Southwest Airlines 2014 Annual Report Download - page 112

floating-rate debt has been effectively converted to a fixed rate via interest rate swap agreements which
expire between 2016 and 2020.
As of December 31, 2014, three Boeing 737 aircraft were financed under a fixed-rate facility.
Each note is secured by a first mortgage on the aircraft to which it relates. As of December 31, 2014,
the weighted average interest rate was 7.02 percent. Payments of principal and interest under the notes
are due semi-annually. The notes mature in years 2016 to 2018.
As of December 31, 2014, Boeing 717 aircraft previously pledged as collateral for the
obligations related to enhanced equipment trust certificates (EETCs) were paid in full. On April 1, 2014,
the Company prepaid a portion of its Fixed-rate 717 Aircraft Notes payable in the amount of $35 million
prior to their 2017 maturity date. On October 1, 2014, the Company prepaid the remainder of its Fixed-
rate 717 Aircraft Notes payable in the amount of $7 million. As a result of the early repayment, the
Company incurred a $6 million make-whole penalty, representing the present value of the future interest
payments on the notes, which is reflected as a component of Interest expense in the Consolidated
Statement of Income. In addition, the Company wrote off the remainder of its unamortized debt premium
associated with these notes in second quarter 2014, in the amount of $5 million, which is reflected as a
reduction to Interest expense in the Consolidated Statement of Income.
In October 2009, AirTran Holdings completed a public offering of $115 million of convertible
senior notes due in 2016. Such notes bear interest at 5.25 percent payable semi-annually, in arrears, on
May 1 and November 1. As a result of the acquisition and subsequent dividends declared by the Company,
the convertible senior notes are convertible into AirTran conversion units of 167.5224 per $1,000 in
principal amount of such notes. Based on the terms of the merger agreement, the holders of these notes
would receive shares of the Company’s common stock at a conversion rate of 53.7747 shares and $615.16
in cash per $1,000 in principal amount of such notes. This conversion rate is subject to adjustment under
certain circumstances such as: granting of stock and cash dividends, a make-whole fundamental change of
ownership provision, the issuance of rights or warrants, and/or a distribution of capital stock. Subsequent to
the acquisition, holders of $5 million in principal amount elected to convert their notes. Remaining holders
may convert their convertible senior notes into cash and shares of common stock at their option at any time.
As such, the Company has classified $68 million, which is the cash portion the Company would be required
to pay upon conversion, as current maturities in the Consolidated Balance Sheet. The convertible senior
notes are not redeemable at the Company’s option prior to maturity. The holders of the convertible
senior notes may require the Company to repurchase such notes, in whole or in part, for cash upon the
occurrence of a fundamental change, as defined in the governing supplemental indenture, at a repurchase
price of 100 percent of the principal amount plus any accrued and unpaid interest.
As a result of triggering the fundamental change of ownership provision in the convertible
senior notes and as a result of the acquisition, an embedded conversion option is deemed to exist. In
accordance with applicable accounting guidance, the embedded conversion option was effectively
separated and accounted for as a free-standing derivative. A fair value calculation, utilizing similar
market yields and the Company’s common stock price, was performed for the debt with and without
the equity to measure the equity component. The value allocated to the conversion option of
$35 million is classified as permanent equity. The estimated premium associated with the notes
excluding the equity feature was $10 million, and is being amortized to interest expense over the
remaining life of the notes. The dilutive effect of the shares that would be issued if the convertible
notes were converted is considered in the Company’s net income per share calculations, unless such
conversion would be considered antidilutive. See Note 3.
104