Avis 2008 Annual Report Download - page 111

impact of changes in the value of the underlying risk they economically hedge. Forward contracts used to hedge forecasted third party
receipts and disbursements up to 12 months are designated and do qualify as cash flow hedges. The amount of gains or losses reclassified
from other comprehensive income to earnings resulting from ineffectiveness or from excluding a component of the forward contracts’ gain
or loss from the effectiveness calculation for cash flow hedges during 2008, 2007 and 2006 was not material, nor is the amount of gains or
losses the Company expects to reclassify from other comprehensive income to earnings over the next 12 months.
Interest Rate Risk . The Company uses various hedging strategies including interest rate swaps and interest rate caps to create an
appropriate mix of fixed and floating rate assets and liabilities. During 2008, the Company recorded a net unrealized loss on all cash flow
hedges of $86 million, net of tax, to other comprehensive income. The after-tax amount of gains or losses reclassified from accumulated
other comprehensive income (loss) to earnings resulting from ineffectiveness for 2008, 2007 and 2006 was not material to the Company’s
results of operations. The Company estimates that approximately $130 million of losses deferred in accumulated other comprehensive
income will be recognized in earnings in 2009, which is expected to be offset in earnings by the impact of the underlying hedged items.
During 2008, the Company used interest rate swaps, designated as cash flow hedges, to manage the risk related to its floating rate corporate
debt. In connection with such cash flow hedges, the Company recorded net unrealized losses of $1 million, net of tax, to other
comprehensive income. In 2007, the Company used interest rate swaps, designated as cash flow hedges, to manage the risk related to its
floating rate corporate debt. In connection with such cash flow hedges, the Company recorded net unrealized losses of $13 million, net of
tax, to other comprehensive income. In 2006, the Company’s hedging strategies related to its corporate debt included swaps and financial
instruments with purchased option features designated as either fair value hedges or freestanding derivatives. The fair value hedges were
effective resulting in no impact on the Company’s consolidated results of operations during 2006, except to create the accrual of interest
expense at variable rates. The freestanding derivatives resulted in a nominal impact in 2006. In 2006, the Company repaid all outstanding
debt associated with terminated hedges and recognized the unamortized gains as a component of the early extinguishment of debt line item
on the accompanying Consolidated Statements of Operations.
The Company uses derivatives to manage the risk associated with its floating rate vehicle-backed debt. These derivatives include
freestanding derivatives and derivatives designated as cash flow hedges, which have maturities ranging from April 2009 to August 2012. In
connection with such cash flow hedges, the Company recorded net unrealized losses of $85 million, $80 million and $5 million, net of tax,
during 2008, 2007 and 2006, respectively, to other comprehensive income. The Company recorded a gain (loss) of $(17) million, $(8)
million and $5 million, respectively, related to freestanding derivatives during 2008, 2007 and 2006, respectively.
Commodity Risk. The Company is also exposed to changes in commodity prices, primarily unleaded gasoline. In the third and fourth
quarters of 2008, first quarter 2007 and fourth quarter 2006, the Company purchased derivative commodity instruments to manage the risk
of changes in unleaded gasoline prices. These instruments were designated as freestanding derivatives. These derivatives resulted in a $22
million loss and a $10 million gain on the Company’s consolidated results of operations in 2008 and 2007, respectively. In 2006, these
derivatives had a nominal impact on the Company’s consolidated results of operations.
Credit Risk and Exposure
. The Company is exposed to counterparty credit risks in the event of nonperformance by counterparties to various
agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such
counterparties and by requiring collateral in certain instances in which financing is provided. The Company mitigates counterparty credit
risk associated with its derivative contracts by monitoring the amount for which it is at risk with each counterparty, periodically evaluating
counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties.
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