Union Pacific 2005 Annual Report Download - page 33

Materials and Supplies – Materials used to maintain the Railroad’s lines, structures, and equipment are the
principal components of materials and supplies expense. This expense item also includes small tools, office
supplies, other materials, and the costs of freight services to ship Railroad supplies and materials. During 2005,
materials and supplies expense increased, primarily due to locomotive and freight car maintenance. We used
more repair materials to maintain a larger fleet of locomotives, including a growing number of units not covered
by warranties. Additionally, we incurred higher costs for car wheel sets, traction motors, and lube oil. Conversely,
we incurred lower freight charges for shipping Railroad materials and stationary and office supplies.
We incurred higher expenses in 2004 due to increased use of locomotive repair materials required to
maintain a larger fleet that includes older units not covered by warranties. We also performed more freight car
repairs, incurred higher materials costs, and experienced increased freight charges for shipment of Railroad
material.
Casualty Costs – Personal injury expense, freight and property damage, insurance, and environmental costs are the
primary components of casualty costs. Casualty costs in 2005 were lower than the previous year primarily due to
higher expenses incurred in 2004 for an asbestos charge, a costly derailment near San Antonio, and a large jury
verdict – affirmed in 2004 – for a 1998 crossing accident. Lower freight and property damage expense and lower
costs for destruction of foreign or leased equipment also reduced casualty costs. Conversely, we incurred higher
insurance costs and increased costs for third-party personal injuries related to long-term environmental
exposures.
In 2004, costs rose due to the asbestos charge of $247 million (pre-tax), a costly derailment near San
Antonio, and a large jury verdict – affirmed in 2004 – for a 1998 crossing accident. Partially offsetting these
increases were lower insurance expenses and reduced personal injury expense, which resulted from lower than
anticipated settlement costs and fewer employee injuries in 2004 than previously assumed.
Purchased Services and Other Costs – Purchased services and other costs include the costs of services purchased
from outside contractors, state and local taxes, net costs of operating facilities jointly used by UPRR and other
railroads, transportation and lodging for train crew employees, trucking and contracting costs for intermodal
containers, leased automobile maintenance expenses, telephone and cellular phone expense, employee travel
expense, and computer and other general expenses. Expenses decreased in 2005 versus 2004 because we incurred
higher relocation costs associated with moving support personnel to Omaha, Nebraska during 2004. In 2005, we
experienced higher volume-related costs for freight car and locomotive contract maintenance and crew
transportation and lodging. Although our intermodal carloadings increased over 4% in 2005, costs for trucking
services provided by intermodal carriers remained flat as we substantially reduced expenses associated with
network inefficiencies. Higher diesel fuel prices increased sales and use taxes in 2005, which resulted in higher
state and local taxes. Other contract services increased in 2005. The 2005 January West Coast storm and
Hurricanes Katrina and Rita also contributed to higher expenses in 2005 (net of insurance reimbursements
received).
In 2004, higher locomotive contract maintenance services, state and local taxes, and relocation costs drove
expenses higher. In addition, we incurred increased trucking expenses for intermodal carriers and crew
transportation costs due to slower network velocity and additional volume.
Non-Operating Items
Millions of Dollars 2005 2004 2003
% Change
2005 v 2004
% Change
2004 v 2003
Other income .................................. $145 $ 88 $ 78 65% 13%
Interest expense ................................. (504) (527) (574) (4) (8)
Income taxes ................................... (410) (252) (581) 63 (57)
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