NOTE 6—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

The table below presents disclosures about the financial assets and financial liabilities measured at fair value on a recurring basis in the Company’s financial statements (in millions):


	September 30, 2013										December 31, 2012
	Total			Level 1		Level 2		Level 3			Total			Level 1		Level 2		Level 3
	UAL
Cash and cash equivalents	$	3,935		$	3,935	$	—	$	—		$	4,770		$	4,770	$	—	$	—
Short-term investments:
Asset-backed securities		683			—		683		—			715			—		715		—
Corporate debt		581			—		581		—			537			—		537		—
Certificates of deposit placed through an account registry service (“CDARS”)		308			—		308		—			367			—		367		—
Auction rate securities		104			—		—		104			116			—		—		116
Other short-term investments		125			—		125		—			38			—		38		—
Enhanced equipment trust certificates (“EETC”)		59			—		—		59			63			—		—		63
Fuel derivative asset (liability), net		52			—		52		—			46			—		46		—
Restricted cash		412			412		—		—			447			447		—		—

	United
Cash and cash equivalents	$	3,928		$	3,928	$	—	$	—		$	4,765		$	4,765	$	—	$	—
Short-term investments:
Asset-backed securities		683			—		683		—			715			—		715		—
Corporate debt		581			—		581		—			537			—		537		—
CDARS		308			—		308		—			367			—		367		—
Auction rate securities		104			—		—		104			116			—		—		116
Other short-term investments		125			—		125		—			38			—		38		—
EETC		59			—		—		59			63			—		—		63
Fuel derivative asset (liability), net		52			—		52		—			46			—		46		—
Restricted cash		411			411		—		—			447			447		—		—
Convertible debt derivative asset		376			—		—		376			268			—		—		268
Convertible debt option liability		(185	)		—		—		(185	)		(128	)		—		—		(128	)

Available-for-sale investment maturities—The short-term investments and EETC securities shown in the table above are classified as available-for-sale. Short-term investments have maturities of less than one year except for asset-backed securities, corporate debt and auction rate securities. As of September 30, 2013, asset-backed securities have remaining maturities of approximately one to 42 years, corporate debt securities have remaining maturities of approximately one to 22 years, and auction rate securities have remaining maturities of approximately one to 33 years. The EETC securities have various maturities with the final maturity in 2019.

The tables below present disclosures about the activity for “Level 3” financial assets and financial liabilities (in millions):


	Three Months Ended September 30,
	2013						2012
UAL	Auction Rate Securities			EETC			Auction Rate Securities		EETC
Balance at June 30	$	115		$	62		$	112	$	63
Settlements		(9	)		(2	)		—		(2	)
Gains (losses):
Reported in earnings—realized		1			—			—		—
Reported in earnings—unrealized		—			—			1		—
Reported in other comprehensive income (loss)		(3	)		(1	)		2		1

Balance at September 30	$	104		$	59		$	115	$	62


	Nine Months Ended September 30,
	2013						2012
UAL	Auction Rate Securities			EETC			Auction Rate Securities		EETC
Balance at January 1	$	116		$	63		$	113	$	60
Settlements		(19	)		(4	)		—		(5	)
Gains (losses):
Reported in earnings—realized		3			—			—		—
Reported in earnings—unrealized		1			—			—		7
Reported in other comprehensive income (loss)		3			—			2		—

Balance at September 30	$	104		$	59		$	115	$	62


	Three Months Ended September 30,
	2013												2012
United	Auction Rate Securities			Convertible Debt Supplemental Derivative Asset			Convertible Debt Conversion Option Liability			EETC			Auction Rate Securities		Convertible Debt Supplemental Derivative Asset			Convertible Debt Conversion Option Liability			EETC
Balance at June 30	$	115		$	395		$	(199	)	$	62		$	112	$	289		$	(147	)	$	63
Settlements		(9	)		—			—			(2	)		—		—			—			(2	)
Gains (losses):
Reported in earnings:
Realized		1			—			—			—			—		—			—			—
Unrealized		—			(19	)		14			—			1		(87	)		56			—
Reported in other comprehensive income (loss)		(3	)		—			—			(1	)		2		—			—			1

Balance at September 30	$	104		$	376		$	(185	)	$	59		$	115	$	202		$	(91	)	$	62


	Nine Months Ended September 30,
	2013											2012
United	Auction Rate Securities			Convertible Debt Supplemental Derivative Asset		Convertible Debt Conversion Option Liability			EETC			Auction Rate Securities		Convertible Debt Supplemental Derivative Asset		Convertible Debt Conversion Option Liability			EETC
Balance at January 1	$	116		$	268	$	(128	)	$	63		$	113	$	193	$	(95	)	$	60
Settlements		(19	)		—		—			(4	)		—		—		—			(5	)
Gains (losses):
Reported in earnings:
Realized		3			—		—			—			—		—		—			—
Unrealized		1			108		(57	)		—			—		9		4			7
Reported in other comprehensive income (loss)		3			—		—			—			2		—		—			—

Balance at September 30	$	104		$	376	$	(185	)	$	59		$	115	$	202	$	(91	)	$	62

As of September 30, 2013, the Company’s auction rate securities, which had a par value of $115 million, were variable-rate debt instruments with interest rates that reset every 7, 28 or 35 days, depending on the terms of the particular instrument. These securities are backed by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. All of the auction rate securities that the Company holds are senior obligations under the applicable indentures authorizing the issuance of the securities.

