Derivative Instruments and Hedging Activities

The Partnership uses derivatives to manage certain risks in accordance with its overall risk management policies.

Foreign Exchange Risk

The Partnership economically hedges portions of its forecasted expenditures denominated in foreign currencies with foreign currency forward contracts. The Partnership has not designated, for accounting purposes, any of the foreign currency forward contracts held during the three or nine months ended September 30, 2018 and 2017 as cash flow hedges.

As at September 30, 2018, the Partnership was committed to the following foreign currency forward contracts:



	Contract Amount in Foreign Currency (thousands)	Fair Value / Carrying Amount of Asset (Liability) (in thousands of U.S. Dollars)		Average Forward Rate ⁽¹⁾	Expected Maturity
						2018	2019
						(in thousands of U.S. Dollars)
Norwegian Kroner	430,000	(1,422	)	7.88		16,565	38,022
Euro	3,000	(146	)	0.82		3,653	—
		(1,568	)			20,218	38,022

(1)Average forward rate represents the contracted amount of foreign currency one U.S. Dollar will buy.

In connection with its issuance of NOK bonds, the Partnership entered into a cross currency swap pursuant to which it receives the principal amount in NOK on the repayment and maturity date, in exchange for payments of a fixed U.S. Dollar amount. In addition, the cross currency swap exchanges a receipt of floating interest in NOK based on NIBOR plus a margin for a payment of U.S. Dollar fixed interest. The purpose of the cross currency swap is to economically hedge the foreign currency exposure on the payment of interest and repayments of principal amounts of the Partnership’s NOK bonds due in 2019 (see note 6). In addition, the cross currency swap economically hedges the interest rate exposure on the NOK bonds. The Partnership has not designated, for accounting purposes, this cross currency swap as a cash flow hedge of its NOK bonds. In July 2018, the Partnership settled a portion of the cross currency swap in connection with the partial repurchase of the NOK bonds and incurred a realized loss during the three and nine months ended September 30, 2018, which is included in foreign currency exchange loss in the consolidated statements of loss.

As at September 30, 2018, the Partnership was committed to the following cross currency swap:



Notional Amount NOK (thousands)	Principal Amount USD (thousands)	Floating Rate Receivable			Fixed Rate Payable		Fair Value / Asset (Liability) $		Remaining Term (years)
		Reference Rate	Margin
		Reference Rate	Margin
95,000	15,409	NIBOR	4.25	%	7.45	%	(3,909	)	0.3

Interest Rate Risk

The Partnership enters into interest rate swaps, which exchange a receipt of floating interest for a payment of fixed interest, to reduce the Partnership’s exposure to interest rate variability on its outstanding floating-rate debt. During the three and nine months ended September 30, 2018, the Partnership dedesignated, for accounting purposes, certain interest rate swaps and, as at September 30, 2018, has not designated, for accounting purposes, any of its interest rate swaps as hedges of variable-rate debt in the consolidated financial statements.

As at September 30, 2018, the Partnership and its consolidated subsidiaries were committed to the following interest rate swap agreements:



	Interest Rate Index	Notional Amount $	Fair Value / Carrying Amount of Asset (Liability) $		Weighted- Average Remaining Term (years)	Fixed Interest Rate (%) ⁽¹⁾
U.S. Dollar-denominated interest rate swaps⁽²⁾	LIBOR	700,000	(64,417	)	6.7	4.1	%
U.S. Dollar-denominated interest rate swaps⁽³⁾	LIBOR	802,418	(12,097	)	3.8	3.2	%
		1,502,418	(76,514	)


(1)	Excludes the margin the Partnership pays on its variable-rate debt, which as at September 30, 2018, ranged between 0.90% and 4.30%.


(2)	Notional amount remains constant over the term of the swap.


(3)	Principal amount reduces quarterly or semi-annually.

For the periods indicated, the following tables present the effective and ineffective portion of the gain (loss) on interest rate swap agreements designated and qualifying as cash flow hedges. The following tables exclude any interest rate swap agreements designated and qualifying as cash flow hedges in the Partnership’s equity accounted joint ventures.



Three Months Ended September 30, 2018					Three Months Ended September 30, 2017
Effective		Effective			Effective		Effective
Portion		Portion			Portion		Portion
Recognized		Reclassified	Ineffective		Recognized		Reclassified		Ineffective
in AOCI ⁽¹⁾		from AOCI ⁽²⁾	Portion ⁽³⁾		in AOCI ⁽¹⁾		from AOCI ⁽²⁾		Portion ⁽³⁾
—		58	—	Interest expense	—		(424	)	—		Interest expense
—		58	—		—		(424	)	—

Nine Months Ended September 30, 2018					Nine Months Ended September 30, 2017
Effective		Effective			Effective		Effective
Portion		Portion			Portion		Portion
Recognized		Reclassified	Ineffective		Recognized		Reclassified		Ineffective
in AOCI⁽¹⁾		from AOCI ⁽²⁾	Portion ⁽³⁾		in AOCI ⁽¹⁾		from AOCI ⁽²⁾		Portion ⁽³⁾
(2,495	)	6	—	Interest expense	(460	)	(1,186	)	(7	)	Interest expense
(2,495	)	6	—		(460	)	(1,186	)	(7	)


(1)	Effective portion of designated and qualifying cash flow hedges recognized in accumulated other comprehensive income (or AOCI).


(2)	Effective portion of designated and qualifying cash flow hedges recorded in AOCI during the term of the hedging relationship and reclassified to earnings.


(3)	Ineffective portion of designated and qualifying cash flow hedges.

As at September 30, 2018, the Partnership had multiple interest rate swaps, cross currency swaps and foreign currency forward contracts governed by certain master agreements. Each of the master agreements provides for the net settlement of all derivatives subject to that master agreement through a single payment in the event of default or termination of any one derivative. The fair value of these derivatives is presented on a gross basis in the Partnership’s consolidated balance sheets. As at September 30, 2018, these derivatives had an aggregate fair value asset amount of $0.2 million and an aggregate fair value liability amount of $69.7 million (December 31, 2017 - an aggregate fair value asset amount of $0.3 million and an aggregate fair value liability amount of $157.4 million). As at December 31, 2017, the Partnership had $4.1 million on deposit with the relevant counterparties as security for cross currency swap liabilities under certain master agreements. As at September 30, 2018, this balance was nil. The deposit is presented in restricted cash on the consolidated balance sheet.

Tabular disclosure

The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Partnership’s balance sheets.



	Other Current Assets $	Other Assets $	Accrued Liabilities $		Current Portion of Derivative Liabilities $		Derivative Liabilities $
As at September 30, 2018
Foreign currency contracts	99	82	—		(1,691	)	(58	)
Cross currency swaps	—	—	(91	)	(3,818	)	—
Interest rate swaps	1,120	9,267	(2,702	)	(15,882	)	(68,317	)
	1,219	9,349	(2,793	)	(21,391	)	(68,375	)

As at December 31, 2017
Foreign currency contracts	347	28	—		(665	)	(67	)
Cross currency swaps	—	—	(916	)	(4,412	)	(38,678	)
Interest rate swaps	233	1,565	(3,883	)	(37,438	)	(128,724	)
	580	1,593	(4,799	)	(42,515	)	(167,469	)

Total realized and unrealized gain (loss) on interest rate swaps and foreign currency forward contracts that are not designated for accounting purposes as cash flow hedges are recognized in earnings and reported in realized and unrealized gain (loss) on derivative instruments in the consolidated statements of loss. The effect of the gain (loss) on these derivatives in the consolidated statements of loss for the three and nine months ended September 30, 2018 and 2017 is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	$		$		$		$
Realized (loss) gain on derivative instruments
Interest rate swaps	(10,749	)	(48,974	)	(33,735	)	(69,936	)
Foreign currency forward contracts	(747	)	1,048		242		640
	(11,496	)	(47,926	)	(33,493	)	(69,296	)
Unrealized gain (loss) on derivative instruments
Interest rate swaps	20,083		28,465		88,057		19,097
Foreign currency forward contracts	794		229		(1,291	)	2,638
	20,877		28,694		86,766		21,735
Total realized and unrealized gain (loss) on derivative instruments	9,381		(19,232	)	53,273		(47,561	)

Realized and unrealized gain (loss) on cross currency swaps are recognized in earnings and reported in foreign currency exchange loss in the consolidated statements of loss. The effect of the gain (loss) on cross currency swaps in the consolidated statements of loss for the three and nine months ended September 30, 2018 and 2017 is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	$		$		$		$
Realized loss	(36,768	)	(42,987	)	(39,504	)	(49,501	)
Unrealized gain	37,367		54,488		39,272		66,978
Total realized and unrealized gain (loss) on cross currency swaps	599		11,501		(232	)	17,477

The Partnership is exposed to credit loss in the event of non-performance by the counterparties, all of which are financial institutions, to the foreign currency forward contracts and the interest rate swap agreements. In order to minimize counterparty risk, the Partnership only enters into derivative transactions with counterparties that are rated A- or better by Standard & Poor’s or A3 or better by Moody’s at the time of the transactions. In addition, to the extent possible and practical, interest rate swaps are entered into with different counterparties to reduce concentration risk.