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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Derivative Instruments and Hedging Activities
From time to time, the Company enters into interest rate agreements to minimize potential variations in cash flows resulting from fluctuations in interest rates and their impact on its variable-rate debt. The Company does not enter into derivative instruments for any purpose other than economic interest rate hedging. That is, the Company does not speculate using derivative instruments. In addition, Hawaii Gas, a business within the Company’s MIC Hawaii reportable segment, enters into commodity price hedges to mitigate the impact of fluctuations in LPG prices on its cash flows.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. Conversely, when the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with creditworthy counterparties.
Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rates is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Interest Rate Contracts
The Company and certain of its businesses have in place variable-rate debt. Management believes that it is prudent to limit the variability of a portion of the business’ interest payments. To meet this objective, the Company enters into interest rate agreements, primarily using interest rate swaps and from time to time using interest rate caps, to manage fluctuations in cash flows resulting from interest rate risk on a portion of its debt with a variable-rate component. Interest rate swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the portion of the debt that is swapped.
At December 31, 2019, the Company had $2,722 million of current and long-term debt, of which $946 million was economically hedged with interest rate contracts, $1,103 million was fixed rate debt and $673 million was unhedged. At December 31, 2018, the Company had $3,083 million of current and long-term debt, of which $947 million was economically hedged with interest rate contracts, $1,453 million was fixed rate debt and $683 million was unhedged. The Company does not use hedge accounting. All movements in the fair value of the interest rate derivatives are recorded directly through earnings.
IMTT
On June 1, 2015, IMTT, as part of the IMTT refinancing in May 2015, entered into interest rate swap contracts maturing in June 2021 with a total notional amount of $361 million. These swaps partially hedged the floating LIBOR interest rate risk associated with the Tax-Exempt Bonds for six years at 1.677%.
On December 5, 2018, IMTT entered into the Amendment on its Tax-Exempt Bonds. The Amendment provided for the change in interest rate to 80% of one-month LIBOR plus an applicable margin plus 0.45% and an extension of maturity from May 2022 to December 2025. The interest rate swap was not amended and therefore increased the unhedged component of the Tax-Exempt Bonds by approximately $58 million. See Note 9, “Long-Term Debt”, for further details on the Amendment.
Atlantic Aviation
In October 2016, Atlantic Aviation entered into $400 million notional interest rate caps with a strike price of 1.00% to hedge the one-month LIBOR floating rate interest exposure on the business’ term loan or revolving credit facility. The notional amount on the interest rate cap will remain at $400 million through its maturity in September 2021.
On December 6, 2018, Atlantic Aviation refinanced its term loan and revolving credit facility under the New AA Credit Agreement. The existing interest rate cap will remain in place and will be used to partially hedge the Atlantic Aviation term loan facility under the New AA Credit Agreement. See Note 9, “Long-Term Debt”, for further details on the New AA Credit Agreement.
MIC Hawaii
In February 2016, in conjunction with a refinancing, Hawaii Gas entered into a new interest rate swap contract for an $80 million notional that took effect on August 8, 2016, upon the maturity of the existing interest rate swap, and expires on February 8, 2020. At December 31, 2019, the interest rate swap fixes the interest rate on the $80 million term loan at 2.49%.
In July 2016, the solar facilities in MIC Hawaii entered into a ten year, $18 million amortizing term loan facility. The interest rate on this term loan facility floats at LIBOR plus 2.00%. Concurrently, it entered into an amortizing interest rate swap contract with an original notional value of $18 million. The contract is scheduled to amortize concurrently with the term loan and fixes the interest rate at 3.38% as of December 31, 2019.
Commodity Price Hedges
The risks associated with fluctuations in the prices that Hawaii Gas, a business within the MIC Hawaii reportable segment, pays for LPG is principally a result of market forces reflecting changes in supply and demand for LPG and other energy commodities. Hawaii Gas’ gross margin (revenue less cost of product sales excluding depreciation and amortization) is sensitive to changes in LPG costs and Hawaii Gas may not always be able to pass through product cost increases fully or on a timely basis, particularly when product costs rise rapidly. In order to reduce the volatility of the business’ LPG market price risk, Hawaii Gas has used and expects to continue to use over-the-counter commodity derivative instruments including price swaps. Hawaii Gas does not use commodity derivative instruments for speculative or trading purposes. Over-the-counter derivative commodity instruments used by Hawaii Gas to hedge forecasted purchases of LPG are generally settled at expiration of the contract. At December 31, 2019, Hawaii Gas had 38 million gallons of LPG hedged that expire in March 2021.
Financial Statement Location Disclosure for Derivative Instruments
The Company measures derivative instruments at fair value using the income approach which discounts the future net cash settlements expected under the derivative contracts to a present value. These valuations use primarily observable (level 2) inputs, including contractual terms, interest rates and yield curves observable at commonly quoted intervals.
The Company’s fair value measurements of its derivative instruments and the related location of the assets and liabilities within the consolidated balance sheets at December 31, 2019 and 2018 were ($ in millions):
Balance Sheet Classification
 
Assets (Liabilities) at Fair Value as of December 31,
 
2019
 
2018
Fair value of derivative instruments - other current assets
 
$
3

 
$
11

Fair value of derivative instruments - other noncurrent assets
 
2

 
15

Total derivative contracts - assets
 
$
5

 
$
26

Fair value of derivative instruments - other current liabilities
 
$
(7
)
 
$
(3
)
Fair value of derivative instruments - other noncurrent liabilities
 
—

 
—

Total derivative contracts - liabilities
 
$
(7
)
 
$
(3
)

The Company’s hedging activities in 2019, 2018 and 2017 and the related location within the consolidated statement of operations were ($ in millions):
Income Statement Classification
 
Amount of (Loss) Gain Recognized in
Consolidated Statements of Operations
Year ended December 31,
 
2019
 
2018
 
2017
Interest expense – interest rate caps
 
$
(7
)
 
$
4

 
$
—

Interest expense – interest rate swaps
 
(6
)
 
4

 
2

Cost of product sales – commodity swaps
 
(10
)
 
(5
)
 
7

Total
 
$
(23
)
 
$
3

 
$
9


All of the Company’s derivative instruments are collateralized by the assets of the respective businesses.