WIN » Topics » Item 3 . Quantitative and Qualitative Disclosures About Market Risk

This excerpt taken from the WIN 10-Q filed May 8, 2009.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

The Company’s market risks at March 31, 2009 are similar to the market risks discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 19, 2009. Market risk is comprised of three elements: foreign currency risk, interest rate risk and equity risk. As further discussed below, the Company is exposed to market risk from changes in interest rates. The Company does not directly own significant marketable equity securities other than highly liquid cash equivalents, nor does it operate in foreign countries. However, the Company’s pension plan invests in marketable equity securities, including marketable debt and equity securities denominated in foreign currencies.

Interest Rate Risk

The Company is exposed to market risk through changes in interest rates, primarily as it relates to the variable interest rates it is charged under its senior secured credit facilities. Under its current policy, the Company 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 Windstream’s total debt outstanding. The Company has established policies and procedures for risk assessment and the approval, reporting, and monitoring of interest rate swap activity. Windstream does not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. Management periodically reviews Windstream’s exposure to interest rate fluctuations and implements strategies to manage the exposure.

Due to the interest rate risk inherent in its variable rate senior secured credit facilities, the Company entered into four pay fixed, receive variable interest rate swap agreements on notional amounts totaling $1,600.0 million at July 17, 2006 to convert variable interest rate payments to fixed. The counterparty for each of the swap agreements is a bank with a current credit rating at or above A+. The four interest rate swap agreements amortize quarterly to a notional value of $906.3 million at maturity on July 17, 2013, and have an unamortized notional value of $1,250.0 million as of March 31, 2009. The variable rate received by Windstream on these swaps is the three-month LIBOR (London-Interbank Offered Rate), which was 1.14 percent at March 31, 2009. The weighted-average fixed rate paid by Windstream is 5.60 percent. The interest rate swap agreements are designated as cash flow hedges of the interest rate risk created by the variable interest rate paid on the senior secured credit facilities pursuant to the guidance in SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities”, as amended.

After the completion of a refinancing transaction in February 2007, a portion of one of the four interest rate swap agreements with a notional value of $125.0 million was de-designated and is no longer considered an effective hedge as the portion of the Company’s senior secured credit facility that it was designated to hedge against was repaid. Changes in the market value of this portion of the swap, which has an unamortized notional value of $102.5 million as of March 31, 2009, are recognized in net income. The change in market value had no impact to net income, primarily due to an insignificant change in LIBOR during the first quarter of 2009. Changes in the market value of the designated portion of the swaps are recognized in other comprehensive income.

As of March 31, 2009, the amount outstanding under the Company’s variable rate senior secured credit facilities exceed the unamortized notional value of the four interest rate swap agreements by $558.8 million, or approximately 10.4 percent of its total outstanding long-term debt. Windstream has estimated its 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 basis points in variable interest rates would reduce annual pre-tax earnings by approximately $5.6 million. Actual results may differ from this estimate.

Equity Risk

The Company is exposed to market risk through the Company’s pension plan investments. The fair market value of these investments, totaling $591.1 million at March 31, 2009, declined 9.6 percent from $654.0 million at December 31, 2008, due to benefit payments as well as a 6.9 percent decline in the market value of assets held. Primarily as a result of the $347.0 million decline in the market value of pension assets that occurred during 2008, the Company will recognize pension expense of $90.4 million in 2009 as compared to a benefit of $1.6 million in 2008.

 

42


Table of Contents

WINDSTREAM CORPORATION

FORM 10-Q

PART I – FINANCIAL INFORMATION

 

These excerpts taken from the WIN 10-K filed Feb 19, 2009.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

For information pertaining to the Company’s market risk disclosures, refer to pages F-26 through F-27 of the Financial Supplement, which is incorporated by reference herein.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

For information pertaining to the Company’s market risk disclosures, refer to pages F-26 through F-27 of the Financial Supplement, which is
incorporated by reference herein.

