United Technologies 2012 Annual Report Download - page 52

50 UNITED TECHNOLOGIES CORPORATION
operating unit level. More than insignificant exposures that cannot
be naturally offset within an operating unit are hedged with foreign
currency derivatives. We also have a significant amount of foreign
currency net asset exposures. Currently, we do not hold any
derivative contracts that hedge our foreign currency net asset
exposures but may consider such strategies in the future.
Within aerospace, our sales are typically denominated in
U.S. Dollars under accepted industry convention. However, for our
non-U.S. based entities, such as P&WC, a substantial portion of
their costs are incurred in local currencies. Consequently, there is a
foreign currency exchange impact and risk to operational results as
U.S. Dollars must be converted to local currencies such as the
Canadian Dollar in order to meet local currency cost obligations. In
order to minimize the exposure that exists from changes in the
exchange rate of the U.S. Dollar against these other currencies, we
hedge a certain portion of sales to secure the rates at which U.S.
Dollars will be converted. The majority of this hedging activity
occurs at P&WC. At P&WC, firm and forecasted sales for both
engines and spare parts are hedged at varying amounts up to 24
months on the U.S. Dollar sales exposure as represented by the
excess of U.S. Dollar sales over U.S. Dollar denominated pur-
chases. Hedging gains and losses resulting from movements in
foreign currency exchange rates are partially offset by the foreign
currency translation impacts that are generated on the translation of
local currency operating results into U.S. Dollars for reporting pur-
poses. While the objective of the hedging program is to minimize
the foreign currency exchange impact on operating results, there
are typically variances between the hedging gains or losses and the
translational impact due to the length of hedging contracts,
changes in the sales profile, volatility in the exchange rates and
other such operational considerations.
Interest Rate Exposures. Our long-term debt portfolio
consists mostly of fixed-rate instruments. From time to time, we
may hedge to floating rates using interest rate swaps. The hedges
are designated as fair value hedges and the gains and losses on
the swaps are reported in interest expense, reflecting that portion of
interest expense at a variable rate. We issue commercial paper,
which exposes us to changes in interest rates. Currently, we do not
hold any derivative contracts that hedge our interest exposures, but
may consider such strategies in the future.
Commodity Price Exposures. We are exposed to volatility
in the prices of raw materials used in some of our products and from
time to time we may use forward contracts in limited circumstances
to manage some of those exposures. In the future, if hedges are
used, gains and losses may affect earnings. There were no sig-
nificant outstanding commodity hedges as of December 31, 2012.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental regulation by federal,
state and local authorities in the United States and regulatory
authorities with jurisdiction over our foreign operations. As a result,
we have established, and continually update, policies relating to
environmental standards of performance for our operations world-
wide. We believe that expenditures necessary to comply with the
present regulations governing environmental protection will not
have a material effect upon our competitive position, results of
operations, cash flows or financial condition.
We have identified 708 locations, mostly in the United
States, at which we may have some liability for remediating con-
tamination. We have resolved our liability at 261 of these locations.
We do not believe that any individual location’s exposure will have a
material effect on our results of operations. Sites in the investigation,
remediation or operation and maintenance stage represent approx-
imately 94% of our accrued environmental remediation reserve.
We have been identified as a potentially responsible party
under the Comprehensive Environmental Response Compensation
and Liability Act (CERCLA or Superfund) at 125 sites. The number
of Superfund sites, in and of itself, does not represent a relevant
measure of liability because the nature and extent of environmental
concerns vary from site to site and our share of responsibility varies
from sole responsibility to very little responsibility. In estimating our
liability for remediation, we consider our likely proportionate share of
the anticipated remediation expense and the ability of other poten-
tially responsible parties to fulfill their obligations.
At December 31, 2012 and 2011, we had $847 million and
$617 million reserved for environmental remediation, respectively.
Cash outflows for environmental remediation were $35 million in
2012, $54 million in 2011 and $44 million in 2010. We estimate that
ongoing environmental remediation expenditures in each of the next
two years will not exceed approximately $70 million. The above
described increase in reserves for environmental remediation as of
December 31, 2012 compared to December 31, 2011 and the
increase in estimated environmental expenditures in each of the
next two years are primarily attributable to the Goodrich acquisition.
GOVERNMENT MATTERS
As described in “Critical Accounting Estimates—Contracting with
the U.S. Government,” our contracts with the U.S. Government are
subject to audits. Such audits may recommend that certain con-
tract prices should be reduced to comply with various government
regulations. We are also the subject of one or more investigations
and legal proceedings initiated by the U.S. Government with
respect to government contract matters.