Windstream 2015 Annual Report Download - page 200

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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F-70
6. Derivative Instruments, Continued:
The three remaining swaps have a notional value of $675.0 million and are hedging probable variable cash flows which extend
up to one year beyond the maturity of certain components of the variable rate debt. Consistent with past practice, Windstream
Services expects to extend or otherwise replace these components of its debt with variable rate debt. The 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 at-market swap. As such, a portion of the cash payment on the swaps
represents the rate that Windstream Services would pay on a hypothetical at-market interest rate swap and is recognized in interest
expense. The remaining portion represents the repayment of the embedded financing element and reduces the initial swap liability.
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) 2015 2014
Designated portion, measured at fair value
Other assets $ — $ 0.4
Other current liabilities $ 18.3 $ 28.5
Other non-current liabilities $ 33.4 $ 48.7
Accumulated other comprehensive (loss) income $ (0.9) $ 4.9
De-designated portion, unamortized value
Accumulated other comprehensive loss $ (0.2) $ (8.8)
Weighted average fixed rate paid 2.99% 3.57%
Variable rate received 0.35% 0.16%
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 $(3.7) million, $(0.3) million and
$1.6 million for the years ended December 31, 2015, 2014 and 2013, respectively.
All or a portion of the change in fair value of Windstream Services’ interest rate swap agreements recorded in accumulated other
comprehensive income may be recognized in earnings in certain situations. If Windstream Services 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 may be recognized in earnings. In addition, the
change in fair value of the swaps may be recognized in earnings if Windstream Services 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
Services has assessed the counterparty risk and determined that no substantial risk of default exists as of December 31, 2015. Each
counterparty is a bank with a current credit rating at or above A, as determined by Moody’s Investors Service, Standard & Poor’s
Corporation and Fitch Ratings.
Windstream Services expects to recognize losses of $7.7 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 and the interest settlements for the three
remaining interest swap agreements at December 31, 2015. 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) 2015 2014 2013
Changes in fair value of effective portion, net of tax (a) $ (5.4) $ (14.3) $ 17.4
Amortization of unrealized losses on de-designated
interest rate swaps, net of tax (a) $ 7.1 $ 9.8 $ 22.2
(a) Included as a component of other comprehensive income (loss) and will be reclassified into earnings as the hedged
transaction affects earnings.