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Derivatives And Hedging Activities
 12 Months Ended
Dec. 31, 2011
Derivatives And Hedging Activities [Abstract]  
Derivatives And Hedging Activities
16. Derivatives and Hedging Activities

We are exposed to certain risks arising from both our business operations and economic conditions. We primarily manage our exposures to a wide variety of business and operational risks through management of our core business activities.

We manage certain economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding, as well as through the use of derivative financial instruments. Specifically, we have entered into interest rate swaps to manage our exposure to interest rate movements.

Our foreign operations expose us to fluctuations of foreign exchange rates. These fluctuations may impact the value of our cash receipts and payments as compared to our reporting currency, the U.S. Dollar. To manage this exposure, we sometimes enter into foreign currency forward contracts to minimize currency exposure due to cash flows from foreign operations.

Cash Flow Hedge of Interest Rate Risk

In January 2010, we entered into an interest rate swap to manage our exposure to interest rate movements on the Foundry Park I mortgage loan and to reduce variability in interest expense. Further information on the mortgage loan is in Note 12. We also had an interest rate swap to manage our exposure to interest rate movements on the Foundry Park I construction loan and add stability to capitalized interest expense. The Foundry Park I construction loan interest rate swap matured on January 1, 2010. Both interest rate swaps are designated and qualify as a cash flow hedge. As such, the effective portion of changes in the fair value of the swaps is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of changes in the fair value of the swap is recognized immediately in earnings. We assess the effectiveness of the mortgage loan interest rate swap quarterly, just as we assessed the effectiveness of the construction loan interest rate swap quarterly, by comparing the changes in the fair value of the derivative hedging instrument with the change in present value of the expected future cash flows of the hedged transaction.

Both interest rate swaps involve the receipt of variable-rate amounts based on LIBOR in exchange for fixed-rate payments over the life of the agreement without exchange of the underlying notional amount. The fixed-rate payments are at a rate of 2.642% for the mortgage loan interest rate swap, while the fixed-rate payments on the construction loan interest rate swap were at a rate of 4.975%. The notional amount of the mortgage loan interest rate swap was approximately $68 million at origination, $64 million at December 31, 2011, and $66 million at December 31, 2010. The notional amount of the mortgage loan interest rate swap amortizes to approximately $54 million over the term of the swap. The amortizing notional amount is necessary to maintain the swap notional at an amount that matches the declining mortgage loan principal balance over the loan term. The mortgage loan interest swap matures on January 29, 2015. The notional amount of the construction loan interest rate swap was approximately $94 million at December 31, 2009, just prior to its January 1, 2010 maturity.

The unrealized loss, net of tax, related to the fair value of the mortgage loan interest rate swap is recorded in accumulated other comprehensive loss in shareholders' equity on the Consolidated Balance Sheets, and amounted to approximately $2.2 million at December 31, 2011 and $1.5 million at December 31, 2010. The unrealized loss, net of tax, related to the fair value of the construction loan interest rate swap and recorded in accumulated other comprehensive loss amounted to approximately $37 thousand at December 31, 2009. This amount was settled on January 1, 2010. Also recorded as a component of accumulated other comprehensive loss in shareholders' equity on the Consolidated Balance Sheets was the accumulated losses related to the construction loan interest rate swap. This amounted to approximately $2.6 million, net of tax, at both December 31, 2011 and December 31, 2010. The amounts remaining in accumulated other comprehensive loss related to the construction loan interest rate swap are being recognized in the Consolidated Statements of Income over the depreciable life of the office building beginning in January 2010. Approximately $900 thousand, net of tax, currently recognized in accumulated other comprehensive loss related to both the construction loan interest rate swap and the mortgage loan interest rate swap is expected to be reclassified into earnings over the next twelve months.

