UNP » Topics » Operating Expenses

This excerpt taken from the UNP 10-Q filed Apr 24, 2009.

Operating Expenses

 

      Three Months Ended
March 31,
   %
Millions of Dollars    2009    2008    Change

Compensation and benefits

   $ 1,070     $ 1,132     (5)% 

Purchased services and materials

     399       469     (15)     

Fuel

     386       957     (60)     

Depreciation

     345       340     1      

Equipment and other rents

     317       342     (7)     

Other

     226       242     (7)     

Total

   $ 2,743     $ 3,482     (21)% 

Operating expenses decreased $739 million in the first quarter of 2009 versus 2008. Our fuel price per gallon declined 47% during the period, decreasing operating expenses by $335 million compared to 2008. Cost savings from lower volume, productivity improvements, and better resource utilization also drove lower operating expenses. Additionally, recovery costs and operational impacts resulting from the January 2008 mudslide that occurred near Eugene, Oregon increased operating expenses in the first quarter of 2008, resulting in a more favorable quarter-over-quarter comparison. Conversely, wage and benefit inflation partially offset these reductions.

Compensation and Benefits – Compensation and benefits include wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. Lower volume and productivity initiatives in all areas, led to an 8% decline in our workforce, saving $106 million in the first quarter of 2009. Conversely, general wage and benefit inflation increased expenses in the first quarter partially offsetting these reductions.

 

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Purchased Services and Materials – Purchased services and materials expense includes the costs of services purchased from outside contractors; 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. Decreased contract services expense (including equipment maintenance) of $48 million and reduced crew transportation and lodging costs of $14 million, due to lower volume levels, primarily contributed to the decrease of expenses in the first quarter of 2009. In addition, we performed fewer locomotive repairs during the quarter, which reduced locomotive materials expense. Clean-up and restoration costs related to the January mudslide also increased expenses in the first quarter of 2008, creating a favorable quarter-over-quarter comparison.

Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Lower diesel fuel prices, which averaged $1.51 per gallon (including taxes and transportation costs) in the first quarter of 2009 compared to $2.84 per gallon in the same period in 2008, reduced expenses by $335 million. Volume, as measured by gross ton-miles, decreased 20% in the first quarter versus 2008, lowering expenses by $177 million compared to 2008. A 5% improvement in our fuel consumption rate resulted in $45 million of cost savings due to the use of newer, more fuel efficient locomotives; our fuel conservation programs; improved network operations; and a shift in commodity mix, primarily due to fewer premium (automotive and intermodal) shipments.

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 the first quarter of 2009. Lower depreciation rates for rail and other track material offset most of the increase. The lower rates, which became effective January 1, 2009 after review and approval by the Surface Transportation Board of the U.S. Department of Transportation, resulted from longer asset lives and reduced track usage (based on lower gross ton-miles).

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 finished vehicles, industrial products and intermodal containers primarily contributed to the $23 million reduction in our short-term freight rental expense in the first quarter of 2009 versus 2008. Lower lease expense for freight cars, intermodal containers, locomotives, and fleet vehicles also decreased costs.

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 the first quarter of 2009 compared to the first quarter of 2008, primarily driven by a $12 million decrease in freight and property damage expenses due to lower volume levels. Expenses for personal injuries, employee travel, other expenses associated with our vehicle fleet, computer software, and utilities also decreased in the first quarter of 2009 compared to 2008. Conversely, higher state and local taxes (primarily property taxes) and an increase in bad debt expense due to the economic downturn partially offset these lower costs.

 

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This excerpt taken from the UNP 10-Q filed Apr 24, 2008.

Operating Expenses

 

      Three Months Ended
March 31,
   %  
Millions of Dollars    2008    2007    Change  

Compensation and benefits

   $1,132    $1,165    (3 )%

Fuel

   957    662    45  

Purchased services and materials

   469    443    6  

Equipment and other rents

   342    339    1  

Depreciation

   340    325    5  

Other

   242    196    23  

Total

   $3,482    $3,130    11 %

Operating expenses increased $352 million in the first quarter of 2008 versus 2007. Fuel price per gallon rose 47% during the period, which increased operating expenses by $299 million. Wage, benefit and materials inflation, higher casualty expense and costs associated with the January mudslide also increased expenses during the year. Productivity improvements and better resource utilization helped offset these increases.

