Union Pacific 2005 Annual Report Download - page 40

dilution. If default or dilution percentages were to increase one percentage point, the amount of eligible
receivables would decrease by $6 million. Should our credit rating fall below investment grade, the value of the
outstanding undivided interest held by investors would be reduced, and, in certain cases, the investors would have
the right to discontinue the facility.
The Railroad services the sold receivables; however, the Railroad does not recognize any servicing asset or
liability as the servicing fees adequately compensate the Railroad for its responsibilities. The Railroad collected
approximately $13.4 billion and $12.2 billion during the years ended December 31, 2005 and 2004, respectively.
UPRI used certain of these proceeds to purchase new receivables under the facility.
The costs of the sale of receivables program are included in other income and were $23 million, $11 million,
and $10 million for 2005, 2004, and 2003, respectively. The costs include interest, program fees paid to banks,
commercial paper issuing costs, and fees for unused commitment availability.
The investors have no recourse to the Railroad’s other assets except for customary warranty and indemnity
claims. Creditors of the Railroad have no recourse to the assets of UPRI. On August 11, 2005, the sale of
receivables program was renewed for an additional 364-day period without any significant changes in terms.
Guarantees – At December 31, 2005, we were contingently liable for $486 million in guarantees. We recorded a
liability of $7 million for the fair value of these obligations as of December 31, 2005. We entered into these
contingent guarantees in the normal course of business, and they include guaranteed obligations related to our
headquarters building, equipment financings, and affiliated operations. The final guarantee expires in 2022. We
are not aware of any existing event of default that would require us to satisfy these guarantees. We do not expect
that these guarantees will have a material adverse effect on our consolidated financial condition, results of
operations, or liquidity.
OTHER MATTERS
Inflation – The cumulative effect of long periods of inflation significantly increases asset replacement costs for
capital-intensive companies. As a result, assuming that we replace all operating assets at current price levels,
depreciation charges (on an inflation-adjusted basis) would be substantially greater than historically reported
amounts.
Derivative Financial Instruments – We use derivative financial instruments in limited instances for other than
trading purposes to manage risk related to changes in fuel prices and to achieve our interest rate objectives. We
are not a party to leveraged derivatives and, by policy, do not use derivative financial instruments for speculative
purposes. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness
between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.
We formally document the nature and relationships between the hedging instruments and hedged items, as well
as our risk-management objectives, strategies for undertaking the various hedge transactions, and method of
assessing hedge effectiveness. We may use swaps, collars, futures, and/or forward contracts to mitigate the
downside risk of adverse price movements and to hedge the exposure to variable cash flows. The use of these
instruments also limits future benefits from favorable movements. The purpose of these programs is to protect
our operating margins and overall profitability from adverse fuel price changes or interest rate fluctuations.
Market and Credit Risk – We address market risk related to derivative financial instruments by selecting
instruments with value fluctuations that highly correlate with the underlying hedged item. Credit risk related to
derivative financial instruments, which is minimal, is managed by requiring high credit standards for
counterparties and periodic settlements. At December 31, 2005 and 2004, we were not required to provide
collateral, nor had we received collateral, relating to our hedging activities.
In addition, we enter into secured financings in which the debtor pledges collateral. The nature of the
financing and the credit risk of the debtor determine the collateral. These arrangements generally prohibit us from
selling or repledging the collateral unless the debtor defaults.
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