(The following story by Stacie Hamel appeared on the World-Herald website on January 26.)
OMAHA, Neb. — Omaha-based Union Pacific Corp. on Thursday reported a 64 percent increase in net income in the fourth quarter of last year, compared with the same period in 2005. It was the second year in a row of earnings growth and momentum for the railroad.
“We turned in a great fourth quarter and a strong finish to a record year,” Jim Young, president and chief executive, said during an earnings announcement broadcast via the Internet from U.P.’s headquarters.
“We made solid progress last year and look forward to building on that momentum,” he said.
Fourth-quarter net income totaled $485 million, or $1.78 per share, compared with $296 million, or $1.10 per share, for the same period in 2005.
Analysts surveyed by Zacks Investment Research had projected fourth-quarter earnings of $1.57 per share. Union Pacific shares were down 47 cents to $96.49 at the close of Thursday trading.
Young said a primary driver of the earnings growth could be found in a 52 percent increase in quarterly operating income, to $810 million from $533 million in the same period of 2005.
The company’s operating ratio improved by 5.6 points to 79.6 percent, compared with the fourth quarter of 2005. The ratio of operating expenses to revenue is considered an important efficiency measure, and Young called the performance a major improvement. He said he expected the ratio to remain at less than 80 percent in 2007.
Also key to the company’s fourth-quarter performance was hauling of agricultural products, partly because of ethanol demand, and coal, which included record tonnage from Wyoming’s Southern Powder River Basin.
Jack Koraleski, executive vice president for marketing and sales, said the energy business unit, of which coal is a part, is expected to “be a building block of volume growth” in 2007.
Revenue grew in five of six business units. Industrial products posted a flat result, partly a reflection of a downturn in the nation’s construction market.
“Obviously that’s the business group we’re most concerned about,” Koraleski said.
The company has improved its ability to recover from severe storms, Young said. The network is more efficient and has been simplified through the Unified Plan, a network management plan put in place about three years ago.
Ice storms in January caused power outages and slowed shipments.
“Mother Nature didn’t take very long to put us on the defensive,” Koraleski said. The effect of the storms could cut the railroad’s volume by 4 percent to 5 percent in the first quarter.
Average train speed and the average amount of time trains spend waiting at terminals improved for the quarter and for the year.
The network also has been improved through capital expenditures of recent years, something U.P. plans to continue this year with a budget of about $3.2 billion, compared with $2.7 billion in 2005.
Young said he expects the increased capital budget to continue for the next few years as the railroad speeds up capacity work on the important Sunset Corridor, between Los Angeles and El Paso, Texas, where U.P. has been adding a track since it merged with the Southern Pacific in 1997.
The railroad now plans to complete that work in the next three or four years instead of taking another eight years, Young said.
The railroad’s improved financial position amid tighter capacity means that it is approaching the point where it will be able “to meet and then beat our cost of capital,” said Rob Knight, chief financial officer.
For the year, net income was about $1.61 billion, or $5.91 per share. That’s an increase of about 57 percent from 2005 net income of about $1.03 billion, or $3.85 per share.
Revenue for the quarter rose to about $3.96 billion from $3.62 billion for the same period in 2005, a 9 percent increase. For the year, revenue rose about 15 percent, from $13.58 billion in 2005 to $15.58 billion in 2006.
The company’s customer satisfaction index again rose through the year, Young said.
The railroad also has focused on raising prices for its improved service and for space on its network. About 6 percent of its contracts are due to be renegotiated in 2007, besides opportunities to seek additional value elsewhere, Young said.
In 2007, first-quarter earnings are expected to be $1.25 to $1.35 per share, Young said.
For the full year, he projected revenue growth between 6 percent and 7 percent and earnings in the range of $6.50 to $6.80 per share, an increase between 10 percent and 15 percent.