Compensation and Benefits – Compensation and benefits includes wages, payroll taxes, health and welfare costs, pension costs, other postretirement benefits, and incentive costs. Productivity initiatives in all areas led to a 3% decline in our workforce, saving $52 million in the first quarter of 2008. Less need for new train personnel reduced training costs during the quarter, which also contributed to the improvement.

 

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Conversely, general wage and benefit inflation increased expenses in the first quarter, reflecting higher salaries and wages.

Fuel – Fuel includes locomotive fuel and gasoline for highway and non-highway vehicles and heavy equipment. Diesel fuel prices, which averaged $2.84 per gallon (including taxes and transportation costs) in the first quarter of 2008 compared to $1.93 per gallon in the same period in 2007, increased expenses by $299 million. A 1% improvement in our fuel consumption rate reduced fuel expense by $9 million due to the use of newer, more fuel-efficient locomotives, our fuel conservation programs, and an increase in average train size. Volume, as measured by gross ton-miles, increased 1% in the first quarter versus 2007, adding $5 million of expenses.

Purchased Services and Materials – Purchased services and materials expense includes the costs of services purchased from outside contractors, 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. Increased contract and consulting fees (including equipment maintenance) of $14 million, higher expenses associated with jointly owned facilities, and increased lodging costs and crew transportation costs due to higher gas prices contributed to the increase of expenses in the first quarter of 2008. Clean-up and restoration costs related to the January mudslide also increased expenses in the first quarter of 2008.

Equipment and Other Rents – Equipment and other rents expense primarily includes rental expense 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. Higher locomotive lease expense was mostly offset by lower volume-related costs in our short-term freight car rental expense due to fewer shipments of finished vehicles and industrial products.

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 the first quarter of 2008.

Other – Other costs include personal injury costs, freight and property damage, insurance, environmental expense, state and local taxes, utilities, telephone and cellular expenses, employee travel expense, and computer software and other general expenses. Other costs were higher in the first quarter of 2008 compared to the first quarter of 2007, primarily driven by an increase in personal injury expenses. We completed an actuarial study in the first quarter of 2007, which resulted in a reduction of personal injury expense of $30 million, reflecting improvements in our safety experience and lower estimated costs to resolve or settle these claims. Increased utility costs and state and local taxes also contributed to higher other costs in the first quarter of 2008.

This excerpt taken from the UNP 10-Q filed May 5, 2006.

Operating Expenses

 

     Three Months Ended
March 31,
   %  

Millions of Dollars

   2006    2005    Change  

Salaries, wages, and employee benefits

   $ 1,129    $ 1,099    3 %

Fuel and utilities

   692    539    28  

Equipment and other rents

   367    353    4  

Depreciation

   303    289    5  

Materials and supplies

   164    135    21  

Casualty costs

   110    95    16  

Purchased services and other costs

   340    329    3  

Total

   $ 3,105    $ 2,839    9 %

 

Operating expenses increased $266 million in the first quarter of 2006 versus the comparable period in 2005. A 29% increase in locomotive fuel prices accounted for $145 million of this increase. While our fuel surcharge programs helped offset these expenses in the form of higher revenue, we remain below 100% recovery of the additional expense incurred above the base fuel price of $0.75 per gallon for our fuel surcharge programs. Inflation of wages, benefits, and materials and supplies; a larger workforce; volume-related expenses; higher locomotive and freight car lease expense; and personal injury costs resulted in most of the additional increase. Lower training costs, an improved fuel consumption rate, and improved car cycle times (which reduced freight car rental expense) partially offset these costs.