Non-designated Hedges

On June 25, 2009, we entered into an interest rate swap with Goldman Sachs in the notional amount of $97 million and with a maturity date of January 19, 2022 (Goldman Sachs interest rate swap). NewMarket entered into the Goldman Sachs interest rate swap in connection with the termination of a loan application and related rate lock agreement between Foundry Park I and Principal Commercial Funding II, LLC (Principal). When the rate lock agreement was originally executed in 2007, Principal simultaneously entered into an interest rate swap with a third party to hedge Principal's exposure to fluctuation in the ten-year United States Treasury Bond rate. Upon the termination on June 25, 2009 of the rate lock agreement, Goldman Sachs both assumed Principal's position with the third party and entered into an offsetting interest rate swap with NewMarket. Under the terms of this interest rate swap, NewMarket is making fixed rate payments at 5.3075% and Goldman Sachs will make variable rate payments based on three-month LIBOR. We have collateralized this exposure through cash deposits posted with Goldman Sachs amounting to $36 million at December 31, 2011 and $23 million at December 31, 2010. This transaction effectively preserves the impact of the original rate lock agreement for the possible application to a future loan of a similar structure.

We elected not to use hedge accounting for the Goldman Sachs interest rate swap and therefore, immediately recognize any change in the fair value of this derivative financial instrument directly in earnings.

The table below presents the fair value of our derivative financial instruments, as well as their classification on the Consolidated Balance Sheets as of December 31, 2011 and December 31, 2010.

Fair Value of Derivative Instruments

 

    Asset Derivatives    

Liability Derivatives

  
     December 31, 2011     December 31, 2010    

December 31, 2011

    

December 31, 2010

  
    

Balance
Sheet Location

   Fair Value     Balance
Sheet Location		   Fair Value    

Balance

Sheet Location

   Fair Value    

Balance

Sheet Location

   Fair Value  

Derivatives Designated as Hedging Instruments

           Accrued expenses and Other noncurrent liabilities     Accrued expenses and Other noncurrent liabilities  

Mortgage loan interest rate swap

     $ 0        $ 0        $ 3,692        $ 2,656   
   

 

 

      

 

 

      

 

 

      

 

 

  

Derivatives Not Designated as Hedging Instruments

          

Accrued expenses and

Other noncurrent liabilities

    

Accrued expenses and

Other noncurrent liabilities

  

Goldman Sachs interest rate swap

     $ 0        $ 0        $ 32,098        $ 19,456   
   

 

 

      

 

 

      

 

 

      

 

 

  

 

The total fair value reflected in the table above includes amounts recorded in accrued expenses of approximately $130 thousand at both December 31, 2011 and December 31, 2010 for the mortgage loan interest rate swap and approximately $2 million at both December 31, 2011 and December 31, 2010 for the Goldman Sachs rate swap.

The tables below present the effect of our derivative financial instruments on the Consolidated Statements of Income.

Effect of Derivative Instruments on the Consolidated Statements of Income

Designated Cash Flow Hedges

 

Derivatives in
Cash Flow
Hedging
Relationship

   Amount of Gain (Loss)
Recognized in OCI on
Derivative (Effective Portion)		    

Location of
Gain (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

   Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)		    

Location of
Gain (Loss)
Recognized
in Income on
Derivative
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)

   Amount of Gain (Loss)
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)		  
    December 31         December 31         December 31  
    2011     2010     2009         2011     2010     2009         2011     2010     2009  

Mortgage loan interest
rate
swap

   $ (2,627 )    $ (4,012 )    $ 0      Interest and financing expenses   $ (1,584 )    $ (1,493 )    $ 0        $ 0      $ 0      $ 0   
 

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

  

Construction loan interest
rate
swap

   $ 0      $ 0      $ (583 )    Cost of rental   $ (85 )    $ (85 )    $ 0      Other expense, net   $ 0      $ 0      $ 92   
 

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

  

Effect of Derivative Instruments on the Consolidated Statements of Income

Not Designated Derivatives

 

Derivatives Not Designated as

Hedging Instruments

   

Location of Gain (Loss)

Recognized in Income on Derivatives

    Amount of Gain (Loss) Recognized in
Income on Derivatives		  
          December 31  
               2011               2010               2009       

Goldman Sachs interest rate swap

    Other expense, net    $ (17,516 )    $ (10,324 )    $ (11,440 ) 
     

 

 

    

 

 

    

 

 

  

Credit-risk-related Contingent Features

We have agreements with both of our current derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of indebtedness is accelerated by the lender due to our default on the indebtedness.

 

As of December 31, 2011, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $35 million. We have minimum collateral posting thresholds with one of our derivative counterparties and have posted cash collateral of $36 million as of December 31, 2011. If required, we could have settled our obligations under the agreements at their termination value of $35 million at December 31, 2011.