Windstream 2010 Annual Report Download - page 141

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies and Changes, Continued:
weighted average fixed rate paid by Windstream will lower to 4.553 percent effective January 17, 2011. The
variable rate received resets on the seventeenth day of each quarter to the three-month LIBOR. The Company’s
interest rate swap agreements are designated as cash flow hedges of the interest rate risk created by the variable
interest rate paid on Tranche B of the senior secured credit facilities, which has varying maturity dates from
July 17, 2013 to December 17, 2015 as a result of an amendment to the credit facility (see Note 5). The variable
interest rate paid on Tranche B is based on the three-month LIBOR, and it also resets on the seventeenth day of
each quarter.
As part of these modifications, the negative fair values of the original interest rate swaps, as well as a certain
amount of accrued interest, associated with the original cash flow hedges were incorporated into the fair values of
the new modified cash flow hedges. The related accumulated other comprehensive loss associated with the
negative fair values of the original cash flow hedges on their dates of modification, which has an unamortized
notional value of $107.6 million as of December 31, 2010, will be amortized using the swaplet method to interest
expense through July 17, 2013, the maturity date of the original cash flow hedges. This method is based upon the
principle that the balance in accumulated other comprehensive loss will be equivalent to the sum of the current
values of the cash flows of each swaplet, or each calculation period of the interest rate swaps.
The Company recognizes all derivative instruments at fair value in the accompanying consolidated balance sheets
as either assets or liabilities depending on the rights or obligations under the related contracts. Set forth below is
information related to the Company’s interest rate swap agreements as of December 31:
(Millions, except for percentages) 2010 2009 2008
Designated portion, measured at fair value
Other current liabilities $ 35.4 $ 42.0 $ 37.2
Other non-current liabilities $ 75.9 $ 65.8 $ 103.6
Other comprehensive income $ 5.6 $ (107.8) $ (140.8)
Undesignated portion, measured at fair value
Other current liabilities $ - $ 3.7 $ 3.3
Other non-current liabilities $ - $ 5.9 $ 9.3
Frozen portion, unamortized notional value
Other comprehensive income (loss) $ (107.6) $ (2.2) $ (2.8)
Weighted average fixed rate paid 5.60% 5.60% 5.60%
Variable rate received 0.29% 0.28% 4.55%
While authoritative guidance permits designating existing derivatives with non-zero fair values in a new cash flow
hedge, Windstream may not assume perfect effectiveness and must to establish that the new hedge relationship is
“highly effective” as the non-zero fair value element to the new hedge relationship introduces a source of
ineffectiveness that the Company must assess and measure. Due to the presence of the off-market, or financing
element in the newly designated hedge, the Company’s cash flow hedges will be assessed each quarter using the
“Perfect Hypothetical Interest Rate Swap Method”. This method measures hedge ineffectiveness based on a
comparison of the fair value of the actual interest rate swap and the fair value of a hypothetical interest rate swap
with terms that identically match the critical terms of the debt being hedged.
The Company settles interest payments on its swaps based on the LIBOR rate. The Company does not expect any
changes in the effectiveness of its swaps due to counterparty risk or further prepayment of hedged items, but any
such changes could result in an increase in the ineffective portion of the swaps. An increase in the value of the
ineffective portion of its swaps either through further de-designation of existing swaps or through further
decreases in the LIBOR rate could have an adverse impact on the Company’s future earnings. The Company
performs and documents this assessment each quarter,
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