Notes to Consolidated Financial Statements 46 NOTE 7 FINANCIAL INSTRUMENTS Annual principal payments required as of December 31, 2004 are as  follows (in millions of dollars): The Company has a revolving credit facility, which provides for  borrowings up to $600 million through July 2009. This new facility  effective July 22, 2004 replaced the Company’s previous facility  of $350 million. At December 31, 2004 and December 31, 2003  there were no borrowings outstanding and no obligations under  standby letters of credit under the facility. The credit agreement is  subject to the usual terms and conditions applied by banks to an  investment grade company. The Company was in compliance with  all covenants at December 31, 2004 and expects to be compliant  in future periods. (a) The maturity of the swaps corresponds with the maturity of the hedged item as noted in the debt summary, unless otherwise indicated. (b) Interest rates are as of December 31, 2004.  As of December 31, 2004 and December 31, 2003, the fair value of  the fixed to floating interest rate swaps was $6.9 million and $11.5  million, respectively and are recorded in the Company’s Consolidated  Balance Sheets as Other non-current assets with a corresponding  adjustment to the carrying value of the hedged debt. The change  in fair value of the swaps exactly offsets the change in fair value of  the hedged debt with no net impact on earnings. The cross currency  swaps were recorded at their fair value of $(33.1) at December 31,  2004 and $(4.2) million at December 31, 2003. Fair value is based  on quoted market prices for contracts with similar maturities and the  ineffective portion of all swaps was not significant. The Company also entered into certain commodity derivative instruments to protect against commodity price changes related  to forecasted raw material and supplies purchases. The primary  purpose of the commodity price hedging activities is to manage the  volatility associated with these forecasted purchases. The Company  utilizes forward and option contracts, which are designated as cash  flow hedges. These instruments are intended to offset the effect  of changes in commodity prices on forecasted purchases. As of  December 31, 2004 the Company had commodity swap contracts  with a total notional value of $3.4 million. The fair market value of the  swap contracts was $0.4 million as of December 31, 2004, which is  deferred in other comprehensive income and will be reclassified and  matched into income as the underlying operating transactions are  The Company’s financial instruments include cash and cash equiva- lents, trade receivables, trade payables and notes payable. Due to  the short-term nature of these instruments, the book value approxi- mates fair value. The Company’s financial instruments also include  long-term debt, interest rate and currency swaps, commodity swap  contracts, and foreign currency forward contracts. As of December 31, 2004 and 2003, the estimated fair values of  the Company’s senior unsecured notes totaled $589.0 million and  $635.0 million, respectively. The estimated fair values were $60.9  million higher in 2004, and $74.9 million higher in 2003, than their  respective carrying values. Fair market values are developed by  the use of estimates obtained from brokers and other appropriate  valuation techniques based on information available as of year-end.  The fair value estimates do not necessarily reflect the values the  Company could realize in the current markets. The Company manages its interest rate risk by balancing its exposure to  fixed and variable rates while attempting to minimize its interest costs.  The Company selectively uses interest rate swaps to reduce market  value risk associated with changes in interest rates (fair value hedges).  We also selectively use cross-currency swaps to hedge the foreign cur- rency exposure associated with our net investment in certain foreign  operations (net investment hedges). A summary of these instruments  outstanding at December 31, 2004 follows (currency in millions): NOTE 8 RETIREMENT BENEFIT PLANS BorgWarner Inc.  and Consolidated Subsidiaries 47 realized. As of December 31, 2003, the Company had commodity  swap contracts with a total notional value of $1.1 million and a fair  market value of $0.1 million as of December 31, 2003, which was  deferred in other comprehensive income. During the twelve months  ended December 31, 2004 and 2003, hedge ineffectiveness associ- ated with these contracts was not significant. The Company uses foreign exchange forward contracts to protect  against exchange rate movements for forecasted cash flows for  purchases, operating expenses or sales transactions designated in  currencies other than the functional currency of the operating unit.  