Union Pacific 2010 Annual Report Download - page 31

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distributed locomotive power; our fuel conservation programs; and improved network operations all drove
this improvement.
Purchased Services and Materials – Purchased services and materials expense includes the costs of
services purchased from outside contractors (including equipment maintenance and contract expenses
incurred by our subsidiaries for external transportation services); materials used to maintain the Railroad’s
lines, structures, and equipment; 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; and tools and supplies. A $148 million increase in
expenses for contract services drove the higher expenses in 2010 versus 2009. Volume-related trucking
and lift costs for intermodal containers and crew transportation and lodging costs also increased costs
from 2009. In addition, an increase in locomotive maintenance materials used to prepare a portion of our
locomotive fleet for return to active service increased expenses during the year compared to 2009.
Conversely, a decrease in freight car maintenance activity during 2010 drove lower freight car material
costs, partially offsetting the cost increases versus 2009.
Contract services expense (including equipment maintenance) decreased $134 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.
Depreciation – The majority of depreciation relates to road property, including rail, ties, ballast, and other
track material. A higher depreciable asset base, reflecting higher capital spending in recent years,
increased depreciation expense in 2010 compared to 2009. Costs also increased $25 million in 2010 due
to the restructuring of certain locomotive leases in the second quarter of 2009. Lower depreciation rates
for rail and other track material partially offset the increases. The lower rates, which became effective
January 1, 2010, resulted from reduced track usage (based on lower gross ton-miles in 2009).
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. 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 in 2008).
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. Short-term freight
car rental expense increased in 2010 compared to 2009, reflecting increased shipments of finished
vehicles and intermodal containers. Increased lease expenses for containers also drove the increase.
Conversely, lower lease expense for freight cars and locomotives decreased costs compared to 2009.
The restructuring of locomotive leases (completed in May 2009) also reduced lease expense by $36
million in 2010 compared to 2009. (See further discussion in this Item 7 under Liquidity and Capital
Resources – Financing Activities.)
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. Lower lease
expense for freight cars, intermodal containers, and fleet vehicles also decreased costs in 2009 versus
2008.
Other – Other expenses include personal injury, freight and property damage, destruction of foreign
equipment, insurance, environmental, bad debt, state and local taxes, utilities, telephone and cellular,
employee travel, computer software, and other general expenses. Other costs were higher in 2010
compared to 2009, driven by higher property taxes and the $45 million one-time payment in the first
quarter of 2010 related to a transaction with CSXI. A $30 million payment in 2009 to Pacer International,