Humana 2006 Annual Report Download - page 93

Humana Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Senior Notes
In May 2006, we issued $500 million of 6.45% senior notes due June 1, 2016. Our net proceeds, reduced for
the discount and cost of the offering, were $494.3 million. We used the proceeds from the offering for the
repayment of the outstanding balance under our credit agreement, which at the time of the issuance was $200
million, and the repayment of $300 million of 7.25% senior notes which matured on August 1, 2006.
Swap Agreements
In order to hedge the risk of changes in the fair value of all our 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. Our interest rate swap agreements exchange the fixed interest rate under all our senior
notes for a variable interest rate based on LIBOR. At December 31, 2006, the weighted average effective interest
rate for all of our senior notes was 6.25%.
The interest rate swap agreements, which have the same critical terms as our senior notes, are designated as
fair value hedges. Changes in the fair value of the 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 sheets 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.
At December 31, 2006, the fair value of all our swap agreements was in our favor by $18.1 million and
included in other long-term assets. Likewise, the carrying values of all of our senior notes have been increased
$18.1 million to reflect their fair values. The counterparties to our swap agreements are major financial
institutions with which we also have other financial relationships.
In June 2003, we recorded a deferred gain and received proceeds of $31.6 million in exchange for new swap
agreements related to our 7.25% senior notes. The corresponding deferred swap gain of $31.6 million was being
amortized to reduce interest expense over the remaining term of the 7.25% senior notes which matured August 1,
2006. Amortization of the deferred swap gain reduced interest expense by $6.1 million in 2006, $10.2 million in
2005, and $9.8 million in 2004.
Credit Agreement
On July 14, 2006, we replaced our existing 5-year $600 million unsecured revolving credit agreement with a
5-year $1.0 billion unsecured revolving credit agreement. We entered into the credit agreement for general
corporate purposes. Under the credit agreement, at our option, we can borrow on either a competitive advance
basis or a revolving credit basis. The revolving credit portion bears interest at either a fixed rate or floating rate
based on LIBOR plus a spread. The spread, which varies depending on our credit ratings, ranges from 27 to 80
basis points. We also pay an annual facility fee regardless of utilization. This facility fee, currently 10 basis
points, may fluctuate between 8 and 20 basis points, depending upon our credit ratings. In addition, a utilization
fee of 10 basis points is payable for any day in which borrowings under the facility exceed 50% of the total $1
billion commitment. The competitive advance portion of any borrowings will bear interest at market rates
prevailing at the time of borrowing on either a fixed rate or a floating rate basis, at our option. The credit
agreement contains customary restrictive and financial covenants as well as customary events of default,
including financial covenants regarding the maintenance of a minimum level of net worth and a maximum
leverage ratio.
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