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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2012
Derivative Instruments and Hedging Activities
15. Derivative Instruments and Hedging Activities

The Company uses derivatives to manage certain risks in accordance with its overall risk management policies.

Foreign Exchange Risk

The Company economically hedges portions of its forecasted expenditures denominated in foreign currencies with foreign currency forward contracts. Certain foreign currency forward contracts are designated, for accounting purposes, as cash flow hedges of forecasted foreign currency expenditures.

As at December 31, 2012, the Company was committed to the following foreign currency forward contracts:

 

                   Fair Value /Carrying Amount        
     Contract Amount
in Foreign
Currency
(millions)		      Average
Forward  Rate (1)		      of Asset (Liability)     Expected Maturity  
           Hedge      Non-hedge     2013  
           $      $     $  
           (in millions of U.S. Dollars)     (in millions of U.S.
Dollars)		  

Norwegian Kroner

      201.0        5.93        —          2.1       33.9  

Euro

      9.8        0.76        —          (0.1 )      13.0  

Canadian Dollar

      9.3        1.01        0.2        —         9.2  

British Pound

      11.3        0.64        0.3        0.4       17.6  
        

 

 

     

 

 

    

 

 

  
           0.5        2.4       73.7  
        

 

 

     

 

 

    

 

 

  

 

(1) Average contractual exchange rate represents the contracted amount of foreign currency one U.S. Dollar will buy.

The Company enters into cross currency swaps, and pursuant to these swaps the Company receives the principal amount in Norwegian Kroner (or NOK) on the maturity date of the swap, in exchange for payment of a fixed U.S. Dollar amount. In addition, the cross currency swaps exchange a receipt of floating interest in Norwegian Kroner based on NIBOR plus a margin for a payment of US Dollar fixed interest or US Dollar floating interest based on LIBOR plus a margin. The purpose of the cross currency swaps is to economically hedge the foreign currency exposure on the payment of interest and principal at maturity of the Company’s Norwegian Kroner bonds due in 2013, 2015 and 2017. In addition, the cross currency swaps due in 2015 and 2017 economically hedges the interest rate exposure on the Norwegian Kroner bonds due in 2015 and 2017. The Company has not designated, for accounting purposes, these cross currency swaps as cash flow hedges of its Norwegian Kroner bonds due in 2013, 2015 and 2017. As at December 31, 2012, the Company was committed to the following cross currency swaps:

 

    

Notional
Amount

     

Notional
Amount

     

 

Floating Rate Receivable

    

 

Floating Rate Payable

          

Fair Value /
Carrying

Amount of
Asset /

  
Maturity          Reference            Reference            Fixed Rate    

Date

    NOK      USD      Rate      Margin     Rate      Margin     Payable     Liability  

2013

      600,000        98,500        NIBOR         4.75 %      LIBOR         5.04 %        (1)      9,890  

2015

      700,000        122,800        NIBOR         4.75 %           5.52 %      3,075  

2017

      600,000        101,400        NIBOR         5.75 %           7.49 %      3,545  

2017

      700,000        125,000        NIBOR         5.25 %           6.88 %      (2,624 ) 
                    

 

 

  
                       13,886  
                    

 

 

  

 

(1) LIBOR subsequently fixed at 1.1%, subject to a LIBOR rate receivable cap of 3.5% (see next section).

Interest Rate Risk

The Company enters into interest rate swap agreements which exchange a receipt of floating interest for a payment of fixed interest to reduce the Company’s exposure to interest rate variability on its outstanding floating-rate debt. In addition, the Company holds interest rate swaps which exchange a payment of floating rate interest for a receipt of fixed interest in order to reduce the Company’s exposure to the variability of interest income on its restricted cash deposits. The Company has not designated its interest rate swap agreements as cash flow hedges for accounting purposes.

As at December 31, 2012, the Company was committed to the following interest rate swap agreements related to its LIBOR-based debt, restricted cash deposits and EURIBOR-based debt, whereby certain of the Company’s floating-rate debt and restricted cash deposits were swapped with fixed-rate obligations or fixed-rate deposits:

 

     Interest
Rate
Index		      Principal
Amount
$		      Fair Value /
Carrying
Amount of
Asset /
(Liability)
$		     Weighted-
Average
Remaining
Term
(years)		      Fixed
Interest
Rate
(%) (1)		  

LIBOR-Based Debt:

              

U.S. Dollar-denominated interest rate swaps (2)

      LIBOR         412,880        (110,590 )      24.1        4.9  

U.S. Dollar-denominated interest rate swaps (3)

      LIBOR         3,170,273        (515,124 )      7.9        4.1  

U.S. Dollar-denominated interest rate swaps (4)

      LIBOR         98,500        (782 )      0.9        1.1  

LIBOR-Based Restricted Cash Deposit:

              

U.S. Dollar-denominated interest rate swaps (2)

      LIBOR         469,260        165,688       24.1        4.8  

EURIBOR-Based Debt:

              

Euro-denominated interest rate swaps (5) (6)

      EURIBOR         341,382        (41,329 )      11.5        3.1  
     

 

 

     

 

 

       
        4,492,295        (502,137 )      
     

 

 

     

 

 

       

 

(1) Excludes the margins the Company pays on its variable-rate debt, which, as of December 31, 2012, ranged from 0.3% to 4.25%.
(2) Principal amount reduces quarterly.
(3) Principal amount of $200 million is fixed at 2.14%, unless LIBOR exceeds 6%, in which case the Company pays a floating rate of interest.
(4) The floating LIBOR rate receivable is capped at 3.5%, which effectively results in a fixed rate of 1.12% unless LIBOR exceeds 3.5%, in which case the Company’s related interest rate effectively floats at LIBOR reduced by 2.38%.
(5) Principal amount reduces monthly to 70.1 million Euros ($92.5 million) by the maturity dates of the swap agreements.
(6) Principal amount is the U.S. Dollar equivalent of 258.8 million Euros.

Tabular Disclosure

The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Company’s consolidated balance sheets.

 

     Current                   Current        
     Portion of                   Portion of        
     Derivative      Derivative      Accrued     Derivative     Derivative  
     Assets      Assets      Liabilities     Liabilities     Liabilities  

As at December 31, 2012

             

Derivatives designated as a cash flow hedge:

             

Foreign currency contracts

      441        —          —         (1 )      —    

Derivatives not designated as a cash flow hedge:

             

Foreign currency contracts

      2,506        —          —         (60 )      —    

Interest rate swap agreements

      16,927        144,247        (22,312 )      (115,774 )      (525,225 ) 

Cross currency swap agreements

      11,795        4,334        719       —         (2,962 ) 
  

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  
     31,669        148,581        (21,593 )      (115,835 )      (528,187 ) 
  

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  

As at December 31, 2011

             

Derivatives designated as a cash flow hedge:

             

Foreign currency contracts

      1,551        28        —         (1,192 )      (264 ) 

Derivatives not designated as a cash flow hedge:

             

Foreign currency contracts

      2,592        3        —         (6,248 )      (832 ) 

Interest rate swap agreements

      15,608        139,651        (24,750 )      (109,897 )      (568,446 ) 

Cross currency swap agreements

      1,576        875        225       —         —    

Foinaven embedded derivative

      3,385        —          —         —         —    
  

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  
     24,712        140,557        (24,525 )      (117,337 )      (569,542 ) 
  

 

 

     

 

 

     

 

 

    

 

 

    

 

 

  

For the periods indicated, the following table presents the effective portion of gains (losses) on foreign currency contracts designated and qualifying as cash flow hedges that was recognized in (1) accumulated other comprehensive income (loss) (or AOCI), (2) recorded in accumulated other comprehensive income (loss) during the term of the hedging relationship and reclassified to earnings, and (3) the ineffective portion of gains (losses) on derivative instruments designated and qualifying as cash flow hedges.

