AT&T Uverse 2006 Annual Report Download - page 44

42 : : 2006 AT&T Annual Report
Maturity
After Fair Value
2007 2008 2009 2010 2011 2011 Total 12/31/06
Interest Rate Derivatives
Interest Rate Swaps:
Receive Fixed/Pay Variable Notional Amount — — — — $1,250 $2,000 $3,250 $(36)
Variable Rate Payable1 6.3% 6.1% 6.1% 6.2% 6.2% 6.0%
Weighted-Average Fixed Rate Receivable 6.0% 6.0% 6.0% 6.0% 6.0% 5.9%
1Interest payable based on current and implied forward rates for Three or Six Month LIBOR plus a spread ranging between approximately 64 and 170 basis points.
We had fair value interest rate swaps with a notional value of
$5,050 at December 31, 2006, and $4,250 at December 31,
2005, with a net carrying and fair value liability of $80 and
$16, respectively. In 2006, we had $1,000 of swaps mature
related to our repayment of the underlying security. The net
fair value liability at December 31, 2006, was comprised of a
liability of $86 and an asset of $6. The net fair value liability
at December 31, 2005, was comprised of a liability of $33 and
an asset of $17.
Included in the fair value interest rate swap notional value
for 2006 were interest rate swaps with a notional amount of
$1,800, which was acquired as a result of our acquisition of
BellSouth on December 29, 2006. These swaps were unwound
in January 2007 and are therefore excluded from the
sensitivity table above.
Foreign Exchange Forward Contracts The fair value of
foreign exchange contracts is subject to changes in foreign
currency exchange rates. For the purpose of assessing specific
risks, we use a sensitivity analysis to determine the effects
that market risk exposures may have on the fair value of our
financial instruments and results of operations. To perform the
sensitivity analysis, we assess the risk of loss in fair values
from the effect of a hypothetical 10% change in the value
of foreign currencies (negative change in the value of the
U.S. dollar), assuming no change in interest rates. See Note 8
to the consolidated financial statements for additional
information relating to notional amounts and fair values
of financial instruments.
For foreign exchange forward contracts outstanding at
December 31, 2006, assuming a hypothetical 10% depreciation
of the U.S. dollar against foreign currencies from the prevailing
foreign currency exchange rates, the fair value of the foreign
exchange forward contracts (net liability) would have decreased
approximately $30. Because our foreign exchange contracts
are entered into for hedging purposes, we believe that these
losses would be largely offset by gains on the underlying
transactions.
The risk of loss in fair values of all other financial instru-
ments resulting from a hypothetical 10% change in market
prices was not significant as of December 31, 2006.
QUAL I TATIV E I NFO RMATI ON AB OUT MA RKET RISK
Foreign Exchange Risk From time to time, we make invest-
ments in businesses in foreign countries, are paid dividends
and receive proceeds from sales or borrow funds in foreign
currency. Before making an investment, or in anticipation of
a foreign currency receipt, we often will enter into forward
foreign exchange contracts. The contracts are used to provide
currency at a fixed rate. Our policy is to measure the risk of
adverse currency fluctuations by calculating the potential
dollar losses resulting from changes in exchange rates that
have a reasonable probability of occurring. We cover the
exposure that results from changes that exceed acceptable
amounts. We do not speculate in foreign exchange markets.
We have also entered into foreign currency contracts to
minimize our exposure to risk of adverse changes in currency
exchange rates. We are subject to foreign exchange risk for
foreign currency-denominated transactions, such as debt
issued, recognized payables and receivables and forecasted
transactions. At December 31, 2006, our foreign currency
exposures were principally Euros, British pound sterling,
Danish krone and Japanese Yen.
Interest Rate Risk We issue debt in fixed and floating
rate instruments. Interest rate swaps are used for the purpose
of controlling interest expense by managing the mix of fixed
and floating rate debt. Interest rate forward contracts are
utilized to hedge interest expense related to debt financing.
We do not seek to make a profit from changes in interest
rates. We manage interest rate sensitivity by measuring
potential increases in interest expense that would result from
a probable change in interest rates. When the potential
increase in interest expense exceeds an acceptable amount,
we reduce risk through the issuance of fixed rate (in lieu of
variable rate) instruments and the purchase of derivatives.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share amounts
Interest Rate Sensitivity The principal amounts by
expected maturity, average interest rate and fair value of our
liabilities that are exposed to interest rate risk are described
in Notes 7 and 8. Following are our interest rate derivatives,
subject to interest rate risk as of December 31, 2006.
The interest rates illustrated in the interest rate swaps
section of the table below refer to the average expected
rates we would receive and the average expected rates we
would pay based on the contracts. The notional amount is
the principal amount of the debt subject to the interest rate
swap contracts. The net fair value asset (liability) represents
the amount we would receive or pay if we had exited the
contracts as of December 31, 2006.