Humana 2004 Annual Report Download - page 87

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. DEBT
Long-term debt outstanding was as follows at December 31, 2004 and 2003:
2004 2003
(in thousands)
Long-term debt:
6.30% senior, unsecured notes due 2018, net of unamortized
discount of $780 at December 31, 2004 and $838 at
December 31, 2003 ................................ $299,220 $299,162
7.25% senior, unsecured notes due 2006, net of unamortized
discount of $231 at December 31, 2004 and $376 at
December 31, 2003 ................................ 299,769 299,624
Fair value of interest rate swap agreements ............... 17,082 12,754
Deferred gain from interest rate swap exchange ............ 16,338 26,175
Total senior notes ............................... 632,409 637,715
Other long-term borrowings ........................... 4,287 4,923
Total long-term debt ............................. $636,696 $642,638
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, which have the same critical terms as our 6.30% senior notes and our 7.25% senior notes, are
designated fair value hedges. 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 based on LIBOR. At December 31, 2004, the effective interest rate was 3.45% for the
6.30% senior notes and 4.38% for the 7.25% senior notes, including the amortization of the deferred swap gain.
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.
At December 31, 2004, the fair value of our swap agreements related to the 6.30% senior notes was in our
favor by $18.6 million and is included in other long-term assets and the fair value of our swap agreements related
to the 7.25% senior notes was out of our favor by $1.5 million and is included in other long-term liabilities.
Likewise, the carrying value of our senior notes has been increased $17.1 million to reflect their fair value. The
counterparties to our swap agreements are major financial institutions with which we also have other financial
relationships.
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