 

Year Ended December 31, 2012

    Year Ended December 31, 2011

Balance

Sheet

(AOCI)

    Statement of Loss    Balance
Sheet
(AOCI)		      Statement of Loss

Effective

Portion

    Effective      Ineffective
Portion		          Effective
Portion		      Effective
Portion		      Ineffective
Portion		      
2,412      —          —       Vessel operating expenses      2,007        918        (568 )    Vessel operating expenses
     1,436        (660 )    General and administrative expenses         4,636        (223 )    General and administrative expenses

 

   

 

 

     

 

 

       

 

 

     

 

 

     

 

 

    
2,412      1,436        (660 )         2,007        5,554        (791 )   

 

   

 

 

     

 

 

       

 

 

     

 

 

     

 

 

    

 

Year Ended December 31, 2010

Balance

Sheet

(AOCI)

      Statement of Loss

Effective

Portion

      Effective
Portion		     Ineffective
Portion		      
      
  (3,559)         (680 )      (3,473 )    Vessel operating expenses
     (2,360 )      (1,402 )    General and administrative expenses

 

 

     

 

 

    

 

 

    
  (3,559)         (3,040 )      (4,875 )   

 

 

     

 

 

    

 

 

    

Realized and unrealized (losses) gains from derivative instruments that are not designated for accounting purposes as cash flow hedges, are recognized in earnings and reported in realized and unrealized (losses) gains on non-designated derivatives in the consolidated statements of loss. The effect of the (loss) gain on derivatives not designated as hedging instruments in the statements of loss are as follows:

 

     Year Ended     Year Ended     Year Ended  
     December 31,     December 31,     December 31,  
     2012     2011     2010  
     $     $     $  

Realized (losses) gains relating to:

       

Interest rate swap agreements

      (123,277 )      (132,931 )      (154,098 ) 

Interest rate swap agreement amendments

      —         (149,666 )      —    

Foreign currency forward contracts

      1,155       9,965       (2,274 ) 

Forward freight agreements and bunker fuel swap contracts

      —         36       (7,914 ) 

Foinaven embedded derivative

      11,452       —         —    
  

 

 

    

 

 

    

 

 

  
     (110,670 )      (272,596 )      (164,286 ) 
  

 

 

    

 

 

    

 

 

  

Unrealized gains (losses) relating to:

       

Interest rate swap agreements

      26,770       (58,405 )      (146,780 ) 

Foreign currency forward contracts

      6,933       (11,399 )      6,307  

Forward freight agreements and bunker fuel swap contracts

      —         —         (108 ) 

Foinaven embedded derivative

      (3,385 )      (322 )      5,269  
  

 

 

    

 

 

    

 

 

  
     30,318       (70,126 )      (135,312 ) 
  

 

 

    

 

 

    

 

 

  

Total realized and unrealized losses on derivative instruments

      (80,352 )      (342,722 )      (299,598 ) 
  

 

 

    

 

 

    

 

 

  

Realized and unrealized gains (losses) of the cross currency swaps are recognized in earnings and reported in foreign currency exchange gain (loss) in the consolidated statements of loss. The effect of the gain (loss) on cross currency swaps on the consolidated statements of loss is as follows:

 

     Year Ended December 31,  
     2012      2011     2010  
     $      $     $  

Realized gains

      3,628        2,881       198  

Unrealized gains (losses)

      10,715        (1,583 )      4,034  
  

 

 

     

 

 

    

 

 

  

Total realized and unrealized gains on cross currency swaps

      14,343        1,298       4,232  
  

 

 

     

 

 

    

 

 

  

As at December 31, 2012, the Company’s accumulated other comprehensive loss included $0.3 million of unrealized gains on foreign currency forward contracts designated as cash flow hedges. As at December 31, 2012, the Company estimated, based on then current foreign exchange rates, that it would reclassify approximately $0.3 million of net gains on foreign currency forward contracts from accumulated other comprehensive loss to earnings during the next 12 months. During 2010, the Company de-designated certain foreign currency forward contracts that were designated as cash flow hedges and reclassified $0.6 million of net losses from accumulated other comprehensive loss to earnings in the consolidated statement of loss. There were no de-designations in 2012 or 2011.

The Company is exposed to credit loss to the extent the fair value represents an asset (see above) in the event of non-performance by the counterparties to the foreign currency forward contracts, and cross currency and interest rate swap agreements; however, the Company does not anticipate non-performance by any of the counterparties. In order to minimize counterparty risk, the Company only enters into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transaction. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.