Alaska Airlines and Horizon Air 2009 Annual Report Download - page 185

Amounts measured at fair value as of
December 31, 2009 are as follows (in millions):
Level 1 Level 2 Level 3 Total
Cash and cash
equivalents . . $164.2 $ — $— $ 164.2
Marketable
securities . . . 108.9 919.0 — 1,027.9
Total ..... $273.1 $919.0 $— $1,192.1
Amounts measured at fair value as of
December 31, 2008 are as follows (in millions):
Level 1 Level 2 Level 3 Total
Cash and cash
equivalents . . $257.2 $ 25.9 $— $ 283.1
Marketable
securities . . . 68.3 726.0 — 794.3
Total ..... $325.5 $751.9 $— $1,077.4
Interest Rate Swap Agreements
In the third quarter of 2009, the Company
entered into interest rate swap agreements with
a third party designed to hedge the volatility of
the underlying variable interest rate in the
Company’s aircraft lease agreements for six
B737-800 aircraft. The agreements stipulate that
the Company pay a fixed interest rate over the
term of the contract and receive a floating
interest rate. All significant terms of the swap
agreement match the terms of the lease
agreements, including interest-rate index, rate
reset dates (every six months), termination dates
and underlying notional values. The agreements
expire beginning in February 2020 through March
2021 to coincide with the lease termination
dates.
The Company has formally designated these
swap agreements as hedging instruments and
will record the effective portion of the hedge as
an adjustment to aircraft rent in the consolidated
statement of operations in the period of contract
settlement. The effective portion of the changes
in fair value for instruments that settle in the
future are recorded in AOCL in the consolidated
balance sheets.
At December 31, 2009, the Company had an
asset of $2.4 million associated with these
contracts, all of which is expected to be
reclassified into earnings within the next twelve
months and is recorded in prepaid expenses and
other current assets in the consolidated balance
sheets. 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. As such, the Company places these
contracts in Level 2 of the fair value hierarchy.
Fair Value of Financial Instruments
The majority of the Company’s financial
instruments are carried at fair value. Those
include cash, cash equivalents and marketable
securities (Note 5), restricted deposits (Note 9),
fuel hedge contracts (Note 3), and interest rate
swap agreements (Note 12). The Company’s
long-term fixed-rate debt is not carried at fair
value.
The estimated fair value of the Company’s long-
term debt was as follows (in millions):
Carrying
Amount
Fair
Value
Long-term debt at December 31,
2009 ..................... $1,855.2 $1,821.3
Long-term debt at December 31,
2008 ..................... $1,841.2 $2,006.8
The fair value of cash equivalents approximates
carrying values due to the short maturity of these
instruments. The fair value of marketable
securities is based on market prices. The fair
value of fuel hedge contracts is based on
commodity exchange prices. The fair value of
restricted deposits approximates the carrying
amount. The fair value of interest rate swap
agreements is based on quoted market swap
rates. The fair value of long-term debt is based
on a discounted cash flow analysis using the
Company’s current borrowing rate.
Concentrations of Credit
The Company continually monitors its positions
with, and the credit quality of, the financial
institutions that are counterparties to its fuel-
hedging contracts and interest rate swap
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ŠForm 10-K