Windstream 2013 Annual Report Download - page 197

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-61
6. Derivatives, Continued:
The current swaps are designated as cash flow hedges of the benchmark LIBOR interest rate risk created by the variable rate
cash flows paid on Windstream Corp.'s senior secured credit facilities, which have varying maturity dates from December 30,
2016 to January 23, 2020. The swaps are hedging probable variable cash flows which extend up to four years beyond the
maturity of certain components of the variable rate debt. Consistent with past practice, Windstream Corp. expects to extend or
otherwise replace these components of its debt with variable rate debt.
All derivative instruments are recognized 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 our interest rate swap agreements:
(Millions, except for percentages) 2013 2012 2011
Designated portion, measured at fair value
Other current liabilities $ 30.0 $ 29.0 $ 30.5
Other non-current liabilities $ 41.8 $ 91.2 $ 88.7
Accumulated other comprehensive income (loss) $ 28.2 $ (14.7) $ (26.9)
De-designated portion, unamortized value
Accumulated other comprehensive loss $ (24.7) $ (45.9) $ (58.6)
Weighted average fixed rate paid 3.57% 4.26% 4.60%
Variable rate received 0.16% 0.21% 0.40%
Derivatives are assessed for effectiveness each quarter and any ineffectiveness is recognized in other (expense) income, net in
the accompanying consolidated statements of income. Ineffectiveness of Windstream Corp.'s cash flow hedges amounted to
$1.6 million, $(7.5) million and $(5.2) million for the years ended December 31, 2013, 2012 and 2011, respectively.
Windstream Corp.'s original four swaps are off-market swaps, meaning they contain an embedded financing element, which the
swap counterparties recover through an incremental charge in the fixed rate over what would be charged for an on-market
swap. As such, a portion of the cash payment on the swaps represents the rate that Windstream Corp. would pay on a
hypothetical on-market interest rate swap and is recognized in interest expense. The remaining portion represents the
repayment of the embedded financing element and reduces the swap liability.
All or a portion of the change in fair value of Windstream Corp.'s interest rate swap agreements recorded in accumulated other
comprehensive income may be recognized in earnings in certain situations. If Windstream Corp. extinguishes all of its variable
rate debt, or a portion of its variable rate debt such that the variable rate interest received on Windstream Corp.'s swaps exceeds
the variable rate interest paid on its debt, all or a portion of the change in fair value of the swaps would be recognized in
earnings. In addition, the change in fair value of the swaps may be recognized in earnings if Windstream Corp. determines it is
no longer probable that it will have future variable rate cash flows to hedge against or if a swap agreement is terminated prior to
maturity. Windstream Corp. has assessed the counterparty risk and determined that no substantial risk of default exists as of
December 31, 2013. Each counterparty is a bank with a current credit rating at or above A.
Windstream Corp. expects to recognize losses of $9.8 million, net of taxes, in interest expense in the next twelve months
related to the unamortized value of the de-designated portion of interest rate swap agreements at December 31, 2013. Payments
on the swaps are presented in the financing activities section of the accompanying consolidated statements of cash flows.