Union Pacific 2007 Annual Report Download - page 33

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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. Higher consulting fees and higher contract expenses (including
equipment maintenance) increased costs by $58 million. In addition, crew transportation and lodging costs
increased $17 million in 2007 due to higher gas prices and rate inflation. Conversely, lower drayage expense of
$13 million, settlement of insurance claims in 2007 related to Hurricane Rita, and higher equity income
partially offset these increases. In addition, the year-over-year comparison was affected by the settlement of
insurance claims totaling $23 million in 2006 related to the January 2005 West Coast storm and a $9 million
gain in 2006 from the sale of two Company-owned airplanes.
Volume-related expenses, including crew transportation and lodging costs, increased in 2006 driven by 3%
growth in carloads. Higher state and local taxes (primarily sales and use taxes related to higher diesel fuel
prices) also increased expenses in 2006 compared to 2005. Conversely, lower locomotive contract maintenance
costs and lower expenses associated with jointly-owned operating facilities reduced expenses in 2006
compared to 2005. Settlement of all remaining insurance claims related to the January 2005 West Coast storm
and the gain from the sale of two airplanes also reduced expenses in 2006. Finally, clean-up and restoration
costs related to the January West Coast storm increased expenses in 2005.
Non-Operating Items
Millions of Dollars 2007 2006 2005
% Change
2007 v 2006
% Change
2006 v 2005
Other income......................................... $ 116 $ 118 $ 145 (2)% (19)%
Interest expense ..................................... (482) (477) (504) 1 (5)
Income taxes .......................................... (1,154) (919) (410) 26 124
Other Income – Lower net gains from non-operating asset sales (primarily real estate) drove the reduction in
other income in 2007. Recognition of rental income in 2006 from the settlement of a rent dispute also
contributed to the year-over-year decrease in other income. Cash investment returns increased $21 million
due to larger cash balances and higher interest rates.
Lower net gains from non-operating asset sales (primarily real estate) and higher expenses due to rising
interest rates associated with our sale of receivables program resulted in a reduction in other income in 2006,
which was partially offset by higher rental income for the use of our right-of-way (including 2006 settlements
of rate disputes from prior years) and cash investment returns due to higher interest rates.
Interest Expense – Higher interest expense in 2007 was driven by an increase in the weighted-average debt
levels of $7.3 billion, compared to $7.1 billion in 2006. A lower effective interest rate of 6.6% in 2007,
compared to 6.7% in 2006, partially offset the effects of the higher debt level.
Lower interest expense in 2006 was due to a decline in the weighted-average debt level from $7.8 billion in
2005 to $7.1 billion in 2006. A higher effective interest rate of 6.7% in 2006, compared to 6.5% in 2005,
partially offset the effects of the declining debt level.
Income Taxes – Income taxes were $235 million higher in 2007, due primarily to higher pre-tax income and
the effect of new tax legislation in the State of Illinois that changed how we determine the amount of our
income subject to Illinois tax. The Illinois legislation increased our deferred tax expense by $27 million in
2007. Our effective tax rates were 38.4% and 36.4% in 2007 and 2006, respectively.
Income tax expense was $509 million higher in 2006 than 2005. Higher pre-tax income resulted in additional
taxes of $414 million and $118 million of the increase resulted from a reduction of deferred tax expense in
2005. Final settlements of pre-1995 tax years and Internal Revenue Service Examination Reports for 1995