body.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   
SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from                    to         
 

 
        
 
Commission
File Number
Exact Name of Registrant as Specified in
its Charter, Principal Office Address and
Telephone Number
State of
Incorporation
I.R.S. Employer
Identification No
 
 
001-06033
UAL Corporation
Delaware
36-2675207
 
 
001-11355
United Air Lines, Inc.
77 W. Wacker Drive
Chicago, Illinois 60601
(312) 997-8000
Delaware
36-2675206
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
UAL Corporation                                                          Yes x No o
United Air Lines, Inc.                                                   Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
UAL Corporation                                                Large accelerated filer x        Accelerated filer o         Non-accelerated filer o
United Air Lines, Inc.                                         Large accelerated filer ¨         Accelerated filer o         Non-accelerated filer x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
UAL Corporation                                                          Yes ¨ No x
United Air Lines, Inc.                                                   Yes ¨ No x
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
 
UAL Corporation                                                          Yes x No o
United Air Lines, Inc.                                                   Yes x No o
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 26, 2007.
 
UAL Corporation                                             116,278,809 shares of common stock ($0.01 par value)
    United Air Lines, Inc.
205 (100% owned by UAL Corporation)
There is no market for United Air Lines, Inc. common stock.
 




 
UAL Corporation and Subsidiary Companies and
United Air Lines, Inc. and Subsidiary Companies
Report on Form 10-Q
For the Quarter Ended September 30, 2007

 
PART I. FINANCIAL INFORMATION
 
Page
Financial Statements
   
       
 
UAL Corporation:
   
 
  Condensed Statements of Consolidated Operations (Unaudited)
   
3
 
 
  Condensed Statements of Consolidated Financial Position (Unaudited)
   
5
 
 
  Condensed Statements of Consolidated Cash Flows (Unaudited)
   
7
 
       
 
United Air Lines, Inc.:
   
 
  Condensed Statements of Consolidated Operations (Unaudited)
   
8
 
 
  Condensed Statements of Consolidated Financial Position (Unaudited)
   
10
 
 
  Condensed Statements of Consolidated Cash Flows (Unaudited)
   
12
 
       
 
Combined Notes to Condensed Consolidated Financial Statements (Unaudited) (UAL Corporation and United Air Lines, Inc.)
   
13
 
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
29
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
   
44
 
Item 4.
Controls and Procedures
   
44
 
           
 
PART II. OTHER INFORMATION
       
Item 1.
Legal Proceedings
   
45
 
Item1A.
Risk Factors
   
46
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
47
 
Item 6.
Exhibits
   
47
 
Signatures 
   
 
 
Exhibit Index 
   
 
 

 

2


PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
UAL Corporation and Subsidiary Companies
 
Condensed Statements of Consolidated Operations (Unaudited)
 
(In millions, except per share amounts)
 
   
   
Three Months Ended September 30,
 
   
2007
   
2006
 
Operating revenues:
           
Passenger - United Airlines
  $
4,225
    $
3,916
 
Passenger - Regional Affiliates
   
819
     
773
 
Cargo
   
198
     
183
 
     Special operating items (Note 2)     45         
Other operating revenues
   
240
     
304
 
 
   
5,527
     
5,176
 
Operating expenses:
               
Aircraft fuel
   
1,324
     
1,368
 
Salaries and related costs
   
1,062
     
1,060
 
Regional affiliates
   
751
     
713
 
Purchased services
   
344
     
302
 
Aircraft maintenance materials and outside repairs
   
295
     
252
 
Depreciation and amortization
   
245
     
226
 
Distribution expenses (Note 1)
   
211
     
215
 
Landing fees and other rent
   
201
     
199
 
Aircraft rent
   
102
     
104
 
Cost of third party sales
   
68
     
153
 
Special operating items (Note 2)
    (22 )     (30 )
Other operating expenses
   
290
     
279
 
     
4,871
     
4,841
 
                 
Earnings from operations
   
656
     
335
 
                 
Other income (expense):
               
Interest expense
    (161 )     (164 )
Interest income
   
71
     
72
 
Interest capitalized
   
5
     
3
 
Miscellaneous, net
    (6 )    
3
 
      (91 )     (86 )
                 
Earnings before income taxes and equity in earnings
               
of affiliates
   
565
     
249
 
Income tax expense
   
232
     
60
 
                 
Earnings before equity in earnings of affiliates
   
333
     
189
 
Equity in earnings of affiliates, net of tax
   
1
     
1
 
Net income
  $
334
    $
190
 
                 
Earnings per share, basic
  $
2.82
    $
1.62
 
Earnings per share, diluted
  $
2.21
    $
1.30
 

 
See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).
 

3



UAL Corporation and Subsidiary Companies
       
Condensed Statements of Consolidated Operations (Unaudited)
       
(In millions, except per share amounts)
       
   
Successor
   
Successor
   
Predecessor
 
   
Nine Months
   
Period from
   
Period from
 
   
Ended
   
February 1
   
January 1
 
   
September 30,
   
to September 30,
   
to January 31,
 
   
2007
   
2006
   
2006
 
Operating revenues:
                 
 Passenger - United Airlines
  $
11,457
    $
9,904
    $
1,074
 
 Passenger - Regional Affiliates
   
2,298
     
1,999
     
204
 
 Cargo
   
547
     
501
     
56
 
 Special operating items (Note 2)
   
45
     
-
     
-
 
     Other operating revenues     766       892       124  
     
15,113
     
13,296
     
1,458
 
 Operating expenses:
                       
