Southwest Airlines 2009 Annual Report Download - page 81

Download and view the complete annual report

Please find page 81 of the 2009 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 108

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
liabilities.” The corresponding adjustment related to the net liability associated with the Company’s fair value
hedges, is to the carrying value of the long-term debt. The corresponding adjustment related to the net liability
associated with the Company’s cash flow hedge is to “Accumulated other comprehensive income (loss).” This
adjustment totaled $19 million, net of tax, at December 31, 2009. See Note 7.
Credit risk and collateral
The Company’s credit exposure related to fuel derivative instruments is represented by the fair value of
contracts with a net positive fair value to the Company at the reporting date. These outstanding instruments
expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements.
However, the Company has not experienced any significant credit loss as a result of counterparty
nonperformance in the past. To manage credit risk, the Company selects and will periodically review
counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors the market
position of the fuel hedging program and its relative market position with each counterparty. At December 31,
2009, the Company had agreements with all of its 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 also had agreements with counterparties in
which cash deposits and/or pledged aircraft are required to be posted whenever the net fair value of derivatives
associated with those counterparties exceeds specific thresholds. The following table provides the fair values of
fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of
December 31, 2009, at which such postings are triggered:
Counterparty (CP)
(in millions) A B C D E Total
Fair value of fuel derivatives ......... $ (199) $ (300) $ (27) $ 18 $ 30 $(478)
Cash collateral held by CP ........... 205 125 — — — 330
Aircraft collateral pledged to CP ...... — 183 — — — 183
If credit rating is investment grade,
fair value of fuel derivative level at
which:
Cash is provided to CP .......... 0to(300) 0 to (125) >(75) >(75) N/A
or >(700) or >(582)
Cash is received from CP ........ >40 >150 >200*** >125 N/A
Aircraft is pledged to CP ........ (300) to (700) (125) to (582) N/A N/A N/A
If credit rating is non-investment
grade, fair value of fuel derivative
level at which:
Cash is provided to CP .......... 0to(300) 0 to (125) zero* zero* zero**
or >(700) or >(582)
Cash is received from CP ........ zero* zero* zero* zero* zero**
Aircraft is pledged to CP ........ (300) to (700) (125) to (582) N/A N/A N/A
* Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.
** If either party is rated below investment grade by two of the three major rating agencies, a cash collateral
agreement would be negotiated with the CP.
*** Thresholds may vary based on changes in credit ratings within investment grade.
The Company also has a cash collateral agreement with one of its counterparties associated with its
outstanding interest rate swap agreements. Under this agreement, if the aggregate fair value of interest rates
swaps outstanding is a liability, the Company becomes obligated to post collateral for the value of the liability in
excess of $50 million. If the aggregate fair value of interest rates swaps outstanding is an asset, the counterparty
becomes obligated to post collateral to the Company for the value of the asset in excess of $250 million. If either
73