Windstream 2014 Annual Report Download - page 141

F-25
MARKET RISK
Market risk is comprised of three elements: interest rate risk, equity risk and foreign currency 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 5 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, 2014, 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, 2014 and 2013, the unhedged portion of Windstream Corp.’s variable rate senior secured credit facility was
$1,476.5 million and $1,526.4 million, or approximately 17.1 percent and 17.7 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 $14.8 million
and $15.3 million for the years ended December 31, 2014 and 2013, 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) 2014 2013 %
Operating income $ 507.1 $ 1,009.0
Depreciation and amortization 1,386.4 1,340.9
OIBDA (a) $ 1,893.5 $ 2,349.9 (19)%
(a) OIBDA is defined as operating income plus depreciation and amortization expense. We believe this measure provides
investors with insight into the core earnings capacity of providing communications and technology services to our
customers.