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November 2012



Financials Article
Financial reports from Class I railroads in third quarter show resilience in the face of weak markets, soft economy



Financials

— by Jeff Stagl, Manager Editor

The still-sluggish economy and either favorable or unfavorable conditions in key business sectors — from coal to agricultural products to merchandise — colored financial results for the six publicly traded Class Is in the third quarter. The primary color was black for four large railroads that either set several financial records or posted profits, and red for the two others that registered revenue and income declines.

Count Union Pacific Corp. among the record-setters. Despite stiff coal and agricultural products headwinds in 3Q, the Class I set the following quarterly records: $5.3 billion in operating revenue, up 5 percent year over year; $1.8 billion in operating income, up 13 percent; $2.19 per share in diluted earnings, up 18 percent; and a 66.6 operating ratio, down 2.5 points.

In addition, net income climbed 15 percent to a best-ever $1 billion and volume remained flat at 2.3 million units even though coal traffic fell 12 percent, and industrial and ag products traffic each declined 2 percent.

“We achieved solid core pricing gains, we managed our network efficiently and we delivered on the benefits of our diverse franchise with growth in many of our other markets,” said UP President and CEO Jack Koraleski during an Oct. 18 earnings conference.

KCS: growth spurt times five

Kansas City Southern set records, too. Despite dismal U.S. grain production in 3Q due to a prolonged drought — including the lowest corn output since 2006 — the Class I’s volume rose 7 percent to an all-time-high 552,400 units and revenue climbed 6 percent to a best-ever $577.4 million. In addition, operating income rose 16 percent to $181 million and the operating ratio improved 2.6 points to a record 68.7.

“For the first half of 2012, cross-border intermodal, automotive, Lázaro Cárdenas container traffic, frac sand and crude oil ... were growing at a rate of 35 percent,” said KCS President and CEO David Starling during an Oct. 19 conference. “In the third quarter, those five areas … grew at a rate of 46 percent.”

The two Canadian Class Is didn’t set any all-time marks, but they registered solid financial performance, nonetheless.

Strong petroleum, chemicals, coal and fertilizer traffic helped CN boost revenue 8 percent to $2.5 billion, increase operating income 5 percent to $985 million and increase volume 3 percent to 1.3 million units. Although the operating ratio rose 1.3 points, it clocked in at a still-sterling 60.6.

“Overall … pretty much all aspects of our agenda are working, and operational and service excellence is helping us deliver very strong results,” said CN President and CEO Claude Mongeau during an Oct. 22 conference.

Canadian Pacific leaders’ efforts to improve operations and service in the quarter under new President and CEO E. Hunter Harrison paid dividends, too. Total revenue rose 8 percent to $1.5 billion, operating income increased 6 percent to $376 million, net income jumped 20 percent to $224 million, volume increased 3 percent to 687,000 units and the operating ratio dropped 1.7 points to 74.1.

“I think two words are key here, and that is that ‘progress’ and ‘momentum’ are both building,” said Harrison during an Oct. 24 conference. “Obviously, this effort is keyed by the efforts toward service.”

Erosion in the East

Meanwhile, the two eastern U.S. Class Is couldn’t overcome economic and coal business woes despite their efforts to boost operational and service efficiency.

Primarily because of a 14 percent drop in coal volume and 1 percent dip in merchandise volume — including a 7 percent decline in metals and construction traffic — Norfolk Southern Corp.’s operating revenue fell 7 percent to $2.7 billion and total volume decreased 1 percent to 1.8 million units. In addition, net income plunged 27 percent to $402 million and the operating ratio climbed 5.4 points to 72.9.

“We were able to hold expenses to just over a 0.5 percent increase compared to last year. While productivity-related efficiency enabled us to do a good job of expense control as related to inflation, the decrease in these expenses, obviously, could not offset the revenue declines,” said NS Chairman, President and CEO Wick Moorman during an Oct. 23 conference.

For CSX Corp., an unfavorable intermodal-high, coal-low traffic mix driven by weak coal demand was too much to overcome. Revenue dipped 2 percent to $2.9 billion, operating income fell 3 percent to $854 million, volume declined 1 percent to 1.6 million units and the operating ratio remained flat at 70.5.

“We continue to adjust to near-term market conditions while staying focused on building our capabilities for the long term,” said CSX Chairman, President and CEO Michael Ward during an Oct. 17 conference. “Bottom line, we’re encouraged by how [we’re] dealing with market conditions that are far from ideal. Long term, this bodes well for what CSX will be able to accomplish when sustainable growth resumes.”

In early November, BNSF Railway Co. also released its third-quarter results in a U.S. Securities and Exchange Commission (SEC) form 10-Q posted on its web site. BNSF registered $5.2 billion in revenue and $1 billion in net income compared with $4.9 billion and $852 million, respectively, in third-quarter 2011.

Total operating expenses climbed from $3.49 billion in the year-ago period to $3.59 billion primarily because of higher compensation and benefits, fuel and purchased services costs.

For 2012's first nine months, BNSF posted total operating revenue of $15.1 billion, up 8 percent compared with the same 2011 period. The gain primarily was driven by higher average revenue per unit, which climbed from $1,982 per car in the year-ago period to $2,067 per car, as a result of an increased rate per unit, BNSF officials said in the SEC filing.

Consumer products revenue rose from $4.4 billion to $4.9 billion; industrial products revenue increased from $3 billion to $3.7 billion; coal revenue dipped from $3.66 billion to $3.61 billion; and agricultural products revenue was relatively flat at $2.7 billion.

Consumer products volume was propelled by higher domestic intermodal business as a result of highway conversions and higher automotive demand, BNSF officials said. Meanwhile, increased shipments of petroleum and construction products, principally sand, drove industrial products revenue, they said.

Coal revenue dipped because of low natural gas prices, a mild winter and spring, and high utility stockpiles, while agricultural products business was impacted by a decrease in wheat and corn exports, which were partially offset by higher soybeans and domestic corn shipments, BNSF officials said.

Operating expenses in the nine-month period rose 4 percent to $10.8 billion primarily because increased unit volumes and inflation contributed to higher compensation and benefits costs, higher diesel prices and volume increased fuel costs, and higher volume-related and equipment maintenance costs drove up purchased service expenses.



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