Derivative Instruments and Hedging Activities | Derivative Instruments and Hedging Activities The Partnership uses derivative instruments in accordance with its overall risk management policy. Foreign Exchange Risk From 2013 through 2016 , concurrently with the issuance of NOK 3.5 billion of senior unsecured bonds (see Note 9) during that time, the Partnership entered into cross-currency swaps, and pursuant to these swaps, the Partnership receives the principal amount in NOK on maturity dates of the swaps in exchange for payments of a fixed U.S. Dollar amount. In addition, the cross-currency swaps exchange a receipt of floating interest in NOK based on NIBOR plus a margin for a payment of U.S. Dollar fixed interest. The purpose of the cross-currency swaps is to economically hedge the foreign currency exposure on the payment of interest and principal of the Partnership’s NOK-denominated bonds due in 2017, 2018, 2020 and 2021, and to economically hedge the interest rate exposure. The following table reflects information relating to the cross-currency swaps as at December 31, 2016 . Floating Rate Receivable Principal Principal Reference Margin Fixed Rate Fair Value / Weighted- 408,500 72,946 NIBOR 5.25 % 6.88 % (26,417 ) 0.3 900,000 150,000 NIBOR 4.35 % 6.43 % (49,655 ) 1.7 1,000,000 134,000 NIBOR 3.70 % 5.92 % (19,900 ) 3.4 900,000 110,400 NIBOR 6.00 % 7.72 % (3,814 ) 4.8 (99,786 ) Interest Rate Risk The Partnership enters into interest rate swaps which exchange a receipt of floating interest for a payment of fixed interest to reduce the Partnership’s exposure to interest rate variability on certain of its outstanding floating-rate debt. As at December 31, 2016 , the Partnership was committed to the following interest rate swap agreements: Interest Principal Fair Value / Weighted- Fixed Interest Rate (%) (i) LIBOR-Based Debt: U.S. Dollar-denominated interest rate swaps LIBOR 90,000 (5,748 ) 1.7 4.9 U.S. Dollar-denominated interest rate swaps LIBOR 100,000 (1,145 ) 0.0 5.3 U.S. Dollar-denominated interest rate swaps (ii) LIBOR 156,250 (26,765 ) 12.0 5.2 U.S. Dollar-denominated interest rate swaps (ii) LIBOR 53,557 (1,494 ) 4.6 2.8 U.S. Dollar-denominated interest rate swaps (iii) LIBOR 320,000 (17,079 ) 1.0 3.4 U.S. Dollar-denominated interest rate swaps (iv) LIBOR 108,333 (665 ) 2.0 1.7 U.S. Dollar-denominated interest rate swaps (v) LIBOR 197,629 590 9.2 2.3 EURIBOR-Based Debt: Euro-denominated interest rate swaps (vi) EURIBOR 219,733 (34,295 ) 4.0 3.1 (86,601 ) (i) Excludes the margins the Partnership pays on its floating-rate term loans, which, at December 31, 2016 , ranged from 0.30% to 2.80% . (ii) Principal amount reduces semi-annually. (iii) These interest rate swaps are being used to economically hedge expected interest payments on future debt that is planned to be outstanding from 2017 to 2024. These interest rate swaps are subject to mandatory early termination in 2017 and 2018 whereby the swaps will be settled based on their fair value at that time. (iv) Principal amount reduces quarterly. (v) Principal amount reduces quarterly commencing December 2017. (vi) Principal amount reduces monthly to 70.1 million Euros ( $73.7 million ) by the maturity dates of the swap agreements. During 2015, as part of its economic hedging program, the Partnership entered into three interest rate swaption agreements, whereby the Partnership has a one-time option (or Call Option ) to enter into an interest rate swap with a third party, and the third party has a one-time option (or Put Option ) to require the Partnership to enter into interest swap agreements. If the Partnership or the third parties exercises its options, there will be cash settlements for the fair value of the interest rate swap, in lieu of taking delivery of the actual interest rate swaps. At December 31, 2016 , the terms of the interest rate swaps underlying the interest rate swaptions were as follows: Interest Principal Option Fair Value / Remaining Interest Interest rate swaption - Call Option LIBOR 155,000 (i) April 28, 2017 31 7.5 3.3 Interest rate swaption - Put Option LIBOR 155,000 (i) April 28, 2017 (1,525 ) 7.5 2.2 Interest rate swaption - Call Option LIBOR 160,000 (ii) January 31, 2018 1,140 8.0 3.1 Interest rate swaption - Put Option LIBOR 160,000 (ii) January 31, 2018 (1,457 ) 8.0 2.0 Interest rate swaption - Call Option LIBOR 160,000 (iii) July 16, 2018 2,112 8.0 2.9 Interest rate swaption - Put Option LIBOR 160,000 (iii) July 16, 2018 (1,248 ) 8.0 1.8 (i) Amortizing every three months from $155.0 million in April 2017 to $85.4 million in October 2024. (ii) Amortizing every three months from $160.0 million in January 2018 to $82.5 million in January 2026. (iii) Amortizing every three months from $160.0 million in July 2018 to $82.5 million in July 2026. As at December 31, 2016 , the Partnership had multiple interest rate swaps, interest rate swaptions, and cross-currency swaps with the same counterparty that are subject to the same master agreement. Each of these master agreements provide for the net settlement of all swaps subject to that master agreement through a single payment in the event of default or termination of any one swap. The fair value of these derivative instruments are presented on a gross basis in the