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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
party’s credit rating were lowered to below investment grade, each party is required to post cash collateral equal
to 100 percent of the fair value of outstanding interest rate derivatives. As of December 31, 2009, the fair value
of interest rate swap agreements outstanding with this counterparty was a net liability of $7 million, thus no
collateral amounts had been posted. With other counterparties to which the Company has interest rate swap
agreements, no cash collateral is required as long as credit ratings remain at investment grade. If either party’s
credit rating were lowered to below investment grade, the threshold amount at which cash collateral is required
for both parties would become zero, or in one case, the parties would then negotiate an agreement. With each of
these other counterparties, the net fair value of the interest rate swap agreements outstanding at December 31,
2009, was either an asset to the Company or was immaterial.
Applicable accounting provisions require an entity to select a policy of how it records the offset rights to
reclaim cash collateral associated with the related derivative fair value of the assets or liabilities of such
derivative instruments. Entities may either select a “net” or a “gross” presentation. The Company has elected to
present its cash collateral utilizing a net presentation, in which cash collateral amounts held or provided have
been netted against the fair value of outstanding derivative instruments. The Company’s policy differs depending
on whether its derivative instruments are in a net asset position or a net liability position. If its fuel derivative
instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against
current derivative amounts (those that will settle during the twelve months following the balance sheet date)
associated with that counterparty until that balance is zero, and then any remainder would be applied against the
fair value of noncurrent outstanding derivative instruments (those that will settle beyond one year following the
balance sheet date). If its fuel derivative instruments are in a net liability position with a counterparty, cash
collateral amounts provided are first netted against noncurrent derivative amounts associated with that
counterparty until that balance is zero, and then any remainder would be applied against the fair value of current
outstanding derivative instruments. At December 31, 2009, of the $330 million in cash collateral deposits posted
with counterparties under its bilateral collateral provisions, $238 million has been netted against noncurrent fuel
derivative instruments within “Other deferred liabilities” and $92 million has been netted against current fuel
derivative instruments within “Accrued liabilities” in the Consolidated Balance Sheet. At December 31, 2008, the
entire $240 million in cash collateral deposits posted with counterparties under its bilateral collateral provisions
has been netted against noncurrent fuel derivative instruments within “Other deferred liabilities.”
11. FAIR VALUE MEASUREMENTS
Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such
as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are
either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market
data exists, therefore requiring an entity to develop its own assumptions.
As of December 31, 2009, the Company held certain items that are required to be measured at fair value on
a recurring basis. These included cash equivalents, short-term investments, certain noncurrent investments,
interest rate derivative contracts, fuel derivative contracts, and available-for-sale securities. Noncurrent
investments consist of certain auction rate securities, primarily those collateralized by student loan portfolios,
which are guaranteed by the U.S. Government. Other available-for-sale securities primarily consist of
investments associated with the Company’s excess benefit plan.
The Company’s fuel derivative instruments consist of over-the-counter (OTC) contracts, which are not
traded on a public exchange. These contracts include both swaps as well as different types of option contracts.
See Note 10 for further information on the Company’s derivative instruments and hedging activities. The fair
values of swap contracts are determined based on inputs that are readily available in public markets or can be
derived from information available in publicly quoted markets. Therefore, the Company has categorized these
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