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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
9 Months Ended
Sep. 30, 2011
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES 
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

7.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Cash Flow Hedges of Interest Rate Risk

 

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

The effective portion of changes in the fair value of interest rate swaps designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company uses its derivatives to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings. No hedge ineffectiveness was recognized during any of the periods presented.

 

As of September 30, 2010, the Company’s only two derivative instruments were interest rate swaps with an aggregate notional amount of $98 million which were designated as a cash flow hedge of interest rate risk. On December 31, 2010, the Company executed an additional interest rate swap with a notional amount of $50 million, that was also designated as a cash flow hedge of interest rate risk.  During 2011, a $30 million swap was reduced, as scheduled, to $25 million bringing the total notional amount of cash flow hedges to $143 million as of September 30, 2011.

 

Amounts reported in accumulated other comprehensive income related to the interest rate swaps are reclassified to interest expense as interest payments are accrued on the Company’s variable-rate debt. Through September 30, 2012, the Company estimates that an additional $3.8 million will be reclassified as an increase to interest expense due to the interest rate swaps since the hedge interest rate exceeds the current variable interest rate on the debt.

 

The table below presents the fair value of the Company’s derivative financial instrument as well as its classification on the consolidated balance sheet as of December 31, 2010 and September 30, 2011 (in thousands):

 

 

 

Liability Derivatives

 

 

 

 

 

Fair Value as of

 

 

 

Balance Sheet
Location

 

December 31,
2010

 

September 30,
2011

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

Interest Rate Swaps

 

Other liabilities

 

$

7,687

 

$

11,663

 

Total derivatives designated as hedging instruments

 

 

 

$

7,687

 

$

11,663

 

 

The table below presents the effect of the Company’s derivative financial instruments on the consolidated income statements for the three and nine months ended September 30, 2010 and 2011 (in thousands):

 

Three Months Ended September 30,

 

Derivative in Cash Flow
Hedging Relationships

 

Amount of Gain or
(Loss) Recognized
in Other
Comprehensive
Income on Derivative
(Effective Portion)

 

Location of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income
(Effective Portion)

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income
(Effective Portion)

 

2010

 

Interest Rate Swap

 

$

(2,010

)

Interest expense

 

$

781

 

2011

 

Interest Rate Swap

 

(3,005

)

Interest expense

 

1,059

 

 

Nine Months Ended September 30,

 

Derivative in Cash Flow
Hedging Relationships

 

Amount of Gain or
(Loss) Recognized
in Other
Comprehensive
Income on Derivative
(Effective Portion)

 

Location of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income
(Effective Portion)

 

Amount of Gain or
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income into Income
(Effective Portion)

 

2010

 

Interest Rate Swap

 

$

(5,093

)

Interest expense

 

$

2,203

 

2011

 

Interest Rate Swap

 

(7,017

)

Interest expense

 

3,131

 

 

Credit-risk-related Contingent Features

 

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

 

As of September 30, 2011, the fair value of the interest rate swaps liability position related to these agreements was $11.7 million. As of September 30, 2011, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at September 30, 2011, it would have been required to settle its obligations under these agreements at their termination values of $11.7 million.