Southwest Airlines 2010 Annual Report Download - page 92

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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,
2010, the Company had agreements with all of its active 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, 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) 0 to (125) >(75) >(75) >(75)
or >(700) or >(535)
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) 0 to (125) ** ** **
or >(700) 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.
The Company also has agreements with each of its counterparties associated with its outstanding interest
rate swap agreements in which cash collateral may be required based on the fair value of outstanding derivative
instruments, as well as the Company’s and its counterparty’s credit ratings. As of December 31, 2010, no cash
collateral had been provided to or received from counterparties associated with the Company’s interest rate
derivatives. If the Company’s credit rating had been below investment grade as of December 31, 2010, it would
have been required to provide $4 million in cash collateral to one counterparty based on its outstanding net
liability derivative position with that counterparty. The outstanding interest rate net derivative positions with all
other counterparties at December 31, 2010 were assets to the Company.
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