Windstream 2008 Annual Report Download - page 114

(g) Includes approximately $24.0 million, net of tax benefit, for expected pension funding contributions in 2010.
Although additional contributions may be required in years 2010 and beyond, due to the uncertainties inherent in
the pension funding calculation, the amount and timing of the remaining contributions are unknown and therefore
have been reflected as due in more than 5 years.
Under our long-term debt agreements, acceleration of principal payments would occur upon payment default, violation
of debt covenants not cured within 30 days, or breach of certain other conditions set forth in the borrowing agreements.
At December 31, 2008, we were in compliance with all of our debt covenants. There are no provisions within any of
our leasing agreements that would trigger acceleration of future lease payments. See Notes 2, 5, 6, 8, 12, 13 and 15 for
additional information regarding certain of the obligations and commitments listed above.
MARKET RISK
Market risk is comprised of three elements: foreign currency risk, interest rate risk and equity risk. As further discussed
below, the Company is exposed to market risk from changes in interest rates. The Company does not directly own
significant marketable equity securities other than highly liquid cash equivalents, nor does it operate in foreign
countries. However, the Company’s pension plan invests in marketable equity securities, including marketable debt and
equity securities denominated in foreign currencies.
Interest Rate Risk
The Company is exposed to market risk through changes in interest rates, primarily as it relates to the variable interest
rates it is charged under its senior secured credit facilities. Under its current policy, the Company enters into interest
rate swap agreements to obtain a targeted mixture of variable and fixed interest rate debt such that the portion of debt
subject to variable rates does not exceed 25 percent of Windstream’s total debt outstanding. The Company has
established policies and procedures for risk assessment and the approval, reporting, and monitoring of interest rate
swap activity. Windstream does not enter into interest rate swap agreements, or other derivative financial instruments,
for trading or speculative purposes. Management periodically reviews Windstream’s exposure to interest rate
fluctuations and implements strategies to manage the exposure.
Due to the interest rate risk inherent in its variable rate senior secured credit facilities, the Company entered into four
pay fixed, receive variable interest rate swap agreements on notional amounts totaling $1,600.0 million at July 17, 2006
to convert variable interest rate payments to fixed. The counterparty for each of the swap agreements is a bank with a
current credit rating at or above A+. The four interest rate swap agreements amortize quarterly to a notional value of
$906.3 million at maturity on July 17, 2013, and have an unamortized notional value of $1,281.2 million as of
December 31, 2008. The variable rate received by Windstream on these swaps is the three-month LIBOR (London-
Interbank Offered Rate), which was 4.55 percent at December 31, 2008. The weighted-average fixed rate paid by
Windstream is 5.60 percent. The interest rate swap agreements are designated as cash flow hedges of the interest rate
risk created by the variable interest rate paid on the senior secured credit facilities pursuant to the guidance in SFAS
No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities”, as amended.
After the completion of a refinancing transaction in February 2007, a portion of one of the four interest rate swap
agreements with a notional value of $125.0 million was de-designated and is no longer considered an effective hedge
as the portion of the Company’s senior secured credit facility that it was designated to hedge against was repaid.
Changes in the market value of this portion of the swap, which has an unamortized notional value of $105.0 million as
of December 31, 2008, are recognized in net income, including a $5.8 million loss in the consolidated statement of
income in 2008. Changes in the market value of the designated portion of the swaps are recognized in other
comprehensive income.
As of December 31, 2008, the unhedged portion of the Company’s variable rate senior secured credit facilities was
$636.1 million, or approximately 11.9 percent of its total outstanding long-term debt. Windstream has estimated its
interest rate risk using a sensitivity analysis. For variable rate debt instruments, market risk is defined as the potential
change in earnings resulting from a hypothetical adverse change in interest rates. A hypothetical increase of 100 basis
points in variable interest rates would reduce annual pre-tax earnings by approximately $6.3 million. Actual results
may differ from this estimate.
Equity Risk
The Company utilizes various financial institutions to invest its cash on hand in short-term securities. These financial
institutions are generally a party to the existing Windstream credit facility. Windstream has maintained an average cash
balance of approximately $119.8 million during the twelve months ended December 31, 2008. These monies have been
invested in both taxable funds as well as tax-exempt municipal funds, and monies will often be moved between these
two types of securities depending on their respective yields. These monies are all invested in AAA rated funds with
same day access, and thus are highly liquid.
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