United Airlines 2010 Annual Report Download - page 149

$235 million purchase of mileage credits has been treated as a loan from Chase and is reported as long-term debt
in the consolidated balance sheet. The liability will be reduced ratably in 2016 as the mileage credits are issued to
Chase.
Convertible Debt Securities.
Following the Merger, UAL, Continental and the trustees for Continental’s 4.5% Convertible Notes, 5%
Convertible Notes and 6% Convertible Junior Subordinated Debentures entered into supplemental indenture
agreements which provide that Continental’s convertible debt, which was previously convertible into shares of
Continental common stock, will be convertible into shares of UAL common stock upon the terms and conditions
specified in the indentures. For purposes of the Continental separate-entity reporting, as a result of the
Continental debt becoming convertible into the stock of a non-consolidated entity, the embedded conversion
options in Continental’s convertible debt are required to be separated and accounted for as though they are free-
standing derivatives. As a result, the carrying value of Continental’s debt, net of current maturities, on a separate-
entity reporting basis as of October 1, 2010 and December 31, 2010, was $5,931 million and $5,536 million,
respectively, which is $71 million and $73 million, respectively, lower than the consolidated UAL carrying
values on those dates.
In addition, UAL’s contractual commitment to provide common stock to satisfy Continental’s obligation
upon conversion of the debt is an embedded call option on UAL common stock that is also required to be
separated and accounted for as though it is a free-standing derivative. The fair value of the indenture derivatives
on a separate-entity reporting basis as of October 1, 2010 and December 31, 2010, was an asset of $520 million
and $286 million, respectively. The fair value of the embedded conversion options as of October 1, 2010 and
December 31, 2010, was a liability of $230 million and $164 million, respectively. The initial contribution of the
indenture derivatives to Continental by UAL was accounted for as additional-paid-in-capital in Continental’s
separate-entity financial statements. Changes in fair value of both the indenture derivatives and the embedded
conversion options subsequent to October 1, 2010 are recognized currently in nonoperating income (expense).
The decline in fair value of the indenture derivatives and the embedded conversion options during the three
months ended December 31, 2010 was largely due to the conversion of Continental’s 5.0% Convertible Notes,
which were redeemed with UAL shares in the fourth quarter of 2010. The net impact of the conversion of
Continental’s 5.0% Convertible Notes and the adjustments to fair value of the indenture derivatives and the
embedded conversion options was not material to Continental’s results of operations for the three months ended
December 31, 2010.
Continental 4.5% Notes. In December 2009, Continental issued $230 million in principal amount of 4.5%
Convertible Notes due 2015 (the “Continental 4.5% Notes”). The Continental 4.5% Notes, which were
convertible into Continental common stock prior to the Merger, became convertible into UAL common stock at a
conversion price of approximately $18.93 per share of UAL common stock. Continental does not have the option
to pay the conversion price in cash. However, holders of the notes may require Continental to repurchase all or a
portion of the notes for cash at par plus any accrued and unpaid interest if certain changes in control of
Continental occur.
Continental 5% Notes. Continental’s $175 million 5% Convertible Notes, which were convertible into
Continental common stock prior to the Merger, became convertible into UAL common stock at a conversion
price of $19.0476 per share of UAL common stock. Prior to the Merger, the Continental 5% Notes were
convertible into shares of Continental common stock. In the fourth quarter of 2010, Continental called the notes
for redemption. The holders of substantially all of these notes exercised their right to convert their notes into
shares of UAL common stock in lieu of cash redemption. During the fourth quarter of 2010, 9.2 million shares of
UAL common stock were issued in connection with the conversion of these notes.
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