Southwest Airlines 2014 Annual Report Download - page 89

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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 Note 6 to the Consolidated Financial Statements for
more information on the material terms of the Company’s short-term and long-term debt.
As of December 31, 2014, excluding the notes or debentures that have been converted to a
floating rate, the Company’s fixed-rate senior unsecured notes outstanding included its $300 million
5.125% senior unsecured notes due 2017 and its $100 million 7.375% senior unsecured notes due
2027. Each of these notes had previously been converted to floating rates, but in 2011 and 2012 the
Company terminated the fixed-to-floating interest rate swap agreements related to them. The effect of
these terminations was that the interest associated with these debts prospectively reverted back to their
original fixed rates. As a result of the gains realized on these transactions, which are being amortized
over the remaining term of the corresponding notes, and based on projected interest rates at the date of
termination, the Company does not believe its future interest expense, based on projected future
interest rates at the date of termination, associated with these notes will significantly differ from the
expense it would have recorded had the notes remained at floating rates. The Company believes the
fixed interest rates associated with each of these notes are comparable to average rates prevailing for
similar debt instruments over the last ten years. The following table displays the characteristics of the
Company’s secured fixed rate debt as of December 31, 2014:
Principal
amount
(in millions)
Effective
fixed rate
Final
maturity Underlying collateral
Term Loan Agreement $ 178 6.315% 5/6/2019 14 specified Boeing 737-700 aircraft
Term Loan Agreement 73 6.84% 7/1/2019 5 specified Boeing 737-700 aircraft
Term Loan Agreement 372 5.223% 5/9/2020 21 specified Boeing 737-700 aircraft
The carrying value of the Company’s floating rate debt totaled $703 million, and this debt had
a weighted-average maturity of 3.48 years at floating rates averaging 2.22 percent for the year ended
December 31, 2014. In total, the Company’s fixed-rate debt and floating rate debt represented
12.59 percent and 4.45 percent, respectively, of consolidated noncurrent assets at December 31, 2014.
The Company also has some risk associated with changing interest rates due to the short-term
nature of its invested cash, which totaled $1.3 billion, and short-term investments, which totaled
$1.7 billion, at December 31, 2014. See Notes 1 and 11 to the Consolidated Financial Statements for
further information. The Company currently invests available cash in certificates of deposit, highly
rated money market instruments, investment grade commercial paper, treasury securities, U.S.
government agency securities, and other highly rated financial instruments, depending on market
conditions and operating cash requirements. As a result of previous turmoil in credit markets, the
Company has discontinued further investments in auction rate securities. Because of the short-term
nature of these investments, the returns earned parallel closely with short-term floating interest rates.
The Company has not undertaken any additional actions to cover interest rate market risk and is not a
party to any other material market interest rate risk management activities.
A hypothetical 10 percent change in market interest rates as of December 31, 2014, would not
have a material effect on the fair value of the Company’s fixed-rate debt instruments. See Note 11 to
81