Derivative Instruments and Fair Value Measurements

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Fair Value Measurements

Forward freight agreements and bunker swaps

The Company trades in forward freight agreements (“FFAs”) and bunker swaps, with the objective of utilizing this market as economic hedging instruments that reduce the risk of specific vessels to changes in the freight market. The Company’s FFAs and bunker swaps have not qualified for hedge accounting treatment. As such, unrealized and realized gains are recognized as a component of other expense in the Consolidated Statement of Operations and Other current assets and Fair value of derivatives in the Consolidated Balance Sheets. Derivatives are considered to be Level 2 instruments in the fair value hierarchy.

For our bunker swaps, the Company may enter into master netting, collateral and offset agreements with counterparties. As of December 31, 2019, the Company has International Swaps and Derivatives Association ("ISDA") agreements with two applicable banks and financial institutions which contain netting provisions. In addition to a master agreement with the Company supported by a primary parent guarantee on either side, the Company also has associated credit support agreements in place with the two counterparties which, among other things, provide the circumstances under which either party is required to post eligible collateral, when the market value of transactions covered by these agreements exceeds specified thresholds. The Company does not anticipate non-performance by any of the counterparties. As of December 31, 2019, no collateral had been received or pledged related to these bunker swaps.

As of December 31, 2019, the Company entered into bunker swap agreements to purchase 38,400 metric tons of high sulfur fuel oil with prices ranging between $235 and $250 and sell 38,400 metric tons of low sulfur fuel oil with prices ranging between $464 and $508 per metric ton, that are expiring at various dates in 2020. The volume represents less than 10% of our estimated consumption on our fleet for the year. Additionally, the Company entered into bunker swap agreements for 1,100 metric tons to purchase low sulfur fuel oil expiring during the year 2020 for prices ranging between $450 and $487 per metric ton. The volume represents less than 10% of our estimated consumption on our fleet for the year.

As of December 31, 2019, the Company entered into FFAs for 180 days (15 days per month) expiring at the end of each calendar month in 2020 at an FFA contract price of $11,650 per day. The Company will realize a gain or loss on these FFAs based on the price differential between the average daily Baltic Supramax Index ("BSI") rate and the FFA contract price. The gains or losses are recorded in Other expense/(income) in our consolidated financial statements.

The effect of non-designated derivative instruments on the Consolidated Statements of Operations:


		For the Years Ended
Derivatives not designated as hedging instruments	Location of (gain)/loss recognized	December 31, 2019		December 31, 2018		December 31, 2017
FFAs	Other expense/(income)	$	(109,602)	$	(471,679)	$	375,672
Bunker swaps	Other expense/(income)	259,234		345,438		(413,577)
Total				$	149,632	$	(126,241)	$	(37,905)


		Fair value of derivatives
Derivatives not designated as hedging instruments	Balance Sheet Location	December 31, 2019		December 31, 2018

FFAs - Unrealized gain	Other current assets	$	475,650	$	669,240
Bunker Swaps - Unrealized loss	Fair value of derivatives	756,229		929,313
Bunker Swaps - Unrealized gain	Other current assets	96,043		—

Cash Collateral Disclosures

The Company does not offset fair value amounts recognized for derivatives by the right to reclaim cash collateral or the obligation to return cash collateral. The amount of collateral to be posted is defined in the terms of respective master agreement executed with counterparties or exchanges and is required when agreed upon threshold limits are exceeded. As of December 31, 2019 and December 31, 2018, the Company posted cash collateral related to derivative instruments under its collateral security arrangements of $0.6 million and $0.8 million, respectively, which is recorded within other current assets in the consolidated balance sheets.

Fair Value Measurements

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash, cash equivalents and restricted cash—the carrying amounts reported in the consolidated balance sheets for interest-bearing deposits approximate their fair value due to their short-term nature thereof.

Debt—the carrying amounts of borrowings under the Norwegian Bond Debt, New Ultraco Debt Facility and Convertible Bond Debt (prior to application of the discount and debt issuance costs) including the revolving credit agreement approximate their fair value, due to the variable interest rate nature thereof.

The Company defines fair value, establishes a framework for measuring fair value and provides disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities. Our Level 1 non-derivatives include cash, money-market accounts and restricted cash accounts.

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable. Our Level 2 non-derivatives include our short-term investments and debt balances under the Norwegian Bond Debt, New Ultraco Debt Facility and Convertible Bond Debt.

Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

Assets and liabilities measured at fair value:


			Fair Value
	Carrying Value ⁽⁵⁾		Level 1		Level 2
December 31, 2019
Assets
Cash and cash equivalents ⁽¹⁾	$	59,130,285	$	59,130,285	$	—
Liabilities
Norwegian Bond Debt ⁽²⁾	188,000,000		—		192,626,680
New Ultraco Debt Facility ⁽³⁾	172,613,988		—		172,613,988
Convertible Bond Debt ⁽⁴⁾	114,120,000		—		118,844,568


			Fair Value
	Carrying Value ⁽⁵⁾		Level 1		Level 2
December 31, 2018
Assets
Cash and cash equivalents ⁽¹⁾	$	78,163,638	$	78,163,638	$	—
Liabilities
Norwegian Bond Debt ⁽²⁾	196,000,000		—		195,040,000
New First Lien Facility ⁽³⁾	60,000,000		—		60,000,000
Original Ultraco Debt Facility ⁽³⁾	82,600,000		—		82,600,000


⁽¹⁾			Includes restricted cash (current and non-current) of $5.5 million at December 31, 2019 and $10.9 million at December 31, 2018.
⁽²⁾			The fair value of the bonds is based on the last trade on December 31, 2019 and December 21, 2018.
⁽³⁾			The fair value of the New Ultraco Debt Facility, New First Lien Facility and the Original Ultraco Debt Facility is based on the required repayment to the lenders if the debt was discharged in full on December 31, 2019 and 2018. The New First Lien Facility and Original Ultraco Debt Facility were fully discharged as part of the refinancing transaction on January 25, 2019. Please see Note 6 Debt to the consolidated financial statements.
⁽⁴⁾			The fair value of the Convertible Bond Debt is based on the last trade on November 21, 2019.
⁽⁵⁾			The outstanding debt balances represent the face value of the debt excluding debt discount and debt issuance costs.