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Derivative Instruments And Hedging Activities
 6 Months Ended
Jun. 30, 2011
Derivative Instruments And Hedging Activities  
Derivative Instruments And Hedging Activities

Note 6. Derivative Instruments and Hedging Activities

We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under our current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt, but we do not attempt to hedge our foreign currency and commodity price risks. We do not hold or issue derivatives for trading purposes.

At June 30, 2011, we had interest rate swap agreements in place to hedge a portion of the variable interest rate risk on our variable rate debt, with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive payment at a variable rate of interest based on the London InterBank Offered Rate ("LIBOR") on the notional amount. The interest rate swap agreements qualify as cash flow hedges, and we have elected to apply hedge accounting for these swap agreements. As a result, the effective portion of changes in the fair value of the interest rate swap agreements is recorded in Accumulated Other Comprehensive Income and is reclassified to interest expense when the underlying interest payment has an impact on earnings. The ineffective portion of changes in the fair value of the interest rate swap agreements is reported in interest expense.

The following table summarizes the terms of our interest rate swap agreements as of June 30, 2011:

 

Notional Amount

  

Effective Date

  

Maturity Date

    Fixed Interest Rate*

$250,000,000

   October 14, 2010   October 14, 2015    3.31%

$100,000,000

   April 14, 2011   October 14, 2013    2.86%

* Includes applicable margin of 1.75% per annum on LIBOR-based debt currently in effect under the 2011 Credit Agreement

On March 25, 2011, Deutsche Bank AG, the counterparty on the Company's $100 million notional amount interest rate swap, assigned its obligation under the swap contract to Bank of America N.A because Deutsche Bank AG is not a secured lender under the 2011 Credit Agreement. We believe Bank of America N.A. is creditworthy to perform its obligation as the counterparty to the swap.

As of June 30, 2011, the fair market value of the $250 million notional amount swap was an asset of $0.9 million included in Other Assets on our Unaudited Consolidated Condensed Balance Sheet, while the fair market value of the $100 million notional amount swap was a liability of $0.9 million included in Other Noncurrent Liabilities on our Unaudited Consolidated Condensed Balance Sheet. As of December 31, 2010, the fair market value of these contracts was an asset of $4.8 million included in Other Assets. At December 31, 2010, we also held a $200 million notional amount swap that was a liability of $1.4 million included in Other Accrued Expenses.

 

The activity related to our interest rate swap agreements is as follows (in thousands):

 

     Three Months Ended
June 30,		     Six Months Ended
June 30,		  
     2011     2010     2011     2010  

Gain (loss) in Accumulated Other Comprehensive Income

    $ (7,908 )    $ 75      $ (6,427 )    $ (1,161 ) 

Loss reclassified to interest expense

      (1,224 )      (2,748 )      (3,270 )      (5,775 ) 

Gain (loss) from hedge ineffectiveness

      —          —          (225 )      —     

Our gain in Accumulated Other Comprehensive Income reported in the footnote disclosure of the Form 10-Q for the three months ended March 31, 2011 contained an immaterial error. The amount disclosed for the six months ended June 30, 2011 reflects the corrected year-to-date amount.

In connection with the execution of our 2011 Credit Agreement on March 25, 2011 as discussed in Note 5, "Long-Term Obligations," we temporarily experienced differences in critical terms between the interest rate swaps and the underlying debt. As a result, we incurred a loss of $0.2 million related to hedge ineffectiveness for the six months ended June 30, 2011. Beginning on April 14, 2011, we have held, and expect to continue to hold through the maturity of the interest rate swap agreements, at least $350 million of LIBOR-based debt, such that future ineffectiveness will be immaterial and the swaps will continue to be highly effective in hedging our variable rate debt.

As of June 30, 2011, we estimate that $2.4 million of derivative losses (net of tax) included in Accumulated Other Comprehensive Income will be reclassified into interest expense within the next 12 months.