Union Pacific 2010 Annual Report Download - page 76

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76
The following is a summary of our interest rate derivatives qualifying as fair value hedges:
Millions, Except Percentages 2010 2009
Amount of debt hedged $ - $ 250
Percentage of total debt portfolio - 3%
Gross fair value asset position $ - $ 15
We recognized the fair value as a Level 2 valuation. A Level 2 valuation is defined as observable market-
based inputs or unobservable inputs that are corroborated by market data.
On February 25, 2010, we elected to terminate an interest rate swap agreement with a notional amount of
$250 million prior to the scheduled maturity and received cash of $20 million (which is comprised of $16
million for the fair value of the swap that was terminated and $4 million of accrued but unpaid interest
receivable). We designated the swap agreement as a fair value hedge, and as such the unamortized
adjustment to debt for the change in fair value of the swap remains classified as debt due after one year
in our Consolidated Statements of Financial Position and will be amortized as a reduction to interest
expense through April 15, 2012. As of December 31, 2010, we do not have any interest rate fair value
hedges outstanding.
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, 2010 and
2009, we had reductions of $3 million recorded as an accumulated other comprehensive loss that is being
amortized on a straight-line basis through September 30, 2014. As of December 31, 2010 and 2009, we
had no interest rate cash flow hedges outstanding.
Earnings Impact – Our use of derivative financial instruments had the following impact on pre-tax income
for the years ended December 31:
Millions 2010 2009 2008
Decrease in interest expense from interest rate hedging $ 2 $ 8 $ 1
Decrease in fuel expense from fuel derivatives - - 1
Increase in pre-tax income $ 2 $ 8 $ 2
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, 2010, the fair value
of total debt was $10.4 billion, approximately $1.2 billion more than the carrying value. At December 31,
2009, the fair value of total debt was $10.8 billion, approximately $945 million more than the carrying
value. At December 31, 2010 and 2009, approximately $303 million and $320 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.