Windstream 2008 Annual Report Download - page 150

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Fair Value Measurements:
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable,
accounts payable, long-term debt and interest rate swaps. The carrying amount of accounts receivable and
accounts payable was estimated by management to approximate fair value due to the relatively short period of
time to maturity for those instruments. Cash equivalents, long-term debt and interest rate swaps are measured at
fair value on a recurring basis in accordance with the fair value measurement provisions of SFAS No. 157.
Windstream utilizes market data or assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can
be readily observable, market corroborated, or generally unobservable. Valuation techniques that maximize the
use of observable inputs and minimize the use of unobservable inputs are used and the fair value balances are
classified based on the observability of those inputs. The highest priority is given to unadjusted quoted prices in
active markets for identical assets or liabilities (level 1 measurement) and the lowest priority is given to
unobservable inputs (level 3 measurement). As required by SFAS No. 157, financial assets and liabilities are
classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value measurement requires judgment
and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy
levels.
The fair values of the Company’s cash equivalents and interest rate swaps were determined using the following
inputs at December 31, 2008:
Quoted Price
in Active Markets
for
Identical Assets
Significant
Other
Observable
Inputs
Significant
Unobservable
Inputs
(Millions)
Fair
Value
Carrying
Amount Level 1 Level 2 Level 3
Cash equivalents (a) $ 296.6 $ 296.6 $ 296.6 $ - $ -
Interest rate swaps (b) $ 153.4 $ 153.4 $ - $ 153.4 $ -
(a) Included in cash and cash equivalents on the consolidated balance sheets.
(b) Included in other current liabilities and other liabilities on the consolidated balance sheets.
The Company’s cash equivalents are primarily highly liquid, actively traded money market funds with next day
access. The fair values of the interest rate swaps were determined based on the present value of expected future
cash flows using LIBOR swap rates which are observable at commonly quoted intervals for the full term of the
swaps using discount rates appropriate with consideration given to the Company’s non-performance risk.
Deducted from the December 31, 2008, interest rate swap fair value calculation was a $17.4 million adjustment in
consideration of the Company’s non-performance risk. The Company’s non-performance risk is assessed based on
the current trading discount of its Tranche B senior secured credit facility as the swap agreements are secured by
the same collateral. In addition, the Company routinely monitors and updates its evaluation of counterparty risk,
and based on such evaluation has determined that the swap agreements continue to meet the requirements of an
effective cash flow hedge. The counterparty to each of the four swap agreements is a bank with a current credit
rating at or above A+.
The fair value and carrying value of the Company’s long-term debt was $4,637.0 million and $5,382.5 million,
respectively, as of December 31, 2008. The fair value of the corporate bonds was calculated based on quoted
market prices of the specific issuances in an active market when available. When an active market is not available
for certain bonds and bank notes, the fair market value was determined based on bid prices and broker quotes. In
calculating the fair market value of the revolving line of credit and Windstream Holdings of the Midwest Inc.
bonds, an appropriate market price for similar instruments in an active market were used considering credit
quality, nonperformance risk and maturity of the instrument.
F-62