American Airlines 2005 Annual Report Download - page 69

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66
7. Financial Instruments and Risk Management (Continued)
For the years ended December 31, 2005, 2004 and 2003, the Company recognized net gains of approximately
$64 million, $99 million and $149 million, respectively, as a component of fuel expense on the accompanying
consolidated statements of operations related to its fuel hedging agreements. The fair value of the Company’s
fuel hedging agreements at December 31, 2005 and 2004, representing the amount the Company would receive
to terminate the agreements, totaled $122 million and $51 million, respectively.
Foreign Exchange Risk Management
The Company has entered into Japanese yen currency exchange agreements to hedge certain yen-based capital
lease obligations (effectively converting these obligations into dollar-based obligations). The Company accounts
for its Japanese yen currency exchange agreements as cash flow hedges whereby the fair value of the related
Japanese yen currency exchange agreements is reflected in Other liabilities and deferred credits and
Accumulated other comprehensive loss on the accompanying consolidated balance sheets. The Company has
no ineffectiveness with regard to its Japanese yen currency exchange agreements. The fair values of the
Company’s yen currency exchange agreements, representing the amount the Company would pay to terminate
the agreements, were $39 million and $23 million as of December 31, 2005 and 2004, respectively. The
exchange rates on the Japanese yen agreements range from 66.50 to 99.65 yen per U.S. dollar. The actual
exchange rate was 117.75 and 102.63 yen per U.S. dollar at December 31, 2005 and 2004, respectively.
Fair Values of Financial Instruments
The fair values of the Company's long-term debt were estimated using quoted market prices where available. For
long-term debt not actively traded, fair values were estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying
amounts and estimated fair values of the Company's long-term debt, including current maturities, were (in
millions):
December 31,
2005 2004
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Secured variable and fixed rate
indebtedness
$ 6,473
$ 5,761
$ 6,340
$ 5,333
Enhanced equipment trust
certificates
3,424
3,414
3,707
3,578
6.125% - 8.5% special facility
revenue bonds
1,697
1,673
946
797
Credit facility agreement 788 791 850 852
4.25% - 4.50 % senior convertible
notes
619
800
619
451
9.0% - 10.20% debentures 320 271 330 224
7.88% - 10.55% notes 286 206 303 197
$ 13,607 $ 12,916 $ 13,095 $ 11,432