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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | 9 Months Ended
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Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company uses derivative financial instruments to mitigate the financial impact of exposure to these risks. Accounting for derivative financial instruments is governed by ASC Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the Company’s investment in its New Zealand operations is partially or completely liquidated. The ineffective portion of any hedge, changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings. The Company’s hedge ineffectiveness was de minimis for all periods presented. FOREIGN CURRENCY EXCHANGE AND OPTION CONTRACTS The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand JV typically hedges 35% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 25% to 75% of forecasted sales and purchases for the forward three to 12 months and up to 50% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of September 30, 2018, foreign currency exchange contracts and foreign currency option contracts had maturity dates through December 2019 and February 2020, respectively. Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments qualify for cash flow hedge accounting. The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model. The Company may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings. Through our ownership in the New Zealand JV, the Company is exposed to foreign currency risk on shareholder distribution payments which are denominated in N.Z. dollars. On behalf of the Company, the New Zealand JV typically hedges 60% to 100% of its estimated foreign currency exposure with respect to the following three months anticipated distributions, up to 75% of anticipated distributions for the forward three to six months and up to 50% of the forward six to 12 months. For the three and nine months ended September 30, 2018, the change in fair value of the foreign exchange forward contracts of ($0.2) million and $2.4 million, respectively, was recorded as a (loss)/gain in “Interest and other miscellaneous income, net” as the contracts did not qualify for hedge accounting treatment. As of September 30, 2018, foreign exchange forward contracts had maturity dates through December 2018. In March 2018, the Company entered into a foreign currency exchange contract (notional amount of NZ$37 million) to mitigate the risk of fluctuations in foreign currency exchange rates when translating the New Zealand JV’s balance sheet to U.S. dollars. This contract hedged the cash portion of the Company’s net investment in New Zealand and qualified as a net investment hedge. The fair value of this contract was determined by a mark-to-market valuation, which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. This hedge qualified for hedge accounting whereby fluctuations in fair market value during the life of the hedge are recorded in AOCI and remain there permanently unless a partial or full liquidation of the investment is made. At each reporting period, the Company reviewed the hedge for ineffectiveness. In April 2018, the foreign currency exchange contract matured and the Company repatriated the cash. The Company did not have any ineffectiveness during the life of the hedge. INTEREST RATE SWAPS The Company is exposed to cash flow interest rate risk on its variable-rate Term Credit Agreement and Incremental Term Loan Agreement (as discussed below), and uses variable-to-fixed interest rate swaps to hedge this exposure. For these derivative instruments, the Company reports the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassifies them to earnings as interest expense in the same period in which the hedged interest payments affect earnings. The following table contains information on the outstanding interest rate swaps as of September 30, 2018:
Outstanding Interest Rate Swaps (a)
Date Entered Into | Term | Notional Amount | Related Debt Facility | Fixed Rate of Swap | Bank Margin on Debt | Total Effective Interest Rate (b)
August 2015 | 9 years | $170,000 | Term Credit Agreement | 2.20 | % | 1.63 | % | 3.83 | %
August 2015 | 9 years | 180,000 | Term Credit Agreement | 2.35 | % | 1.63 | % | 3.98 | %
April 2016 | 10 years | 100,000 | Incremental Term Loan | 1.60 | % | 1.90 | % | 3.50 | %
April 2016 | 10 years | 100,000 | Incremental Term Loan | 1.60 | % | 1.90 | % | 3.50 | %
July 2016 | 10 years | 100,000 | Incremental Term Loan | 1.26 | % | 1.90 | % | 3.16 | %
(a) | All interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting.
(b) | Rate is before estimated patronage payments.
CARBON OPTIONS The New Zealand JV enters into carbon options from time to time to sell carbon assets at certain prices. The fair value of carbon options is determined by a mark-to-market valuation using the Black-Scholes option pricing model, which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. For the three and nine months ended September 30, 2018, the change in fair value of the carbon option contracts of ($0.6) million and ($0.6) million, respectively, was recorded as a loss in “Interest and other miscellaneous income, net” as the contracts did not qualify for hedge accounting treatment. As of September 30, 2018, carbon option contracts had maturity dates through March 2019. The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2018 and 2017.
