Southwest Airlines 2011 Annual Report Download - page 107

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Credit risk and collateral
Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an
asset 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 periodically reviews 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, 2011, 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, 2011, at which such postings are triggered:
Counterparty (CP)
TotalA B C D E Other(a)
(in millions)
Fair value of fuel derivatives .... $ (9)$ (147)$ (87)$ 61 $ 133 $ 5 $ (44)
Cash collateral held from (by)
CP ....................... (40) (152) (34) — — — (226)
If credit rating is investment
grade, fair value of fuel
derivative level at which:
Cash is provided to CP ..... 0to(300) 0 to (125) >(50) >(75) >(50)
or >(700) or >(625)
Cash is received from CP . . . >40 >150 >200(c) >125(c) >250
Aircraft or cash can be
pledged to CP .......... (300) to (700)(d) (125) to (625)(d) 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) (b) (b) (b)
or >(700) or >(625)
Cash is received from CP . . . (b) (b) (b) (b) (b)
Aircraft can be pledged to
CP ................... (300) to (700) (125) to (625) N/A N/A N/A
(a) Individual counterparties with fair value of fuel derivatives <$15 million.
(b) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.
(c) Thresholds may vary based on changes in credit ratings within investment grade.
(d) The Company has the option of providing cash or pledging aircraft as collateral. No aircraft were pledged as
collateral as of December 31, 2011.
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, 2011, $64 million
had been provided to one counterparty associated with interest rate derivatives based on the Company’s outstanding
net liability derivative position with that counterparty. In addition, in connection with interest rate swaps entered
into by AirTran, a total of $32 million had been provided to two counterparties at December 31, 2011, as a result of
net liability derivative positions with those counterparties. The outstanding interest rate net derivative positions with
all other counterparties at December 31, 2011, were assets to the Company.
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