Solid quarter, year for UP

Union Pacific posted solid financials for fourth-quarter and full-year 2018, and committed to a 2019 capital program that will equal 2018’s $3.2 billion.

UP reported record 2018 fourth-quarter net income of $1.6 billion, or $2.12 per diluted share, which represents 29% and 39% increases, respectively, when compared to adjusted results for fourth-quarter 2017. Reported fourth-quarter 2017 results include previously disclosed adjustments reflecting the impact of corporate tax reform. Including those items, 2017 fourth-quarter reported net income was $7.3 billion, or $9.25 per diluted share.

Operating revenue totaled $22.8 billion compared to $21.2 billion in 2017. Operating income totaled $8.5 billion, an 8% increase compared to adjusted 2017. In addition:

• Freight revenue totaled $21.4 billion, an 8% increase compared to 2017. Carloadings were up 4% vs. 2017, led by strong growth in industrial and premium shipments.
• Average diesel fuel prices increased 27% to $2.29 per gallon in 2018 from $1.81 per gallon in 2017.
• UP’s operating ratio improved to 62.7%, 0.1 points lower than adjusted 2017.
• Average network velocity, as reported to the Association of American Railroads, was 24.5 mph, 4% slower than full-year 2017.
• Average terminal dwell was 29.6 hours, a 2% improvement compared to full-year 2017.
• UP’s reportable personal injury rate of 0.82 incidents per 200,000 employee-hours increased 4% compared to full-year 2017.
• The capital program in 2018 totaled $3.2 billion.
• UP repurchased 57.2 million shares in 2018 at an aggregate cost of $8.2 billion, which includes 24.3 million shares associated with a $3.6 billion Accelerated Share Repurchase program initiated in June 2018 and completed in the fourth quarter.

“We reported record earnings for the quarter driven by strong volume growth, core pricing gains, and regaining positive productivity momentum,” said Lance Fritz, Union Pacific Chairman, President and CEO. “Building on this progress, we are advancing the implementation schedule for Unified Plan 2020 (UP’s iteration of Precision Scheduled Railroading). Since starting this initiative in October, we have improved on-time service for our customers while at the same time eliminating excess costs and improving the utilization of network resources.”

Fourth Quarter Summary

Operating revenue of $5.8 billion was up 6% in fourth-quarter 2018 compared to fourth-quarter 2017. Business volumes, as measured by total revenue carloads, increased 3% compared to 2017. Strong growth in industrial and premium shipments more than offset declines in agricultural products and energy. In addition:

• Quarterly freight revenue increased 6% compared to fourth-quarter 2017, as positive volume, increased fuel surcharge revenue and core pricing gains all contributed to the increase, but were partially offset by negative business mix.
• UP’s operating ratio of 61.6% improved 1.1 points compared to adjusted fourth-quarter 2017.
• The $2.33 per gallon average quarterly diesel fuel price in fourth-quarter 2018 was 15% higher than fourth-quarter 2017.
• Quarterly average network velocity, as reported to the AAR, was 24.4 mph, 3% slower than fourth-quarter 2017.
• Average terminal dwell was 26.7 hours, an 18% improvement compared to fourth-quarter 2017.
• UP repurchased 8 million shares in fourth-quarter 2018 at an aggregate cost of $1.2 billion, and received 4.5 million shares to complete a $3.6 billion Accelerated Share Repurchase program initiated in June 2018.

Summary of Fourth Quarter Freight Revenues

• Energy down 8%.
• Agricultural Products up 5%.
• Industrial up 10%.
• Premium up 15%.

2018 Full Year Summary

For full-year 2018, UP reported record net income of $6 billion or $7.91 per diluted share, which represents 29% and 37% increases, respectively, when compared to adjusted results for 2017. Reported 2017 results include previously disclosed adjustments reflecting the impact of corporate tax reform. Including those items, 2017 reported net income was $10.7 billion, or $13.36 per diluted share.

2019 Outlook

“We are optimistic that continued economic growth, improving service performance and the strength of our diverse franchise will drive positive volume and revenue growth in 2019. We expect operating margins will increase as a result of solid core pricing gains and significant productivity benefits from our G55 + 0 initiatives, including Unified Plan 2020,” said Fritz. “We have a strong leadership team in place that includes new people in key positions who will help deliver on our goals for achieving industry-leading safety, service reliability and financial performance in the coming year.”

2019 Capital Program

UP committed to $3.2 billion in 2019 capital spending, the same amount it invested in 2018.

The spend on Positive Train Control (PTC) is forecast at $115 million this year, a dramatic decline of $43 million as the PTC initiative moves from “revolution to everyday operations.” That will leave the lion’s share of 2019 capital spending for infrastructure replacement.

That’s in keeping with what vendors and contractors were told at the NRC Conference in Marco Island, Fla., earlier this month.

UP Vice President Engineering Eric Gehringer told the conference that in 2019 the railroad would invest in 3.7 million ties, 515 miles of rail, 170 miles of ballast renewal, and 4,000 miles of OOF (out-of-face) surfacing.

Reading between the lines in the earnings statement, it seems likely that UP’s capex will hold at comparable levels for the foreseeable future. UP reached an operating ratio of 61.1% in the fourth quarter, an improvement of 1.1 points compared to adjusted fourth-quarter 2017 OR. And in remarks to Wall Street analysts new Chief Operating Officer Jim Vena committed to getting the OR to “below 60.”

But Gehringer told attendees at the NRC Conference that there were multiple areas where work could be found, most notably an expansion of the La Salle and Tyler yards, grading and main line improvements at the new Brazos Yard (which is expected to be finished by year end), and track extensions around the network.

Also of interest to the railroad maintenance and construction industry is that UP is changing some of its work approaches. The railroad is using panelized turnouts again, will take delivery of an autonomous tie plate distribution machine in the second quarter, and is looking to boost productivity while reducing the number of machines used in a tie gang.

One particularly interesting development is the use of helicopters for vegetation control. “It’s half as expensive as if we had done it with our existing tools,” Gehringer said.

Engineering Editor Paul Conley contributed to this story.