 Aircraft fuel
   
3,571
     
3,323
     
362
 
 Salaries and related costs
   
3,149
     
2,857
     
358
 
 Regional affiliates
   
2,176
     
1,896
     
228
 
 Purchased services
   
980
     
829
     
98
 
 Aircraft maintenance materials and outside repairs
   
860
     
688
     
80
 
 Depreciation and amortization
   
694
     
592
     
68
 
 Landing fees and other rent
   
654
     
569
     
75
 
 Distribution expenses (Note 1)
   
596
     
564
     
60
 
 Aircraft rent
   
307
     
288
     
30
 
 Cost of third party sales
   
238
     
471
     
65
 
 Special operating items (Note 2)
    (44 )     (30 )    
-
 
 Other operating expenses
   
831
     
773
     
86
 
     
14,012
     
12,820
     
1,510
 
                         
Earnings (loss) from operations
   
1,101
     
476
      (52 )
                         
Other income (expense):
                       
Interest expense (Note 11)
    (506 )     (516 )     (42 )
Interest income
   
191
     
167
     
6
 
Interest capitalized
   
14
     
10
     
-
 
Miscellaneous, net
    (7 )    
5
     
-
 
      (308 )     (334 )     (36 )
                         
Earnings (loss) before reorganization items, income
                       
taxes and equity in earnings of affiliates
   
793
     
142
      (88 )
Reorganization items, net
   
-
     
-
     
22,934
 
                         
Earnings before income taxes and equity in
                       
earnings of affiliates
   
793
     
142
     
22,846
 
Income tax expense
   
340
     
60
     
-
 
                         
Earnings before equity in earnings of affiliates
   
453
     
82
     
22,846
 
Equity in earnings of affiliates, net of tax
   
3
     
4
     
5
 
Net income
  $
456
    $
86
    $
22,851
 
                         
Earnings per share, basic
  $
3.82
    $
0.69
    $
196.61
 
Earnings per share, diluted
  $
3.10
    $
0.68
    $
196.61
 
                         
 
See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).
 

4


UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position (Unaudited)
(In millions, except shares)
 
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $
1,263
    $
3,832
 
Short-term investments
   
2,899
     
312
 
Restricted cash
   
341
     
341
 
Receivables, less allowance for doubtful accounts (2007—$29; 2006—$27)
   
1,095
     
820
 
Prepaid fuel
   
418
     
283
 
Aircraft fuel, spare parts and supplies, less
               
obsolescence allowance (2007—$22; 2006—$6)
   
230
     
218
 
Deferred income taxes
   
77
     
122
 
Prepaid expenses and other
   
643
     
345
 
     
6,966
     
6,273
 
Operating property and equipment:
               
Owned—
               
Flight equipment
   
9,212
     
8,958
 
Advances on flight equipment
   
103
     
103
 
Other property and equipment
   
1,536
     
1,441
 
     
10,851
     
10,502
 
Less—accumulated depreciation and amortization
    (918 )     (503 )
     
9,933
     
9,999
 
Capital leases:
               
Flight equipment
   
1,512
     
1,511
 
Other property and equipment
   
34
     
34
 
     
1,546
     
1,545
 
Less—accumulated amortization
    (151 )     (81 )
     
1,395
     
1,464
 
     
11,328
     
11,463
 
Other assets:
               
Intangibles, less accumulated amortization (2007—$285; 2006—$169)
   
2,912
     
3,028
 
Goodwill
   
2,695
     
2,703
 
Restricted cash
   
447
     
506
 
Aircraft lease deposits
   
327
     
539
 
Investments
   
194
     
113
 
Other, net
   
739
     
744
 
     
7,314
     
7,633
 
    $
25,608
    $
25,369
 

 
See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).
 

5


UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Financial Position (Unaudited)
(In millions, except shares)
 
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Liabilities and Stockholders’ Equity
           
Current liabilities:
           
Advance ticket sales
  $
2,246
    $
1,669
 
Mileage Plus deferred revenue
   
1,201
     
1,111
 
Accounts payable
   
830
     
667
 
Accrued salaries, wages and benefits
   
823
     
795
 
Advanced purchase of miles
   
708
     
681
 
Long-term debt maturing within one year (Note 11)
   
654
     
1,687
 
Fuel purchase commitments
   
418
     
283
 
Current obligations under capital leases
   
319
     
110
 
Accrued interest
   
162
     
241
 
Other
   
498
     
701
 
     
7,859
     
7,945
 
                 
Long-term debt (Note 11)
   
7,027
     
7,453
 
Long-term obligations under capital leases
   
1,129
     
1,350
 
Other liabilities and deferred credits:
               
Mileage Plus deferred revenue
   
2,666
     
2,569
 
Postretirement benefit liability
   
1,934
     
1,955
 
Deferred income taxes
   
1,048
     
688
 
Deferred pension liability
   
137
     
130
 
Other
   
802
     
770
 
     
6,587
     
6,112
 
Mandatorily convertible preferred securities
   
366
     
361
 
Commitments and contingent liabilities (Note 13)
               
                 
Stockholders’ equity:
               
Preferred stock
   
     
 
Common stock at par, $0.01 par value; authorized 1,000,000,000 shares; outstanding 116,035,322 and 112,280,629 shares at September 30, 2007 and December 31, 2006, respectively
   
1
     
1
 
Additional capital invested
   
2,122
     
2,053
 
Retained earnings
   
467
     
16
 
Stock held in treasury, at cost (Note 4)
    (15 )     (4 )
Accumulated other comprehensive income
   
65
     
82
 
     
2,640
     
2,148
 
    $
25,608
    $
25,369
 

 
See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).
 

