Southwest Airlines 2013 Annual Report Download - page 81

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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, 2013, $31
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, a total of $1 million in cash collateral had been provided to one counterparty at
December 31, 2013, as a result of a net liability derivative position with that counterparty. The outstanding
interest rate net derivative positions with all other counterparties at December 31, 2013, were assets to the
Company.
Due to the significance of the Company’s fuel hedging program and the emphasis that the Company places
on utilizing fuel derivatives to reduce its fuel price risk, the Company has created a system of governance and
management oversight and has put in place a number of internal controls designed so that procedures are
properly followed and accountability is present at the appropriate levels. For example, the Company has put in
place controls designed to: (i) create and maintain a comprehensive risk management policy; (ii) provide for
proper authorization by the appropriate levels of management; (iii) provide for proper segregation of duties;
(iv) maintain an appropriate level of knowledge regarding the execution of and the accounting for derivative
instruments; and (v) have key performance indicators in place in order to adequately measure the performance of
its hedging activities. The Company believes the governance structure that it has in place is adequate given the
size and sophistication of its hedging program.
Financial market risk
The vast majority of the Company’s tangible assets are aircraft, which are long-lived. The Company’s
strategy is to maintain a conservative balance sheet and grow capacity steadily and profitably under the right
conditions. While the Company uses financial leverage, it strives to maintain a strong balance sheet and has a
“BBB” rating with Fitch, a “BBB-” rating with Standard & Poor’s, and a “Baa3” credit rating with Moody’s as of
December 31, 2013, all of which are considered “investment grade.” The Company’s French Credit Agreements
due 2018 do not give rise to significant fair value risk but do give rise to interest rate risk because this borrowing
was originally issued as floating-rate debt. In addition, as disclosed in Note 10 to the Consolidated Financial
Statements, the Company has converted certain of its long-term debt to floating rate debt by entering into an
interest rate swap agreement. Although there is interest rate risk associated with these floating rate borrowings,
the risk of the French Credit Agreements due 2018 is somewhat mitigated by the fact that the Company may
prepay this debt under certain conditions. See Notes 6 and 7 to the Consolidated Financial Statements for more
information on the material terms of the Company’s short-term and long-term debt.
73