Southwest Airlines 2015 Annual Report Download - page 82

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As of December 31, 2015, 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 5.75%
senior unsecured notes 2016, 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 at one point been converted
to floating rates, but the Company subsequently 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 following table displays the characteristics of the Company’s secured fixed rate debt as of
December 31, 2015:
Principal
amount
(in millions)
Effective
fixed rate
Final
maturity Underlying collateral
Term Loan Agreement $ 143 6.315% 5/6/2019 14 specified Boeing 737-700 aircraft
Term Loan Agreement 36 4.84% 7/1/2019 4 specified Boeing 737-700 aircraft
Term Loan Agreement 329 5.223% 5/9/2020 21 specified Boeing 737-700 aircraft
The carrying value of the Company’s floating rate debt totaled $859 million, and this debt had a
weighted-average maturity of 4.36 years at floating rates averaging 1.47 percent for the year ended
December 31, 2015. In total, the Company’s fixed-rate debt and floating rate debt represented 13.42
percent and 4.97 percent, respectively, of consolidated noncurrent assets at December 31, 2015.
The Company also has some risk associated with changing interest rates due to the short-term nature of
its invested cash, which totaled $1.6 billion, and short-term investments, which totaled $1.5 billion at
December 31, 2015. 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, 2015, would not have a
material effect on the fair value of the Company’s fixed-rate debt instruments. See Note 11 to the
Consolidated Financial Statements for further information on the fair value of financial instruments. A
change in market interest rates could, however, have a corresponding effect on earnings and cash flows
associated with the Company’s floating-rate debt, invested cash (excluding cash collateral deposits
held, if applicable), floating-rate aircraft leases, and short-term investments because of the floating-rate
nature of these items. Assuming floating market rates in effect as of December 31, 2015 were held
constant throughout a 12-month period, a hypothetical 10 percent change in those rates would have an
immaterial impact on the Company’s net earnings and cash flows. Utilizing these assumptions and
considering the Company’s cash balance (excluding the impact of cash collateral deposits held or
74