6


UAL Corporation and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In millions)
 
   
Successor
   
Predecessor
 
   
Nine Months
Ended
September 30,
   
Period from
February 1 to
September 30,
   
Period from
January 1 to
January 31,
 
   
2007
   
2006
   
2006
 
Cash flows provided (used) by operating activities:
                 
Net income (loss) before reorganization items
  $
456
    $
86
    $ (83 )
Adjustments to reconcile to net cash provided (used) by operating activities—
                       
Increase in advance ticket sales
   
577
     
339
     
109
 
Increase in deferred income taxes
   
364
     
60
     
-
 
Increase in receivables
    (269 )     (95 )     (88 )
Depreciation and amortization
   
694
     
592
     
68
 
Mileage Plus deferred revenue and advanced purchase of miles
   
214
     
153
     
14
 
Other, net
    (34 )     (27 )    
141
 
     
2,002
     
1,108
     
161
 
Cash flows provided (used) by reorganization activities:
                       
Reorganization items, net
   
     
     
22,934
 
Increase in other liabilities
   
     
     
37
 
Increase in non-aircraft claims accrual
   
     
     
429
 
Discharge of claims and liabilities
   
     
      (24,628 )
Revaluation of Mileage Plus frequent flyer deferred revenue
   
     
     
2,399
 
Revaluation of other assets and liabilities
   
     
      (2,106 )
Pension curtailment, settlement and employee claims
   
     
     
912
 
     
     
      (23 )
Cash flows provided (used) by investing activities:
                       
Net (purchases) sales of short-term investments
    (2,587 )    
72
     
2
 
Purchases of EETC securities (Notes 1 and 11)
    (76 )    
     
 
Additions to property and equipment
    (428 )     (222 )     (30 )
(Increase) decrease in restricted cash
   
59
     
300
      (203 )
Decrease in segregated funds
   
     
200
     
 
Other, net
    (25 )    
39
      (7 )
      (3,057 )    
389
      (238 )
Cash flows provided (used) by financing activities:
                       
Proceeds from secured notes
   
694
     
     
 
Proceeds from Credit Facility
   
     
2,961
     
 
Repayment of Credit Facility
    (995 )     (175 )    
 
Repayment of DIP Financing
   
      (1,157 )    
 
Repayment of other long-term debt
    (1,149 )     (545 )     (24 )
Principal payments under capital leases
    (60 )     (66 )     (5 )
Other, net
    (4 )     (65 )     (1 )
      (1,514 )    
953
      (30 )
Increase (decrease) in cash and cash equivalents during the period
    (2,569 )    
2,450
      (130 )
Cash and cash equivalents at beginning of the period
   
3,832
     
1,631
     
1,761
 
Cash and cash equivalents at end of the period
  $
1,263
    $
4,081
    $
1,631
 

 
See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).
 

7



United Air Lines, Inc. and Subsidiary Companies
 
Condensed Statements of Consolidated Operations (Unaudited)
 
(In millions)
 
             
       
   
Three Months Ended September 30,
 
   
2007
   
2006
 
Operating revenues:
           
Passenger - United Airlines
  $
4,225
    $
3,916
 
Passenger - Regional Affiliates
   
819
     
773
 
Cargo
   
198
     
183
 
Special operating items (Note 2)
   
45
     
-
 
     Other operating revenues      243       304  
     
5,530
     
5,176
 
Operating expenses:
               
Aircraft fuel
   
1,324
     
1,368
 
Salaries and related costs
   
1,059
     
1,059
 
Regional affiliates
   
751
     
713
 
Purchased services
   
344
     
301
 
Aircraft maintenance materials and outside repairs
   
295
     
252
 
Depreciation and amortization
   
245
     
225
 
Distribution expenses (Note 1)
   
211
     
215
 
Landing fees and other rent
   
201
     
199
 
Aircraft rent
   
102
     
104
 
Cost of third party sales
   
67
     
150
 
Special operating items (Note 2)
    (22 )     (30 )
Other operating expenses
   
291
     
281
 
     
4,868
     
4,837
 
                 
Earnings from operations
   
662
     
339
 
                 
Other income (expense):
               
Interest expense
    (161 )     (165 )
Interest income
   
70
     
79
 
Interest capitalized
   
5
     
3
 
Miscellaneous, net
    (6 )    
3
 
      (92 )     (80 )
                 
Earnings before income taxes and equity in earnings
               
of affiliates
   
570
     
259
 
Income tax expense
   
234
     
65
 
                 
Earnings before equity in earnings of affiliates
   
336
     
194
 
Equity in earnings of affiliates, net of tax
   
1
     
1
 
Net income
  $
337
    $
195
 
                 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

8


United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Operations (Unaudited)
(In millions)

   
Successor
   
Successor
   
Predecessor
 
   
Nine Months
   
Period from
   
Period from
 
   
Ended
   
February 1
   
January 1
 
   
September 30,
   
to September 30,
   
to January 31,
 
   
2007
   
2006
   
2006
 
Operating revenues:
                 
Passenger - United Airlines
  $
11,457
    $
9,904
    $
1,074
 
Passenger - Regional Affiliates
   
2,298
     
1,999
     
204
 
Cargo
   
547
     
501
     
56
 
Special operating items (Note 2)
   
45
     
-
     
-
 
    Other operating revenues      776       889       120  
     
15,123
     
13,293
     
1,454
 
Operating expenses:
                       
