Union Pacific 2001 Annual Report Download - page 42

16
and in the coal mining regions of Colorado and Utah. These increases were driven by strong utility demand caused by
severe winter weather in late 2000 and the first quarter of 2001. In the first half of the year, demand for coal also increased
due to the high cost of alternative fuels, such as natural gas, fuel oil and higher-priced eastern-sourced coal. Carloads also
increased due to gains in market share.
Industrial Products – Revenue decreased 1%, as a 2% decline in carloads was partially offset by a 1% increase in average
revenue per car. The decline was mainly the result of the economic slowdown, which had a negative effect on many
economically sensitive commodities including steel and paper markets. Steel producers were additionally impacted by
high levels of low-cost imported steel, which forced plant shutdowns and bankruptcies. Newsprint and fiber revenue
declined due to lack of demand for printed advertising. Partially offsetting these declines were increases in construction-
related commodities, led by stone and cement, as strong building and road construction activity continued in the South
and Southwestern regions of the country. Lumber volumes increased due to strong housing construction and uncertainty
surrounding restrictions on Canadian lumber imports. Average revenue per car increased due to price increases and a
greater mix of longer average length of haul business. These gains were partially offset by the impact of increased
shipments of stone, which generates lower average revenue per car.
Intermodal – Revenue was flat, as a 3% decline in carloads was offset by a 3% increase in average revenue per car. The
volume decrease was primarily the result of soft economic demand for domestic shipments. In addition, the voluntary
action of shedding low-margin trailer business in favor of higher-margin containers contributed to the decline. Partially
offsetting the domestic declines were increases in international shipments, the result of higher import demand. The
increase in average revenue per car was primarily the result of price increases.
Operating Expenses – Operating expenses decreased $109 million (1%) to $8.7 billion in 2001. Excluding the $115
million work force reduction charge in 2000, operating expenses were essentially flat. Higher expenses as a result of
inflation, higher equipment rents expense and depreciation were offset by savings from lower force levels, productivity
gains and cost control efforts and lower fuel prices.
Salaries, Wages and Employee Benefits – Salaries, wages and employee benefits decreased $83 million (2%) in 2001 to $3.5
billion. Excluding the $115 million work force reduction charge in 2000, salaries, wages and employee benefits expense
increased $32 million (1%). The primary driver of the increase was wage and employee benefits inflation. A 3% gross
ton mile increase also added volume costs. A 4% reduction in employee force levels as a result of the work force reduction
plan offset a significant portion of these higher costs.
Equipment and Other Rents – Expenses increased $32 million (3%) compared to 2000 due primarily to higher locomotive
leases and longer car cycle times. The higher locomotive lease expense is due to the Railroad's increased leasing of new,
more reliable and fuel efficient locomotives. These new locomotives replaced older, non-leased models in the fleet, which
helped reduce expenses for depreciation, labor, materials and fuel during the year. The increase in car cycle times is
partially attributable to a decline in automotive shipments earlier in the year, which resulted in excess freight cars being
stored at assembly plants and unloading facilities. Partially offsetting the increases in expenses were lower volume costs,
lower car leases and lower prices for equipment. The decrease in volume costs was attributable to a decline in carloads
in business segments such as industrial products and intermodal that utilize a high percentage of rented freight cars.
Depreciation – Depreciation expense increased $31 million (3%) over 2000, resulting from capital spending in recent
years. Capital spending totaled $1.7 billion in 2001 and in 2000 and $1.8 billion in 1999.
Fuel and Utilities – Expenses decreased $30 million (2%). The decrease was driven by lower fuel prices and a record low
fuel consumption rate, as measured by gallons consumed per thousand gross ton miles. Fuel prices averaged 88 cents
per gallon in 2001 compared to 90 cents per gallon in 2000, including taxes, transportation costs and regional pricing
spreads of 17 cents and 13 cents in 2001 and 2000, respectively. The Railroad hedged approximately 32% of its fuel
consumption for the year, which increased fuel costs by $20 million. As of December 31, 2001, expected fuel consumption
for 2002 is 44% hedged at 56 cents per gallon excluding taxes, transportation costs and regional pricing spreads and for
2003 is 5% hedged at 56 cents per gallon excluding taxes, transportation costs and regional pricing spreads (see note 4
to the Consolidated Financial Statements, Item 8).