SEC Company Response from UNION PACIFIC CORP (UNP) (CIK 0000100885) (UNP) — Jan 11, 2010
UNION PACIFIC CORP (UNP) (CIK 0000100885)
Date: Jan. 11, 2010 · CIK: 0000100885 · Accession: 0001193125-10-003999
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-06075
Letter
Division of Corporation Finance File No. 001-06075 Form 10-K for the fiscal year ended December 31, 2008 Form 10-Q for the quarterly period ended March 31, 2009
Re: Union Pacific Corporation
Dear Mr. Shenk:
This letter is in response to the comment letter, dated October 30, 2009, addressed to Mr. Robert M. Knight, Jr., Executive Vice President-Finance and Chief Financial Officer of Union Pacific Corporation (the “Company”), regarding the comments of the Staff of the Securities and Exchange Commission with respect to the Company’s September 29, 2009 correspondence. In addition, this letter reflects responses to various telephonic discussions with the Staff.
For the convenience of the Commission Staff, we reproduce the text of each numbered paragraph in the comment letter and follow with our responses.
We respectfully submit the following information and comments with respect to each comment contained in the comment letter.
* * * * *
Form 10-K for the Fiscal Year Ended December 31, 2008
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
Investing Activities, page 38
1. Refer to your response to our prior comment number 4. You state that the table on page 38 of your Form 10-K for the fiscal year ended December 31, 2008 is designed to show how you manage your capital programs. However, we believe that your table would be more meaningful to the readers of your financial statements if it was supplemented by
Lyn Shenk, Branch Chief
Securities and Exchange Commission
January 11, 2010
Page
additional tabular disclosure and/or a narrative discussion of (i) the number of track miles of rail replaced, (ii) the number of crossties replaced, (iii) the number of new track miles of rail installed, (iv) the number of new crossties installed, (v) the number of track miles of rail resurfaced, and (vi) any additional information that would allow readers to further analyze the factors contributing to the fluctuations in your capital expenditures. In this regard, also consider expanding the tabular disclosure currently presented on page 38 to separately quantify your capital expenditures related to the replacement of rail, the replacement of ties, resurfacing activities, and any other significant activities related to the replacement or renewal of your existing depreciable road assets and/or infrastructure. Please provide your proposed expanded disclosure as part of your response.
RESPONSE:
We note your comment and will revise our future filings on Form 10-K to provide additional detail regarding our cash capital expenditures. Although you requested that we report both the number of crossties replaced and the number of new crossties installed, we propose reporting only the number of new crossties installed because this number includes crosstie replacements. The tables presented below and on the following page will replace the table that was previously included in the Liquidity and Capital Resources – Investing Activities section of the MD&A of our Form 10-K filings.
The tables below detail cash capital investments (including capital leases) and track statistics for the years ended December 31, 2008, 2007, and 2006:
Millions of Dollars
Rail
$
$
$
Ties
Ballast
Other [a]
Total road infrastructure replacements
1,700
1,593
1,487
Line expansion and other capacity projects
Commercial facilities
Total capacity projects and commercial facilities
Locomotives and freight cars
Technology and other
Total cash capital investments
$ 2,780
$ 2,496
$ 2,242
[a] Other includes bridges and tunnels, signals, and other road assets
Lyn Shenk, Branch Chief
Securities and Exchange Commission
January 11, 2010
Page
Track miles of rail replaced
Track miles of rail capacity expansion
New crossties installed (thousands)
4,599
4,267
4,573
Miles of track surfaced
11,369
12,495
8,239
Critical Accounting Policies
Property and Depreciation, page 49
2. Please refer to your response to our prior comment number 3. We note that you do not recognize a gain or loss upon the normal retirement (or replacement) of depreciable rail property accounted for pursuant to the group method of depreciation, as you assume that, on average, such assets are fully depreciated at the time they are retired. However, we note that your response does not (i) explain how you distinguish between normal and abnormal retirements of your depreciable rail assets or (ii) discuss your accounting treatment for abnormal retirements. In this regard, while it appears reasonable for you to characterize the replacements of depreciable rail assets that have reached or exceeded their expected service lives as normal retirements, it is not clear from your response or your disclosure how you determine the appropriate characterization for replacements of depreciable rail assets that occur prior to the end of such assets’ expected service lives. More specifically, it appears that circumstances could exist for which it would be appropriate to evaluate whether the replacement of depreciable rail assets prior to the end of their expected service lives reflects or suggests an abnormal retirement. Given that it is inherent under group depreciation that a significant portion of your depreciable rail assets will not reach their expected service lives prior to retirement (e.g., per your response, 45 percent of the depreciable rail assets that you retired in fiscal year 2008 did not reach their expected service lives), we believe that it is important for you to disclose how you evaluate whether premature asset replacements should be characterized as normal or abnormal retirements. Furthermore, we believe that your accounting policy regarding property and depreciation should specifically address the accounting treatment applied to abnormal retirements. Please expand the disclosure in the “Critical Accounting Policies” section of MD&A and the footnotes to your financial statements, as appropriate. In addition, please provide your proposed expanded disclosure as part of your response.
