Southwest Airlines 2001 Annual Report Download - page 24

SOUTHWEST AIRLINES CO. 2001 ANNUAL REPORT
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respectively, from hedging activities. At December 31, 2001 and 2000,
approximately $8.2 million and $49.9 million, respectively, were due
from third parties from expired derivative contracts, and accordingly,
are included in “Accounts and other receivables” in the accompanying
Consolidated Balance Sheet. The Company accounts for its fuel hedge
derivative instruments as cash flow hedges, as defined. Therefore, all
changes in fair value that are considered to be effective are recorded
in “Accumulated other comprehensive income (loss)” until the
underlying jet fuel is consumed. The fair value of the Company’s
financial derivative instruments at December 31, 2001, was a net
liability of approximately $19.4 million and is classified as “Accrued
liabilities” in the Consolidated Balance Sheet. The fair value of the
derivative instruments, depending on the type of instrument, was
determined by the use of present value methods or standard option
value models with assumptions about commodity prices based on
those observed in underlying markets.
As of December 31, 2001, the Company had approximately
$31.1 million in unrealized losses, net of tax, in “Accumulated other
comprehensive income (loss)” related to fuel hedges. Included in this
total are approximately $22.2 million in net unrealized losses that are
expected to be realized in earnings during 2002. Upon the adoption of
SFAS 133 on January 1, 2001, the Company recorded unrealized fuel
hedge gains of $46.1 million, net of tax, of which $45.5 million was
realized in earnings during 2001.
Outstanding financial derivative instruments expose the Company
to credit loss in the event of nonperformance by the counterparties to
the agreements. However, the Company does not expect any of the
counterparties to fail to meet their obligations. The credit exposure
related to these financial instruments is represented by the fair value
of contracts with a positive fair value at the reporting date. To manage
credit risk, the Company selects and periodically reviews
counterparties based on credit ratings, limits its exposure to a single
counterparty, and monitors the market position of the program and its
relative market position with each counterparty. At December 31, 2001,
the Company had agreements with five counterparties containing early
termination rights and/or bilateral collateral provisions whereby
security is required if market risk exposure exceeds a specified
threshold amount or credit rating falls below certain levels. Neither the
Company nor the counterparties exceeded such threshold amounts at
December 31, 2001. The Company is in the process of negotiating
similar agreements with other counterparties.
The carrying amounts and estimated fair values of the Company’s
long-term debt at December 31, 2001, were as follows:
(in thousands) CARRYING VALUE FAIR VALUE
8 3/4% Notes due 2003 $ 100,000 $ 106,954
Aircraft Secured Notes
due 2004 200,000 200,000
8% Notes due 2005 100,000 107,602
Pass Through Certificates 614,250 605,839
7 7/8% Notes due 2007 100,000 108,455
French Credit Agreements 52,31 0 52,310
7 3/8% Debentures due 2027 1 00,000 96, 1 50
The estimated fair values of the Company’s long-term debt were
basedonquoted market prices. The carrying values of all other financial
instruments approximate their fair value.
10. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of certain
financial derivative instruments, which qualify for hedge accounting,
and unrealized gains and losses on certain investments. Comprehensive
income totaled $479.6 million for 2001. The difference between Net
income and Comprehensive income for 2001 is as follows:
(in thousands) 2001
Net income $ 51 1,147
Unrealized (loss) on derivative
instruments, net of deferred
taxes of ($20,719) (31,063)
Other, net of deferred
taxes of ($320) (475)
Total other comprehensive
income (loss) (3 1,538)
Comprehensive income $ 479,609
A rollforward of the amounts included in “Accumulated other
comprehensive income (loss),” net of taxes, is shown below:
ACCUMULATED
OTHER
FUEL HEDGE COMPREHENSIVE
(in thousands) DERIVATIVES OTHER INCOME (LOSS)
Balance at
December 31, 2000 $ - $ - $ -
January 1, 2001
transition adjustment 46,089 - 46,089
2001 changes in
fair value (31 ,665) (475) (32,140)
Reclassification
to earnings (45,487) - (45,487)
Balance at
December 31, 2001 $ (31 ,063) $ (475) $(31 ,538)
11. COMMON STOCK
The Company has one class of common stock. Holders of shares of
common stock are entitled to receive dividends when and if declared
by the Board of Directors and are entitled to one vote per share on all
matters submitted to a vote of the shareholders.
At December 31, 2001, the Company had common stock reserved for
issuance pursuant to Employee stock benefit plans (140.3 million shares
authorized of which 40.2 million shares have not yet been granted) and
upon exercise of rights (323.0 million shares) pursuant to the Common
Share Purchase Rights Agreement, as amended (Agreement).