DERIVATIVE FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2020

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

7. DERIVATIVE FINANCIAL INSTRUMENTS

We use derivative financial instruments to manage our exposure to the risks associated with fluctuations in interest rates. Our interest rate swap agreements effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments.  Derivative financial instruments are recorded at fair value in our condensed consolidated balance sheets.  We may designate certain of our interest rate swaps as cash flow hedges of our expected future interest payments.  For derivative instruments designated as a cash flow hedge, the change in the fair value is recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and is recognized as an adjustment to earnings over the period in which the hedged item impacts earnings. When an interest rate swap agreement terminates, any resulting gain or loss is recognized over the shorter of the remaining original term of the hedging instrument or the remaining life of the underlying debt obligation.  If a derivative instrument is de-designated, the remaining gain or loss in AOCI on the date of de-designation is amortized to earnings over the remaining term of the hedging instrument. For derivative financial instruments that are not designated as a hedge, including those that have been de-designated, changes in fair value are recognized on a current basis in earnings.    Cash flows from hedging activities are classified under the same category as the cash flows from the hedged items in our condensed consolidated statements of cash flows.

The following interest rate swaps were outstanding as of March 31, 2020:

	Notional
(In thousands)	Amount		2020 Balance Sheet Location	Fair Value
Cash Flow Hedges:
Fixed to 1-month floating LIBOR (with floor)	$	705,000	Accrued expense	$	(3,049)
Fixed to 1-month floating LIBOR (with floor)	$	500,000	Other long-term liabilities		(27,525)
Forward starting fixed to 1-month floating LIBOR (with floor)	$	705,000	Other long-term liabilities		(10,684)
Total Fair Values				$	(41,258)

Our interest rate swap agreements mature on various dates between July 2020 and July 2023.  The forward-starting interest rate swap agreement has a term of one year and becomes effective in July 2020.

The following interest rate swaps were outstanding as of December 31, 2019:

	Notional
(In thousands)	Amount		2019 Balance Sheet Location	Fair Value
Cash Flow Hedges:
Fixed to 1-month floating LIBOR (with floor)	$	705,000	Accrued expense	$	(2,565)
Fixed to 1-month floating LIBOR (with floor)	$	500,000	Other long-term liabilities		(18,303)
Forward starting fixed to 1-month floating LIBOR (with floor)	$	705,000	Other long-term liabilities		(6,657)
Total Fair Values				$	(27,525)

The counterparties to our various swaps are highly rated financial institutions. None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties.  The swaps of any counterparty that is a lender, as defined in our credit facility, are secured along with the other creditors under the credit facility.  Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties.  

As of March 31, 2020 and December 31, 2019, the total pre-tax unrealized loss related to our interest rate swap agreements included in AOCI was $(36.5) million and $(22.5) million, respectively.  From the balance in AOCI as of March 31, 2020, we expect to recognize a loss of approximately $18.8 million in earnings in the next twelve months.

Information regarding our cash flow hedge transactions is as follows:

	Quarter Ended
	March 31,
(In thousands)	2020		2019
Unrealized loss recognized in AOCI, pretax	$	(16,152)	$	(9,053)
Deferred (loss) gain reclassified from AOCI to interest expense	$	(2,175)	$	280