Verizon Wireless 2014 Annual Report Download - page 33

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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, 2014, approximately 86% 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 $0.2 billion. The interest rates on
substantially all of 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, 2014 and 2013. 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
sensitivity 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)
Long-term debt and
related derivatives FairValue
FairValue
assuming
+ 100 basis
point shift
FairValue
assuming
- 100 basis
point shift
At December 31, 2014 $ 126,139 $ 115,695 $ 138,420
At December 31, 2013 103,103 95,497 111,910
Interest Rate Swaps
We enter 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 the second quarter of 2013, interest rate swaps with a notional
value of $1.25 billion matured and the impact to our consolidated nan-
cial statements was not material. During the third quarter of 2013, we
entered into interest rate swaps with a total notional value of $1.8 bil-
lion. At December 31, 2014 and 2013, the fair value of these interest
rate swaps was not material. At December 31, 2014, the total notional
amount of these interest rate swaps was $1.8 billion. The ineective por-
tion of these interest rate swaps was not material at December 31, 2014
and 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.InMarch2014,wesettledthese
forward interest rate swaps and the pre-tax gain was not material. During
2014, we entered into forward interest rate swaps with a total notional
value of $4.8 billion. We designated these contracts as cash ow hedges.
During the fourth quarter of 2014, we settled $2.8 billion of forward
interest rate swaps and the pre-tax loss was not material. The fair value of
these contracts was $0.2 billion, which was included within Other liabili-
ties on our consolidated balance sheet, at December 31, 2014 and 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, 2014, our primary translation exposure was to the British Pound
Sterling and the Euro.
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. In
June 2014, we settled $0.8 billion of these cross currency swaps and the
gains with respect to these swaps were not material.
During the rst quarter of 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.
During the second quarter of 2014, we entered into cross currency swaps
designated as cash ow hedges to exchange approximately $1.2 billion
of British Pound Sterling denominated debt into U.S. dollars. During
the fourth quarter of 2014, we entered into cross currency swaps des-
ignated as cash ow hedges to exchange approximately $3.0 billion of
Euro denominated debt into U.S. dollars and to x our future interest and
principal payments in U.S. dollars. Each of these cross currency swaps
was entered into in order to mitigate the impact of foreign currency
transaction gains or losses.
A portion 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 under-
lying debt obligations. The fair value of the outstanding swaps was $0.6
billion, which was primarily included within Other liabilities on our con-
solidated balance sheet, at December 31, 2014 and was not material at
December 31, 2013. During 2014 and 2013, a pre-tax loss of $0.1 billion
and an immaterial pre-tax gain, respectively, were recognized in Other
comprehensive income with respect to these swaps.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued