Union Pacific 2009 Annual Report Download - page 51

Download and view the complete annual report

Please find page 51 of the 2009 Union Pacific annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 114

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114

51
and we may increase or decrease the number of asset classes due to changes in technology, asset
strategies, or other factors.
We determine the estimated service lives of depreciable railroad property by means of depreciation
studies. We perform depreciation studies at least every three years for equipment and every six years for
track assets (i.e., rail and other track material, ties, and ballast) and other road property. Our depreciation
studies take into account the following factors:
• Statistical analysis of historical patterns of use and retirements of each of our asset classes;
• Evaluation of any expected changes in current operations and the outlook for continued use of the
assets;
• Evaluation of technological advances and changes to maintenance practices; and
• Expected salvage to be received upon retirement.
For rail in high-density traffic corridors, we measure estimated service lives in millions of gross tons per
mile of track. It has been our experience that the lives of rail in high-density traffic corridors are closely
correlated to usage (i.e., the amount of weight carried over the rail). The service lives also vary based on
rail weight, rail condition, (e.g., new or secondhand), and rail type (e.g., straight or curve). Our
depreciation studies for rail in high density traffic corridors consider each of these factors in determining
the estimated service lives. For rail in high-density traffic corridors, we calculate depreciation rates
annually by dividing the number of gross ton-miles carried over the rail (i.e., the weight of loaded and
empty freight cars, locomotives and maintenance of way equipment transported over the rail) by the
estimated service lives of the rail measured in millions of gross tons per mile. Rail in high-density traffic
corridors accounts for approximately 70 percent of the historical cost of rail and other track material.
Based on the number of gross ton-miles carried over our rail in high density traffic corridors during 2009,
the estimated service lives of the majority of this rail ranged from 14 years to 30 years. For all other
depreciable assets, we compute depreciation based on the estimated service lives of our assets as
determined from the analysis of our depreciation studies. Changes in the estimated service lives of our
assets and their related depreciation rates are implemented prospectively.
Estimated service lives of depreciable railroad property may vary over time due to changes in physical
use, technology, asset strategies, and other factors that will have an impact on the retirement profiles of
our assets. We are not aware of any specific factors that are reasonably likely to significantly change the
estimated service lives of our assets. Actual use and retirement of our assets may vary from our current
estimates, which would impact the amount of depreciation expense recognized in future periods.
Changes in estimated useful lives of our assets due to the results of our depreciation studies could
significantly impact future periods’ depreciation expense and have a material impact on our Consolidated
Financial Statements. If the estimated useful lives of all depreciable assets were increased by one year,
annual depreciation expense would decrease by approximately $43 million. If the estimated useful lives
of all depreciable assets were decreased by one year, annual depreciation expense would increase by
approximately $46 million. Our recent depreciation studies have resulted in changes in depreciation rates
for some asset classes, which did not significantly affect our annual depreciation expense.
Under group depreciation, the historical cost (net of salvage) of depreciable property that is retired or
replaced in the ordinary course of business is charged to accumulated depreciation and no gain or loss is
recognized. The historical cost of certain track assets is estimated using (i) inflation indices published by
the Bureau of Labor Statistics and (ii) the estimated useful life of the assets as determined by our
depreciation studies. The indices were selected because they closely correlate with the major costs of the
properties comprising the applicable track asset classes. Because of the number of estimates inherent in
the depreciation and retirement processes and because it is impossible to precisely estimate each of these
variables until a group of property is completely retired, we continually monitor the estimated service