Aircraft fuel
   
3,571
     
3,323
     
362
 
Salaries and related costs
   
3,145
     
2,854
     
358
 
Regional affiliates
   
2,176
     
1,896
     
228
 
Purchased services
   
980
     
828
     
97
 
Aircraft maintenance materials and outside repairs
   
860
     
688
     
80
 
Depreciation and amortization
   
694
     
591
     
68
 
Landing fees and other rent
   
654
     
569
     
75
 
Distribution expenses (Note 1)
   
596
     
564
     
60
 
Aircraft rent
   
308
     
289
     
30
 
Cost of third party sales
   
235
     
464
     
63
 
Special operating items (Note 2)
    (44 )     (30 )    
-
 
Other operating expenses
   
831
     
771
     
85
 
     
14,006
     
12,807
     
1,506
 
                         
Earnings (loss) from operations
   
1,117
     
486
      (52 )
                         
Other income (expense):
                       
Interest expense (Note 11)
    (506 )     (518 )     (42 )
Interest income
   
194
     
172
     
6
 
Interest capitalized
   
14
     
10
     
-
 
Miscellaneous, net
    (7 )    
2
     
-
 
      (305 )     (334 )     (36 )
                         
Earnings (loss) before reorganization items, income
                       
taxes and equity in earnings of affiliates
   
812
     
152
      (88 )
Reorganization items, net
   
-
     
-
     
22,709
 
                         
Earnings before income taxes and equity in
                       
earnings of affiliates
   
812
     
152
     
22,621
 
Income tax expense
   
348
     
65
     
-
 
                         
Earnings before equity in earnings of affiliates
   
464
     
87
     
22,621
 
Equity in earnings of affiliates, net of tax
   
3
     
4
     
5
 
Net income
  $
467
    $
91
    $
22,626
 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).


9


United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position (Unaudited)
(In millions, except shares)
               
     
September 30,
   
December 31,
 
     
2007
   
2006
 
Assets
             
Current assets:
             
Cash and cash equivalents
    $
1,246
    $
3,779
 
Short-term investments
     
2,860
     
308
 
Restricted cash
     
308
     
303
 
Receivables, less allowance for doubtful
                 
accounts (2007 - $29; 2006 - $27)
     
1,087
     
814
 
Prepaid fuel
     
418
     
283
 
Aircraft fuel, spare parts and supplies, less
                 
obsolescence allowance (2007 - $22; 2006 - $6)
     
230
     
218
 
Receivables from related parties
     
168
     
154
 
Deferred income taxes
     
70
     
114
 
Prepaid expenses and other
     
639
     
348
 
       
7,026
     
6,321
 
Operating property and equipment:
                 
Owned -
                 
Flight equipment
     
9,206
     
8,952
 
Advances on flight equipment
     
91
     
91
 
Other property and equipment
     
1,536
     
1,441
 
       
10,833
     
10,484
 
Less - accumulated depreciation and amortization
      (917 )     (502 )
       
9,916
     
9,982
 
Capital leases:
                 
Flight equipment
     
1,512
     
1,511
 
Other property and equipment
     
34
     
34
 
       
1,546
     
1,545
 
Less - accumulated amortization
      (151 )     (81 )
       
1,395
     
1,464
 
       
11,311
     
11,446
 
Other assets:
                 
Intangibles, less accumulated amortization
                 
 
(2007- $285; 2006-$169)
     
2,912
     
3,028
 
Goodwill
     
2,695
     
2,703
 
Restricted cash
     
447
     
506
 
Aircraft lease deposits
     
327
     
539
 
Investments
     
194
     
113
 
Note receivable from affiliate
     
-
     
201
 
Other, net
     
726
     
724
 
         
7,301
     
7,814
 
        $
25,638
    $
25,581
 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

10


United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Financial Position (Unaudited)
(In millions, except shares)
             
   
September 30,
   
December 31,
 
   
2007
   
2006
 
Liabilities and Stockholder’s Equity
           
Current liabilities:
           
   Advance ticket sales
  $
2,246
    $
1,669
 
   Mileage Plus deferred revenue
   
1,201
     
1,111
 
   Accounts payable
   
832
     
671
 
   Accrued salaries, wages and benefits
   
823
     
795
 
   Advanced purchase of miles
   
708
     
681
 
   Long-term debt maturing within one year (Note 11)
   
654
     
1,687
 
   Fuel purchase commitments
   
418
     
283
 
   Current obligations under capital leases
   
319
     
110
 
   Accrued interest
   
163
     
241
 
   Accounts payable to affiliates
   
6
     
2
 
   Other
   
710
     
920
 
     
8,080
     
8,170
 
                 
Long-term debt (Note 11)
   
7,026
     
7,449
 
Long-term obligations under capital leases
   
1,129
     
1,350
 
                 
Other liabilities and deferred credits:
               
   Mileage Plus deferred revenue
   
2,666
     
2,569
 
   Postretirement benefit liability
   
1,934
     
1,955
 
   Deferred income taxes
   
966
     
596
 
   Deferred pension liability
   
137
     
130
 
   Other
   
801
     
769
 
     
6,504
     
6,019
 
                 
Parent company mandatorily convertible
    preferred securities
   
366
     
361
 
Commitments and contingent liabilities (Note 13)
               
                 
Stockholder’s equity:
               
   Common stock at par, $5 par value; authorized 1,000 shares; outstanding 205 at both September 30, 2007 and December 31, 2006
   
