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Derivative Instruments and Hedging Activities
 6 Months Ended
Jun. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities
The Company uses derivatives to manage certain risks in accordance with its overall risk management policies.

Foreign Exchange Risk

From time to time the Company economically hedges portions of its forecasted expenditures denominated in foreign currencies with foreign currency forward contracts. As at June 30, 2018, the Company was not committed to any foreign currency forward contracts.
 
The Company enters into cross-currency swaps, and pursuant to these swaps the Company receives the principal amount in NOK on the maturity date of the swap, in exchange for payment of a fixed U.S. Dollar amount. In addition, the cross-currency swaps exchange a receipt of floating interest in NOK based on NIBOR plus a margin for a payment of U.S. Dollar fixed interest. The purpose of the cross-currency swaps is to economically hedge the foreign currency exposure on the payment of interest and principal amounts of the Company’s NOK-denominated bonds due in 2018, 2020 and 2021. In addition, the cross-currency swaps economically hedge the interest rate exposure on the NOK bonds due in 2018, 2020 and 2021. The Company has not designated, for accounting purposes, these cross-currency swaps as cash flow hedges of its NOK-denominated bonds due in 2018, 2020 and 2021. As at June 30, 2018, the Company was committed to the following cross-currency swaps:
 
 
 
 
 
 
 
 
 
 
Fair Value /
Carrying
Amount of
Asset /
(Liability)
$
 
 
Notional
Amount
NOK
 
Notional
Amount
USD
 
Floating Rate Receivable
 
 
 
 
 
 
 
Reference
Rate
 
Margin
 
Fixed Rate
Payable
 
 
Remaining
Term (years)
900,000
 
150,000

 
NIBOR
 
4.35%
 
6.43%
 
(40,214
)
 
0.2
1,000,000
 
134,000

 
NIBOR
 
3.70%
 
5.92%
 
(10,761
)
 
1.9
1,200,000
 
146,500

 
NIBOR
 
6.00%
 
7.72%
 
6,449

 
3.3
 
 
 
 
 
 
 
 
 
 
(44,526
)
 
 


Interest Rate Risk

The Company enters into interest rate swap agreements, which exchange a receipt of floating interest for a payment of fixed interest, to reduce the Company’s exposure to interest rate variability on its outstanding floating-rate debt. The Company designates certain of its interest rate swap agreements as cash flow hedges for accounting purposes.
 
As at June 30, 2018, the Company was committed to the following interest rate swap agreements related to its LIBOR-based debt and EURIBOR-based debt, whereby certain of the Company’s floating-rate debt were swapped with fixed-rate obligations: 
 
Interest
Rate
Index
 
Principal
Amount
 
Fair Value /
Carrying
Amount of
Asset /
(Liability)
$
 
Weighted-
Average
Remaining
Term
(years)
 
Fixed
Interest
Rate
(%) (1)
LIBOR-Based Debt:
 
 
 
 
 
 
 
 
 
U.S. Dollar-denominated interest rate swaps (2)
LIBOR
 
1,256,827

 
(14,623
)
 
4.1
 
2.9

EURIBOR-Based Debt:
 
 
 
 
 
 
 
 
 
Euro-denominated interest rate swaps (3)
EURIBOR
 
217,621

 
(26,107
)
 
2.5
 
3.1

 
 
 
 
 
(40,730
)
 
 
 
 

(1)
Excludes the margins the Company pays on its variable-rate debt, which, as of June 30, 2018, ranged from 0.3% to 4.0%.
(2)
Includes interest rate swaps with the notional amount reducing quarterly or semi-annually. Two interest rate swaps are subject to mandatory early termination in 2020 and 2021, at which time the swaps will be settled based on their fair value.
(3)
Principal amount is the U.S. Dollar equivalent of 186.2 million Euros. Principal amount reduces monthly to 70.1 million Euros ($81.9 million) by the maturity dates of the swap agreements. Certain of these Euro-denominated interest rate swaps are subject to mandatory early termination in 2018 whereby the swaps will be settled based on their fair value at that time. Certain of these interest rate swaps were terminated in July 2018.

Stock Purchase Warrants

As at June 30, 2018, Teekay held 14.5 million Brookfield Transaction Warrants (see Notes 4 and 11) with a fair value of $33.8 million on June 30, 2018.

As of June 30, 2018, Teekay held 1,755,000 Series D Warrants of Teekay Offshore (see Notes 4 and 11) with a fair value of $1.5 million on June 30, 2018.
 
Tabular Disclosure

The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Company’s unaudited consolidated balance sheets.
 
Prepaid Expenses and Other
 
Other Non-Current Assets
 
Accrued
Liabilities and Other
 
Current
Portion of
Derivative
Liabilities
 
Derivative
Liabilities
 
$
 
$
 
$
 
$
 
$
As at June 30, 2018
 
 
 
 
 
 
 
 
 
Derivatives designated as a cash flow hedge:
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
515

 
5,594

 
—

 
—

 
—

Derivatives not designated as a cash flow hedge:
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
3,053

 
5,869

 
(3,385
)
 
(22,812
)
 
(29,564
)
Cross-currency swap agreements
—

 
7,212

 
(645
)
 
(42,284
)
 
(8,809
)
Stock purchase warrants
—

 
35,271

 
—

 
—

 
—

Forward freight agreements
34

 
—

 
—

 
(16
)
 
—

 
3,602

 
53,946

 
(4,030
)
 
(65,112
)
 
(38,373
)
As at December 31, 2017
 
 
 
 
 
 
 
 
 
Derivatives designated as a cash flow hedge:
 
