Humana 2003 Annual Report Download - page 86

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. DEBT
Short-term and long-term debt outstanding was as follows at December 31, 2003 and 2002:
2003 2002
(in thousands)
Short-term debt:
Conduit commercial paper financing program ............. $ — $265,000
Long-term debt:
6.30% senior, unsecured notes due 2018, net of unamortized
discount of $838 at December 31, 2003 ................ $299,162 $ —
7.25% senior, unsecured notes due 2006, net of unamortized
discount of $376 at December 31, 2003 and $521 at
December 31, 2002 ................................ 299,624 299,479
Fair value of interest rate swap agreements ............... 12,754 34,889
Deferred gain from interest rate swap exchange ............ 26,175 —
Total senior notes ............................... 637,715 334,368
Other long-term borrowings ........................... 4,923 5,545
Total long-term debt ............................. $642,638 $339,913
Senior Notes
In order to term-out our short-term debt and take advantage of historically low interest rates, we issued
$300 million 6.30% senior notes due August 1, 2018 on August 5, 2003. Our net proceeds, reduced for the cost
of the offering, were approximately $295.8 million. The net proceeds were used for general corporate purposes,
including the funding of our short term cash needs.
In order to hedge the risk of changes in the fair value of our $300 million 6.30% senior notes and our
$300 million 7.25% senior notes attributable to fluctuations in interest rates, we entered into interest rate swap
agreements. Interest rate swap agreements, which are considered derivatives, are contracts that exchange interest
payments on a specified principal amount, or notional amount, for a specified period. The interest rate swap
agreements have the same critical terms as our 6.30% senior notes and our 7.25% senior notes. Changes in the
fair value of the 6.30% or 7.25% senior notes and the swap agreements due to changing interest rates are
assumed to offset each other completely, resulting in no impact to earnings from hedge ineffectiveness. Our swap
agreements are recognized in our consolidated balance sheet at fair value with an equal and offsetting adjustment
to the carrying value of our senior notes. The fair value of our interest rate swap agreements are estimated based
on quoted market prices of comparable agreements, and reflect the amounts we would receive (or pay) to
terminate the agreements at the reporting date.
Our interest rate swap agreements exchange the fixed interest rate under our 6.30% and 7.25% senior notes
for a variable interest rate. At December 31, 2003, the variable interest rate was 2.03% for the 6.30% senior notes
and 6.26% for the 7.25% senior notes. The $300 million swap agreements for the 6.30% senior notes mature on
August 1, 2018, and the $300 million swap agreements for the 7.25% senior notes mature on August 1, 2006, and
each has the same critical terms as the related senior notes.
In June 2003, we recorded a deferred gain and received proceeds of $31.6 million in exchange for new swap
agreements discussed above related to our 7.25% senior notes. The corresponding deferred swap gain of
$31.6 million is being amortized to reduce interest expense over the remaining term of the 7.25% senior notes.
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