Union Pacific 2007 Annual Report Download - page 60

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56
The Railroad, along with its subsidiaries and rail affiliates, is our one reportable operating segment. Although
revenue is analyzed by commodity group, we analyze the net financial results of the Railroad as one segment
due to the integrated nature of our rail network. The following table provides revenue by commodity group:
Millions of Dollars 2007 2006 2005
Agricultural ............................................................................................. $ 2,597 $ 2,395 $ 1,971
Automotive ............................................................................................. 1,469 1,438 1,273
Chemicals................................................................................................ 2,293 2,098 1,848
Energy...................................................................................................... 3,136 2,953 2,578
Industrial Products................................................................................. 3,110 3,168 2,814
Intermodal .............................................................................................. 2,911 2,810 2,473
Total commodity revenue...................................................................... $15,516 $14,862 $12,957
Other revenue ......................................................................................... 767 716 621
Total operating revenue ......................................................................... $16,283 $15,578 $13,578
3. Financial Instruments
Strategy and Risk – 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 specified level of
effectiveness between the hedging instrument and the item being hedged, both at inception and throughout
the hedged period. We formally document the nature and relationships between the hedging instruments and
hedged items at inception, as well as our risk-management objectives, strategies for undertaking the various
hedge transactions, and method of assessing hedge effectiveness. Changes in the fair market value of derivative
financial instruments that do not qualify for hedge accounting are charged to earnings. We may use swaps,
collars, futures, and/or forward contracts to mitigate the risk of adverse movements in interest rates and fuel
prices; however, the use of these derivative financial instruments may limit future benefits from favorable
price movements.
Market and Credit Risk – We address market risk related to derivative financial instruments by selecting
instruments with value fluctuations that highly correlate with the underlying hedged item. We manage credit
risk related to derivative financial instruments, which is minimal, by requiring high credit standards for
counterparties and periodic settlements. At December 31, 2007 and 2006, we were not required to provide
collateral, nor had we received collateral, relating to our hedging activities.
Determination of Fair Value – We determine the fair values of our derivative financial instrument positions
based upon current fair values as quoted by recognized dealers or the present value of expected future cash
flows.
Interest Rate Fair Value Hedges – We manage our overall exposure to fluctuations in interest rates by
adjusting the proportion of fixed and floating rate debt instruments within our debt portfolio over a given
period. We generally manage the mix of fixed and floating rate debt through the issuance of targeted amounts
of each as debt matures or as we require incremental borrowings. We employ derivatives, primarily swaps, as
one of the tools to obtain the targeted mix. In addition, we also obtain flexibility in managing interest costs
and the interest rate mix within our debt portfolio by evaluating the issuance of and managing outstanding
callable fixed-rate debt securities.
Swaps allow us to convert debt from fixed rates to variable rates and thereby hedge the risk of changes in the
debt’s fair value attributable to the changes in interest rates. We account for swaps as fair value hedges using
the short-cut method pursuant to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities; therefore, we do not record any ineffectiveness within our Consolidated Financial Statements.