Derivative Instruments

6 Months Ended

Jun. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

From time to time, we enter into derivative financial instruments to manage certain cash flow risks.

Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges.

Interest Rate Swaps

Our objectives in using interest rate swaps are to reduce variability in interest expense and to manage exposure to adverse interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

As of June 30, 2021, we had interest rate swap agreements in place with an aggregate notional amount of $700 million. The forward swap agreements effectively fix the interest rate on $700 million of term loan borrowings, $225 million of swaps allocated to Term Loan A, $225 million allocated to Term Loan B and $250 million allocated to Term Loan C, through the current maturity dates of the respective term loans.

We reflect our interest rate swap agreements, which are designated as cash flow hedges, at fair value as either assets or liabilities on the consolidated balance sheets within the “Other assets, net” or “Derivative liabilities” line items, as applicable. As of June 30, 2021 and December 31, 2020, the fair value of interest rate swaps represented a net liability of $32.2 million and $49.8 million, respectively.

The forward interest rate swap agreements are derivatives that currently qualify for hedge accounting whereby we record the effective portion of changes in fair value of the interest rate swaps in accumulated other comprehensive income or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of a derivative's change in fair value is immediately recognized within net income (loss). The amount reclassified from other comprehensive income to interest expense on the consolidated statements of operations was an increase to interest expense of $3.4 million and $2.7 million for the three months ended June 30, 2021, and 2020, respectively, and $6.8 million and $3.5 million for the six months ended June 30, 2021, and 2020, respectively. There was no ineffectiveness recognized for the three and six months ended June 30, 2021, and 2020. During the subsequent twelve months, beginning July 1, 2021, we estimate that $14.3 million will be reclassified from other comprehensive income as an increase to interest expense.

Interest rate derivatives and their fair values as of June 30, 2021 and December 31, 2020 were as follows (unaudited and in thousands):


Notional Amount				Fixed One Month LIBOR rate per annum				Fair Value (1)
June 30, 2021		December 31, 2020				Effective Date	Expiration Date	June 30, 2021		December 31, 2020
$	25,000	$	25,000	1.989	%	January 2, 2018	December 17, 2021	$	(220)	$	(447)
100,000		100,000		1.989	%	January 2, 2018	December 17, 2021	(878)		(1,788)
75,000		75,000		1.989	%	January 2, 2018	December 17, 2021	(659)		(1,342)
50,000		50,000		2.033	%	January 2, 2018	April 27, 2022	(789)		(1,248)
100,000		100,000		2.029	%	January 2, 2018	April 27, 2022	(1,574)		(2,490)
50,000		50,000		2.033	%	January 2, 2018	April 27, 2022	(789)		(1,248)
100,000		100,000		2.617	%	January 2, 2020	December 17, 2023	(5,540)		(7,191)
100,000		100,000		2.621	%	January 2, 2020	April 27, 2024	(6,132)		(8,000)
70,000		70,000		0.968	%	March 2, 2020	October 18, 2026	(324)		(2,174)
30,000		30,000		0.973	%	March 2, 2020	October 18, 2026	(142)		(938)
200,000		200,000		2.636	%	December 17, 2021	December 17, 2023	(8,804)		(9,648)
200,000		200,000		2.642	%	April 27, 2022	April 27, 2024	(8,204)		(9,500)
125,000		125,000		1.014	%	December 17, 2023	December 17, 2024	140		(704)
100,000		100,000		1.035	%	December 17, 2023	December 17, 2024	89		(584)
75,000		75,000		1.110	%	December 17, 2023	October 18, 2026	481		(866)
100,000		100,000		1.088	%	April 27, 2024	April 27, 2025	157		(540)
125,000		125,000		1.082	%	April 27, 2024	April 27, 2025	208		(666)
75,000		75,000		0.977	%	April 27, 2024	October 18, 2026	765		(422)
								$	(32,215)	$	(49,796)

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(1)The fair value of the derivative financial instruments is presented on a gross basis, whereby positive amounts are presented within the “Other assets, net” and negative amounts are presented within the “Derivative liabilities” line items, as applicable, within the consolidated balance sheets.

Power Purchase Agreements

In March 2019, we entered into two 10-year agreements to purchase renewable energy equal to the expected electricity needs of our data centers in Chicago, Illinois and Piscataway, New Jersey. These arrangements currently qualify for hedge accounting whereby we record the changes in fair value of the instruments in “Accumulated other comprehensive income” or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The amount reclassified from other comprehensive income to utilities expense on the consolidated statements of operations was an increase to utilities expense of $0.2 million and an increase to utilities expense of $0.4 million for the three months ended June 30, 2021, and 2020, respectively, and an increase to utilities expense of $0.1 million and an increase to utilities expense of $0.8 million for the six months ended June 30, 2021 and 2020, respectively. We currently reflect these agreements, which are designated as cash flow hedges, at fair value as liabilities on the consolidated balance sheets within the “Derivative liabilities” line item.

Power purchase agreement derivatives and their fair values as of June 30, 2021 and December 31, 2020 were as follows (unaudited and in thousands):


				Fair Value
Counterparty	Facility	Effective Date	Expiration Date	June 30, 2021		December 31, 2020
Calpine Energy Solutions, LLC	Piscataway	March 8, 2019	February 28, 2029	$	(1,118)	$	(2,162)
Calpine Energy Solutions, LLC	Chicago	March 8, 2019	February 28, 2029	496		(1,764)
				$	(622)	$	(3,926)

QTS Realty Trust, Inc. 10-Q