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Derivative instruments and hedging activities | 9 Months Ended
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Sep. 30, 2013
Derivative instruments and hedging activities |
Derivative instruments and hedging activities | 7. 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 September 30, 2013 and December 31, 2012. Changes in the fair market value of the contract are recorded in the consolidated statements of operations. In April, June and August 2013, the Tunis project entered into contracts for the purchase of natural gas beginning on October 1, 2013 and expiring on March 31, 2014. These contracts are accounted for as derivative financial instruments and are recorded in the consolidated balance sheet at fair value as of September 30, 2013. Changes in the fair market value of the contracts are recorded in the consolidated statement of operations. Natural gas swaps Our strategy to mitigate a portion of 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 74% 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 38% of our share of the expected natural gas purchases at the project during 2016 and 2017. Interest rate swaps Cadillac Renewable Energy, LLC ("Cadillac") has an interest rate swap agreement that effectively fixes the interest rate at 6.0% from February 16, 2011 to February 15, 2015, 6.1% from February 16, 2015 to February 15, 2019, 6.3% from February 16, 2019 to February 15, 2023, and 6.4% 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). Piedmont 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 3.8% through February 29, 2016. From February 2016 until November 2017, the fixed rate of the swap is 4.5% and the applicable margin is 4.0%, resulting in an all-in rate of 8.5%. The swap continues at the fixed rate of 4.5% 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 ("Epsilon") 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 7.4% 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's 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. Rockland Wind Farm, LLC ("Rockland") 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 4.2% plus an applicable margin of 2.3% - 2.8%. 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 7.8%. The interest rate swap agreements are not designated as a hedge and changes in their fair market value are recorded in the consolidated statements of operations. The Meadow Creek project ("Meadow Creek") 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 agreements effectively converted 75% of the floating rate debt to a fixed interest rate of 2.3% plus an applicable margin of 2.8% - 3.3% from December 31, 2012 to December 31, 2024. The second tranche is the post-term portion of the loan, or the balloon payment and commences on December 31, 2024 and ends on December 31, 2030, fixing the interest rate at 7.2%. 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 many of our projects generate cash flow in U.S. dollars and Canadian dollars but we pay dividends to shareholders, if and when declared by the board of directors, and interest on corporate level long-term debt and convertible debentures, predominantly in Canadian dollars. We have a hedging strategy for the purpose of mitigating the currency risk impact on future payments of dividends to shareholders, if and when declared by the board of directors. We have executed this strategy utilizing cash flows from our projects that generate Canadian dollars and by entering into forward contracts to purchase Canadian dollars at a fixed rate to hedge an average of approximately 71% of any dividend and expected long-term debt 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 September 30, 2013, the forward contracts consist of contracts assumed in our acquisition of the Partnership with various expiration dates through December 2015 to purchase a total of Cdn$34.9 million at an average exchange rate of Cdn$1.108 per U.S. dollar. It is our intention to periodically consider extending or terminating these forward contracts. In April 2013, we terminated various foreign currency forward contracts with expiration dates through June 2015 assumed in our acquisition of the Partnership resulting in proceeds and a realized gain of $9.4 million. Volume of forecasted transactions We have entered into derivative instruments in order to economically hedge the following notional volumes of forecasted transactions as summarized below, by type, excluding those derivatives that qualified for the NPNS exemption as of September 30, 2013 and December 31, 2012:
