Derivative Financial Instruments
|9 Months Ended|
Sep. 30, 2018
|Derivative Instruments And Hedging Activities Disclosure [Abstract]|
|Derivative Financial Instruments||
8. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swaps have been used by the Company to adjust the proportion of total debt that is subject to variable interest rates. The interest rate swaps require the Company to pay an amount equal to a specific fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts are not exchanged. Forward starting interest rate swaps have also been used by the Company to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. No other cash payments are made unless the contract is terminated prior to its maturity, in which case the contract would likely be settled for an amount equal to its fair value. The Company enters into interest rate swaps with a number of major financial institutions to minimize counterparty credit risk.
Interest rate swaps qualify and are designated as hedges of the amount of future cash flows related to interest payments on variable rate debt. Therefore, interest rate swaps are recorded in the consolidated balance sheets at fair value and the related gains or losses are deferred in shareholders’ equity or partners’ capital as Accumulated Other Comprehensive Loss (“AOCL”). These deferred gains and losses are recognized in interest expense during the period or periods in which the related interest payments affect earnings. However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was de minimis for the three and nine months ended September 30, 2018 and 2017.
In 2017, the Company terminated hedges and settled interest rate swap agreements on $225 million of the Company’s variable rate debt in connection with repayment of the related variable rate term notes. As a result of the termination, no gains or losses related to the terminated interest rate swaps are included in AOCL at September 30, 2018 or December 31, 2017.
In the third quarter of 2018, the Company’s last remaining interest rate swaps on $100 million of the Company’s variable rate debt expired and were settled by the Company. As a result, no gains or losses related to the expired interest rate swaps are included in AOCL at September 30, 2018.
In the fourth quarter of 2015, the Company entered into forward starting interest rate swap agreements with a total notional value of $50 million. In the first quarter of 2016, the Company entered into additional forward starting interest rate swap agreements with a total notional value of $100 million. These forward starting interest rate swap agreements were entered into to hedge the risk of changes in the interest-related cash flows associated with the potential issuance of fixed rate long-term debt. In conjunction with the issuance of the $600 million 2026 Senior Notes (see Note 6), the Company terminated these hedges and settled the forward starting swap agreements for approximately $9.2 million. The $9.2 million was deferred in AOCL and is being amortized as additional interest expense over the ten-year term of the $600 million 2026 Senior Notes or until such time as interest payments on the 2026 Senior Notes are no longer probable.
There are no derivative instruments, as defined by FASB ASC Topic 815 “Derivatives and Hedging”, held by the Company at September 30, 2018. During the three months ended September 30, 2018 and 2017, the net reclassification from AOCL to interest expense was ($0.2 million) and $0.5 million, respectively, based on payments received and made under the swap agreements. During the nine months ended September 30, 2018 and 2017, the net reclassification from AOCL to interest expense was ($0.3 million) and $2.1 million, respectively, based on payments received and made under the swap agreements. Payments made or received under the interest rate swap agreements have been reclassified to interest expense as swap settlement occurs. The fair value of the swap agreements, including accrued interest, was an asset of $0.2 million at December 31, 2017.
The changes in AOCL for the three and nine months ended September 30, 2018 and 2017 are summarized as follows:
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.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef