Note 7 - Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

(7)           DERIVATIVE FINANCIAL INSTRUMENTS

Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (“OCI”) and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in the current period’s results of operations. Gains and losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized in the current period’s results of operations.

Using derivative instruments means assuming counterparty credit risk. Counterparty credit risk relates to the loss we could incur if a counterparty were to default on a derivative contract. We deal with investment grade counterparties and monitor the overall credit risk and exposure to individual counterparties. We do not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is the unrealized gains, if any, on such derivative contracts. We do not require, nor do we post, collateral or security on such contracts.

Hedging Strategy

We are exposed to certain risks relating to our ongoing business operations. As a result, we enter into derivative transactions to manage certain of these exposures that arise in the normal course of business. The primary risks managed by using derivative instruments are foreign currency exchange rate and interest rate risks. Fluctuations in these rates and prices can affect our operating results and financial condition. We manage the exposure to these market risks through operating and financing activities and through the use of derivative financial instruments. We do not enter into derivative financial instruments for trading or speculative purposes.

We periodically enter into foreign currency forward contracts which are designated as fair value hedges related to payments under our new-build vessel construction programs and are highly effective, as the terms of the forward contracts approximate the purchase commitments under the related contracts. Any gains or losses resulting from changes in fair value are recognized in construction-in-progress related to the vessel under construction. As of June 30, 2013, we had open foreign currency forward contracts hedging Pounds Sterling (GBP) exposure to $7.0 million in Euro denominated contract payments due through July 2013.

We entered into an interest rate swap with the objective of reducing our exposure to interest rate risk for $100.0 million of our Old Facility variable-rate debt.  The swap was designated as a cash flow hedge. The terms of this swap, including reset dates and floating rate indices, matched those of our underlying variable-rate debt and no ineffectiveness was recorded in prior periods.

On February 27, 2012, we announced our intent to issue the Senior Notes with a fixed interest rate, the proceeds of which would be used to pay down amounts outstanding under the Old Facility and Old Notes and as a result we no longer had forecasted interest payments that qualify for hedge accounting. When a cash flow hedge ceases to qualify for hedge accounting, any amounts remaining in accumulated OCI are released and charged or credited to the underlying expense, in this case interest expense. We paid down amounts outstanding under the Old Facility in varying amounts over the remainder of 2012. As a result, we allocated a proportionate amount of the accumulated change in the fair value of the interest rate swaps recorded in accumulated OCI to amounts remaining outstanding under the Old Facility. We amortized these amounts to interest expense over the remaining life of the interest rate swap which matured December 31, 2012. We elected to retain and hold the interest rate swap until December 31, 2012. Since it no longer qualified as a cash flow hedge, it was considered a derivative with no hedging designation. Changes in fair value of the swap were included in earnings in the period of the change. No significant gain or losses were recorded related to this derivative. As of second quarter 2013, we have one outstanding foreign currency derivative contract that is recorded for as a fair value hedge.

Early Hedge Settlement

During December 2009, we cash settled certain interest rate swap contracts prior to their scheduled settlement dates. As a result of these transactions, we paid $6.4 million in cash, which represented the fair value of the contracts at the date of settlement. The forecasted payments associated with these settled swaps are related to the Old Facility. For reasons discussed above, we reclassified $0.3 million from accumulated OCI as the forecasted transaction was reduced and the remaining during 2012. This balance was amortized into interest expense through December 31, 2012 when the interest rate swap expired based on forecasted payments as of the settlement date.

The following table quantifies the fair values, on a gross basis, of all our derivative contracts and identifies the balance sheet location as of June 30, 2013 and December 31, 2012 (dollars in thousands):

	Asset Derivatives						Liability Derivatives
	June 30, 2013			December 31, 2012			June 30, 2013			December 31, 2012
Derivatives designed as hedging instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Foreign Currency Forwards	Prepaid expenses and other current assets	$	473	Prepaid expenses and other current assets	$	568	Fair value of derivative	$	-	Fair value of derivative	$	-
		$	473		$	568		$	-		$	-

The following tables quantify the amount of gain or loss recognized during the quarters ended June 30, and identify the consolidated statement of operations location:

Derivatives in cash flow hedging relationships	Amount of Loss Recognized in OCI on Derivative					Location of Loss Reclassified from Accumulated OCI into Income	Amount of Loss Reclassified from Accumulated OCI into Income
	Six Months Ended June 30,						Six Months Ended June 30,
	2013		2012				2013		2012
	(in thousands)						(in thousands)
Interest rate swaps	$	-	$	(176	)	Interest expense	$	-	$	(2,908	)

	Three Months Ended June 30,					Three Months Ended June 30,
	2013		2012			2013		2012
	(in thousands)					(in thousands)
Interest rate swaps	$	-	$	-	Interest expense	$	-	$	(225	)

Changes in the fair values of our derivative instruments with no hedging designation (both assets and liabilities) are reflected in current earnings.