Verizon Wireless 2009 Annual Report Download - page 61

Notes to Consolidated Financial Statements continued
59
NOTE 10
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
The following table presents the balances of assets measured at fair value
on a recurring basis as of December 31, 2009:
(dollars in millions)
Level 1 Level 2 Level 3 Total
Assets:
Short-term investments $ 274 $ 216 $ – $ 490
Investments in
unconsolidated businesses 417 – – 417
Other assets – 1,365 – 1,365
Short-term investments and Investments in unconsolidated businesses
include equity securities, mutual funds and U.S. Treasuries, which are gen-
erally measured using quoted prices in active markets and are classified
as Level 1.
Other assets and the short-term investments classified as Level 2 are
comprised of domestic and foreign corporate and government bonds.
While quoted prices in active markets for certain of these debt securities
are available, for some they are not. We use alternative matrix pricing as
a practical expedient resulting in our debt securities being classified as
Level 2. Our derivative contracts included in Other assets are primarily
comprised of cross currency and interest rate swaps. Derivative contracts
are valued using models based on readily observable market parameters
for all substantial terms of our derivative contracts and thus are classified
within Level 2. We use mid-market pricing for fair value measurements of
our derivative instruments.
Gross unrealized gains and losses on marketable securities and other
investments were not significant during 2009 and 2008.
Upon closing of the Alltel acquisition (see Note 2), the $4.8 billion invest-
ment in Alltel debt, which was classified as Level 3 at December 31, 2008,
became an intercompany loan and is eliminated in consolidation.
Investment Impairment Charge
During 2008, we recorded a pretax charge of $48 million ($31 million
after-tax) related to an other-than-temporary decline in the fair value of
our investments in certain marketable securities.
Fair Value of Short-term and Long-term Debt
The fair value of our short-term and long-term debt, excluding capital
leases, is determined based on market quotes for similar terms and
maturities or future cash flows discounted at current rates. The fair value
and carrying value of our long-term and short-term debt, excluding cap-
ital leases, were as follows:
(dollars in millions)
At December 31, 2009 2008
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Short- and long-term debt $ 61,859 $ 67,359 $ 51,562 $ 53,174
Derivatives
Interest Rate Swaps
We have entered into domestic interest rate swaps to achieve a targeted
mix of fixed and variable rate debt, where we principally receive fixed
rates and pay variable rates based on London Interbank Offered Rate
(LIBOR). These swaps are designated as fair value hedges and hedge
against changes in the fair value of our debt portfolio. We record the
interest rate swaps at fair value on our balance sheet as assets and liabili-
ties. Changes in the fair value of the interest rate swaps are recorded to
interest expense, which are offset by changes in the fair value of the debt
due to changes in interest rates. The fair value of these contracts was
$171 million and $415 million at December 31, 2009 and December 31,
2008, respectively, and is included in Other assets and Long-term debt.
As of December 31, 2009, the total notional amount of these interest rate
swaps was $6.0 billion.
Cross Currency Swaps
During the fourth quarter of 2008, Verizon Wireless entered into cross cur-
rency swaps designated as cash flow hedges to exchange approximately
$2.4 billion of the net proceeds from the December 2008 Verizon Wireless
co-issued debt offering of British Pounds Sterling and Euro denominated
debt into U.S. dollars and to fix our future interest and principal payments
in U.S. dollars, as well as mitigate the impact of foreign currency transac-
tion gains or losses. The fair value of these swaps included in Other assets
at December 31, 2009 was approximately $315 million and at December
31, 2008 was insignificant. During 2009, a pretax gain of $310 million
was recognized in Other comprehensive income, of which $135 million
was reclassified from Accumulated other comprehensive loss to Other
income and (expense), net to offset the related pretax foreign currency
transaction loss on the underlying debt obligation.
Alltel Interest Rate Swaps
As a result of the Alltel acquisition, Verizon Wireless acquired seven interest
rate swap agreements with a notional value of $9.5 billion that paid fixed
and received variable rates based on three-month and one-month LIBOR
with maturities ranging from 2009 to 2013. During the second quarter
of 2009, we settled all of these agreements using cash generated from
operations for a gain that was not significant. Changes in the fair value of
these swaps were recorded in earnings through settlement.
Prepaid Forward Agreement
During the first quarter of 2009, we entered into a privately negotiated pre-
paid forward agreement for 14 million shares of Verizon common stock at
a cost of approximately $390 million. During the fourth quarter of 2009, we
terminated the prepaid forward agreement with respect to 5 million shares
of Verizon common stock, which resulted in the delivery of those shares to
Verizon. The remaining balance of the prepaid forward agreement for 9
million shares of Verizon common stock at December 31, 2009 of $252 mil-
lion is included in Other assets. Changes in the fair value of the agreement,
which were not significant during 2009, were included in Selling, general
and administrative expense and Cost of services and sales.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk con-
sist primarily of temporary cash investments, short-term and long-term
investments, trade receivables, certain notes receivable, including lease
receivables, and derivative contracts. Our policy is to deposit our tem-
porary cash investments with major financial institutions. Counterparties
to our derivative contracts are also major financial institutions. The finan-
cial institutions have all been accorded high ratings by primary rating
agencies. We limit the dollar amount of contracts entered into with any
one financial institution and monitor our counterparties’ credit ratings.
We generally do not give or receive collateral on swap agreements due
to our credit rating and those of our counterparties. While we may be
exposed to credit losses due to the nonperformance of our counterpar-
ties, we consider the risk remote and do not expect the settlement of
these transactions to have a material effect on our results of operations
or financial condition.