Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments

v2.4.0.6
Derivative Financial Instruments
12 Months Ended
Dec. 31, 2011
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments

8. DERIVATIVE FINANCIAL INSTRUMENTS

Interest rate swaps are used to adjust the proportion of total debt that is subject to variable interest rates. The interest rate swaps require the Company to pay an amount equal to a specific fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts are not exchanged. No other cash payments are made unless the contract is terminated prior to its maturity, in which case the contract would likely be settled for an amount equal to its fair value. The Company enters interest rate swaps with a number of major financial institutions to minimize counterparty credit risk.

The interest rate swaps qualify and are designated as hedges of the amount of future cash flows related to interest payments on variable rate debt. Therefore, the interest rate swaps are recorded in the consolidated balance sheet at fair value and the related gains or losses are deferred in shareholders' equity as Accumulated Other Comprehensive Loss ("AOCL"). These deferred gains and losses are amortized into interest expense during the period or periods in which the related interest payments affect earnings. However, to the extent that the interest rate swaps are not perfectly effective in offsetting the change in value of the interest payments being hedged, the ineffective portion of these contracts is recognized in earnings immediately. Ineffectiveness was immaterial in 2011, 2010, and 2009.

The Company has six interest rate swap agreements in effect at December 31, 2011 as detailed below to effectively convert a total of $245 million of variable-rate debt to fixed-rate debt.

 

Notional Amount

   Effective Date      Expiration Date      Fixed
Rate Paid
    Floating Rate
Received
 

$20 Million

     9/4/05         9/4/13         4.4350     6 month LIBOR   

$75 Million

     9/1/2011         8/1/18         2.3700     1 month LIBOR   

$50 Million

     9/1/2011         8/1/18         2.3700     1 month LIBOR   

$50 Million

     12/30/11         12/29/17         1.6125     1 month LIBOR   

$25 Million

     12/30/11         12/29/17         1.6125     1 month LIBOR   

$25 Million

     12/30/11         12/29/17         1.6125     1 month LIBOR   

The interest rate swap agreements are the only derivative instruments, as defined by FASB ASC Topic 815 "Derivatives and Hedging", held by the Company. During 2011, 2010, and 2009, the net reclassification from AOCL to interest expense was $10.5 million, $6.9 million and $9.7 million, respectively, based on payments made under the swap agreements. Based on current interest rates, the Company estimates that payments under the interest rate swaps will be approximately $4.8 million in 2012. Payments made under the interest rate swap agreements will be reclassified to interest expense as settlements occur. The fair value of the swap agreements, including accrued interest, was a liability of $10.7 million and $10.5 million at December 31, 2011, and 2010 respectively.

 

(dollars in thousands)

   Jan. 1, 2011
to

Dec. 31,  2011
    Jan. 1, 2010
to

Dec. 31,  2010
    Jan. 1, 2009
to

Dec. 31,  2009
 

Adjustments to interest expense:

      

Realized loss reclassified from accumulated other comprehensive loss to interest expense

   $ (10,516   $ (6,900   $ (9,687
  

 

 

   

 

 

   

 

 

 

Adjustments to other comprehensive income (loss):

      

Realized loss reclassified to interest expense

     10,516       6,900       9,687  

Unrealized (loss) gain from changes in the fair value of

the effective portion of the interest rate swaps

     (10,517     (5,889     4,210  
  

 

 

   

 

 

   

 

 

 

(Loss) Gain included in other comprehensive income (loss)

   $ (1   $ 1,011      $ 13,897   
  

 

 

   

 

 

   

 

 

 

 

In August 2011, the Company repaid $150 million in variable rate term notes. In August 2011, the Company also terminated two interest rate swap agreements that were designated as hedges of forecasted interest payments on variable rate debt. Realized losses recognized in interest expense in 2011 include $5.5 million in costs to terminate the interest rate swaps. In October 2009, the Company prepaid $100 million in variable rate term notes. In October 2009, the Company also terminated two interest rate swap agreements that were designated as hedges of forecasted interest payments on variable rate debt. Realized losses recognized in interest expense in 2009 include $8.4 million in costs to terminate the interest rate swaps. The cost approximated the fair market values of the swaps at the dates of termination. No interest rate swap termination occurred in 2010.