|  |  | Three Months Ended September 30,
| Income Statement Location |  | 2018 |  | 2017
Derivatives designated as cash flow hedges: |  |  |  |  |
Foreign currency exchange contracts | Other comprehensive (loss) income |  |  | ($1,402 | ) |  |  | ($1,579 | )
Foreign currency option contracts | Other comprehensive (loss) income |  | (29 | ) |  | (716 | )
Interest rate swaps | Other comprehensive (loss) income |  | 5,173 |  |  | (533 | )
Derivatives not designated as hedging instruments: |  |  |  |
Foreign currency exchange contracts | Interest and other miscellaneous income, net |  | (189 | ) |  | 609 |
Carbon option contracts | Interest and other miscellaneous income, net |  | (577 | ) |  | — |
|  |  | Nine Months Ended September 30,
| Income Statement Location |  | 2018 |  | 2017
Derivatives designated as cash flow hedges: |  |  |  |  |
Foreign currency exchange contracts | Other comprehensive (loss) income |  |  | ($6,800 | ) |  |  | $1,611 |
Foreign currency option contracts | Other comprehensive (loss) income |  | (388 | ) |  | 219 |
Interest rate swaps | Other comprehensive (loss) income |  | 26,461 |  |  | (2,921 | )
Derivatives designated as a net investment hedge: |  |  |  |
Foreign currency exchange contract | Other comprehensive (loss) income |  | (344 | ) |  | — |
Derivatives not designated as hedging instruments: |  |  |  |
Foreign currency exchange contracts | Interest and other miscellaneous income, net |  | 2,419 |  |  | 283 |
Carbon option contracts | Interest and other miscellaneous income, net |  | (577 | ) |  | — |
During the next 12 months, the amount of the September 30, 2018 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a loss of approximately $2.6 million. The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
| Notional Amount
| September 30, 2018 |  | December 31, 2017
Derivatives designated as cash flow hedges: |  |  |
Foreign currency exchange contracts |  | $103,000 |  |  |  | $107,400 |
Foreign currency option contracts | 20,000 |  |  | 48,000 |
Interest rate swaps | 650,000 |  |  | 650,000 |
Derivative not designated as a hedging instrument: |  |  |
Foreign currency exchange contracts | 21,019 |  |  | 18,439 |
Carbon options (a) | 7,500 |  |  | — |
(a) Notional amount for carbon options is calculated as the number of units outstanding multiplied by the spot price as of September 30, 2018. The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:
| Location on Balance Sheet |  | Fair Value Assets / (Liabilities) (a)
|  |  | September 30, 2018 |  | December 31, 2017
Derivatives designated as cash flow hedges: |  |  |  |
Foreign currency exchange contracts | Other current assets |  |  | $9 |  |  |  | $2,286 |
| Other assets |  | — |  |  | 538 |
| Other current liabilities |  | (3,528 | ) |  | (37 | )
| Other non-current liabilities |  | (494 | ) |  | — |
Foreign currency option contracts | Other current assets |  | 40 |  |  | 389 |
| Other assets |  | 79 |  |  | 137 |
| Other current liabilities |  | (104 | ) |  | (119 | )
| Other non-current liabilities |  | (79 | ) |  | (55 | )
Interest rate swaps | Other assets |  | 41,900 |  |  | 17,473 |
| Other non-current liabilities |  | — |  |  | (2,033 | )
Derivative not designated as a hedging instrument: |  |  |  |
Foreign currency exchange contracts | Other current assets |  | 2,206 |  |  | 209 |
| Other current liabilities |  | (1 | ) |  | (189 | )
Carbon options | Other current liabilities |  | (664 | ) |  | — |
Total derivative contracts: |  |  |  |  |
Other current assets |  |  |  | $2,255 |  |  |  | $2,884 |
Other assets |  |  | 41,979 |  |  | 18,148 |
Total derivative assets |  |  |  | $44,234 |  |  |  | $21,032 |
Other current liabilities |  |  | (4,297 | ) |  | (345 | )
Other non-current liabilities |  |  | (573 | ) |  | (2,088 | )
Total derivative liabilities |  |  |  | ($4,870 | ) |  |  | ($2,433 | )
(a) See Note 13 — Fair Value Measurements for further information on the fair value of the Company’s derivatives including their classification within the fair value hierarchy. OFFSETTING DERIVATIVES Derivative financial instruments are presented at their gross fair values in the Consolidated Balance Sheets. The Company’s derivative financial instruments are not subject to master netting arrangements, which would allow the right of offset.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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