This excerpt taken from the WIN 10-Q filed Nov 7, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

The Company’s market risks at September 30, 2008 are similar to the market risks discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on February 29, 2008. Market risk is comprised of three elements: foreign currency risk, interest rate risk and equity risk. As further discussed below, the Company is exposed to market risk from changes in interest rates. The Company does not directly own significant marketable equity securities other than highly liquid cash equivalents, nor does it operate in foreign countries. However, the Company’s pension plan invests in marketable equity securities, including marketable debt and equity securities denominated in foreign currencies.

Interest Rate Risk

The Company is exposed to market risk through changes in interest rates, primarily as it relates to the variable interest rates it is charged under its senior secured credit facilities. Under its current policy, the Company 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 Windstream’s total debt outstanding. The Company has established policies and procedures for risk assessment and the approval, reporting, and monitoring of interest rate swap activity. Windstream does not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. Management periodically reviews Windstream’s exposure to interest rate fluctuations and implements strategies to manage the exposure.

Due to the interest rate risk inherent in its variable rate senior secured credit facilities, the Company entered into four pay fixed, receive variable interest rate swap agreements on notional amounts totaling $1,600.0 million at July 17, 2006 to convert variable interest rate payments to fixed. The counterparty for each of the swap agreements is a bank with a current credit rating at or above A+. The four interest rate swap agreements amortize quarterly to a notional value of $906.3 million at maturity on July 17, 2013, and have an unamortized notional value of $1,312.5 million as of September 30, 2008. The variable rate received by Windstream on these swaps was 2.79 percent at September 30, 2008, which is the three-month LIBOR (London-Interbank Offered Rate) on July 17, 2008. The weighted-average fixed rate paid by Windstream is 5.60 percent. The interest rate swap agreements are designated as cash flow hedges of the interest rate risk created by the variable interest rate paid on the senior secured credit facilities pursuant to the guidance in SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities”, as amended.

After the completion of a refinancing transaction in February 2007, a portion of one of the four interest rate swap agreements with a notional value of $125.0 million was de-designated and is no longer considered an effective hedge as the portion of the Company’s senior secured credit facility that it was designated to hedge against was repaid. Changes in the market value of this portion of the swap, which had an unamortized notional value of $107.6 million as of September 30, 2008, are recognized in net income, including $(0.3) million and $0.5 million recognized as other income (loss) in the unaudited interim consolidated statement of income for the three and nine months ended September 30, 2008, respectively. Changes in the market value of the designated portion of the swaps are recognized in other comprehensive income.

As of September 30, 2008, the unhedged portion of the Company’s variable rate senior secured credit facilities was $503.3 million, or approximately 9 percent of its total outstanding long-term debt. Windstream has estimated its 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 basis points in variable interest rates would reduce annual pre-tax earnings by approximately $5.0 million. Actual results may differ from this estimate.

Equity Risk

The Company is exposed to market risk through the Company’s pension plan investments. The fair market value of these investments, totaling $756.3 million at September 30, 2008, declined 24.4 percent from $1,001.0 million at December 31, 2007, due to benefit payments as well as declines in the market value of assets held. Continued returns below our expected rate of return of 8.0 percent will result in increased pension expense beginning in 2009.

 

51


Table of Contents

WINDSTREAM CORPORATION

FORM 10-Q

PART I – FINANCIAL INFORMATION

This excerpt taken from the WIN 10-Q filed Aug 8, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

The Company’s market risks at June 30, 2008 are similar to the market risks discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on February 29, 2008. Market risk is comprised of three elements: foreign currency risk, interest rate risk and equity risk. As further discussed below, the Company is exposed to market risk from changes in interest rates. The Company does not directly own significant marketable equity securities other than highly liquid short-term investments, nor does it operate in foreign countries. However, the Company’s pension plan invests in marketable equity securities, including marketable debt and equity securities denominated in foreign currencies.

Interest Rate Risk

The Company is exposed to market risk through changes in interest rates, primarily as it relates to the variable interest rates it is charged under its senior secured credit facilities. Under its current policy, the Company 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 Windstream’s total debt outstanding. The Company has established policies and procedures for risk assessment and the approval, reporting, and monitoring of interest rate swap activity. Windstream does not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. Management periodically reviews Windstream’s exposure to interest rate fluctuations and implements strategies to manage the exposure.

