Windstream 2014 Annual Report Download - page 175

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-59
5. Derivative Instruments:
Windstream Corp. has entered into the following interest rate swap agreements to mitigate the interest rate risk inherent in its
variable rate senior secured credit facility. In 2006, Windstream Corp. entered into four pay fixed, receive variable interest rate
swap agreements to serve as cash flow hedges of the interest rate risk inherent in its senior secured credit facility. Windstream
Corp. renegotiated the four interest rate swap agreements on December 3, 2010, and again on August 21, 2012, each time lowering
the fixed interest rate paid and extending the maturity. As a result of the August 21, 2012 transaction, Windstream Corp. reduced
its fixed interest rate paid from 4.553 percent to 3.391 percent effective October 17, 2012. The fixed interest rate paid includes a
component which serves to settle the liability existing on Windstream Corp. swaps at the time of the transaction. The variable rate
received resets on the seventeenth day of each month to the one-month London Interbank Offered Rate (“LIBOR”). The swaps
had a notional value of $900.0 million as of December 31, 2014, where it will remain until maturity on October 17, 2019.
On May 31, 2013, Windstream Corp. entered into six new pay fixed, receive variable interest rate swap agreements, designated
as cash flow hedges of the previously unhedged interest rate risk inherent in its senior secured credit facility. These swaps have a
fixed notional value of $750.0 million and mature on June 17, 2016. The fixed rate paid ranges from 1.026 to 1.040 percent plus
a fixed spread of 2.750 percent. The variable rate received resets on the seventeenth day of each month to the one-month LIBOR
subject to a minimum rate of 0.750 percent.
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 facility, 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) 2014 2013 2012
Designated portion, measured at fair value
Other assets $ 0.4 $ — $ —
Other current liabilities $ 28.5 $ 30.0 $ 29.0
Other non-current liabilities $ 48.7 $ 41.8 $ 91.2
Accumulated other comprehensive income (loss) $ 4.9 $ 28.2 $ (14.7)
De-designated portion, unamortized value
Accumulated other comprehensive loss $ (8.8)$ (24.7)$ (45.9)
Weighted average fixed rate paid 3.57% 3.57% 4.26%
Variable rate received 0.16% 0.16% 0.21%
Derivatives are assessed for effectiveness each quarter and any ineffectiveness is recognized in other income (expense), net in our
consolidated statements of operations. Ineffectiveness recognized on the cash flow hedges was $(0.3) million, $1.6 million and
$(7.5) million for the years ended December 31, 2014, 2013 and 2012, 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.