Spirit Airlines 2012 Annual Report Download - page 78

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Notes to Financial Statements—(Continued)
are recognized over the remaining life of the lease as aircraft hours accumulate, beginning from the time when the Company determines it is probable such costs will be
incurred and can generally be estimated. Such estimated costs exclude the costs of maintenance events that are covered by reserves on deposit with the relevant lessor, or
routine maintenance costs that are recorded in maintenance expense.
During 2012 , the Company entered into sale and leaseback transactions with third-party aircraft lessors for the sale and leaseback of seven Airbus A320 aircraft that
resulted in deferred losses of $5.0 million , which are included in deferred heavy maintenance and other long-term assets within the balance sheet. The deferred losses will
be recognized as rent expense on a straight-line basis over the term of the respective operating leases. The Company had agreements in place prior to the delivery of these
aircraft which resulted in the settlement of the purchase obligation by the lessor and the refund of $40.5 million in pre-delivery deposits from Airbus during 2012. The
refunded pre-delivery deposits have been disclosed in the statement of cash flows as investing activities within pre-delivery deposits, net of refunds. In addition, the
Company entered into sale and leaseback transactions with third-party lessors for the sale and leaseback of two V2500 IAE International Aero Engines AG engines. Cash
outflows related to the purchase of the engine have been disclosed in the statement of cash flows as investing activities within purchases of property and equipment and the
cash inflows from the sale of the engine as financing activities within proceeds received on sale lease back transactions. All of the leases from these sale and leaseback
transactions are accounted for as operating leases. Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft. Payments under
the lease agreements are fixed for the term of the lease. The lease agreements contain standard termination events, including termination upon a breach of the Company's
obligations to make rental payments and upon any other material breach of the Company's obligations under the leases, and standard maintenance and return condition
provisions. Upon a termination of the lease due to a breach by the Company, the Company would be liable for standard contractual damages, possibly including damages
suffered by the lessor in connection with remarketing the aircraft or while the aircraft is not leased to another party.
Future minimum lease payments under noncancelable operating leases with initial or remaining terms in excess of one year at December 31, 2012 were as follows:
As part of the Company’s risk management program, the Company from time to time uses a variety of financial instruments to reduce its exposure to fluctuations in
the price of jet fuel. The Company does not hold or issue derivative financial instruments for trading purposes.
The Company is exposed to credit losses in the event of nonperformance by counterparties to these financial instruments. The Company periodically reviews and seeks
to mitigate exposure to the financial deterioration and nonperformance of any counterparty by monitoring the absolute exposure levels, each counterparty's credit ratings,
and the historical performance of the counterparties relating to hedge transactions. The credit exposure related to these financial instruments is limited to the fair value of
contracts in a net receivable position at the reporting date. The Company also maintains security agreements that require the Company to post collateral if the value of
selected instruments falls below specified mark-to-market thresholds.
The Company records financial derivative instruments at fair value, which includes an evaluation each counterparty's credit risk. Fair value of the instruments is
determined using standard option valuation models.
Management chose not to elect hedge accounting on any derivative instruments entered into during 2012 , 2011 , and 2010 and, as a result, changes in the fair value of
these fuel hedge contracts are recorded each period in aircraft fuel expense.
77
Operating Leases
As of December 31,
Aircraft
and Spare Engine
Leases
Property
Facility Leases
Total Operating
Leases
(in thousands)
2013
$
152,558
$
15,799
$
168,357
2014
152,575
13,964
166,539
2015
152,961
11,958
164,919
2016
152,801
7,553
160,354
2017
131,849
3,779
135,628
2018 and thereafter
358,310
20,717
379,027
Total minimum lease payments
$
1,101,054
$
73,770
$
1,174,824
12.
Financial Instruments and Risk Management