The accompanying notes
are an integral part of these financial statements.
The accompanying notes
are an integral part of these financial statements.
Notes to Financial Statements
December 31, 2016
1. Description of the Plan
The following description of the Verizon Savings Plan for Management Employees (the Plan) provides only general information.
Participants should refer to the Summary Plan Description and Plan Document for a complete description of the Plans provisions. The Plan is a defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of
1974 (ERISA).
Eligibility
The Plan provides eligible employees, as defined by the Plan Document, of Verizon Communications Inc. (Verizon or Plan
sponsor) and certain of its subsidiaries (Participating Affiliates) with a convenient way to save for both short-term and long-term needs.
Covered employees are eligible to make
before-tax,
Roth and/or
after-tax
contributions to the Plan and to receive matching employer contributions upon completion of enrollment in the Plan, as soon as practicable following the date of hire. Beginning January 1, 2012,
covered employees who are employed by Verizon or its Participating Affiliates on the last day of the year or who satisfy certain other requirements may receive employer annual discretionary awards (profit sharing contributions) under the
Plan.
An individuals active participation in the Plan shall terminate when the individual ceases to be an eligible employee;
however, the individual shall remain a participant until the entire account balance under the Plan has been distributed or forfeited.
Plan Transfers
and Mergers
On April 1, 2016, Verizon sold to Frontier Communications Corporation (Frontier) its local exchange
business and related landline activities in California, Florida, and Texas. Upon the closing of the transaction, net assets of $302.8 million were transferred from the Plan to the Frontier Communications 401(K) Savings Plan sponsored by
Frontier.
On June 12, 2015 Verizon acquired AOL, Inc. (AOL). AOL employees were eligible to enroll and participate in
the Plan as of January 1, 2016. As a result of the merger, net assets of $592.5 million were transferred to the Plan on May 3, 2016.
The increase of $289.7 million in net asset transfers is reflected in the Statement of Net Assets Available for Benefits.
Subsequent Events
Verizon acquired
Telogis, Inc. (Telogis) on July 29, 2016; Fleetmatics Group PLC (Fleetmatics) on November 7, 2016; Sensity Systems, Inc. (Sensity) on October 4, 2016; XO Communications, Inc. (XO
Communications) on February 1, 2017; and Skyward IO, Inc. (Skyward) on February 15, 2017. The employees of Telogis, Fleetmatics and Sensity were eligible to enroll in the Plan as of January 1, 2017. The employees of
XO Communications and Skyward were eligible to enroll in the Plan as of April
- 4 -
1, 2017. As a result of these mergers, total net assets of approximately $326.9 million were transferred to the Plan in 2017.
Verizon acquired Yahoo! Inc.s (Yahoo) operating business on June 13, 2017.
Investment Options
Participants direct
their contributions to be invested in any of the current investment options.
Participant Accounts
Each participants account is credited with the participants contributions, rollovers, employer-matching contributions, profit
sharing contributions, and allocations of Plan income. Allocations of Plan income are based on participant account balances. The benefit to which a participant is entitled is the benefit that can be provided from the participants vested
account.
Administrative Expenses
Plan administrative fees may include legal, accounting, trustee, recordkeeping, and other administrative fees and expenses associated with
maintaining the Plan. The cost of administering the Plan is paid by participants through a combination of fees allocated to each participants account and fees that are paid as part of the investment fees that are allocated to the Plans
investment options. Participants are provided with a detailed schedule of fees in the annual disclosure notice.
Payment of Benefits
Benefits are recorded when paid. Benefits are payable in a lump sum cash payment unless a participant elects, in writing, one of the following
three optional forms of benefit payment: (1) a lump sum in Verizon shares for investments in the Verizon Company Stock Fund, or the Employee Stock Ownership Plan (ESOP) Shares Fund with the balance in cash, (2) annual,
semi-annual, quarterly, or monthly installments in cash of approximately equal amounts to be paid out for a period of 2 to 20 years, as selected by the participant, or (3) for those participants eligible to receive their distribution in
installments as described in (2) above, a pro rata portion of each installment payment in Verizon shares for investments in the Verizon Company Stock Fund or the ESOP Shares Fund, with the balance of each installment in cash.
