AT&T Wireless 2006 Annual Report Download - page 66

64 : : 2006 AT&T Annual Report
Notes to Consolidated Financial Statements (continued)
Dollars in millions except per share amounts
current interest rates. The carrying value of debt with an
original maturity of less than one year approximates market
value.
Prior to our December 29, 2006 acquisition of BellSouth
(see Note 2), we and BellSouth, the two owners of AT&T
Mobility, each made a subordinated loan to AT&T Mobility
(shareholder loans). Following the BellSouth acquisition, our
shareholder loan with AT&T Mobility was consolidated and
does not appear on our Consolidated Balance Sheet at
December 31, 2006. At December 31, 2005, our shareholder
loan to AT&T Mobility was recorded at face value, and the
carrying amounts approximate fair values.
The fair value of our EchoStar note receivable was esti-
mated based on a third-party valuation. The carrying amount
of this note was based on the present value of cash and
interest payments, which will be accreted on the note up to
the face value of $500 on a straight-line basis through August
2008.
Our available-for-sale equity securities are carried at fair
value, and realized gains and losses on these equity securities
were included in “Other income (expense) – net” on the
Consolidated Statements of Income. The fair value of our
available-for-sale equity securities was principally determined
based on quoted market prices and the carrying amount of
the remaining securities approximates fair value. Gross
realized gains on our available-for-sale equity securities were
$10 in 2006, $110 in 2005 and $323 in 2004. Gross realized
losses on these securities were $0 in 2006, $1 in 2005 and
$191 in 2004. These gains and losses were determined using
the specific identification method. Our proceeds from the
sales of our available-for-sale equity securities were $10 in
2006, $125 in 2005 and $3,188 in 2004.
Our short-term investments, other short-term and long-
term held-to-maturity investments and customer deposits are
recorded at amortized cost, and the carrying amounts approxi-
mate fair values. We held other short-term held-to-maturity
securities of $477 at December 31, 2006, compared to $3 at
December 31, 2005.
Preferred Stock Issuances In November 2005, we issued
768,391.4 shares of Perpetual Cumulative Preferred Stock
(AT&T preferred stock), par value $1 per share. The AT&T
preferred stock was issued to replace each share of ATTC
preferred stock that was issued and outstanding prior to the
November 18, 2005 acquisition and is held by a subsidiary
of ATTC.
Preferred Stock Issuances by Subsidiaries In 2002, we
restructured our holdings in certain investments, including
Sterling. As part of this restructuring, a newly created
subsidiary issued $43 of preferred stock, which was included
in “Other noncurrent liabilities” on the Consolidated Balance
Sheets. The preferred stock will accumulate dividends at an
annual rate of 5.79% and can be converted, at the option of
the holder, to common stock (but not a controlling interest)
of the subsidiary at any time.
In 2005, we redeemed $350 of an AT&T subsidiary-issued
preferred stock private placement and repaid $378 of
preferred securities previously issued by an AT&T subsidiary,
which was related to an internal restructuring of our owner-
ship in several investments.
Letters of Credit Letters of credit are guarantees we
purchase, which ensure our performance or payment to third
parties in accordance with specified terms and conditions.
Management has determined that our letters of credit do not
create additional risk to us. The notional amounts outstanding
were $478 at December 31, 2006, and $623 at December 31,
2005, and the fair values of the letters of credit, based on the
fees paid to obtain the obligations, for both periods were $1.
Derivatives We use interest rate swaps, interest rate
forward contracts and foreign currency exchange contracts to
manage our market risk changes in interest rates and foreign
exchange rates. We do not use financial instruments for
trading or speculative purposes. Each swap matches the exact
maturity dates of the underlying debt to which they are
related, allowing for perfectly effective hedges. Each utilized
forward contract matches the interest payments of the
underlying debt to which they are related, allowing for
perfectly effective hedges.
Interest Rate Swaps 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 in 2006 related to our repayment of
the underlying security. The net fair value liability at Decem-
ber 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 above fair value interest rate swap notional
value for 2006 was interest rate swaps with a notional
amount of $1,800 acquired as a result of our acquisition of
BellSouth on December 29, 2006. These swaps were unwound
in January 2007.
Interest Rate Locks In May 2006, we entered into an
interest rate forward contract with a notional amount of $750
to partially hedge interest expense related to our debt
issuance in 2006. In 2006, we utilized a notional amount of
$600 of this forward contract and incurred settlement gains of
$4. In November 2005, we entered into an interest rate
forward contract with a notional amount of $500 to partially
hedge interest expense related to refinancing a portion of our
debt maturities in 2006. In November 2005, we utilized the
notional amount of this interest rate forward contract and
incurred settlement costs of $2. During 2004, we utilized a
notional amount of $1,500 of interest rate forward contracts
and incurred settlement costs of $302 ($196 net of tax
benefit). During 2007, we expect to reclassify into earnings
between $8 to $9, net of tax, of the previously mentioned
settlement expenses.
Interest Rate Foreign Currency Swaps We had combined
interest rate foreign currency swap agreements for Euro-
denominated debt, which hedge our risk to both interest
rate and currency movements. In November 2006, we repaid
the notional amount of our foreign currency swap of $636.
Upon repayment we unwound our swap asset of $284.
Additionally, we repaid the collateral associated with the
swap contract of $150, which was received by us over the
term of the swap agreement.