RESPONSE:
In the Overview of Group Depreciation provided in our response to your August 31, 2009 comment letter, we noted that the calculation of depreciation expense for large groups of assets requires the use of averages, in particular for service life. Average values are required because not all of the assets in the groups of similar function/nature experience the same service life.
Lyn Shenk, Branch Chief
Securities and Exchange Commission
January 11, 2010
Page
That is, despite the fact that the assets in the group are homogeneous, they experience lives that are dispersed over a range.1 This range can be wide for multiple reasons including physical factors (e.g., wear and tear, decay or deterioration), functional factors (e.g., obsolescence, changes in technology, changes in demand, or requirements of public authorities), and contingent factors (e.g., accidents/casualties or severe weather conditions). One of the major advantages of the group depreciation method is that it deals effectively with dispersions in asset lives, which are the focus of periodic depreciation studies. The life studies use actuarially-based methods to analyze asset retirements and, in turn, to compute the average life of the property (i.e., the estimated service life). Because the estimated service life represents the mean, it should be expected that 50 percent of the assets in a group are retired prior to reaching their estimated service life and 50 percent retired after. We previously indicated that 45 percent of the depreciable rail assets that we retired in fiscal year 2008 did not reach their expected service lives. This does not imply that we may have had “premature asset replacements”, but rather that our retirement experience may indicate that a change in the estimated useful life was warranted.
Although the group method of depreciation does not recognize gains or losses on normal retirements or replacements of depreciable property, the group method provides for adjustments to earnings in the event of abnormal retirements. The 2007 PricewaterhouseCoopers accounting guide for the rail industry states that, “These occurrences, which result in a gain or loss, have been relatively rare historically and usually include significant line and equipment sales.” With respect to our policy, we define a retirement as abnormal if it meets each of the following three conditions: (i) is unusual, (ii) is material in amount, and (iii) varies significantly from the retirement profile identified through our depreciation studies. When assessing materiality, we consider all relevant facts and circumstances, including the significance of a retirement to our financial statements, in making our determination.
We note your comment and propose including the following in the Critical Accounting Policies section of the MD&A of future Form 10-K filings:
Property and Depreciation – Our railroad operations are highly capital intensive and our large base of homogeneous, network-type assets turns over on a continuous basis. Each year we develop a capital program for the replacement of assets and for the acquisition or construction of assets that enable us to enhance our operations or provide new service offerings to customers. Assets purchased or constructed throughout the year are capitalized if they meet applicable minimum units of property criteria. Properties and equipment are carried at cost and are depreciated on a straight-line basis over their estimated service lives, which are measured in years except for rail in high-density traffic corridors (i.e., all rail lines except for those subject to abandonment, yard and switching tracks, and electronic yards), which are measured in millions of gross tons per mile of
William M. Stout, P.E., A Comparison of Component and Group Depreciation For Large Homogeneous Groups of Network Assets, a presentation to the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants
Lyn Shenk, Branch Chief
Securities and Exchange Commission
January 11, 2010
Page
track. We use the group method of depreciation in which all items with similar characteristics, use, and expected life are grouped together in asset classes, and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items. We currently have more than 60 depreciable asset classes, and we may increase or decrease the number of asset classes due to changes in technology, asset strategies, or other factors.
We determine the estimated service lives of depreciable railroad property by means of depreciation studies. We perform depreciation studies at least every three years for equipment and every six years for track assets (i.e., rail and other track material, ties, and ballast) and other roadway property. Our depreciation studies take into account the following factors:
•
statistical analysis of historical patterns of use and retirements of each of our asset classes;
•
evaluation of any expected changes in current operations and the outlook for continued use of the assets;
•
evaluation of technological advances and changes to maintenance practices; and
•
expected salvage to be received upon retirement.
