Derivatives

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company uses interest-rate-related derivative instruments to manage its variability of cash flows associated with changes in interest rates on its variable-rate debt.

On March 9, 2020, the Company sold its Well Support Services segment to Basic Energy Services, Inc. (“Basic”) for $93.7 million of total proceeds, including $59.4 million in cash, before transaction costs, escrowed amounts, and subject to customary working capital adjustments, for a net of $53.3 million received at close, and $34.4 million of par value Senior Secured Notes, with 10.75% coupon rate, (“WSS Notes”) previously issued by Basic. Under the terms of the agreement, the WSS Notes are accompanied by a make-whole guarantee at par value, which guarantees the payment of $34.4 million to NexTier after the WSS Notes are held to the one-year anniversary of March 9, 2021. The cash equivalent make-whole is issued under a fund guarantee by Ascribe III Investments LLC, a private equity investment firm with approximately $1.0 billion in assets under management. In the event of a Basic restructuring or a credit rating downgrade in conjunction with a change in control prior to the one-year anniversary, the make-whole guarantee accelerates the WSS Notes to par value of $34.4 million. NexTier is entitled to semi-annual interest payments on the WSS Notes based on the 10.75% annual coupon throughout the holding period. The Company identified the make-whole guarantee as an embedded derivative and bifurcated the valuation of the WSS Note and the make-whole guarantee. The Company elected the fair value option for the WSS Notes at the inception of the transaction. The fair value on the date of the transaction for the make-whole derivative and WSS Notes was $12.2 million and $22.2 million, respectively, and resulted in a gain on divestiture of $8.0 million. The fair value of the WSS Notes and the make-whole guarantee are measured at the end of each reporting period. Gains and losses recognized in relation to these instruments will be recognized in net income. The fair value of the WSS Notes and make-whole guarantee are recorded in Other Current Assets. See Note (15) Business Segments for further discussion.

On May 25, 2018, the Company, and certain subsidiaries of the Company as guarantors, entered into a term loan facility (the "2018 Term Loan Facility") with each lender from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent. The 2018 Term Loan Facility has an initial aggregate principal amount of $350.0 million and proceeds were used to repay the Company's pre-existing 2017 term loan facility. The 2018 Term Loan Facility has a variable interest rate based on the London Interbank Offer Rate ("LIBOR"), subject to a 1.0% floor. As a result of this transaction, the Company desired to hedge additional notional amounts to continue to hedge approximately 50% of its expected LIBOR exposure and to extend the terms of its swaps to align with the 2018 Term Loan Facility.

On June 22, 2018, the Company unwound its existing interest rate swaps and received $3.2 million in proceeds. The Company used the $3.2 million of proceeds to execute a new off-market interest rate swap. Under the terms of the new interest rate swap, the Company receives 1-month LIBOR, subject to a 1% floor, and makes payments based on a fixed rate of 2.625%. The new interest rate swap is effective through March 31, 2025 and has a notional amount of $175 million. The new interest rate swap was designated in a new cash flow hedge relationship.

The Company discontinued hedge accounting on the pre-existing interest rate swaps upon termination. At

the time hedge accounting was discontinued, the exiting interest rate swaps had $3.5 million of deferred gains in accumulated other comprehensive loss. This amount was not reclassified from accumulated other comprehensive loss into earnings, as it remained probable that the originally forecasted transaction will occur. This amount will be recognized into earnings through August 18, 2022, the termination date of the pre-existing interest rate swap.

The following tables present the fair value of the Company's derivative instruments on a gross and net basis as of the periods shown below:



	(Thousands of Dollars)
	Derivatives designated as hedging instruments			Derivatives not designated as hedging instruments		Gross Amounts of Recognized Assets and Liabilities			Gross Amounts Offset in the Balance Sheet⁽¹⁾		Net Amounts Presented in the Balance Sheet⁽²⁾
As of March 31, 2020:
Other current asset	—			15,827		15,827			—		15,827
Other current liability	$	(2,657	)	$	—	$	(2,657	)	$	—	$	(2,657	)
Other noncurrent liability	(7,174		)	—		(7,174		)	—		(7,174		)
As of December 31, 2019:
Other current liability	$	(1,729	)	$	—	$	(1,729	)	$	—	$	(1,729	)
Other noncurrent liability	(5,559		)	—		(5,559		)	—		(5,559		)

⁽¹⁾ Agreements are in place that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements.

⁽²⁾ There are no amounts subject to an enforceable master netting arrangement that are not netted in these amounts. There are no amounts of related financial collateral received or pledged.

The following table presents gains and losses for the Company's interest rate derivatives designated as cash flow hedges (in thousands of dollars):



	Three Months Ended March 31,
	2020			2019			Location
Amount of loss recognized in total other comprehensive loss on derivative	$	(2,961	)	$	(2,862	)	OCI
Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings	(341		)	247			Interest Expense

The gain (loss) recognized in other comprehensive loss for the derivative instrument is presented within hedging activities in the unaudited condensed consolidated statements of operations and comprehensive loss.

There were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness. Based on recorded values as of March 31, 2020, $2.4 million of net losses will be reclassified from accumulated other comprehensive loss into earnings within the next 12 months.

The Company recognized a gain on the change in fair market value of the WSS Notes and make-whole derivative of $0.1 million for the period ended March 31, 2020, which is recorded within other income (expense) on the Consolidated Statements of Operations and Comprehensive Loss.

See Note (9) Fair Value Measurements and Financial Information for discussion on fair value measurements related to the Company's derivative instruments.