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Derivative Instruments and Fair Value Accounting

6 Months Ended

Jun. 30, 2020

Note 2. Derivative Instruments and Fair Value Accounting

Derivative Instruments

We use derivative instruments to mitigate the impact of changes in interest rates, both in anticipation of future debt issuances and to offset interest rate variability of certain floating rate debt issuances outstanding. We also may use derivative instruments to mitigate the impact of changes in natural gas and diesel fuel prices and changes in foreign currency exchange rates. Derivative instruments that are designated and qualify as cash flow hedges are accounted for by recording the effective portion of the gain or loss on the derivative instrument in accumulated other comprehensive loss ("AOCL") as a separate component of stockholders' equity and reclassified into earnings in the period during which the hedged transaction affects earnings. We continuously monitor our derivative positions and the credit ratings of our counterparties and do not anticipate losses due to non-performance. See Note 7 for a description of our debt instruments.

Interest Rate Hedges


					Included in accompanying balance sheet at June 30, 2020
	Notional Amount		Interest Rate ⁽¹⁾		Asset/(Liability)		AOCL – loss/(income)		Noncontrolling Interest
	(in millions, except %)
Expired hedges:
2018 secured railcar equipment notes	$	249.3	4.41	%	$	—	$	0.9	$	—
TRIP Holdings warehouse loan	$	788.5	3.60	%	$	—	$	1.8	$	2.4
TRIP Master Funding secured railcar equipment notes	$	34.8	2.62	%	$	—	$	0.1	$	0.1
2017 promissory notes - interest rate cap	$	169.3	3.00	%	$	—	$	(0.5)	$	—
Open hedge:
2017 promissory notes - interest rate swap	$	461.2	2.86	%	$	(52.6)	$	52.1	$	—

⁽¹⁾Weighted average fixed interest rate, except for the interest rate cap on the 2017 promissory notes.


	Effect on interest expense-increase/(decrease)
	Three Months Ended June 30,						Six Months Ended June 30,				Expected effect during next twelve months⁽¹⁾
	2020		2019		2020		2019
	(in millions)
Expired hedges:
2006 secured railcar equipment notes ⁽²⁾	$	—	$	(0.1)	$	(0.1)	$	(0.1)	$	—
2018 secured railcar equipment notes	$	—	$	—	$	0.1	$	0.1	$	0.2
TRIP Holdings warehouse loan	$	0.5	$	0.5	$	1.0	$	1.0	$	2.0
TRIP Master Funding secured railcar equipment notes	$	—	$	—	$	0.1	$	0.1	$	0.1
2017 promissory notes - interest rate cap	$	—	$	(0.1)	$	—	$	(0.1)	$	(0.1)
Open hedge:
2017 promissory notes - interest rate swap	$	3.0	$	0.7	$	4.7	$	1.3	$	9.4

⁽¹⁾Based on the fair value of open hedges as of June 30, 2020.

⁽²⁾ Upon settlement of the debt in March 2020, the remaining balance of $0.1 million in AOCL was recognized through interest expense. See Note 7 for additional information on the debt redemption.

Other Derivatives


			Included in accompanying balance sheet at June 30, 2020						Effect on cost of revenues – increase/(decrease)
	Notional Amount		Asset/(Liability)		AOCL – loss/(income)		Three Months Ended		Six Months Ended			Expected effect during next twelve months⁽¹⁾
											June 30, 2020			June 30, 2020
	(in millions)
Foreign currency hedge	$	55.0	$	(1.3)	$	3.1	$	2.6	$	1.8		$	3.1

⁽¹⁾Based on the fair value of open hedges as of June 30, 2020.

Our exposure related to foreign currency and commodity transactions is currently hedged for up to a maximum of twelve months. The effect of commodity hedge transactions was immaterial to the Consolidated Financial Statements for all periods presented herein.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to establish a fair value hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are listed below.

