American Home Shield 2008 Annual Report Download - page 66

Table of Contents
The Company believes its exposure to interest rate fluctuations, when viewed on both a gross and net basis, is material to its 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,
whether because of an increase in market interest rates or a decrease in our creditworthiness, would increase the cost of servicing our debt and could
materially reduce our profitability and cash flows. As of December 31, 2008, each one percentage point change in interest rates would result in an
approximately $11.8 million change in the annual interest expense on our Term Loan Facilities after considering the impact of the interest rate swaps into
which we had entered. Assuming all revolving loans were fully drawn, each one percentage point change in interest rates would result in a $5.0 million
change in annual interest expense on our Revolving Credit Facility. We are also exposed to increases in interest rates with respect to our arrangement enabling
us to transfer an interest in certain receivables to unrelated third parties. Assuming all available amounts were transferred under this arrangement, each one
percentage point change in interest rates would result in a $0.5 million change on annual interest expense with respect to this arrangement. Additionally, we
are exposed to increases in interest rates with respect to our floating rate operating leases, and a one percentage point change in interest rates would result in
an approximately $2.2 million change in annual rent expense with respect to such operating leases. The impact of increases in interest rates could be more
significant for us than it would be for some other companies because of our substantial debt and floating rate operating leases.
The following table summarizes information about the Company's debt as of December 31, 2008 (after considering the effect of the interest rate swap
agreements), including the principal cash payments and related weighted-average interest rates by expected maturity dates based on applicable rates at
December 31, 2008.
Expected Year of Maturity
Fair
Value
As of December 31, 2008 2009 2010 2011 2012 2013 Thereafter Total
($ in millions)
Debt:
Fixed rate $ 20 $ 14 $ 9 $ 5 $ 2 $ 2,939 $2,989 $1,329
Average interest rate 6.1% 6.5% 6.8% 7.7% 7.9% 8.3% 8.3%
Variable rate $201 $ 39 $ 27 $ 26 $ 27 $ 1,048 $1,368 $ 837
Average interest rate 2.9% 3.1% 2.9% 2.9% 2.9% 2.9% 2.9%
Interest Rate Swaps:
Receive variable/pay fixed $530 $450 $450
Average pay rate 5.1% 3.5% 3.5%
Average receive rate 0.4% 1.0% 1.0%
Fuel Price Risk
The Company is exposed to market risk for changes in fuel prices through the consumption of fuel by its vehicle fleet in the delivery of services to its
customers. The Company uses approximately 28 million gallons of fuel on an annual basis. A 10% change in fuel prices would result in a change of
approximately $5 million in the Company's annual fuel costs before considering the impact of fuel swap contracts.
The Company uses fuel swap contracts to mitigate the financial impact of fluctuations in fuel prices. As of December 31, 2008, the Company had fuel
swap contracts to pay fixed prices for fuel with an aggregate notional amount of $84.9 million, maturing through 2010. The estimated fair value of these
contracts at December 31, 2008 was a liability of $24.9 million, substantially all of which relates to contracts maturing in 2009. These fuel swap contracts
provide a fixed price for approximately 70% and 15% of the Company's estimated fuel usage for the 2009 and 2010, respectively.
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