Southwest Airlines 2009 Annual Report Download - page 42

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“Other (gains) losses, net,” primarily includes amounts recorded in accordance with the Company’s hedging
activities. During the first half of 2008, the Company recorded significant gains related to the ineffectiveness of
its hedges, as well as the increase in market value of fuel derivative contracts that were marked to market because
they did not qualify for special hedge accounting, as commodity prices rose during that period. During the second
half of 2008, when commodity prices fell, the Company recorded significant losses from hedge ineffectiveness
and derivatives not qualifying for special hedge accounting, thereby more than offsetting the gains previously
recorded during the first half of the year. During 2007, the Company recorded significant gains related to the
ineffectiveness of its hedges as well as to the increase in market value of fuel derivative contracts that were
marked to market because they did not qualify for special hedge accounting. The gains resulted from the increase
in the fair value of the Company’s portfolio of fuel derivative instruments as commodity prices rose. The
following table displays the components of “Other (gains) losses, net,” for the years ended December 31, 2008
and 2007:
(In millions) 2008 2007
Mark-to-market impact from fuel contracts settling in future periods — included
in Other (gains) losses, net ........................................... $ (6) $(219)
Ineffectiveness from fuel hedges settling in future periods — included in Other
(gains) losses, net .................................................. 106 (51)
Realized ineffectiveness and mark-to-market (gains) or losses — included in
Other (gains) losses, net ............................................. (80) (90)
Premium cost of fuel contracts included in Other (gains) losses, net ............ 69 58
Other ............................................................. 3 10
$ 92 $(292)
See Note 10 to the Consolidated Financial Statements for further information on the Company’s hedging
activities.
Income taxes
The provision for income taxes, as a percentage of income before taxes, decreased to 35.9 percent in 2008
from 39.0 percent in 2007. The lower 2008 rate included a $12 million ($.01 per share, diluted) net reduction
related to the first quarter 2008 reversal of a 2007 revision in Illinois income tax laws. The 2007 rate included an
$11 million addition to taxes from the enactment of the Illinois tax law.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $985 million in 2009 compared to $1.5 billion used in
operations in 2008. For the Company, operating cash inflows primarily are derived from providing air
transportation for Customers. The vast majority of tickets are purchased prior to the day on which travel is
provided and, in some cases, several months before the anticipated travel date. Operating cash outflows primarily
are related to the recurring expenses of operating the airline. Operating cash flows over the past three years have
also been significantly impacted by the Company’s fuel hedge positions and the significant fluctuation in fair
value of those positions and the corresponding cash collateral requirements associated with those positions. In the
Consolidated Statement of Cash Flows, increases and/or decreases to these cash deposits are reflected in
operating cash flows in the caption “Cash collateral received from (provided to) fuel derivative counterparties.”
As of December 31, 2009, the amount of cash provided to fuel hedge counterparties was $330 million, of which
$92 million has been netted against “Accrued liabilities” and $238 million of which is netted against “Other
deferred liabilities” in the Consolidated Balance Sheet. Since the amount of cash collateral deposits provided by
the Company at December 31, 2008 was $240 million, the net change in cash deposits for 2009 was a net
operating outflow of $90 million. At December 31, 2007, the Company had held $2.0 billion in cash collateral
from counterparties, which then resulted in a net outflow of $2.2 billion during 2008. The fluctuation in these
deposits during 2008 was due to the significant decline in fair value of the Company’s fuel derivative portfolio
34