Southwest Airlines 2010 Annual Report Download - page 66

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$383 million. To manage credit risk, the Company selects and will periodically review counterparties based on
credit ratings, limits its exposure to a single counterparty with collateral support agreements, and monitors the
market position of the program and its relative market position with each counterparty. However, if one or more
of these counterparties were in a liability position to the Company and were unable to meet their obligations, any
open derivative contracts with the counterparty could be subject to early termination, which could result in
substantial losses for the Company. At December 31, 2010, the Company had agreements with all of its
counterparties containing early termination rights triggered by credit rating thresholds and/or bilateral collateral
provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on
the counterparty’s credit rating. 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—cash is either posted by the counterparty if the value of derivatives is
an asset to the Company, or is posted by the Company if the value of derivatives is a liability to the Company.
The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable
collateral posting threshold amounts as of December 31, 2010, at which such postings are triggered:
Counterparty (CP)
(in millions) A B C D E Other Total
Fair value of fuel derivatives ...... $ 114 $ (238)$ (3) $ 79 $ 189 $ 1 * $142
Cash collateral held by CP ........ (60) 125 — — — — 65
Aircraft collateral pledged to CP . . . — 113 — — — — 113
If credit rating is investment
grade, fair value of fuel derivative
level at which:
Cash is provided to CP ....... 0to(300)
or >(700)
0 to (125)
or >(535)
>(75) >(75) >(75)
Cash is received from CP ..... >40 >150 >200*** >125*** >250
Aircraft is pledged to CP ..... (300) to (700) (125) to (535) 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)
or >(700)
0 to (125)
or >(535) ** ** **
Cash is received from CP ..... ** ** ** ** **
Aircraft is pledged to CP ..... (300) to (700) (125) to (535) N/A N/A N/A
* Sum of counterparties with fair value of fuel derivatives <$5M and no risk of the Company posting
collateral.
** Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.
*** Thresholds may vary based on changes in credit ratings within investment grade.
At December 31, 2010, the $60 million in cash collateral deposits held by the Company has been netted
against the noncurrent fuel derivative assets from that counterparty within Other assets in the Consolidated
Balance Sheet. The $125 million in cash collateral deposits provided by the Company to one counterparty has
been netted against the noncurrent fuel derivative liabilities from that counterparty within Other non-current
liabilities in the Consolidated Balance Sheet. Due to the terms of the Company’s current fuel hedging agreements
with counterparties and the types of derivatives held, in the Company’s judgment, it does not have significant
additional exposure to future cash collateral requirements. As an example, if market prices for the commodities
used in the Company’s fuel hedging activities were to decrease by 33 percent from market prices as of
December 31, 2010, given the Company’s fuel derivative portfolio, its aircraft collateral facilities, and its
investment grade credit rating, it would have to provide an additional $497 million in cash collateral to its current
counterparties. See also Note 10 to the Consolidated Financial Statements.
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