Baker Hughes 2013 Annual Report Download - page 73

Baker Hughes Incorporated43
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
We have debt in fixed and floating rate instruments. We are subject to interest rate risk on our debt and
investment portfolio. We maintain an interest rate risk management strategy which primarily uses a mix of fixed and
variable rate debt that is intended to mitigate the risk exposure to changes in interest rates in the aggregate. We
may use interest rate swaps to manage the economic effect of fixed rate obligations associated with certain debt.
There were no outstanding interest rate swap agreements as of December 31, 2013 or 2012.
We had fixed rate long-term debt, including capital lease obligations, aggregating $3.9 billion and $3.8 billion at
December 31, 2013 and 2012, respectively. The following table sets forth our fixed rate long-term debt and the
related weighted average interest rates by expected maturity dates as of December 31, 2013 and 2012.
(In millions) 2013 2014 2015 2016 2017 2018 Thereafter Total
As of December 31, 2013
Long-term debt (1) (2) $ — $ — $ 21 $ 17 $ 11 $ 1,013 $ 2,849 $3,911
Weighted average interest rates — — 13.68% 17.71% 17.47% 7.41% 5.36% 6.02%
As of December 31, 2012
Long-term debt (1) (2) $ — $ — $ — $ — $ — $ 1,000 $ 2,800 $3,800
Weighted average interest rates — — — — — 7.28% 5.17% 5.72%
(1) Amounts do not include any unamortized discounts or deferred issuance costs on our fixed rate long-term
debt.
(2) Fair market value of our fixed rate long-term debt was $4.36 billion at December 31, 2013 and $4.68 billion
at December 31, 2012.
FOREIGN CURRENCY EXCHANGE RISK
We conduct our operations around the world in a number of different currencies, and we are exposed to market
risks resulting from fluctuations in foreign currency exchange rates. Many of our significant foreign subsidiaries
have designated the local currency as their functional currency. As such, future earnings are subject to change due
to fluctuations in foreign currency exchange rates when transactions are denominated in currencies other than our
functional 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.
At December 31, 2013 and 2012, we had outstanding foreign currency forward contracts with notional amounts
aggregating $486 million and $207 million, respectively, to hedge exposure to currency fluctuations in various
foreign currencies. The notional amounts of our foreign currency forward contracts do not generally represent
amounts exchanged by the parties and, thus are not a measure of the cash requirements related to these contracts
or of any possible loss exposure. The amounts actually exchanged are calculated by reference to the notional
amounts and by other terms of the derivative contracts, such as exchange rates. Based on quoted market prices as
of December 31, 2013 and 2012 for contracts with similar terms and maturity dates, we recorded a gain of $2
million and a loss of $1 million, respectively, to adjust these foreign currency forward contracts to their fair market
value. These gains and losses offset designated foreign currency exchange gains and losses resulting from the
underlying exposures and are included in MG&A expenses in the consolidated statements of income.