Union Pacific 2011 Annual Report Download - page 31

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Purchased Services and Materials – Expense for purchased services and materials includes the costs of
services purchased from outside contractors and other service providers (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. Expenses for contract services increased $106 million in 2011 versus 2010, driven by volume-
related external transportation services incurred by our subsidiaries, and various other types of
contractual services, including flood-related repairs, mitigation and improvements. Volume-related crew
transportation and lodging costs, as well as expenses associated with jointly owned operating facilities,
also increased costs compared to 2010. In addition, an increase in locomotive maintenance materials
used to prepare a portion of our locomotive fleet for return to active service due to increased volume and
additional capacity for weather related issues and warranty expirations increased expenses in 2011.
A $148 million increase in costs 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.
Depreciation – The majority of depreciation relates to road property, including rail, ties, ballast, and other
track material. A higher depreciable asset base, reflecting ongoing capital spending, increased
depreciation expense in 2011 compared to 2010. Higher depreciation rates for rail and other track
material also contributed to the increase. The higher rates, which became effective January 1, 2011,
resulted primarily from increased track usage (based on higher gross ton-miles in 2010).
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).
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; and office and other rent expenses. Costs increased in 2011 versus 2010 as
higher short-term freight car rental expense and container lease expense offset lower freight car and
locomotive lease expense.
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.
Other – Other expenses include personal injury, freight and property damage, destruction of equipment,
insurance, environmental, bad debt, state and local taxes, utilities, telephone and cellular, employee
travel, computer software, and other general expenses. Higher property taxes, casualty costs associated
with destroyed equipment, damaged freight and property and environmental costs increased other costs
in 2011 compared to 2010. A one-time payment of $45 million in the first quarter of 2010 related to a
transaction with CSXI and continued improvement in our safety performance and lower estimated liability
for personal injury, which reduced our personal injury expense year-over-year, partially offset increases in
other costs.
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, Inc. and lower expenses for freight and property damages partially offset
these increases in comparing 2009 with 2010. In addition, personal injury expense was lower in 2010
compared to 2009, reflecting continued improvement in our personal injury incident rate and lower
settlement costs per claim. The change in asbestos-related claim expenses in 2010 versus 2009 offset