Partnership’s consolidated balance sheets. As at December 31, 2016 , these interest rate swaps, interest rate swaptions, and cross-currency swaps had an aggregate fair value assets of $4.2 million and an aggregate fair value liability of $173.6 million . As at December 31, 2016 , the Partnership had $37.8 million ( December 31, 2015 – $44.8 million ) on deposit as security for swap liabilities under certain master agreements. The deposit is presented in restricted cash – current and – long-term on the Partnership’s consolidated balance sheets. Credit Risk The Partnership is exposed to credit loss in the event of non-performance by the counterparties to the interest rate swap agreements. In order to minimize counterparty risk, the Partnership only enters into derivative transactions with counterparties that are rated investment grade by Standard & Poor’s or A3 or better by Moody’s at the time of the transactions. In addition, to the extent practical, interest rate swaps are entered into with different counterparties to reduce concentration risk. Other Derivatives In order to reduce the variability of its revenue, the Partnership has entered into an agreement with Teekay Corporation under which Teekay Corporation pays the Partnership any amounts payable to the charterer of the Toledo Spirit as a result of spot rates being below the fixed rate, and the Partnership pays Teekay Corporation any amounts payable to the Partnership by the charterer of the Toledo Spirit as a result of spot rates being in excess of the fixed rate. The fair value of the derivative asset at December 31, 2016 was $2.1 million ( December 31, 2015 – a liability of $6.3 million ). The following table presents the location and fair value amounts of derivative instruments, segregated by type of contract, on the Partnership’s consolidated balance sheets. Derivative Accrued Current Derivative As at December 31, 2016 Interest rate swap agreements — — 1,080 (5,514 ) (22,432 ) (59,735 ) Interest rate swaption agreements — 31 3,252 — (1,525 ) (2,705 ) Cross-currency swap agreements — — — (1,090 ) (32,843 ) (65,853 ) Toledo Spirit time-charter derivative 1,274 500 360 — — — 1,274 531 4,692 (6,604 ) (56,800 ) (128,293 ) As at December 31, 2015 Interest rate swap agreements — — — (6,833 ) (41,028 ) (56,276 ) Interest rate swaption agreements — — 5,623 — — (6,406 ) Cross-currency swap agreements — — — (1,181 ) (9,755 ) (117,846 ) Toledo Spirit time-charter derivative — — — (3,186 ) (1,300 ) (1,810 ) — — 5,623 (11,200 ) (52,083 ) (182,338 ) Realized and unrealized gains (losses) relating to non-designated interest rate swap agreements, interest rate swaption agreements, and the Toledo Spirit time-charter derivative are recognized in earnings and reported in realized and unrealized loss on non-designated derivative instruments in the Partnership’s consolidated statements of income. The effect of the gain (loss) on these derivatives on the Partnership’s consolidated statements of income is as follows: Year Ended December 31, 2016 2015 2014 Realized Unrealized Total Realized Unrealized Total Realized Unrealized Total Interest rate swap agreements (25,940 ) 15,627 (10,313 ) (28,968 ) 14,768 (14,200 ) (39,406 ) 4,204 (35,202 ) Interest rate swaption agreements — (164 ) (164 ) — (783 ) (783 ) — — — Interest rate swap agreements termination — — — — — — (2,319 ) — (2,319 ) Toledo Spirit time-charter derivative (654 ) 3,970 3,316 (3,429 ) (1,610 ) (5,039 ) (861 ) (6,300 ) (7,161 ) (26,594 ) 19,433 (7,161 ) (32,397 ) 12,375 (20,022 ) (42,586 ) (2,096 ) (44,682 ) Unrealized and realized gains (losses) relating to cross-currency swap agreements are recognized in earnings and reported in foreign currency exchange gain in the Partnership’s consolidated statements of income. The effect of the gain (loss) on these derivatives on the Partnership's consolidated statements of income is as follows: Year Ended December 31, 2016 2015 2014 Realized Unrealized Total Realized Unrealized Total Realized Unrealized Total Cross-currency swap agreements (9,063 ) 28,905 19,842 (7,640 ) (57,759 ) (65,399 ) (2,222 ) (51,762 ) (53,984 ) Cross-currency swap agreements termination (17,711 ) — (17,711 ) — — — — — — (26,774 ) 28,905 2,131 (7,640 ) (57,759 ) (65,399 ) (2,222 ) (51,762 ) (53,984 ) For the year ended December 31, 2016 (no activity for the years ended December 31, 2015 and 2014 ), the following table presents the effective and ineffective portion of losses on interest rate swap agreements designated and qualifying as cash flow hedges. The following table excludes any interest rate swap agreements designated and qualifying as cash flow hedges in the Partnership’s equity accounted joint ventures. Year Ended December 31, 2016 Effective Portion Recognized in AOCI (i) $ Effective Portion Reclassified from AOCI (ii) $ Ineffective Portion (iii) $ 590 — — Interest expense 590 — — (i) Effective portion of designated and qualifying cash flow hedges recognized in other comprehensive income (loss). (ii) Effective portion of designated and qualifying cash flow hedges recorded in accumulated other comprehensive income (loss) (or AOCI ) during the term of the hedging relationship and reclassified to earnings. (iii) Ineffective portion of designated and qualifying cash flow hedges. |