3Q: UP overcomes Colorado floods, three weak business sectors to set four financial records

Despite severe floods in Colorado and volume drops in three of six business groups, Union Pacific Corp. set four all-time financial records in the third quarter.

Diluted earnings per share jumped 13 percent to a quarterly record $2.48, operating revenue rose 4 percent to an all-time-high $5.6 billion, operating income climbed 10 percent to an all-time-best $1.96 billion and the operating ratio dropped 1.8 points to a best-ever 64.8 compared with third-quarter 2012 results. The ratio beat the previous quarterly record set in second-quarter 2013 by 0.9 points. In addition, net income increased 10 percent to $1.15 billion.

Traffic declined in the agricultural, coal and intermodal sectors during 3Q — the primary reason volume was flat at 2.3 million units — and heavy floods severed numerous corridors in Colorado in mid-September. But managing such obstacles is "all part of a running a railroad," said UP President and Chief Executive Officer Jack Koraleski during the Class I's earnings conference this morning.

"We managed our network efficiently and continued to benefit from the strength of our diverse franchise," he said. "When combined with real core pricing and productivity gains, we more than offset flat volumes."

Revenue and volume breakdowns by business group show:

• agricultural products revenue dipped 2 percent to $771 million and volume decreased 4 percent to 210,000 units as grain traffic fell 9 percent to 63,800 units;
• automotive revenue jumped 17 percent to $512 million and volume rose 8 percent to 195,000 units as finished vehicles and auto parts traffic increased 5 percent and 12 percent, respectively;
• coal revenue ratcheted up 2 percent to $1 billion but volume fell 7 percent to 468,000 units as Southern Powder River Basin traffic declined 8 percent to 41,100 units;
• industrial products revenue climbed 11 percent to $975 million and volume rose 9 percent to 325,000 units as frac sand and lumber traffic increased 27 percent and 6 percent, respectively;
• intermodal revenue was flat at $1 billion and volume dipped 1 percent to 848,000 units as retailers proceeded cautiously to stock shelves due to the uncertain economy; and
• chemicals revenue rose 5 percent to $883 million and volume increased 3 percent to 282,000 units as industrial chemicals and petroleum products traffic climbed 9 percent and 10 percent respectively, helping to offset a 5 percent drop in crude-by-rail shipments due to narrow pricing spreads that made it more attractive to refiners to access pipelines in Oklahoma and Texas or transport crude to the East.

UP also reported 3Q operating expenses of $3.6 billion, up 2 percent year over year. Purchased services and materials costs rose 8 percent to $588 million, but fuel costs declined 2 percent to $866 million.

Compensation and benefit expenses inched up 1 percent to $1.2 billion primarily because of higher inflation and training costs. UP's workforce increased 1 percent to 46,605 compared with third-quarter 2012's level because of additional train, engine and yard service employees, and workers required for positive train control implementation, said Chief Financial Officer Robert Knight.

By year's end, UP expects to register modest volume growth for the fourth quarter and round out another record-setting year by posting best-ever earnings for the full year, he said. Looking ahead to 2014, volume growth is projected to be modest and core pricing gains are forecasted to continue, but be lower than 2013 levels, if the "slow growth trajectory" in the economy continues, said Knight.

Added Koraleski: "As we move through the fourth quarter, we continue to monitor the economic landscape. Supported by our diverse franchise, we remain agile and well positioned for economic recovery."

— Jeff Stagl