Derivative Instruments

9 Months Ended

Sep. 30, 2017

Derivative Instruments

Derivative Instruments

Note 9. Derivative Instruments

We are exposed to fluctuations in interest rates on our long‑term debt. We manage our exposure to fluctuations in the 3‑month LIBOR through the use of interest rate cap agreements designated as cash flow hedges. We are meeting our objective by hedging the risk of changes in cash flows related to changes in LIBOR by capping the interest on our floating rate debt linked to LIBOR to approximately 3%. We do not utilize derivatives for speculative or trading purposes.

As of September 30, 2017 and December 31, 2016, we had $540,000 in notional debt outstanding related to these interest rate caps, which cover quarterly interest payments through September 2019. The notional amount decreases over time.

All of our outstanding interest rate cap contracts qualify for cash flow hedge accounting treatment in accordance with ASC 815, Derivatives and Hedging. Cash flow hedge accounting treatment allows for gains and losses on the effective portion of qualifying hedges to be deferred in accumulated other comprehensive income (loss) until the underlying transaction occurs, rather than recognizing the gains and losses on these instruments in earnings during each period they are outstanding. When the actual interest payments are made on our variable rate debt and the related derivative contract settles, any effective portion of realized interest rate hedging derivative gains and losses previously recorded in accumulated other comprehensive income (loss) is recognized in interest expense. We recognized interest expense of $605 and $56 related to interest rate caps during the three months ended September 30, 2017 and 2016, respectively, and $1,204 and $200 during the nine months ended September 30, 2017 and 2016, respectively.  

Ineffectiveness results, in certain circumstances, when the change in total fair value of the derivative instrument differs from the change in the fair value of our expected future cash outlays for the related interest payment and is recognized immediately in interest expense. There was no ineffectiveness recorded during the nine months ended September 30, 2017 and 2016, respectively. Likewise, if the hedge does not qualify for hedge accounting, the periodic changes in its fair value are recognized in the period of the change in interest expense. All cash flows related to our interest rate cap agreements are classified as operating cash flows.

Any outstanding derivative instruments expose us to credit loss in the event of nonperformance by the counterparties to the agreements, but we do not expect that the counterparty will fail to meet their obligations. The amount of such credit exposure is generally the positive fair value of our outstanding contracts. To manage credit risks, we select counterparties based on credit assessments, limit our overall exposure to any single counterparty and monitor the market position of any counterparty.

The table below reflects quantitative information related to the fair value of our derivative instruments and where these amounts are recorded in our consolidated financial statements as of the period presented:

	September 30,		December 31,
	2017		2016
Liability fair value recorded in other long-term liabilities	$	1,255	$	1,729
Liability fair value recorded in accounts payable and accrued other expenses		984		1,065
Estimated amount of existing losses expected to be reclassified into earnings in the next 12 months		(2,519)		(1,783)

We record deferred hedge premiums which are being paid over the life of the hedge in accumulated other comprehensive (loss) income until the related hedge ultimately settles and interest payments are made on the underlying debt. As of September 30, 2017, we have made payments of $3,661 related to these deferred premiums. We expect to pay an additional $2,733 in deferred premiums through 2019 related to our outstanding interest rate cap agreements which is reflected in the fair value of these derivatives in the table above.

Comprehensive income includes changes in the fair value of our interest rate cap agreements which qualify for hedge accounting. Changes in other comprehensive income for the periods presented related to derivative instruments classified as cash flow hedges were as follows:

	Three Months Ended September 30,
	2017		2016
Balance at beginning of period, July 1	$	(3,203)	$	(3,534)
Reclassifications in earnings, net of tax of $229 and $21, respectively		376		35
Change in fair value of derivative instrument, net of tax of $46 and $45, respectively		(75)		(84)
Balance at end of period, September 30	$	(2,902)	$	(3,583)

	Nine Months Ended September 30,
	2017		2016
Balance at beginning of period, January 1	$	(3,334)	$	(2,968)
Reclassifications in earnings, net of tax of $455 and $76, respectively		749		124
Change in fair value of derivative instrument, net of tax of $208 and $463, respectively		(317)		(739)
Balance at end of period, September 30	$	(2,902)	$	(3,583)