Baker Hughes 2009 Annual Report Download - page 106

32 Baker Hughes Incorporated
spending, profitability, strategies for our operations, impact
of any common stock repurchases, oil and natural gas market
conditions, market share and contract terms, costs and avail-
ability of resources, economic and regulatory conditions, the
potential merger with BJ Services, and environmental matters
are only our forecasts regarding these matters.
All of our forward-looking information is subject to risks
and uncertainties that could cause actual results to differ
materially from the results expected. Although it is not possi-
ble to identify all factors, these risks and uncertainties include
the risk factors and the timing of any of those risk factors
identified in Item 1A. Risk Factors and those set forth from
time to time in our filings with the SEC. These documents are
available through our website or through the SEC’s Electronic
Data Gathering and Analysis Retrieval System (“EDGAR”) at
http://www.sec.gov.
Risk Factors
For discussion of our risk factors and cautions regarding
forward-looking statements, see Item 1A. Risk Factors and in
the “Forward-Looking Statements” section in Item 7, both
contained herein. The risk factors and cautions discussed
there are not intended to be all inclusive.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent
in our financial instruments and arise from changes in interest
rates and foreign currency exchange rates. We may enter into
derivative financial instrument transactions to manage or
reduce market risk but do not enter into derivative financial
instrument transactions for speculative purposes. A discussion
of our primary market risk exposure in financial instruments is
presented below.
INTEREST RATE RISK AND INDEBTEDNESS
We are subject to interest rate risk on our long-term fixed
interest rate debt. Commercial paper borrowings, other short-
term borrowings and variable rate long-term debt do not give
rise to significant interest rate risk because these borrowings
either have maturities of less than three months or have vari-
able interest rates similar to the interest rates we receive on
our short-term investments. All other things being equal, the
fair market value of debt with a fixed interest rate will increase
as interest rates fall and will decrease as interest rates rise. This
exposure to interest rate risk can be managed by borrowing
money that has a variable interest rate or using interest rate
swaps to change fixed interest rate borrowings to variable
interest rate borrowings.
Interest Rate Swap Agreements
In June 2009, we entered into two interest rate swap
agreements (“the Swap Agreements”) for a notional amount
of $250 million each in order to hedge changes in the fair
market value of our $500 million 6.5% senior notes maturing
on November 15, 2013. Under the Swap Agreements, we
receive interest at a fixed rate of 6.5% and pay interest at a
floating rate of one-month Libor plus a spread of 3.67% on
one swap and three-month Libor plus a spread of 3.54% on
the second swap through November 15, 2013. The Swap
Agreements are designated and each qualifies as a fair value
hedging instrument. The fair value of the Swap Agreements
at December 31, 2009, was a $7 million asset and was based
on quoted market prices for contracts with similar terms and
maturity dates.
The financial institutions that are counterparties to the
Swap Agreements are primarily the lenders in our credit facili-
ties. Under the terms of the credit support documents govern-
ing the Swap Agreements, the relevant party will have to post
collateral in the event such party’s long-term debt rating falls
below investment grade or is no longer rated.