Document wqq226nXnB5Rk1o4vGo5ZzZ3Q

elOvk Page 73 of 84 Table of Contents COOPER INDUSTRIES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Hedge accounting is discontinued prospectively when (1) it is determined that a derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item, (2) the derivative is sold, terminated or exercised, (3) the hedged item no longer meets the definition of a firm commitment, or (4) it is unlikely that a forecasted transaction will occur within two months of the originally specified time period When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fairvalue hedge, the derivative will continue to be carried on the balance sheet at its fair value, and the hedged asset or liability will no longer be adjusted for changes in fair value When hedge accounting is discontmued because a hedged item no longer meets the definition of a firm commitment, the derivative will continue to be carried on the balance sheet at its fair value, and any asset or liability that was recorded pursuant to recognition of the firm commitment will be removed from the balance sheet and recognized as a gam or loss currently in earnings When hedge accounting is discontmued because it is probable that a forecasted transaction will not occur within two months of the originally specified time period, the derivative will continue to be carried on the balance sheet at its fair value, and gams and losses reported in accumulated nonowner changes in equity will be recognized immediately in earnings Cooper enters into foreign currency forward exchange contracts and commodity futures contracts to reduce the risks of adverse changes in foreign exchange rates and commodity prices In 2003, Cooper entered into interest-rate swaps to reduce the interest-rate risk associated with certain fixed-rate debt Cooper does not enter into speculative derivative transactions As a result of having sales, purchases and certain intercompany transactions denominated in currencies other than the functional currencies of Cooper's businesses, Cooper is exposed to the effect of foreign exchange rate changes on its cash flows and earnings Cooper enters into foreign currency forward exchange contracts to hedge significant foreign currency denominated transactions for periods consistent with the terms of the underlying transactions Contracts generally have maturities that do not exceed one year Foreign currency forward exchange contracts executed to hedge a recognized asset, liability or firm commitment are accounted for as fair value hedges The net gam or loss on contracts designated as fair value hedges was not material during 2004, 2003 or 2002 Foreign currency forward exchange contracts executed to hedge forecasted transactions are accounted for as cash flow hedges The net gam or loss on contracts designated as cash flow hedges was not material during 2004, 2003 or 2002 Cooper also enters into certain foreign currency forward exchange contracts that are not designated as hedges These contracts are intended to reduce cash flow volatility related to intercompany financing transactions Cooper enters into commodity futures contracts to reduce the volatility of price fluctuations on a portion of its forecasted annual raw material purchases These instruments are designated as cash flow hedges The net gam or loss on commodity futures contracts was not material in 2004, 2003 or 2002 During August 2003, Cooper entered into interest-rate swaps to effectively convert $300 million of 5 25% long-term fixed-rate debt to variable-rate debt at the six-month LIBOR rate plus 1 91% (with semi-annual reset) The interest-rate swaps are designated as fair value hedges The notional principal amount and maturity dates of the interest-rate swaps match the underlying long-term debt During the years ended December 31, 2004 and 2003, respectively, Cooper recognized a $5 1 million and $2 4 million reduction of interest expense, net related to the interest-rate swaps Gams or losses on derivative instruments are reported in the same line item as the underlying hedged transaction in the consolidated statements of income At December 31, 2004, Cooper expects to reclassify $1 5 million of net gams on derivative instruments designated as cash flow hedges from accumulated nonowner changes in equity to earnings during the next twelve months The amount of discontmued cash flow hedges during 2004, 2003 and 2002 was not material F-30 httpY/www sec gov/Archives/edgar/data/1141982/000095012905001490/h22660el0vk htm 2/6/2006