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Derivative Instruments And Hedging Activities | 9 Months Ended
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Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments And Hedging Activities | Derivative Instruments and Hedging Activities Our business is exposed to market risks 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. To reduce the impact of these risks on earnings and increase the predictability of our cash flows, from time to time we enter into certain derivative contracts, including interest rate swaps and foreign currency exchange contracts. All derivatives are reflected in the accompanying condensed consolidated balance sheets at fair value. 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 fair value of derivatives 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 OCI (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 18 to our 2015 Form 10-K. Interest Rate Risk From time to time, we enter into interest rate swaps to stabilize cash flows related to our long-term variable interest rate debt. In September 2013, we entered into various interest rate swap contracts to fix the interest rate on $148.1 million of our Term Loan borrowings (Note 6). These contracts, which are settled monthly, began in October 2013 and extend through October 2016. Additionally, in June 2015 we entered into various interest rate swap contracts to fix the interest rate on $187.5 million of our Nordea Q5000 Loan borrowings (Note 6). These swap contracts, which are settled monthly, began in June 2015 and extend through April 2020. Our interest rate swap contracts qualify for cash flow hedge accounting treatment. Changes in the fair value of interest rate swaps are deferred to the extent the swaps are effective. These changes are recorded as a component of Accumulated OCI until the anticipated interest is recognized as interest expense. The ineffective portion of the interest rate swaps, if any, is recognized immediately in earnings within the line titled “Net interest expense.” The amount of ineffectiveness associated with our interest rate swap contracts was immaterial for all periods presented. Foreign Currency Exchange Rate Risk Because we operate in various regions around the world, we conduct a portion of our business in currencies other than the U.S. dollar. We enter into foreign currency exchange contracts from time to time to stabilize expected cash outflows related to our vessel charters that are denominated in foreign currencies. In January 2013, we entered into foreign currency exchange contracts to hedge through September 2017 the foreign currency exposure associated with the Grand Canyon charter payments ($104.6 million) denominated in Norwegian kroner (NOK 591.3 million). In February 2013, we entered into similar foreign currency exchange contracts to hedge our foreign currency exposure with respect to the Grand Canyon II and Grand Canyon III charter payments ($100.4 million and $98.8 million, respectively) denominated in Norwegian kroner (NOK 594.7 million and NOK 595.0 million, respectively), through July 2019 and February 2020, respectively. During discussions with the owner of the Grand Canyon, Grand Canyon II and Grand Canyon III vessels with respect to amending the charter agreements, it became apparent in December 2015 that a portion of previously forecasted charter payments in NOK would no longer be made. We concluded that the foreign currency exchange contracts associated with the charter payments for the Grand Canyon still qualified for cash flow hedge accounting treatment. However, the foreign currency exchange contracts associated with the charter payments for the Grand Canyon II and the Grand Canyon III vessels no longer qualified as cash flow hedges. As a result, we de-designated these hedges and re-designated the hedging relationship between a portion of our foreign currency exchange contracts and our forecasted Grand Canyon II and Grand Canyon III charter payments of NOK 434.1 million and NOK 185.2 million, respectively, that were expected to remain highly probable of occurring. Unrealized losses associated with the effective portion of the re-designated foreign currency exchange contracts that qualify for hedge accounting treatment are included in our Accumulated OCI (net of tax). Changes in unrealized losses associated with the ineffective portion of the re-designated foreign currency exchange contracts are reflected in “Other income (expense), net” in the accompanying condensed consolidated statement of operations. “Other income (expense), net” also includes changes in unrealized losses associated with the foreign currency exchange contracts that are no longer designated as cash flow hedges. Quantitative Disclosures Relating to Derivative Instruments The following table presents the balance sheet location and fair value of our derivative instruments that were designated as hedging instruments (in thousands):
