Southwest Airlines 2010 Annual Report Download - page 82

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737-800s, the election must be made 12 months in advance. During 2010, the Company made the election to
convert all of its 2012 firm orders from Boeing to 737-800s. For aircraft commitments with Boeing, the
Company is required to make cash deposits towards the purchase of aircraft in advance. These deposits are
classified as Deposits on flight equipment purchase contracts in the Consolidated Balance Sheet until the aircraft
is delivered, at which time deposits previously made are deducted from the final purchase price of the aircraft
and are reclassified as Flight equipment.
During 2008, the City of Dallas approved the Love Field Modernization Program (LFMP), a project to
reconstruct Dallas Love Field (Airport) with modern, convenient air travel facilities. Pursuant to a Program
Development Agreement (PDA) with the City of Dallas, and the Love Field Airport Modernization Corporation
(or LFAMC, a Texas non-profit “local government corporation” established by the City to act on the City’s
behalf to facilitate the development of the LFMP), the Company is managing this project. Major construction
commenced during 2010, with completion of the project scheduled for the second half of 2014. Although subject
to change, at the current time the project is expected to include the renovation of the Airport airline terminals and
complete replacement of gate facilities with a new 20-gate facility, including infrastructure, systems and
equipment, aircraft parking apron, fueling system, roadways and terminal curbside, baggage handling systems,
passenger loading bridges and support systems, and other supporting infrastructure.
The PDA authorized reimbursement to the Company for certain early LFMP expenditures the Company
would incur from April 25, 2008 until the issuance of bonds used to fund ongoing construction. On October 27,
2010, the LFAMC Board approved a Resolution establishing $100 million as the maximum amount of costs to be
reimbursed to the Company for such early LFMP expenditures. During fourth quarter 2010, $310 million of such
bonds were issued by the LFAMC, and the Company was reimbursed approximately $80 million, which was the
amount the Company had spent towards LFMP construction prior to the issuance of such bonds, including
capitalized interest. The Company has guaranteed principal and interest payments on the bonds. It is currently
expected that the total amount spent on the LFMP project will be approximately $519 million. Although the City
of Dallas has received commitments from various sources that are expected to fund portions of the LFMP
project, including the Federal Aviation Administration, the Transportation Security Administration, and the
City’s Aviation Fund, the majority of the funds used are expected to be from the issuance of bonds. Depending
on funding needs and the timing of these funds from other sources, an additional tranche of bonds will likely be
issued prior to the completion of the LFMP project.
The Company has agreed to manage the majority of the LFMP project, and as a result, has evaluated its
ongoing accounting requirements in consideration of accounting guidance provided for lessees involved in asset
construction. The Company has recorded and will continue to record an asset and corresponding obligation for
the cost of the LFMP project on the Company’s balance sheet as the construction of the facility occurs. As of
December 31, 2010, the Company had recorded construction cost incurred of $86 million as both an asset as a
component of Ground property and equipment and a corresponding liability as a component of Other non-current
liabilities, respectively, in its Consolidated Balance Sheet. Upon completion of the LFMP project, it is expected
the Company would begin depreciating the assets over their estimated useful lives, and would reduce the
corresponding liabilities primarily through the Company’s rental payments to the City of Dallas.
Contingencies
The Company is from time to time subject to various legal proceedings and claims arising in the ordinary
course of business, including, but not limited to, examinations by the Internal Revenue Service (IRS). The
Company’s management does not expect that the outcome in any of its currently ongoing legal proceedings or
the outcome of any proposed adjustments presented to date by the IRS, individually or collectively, will have a
material adverse effect on the Company’s financial condition, results of operations, or cash flow.
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