Southwest Airlines 2012 Annual Report Download - page 107

Download and view the complete annual report

Please find page 107 of the 2012 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 140

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140

ineffectiveness and unrealized gains and losses on derivative contracts include: significant fluctuation in energy
prices, the number of derivative positions the Company holds, significant weather events affecting refinery
capacity and the production of refined products, and the volatility of the different types of products the Company
uses in hedging. However, even though derivatives may not qualify for hedge accounting, the Company continues
to hold the instruments as management believes derivative instruments continue to afford the Company the
opportunity to stabilize jet fuel costs.
Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent
requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a
commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous
documentation that is required at the time each hedge is designated by the Company. The Company also examines
the effectiveness of each individual hedge and its entire hedging program on a quarterly basis utilizing statistical
analysis. This analysis involves utilizing regression and other statistical analyses that compare changes in the price
of jet fuel to changes in the prices of the commodities used for hedging purposes.
All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash
flows in the Consolidated Statement of Cash Flows. The following table presents the location of all assets and
liabilities associated with the Company’s hedging instruments within the Consolidated Balance Sheet:
Balance Sheet
location
Asset derivatives Liability derivatives
(in millions)
Fair value
at
2/31/12
Fair value
at
12/31/11
Fair value
at
12/31/12
Fair value
at
12/31/11
Derivatives designated as hedges*
Fuel derivative contracts (gross) ..... Other current assets $ — $ 17 $ — $ —
Fuel derivative contracts (gross) ..... Other assets 355 542 16 107
Fuel derivative contracts (gross) ..... Accrued liabilities — 97 — 8
Fuel derivative contracts (gross) ..... Other noncurrent liabilities — 93 — 24
Interest rate derivative contracts ...... Other assets 31 64 — —
Interest rate derivative contracts ...... Accrued liabilities — 2 — —
Interest rate derivative contracts ...... Other noncurrent liabilities — — 126 132
Total derivatives designated as
hedges ........................ $ 386$ 815$ 142$ 271
Derivatives not designated as
hedges*
Fuel derivative contracts (gross) ..... Other current assets $ 375 $ 124 $ 327 $ 58
Fuel derivative contracts (gross) ..... Other assets 233 26 351 272
Fuel derivative contracts (gross) ..... Accrued liabilities 10 326 60 687
Fuel derivative contracts (gross) ..... Other noncurrent liabilities — 9 — 122
Total derivatives not designated as
hedges ........................ $ 618$ 485$ 738$ 1,139
Total derivatives ................. $ 1,004 $ 1,300 $ 880 $ 1,410
* Represents the position of each trade before consideration of offsetting positions with each counterparty and
does not include the impact of cash collateral deposits provided to or received from counterparties. See
discussion of credit risk and collateral following in this Note.
99