Windstream 2010 Annual Report Download - page 122

(d) Purchase obligations include open purchase orders not yet receipted and amounts payable under noncancellable
contracts. The portion attributable to noncancellable contracts primarily represents agreements for network
capacity and software licensing.
(e) Other long-term liabilities and commitments primarily consist of deferred tax liabilities, pension and other
postretirement benefit obligations and interest rate swaps.
(f) Excludes $20.8 million of reserves for uncertain tax positions, including interest and penalties, that were included
in other liabilities at December 31, 2010 for which the Company is unable to make a reasonably reliable estimate
as to when cash settlements with taxing authorities will occur.
(g) Includes $35.4 million and $8.8 million in current portion of interest rate swaps and pension and postretirement
benefit obligations, respectively that were included in current portion of interest rate swaps and other current
liabilities at December 31, 2010.
(h) Includes $60.0 million for expected pension funding contributions in 2011. Although additional contribution may
be required in years 2011 and beyond, due to 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, a change in control including a person or group obtaining 50 percent or
more of Windstream’s outstanding voting stock, or breach of certain other conditions set forth in the borrowing
agreements. At December 31, 2010, we were in compliance with all of our debt covenants. 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 facility. 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.
In 2006, due to the interest rate risk inherent in the variable rate senior secured credit facilities, the Company entered
into four pay fixed, receive variable interest rate swap agreements, designated as a cash flow hedge, with a maturity on
July 17, 2013. The counterparty for each of the swap agreements is a bank with a current credit rating at or above A+.
The variable rate received by Windstream on the swaps was the three-month LIBOR (London-Interbank Offered Rate),
and the weighted-average fixed rate paid by Windstream was 5.604 percent. On October 19, 2009, Windstream
completed an amendment and restatement of its credit facility and as part of this amendment the maturity date
associated with a portion of term loan B was extended.
In December of 2010, Windstream renegotiated the four interest rate swap agreements. The balance in other
comprehensive income for the original terms of the swaps was frozen and will be amortized to interest expense over
the remaining life of the original swaps. The modified swaps, commonly referred to as “blend and extends”, will
amortize quarterly to a notional value of $900.0 million in 2013, where it will remain until maturity on October 17,
2015 ($1,093.8 million as of December 31, 2010). The variable rate received resets on the seventeenth day of each
quarter to the three-month LIBOR, which was 0.29 percent at December 31, 2010. The weighted-average fixed rate
paid by Windstream was 5.604 percent during the year ended December 31, 2010 and was lowered to 4.553 percent
effective January 17, 2011, resulting in an estimated 2011 cash interest expense savings of $11.2 million. The
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