Verizon Wireless 2008 Annual Report Download - page 30

Alltel Interest Rate Swaps
InconnectionwiththeAlltelacquisition(see“RecentDevelopments”),
Verizon Wireless acquired seven interest rate swap agreements with a
notional value of $9.5 billion that pay fixed and receive variable rates
basedonthree-monthandone-monthLIBORwithmaturitiesranging
from 2009 to 2013. Until they are terminated, the swap agreements are
guaranteed by Verizon Wireless. Upon closing of the acquisition, these
swap agreements will be recorded at fair value as of the closing date as
part of the purchase price allocation and subsequent changes in the fair
value will be recorded in earnings. Based on recent trends in the credit
markets, changes in interest rates may have a significant impact on our
earnings as long as the contracts are outstanding. We estimate that a
10-basis point change in rates can result in an approximately $30 mil-
lion impact on pretax earnings. We anticipate that these contracts will be
settled during the first half of 2009.
Foreign Currency Translation
The functional currency of our foreign operations is generally the local cur-
rency. For these foreign entities, we translate income statement amounts
at average exchange rates for the period, and we translate assets and
liabilities at end-of-period exchange rates. We record these translation
adjustments in Accumulated other comprehensive loss, a separate com-
ponent of Shareowners’ Investment, in our consolidated balance sheets.
We report exchange gains and losses on intercompany foreign currency
transactions of a long-term nature in Accumulated other comprehen-
sive loss. Other exchange gains and losses are reported in income. At
December 31, 2008, our primary translation exposure was to the British
Pound Sterling, the Euro and the Australian Dollar.
During 2008, we entered into cross currency swaps designated as cash
flow hedges to exchange the net proceeds from the December 18, 2008
Verizon Wireless and Verizon Wireless Capital LLC offering from British
Pound Sterling and Euros into U.S. dollars, to fix our future interest and
principal payments in U.S. dollars as well as mitigate the impact of for-
eign currency transaction gains or losses. We record these contracts at
fair value and any gains or losses on these contracts will, over time, offset
the gains or losses on the underlying debt obligations.
During 2007, we entered into foreign currency forward contracts to
hedge a portion of our net investment in Vodafone Omnitel. Changes
in fair value of these contracts due to Euro exchange rate fluctuations
are recognized in Accumulated other comprehensive loss and partially
offset the impact of foreign currency changes on the value of our net
investment. During 2008, our positions in these foreign currency forward
contracts were settled. As of December 31, 2008, Accumulated other
comprehensive loss includes unrecognized losses of approximately $166
million ($108 million after-tax) related to these hedge contracts, which
along with the unrealized foreign currency translation balance on the
investment hedged, remain in Accumulated other comprehensive loss
until the investment is sold.
Guarantees
In connection with the execution of agreements for the sale of businesses
and investments, Verizon ordinarily provides representations and warran-
ties to the purchasers pertaining to a variety of nonfinancial matters, such
as ownership of the securities being sold, as well as financial losses.
As of December 31, 2008, letters of credit totaling approximately $200
million were executed in the normal course of business, which support
several financing arrangements and payment obligations to third parties.
MARKET RISK
We are exposed to various types of market risk in the normal course of
business, including the impact of interest rate changes, foreign currency
exchange rate fluctuations, changes in equity investment and commodity
prices and changes in corporate tax rates. We employ risk management
strategies which may include the use of a variety of derivatives, including
cross currency swaps, foreign currency forwards and collars, equity
options, interest rate and commodity swap agreements and interest rate
locks. We do not hold derivatives for trading purposes.
It is our general policy to enter into interest rate, foreign currency and
other derivative transactions only to the extent necessary to achieve our
desired objectives in limiting our exposure to the various market risks. Our
objectives include maintaining a mix of fixed and variable rate debt to
lower borrowing costs within reasonable risk parameters and to protect
against earnings and cash flow volatility resulting from changes in market
conditions. We do not hedge our market risk exposure in a manner that
would completely eliminate the effect of changes in interest rates and
foreign exchange rates on our earnings. We do not expect that our net
income, liquidity and cash flows will be materially affected by these risk
management strategies.
Interest Rate Risk
The table that follows summarizes the fair values of our long-term debt
and interest rate and cross currency swap derivatives as of December 31,
2008 and 2007. The table also provides a sensitivity analysis of the esti-
mated fair values of these financial instruments assuming 100-basis-point
upward and downward shifts in the yield curve. Our sensitivity analysis
does not include the fair values of our commercial paper and bank loans,
if any, because they are not significantly affected by changes in market
interest rates.
(dollars in millions)
At December 31, 2008 Fair Value
Fair Value
assuming
+100 basis
point shift
Fair Value
assuming
–100 basis
point shift
Long-term debt and related
derivatives $ 51,258 $ 48,465 $ 54,444
At December 31, 2007
Long-term debt and related
derivatives $ 31,930 $ 30,154 $ 33,957
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Management’s Discussion and Analysis
ofFinancialConditionandResultsofOperations continued