December 31, 2014, the Company’s long-term interest rate contracts hedged 81 percent of the New Zealand JV’s variable rate debt and had maturity dates through January 2020.

Fuel Hedge Contracts

The Company historically used fuel hedge contracts to manage its New Zealand JV’s exposure to changes in New Zealand’s domestic diesel prices. Due to the low volume of diesel fuel purchases made by the New Zealand JV in 2013, the Company decided to no longer hedge its diesel fuel purchases effective November 2013. There were no contracts remaining as of December 31, 2014.

The following table demonstrates the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2014 and 2013. Information is not presented for 2012 as derivative balances and activity were not consolidated prior to Rayonier’s acquisition of a controlling interest in the New Zealand JV during 2013.

	Location on Statement of Income and Comprehensive Income	2014	2013
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)	$(1,069)	$950
	Other operating (income) expense	—	652
Foreign currency option contracts	Other comprehensive income (loss)	(1,647)	460
Derivative designated as a net investment hedge:
Foreign currency exchange contract	Other comprehensive income (loss)	(145)	—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Other operating (income) expense	25	(1,607)
Foreign currency option contracts	Other operating (income) expense	7	1,147
Interest rate swaps	Interest and miscellaneous (expense) income	(5,882)	6,085
Fuel hedge contracts	Cost of sales (benefit)	160	(255)

During the next 12 months, the amount of the December 31, 2014 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a loss of approximately $0.9 million.

The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets at December 31, 2014 and 2013:

	Notional Amount
	2014	2013
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	$28,540	$32,300
Foreign currency option contracts	79,400	38,000
Derivative designated as a net investment hedge:
Foreign currency exchange contract	$27,419	—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	—	$1,950
Foreign currency option contracts	—	4,000
Interest rate swaps	161,968	183,851
Fuel hedge contracts (in thousands of barrels)	—	38

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets at December 31, 2014 and 2013. Changes in balances of derivative financial instruments are recorded as operating activities in the Consolidated Statements of Cash Flows.

		Fair Value Assets (Liabilities) (a)
	Location on Balance Sheet	2014	2013
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Prepaid and other current assets	$132	$915
	Other assets	59	—
	Other current liabilities	(272)	—
Foreign currency option contracts	Prepaid and other current assets	299	673
	Other assets	198	—
	Other current liabilities	(1,439)	(214)
	Other non-current liabilities	(196)	—
Derivative designated as a net investment hedge:
Foreign currency exchange contract	Other current liabilities	(223)	—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Prepaid and other current assets	—	$25
Foreign currency option contracts	Prepaid and other current assets	—	8
Interest rate swaps	Other non-current liabilities	(7,247)	(4,659)
Fuel hedge contracts	Prepaid and other current assets	—	160
Total derivative contracts:
Prepaid and other current assets		$431	$1,781
Other assets		257	—
Total derivative assets		$688	$1,781
Other current liabilities		$(1,934)	$(214)
Other non-current liabilities		(7,443)	(4,659)
Total derivative liabilities		$(9,377)	$(4,873)

(a) See Note 7 —Fair Value Measurements for further information on the fair value of our derivatives including their classification within the fair value hierarchy.

Offsetting Derivatives

Derivative financial instruments are presented at their gross fair values in the Consolidated Balance Sheets. The Company’s derivative financial instruments are not subject to master netting arrangements which would allow the right of offset.