Derivatives and Risk Management

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES AND RISK MANAGEMENTChanges in fuel prices, interest rates and foreign currency exchange rates impact our results of operations. In an effort to manage our exposure to these risks, we enter into derivative contracts and adjust our derivative portfolio as market conditions change. We recognize derivative contracts at fair value on our balance sheet. Cash flows associated with purchasing and settling hedge contracts generally are classified as operating cash flows.

Fuel Price Risk

Our derivative contracts to hedge the financial risk from changing fuel prices are primarily related to Monroe’s inventory.

Interest Rate Risk

Our exposure to market risk from adverse changes in interest rates is primarily associated with our debt obligations. Market risk associated with our fixed and variable rate debt relates to the potential reduction in fair value and negative impact to future earnings, respectively, from an increase in interest rates.

In the March 2020 quarter, we unwound a majority of our interest rate swap contracts. The unwind of these contracts generated approximately $100 million of cash in the March 2020 quarter. These gains are being reflected in our income statement over the remaining term of the related debt agreements.

Foreign Currency Exchange Risk

We are subject to foreign currency exchange rate risk because we have revenue, expense and equity investments denominated in foreign currencies. To manage exchange rate risk, we execute both our international revenue and expense transactions in the same foreign currency to the extent practicable. From time to time, we may also enter into foreign currency option and forward contracts.

Hedge Position as of September 30, 2020


(in millions)	Volume		Final Maturity Date	Prepaid Expenses and Other		Other Noncurrent Assets		Other Accrued Liabilities		Other Noncurrent Liabilities		Hedge Derivatives, net
Designated as hedges
Interest rate contracts (fair value hedges)	150	U.S. dollars	April 2028	$	2	$	23	$	—	$	—	$	25
Not designated as hedges
Foreign currency exchange contracts	177,045	South Korean won	April 2023	—		—		—		(2)		(2)
Fuel hedge contracts	197	gallons - crude oil and refined products	April 2021	3		—		(6)		—		(3)
Total derivative contracts						$	5	$	23	$	(6)	$	(2)	$	20

Hedge Position as of December 31, 2019


(in millions)	Volume		Final Maturity Date	Prepaid Expenses and Other		Other Noncurrent Assets		Other Accrued Liabilities		Other Noncurrent Liabilities		Hedge Derivatives, net
Designated as hedges
Interest rate contracts (fair value hedges)	1,872	U.S. dollars	April 2028	$	12	$	53	$	(4)	$	—	$	61
Not designated as hedges
Foreign currency exchange contracts	397	Euros	December 2020	9		—		—		—		9
Foreign currency exchange contracts	177,045	South Korean won	April 2023	1		—		—		(4)		(3)
Fuel hedge contracts	243	gallons - crude oil and refined products	July 2020	16		—		(15)		—		1
Total derivative contracts						$	38	$	53	$	(19)	$	(4)	$	68

Balance Sheet Location of Hedged Item in Fair Value Hedges


	Carrying Amount of Hedge Instruments						Cumulative Amount of Fair Value Hedge Adjustments ⁽¹⁾
(in millions)	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Current maturities of debt and finance leases	$	21	$	(19)	$	21	$	8
Debt and finance leases	$	(61)	$	(1,783)	$	88	$	53

⁽¹⁾As of September 30, 2020, these amounts include the cumulative amount of fair value hedging adjustments remaining for which hedge accounting has been discontinued of approximately $84 million.

Offsetting Assets and Liabilities

We have master netting arrangements with our counterparties giving us the right to offset hedge assets and liabilities. However, we have elected not to offset the fair value positions recorded on our balance sheet. The following table shows the net fair value of our counterparty positions had we elected to offset.


(in millions)	Prepaid Expenses and Other		Other Noncurrent Assets		Other Accrued Liabilities		Other Noncurrent Liabilities		Hedge Derivatives, net
September 30, 2020
Net derivative contracts	$	2	$	23	$	(3)	$	(2)	$	20
December 31, 2019
Net derivative contracts	$	24	$	53	$	(5)	$	(4)	$	68

Not Designated Hedge Gains (Losses)

Gains (losses) related to our foreign currency exchange and fuel hedge contracts are as follows:


	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income
(in millions)		2020		2019
Three Months Ended September 30,
Foreign currency exchange contracts	Gain/(loss) on investments, net	$	(21)	$	18
Fuel hedge contracts	Aircraft fuel and related taxes	(22)		31
Total		$	(43)	$	49
Nine Months Ended September 30,
Foreign currency exchange contracts	Gain/(loss) on investments, net	$	(20)	$	25
Fuel hedge contracts	Aircraft fuel and related taxes	127		(5)
Total		$	107	$	20

Credit Risk

To manage credit risk associated with our fuel price, interest rate and foreign currency hedging programs, we evaluate counterparties based on several criteria, including their credit ratings, and limit our exposure to any one counterparty.