 

Salaries, Wages, and Employee Benefits – Several factors drove higher labor expenses in the first quarter of 2006 versus 2005. General wage and benefit inflation continued to increase expenses, reflecting higher salaries and wages and the impact of higher healthcare and other benefit costs. We also incurred additional expenses associated with higher volume levels, a 2% increase in our workforce, and higher management compensation costs driven by stock compensation expense pursuant to Financial Accounting Standards Board (FASB) Statement No. 123(R), Share-Based Payment. Conversely, lower crew training costs, reduced protection pay, and network improvements boosted by mild winter weather conditions partially offset these costs. Expenses were also lower in 2006 as the first quarter of 2005 included higher labor expenses associated with the January West Coast storm.

 

Fuel and Utilities – Fuel and utilities include locomotive fuel, utilities other than telephone, and gasoline and other fuels. Higher diesel fuel prices, which averaged $1.87 per gallon (including taxes and transportation costs) in the first quarter of 2006 compared to $1.45 per gallon in the same period in 2005, increased expenses by $145 million. A 2% increase in gross ton-miles resulted in $8 million of additional expenses. However, we improved our consumption rate by 2% through both fuel conservation programs and the use of newer, more fuel-efficient locomotives, which provided a $7 million reduction in expense compared to 2005. Gasoline, utilities, and propane expenses increased $6 million in the first quarter of 2006 due to higher prices.

 

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Equipment and Other Rents – Equipment and other rents primarily includes rental expense 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. In the first quarter of 2006, the number of leased locomotives and freight cars increased, resulting in additional lease expense. Strong intermodal and automotive volume growth also increased our short-term freight car rental expense. Improved car cycle times partially offset these increases, which lowered short-term freight car rental expense.

 

Depreciation – A 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 the first quarter of 2006.

 

Materials and Supplies – Materials used to maintain the Railroad’s lines, structures, and equipment are the principal component of materials and supplies expense. This expense item also includes small tools, office supplies, other materials, and the costs of freight services to ship Railroad materials. During the first quarter of 2006, materials and supplies expense increased, primarily due to locomotive and freight car maintenance. We used more repair materials to maintain a larger fleet of locomotives, including a growing number of units not covered by warranties. In addition, we performed maintenance on more locomotives that were serviced internally and not subject to maintenance contracts with third-party contractors compared to the first quarter 2005. We also incurred higher costs for car wheel sets and lube oil.

 

Casualty Costs – Personal injury expense, freight and property damage, insurance, and environmental costs are the primary components of casualty costs. Higher personal injury expense drove the first quarter year-over-year increase, mainly due to higher estimated costs for future claims and adverse developments on a small group of existing claims. Insurance costs also increased in the first quarter of 2006 compared to 2005 due to higher premiums. Lower freight loss and damage expense and lower costs for destruction of foreign or leased equipment partially offset these higher costs. We incur expense for destruction of foreign equipment when equipment owned by other railroads is damaged while in our possession.

 

Purchased Services and Other Costs – Purchased services and other costs include the costs of services purchased from outside contractors, state and local taxes, net 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, telephone and cellular expense, employee travel expense, and computer and other general expenses. Expenses increased in the first quarter of 2006 due to higher state and local taxes driven in part by higher diesel fuel prices, volume-related expenses associated with crew transportation and lodging, as well as trucking services provided by intermodal carriers. Lower freight car and locomotive contract maintenance costs and lower expenses associated with jointly owned operating facilities partially offset these costs. In addition, we incurred clean-up and restoration expenses in the first quarter of 2005 due to the January West Coast storm.

 

This excerpt taken from the UNP 10-Q filed May 6, 2005.

Operating Expenses

 

    

Three Months Ended

March 31,


   %
Change


 

Millions of Dollars


   2005

   2004

  

Salaries, wages, and employee benefits

   $ 1,099    $ 1,011    9 %

Equipment and other rents

     353      327    8  

Depreciation

     289      274    5  

Fuel and utilities

     539      389    39  

Materials and supplies

     135      123    10  

Casualty costs

     95      148    (36 )

Purchased services and other costs

     329      307    7  
    

  

  

Total

   $ 2,839    $ 2,579    10 %
    

  

  

 

Operating expenses increased in the first quarter of 2005 due to significantly higher fuel prices, inflation, additional training and guaranteed wage expenses associated with higher trainmen employment levels, depreciation expense, increased locomotive lease and freight car rental expense, and clean-up and restoration costs associated with the West Coast storm. These costs were partially offset by lower casualty costs relating to expenses recognized in the first quarter of 2004 associated with a 1998 third-party crossing accident.

