Southwest Airlines 2013 Annual Report Download - page 118

Company’s auction rate securities are time to principal recovery, an illiquidity premium, and counterparty credit
spread. Holding other inputs constant, a significant increase (decrease) in such unobservable inputs would result
in a significantly lower (higher) fair value measurement, respectively.
All settlements from fuel derivative contracts that are deemed “effective” are included in Fuel and oil
expense in the period the underlying fuel is consumed in operations. Any “ineffectiveness” associated with
hedges, including amounts that settled in the current period (realized), and amounts that will settle in future
periods (unrealized), is recorded in earnings immediately, as a component of Other (gains) losses, net. See Note
10 for further information on hedging. Any gains and losses (realized and unrealized) related to other
investments are reported in Other operating expenses, and were immaterial for 2013 and 2012.
The following table presents a range of the unobservable inputs utilized in the fair value measurements of
the Company’s assets and liabilities classified as Level 3 at December 31, 2013:
Quantitative information about Level 3 fair value measurements
Valuation technique Unobservable input Period (by year) Range
Fuel derivatives Option model Implied volatility 2014 9-25%
2015 13-23%
2016 13-20%
2017 13-17%
Auction rate securities Discounted cash flow Time to principal recovery 5-8 years
Illiquidity premium 3-4%
Counterparty credit
spread
1-3%
The carrying amounts and estimated fair values of the Company’s long-term debt (including current
maturities), as well as the applicable fair value hierarchy tier, at December 31, 2013, are presented in the table
below. The fair values of the Company’s publicly held long-term debt are determined based on inputs that are
readily available in public markets or can be derived from information available in publicly quoted markets;
therefore, the Company has categorized these agreements as Level 2. Six of the Company’s debt agreements are
not publicly held. The Company has determined the estimated fair value of this debt to be Level 3, as certain
inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative
pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.
(in millions)
Carrying
value
Estimated fair
value
Fair value level
hierarchy
5.25% Notes due 2014 ..................................... $ 357 $ 362 Level 2
5.75% Notes due 2016 ..................................... 320 354 Level 2
5.25% Convertible Senior Notes due 2016 ..................... 115 178 Level 2
5.125% Notes due 2017 .................................... 322 346 Level 2
Fixed-rate 717 Aircraft Notes payable through 2017—10.37% ..... 41 39 Level 2
French Credit Agreements due 2018—1.05% ................... 46 46 Level 3
Fixed-rate 737 Aircraft Notes payable through 2018—7.02% ...... 30 31 Level 3
Term Loan Agreement due 2019—6.315% ..................... 210 213 Level 3
Term Loan Agreement due 2019—6.84% ...................... 85 90 Level 3
Term Loan Agreement due 2020—5.223% ..................... 413 388 Level 3
Floating-rate 737 Aircraft Notes payable through 2020............ 340 335 Level 3
Pass Through Certificates due 2022—6.24% .................... 371 418 Level 2
7.375% Debentures due 2027 ................................ 136 146 Level 2
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