-
     
-
 
   Additional capital invested
   
1,981
     
2,127
 
   Retained earnings
   
487
     
23
 
   Accumulated other comprehensive income
   
65
     
82
 
     
2,533
     
2,232
 
    $
25,638
    $
25,581
 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

11


 United Air Lines, Inc. and Subsidiary Companies
Condensed Statements of Consolidated Cash Flows (Unaudited)
(In millions)

   
Successor
   
Predecessor
 
   
Nine Months
 Ended
September 30,
   
Period from February 1 to September 30,
   
Period from
January 1 to
 January 31,
 
   
2007
   
2006
   
2006
 
Cash flows provided (used) by operating activities:
                 
   Net income (loss) before reorganization items
  $
467
    $
91
    $ (83 )
   Adjustments to reconcile to net cash provided (used) by operating
                       
     activities -
                       
       Increase in advance ticket sales
   
577
     
339
     
109
 
       Increase in deferred income taxes
   
372
     
65
     
-
 
       Increase in receivables
    (271 )     (91 )     (98 )
       Depreciation and amortization
   
694
     
592
     
68
 
       Mileage Plus deferred revenue and advanced purchase of miles
   
214
     
153
     
14
 
       Other, net
    (65 )     (25 )    
153
 
     
1,988
     
1,124
     
163
 
Cash flows provided (used) by reorganization activities:
                       
      Reorganization items, net
   
-
     
-
     
22,709
 
      Increase in other liabilities
   
-
     
-
     
38
 
      Increase in non-aircraft claims accrual
   
-
     
-
     
421
 
      Discharge of claims and liabilities
   
-
     
-
      (24,389 )
      Revaluation of Mileage Plus frequent flyer deferred revenue
   
-
     
-
     
2,399
 
      Revaluation of other assets and liabilities
   
-
     
-
      (2,111 )
      Pension curtailment, settlement and employee claims
   
-
     
-
     
912
 
     
-
     
-
      (21 )
Cash flows provided (used) by investing activities:
                       
      Net (purchases) sales of short-term investments
    (2,552 )    
72
     
2
 
      Purchases of EETC securities (Notes 1 and 11)
    (76 )    
-
     
-
 
      Additions to property and equipment
    (428 )     (222 )     (30 )
      (Increase) decrease in restricted cash
   
54
     
303
      (203 )
      Decrease in segregated funds
   
-
     
200
     
-
 
      Other, net
    (26 )     (15 )     (7 )
      (3,028 )    
338
      (238 )
Cash flows provided (used) by financing activities:
                       
      Proceeds from secured notes
   
694
     
-
     
-
 
      Proceeds from Credit Facility
   
-
     
2,961
     
-
 
      Repayment of Credit Facility
    (995 )     (175 )    
-
 
      Repayment of DIP Financing
   
-
      (1,157 )    
-
 
      Repayment of other long-term debt
    (1,148 )     (544 )     (24 )
      Principal payments under capital leases
    (60 )     (66 )     (5 )
      Other, net
   
16
      (65 )     (1 )
      (1,493 )    
954
      (30 )
Increase (decrease) in cash and cash equivalents during the period
    (2,533 )    
2,416
      (126 )
Cash and cash equivalents at beginning of the period
   
3,779
     
1,596
     
1,722
 
Cash and cash equivalents at end of the period
  $
1,246
    $
4,012
    $
1,596
 

See accompanying Combined Notes to Condensed Consolidated Financial Statements (Unaudited).

 

12


UAL Corporation and Subsidiary Companies and
 United Air Lines, Inc. and Subsidiary Companies
Combined Notes to Condensed Consolidated Financial Statements (Unaudited)

 
(1) Basis of Presentation
 
UAL Corporation (together with its consolidated subsidiaries, “UAL”), is a holding company and its principal, wholly-owned subsidiary is United Air Lines, Inc. (together with its consolidated subsidiaries, “United”). We sometimes use the words “we,” “our,” “us,” and the “Company” in this Form 10-Q for disclosures that relate to both UAL and United.
 
This Quarterly Report on Form 10-Q is a combined report of UAL and United. Therefore, these Combined Notes to Condensed Consolidated Financial Statements (Unaudited) apply to both UAL and United, unless otherwise noted. As UAL consolidates United, disclosures that relate to activities of United also apply to UAL.
 
Interim Financial Statements.The UAL and United unaudited condensed consolidated financial statements shown here have been prepared as required by the Securities and Exchange Commission (the “SEC”). Some information and footnote disclosures normally included in financial statements that meet generally accepted accounting principles (“GAAP”) have been condensed or omitted as permitted by the SEC. UAL and United believe that the disclosures presented here are not misleading. The financial statements include all adjustments, which include only normal recurring adjustments and adjustments required by fresh-start reporting and reorganization items as described below, that are considered necessary for a fair presentation of the financial position and results of operations of UAL and United. These financial statements should be read together with the information included in UAL’s and United’s Annual Reports on Form 10-K for the year ended December 31, 2006 (the “2006 Annual Reports”).
 
Investments.The Company’s cash equivalents and short-term investments are classified as held-to-maturity. In addition, the Company has $76 million of debt securities that are reported as non-current investments, which are classified as available-for-sale. The non-current debt investments are certain of the Company’s previously issued debt instruments that were acquired in open market transactions during the third quarter of 2007.  See Note 11, "Debt Obligations," for further information related to the $76 million of non-current debt securities.
 
Mileage Plus Accounting.The following is an update to the accounting policy disclosures in the 2006 Annual Reports. For further information related to Mileage Plus accounting, refer to the 2006 Annual Reports and Critical Accounting Policies in this Form 10-Q.
 
