Delta Airlines 2015 Annual Report Download - page 76

TableofContents
WeaccountfortheinvestmentundertheequitymethodofaccountingandrecognizeourportionofVirginAtlantic'sfinancialresultsinotherexpenseinour
ConsolidatedStatementsofOperations.Aspartoftheequitymethodofaccounting,weallocatedtheinvestmentinVirginAtlanticto(1)ourportionoftheir
equity,(2)adjustmentsinthefairmarketvalueofassetsandliabilitiesand(3)impliedgoodwill.
NOTE4.DERIVATIVESANDRISKMANAGEMENT
Changesinaircraftfuelprices,interestratesandforeigncurrencyexchangeratesimpactourresultsofoperations.Inanefforttomanageourexposuretothese
risks,weenterintoderivativecontractsandadjustourderivativeportfolioasmarketconditionschange.
Aircraft Fuel Price Risk
Changesinaircraftfuelpricesmateriallyimpactourresultsofoperations.Weactivelymanageourfuelpriceriskthroughahedgingprogramintendedtoreduce
thefinancialimpactfromchangesinthepriceofjetfuel.Weutilizedifferentcontractandcommoditytypesinthisprogramandfrequentlytesttheireconomic
effectivenessagainstourfinancialtargets.Wecloselymonitorthehedgeportfolioandrebalancetheportfoliobasedonmarketconditions,whichmayresultin
lockingingainsorlossesonhedgecontractspriortotheirsettlementdates.DuringtheyearsendedDecember31,2015and2014,werecordedfuelhedgelosses
of$741millionand$2.0billion,respectively.
During2015,weeffectivelydeferredsettlementofaportionofourhedgeportfoliountil2016byenteringintofuelderivativetransactionsthat,excluding
marketmovementsfromthedateofinception,wouldsettleandprovideapproximately$300millionincashreceiptsduringthesecondhalfof2015andrequire
approximately$300millionincashpaymentsin2016.Byeffectivelydeferringsettlementofaportionoftheoriginalderivativetransactions,therestructuredhedge
portfolioprovidedadditionaltimeforthefuelmarkettostabilize.Weearlyterminatedcertainofthesedeferraltransactionsin2015.Asaresult,wereported$429
millionincashreceiptsand$71millionincashpaymentsassociatedwiththesedeferraltransactionsascashflowsfromfinancingactivitiesonourConsolidated
StatementofCashFlowsfortheyearendedDecember31,2015.
Duetothecontinuedvolatilityinthefuelmarket,duringJanuaryandFebruary2016,weenteredintoadditionaldeferraltransactionstofurtherdefersettlement
ofaportionofourhedgeportfoliountil2017.Thesedeferraltransactions,excludingmarketmovementsfromthedateofinception,willsettleandprovide
approximately$300millionincashreceiptsduringthesecondhalfof2016andrequireapproximately$300millionincashpaymentsin2017.Wewillreportthe
cashreceiptsandcashpaymentsassociatedwiththesedeferraltransactionsascashflowsfromfinancingactivitiesonourConsolidatedStatementsofCashFlows.
DuringtheDecember2015quarter,weenteredintohedgesdesignedtooffsetandeffectivelyterminateourexistinghedgepositionsfortheMarch2016
quarter.InJanuary2016,wecontinuedthisprocessforsubstantiallyallofourpositionswithcontractsettlementdatesthroughDecember31,2016.Asaresult,we
havebothneutralizedourhedgeportfolioandlockedincashpaymentsofapproximately$725millionin2016,includingthedeferraltransactionsdiscussedabove.
Interest Rate Risk
Ourexposuretomarketriskfromadversechangesininterestratesisprimarilyassociatedwithourlong-termdebtobligations.Marketriskassociatedwithour
fixedandvariableratelong-termdebtrelatestothepotentialreductioninfairvalueandnegativeimpacttofutureearnings,respectively,fromanincreasein
interestrates.
Inanefforttomanageourexposuretotheriskassociatedwithourvariableratelong-termdebt,weperiodicallyenterintointerestrateswaps.Wedesignate
interestratecontractsusedtoconverttheinterestrateexposureonaportionofourdebtportfoliofromafloatingratetoafixedrateascashflowhedges,while
thosecontractsconvertingourinterestrateexposurefromafixedratetoafloatingratearedesignatedasfairvaluehedges.During2014,weterminatedour
remaininginterestrateswapagreementsdesignatedascashflowhedgesinconnectionwiththeextinguishmentoftheunderlyingdebt.
Wealsohaveexposuretomarketriskfromadversechangesininterestratesassociatedwithourcashandcashequivalentsandbenefitplanobligations.Market
riskassociatedwithourcashandcashequivalentsrelatestothepotentialdeclineininterestincomefromadecreaseininterestrates.Pension,postretirement,
postemploymentandworker'scompensationobligationriskrelatestothepotentialincreaseinourfutureobligationsandexpensesfromadecreaseininterestrates
usedtodiscounttheseobligations.
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