Southwest Airlines 2013 Annual Report Download - page 113

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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.
As a result of the fixed-to-floating interest rate swap agreement in place, the average floating rate recognized
during 2013 for the Company’s $300 million 5.75% Notes due 2016 was approximately 2.54 percent, based on actual
and forward rates as of December 31, 2013.
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. At such times, 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 with respect to each counterparty, and
monitors the market position of the fuel hedging program and its relative market position with each counterparty. At
December 31, 2013, 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 based on the counterparty credit rating. The Company also had agreements with counterparties in which cash
deposits, letters of credit, 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, 2013, at
which such postings are triggered:
Counterparty (CP)
A B C D E Other(a) Total
(in millions)
Fair value of fuel derivatives ............ $ 27 $ 42 $ 41 $ 24 $ 26 $ 20 $ 180
Cash collateral held (by) CP ............ — — — — — — —
Aircraft collateral pledged to CP ......... — — — — — — —
Letters of credit (LC) .................. — — — — — — —
Option to substitute LC for aircraft ..... (250) to
(650)(d) (100) to
(500)(d) N/A (250) to
(650) (d) N/A
Option to substitute LC for cash ....... N/A >(500) (100) to
(150)(e) (50) to
(250) or
>(650)(d)
N/A
If credit rating is investment grade, fair
value of fuel derivative level at which:
Cash is provided to CP .............. (50) to (250)
or >(650) (50) to
(100) or
>(500)
>(50)(50)
to (250)
or >(650)
>(50)
Cash is received from CP ............ >50 >150 >175(c) >200 >30
Aircraft or cash can be pledged to CP as
collateral ....................... (250) to
(650)(d) (100) to
(500) (d) N/A (250) to
(650) (d) N/A
If credit rating is non-investment grade,
fair value of fuel derivative level at
which:
Cash is provided to CP .............. (0)to(250)
or >(650) (0) to
(100) or
>(500)
(b) (0) to
(250) or
>(650)
(b)
Cash is received from CP ............ (b) (b) (b) (b) (b)
Aircraft can be pledged to CP as
collateral ....................... (250) to
(650) (100) to
(500) N/A (250) to
(650) N/A
105