|  | Units |  | September 30, 2013 |  | December 31, 2012 |
--- | --- | --- | --- | --- | --- | --- | ---
Natural gas swaps |  | Natural Gas (Mmbtu) |  |  | 5.6 |  |  | 10.6 |
Gas purchase agreements |  | Natural Gas (GJ) |  |  | 43.9 |  |  | 49.8 |
Interest rate swaps |  | Interest (US$) |  |  | 164.4 |  |  | 172.0 |
Foreign currency forwards |  | Cdn$ |  |  | 34.9 |  |  | 176.6 |
Fair value of derivative instruments The fair value of our derivative assets and liabilities under counterparty master netting agreement are disclosed net on the consolidated balance sheets at September 30, 2013 and December 31, 2012. In the following table, 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:
|  | September 30, 2013 |
--- | --- | --- | ---
|  | Derivative Assets |  | Derivative Liabilities |
Derivative instruments designated as cash flow hedges: |  |  |  |  |  |  |
Interest rate swaps current |  | $ | — |  | $ | 1.3 |
Interest rate swaps long-term |  |  | — |  |  | 3.2 |
Total derivative instruments designated as cash flow hedges |  |  | — |  |  | 4.5 |
Derivative instruments not designated as cash flow hedges: |  |  |  |  |  |  |
Interest rate swaps current |  |  | — |  |  | 7.5 |
Interest rate swaps long-term |  |  | 7.9 |  |  | 12.6 |
Foreign currency forward contracts current |  |  | 0.6 |  |  | 0.3 |
Foreign currency forward contracts long-term |  |  | 1.6 |  |  | — |
Natural gas swaps current |  |  | — |  |  | 1.2 |
Natural gas swaps long-term |  |  | — |  |  | 3.9 |
Gas purchase agreements current |  |  | — |  |  | 22.8 |
Gas purchase agreements long-term |  |  | — |  |  | 67.4 |
Total derivative instruments not designated as cash flow hedges |  |  | 10.1 |  |  | 115.7 |
Total derivative instruments |  | $ | 10.1 |  | $ | 120.2 |
|  | December 31, 2012 |
--- | --- | --- | ---
|  | Derivative Assets |  | Derivative Liabilities |
Derivative instruments designated as cash flow hedges: |  |  |  |  |  |  |
Interest rate swaps current |  | $ | — |  | $ | 1.3 |
Interest rate swaps long-term |  |  | — |  |  | 5.2 |
Total derivative instruments designated as cash flow hedges |  |  | — |  |  | 6.5 |
Derivative instruments not designated as cash flow hedges: |  |  |  |  |  |  |
Interest rate swaps current |  |  | — |  |  | 7.3 |
Interest rate swaps long-term |  |  | 0.1 |  |  | 27.7 |
Foreign currency forward contracts current |  |  | 9.5 |  |  | — |
Foreign currency forward contracts long-term |  |  | 11.0 |  |  | — |
Natural gas swaps current |  |  | — |  |  | — |
Natural gas swaps long-term |  |  | 0.1 |  |  | 3.9 |
Gas purchase agreements current |  |  | 0.1 |  |  | 24.5 |
Gas purchase agreements long-term |  |  | — |  |  | 81.4 |
Total derivative instruments not designated as cash flow hedges |  |  | 20.8 |  |  | 144.8 |
Total derivative instruments |  | $ | 20.8 |  | $ | 151.3 |
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:
(in millions) Three months ended September 30, 2013 |  | Interest Rate Swaps |  | Natural Gas Swaps |  | Total |
--- | --- | --- | --- | --- | --- | --- | ---
Accumulated OCI balance at June 30, 2013 |  | $ | (0.4 | ) | $ | — |  | $ | (0.4 | )
Change in fair value of cash flow hedges |  |  | (0.1 | ) |  | — |  |  | (0.1 | )
Realized from OCI during the period |  |  | 0.2 |  |  | — |  |  | 0.2 |
Accumulated OCI balance at September 30, 2013 |  | $ | (0.3 | ) | $ | — |  | $ | (0.3 | )
(in millions) Three months ended September 30, 2012 |  | Interest Rate Swaps |  | Natural Gas Swaps |  | Total |
--- | --- | --- | --- | --- | --- | --- | ---
Accumulated OCI balance at June 30, 2012 |  | $ | (1.7 | ) | $ | 0.2 |  | $ | (1.5 | )
Change in fair value of cash flow hedges |  |  | (0.3 | ) |  | — |  |  | (0.3 | )
Realized from OCI during the period |  |  | 0.2 |  |  | (0.1 | ) |  | 0.1 |
Accumulated OCI balance at September 30, 2012 |  | $ | (1.8 | ) | $ | 0.1 |  | $ | (1.7 | )
(in millions) Nine months ended September 30, 2013 |  | Interest Rate Swaps |  | Natural Gas Swaps |  | Total |
--- | --- | --- | --- | --- | --- | --- | ---
Accumulated OCI balance at December 31, 2012 |  | $ | (1.5 | ) | $ | 0.1 |  | $ | (1.4 | )