| September 30, 2016 |  | December 31, 2015
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Asset Derivatives: |  |  |  |  |  |  |
Interest rate swaps | Other assets, net |  | $ | — |  |  | Other assets, net |  | $ | 413 |
|  |  | $ | — |  |  |  |  | $ | 413 |
Liability Derivatives: |  |  |  |  |  |  |
Foreign exchange contracts | Accrued liabilities |  | $ | 12,897 |  |  | Accrued liabilities |  | $ | 14,955 |
Interest rate swaps | Accrued liabilities |  | 1,212 |  |  | Accrued liabilities |  | 1,473 |
Foreign exchange contracts | Other non-current liabilities |  | 12,776 |  |  | Other non-current liabilities |  | 28,458 |
Interest rate swaps | Other non-current liabilities |  | 1,278 |  |  | Other non-current liabilities |  | — |
|  |  | $ | 28,163 |  |  |  |  | $ | 44,886 |
The following table presents the fair value and balance sheet classification of our derivative instruments that were not designated as hedging instruments (in thousands):
| September 30, 2016 |  | December 31, 2015
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Liability Derivatives: |  |  |  |  |  |  |
Foreign exchange contracts | Accrued liabilities |  | $ | 3,612 |  |  | Accrued liabilities |  | $ | 6,763 |
Foreign exchange contracts | Other non-current liabilities |  | 6,329 |  |  | Other non-current liabilities |  | 11,251 |
|  |  | $ | 9,941 |  |  |  |  | $ | 18,014 |
For the nine-month period ended September 30, 2016, we recorded unrealized gains $0.1 million related to our hedge ineffectiveness. Realized gains for the nine-month period ended September 30, 2016 as well as realized and unrealized gains for the three-month period ended September 30, 2016 related to the hedge ineffectiveness were immaterial. For the three- and nine-month periods ended September 30, 2015, we recorded unrealized losses of $0.4 million and $3.6 million, respectively, and realized losses of $0.3 million and $0.4 million, respectively, related to our hedge ineffectiveness. The following tables present the impact that derivative instruments designated as hedging instruments had on our Accumulated OCI (net of tax) and our condensed consolidated statements of operations (in thousands). We estimate that as of September 30, 2016, $8.9 million of losses in Accumulated OCI associated with our derivatives is expected to be reclassified into earnings within the next 12 months.
| Gain (Loss) Recognized in OCI on Derivatives, Net of Tax (Effective Portion)
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2016 |  | 2015 |  | 2016 |  | 2015
Foreign exchange contracts | $ | 4,249 |  |  | $ | (5,777 | ) |  | $ | 10,745 |  |  | $ | (7,136 | )
Interest rate swaps | 643 |  |  | (975 | ) |  | (880 | ) |  | (1,848 | )
| $ | 4,892 |  |  | $ | (6,752 | ) |  | $ | 9,865 |  |  | $ | (8,984 | )
| Location of Loss Reclassified from Accumulated OCI into Earnings |  | Loss Reclassified from Accumulated OCI into Earnings (Effective Portion)
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2016 |  | 2015 |  | 2016 |  | 2015
Foreign exchange contracts | Cost of sales |  | $ | (2,663 | ) |  | $ | (3,433 | ) |  | $ | (8,033 | ) |  | $ | (7,828 | )
Interest rate swaps | Net interest expense |  | (494 | ) |  | (822 | ) |  | (1,618 | ) |  | (1,358 | )
|  |  | $ | (3,157 | ) |  | $ | (4,255 | ) |  | $ | (9,651 | ) |  | $ | (9,186 | )
The following table presents the impact that derivative instruments not designated as hedging instruments had on our condensed consolidated statement of operations (in thousands):
| Location of Gain Recognized in Earnings on Derivatives |  | Gain Recognized in Earnings on Derivatives
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2016 |  | 2015 |  | 2016 |  | 2015
Foreign exchange contracts | Other income (expense), net |  | $ | 1,309 |  |  | $ | — |  |  | $ | 3,375 |  |  | $ | — |
|  |  | $ | 1,309 |  |  | $ | — |  |  | $ | 3,375 |  |  | $ | — |

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