Participant Loans
The Plan includes a
loan provision authorizing participants to borrow an aggregate amount generally not exceeding the lesser of (i) $50,000 or (ii) 50% of their vested account balances in the Plan, subject to certain limitations. Loans are generally repaid by payroll
deductions. The general term of repayment for loans is a minimum of six months and a maximum of five years (fifteen years for a loan to purchase a principal residence). Beginning January 1, 2012, each new loan bears interest at a rate based on
the prime rate plus one percent as determined on the last business day of the calendar quarter immediately preceding the calendar quarter in which the loan is made. Loans made prior to January 1, 2012 bear interest at a rate based upon the
prime rate. A loan processing fee of $50 is charged to a participants savings plan account upon initiation of a new loan. Participant loans have been classified as Notes receivable from participants in the Statements of Net Assets
Available for Benefits. Interest rates range from 2.75% to 10.50% for the year ended December 31, 2016.
- 5 -
Master Trusts
At December 31, 2016 and 2015, the Plan participated in the Verizon Master Savings Trust (the Master Trust) and owned
approximately 72.5% and 70.6%, respectively, of the net assets in the Master Trust. This percentage is based on a pro rata share of the net assets in the Master Trust.
Fidelity Management Trust Company (the Trustee or Fidelity) has been designated as the trustee of the Master Trust and
is responsible for the control and disbursement of the funds and portfolios of the Plan. Expenses of administering the Plan, including fees and expenses of the Trustee may be charged to the Plan. The Trustee is also responsible for the investment
and reinvestment of the funds and portfolios of the Plan, except to the extent that it is directed by Verizon Investment Management Corp. (VIMCO) or by third-party investment managers appointed by VIMCO. Investment fees are charged
against the earnings of the funds and portfolios.
At December 31, 2016 and 2015, the Plan also owned approximately 96.1% and 94.2%,
respectively, of the net assets allocated to a defined contribution account in the Bell Atlantic Master Trust (together with the Master Trust, the Master Trusts). The Bank of New York Mellon (BNY Mellon) is the trustee of the
Bell Atlantic Master Trust. The assets in the Bell Atlantic Master Trust are pooled between defined benefit plans and defined contribution plans. The fair value of the Plans net assets allocated to the defined contribution account at
December 31, 2016 and 2015 was $134.3 million and $96.0 million, respectively, and is included in the table of the Master Trusts investments at net asset value (NAV) (see Note 6).
The Plans participating interest in the investment funds of the Master Trusts is based on account balances of the participants and their
elected investment funds. The net assets of the Master Trusts are allocated by assigning to each plan participating in the Master Trusts those transactions that can be specifically identified as related to the plan, such as contributions, benefit
payments, and plan-specific expenses. The income and expenses resulting from the collective investments of the Master Trusts assets are allocated in proportion to the fair value of the assets assigned to such plan.
Plan Modification
The Board of
Directors of Verizon may terminate or partially terminate the Plan at any time and also may modify, alter or amend the Plan at any time. The most senior Human Resources officer of Verizon also has the right to modify, alter or amend the Plan at any
time. The chief legal counsel to the Verizon Employee Benefits Committee may also amend the Plan for changes required by the Internal Revenue Service (IRS) in connection with a determination letter or voluntary compliance application,
changes required for compliance with applicable law, and administrative changes required in connection with a merger, consolidation, or transfer of assets to or from the Plan. No amendment may permit any of the assets held pursuant to the Plan
to be used for any purpose other than for the exclusive benefit of the participants and their beneficiaries or for paying reasonable expenses of administering the Plan. In the event the Plan terminates, participants will become fully vested in their
accounts.
Risks and Uncertainties
The Plan provides investment options for participants who can invest in combinations of stocks, fixed income securities, and other investment
securities. Investment securities are exposed to various risks, such as interest rate, market, equity price, and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the
values of investment securities will
- 6 -
occur in the near term and that such changes could materially affect participants account balances and the amounts reported in these financial statements.
2. Accounting Policies
Basis of Accounting
The accompanying
financial statements have been prepared on the accrual basis of accounting. The preparation of financial statements is in conformity with accounting principles generally accepted in the United States (U.S. GAAP).
