Verizon Wireless 2013 Annual Report Download - page 31

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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 uctuations, 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 swap agreements, commodity swap
and forward agreements and interest rate locks. We do not hold deriva-
tives 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 xed and variable rate debt to
lower borrowing costs within reasonable risk parameters and to protect
against earnings and cash ow volatility resulting from changes in market
conditions. We do not hedge our market risk exposure in a manner that
would completely eliminate the eect of changes in interest rates and
foreign exchange rates on our earnings. We do not expect that our net
income, liquidity and cash ows will be materially aected 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 oating interest
rates. As of December 31, 2013, approximately 92% of the aggregate
principal amount of our total debt portfolio consisted of fixed rate
indebtedness, including the eect of interest rate swap agreements des-
ignated as hedges. The impact of a 100 basis point change in interest
rates aecting our oating 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 unaected 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, 2013 and 2012. The table also provides a sensitivity anal-
ysis of the estimated fair values of these nancial 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 signicantly aected by
changes in market interest rates.
(dollars in millions)
At December 31, 2013 FairValue
FairValue
assuming
+100basis
point shift
FairValue
assuming
- 100 basis
point shift
Long-term debt and related
derivatives $ 103,103 $ 95,497 $ 111,910
At December 31, 2012
Long-term debt and related
derivatives $ 61,045 $ 56,929 $ 65,747
Interest Rate Swaps
We have entered into domestic interest rate swaps to achieve a targeted
mix of xed and variable rate debt. We principally receive xed 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.
During 2012, interest rate swaps with a notional value of $5.8 billion were
settled. As a result of the settlements, we received net proceeds of $0.7
billion, including accrued interest which is included in Other, net oper-
ating activities in the consolidated statement of cash ows. The fair value
basis adjustment to the underlying debt instruments was recognized
into earnings as a reduction of Interest expense over the remaining lives
of the underlying debt obligations. During the second quarter of 2013,
interest rate swaps with a notional value of $1.25 billion matured and
the impact to our consolidated nancial statements was not material.
During the third quarter of 2013, we entered into interest rate swaps with
a total notional value of $1.8 billion. At December 31, 2013 and 2012, the
fair value of these interest rate swaps was not material. At December 31,
2013, the total notional amount of these interest rate swaps was $1.8 bil-
lion. The ineective portion of these interest rate swaps was not material
at December 31, 2013.
Forward Interest Rate Swaps
In order to manage our exposure to future interest rate changes, during
the fourth quarter of 2013, we entered into forward interest rate swaps
with a notional value of $2.0 billion. We designated these contracts as
cash ow hedges. The fair value of these contracts was not material at
December 31, 2013.
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 income in our consolidated balance sheets. Gains and
losses on foreign currency transactions are recorded in the consolidated
statements of income in Other income and (expense), net. At December
31,2013,our primary translationexposurewasto theBritish Pound
Sterling, the Euro, the Australian Dollar and the Japanese Yen.
Cross Currency Swaps
Verizon Wireless previously entered into cross currency swaps designated
ascashowhedgestoexchangeapproximately$1.6billionofBritish
Pound Sterling and Euro-denominated debt into U.S. dollars and to x
our future interest and principal payments in U.S. dollars, as well as to
mitigate the impact of foreign currency transaction gains or losses. A por-
tion of the gains and losses recognized in Other comprehensive income
was reclassied to Other income and (expense), net to oset the related
pre-tax foreign currency transaction gain or loss on the underlying debt
obligations. The fair value of the outstanding swaps was not material at
December 31, 2013 or December 31, 2012. During 2013 and 2012 the
gains with respect to these swaps were not material.
DuringFebruary2014,weenteredintocrosscurrencyswapsdesignated
as cash ow hedges to exchange approximately $5.4 billion of Euro and
BritishPoundSterlingdenominateddebtintoU.S.dollarsandtoxour
future interest and principal payments in U.S. dollars, as well as to miti-
gate the impact of foreign currency transaction gains or losses.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued
MARKET RISK