Southwest Airlines 2008 Annual Report Download - page 60

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obligated to post collateral as security for its potential
obligations under this counterparty agreement, all
such collateral was required to be cash. Under the
agreement, as amended, until January 1, 2010, if the
Company becomes obligated to post collateral for
obligations in amounts of up to $300 million and in
excess of $700 million, the Company will continue to
be required to post cash collateral; however, if the
Company becomes obligated to post collateral for
obligations in amounts between $300 million and
$700 million, the Company has pledged 20 of its
Boeing 737-700 aircraft as collateral in lieu of cash.
As of January 20, 2009, assuming no changes to the
Company’s current net fuel hedge position, the
forward market price of crude oil would have to fall
to approximately $10 per barrel for each year from
2009 to 2013 before the Company would exceed the
$700 million threshold that would require additional
cash collateral beyond the initial $300 million level.
At December 31, 2008, the Company had posted
$240 million in cash collateral deposits with a
counterparty under these bilateral collateral provisions.
The deposits are classified as a component of “Prepaid
expenses and other current assets” in the Consolidated
Balance Sheet. See also Note 10 to the Consolidated
Financial Statements.
Financial market risk
The vast majority of the Company’s assets are
aircraft, which are long-lived. The Company’s strategy
is to maintain a conservative balance sheet and grow
capacity steadily and profitably under the right
conditions. While the Company uses financial
leverage, it has maintained a strong balance sheet and
a “BBB+” rating with Fitch and Standard & Poor’s,
and a “Baa1” credit rating with Moody’s as of
December 31, 2008. The Company’s 1999 and 2004
French Credit Agreements do not give rise to
significant fair value risk but do give rise to interest
rate risk because these borrowings are floating-rate
debt. In addition, as disclosed in Note 10 to the
Consolidated Financial Statements, the Company has
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 unsecured notes due 2012, the $350 million
5.25% senior unsecured notes due 2014, the $300
million 5.125% senior unsecured notes due 2017, and
the $100 million 7.375% senior unsecured debentures
due 2027. 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.
41