8. DERIVATIVES

In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.

Cash Flow Hedges of Interest Rate Risk

Our outstanding derivatives have been designated under applicable accounting authority as cash flow hedges. The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in “Accumulated other comprehensive loss” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. To the extent these instruments are ineffective as cash flow hedges, changes in the fair value of these instruments are recorded in “Interest expense, net.” We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets. Our derivative assets and liabilities are recorded in “Fair value of derivative instruments.”

Amounts reported in “Accumulated other comprehensive loss” that are related to derivatives will be reclassified to “Interest expense, net” as interest payments are made on our corresponding debt. During the next twelve months, we estimate that $14.0 million will be reclassified as an increase to interest expense in connection with derivatives.

Interest Rate Swaps and Cap

As of September 30, 2012, we had entered into nine interest rate swap agreements with a weighted average interest rate of 2.93% on a notional amount of $617.3 million maturing on various dates through November 2013, and two forward starting interest rate swap agreements with a weighted average interest rate of 1.25% on a notional amount of $53.1 million maturing on various dates through January 2017. We had entered into an interest rate cap that matured in April 2012.

We entered into these interest rate swap agreements (including the forward starting swap agreements) in order to hedge the interest payments associated with the 2010 Credit Facility and our issuances of variable interest rate long-term debt. We have assessed the effectiveness of these interest rate swap agreements as hedges at inception and on a quarterly basis. On September 30, 2012, we considered these interest rate swap agreements to be highly effective as cash flow hedges. The interest rate swap agreements are net settled monthly.

Accumulated other comprehensive loss as of September 30, 2012 includes a net loss of $9.6 million relating to forward-starting swaps that we cash settled in prior years that are being amortized over 10 year periods commencing on the closing dates of the debt instruments that are associated with these settled swaps. The following table summarizes the terms and estimated fair values of our interest rate swap, cap and forward starting swap derivative instruments at September 30, 2012 and December 31, 2011. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks. The fair values of our derivative instruments are recorded in “Fair value of derivative instruments” on our balance sheet.


(in millions of dollars) Notional Value	Fair Value at September 30, 2012⁽¹⁾			Fair Value at December 31, 2011⁽¹⁾			Interest Rate			Effective Date	Maturity Date
Interest Rate Swaps
$200.0	$	N/A		$	(0.7	)		1.78	%			April 2, 2012
25.0		(0.1	)		(0.3	)		1.83	%			December 31, 2012
60.0		(0.4	)		(0.9	)		1.74	%			March 11, 2013
200.0		(2.4	)		(4.5	)		2.96	%			March 11, 2013
40.0		(0.3	)		(0.6	)		1.82	%			March 11, 2013
65.0		(2.0	)		(3.2	)		3.60	%			September 9, 2013
68.0		(2.2	)		(3.5	)		3.69	%			September 9, 2013
56.3		(1.8	)		(2.9	)		3.73	%			September 9, 2013
55.0		(1.7	)		(2.4	)		2.90	%			November 29, 2013
48.0		(1.5	)		(2.1	)		2.90	%			November 29, 2013
Interest Rate Cap
15.3		N/A			(0.0	)		2.50	%			April 2, 2012
Forward Starting Interest Rate Swaps
28.1		(0.9	)		N/A			1.38	%	January 2, 2013		January 2, 2017
25.0		(0.5	)		N/A			1.10	%	March 12, 2013		July 31, 2016

	$	(13.8	)	$	(21.1	)

⁽¹⁾

As of September 30, 2012 and December 31, 2011, derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. As of September 30, 2012 and December 31, 2011, we do not have any significant recurring fair value measurements related to derivative instruments using significant unobservable inputs (Level 3).

The table below presents the effect of our derivative financial instruments on our consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011:


(in millions of dollars)	Three months ended September 30,						Nine months ended September 30,						Consolidated Statements of Operations location
(in millions of dollars)	2012			2011			2012			2011
Derivatives in cash flow hedging relationships
Interest rate products
Loss recognized in Other Comprehensive Loss on derivatives	$	(1.3	)	$	(3.8	)	$	(4.9	)	$	(10.8	)		N/A
Loss reclassified from Accumulated Other Comprehensive Loss into Income (effective portion)	$	4.6		$	4.2		$	13.0		$	13.2			Interest expense
Gain (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)		—			—			—			—			Interest expense

Credit-Risk-Related Contingent Features

We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on those derivatives obligations. We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in us being in default on any derivative instrument obligations covered by the agreement. As of September 30, 2012, we were not in default on any of our derivative obligations.

As of September 30, 2012, the fair value of derivatives in a net liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $13.8 million. If we had breached any of the default provisions in these agreements as of September 30, 2012, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $15.3 million. We had not breached any of these provisions as of September 30, 2012.