As of September 30, 2013, United’s EETC securities, which were repurchased in open market transactions in 2007, have unrealized gains of $2 million. All changes in the fair value of these investments have been classified within accumulated other comprehensive income.

United’s debt-related derivatives presented in the tables above relate to (a) supplemental indenture agreements that provide that United’s convertible debt is convertible into shares of UAL common stock upon the terms and conditions specified in the indentures, and (b) the embedded conversion options in United’s convertible debt that are required to be separated and accounted for as though they are free-standing derivatives as a result of the United debt becoming convertible into the common stock of a different reporting entity. The derivatives described above relate to the 6% convertible junior subordinated debentures due 2030 and the 4.5% convertible notes due 2015. These derivatives are reported in United’s separate financial statements and eliminated in consolidation for UAL.

Derivative instruments and investments presented in the tables above have the same fair value as their carrying value. The table below presents the carrying values and estimated fair values of financial instruments not presented in the tables above (in millions):


Fair Value of Debt by Fair Value Hierarchy Level

	September 30, 2013										December 31, 2012
	Carrying Amount		Fair Value								Carrying Amount		Fair Value
			Total		Level 1		Level 2		Level 3				Total		Level 1		Level 2		Level 3
UAL debt	$	11,161	$	12,036	$	—	$	7,428	$	4,608	$	12,252	$	13,419	$	—	$	8,045	$	5,374
United debt		11,008		11,651		—		7,043		4,608		11,850		12,460		—		7,086		5,374


Quantitative Information About Level 3 Fair Value Measurements (in millions)

Item	Fair Value at September 30, 2013			Valuation Technique	Unobservable Input	Range (Weighted Average)
Auction rate securities	$	104		Valuation Service / Broker Quotes	Broker quotes (a)	NA
EETC	$	59		Discounted Cash Flows	Structure credit risk (b)	5% - 6%(6%)
Convertible debt derivative asset	$	376		Binomial Lattice Model	Expected volatility (c) Own credit risk (d)	45% - 60%(47%) 5% - 6%(5%)
Convertible debt option liability	$	(185	)	Binomial Lattice Model	Expected volatility (c) Own credit risk (d)	45% - 60%(47%) 5% - 6%(5%)

(a)	Broker quotes obtained by a third-party valuation service.

(b)	Represents the credit risk premium of the EETC structure above the risk-free rate that the Company has determined market participants would use in pricing the instruments.

(c)	Represents the range in volatility estimates that the Company has determined market participants would use when pricing the instruments.

(d)	Represents the range of Company-specific risk adjustments that the Company has determined market participants would use as a model input.

Valuation Processes—Level 3 Measurements—Depending on the instrument, the Company utilizes broker quotes obtained from third-party valuation services, discounted cash flow methods, or option pricing methods, as indicated above. Valuations using discounted cash flow methods are generally conducted by the Company. Valuations using option pricing models are generally provided to the Company by third-party valuation experts. Each reporting period, the Company reviews the unobservable inputs used by third-party valuation experts for reasonableness utilizing relevant information available to the Company from other sources.

The Company uses broker quotes obtained from a valuation service (in replacement of a discounted cash flows method) for valuing auction rate securities. This approach provides the best available information.

Sensitivity Analysis—Level 3 Measurements—Changes in the structure credit risk would be unlikely to cause material changes in the fair value of the EETCs.

The significant unobservable inputs used in the fair value measurement of the United convertible debt derivative assets and liabilities are the expected volatility in UAL common stock and the Company’s own credit risk. Significant increases (decreases) in expected stock volatility would result in a higher (lower) fair value measurement. Significant increases (decreases) in the Company’s own credit risk would result in a lower (higher) fair value measurement. A change in one of the inputs would not necessarily result in a directionally similar change in the other.

Fair value of the financial instruments included in the tables above was determined as follows:


Description		Fair Value Methodology
Cash and cash equivalents		The carrying amounts approximate fair value because of the short-term maturity of these assets.

Short-term investments and Restricted cash		Fair value is based on (a) the trading prices of the investment or similar instruments, (b) an income approach, which uses valuation techniques to convert future amounts into a single present amount based on current market expectations about those future amounts when observable trading prices are not available, (c) internally-developed models of the expected future cash flows related to the securities, or (d) broker quotes obtained by third-party valuation services.

Fuel derivatives		Derivative contracts are privately negotiated contracts and are not exchange traded. Fair value measurements are estimated with option pricing models that employ observable inputs. Inputs to the valuation models include contractual terms, market prices, yield curves, fuel price curves and measures of volatility, among others.

Foreign currency derivatives		Fair value is determined with a formula utilizing observable inputs. Significant inputs to the valuation models include contractual terms, risk-free interest rates and forward exchange rates.

Debt		Fair values were based on either market prices or the discounted amount of future cash flows using our current incremental rate of borrowing for similar liabilities.

Convertible debt derivative asset and option liability		United used a binomial lattice model to value the conversion options and the supplemental derivative assets. Significant binomial model inputs that are not objectively determinable include volatility and the Company’s credit risk component of the discount rate.