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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
Nov. 30, 2011
Derivative Instruments And Hedging Activities [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NOTE 9 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations. One risk managed by the Company using derivative instruments is interest rate risk.  To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments.  The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans.  As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.

In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to the non-functional currency long-term debt of one of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company's subsidiary entered into a cross currency interest rate swaps that converts its non-functional currency denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument.  As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedge is intended to offset changes in cash flows attributable to interest rate and foreign currency exchange movements.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is determined to be ineffective.  There were no such amounts for the periods reported herein.

The Company formally documents the hedging relationships for all derivative instruments. As of November 30 and August 31, 2011, all of the Company's derivative financial instruments are designated and qualify as cash flow hedges.  The Company has procedures in place in order to monitor and control the use of derivative financial instruments and ensure they are not used for trading or speculative purposes.

The Company's Colombia subsidiary entered into four cross-currency interest rate swap agreements.  The cross-currency interest rate swap agreements convert the Company's foreign currency United States dollar denominated floating interest payments on long-term debt to functional currency fixed interest payments during the life of the hedging instrument.  As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedge is intended to offset changes in cash flows attributable to interest rate and foreign currency exchange movements.  The Company's Trinidad and Barbados subsidiaries entered into interest rate swaps agreements that fix the interest rate over the life of the underlying loans.

The following table summarizes these agreements:

 Subsidiary
 
Date entered into
 
Derivative Financial Counter-party
 
Derivative Financial Instruments
 
US Notional Amount
 
Bank US loan Held with
 
Floating Leg (swap counter-party)
 
Fixed Rate for PSMT Subsidiary
   
Settlement Reset Date
 
Effective Period
Colombia
 
17-Nov-11
 
Bank of Nova Scotia
 
Cross currency interest rate swap
 
$
8,000,000.00
 
 Citibank, N.A.
 
Variable rate 6-month Eurodollar Libor plus 2.4%
 
5.85
%
 
May 3, 2012 and semi-annually thereafter.
 
November 3, 2011 - November 3, 2013
Colombia
 
21-Oct-11
 
Bank of Nova Scotia
 
Cross currency interest rate swap
 
$
2,000,000.00
 
Bank of Nova Scotia
 
Variable rate 3-month Libor plus 0.7%
 
5.30
%
 
January, April, July and October, beginning on October 29, 2011.
 
July 29, 2011 - April 1, 2016
Colombia
 
21-Oct-11
 
Bank of Nova Scotia
 
Cross currency interest rate swap
 
$
6,000,000.00
 
Bank of Nova Scotia
 
Variable rate 3-month Libor plus 0.7%
 
5.45
%
 
March, June, September and December, beginning on October 29, 2011.
 
September 29, 2011 - April 1, 2016
Colombia
 
5-May-11
 
Bank of Nova Scotia
 
Cross currency interest rate swap
 
$
8,000,000.00
 
Bank of Nova Scotia
 
Variable rate 3-month Libor plus 0.7%
 
6.09
%
 
January, April, July and October, beginning on July 5, 2011.
 
April 1, 2011 - April 1, 2016
Trinidad
 
20-Nov-08
 
Royal Bank of Trinidad & Tobago
 
Interest rate swaps
 
$
8,900,000.00
 
Royal Bank of Trinidad & Tobago
 
Variable rate 1-year Libor plus 2.75%
 
7.05
%
 
Annually on August 26.
 
September 25, 2008 - September 26, 2013
Barbados
 
13-Feb-08
 
Citibank, N.A.
 
Interest rate swaps
 
$
4,500,000.00
 
Citibank, N.A.
 
Variable rate 9-month Libor plus 1.5%
 
5.22
%
 
Semi-annually on November 15 and May 15
 
November 15, 2007 - November 14, 2012

For the three month periods ended November 30, 2011 and 2010, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item-interest expense-as the offsetting gain or loss on the related interest rate swaps as follows (in thousands):

Income Statement Classification
 
Interest expense
on Borrowings
 
Loss on Swaps
   
Interest expense
 
Interest expense for the three months ended November 30, 2011
$
143
 
$
248
   
$
391
 
Interest expense for the three months ended November 30, 2010
$
75
 
$
  96
   
$
  171
 


The total notional amount of the Company's pay-fixed/receive-variable interest rate swaps was as follows (in thousands):
 
 Floating Rate Payer (Swap Counterparty)
 
Notional Amount as of
November 30, 2011
 
Notional Amount as of
August 31, 2011
 
RBTT
  $
6,075
 
$
  6,300
 
Scotiabank
  $
24,000
 
$
  8,000
 
Citibank N.A.
  $
2,700
 
$
  2,925
 
Total
  $
32,775
 
$
  17,225
 
 
The Company measures the fair value for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis or on a nonrecurring basis during the reporting period as further described within Note 2.  The debt fair value is measured as the net present value of the debt cash payments.  This requires estimating the payments and the timing of the payments and taking the discounted cash flow of these payments.  The amount and timing of the cash flows are often determined by the debt instrument assuming no defaults.  The discount rate used to calculate the net present value of the debt is the current risk-free rate plus the risk premium adjustment reflecting the credit rating.  The Company considered the effect of its credit risk (credit standing) on the fair value of the liability in all periods in which the liability was measured at fair value.

The following table summarizes the fair value of derivative instruments (in thousands):

 
Liability Derivatives
 
 
November 30, 2011
 
August 31, 2011
 
Derivatives designated as cash flow hedging instruments
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Cross currency interest rate swaps(2)
Other non-current assets
 
$
(399
)
Other non-current assets
 
$
-
 
Interest rate swaps(1)
Other long-term liabilities
   
427
 
 Other long-term  liabilities
   
544
 
Cross currency interest rate swaps(2)
Other long-term liabilities
   
33
 
 Other long-term liabilities
   
340
 
Net fair value of derivatives designated as hedging instruments(3)
   
$
61
    
$
884
 

(1)
The effective portion of the interest rate swaps was recorded as a loss to accumulated other comprehensive loss for $320,000 and $408,000 net of tax, as of November 30 and August 31, 2011, respectively.  The Company has recorded a deferred tax asset amount of $107,000 and $136,000 as of November 30 and August 31, 2011, respectively.
(2)
The effective portion of the cross currency interest rate swaps was recorded to accumulated other comprehensive loss for $(366,000) and $340,000 as of November 30 and August 31, 2011, respectively.  The Company has recorded a deferred tax liability amount of $(132,000) as of November 30, 2011 and a valuation allowance on the related deferred tax asset.
(3)
All derivatives were designated as cash flow hedging instruments.