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Accounting for Derivatives
 6 Months Ended
Jun. 30, 2013
Accounting for Derivatives  
Accounting for Derivatives

7.  Accounting for Derivatives

 

We are exposed to market risks primarily associated with changes in interest rates. We use derivative financial instruments to minimize the risks and/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We do not use derivative financial instruments for trading or other speculative purposes.

 

Interest Rate Risk

 

In May 2013, we amended our existing interest rate swap agreements with a notional value of $250.0 million to adjust the fixed interest rates and extend the maturity dates to May 2018 consistent with the maturity date of the Partnership Credit Agreement. These amendments effectively created new derivative contracts and terminated the old derivative contracts. As a result, we de-designated the original hedge relationships as of the termination date and designated the new hedge relationships under the amended terms. The original hedge relationships qualified for hedge accounting and were included at their fair value in our balance sheet as a liability and accumulated other comprehensive income (loss). The fair value of the interest rate swap agreements immediately prior to the execution of the amendments was a liability of $8.8 million. The associated amount in accumulated other comprehensive income (loss) is being amortized into interest expense over the original terms of the swaps. During the three months ended June 30, 2013, we reclassified $0.6 million of pre-tax losses from these terminated interest rate swaps into interest expense. We estimate that $3.8 million of deferred pre-tax losses from these terminated interest rate swaps will be amortized into interest expense during the next twelve months.

 

At June 30, 2013, we were a party to interest rate swaps pursuant to which we make fixed payments and receive floating payments on a notional value of $250.0 million. We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. Our interest rate swaps expire in May 2018. As of June 30, 2013, the weighted average effective fixed interest rate on our interest rate swaps was 1.7%. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and therefore we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. We recorded $0.2 million of interest income during each of the three and six month periods ended June 30, 2013 due to ineffectiveness related to interest rate swaps. There was no ineffectiveness related to interest rate swaps during the three and six months ended June 30, 2012. We estimate that $3.3 million of deferred pre-tax losses attributable to existing interest rate swaps and included in our accumulated other comprehensive income (loss) at June 30, 2013, will be reclassified into earnings as interest expense at then current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions, unless the derivative contract contains a significant financing element; in this case, the cash settlements for these derivatives are classified as cash flows from financing activities in our condensed consolidated statement of cash flows.

 

In the fourth quarter of 2010, we paid $43.0 million to terminate interest rate swap agreements with a total notional value of $585.0 million and a weighted average effective fixed interest rate of 4.6%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive income (loss). The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive income (loss) is being amortized into interest expense over the original terms of the swaps. During the six months ended June 30, 2013, we reclassified $1.0 million of pre-tax losses from these terminated interest rate swaps into interest expense. We estimate that $1.1 million of deferred pre-tax losses from these terminated interest rate swaps will be amortized into interest expense during the next twelve months.

 

The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands):

 

 

 

June 30, 2013

 

 

 

Balance Sheet Location

 

Fair Value
Asset (Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Intangible and other assets, net

 

$

132

 

Interest rate hedges

 

Accrued liabilities

 

(3,276

)

Total derivatives

 

 

 

$

(3,144

)

 

 

 

 

 

 

 

 

December 31, 2012

 

 

 

Balance Sheet Location

 

Fair Value
Asset (Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Accrued liabilities

 

$

(3,873

)

Interest rate hedges

 

Other long-term liabilities

 

(6,043

)

Total derivatives

 

 

 

$

(9,916

)

 

 

 

Three Months Ended June 30, 2013

 

Six Months Ended June 30, 2013

 

 

 

Pre-tax Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Pre-
tax Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)

 

Pre-tax Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Pre-tax Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Pre-
tax Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)

 

Pre-tax Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate hedges

 

$

4,484

 

Interest expense

 

$

(2,001

)

$

4,700

 

Interest expense

 

$

(3,473

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2012

 

Six Months Ended June 30, 2012

 

 

 

Pre-tax Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Pre-
tax Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)

 

Pre-tax Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Pre-tax Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Pre-
tax Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)

 

Pre-tax Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate hedges

 

$

 

(2,437

)

Interest expense

 

$

(9,854

)

$

(4,381

)

Interest expense

 

$

(19,601

)

 

The counterparties to our derivative agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no specific collateral posted for our derivative instruments. The counterparties to our interest rate swaps are also lenders under the Partnership Credit Agreement and, in that capacity, share proportionally in the collateral pledged under the related facility.