Union Pacific 2006 Annual Report Download - page 32

specialty equipment leases; and office and other rentals. Lease expense increased in 2006 compared to 2005 as we
leased more locomotives and freight cars. Growth in automotive and intermodal shipments also increased our
short-term freight car rental expense. Improved car-cycle times driven by network management initiatives
partially offset this increase.
In 2005, the number of leased locomotives and freight cars increased, resulting in higher lease expense.
Carload volume growth also increased 2005 expenses. Improved car-cycle times partially offset these increases
which lowered our short-term freight car rental expense.
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, and increased usage of our
assets combined for higher depreciation expense in 2006 and 2005.
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. We used more
repair materials at higher component costs to repair and maintain freight cars and our fleet of locomotives in
2006, including a growing number of units not covered by warranties. In addition, we performed more
maintenance on locomotives that were maintained internally and not subject to maintenance contracts with
third-party contractors compared to 2005.
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 stationery
and office supplies.
Casualty Costs – Personal injury costs, freight and property damage, insurance, and environmental expense are
the primary components of casualty costs. Costs were flat in 2006 compared to 2005 as lower bad debt expenses,
lower freight damage expenses, and lower expenses for destruction of foreign or leased equipment all offset
personal injury costs and higher settlement expenses.
In 2005, casualty costs 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 and damages related to environmental exposures.
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 expense, employee travel expense,
and computer and other general expenses. Volume-related expenses, including crew transportation and lodging
costs, increased in 2006 driven by 3% growth of carloads. Higher state and local taxes (primarily sales and use
taxes related to higher diesel fuel prices) also increased expenses in 2006 compared to 2005. Conversely, lower
locomotive contract maintenance costs and lower expenses associated with jointly-owned operating facilities
reduced expenses in 2006 compared to 2005. Settlement of all remaining insurance claims related to the
2005 January West Coast storm and the gain from the sale of two airplanes also reduced expenses in 2006. Finally,
clean-up and restoration costs related to the January West Coast storm increased expenses in 2005, which also
contributed to lower year-over-year expenses in 2006.
Expenses increased in 2005 versus 2004 because we experienced higher volume-related costs for freight car
and locomotive contract maintenance and crew transportation and lodging. Although our intermodal carloadings
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