United recognizes revenue for customer accounts that are cancelled after a period of inactivity as defined by the Mileage Plus program. United estimates the number of accounts that it expects to deactivate and ratably recognizes revenue for these accounts over the expiration period. In early 2007, United announced a reduction in the expiration period from 36 months to 18 months. Based on this program change, United reduced the period over which it recognizes revenue for deactivated accounts from 36 months to 18 months. This change provided a benefit to United’s operating revenues of approximately $50 million and $125 million for the three and nine month periods ended September 30, 2007, respectively, and United estimates that it will provide a total benefit of approximately $180 million for the year ended December 31, 2007. The pre-tax diluted per share benefit to UAL was approximately $0.32 and $0.81 for the three and nine months ended September 30, 2007, respectively.
 
Reclassifications.In the first quarter of 2007, United and UAL changed their classification of certain distribution-related costs, previously included in purchased services and commissions, to classify these costs as distribution expenses in the Condensed Statements of Consolidated Operations (Unaudited). The distribution expenses previously reported for 2006 were reclassified to provide a comparable presentation in each of the 2007 quarterly reports on Form 10-Q. Amounts previously reported as commissions and purchased services in the UAL and United 2006 quarterly reports on Form 10-Q are shown below:
 

13



 
   
Predecessor
 
Successor
 
      2006
(In millions)
     
January 1 to
January 31,
 
Period from
February 1 to
March 31,
 
Three Months
Ended
June 30,
 
Three Months
Ended
September 30,
 
Three Months
Ended
December 31,
 
Commissions (historical) (a)
  $
24
    $
51
    $
82
    $
91
    $
67
   
Purchased services (historical) (b)
   
36
     
90
     
126
     
124
     
107
   
Distribution expenses (revised)
  $
60
    $
141
    $
208
    $
215
    $
174
   
____________________ 
(a)
Commissions were previously reported as a separate expense item in the UAL and United 2006 quarterly reports on Form 10-Q and the 2006 Annual Reports.
 
(b)
Consists of credit card transaction fees and global distribution systems (“GDS”) transaction expenses that were classified as components of purchased services in the UAL and United quarterly reports on Form 10-Q and the 2006 Annual Reports. For 2007 Form 10-Q reporting purposes, the revised purchased services amounts for the 2006 periods are the result of decreasing the amounts previously reported in the UAL and United 2006 quarterly reports on Form 10-Q by these same adjustments.
 
Fresh-Start Reporting.As a result of the adoption of fresh-start reporting in accordance with American Institute of Certified Public Accountants’ Statement of Position 90-7 “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”), the financial statements prior to February 1, 2006 are not comparable with the financial statements for periods on or after February 1, 2006. SOP 90-7 requires that the financial statements for periods after a Chapter 11 filing separate transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Bankruptcy reorganization items are classified as reorganization items, net in the Condensed Statements of Consolidated Operations (Unaudited). UAL common and preferred securities outstanding at January 31, 2006 were cancelled and new securities were issued to unsecured creditors and employees. In addition, fresh-start reporting required that most of the Company’s’ tangible and intangible assets and liabilities be recorded at fair value upon its emergence from bankruptcy. References to “Successor ” refer to UAL or United on or after February 1, 2006, after giving effect to the adoption of fresh-start reporting. References to “Predecessor” refer to UAL or United prior to February 1, 2006.
 
(2) Voluntary Reorganization Under Chapter 11
 
Bankruptcy Considerations. The following discussion provides general background information regarding UAL and United pending litigation related to their bankruptcy reorganization, and is not intended to be an exhaustive summary. Detailed information pertaining to the bankruptcy filings may be obtained at www.pd-ual.com and in the 2006 Annual Reports.
 
On December 9, 2002 (the “Petition Date”), UAL Corporation, United Air Lines, Inc. and 26 direct and indirect wholly-owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Bankruptcy Court”). On January 20, 2006, the Bankruptcy Court confirmed the Plan of Reorganization, which became effective February 1, 2006 (the “Effective Date”). On the Effective Date, UAL and United emerged from bankruptcy protection and implemented fresh-start reporting.
 
The Plan of Reorganization generally provided for the full payment or reinstatement of allowed administrative claims, priority claims and secured claims, and the distribution of new UAL equity and UAL and United debt securities to the Debtors’ creditors and employees in satisfaction of allowed unsecured and deemed claims. UAL common and preferred securities outstanding at January 31, 2006 were cancelled. The Plan of Reorganization contemplated UAL issuing up to 125 million shares of new UAL common stock consisting of 115 million shares to be issued to unsecured creditors and employees and 10 million shares to be issued pursuant to UAL’s share-based management and director compensation plans. The new UAL common stock was listed on a NASDAQ market and began trading under the symbol “UAUA” on February 2, 2006.
 
Significant Matters Resolved in Chapter 11 Cases Since Filing the UAL and United Annual Reports on Form 10-K for the Fiscal Year ended December 31, 2006.The following material matters have been resolved in the Bankruptcy Court since the filing of the 2006 Annual Reports:
 
 
(a)
Pilot Plan Termination Order. In December 2004, the Pension Benefit Guaranty Corporation (“PBGC”) filed an involuntary termination proceeding against United, as plan administrator for the United Airlines Pilot Defined Benefit Pension Plan (the “Pilot Plan”), in the District Court.
 

14


 
In January 2005, the District Court granted a motion filed by United and referred the involuntary termination proceeding to the Bankruptcy Court. Air Line Pilots Association (“ALPA”) and United Retired Pilots Benefit Protection Association and seven retired pilots (collectively, “URPBPA”) were later granted leave to intervene in the involuntary termination proceeding.
      