Due to the interest rate risk inherent in its variable rate senior secured credit facilities, the Company entered into four pay fixed, receive variable interest rate swap agreements on notional amounts totaling $1,600.0 million at July 17, 2006 to convert variable interest rate payments to fixed. The four interest rate swap agreements amortize quarterly to a notional value of $906.3 million at maturity on July 17, 2013, and have an unamortized notional value of $1,343.8 million as of June 30, 2008. The variable rate received by Windstream on these swaps was 2.72 percent at June 30, 2008, which is the three-month LIBOR (London-Interbank Offered Rate) on April 17, 2008. The weighted-average fixed rate paid by Windstream is 5.60 percent. The interest rate swap agreements are designated as cash flow hedges of the interest rate risk created by the variable interest rate paid on the senior secured credit facilities pursuant to the guidance in SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities”, as amended.

After the completion of a refinancing transaction in February 2007, a portion of one of the four interest rate swap agreements with a notional value of $125.0 million was de-designated and is no longer considered an effective hedge as the portion of the Company’s senior secured credit facility that it was designated to hedge against was repaid. Changes in the market value of this portion of the swap, which had an unamortized notional value of $110.1 million as of June 30, 2008, are recognized in net income, including $4.7 million and $0.8 million recognized as other income in the unaudited consolidated statement of income for the three and six months ended June 30, 2008, respectively. Changes in the market value of the designated portion of the swaps are recognized in other comprehensive income.

As of June 30, 2008, the unhedged portion of the Company’s variable rate senior secured credit facilities was $445.5 million, or approximately 8 percent of its total outstanding long-term debt. Windstream has estimated its 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 basis points in variable interest rates would reduce annual pre-tax earnings by approximately $4.5 million. Actual results may differ from this estimate.

Equity Risk

The Company is exposed to market risk through the Company’s pension plan investments. The fair market value of these investments, totaling $865.6 million at June 30, 2008, decreased 13.5 percent from $1,001.0 million at December 31, 2007. However, long-term returns are expected to approximate 8.0 percent based on historical investment performance, as well as input from investment advisors. Projected returns by such advisors were based on broad equity and bond indices. At December 31, 2007, the Company’s pension plan was overfunded by approximately $107.5 million.

 

48


Table of Contents

WINDSTREAM CORPORATION

FORM 10-Q

PART I – FINANCIAL INFORMATION

This excerpt taken from the WIN 10-Q filed May 9, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

The Company’s market risks at March 31, 2008 are similar to the market risks discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on February 29, 2008. Market risk is comprised of three elements: equity risk, foreign currency risk and interest rate risk. As further discussed below, the Company is exposed to market risk from changes in interest rates. The Company does not directly own significant marketable equity securities other than highly liquid short-term investments, nor does it operate in foreign countries. However, the Company’s pension plan invests in marketable equity securities, including marketable debt and equity securities denominated in foreign currencies.

Interest Rate Risk

The Company is exposed to market risk through changes in interest rates, primarily as it relates to the variable interest rates it is charged under its senior secured credit facilities. Under its current policy, the Company 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 Windstream’s total debt outstanding. The Company has established policies and procedures for risk assessment and the approval, reporting, and monitoring of interest rate swap activity. Windstream does not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. Management periodically reviews Windstream’s exposure to interest rate fluctuations and implements strategies to manage the exposure.

Due to the interest rate risk inherent in its variable rate senior secured credit facilities, the Company entered into four pay fixed, receive variable interest rate swap agreements on notional amounts totaling $1,600.0 million at July 17, 2006 to convert variable interest rate payments to fixed. The four interest rate swap agreements amortize quarterly to a notional value of $906.3 million at maturity on July 17, 2013, and have an unamortized notional value of $1,375.0 million as of March 31, 2008. The variable rate received by Windstream on these swaps was 4.0 percent at March 31, 2008, which is the three-month LIBOR (London-Interbank Offered Rate) on January 17, 2008. The weighted-average fixed rate paid by Windstream is 5.60 percent. The interest rate swap agreements are designated as cash flow hedges of the interest rate risk created by the variable interest rate paid on the senior secured credit facilities pursuant to the guidance in SFAS No. 133, “Accounting for Derivative Financial Instruments and Hedging Activities”, as amended.