Use of Estimates
U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported in the financial statements, accompanying notes and supplemental schedule. Actual results could differ from those estimates.
Reclassification
Certain prior year
amounts have been reclassified to conform to the current years presentation.
Notes Receivable from Participants
Notes receivable from participants represent participant loans that are recorded at their unpaid principal balance plus any accrued but unpaid
interest. Interest income on notes receivable from participants is recorded when it is earned. Related fees are recorded as administrative expenses and are expensed when they are incurred. No allowance for credit losses has been recorded as of
December 31, 2016 or 2015. A participant loan is in default if loan repayments are delinquent beyond the end of the Plans grace period. Defaulted loans are treated as an offset distribution or deemed distribution for tax purposes and
become taxable income to the participant in the year in which the default occurs. In the case of an offset distribution, the participant loan balance is reduced and a distribution is recorded on the participants account.
Recently Issued Accounting Standards
In
February 2017, the Financial Accounting Standards Board issued the Accounting Standards Update (ASU)
No. 2017-06,
Employee Benefit Plan Master Trust Reporting. This ASU requires an
employee benefit plan to disclose the plans percentage interest in a master trust and a list of the investments held by the master trust, presented by general type, within the plans financial statements. This ASU also removes the
requirement to disclose the plans overall percentage interest in a master trust for plans with divided interests and requires that all plans disclose the dollar amount of their interest in each general type of investment. In addition, the ASU
requires the disclosure of the master trusts other asset and liability balances and the dollar amount of the plans interest in each of those balances. The amendments in this ASU are effective for fiscal years beginning after
December 15, 2018 and will be applied retrospectively. Early adoption is permitted. The Plan is currently evaluating the impact that this ASU will have on the presentation of the financial statements and disclosures.
- 7 -
Investments in Master Trusts
The Plans interests in the Master Trusts are stated at fair value (except for Fully Benefit-Responsive Investment Contracts
(FBRICs) which are reported at contract value). The Statement of Changes in Net Assets Available for Benefits reflects the net investment gain from the Plans interests in the Master Trusts which consists of the realized gains or
losses and the unrealized appreciation/(depreciation) in fair value or contract value of those investments, as well as interest and dividends earned. Purchases and sales of investments are reflected as of the trade date. Realized gains and losses on
sales of investments are determined on the basis of average cost. Dividend income is recorded on the
ex-dividend
date. Interest earned on investments is recorded on the accrual basis.
Fair Value Measurements
Fair value of
financial and
non-financial
assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 No observable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair
value measurements. The Plan sponsors assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their categorization
within the fair value hierarchy.
3. Vesting and Contributions
A participant shall be fully vested
in the employer-matching and profit sharing contributions allocated to his or her account or ESOP account and any income thereon upon completing three years of vesting service or upon death, disability, retirement from Verizon or its Participating
Affiliates, attainment of normal retirement age, or involuntary termination (other than for cause).
A terminated employees
non-vested
employer-matching and profit sharing contributions are forfeited and offset against subsequent employer-matching and profit sharing contributions to the Plan. Forfeitures used to reduce employer-matching
contributions were $35.0 million for the year ended December 31, 2016. The balance in the forfeiture account was $33.5 million and $41.5 million at December 31, 2016 and 2015, respectively.
The Plan is funded by employee contributions up to a maximum of 25% of compensation (16% for highly compensated employees as defined in the
Plan Document) and by employer-matching and profit sharing contributions. The employer-matching contributions are equivalent in value to 100% of the initial 6% of the participants contributions of eligible compensation for each payroll period.
Employees attaining the age of 50 or older can elect to make additional
catch-up
contributions to the Plan. Effective with the 2012 Plan year, Verizon or its Participating Affiliates may make a discretionary,
performance-based profit
- 8 -
sharing contribution to the Plan in an amount up to 3% of each employees eligible compensation for the Plan year.
