UP's earnings and income way up, operating ratio way down

The effects of a recession aren’t apparent in Union Pacific Corp.’s fourth-quarter financial results. The Class I posted large earnings and income gains, and a big drop in its operating ratio even though volume tumbled 12 percent.

UP reported earnings of $1.31 per diluted share, up 41 percent compared with fourth-quarter 2007 earnings. Analysts on average expected earnings to reach $1.23 per share, according to Reuters Estimates. Net income jumped 35 percent to $661 million, operating income soared 32 percent to $1.14 billion and the railroad’s operating ratio fell 6 points to a best-ever 73.4.

Despite a very challenging business environment, UP’s earnings and operating ratio benefited from lower fuel costs, better pricing, productivity gains and improved safety, said UP Chairman, President and Chief Executive Officer Jim Young during an earnings conference held this morning.

Quarterly operating revenue rose 2 percent to $4.3 billion compared with fourth-quarter 2007’s total. Energy and agricultural revenue increased 20 percent and 10 percent, respectively. A 22 percent increase in revenue per car and strong demand for Powder River Basin coal drove energy revenue gains, said Executive Vice President of Marketing and Sales Jack Koraleski.

However, automotive revenue declined 17 percent, intermodal revenue decreased 7 percent, industrial products revenue dropped 3 percent and chemicals revenue fell 1 percent. Not surprisingly, the commodities that are most sensitive to the overall economy registered revenue declines, said Koraleski.

Quarterly operating expenses dropped 6 percent to $3.1 billion compared with fourth-quarter 2007 expenses primarily because fuel costs fell 19 percent to $732 million as diesel prices decreased 6 percent. In addition, lower traffic volume, reduced fuel consumption and efficiencies played prominent roles, said EVP and Chief Financial Officer Rob Knight.

For the full year. revenue increased 10 percent to $18 billion, earnings jumped 31 percent to $4.54 per diluted share, net income soared 26 percent to $2.3 billion, operating income rose 21 percent to $4 billion and UP’s operating ratio improved 2 points to 77.3 compared with 2007 figures.

The railroad’s annual operating ratio has improved 9.5 points since 2005, said Knight, adding that UP will continue to march toward its goal of a low-70s ratio by 2012.

The Class I anticipates a “very difficult year” in 2009 and has more questions than answers about how the economy, new Administration and other factors will impact volumes and earnings, senior executives said. UP is anticipating a core rate increase between 5 percent and 6 percent, said Knight. In addition, the railroad estimates its 2009 capital investment program will total $2.8 billion, down from 2008’s $3.1 billion program.

— Jeff Stagl