Derivative Instruments

6 Months Ended

Jun. 30, 2011

Note 7. Derivative Instruments

We use derivative instruments to mitigate the impact of changes in interest rates and pricing for zinc, natural gas, and diesel fuel, as well as to convert a portion of our variable-rate debt to fixed-rate debt. Additionally, we use derivative instruments to mitigate the impact of unfavorable fluctuations in foreign currency exchange rates. We also use derivatives to lock in fixed interest rates in anticipation of future debt issuances. Derivative instruments that are designated and qualify as cash flow hedges are accounted for in accordance with applicable accounting standards. See Note 3 Fair Value Accounting to the consolidated financial statements for discussion of how the Company valued its commodity hedges and interest rate swaps and options at June 30, 2011.

Interest rate hedges


						Included in accompanying balance sheet
						at June 30, 2011
								AOCL —
			Interest					loss/			Noncontrolling
	Notional Amount		Rate¹			Liability		(income)			Interest
			(in millions, except %)
Interest rate locks:
2005-2006	$	200.0		4.87	%		—	$	(2.4	)		—
2006-2007	$	370.0		5.34	%		—	$	12.3			—

Interest rate swaps/options:
TRIP warehouse	$	788.5		3.60	%	$	47.0	$	25.3		$	18.9
2008 debt issuance	$	489.4		4.13	%	$	45.7	$	43.9			—

¹Weighted average fixed interest rate


	Effect on interest expense — increase/(decrease)
	Three Months Ended						Six Months Ended						Expected effect
	June 30,						June 30,						during next
	2011			2010			2011			2010			twelve months²
							(in millions)
Interest rate locks:
2005-2006	$	(0.1	)	$	(0.1	)	$	(0.2	)	$	(0.2	)	$	(0.3	)
2006-2007	$	0.9		$	0.9		$	1.8		$	1.9		$	3.4

Interest rate swaps/options:
TILC warehouse		—		$	0.0			—		$	0.4			—
TRIP warehouse	$	6.8		$	7.3		$	14.1		$	14.8		$	6.3
2008 debt issuance	$	5.2		$	5.5		$	9.7		$	10.7		$	18.2


²	Based on fair value as of June 30, 2011

During 2005 and 2006, we entered into interest rate swap transactions in anticipation of a future debt issuance. These instruments, with a notional amount of $200 million, fixed the interest rate on a portion of a future debt issuance associated with a railcar leasing transaction in 2006 and settled at maturity in the first quarter of 2006. These interest rate swaps were being accounted for as cash flow hedges with changes in the fair value of the instruments of $4.5 million in income recorded in accumulated other comprehensive loss (“AOCL”) through the date the related debt issuance closed in May 2006. The balance is being amortized over the term of the related debt. The effect on interest expense is due to amortization of the AOCL balance.

In anticipation of a future debt issuance, we entered into interest rate swap transactions during the fourth quarter of 2006 and during 2007. These instruments, with a notional amount of $370 million, hedged the interest rate on a portion of a future debt issuance associated with an anticipated railcar leasing transaction, which closed in May 2008. These instruments settled during the second quarter of 2008 and were accounted for as cash flow hedges with changes in the fair value of the instruments of $24.5 million recorded as a loss in AOCL through the date the related debt issuance closed in May 2008. The balance is being amortized over the term of the related debt. The effect on interest expense is due to amortization of the AOCL balance.

During 2008, we entered into interest rate swap transactions, with a notional amount of $200 million, which were being used to counter our exposure to changes in the variable interest rate associated with our TILC warehouse facility. The effect on interest expense included the mark to market valuation on the interest rate swap transactions and monthly interest settlements. These interest rate hedges expired during the fourth quarter of 2010.

In May 2008, we entered into an interest rate swap transaction that is being used to fix the Libor component of the debt issuance which closed in May 2008. The effect on interest expense results primarily from monthly interest settlements.

Between 2007 and 2009, TRIP Holdings, as required by its warehouse loan agreement, entered into interest rate swap and option transactions, all of which qualify as cash flow hedges. The purpose of these transactions was to reduce the effect of changes in interest rates. On July 6, 2011, interest rate hedges related to TRIP Holdings were terminated in connection with our refinancing of the TRIP Holdings-related debt. Balances included in AOCL at the date the hedges were terminated will be amortized over the expected life of the new debt with $6.3 million of additional interest expense expected to be recognized during the next twelve months following June 30, 2011.

See Note 11 Debt for a discussion of the related debt instruments.

Other Derivatives


	Effect on operating income—increase/(decrease)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
				(in millions)
Fuel hedges¹
Effect of mark to market valuation	$	(0.3	)	$	(0.0	)	$	0.2		$	(0.1	)
Settlements		0.1			(0.0	)		0.1			(0.0	)

	$	(0.2	)	$	(0.0	)	$	0.3		$	(0.1	)

Foreign exchange hedges²	$	—		$	0.3		$	(0.6	)	$	(0.3	)


¹	Included in cost of revenues in the accompanying consolidated statement of operations

²	Included in other, net in the accompanying consolidated statement of operations

Natural gas and diesel fuel

We maintain a program to mitigate the impact of fluctuations in the price of natural gas and diesel fuel purchases. The intent of the program is to protect our operating profit from adverse price changes by entering into derivative instruments. For those instruments that do not qualify for hedge accounting treatment, any changes in their valuation are recorded directly to the consolidated statement of operations. The amount recorded in the consolidated balance sheet as of June 30, 2011 for these instruments was an asset of $0.4 million and $0.3 million of income in AOCL.

Foreign exchange hedge

During the six month period ended June 30, 2011 and the three and six month periods ended June 30, 2010, we entered into foreign exchange hedges to mitigate the impact on operating profit of unfavorable fluctuations in foreign currency exchange rates. These instruments are short term with quarterly maturities and no remaining balance in AOCL as of June 30, 2011.

Zinc

We maintain a program to mitigate the impact of fluctuations in the price of zinc purchases. The intent of this program is to protect our operating profit from adverse price changes by entering into derivative instruments. The effect of these derivative instruments on the consolidated financial statements for the three and six months ended June 30, 2011 and 2010 were not significant.