Metro PCS 2008 Annual Report Download - page 119

MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
F-17
credit and capital markets, the auction rate securities held by the Company at December 31, 2008 continued to
experience failed auctions as the amount of securities submitted for sale in the auctions exceeded the amount of
purchase orders. In addition, all of the auction rate securities held by the Company have been downgraded or placed
on credit watch.
The estimated market value of the Company's auction rate security holdings at December 31, 2008 was
approximately $6.0 million, which reflects a $127.9 million cumulative adjustment to the original principal value of
$133.9 million. The estimated market value at December 31, 2007 was approximately $36.1 million, which
reflected a $97.8 million adjustment to the aggregate principal value at that date. Although the auction rate
securities continue to pay interest according to their stated terms, based on valuation models that rely exclusively on
unobservable inputs, the Company recorded an impairment charge of $30.9 million during the year ended December
31, 2008, reflecting an additional portion of the auction rate security holdings that the Company has concluded have
an other-than-temporary decline in value. The offsetting increase in fair value of approximately $0.8 million is
reported in accumulated other comprehensive loss in the consolidated balance sheets.
Historically, given the liquidity created by auctions, the Company’s auction rate securities were presented as
current assets under short-term investments on the Company's balance sheet. Given the failed auctions, the
Company's auction rate securities are illiquid until there is a successful auction for them or the Company sells them.
Accordingly, the entire amount of such remaining auction rate securities has been reclassified from current to non-
current assets and is presented in long-term investments on the accompanying balance sheets as of December 31,
2008 and 2007. The Company may incur additional impairments to its auction rate securities.
6. Derivative Instruments and Hedging Activities:
On November 21, 2006, Wireless entered into a three-year interest rate protection agreement to manage the
Company’s interest rate risk exposure and fulfill a requirement of Wireless’ Senior Secured Credit Facility. The
agreement covers a notional amount of $1.0 billion and effectively converts this portion of Wireless’ variable rate
debt to fixed-rate debt at an annual rate of 7.169%. The quarterly interest settlement periods began on February 1,
2007. The interest rate protection agreement expires on February 1, 2010. This financial instrument is reported in
other long-term liabilities at fair market value of approximately $38.8 million as of December 31, 2008. The net
change in fair value of $15.3 million is reported in accumulated other comprehensive loss in the consolidated
balance sheets, net of income taxes in the amount of approximately $5.9 million. As of December 31, 2007, this
financial instrument was reported in other long-term liabilities at fair market value of approximately $23.5 million.
The net change in fair value of $13.6 million was reported in accumulated other comprehensive loss in the
consolidated balance sheets, net of income taxes in the amount of approximately $9.9 million.
On April 30, 2008, Wireless entered into an additional two-year interest rate protection agreement to manage the
Company’s interest rate risk exposure. The agreement was effective on June 30, 2008 and covers a notional amount
of $500.0 million and effectively converts this portion of Wireless’ variable rate debt to fixed rate debt at an annual
rate of 5.464%. The monthly interest settlement periods began on June 30, 2008. This agreement expires on June
30, 2010. This financial instrument is reported in other long-term liabilities at fair market value of approximately
$16.2 million as of December 31, 2008. The net change in fair value of $16.2 million is reported in accumulated
other comprehensive loss in the accompanying consolidated balance sheet, net of income taxes in the amount of
approximately $6.5 million.
The interest rate protection agreements have been designated as cash flow hedges. If a derivative is designated as
a cash flow hedge and the hedging relationship qualifies for hedge accounting under the provisions of
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”),
the effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive
income (loss) and reclassified to interest expense in the period in which the hedged transaction affects earnings. The
ineffective portion of the change in fair value of a derivative qualifying for hedge accounting is recognized in
earnings in the period of the change. For the year ended December 31, 2008, the change in fair value did not result
in ineffectiveness.