DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2012

DERIVATIVE FINANCIAL INSTRUMENTS

8. DERIVATIVE FINANCIAL INSTRUMENTS:

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk and commodity price risk. From time to time, interest rate swaps may be entered into to manage interest rate risk associated with portions of the Company’s variable rate borrowings. From time to time, natural gas price swaps may be entered into to manage the price risk associated with forecasted purchases of natural gas and electricity used by the Company’s hotels. The Company designates its interest rate swaps as cash flow hedges of variable rate borrowings and its natural gas price swaps as cash flow hedges of forecasted purchases of natural gas and electricity. All of the Company’s derivatives are held for hedging purposes. The Company does not engage in speculative transactions, nor does it hold or issue financial instruments for trading purposes. All of the counterparties to the Company’s derivative agreements are financial institutions with at least investment grade credit ratings.

Cash Flow Hedging Strategy

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings (e.g., in “interest expense” when the hedged transactions are interest cash flows associated with variable rate debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, or ineffectiveness, if any, is recognized in the statement of operations during the current period.

At September 30, 2012 and December 31, 2011, the Company had no variable to fixed interest rate swap contracts. The interest rate swap agreement previously utilized by the Company until its expiration on July 25, 2011 effectively modified the Company’s exposure to interest rate risk by converting $500.0 million, or 71%, of the Company’s variable rate debt outstanding under the term loan portion of the Company’s former $1.0 billion credit facility to a weighted average fixed rate of 3.94% plus the applicable margin on these borrowings, thus reducing the impact of interest rate changes on future interest expense. This agreement involved the receipt of variable rate amounts in exchange for fixed rate interest payments through July 25, 2011, without an exchange of the underlying principal amount. The critical terms of the swap agreements matched the critical terms of the borrowings under the term loan portion of the $1.0 billion credit facility. Therefore, the Company designated these interest rate swap agreements as cash flow hedges. As the terms of these derivatives matched the terms of the underlying hedged items, there was no gain (loss) from ineffectiveness recognized in income on derivatives.

At September 30, 2012 and December 31, 2011, the Company had no variable to fixed natural gas price swap contracts. The Company previously entered into natural gas price swap contracts to manage the price risk associated with a portion of the Company’s forecasted purchases of natural gas and electricity used by the Company’s hotels. The objective of the hedge was to reduce the variability of cash flows associated with the forecasted purchases of these commodities.

The effect of derivative instruments on the statement of operations for the respective periods is as follows (in thousands):

	Amount of Loss Recognized in OCI on Derivative (Effective Portion)						Amount Reclassified from Accumulated OCI into Income
Derivatives in Cash Flow Hedging Relationships	Three Months		Three Months				Three Months		Three Months
	Ended		Ended				Ended		Ended
	September 30,		September 30,			Location of Amount Reclassified from	September 30,		September 30,
	2012		2011			Accumulated OCI into Income	2012		2011
Interest rate swaps	$	—	$	(20	)	Interest expense, net of amounts capitalized	$	—	$	1,549
Natural gas swaps		—		(249	)	Operating Costs		—		124
Total	$	—	$	(269	)	Total	$	—	$	1,673

	Amount of Loss Recognized in
	OCI on Derivative (Effective						Amount Reclassified from
	Portion)						Accumulated OCI into Income
Derivatives in Cash Flow Hedging Relationships	Nine Months		Nine Months				Nine Months		Nine Months
	Ended		Ended				Ended		Ended
	September 30,		September 30,			Location of Amount Reclassified from	September 30,		September 30,
	2012		2011			Accumulated OCI into Income	2012		2011
Interest rate swaps	$	—	$	(447	)	Interest expense, net of amounts capitalized	$	—	$	12,674
Natural gas swaps		—		(458	)	Operating Costs		—		339
Total	$	—	$	(905	)	Total	$	—	$	13,013