 
 
 
 
 
 
 
 
Interest rate swap agreements
—

 
1,037

 
(18
)
 
(751
)
 
(7
)
Derivatives not designated as a cash flow hedge:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
96

 
—

 
—

 
(15
)
 
—

Interest rate swap agreements
1,124

 
4,319

 
(4,836
)
 
(35,134
)
 
(38,213
)
Cross-currency swap agreements
—

 
5,042

 
(810
)
 
(44,523
)
 
(10,168
)
Stock purchase warrants
—

 
30,749

 
—

 
—

 
—

 
1,220

 
41,147

 
(5,664
)
 
(80,423
)
 
(48,388
)

 
As at June 30, 2018, the Company had multiple interest rate swaps and cross-currency swaps with the same counterparty that are subject to the same master agreements. Each of these master agreements provides for the net settlement of all derivatives subject to that master agreement through a single payment in the event of default or termination of any one derivative. The fair value of these derivatives is presented on a gross basis in the Company’s unaudited consolidated balance sheets. As at June 30, 2018, these derivatives had an aggregate fair value asset amount of $21.4 million and an aggregate fair value liability amount of $73.6 million. As at June 30, 2018, the Company had $17.2 million on deposit with the relevant counterparties as security for swap liabilities under certain master agreements. The deposit is presented in restricted cash on the unaudited consolidated balance sheets.

For the periods indicated, the following table presents the effective portion of gains (losses) on interest rate swap agreements designated and qualifying as cash flow hedges (excluding such agreements in equity-accounted investments):

Three Months Ended June 30, 2018
 
Effective Portion
 
Effective Portion
Ineffective
 
Recognized in AOCI(1)
 
Reclassified from AOCI(2)
Portion(3)
 
$
 
$
$
 
1,534
 
2
—
Interest expense
1,534
 
2
—
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
Effective Portion
 
Effective Portion
Ineffective
 
Recognized in AOCI(1)
 
Reclassified from AOCI(2)
Portion(3)
 
(1,508)
 
(706)
(821)
Interest expense
(1,508)
 
(706)
(821)
 
 
 
Six Months Ended June 30, 2018
 
Effective Portion
 
Effective Portion
Ineffective
 
Recognized in AOCI(1)
 
Reclassified from AOCI(2)
Portion(3)
 
$
 
$
$
 
5,090
 
(248)
740
Interest expense
5,090
 
(248)
740
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Effective Portion
 
Effective Portion
Ineffective
 
Recognized in AOCI(1)
 
Reclassified from AOCI(2)
Portion(3)
 
(1,562)
 
(762)
(754)
Interest expense
(1,562)
 
(762)
(754)
 

(1) Recognized in accumulated other comprehensive income (loss) (or AOCI).
(2) Recorded in AOCI during the term of the hedging relationship and reclassified to earnings.
(3) Recognized in the ineffective portion of gains (losses) on derivative instruments designated and qualifying as cash flow hedges.

Realized and unrealized (losses) and gains from derivative instruments that are not designated for accounting purposes as cash flow hedges are recognized in earnings and reported in realized and unrealized gains (losses) on non-designated derivatives in the unaudited consolidated statements of loss. The effect of the (losses) and gains on derivatives not designated as hedging instruments in the unaudited consolidated statements of loss is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
$
 
$
 
$
 
$
Realized (losses) gains relating to:
 
 
 
 
 
 
 
Interest rate swap agreements
(4,031
)
 
(15,914
)
 
(8,840
)
 
(32,470
)
Interest rate swap agreement terminations
—

 
(1,005
)
 
—

 
(610
)
Foreign currency forward contracts
—

 
(618
)
 
—

 
(971
)
Time charter swap agreement
—

 
360

 
—

 
1,106

Forward freight agreements
(18
)
 
80

 
(18
)
 
113

 
(4,049
)
 
(17,097
)
 
(8,858
)
 
(32,832
)
Unrealized gains (losses) relating to:
 
 
 
 
 
 
 
Interest rate swap agreements
8,532

 
(15,517
)
 
24,451

 
(6,394
)
Foreign currency forward contracts
—

 
2,808

 
—

 
3,648

Stock purchase warrants
6,206

 
(332
)
 
4,522

 
(575
)
Time charter swap agreement
—

 
(402
)
 
—

 
(875
)
Forward freight agreements
34

 
(30
)
 
34

 
(17
)
 
14,772

 
(13,473
)
 
29,007

 
(4,213
)
Total realized and unrealized gains (losses) on derivative instruments
10,723

 
(30,570
)
 
20,149

 
(37,045
)


Realized and unrealized gains and losses of the cross-currency swaps are recognized in earnings and reported in foreign exchange gain (loss) in the consolidated statements of loss. The effect of the gains and losses on cross-currency swaps on the consolidated statements of loss is as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
$
 
$
 
$
 
$
Realized losses on maturity and termination of cross-currency swaps
—

 
(25,733
)
 
—

 
(25,733
)
Realized losses
(1,798
)
 
(5,394
)
 
(3,182
)
 
(12,135
)
Unrealized (losses) gains
(16,566
)
 
43,017

 
5,768

 
50,096

Total realized and unrealized (losses) gains on cross-currency swaps
(18,364
)
 
11,890

 
2,586

 
12,228



The Company is exposed to credit loss to the extent the fair value represents an asset in the event of non-performance by the counterparties to the foreign currency forward contracts, and cross-currency and interest rate swap agreements; however, the Company does not anticipate non-performance by any of the counterparties. In order to minimize counterparty risk, the Company only enters into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transaction. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.