Derivatives And Hedging

6 Months Ended

Jun. 30, 2011

Derivatives And Hedging

Derivatives And Hedging

Note 5. Derivatives and Hedging

Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage our interest rate risk, we occasionally hedge the future cash flows of our debt transactions, as well as changes in the fair value of our debt instruments, principally through interest rate contracts with major financial institutions. Interest rate contracts that meet specific criteria are accounted for as either assets or liabilities as a fair value or cash flow hedge.

Cash Flow Hedges of Interest Rate Risk:

Our objective in using interest rate contracts is to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate contracts as part of our interest rate risk management strategy. Interest rate contracts designated as cash flow hedges involve the receipt of variable 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 or capping floating rate interest payments.

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 loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

As of June 30, 2011 and December 31, 2010, respectively, we had three and two active interest rate contracts designated as cash flow hedges with an aggregate notional amount of $27.4 million and $11.8 million, respectively. These contracts have maturities through September 2017 and either fix or cap interest rates ranging from 2.3% to 5.0%. We have determined that these contracts are highly effective in offsetting future variable interest cash flows. As of June 30, 2011 and December 31, 2010, the fair value of these derivatives included in net other assets was $.1 million in each respective period and included in net other liabilities was $.2 million and $.1 million, respectively.

As of June 30, 2011 and December 31, 2010, the balance in accumulated other comprehensive loss relating to cash flow interest rate contracts was $10.7 million and $11.7 million, respectively, and will be reclassified to net interest expense as interest payments are made on our fixed-rate debt. Amounts reclassified from accumulated other comprehensive loss to net interest expense were $.6 million during both the three months ended June 30, 2011 and 2010, and $1.2 million and $1.3 million during the six months ended June 30, 2011 and 2010, respectively. Within the next 12 months, approximately $2.6 million of the balance in accumulated other comprehensive loss is expected to be amortized to net interest expense related to settled interest rate contracts.

Fair Value Hedges of Interest Rate Risk:

We are exposed to changes in the fair value of certain of our fixed-rate obligations due to changes in benchmark interest rates, such as LIBOR. We use interest rate contracts to manage our exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate contracts designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for us making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. Changes in the fair value of interest rate contracts designated as fair value hedges, as well as changes in the fair value of the related debt being hedged, are recorded in earnings each reporting period.

As of June 30, 2011 and December 31, 2010, we had four interest rate contracts with an aggregate notional amount of $119.9 million and $120.4 million, respectively, that were designated as fair value hedges and convert fixed interest payments at rates from 4.2% to 7.5% to variable interest payments ranging from .2% to 4.3% and .3% to 4.4%, respectively. We have determined that our fair value hedges are highly effective in limiting our risk of changes in the fair value of fixed-rate notes attributable to changes in interest rates.

For the three and six months ended June 30, 2011, we recognized a net reduction in interest expense of $1.8 million and $3.6 million, respectively, related to our fair value hedges, which includes net settlements and any amortization adjustment of the basis in the hedged item. For the three and six months ended June 30, 2010, we recognized a net reduction in interest expense of $1.7 million and $3.2 million, respectively, related to our fair value hedges, which includes net settlements and any amortization adjustment of the basis in the hedged item. Also, for the three and six months ended June 30, 2010, we recognized a gain of $.3 million and $.6 million, respectively, associated with hedge ineffectiveness with no such activity in the related periods of 2011.

A summary of the changes in fair value of our interest rate contracts is as follows (in thousands):

	Gain (Loss) on Contracts		Gain (Loss) on Borrowings		Gain (Loss) Recognized in Income
Three Months Ended June 30, 2011:
Interest expense, net	$	2,000	$	(2,000)	$	-
Six Months Ended June 30, 2011:
Interest expense, net	$	495	$	(495)	$	-
Three Months Ended June 30, 2010:
Interest expense, net	$	9,674	$	(9,364)	$	310
Six Months Ended June 30, 2010:
Interest expense, net	$	13,893	$	(13,342)	$	551

The interest rate contracts at June 30, 2011 and December 31, 2010 were reported at their fair values as follows (in thousands):

	Assets			Liabilities
	Balance Sheet Location	Amount		Balance Sheet Location	Amount
Designated Hedges:
June 30, 2011	Other Assets, net	$	7,703	Other Liabilities, net	$	177
December 31, 2010	Other Assets, net	$	7,192	Other Liabilities, net	$	108

A summary of our derivatives is as follows (in thousands):

Derivatives Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion)		Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income	Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)			Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative		Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Three Months Ended June 30, 2011:
Cash Flow Interest Rate Contracts	$	420	Interest expense, net	$	(619	)				Interest expense, net	$	(19	)
Fair Value Interest Rate Contracts							Interest expense, net	$	3,042
Six Months Ended June 30, 2011:
Cash Flow Interest Rate Contracts	$	302	Interest expense, net	$	(1,238	)				Interest expense, net	$	(12	)
Fair Value Interest Rate Contracts							Interest expense, net	$	2,572
Three Months Ended June 30, 2010:
Cash Flow Interest Rate Contracts			Interest expense, net	$	(619	)
Fair Value Interest Rate Contracts							Interest expense, net	$	14,422	Interest expense, net	$	310
Six Months Ended June 30, 2010:
Cash Flow Interest Rate Contracts			Interest expense, net	$	(1,328	)
Fair Value Interest Rate Contracts							Interest expense, net	$	17,542	Interest expense, net	$	551