Participant contributions may be made on a
before-tax
or Roth
after-tax
basis (elective contributions) or from currently taxed compensation
(after-tax
contributions). Each participants elective
contributions for the 2016 Plan year were limited to $18,000. For 2016, the total amount of elective contributions,
after-tax
contributions, employer-matching contributions, profit sharing contributions, and
certain forfeitures that may be allocated to a Plan participant was limited to the lesser of (1) $53,000 or (2) 100% of the participants total compensation, and the compensation on which such contributions were based was limited to $265,000.
The
catch-up
contribution limit is $6,000 for participants eligible to make
catch-up
contributions.
Employer-matching contributions and profit sharing contributions are made half in Verizon common stock and half in cash, and the cash is
invested in the same options as the participants current contributions. The Verizon common stock is held by the Plan in a unitized fund, which means participants do not actually own shares of Verizon common stock but rather own an interest in
the unitized fund. For the year ended December 31, 2016, total employer-matching and profit sharing contributions consisted of a stock contribution of 6.1 million shares of Verizon common stock with a fair value at the date of contribution
of $312.8 million and a cash contribution of $312.8 million. Included in these amounts is a discretionary profit sharing contribution of $103.0 million, 50% in shares of Verizon common stock, and 50% in cash.
Effective January 1, 2016, the Plan was amended to make employer contributions (and earnings thereon) invested in the Verizon Company
Stock Fund immediately eligible for diversification into other investment options in the Plan, regardless of an employees age or years of service.
In addition, effective January 1, 2017, 100% of company match and profit sharing contributions are being deposited as cash into the
investment options participants select, instead of having 50% automatically invested in the Verizon Company Stock Fund. The Plan has also allowed an increase of employee contributions by
non-highly
compensated
employees up to a maximum of 50% of compensation, where the 16% maximum contribution for highly compensated employees remains unchanged.
4. Related-Party Transactions
VIMCO, an indirect, wholly-owned subsidiary of Verizon, is the investment advisor for certain investment funds and therefore qualifies as a
party-in-interest.
VIMCO received no compensation from the Plan other than reimbursement of certain expenses directly attributable to its investment advisory and investment
management services rendered to the Plan. In addition, certain investments held by the Master Trusts are managed by BNY Mellon, as trustee, and Fidelity, as trustee and record keeper. Therefore, these investments qualify as
parties-in-interest
transactions. The Plan also allows investment, through a unitized fund, in Verizon common stock, which is a
party-in-interest
transaction. All of these transactions are exempt from the prohibited transaction rules.
5. Income Tax Status
The Plan has received a determination letter from the IRS dated April 30, 2015, stating that the Plan is qualified under
Section 401(a) of the Internal Revenue Code (the Code) and, therefore, the related trusts
- 9 -
are exempt from taxation. The Plan is required to operate in conformity with the Code to maintain its qualification. The Plan administrator believes the Plan is being operated in compliance with
the applicable requirements of the Code and, therefore, believes that the Plan is qualified and the related trusts are tax exempt.
U.S.
GAAP requires Plan management to evaluate uncertain tax positions taken by the Plan. The financial statement effects of a tax position are recognized when the position is more likely than not, based on the technical merits, to be sustained upon
examination by the IRS. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2016, there are no uncertain positions taken or expected to be taken. The Plan is subject to routine
audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The Plan administrator believes the Plan is no longer subject to income tax examinations for years prior to 2013.
6. Investments in Master Trusts
Valuation of Investments
Cash and cash
equivalents include short-term investment funds, primarily in diversified portfolios of investment grade money market instruments and are valued using quoted market prices or other valuation methods.
Investments in securities traded on national and foreign securities exchanges are valued by the custodian at the last reported sale prices on
the last business day of the year or, if no sales were reported on that date, at the last reported bid prices.
Over-the-counter
securities, government obligations,
corporate bonds and international bonds are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable such as multiple
broker quotes.
Commingled funds not traded on national exchanges are valued by the custodian or fund administrator at NAV. Commingled
funds held by third-party custodians appointed by the fund managers provide the fund manager with a NAV. The fund manager has the responsibility for providing this information to the custodian of the respective plan. Hedge fund investments include
those investments seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. Hedge funds are valued by the custodian at NAV based on statements received from the investment
manager. These funds are valued in accordance with the terms of their corresponding offering or private placement memoranda. Commingled funds and hedge funds for which fair value is measured using the NAV per share as a practical expedient are not
leveled within the fair value hierarchy and are included as a reconciling item to total investments in the Master Trusts.