For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on rail weight, rail condition, (e.g., new or secondhand), and rail type (e.g., straight or curve). Our depreciation studies for rail in high density traffic corridors consider each of these factors in determining the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the estimated service lives of the rail measured in millions of gross tons per mile. Rail in high-density traffic corridors accounts for approximately 70 percent of the historical cost of rail and other track material. Based on the number of gross ton-miles carried over our rail in high density traffic corridors during 2009, the estimated service lives of the majority of this rail ranged from 14 years to 30 years. For all other depreciable assets, we compute depreciation based on the estimated service lives of our assets as determined from the analysis of our depreciation studies. Changes in the estimated service lives of our assets and their related depreciation rates are implemented prospectively.
Estimated service lives of depreciable railroad property may vary over time due to changes in physical use, technology, asset strategies, and other factors that will have an impact on the retirement profiles of our assets. We are not aware of any specific factors that are reasonably likely to significantly change the estimated service lives of our assets.
Lyn Shenk, Branch Chief
Securities and Exchange Commission
January 11, 2010
Page
Actual use and retirement of our assets may vary from our current estimates, which would impact the amount of depreciation expense recognized in future periods.
Changes in estimated useful lives of our assets due to the results of our depreciation studies could significantly impact future periods’ depreciation expense and have a material impact on our Consolidated Financial Statements. If the estimated useful lives of all depreciable assets were increased by one year, annual depreciation expense would decrease by approximately $48 million. If the estimated useful lives of all depreciable assets were decreased by one year, annual depreciation expense would increase by approximately $52 million. Our recent depreciation studies have resulted in changes in depreciation rates for some asset classes, which did not significantly affect our annual depreciation expense.
Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. The historical cost of certain track assets is estimated using (i) inflation indices published by the Bureau of Labor Statistics and (ii) the estimated useful life of the assets as determined by our depreciation studies. The indices were selected because they closely correlate with the major costs of the properties comprising the applicable track asset classes. Because of the number of estimates inherent in the depreciation and retirement processes and because it is impossible to precisely estimate each of these variables until a group of property is completely retired, we continually monitor the estimated service lives of our assets and the accumulated depreciation associated with each asset class to ensure our depreciation rates are appropriate.
For retirements of depreciable railroad properties that do not occur in the normal course of business, a gain or loss may be recognized if the retirement meets each of the following three conditions: (i) is unusual, (ii) is material in amount, and (iii)
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CORRESP 1 filename1.htm Correspondence January 11, 2010 Lyn Shenk, Branch Chief Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Re: Union Pacific Corporation File No. 001-06075 Form 10-K for the fiscal year ended December 31, 2008 Form 10-Q for the quarterly period ended March 31, 2009 Dear Mr. Shenk: This letter is in response to the comment letter, dated October 30, 2009, addressed to Mr. Robert M. Knight, Jr., Executive Vice President-Finance and Chief Financial Officer of Union Pacific Corporation (the “Company”), regarding the comments of the Staff of the Securities and Exchange Commission with respect to the Company’s September 29, 2009 correspondence. In addition, this letter reflects responses to various telephonic discussions with the Staff. For the convenience of the Commission Staff, we reproduce the text of each numbered paragraph in the comment letter and follow with our responses. We respectfully submit the following information and comments with respect to each comment contained in the comment letter. * * * * * Form 10-K for the Fiscal Year Ended December 31, 2008 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources Investing Activities, page 38 1. Refer to your response to our prior comment number 4. You state that the table on page 38 of your Form 10-K for the fiscal year ended December 31, 2008 is designed to show how you manage your capital programs. However, we believe that your table would be more meaningful to the readers of your financial statements if it was supplemented by Lyn Shenk, Branch Chief Securities and Exchange Commission January 11, 2010 Page 2 additional tabular disclosure and/or a narrative discussion of (i) the number of track miles of rail replaced, (ii) the number of crossties replaced, (iii) the number of new track miles of rail installed, (iv) the number of new crossties installed, (v) the number of track miles of rail resurfaced, and (vi) any additional information that would allow readers to further analyze the factors contributing to the fluctuations in your capital expenditures. In this regard, also consider expanding the tabular disclosure currently presented on page 38 to separately quantify your capital expenditures related to the replacement of rail, the replacement of ties, resurfacing activities, and any other significant activities related to the replacement or renewal of your existing depreciable road assets and/or infrastructure. Please provide your proposed expanded disclosure as part of your response. RESPONSE: We note your comment and will revise our future filings on Form 10-K to provide additional detail regarding our cash capital expenditures. Although