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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | 3 Months Ended
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Mar. 31, 2019
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 (loss) (“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. FOREIGN CURRENCY EXCHANGE AND OPTION CONTRACTS The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand subsidiary is the New Zealand dollar. The New Zealand subsidiary is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand subsidiary 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 subsidiary’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of March 31, 2019, foreign currency exchange contracts and foreign currency option contracts had maturity dates through July 2020 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 (loss) until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings. 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 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 March 31, 2019:
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 subsidiary 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 months ended March 31, 2019, the change in fair value of the carbon option contracts of $0.4 million, was recorded as a gain in “Interest and other miscellaneous income, net” as the contracts did not qualify for hedge accounting treatment. As of March 31, 2019, carbon option contracts had maturity dates through April 2020. The following tables demonstrate the impact, gross of tax, of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2019 and 2018.
|  |  | Three Months Ended March 31,
| Income Statement Location |  | 2019 |  | 2018
Derivatives designated as cash flow hedges: |  |  |  |  |
Foreign currency exchange contracts | Other comprehensive (loss) income |  |  | $1,119 |  |  |  | $1,233 |
Foreign currency option contracts | Other comprehensive (loss) income |  | 77 |  |  | 181 |
Interest rate swaps | Other comprehensive (loss) income |  | (11,548 | ) |  | 15,598 |
Derivatives designated as a net investment hedge: |  |  |  |
Foreign currency exchange contract | Other comprehensive (loss) income |  | — |  |  | 110 |
Derivatives not designated as hedging instruments: |  |  |  |
Foreign currency exchange contracts | Interest and other miscellaneous income, net |  | (16 | ) |  | 129 |
Carbon option contracts | Interest and other miscellaneous income, net |  | 402 |  |  | — |
During the next 12 months, the amount of the March 31, 2019 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 $0.2 million. The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
| Notional Amount
| March 31, 2019 |  | December 31, 2018
Derivatives designated as cash flow hedges: |  |  |
Foreign currency exchange contracts |  | $77,500 |  |  |  | $69,950 |
Foreign currency option contracts | 24,000 |  |  | 24,000 |
Interest rate swaps | 650,000 |  |  | 650,000 |
Derivative not designated as a hedging instrument: |  |  |
Foreign currency exchange contracts | 4,082 |  |  | 9,396 |
Carbon options (a) | 6,995 |  |  | 2,517 |
(a) Notional amount for carbon options is calculated as the number of units outstanding multiplied by the spot price as of March 31, 2019. 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)
|  |  | March 31, 2019 |  | December 31, 2018
Derivatives designated as cash flow hedges: |  |  |  |
Foreign currency exchange contracts | Other current assets |  |  | $150 |  |  | — |
| Other assets |  | 42 |  |  | — |
| Other current liabilities |  | (642 | ) |  | (1,569 | )
Foreign currency option contracts | Other current assets |  | 296 |  |  | 217 |
| Other assets |  | — |  |  | 102 |
| Other current liabilities |  | (73 | ) |  | (106 | )
| Other non-current liabilities |  | — |  |  | (68 | )
Interest rate swaps | Other assets |  | 14,239 |  |  | 23,735 |
| Other non-current liabilities |  | (2,052 | ) |  | — |
Derivative not designated as a hedging instrument: |  |  |  |
Foreign currency exchange contracts | Other current assets |  | 51 |  |  | 152 |
| Other current liabilities |  | — |  |  | (24 | )
Carbon options | Other current liabilities |  | — |  |  | (322 | )
| Other non-current liabilities |  | (15 | ) |  | — |
Total derivative contracts: |  |  |  |  |
Other current assets |  |  |  | $497 |  |  |  | $369 |
Other assets |  |  | 14,281 |  |  | 23,837 |
Total derivative assets |  |  |  | $14,778 |  |  |  | $24,206 |
Other current liabilities |  |  | (715 | ) |  | (2,021 | )
Other non-current liabilities |  |  | (2,067 | ) |  | (68 | )
Total derivative liabilities |  |  |  | ($2,782 | ) |  |  | ($2,089 | )
(a) See Note 14 — 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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