Union Pacific 2006 Annual Report Download - page 40

The value of the outstanding undivided interest held by investors could fluctuate based upon the availability
of eligible receivables and is directly affected by changing business volumes and credit risks, including default and
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 $15.5 billion and $13.4 billion during the years ended December 31, 2006 and 2005, 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 $33 million, $23 million,
and $11 million for 2006, 2005, and 2004, 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. In August 2006, the sale of receivables
program was renewed for an additional 364-day period without any significant changes in terms.
Guarantees – At December 31, 2006, we were contingently liable for $464 million in guarantees. We have
recognized a $6 million liability for the fair value of these obligations as of December 31, 2006. 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 may use derivative financial instruments in limited instances for other
than trading purposes to assist in managing our overall exposure to fluctuations in interest rates and fuel prices.
We are not a party to leveraged derivatives and, by policy, do not use derivative financial instruments for
speculative purposes. Derivative 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. Changes in the fair market value of derivative
financial instruments that do not qualify for hedge accounting are charged to earnings. We may use swaps, collars,
futures, and/or forward contracts to mitigate the risk of adverse movements in interest rates and fuel prices;
however, the use of these derivative financial instruments may limit future benefits from favorable price
movements.
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, 2006 and 2005, we were not required to provide
collateral, nor had we received collateral, relating to our hedging activities.
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