Union Pacific 2002 Annual Report Download - page 57

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recorded within the Corporation’s Consolidated Financial Statements. In January 2002, the Corporation entered into an
interest rate swap on $250 million of debt with a maturity date of December 2006. In May 2002, the Corporation entered
into an interest rate swap on $150 million of debt with a maturity date of February 2023. This swap contained a call option
that matches the call option of the underlying hedged debt, as allowed by FAS 133. In January 2003, the swap’s counterparty
exercised their option to cancel the swap, effective February 1, 2003. Similarly, the Corporation has exercised its option to
redeem the underlying debt. As of December 31, 2002 and 2001, the Corporation had approximately $898 million and $598
million of interest rate swaps, respectively. The effect of a 10% interest rate increase or decrease in 2003 over the December
31, 2002 rates is included in the preceding and succeeding paragraph disclosure, respectively.
Market risk for fixed-rate debt is estimated as the potential increase in fair value resulting from a hypothetical 10%
decrease in interest rates as of December 31, 2002, and amounts to approximately $203 million at December 31, 2002. Market
risk resulting from a hypothetical 10% decrease in interest rates as of December 31, 2001, amounted to approximately $226
million at December 31, 2001. The fair values of the Corporation’s fixed-rate debt were estimated by considering the impact
of the hypothetical interest rates on quoted market prices and current borrowing rates.
Fuel – Fuel costs are a significant portion of the Corporation’s total operating expenses. As a result of the significance of fuel
costs and the historical volatility of fuel prices, the Corporation’s transportation subsidiaries periodically use swaps, futures
and/or forward contracts to mitigate the impact of adverse fuel price changes. The Corporation at times may use swaptions
to secure more favorable swap prices.
As of December 31, 2002, expected rail fuel consumption for 2003 is 7% hedged at 58 cents per gallon, excluding taxes,
transportation costs and regional pricing spreads. As of December 31, 2002, the Railroad has no outstanding hedges for
2004. Based on annualized fuel consumption during 2002, and excluding the impact of the hedging program, each one-cent
increase in the price of fuel would have resulted in approximately $8.2 million of additional fuel expense, after tax.
As of December 31, 2001, the Corporation had hedged approximately 44% of its forecasted 2002 fuel consumption and 5%
of its forecasted 2003 fuel consumption at 56 cents per gallon, excluding taxes, transportation costs and regional pricing spreads.
As of December 31, 2002, expected trucking fuel consumption for 2003 is 5% hedged at 58 cents per gallon, excluding
taxes, transportation costs and regional pricing spreads. As of December 31, 2002, there are no outstanding hedges for 2004.
Based on annualized fuel consumption during 2002, and excluding the impact of the hedging program, each one-cent
increase in the price of fuel would have resulted in approximately $400,000 of additional fuel expense, after tax.
As of December 31, 2001, the Corporation had hedged approximately 16% of its forecasted 2002 trucking fuel
consumption and 5% of its forecasted 2003 fuel consumption at 58 cents per gallon, excluding taxes, transportation costs
and regional pricing spreads.
Accounting Pronouncements – In August 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement
Obligations” (FAS 143). FAS 143 is effective for the Corporation beginning January 1, 2003. FAS 143 requires that the
Corporation record a liability for the fair value of an asset retirement obligation when the Corporation has a legal obligation
to remove the asset. The standard will affect the way the Corporation accounts for track structure removal costs, but will
have no impact on liquidity. The Corporation is currently evaluating the impact of this statement on the Corporation's
Consolidated Financial Statements. Any impact resulting from the adoption of this statement will be recorded as a
cumulative effect of a change in accounting principle in the first quarter of 2003.
In June 2002, the FASB issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activites” (FAS
146). FAS 146 requires that a liability for a cost associated with an exit or disposal activity is recognized at fair value when
the liability is incurred and is effective for exit or disposal activities that are initiated after December 31, 2002. Management
believes that FAS 146 will not have a material impact on the Corporation’s Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others” (FIN 45). FIN 45 is effective for guarantees issued or modified
after December 31, 2002. The disclosure requirements were effective for the year ending December 31, 2002, which expand the
disclosures required by a guarantor about its obligations under a guarantee. FIN 45 also requires the Corporation to recognize,
at the inception of a guarantee, a liability for the fair value of the obligation undertaken in the issuance of the guarantee.
Management does not believe that FIN 45 will have a material impact on the Corporation’s Consolidated Financial Statements.