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12/5/2013



Rail News: Union Pacific Railroad

UP's volume on modest growth path in 4Q, CFO Knight says


Despite solid traffic growth in base chemicals, automotive, construction-related materials and crude oil, weak coal volume and earlier softness in grain carloads have "overshadowed" the gainers, resulting in a slight drop in overall volume so far this year, said Union Pacific Railroad Executive Vice President and Chief Financial Officer Robert Knight yesterday at Credit Suisse's Global Industrials Conference in New York City.

"But if you look at our base business and exclude commodities that are not as economically sensitive, such as coal, agricultural and shale-related shipments, our volumes are up about one point, more in line with industrial production growth so far this year," he said, according to a transcript posted on Seeking Alpha's website.

Business levels in the fourth quarter match UP's expectation for modest volume growth, "but we'll have to see how the remaining weeks play out," said Knight.

Despite some pullback in shale-related crude moves beginning in the third quarter, overall crude shipments climbed more than 35 percent in the year's first nine months, while frac sand loads grew more than 20 percent, he said. Shale-related moves account for about 4.5 percent of total volume.

In the third quarter, pipeline capacity expansions in the south narrowed spreads between the WTI and Brent crude, resulting in a decline in UP's shorter-haul Texas crude moves, said Knight. The pattern has continued into the fourth quarter even though spreads have widened in recent weeks, he added.

Going forward, Canadian heavy crude and West Coast destinations should provide new opportunities as crude-by-rail continues to evolve, said Knight.

"We believe the long-term fundamentals of crude-by-rail remain attractive. Increasing crude production, limited pipeline infrastructure and the flexibility that rail provides will enable us to leverage our value proposition in this market," he said.

In terms of grain — which accounts for more than 40 percent of the railroad's agricultural business — the residual impact of last year's drought was felt throughout most of 2013. But UP turned the corner in fall with a strong harvest, which is driving a 40 percent increase in grain volumes in the fourth quarter to date, said Knight.

"We expect to end the fourth quarter with solid, positive volume growth in our ag line, which is currently up about 13 percent," he said. "But as always, weather fluctuations and commodity prices, global supply and demand will be driving factors that will ultimately determine ultimate volumes."



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