After several months, the Bankruptcy Court conducted a trial and determined that the Pilot Plan should be involuntarily terminated under the Employee Retirement Income Security Act (“ERISA”) Section 4042 with a termination date of December 30, 2004. Subsequently, on October 28, 2005 the Bankruptcy Court entered an order authorizing termination of the Pilot Plan.
 
The PBGC, ALPA and URPBPA filed notices of appeal with the District Court. In February 2006, the District Court reversed and remanded the Bankruptcy Court’s termination order on the grounds that the matter was not a core proceeding in which it could issue a final order, but rather, could only issue proposed findings of fact and conclusions of law for consideration by the District Court. Upon remand and after the Bankruptcy Court made proposed findings of fact and conclusions of law, in June 2006 the District Court entered an order approving the termination of the Pilot Plan. ALPA, URPBPA and PBGC each filed an appeal with the Court of Appeals. On October 25, 2006, the Court of Appeals affirmed the District Court’s order approving the termination of the Pilot Plan effective December 30, 2004. On November 6, 2006, ALPA filed a petition for rehearing in the Court of Appeals which motion has been denied. ALPA and URPBPA filed petitions for writ of certiorari from the United States Supreme Court on the plan termination. On April 2, 2007, the Supreme Court denied such petitions, effectively terminating these proceedings.
 
(b)
Pilot Plan Non-Qualified Pension Benefits—October 2005 Order. After the PBGC commenced its involuntary termination proceeding and sought a December 30, 2004 termination date, United suspended payment of non-qualified pension benefits under the Pilot Plan pending the setting of such a termination date. In the first quarter of 2005, the Bankruptcy Court required United to continue paying non-qualified pension benefits to retired pilots pending the outcome of the involuntary termination proceeding, notwithstanding the possibility that the Pilot Plan might be terminated retroactively to December 30, 2004. Then, on October 6, 2005, despite its oral ruling terminating the Pilot Plan, the Bankruptcy Court entered an order requiring United to continue paying non-qualified pension benefits until entry of a written order. However, United appealed that order and placed approximately $6 million necessary to pay non-qualified benefits for the month of October 2005 in a segregated account.
 
Following the entry of the Bankruptcy Court’s termination order on October 28, 2005, United once again ceased paying non-qualified benefits. Subsequently, during the first quarter of 2006, the District Court dismissed United’s appeal of the Bankruptcy Court’s October 6, 2005 order in light of its earlier decision reversing the Bankruptcy Court’s termination order. United filed a notice of appeal of the District Court’s ruling regarding the October 6, 2005 order to the Court of Appeals. On October 25, 2006, the Court of Appeals reversed the District Court’s order dismissing for lack of ripeness the Company’s appeal of the Bankruptcy Court’s October 6, 2005 order and remanded the case with instructions to reverse the Bankruptcy Court’s order compelling payment of non-qualified benefits for October 2005 or later months. On November 6, 2006, ALPA filed a petition for rehearing on the Court of Appeals reversal of the October 6, 2005 order, which motion has been denied. ALPA and URPBPA filed petitions for writ of certiorari from the Supreme Court. On April 2, 2007, the Supreme Court denied such petitions, effectively terminating these proceedings. The $6 million deposit was released from the segregated account in June 2007.
 
 
(c)
Pilot Plan Non-Qualified Pension Benefits—March 2006 Order. In March 2006, in a separate proceeding related to the matter described in item (b) above, the Bankruptcy Court ruled that United was obligated to make payment of all non-qualified pension benefits for the months of November and December 2005 and January 2006. The Bankruptcy Court also ruled that United’s obligation to pay non-qualified pension benefits ceased as of January 31, 2006. United filed a notice of appeal of the Bankruptcy Court’s ruling to the District Court. URPBPA and ALPA also filed notices of appeal with respect to the Bankruptcy Court’s order, which were subsequently consolidated with United’s appeal. United agreed with URPBPA and ALPA to pay, into an escrow account, the disputed non-qualified pension benefits for the months of November and December 2005 and January 2006, an aggregate amount totaling approximately $17 million. The District Court affirmed the Bankruptcy Court’s ruling in September 2006. United filed a notice of appeal of the District Court’s ruling to the Court of Appeals. URPBPA and ALPA also appealed the District Court’s decision. The Company subsequently filed a motion to consolidate its appeal from the Bankruptcy Court’s October 2005 non-qualified benefits order with
 

15


 
the three appeals from the Bankruptcy Court’s March 2006 non-qualified benefits order. The Court of Appeals denied the Company’s motion, but issued an order staying briefing on the March 2006 non-qualified benefits order until further order of the Court of Appeals. On April 19, 2007, the Court of Appeals reversed the March 2006 order and remanded the case with instructions to the District Court to enter judgment for entry of an order in United’s favor. The deadline for filing a petition for a writ of certiorari, July 19, 2007, has passed without such a petition being filed, which effectively brings this matter to conclusion. The $17 million deposit was released from the escrow account in July 2007.
 