The following table summarizes
redemption restrictions for investments for which fair value is estimated using NAV per share. This table does not include the real estate fund, which is noted below the table:
|
|
|
|
|
|
|
Liquidation
|
|
Redemption
|
|
Redemption
|
|
Redemption
|
Period
|
|
Frequency
|
|
Notice
|
|
Restrictions
|
|
|
|
|
Daily
|
|
Daily
|
|
Daily
|
|
None
|
- 10 -
For a portion of the real estate fund, redemption requests will be scheduled for payment on the
next valuation date which is at least three months after receipt of a written request for redemption (last business day of the quarter). Redemption requests are subject to fund management discretion based on cash available to meet redemption
requests. In the event total redemption requests exceed the total cash available to honor such requests, available cash will be prorated among the contract-holders eligible for redemption.
The accounting records of the Master Trusts are maintained in U.S. dollars. Foreign currency denominated assets and liabilities are translated
into U.S. dollars at the prevailing rates of exchange at the end of each accounting period, with the impact of fluctuations in foreign exchange rates reflected as an unrealized gain or loss in the fair value of the investments.
Cash receipts and payments derived from investment trades involving foreign currency denominated investments are translated into U.S. dollars
at the prevailing exchange rate on the respective transaction date. Net realized gains and losses on foreign currency transactions result from the disposition of foreign currency denominated investments as a result of fluctuations in foreign
exchange rates between the trade and settlement dates and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received.
The foreign exchange effect on foreign currency denominated investments is not segregated from the impact of changes in market prices in the
Statement of Changes in Net Assets Available for Benefits.
The Plans interest in the fair value of the Master Trust and the Bell
Atlantic Master Trust and the related investment gains are reported in Investments at fair value and Net investment gain from investments in Master Trusts in the Statements of Net Assets Available for Benefits and in the
Statement of Changes in Net Assets Available for Benefits, respectively.
- 11 -
The following table represents the Master Trusts net investments by investment type
measured at fair value on a recurring basis by the fair value measurement levels described in Note 2 as of December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value as of December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
99
|
|
|
$
|
58,060
|
|
|
$
|
-
|
|
|
$
|
58,159
|
|
Verizon common stock
|
|
|
7,499,041
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,499,041
|
|
Mutual funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. fixed income
|
|
|
1,210,836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,210,836
|
|
U.S. equity
|
|
|
370,219
|
|
|
|
-
|
|
|
|
-
|
|
|
|
370,219
|
|
U.S. small cap
|
|
|
401,443
|
|
|
|
-
|
|
|
|
-
|
|
|
|
401,443
|
|
International equity
|
|
|
284,670
|
|
|
|
-
|
|
|
|
-
|
|
|
|
284,670
|
|
Global fixed income
|
|
|
308,544
|
|
|
|
-
|
|
|
|
-
|
|
|
|
308,544
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International equity
|
|
|
2,211,706
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,211,706
|
|
U.S. equity
|
|
|
6,067,660
|
|
|
|
117
|
|
|
|
-
|
|
|
|
6,067,777
|
|
Fixed income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. bonds
|
|
|
5,520
|
|
|
|
1,003,669
|
|
|
|
978
|
|
|
|
1,010,167
|
|
U.S. treasuries and agencies
|
|
|
580,777
|
|
|
|
291,431
|
|
|
|
-
|
|
|
|
872,208
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
145,488
|
|
|
|
-
|
|
|
|
145,488
|
|
International bonds
|
|
|
573
|
|
|
|
670,940
|
|
|
|
270
|
|
|
|
671,783
|
|
Convertible securities
|
|
|
2,262
|
|
|
|
6,530
|
|
|
|
-
|
|
|
|
8,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
|
18,943,350
|
|
|
|
2,176,235
|
|
|
|
1,248
|
|
|
|
21,120,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments measured at NAV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,524,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
18,943,350
|
|
|
$
|
2,176,235
|
|
|
$
|
1,248
|
|
|
$
|
28,645,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table states the change in fair value of the Master Trusts Level 3 assets for the
year ended December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
January 1,
2016
|
|
Transfer
Out
|
|
Transfer
In
|
|
Acquisitions
|
|
Dispositions
|
|
Realized
Gain/(Loss)
|
|
Change in
Unrealized
Gain
|
|
Fair Value
December 31,
2016
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. bonds
|
|
$
|
752
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
826
|
|
|
$
|
(653
|
)
|
|
$
|
(68
|
)
|
|
$
|
121
|
|
|
$
|
978
|
|
International bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
265
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
752
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,091
|
|
|
$
|
(653
|
)
|
|
$
|
(63
|
)
|
|
$
|
121
|
|
|
$
|
1,248
|
|
|
|
|
|
|
|
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Assets are monitored to assess the appropriate levels assigned within the fair value hierarchy. Changes in
economic conditions, such as bankruptcy, default or delisting, may require the transfer of an asset from one fair value level to another. When such a transfer occurs, it is recognized as of the end of the reporting period.
