14. 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. We have one contract designated as a cash flow hedge, and 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 (loss). The ineffective portion of a cash flow hedge is immediately recognized in earnings (loss). For our other derivatives that are not designated as cash flow hedges, the changes in the fair value are immediately recognized in earnings (loss). These guidelines apply to our natural gas swaps, interest rate swaps, and foreign exchange contracts.

Gas purchase agreements

Gas purchase agreements to purchase gas forward at our North Bay, Kapuskasing and Nipigon projects do not qualify for the normal purchase normal sales (“NPNS”) exemption and are accounted for as derivative financial instruments. The gas purchase agreements at North Bay and Kapuskasing satisfy all of the forecasted fuel requirements for these projects through their expiration in the fourth quarter of 2016. The gas purchase agreement for Nipigon satisfies the majority of forecasted fuel requirements through December 31, 2022. These derivative financial instruments 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 June 2014, the Partnership entered into contracts for the purchase of 2.9 million Gigajoules (“Gj”) of future natural gas purchases beginning on November 1, 2014 and expiring on December 31, 2017 for our projects in Ontario. These contracts effectively fix the price of approximately 98% of our expected uncontracted gas requirements for each of 2014 and 2015 and 32% and 30% of our expected uncontracted gas requirements for 2016 and 2017, respectively. These contracts are accounted for as derivative financial instruments and are recorded in the consolidated balance sheet at fair value at December 31, 2015. Changes in the fair market value of these contracts are recorded in the consolidated statement of operations.

Natural gas swaps

Our strategy to mitigate 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. We previously entered into natural gas swaps to effectively fix the price of 4.5 million Mmbtu of future natural gas purchases. On February 20, 2014, we paid $4.0 million to terminate a portion of these contracts in connection with the termination of our prior revolving credit facility. We recorded fuel expense related to the settlement of these contracts in the consolidated statement of operations.

We have entered into various natural gas swaps to effectively fix the price of 6.3 million Mmbtu of future natural gas purchases at Orlando, which is approximately 100% of our share of the expected on-peak natural gas purchases at the project through 2016 or approximately 63% of our share of the expected base load natural gas purchases for 2015 and 2016, respectively. These contracts are accounted for as derivative financial instruments and are recorded in the consolidated balance sheet at fair value at December 31, 2015. Changes in the fair market value of these contracts are recorded in the consolidated statement of operations.

Interest rate swaps

The Cadillac project has an interest rate swap agreement that effectively fixes the interest rate at 6.0% through 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).

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 3.8% through February 29, 2016. From February 2016 until the maturity of the debt in August 2018, the fixed rate of the swap is 4.47% and the applicable margin is 4.0%, resulting in an all‑in rate of 8.5%. The swap continues at the fixed rate of 4.47% from the maturity of the debt in August 2018 until November 2030. Prior to conversion of the Piedmont Construction loan facility to a term loan, the notional amounts of the interest rate swap agreements matched the estimated outstanding principal balance of Piedmont’s construction loan facility. 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. As a result of the Piedmont term loan conversion on February 14, 2014, these swap agreements were amended to reduce the notional amounts to match the outstanding $68.5 million principal of the term loan. We recorded $1.0 million of deferred financing costs related to this transaction in the consolidated balance sheets. 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.

On May 5, 2014 the Partnership entered into interest rate swap agreements to mitigate exposure to changes in the Adjusted Eurodollar Rate for $199.0 million notional amount ($153.6 million at December 31, 2015) of the $600 million aggregate principal amount of borrowings ($473.2 million of borrowings at December 31, 2015) under the Term Loan Facility. Borrowings under the $600 million Term Loan Facility bear interest at a rate equal to the Adjusted Eurodollar Rate plus an applicable margin of 3.75%. Based on the terms of the Credit Agreement, the Adjusted Eurodollar Rate cannot be less than 1.00% resulting in a minimum of a 4.75% all-in rate on the Term Loan Facility. As a result of entering into the swap agreements, the all-in rate for $199.0 million of the Term Loan Facility cannot be less than 4.91% if the Adjusted Eurodollar Rate is equal to or greater than 1.00%. If the Adjusted Eurodollar Rate is below 1.00%, we will pay interest at a rate equivalent to the minimum 4.75% all-in rate plus any difference between the actual Adjusted Eurodollar Rate and 1.16%. The interest rate swap agreements were effective June 30, 2014 and terminate on December 29, 2017. The interest rate swap agreements are not designated as hedges and changes in their fair market value will be recorded in the consolidated statements of operations.

Epsilon Power Partners, our wholly owned subsidiary, previously had 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 had a maturity date of July 2019. The notional amount of the swap matched the outstanding principal balance over the remaining life of Epsilon Power Partners’ debt. On February 20, 2014, we paid $2.6 million to terminate this contract in connection with the termination of our prior revolving credit facility. We recorded interest expense related to its settlement in the consolidated statement of operations. This interest rate swap agreement was not designated as a hedge and changes in its fair market value were recorded in the consolidated statements of operations.

