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Derivative Instruments And Hedging Activities
 3 Months Ended
Mar. 31, 2013
Derivative Instruments And Hedging Activities [Abstract]  
Derivative Instruments And Hedging Activities

Note 16 — Derivative Instruments and Hedging Activities

 

Our continuing operations are exposed to market risk associated with interest rates and foreign currency exchange rates.  Our risk management activities involve the use of derivative financial instruments to hedge the impact of market risk exposure related to variable interest rates and foreign currency exchange rates.  All derivatives are reflected in the accompanying condensed consolidated balance sheets at fair value, unless otherwise noted.

 

We engage solely in cash flow hedges.  Hedges of cash flow exposure are entered into to hedge a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability.  Changes in the derivative fair values that are designated as cash flow hedges are deferred to the extent that the hedges are effective.  These fair value changes are recorded as a component of accumulated other comprehensive income or loss (a component of shareholders’ equity) until the hedged transactions occur and are recognized in earnings.  The ineffective portion of changes in the fair value of cash flow hedges is recognized immediately in earnings.  In addition, any change in the fair value of a derivative that does not qualify for hedge accounting is recorded in earnings in the period in which the change occurs.

 

For additional information regarding our accounting for derivatives, see Notes 2 and 17 of our 2012 Form 10-K. 

 

Interest Rate Risk 

 

As some of our long-term debt has variable interest rates, we historically entered into interest rate swaps to stabilize cash flows related to a portion of our Term Loan debt.  We de-designated all of our outstanding interest rate swaps as hedging instruments in December 2012 following the announcement of the sale of ERT.  We cash settled all outstanding interest rate swap contracts in February 2013. 

 

Foreign Currency Exchange Rate Risk

 

Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar.  We entered into various foreign currency forwards to stabilize expected cash outflows relating to certain vessel charters that are denominated in British pounds and Norwegian kroner.

 

In January 2013, we entered into foreign currency exchange contracts to hedge the foreign currency exposure to potential variability in cash flows associated with the Grand Canyon charter payments ($104.6 million) denominated in Norwegian kroner (NOK591.3 million), through September 2017.  In February 2013, we entered into similar foreign currency exchange contracts for the Grand Canyon II and Grand Canyon III charter payments ($100.4 million and $98.8 million) denominated in Norwegian kroner (NOK594.7 million and NOK595.0 million), through July 2019 and February 2020, respectively.  These contracts currently qualify for hedge accounting treatment.  All of our remaining foreign exchange contracts are not accounted for as hedge contracts and changes in their fair value are being marked-to-market each reporting period.

 

Quantitative Disclosures Related to Derivative Instruments 

 

As a result of the announcement in December 2012 of the sale of ERT, we de-designated all of our outstanding oil and natural gas derivative contracts as hedging instruments.  In addition, under the terms of our Credit Agreement (Note 7), we are required to use at a minimum 60% of the after-tax proceeds from the sales of the Caesar, the Express and ERT to make payments to reduce our Term Loan debt and borrowings under the Revolving Credit Facility.  Because of the probability that the Term Loan debt would be totally repaid before the expiration of our interest rate swaps, we also concluded that the swaps no longer qualified as cash flow hedges.  In February 2013, we settled all of our outstanding commodity derivative contracts and interest rate swap contracts for approximately $22.5 million and $0.6 million, respectively.

 

The following table presents the fair value and balance sheet classification of our derivative instruments that were not designated as hedging instruments (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2013

 

As of December 31, 2012

 

 

 

Balance Sheet

 

Fair

 

Balance Sheet

 

Fair

 

 

 

Location

 

Value

 

Location

 

Value

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Oil contracts

 

Other current assets

$

 -

 

Other current assets

$
5,800 

 

Foreign exchange forwards

 

Other current assets

 

 -

 

Other current assets

 
146 

 

 

 

 

$

 -

 

 

$
5,946 

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Oil contracts

 

Accrued liabilities

$

 -

 

Accrued liabilities

$
15,777 

 

Interest rate swaps

 

Accrued liabilities

 

 -

 

Accrued liabilities

 
489 

 

Foreign exchange forwards

 

Accrued liabilities

 
821 

 

Accrued liabilities

 

 -

 

Interest rate swaps

 

Other long-term liabilities

 

 -

 

Other long-term liabilities

 
32 

 

Foreign exchange forwards

 

Other long-term liabilities

 
2 

 

Other long-term liabilities

 

 -

 

 

 

 

$
823 

 

 

$
16,298 

 

 

As of March 31, 2013, our only derivative instruments designated as cash flow hedges were foreign currency exchange contracts related to the Grand Canyon,  Grand Canyon II and Grand Canyon III charter payments.  The fair value of these hedging instruments as of March 31, 2013 totaled $11.1 million, $1.2 million of which is reflected in “Accrued liabilities” and the remaining $9.9 million of which is reflected in “Other long-term liabilities” in the accompanying condensed consolidated balance sheet.  The last of these contracts will settle in February 2020.

 

Ineffectiveness associated with our foreign exchange contracts was immaterial for all periods presented.  The following tables present the impact that derivative instruments designated as cash flow hedges had on our accumulated comprehensive income (loss) and our condensed consolidated statements of operations (in thousands). 

 

 

 

 

 

 

 

 

 

 

 

Loss Recognized in OCI on Derivatives

 

 

 

(Effective Portion)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

Foreign exchange forwards

$
(7,238)

 

$

 -

 

Oil and natural gas commodity contracts

 

 -

 

 
(13,555)

 

Interest rate swaps

 

 -

 

 
(247)

 

 

$
(7,238)

 

$
(13,802)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Reclassified from

 

 

 

 

 

 

Accumulated OCI into Income

 

 

 

Location of Gain (Loss)

 

 

(Effective Portion)

 

 

 

Reclassified from

 

 

Three Months Ended

 

 

 

Accumulated OCI into Income

 

 

March 31,

 

 

 

(Effective Portion)

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas commodity contracts

 

Income from discontinued operations, net of tax

 

$

 -

 

$
109 

 

Interest rate swaps

 

Net interest expense

 

 

 -

 

 
(193)

 

Foreign exchange forwards

 

Cost of sales

 

 
(150)

 

 

 -

 

 

 

 

 

$
(150)

 

$
(84)

 

 

The following table presents the impact that derivative instruments not designated as hedges had on our condensed consolidated statement of operations (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized

 

 

 

 

 

 

in Income on Derivatives

 

 

 

Location of Gain (Loss)

 

 

Three Months Ended

 

 

 

Recognized in Income

 

 

March 31,

 

 

 

on Derivatives

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas commodity contracts

 

Loss on commodity derivative contracts

 

$
(14,113)

 

$

 -

 

Interest rate swaps

 

Other income (expense), net

 

 
(86)

 

 

 -

 

Foreign exchange forwards

 

Other income (expense), net

 

 
(1,244)

 

 
233 

 

 

 

 

 

$
(15,443)

 

$
233