Southwest Airlines 2009 Annual Report Download - page 78

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
a derivative by derivative basis or in the aggregate for a specific commodity. This may result, and has resulted, in
increased volatility in the Company’s financial results. Factors that have and may continue to lead to
ineffectiveness and unrealized gains and losses on derivative contracts include: significant fluctuation in energy
prices, the number of derivative positions the Company holds, significant weather events affecting refinery
capacity and the production of refined products, and the volatility of the different types of products the Company
uses in hedging. The number of instances in which the Company has discontinued hedge accounting for specific
hedges and for specific refined products, such as unleaded gasoline, has increased in recent years, primarily due
to the foregoing factors. However, even though these derivatives may not qualify for special hedge accounting,
the Company continues to hold the instruments as it believes they continue to afford the Company the
opportunity to somewhat stabilize jet fuel costs.
Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent
requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a
commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous
documentation that is required at the time each hedge is designated by the Company. As required, the Company
assesses the effectiveness of each of its individual hedges on a quarterly basis. The Company also examines the
effectiveness of its entire hedging program on a quarterly basis utilizing statistical analysis. This analysis
involves utilizing regression and other statistical analyses that compare changes in the price of jet fuel to changes
in the prices of the commodities used for hedging purposes.
All cash flows associated with purchasing and selling derivatives are classified as operating cash flows in
the Consolidated Statement of Cash Flows. The following table presents the location of all assets and liabilities
associated with the Company’s hedging instruments within the Consolidated Balance Sheet:
Asset Derivatives
Liability
Derivatives
(in millions)
Balance Sheet
Location
Fair
Value
at
12/31/09
Fair
Value
at
12/31/08
Fair
Value
at
12/31/09
Fair
Value
at
12/31/08
Derivatives designated as hedges
Fuel derivative contracts (gross)* ................... Accrued
liabilities $ 122 $ 94 $ 4 $ 19
Fuel derivative contracts (gross)* ................... Other deferred
liabilities 225 40 10 522
Interest rate derivative contracts .................... Other assets 47 91 — —
Interest rate derivative contracts .................... Other deferred
liabilities — — 10 8
Total derivatives designated as hedges .............. $ 394 $225 $ 24 $ 549
Derivatives not designated as hedges
Fuel derivative contracts (gross)* ................... Accrued
liabilities $ 324 $387 $ 566 $ 708
Fuel derivative contracts (gross)* ................... Other deferred
liabilities 302 266 870 530
Total derivatives not designated as hedges .......... $ 626 $653 $1,436 $1,238
Total derivatives ................................ $1,020 $878 $1,460 $1,787
* Does not include the impact of cash collateral deposits provided to counterparties. See discussion of credit risk
and collateral following in this Note.
70