Windstream 2011 Annual Report Download - page 149

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-41
At the time of the modifications, the original interest rate swaps had a negative fair value and were presented as current and
long-term liabilities on the balance sheet. These negative fair values and 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 of the original swaps was frozen at the time of modification and is being amortized into
interest expense through July 17, 2013, the maturity date of the original cash flow hedges. The accumulated loss had an
unamortized balance of $58.6 million as of December 31, 2011. The balance is amortized using the swaplet method, which is
based on the principle that the balance in accumulated other comprehensive loss will be equivalent to the sum of the values of
the cash flows of each swaplet at the time it was frozen. A swaplet is each calculation period of the interest rate swaps.
We recognize 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. The fair value of the designated portion of the
swaps decreased $20.1 million, net of tax, during the twelve months ended December 31, 2011. This is included as a
component of other comprehensive income and will be reclassified into earnings as the hedged transaction affects earnings.
Set forth below is information related to our interest rate swap agreements:
(Millions, except for percentages)
Designated portion, measured at fair value
Other current liabilities
Other non-current liabilities
Accumulated other comprehensive (loss) income
Undesignated portion, measured at fair value
Other current liabilities
Other non-current liabilities
De-designated portion, unamortized value
Accumulated other comprehensive loss
Weighted average fixed rate paid
Variable rate received
2011
$ 30.5
$ 88.7
$(26.9)
$—
$—
$(58.6)
4.60%
0.40%
2010
$ 35.4
$ 75.9
$ 5.6
$—
$—
$(107.6)
5.60%
0.29%
2009
$ 42.0
$ 65.8
$(107.8)
$ 3.7
$ 5.9
$(2.2)
5.60%
0.28%
Authoritative guidance permits designating existing derivatives with non-zero fair values in a new cash flow hedge, but perfect
effectiveness may not be assumed. Rather, the hedge relationship must be established as “highly effective” as the non-zero fair
value element to the new hedge relationship introduces a source of ineffectiveness. The non-zero fair value element of the new
hedge relationship represents an off-market or financing element, and as such we assess the effectiveness of our cash flow
hedges each quarter using the Perfect Hypothetical Interest Rate Swap Method. This method measures hedge ineffectiveness
based on a comparison of the change in fair value of the actual interest rate swap and the change in fair value of a hypothetical
interest rate swap with terms that identically match the critical terms of the hedged debt and an original balance of zero. We
perform and document this assessment each quarter and recognized a $5.2 million charge to earnings, reflected in other
expense, related to ineffectiveness of our cash flow hedges for the year ended December 31, 2011, respectively, primarily due
to declines in the LIBOR rate.
A portion of the net amount due representing the rate we would receive on the hypothetical interest rate swap discussed above
is recognized in interest expense. The remainder represents the repayment of the embedded financing element and reduces the
current portion of our swap liability.
Interest payments on our swaps are based on the LIBOR rate. We do not expect any changes in the effectiveness of our 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 our swaps, either through de-designation
of existing swaps or through decreases in the LIBOR rate, could have an adverse impact on our earnings.