Significant Matters Remaining to be Resolved in Chapter 11 Cases. The following material matters remain to be resolved in the Bankruptcy Court or another court:
 
 
(a)
SFO Municipal Bond Secured Interest. HSBC Bank Inc. (“HSBC”), as trustee for the 1997 municipal bonds related to San Francisco International Airport (“SFO”), filed a complaint against United asserting a security interest in United’s leasehold for portions of its maintenance base at SFO. Pursuant to Section 506(a) of the Bankruptcy Code, HSBC alleges that it is entitled to be paid the value of that security interest, which HSBC had claimed was as much as $257 million. HSBC and United went to trial in April 2006 and the Bankruptcy Court rejected as a matter of law HSBC’s $257 million claim. HSBC subsequently alleged that it was entitled to $154 million, or at a minimum, approximately $93 million. The parties tried the case and filed post-trial briefs which were heard by the Bankruptcy Court. In the third quarter of 2006, the Company recorded a special item of $30 million as a benefit to income from continuing operations to reduce the Company’s recorded obligation for the SFO municipal bonds to a revised estimate of a probable amount to be allowed by the Bankruptcy Court, in accordance with AICPA Practice Bulletin 11, “Accounting for Preconfirmation Contingencies in Fresh-Start Reporting” (“Practice Bulletin 11”). In October 2006, the Bankruptcy Court issued its written opinion holding that the value of the security interest is approximately $27 million. United has accrued this amount as its estimated obligation as of September 30, 2007. After the Bankruptcy Court denied various post-trial motions, both parties have appealed to the District Court and those appeals are pending.
 
(b)
LAX Municipal Bond Secured Interest. There is pending litigation before the Bankruptcy Court regarding the extent to which the Los Angeles International Airport (“LAX”) municipal bond debt is entitled to secured status under Section 506(a) of the Bankruptcy Code. At December 31, 2006, United had accrued $60 million for this matter. Trial on this matter occurred during April 2007 and the two parties filed post-trial briefs in the second quarter of 2007. During the first quarter of 2007 the Company reduced its accrual for this matter by $19 million. In August 2007, the Bankruptcy Court issued its written opinion holding that the value of the security interest is approximately $33 million. During the third quarter of 2007, United adjusted the accrual for this matter to $33 million resulting in a favorable adjustment of $8 million that is classified as part of special items in the Company’s Condensed Statements of Consolidated Operations (Unaudited).
 
Claims Resolution Process.As permitted under the bankruptcy process, the Debtors’ creditors filed proofs of claim with the Bankruptcy Court. Through the claims resolution process, the Company identified many claims which were disallowed by the Bankruptcy Court for a number of reasons, such as claims that were duplicative, amended or superseded by later filed claims, were without merit, or were otherwise overstated. Throughout the Chapter 11 proceedings, the Company resolved many claims through settlement or objections ordered by the Bankruptcy Court. The Company will continue to settle claims and file additional objections with the Bankruptcy Court.
 
With respect to unsecured claims, once a claim is deemed to be valid, either through the Bankruptcy Court process or through other means, the claimant is entitled to a distribution of new UAL common stock. Pursuant to the terms of the Plan of Reorganization, 115 million shares of new UAL common stock have been authorized to satisfy valid unsecured claims. The Bankruptcy Court confirmed the Plan of Reorganization and established January 20, 2006 as the record date for purposes of establishing the persons that are claimholders of record to receive distributions. Approximately 111.4 million shares of UAL common stock have been issued and distributed to holders of valid unsecured claims between February 2, 2006, the first distribution date established in the Plan of Reorganization, and September 30, 2007. As of September 30, 2007, approximately 46,000 valid unsecured claims aggregating to approximately $29.1 billion in claim value had received those shares to partially satisfy those claims. As of September 30, 2007, there are 3,560,374 remaining shares of UAL common stock being held in reserve to satisfy all of the remaining disputed and undisputed unsecured claim values, once the remaining claim disputes are resolved. In November 2007, approximately 1 million additional UAL common shares are expected to be distributed. The final distributions of shares will not occur until 2008 or later, pending resolution of bankruptcy matters such as those discussed above.
 
 
 

16

    UAL and United currently estimate that the probable range of unsecured claims to be ultimately allowed by the Bankruptcy Court will be between $29.3 billion and $29.6 billion. Differences between claim amounts filed and
management’s estimates are being investigated and will be resolved in connection with the claims resolution process. However, there will be no further financial impact to the Company associated with the settlement of such unsecured claims, as the holders of all allowed unsecured claims will receive under the Plan of Reorganization only their pro rata share of the distribution of the 115 million shares of new UAL common stock, together with the previously-agreed issuance of certain other securities.
 
With respect to valid administrative and priority claims, pursuant to the terms of the Plan of Reorganization these claims will be satisfied with cash. Many asserted administrative and priority claims still remain unpaid, and the Company will continue to settle claims and file objections with the Bankruptcy Court to eliminate or reduce such claims. In addition, certain disputes, the most significant of which are discussed in “Significant Matters Remaining to be Resolved in Chapter 11 Cases,” above, still remain with respect to the valuation of certain claims. The Company accrued an obligation for claims it believed were reasonably estimable and probable at the Effective Date. However, the claims resolution process is uncertain and adjustments to claims estimates could result in material adjustments to the Successor Company’s financial statements in future periods as a result of court rulings, the receipt of new or revised information or the finalization of these matters.
 
The table below includes activity related to the administrative and priority claims and other bankruptcy-related claim reserves including reserves related to legal, professional and tax matters, among others, for the Successor Company for the three and nine months ended September 30, 2007. These reserves are primarily classified in other current liabilities and other non-current liabilities in the Condensed Statements of Consolidated Financial Position (Unaudited) based on the expected timing of resolution of these matters.  Certain of the accrual adjustments identified below are a direct result of the Company's ongoing efforts to resolve certain bankruptcy pre-confirmation contingencies and do not relate directly to the Company's ongoing performance; therefore, the Company considers these adjustments to be special.
 
   
Three months