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 uses derivative financial instruments to mitigate the financial impact of exposure to these risks.

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 accumulated other comprehensive income (“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 its New Zealand operations is partially or completely liquidated. The ineffective portion of any hedge, changes in the fair value of derivatives not designated as hedging instruments 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 Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand JV typically hedges 35% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 25% to 75% of forecasted sales and purchases for the forward three to 12 months and up to 50% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of March 31, 2018, foreign currency exchange contracts and foreign currency option contracts had maturity dates through May 2019 and March 2019, respectively.

Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments 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.

The Company may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.

The New Zealand JV is exposed to foreign currency risk when making shareholder loan payments which are denominated in U.S. dollars. The New Zealand JV typically hedges 60% to 100% of its estimated foreign currency exposure with respect to the following three months forecasted distributions, up to 75% of forecasted distributions for the forward three to six months and up to 50% of the forward six to 12 months. For the three months ended March 31, 2018, the change in fair value of the foreign exchange forward contracts of $0.1 million was recorded in “Interest and other miscellaneous income, net” as the contracts did not qualify for hedge accounting treatment. As of March 31, 2018, foreign exchange forward contracts had maturity dates through December 2018.

In March 2018, the Company entered into a foreign currency exchange contract (notional amount of NZ$37 million) to mitigate the risk of fluctuations in foreign currency exchange rates when translating the New Zealand JV’s balance sheet to U.S. dollars. This contract hedged the cash portion of the Company’s net investment in New Zealand and qualified as a net investment hedge. The Company intends to repatriate the cash in April 2018. The fair value of this contract was 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 hedge qualified for hedge accounting whereby fluctuations in fair market value during the life of the hedge are recorded in AOCI and remain there permanently unless a partial or full liquidation of the investment is made. At each reporting period, the Company reviews the hedge for ineffectiveness. Ineffectiveness can occur when changes to the investment or the hedged instrument are made such that the risk of foreign exchange movements are no longer mitigated by the hedging instrument. At that time, the amount related to the ineffectiveness of the hedge is recorded into earnings. The Company does not expect any ineffectiveness during the life of the hedge. The foreign currency exchange contract matures April 2018.

INTEREST RATE SWAPS

The Company is exposed to cash flow interest rate risk on its variable-rate Term Credit Agreement and Incremental Term Loan Agreement (as discussed below), and uses variable-to-fixed interest rate swaps to hedge this exposure. For these derivative instruments, the Company reports the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassifies them to earnings as interest expense in the same period in which the hedged interest payments affect earnings.

The following table contains information on the outstanding interest rate swaps as of March 31, 2018:



Outstanding Interest Rate Swaps (a)
Date Entered Into	Term	Notional Amount	Related Debt Facility	Fixed Rate of Swap		Bank Margin on Debt		Total Effective Interest Rate (b)
August 2015	9 years	$170,000	Term Credit Agreement	2.20	%	1.63	%	3.83	%
August 2015	9 years	180,000	Term Credit Agreement	2.35	%	1.63	%	3.98	%
April 2016	10 years	100,000	Incremental Term Loan	1.60	%	1.90	%	3.50	%
April 2016	10 years	100,000	Incremental Term Loan	1.60	%	1.90	%	3.50	%
July 2016	10 years	100,000	Incremental Term Loan	1.26	%	1.90	%	3.16	%


(a)	All interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting.


(b)	Rate is before estimated patronage payments.

The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2018 and 2017.



		Three Months Ended March 31,
	Income Statement Location	2018		2017
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income		$1,233		($71	)
Foreign currency option contracts	Other comprehensive income	181		(41		)
Interest rate swaps	Other comprehensive income	15,598		2,633

Derivatives designated as a net investment hedge:
Foreign currency exchange contract	Other comprehensive income	110		—

Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Interest and other miscellaneous income, net	129		125

During the next 12 months, the amount of the March 31, 2018 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 gain of approximately $3.0 million.

The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:



	Notional Amount
	March 31, 2018		December 31, 2017
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts		$87,400		$107,400
Foreign currency option contracts	34,000		48,000
Interest rate swaps	650,000		650,000

Derivatives designated as a net investment hedge:
Foreign currency exchange contract	26,788		—

Derivative not designated as a hedging instrument:
Foreign currency exchange contracts	25,883		18,439

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:



	Location on Balance Sheet	Fair Value Assets / (Liabilities) (a)
		March 31, 2018			December 31, 2017
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other current assets		$3,736			$2,286
	Other assets	304			538
	Other current liabilities	(21		)	(37		)
Foreign currency option contracts	Other current assets	572			389
	Other assets	—			137
	Other current liabilities	(68		)	(119		)
	Other non-current liabilities	—			(55		)
Interest rate swaps	Other assets	31,037			17,473
	Other non-current liabilities	—			(2,033		)

Derivatives designated as net investment hedges:
Foreign currency exchange contract	Other current assets	110			—

Derivative not designated as a hedging instrument:
Foreign currency exchange contracts	Other current assets	238			209
	Other current liabilities	(155		)	(189		)

Total derivative contracts:
Other current assets			$4,656			$2,884
Other assets		31,341			18,148
Total derivative assets			$35,997			$21,032

Other current liabilities		(244		)	(345		)
Other non-current liabilities		—			(2,088		)
Total derivative liabilities			($244	)		($2,433	)


(a)	See Note 13 — Fair Value Measurements for further information on the fair value of the Company’s 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.