AT&T Wireless 2007 Annual Report Download - page 71

2007 AT&T Annual Report
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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 $3,250 at December 31, 2007, and
$5,050 at December 31, 2006, with a net carrying and fair
value asset of $88 and liability of $80, respectively. The net fair
value liability at December 31, 2006 was comprised of a
liability of $86 and an asset of $6. Included in the fair value
interest rate swap notional amount for 2006 were interest rate
swaps with a notional value of $1,800, which were acquired as
a result of our acquisition of BellSouth on December 29, 2006.
These swaps were unwound in January 2007.
Interest Rate Foreign Currency Swaps We have combined
interest rate foreign currency swap agreements for Euro-
denominated debt and British pound sterling-denominated
debt, which hedge our risk to both interest rate and currency
movements. In March 2007, we entered into fixed-to-fixed
cross-currency swaps on foreign-currency-denominated debt
instruments with a U.S. dollar notional value of $2,799 to
hedge our exposure to changes in foreign currency exchange
rates. These hedges include initial and final exchanges of
principal from fixed foreign denominations to fixed
U.S.-denominated amounts, to be exchanged at a specified
rate, which was determined by the market spot rate upon
issuance. They also include an interest rate swap of a fixed
foreign-denominated rate to a fixed U.S.-denominated interest
rate. These derivatives have been designated at inception and
qualify as cash flow hedges with a net fair value of $114 at
December 31, 2007. These swaps are valued using current
market quotes, which were obtained from dealers.
In November 2006, we repaid the notional amount of a
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.
Interest Rate Locks We entered into interest rate forward
contracts to partially hedge interest expense related to our
debt issuances. During 2008, we expect to reclassify into
earnings net settlement expenses of approximately $8 to $9,
net of tax. The following table summarizes our interest rate
lock activity:
Utilized Settlement
Rate Lock Notional Notional Settlement Gain/(Cost) –
Execution Period Amount Amount Gain/(Cost) net of tax
2007 $1,800 $1,800 $ (8) $ (5)
2006 750 600 4 3
2005 500 500 (2) (1)
2004 5,250 5,250 (302) (196)
Foreign Currency Forward Contracts We enter into foreign
currency forward contracts to manage our exposure to
changes in currency exchange rates related to foreign-
currency-denominated transactions. At December 31, 2007
and 2006, our foreign exchange contracts consisted principally
of Euros, British pound sterling, Danish krone and Japanese
yen. At December 31, 2007, the notional amounts under
contract were $345, of which none were designated as net
investment hedges. At December 31, 2006, the notional
amounts under contract were $440, of which $6 were
designated as net investment hedges. The remaining contracts
in both periods were not designated for accounting purposes.
At December 31, 2007 and 2006, these foreign exchange
contracts had a net carrying and fair value liability of less
than $2. These contracts were valued using current market
quotes, which were obtained from independent sources.
NOTE 10. INCOME TAXES
Significant components of our deferred tax liabilities (assets)
are as follows at December 31:
2007 2006
Depreciation and amortization $17,004 $21,016
Intangibles (nonamortizable) 1,990 2,271
Equity in foreign affiliates 231 515
Employee benefits (6,121) (9,667)
Currency translation adjustments (287) (261)
Allowance for uncollectibles (388) (385)
Net operating loss and other carryforwards (2,838) (2,981)
Investment in wireless partnership 13,997 12,580
Other – net (1,763) 300
Subtotal 21,825 23,388
Deferred tax assets valuation allowance 1,070 984
Net deferred tax liabilities $22,895 $24,372
Net long-term deferred tax liabilities $24,939 $27,406
Less: Net current deferred tax assets (2,044) (3,034)
Net deferred tax liabilities $22,895 $24,372
At December 31, 2007, we had combined net operating and
capital loss carryforwards (tax effected) for federal, and for
state and foreign income tax purposes of $1,289 and $1,207,
respectively, expiring through 2026. The federal net operating
loss carryforward primarily relates to the acquisitions of
AT&T Wireless Services, Inc. in 2004 and Dobson in 2007.
Additionally, we had federal and state credit carryforwards of
$100 and $242, respectively, expiring primarily through 2024.
We recognize a valuation allowance if, based on the
weight of available evidence, it is more-likely-than-not that
some portion, or all, of a deferred tax asset will not be
realized. Our valuation allowances at December 31, 2006 and
2007 relate primarily to state net operating loss carryforwards.
The net increase in the valuation allowance for 2007 results
from the acquisition of Dobson and the generation of
additional state net operating losses, the ultimate realization
of which are not more-likely-than-not. Future adjustments
(prior to the effective date of FAS 141(R)) to the valuation
allowance attributable to the ATTC, BellSouth, AT&T Mobility,
and Dobson opening balance sheet items may be required
to be allocated to goodwill and other purchased intangibles.
After the effective date of FAS 141(R), changes to these
valuation allowances may be reflected in income tax expense.