Verizon Wireless 2010 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, 2010:
(dollars in millions)
Level 1 Level 2 Level 3 Total
Assets:
Short-term investments:
Equity securities $ 281 $ – $ – $ 281
Fixed income securities 8 256 – 264
Other current assets:
Interest rate swaps – 42 – 42
Cross currency swaps – 7 – 7
Other assets:
Equity securities 285 – – 285
Fixed income securities 205 766 – 971
Interest rate swaps – 278 – 278
Forward interest rate swaps – 108 – 108
Cross currency swaps – 101 – 101
Total $ 779 $ 1,558 $ – $ 2,337
Equity securities consist of investments in common stock of domestic
and international corporations in a variety of industry sectors and are
generally measured using quoted prices in active markets and are clas-
sified as Level 1.
Fixed income securities consist primarily of investments in U.S. Treasuries
and agencies, as well as municipal bonds. We use quoted prices in active
markets for our U.S. Treasury securities, and therefore these securities are
classified as Level 1. For all other fixed income securities that do not have
quoted prices in active markets, we use alternative matrix pricing as a prac-
tical expedient resulting in these debt securities being classified as Level 2.
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.
We recognize transfers between levels of the fair value hierarchy as of the
end of the reporting period. There were no transfers within the fair value
hierarchy during 2010.
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 matur-
ities or future cash flows discounted at current rates. The fair value of our
short-term and long-term debt, excluding capital leases, was as follows:
(dollars in millions)
At December 31, 2010 2009
Carrying
Amount Fair Value
Carrying
Amount Fair Value
Short and long-term debt,
excluding capital leases $ 52,462 $ 59,020 $ 61,859 $ 67,359
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 consolidated balance sheets as assets and
liabilities. 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 $0.3 billion and $0.2 billion at December 31, 2010 and December 31,
2009, respectively, and are primarily included in Other assets and Long-
term debt. As of December 31, 2010, the total notional amount of these
interest rate swaps was $6.0 billion. During February 2011, we entered
into interest rate swaps, designated as fair value hedges, with a notional
amount of approximately $3.0 billion.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during
2010, we entered into forward interest rate swaps with a total notional
value of $1.4 billion. We have designated these contracts as cash flow
hedges. The fair value of these contracts was $0.1 billion at December
31, 2010 and the contracts are included in Other assets. On or before
February 7, 2011, Verizon terminated these forward interest rate swaps.
Cross Currency Swaps
Verizon Wireless has entered into cross currency swaps designated as
cash flow hedges to exchange approximately $2.4 billion British Pound
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 transaction gains or losses. The fair value of
these swaps included primarily in Other assets was approximately $0.1
billion and $0.3 billion at December 31, 2010 and December 31, 2009,
respectively. During 2010 and 2009, a pre-tax loss of $0.2 billion and a
pre-tax gain of $0.3 billion, respectively, was recognized in Other compre-
hensive income, a portion of which was reclassified to Other income and
(expense), net to offset the related pre-tax foreign currency transaction
gain on the underlying debt obligations.
Prepaid Forward Agreement
During the first quarter of 2009, we entered into a privately negotiated
prepaid forward agreement for 14 million shares of Verizon common
stock at a cost of approximately $0.4 billion. We terminated the prepaid
forward agreement with respect to 5 million of the shares during the
fourth quarter of 2009 and 9 million of the shares during the first quarter
of 2010, which resulted in the delivery of those shares to Verizon.
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 2009, we settled all of
these agreements for a gain that was not significant. Changes in the fair
value of these swaps were recorded in earnings through settlement.
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.