(The following story by Ruthie Ackerman appeared at Forbes.com on December 10.) Reuters and The Associated Press contributed to this article.)
NEW YORK — Union Pacific is still chugging along in the fourth quarter albeit at a slower pace than previously expected, due to soaring diesel fuel costs and the lag time it takes to recover fuel surcharge fees.
The largest United States railroad company announced that it was lowering its fourth-quarter 2007 earnings outlook by about 20 cents a share. The company also pointed to adverse weather as the reason for weaker than expected volumes in recent weeks.
“Given the ongoing economic uncertainty, lingering weather challenges and the year-end holidays, it’s difficult to estimate volume growth in these last few weeks of the year,” said Jim Young, the company’s chief executive. “Despite these near-term challenges, Union Pacific’s long-term opportunities remain strong as our productivity and service initiatives continue to gain momentum.”
The Omaha, Neb.-based company now said it’s forecasting its fourth quarter 2007 earnings to be in the range of $1.70 to $1.80 per diluted share, down from the its previous estimate of $1.90 to $2.00 per diluted share.
Analysts had expected earnings for the fourth quarter to be $1.98 per share.
The firm expects full year 2007 earnings to be in the range of $6.76 to $6.86 per diluted share, which is more than a 14% increase compared to 2006 earnings of $5.91 per diluted share.
Fourth quarter 2007 diesel fuel costs should average roughly $2.60 per gallon. This would be a 34% increase from last year’s fourth quarter level. Diesel fuel costs averaged $2.43 per gallon in October $2.66 per gallon in November, and are expected to be over $2.70 per gallon in December.
Meanwhile, the company is expecting its fuel costs for the fourth quarter to soar over $200 million higher than the previous year. Just in November and December alone, fuel costs will be approximately $65 million higher than originally anticipated. But the company said its fuel surcharges on these higher fuel costs will not be recovered until 2008 because there is a two month lag on average in the fuel surcharge programs between expense and surcharge recovery.
“During our October 18th earnings release conference call, we cautioned investors that if fuel costs continued to rise, our financial guidance targets would be at risk,” said Rob Knight, the company’s chief financial officer. “Fourth quarter earnings will clearly be impacted by the combination of steep fuel cost increases and the recovery delay inherent in the surcharge programs.”
Also Wednesday, CSX, activist shareholders 3G Capital Partners and The Children’s Investment Fund Management nominated a minority slate of five directors to the railroad’s board as a way of increasing their influence in the company. The groups have been vocal critics of the company’s management and operational performance.
Union Pacific probably won’t be the only railroad to lower its outlook in the near-term since all railroad companies will be impacted by rising fuel costs. All the railroad companies took a nosedive on Wednesday. Union Pacific shares tumbled 3.7%, or $4.82, to $124.61 at the close after reaching a 52-week high of $137.56 just a week ago. Burlington Northern Santa Fe, the second largest U.S. railroad, slid 2.3%, or $1.93, to $81.78. Kansas City Southern slipped 1.0%, or 35 cents, to $33.88.