Southwest Airlines 2014 Annual Report Download - page 108

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Houston William P. Hobby Airport
The Company entered into a Memorandum of Agreement (“MOA”) with the City of Houston
(“City”), effective June 2012, to expand the existing Houston Hobby airport facility. As provided in the MOA,
the Company and the City have entered into an Airport Use and Lease Agreement (“Lease”) to control the
execution of this expansion and the financial terms thereof. Per the MOA and Lease, this project provides for a
new five-gate international terminal with international passenger processing facilities, expansion of the
existing security checkpoint, and upgrades to the Southwest ticket counter area. The project is estimated to
cost $156 million, and the Company has agreed to provide the funding for, as well as management over, the
project. In return, the capital cost portion of the rent the Company pays for the international facility will be
waived from the initial occupancy until the expiration of the Lease. However, after completion of the project,
the City has the option to buy-out Southwest’s investment at the then-unamortized cost of the facility. This
purchase would trigger payment of the previously waived capital cost component of rents owed the City.
Additionally, some portion of the project is expected to qualify for rental credits that would be utilized upon
completion of the facility against the Company’s lease payments at the airport. Construction began during
third quarter 2013 and is estimated to be completed during the second half of 2015.
As a result of its significant involvement in the Houston Hobby project, the Company has
evaluated its ongoing accounting requirements in consideration of accounting guidance provided for
lessees involved in asset construction, and has determined that it qualifies as the accounting owner of the
facility during the construction period. As such, during construction, the Company records expenditures
as Assets constructed for others in the Consolidated Balance Sheet, along with a corresponding outflow
within Capital expenditures, in the Consolidated Statement of Cash Flows. As of December 31, 2014, the
Company had recorded construction costs related to Houston Hobby of $64 million.
Los Angeles International Airport
In March 2013, the Company executed a lease agreement with Los Angeles World Airports
(“LAWA”), which owns and operates Los Angeles International Airport (“LAX”). Under the lease
agreement, which was amended in June 2014, the Company will oversee and manage the design,
development, financing, construction and commissioning of the airport’s Terminal 1 Modernization Project
(the “Project”) at a cost not to exceed $525 million. The Project will be funded using the Regional Airports
Improvement Corporation (“RAIC”), which is a quasi-governmental special purpose entity which will act
as a conduit borrower under a syndicated credit facility provided by a group of lenders. Loans made under
the credit facility will be used to fund the development of the Project, and the outstanding loans will be
repaid with the proceeds of LAWA’s payments to purchase completed Project phases. The Company has
guaranteed the obligations of the RAIC under the credit facility. Construction on the project began during
2014. The Company believes that due to its agreed upon role in overseeing and managing the project, it is
considered the owner of the project for accounting purposes. As of December 31, 2014, the Company had
recorded construction costs related to LAX of $52 million, which are classified with Assets constructed for
others and as Construction obligation in the accompanying Consolidated Balance Sheet.
Dallas Love Field
During 2008, the City of Dallas approved the Love Field Modernization Program (“LFMP”), a
project to reconstruct Dallas Love Field with modern, convenient air travel facilities. Pursuant to a
Program Development Agreement with the City of Dallas and the Love Field Airport Modernization
Corporation (or “LFAMC,” a Texas non-profit “local government corporation” established by the City
of Dallas to act on the City of Dallas’ behalf to facilitate the development of the LFMP), the Company
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