Derivative Instruments and Fair Value Measurements

Interest-Rate Swaps

From time to time, the Company enters into interest rate swap agreements to mitigate the risk of interest rate fluctuations on its variable rate debt. The Company was party to one interest rate swap, which was entered into in February 2011, as required by the 109 Long Wharf Construction to Term Loan agreement. Under the terms of the swap agreement, the interest rate was fixed at 6.63%. The swap was cancelled in conjunction with, and the outstanding balance was financed by, the 109 Long Wharf Commercial Term Loan in May 2016, which is discussed in Note 4.

The Company did not elect to designate the swap as a hedge at inception, pursuant to ASC 815, Derivatives and Hedging. Accordingly, changes in the fair value are recorded in current earnings in the accompanying consolidated statements of income.

The aggregate change in the fair value of the interest rate swap agreement for the nine months ended September 30, 2016 was a loss of $104,000 which was reflected in the unrealized (loss) gain on derivative instruments in the accompanying consolidated statements of operations.

Forward freight agreements

The Company assesses risk associated with fluctuating future freight rates and, when appropriate, hedges identified economic risk with appropriate derivative instruments, specifically forward freight agreements (FFAs). Such economic hedges do not always qualify for hedge accounting under ASC 815 and as such, the usage of such derivatives can lead to fluctuations in the Company’s reported results from operations on a period-to-period basis. Between November 2016 and September 30, 2017, the Company entered into FFAs that were not designated for hedge accounting. The aggregate fair value of these FFAs at September 30, 2017 and December 31, 2016 were assets of approximately $675,000, which are included in other current assets on the consolidated balance sheets, and liabilities of approximately $21,000, respectively, which are included in other current liabilities on the consolidated balance sheets. The change in the aggregate fair value of the FFAs during the three and nine months ended September 30, 2017 are a loss of approximately $379,000 and a gain of approximately $696,225, respectively, which are included in unrealized (loss) gain on derivative instruments in the accompanying consolidated statements of operations. There were no open positions, and therefore no gain or loss in the three and nine months ended September 30, 2016.

Fuel Swap Contracts

The Company continuously monitors the market volatility associated with bunker prices and seeks to reduce the risk of such volatility through a bunker hedging program. During 2017 and 2016, the Company entered into various fuel swap contracts that were not designated for hedge accounting. The aggregate fair value of these fuel swaps at September 30, 2017 and December 31, 2016 are assets of approximately $38,000 and $304,000, respectively, which are included in other current assets on the consolidated balance sheets. The change in the aggregate fair value of the fuel swaps during the three and nine months ended September 30, 2017 are gains of approximately $319,000 and losses of approximately $265,000, respectively, which are included in unrealized (loss) gain on derivative instruments in the accompanying consolidated statements of operations. The change in the aggregate fair value of the fuel swaps during the three and nine months ended September 30, 2016 are losses of approximately $156,000 and gains of approximately $1,109,000, respectively, which are included in unrealized (loss) gain on derivative instruments in the accompanying consolidated statements of income.

The three levels of the fair value hierarchy established by ASC 820, Fair Value Measurements and Disclosures, in order of priority are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities. Our Level 1 fair value measurements include cash, money-market accounts and restricted cash accounts.

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable.

Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016:



	Balance at September 30, 2017		Level 1		Level 2		Level 3
	(unaudited)
Margin accounts	$	2,688,122	$	2,688,122	$	—	$	—
Fuel swaps	$	38,319	$	—	$	38,319	$	—
Freight forward agreements	$	675,275	$	—	$	675,275	$	—



	Balance at December 31, 2016			Level 1		Level 2			Level 3
Margin accounts	$	488,084		$	488,084	$	—		$	—
Fuel swaps	$	303,675		$	—	$	303,675		$	—
Freight forward agreements	$	(20,950	)	$	—	$	(20,950	)	$	—

The estimated fair values of the Company’s forward freight agreements and fuel swap contracts are based on market prices obtained from an independent third-party valuation specialist based on published indexes. Such quotes represent the estimated amounts the Company would receive or pay to terminate the contracts.