Derivative Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments

Derivative Instruments

6.  Derivative Instruments

As discussed in Note 5, we terminated six interest rate swaps with a notional value of $215.0 million on September 17, 2012. The originally specified hedged forecasted transactions were terminated upon the closing of WEST II on September 17, 2012. The effective portion of the loss on these cash flow hedges was $10.1 million and was reclassified out of accumulated other comprehensive income and recorded in earnings for the three months ended September 30, 2012. As of September 30, 2012,  we have one interest rate swap remaining under our revolving credit facility.

We hold one interest rate derivative instrument to mitigate exposure to changes in interest rates, in particular one-month LIBOR, with $271.0 million of our borrowings at September 30, 2012 at variable rates. As a matter of policy, we do not use derivatives for speculative purposes. At September 30, 2012, we were a party to one interest rate swap agreement with a notional outstanding amount of $100.0 million with a remaining term of fourteen months and a fixed rate of 2.10%. The net fair value of the swaps at September 30, 2012 was negative $2.1 million, representing a net liability for us. The amount represents the estimated amount we would be required to pay if we terminated the swaps.

The Company estimates the fair value of derivative instruments using a discounted cash flow technique and, as of September 30, 2012, has used creditworthiness inputs that can be corroborated by observable market data evaluating the Company’s and counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied assumptions consistently during the period. We apply hedge accounting and account for the change in fair value of our cash flow hedges through other comprehensive income for all derivative instruments.

Based on the implied forward rate for LIBOR at September 30, 2012, we anticipate that net finance costs will be increased by approximately $1.5 million for the 12 months ending September 30, 2013 due to the interest rate derivative contract currently in place.

Fair Values of Derivative Instruments in the Consolidated Balance Sheets

The following table provides information about the fair value of our derivatives, by contract type:

	Derivatives
		Fair Value
Derivatives Designated asHedging Instruments	Balance Sheet Location	September 30,2012		December 31,2011
		(in thousands)
Interest rate contracts	Liabilities under derivative instruments	$	2,115	$	12,341

Earnings Effects of Derivative Instruments on the Consolidated Statements of Income

The following table provides information about the income effects of our cash flow hedging relationships for the three and nine months ended September 30, 2012 and 2011:

		Amount of Loss Recognizedon Derivatives in theStatements of Income
Derivatives in Cash Flow	Location of Loss Recognized on Derivatives in	Three Months EndedSeptember 30,
Hedging Relationships	the Statements of Income	2012		2011
		(in thousands)
Interest rate contracts	Interest expense	$	1,810	$	2,631
Reclassification adjustment for losses included in termination of derivative instruments	Loss on debt extinguishment and derivative termination	$	10,143	$	—
Total		$	11,953	$	2,631

		Amount of Loss Recognizedon Derivatives in theStatements of Income
Derivatives in Cash Flow	Location of Loss Recognized on Derivatives in	Nine Months EndedSeptember 30,
Hedging Relationships	the Statements of Income	2012		2011
		(in thousands)
Interest rate contracts	Interest expense	$	6,026	$	8,815
Reclassification adjustment for losses included in termination of derivative instruments	Loss on debt extinguishment and derivative termination	$	10,143	$	—
Total		$	16,169	$	8,815

Our derivatives are designated in a cash flow hedging relationship with the effective portion of the change in fair value of the derivative reported in the cash flow hedges subaccount of accumulated other comprehensive income.

Effect of Derivative Instruments on Cash Flow Hedging

The following tables provide additional information about the financial statement effects related to our cash flow hedges for the three and nine months ended September 30, 2012 and 2011:

	Amount of Gain (Loss) Recognized in OCI on Derivatives  (Effective Portion)						Location of Loss Reclassified	Amount of Loss Reclassified from Accumulated OCI into Income  (Effective Portion)
Derivatives in Cash Flow	Three Months Ended  September 30,						from Accumulated OCI into Income	Three Months Ended  September 30,
Hedging Relationships	2012			2011			(Effective Portion)	2012			2011
	(in thousands)							(in thousands)
Interest rate contracts*	$	(1,191	)	$	(1,236	)	Interest expense	$	(1,810	)	$	(2,631	)
Total	$	(1,191	)	$	(1,236	)	Total	$	(1,810	)	$	(2,631	)

	Amount of Gain (Loss) Recognized in OCI on Derivatives  (Effective Portion)					Location of Loss Reclassified	Amount of Loss Reclassified from Accumulated OCI into Income  (Effective Portion)
Derivatives in Cash Flow	Nine Months Ended September 30,					from Accumulated OCI into Income	Nine Months Ended September 30,
Hedging Relationships	2012		2011			(Effective Portion)	2012			2011
	(in thousands)						(in thousands)
Interest rate contracts**	$	83	$	(683	)	Interest expense	$	(6,026	)	$	(8,815	)
Total	$	83	$	(683	)	Total	$	(6,026	)	$	(8,815	)

*These amounts are shown net of $1.9 million and $2.6 million of interest payments reclassified to the income statement during the three months ended September 30, 2012 and 2011, respectively.

**These amounts are shown net of $6.2 million and $8.3 million of interest payments reclassified to the income statement during the nine months ended September 30, 2012 and 2011, respectively.

The effective portion of the change in fair value on a derivative instrument designated as a cash flow hedge is reported as a component of accumulated other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings or it is probable that the forecasted transaction will not occur. The ineffective portion of the hedges is recorded in earnings in the current period. However, these are highly effective hedges and no significant ineffectiveness occurred in either period presented.

As discussed above, we terminated six interest rate swaps with a notional value of $215.0 million on September 17, 2012. The originally specified hedged forecasted transactions were terminated upon the closing of WEST II on September 17, 2012. The effective portion of the loss on these cash flow hedges at the termination date was $10.1 million and was reclassified out of accumulated other comprehensive income and recorded in earnings for the three months ended September 30, 2012.

Counterparty Credit Risk

The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The swap counterparty for the interest rate swap in place at September 30, 2012 is a large financial institution in the United States that possesses an investment grade credit rating. Based on this rating, the Company believes that the counterparty is currently creditworthy and that their continuing performance under the hedging agreement is probable, and has not required the counterparty to provide collateral or other security to the Company. As of September 30, 2012, no hedging agreements exist under which the counterparties would owe the Company compensation upon termination due to their failure to perform under the applicable agreements.