you requested that we report both the number of crossties replaced and the number of new crossties installed, we propose reporting only the number of new crossties installed because this number includes crosstie replacements. The tables presented below and on the following page will replace the table that was previously included in the Liquidity and Capital Resources – Investing Activities section of the MD&A of our Form 10-K filings. The tables below detail cash capital investments (including capital leases) and track statistics for the years ended December 31, 2008, 2007, and 2006: Millions of Dollars 2008 2007 2006 Rail $ 646 $ 628 $ 574 Ties 425 404 398 Ballast 243 206 183 Other [a] 386 355 332 Total road infrastructure replacements 1,700 1,593 1,487 Line expansion and other capacity projects 488 419 350 Commercial facilities 254 115 160 Total capacity projects and commercial facilities 742 534 510 Locomotives and freight cars 164 263 135 Technology and other 174 106 110 Total cash capital investments $ 2,780 $ 2,496 $ 2,242 [a] Other includes bridges and tunnels, signals, and other road assets Lyn Shenk, Branch Chief Securities and Exchange Commission January 11, 2010 Page 3 2008 2007 2006 Track miles of rail replaced 810 877 866 Track miles of rail capacity expansion 118 79 127 New crossties installed (thousands) 4,599 4,267 4,573 Miles of track surfaced 11,369 12,495 8,239 Critical Accounting Policies Property and Depreciation, page 49 2. Please refer to your response to our prior comment number 3. We note that you do not recognize a gain or loss upon the normal retirement (or replacement) of depreciable rail property accounted for pursuant to the group method of depreciation, as you assume that, on average, such assets are fully depreciated at the time they are retired. However, we note that your response does not (i) explain how you distinguish between normal and abnormal retirements of your depreciable rail assets or (ii) discuss your accounting treatment for abnormal retirements. In this regard, while it appears reasonable for you to characterize the replacements of depreciable rail assets that have reached or exceeded their expected service lives as normal retirements, it is not clear from your response or your disclosure how you determine the appropriate characterization for replacements of depreciable rail assets that occur prior to the end of such assets’ expected service lives. More specifically, it appears that circumstances could exist for which it would be appropriate to evaluate whether the replacement of depreciable rail assets prior to the end of their expected service lives reflects or suggests an abnormal retirement. Given that it is inherent under group depreciation that a significant portion of your depreciable rail assets will not reach their expected service lives prior to retirement (e.g., per your response, 45 percent of the depreciable rail assets that you retired in fiscal year 2008 did not reach their expected service lives), we believe that it is important for you to disclose how you evaluate whether premature asset replacements should be characterized as normal or abnormal retirements. Furthermore, we believe that your accounting policy regarding property and depreciation should specifically address the accounting treatment applied to abnormal retirements. Please expand the disclosure in the “Critical Accounting Policies” section of MD&A and the footnotes to your financial statements, as appropriate. In addition, please provide your proposed expanded disclosure as part of your response. RESPONSE: In the Overview of Group Depreciation provided in our response to your August 31, 2009 comment letter, we noted that the calculation of depreciation expense for large groups of assets requires the use of averages, in particular for service life. Average values are required because not all of the assets in the groups of similar function/nature experience the same service life. Lyn Shenk, Branch Chief Securities and Exchange Commission January 11, 2010 Page 4 That is, despite the fact that the assets in the group are homogeneous, they experience lives that are dispersed over a range.1 This range can be wide for multiple reasons including physical factors (e.g., wear and tear, decay or deterioration), functional factors (e.g., obsolescence, changes in technology, changes in demand, or requirements of public authorities), and contingent factors (e.g., accidents/casualties or severe weather conditions). One of the major advantages of the group depreciation method is that it deals effectively with dispersions in asset lives, which are the focus of periodic depreciation studies. The life studies use actuarially-based methods to analyze asset retirements and, in turn, to compute the average life of the property (i.e., the estimated service life). Because the estimated service life represents the mean, it should be expected that 50 percent of the assets in a group are retired prior to reaching their estimated service life and 50 percent retired after. We previously indicated that 45 percent of the depreciable rail assets that we retired in fiscal year 2008 did not reach their expected service lives. This does not imply that we may have had “premature asset replacements”, but rather that our retirement experience may indicate that a change in the estimated useful life was warranted. Although the group method of depreciation does not recognize gains or losses on normal retirements or replacements of depreciable property, the group method provides for adjustments to earnings in the event of abnormal retirements. The 2007 PricewaterhouseCoopers accounting guide for the rail industry states that, “These occurrences, which result in a gain or loss, have been relatively rare historically and usually include significant line and equipment sales.” With respect to our policy, we define a retirement as abnormal if it meets each of the following three conditions: (i) is unusual, (ii) is material in amount, and (iii) varies significantly from the retirement profile identified through our depreciation