Union Pacific 2007 Annual Report Download - page 32

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costs) in 2007 compared to $2.06 per gallon in 2006, increased expenses by $242 million. A 2% improvement
of our fuel consumption rate resulting from the use of newer, more fuel-efficient locomotives and our fuel
conservation programs reduced fuel expense by $43 million, and a 2% decrease of gross ton miles reduced fuel
expense by an additional $53 million.
Higher diesel fuel prices, which averaged $2.06 per gallon (including taxes and transportation costs) in 2006
compared to $1.77 per gallon in 2005, increased expenses by $393 million during 2006. A 3% increase in gross
ton-miles resulted in $63 million of additional expenses, which was partially offset by a 2% improvement in
our fuel consumption rate due to the use of newer, more fuel-efficient locomotives and our fuel conservation
programs. As noted above (and described in this Item 7), we offset a significant portion of increased
locomotive fuel expenses through revenue from fuel surcharges. Gasoline, utilities, and propane and other fuel
expenses increased $20 million in 2006 due to higher prices and increased usage.
Equipment and Other Rents – Equipment and other rents includes primarily rental expense we pay for freight
cars owned by other railroads or private companies; freight car, intermodal, and locomotive leases; other
specialty equipment leases; and office and other rentals. Fewer shipments of industrial products, combined
with improved car-cycle times, which reflect operational improvement and better asset utilization, reduced
our short-term freight car rental expense by $46 million in 2007 compared to 2006. Lower lease expenses for
freight cars, intermodal containers, and fleet vehicles and equipment decreased costs by $20 million in 2007.
Conversely, higher locomotive lease expense resulted in a $33 million increase in costs during the year.
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.
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, increased
depreciation expense in 2007 and 2006.
Materials and Supplies – Materials used to maintain our 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 supplies and materials. Increased use of higher cost
components to repair and maintain our fleet of locomotives (including a growing number of units not
covered by warranties) added $32 million to materials and supplies expense during 2007. Conversely, we used
fewer parts for freight car repairs due to program maintenance scheduling, which lowered costs by $11 million
and partially offset the increase for 2007.
We used more repair materials at higher component costs to repair and maintain freight cars and 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.
Casualty Costs – Personal injury costs, freight and property damage, insurance, and environmental expense are
the primary components of casualty costs. Casualty costs were lower in 2007 compared to 2006 driven
primarily by a reduction in personal injury expense. Actuarial studies completed during 2007 resulted in a
reduction in personal injury expense of approximately $80 million, which was partially offset by an adverse
development with respect to one claim.
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 increased personal injury costs and
higher settlement expenses.
Purchased Services and Other Costs – Purchased services and other costs include expenses associated with
outside contractors, state and local taxes, net costs of operating facilities jointly used with other railroads,