Derivative Instruments And Hedging Activities

6 Months Ended

Jun. 30, 2014

Derivative Instruments And Hedging Activities [Abstract]

Derivative Instruments And Hedging Activities

Note 15 — Derivative Instruments and Hedging Activities

Our 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.

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 OCI (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 Notes2 and 16to our 2013 Form 10-K. 

Interest Rate Risk

From time to time, we enter into interest rate swaps to stabilize cash flows related to our long-term debt subject to variable interest rates.  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 OCI until the anticipated interest payments occur and are recognized in interest expense.  The ineffective portion of the interest rate swap, if any, is recognized immediately in earnings within the line titled “Net interest expense.”  The amount of ineffectiveness associated with our interest rate swap contracts was immaterial for all periods presented.  In September 2013, we entered into interest rate swap contracts to fix the interest rate on $148.1 million of our Term Loan (Note 6).  These monthly contracts began in October2013 and extend through October2016.

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 exchange contracts to stabilize expected cash outflows relating to certain vessel charters that are denominated in British pounds and Norwegian kroner.

In January2013, we entered into foreign currency exchange contracts to hedge through September 2017 the foreign currency exposure associated with the Grand Canyon charter payments ($104.6 million) denominated in Norwegian kroner (NOK591.3 million).  In February2013, we entered into similar foreign currency exchange contracts to hedge our foreign currency exposure with respect to the Grand Canyon II and Grand Canyon III charter payments ($100.4 million and $98.8 million, respectively) denominated in Norwegian kroner (NOK594.7 million and NOK595.0 million, respectively), through July2019 and February2020, respectively.  These contracts currently qualify for hedge accounting treatment.  All of our remaining foreign exchange contracts that were not accounted for as hedge contracts have been settled.  We had no foreign currency exchange contracts for vessel chartersdenominatedin British pounds as of June 30, 2014.

Quantitative Disclosures Related to Derivative Instruments 

As a result of the announcement in December2012 of the sale of ERT, we de-designated all of our then remaining oil and natural gas derivative contracts as hedging instruments.  In addition, under the terms of our former credit agreement (Note 6), 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 no longer qualified as cash flow hedges.  The mark-to-market adjustments related to our commodity derivative contracts and interest rate swaps are reflected in “Loss on commodity derivative contracts” and “Other expense, net,” respectively, in the accompanying condensed consolidated statements of operations.

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

	June 30, 2014			December 31, 2013
	Balance Sheet		Fair	Balance Sheet		Fair
	Location		Value	Location		Value
Asset Derivatives:
Foreign exchange contracts	Other current assets	$	-	Other current assets	$	69
		$	-		$	69

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

	June 30, 2014			December 31, 2013
	Balance Sheet		Fair	Balance Sheet		Fair
	Location		Value	Location		Value
Asset Derivatives:
Interest rate swaps	Other assets, net	$	290	Other assets, net	$	446
		$	290		$	446
Liability Derivatives:
Foreign exchange contracts	Accrued liabilities	$	2,779	Accrued liabilities	$	1,905
Interest rate swaps	Accrued liabilities		766	Accrued liabilities		746
Foreign exchange contracts	Other non-current liabilities		10,922	Other non-current liabilities		13,166
		$	14,467		$	15,817

Ineffectiveness associated with our derivatives was immaterial for all periods presented.  The following tables present the impact that derivative instruments designated as cash flow hedges had on our Accumulated OCI (net of tax) and our condensed consolidated statements of operations (inthousands).  We estimate that as of June 30, 2014,$2.3 million of unrealized losses in Accumulated OCI associated with our derivatives is expected to be reclassified into earnings within the next 12 months.

		Gain (Loss) Recognized in OCI
		on Derivatives, Net of Tax
		(Effective Portion)
		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2014		2013		2014		2013
Foreign exchange contracts	$	(2,134)	$	(3,593)	$	890	$	(10,831)
Interest rate swaps		(153)		-		(114)		-
	$	(2,287)	$	(3,593)	$	776	$	(10,831)

			Gain (Loss) Reclassified from
			Accumulated OCI into Earnings
	Location of Gain (Loss)		(Effective Portion)
	Reclassified from		Three Months Ended				Six Months Ended
	Accumulated OCI into Earnings		June 30,				June 30,
	(Effective Portion)		2014		2013		2014		2013
Interest rate swaps	Net interest expense	$	(217)	$	-	$	(431)	$	-
Foreign exchange contracts	Cost of sales		(393)		(354)		(837)		(504)
		$	(610)	$	(354)	$	(1,268)	$	(504)

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

			Gain (Loss) Recognized
			in Earnings on Derivatives
	Location of Gain (Loss)		Three Months Ended				Six Months Ended
	Recognized in Earnings		June 30,				June 30,
	on Derivatives		2014		2013		2014		2013
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		-		53		7		(1,191)
		$	-	$	53	$	7	$	(15,390)