Foreign currency forward contracts

From time to time, 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. On February 20, 2014, we paid $0.4 million to terminate all of our remaining foreign currency forward contracts in connection with the termination of our prior revolving credit facility and recorded their settlement in foreign exchange gain in the consolidated statement of operations for the three months ended March 31, 2014. On April 2, 2014, we executed a foreign currency forward contract in which we agreed to sell $41.0 million on September 30, 2014 and receive Cdn$45.3 million at a foreign exchange rate of Cdn$1.105 per U.S. dollar in order to mitigate the foreign exchange risk on the repayment at maturity of the Cdn$44.8 million convertible debentures due in October 2014. We recorded a $0.5 million realized foreign exchange loss on the expiration of the foreign currency forward contract on September 30, 2014. We repaid the Cdn$44.8 million convertible debentures with cash on hand at their maturity on October 31, 2014.

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, 2015 and December 31, 2014:


		December 31,	December 31,
	Units	2015	2014
Natural gas swaps	Natural Gas (Mmbtu)	2.8	6.3
Gas purchase agreements	Natural Gas (Gigajoules)	25.0	33.9
Interest rate swaps	Interest (US$)	302.3	333.9

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, 2015
	Derivative		Derivative
	Assets		Liabilities
Derivative instruments designated as cash flow hedges:
Interest rate swaps current	$	—	$	1.0
Interest rate swaps long-term		—		2.7
Total derivative instruments designated as cash flow hedges		—		3.7
Derivative instruments not designated as cash flow hedges:
Interest rate swaps current		—		2.0
Interest rate swaps long-term		0.3		7.8
Natural gas swaps current		—		5.0
Gas purchase agreements current		—		28.7
Gas purchase agreements long-term		—		10.3
Total derivative instruments not designated as cash flow hedges		0.3		53.8
Total derivative instruments	$	0.3	$	57.5


	December 31, 2014
	Derivative		Derivative
	Assets		Liabilities
Derivative instruments designated as cash flow hedges:
Interest rate swaps current	$	—	$	1.1
Interest rate swaps long-term		—		2.9
Total derivative instruments designated as cash flow hedges		—		4.0
Derivative instruments not designated as cash flow hedges:
Interest rate swaps current		—		2.0
Interest rate swaps long-term		1.1		6.9
Natural gas swaps current		—		4.4
Natural gas swaps long-term		—		2.2
Gas purchase agreements current		—		28.6
Gas purchase agreements long-term		—		35.5
Total derivative instruments not designated as cash flow hedges		1.1		79.6
Total derivative instruments	$	1.1	$	83.6

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:


	Interest Rate
For the year ended December 31, 2015	Swaps
Accumulated OCI balance at January 1, 2015	$	0.1
Change in fair value of cash flow hedges		(0.6)
Realized from OCI during the period		0.7
Accumulated OCI balance at December 31, 2015	$	0.2
Gains expected to be realized from OCI in the next 12 months, net of $0.6 million of tax	$	0.8


	Interest Rate
For the year ended December 31, 2014	Swaps
Accumulated OCI balance at January 1, 2014	$	0.2
Change in fair value of cash flow hedges		(1.0)
Realized from OCI during the period		0.9
Accumulated OCI balance at December 31, 2014	$	0.1
Gains expected to be realized from OCI in the next 12 months, net of $0.6 million of tax	$	0.9


	Interest Rate		Natural Gas
For the year ended December 31, 2013	Swaps		Swaps		Total
Accumulated OCI balance at January 1, 2013	$	(1.5)	$	0.1	$	(1.4)
Change in fair value of cash flow hedges		0.7		—		0.7
Realized from OCI during the period		1.0		(0.1)		0.9
Accumulated OCI balance at December 31, 2013	$	0.2	$	—	$	0.2
Gains expected to be realized from OCI in the next 12 months, net of $0.6 million of tax	$	0.9	$	—	$	0.9

Impact of derivative instruments on the consolidated statements of operations

The following table summarizes realized loss (gain) for derivative instruments not designated as cash flow hedges:



	Classification of loss (gain)	Year Ended December 31,
	recognized in income	2015		2014		2013
Gas purchase agreements	Fuel	$	47.3	$	52.4	$	56.5
Natural gas swaps	Fuel		6.0		4.3		—
Interest rate swaps	Interest, net		3.8		6.1		3.4
Foreign currency forwards	Foreign exchange loss (gain)		—		0.5		(14.4)

The following table summarizes the unrealized loss (gain) resulting from changes in the fair value of derivative financial instruments that are not designated as cash flow hedges:


	Classification of gain (loss)	Year ended December 31,
	recognized in income	2015		2014		2013
Natural gas swaps	Change in fair value of derivatives	$	1.0	$	(3.3)	$	(0.7)
Gas purchase agreements	Change in fair value of derivatives		16.1		11.6		19.2
Interest rate swaps	Change in fair value of derivatives		(1.7)		(1.5)		7.0
		$	15.4	$	6.8	$	25.5
Foreign currency forwards	Foreign exchange loss	$	—	$	(1.1)	$	(19.4)