Derivative Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

The Company's objective in using derivative instruments is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as a primary part of its cash flow hedging strategy. The Company's interest rate swaps utilized as cash flow hedges involve the receipt of variable–rate payments in exchange for fixed–rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivative financial instruments for trading or speculative purposes.

In March 2013, the Company refinanced its existing debt under the Propco and Opco credit agreements and the Propco senior notes. In connection with the refinancing, the Company amended one of its interest rate swaps to include a minimum interest rate of 1.00% on the floating leg to match the terms of the New Credit Facility (see Note 3). The Company also amended its other interest rate swap to include a minimum interest rate of 1.00% on the floating leg to match the terms of the New Credit Facility as well as to extend the maturity and adjust the notional amount. These amendments resulted in the discontinuation of the Company's two cash flow hedging relationships that existed at the time, and as a result of the discontinuation, cumulative deferred losses of $1.1 million that had been previously recognized in other comprehensive income will be amortized as an increase to interest expense as the previously hedged interest payments continue to occur through July 2015.

As of March 31, 2013, the Company has two outstanding interest rate swaps with initial notional amounts totaling $1.1 billion, which effectively convert $1.1 billion of its floating-rate debt to a fixed rate of 6.0%. In accordance with the accounting guidance in ASC Topic 815, Derivatives and Hedging, the Company has designated the full notional amount of both of its outstanding swaps as cash flow hedges of interest rate risk. Under the terms of the swap agreements, the Company pays fixed rates ranging from 1.77% to 2.13% and receives variable rates based on one-month LIBOR (subject to a minimum of 1.00%).

For derivative instruments that are designated and qualify as cash flow hedges of forecasted interest payments, the effective portion of the gain or loss is reported as a component of other comprehensive income (loss) until the interest payments being hedged are recorded as interest expense, at which time the amounts in other comprehensive income (loss) are reclassified as an adjustment to interest expense. Gains or losses on any ineffective portion of derivative instruments in cash flow hedging relationships are recorded as a component of change in fair value of derivative instruments in the Condensed Consolidated Statements of Operations. Ineffectiveness results from both of the Company's designated swaps having fair values other than zero at the time they were designated. For the three months ended March 31, 2013, the Company has recorded $68 thousand of such ineffectiveness.

Certain derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements, but do not meet the hedge accounting requirements. The Company records any changes in the fair value of interest rate swaps not designated in hedging relationships in change in fair value of derivative instruments in its statements of operations. Prior to the March 2013 amendment and re-designation of the interest rate swaps described above, a portion of one of the Company's interest rate swaps was not designated in a hedging relationship. For the three months ended March 31, 2013, the Company recorded a loss of $0.2 million related to the non-designated portion of its interest rate swaps. As of March 31, 2013, the Company no longer has any hedges that are not designated in cash flow hedging relationships.

The table below presents the fair value of the Company's derivative financial instruments, exclusive of any accrued interest, as well as their classification on the Condensed Consolidated Balance Sheets (amounts in thousands):

	Balance sheet classification	Fair value
		March 31, 2013		December 31, 2012
		(unaudited)
Derivatives designated as hedging instruments:
Interest rate swaps	Other long–term liabilities	$	26,438	$	21,140
Derivatives not designated as hedging instruments:
Interest rate swaps	Other long–term liabilities	$	—	$	2,746

The table below presents the effect of the Company's derivative financial instruments on the Condensed Consolidated Statements of Operations (amounts in thousands, unaudited):

Derivatives in Cash Flow Hedging Relationships	Amount of Loss on Derivatives Recognized in Other Comprehensive Income (Effective Portion)				Location of Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)				Location of Loss on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
	Three Months Ended March 31,					Three Months Ended March 31,					Three Months Ended March 31,
	2013		2012			2013		2012			2013		2012
Interest rate swaps	$	4,067	$	5,030	Interest expense, net	$	3,107	$	3,121	Change in fair value of derivative instruments	$	68	$	—

Losses reclassified from accumulated other comprehensive income (loss) into interest expense, net includes reclassifications of deferred losses related to discontinued cash flow hedging relationships. Approximately $13.1 million of the deferred losses included in accumulated other comprehensive loss on the Condensed Consolidated Balance Sheet at March 31, 2013 is expected to be reclassified into earnings during the next twelve months.

The table below presents the effect of the Company's derivative financial instruments not designated in hedging relationships on the Condensed Consolidated Statements of Operations (amounts in thousands, unaudited):

		Amount of Loss on Derivative Instruments Recognized in Income
		Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments	Location of Loss on Derivative Instruments Recognized in Income	2013		2012 (a)
Interest rate swaps	Change in fair value of derivative instruments	$	204	$	—

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(a) During the three months ended March 31, 2012, the Company had no derivative instruments that were not designated in hedging relationships.

As of March 31, 2013, the Company had not posted any collateral related to these interest rate swap agreements; however, the Company's obligations under the agreements are subject to the security and guarantee arrangements applicable to the related credit agreements. The swap agreements contains cross-default provisions under which the Company could be declared in default on its obligations under the agreements if certain conditions of default exist on the New Credit Facility. As of March 31, 2013, the termination value of the interest rate swaps was a net liability of $29.0 million which represents the amount the Company could have been required to pay to settle the obligations had it been in breach of the provisions of the swap arrangements.