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Accounting for derivative instruments and hedging activities | 12 Months Ended
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Dec. 31, 2012
Accounting for derivative instruments and hedging activities |
Accounting for derivative instruments and hedging activities | 12. Accounting for derivative instruments and hedging activities We recognize all derivative instruments on the balance sheet as either assets or liabilities and measure them at fair value each reporting period. For certain contracts designated as cash flow hedges, we defer the effective portion of the change in fair value of the derivatives in accumulated other comprehensive income (loss), until the hedged transactions occur and are recognized in earnings. The ineffective portion of a cash flow hedge is immediately recognized in earnings. For derivatives that are not designated as cash flow hedges, the changes in the fair value are immediately recognized in earnings. The guidelines apply to our natural gas swaps, interest rate swaps, and foreign exchange contracts. Gas purchase agreements On March 12, 2012, we discontinued the application of the normal purchase normal sales ("NPNS") exemption on gas purchase agreements at our North Bay, Kapuskasing and Nipigon projects. On that date, we entered into an agreement with a third party that resulted in the gas purchase agreements no longer qualifying for the NPNS exemption. The agreements at North Bay and Kapuskasing expire on December 31, 2016. These gas purchase agreements are derivative financial instruments and are recorded in the consolidated balance sheets at fair value and the changes in their fair market value are recorded in the consolidated statements of operations. In May 2012, the Nipigon project entered into a long-term contract for the purchase of natural gas beginning on January 1, 2013 and expiring on December 31, 2022. This contract is accounted for as a derivative financial instrument and is recorded in the consolidated balance sheet at fair value at December 31, 2012. Changes in the fair market value of the contract are recorded in the consolidated statements of operations. In May 2012, the Tunis project entered into a contract for the purchase of natural gas beginning on October 1, 2012 and expiring on March 31, 2013 and qualified for the NPNS exemption. In October 2012, the Tunis project entered into an additional contract for the purchase of natural gas beginning on December 1, 2012 and expiring on March 31, 2013. Those contracts are accounted for as a derivative financial instruments and are recorded in the consolidated balance sheet at fair value. Changes in the fair market value of the contracts are recorded in the consolidated statements of operations. Natural gas swaps Our strategy to mitigate the future exposure to changes in natural gas prices at our projects consists of periodically entering into financial swaps that effectively fix the price of natural gas expected to be purchased at these projects. These natural gas swaps are derivative financial instruments and are recorded in the consolidated balance sheets at fair value and the changes in their fair market value are recorded in the consolidated statements of operations. The operating margin at our 50% owned Orlando project is exposed to changes in natural gas prices following the expiration of its fuel contract at the end of 2013. We have entered into natural gas swaps to effectively fix the price of 3.2 million Mmbtu of future natural gas purchases, or approximately 64% of our share of the expected natural gas purchases at the project during 2014 and 2015. We also entered into natural gas swaps to effectively fix the price of 1.3 million Mmbtu of future natural gas purchases representing approximately 25% of our share of the expected natural gas purchases at the project during 2016 and 2017. Interest rate swaps The Cadillac project has an interest rate swap agreement that effectively fixes the interest rate at 6.02% from February 16, 2011 to February 15, 2015, 6.14% from February 16, 2015 to February 15, 2019, 6.26% from February 16, 2019 to February 15, 2023, and 6.38% thereafter. The notional amount of the interest rate swap agreement matches the outstanding principal balance over the remaining life of Cadillac's debt. This swap agreement, which qualifies for and is designated as a cash flow hedge, is effective through June 2025 and the effective portion of the changes in the fair market value is recorded in accumulated other comprehensive income (loss). The Piedmont project has interest rate swap agreements to economically fix its exposure to changes in interest rates related to its variable-rate debt. The interest rate swap agreement effectively converts the floating rate debt to a fixed interest rate of 1.7% plus an applicable margin ranging from 3.5% to 3.75% through February 29, 2016. From February 2016 until the maturity of the debt in November 2017, the fixed rate of the swap is 4.47% and the applicable margin is 4.0%, resulting in an all-in rate of 8.47%. The swap continues at the fixed rate of 4.47% from the maturity of the debt in November 2017 until November 2030. The notional amounts of the interest rate swap agreements match the estimated outstanding principal balance of Piedmont's cash grant bridge loan and the construction loan facility that will convert to a term loan. The interest rate swaps were executed on October 21, 2010 and November 2, 2010 and expire on February 29, 2016 and November 30, 2030, respectively. The