Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

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Derivative Financial Instruments
9 Months Ended
Sep. 30, 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 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 and 2010.

The Company has six interest rate swap agreements in effect at September 30, 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 the nine months ended September 30, 2011. During the nine months ended September 30, 2011 and 2010, the net reclassification from AOCL to interest expense was $9.8 million and $5.4 million, respectively, based on payments made under swap agreements. Based on current interest rates, the Company had estimated that payments under the interest rate swaps would be approximately $4.5 million for the twelve months ended September 30, 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 $8.6 million and $10.5 million at September 30, 2011 and December 31, 2010, respectively.

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 the three months ended September 30, 2011 include $5.5 million in costs to terminate the interest rate swaps. The cost approximated the fair market values of the swaps at the date of termination.

 

(dollars in thousands)   

Jan. 1, 2011

to

Sep. 30, 2011

    

Jan. 1, 2010

to

Sep. 30, 2010

 

Adjustments to interest expense:

     

Realized loss reclassified from accumulated other comprehensive

loss to interest expense

     $   (9,841)         $  (5,353)   

Adjustments to other comprehensive (loss) income:

     

Realized loss reclassified to interest expense

     9,841         5,353   

Unrealized loss from changes in the fair value of the effective

portion of the interest rate swaps

     (7,952)         (6,225)   
  

 

 

    

 

 

 

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

     $  1,889         $      (872)