The total net appreciation of $2.2 billion for the year ended December 31, 2016 includes gains and losses on investments bought and
sold, as well as held during the year for all the Master Trusts investments. Interest and dividends, along with the net appreciation/(depreciation) in fair value or contract value of investments, are allocated to the Plan on a daily basis
based upon the Plans participation in the various investment funds and portfolios that comprise the Master Trusts as a percentage of the total participation
- 12 -
in such funds and portfolios. Interest and dividend income for the Master Trusts was $627.0 million for the year ended December 31, 2016.
The Bell Atlantic Master Trusts defined contribution net investments are held in unitized commingled defined benefit and defined
contribution investment accounts measured at NAV per share as a practical expedient. The defined contribution net investments held in the Bell Atlantic Master Trust were $139.8 million and $101.9 million at December 31, 2016 and 2015,
respectively, and are reflected in Investments measured at NAV on the fair value hierarchy tables. The net appreciation for the Bell Atlantic Master Trusts net investments was $8.3 million for the year ended December 31,
2016, which is included in the total net appreciation.
The following table represents the Master Trusts net investments by investment type measured
at fair value on a recurring basis by the fair value measurement levels described in Note 2 as of December 31, 2015 (in thousands):
|
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|
Assets at Fair Value as of December 31, 2015
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|
Level 1
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|
Level 2
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|
Level 3
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|
Total
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
815
|
|
|
$
|
275,663
|
|
|
$
|
-
|
|
|
$
|
276,478
|
|
Verizon common stock
|
|
|
6,677,923
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,677,923
|
|
Mutual funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. fixed income
|
|
|
1,213,764
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,213,764
|
|
U.S. equity
|
|
|
469,519
|
|
|
|
-
|
|
|
|
-
|
|
|
|
469,519
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|
U.S. small cap
|
|
|
338,019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
338,019
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|
International equity
|
|
|
384,959
|
|
|
|
-
|
|
|
|
-
|
|
|
|
384,959
|
|
Global fixed income
|
|
|
223,888
|
|
|
|
-
|
|
|
|
-
|
|
|
|
223,888
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|
Commodities
|
|
|
46,867
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,867
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|
Alternative investments
|
|
|
10,919
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|
|
|
-
|
|
|
|
-
|
|
|
|
10,919
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|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International equity
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|
|
2,127,937
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|
|
|
-
|
|
|
|
-
|
|
|
|
2,127,937
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|
U.S. equity
|
|
|
4,417,611
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|
|
|
110
|
|
|
|
-
|
|
|
|
4,417,721
|
|
Fixed income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. bonds
|
|
|
29,417
|
|
|
|
288,297
|
|
|
|
752
|
|
|
|
318,466
|
|
U.S. treasuries and agencies
|
|
|
341,792
|
|
|
|
242,733
|
|
|
|
-
|
|
|
|
584,525
|
|
Asset-backed securities
|
|
|
-
|
|
|
|
32,030
|
|
|
|
-
|
|
|
|
32,030
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|
International bonds
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|
|
-
|
|
|
|
781,178
|
|
|
|
-
|
|
|
|
781,178
|
|
Convertible securities
|
|
|
768
|
|
|
|
2,976
|
|
|
|
-
|
|
|
|
3,744
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
|
16,284,198
|
|
|
|
1,622,987
|
|
|
|
752
|
|
|
|
17,907,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments measured at NAV
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,900,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
16,284,198
|
|
|
$
|
1,622,987
|
|
|
$
|
752
|
|
|
$
|
25,807,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 13 -
The following table states the change in fair value of the Master Trusts Level 3
assets for the year ended December 31, 2015 (in thousands):
