Verizon Wireless 2011 Annual Report Download - page 46

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Interest Rate Swaps
We have entered into domestic interest rate swaps to achieve a targeted
mix of fixed and variable rate debt. We principally receive fixed rates and
payvariableratesbasedonLIBOR,resultinginanetincreaseordecrease
to Interest expense. 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 due to changes in interest rates are recorded to Interest expense,
which are offset by changes in the fair value of the debt. The fair value of
these contracts was $0.6 billion at December 31, 2011 and $0.3 billion at
December 31, 2010 and is primarily included in Other assets and Long-
term debt. As of December 31, 2011, the total notional amount of these
interest rate swaps was $7.0 billion.
Foreign Currency Translation
The functional currency for our foreign operations is primarily the
local currency. The translation of income statement and balance sheet
amounts of our foreign operations into U.S. dollars is recorded as cumu-
lative translation adjustments, which are included in Accumulated other
comprehensive loss in our consolidated balance sheets. Gains and losses
on foreign currency transactions are recorded in the consolidated state-
ments of income in Other income and (expense), net. At December 31,
2011, our primary translation exposure was to the British Pound Sterling,
the Euro and the Australian Dollar.
Cross Currency Swaps
During 2008, Verizon Wireless entered into cross currency swaps des-
ignated as cash flow hedges to exchange approximately $2.4 billion of
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.
During December 2011, we repaid $0.9 billion upon maturity for the €0.7
billion of 7.625% Verizon Wireless Notes. The settlement of the related
cross currency swap did not have a material impact on our financial
statements. The fair value of the outstanding swaps, primarily included
in Other assets, was approximately $0.1 billion at December 31, 2011 and
December 31, 2010, respectively. During 2011, the pretax loss recognized
in Other comprehensive income was not significant. During 2010, a pre-
tax loss of $0.2 billion was recognized in Other comprehensive income.
A portion of these gains and losses recognized in Other comprehensive
income was reclassified to Other income and (expense), net to offset the
related pretax foreign currency transaction gain or loss on the underlying
debt obligations.
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 cur-
rency exchange rate fluctuations, changes in investment, equity and
commodity prices and changes in corporate tax rates. We employ risk
management strategies, which may include the use of a variety of deriva-
tives including cross currency swaps, foreign currency and prepaid
forwards and collars, 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 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
We are exposed to changes in interest rates, primarily on our short-term
debt and the portion of long-term debt that carries floating interest
rates. As of December 31, 2011, more than three-fourths in aggregate
principal amount of our total debt portfolio consisted of fixed rate
indebtedness, including the effect of interest rate swap agreements des-
ignated as hedges. The impact of a 100 basis point change in interest
rates affecting our floating rate debt would result in a change in annual
interest expense, including our interest rate swap agreements that are
designated as hedges, of approximately $0.1 billion. The interest rates on
our existing long-term debt obligations are unaffected by changes to our
credit ratings.
The table that follows summarizes the fair values of our long-term debt,
including current maturities, and interest rate swap derivatives as of
December 31, 2011 and 2010. The table also provides a sensitivity anal-
ysis of the estimated fair values of these financial instruments assuming
100-basis-point upward and downward shifts in the yield curve. Our sen-
sitivity 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, 2011 FairValue
FairValue
assuming
+ 100 basis
point shift
FairValue
assuming
- 100 basis
point shift
Long-term debt and related derivatives $ 61,870 $ 58,117 $ 66,326
At December 31, 2010
Long-term debt and related derivatives $ 58,591 $ 55,427 $ 62,247
ManagEMEnt’s discussiOn and analYsis
OF Financial cOnditiOn and REsults OF OPERatiOns continued