United Airlines 2008 Annual Report Download - page 74

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Foreign Currency Exchange Rate Risks. United’s exposure to market risk
associated with changes in interest rates relates primarily to its debt obligations and short-term
investments. The Company does not use derivative financial instruments in its investment portfolio.
United’s policy is to manage interest rate risk through a combination of fixed and variable rate debt and
by entering into swap agreements, depending upon market conditions. A portion of United’s aircraft
lease obligations and related accrued interest ($306 million in equivalent U.S. dollars at December 31,
2008) is denominated in foreign currencies that expose the Company to risks associated with changes in
foreign exchange rates. To hedge against this risk, United has placed foreign currency deposits
($306 million in equivalent U.S. dollars at December 31, 2008), primarily for euros, to meet foreign
currency lease obligations denominated in that respective currency. Since unrealized mark-to-market
gains or losses on the foreign currency deposits are offset by the losses or gains on the foreign currency
obligations, United has hedged its overall exposure to foreign currency exchange rate volatility with
respect to its foreign lease deposits and obligations. The fair value of these deposits is determined based
on the present value of future cash flows using an appropriate swap rate. The fair value of long-term
debt is predominantly based on the present value of future cash flows using a U.S. Treasury rate that
matches the remaining life of the instrument, adjusted by a credit spread and, to a lesser extent, on the
quoted market prices for the same or similar instruments. The table below presents information as of
December 31, 2008 about certain of the Company’s financial instruments that are sensitive to changes in
interest and exchange rates. Amounts shown below are the same for both UAL and United, except as
noted.
(Dollars in millions) 2009 2010 2011 2012 2013 Thereafter Total
Fair
Value Total
Fair
Value
Expected Maturity Date
2008 2007
UAL ASSETS
Cash equivalents
Fixedrate(a)............... $2,039 $ — $ — $ — $ — $ — $2,039 $2,039 $3,554 $3,554
Avg.interestrate.......... 1.02% ———— — 1.02% 5.08%
Lease deposits
Fixed rate—EUR deposits . .... $ 21 $228 $ 15 $ — $ — $ — $ 264 $ 330 $ 428 $ 511
Accruedinterest........... 7 28 7 — — — 42 69
Avg.interestrate.......... 3.95% 6.86% 4.41% — — — 6.45% 6.54%
Fixed rate—USD deposits . .... $ — $ 11 $ — $ — $ — $ — $ 11 $ 21 $ 11 $ 20
Accruedinterest........... — 9 — — — — 9 8
Avg.interestrate.......... — 6.49% — — — — 6.49% 6.49%
UAL LONG-TERM DEBT(a)
U. S. Dollar denominated
Variable rate debt . . ......... $ 205 $262 $186 $186 $207 $1,594 $2,640 $1,524 $2,510 $2,405
Avg.interestrate.......... 3.40% 3.34% 3.26% 3.19% 3.11% 3.02% 3.24% 6.18%
Fixed rate debt ............. $ 577 $690 $683 $228 $ 61 $2,149 $4,388 $2,668 $4,834 $4,391
Avg.interestrate.......... 6.38% 6.24% 6.11% 5.89% 5.78% 5.73% 6.09% 6.40%
(a) Amounts also represent United except that in 2008, United’s carrying value and fair value of its cash equivalents and debt
obligations are approximately $6 million and $2 million, respectively, lower than the reported UAL amounts. The reported
2007 cash equivalents balance includes cash of $1.3 billion with a weighted average rate of 5.12% and short-term investments
of $2.3 billion with a weighted average rate of 5.04%. United’s 2007 cash equivalents and debt obligations were
approximately $56 million and $3 million, respectively, lower than the amounts reported for UAL.
In addition to the cash equivalents included in the table above, UAL and United have $54 million
and $50 million of short-term restricted cash, respectively, and $218 million and $217 million,
respectively, of long-term restricted cash. As discussed in Note 1(d), “Summary of Significant Accounting
Policies—Cash and Cash Equivalents, Short-Term Investments and Restricted Cash” in Combined Notes
to Consolidated Financial Statements, this cash is being held in restricted accounts primarily for workers’
compensation obligations, security deposits for airport leases and reserves with institutions that process
United’s credit card ticket sales. Due to the short term nature of these cash balances, their carrying
values approximate their fair values. The Company’s interest income is exposed to changes in interest
rates on these cash balances. During 2007, the Company also repurchased certain of its own debt
instruments, which remain outstanding and have a fair value and carrying value of $46 million at
74