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Accounting for Derivatives
 3 Months Ended
Mar. 31, 2015
Accounting for Derivatives  
Accounting for Derivatives

 

9.  Accounting for Derivatives

 

We are exposed to market risks associated with changes in interest rates. We use derivative financial instruments to minimize the risks and/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We do not use derivative financial instruments for trading or other speculative purposes.

 

Interest Rate Risk

 

During the three months ended March 31, 2015, the Partnership entered into an interest rate swap with a notional value of $100.0 million. At March 31, 2015, the Partnership was a party to interest rate swaps with a total notional value of $500.0 million, pursuant to which it makes fixed payments and receives floating payments. The Partnership entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. The Partnership’s interest rate swaps expire over varying dates, with interest rate swaps having a notional amount of $300.0 million expiring in May 2018, interest rate swaps having a notional amount of $100.0 million expiring in May 2019 and the remaining interest rate swaps having a notional amount of $100.0 million expiring in May 2020. As of March 31, 2015, the weighted average effective fixed interest rate on the interest rate swaps was 1.6%. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. As the swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. We recorded $0.3 million of interest income during the three months ended March 31, 2015 due to ineffectiveness related to interest rate swaps. There was no ineffectiveness related to interest rate swaps during the three months ended March 31, 2014. We estimate that $5.8 million of deferred pre-tax losses attributable to interest rate swaps and included in our accumulated other comprehensive income (loss) at March 31, 2015, will be reclassified into earnings as interest expense at then current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions, unless the derivative contract contains a significant financing element; in this case, the cash settlements for these derivatives are classified as cash flows from financing activities in our condensed consolidated statements of cash flows.

 

The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands):

 

 

 

March 31, 2015

 

 

 

Balance Sheet Location

 

Fair Value
Asset (Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Accrued liabilities

 

$
(6,138

)

Interest rate hedges

 

Other long-term liabilities

 
(2,747

)

Total derivatives

 

 

 

$
(8,885

)

 

 

 

December 31, 2014

 

 

 

Balance Sheet Location

 

Fair Value
Asset (Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Intangible and other assets, net

 

$
712

 

Interest rate hedges

 

Accrued liabilities

 
(4,958

)

Interest rate hedges

 

Other long-term liabilities

 
(150

)

Total derivatives

 

 

 

$
(4,396

)

 

 

 

 

 

Pre-tax Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Pre-tax
Gain (Loss)
 Reclassified from
Accumulated Other
 Comprehensive
Income (Loss) into
Income (Loss)

 

Pre-tax Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

Interest rate hedges

 

 

 

 

 

 

 

Three months ended March 31, 2015

 

$
(6,253

)

Interest expense

 

$
(1,675

)

Three months ended March 31, 2014

 
(955

)

Interest expense

 
(1,264

)

 

The counterparties to the derivative agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. The Partnership has no specific collateral posted for its derivative instruments. The counterparties to the interest rate swaps are also lenders under the Partnership’s senior secured credit facility and, in that capacity, share proportionally in the collateral pledged under the related facility.