Verizon Wireless 2006 Annual Report Download - page 61

Notes to Consolidated Financial Statements continued
59
In addition, on January 20, 2006, Verizon announced an offer to
repurchase MCI $1,983 million aggregate principal amount of
5.908% Senior Notes Due 2007 at 101% of their par value. On
February 21, 2006, $1,804 million of these notes were redeemed by
Verizon. Verizon satisfied and discharged the indenture governing
this series of notes shortly after the close of the offer for those
noteholders who did not accept this offer.
Other Debt Redemptions/Prepayments
During the second quarter of 2006, we redeemed/prepaid several
debt issuances, including: Verizon North Inc. $200 million 7.625%
Series C debentures due May 15, 2026; Verizon Northwest Inc. $175
million 7.875% Series B debentures due June 1, 2026; Verizon
South Inc. $250 million 7.5% Series D debentures due March 15,
2026; Verizon California Inc. $25 million 9.41% Series W first mort-
gage bonds due 2014; Verizon California Inc. $30 million 9.44%
Series X first mortgage bonds due 2015; Verizon Northwest Inc. $3
million 9.67% Series HH first mortgage bonds due 2010 and Contel
of the South Inc. $14 million 8.159% Series GG first mortgage bonds
due 2018. The gain/(loss) from these retirements was immaterial.
During the third quarter of 2005, we redeemed Verizon New
England Inc. $250 million 6.875% debentures due October 1, 2023
resulting in a pretax charge of $10 million ($6 million after-tax) in
connection with the early extinguishment of the debt.
Zero-Coupon Convertible Notes
Previously in May 2001, Verizon Global Funding issued approxi-
mately $5.4 billion in principal amount at maturity of zero-coupon
convertible notes due 2021, resulting in gross proceeds of approxi-
mately $3 billion. The notes were convertible into shares of our
common stock at an initial price of $69.50 per share if the closing
price of Verizon common stock on the New York Stock Exchange
exceeded specified levels or in other specified circumstances. The
conversion price increased by at least 3% a year. The initial conver-
sion price represented a 25% premium over the May 8, 2001
closing price of $55.60 per share. The notes were redeemable at the
option of the holders on May 15th in each of the years 2004, 2006,
2011 and 2016. On May 15, 2004, $3,292 million of principal
amount of the notes ($1,984 million after unamortized discount)
were redeemed by Verizon Global Funding. In addition, the zero-
coupon convertible notes were callable by Verizon on or after May
15, 2006. On May 16, 2006, we redeemed the remaining $1,375 mil-
lion accreted principal of the remaining outstanding zero-coupon
convertible principal. The total payment on the date of redemption
was $1,377 million.
Support Agreements
All of Verizon Global Funding’s debt had the benefit of Support
Agreements between us and Verizon Global Funding, which gave
holders of Verizon Global Funding debt the right to proceed directly
against us for payment of interest, premium (if any) and principal
outstanding should Verizon Global Funding fail to pay. The holders
of Verizon Global Funding debt did not have recourse to the stock
or assets of most of our telephone operations; however, they did
have recourse to dividends paid to us by any of our consolidated
subsidiaries as well as assets not covered by the exclusion. On
February 1, 2006, Verizon announced the merger of Verizon Global
Funding into Verizon. As a result of the merger all of Verizon Global
Funding’s debt has been assumed by Verizon by operation of law.
In addition, Verizon Global Funding had guaranteed the debt obli-
gations of GTE Corporation (but not the debt of its subsidiary or
affiliate companies) that were issued and outstanding prior to July
1, 2003. In connection with the merger of Verizon Global Funding
into Verizon, Verizon has assumed this guarantee. As of December
31, 2006, $2,950 million principal amount of these obligations
remained outstanding.
Verizon and NYNEX Corporation are the joint and several co-
obligors of the 20-Year 9.55% Debentures due 2010 previously
issued by NYNEX on March 26, 1990. As of December 31, 2006,
$92 million principal amount of this obligation remained out-
standing. NYNEX and GTE no longer issue public debt or file SEC
reports. See Note 20 for information on guarantees of operating
subsidiary debt listed on the New York Stock Exchange.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all of
our debt covenants.
Maturities of Long-Term Debt
Maturities of long-term debt outstanding at December 31, 2006 are
$4.1 billion in 2007, $2.5 billion in 2008, $1.4 billion in 2009, $2.8
billion in 2010, $2.6 billion in 2011 and $19.4 billion thereafter.
NOTE 12
FINANCIAL INSTRUMENTS
Derivatives
The ongoing effect of SFAS No. 133 and related amendments and
interpretations on our consolidated financial statements will be
determined each period by several factors, including the specific
hedging instruments in place and their relationships to hedged
items, as well as market conditions at the end of each period.
Interest Rate Risk Management
We have entered into domestic interest rate swaps, to achieve a tar-
geted mix of fixed and variable rate debt, where we principally
receive fixed rates and pay variable rates based on LIBOR. These
swaps hedge against changes in the fair value of our debt portfolio.
We record the interest rate swaps at fair value in our balance sheet as
assets and liabilities and adjust debt for the change in its fair value
due to changes in interest rates. The ineffective portions of these
hedges were recorded as gains in the consolidated statements of
income of $4 million for the year ended December 31, 2004.
We also enter into interest rate derivatives to limit our exposure to
interest rate changes. In accordance with the provisions of SFAS
No. 133, changes in fair value of these cash flow hedges due to
interest rate fluctuations are recognized in Accumulated Other
Comprehensive Loss. We recorded Other Comprehensive Income
(Loss) of $14 million and $10 million related to these interest rate
cash flow hedges for the years ended December 31, 2006 and
2005, respectively.
Foreign Exchange Risk Management
From time to time, our foreign exchange risk management has
included the use of foreign currency forward contracts and cross
currency interest rate swaps with foreign currency forwards. These
contracts are typically used to hedge short-term foreign currency
transactions and commitments, or to offset foreign exchange gains
or losses on the foreign currency obligations and are designated as
cash flow hedges. There were no foreign currency contracts out-
standing as of December 31, 2006 and 2005. We record these
contracts at fair value as assets or liabilities and the related gains or
losses are deferred in shareowners’ investment as a component of
Accumulated Other Comprehensive Loss. We have recorded net