Southwest Airlines 2007 Annual Report Download - page 69

5.125% senior unsecured notes due 2017 and its
$100 million 7.375% senior unsecured debentures due
2027. Under the agreement related to its $300 million
5.125% senior unsecured notes due 2017, the average
floating rate paid during 2007 was 4.64 percent. Under
the agreement related to its $100 million 7.375% senior
unsecured debentures due 2027, the average floating rate
paid during 2007 was 6.73 percent.
Prior to 2007, the Company had entered into
interest rate swap agreements relating to its $385 million
6.5% senior unsecured notes due 2012 and its $350 mil-
lion 5.25% senior unsecured notes due 2014. Under each
of these interest rate swap agreements, the Company pays
the London InterBank Offered Rate (LIBOR) plus a
margin every six months on the notional amount of the
debt, and receives payments based on the fixed stated rate
of the notes every six months until the date the notes
become due. Under the agreement related to its $385 mil-
lion 6.5% senior unsecured notes due 2012, the average
floating rate paid during 2007 is estimated to be 7.31 per-
cent based on actual and forward rates at December 31,
2007. Under the agreement related to its $350 million
5.25% senior unsecured notes due 2014, the average
floating rate paid during 2007 was 6.02 percent.
The primary objective for the Company’s use of
interest rate hedges is to reduce the volatility of net
interest income by better matching the repricing of its
assets and liabilities. The Company’s interest rate swap
agreements qualify as fair value hedges, as defined by
SFAS 133. The fair values 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,
2007, was an asset of approximately $16 million and is
recorded in “Other deferred liabilities” in the Consoli-
dated Balance Sheet. In accordance with fair value hedg-
ing, the offsetting entry is an adjustment to increase the
carrying value of long-term debt. See Note 7.
Outstanding financial derivative instruments expose
the Company to credit loss in the event of nonperfor-
mance by the counterparties to the agreements. However,
the Company does not expect any of the counterparties to
fail to meet its 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 period-
ically 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, 2007,
the Company had agreements with nine counterparties
containing early termination rights and/or bilateral col-
lateral provisions whereby security is required if market
risk exposure exceeds a specified threshold amount or
credit ratings fall below certain levels. At December 31,
2007, the Company held $2.0 billion in fuel hedge
related cash collateral deposits under these bilateral col-
lateral provisions. These collateral deposits serve to
decrease, but not totally eliminate, the credit risk asso-
ciated with the Company’s hedging program. The cash
deposits, which can have a significant impact on the
Company’s cash balance and cash flows as of and for a
particular operating period, are included in “Accrued
liabilities” on the Consolidated Balance Sheet and are
included as “Operating cash flows” in the Consolidated
Statement of Cash Flows.
The carrying amounts and estimated fair values of
the Company’s long-term debt and fuel contracts at
December 31, 2007 were as follows:
Carrying
Value
Estimated Fair
Value
(In millions)
French Credit Agreements
due 2012 ............ $ 32 $ 32
61⁄2% Notes due 2012 ..... 386 402
51⁄4% Notes due 2014 ..... 352 342
53⁄4% Notes due 2016 ..... 300 295
51⁄8% Notes due 2017 ..... 311 291
French Credit Agreements
due 2017 ............ 94 94
Pass Through Certificates. . . 480 487
73⁄8% Debentures due 2027. . 103 105
Fuel contracts ........... 2,387 2,387
The estimated fair values of the Company’s publicly
held long-term debt were based on quoted market prices.
The carrying values of all other financial instruments
approximate their fair value.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)