Union Pacific 2009 Annual Report Download - page 33

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33
lodging for train crew employees; trucking and contracting costs for intermodal containers; leased
automobile maintenance expenses; and tools and supplies. Contract services expense (including
equipment maintenance) decreased $138 million in 2009 versus 2008 due to lower volume levels and a
favorable year-over-year comparison due to expenses incurred in 2008 resulting from Hurricanes Gustav
and Ike. In addition, lower volume levels drove cost reductions of $55 million in transportation and
lodging costs and $27 million in expenses associated with operating jointly owned facilities in 2009
versus 2008. We also performed fewer locomotive and freight car repairs as a result of lower volumes and
having portions of these fleets stored, which reduced related materials expenses by $87 million in 2009
versus 2008. Clean-up and restoration expenses related to the Cascade mudslide in January, flooding in
the Midwest in June, and the two September hurricanes also increased expenses in 2008, creating a
favorable year-over-year comparison.
In 2008, higher contract costs (including restoration costs related to the January Cascade mudslide, June
Midwest flooding, and September hurricanes) increased expenses $40 million compared to 2007. Higher
material costs for freight car wheel sets during the year and an increase in the number of wheel sets
required to repair flood-damaged freight cars also contributed to higher materials expense in 2008.
Conversely, rail scrap proceeds associated with our rail replacement program partially offset these
increases for the year.
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 2009 versus 2008. Costs also increased $34 million in 2009 due to the
restructuring of certain locomotive leases (see further discussion in this Item 7 under Liquidity and
Capital Resources – Financing Activities). Lower depreciation rates for rail and other track material
partially offset the increases. The lower rates, which became effective January 1, 2009, resulted from
longer asset lives as determined by service life studies and reduced track usage (based on lower gross ton-
miles).
A higher depreciable asset base, reflecting higher capital spending in recent years, increased depreciation
expense in 2008 versus 2007.
Equipment and Other Rents – Equipment and other rents expense primarily includes rental expense that
the Railroad pays 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 and intermodal containers primarily contributed to the $85 million reduction in our
short-term freight car rental expense in 2009 versus 2008. In addition, the restructuring of locomotive
leases reduced lease expense by $52 million in 2009 compared to 2008 (see further discussion in this Item
7 under Liquidity and Capital Resources – Financing Activities). Lower lease expense for freight cars,
intermodal containers, and fleet vehicles also decreased costs in 2009 versus 2008.
Fewer shipments of finished vehicles, industrial products and intermodal containers reduced our short
term freight car rental expense by $62 million in 2008 compared to 2007. Lower lease expense for freight
cars, intermodal containers, and locomotives also decreased costs. Conversely, lease expense for fleet
vehicles increased costs in 2008 compared to 2007.
Other – Other expenses include personal injury, freight and property damage, insurance, environmental,
bad debt, state and local taxes, utilities, telephone and cellular, employee travel, computer software, and
other general expenses. Other costs were lower in 2009 compared to 2008 driven by a reduction in
personal injury expense (including asbestos-related claims). We completed actuarial studies of personal
injury expenses in both the second and fourth quarters of 2009 and 2008 and annual reviews of asbestos-
related claims in both years, which resulted in a net reduction of $55 million in casualty expense in 2009
versus 2008. The reduction reflects improvements in our safety experience and lower estimated costs to
resolve claims. In addition, the year-over-year comparison was favorably impacted by $28 million due to