Notes to Consolidated Financial Statements
In 2004, we entered into an interest rate swap contract with a total notional amount of $50 million to receive interest at 3.36% and pay a variable rate of interest based on six-month LIBOR minus 0.21%. We designated this swap, which expires on April 15, 2009, as a fair value hedge of the changes in fair value of the $50 million of medium-term notes maturing on April 15, 2009. No hedge ineffectiveness is recognized as the interest rate swap qualifies for “shortcut” treatment.
The variable interest on $75 million of commercial paper is hedged by forward starting interest rate swaps for the period through 2011. Net interest payments on this commercial paper are effectively fixed at 6.35% during the period. The unrealized gain or loss on these swaps is recorded in other comprehensive income, as we intend to hold these interest rate swaps until maturity and maintain $75 million of commercial paper outstanding through 2011. Hedge ineffectiveness was not material. Subsequent to the starting date of these swaps, the net cash settlements are reflected in interest expense in the applicable period.
In 2001, we incurred a $14.7 million loss on the settlement of swaps used to hedge the 2001 issuance of $294 million of medium-term notes. The loss on these swaps was deferred in other comprehensive income and is being amortized over the five to seven year life of the medium-term notes as a component of interest expense. Amounts reclassified from other comprehensive income to interest expense for settled interest rate swaps were $1.6 million, $2.5 million and $2.5 million in the years 2006, 2005 and 2004, respectively, and are included in the net change in unrealized gain or loss on derivative financial instruments in the statement of shareholders’ equity.
Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments at November 30, 2006 and 2005 were as follows:
| 2006 | 2005 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (millions) | Carrying amount |
Fair value |
Carrying amount |
Fair value |
||||||||
| Other investments | $ | 44.5 | $ | 44.5 | $ | 36.1 | $ | 36.1 | ||||
| Long-term debt | 570.2 | 587.0 | 464.6 | 488.5 | ||||||||
| Derivative related to: Interest rates |
(3.9 | ) | (3.9 | ) | (9.1 | ) | (9.1 | ) | ||||
| Foreign currencies | (.2 | ) | (.2 | ) | (.6 | ) | (.6 | ) | ||||
Because of their short-term nature, the amounts reported in the balance sheet for cash and cash equivalents, receivables, short-term borrowings and trade accounts payable approximate fair value. The fair value of other investments, long-term debt and derivative financial instruments were based on quoted market prices.
Investments in affiliates are not readily marketable, and it is not practicable to estimate their fair value. Other investments are comprised of fixed income and equity securities held on behalf of employees in certain employee benefit plans and are stated at fair value. The cost of these investments was $41.0 million and $34.8 million at November 30, 2006 and 2005, respectively.
Concentrations of Credit Risk
We are potentially exposed to concentrations of credit risk with trade accounts receivable, prepaid allowances and financial instruments. Because we have a large and diverse customer base with no single customer accounting for a significant percentage of trade accounts receivable and prepaid allowances, there was no material concentration of credit risk in these accounts at November 30, 2006. We evaluate the credit worthiness of the coun-terparties to financial instruments and consider nonperformance credit risk to be remote.