Virgin Media 2008 Annual Report Download - page 87

Foreign Currency Forward Contracts
We have entered into a number of forward contracts maturing on April 14, 2009 to purchase a
total of $425 million. These contracts economically hedge changes in the pound sterling value of the
U.S. dollar denominated principal obligation relating to the 8.75% senior notes due 2014 caused by
changes in the U.S. dollar and pound sterling exchange rates. The foreign exchange risk relating to
principal obligations under the A225 million 8.75% senior notes due 2014, the $550 million 9.125%
senior notes due 2016, and the $531.9 million and A423.9 million principal obligations under the senior
credit facility is being mitigated through the use of cross-currency interest rate swaps, and therefore
separate forward rate contracts for these debt instruments were not necessary.
These foreign currency forward rate contracts have not been designated as accounting hedges
under FAS 133. As such, the contracts are carried at fair value on our balance sheet with changes in
the fair value recognized immediately through foreign currency (losses) gains in the consolidated
statement of operations. The foreign currency forward rate contracts do not subject us to material
volatility in our earnings and cash flows because changes in the fair value directionally and partially
mitigate the gains or losses on the remeasurement of our U.S. dollar denominated debt into our
reporting currency, pounds sterling, in accordance with FASB Statement No. 52, Foreign Currency
Translation. Changes in fair value of these contracts are reported within foreign currency transaction
gains (losses).
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including changes in foreign currency exchange rates and
interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices,
like foreign currency exchange and interest rates. As some of our indebtedness accrues interest at
variable rates, we have exposure to volatility in future cash flows and earnings associated with variable
interest rate payments.
Also, substantially all of our revenues, operating costs and selling, general and administrative
expenses are earned and paid in pounds sterling but we pay interest and principal obligations on some
of our indebtedness in U.S. dollars and euros. As of December 31, 2008, £1,714.8 million, or 27% of
our indebtedness, was denominated in U.S. dollars and £617.8 million, or 10%, of our indebtedness was
denominated in euros. As a result, we have exposure to volatility in future cash flows and earnings
associated with changes in foreign exchange rates on payments of principal and interest on a portion of
our indebtedness.
To mitigate the risk from these exposures, we have implemented a cash flow hedging program. The
objective of this program is to reduce the volatility of our cash flows and earnings caused by changes in
underlying rates. To achieve this objective we have entered into a number of derivative instruments.
The derivative instruments utilized comprise interest rate swaps, cross-currency interest rate swaps and
foreign currency forward contracts. We do not enter into derivative instruments for trading or
speculative purposes. See note 10 to the consolidated financial statements of Virgin Media Inc. and
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Derivative
Instruments and Hedging Activities.
The fair market value of long term fixed interest rate debt and the amount of future interest
payments on variable interest rate debt are subject to interest rate risk.
85