Baker Hughes 2004 Annual Report Download - page 84

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Interest฀Rate฀Swap฀Agreements
In฀April฀2004,฀we฀entered฀into฀an฀interest฀rate฀swap฀agree-
ment฀for฀a฀notional฀amount฀of฀$325.0฀million฀associated฀with฀
our฀6.25%฀Notes฀due฀January฀2009.฀Under฀this฀agreement฀we฀
receive฀interest฀at฀a฀fixed฀rate฀of฀6.25%฀and฀pay฀interest฀at฀
a฀floating฀rate฀of฀six-month฀LIBOR฀plus฀a฀spread฀of฀2.741%.฀
The฀interest฀rate฀swap฀agreement฀has฀been฀designated฀and฀
qualifies฀as฀a฀fair฀value฀hedging฀instrument.฀The฀interest฀rate฀
swap฀agreement฀is฀fully฀effective,฀resulting฀in฀no฀gain฀or฀loss฀
recorded฀in฀the฀consolidated฀statement฀of฀operations.฀We฀
recorded฀the฀fair฀value฀of฀the฀interest฀rate฀swap฀agreement,฀
which฀was฀a฀$2.3฀million฀liability฀at฀December฀31,฀2004,฀based฀
on฀quoted฀market฀prices฀for฀contracts฀with฀similar฀terms฀and฀
maturity฀dates.
At฀different฀times฀during฀2003,฀we฀entered฀into฀three฀
separate฀interest฀rate฀swap฀agreements,฀each฀for฀a฀notional฀
amount฀of฀$325.0฀million,฀associated฀with฀our฀6.25%฀Notes฀
due฀January฀2009.฀These฀agreements฀had฀been฀designated฀
and฀had฀qualified฀as฀fair฀value฀hedging฀instruments.฀Due฀to฀
our฀outlook฀for฀interest฀rates,฀we฀terminated฀the฀three฀agree-
ments฀and฀received฀payments฀totaling฀$26.9฀million.฀Each฀of฀
the฀three฀agreements฀was฀terminated฀prior฀to฀entering฀into฀a฀
new฀agreement.฀The฀deferred฀gains฀are฀being฀amortized฀as฀a฀
reduction฀of฀interest฀expense฀over฀the฀remaining฀life฀of฀the฀
underlying฀debt฀security,฀which฀matures฀in฀January฀2009.
During฀2002,฀we฀terminated฀two฀interest฀rate฀swap฀฀
agreements฀that฀had฀been฀entered฀into฀in฀prior฀years.฀These฀
agreements฀had฀been฀designated฀and฀had฀qualified฀as฀fair฀
value฀hedging฀instruments.฀Upon฀termination,฀we฀received฀
proceeds฀of฀$4.8฀million฀and฀$11.0฀million.฀The฀deferred฀
gain฀of฀$4.8฀million฀was฀amortized฀as฀a฀reduction฀of฀interest฀
expense฀over฀the฀remaining฀life฀of฀the฀underlying฀debt฀security,฀
which฀matured฀in฀June฀2004.฀The฀deferred฀gain฀of฀$11.0฀mil-
lion฀is฀being฀amortized฀as฀a฀reduction฀of฀interest฀expense฀over฀
the฀remaining฀life฀of฀the฀underlying฀debt฀security,฀which฀
matures฀in฀January฀2009.
Foreign฀Currency฀and฀Foreign฀฀
Currency฀Forward฀Contracts
We฀conduct฀operations฀around฀the฀world฀in฀a฀number฀
of฀different฀currencies.฀The฀majority฀of฀our฀significant฀foreign฀
subsidiaries฀have฀designated฀the฀local฀currency฀as฀their฀func-
tional฀currency.฀As฀such,฀future฀earnings฀are฀subject฀to฀change฀
due฀to฀changes฀in฀foreign฀currency฀exchange฀rates฀when฀trans-
actions฀are฀denominated฀in฀currencies฀other฀than฀our฀func-
tional฀currencies.฀To฀minimize฀the฀need฀for฀foreign฀currency฀
forward฀contracts฀to฀hedge฀this฀exposure,฀our฀objective฀is฀to฀
manage฀foreign฀currency฀exposure฀by฀maintaining฀a฀minimal฀
consolidated฀net฀asset฀or฀net฀liability฀position฀in฀a฀currency฀
other฀than฀the฀functional฀currency.
