Derivative Instruments

9 Months Ended

Sep. 30, 2015

Derivative Instruments

Derivative Instruments

6.  Derivative Instruments

We have periodically held interest rate derivative instruments to mitigate exposure to changes in interest rates, in particular one-month LIBOR, with $530.4 million and $468.5 million of our borrowings at September 30, 2015 and December 31, 2014, respectively, at variable rates. As a matter of policy, we do not use derivatives for speculative purposes. We currently have no interest rate swap agreements in place. During 2013 we were a party to one interest rate swap agreement with a notional outstanding amount of $100.0 million with a fixed rate of 2.10%. The swap agreement expired in November 2013. The remaining effective portion of these hedges at the swap expiration date was amortized into earnings over the term of the underlying borrowings. We recorded a $0.1 million and $0.4 million benefit to net finance costs during the three and nine month periods ended September 30, 2014, respectively.

The Company estimates the fair value of derivative instruments using a discounted cash flow technique and uses creditworthiness inputs that can be corroborated by observable market data evaluating the Company’s and counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. We apply hedge accounting and account for the change in fair value of our cash flow hedges through other comprehensive income for all derivative instruments.

Earnings Effects of Derivative Instruments on the Consolidated Statements of Income

The following table provides information about the income effects of our cash flow hedging relationships for the three and nine month periods ended September 30, 2015 and 2014:

		Amount of Gain Recognized
		on Derivatives in the
		Statements of Income
	Location of Gain	Three Months Ended				Nine Months Ended
Derivatives in Cash Flow	Recognized on Derivatives in the	September 30,				September 30,
Hedging Relationships	Statements of Income	2015		2014		2015		2014
		(in thousands)
Interest rate contracts	Interest expense	$	—	$	(122)	$	—	$	(371)
Total		$	—	$	(122)	$	—	$	(371)

Our derivatives are designated in a cash flow hedging relationship with the effective portion of the change in fair value of the derivative reported in the cash flow hedges subaccount of accumulated other comprehensive income.

Effect of Derivative Instruments on Cash Flow Hedging

The following tables provide additional information about the financial statement effects related to our cash flow hedges for the three and nine month periods ended September 30, 2015 and 2014:

Location of Gain	Amount of Gain Reclassified from
Reclassified	Accumulated OCI into Income (Effective Portion)
from Accumulated OCI into	Three Months Ended					Nine Months Ended
Income	September 30,					September 30,
(Effective Portion)	2015		2014			2015		2014
	(in thousands)					(in thousands)
Interest expense	$	—	$	122	$		$	371
Total	$	—	$	122	S		$	371

We hold interest rate derivative instruments from time to time to mitigate exposure to changes in interest rates, in particular one-month LIBOR, with $530.4 million of our borrowings at September 30, 2015 at variable rates. The last of our interest rate derivatives terminated on November 25, 2013, at which time the liabilities under derivative instruments decreased to nil.

The change in fair value on a derivative instrument designated as a cash flow hedge is reported as a component of accumulated other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings or it is probable that the forecasted transaction will not occur.

As of September 30, 2014, we had $0.1 million in accumulated other comprehensive income related to a previously held derivative instrument designated as a cash flow hedge.  This amount was reclassified into interest expense through December 2014, the remaining term of the associated debt.  For the quarters ended September 30, 2015 and September 30, 2014, interest expense was reduced by zero and $0.1 million respectively, as a result of this reclassification out of accumulated other comprehensive income.