Accounting for Interest Rate Swap Agreements

12 Months Ended

Dec. 31, 2012

Accounting for Interest Rate Swap Agreements

Accounting for Interest Rate Swap Agreements

8.  Accounting for Interest Rate Swap Agreements

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

At December 31, 2012, 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 November 2015. As of December 31, 2012, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%. 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 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. For the years ended December 31, 2012 and 2011, there was no ineffectiveness related to interest rate swaps. We estimate that $3.9 million of deferred losses attributable to existing interest rate swaps and included in our accumulated other comprehensive loss at December 31, 2012, 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 consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

In November 2010, we paid $14.8 million to terminate interest rate swap agreements with a total notional value of $285.0 million and a weighted average effective fixed interest rate of 4.4%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive loss. The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive loss is being amortized into interest expense over the original terms of the swaps. We estimate that $0.2 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):

	December 31, 2012
	Balance Sheet Location	Fair ValueAsset(Liability)
Derivatives designated as hedging instruments:
Interest rate hedges	Current portion of interest rate swaps	$	(3,873	)
Interest rate hedges	Interest rate swaps	(6,043		)
Total derivatives		$	(9,916	)

	December 31, 2011
	Balance Sheet Location	Fair ValueAsset(Liability)
Derivatives designated as hedging instruments:
Interest rate hedges	Current portion of interest rate swaps	$	(3,040	)
Interest rate hedges	Interest rate swaps	(5,197		)
Total derivatives		$	(8,237	)

	Year Ended December 31, 2012
	Gain (Loss)Recognized in OtherComprehensiveIncome (Loss) onDerivatives			Location of Gain(Loss) Reclassifiedfrom AccumulatedOther ComprehensiveIncome (Loss) intoIncome (Loss)	Gain (Loss)Reclassified fromAccumulated OtherComprehensiveIncome (Loss) intoIncome (Loss)
Derivatives designated as cash flow hedges:
Interest rate hedges	$	(5,542	)	Interest expense	$	(4,761	)

	Year Ended December 31, 2011
	Gain (Loss)Recognized in OtherComprehensiveIncome (Loss) onDerivatives			Location of Gain(Loss) Reclassifiedfrom AccumulatedOther ComprehensiveIncome (Loss) intoIncome (Loss)	Gain (Loss)Reclassified fromAccumulated OtherComprehensiveIncome (Loss) intoIncome (Loss)
Derivatives designated as cash flow hedges:
Interest rate hedges	$	(14,601	)	Interest expense	$	(13,961	)

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 our senior secured credit facility and, in that capacity, share proportionally in the collateral pledged under the senior secured credit facility.