Alaska Airlines and Horizon Air 2014 Annual Report Download - page 163

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The Company uses the market approach and the income approach to determine the fair value of
derivative instruments. Fuel hedge contracts that are not traded on a public exchange are Level 2 as
the fair value is primarily based on inputs which are readily available in active markets or can be derived
from information available in active markets. The fair value for call options is determined utilizing an
option pricing model based on inputs that are readily available in active markets, or can be derived from
information available in active markets. In addition, the fair value considers the exposure to credit
losses in the event of non-performance by counterparties. Interest rate swap agreements are Level 2 as
the fair value of these contracts is determined based on the difference between the fixed interest rate
in the agreements and the observable LIBOR-based interest forward rates at period end, multiplied by
the total notional value.
The Company has no other financial assets that are measured at fair value on a nonrecurring basis at
December 31, 2014.
Fair Value of Other Financial Instruments
The Company used the following methods and assumptions to determine the fair value of financial
instruments that are not recognized at fair value as described below.
Cash and Cash Equivalents: Carried at amortized costs which approximate fair value.
Debt: The carrying amounts of the Company’s variable-rate debt approximate fair values. For fixed-rate
debt, the Company uses the income approach to determine the estimated fair value, by discounting
cash flows using borrowing rates for comparable debt over the weighted life of the outstanding debt.
The estimated fair value of the fixed-rate debt is Level 3 as certain inputs used are unobservable.
Fixed-rate debt that is not carried at fair value on the consolidated balance sheet and the estimated fair
value of long-term fixed-rate debt (in millions):
2014 2013
Carrying Amount $ 614 $ 703
Fair value 666 762
NOTE 5. ASSETS CONSTRUCTED FOR OTHERS
In March 2012, the Company placed into service assets constructed for others (Terminal 6 at LAX),
including a new baggage system, additional gates, new common use systems, expansion of security
screening checkpoints, and a new ticket lobby, all of which were constructed for the City of Los Angeles
and Los Angeles World Airports (LAWA). For accounting and financial reporting purposes, the Company
is considered to be the owners of the assets constructed for others and did not qualify for sale and
leaseback accounting when the non-proprietary assets were transferred to the City of Los Angeles due
to the Company’s continuing involvement with the project. The assets are depreciated over the life of
the lease based on the straight-line method, while the liability is amortized on the effective interest
method based on the lease rental payments. At December 31, 2014, the net asset was $178 million,
and the liability was $174 million.
Future minimum payments related to the Terminal 6 lease are included in facility leases described in
the “Commitments and Contingencies” note.
79
ŠForm 10-K