Derivative Instruments

12 Months Ended

Dec. 31, 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 $10.2 million and was reclassified out of accumulated other comprehensive income and recorded in 2012 earnings. As of December 31, 2012, we have one interest rate swap related to our revolving credit facility.

We hold interest rate derivative instruments to mitigate exposure to changes in interest rates, in particular one-month LIBOR, with $282.0 million of our borrowings at December 31, 2012 at variable rates. As a matter of policy, we do not use derivatives for speculative purposes. At December 31, 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 eleven months and a fixed rate of 2.10%. At December 31, 2011, we were a party to interest rate swap agreements with notional outstanding amounts of $375.0 million, remaining terms of between three and forty months and fixed rates of between 2.10% and 5.05%. The net fair value of the swaps at December 31, 2012 and 2011 was negative $1.7 million and negative $12.3 million, respectively, representing a net liability for us. These amounts represent 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 December 31, 2012, has used creditworthiness inputs that corroborate 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 December 31, 2012, we anticipate that net finance costs will be increased by approximately $1.7 million for the year ending December 31, 2013 due to the interest rate derivative contracts currently in place.

We terminated three swaps with a notional value of $105.0 million on November 18, 2009. The originally specified hedged forecasted transactions remain probable to occur as the debt remains in place. The effective portion of the loss on these hedges at the termination date was $2.6 million and is being reclassified into earnings over the original term of the swaps.

Fair Values of Derivative Instruments in the Consolidated Balance Sheets

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

	Derivatives
		Fair Value
		Years Ended December 31,
Derivatives Designated as Hedging Instruments	Balance Sheet Location	2012		2011
		(in thousands)
Interest rate contracts	Liabilities under derivative instruments	$	1,690	$	12,341

Earnings Effects of Derivative Instruments on the Statements of Income

The following table provides information about the income effects of our cash flow hedging relationships for the years ended December 31, 2012, 2011 and 2010:

		Amount of Loss (Gain) Recognized on Derivatives in the Statements of Income
Derivatives in Cash Flow Hedging	Location of Loss (Gain) Recognized on	Years Ended December 31,
Relationships	Derivatives in the Statements of Income	2012		2011		2010
		(in thousands)
Interest rate contracts	Interest expense	$	6,427	$	11,349	$	18,633
Reclassification adjustment for losses included in termination of derivative instruments	Loss on debt extinguishment and derivative termination	$	10,143	$	—	$	—
Total		$	16,570	$	11,349	$	18,633

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 years ended December 31, 2012, 2011 and 2010:

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)							Location of Loss (Gain) Reclassified from Accumulated OCI into Income	Amount of Loss (Gain) Reclassified from Accumulated OCI into Income (Effective Portion)
	Years Ended December 31,								Years Ended December 31,
	2012		2011		2010			(Effective Portion)	2012		2011		2010
	(in thousands)								(in thousands)
Interest rate contracts*	$	508	$	1,933	$	(6,380	)	Interest expense	$	6,427	$	11,349	$	18,633
Total	$	508	$	1,933	$	(6,380	)	Total	$	6,427	$	11,349	$	18,633

* These amounts are shown net of $6.7 million, $10.9 million and $15.7 million of interest payments reclassified to the income statement during the years ended December 31, 2012, 2011 and 2010, 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 other comprehensive income and is reclassified into earnings in the period during which the transaction being hedged affects earnings. 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 of the periods presented.

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 December 31, 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.