Union Pacific 2007 Annual Report Download - page 61

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The following is a summary of our interest rate derivatives qualifying as fair value hedges:
Millions of Dollars, Except Percentages 2007 2006
Amount of debt hedged.............................................................................................. $250 $500
Percentage of total debt portfolio .............................................................................. 3% 7%
Gross fair value asset/(liability) position ................................................................... $ 2 $(14)
Interest Rate Cash Flow Hedges – We report changes in the fair value of cash flow hedges in accumulated
other comprehensive loss until the hedged item affects earnings. At December 31, 2007 and 2006, we had
reductions of $4 million and $5 million, respectively, recorded as an accumulated other comprehensive loss
that is being amortized on a straight-line basis through September 30, 2014. As of December 31, 2007 and
2006, we had no interest rate cash flow hedges outstanding.
Fuel Swaps – Two fuel basis swaps cover a total of 151 million gallons of diesel fuel for the period August 2006
through July 2008. These commodity basis swaps require us to make payments to, or receive payments from,
the counterparty based on the difference between certain price indices. Changes in the fair value of these swaps
are reflected in fuel expense. We reported a derivative asset of approximately $1 million and $2 million at
December 31, 2007 and 2006, respectively, which represents the fair value of the swaps. The swaps increased
fuel expense for 2007 by $1 million and reduced fuel expense for 2006 by $3 million. The recognition of the
swaps in fuel expense included monthly net settlements with the counterparty and the change in fair value.
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 2007 2006 2005
(Increase)/decrease in interest expense from interest rate hedging... $(8) $(8) $5
(Increase)/decrease in fuel expense from fuel derivatives .................. (1) 3 -
Increase/(decrease) in pre-tax income ................................................ $(9) $(5) $5
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, 2007 and 2006, the fair value of
total debt exceeded the carrying value by approximately $96 million and $273 million, respectively. At
December 31, 2007 and 2006, approximately $164 million and $165 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
on a 364-day revolving basis, 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 both December 31, 2007 and
2006. The value of the outstanding undivided interest held by investors under the facility was $600 million at
both December 31, 2007 and 2006, 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 $1,071 million and $1,158 million of accounts receivable held by UPRI at
December 31, 2007 and 2006, respectively. At December 31, 2007 and 2006, the value of the interest retained
by UPRI was $471 million and $558 million, respectively. This retained interest is included in accounts
receivable in our Consolidated Financial Statements. The interest sold to investors is sold at carrying value,
which approximates fair value, and there is no gain or loss recognized from the transaction.