FINANCIAL INSTRUMENTS

Fair value of financial instruments

Financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable, senior and subordinated debts, a deferred payment liability and accrued liabilities. The estimated fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate book values because of the short-term maturities of these instruments. The estimated fair value of senior and subordinated debt approximates the carrying value as the debt bears interest at variable interest rates, which are based on rates for similar debt with similar credit rates in the open market. The deferred payment liabilities are valued based on the interest rate of similar debt in the open market.

Fair value guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. A financial asset's or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

Commencing August 2014, the Company entered into rolling foreign currency hedge contracts of various amounts to mitigate currency fluctuation risk on its subordinated U.S. dollar denominated debt owed by Lower Lakes Towing.

Fair value guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the fair value of the foreign currency hedge contracts measured on a recurring basis as of December 31, 2015 and March 31, 2015:

Fair value measurements at

December 31, 2015

March 31, 2015

Carrying

value at

December 31, 2015

Quoted

prices in

active markets

(Level 1)

Significant other

observable

inputs

(Level 2)

Carrying

value at

March 31,

2015

Quoted

prices in

active markets

(Level 1)

Significant other

observable

inputs

(Level 2)

Foreign currency hedge contracts

$(318)

$—

$(318)

$573

$—

$573

The foreign currency hedge contracts are measured at fair value using available rates on the similar instruments and are classified within Level 2 of the valuation hierarchy. This contracts are accounted for using the mark-to-market accounting method as if they were terminated at the day of valuation. There were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the nine month period ended December 31, 2015.

The Company recorded a payable of $318 as of December 31, 2015 for the foreign currency hedge contract on the Company’s U.S. dollar denominated subordinated debt owed by Lower Lakes. For the three month period ended December 31, 2015, the fair value adjustments of the foreign currency hedge contract resulted in a gain of $1,371 ($1,668 for three month period ended December 31, 2014) and $2,855 for the nine month period ended December 31, 2015 ($1,231 for the nine month period ended December 31, 2014). This gain is included in the Company’s earnings and the fair value of settlement costs to terminate the contract is included in current liabilities on the Company's consolidated balance sheet.

22. FINANCIAL INSTRUMENTS (continued)

The following table sets forth the fair value of the foreign currency hedge instruments as of the dates set forth below:

The Company has not designated this contract as a hedging instrument. The changes in fair value of the foreign currency hedge contracts are recorded in earnings as follows:



Derivatives not designated as hedging instrument:	Location of (loss) gain -Recognized in earnings	Three months ended December 31, 2015	Three months ended December 31, 2014	Nine months ended December 31, 2015	Nine months ended December 31, 2014
Foreign currency hedge contracts	Loss on foreign exchange	$(1,371)	$(1,668)	$(2,855)	$(1,231)

Foreign exchange risk

Foreign currency exchange risk to the Company results primarily from changes in exchange rates between the Company’s reporting currency, the U.S. Dollar, and the Canadian dollar. As discussed above, in August 2014, the Company commenced entering into rolling foreign currency hedge contracts to mitigate currency fluctuation risk on its U.S. dollar denominated subordinated debt owed by Lower Lakes. The Company is exposed to fluctuations in foreign exchange as a significant portion of revenue and operating expenses are denominated in Canadian dollars.

Interest rate risk

The Company is exposed to fluctuations in interest rates as a result of its banking facilities and senior debt bearing variable interest rates.

In December 2012, the Company entered into two interest rate cap contracts covering 50% of its then outstanding term debt on the date of such contracts at a cap of three month LIBOR at 2.5% on its U.S. Term Debt borrowings and a cap of three month BA rates at 3.0% on its Canadian Term Debt borrowings. The notional amount on each of these instruments decreased with each scheduled principal payment of the term loan under the Third Amended and Restated Credit Agreement, notwithstanding the termination of such agreement. The interest rate cap contracts terminated on December 1, 2015.

Credit risk

Accounts receivable credit risk is mitigated by the diversification of the Company’s customers among industries and the short shipping season.

Liquidity risk

A tightened credit in financial markets or an economic downturn in certain of our markets may adversely affect the ability of the Company’s customers and suppliers to obtain financing for significant operations and purchases and to perform their obligations under agreements with the Company. A tightening of credit could (i) result in a decrease in, or cancellation of, existing business, (ii) limit new business, (iii) negatively impact the Company’s ability to collect accounts receivable on a timely basis and (iv) affect the eligible receivables that are collateral for the Company’s lines of credit. Excluding vessel acquisitions or major vessel conversion contracts, the Company makes seasonal net incremental borrowings under its Credit Agreement during the first quarter of each fiscal year to fund working capital needed to commence the sailing season. Such borrowings are then reduced during the second half of each fiscal year.

Derivatives not designated as hedging instrument:

Balance Sheet location

Fair Value as at
December 31, 2015

Fair Value as at
March 31, 2015

Foreign currency hedge contracts

(Accrued liabilities)/accounts receivables