Union Pacific 2005 Annual Report Download - page 59

The following is a summary of our interest rate derivatives qualifying as fair value hedges:
Millions of Dollars, Except Percentages 2005 2004
Interest rate fair value hedging:
Amount of debt hedged ...................................................... $750 $750
Percentage of total debt portfolio .............................................. 10% 9%
Gross fair value asset position ................................................. $ - $ 8
Gross fair value liability position ............................................... $(17) $ (4)
Interest Rate Cash Flow Hedges – We report changes in the fair value of cash flow hedges in accumulated other
comprehensive income until the hedged item affects earnings.
In 2004, we entered into treasury lock transactions, which are accounted for as cash flow hedges. These
treasury lock transactions resulted in a payment of $11 million that is being amortized on a straight-line basis over
10 years, ending September 30, 2014. The unamortized portion of the payment is recorded as a $6 million
after-tax reduction to common shareholders’ equity as part of accumulated other comprehensive loss at
December 31, 2005. As of December 31, 2005 and 2004, we had no interest rate cash flow hedges outstanding.
Fuel Cash Flow Hedges – Fuel costs are a significant portion of our total operating expenses. In 2005 and 2004,
our primary means of mitigating the impact of adverse fuel price changes was our fuel surcharge programs.
However, we may use swaps, collars, futures and/or forward contracts to further mitigate the impact of adverse
fuel price changes. We hedged 120 million gallons of fuel during 2004 using collars with average cap, floor, and
ceiling prices of $0.74, $0.64, and $0.86 per gallon, respectively. At December 31, 2004, there were no fuel hedges
outstanding, and we did not have any fuel hedges in place during 2005.
Earnings Impact – Our use of derivative financial instruments had the following impact on pre-tax income for
the years ended December 31:
Millions of Dollars 2005 2004 2003
Decrease in interest expense from interest rate hedging ............................ $5 $24 $30
Decrease in fuel expense from fuel hedging ...................................... - 14 28
Increase in other income from interest rate swap cancellation ....................... - - 5
Increase in pre-tax income ................................................... $5 $38 $63
Fair Value of Debt Instruments – The fair value of our short- and long-term debt was estimated using quoted
market prices, where available, or current borrowing rates. At December 31, 2005 and 2004, the fair value of total
debt exceeded the carrying value by approximately $460 million and $673 million, respectively. At December 31,
2005 and 2004, approximately $169 million and $282 million, respectively, of fixed-rate debt securities contained
call provisions that allowed us to retire the debt instruments prior to final maturity, with the payment of fixed call
premiums, or in certain cases, at par.
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, 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 December 31, 2005. The value of the outstanding undivided
interest held by investors under the facility was $600 million and $590 million at December 31, 2005 and 2004,
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 $1,226 million and
$1,089 million of accounts receivable held by UPRI at December 31, 2005 and 2004, respectively. At December 31,
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