(Dollar฀amounts฀in฀millions)฀ 2004฀ 2005฀ 2006฀ 2007฀ 2008฀ 2009฀ Thereafter฀ Total
As฀of฀December฀31,฀2004:
Long-term฀debt(1)(2)฀ $฀ –฀ $฀ 0.1฀ $฀ 0.1฀ $฀ –฀ $฀ –฀ $฀525.0฀ $฀ 550.0฀ $฀1,075.2
฀ Weighted฀average
฀ ฀ effective฀interest฀rates฀ ฀ ฀ ฀ 12.30%฀ ฀ 6.50%฀ ฀ ฀ ฀ 4.96%(3)(4)฀ 7.55%฀6.24%(3)(4)
Fixed฀to฀variable฀swaps(4)
฀ Notional฀amount฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ $฀ 325.0฀ ฀ ฀ $฀ 325.0
฀ Pay฀rate฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ 4.60%(5)฀ ฀ ฀ 4.60%(5)
฀ Receive฀rate฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ 6.25%฀ ฀ ฀ 6.25%
As฀of฀December฀31,฀2003:
Long-term฀debt(1)(2)฀ $฀350.4฀ $฀ –฀ $฀ 0.2฀ $฀ –฀ $฀ –฀ $฀ –฀ $฀1,075.0฀ $฀1,425.6
฀ Weighted฀average
฀ ฀ effective฀interest฀rates฀ ฀ 7.21%(3)฀ ฀ ฀ ฀ 6.12%฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ 6.16%(3)฀ 6.41%(3)
(1)฀ Amounts฀do฀not฀include฀any฀unamortized฀discounts,฀deferred฀issuance฀costs฀or฀deferred฀gains฀on฀terminated฀interest฀rate฀swap฀agreements.
(2)฀ Fair฀market฀value฀of฀fixed฀rate฀long-term฀debt฀was฀$1,239.0฀million฀at฀December฀31,฀2004฀and฀$1,570.8฀million฀at฀December฀31,฀2003.
(3)฀ Includes฀the฀effect฀of฀the฀amortization฀of฀deferred฀gains฀on฀terminated฀interest฀rate฀swap฀agreements.
(4)฀ Includes฀the฀fair฀market฀value฀of฀the฀interest฀rate฀swap฀agreement฀entered฀into฀in฀April฀2004.฀The฀fair฀market฀value฀of฀the฀interest฀rate฀swap฀agreement฀was฀a฀฀
$2.3฀million฀liability฀at฀December฀31,฀2004.
(5)฀ Six-month฀LIBOR฀for฀the฀U.S.฀Dollar,฀reset฀semi-annually฀in฀January฀and฀July,฀plus฀2.741%.
At฀December฀31,฀2004฀and฀2003,฀we฀had฀fixed฀rate฀debt฀aggregating฀$1,075.2฀million฀and฀$1,425.6฀million,฀respectively.฀The฀fol-
lowing฀table฀sets฀forth฀the฀required฀cash฀payments฀for฀our฀indebtedness,฀which฀bear฀a฀fixed฀rate฀of฀interest฀and฀are฀denominated฀in฀
U.S.฀Dollars,฀and฀the฀related฀weighted฀average฀effective฀interest฀rates฀by฀expected฀maturity฀dates฀as฀of฀December฀31,฀2004฀and฀2003.
34฀฀฀฀฀Baker฀Hughes฀Incorporated