Southwest Airlines 2012 Annual Report Download - page 109

unrealized losses from fuel hedges as of December 31, 2012, were approximately $92 million in unrealized
losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to
December 31, 2012. In addition, as of December 31, 2012, the Company had already recognized cumulative net
gains due to ineffectiveness and derivatives that do not qualify for hedge accounting treatment totaling
$52 million, net of taxes, related to unsettled derivatives at December 31, 2012. These net gains were recognized
in 2012 and prior periods, and are reflected in Retained earnings as of December 31, 2012, but the underlying
derivative instruments will not expire/settle until 2013 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 all of the Company’s interest rate cash flow hedges for all periods presented was not material.
The Company has floating-to-fixed interest rate swap agreements associated with its $600 million floating-rate
term loan agreement due 2020 and its $332 million term loan agreement due 2019 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.
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 $31 million are
fair value hedges and are classified as a component of Other assets. The corresponding adjustment related to the
net asset associated with the Company’s fair value hedges is to the carrying value of the long-term debt.
Agreements totaling a net liability of $126 million are cash flow hedges and are classified as a component of
Other noncurrent liabilities. The corresponding adjustment related to the net liability associated with the
Company’s cash flow hedges is to AOCI. See Note 12.
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 4.35 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, 2012, was $305 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 interest rate cash flow
hedges for all periods presented was not material.
In June 2012, the Company terminated the AirTran floating-to-fixed interest rate swap agreements related to
its Floating-rate 737 Aircraft Notes payable through 2020. These swaps were previously designated as cash flow
hedges and the gains and/or losses that had previously been deferred in AOCI, which were not material, are being
released to expense/income in accordance with the original debt payment schedule. The release of amounts
deferred in AOCI related to these interest rate swap agreements was not material during 2012 and is not expected
to have a material effect on the Company’s future results of operations.
In December 2012, the Company terminated the fixed-to-floating interest rate swap agreement related to its
$100 million 7.375% debentures due 2027. The effect of this termination is such that the interest associated with
the debt prospectively reverts back to its original fixed rate. As a result of the approximate $38 million gain
realized on this transaction, which will be amortized over the remaining term of the corresponding debentures,
and based on projected interest rates at the date of termination, the Company does not believe its future interest
expense associated with these debentures will significantly differ from the expense it would have recorded had
the debentures remained at floating rates.
101