Derivative Instruments and Risk Management Activities

9 Months Ended

Sep. 30, 2011

Derivative Instruments and Risk Management Activities [Abstract]

DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES

4. DERIVATIVE INSTRUMENTS AND RISK MANAGEMENT ACTIVITIES

     The periodic interest rates of the Revolving Credit Facility (as defined in Note 9), the Mortgage Facility (as defined in Note 10) and certain variable-rate real estate related borrowings are indexed to one-month London Inter Bank Offered Rate (“LIBOR”) plus an associated company credit risk rate. In order to minimize the earnings variability related to fluctuations in these rates, the Company employs an interest rate hedging strategy, whereby it enters into arrangements with various financial institutional counterparties with investment grade credit ratings, swapping its variable interest rate exposure for a fixed interest rate over terms not to exceed the related variable-rate debt.

     The Company presents the fair value of all derivatives on its Consolidated Balance Sheets. The Company measures its interest rate derivative instruments utilizing an income approach valuation technique, converting future amounts of cash flows to a single present value in order to obtain a transfer exit price within the bid and ask spread that is most representative of the fair value of its derivative instruments. In measuring fair value, the Company utilizes the option-pricing Black-Scholes present value technique for all of its derivative instruments. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service provider, matched to the identical maturity term of the instrument being measured. Observable inputs utilized in the income approach valuation technique incorporate identical contractual notional amounts, fixed coupon rates, periodic terms for interest payments and contract maturity. The fair value estimate of the interest rate derivative instruments also considers the credit risk of the Company for instruments in a liability position or the counterparty for instruments in an asset position. The credit risk is calculated by using the spread between the one-month LIBOR yield curve and the relevant average 10 and 20-year rate according to Standard and Poor’s. The Company has determined the valuation measurement inputs of these derivative instruments to maximize the use of observable inputs that market participants would use in pricing similar or identical instruments and market data obtained from independent sources, which is readily observable or can be corroborated by observable market data for substantially the full term of the derivative instrument. Further, the valuation measurement inputs minimize the use of unobservable inputs. Accordingly, the Company has classified the derivatives within Level 2 of the hierarchy framework as described by the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification.

     The related gains or losses on these interest rate derivatives are deferred in stockholders’ equity as a component of accumulated other comprehensive loss. These deferred gains and losses are recognized in income in the period in which the related items being hedged are recognized in expense. However, to the extent that the change in value of a derivative contract does not perfectly offset the change in the value of the items being hedged, that ineffective portion is immediately recognized in other income or expense. Monthly contractual settlements of these swap positions are recognized as floorplan or other interest expense in the Company’s accompanying Consolidated Statements of Operations. All of the Company’s interest rate hedges are designated as cash flow hedges.

     As of September 30, 2011, the Company held interest rate swaps in effect of $300.0 million in notional value that fixed its underlying one-month LIBOR at a weighted average rate of 4.3%. Of this total notional value, $250.0 million expire in 2012 and $50.0 million expire in 2015. At September 30, 2011, all of the Company’s derivative contracts were determined to be effective. For the three and nine months ended September 30, 2011, the impact of the Company’s interest rate hedges in effect increased floorplan interest expense by $3.1 million and $9.6 million, respectively; for the three and nine months ended September 30, 2010, the impact of these interest rate hedges increased floorplan interest expense by $5.5 million and $15.9 million, respectively. Total floorplan interest expense was $7.0 million and $9.0 million for the three months ended September 30, 2011 and 2010, respectively, and $20.2 million and $25.2 million for the nine months ended September 30, 2011 and 2010, respectively.

     In addition to the $300.0 million of swaps in effect as of September 30, 2011, the Company entered into 18 additional interest rate swaps during the nine months ended September 30, 2011 with forward start dates in either August 2012, December 2012, or August 2015 and expiration dates in August 2015, December 2016, December 2017, or December 2018. The aggregate notional value of these 18 forward-starting swaps is $575.0 million and the weighted average interest rate of these swaps is 2.9%.

     As of September 30, 2011 and December 31, 2010, the Company reflected liabilities from interest risk management activities of $32.8 million and $17.5 million, respectively, in its Consolidated Balance Sheets, of which a portion with expiration dates less than one year was classified as a current liability. Included in accumulated other comprehensive loss at September 30, 2011 and 2010 were unrealized losses, net of income taxes, totaling $20.5 million and $15.2 million, respectively, related to these hedges.

     The Company had no gains or losses related to ineffectiveness or amounts excluded from effectiveness testing recognized in the Statements of Operations for either the nine months ended September 30, 2011 or 2010, respectively.

	Amount of Unrealized Gain (Loss),
	Net of Tax, Recognized in Other
	Comprehensive Income
Derivatives in	Nine Months Ended September 30,
Cash Flow Hedging Relationship	2011			2010
	(In thousands)
Interest rate swap contracts	$	(9,528	)	$	3,904

	Amount of Loss Reclassified from
	Other Comprehensive Income into
	Statements of Operations
Location of Loss Reclassified from OCI	Nine Months Ended September 30,
into Statements of Operations	2011			2010
	(In thousands)
Floorplan interest expense	$	(9,587	)	$	(15,887	)
Other interest expense		(749	)		(2,521	)

     The amount expected to be reclassified out of accumulated other comprehensive income into earnings (through floorplan interest expense or other interest expense) in the next twelve months is $11.5 million.