Derivative Financial Instruments

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The Company has floating rate long-term debt (see Note 11 - Long-Term Debt). This type of debt exposes the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also generally decreases. The Company has used interest rate swaps, in an attempt to manage its exposure to fluctuations in interest rate movements. The Company’s primary objective in managing interest rate risk was to decrease the volatility of its earnings and cash flows affected by changes in the underlying rates. The Company does not use derivative financial instruments for speculative purposes.

In March 2007, Level 3 Financing, Inc. entered into two interest rate swap agreements to hedge the interest payments on $1 billion principal amount of floating rate debt. The Company had designated these interest rate swap agreements as cash flow hedges. The hedge designation was terminated in 2012 in connection with certain refinancing activities, and the instruments were settled upon maturity in 2014. Prior to the redesignation of the hedging relationship in 2012, the change in the fair value of the interest rate swap agreements was reflected in Accumulated Other Comprehensive Income (Loss) ("AOCI") and was subsequently reclassified into earnings through an interest expense yield adjustment, as interest expense on the hedged debt obligation was incurred.

Upon redesignation, the Company recognized a non-cash loss on these agreements of approximately $60 million (excluding accrued interest) in the third quarter of 2012, which represented the cumulative loss recorded in AOCI at the date the instruments ceased to qualify as hedges (see Note 11 - Long-Term Debt). After August 6, 2012, the Company recorded the change in the fair value of the swaps in Other, net in its Consolidated Statement of Operations until maturity of the swaps in early 2014. The Company recognized a loss of zero, $2 million and $4 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets (dollars in millions):

	Liability Derivatives
	December 31, 2013
Derivatives not designated as hedging instruments	Balance Sheet Location	Fair Value
Interest rate swap agreements	Other current liabilities	$	12

The amount of net gains recognized in AOCI, including reclassifications of unrealized losses, consists of the following (dollars in millions):

	Year Ended December 31,
Derivatives designated as hedging instruments	2013		2012
Cash flow hedging contracts	$	—	$	90

The amount of losses reclassified from AOCI to earnings (effective portions) consists of the following (dollars in millions):

		Year Ended December 31,
Derivatives designated as hedging instruments	Statement of Operations Location	2013		2012
Cash flow hedging contracts	Interest Expense	$	—	$	(26	)

The effect of the Company’s derivatives not designated as hedging instruments on net loss is as follows (dollars in millions):

		Year Ended December 31,
Derivatives not designated as hedging instruments	Statement of Operations Location	2014		2013			2012
Interest rate swaps	Other Expense - Other, net	$	—	$	(2	)	$	(64	)