8. DERIVATIVE FINANCIAL INSTRUMENTS

Interest rate swaps are used to adjust the proportion of total debt that is subject to variable interest rates. The interest rate swaps require the Company to pay an amount equal to a specific fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts are not exchanged. Forward starting interest rate swaps are also used by the Company to hedge the risk of changes in the interest-related cash outflows associated with the potential issuance of long-term debt. No other cash payments are made unless the contract is terminated prior to its maturity, in which case the contract would likely be settled for an amount equal to its fair value. The Company enters into interest rate swaps with a number of major financial institutions to minimize counterparty credit risk.

Interest rate swaps qualify and are designated as hedges of the amount of future cash flows related to interest payments on variable rate debt. Therefore, interest rate swaps are recorded in the consolidated balance sheets at fair value and the related gains or losses are deferred in shareholders’ equity or partners’ capital as Accumulated Other Comprehensive Loss (“AOCL”). These deferred gains and losses are recognized in interest expense during the period or periods in which the related interest payments affect earnings. However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was de minimis for the three and six months ended June 30, 2018 and 2017.

The Company has interest rate swap agreements in effect at June 30, 2018 as detailed below to effectively convert a total of $100 million of variable-rate debt to fixed-rate debt.

Notional Amount

Effective Date

Expiration Date

Fixed

Rate Paid

Floating Rate

Received

$100 Million

9/4/13

9/4/18

1.3710

1 month LIBOR

In 2017, the Company terminated hedges and settled interest rate swap agreements on $225 million of the Company’s variable rate debt in connection with repayment of the related variable rate term notes. As a result of the termination, no gains or losses related to the terminated interest rate swaps are included in AOCL at June 30, 2018 or December 31, 2017.

In the fourth quarter of 2015, the Company entered into forward starting interest rate swap agreements with a total notional value of $50 million. In the first quarter of 2016, the Company entered into additional forward starting interest rate swap agreements with a total notional value of $100 million. These forward starting interest rate swap agreements were entered into to hedge the risk of changes in the interest-related cash flows associated with the potential issuance of fixed rate long-term debt. In conjunction with the issuance of the $600 million 2026 Senior Notes (see Note 6), the Company terminated these hedges and settled the forward starting swap agreements for approximately $9.2 million. The $9.2 million has been deferred in AOCL and is being amortized as additional interest expense over the ten-year term of the $600 million 2026 Senior Notes or until such time as interest payments on the 2026 Senior Notes are no longer probable.

The interest rate swap agreements are the only derivative instruments, as defined by FASB ASC Topic 815 “Derivatives and Hedging”, held by the Company at June 30, 2018. During the three months ended June 30, 2018 and 2017, the net reclassification from AOCL to interest expense was ($0.1 million) and $0.7 million, respectively, based on payments received and made under the swap agreements. During the six months ended June 30, 2018 and 2017, the net reclassification from AOCL to interest expense was ($0.1 million) and $1.6 million, respectively, based on payments received and made under the swap agreements. Based on current interest rates, the Company estimates that payments received under the interest rate swaps for the 12 months ended June 30, 2019 would be de minimis. Payments made or received under the interest rate swap agreements will be reclassified to interest expense as swap settlement occurs. The fair value of the swap agreements, including accrued interest, was an asset of $0.2 million at both June 30, 2018 and December 31, 2017.

The Company’s agreements with its interest rate swap counterparties contain provisions pursuant to which the Company could be declared in default of its derivative obligations, if any, if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender. The interest rate swap agreements also incorporate other loan covenants of the Company. Failure to comply with the loan covenant provisions would result in the Company being in default on the interest rate swap agreements. As of June 30, 2018, the Company had not posted any collateral related to the interest rate swap agreements.

The changes in AOCL for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

(dollars in thousands)	Three Months Ended June 30, 2018			Three Months Ended June 30, 2017			Six Months Ended June 30, 2018			Six Months Ended June 30, 2017
Accumulated other comprehensive loss beginning of period	$	(7,310	)	$	(19,853	)	$	(7,587	)	$	(21,475	)
Realized loss reclassified from accumulated other comprehensive loss to interest expense		113			956			309			2,076
Unrealized (loss) gain from changes in the fair value of the effective portion of the interest rate swaps		(7	)		(719	)		74			(217	)
Gain included in other comprehensive loss		106			237			383			1,859
Accumulated other comprehensive loss end of period	$	(7,204	)	$	(19,616	)	$	(7,204	)	$	(19,616	)