NOTE 5. DERIVATIVE INSTRUMENTS

From time to time, we enter into derivative financial instruments to manage certain cash flow and fair value risks.

Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset or liability to a particular risk, such as interest rate risk, are considered fair value hedges. We have five fair value interest rate swaps to convert interest payments on fixed-rate debt to variable-rate 3-month LIBOR plus a spread.

Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges. We have one interest rate swap to convert variable-rate debt, comprised of 3-month LIBOR plus a spread, to fixed-rate debt. Our cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedge. Therefore, changes in the fair value of the interest rate swap are recorded as a component of other comprehensive income and will be recognized in earnings when the hedged interest rate affects earnings. The amounts paid or received on this interest rate hedge will be recognized as adjustments to interest expense. As of June 30, 2017, the amount of net losses expected to be reclassified into earnings in the next 12 months is $0.1 million.

Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements, commodity price movements or other identified risks, but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly into income. In April 2017, we entered into a lumber price swap to fix the price on a total of 36 million board feet (mmbf) of southern yellow pine with an effective date of July 1, 2017 and a termination date of December 31, 2017. Under the contract, cash settlement on 6 mmbf occurs monthly.

The following table presents the gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets:

		Asset Derivatives					Liability Derivatives
(Dollars in thousands)	Location	June 30, 2017		December 31, 2016		Location	June 30, 2017		December 31, 2016
Derivatives designated in fair value hedging relationships:
Interest rate contracts	Other assets, current	$	99	$	32		$	—	$	—
Interest rate contracts	Other assets, non-current		—		215	Other long-term obligations		115		91
		$	99	$	247		$	115	$	91

Derivatives designated in cash flow hedging relationships:
Interest rate contracts	Other assets, non-current	$	924	$	1,148		$	—	$	—

Derivatives not designated as hedging instruments:
Lumber price swap	Other assets, current	$	3,265	$	—		$	—	$	—

The following table details the effect of derivatives on our Consolidated Statements of Income (Loss):

		Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	Location	2017			2016			2017			2016
Derivatives designated in fair value hedging relationships:
Interest rate contracts
Realized gain on interest rate contracts¹	Interest expense	$	123		$	214		$	290		$	456

Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Loss recognized in other comprehensive income, net of tax (effective portion)		$	(226	)	$	(490	)	$	(228	)	$	(654	)
Loss reclassified from accumulated other comprehensive income (effective portion)¹	Interest expense	$	(41	)	$	(77	)	$	(91	)	$	(77	)

Derivatives not designated as hedging instruments:
Lumber price contracts
Realized gain on lumber price swap		$	—		$	—		$	—		$	—
Unrealized gain on lumber price swap	Gain on lumber price swap		3,265			—			3,265			—
Net gain on lumber price contracts		$	3,265		$	—		$	3,265		$	—

Realized gain on hedging instruments consists of net cash settlements and interest accruals on the fair value interest rate swaps during the periods. Net cash settlements are included in the supplemental cash flow information within interest, net of amounts capitalized in the Condensed Consolidated Statements of Cash Flows.