 

Salaries, Wages, and Employee Benefits – Higher 2005 expenses were driven by wage and benefit inflation, increased use of train crews due to system velocity and current demand levels, training and guaranteed wage expenses associated with an increase in trainmen employment levels, additional track and mechanical maintenance personnel, and increased labor expenses associated with the West Coast storm.

 

Equipment and Other Rents – Equipment and other rents primarily includes rental expense 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. Expenses increased in the first quarter of 2005 due to higher locomotive lease costs and increased car rental expenses. The higher locomotive expense includes additional costs associated with leasing short-term locomotive power, which is more costly than long-term locomotive leases, and the increased leasing of new locomotives, which are being utilized for higher business volumes and to improve network performance. Higher freight car rental expense was driven by volume-related growth in intermodal business, longer car cycle times for equipment used in automotive and intermodal shipments, and an increase in longer-haul traffic in our Industrial Products and Agricultural commodity groups.

 

Depreciation – The majority of depreciation relates to track structure, including rail, ties, and other track material. Depreciation expense increased in the first quarter of 2005 primarily due to a higher depreciable asset base caused by significant capital expenditures in recent years.

 

Fuel and Utilities – Fuel and utilities include locomotive fuel, utilities other than telephone, and gasoline and other fuels. The increase in the first quarter of 2005 was driven by higher diesel fuel prices, which averaged $1.45 per gallon compared to $1.02 per gallon in the first quarter of 2004 (including taxes and transportation costs). The higher fuel price contributed $149 million to the increase, and $136 million of the additional fuel cost was recovered through our fuel surcharge programs and is included in operating revenue. The 3% increase in gross ton-miles in the first quarter of 2005 drove higher fuel usage, resulting in an additional $9 million of fuel expense for the quarter. This was more than offset by a 4% improvement in the fuel consumption rate, saving $12 million in first quarter fuel expense versus 2004. The Railroad did not have any fuel hedges in place during the first quarter of 2005. In the first quarter of 2004, our fuel hedges decreased fuel costs by $4 million. Gasoline, utilities, and propane expenses increased $4 million in the first quarter of 2005 due to higher prices.

 

Materials and Supplies – Materials used to maintain the Railroad’s lines, structures, and equipment are the principal component of materials and supplies expense. Office, small tools and other supplies, and the costs of freight services to ship Railroad materials are also included. Expenses increased in the first quarter of 2005 due to the increased use of locomotive repair materials associated with maintaining a larger fleet that includes older units not covered by warranties, additional freight car repairs, and higher material costs. Material cost increases were driven primarily by higher prices for freight car wheel sets and lube oil prices.

 

Casualty Costs – Personal injury expense, freight and property damage, insurance, and environmental costs are included in casualty costs. Costs in the first quarter of 2005 were lower due to expense recognized in 2004 as a result of a court ruling on a 1998 third-party crossing accident. Lower freight loss and damage expense, lower expenses associated with destruction of foreign equipment, and lower costs associated with asbestos claims due to the one-

 

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time charge recognized in the fourth quarter of 2004 for future unasserted claims also contributed to the lower expense. Destruction of foreign equipment expense is incurred when equipment owned by other railroads is damaged while in our possession.

 

Purchased Services and Other Costs – Purchased services and other costs include the costs of services purchased from outside contractors, state and local taxes, net 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, telephone and cellular expense, employee travel expense, and computer and other general expenses. Expenses increased in the first quarter of 2005 as a result of West Coast flood clean-up and restoration expenses, increased trucking expenses for intermodal carriers, and crew transportation and lodging costs.

 

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