Southwest Airlines 2003 Annual Report Download - page 61

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The Company’s interest rate swap agreements qualify as fair value hedges, as defined by SFAS 133. The
fair value of the interest rate swap agreements, which are adjusted regularly, are recorded in the Consolidated
Balance Sheet, as necessary, with a corresponding adjustment to the carrying value of the long-term debt.
The fair value of the interest rate swap agreements, excluding accrued interest, at December 31, 2003, was a
liability of approximately $18 million. This amount is recorded in “Other deferred liabilities” in the
Consolidated Balance Sheet. In accordance with fair value hedging, the offsetting entry is an adjustment to
decrease the carrying value of long-term debt. See Note 7.
Outstanding financial derivative instruments expose the Company to credit loss in the event of
nonperformance by the counterparties to the agreements. However, the Company does not expect any of the
counterparties to fail to meet their obligations. The credit exposure related to these financial instruments is
represented by the fair value of contracts with a positive fair value at the reporting date. To manage credit
risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure
to a single counterparty, and monitors the market position of the program and its relative market position
with each counterparty. At December 31, 2003, the Company had agreements with seven counterparties
containing early termination rights and/or bilateral collateral provisions whereby security is required if
market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels. The
Company is in the process of negotiating similar agreements with other counterparties.
The carrying amounts and estimated fair values of the Company’s long-term debt at December 31, 2003 were
as follows:
(In millions) Carrying value
Estimated fair
value
Aircraft Secured Notes due 2004 175$ 175$
8% Notes due 2005 100 107
Pass Through Certificates 564 604
7 7/8% Notes due 2007 100 116
French Credit Agreements 47 47
6 1/2% Notes due 2012 371 409
7 3/8% Debentures due 2027 100 112
The estimated fair values of the Company’s long-term debt were based on quoted market prices. The
carrying values of all other financial instruments approximate their fair value.
11. 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 $510 million, $327 million, and $479 million for 2003, 2002, and 2001, respectively. The differences
between Net income and Comprehensive income for these years are as follows:
(In millions) 2003 2002 2001
Net income 442$ 241$ 511$
Unrealized gain (loss) on derivative
instruments, net of deferred taxes of
$43, $56 and ($21) 66 88 (31
)
Other, net of deferred taxes of $1,
($1) and $0 2(2) (1
)
Total other comprehensive income 68 86 (32
)
Comprehensive income 510$ 327$ 479$