Union Pacific 2007 Annual Report Download - page 41

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Off-Balance Sheet Arrangements
Sale of Receivables – The Railroad transfers most of its accounts receivable to Union Pacific Receivables, Inc.
(UPRI), a bankruptcy-remote subsidiary, as part of a sale of receivables facility. UPRI sells, without recourse
on a 364-day revolving basis, an undivided interest in such accounts receivable to investors. The total capacity
to sell undivided interests to investors under the facility was $600 million at both December 31, 2007 and
2006. The value of the outstanding undivided interest held by investors under the facility was $600 million at
both December 31, 2007 and 2006, respectively. The value of the outstanding undivided interest held by
investors is not included in our Consolidated Financial Statements. The value of the undivided interest held by
investors was supported by $1,071 million and $1,158 million of accounts receivable held by UPRI at
December 31, 2007 and 2006, respectively. At December 31, 2007 and 2006, the value of the interest retained
by UPRI was $471 million and $558 million, respectively. This retained interest is included in accounts
receivable in our Consolidated Financial Statements. The interest sold to investors is sold at carrying value,
which approximates fair value, and there is no gain or loss recognized from the transaction.
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 us for these responsibilities. The Railroad collected
approximately $16.1 billion and $15.5 billion during the years ended December 31, 2007 and 2006,
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 $35 million, $33 million,
and $23 million for 2007, 2006, and 2005, 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 do not have recourse to the assets of UPRI. In August 2007, the sale of
receivables program was renewed for an additional 364-day period without any significant changes in terms.
Guarantees – At December 31, 2007, we were contingently liable for $465 million in guarantees. We have
recorded a liability of $5 million and $6 million for the fair value of these obligations as of December 31, 2007
and 2006, 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 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