Southwest Airlines 2014 Annual Report Download - page 129

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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.
During fourth quarter 2014, the Company entered into an interest rate swap agreement related
to its $300 million 2.75% Notes due 2019. The primary objective for the Company’s use of this interest
rate hedge was to reduce the volatility of net interest expense by better matching the repricing of its
assets and liabilities. Under this interest rate swap agreement, the Company pays LIBOR plus a margin
every six months on the notional amount of the debt, and receives payments based on the fixed stated
rate of the notes every six months until the date the notes become due. This interest rate swap
agreement qualifies as a fair value hedge, as defined in “Derivatives and Hedging.” As a result of the
fixed-to-floating interest rate swap agreement in place, the average floating rate recognized during
2014 was approximately 1.23 percent, based on actual and forward rates as of December 31, 2014.
As a result of the fixed-to-floating interest rate swap agreement in place, the average floating
rate recognized during 2014 for the Company’s $300 million 5.75% Notes due 2016 was
approximately 2.51 percent, based on actual and forward rates as of December 31, 2014.
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, 2014, 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
121