Note 9 - Derivative Instruments and Hedging Strategies
|12 Months Ended|
Dec. 31, 2018
|Notes to Financial Statements|
|Derivative Instruments and Hedging Activities Disclosure [Text Block]||
Derivative instruments are classified as either assets or liabilities based on their individual fair values. The fair values of the Company's derivative instruments as of
December 31were as follows (in thousands):
From time to time, the Company
Fair Value Hedges.
maydesignate certain of its foreign currency exchange contracts as fair value hedges in respect of capital commitments denominated in foreign currencies. By entering into these foreign currency exchange contracts, the Company
mayfix a portion of its capital commitments denominated in foreign currencies in U.S. dollars to protect against currency fluctuations. During the year ended
2017,the Company recognized gains of
$0.1million on these contracts which were recognized to the corresponding hedged equipment included in construction in progress in the accompanying consolidated balance sheets. During the year ended
December 31, 2016,the Company recognized losses of
$0.8million on these contracts which were recognized to the corresponding hedged equipment included in construction in progress in the accompanying consolidated balance sheets.
The Company and certain of its
Cash Flow Hedges.
50%or less owned companies have interest rate swap agreements designated as cash flow hedges at their inception. By entering into these interest rate swap agreements, the Company and its
50%or less owned companies have converted the variable LIBOR or EURIBOR component of certain of their outstanding borrowings to a fixed interest rate. The Company recognized losses on derivative instruments designated as cash flow hedges of
$1.6million for the year ended
December 31, 2018,gains of
$0.2million for the year ended
2017and losses of
$2.5million for the year ended
2016as a component of other comprehensive loss. As of
2018,the interest rate swaps held by the Company and certain of the Company's
50%or less owned companies were as follows:
notqualifying for the normal purchase and normal sale exception are recorded on the balance sheets at fair value. The treatment of the periodic changes in fair value will depend on whether the derivative is designated and effective as a hedge for accounting purposes.
If a derivative qualifies for hedge accounting and is designated as a cash flow hedge, the effective portion of the change in fair value of the derivative is deferred in Accumulated Other Comprehensive Income (“AOCI”), a component of owners’ equity, and reclassified to earnings when the forecasted transaction occurs. Cash flows from a derivative instrument designated as a hedge are classified in the same category as the cash flows from the item being hedged. As such, we include the cash flows from interest rate derivative instruments in interest expense.
If a derivative does
notqualify as a hedge or is
notdesignated as a hedge, the gain or loss resulting from the change in fair value on the derivative is recognized currently in earnings as a component of other income (expense).
We formally document all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking the hedge. This documentation includes the specific identification of the hedging instrument and the hedged item, the nature of the risk being hedged and the manner in which the hedging instrument’s effectiveness will be assessed. At the inception of the hedge, and on an ongoing basis, we assess whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.
The relationship between the hedging instrument and the hedged item must be highly effective in achieving the offset of changes in cash flows attributable to the hedged risk both at the inception of the contract and on an ongoing basis. We measure hedge ineffectiveness on a quarterly basis and reclassify any ineffective portion of the gain or loss related to the change in fair value to earnings in the current period.
We will discontinue hedge accounting on a prospective basis when a hedge instrument is terminated or ceases to be highly effective. Gains and losses deferred in AOCI related to cash flow hedges for which hedge accounting has been discontinued remain deferred until the forecasted transaction occurs. If it is
nolonger probable that a hedged forecasted transaction will occur, deferred gains or losses on the hedging instrument are reclassified to earnings immediately.
For balance sheet classification purposes, we analyze the fair values of the derivative instruments on a contract by contract basis and report the related fair values and any related collateral by counterparty on a gross basis. Realized and unrealized gains and losses on derivatives designated as cash flow hedges that are entered into by the Company’s
50%or less owned companies are also reported as a component of the Company’s other comprehensive loss in proportion to the Company’s ownership percentage, with reclassifications and ineffective portions being included in equity in earnings (losses) of
50%or less owned companies, net of tax, in the accompanying consolidated statements of loss.
The fair value of our derivative instruments, depending on the type of instrument, was determined by the use of present value methods or standard option valuation models with assumptions about commodity prices based on those observed in underlying markets. The estimated fair value of our derivative instruments was a net liability of
$6.9million as of
2018.The estimated fair value is net of an adjustment for credit risk based on the default probabilities by year as indicated by market quotes for the counterparties’ credit default swap rates. The credit risk adjustment was immaterial for all periods presented.
The following tables reflect amounts recorded in Other Comprehensive Income (“OCI”) and amounts reclassified from OCI to revenue and expense for the periods indicated:
Our consolidated earnings are also affected by the use of the mark-to-market method of accounting for derivative instruments that do
notqualify for hedge accounting or that have
notbeen designated as hedges. The changes in fair value of these instruments are recorded on the balance sheet and through earnings rather than being deferred until the anticipated transaction settles. The use of mark-to-market accounting for financial instruments can cause non-cash earnings volatility due to changes in the underlying commodity price indices.
The Company recognized gains (losses) on derivative instruments
Other Derivative Instruments.
notdesignated as hedging instruments for the years ended
December 31as follows (in thousands):
The conversion option liability relates to the bifurcated embedded conversion option in the Convertible Senior
Notes (See Notes
The Company and certain of the Company's
50%or less owned companies have entered into interest rate swap agreements for the general purpose of providing protection against increases in interest rates, which might lead to higher interest costs. As of
2018,the interest rate swaps held by the Company or its
50%or less owned companies were as follows:
2017,the Company held positions in publicly traded equity options that convey the right or obligation to engage in a future transaction on the underlying equity security or index. The Company's investment in equity options primarily included positions in energy related businesses. These contracts were typically entered into to mitigate the risk of changes in market value of marketable security positions that the Company was either about to acquire, had acquired or was about to dispose.
The Company enters and settles forward currency exchange, option and future contracts with respect to various foreign currencies. These contracts enable the Company to buy currencies in the future at fixed exchange rates, which could offset possible consequences of changes in currency exchange rates with respect to the Company's business conducted outside of the United States. The Company generally does
notenter into contracts with forward settlement dates beyond
eighteenmonths. There are
nooutstanding contracts at
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef