Southwest Airlines 2011 Annual Report Download - page 106

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losses due to ineffectiveness and derivatives that do not qualify for hedge accounting treatment totaling
$68 million, net of taxes. These net losses were recognized in 2011 and prior periods, and are reflected in
Retained earnings as of December 31, 2011, but the underlying derivative instruments will not expire/settle until
2012 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 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 6.315 percent until maturity.
In January 2011, the Company terminated the fixed-to-floating interest rate swap agreements related to its
$350 million 5.25% senior unsecured notes due 2014 and its $300 million 5.125% senior unsecured notes due
2017. The effect of these terminations is basically that the interest associated with these debts prospectively
reverts back to their original fixed rates. As a result of the gains realized on these transactions, which will be
amortized over the remaining term of the corresponding notes, and based on projected interest rates at the date of
termination, the Company does not believe its future interest expense associated with these notes will
significantly differ from the expense it would have recorded had the notes remained at floating rates.
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 $64 million are
classified as a component of Other assets and agreements totaling an asset of $2 million are classified as a
component of Accrued liabilities with a corresponding adjustment to the carrying value of the long-term debt.
Agreements totaling a net liability of $132 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 hedges is to AOCI. See Note 13.
AirTran has also entered into a number of interest rate swap agreements, which convert a portion of
AirTran’s floating-rate debt to a fixed-rate basis for the remaining life of the debt, thus reducing the impact of
interest rate changes on future interest expense and cash flows. Under these agreements, which expire between
2016 and 2020, it pays fixed rates between 4.34 percent and 6.435 percent and receives either three-month or
six-month LIBOR on the notional values. The notional amount of outstanding debt related to interest rate swaps
as of December 31, 2011, was $442 million. These interest rate swap arrangements were designated as cash flow
hedges as of the acquisition date. The ineffectiveness associated with all of the Company’s and Air Tran’s
interest rate cash flow hedges for all periods presented was not material.
The following table contains the floating rates recognized during 2011, based on actual and forward rates at
December 31, 2011, under the Company’s fixed-to-floating interest rate agreements in existence at December 31,
2011:
Debt instrument
Fixed rate associated
with debt instrument
Average floating
rate recognized in 2011
$385 million Notes due 2012 ......................... 6.5% 2.91%
$300 million Notes due 2016 ......................... 5.75% 2.77%
$100 million Debentures due 2027 ..................... 7.375% 2.36%
100