Union Pacific ‘well-positioned’ for good fortune or bad

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Posted: Friday, April 19, 2013 12:00 am

While challenges in lagging coal and agricultural markets remained during the first quarter of 2013, Union Pacific officials said Thursday they expect those businesses to pick up this year because of climbing natural gas prices and so-far normal weather patterns.

“We’re well-positioned for the upside,” said CEO Jack Koraleski, “but we are just as prepared if our environment should take a turn for the worse.”

In a first-quarter record, the Omaha-based railroad’s profit was $957 million, or $2.03 per diluted share, up 11 percent from $863 million, or $1.79 per diluted share, this time last year.

Overall business volume in the first quarter was down 2 percent, with coal volumes down 19 percent and agricultural volumes down 9 percent. Those declines were offset by chemical volumes, up 12 percent; intermodal volumes, up 4 percent; and automotive volumes, up 2 percent.

A decline in coal volumes was due to a 2013 contract loss, high coal stockpiles and mine production issues, said Eric Butler, executive vice president of marketing and sales. Koraleski anticipates the coal segment will strengthen as the summer air- conditioning season approaches. He said higher natural gas prices are also playing a role.

“We’ve had a couple of customers who had shifted from coal to natural gas, and they said now that natural gas is going up above four bucks, they’re going to start taking coal again,” Koraleski said. He noted that coal has started to regain its place in the electrical market share, climbing to about 40 percent from the mid-30 percent range a year ago.

Last summer’s drought continued to affect agricultural product volumes in the first quarter, most significantly the grain volumes segment, which dropped 19 percent compared with this time last year. But already this year, healthy amounts of rain and snow across the Midlands are replenishing the agricultural outlook.

“We’re about ready to stick a fork in this drought,” Koraleski said. “We’ve had some nice heavy rains and nice heavy snows. Hopefully it does its job in solving the drought.”

Automotive growth was a strength, continuing to outpace the overall economy. Pent-up demand for new vehicles is “compelling consumers to replace old vehicles,” Butler said. Within the auto segment, auto parts volume grew 5 percent. Meanwhile, finished vehicle volume increased 1 percent “as dealers sold off existing inventories,” Butler said.

Chemicals also served as a strong segment in the first quarter of 2013. Crude oil volume increased 107 percent because of increased shipments from Oklahoma and Texas. Meanwhile, plastics volume bumped up 3 percent as a result of domestic demand and new business.

Industrial products and domestic intermodal remained flat. A 63 percent decrease in hazardous waste volumes offset double-digit growth in nonmetallic minerals volume because of continued growth in shale-related drilling and lumber volume. Butler said the company is “excited about the housing improvement” — evident as lumber volumes increase.

Domestic intermodal was flat, but offset by an 8 percent increase in international intermodal volume. The international growth, Butler said, is driven by slow economic recovery.

Public grade crossing incidents increased 14 percent compared with this time last year, a number that Lance Fritz, executive vice president of operations, said is being driven by more incidents of drivers striking trains or not properly stopping at crossings in the railroad’s growing Southern network.

“This is an extremely frustrating statistic for us,” he said, noting that the company has been working hard to alter the trend, particularly in Texas.

Koraleski said the railroad’s UP CARES (Union Pacific Crossing Accident Reduction Education and Safety) and Operation Lifesaver education campaigns are working in Southern communities, particularly in high schools. Additionally, the railroad is putting up English and Spanish warning signs at crossings and launching media campaigns to spread a safety message.

“We’re doing anything we can possibly think of,” Koraleski said.

Other quarterly figures included operating revenue of $5.3 billion, a 3 percent increase from $5.1 billion. The company’s consumer satisfaction index was 94, up 1 percentage point from this time last year. That index is also a first-quarter record for the railroad.

Looking ahead, Koraleski said there’s still “much uncertainty” about 2013, but the railroad’s diverse franchise supports a continued focus on profitable growth and business development opportunities. CFO Rob Knight said even if the drought persists, expected improvements in coal and other markets remaining the same will make for a positive 2013.

“We think at the end of the day, at the end of the year, we’ll have volumes on the positive side of the ledger,” Knight said.

Contact the writer: 402-444-1192, emily.nohr@owh.com

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