This excerpt taken from the AAI 10-K filed Mar 15, 2005.
4. Derivatives and Other Financial Instruments
During 2001, we used swap agreements to hedge our fuel requirements. We accounted for our derivative instruments used to hedge fuel costs as cash flow hedges in accordance with SFAS 133. Therefore, all changes in fair value that were considered to be effective were recorded in Accumulated other comprehensive loss until the underlying aircraft fuel were consumed.
On November 28, 2001, the credit rating of the counterparty to all of our fuel-related hedges was downgraded and the counterparty declared bankruptcy on December 2, 2001. Due to the deterioration of the counterpartys creditworthiness, we no longer considered the financial contracts with the counterparty to be highly effective in offsetting our risk related to changing fuel prices because of the consideration of the possibility that the counterparty would default by failing to make contractually required payments as scheduled in the derivative instrument. As a result, on November 28, 2001, hedge accounting treatment was discontinued prospectively for our derivative contracts with this counterparty in accordance with SFAS 133. Gains and losses previously deferred in Accumulated other comprehensive loss were reclassified to earnings as the hedged item affected earnings. Beginning on November 28, 2001, changes in fair value of the derivative instruments were marked to market through earnings.
In March 2002, we terminated all our derivative agreements with the counterparty. The fair market value of the derivative liability on the termination date was approximately $0.5 million. Since this was an early termination of our derivative contracts, losses of $6.8 million at December 31, 2001, deferred in other comprehensive loss were reclassified to earnings as the related fuel was used through September 2004. During 2004, 2003 and 2002, we recognized losses of $0.3 million, $0.5 million and $6.0 million, respectively, representing the effective portion of our hedging activities. These losses are included in Aircraft fuel in the consolidated statement of income. We recognized a gain of approximately $5.9 million during 2002, representing the ineffectiveness of our hedging relationships. This gain is recorded in SFAS 133 adjustment in our consolidated statements of income.
Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, and accounts receivable. We maintain cash and cash equivalents and short-term investments with various high credit-quality financial institutions or in short-duration, high-quality debt securities. Investments are stated at fair value, which approximates cost. We periodically evaluate the relative credit standing of those financial institutions that are considered in our investment strategy. Concentration of credit risk with respect to accounts receivable is limited, due to the large number of customers comprising our customer base. The estimated fair value of other financial instruments, excluding debt described below, approximate their carrying amount. There were no realized or unrealized gains or losses on our available-for-sale, securities for the years ending December 31 2004, 2003, or 2002. We use specific identification of securities for determining gains and losses. Contractual maturities of our available-for-sale securities at December 31, 2004 exceed 10 years while the auction re-set periods are 28 to 35 days. The balance of these available-for-sale securities at December 31, 2004 was approximately $27.0 million.
The fair values of our long-term debt are based on quoted market prices, if available, or are estimated using discounted cash flow analyses, based on our current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and estimated fair values of our long-term debt were $314.0 million and $344.9 million, respectively, at December 31, 2004, and $246.8 million and $241.3 million, respectively, at December 31, 2003.