Level 1 — This level is defined as quoted prices in active markets for identical assets or liabilities. Our cash equivalents and restricted cash are instruments of the U.S. Treasury or highly-rated money market mutual funds. The assets measured as Level 1 in the fair value hierarchy are summarized below:


	Level 1
	June 30, 2020		December 31, 2019
	(in millions)
Assets:
Cash equivalents	$	76.1	$	57.9
Restricted cash	136.9		111.4
Total assets	$	213.0	$	169.3

Level 2 — This level is defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Interest rate hedges are valued at exit prices obtained from each counterparty. Foreign currency hedges are valued at exit prices obtained from each counterparty, which are based on currency spot and forward rates and forward points. The assets and liabilities measured as Level 2 in the fair value hierarchy are summarized below:


	Level 2
	June 30, 2020		December 31, 2019
	(in millions)
Assets:
Foreign currency hedge ⁽¹⁾	$	—	$	1.2

Total assets	$	—	$	1.2

Liabilities:
Interest rate hedge ⁽²⁾	$	52.6	$	28.0
Foreign currency hedge ⁽²⁾	1.3		—
Total liabilities	$	53.9	$	28.0

⁽¹⁾ Included in other assets in our Consolidated Balance Sheets.

⁽²⁾ Included in accrued liabilities in our Consolidated Balance Sheets.

Level 3 — This level is defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. As of June 30, 2020 and December 31, 2019, we have no assets measured as Level 3 in the fair value hierarchy, except as described in Note 10 to this Form 10-Q and Note 10 to the Consolidated Financial Statements included in our 2019 Annual Report on Form 10-K.

See Note 10 for more information regarding the non-recurring fair value measurement considerations during the three and six months ended June 30, 2020 for the impairment charge related to our small cube covered hopper railcars. See Note 7 for the estimated fair values of our debt instruments. The fair values of all other financial instruments are estimated to approximate carrying value.

Derivative Instruments and Hedging Activities Disclosure [Text Block]

See Note 7 for a description of our debt instruments.

Interest Rate Hedges


					Included in accompanying balance sheet at June 30, 2020
	Notional Amount		Interest Rate ⁽¹⁾		Asset/(Liability)		AOCL – loss/(income)		Noncontrolling Interest
	(in millions, except %)
Expired hedges:
2018 secured railcar equipment notes	$	249.3	4.41	%	$	—	$	0.9	$	—
TRIP Holdings warehouse loan	$	788.5	3.60	%	$	—	$	1.8	$	2.4
TRIP Master Funding secured railcar equipment notes	$	34.8	2.62	%	$	—	$	0.1	$	0.1
2017 promissory notes - interest rate cap	$	169.3	3.00	%	$	—	$	(0.5)	$	—
Open hedge:
2017 promissory notes - interest rate swap	$	461.2	2.86	%	$	(52.6)	$	52.1	$	—

⁽¹⁾Weighted average fixed interest rate, except for the interest rate cap on the 2017 promissory notes.


	Effect on interest expense-increase/(decrease)
	Three Months Ended June 30,						Six Months Ended June 30,				Expected effect during next twelve months⁽¹⁾
	2020		2019		2020		2019
	(in millions)
Expired hedges:
2006 secured railcar equipment notes ⁽²⁾	$	—	$	(0.1)	$	(0.1)	$	(0.1)	$	—
2018 secured railcar equipment notes	$	—	$	—	$	0.1	$	0.1	$	0.2
TRIP Holdings warehouse loan	$	0.5	$	0.5	$	1.0	$	1.0	$	2.0
TRIP Master Funding secured railcar equipment notes	$	—	$	—	$	0.1	$	0.1	$	0.1
2017 promissory notes - interest rate cap	$	—	$	(0.1)	$	—	$	(0.1)	$	(0.1)
Open hedge:
2017 promissory notes - interest rate swap	$	3.0	$	0.7	$	4.7	$	1.3	$	9.4

⁽¹⁾Based on the fair value of open hedges as of June 30, 2020.

Other Derivatives


			Included in accompanying balance sheet at June 30, 2020						Effect on cost of revenues – increase/(decrease)
	Notional Amount		Asset/(Liability)		AOCL – loss/(income)		Three Months Ended		Six Months Ended			Expected effect during next twelve months⁽¹⁾
											June 30, 2020			June 30, 2020
	(in millions)
Foreign currency hedge	$	55.0	$	(1.3)	$	3.1	$	2.6	$	1.8		$	3.1

⁽¹⁾Based on the fair value of open hedges as of June 30, 2020.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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