Waste Management 2006 Annual Report Download - page 87

actual or anticipated economic exposures although certain transactions did not qualify for hedge accounting. We are
exposed to credit risk in the event of non-performance by our derivative counterparties. However, we monitor our
derivative positions by regularly evaluating our positions and the creditworthiness of the counterparties, all of
whom we either consider credit-worthy, or who have issued letters of credit to support their performance.
We have performed sensitivity analyses to determine how market rate changes might affect the fair value of our
market risk sensitive derivatives and related positions. These analyses are inherently limited because they reflect a
singular, hypothetical set of assumptions. Actual market movements may vary significantly from our assumptions.
The effects of market movements may also directly or indirectly affect our assumptions and our rights and
obligations not covered by the sensitivity analyses. Fair value sensitivity is not necessarily indicative of the ultimate
cash flow or the earnings effect from the assumed market rate movements.
Interest Rate Exposure. Our exposure to market risk for changes in interest rates relates primarily to our debt
obligations, which are primarily denominated in U.S. dollars. In addition, we use interest rate swaps to manage the
mix of fixed and floating rate debt obligations, which directly impacts variability in interest costs. An instantaneous,
one percentage point increase in interest rates across all maturities and applicable yield curves would have
decreased the fair value of our combined debt and interest rate swap positions by approximately $460 million at
December 31, 2006 and $480 million at December 31, 2005. This analysis does not reflect the effect that increasing
interest rates would have on other items, such as new borrowings, nor the unfavorable impact they would have on
interest expense and cash payments for interest.
We are also exposed to interest rate market risk because we have $377 million and $460 million of assets held
in restricted trust funds and escrow accounts primarily included within long-term “Other assets” in our Consol-
idated Balance Sheets at December 31, 2006 and 2005, respectively. These assets are generally restricted for future
capital expenditures and closure, post-closure and environmental remediation activities at our disposal facilities and
are, therefore, invested in high quality, liquid instruments including money market accounts and U.S. government
agency debt securities. Because of the short terms to maturity of these investments, we believe that our exposure to
changes in fair value due to interest rate fluctuations is insignificant.
Currency Rate Exposure. From time to time, we have used currency derivatives to mitigate the impact of
currency translation on cash flows of intercompany Canadian-currency denominated debt transactions. Our foreign
currency derivatives have not materially affected our financial position or results of operations for the periods
presented. In addition, a change in foreign currency rates would not significantly affect our fair value positions.
Commodities Price Exposure. We market recycled products such as wastepaper, aluminum and glass from
our material recovery facilities. We have entered into commodity swaps and options to mitigate the variability in
cash flows from a portion of these sales. Under the swap agreements, we pay a floating index price and receive a
fixed price for a fixed period of time. With regard to our option agreements, we have purchased price protection on
certain wastepaper sales via synthetic floors (put options) and price protection on certain wastepaper purchases via
synthetic ceilings (call options). Additionally, we have entered into collars (combination of a put and call option)
with financial institutions in which we receive the market price for our wastepaper and aluminum sales within a
specified floor and ceiling. We record changes in the fair value of commodity derivatives not designated as hedges
to earnings, as required. All derivative transactions are subject to our risk management policy, which governs the
type of instruments that may be used. The fair value position of our commodity derivatives would decrease by
approximately $5 million at December 31, 2006 and by approximately $10 million at December 31, 2005 if there
were an instantaneous 10% increase across all commodities and applicable yield curves.
See Notes 3 and 7 to the Consolidated Financial Statements for further discussion of the use of and accounting
for derivative instruments.
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