Union Pacific 2005 Annual Report Download - page 32

partially offset these increases. Transferring various support personnel to Omaha, Nebraska, resulted in higher
severance and relocation costs in 2004.
The increase in 2004 also resulted from a number of factors, including higher wages and training expenses
associated with hiring additional trainmen, increased crew costs due to slower network velocity, inflation,
volume-related expenses, and severance and relocation costs. Because we did not award executive bonuses for
2004, lower performance-based compensation expense for management partially offset these increases. Lower
protection costs also offset these increased expenses. Protection cost represents the differential payment when the
wage earned for active employment is lower than an employee’s “protected” rate of pay. The STB mandates
protected rates for employees adversely affected by a merger, and collective bargaining agreements with our labor
unions also establish these rates. Finally, a smaller non-transportation workforce yielded cost savings during the
year.
Fuel and Utilities
Millions of Dollars 2005 2004 2003
% Change
2005 v 2004
% Change
2004 v 2003
Locomotive fuel expense ....................... $2,393 $1,684 $1,221 42% 38%
Fuel surcharge revenue ......................... 1,017 330 112 208 195
Fuel and utilities include locomotive fuel, utilities other than telephone, and gasoline and other fuels. Higher
diesel fuel prices, which averaged $1.77 per gallon (including taxes and transportation costs) in 2005 compared to
$1.22 per gallon in 2004, increased expenses by $740 million. A 1% increase in gross ton-miles resulted in $8
million of additional expenses. We offset $39 million of these increases with a 2% improvement in our
consumption rate in 2005 versus 2004. The Railroad had no fuel hedges in place during 2005, and has none in
place for 2006. Gasoline, utilities, and propane expenses increased $37 million in 2005 versus 2004 due to higher
prices.
The increase in 2004 compared to 2003 was driven by higher diesel fuel prices, which averaged $1.22 per
gallon and $0.92 per gallon in 2004 and 2003, respectively (including taxes and transportation costs), and higher
gallons consumed. Higher fuel prices contributed $416 million to the increase; however, we recovered
approximately 52% of these costs through our fuel surcharge programs, which were included in operating
revenues. The increase in gross ton-miles in 2004 drove consumption higher, resulting in an additional $24
million in fuel expense for the year. The Railroad hedged approximately 9% of its fuel usage in 2004, which
decreased fuel costs by $14 million. Gasoline, utilities, and propane expenses increased $13 million in 2004 due to
higher prices.
Equipment and Other Rents – Equipment and other rents includes primarily rental expense the Railroad pays for
freight cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; other
specialty equipment leases; and office and other rentals. In 2005, the number of leased locomotives and freight
cars increased, resulting in additional lease expenses. Higher carloads also increased 2005 expenses. Improved
car-cycle times partially offset these increases reflecting increased network efficiency, which lowered our short-
term freight car rental expense.
Expenses increased in 2004 due to carload volume growth and longer car cycle times, resulting in higher
expenses for locomotive and car rentals. Higher locomotive expense included additional costs associated with
leasing short-term, or surge, locomotive power, which is more costly than long-term locomotive leases, and the
increased leasing of new locomotives.
Depreciation – The majority of depreciation relates to track structure, including rail, ties, and other track material.
A higher depreciable asset base, reflecting higher capital spending in recent years, increased our depreciation
expense in 2005 and 2004.
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