Windstream 2013 Annual Report Download - page 161

F-25
See "Debt Covenants and Amendments" for information regarding our debt covenants. See Notes 2, 5, 6, 8, 12, and 13 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,
we are exposed to market risk from changes in interest rates. We do not own any marketable equity securities other than highly
liquid cash equivalents, nor do we operate in foreign countries denominated in foreign currencies.
Interest Rate Risk
We are exposed to market risk through changes in interest rates, primarily as it relates to the variable interest rates we are
charged under Windstream Corp.’s senior secured credit facility. Under our current policy, Windstream Corp. 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 our total debt outstanding. For a detailed discussion of our interest rate swap
agreements, see Note 6 to the consolidated financial statements.
We have established policies and procedures for risk assessment and the approval, reporting and monitoring of interest rate
swap activity. We do not enter into interest rate swap agreements, or other derivative financial instruments, for trading or
speculative purposes. Management periodically reviews our exposure to interest rate fluctuations and implements strategies to
manage the exposure.
As of December 31, 2013, Windstream Corp. has entered into ten pay fixed, receive variable interest rate swap agreements
designated as cash flow hedges of the benchmark LIBOR interest rate risk created by the variable cash flows paid on
Windstream Corp.’s senior secured credit facility. The maturities of the ten interest rate swaps range from June 17, 2016 to
October 17, 2019. The hedging relationships are expected to be highly effective in mitigating cash flow risks resulting from
changes in interest rates.
As of December 31, 2013 and 2012, the unhedged portion of Windstream Corp.'s variable rate senior secured credit facility was
$1,526.4 million and $1,697.9 million, or approximately 17.7 percent and 20.9 percent of Windstream Corp.'s total outstanding
long-term debt, respectively. We have estimated our 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 100.0 basis points in variable interest rates would have reduced annual pre-tax earnings by
approximately $15.3 million and $17.0 million for the years ended December 31, 2013 and 2012, respectively. Actual results
may differ from this estimate.
Reconciliation of non-GAAP financial measures
From time to time, we will reference certain non-GAAP measures in our filings. Management’s purpose for including these
measures is to provide investors with measures of performance that management uses in evaluating the performance of the
business. These non-GAAP measures should not be considered in isolation or as a substitute for measures of financial
performance reported under GAAP. Following is a reconciliation of non-GAAP financial measures to the most closely related
financial measure reported under GAAP referenced in this filing.
Operating income before depreciation and amortization to GAAP operating income:
(Millions) 2013 2012 %
Operating income $ 1,009.0 $ 883.9
Depreciation and amortization 1,340.9 1,296.9
OIBDA (a) $ 2,349.9 $ 2,180.8 8%
(a) OIBDA is defined as operating income plus depreciation and amortization expense. Management believes this measure
provides investors with insight into the core earnings capacity of providing telecommunications services to its
customers.