Southwest Airlines 2006 Annual Report Download - page 50

converted certain of its long-term debt to floating rate
debt by entering into interest rate swap agreements. This
includes the Company’s $385 million 6.5% senior unse-
cured notes due 2012 and the $350 million 5.25% senior
unsecured notes due 2014. Although there is interest rate
risk associated with these floating rate borrowings, the
risk for the 1999 and 2004 French Credit Agreements is
somewhat mitigated by the fact that the Company may
prepay this debt under certain conditions. See Notes 6
and 7 to the Consolidated Financial Statements for more
information on the material terms of the Company’s
short-term and long-term debt.
Excluding the $385 million 6.5% senior unsecured
notes, and the $350 million 5.25% senior unsecured
notes that were converted to a floating rate as previously
noted, the Company had outstanding senior unsecured
notes totaling $800 million at December 31, 2006. These
senior unsecured notes currently have a weighted-average
maturity of 10.2 years at fixed rates averaging 5.98 per-
cent at December 31, 2006, which is comparable to
average rates prevailing for similar debt instruments over
the last ten years. The carrying value of the Company’s
floating rate debt totaled $843 million, and this debt had
a weighted-average maturity of 7.0 years at floating rates
averaging 6.74 percent for the twelve months ended
December 31, 2006. In total, the Company’s fixed rate
debt and floating rate debt represented 7.4 percent and
7.8 percent, respectively, of total noncurrent assets at
December 31, 2006.
The Company also has some risk associated with
changing interest rates due to the short-term nature of its
invested cash, which totaled $1.4 billion, and short-term
investments, which totaled $369 million, at December 31,
2006. The Company invests available cash in certificates
of deposit, highly rated money market instruments,
investment grade commercial paper, auction rate securi-
ties, and other highly rated financial instruments. Because
of the short-term nature of these investments, the returns
earned parallel closely with short-term floating interest
rates. The Company has not undertaken any additional
actions to cover interest rate market risk and is not a party
to any other material market interest rate risk manage-
ment activities.
A hypothetical ten percent change in market inter-
est rates as of December 31, 2006, would not have a
material affect on the fair value of the Company’s fixed
rate debt instruments. See Note 10 to the Consolidated
Financial Statements for further information on the fair
value of the Company’s financial instruments. A change
in market interest rates could, however, have a corre-
sponding effect on the Company’s earnings and cash
flows associated with its floating rate debt, invested cash,
and short-term investments because of the floating-rate
nature of these items. Assuming floating market rates in
effect as of December 31, 2006, were held constant
throughout a 12-month period, a hypothetical ten per-
cent change in those rates would correspondingly change
the Company’s net earnings and cash flows associated
with these items by less than $3 million. Utilizing these
assumptions and considering the Company’s cash bal-
ance, short-term investments, and floating-rate debt out-
standing at December 31, 2006, an increase in rates
would have a net positive effect on the Company’s earn-
ings and cash flows, while a decrease in rates would have a
net negative effect on the Company’s earnings and cash
flows. However, a ten percent change in market rates
would not impact the Company’s earnings or cash flow
associated with the Company’s publicly traded fixed-rate
debt.
The Company is also subject to various financial
covenants included in its credit card transaction process-
ing agreement, the revolving credit facility, and outstand-
ing debt agreements. Covenants include the maintenance
of minimum credit ratings. For the revolving credit
facility, the Company shall also maintain, at all times,
a Coverage Ratio, as defined in the agreement, of not less
than 1.25 to 1.0. The Company met or exceeded the
minimum standards set forth in these agreements as of
December 31, 2006. However, if conditions change and
the Company fails to meet the minimum standards set
forth in the agreements, it could reduce the availability of
cash under the agreements or increase the costs to keep
these agreements intact as written.
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