Derivative Instruments And Hedging Activities

9 Months Ended

Sep. 30, 2013

Derivative Instruments And Hedging Activities [Abstract]

Derivative Instruments And Hedging Activities

Note 16 — Derivative Instruments and Hedging Activities

Our continuing operations are exposed to market risk associated with interest rates and foreign currency exchange rates.  Our risk management activities involve the use of derivative financial instruments to hedge the impact of market risk exposure related to variable interest rates and foreign currency exchange rates.  All derivatives are reflected in the accompanying condensed consolidated balance sheets at fair value, unless otherwise noted.

We engage solely in cash flow hedges.  Hedges of cash flow exposure are entered into to hedge a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.  Changes in the derivative fair values that are designated as cash flow hedges are deferred to the extent that the hedges are effective.  These fair value changes are recorded as a component of accumulated other comprehensive income or loss (a component of shareholders’ equity) until the hedged transactions occur and are recognized in earnings.  The ineffective portion of changes in the fair value of cash flow hedges is recognized immediately in earnings.  In addition, any change in the fair value of a derivative that does not qualify for hedge accounting is recorded in earnings in the period in which the change occurs.

For additional information regarding our accounting for derivatives, see Notes 2 and 17 to our 2012 Form 10-K. 

Interest Rate Risk

We enter into interest rate swaps to stabilize cash flows related to our long-term debt subject to variable interest rates.  In September 2013, we entered into interest rate swap contracts to fix the interest rate on $148.1 million of our Term Loan debt.  These monthly contracts begin in October 2013 and extend through October 2016.  Changes in the fair value of an interest rate swap are deferred to the extent the swap is effective.  These changes are recorded as a component of accumulated other comprehensive income (loss) until the anticipated interest payments occur and are recognized in interest expense.  The ineffective portion of the interest rate swap, if any, will be recognized immediately in earnings within the line titled “Net interest expense.”

Foreign Currency Exchange Rate Risk

Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar.  We entered into various foreign currency forwards to stabilize expected cash outflows relating to certain vessel charters that are denominated in British pounds and Norwegian kroner.

In January 2013, we entered into foreign currency exchange contracts to hedge the foreign currency exposure associated with the Grand Canyon charter payments ($104.6 million) denominated in Norwegian kroner (NOK591.3 million), through September 2017.  In February 2013, we entered into similar foreign currency exchange contracts for the Grand Canyon II and Grand Canyon III charter payments ($100.4 million and $98.8 million) denominated in Norwegian kroner (NOK594.7 million and NOK595.0 million), through July 2019 and February 2020, respectively.  These contracts currently qualify for hedge accounting treatment.  All of our remaining foreign exchange contracts are not accounted for as hedge contracts and changes in their fair value are marked-to-market each reporting period.

Quantitative Disclosures Related to Derivative Instruments 

As a result of the announcement in December 2012 of the sale of ERT, we de-designated all of our remaining oil and natural gas derivative contracts as hedging instruments.  In addition, under the terms of our former credit agreement (Note 7), we were required to use a portion of the proceeds from the sales of ERT, the Caesarand theExpress to make payments to reduce our indebtedness.  Because of the probability that the former term loan debt would be totally repaid before the expiration of our then existing interest rate swaps, we also concluded that those swaps also no longer qualified as cash flow hedges.  In February 2013, we settled all of our outstanding commodity derivative contracts and then existing interest rate swap contracts for approximately $22.5 million and $0.6 million, respectively.

The following table presents the fair value and balance sheet classification of our derivative instruments that were not designated as hedging instruments (in thousands): 

	As of September 30, 2013			As of December 31, 2012
	Balance Sheet		Fair	Balance Sheet		Fair
	Location		Value	Location		Value
Asset Derivatives:
Oil contracts	Other current assets	$	-	Other current assets	$	5,800
Foreign exchange contracts	Other current assets		6	Other current assets		146
		$	6		$	5,946
Liability Derivatives:
Oil contracts	Accrued liabilities	$	-	Accrued liabilities	$	15,777
Interest rate swaps	Accrued liabilities		-	Accrued liabilities		489
Interest rate swaps	Other non-current liabilities		-	Other non-current liabilities		32
		$	-		$	16,298

The following table presents the fair value and balance sheet classification of our derivative instruments that were designated as hedging instruments (in thousands): 

	As of September 30, 2013			As of December 31, 2012
	Balance Sheet		Fair	Balance Sheet		Fair
	Location		Value	Location		Value
Asset Derivatives:
Interest rate swaps	Other assets, net	$	421	Other assets, net	$	-
		$	421		$	-
Liability Derivatives:
Foreign exchange contracts	Accrued liabilities	$	1,660	Accrued liabilities	$	-
Interest rate swaps	Accrued liabilities		732	Accrued liabilities		-
Foreign exchange contracts	Other non-current liabilities		13,179	Other non-current liabilities		-
		$	15,571		$	-

Ineffectiveness associated with our foreign exchange and interest rate swap contracts was immaterial for all periods presented.  The following tables present the impact that derivative instruments designated as cash flow hedges had on our accumulated other comprehensive income (loss) (net of tax), and our condensed consolidated statements of operations (in thousands). 

		Gain (Loss) Recognized in OCI on Derivatives
		(Effective Portion)
		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2013		2012		2013		2012
Foreign exchange contracts	$	1,186	$	-	$	(9,645)	$	-
Oil and natural gas commodity contracts		-		(19,868)		-		(20,664)
Interest rate swaps		(202)		(168)		(202)		(494)
	$	984	$	(20,036)	$	(9,847)	$	(21,158)

			Gain (Loss) Reclassified from
			Accumulated OCI into Income
	Location of Gain (Loss)		(Effective Portion)
	Reclassified from		Three Months Ended				Nine Months Ended
	Accumulated OCI into Income		September 30,				September 30,
	(Effective Portion)		2013		2012		2013		2012
Oil and natural gas commodity contracts	Income from discontinued operations, net of tax	$	-	$	414	$	-	$	8,546
Interest rate swaps	Net interest expense		-		(121)		-		(434)
Foreign exchange contracts	Cost of sales		(396)		-		(900)		-
		$	(396)	$	293	$	(900)	$	8,112

The following table presents the impact that derivative instruments not designated as hedges had on our condensed consolidated statements of operations (in thousands): 

			Gain (Loss) Recognized
			in Income on Derivatives
	Location of Gain (Loss)		Three Months Ended				Nine Months Ended
	Recognized in Income		September 30,				September 30,
	on Derivatives		2013		2012		2013		2012
Oil and natural gas commodity contracts	Income from discontinued operations, net of tax	$	-	$	633	$	-	$	633
Oil and natural gas commodity contracts	Loss on commodity derivative contracts		-		-		(14,113)		-
Interest rate swaps	Other expense, net		-		-		(86)		-
Foreign exchange contracts	Other expense, net		498		217		(693)		381
		$	498	$	850	$	(14,892)	$	1,014