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|
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|
|
|
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|
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|
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|
|
|
|
|
|
Fair Value
January 1,
2015
|
|
Transfer
Out
|
|
Transfer
In
|
|
Acquisitions
|
|
Dispositions
|
|
Realized
Loss
|
|
Change in
Unrealized
Gain
|
|
Fair Value
December 31,
2015
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. bonds
|
|
$
|
7,830
|
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
152
|
|
|
$
|
(6,847
|
)
|
|
$
|
(1,423
|
)
|
|
$
|
1,044
|
|
|
$
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
7,830
|
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
152
|
|
|
$
|
(6,847
|
)
|
|
$
|
(1,423
|
)
|
|
$
|
1,044
|
|
|
$
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets are monitored to assess the appropriate levels assigned within the fair value hierarchy. Changes in
economic conditions, such as bankruptcy, default or delisting, may require the transfer of an asset from one fair value level to another. When such a transfer occurs, it is recognized as of the end of the reporting period. Transfers out of
international bonds to U.S. bonds reflect a change in classification.
Fully Benefit-Responsive Investment Contracts
The Plan held a portfolio of synthetic investment contracts that met the criteria of a FBRIC. The contract value of these investment contracts
was approximately $1.1 billion as of December 31, 2015, which was reflected in the Statements of Net Assets Available for Benefits. The contract value is the relevant measurement of the FBRICs because it represents the amount participants
would receive if they were to initiate permitted transactions under the terms of the Plan. The contract value of the investment contracts represents contributions plus earnings, less participant withdrawals and administrative expenses.
On January 4, 2016, the Plan closed one of its fixed income investment options, the Conservative Fixed Income Fund. The assets that had
been invested in this fund were mapped to another fixed income investment option that does not contain FBRICs. As a result, the Plan has zero interest in the Master Trusts FBRIC investments as of December 31, 2016.
The underlying investments of the FBRICs are included in the Master Trusts assets at contract value, which as reported by the insurance
companies and banks, was approximately $0.7 billion and $1.8 billion as of December 31, 2016 and 2015, respectively. The FBRICs contract value decreased due to the closing of the Conservative Fixed Income Fund, which contained FBRICs.
The synthetic investment contracts held by the Master Trust include wrapper contracts that provide a guarantee that the credit rate will
not fall below zero percent. The wrap contracts are held with insurance companies and banks. In a typical wrap contract, the wrap issuer agrees to pay the fund the difference between the contract value and the fair value of the covered assets once
the fair value has been totally exhausted. Though relatively unlikely, this could happen if the fund experiences significant redemptions during a time when the fair value of the funds covered assets is below their contract value and fair value
is ultimately reduced to zero. Standard & Poors (S&P) rated the issuers of these contracts and the contracts underlying the securities from
AA-
to A+ as of December 31, 2016
and 2015.
7. Derivatives
In the normal course of operations, the Master Trusts assets and liabilities may include derivative financial instruments. Derivatives
are synthetic instruments used to get various market exposures with limited margin requirements and therefore with leverage risk involved. The contract or notional amounts
- 14 -
disclosed in this footnote provide a measure of the Master Trusts involvement in such instruments but are not indicative of potential loss. The intent is to use derivative financial
instruments to gain market exposure or as economic hedges to manage various risks such as market volatility risk, foreign currency exchange rate risk, interest rate risk or credit risk associated with the Master Trusts investment assets or to
express investment managers views of future market movements efficiently.
At December 31, 2016 and 2015, the Master Trust
utilized futures, options, foreign currency forwards, interest rate and credit derivatives to manage risks such as price risk, foreign currency exchange rate risk, interest rate sensitivity and credit risk.
