Union Pacific 2002 Annual Report Download - page 48

22
Operating Expenses – Operating expenses decreased $74 million (1%) to $9.9 billion in 2001 from $10.0 billion in 2000.
Excluding the effect of the work force reduction charge in 2000, operating expenses increased $41 million compared to 2000
reflecting wage and benefit inflation and higher equipment rents and depreciation expenses. These increases were partially
offset by a 4% reduction in employment levels at the Railroad, lower fuel prices and cost control efforts. Lower fuel prices
in 2001 versus 2000 reduced fuel expense by $35 million in 2001.
Salaries, wages and employee benefits decreased $35 million compared to 2000. Excluding the work force reduction
charge, salaries, wages and employee benefits increased $80 million (2%), as wage and benefit inflation and volume costs
exceeded savings from lower employment levels and improved productivity. Equipment and other rents expense increased
$26 million (2%) as a result of additional locomotive lease expense and longer car cycle times, which indicates that cars spent
more time on the rail system between shipments. Partially offsetting these increases were lower costs due to declines in rail
traffic requiring rental of freight cars. In addition, the Railroad experienced lower rental rates, and Overnite experienced
lower contract transportation costs. Depreciation expense increased $34 million (3%) as a result of the Railroad’s capital
spending in recent years which increased the total value of the Corporation’s assets subject to depreciation (see note 1 to the
Consolidated Financial Statements, Item 8). Fuel and utilities costs were down $34 million (3%) compared to 2000 due to
lower fuel prices and a lower fuel consumption rate, partially offset by higher gross ton miles at the Railroad and losses on
fuel hedging activity (see note 2 to the Consolidated Financial Statements, Item 8). Materials and supplies expense decreased
$56 million (9%) primarily due to reduced locomotive repairs and cost control actions. Casualty costs increased $16 million
(4%) over 2000 due to higher insurance, bad debts and environmental expenses. Other costs decreased $25 million (3%) as
productivity and cost control efforts more than offset higher state and local taxes.
Operating Income – Operating income increased $169 million (9%) to $2.1 billion in 2001. Excluding the effect of the $115
million work force reduction charge in 2000, 2001 operating income increased $54 million (3%) as revenue growth,
productivity gains and lower fuel prices more than offset inflation, increased depreciation expense and higher rail costs due
to increased rail volume.
Non-Operating Items – Interest expense decreased $22 million (3%) compared to 2000 due to lower weighted-average debt
levels and weighted-average interest rates in 2001. In 2001, the Corporation’s weighted-average debt level decreased from
$10,044 million in 2000 to $9,980 million in 2001. The Corporation’s weighted-average interest rate was 7.0% in 2001 as
compared to 7.2% in 2000. Other income increased $32 million (25%) in 2001 compared to 2000 due primarily to higher
real estate sales. Income tax expense increased $99 million (21%) in 2001 over 2000. Excluding the effect of the $115 million
work force reduction charge on income tax expense in 2000, income taxes for 2001 increased $56 million (11%) over 2000.
The increase was a result of higher pre-tax income levels in 2001 and an increase in the effective tax rate from 35.7% in 2000
to 37.0% in 2001.
Key Measures – Net income as a percentage of operating revenues increased to 8.1% in 2001 from 7.1% in 2000. Net income
as a percentage of operating revenues in 2000, excluding the work force reduction charge, was 7.7%. Return on average
common shareholders’ equity was 10.6% in 2001, up from 10.1% in 2000. Excluding the charge in 2000, return on average
common shareholders’ equity was 10.9% in 2000. The Corporation’s operating margin was 17.3% in 2001 compared to 16.0%
in 2000 and, excluding the work force reduction charge in 2000, 17.0%. Excluding Overnite, the Corporation’s operating
margin was 18.6% in 2001 compared to 17.2% in 2000 and, excluding the work force reduction charge in 2000, 18.3%.
Rail Segment
Net Income – Rail operations reported net income of $1.1 billion in 2001 compared to net income of $926 million in 2000,
up 14%. Excluding the work force reduction charge in 2000, net income was $998 million. The increase in earnings resulted
from higher commodity revenue and real estate sales combined with lower fuel expense, interest expense and materials and
supplies expense. These improvements were partially offset by inflation, lower other revenue and higher equipment rent and
depreciation expenses.