interest rate swap agreements are not designated as hedges, and changes in their fair market value are recorded in the consolidated statements of operations. Epsilon Power Partners, a wholly owned subsidiary, has an interest rate swap to economically fix the exposure to changes in interest rates related to the variable-rate non-recourse debt. The interest rate swap agreement effectively converted the floating rate debt to a fixed interest rate of 7.37% and has a maturity date of July 2019. The notional amount of the swap matches the outstanding principal balance over the remaining life of Epsilon Power Partners' debt. This interest rate swap agreement is not designated as a hedge and changes in its fair market value are recorded in the consolidated statements of operations. The Rockland project entered into interest rate swaps to manage interest rate risk exposure. These swaps effectively modify the project's exposure by converting the project's floating rate debt to a fixed basis. The interest rate swaps are with various counterparties and swap 100% of the expected interest payments from floating LIBOR to fixed rates structured in two tranches. The first tranche is for the notional amount due on the term loan commencing on December 30, 2011 and ending December 31, 2026 and fixes the interest rate at 4.16%. The second tranche is the post-term portion of the loan, or the balloon payment and commences on December 31, 2026 and ends on December 31, 2031, fixing the interest rate at 5.06%. This interest rate swap agreement is not designated as a hedge and changes in its fair market value are recorded in the consolidated statements of operations. The Meadow Creek project has interest rate swap agreements to economically fix its exposure to changes in interest rates related to its variable-rate debt. The interest rate swap agreement effectively converted the floating rate debt to a fixed interest rate of 5.08% from December 31, 2012 to December 31, 2024. From December 2024 until the maturity of the debt in December 2030, the fixed rate of the swap is 6.70%. The notional amounts of the interest rate swap agreements match the estimated outstanding principal balance of Meadow Creek's term loan/construction loan debt. The interest rate swaps were both executed on September 17, 2012 and expire on December 31, 2024 and December 31, 2030, respectively. The interest rate swap agreements are not designated as hedges, and changes in their fair market value are recorded in the consolidated statements of operations. Foreign currency forward contracts We use foreign currency forward contracts to manage our exposure to changes in foreign exchange rates, as we generate cash flow in U.S. dollars and Canadian dollars but pay dividends to shareholders and interest on our Canadian dollar denominated convertible debentures and long-term debt predominantly in Canadian dollars. We have a hedging strategy for the purpose of mitigating the currency risk impact on the long-term sustainability of dividends to shareholders. We have executed this strategy by entering into forward contracts to purchase Canadian dollars at a fixed rate to hedge an average of approximately 60% of our expected dividend and convertible debenture interest payments through 2015. Changes in the fair value of the forward contracts partially offset foreign exchange gain or losses on the U.S. dollar equivalent of our Canadian dollar obligations. At December 31, 2012, the forward contracts consist of (1) monthly purchases through the end of 2013 of Cdn$6.0 million at an exchange rate of Cdn$1.134 per U.S. dollar and (2) contracts assumed in our acquisition of the Partnership with various expiration dates through December 2015 to purchase a total of Cdn$176.5 million at an average exchange rate of Cdn$1.14 per U.S. dollar. It is our intention to periodically consider extending the length or terminating these forward contracts. The foreign currency forward contracts are not designated as hedges, and changes in their market value are recorded in the consolidated statements of operations. Volume of forecasted transactions We have entered into derivative instruments in order to economically hedge the following notional volumes of forecasted transactions as summarized below, by type, excluding those derivatives that qualified for the NPNS exemption as of year ended December 31, 2012 and December 31, 2011:
|  | Units |  | December 31, 2012 |  | December 31, 2011 |
--- | --- | --- | --- | --- | --- | --- | ---
Natural gas swaps |  | Natural Gas (Mmbtu) |  |  | 10,640 |  |  | 14,140 |
Gas Purchase Agreements |  | Natural Gas (GJ) |  |  | 49,810 |  |  | — |
Interest Rate Swaps |  | Interest (US$) |  |  | 140,154 |  |  | 52,711 |
Currency forwards |  | Cdn$ |  |  | 176,550 |  |  | 312,533 |
Fair value of derivative instruments We have elected to disclose derivative instrument assets and liabilities on a trade-by-trade basis and do not offset amounts at the counterparty master agreement level. The following table summarizes the fair value of our derivative assets and liabilities:
|  | December 31, 2012 |
--- | --- | --- | ---
|  | Derivative Assets |  | Derivative Liabilities |
Derivative instruments designated as cash flow hedges: |  |  |  |  |  |  |
Interest rate swaps current |  | $ | — |  | $ | 1,340 |
Interest rate swaps long-term |  |  | — |  |  | 5,167 |
Total derivative instruments designated as cash flow hedges |  |  | — |  |  | 6,507 |
Derivative instruments not designated as cash flow hedges: |  |  |  |  |  |  |
Interest rate swaps current |  |  | — |  |  | 7,261 |
