DERIVATIVE INTEREST RATE SWAP

9 Months Ended

Sep. 30, 2011

DERIVATIVE INTEREST RATE SWAP [Abstract]

DERIVATIVE INTEREST RATE SWAP

NOTE 7.  DERIVATIVE INTEREST RATE SWAP

We are a party to an interest rate swap agreement to limit our exposure to market rate fluctuations that effectively converts our variable rate interest payments related to our industrial revenue bonds to a fixed rate.  Our interest rate swap agreement is designated as a cash flow hedge and is required to be measured at fair value on a recurring basis. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings through interest expense in the period that the hedged forecasted transaction affects earnings.

Our swap agreement requires us to pay the counterparty a stream of fixed interest payments at a rate of 3.6%, and in turn, receive variable interest payments based on the SIFMA Municipal Index, which is the identical variable interest payment outflow on our bonds. Both the industrial revenue bonds and the interest rate swap are based on the same initial $4 million declining notional amount, are amortized over a 20-year term, and have the same termination date of December 1, 2018. The swap contains a margin spread of 0.1% which is recorded in interest expense during the period that it is recognized.

Our interest rate swap is valued based on quoted data from various direct and indirect observable sources and market data combined with some estimates based on historical patterns, which, combined, are deemed to be a Level 2 input in the fair value hierarchy. At September 30, 2011, our liability related to this derivative on our consolidated balance sheet included $176,000 under accrued expenses for the approximate fair value of the swap. The effective portion of the related unrealized loss on the swap is deferred in accumulated other comprehensive loss and will be recognized as interest expense as the interest payments become due. No ineffectiveness was recorded in the consolidated statements of income during the nine months ended September 30, 2011.   The counterparty to this swap is RBC Bank and from time to time we assess our potential credit risk. As of September 30, 2011, we were in a liability position to RBC Bank and therefore had limited counterparty credit risk. (See NOTE 5.  FAIR VALUE MEASUREMENTS)

Subsequently, on October 31, 2011, we refinanced the industrial revenue bonds with PNC Bank which included embedding an interest rate derivative to provide a fixed interest rate throughout the maturity date of the bonds, and eliminates our accumulated other comprehensive loss balance in future periods with no impact to our consolidated financial statements.