Union Pacific 2002 Annual Report Download - page 46

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Salaries, Wages and Employee Benefits – Salaries, wages and employee benefits increased $76 million (2%) in 2002 to $3.6
billion. Increases were driven by inflation and volume-related costs related to a 4% increase in gross ton miles. A 3%
reduction in employee force levels in conjunction with worker productivity improvements partially offset the inflation and
higher volume-related costs.
Equipment and Other Rents – Equipment and other rents primarily includes rental expense the Railroad pays for freight cars
owned by other railroads or private companies; freight car, intermodal and locomotive leases; other specialty equipped
vehicle leases; and office and other rentals. Expenses increased $24 million (2%) compared to 2001 due primarily to higher
locomotive leases and volume-related costs, partially offset by savings from lower car cycle times (the average number of
accumulated days per load or cycle that loaded and empty cars from other railroads spend on UPRR’s system) and rental
prices for private cars. 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 volume costs is primarily due to
increased shipments of finished autos that almost exclusively utilize rented freight cars. The reduction in car cycle times is
attributable to increased volume demand and better car utilization.
Depreciation – The majority of depreciation relates to track structure, including rail, ties and other track material.
Depreciation expense increased $19 million (2%) over 2001 as a result of higher capital spending in recent years. Capital
spending totaled $1.8 billion in 2002 and $1.7 billion in 2001.
Fuel and Utilities – Fuel and utilities is comprised of locomotive fuel, utilities other than telephone, and gasoline and other
fuels. Expenses declined $184 million (15%) in 2002. 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 73 cents per gallon
in 2002 compared to 88 cents per gallon in 2001 (including taxes, transportation costs and regional pricing spreads). The
Railroad hedged approximately 42% of its fuel consumption for the year, which decreased fuel costs by $55 million. As of
December 31, 2002, expected fuel consumption for 2003 is 7% hedged at 58 cents per gallon excluding taxes, transportation
costs and regional pricing spreads (see note 2 to the Consolidated Financial Statements, Item 8).
Materials and Supplies – Materials used for the maintenance of the Railroad’s track, facilities and equipment is the principal
component of materials and supplies expense. Office, small tools and other supplies and the costs of freight services
purchased to ship company materials are also included. Expenses decreased $9 million (2%), primarily reflecting a reduction
in the number of locomotives overhauled. Materials expense for locomotive overhauls decreased due to the use of new,
more-reliable locomotives during the past several years, the sale of older units, which required higher maintenance, and
increased outsourcing of locomotive maintenance. Partially offsetting the reductions in locomotive overhauls was an
increase in cost for freight car repairs.
Casualty Costs – The largest component of casualty costs is personal injury expense. Freight and property damage, insurance,
environmental matters and occupational illness expense are also included in casualty costs. Costs increased $32 million (10%)
compared to 2001, as higher personal injury and insurance costs were partially offset by lower costs for freight damage.
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.
Expenses increased $93 million (11%) compared to 2001 primarily due to increased spending for contract services, jointly
operated facilities and state and local taxes.
Operating Income – Operating income increased $252 million (12%) to a record $2.3 billion in 2002. The operating margin
for 2002 was 21.0%, compared to 19.3% in 2001.
Non-Operating Items – Interest expense decreased $43 million (7%) as a result of lower average debt levels and lower
weighted-average interest rates in 2002. Other income increased $147 million (84%) due to the sale transactions with the
UTA and VTA. Income taxes increased $126 million (21%) in 2002 compared to 2001 resulting from higher pre-tax income
levels in 2002 partially offset by a tax adjustment for prior years’ income tax examinations.