Interest rate swaps long-term |  |  | 69 |  |  | 27,713 |
Foreign currency forward contracts current |  |  | 9,456 |  |  | — |
Foreign currency forward contracts long-term |  |  | 10,998 |  |  | — |
Natural gas swaps current |  |  | — |  |  | — |
Natural gas swaps long-term |  |  | 117 |  |  | 3,864 |
Gas purchase agreements current |  |  | 71 |  |  | 24,544 |
Gas purchase agreements long-term |  |  | — |  |  | 81,359 |
Total derivative instruments not designated as cash flow hedges |  |  | 20,711 |  |  | 144,741 |
Total derivative instruments |  | $ | 20,711 |  | $ | 151,248 |
|  | December 31, 2011 |
|  | Derivative Assets |  | Derivative Liabilities |
Derivative instruments designated as cash flow hedges: |  |  |  |  |  |  |
Interest rate swaps current |  | $ | — |  | $ | 1,561 |
Interest rate swaps long-term |  |  | — |  |  | 5,317 |
Total derivative instruments designated as cash flow hedges |  |  | — |  |  | 6,878 |
Derivative instruments not designated as cash flow hedges: |  |  |  |  |  |  |
Interest rate swaps current |  |  | — |  |  | 2,587 |
Interest rate swaps long-term |  |  | — |  |  | 9,637 |
Foreign currency forward contracts current |  |  | 10,630 |  |  | 224 |
Foreign currency forward contracts long-term |  |  | 22,224 |  |  | 221 |
Natural gas swaps current |  |  | — |  |  | 16,439 |
Natural gas swaps long-term |  |  | — |  |  | 18,216 |
Gas purchase agreements current |  |  | — |  |  | — |
Gas purchase agreements long-term |  |  | — |  |  | — |
Total derivative instruments not designated as cash flow hedges |  |  | 32,854 |  |  | 47,324 |
Total derivative instruments |  | $ | 32,854 |  | $ | 54,202 |
Accumulated other comprehensive income The following table summarizes the changes in the accumulated other comprehensive income (loss) ("OCI") balance attributable to derivative financial instruments designated as a hedge, net of tax:
For the year ended December 31, 2012 |  | Interest Rate Swaps |  | Natural Gas Swaps |  | Total |
--- | --- | --- | --- | --- | --- | --- | ---
Accumulated OCI balance at January 1, 2012 |  | $ | (1,704 | ) | $ | 321 |  | $ | (1,383 | )
Change in fair value of cash flow hedges |  |  | (949 | ) |  | — |  |  | (949 | )
Realized from OCI during the period |  |  | 1,120 |  |  | (232 | ) |  | 888 |
Accumulated OCI balance at December 31, 2012 |  | $ | (1,533 | ) | $ | 89 |  | $ | (1,444 | )
Gains (losses) expected to be realized from OCI in the next 12 months, net of $593 tax |  | $ | 979 |  | $ | (89 | ) | $ | 890 |
For the year ended December 31, 2011 |  | Interest Rate Swaps |  | Natural Gas Swaps |  | Total |
Accumulated OCI balance at January 1, 2011 |  | $ | (427 | ) | $ | 682 |  | $ | 255 |
Change in fair value of cash flow hedges |  |  | (2,647 | ) |  | — |  |  | (2,647 | )
Realized from OCI during the period |  |  | 1,370 |  |  | (361 | ) |  | 1,009 |
Accumulated OCI balance at December 31, 2011 |  | $ | (1,704 | ) | $ | 321 |  | $ | (1,383 | )
For the year ended December 31, 2010 |  | Interest Rate Swaps |  | Natural Gas Swaps |  | Total |
Accumulated OCI balance at January 1, 2010 |  | $ | (538 | ) | $ | (321 | ) | $ | (859 | )
Change in fair value of cash flow hedges |  |  | (360 | ) |  | — |  |  | (360 | )
Realized from OCI during the period |  |  | 471 |  |  | 1,003 |  |  | 1,474 |
Accumulated OCI balance at December 31, 2010 |  | $ | (427 | ) | $ | 682 |  | $ | 255 |
Impact of derivative instruments on the consolidated statements of operations The following table summarizes realized (gains) and losses for derivative instruments not designated as cash flow hedges:
|  |  |  | Year ended December 31, |
--- | --- | --- | --- | --- | ---
|  | Classification of (gain) loss recognized in income |
|  | 2012 |  | 2011 |  | 2010 |
Gas purchase agreements |  | Fuel |  |  | 43,470 |  |  | — |  |  | — |
Interest rate swaps |  | Interest, net |  |  | 4,584 |  |  | 4,166 |  |  | 1,664 |
Foreign currency forwards |  | Foreign exchange (gain) loss |  |  | (18,483 | ) |  | 5,201 |  |  | (6,625 | )
The following table summarizes the unrealized gains and (losses) resulting from changes in the fair value of derivative financial instruments that are not designated as cash flow hedges:
|  |  |  | Year ended December 31, |
--- | --- | --- | --- | --- | ---
|  | Classification of (gain) loss recognized in income |
|  | 2012 |  | 2011 |  | 2010 |
Natural gas swaps |  | Change in fair value of derivatives |  | $ | (1,241 | ) | $ | (2,357 | ) | $ | (148 | )
Gas purchase agreements |  | Change in fair value of derivatives |  | $ | (56,954 | ) |  | — |  |  | — |
Interest rate swaps |  | Change in fair value of derivatives |  |  | (1,077 | ) |  | (12,237 | ) |  | 3,423 |
|  |  |  | $ | (59,272 | ) | $ | (14,594 | ) | $ | 3,275 |
Foreign currency forwards |  | Foreign exchange (gain) loss |  | $ | 11,956 |  | $ | 14,211 |  | $ | (3,542 | )

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80784-113994 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624171-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624181-113959 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4K -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708775-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579245-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41641-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5579240-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41638-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41635-113959 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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