Derivatives:

Windstream Services has entered into the following interest rate swap agreements to mitigate the interest rate risk inherent in its variable rate senior secured credit facility. Derivative instruments are accounted for in accordance with authoritative guidance for recognition, measurement and disclosures about derivative instruments and hedging activities, including when a derivative or other financial instrument can be designated as a hedge. This guidance requires recognition of all derivative instruments at fair value, and accounting for the changes in fair value depends on whether the derivative has been designated as, qualifies as and is effective as a hedge. Changes in fair value of the effective portions of cash flow hedges are recorded as a component of other comprehensive income (loss) in the current period. Any ineffective portion of the hedges is recognized in earnings in the current period.

In 2006, Windstream Services 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 Services renegotiated the four interest rate swap agreements in December 2010, and again in August 2012, each time lowering the fixed interest rate paid and extending the maturity. As a result of the August 2012 transaction, Windstream Services reduced its fixed interest rate paid from 4.553 percent to 3.391 percent. The fixed interest rate paid includes a component which serves to settle the liability existing on Windstream Services 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 March 31, 2015, which will remain unchanged until maturity on October 17, 2019.

In May 2013, Windstream Services 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 Services’ 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 Services expects to extend or otherwise replace these components of its debt with variable rate debt.

4. Derivatives, Continued:

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 the interest rate swap agreements:



(Millions, except for percentages)	March 31, 2015			December 31, 2014
Designated portion, measured at fair value:
Other assets	$	—		$	0.4
Other current liabilities	$	28.5		$	28.5
Other non-current liabilities	$	54.7		$	48.7
Accumulated other comprehensive (loss) income	$	(3.7	)	$	4.9
De-designated portion, unamortized value:
Accumulated other comprehensive loss	$	(5.5	)	$	(8.8	)
Weighted average fixed rate paid	3.57		%	3.57		%
Variable rate received	0.17		%	0.16		%

Derivatives are assessed for effectiveness each quarter and any ineffectiveness is recognized in other (expense) income, net in our consolidated statements of operations. Ineffectiveness recognized on the cash flow hedges was $(2.3) million for the three month period ended March 31, 2015. Comparatively, there was no ineffectiveness recognized for the three month period ended March 31, 2014.

Windstream Services’ 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 Services 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.

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 would 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 March 31, 2015. Each counterparty is a bank with a current credit rating at or above A.

Windstream Services expects to recognize losses of $5.0 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 March 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 three month periods ended March 31:



(Millions)	2015			2014
Changes in fair value of effective portion, net of tax (a)	$	(5.2	)	$	(4.3	)
Amortization of unrealized losses on de-designated interest rate swaps, net of tax (a)	$	2.0		$	2.6


(a)	Included as a component of other comprehensive loss and will be reclassified into earnings as the hedged transaction affects earnings.

4. Derivatives, Continued:

The agreements with each of the derivative counterparties contain cross-default provisions, whereby if Windstream Services 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 Services’ creditworthiness in an adverse manner, Windstream Services may be required to fully collateralize its derivative obligations. At March 31, 2015, Windstream Services had not posted any collateral related to its interest rate swap agreements.

Balance Sheet Offsetting

Windstream Services 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 Services does not offset assets and liabilities under these arrangements.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of March 31, 2015 and December 31, 2014. As of March 31, 2015, all swap agreements with counterparties were in a liability position and, accordingly, there were no assets to be recognized in the accompanying consolidated balance sheet 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

Information pertaining to derivative liabilities was as follows:



					Gross Amounts Not Offset in the Consolidated Balance Sheets
(Millions)	Gross Amount of Recognized Liabilities		Net Amount of Liabilities presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received		Net Amount
March 31, 2015:
Interest rate swaps	$	83.2	$	83.2	$	—		$	—	$	83.2

December 31, 2014:
Interest rate swaps	$	77.2	$	77.2	$	(0.3	)	$	—	$	76.9

As further discussed in Note 13, in conjunction with the spin-off, Windstream Services terminated seven of its interest rate swaps.