American Home Shield 2009 Annual Report Download - page 54

Table of Contents
A portion of the Company's vehicle fleet and some equipment are leased through operating leases. The lease terms are non-cancelable for the first
twelve-month term, and then are month-to-month, cancelable at the Company's option. There are residual value guarantees by the Company (ranging from
70 percent to 84 percent of the estimated terminal value at the inception of the lease depending on the agreement) relative to these vehicles and equipment,
which historically have not resulted in significant net payments to the lessors. The fair value of the assets under all of the fleet and equipment leases is
expected to substantially mitigate the Company's guarantee obligations under the agreements. At December 31, 2009, the Company's residual value
guarantees related to the leased assets totaled $78.4 million for which the Company has recorded the estimated fair value of these guarantees of $1.6 million in
the Consolidated Statements of Financial Position.
The Company maintains lease facilities with banks totaling $65.2 million, which provide for the financing of branch properties to be leased by the
Company. At December 31, 2009, $65.2 million was funded under these facilities. $12.5 million of these leases are accounted for as capital leases and have
been included on the balance sheet as assets with related debt as of December 31, 2009. The balance of the funded amount is accounted for as operating
leases. In connection with the closing of the Merger, the Company amended these leases effective July 24, 2007. Among the modifications, the Company
extended the lease terms through July 24, 2010 and made a $22.0 million investment in the lease facilities. This $22.0 million investment is included in other
assets in the Consolidated Statements of Financial Position, and will be returned to the Company at the end of the lease term. The operating lease and capital
lease classifications of these leases did not change as a result of the modifications. No later than 120 days prior to the end of the lease term, the Company must
exercise one of the following three options related to the leased properties: (1) negotiate an extension to the current leasing arrangement; (2) return the
properties to the lessor; or (3) purchase the properties for $65.2 million, the total amount funded under the lease facilities. If the properties are returned to the
lessor, the lessor will sell the properties and the Company will be obligated to pay the lessor for any shortfall between the sales proceeds and the amount
funded under the lease facilities up to 73 percent of the fair market value of the properties at the commencement of the lease pursuant to a residual value
guarantee. In March 2010, the Company elected the third option noted above and will purchase the properties for $65.2 million at the end of the lease term.
In the third quarter of 2009, the Company determined that it was probable that the fair value of the properties under operating leases would be below the
total amount funded under the lease facilities at the end of the lease term. The Company's current estimate of this shortfall is $11.8 million, which will be
expensed over the remainder of the lease term. The Company recorded a charge of $5.5 million in the year ended December 31, 2009 related to this shortfall
and will expense the remaining $6.3 million over the remainder of the lease term, which expires July 24, 2010. There was no similar charge in any prior
period.
The Company holds certain financial instruments that are measured at fair value on a recurring basis. The fair values of these instruments are measured
using both the market and income approaches. For investments in marketable securities, deferred compensation trust assets and derivative contracts, which are
carried at their fair values, the Company's fair value estimates incorporate quoted market prices, other observable inputs (for example, interest rates) and
unobservable inputs (for example, forward commodity prices) at the balance sheet date.
Under the terms of its fuel swap contracts, the Company is required to post collateral in the event that the fair value of the contracts exceeds a certain
agreed upon liability level. As of December 31, 2009, the fair value of the Company's fuel swap contracts was an asset of $6.9 million and the Company
posted $2.5 million in letters of credit as collateral for these contracts, none of which were issued under the Company's Revolving Credit Facility. The
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