Southwest Airlines 2012 Annual Report Download - page 111

(d) The Company has the option of providing cash, letters of credit, or pledging aircraft as collateral. No cash,
letters of credit, or aircraft were pledged as collateral with such counterparties as of December 31, 2012.
(e) The Company has the option of providing cash or letters of credit as collateral. No cash or letters of credit
were pledged as collateral with such counterparties as of December 31, 2012.
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, 2012,
$66 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, $23 million had been provided to one counterparty at December 31,
2012, as a result of net liability derivative position with that counterparty. The outstanding interest rate net
derivative positions with all other counterparties at December 31, 2012, were assets to the Company.
Applicable accounting provisions require an entity to select a policy for how it records the offset rights to
reclaim cash collateral associated with the related derivative fair value of the assets or liabilities of such
derivative instruments. In the accompanying Consolidated Balance Sheet, the Company has elected to present its
cash collateral utilizing a net presentation, in which cash collateral amounts held or provided have been netted
against the fair value of outstanding derivative instruments. The Company’s application of this policy differs
depending on whether its derivative instruments are in a net asset position or a net liability position. If its fuel
derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted
against current derivative amounts (those that will settle during the twelve months following the balance sheet
date) associated with that counterparty until that balance is zero, and then any remainder is applied against the
fair value of noncurrent outstanding derivative instruments (those that will settle beyond one year following the
balance sheet date). If the Company’s fuel derivative instruments are in a net liability position with the
counterparty, cash collateral amounts provided are first netted against noncurrent derivative amounts associated
with that counterparty until that balance is zero, and then any remainder is applied against the fair value of
current outstanding derivative instruments. At December 31, 2012, no cash collateral deposits, letters of credit,
and/or aircraft collateral were provided by or held by the Company associated with its outstanding fuel derivative
instruments. At December 31, 2011, of the entire $226 million in cash collateral deposits posted with
counterparties under the Company’s bilateral collateral provisions, $41 million was netted against noncurrent
fuel derivative instruments within Other noncurrent liabilities and $185 million was netted against current fuel
derivative instruments within Accrued liabilities in the Consolidated Balance Sheet.
11. FAIR VALUE MEASUREMENTS
Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable
inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active
markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of December 31, 2012, the Company held certain items that are required to be measured at fair value on
a recurring basis. These included cash equivalents, short-term investments (primarily treasury bills, commercial
paper, and certificates of deposit), certain noncurrent investments, interest rate derivative contracts, fuel
derivative contracts, and available-for-sale securities. The majority of the Company’s short-term investments
consist of instruments classified as Level 1. However, the Company has certificates of deposit, commercial
paper, and Eurodollar time deposits that are classified as Level 2, due to the fact that the fair value for these
instruments is determined utilizing observable inputs in non-active markets. Noncurrent investments consist of
certain auction rate securities, primarily those collateralized by student loan portfolios, which are guaranteed by
the U.S. Government. Other available-for-sale securities primarily consist of investments associated with the
Company’s excess benefit plan.
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