studies. When assessing materiality, we consider all relevant facts and circumstances, including the significance of a retirement to our financial statements, in making our determination. We note your comment and propose including the following in the Critical Accounting Policies section of the MD&A of future Form 10-K filings: Property and Depreciation – Our railroad operations are highly capital intensive and our large base of homogeneous, network-type assets turns over on a continuous basis. Each year we develop a capital program for the replacement of assets and for the acquisition or construction of assets that enable us to enhance our operations or provide new service offerings to customers. Assets purchased or constructed throughout the year are capitalized if they meet applicable minimum units of property criteria. Properties and equipment are carried at cost and are depreciated on a straight-line basis over their estimated service lives, which are measured in years except for rail in high-density traffic corridors (i.e., all rail lines except for those subject to abandonment, yard and switching tracks, and electronic yards), which are measured in millions of gross tons per mile of 1 William M. Stout, P.E., A Comparison of Component and Group Depreciation For Large Homogeneous Groups of Network Assets, a presentation to the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants Lyn Shenk, Branch Chief Securities and Exchange Commission January 11, 2010 Page 5 track. We use the group method of depreciation in which all items with similar characteristics, use, and expected life are grouped together in asset classes, and are depreciated using composite depreciation rates. The group method of depreciation treats each asset class as a pool of resources, not as singular items. We currently have more than 60 depreciable asset classes, and we may increase or decrease the number of asset classes due to changes in technology, asset strategies, or other factors. We determine the estimated service lives of depreciable railroad property by means of depreciation studies. We perform depreciation studies at least every three years for equipment and every six years for track assets (i.e., rail and other track material, ties, and ballast) and other roadway property. Our depreciation studies take into account the following factors: • statistical analysis of historical patterns of use and retirements of each of our asset classes; • evaluation of any expected changes in current operations and the outlook for continued use of the assets; • evaluation of technological advances and changes to maintenance practices; and • expected salvage to be received upon retirement. For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on rail weight, rail condition, (e.g., new or secondhand), and rail type (e.g., straight or curve). Our depreciation studies for rail in high density traffic corridors consider each of these factors in determining the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the estimated service lives of the rail measured in millions of gross tons per mile. Rail in high-density traffic corridors accounts for approximately 70 percent of the historical cost of rail and other track material. Based on the number of gross ton-miles carried over our rail in high density traffic corridors during 2009, the estimated service lives of the majority of this rail ranged from 14 years to 30 years. For all other depreciable assets, we compute depreciation based on the estimated service lives of our assets as determined from the analysis of our depreciation studies. Changes in the estimated service lives of our assets and their related depreciation rates are implemented prospectively. Estimated service lives of depreciable railroad property may vary over time due to changes in physical use, technology, asset strategies, and other factors that will have an impact on the retirement profiles of our assets. We are not aware of any specific factors that are reasonably likely to significantly change the estimated service lives of our assets. Lyn Shenk, Branch Chief Securities and Exchange Commission January 11, 2010 Page 6 Actual use and retirement of our assets may vary from our current estimates, which would impact the amount of depreciation expense recognized in future periods. Changes in estimated useful lives of our assets due to the results of our depreciation studies could significantly impact future periods’ depreciation expense and have a material impact on our Consolidated Financial Statements. If the estimated useful lives of all depreciable assets were increased by one year, annual depreciation expense would decrease by approximately $48 million. If the estimated useful lives of all depreciable assets were decreased by one year, annual depreciation expense would increase by approximately $52 million. Our recent depreciation studies have resulted in changes in depreciation rates for some asset classes, which did not significantly affect our annual depreciation expense. Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is recognized. The historical cost of certain track assets is estimated using (i) inflation indices published by the Bureau of Labor Statistics and (ii) the estimated useful life of the assets as determined by our depreciation studies. The indices were selected because they closely correlate with the major costs of the properties comprising the applicable track asset classes. Because of the number of estimates inherent in the depreciation and retirement processes and because it is impossible to precisely estimate each of these variables until a group of property is completely retired, we continually monitor the estimated service lives of our assets and the accumulated depreciation associated with each asset class to ensure our depreciation rates are appropriate. For retirements of depreciable railroad properties that do not occur in the normal course of business, a gain or loss may be recognized if the retirement meets each of the following three conditions: (i) is unusual, (ii) is material in amount, and (iii)