Humana 2005 Annual Report Download - page 89

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. DEBT
Long-term debt outstanding was as follows at December 31, 2005 and 2004:
2005 2004
(in thousands)
Long-term debt:
6.30% senior, unsecured notes due 2018, net of unamortized
discount of $724 at December 31, 2005 and $780 at
December 31, 2004 ................................ $299,276 $299,220
7.25% senior, unsecured notes due 2006, net of unamortized
discount of $86 at December 31, 2005 and $231 at
December 31, 2004 ................................ 299,914 299,769
Fair value of interest rate swap agreements ............... 6,084 17,082
Deferred gain from interest rate swap exchange ............ 6,131 16,338
Total senior notes ............................... 611,405 632,409
Credit agreement .................................... 200,000 —
Other long-term borrowings ........................... 3,639 4,287
Total debt ...................................... 815,044 636,696
Less: Current portion of long-term debt .............. 301,254 —
Total long-term debt ............................. $513,790 $636,696
Swap Agreements
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, 2005, the effective interest rate was 5.41% for the
6.30% senior notes and 6.22% 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, 2005, the fair value of our swap agreements related to the 6.30% senior notes was in our
favor by $10.9 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 $4.8 million and is included in trade accounts payable and
accrued expenses. Likewise, the carrying value of our senior notes has been increased $6.1 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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