Union Pacific 2010 Annual Report Download - page 39

39
Debt Exchange – On July 14, 2010, we exchanged $376 million of 7.875% notes due in 2019 (Existing
Notes) for 5.78% notes (New Notes) due July 15, 2040, plus cash consideration of approximately $96
million and $15 million for accrued and unpaid interest on the Existing Notes. The cash consideration,
recorded as an adjustment to the carrying value of debt, and the balance of the unamortized discount and
issue costs from the Existing Notes are being amortized as an adjustment of interest expense over the
term of the New Notes. No gain or loss was recognized as a result of the exchange. Costs related to the
debt exchange that were payable to parties other than the debt holders totaled approximately $2 million
and were included in interest expense during the third quarter.
Debt Redemptions – On March 22, 2010, we redeemed $175 million of our 6.5% notes due April 15,
2012. The redemption resulted in an early extinguishment charge of $16 million in the first quarter of
2010. On November 1, 2010, we redeemed all $400 million of our outstanding 6.65% notes due January
15, 2011. The redemption resulted in a $5 million early extinguishment charge.
Receivables Securitization Facility – In June 2009, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update No. 2009-16, Accounting for Transfers of Financial Assets (ASU
2009-16). ASU 2009-16 limits the circumstances in which transferred financial assets can be
derecognized and requires enhanced disclosures regarding transfers of financial assets and a transferor’s
continuing involvement with transferred financial assets. We adopted the authoritative accounting
standard on January 1, 2010. As a result, we no longer account for the value of the outstanding undivided
interest held by investors under our receivables securitization facility as a sale. In addition, transfers of
receivables occurring on or after January 1, 2010, are reflected as debt issued in our Consolidated
Statements of Cash Flows, and the value of the outstanding undivided interest held by investors at
December 31, 2010, is accounted for as a secured borrowing and is included in our Consolidated
Statements of Financial Position as debt due after one year.
Under the receivables securitization facility, the Railroad sells most of its accounts receivable to Union
Pacific Receivables, Inc. (UPRI), a bankruptcy-remote subsidiary. UPRI may subsequently transfer,
without recourse on a 364-day revolving basis, an undivided interest in eligible accounts receivable to
investors. The total capacity to transfer undivided interests to investors under the facility was $600 million
at December 31, 2010 and 2009, respectively. The value of the outstanding undivided interest held by
investors under the facility was $100 million and $400 million at December 31, 2010 and 2009,
respectively. The value of the undivided interest held by investors was supported by $960 million and
$817 million of accounts receivable at December 31, 2010 and 2009, respectively. At December 31,
2010 and 2009, the value of the interest retained by UPRI was $960 million and $417 million,
respectively. This retained interest is included in accounts receivable, net in our Consolidated Statements
of Financial Position.
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 ratios increase one percent, the value of the
outstanding undivided interest held by investors would not change as of December 31, 2010. 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 collected approximately $16.3 billion and $13.8 billion of receivables during the years ended
December 31, 2010 and 2009, respectively. UPRI used certain of these proceeds to purchase new
receivables under the facility.
The costs of the receivables securitization facility include interest, which will vary based on prevailing
commercial paper rates, program fees paid to banks, commercial paper issuing costs, and fees for
unused commitment availability. The costs of the receivables securitization facility are included in interest
expense and were $6 million during 2010. Prior to adoption of the new accounting standard, the costs of
the receivables securitization facility were included in other income and were $9 million and $23 million
for 2009 and 2008, respectively.
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 2010, the receivables securitization facility was renewed for an additional 364-day period at
comparable terms and conditions.