Sprint - Nextel 2005 Annual Report Download - page 82

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designated as fair value hedges effectively convert our fixed-rate debt to a floating-rate by receiving fixed rate
amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the
underlying principal amount. As of December 31, 2005, we had outstanding interest rate swap agreements that
were designated as fair value hedges.
Approximately 80% of our debt as of December 31, 2005 was fixed-rate debt excluding interest rate swaps.
While changes in interest rates impact the fair value of this debt, there is no impact to earnings and cash flows
because we intend to hold these obligations to maturity unless market and other conditions are favorable.
As of December 31, 2005, we held fair value interest rate swaps with a notional value of $1 billion. These swaps
were entered into as hedges of the fair value of a portion of our senior notes. These interest rate swaps have
maturities ranging from 2008 to 2012. On a semiannual basis, we pay a floating rate of interest equal to the
six-month LIBOR plus a fixed spread and receive an average interest rate equal to the coupon rates stated on the
underlying senior notes. On December 31, 2005, the rate we would pay averaged 7.0% and the rate we would
receive was 7.2%. Assuming a one percentage point increase in the prevailing forward yield curve, the fair value
of the interest rate swaps and the underlying senior notes would change by $36 million. These interest rate swaps
met all the requirements for perfect effectiveness under derivative accounting rules as all of the critical terms of
the swaps perfectly matched the corresponding terms of the hedged debt; therefore, there is no impact to earnings
and cash flows for any fair value fluctuations.
We perform interest rate sensitivity analyses on our variable rate debt including interest rate swaps. These
analyses indicate that a one percentage point change in interest rates would have an annual pre-tax impact of $45
million on our statements of operations and cash flows as of December 31, 2005. While our variable-rate debt
may impact earnings and cash flows as interest rates change, it is not subject to changes in fair values.
We also perform a sensitivity analysis on the fair market value of our outstanding debt. A 10% decline in market
interest rates would cause a $987 million increase in fair market value of our debt to $29 billion. This analysis
includes the hedged debt.
We have entered into a series of interest rate collars associated with the anticipated issuance of debt by Embarq
at the time of its expected spin-off in 2006. These collars have been designated as cash flow hedges in Embarq’s
financial statements against the variability in interest payments that would result from a change in interest rates
before the debt is issued at the time of spin-off. However, because the forecasted interest payments of debt will
occur after the subsidiary is spun-off, the derivative instruments do not qualify for hedge accounting treatment in
our consolidated financial statements, and so any changes in the fair value of these instruments are recognized in
earnings during the period of change. Based on market prices on December 31, 2005, a one percentage point
change in interest rates would result in a decrease in the fair value of these instruments by approximately $179
million.
Foreign Currency Risk
We also enter into forward contracts and options in foreign currencies to reduce the impact of changes in foreign
exchange rates. Our foreign exchange risk management program focuses on reducing transaction exposure to
optimize consolidated cash flow. We use foreign currency derivatives to hedge our foreign currency exposure
related to settlement of international telecommunications access charges and the operation of our international
subsidiaries. The dollar equivalent of our net foreign currency payables from international settlements was $20
million and net foreign currency receivables from international operations was $24 million as of December 31,
2005. The potential immediate pre-tax loss to us that would result from a hypothetical 10% change in foreign
currency exchange rates based on these positions would be less than $1 million.
Equity Risk
We are exposed to market risk as it relates to changes in the market value of our investments. We invest in equity
instruments of public and private companies for operational and strategic business purposes. These securities are
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