American Home Shield 2015 Annual Report Download - page 74

56
We do not hold or issue derivative financial instruments for trading or speculative purposes. We have entered into specific
financial arrangements, primarily fuel swap agreements and interest rate swap agreements, in the normal course of business to manage
certain market risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of
derivative financial instrument transactions could have a material impact on our financial statements.
Interest Rate Risk
We are exposed to the impact of interest rate changes and manage this exposure through the use of variable-rate and fixed-
rate debt and by utilizing interest rate swaps.
On July 23, 2014, we entered into two four-year interest rate swap agreements effective August 1, 2014. The aggregate
notional amount of the agreements was $300 million. Under the terms of the agreements, we will pay a weighted-average fixed rate of
interest of 1.786 percent on the $300 million notional amount, and we will receive a floating rate of interest (based on one-month
LIBOR) on the notional amount. Therefore, during the term of the agreements, the effective interest rate on $300 million of the Term
Loan Facility is fixed at a rate of 1.786 percent, plus the incremental borrowing margin of 3.25 percent.
On July 23, 2014, we entered into three forty-one month interest rate swap agreements effective March 1, 2015. The
aggregate notional amount of the agreements was $400 million. Under the terms of the agreements, we will pay a weighted-average
fixed rate of interest of 1.927 percent on the $400 million notional amount, and we will receive a floating rate of interest (based on
one-month LIBOR) on the notional amount. Therefore, during the term of the agreements, the effective interest rate on $400 million
of the Term Loan Facility is fixed at a rate of 1.927 percent, plus the incremental borrowing margin of 3.25 percent.
We believe our exposure to interest rate fluctuations, when viewed on both a gross and net basis, is material to our overall
results of operations. A significant portion of our outstanding debt, including debt under the Credit Facilities, bears interest at variable
rates. As a result, increases in interest rates would increase the cost of servicing our indebtedness and could materially reduce our
profitability and cash flows. As of December 31, 2015, each one percentage point change in interest rates would result in an
approximate $17 million change in the annual interest expense on our Term Facility after considering the impact of the effective
interest rate swaps. Assuming all revolving loans were fully drawn as of December 31, 2015, each one percentage point change in
interest rates would result in an approximate $2 million change in annual interest expense on our Revolving Credit Facility. Our
exposure to interest rate fluctuations has not changed significantly since December 31, 2014. The impact of increases in interest rates
could be more significant for us than it would be for some other companies because of our substantial indebtedness.
The following table summarizes information about our debt as of December 31, 2015 (after considering the impact of the
effective interest rate swaps), including the principal cash payments and related weighted-average interest rates by expected maturity
dates based on applicable rates at December 31, 2015.
Expected Year of Maturity Fair
(In millions) 2016 2017 2018 2019 2020 Thereafter Total Value
Debt:
Fixed rate $ 15 $ 12 $ 88 $ 7 $ 6 $ 978 $ 1,105 $ 1,092
Average interest rate 6.9 % 6.5 % 7.0 % 6.5 % 6.5 % 5.8 % 5.9 %
Variable rate $ 39 $ 54 $ 34 $ 30 $ 27 $ 1,554 $ 1,738 $ 1,721
Average interest rate 3.6 % 3.3 % 3.7 % 3.9 % 4.1 % 4.2 % 4.2 %
Interest Rate Swaps:
Receive variable/pay fixed $ 700
Average pay rate(1) 1.9 %
Average receive rate(1) 1.0 %
(1) Before the application of the applicable borrowing margin.
Fuel Price Risk
We are exposed to market risk for changes in fuel prices through the consumption of fuel by our vehicle fleet in the delivery
of services to our customers. We expect to use approximately 13 million gallons of fuel in 2016. As of December 31, 2015, a ten
percent change in fuel prices would result in a change of approximately $3 million in our annual fuel cost before considering the
impact of fuel swap contracts.
We use fuel swap contracts to mitigate the financial impact of fluctuations in fuel prices. As of December 31, 2015, we had
fuel swap contracts to pay fixed prices for fuel with an aggregate notional amount of $21 million, maturing through 2016. The
estimated fair value of these contracts as of December 31, 2015 was a net liability of $4 million. These fuel swap contracts provide a
fixed price for approximately 71 percent of our estimated fuel usage for 2016.
72 2015 Annual Report