Change in fair value of cash flow hedges |  |  | 0.5 |  |  | — |  |  | 0.5 |
Realized from OCI during the period |  |  | 0.7 |  |  | (0.1 | ) |  | 0.6 |
Accumulated OCI balance at September 30, 2013 |  | $ | (0.3 | ) | $ | — |  | $ | (0.3 | )
(in millions) Nine months ended September 30, 2012 |  | Interest Rate Swaps |  | Natural Gas Swaps |  | Total |
--- | --- | --- | --- | --- | --- | --- | ---
Accumulated OCI balance at December 31, 2011 |  | $ | (1.7 | ) | $ | 0.3 |  | $ | (1.4 | )
Change in fair value of cash flow hedges |  |  | (0.8 | ) |  | — |  |  | (0.8 | )
Realized from OCI during the period |  |  | 0.7 |  |  | (0.2 | ) |  | 0.5 |
Accumulated OCI balance at September 30, 2012 |  | $ | (1.8 | ) | $ | 0.1 |  | $ | (1.7 | )
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:
|  |  |  | Three months ended September 30, |
--- | --- | --- | --- | --- | ---
|  | Classification of (gain) loss recognized in income |
|  | 2013 |  | 2012 |
Gas purchase agreements |  | Fuel |  | $ | 7.6 |  | $ | 13.3 |
Foreign currency forwards |  | Foreign exchange gain |  |  | (1.1 | ) |  | (2.1 | )
Interest rate swaps |  | Interest, net |  |  | 2.7 |  |  | 1.2 |
|  |  |  | Nine months ended September 30, |
--- | --- | --- | --- | --- | ---
|  | Classification of (gain) loss recognized in income |
|  | 2013 |  | 2012 |
Gas purchase agreements |  | Fuel |  | $ | 38.0 |  | $ | 29.3 |
Foreign currency forwards |  | Foreign exchange gain |  |  | (14.4 | ) |  | (17.3 | )
Interest rate swaps |  | Interest, net |  |  | 9.4 |  |  | 3.4 |
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:
|  |  |  | Three months ended September 30, |
--- | --- | --- | --- | --- | ---
|  | Classification of (gain) loss recognized in income |
|  | 2013 |  | 2012 |
Natural gas swaps |  | Change in fair value of derivatives |  | $ | 0.6 |  | $ | (1.0 | )
Gas purchase agreements |  | Change in fair value of derivatives |  |  | 3.6 |  |  | (10.0 | )
Interest rate swaps |  | Change in fair value of derivatives |  |  | (0.7 | ) |  | 0.3 |
Total change in fair value of derivative instruments |  |  |  | $ | 3.5 |  | $ | (10.7 | )
Foreign currency forwards |  | Foreign exchange loss (gain) |  | $ | (0.2 | ) | $ | (4.7 | )
|  |  |  | Nine months ended September 30, |
--- | --- | --- | --- | --- | ---
|  | Classification of (gain) loss recognized in income |
|  | 2013 |  | 2012 |
Natural gas swaps |  | Change in fair value of derivatives |  | $ | 1.4 |  | $ | (0.2 | )
Gas purchase agreements |  | Change in fair value of derivatives |  |  | (12.0 | ) |  | (49.3 | )
Interest rate swaps |  | Change in fair value of derivatives |  |  | (22.8 | ) |  | (1.8 | )
Total change in fair value of derivative instruments |  |  |  | $ | (33.4 | ) | $ | (51.3 | )
Foreign currency forwards |  | Foreign exchange loss (gain) |  | $ | 18.5 |  | $ | 8.2 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: 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 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624163-113959 Reference 3: 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=26873400&loc=d3e23780-122690 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5708773-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 6: 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 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624258-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5618551-113959 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 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7668309&loc=d3e80748-113994 Reference 11: 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 12: 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 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7476318&loc=d3e41620-113959 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4D -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5624177-113959 Reference 15: 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 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=7476318&loc=SL5580258-113959 Reference 17: 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 18: 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 19: 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 20: 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 + Details
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