DERIVITIVE FINANCIAL INSTRUMENTS AND HEDGING

12 Months Ended

Dec. 31, 2013

DERIVITIVE FINANCIAL INSTRUMENTS AND HEDGING

DERIVITIVE FINANCIAL INSTRUMENTS AND HEDGING

NOTE 18 - DERIVITIVE FINANCIAL INSTRUMENTS AND HEDGING

We are exposed to interest rate risk through our variable-rate debt. We manage this risk primarily by managing the amount, sources, and duration of our debt funding and through the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage our exposure to known or expected cash payments related to our variable-rate debt. The maximum length of time over which we have hedged our exposure to variable interest rates with our existing derivative financial instruments is approximately six years.

Our objectives in using derivative financial instruments are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Our interest rate swaps designated as cash flow hedges involve the receipt of variable-rate payments from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

Our agreements with our derivative counterparties contain a provision where if we default, or are capable of being declared in default, on any of our indebtedness, then we could also be declared in default on our derivative financial instruments.

On September 5, 2013, we entered into an interest rate swap with a notional value of $75.0 million that became effective on January 2, 2014 and matures on October 10, 2018. This interest rate derivative was designated a cash flow hedge and effectively fixes LIBOR at 2.04%.  The interest rate on the $75 Million Term Loan was 3.94% at January 2, 2014.

On October 31, 2013, we paid off a term loan and terminated a related interest rate swap that had a notional value of $10.3 million. We incurred termination costs of less than $0.1 million, which were charged to debt transaction costs.

Information about our derivative financial instruments at December 31, 2013 and 2012 follows (dollar amounts in thousands):

	December 31, 2013						December 31, 2012
	Number of Instruments	Notional Amount		Fair Value			Number of Instruments	Notional Amount		Fair Value
Interest rate swaps (asset)	3	$	29,273	$	253		—	$	—	$	—
Interest rate swaps (liability)	1	75,000		(1,772		)	4	41,095		(641		)
	4	$	104,273	$	(1,519	)	4	$	41,095	$	(641	)

All of our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At December 31, 2013, three of our interest rate swaps were in an asset position and one was in a liability position. At December 31, 2012, all of our interest rate swaps were in a liability position. We have not posted any collateral related to these agreements and are not in breach of any financial provisions of the agreements. If we had breached any agreement provisions at December 31, 2013, we could have been required to settle our obligation under the agreement that was in a liability position at its termination value of $1.7 million.

The table below details the location in the financial statements of the loss recognized on derivative financial instruments designated as cash flow hedges (in thousands). We had no derivative financial instruments in 2011.

	2013			2012
Gain (loss) recognized in accumulated other comprehensive income on derivative financial instruments (effective portion)	$	(1,240	)	$	(786	)
Gain (loss) reclassified from accumulated other comprehensive income to interest expense (effective portion)	$	(359	)	$	(147	)
Gain (loss) recognized in gain (loss) on derivative financial instruments (ineffective portion)	$	2		$	(2	)

Amounts reported in accumulated other comprehensive income related to derivative financial instruments will be reclassified to interest expense as interest payments are made on the hedged variable-rate debt. In 2014, we estimate that an additional $1.7 million will be reclassified from other comprehensive income as an increase to interest expense.