Baker Hughes 2009 Annual Report Download - page 127

2009 Form 10-K 53
that is intended to mitigate the exposure to changes in inter-
est rates in the aggregate for our investment portfolio. In addi-
tion, we are currently using interest rate swaps to manage the
economic effect of fixed rate obligations associated with our
senior notes so that the interest payable on the senior notes
effectively becomes linked to variable rates.
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 both through November 15, 2013. The counter-
parties are primarily the lenders in our credit facilities. The Swap
Agreements are designated and each qualifies as a fair value
hedging instrument. The swap to three-month Libor is deemed
to be 100 percent effective resulting in no gain or loss recorded
in the consolidated statement of operations. The effectiveness
of the swap to one-month Libor, which is highly effective, is
calculated as of each period end and any ineffective portion
is recognized in the consolidated statement of operations.
The fair value of the Swap Agreements was determined using
a model with Level 2 inputs including quoted market prices
for contracts with similar terms and maturity dates.
Fair Value of Derivative Instruments
The fair value of derivative instruments included in our consolidated balance sheet was as follows as of December 31, 2009:
Derivative Balance Sheet Location Fair Value
Foreign Currency Forward Contracts Other accrued liabilities $ 1
Interest Rate Swaps Other assets 7
The effects of derivative instruments in our consolidated statement of operations were as follows for the year ended December 31,
2009 (amounts exclude any income tax effects):
Derivative Statement of Operations Location Amount of Gain Recognized in Income
Foreign Currency Forward Contracts Marketing, general and administrative $ 11
Interest Rate Swaps Interest Expense 6
NOTE 12. INDEBTEDNESS
Total debt consisted of the following at December 31, net of unamortized discount and debt issuance costs:
2009 2008
6.25% Notes due January 2009 with an effective interest rate of 5.77% $ – $ 325
6.00% Notes due February 2009 with an effective interest rate of 6.11% – 200
6.50% Senior Notes due November 2013 with an effective interest rate of 6.73% 504 495
7.50% Senior Notes due November 2018 with an effective interest rate of 7.67% 741 740
8.55% Debentures due June 2024 with an effective interest rate of 8.76% 148 148
6.875% Notes due January 2029 with an effective interest rate of 7.08% 392 392
Other debt 15 33
Total debt 1,800 2,333
Less short-term debt and current maturities of long-term debt 15 558
Long-term debt $ 1,785 $ 1,775
Concentration of Credit Risk
We sell our products and services to numerous companies
in the oil and natural gas industry. Although this concentration
could affect our overall exposure to credit risk, we believe that
our risk is minimized since the majority of our business is con-
ducted with major companies within the industry. We perform
periodic credit evaluations of our customers’ financial condition
and generally do not require collateral for our accounts receiv-
able. In some cases, we will require payment in advance or
security in the form of a letter of credit or bank guarantee.
We maintain cash deposits with financial institutions that
may exceed federally insured limits. We monitor the credit
ratings and our concentration of risk with these financial insti-
tutions on a continuing basis to safeguard our cash deposits.