NOTE 7 — FINANCIAL INSTRUMENTS
Interest Rate Swap Agreements
We have entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates. These swap agreements involve the exchange of fixed and variable rate interest payments between two parties based on common notional principal amounts and maturity dates. Pay-fixed interest rate swaps effectively convert LIBOR indexed variable rate obligations to fixed interest rate obligations. The interest payments under these agreements are settled on a net basis. The net interest payments, based on the notional amounts in these agreements, generally match the timing of the related liabilities, for the interest rate swap agreements which have been designated as cash flow hedges. The notional amounts of the swap agreements represent amounts used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions.
The following table sets forth our interest rate swap agreements, which have been designated as cash flow hedges, at December 31, 2013 (dollars in millions):
| Notional Amount |
Maturity Date | Fair Value |
||||||||||
|
Pay-fixed interest rate swaps |
$ | 500 | December 2014 | $ | (5 | ) | ||||||
|
Pay-fixed interest rate swaps |
3,000 | December 2016 | (248 | ) | ||||||||
|
Pay-fixed interest rate swaps |
1,000 | December 2017 | (42 | ) | ||||||||
During the next 12 months, we estimate $127 million will be reclassified from other comprehensive income (“OCI”) to interest expense.
Cross Currency Swaps
The Company and certain subsidiaries have incurred obligations and entered into various intercompany transactions where such obligations are denominated in currencies, other than the functional currencies of the parties executing the trade. In order to mitigate the currency exposure risks and better match the cash flows of our obligations and intercompany transactions with cash flows from operations, we enter into various cross currency swaps. At December 31, 2013, we are not party to any cross currency swaps.
Derivatives — Results of Operations
The following tables present the effect of our interest rate and cross currency swaps on our results of operations for the year ended December 31, 2013 (dollars in millions):
|
Derivatives in Cash Flow Hedging Relationships |
Amount of Gain Recognized in OCI on Derivatives, Net of Tax |
Location of Loss Reclassified from Accumulated OCI into Operations |
Amount of Loss Reclassified from Accumulated OCI into Operations |
|||||||||
|
Interest rate swaps |
$ | 2 | Interest expense | $ | 131 | |||||||
|
Derivatives Not Designated as Hedging Instruments |
Location of Gain Recognized in Operations on Derivatives |
Amount of Gain Recognized in Operations on Derivatives |
||||||
|
Cross currency swap (matured November 2013) |
Other operating expenses | $ | 13 | |||||
Credit-risk-related Contingent Features
We have agreements with each of our derivative counterparties that contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of December 31, 2013, we have not been required to post any collateral related to these agreements. If we had breached these provisions at December 31, 2013, we would have been required to settle our obligations under the agreements at their aggregate, estimated termination value of $308 million.