Southwest Airlines 2010 Annual Report Download - page 91

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those observed in underlying markets. Included in the Company’s total net unrealized losses from fuel hedges as
of December 31, 2010, were approximately $112 million in unrealized losses, net of taxes, which are expected to
be realized in earnings during 2011. In addition, as of December 31, 2010, the Company had already recognized
cumulative net losses due to ineffectiveness and derivatives that do not qualify for hedge accounting treatment
totaling $61 million, net of taxes. These net losses were recognized in 2010 and prior periods, and are reflected in
Retained earnings as of December 31, 2010, but the underlying derivative instruments will not expire/settle until
2011 or future periods.
Interest rate swaps
The Company is party to certain interest rate swap agreements that are accounted for as either fair value
hedges or cash flow hedges, as defined in the applicable accounting guidance for derivative instruments and
hedging. The interest rate swap agreements accounted for as fair value hedges qualify for the “shortcut” method
of accounting for hedges, which dictates that the hedges are assumed to be perfectly effective, and, thus, there is
no ineffectiveness to be recorded in earnings. For the Company’s interest rate swap agreements accounted for as
cash flow hedges, ineffectiveness is required to be measured at each reporting period. The ineffectiveness
associated with these hedges for all periods presented was immaterial. The following table contains the floating
rates recognized during 2010, based on actual and forward rates at December 31, 2010, under the Company’s
fixed-to-floating interest rate agreements:
Debt instrument
Fixed rate associated
with debt instrument
Average floating
rate recognized in 2010
$400 million Secured notes due 2011 ................. 10.5% 9.19%
$385 million Notes due 2012 ....................... 6.5% 2.78%
$350 million Notes due 2014 ....................... 5.25% 1.23%
$300 million Notes due 2016 ....................... 5.75% 2.76%
$300 million Notes due 2017 ....................... 5.125% 0.32%
$100 million Debentures due 2027 ................... 7.375% 2.40%
The Company has floating-to-fixed interest rate swap agreements associated with its $600 million floating-
rate term loan agreement and its $332 million term loan agreement that are accounted for as cash flow hedges.
These interest rate hedges have fixed the interest rate on the $600 million floating-rate term loan agreement at
5.223 percent until maturity, and for the $332 million term loan agreement at 6.64 percent until maturity. The
ineffectiveness associated with these hedges for 2010 and 2009 was not material.
The fair values of the interest rate swap agreements, which are adjusted regularly, have been aggregated by
counterparty for classification in the Consolidated Balance Sheet. Agreements totaling an asset of $73 million are
classified as a component of Other assets with a corresponding adjustment to the carrying value of the long-term
debt. Agreements totaling a net liability of $4 million are classified as a component of Other noncurrent
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). See
Note 7.
85