Walgreens 2014 Annual Report Download - page 87

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Company maintains two unsecured backup syndicated lines of credit that total $1.35 billion. The first $500
million facility expires on July 20, 2015, and allows for the issuance of up to $250 million in letters of credit. The
second $850 million facility expires on July 23, 2017, and allows for the issuance of up to $200 million in letters
of credit. The issuance of letters of credit under either of these facilities reduces available borrowings. The
Company’s ability to access these facilities is subject to compliance with the terms and conditions of the credit
facilities, including financial covenants. The covenants require the Company to maintain certain financial ratios
related to minimum net worth and priority debt, along with limitations on the sale of assets and purchases of
investments. At August 31, 2014, the Company was in compliance with all such covenants. The Company pays a
facility fee to the financing banks to keep these lines of credit active. At August 31, 2014, there were no letters of
credit issued against these credit facilities and the Company does not anticipate any future letters of credit to be
issued against these facilities.
(10) Financial Instruments
The Company uses derivative instruments to manage its interest rate exposure associated with some of its fixed-
rate borrowings. The Company does not use derivative instruments for trading or speculative purposes. All
derivative instruments are recognized in the Consolidated Balance Sheets at fair value. The Company designates
interest rate swaps as fair value hedges of fixed-rate borrowings. For derivatives designated as fair value hedges,
the change in the fair value of both the derivative instrument and the hedged item are recognized in earnings in
the current period. The Company’s forward starting interest rate swaps used to hedge anticipated debt issuances
are designated as cash flow hedges. Changes in the fair value of cash flow hedges deemed effective are
recognized in other comprehensive income. At the inception of a hedge transaction, the Company formally
documents the hedge relationship and the risk management objective for undertaking the hedge. In addition, it
assesses both at inception of the hedge and on an ongoing basis whether the derivative in the hedging transaction
has been highly effective in offsetting changes in fair value of the hedged item and whether the derivative is
expected to continue to be highly effective. The impact of any ineffectiveness is recognized currently in earnings.
Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of
nonperformance, but the Company regularly monitors the credit worthiness of each counterparty.
Fair Value Hedges
In prior fiscal years, the Company entered into a series of interest rate swaps converting $750 million of its
5.250% fixed rate notes to a floating interest rate based on the six-month LIBOR in arrears plus a constant spread
and an interest rate swap converting $250 million of its 5.250% fixed rate notes to a floating interest rate based
on the one-month LIBOR in arrears plus a constant spread. All swap termination dates coincide with the notes
maturity date, January 15, 2019. The changes in fair value of the notes attributable to the hedged risk are
included in short-term and long-term debt on the Consolidated Condensed Balance Sheets. No material gains or
losses were recorded in fiscal 2014 or 2013 from ineffectiveness.
Cash Flow Hedges
In the current fiscal year, the Company entered into a series of forward starting interest rate swap transactions
locking in the then current three-month LIBOR interest rate on $1.5 billion of anticipated debt issuance, with
expected maturity tenures of 10 and 30 years. The swap transactions are designated as cash flow hedges. Changes
in the fair value of swaps are recorded in other comprehensive income. Any ineffectiveness is recognized in
interest expense on the Consolidated Balance Sheets.
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