After the completion of a refinancing transaction in February 2007, a portion of one of the four interest rate swap agreements with a notional value of $125.0 million was de-designated and is no longer considered an effective hedge as the portion of the Company’s senior secured credit facility that it was designated to hedge against was repaid. Changes in the market value of this portion of the swap, which has an unamortized notional value of $112.7 million as of March 31, 2008, are recognized in net income, including a $3.9 million loss in 2008. Changes in the market value of the designated portion of the swaps are recognized in other comprehensive income.

As of March 31, 2008, the unhedged portion of the Company’s variable rate senior secured credit facilities was $412.8 million, or approximately 8 percent of its total outstanding long-term debt. Windstream has estimated its 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 basis points in variable interest rates would reduce annual pre-tax earnings by approximately $4.1 million. Actual results may differ from this estimate.

Equity Risk

The Company is exposed to market risk through the Company’s pension plan investments. The fair market value of these investments, totaling $902.6 million at March 31, 2008, decreased 9.8 percent from $1,001.0 million at December 31, 2007. However, long-term returns are expected to be approximately 8.0 percent based on historical investment performance, as well as input from investment advisors. Projected returns by such advisors were based on broad equity and bond indices. At December 31, 2007, the Company’s pension plan was overfunded by approximately $107.5 million. Further contributions to the plan may be required if market conditions were to result in a significant decline in the return on assets in the overall plan asset portfolio.

 

43


Table of Contents

WINDSTREAM CORPORATION

FORM 10-Q

PART I – FINANCIAL INFORMATION

This excerpt taken from the WIN 10-K filed Feb 29, 2008.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

For information pertaining to the Company’s market risk disclosures, refer to pages F-24 through F-25 of the Financial Supplement, which is incorporated by reference herein.

This excerpt taken from the WIN 10-Q filed Nov 8, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risks at September 30, 2007 are similar to the market risks discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 1, 2007. The Company is primarily exposed to market risk from changes in interest rates. The Company does not own significant marketable equity securities nor does it operate in foreign countries, and therefore Windstream is not materially exposed to market risk from changes in equity prices or foreign currency rates. Windstream has estimated its interest rate risk using a sensitivity analysis. For Windstream’s variable rate debt instruments, market risk is defined as the potential change in earnings resulting from a hypothetical adverse change in interest rates. The results of the sensitivity analysis used to estimate market risk is presented below. Actual results may differ from this estimate.

Interest Rate Risk

Under its current policy, the Company 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 Windstream’s total debt outstanding. The Company has established policies and procedures for risk assessment and the approval, reporting, and monitoring of interest rate swap activity. Windstream does not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. Management periodically reviews Windstream’s exposure to interest rate fluctuations and implements strategies to manage the exposure.

The Company’s earnings are affected by changes in variable interest rates related to Windstream’s borrowings under its senior secured credit facilities. Due to the interest rate risk inherent in the variable rate senior secured credit facilities, the Company entered into four pay fixed, receive variable interest rate swap agreements on notional amounts totaling $1,600.0 million at July 17, 2006 to convert variable interest rate payments to fixed. The four interest rate swap agreements amortize quarterly to a notional value of $906.3 million at maturity on July 17, 2013, and have an unamortized notional value of $1,450.0 million as of September 30, 2007. The variable rate received by Windstream on these swaps is the three-month LIBOR (London-Interbank Offered Rate), which was 5.36 percent at September 30, 2007. The weighted-average fixed rate paid by Windstream is 5.60 percent. The interest rate swap agreements are designated as cash flow hedges of the interest rate risk created by the variable interest rate paid on the senior secured credit facilities pursuant to the guidance in SFAS No. 133, “Derivative Financial Instruments”, as amended.

After the completion of the refinancing transaction on February 27, 2007, a portion of one of the four interest rate swap agreements with a notional value of $125.0 million was de-designated and is no longer considered an effective hedge as the portion of the Company’s senior secured credit facility that it was designated to hedge against was repaid. Changes in the market value of this portion of the swap, which has an unamortized notional value of $118.9 million as of September 30, 2007, are recognized in net income, including a $2.9 million loss for the three months ended, September 30, 2007, which offsets a $2.9 million gain realized during the first six months of 2007. These activities are reflected as other income in the unaudited consolidated statement of income for the three and nine months ended September 30, 2007, respectively.

A hypothetical increase of 100 basis points in variable interest rates would reduce annual pre-tax earnings by approximately $6.6 million. Conversely, a hypothetical decrease of 100 basis points in variable interest rates would increase annual pre-tax earnings by approximately $6.6 million.

 

59


Table of Contents

WINDSTREAM CORPORATION

FORM 10-Q

PART I – FINANCIAL INFORMATION

This excerpt taken from the WIN 10-Q filed Aug 8, 2007.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risks at June 30, 2007 are similar to the market risks discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the SEC on March 1, 2007. The Company is primarily exposed to market risk from changes in interest rates. The Company does not own marketable equity securities nor operate in foreign countries, and therefore Windstream is not exposed to market risk from changes in equity prices or foreign currency rates. Windstream has estimated its interest rate risk using sensitivity analysis. For Windstream’s variable rate debt instruments, market risk is defined as the potential change in earnings resulting from a hypothetical adverse change in interest rates. The results of the sensitivity analysis used to estimate market risk is presented below. Actual results may differ from this estimate.

Interest Rate Risk

Under its current policy, the Company 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 Windstream’s total debt outstanding. The Company has established policies and procedures for risk assessment and the approval, reporting, and monitoring of interest rate swap activity. Windstream does not enter into interest rate swap agreements, or other derivative financial instruments, for trading or speculative purposes. Management periodically reviews Windstream’s exposure to interest rate fluctuations and implements strategies to manage the exposure.

The Company’s earnings are affected by changes in variable interest rates related to Windstream’s borrowings under its senior secured credit facilities. Due to the interest rate risk inherent in the variable rate senior secured credit facilities, the Company entered into four pay fixed, receive variable interest rate swap agreements on notional amounts totaling $1,600.0 million to convert variable interest rate payments to fixed. The four interest rate swap agreements amortize quarterly to a notional value of $906.3 million at maturity on July 17, 2013, and have an unamortized notional value of $1,487.5 million as of June 30, 2007. The variable rate received by Windstream on these swaps is the three-month LIBOR (London-Interbank Offered Rate), which was 5.36 percent at June 30, 2007. The weighted-average fixed rate paid by Windstream is 5.60 percent. The interest rate swap agreements are designated as cash flow hedges of the interest rate risk created by the variable interest rate paid on the senior secured credit facilities pursuant to the guidance in SFAS No. 133, “Derivative Financial Instruments”, as amended.

After the completion of the February 27th refinancing transaction, a portion of one of the four interest rate swap agreements with a notional value of $125.0 million was no longer considered an effective hedge as the portion of the Company’s senior secured credit facility that it was designated to hedge against was repaid. Changes in the market value of this portion of the swap, which has an unamortized notional value of $115.6 million as of June 30, 2007, are recognized in net income, including $2.5 million and $2.9 million recognized as other income in the unaudited consolidated statement of income for the three and six months ended June 30, 2007, respectively.

A hypothetical increase of 100 basis points in variable interest rates would reduce annual pre-tax earnings by approximately $4.1 million. Conversely, a hypothetical decrease of 100 basis points in variable interest rates would increase annual pre-tax earnings by approximately $4.1 million.

 

47


Table of Contents

WINDSTREAM CORPORATION

FORM 10-Q

PART I – FINANCIAL INFORMATION

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