Most contracts mature in less than one year, however certain long- term commitments are covered by forward currency arrangements  to protect against currency risk through the second quarter of 2009.  Foreign currency contracts require the Company, at a future date, to  either buy or sell foreign currency in exchange for the operating units  local currency. At December 31, 2004 contracts were outstanding  to buy or sell U.S. Dollars, Euros, British Pounds Sterling, Canadian  Dollars and Hungarian Forints. Gains and losses arising from these  contracts are unrealized in other comprehensive income and will be  reclassified and matched into income as the underlying operating  transactions are realized. As of December 31, 2004 unrealized gains  amounted to $8.8 million, ($4.2 million maturing in less than one  year) and unrealized losses amounted to  $ (4.1) million ($(3.2) million  maturing in less than one year). As of Dec e mber 31, 2003 unrealized  gains amounted to $3.6 million and unr e alized losses amounted to  $(3.3) million. Hedge ineffectiveness asso c iated with these contracts  during 2003 and 2004 was not significan t. The Company has a number of define d b enefit pension plans and  other post retirement benefit plans cov e ring eligible salaried and  hourly employees. The other post retir e ment benefit plans, which  provide medical and life insurance ben e fits, are unfunded plans.  The measurement date for all plans is D e cember 31. The following  provides a reconciliation of the plans’ ben ef it obligations, plan assets,  funded status and recognition in the Con s olidated Balance Sheets. Other post  Pension benefits  retirement benefits 2004 2003 2004 2003 millions of dollars  U.S. Non-U.S. U.S. Non-U.S. Change in projected benefit obligation: Projected benefit obligation at beginning of year  $316.5 $217.1 $283.2 $ 159.9 $ 537.4  $ 446.5 Service cost  2.4 9.3  2.5 7.5 6.0  5.3 Interest cost  17.3 11.5  18.5 9.5 28.8  29.7 Plan participants’ contributions  — 0.3  — 0.3 — — Actuarial (gain)/loss  (8.3) 12.2 33.9 21.1 (2.1) 89.2 Currency translation  — 17.9  — 24.7 — — Curtailments  — — — — — (0.8) Benefits paid  (22.6) (8.1) (21.6) (5.9)  (32.9) (32.5) Projected benefit obligation at end of year  $305.3 $260.2  $316.5 $ 217.1 $ 537.2 $ 537.4 Change in plan assets: Fair value of plan assets at beginning of year  $288.0 $103.4  $245.7 $ 77.8 Actual return on plan assets  34.7 8.9 52.9 15.1 Employer contribution  24.3 12.0  11.0 6.1 Plan participants’ contribution  — 0.3 — 0.3 Currency translation  — 8.2  — 10.0 Benefits paid  (22.6) (8.1) (21.6) (5.9) Fair value of plan assets at end of year  $324.4 $124.7 $288.0 $ 103.4 Funded status: Funded status at end of year  $ 19.1 $(135.5) $ (28.5)  $(113.7)  $(537.2) $(537.4) Unrecognized net actuarial (gain) loss  79.1 57.2 101.2 45.2 203.7  214.4 Unrecognized transition obligation (asset)  — — — 0.2 — — Unrecognized prior service cost  7.5 0.3  9.0 0.4 (2.1) (2.3) Net amount recognized  $105.7 $ (78.0) $ 81.7 $ (67.9)  $(335.6) $(325.3) Amounts recognized in the Consolidated  Balance Sheets consist of: Prepaid benefit cost  $105.7 $ — $ 81.7 $ — $ — $ — Accrued benefit liability  — (78.0) —  (67.9)  (335.6) (325.3) Additional minimum liability  (63.2) (21.2) (80.5) (22.8)  — — Intangible asset  7.2 0.2  8.7 0.4 — — Accumulated reduction in stockholders equity  56.0 21.0  71.8 22.4 — — Net amount recognized  $105.7 $ (78.0) $ 81.7 $ (67.9)  $(335.6) $(325.3) Total accumulated benefit obligation for all plans  $301.8 $229.6 $316.2 $ 194.9 Notional  Interest Rates $^{(b)}$ Floating Interest Hedge Type  Amount  Receive  Pay  Rate Basis Interest rate swaps (a) Fixed to floating  Fair value  $139  7.0%  4.5%  6 month LIBOR+1.7% Fixed to floating  Fair value  $100  6.5%  5.2%  6 month LIBOR+2.4% Fixed to floating  Fair value  $ 75  8.0%  5.4%  6 month LIBOR+2.6% Cross currency swap (matures in 2006) Floating $  Net investment  $125  4.2%  —  6 mo. USD LIBOR+1.4%  to floating ¥ ¥14,930  —  1.7%  6 mo. JPY LIBOR+1.6% Cross currency swap (matures in 2009) Floating $  Net investment  $75  5.4%  —  6 mo. USD LIBOR+2.6% to floating € € 57  —  4.8%  6 mo. EURIBOR+2.6% Cross currency swap (matures in 2019) Floating $  Net investment  $75  5.4%  —  6 mo. USD LIBOR+2.6% to floating € € 61  —  4.8%  6 mo. EURIBOR+2.6% 2005 $ 16.5 2006 151.4 2007  6.7 2008 6.7 2009 146.0 after 2009  259.5 Total payments  586.8 Less: Unamortized discounts  (2.3) Total $584.5