Windstream 2014 Annual Report Download - page 176

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-60
5. Derivative Instruments, Continued:
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 the 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, 2014. Each
counterparty is a bank with a current credit rating at or above A.
Windstream Corp. expects to recognize losses of $6.6 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, 2014. Payments on the
swaps are presented in the financing activities section of the accompanying consolidated statements of cash flows due to the
embedded financing element discussed above.
Changes in the value of these derivative instruments were as follows for the years ended December 31:
(Millions) 2014 2013 2012
Changes in fair value of effective portion, net of tax (a) $ (14.3) $ 17.4 $ (12.6)
Amortization of unrealized losses on de-designated
interest rate swaps, net of tax (a) $ 9.8 $ 22.2 $ 28.0
(a) Included as a component of other comprehensive income (loss) and will be reclassified into earnings as the hedged
transaction affects earnings.
The agreements with each of the derivative counterparties contain cross-default provisions, whereby if Windstream Corp. were
to default on certain indebtedness, it could also be declared in default on its derivative obligations and may be required to net settle
any outstanding derivative liability positions with its counterparties. In addition, certain of the agreements with the counterparties
contain provisions where if a specified event or condition, such as a merger, occurs that materially changes Windstream Corp.’s
creditworthiness in an adverse manner, Windstream Corp. may be required to fully collateralize its derivative obligations. At
December 31, 2014, Windstream Corp. had not posted any collateral related to its interest rate swap agreements.
Balance Sheet Offsetting
Windstream Corp. is party to master netting arrangements, which are designed to reduce credit risk by permitting net settlement
of transactions, with counterparties. For financial statement presentation purposes, Windstream Corp. does not offset assets and
liabilities under these arrangements.
The following tables present assets and the liabilities subject to an enforceable master netting arrangement as of December 31,
2014 and 2013. As of December 31, 2013, all swap agreements with counterparties were in a liability position and, accordingly,
there were no assets to be recognized in the accompanying consolidated balance sheets as of that date.
Information pertaining to derivative assets was as follows:
Gross Amounts Not Offset
in the Consolidated
Balance Sheets
(Millions)
Gross Amount of
Recognized
Assets
Net Amount of Assets
presented in the
Consolidated Balance
Sheets
Financial
Instruments
Cash
Collateral
Received
Net
Amount
December 31, 2014:
Interest rate swaps $ 0.4 $ 0.4 $ (0.3)$— $0.1