Union Pacific 2009 Annual Report Download - page 44

44
The investors have no recourse to the Railroad’ s other assets except for customary warranty and
indemnity claims. Creditors of the Railroad do not have recourse to the assets of UPRI.
In August 2009, the sale of receivables facility was renewed for an additional 364-day period at
comparable terms and conditions, although the capacity to sell undivided interests was reduced from $700
million to $600 million.
See further discussion in this Item 7 under Other Matters – Accounting Pronouncements for information
about recent accounting pronouncements that will have an impact on the accounting treatment of our sale
of receivables program.
Guarantees – At December 31, 2009, we were contingently liable for $416 million in guarantees. We
have recorded a liability of $3 million and $4 million for the fair value of these obligations as of
December 31, 2009 and 2008, respectively. 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 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 at inception, 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. We
manage credit risk related to derivative financial instruments, which is minimal, by requiring high credit
standards for counterparties and periodic settlements. At December 31, 2009 and 2008, we were not
required to provide collateral, nor had we received collateral, relating to our hedging activities.
Determination of Fair Value – We determine the fair values of our derivative financial instrument
positions based upon current fair values as quoted by recognized dealers or the present value of expected
future cash flows.
Sensitivity Analyses – The sensitivity analyses that follow illustrate the economic effect that hypothetical
changes in interest rates could have on our results of operations and financial condition. These
hypothetical changes do not consider other factors that could impact actual results.