Futures Contracts
Upon entering into a
futures contract on behalf of the Master Trust, the investment manager is required to pledge to the broker an amount of cash or securities equal to the minimum initial margin requirements of the exchange on which the contract is traded.
Pursuant to the contract, the investment manager agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as variation margin and are recorded on a
daily basis by the trustee as a realized gain or loss equal to the difference in the value of the contract between daily closing prices.
Option
Contracts
Purchased and written option contracts are agreements between two parties giving the owner, under a purchased option, the
right, but not the obligation, to buy or sell a specified item at a fixed price (exercise or strike) during a specified period and, under a written option, the obligation to buy or sell a specified item at a fixed price. When
the investment manager buys or writes an option contract, a nonrefundable fee (the premium) is paid or received by the Master Trust, recorded as an asset or liability and subsequently adjusted to the current market value of the option
purchased or written. The premiums paid or received from buying or writing options together with the option settlement amounts are recorded as realized gains or losses when the options expire. The difference between the premium and the amount paid
or received on effecting a closing purchase or sale transaction is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is recorded as a realized gain or loss if sold or an adjustment to cost of the
underlying investment if acquired upon exercise.
Foreign Currency Forward Contracts
Foreign currency forward contracts are agreements to exchange foreign currencies at a specified future date and rate, the terms of which are
not standardized on an exchange. Risk arises both from the possible inability of the counterparties to meet the terms of the contracts (credit risk) and from the movements in foreign currency exchange rates (market risk). The contracts are recorded
at fair value on the date the contract is entered into, which is typically zero.
Interest Rate Derivatives
An interest rate swap is a bilateral contract between a buyer and a seller under which the buyer and seller agree to exchange payments based
on interest rate movements, typically fixed versus floating rates on an agreed upon notional amount. Counterparty risk, or the risk associated with the party one enters into a contract with, is an important consideration for all forms of contractual
agreement that are settled
over-the-counter.
- 15 -
Credit Derivatives
A credit default swap is a particular type of swap designed to transfer the credit exposure of fixed income products between two parties. In a
credit default swap, the buyer of the swap makes payments to the swaps seller up until the maturity date of a contract. In return, the seller agrees that, in the event that the debt (reference name) issuer defaults or experiences
another credit event, the seller will pay the buyer the securitys principal as well as all interest payments that would have been paid between that time and the securitys maturity date.
These triggering events may include the market standard of failure to pay on indebtedness, bankruptcy of the reference credit, debt
restructuring, or the acceleration of indebtedness. The seller of such protection may not be required to make payments until a specified amount of losses has occurred with respect to the portfolio and/or may only be required to pay for losses up to
a specified amount.
Credit derivatives are used primarily to help mitigate credit risk in the Master Trusts corporate bonds
portfolio or to address investment managers views on the likelihood of future credit events. Through these contracts, the Master Trust either purchases or writes protection on either a single name or a portfolio of reference credits. The
credit derivatives written by the Master Trust include credit default swaps (CDS).
A CDS is a contract in which, for a fee, a
protection seller agrees to reimburse a protection buyer for any losses that occur due to a credit event on a reference name. If there is no credit default event or settlement trigger, as defined by the specific derivative contract, then the
protection seller makes no payments to the protection buyer and receives only the contractually specified fee. However, if a credit event occurs as defined in the specific derivative contract sold, the protection seller will be required to make a
payment to the protection buyer.
- 16 -
The notional amounts and fair values of the derivative instruments as of December 31, 2016
and 2015 are presented below. The fair values presented in the tables are included in the Statements of Net Assets Available for Benefits under Investments at fair value (in thousands):
The following table reconciles the
Net assets available for benefits per the Statements of Net Assets Available for Benefits to the Plans Form 5500 Asset and Liability Statement at December 31, 2016 and 2015 (in thousands):
The following table reconciles the Net change and net transfers per the Statement of Changes in Net Assets
Available for Benefits to Net income and transfers of assets per the Plans Form 5500 Income and Expense Statement for the year ended December 31, 2016 (in thousands):
Cost information is not required because investments are participant-directed.