Union Pacific's coal volumes remained steady this quarter after declining for five consecutive quarters, helping the railroad to achieve its best-ever results in the most recent quarter.
Coal stabilized because of reduced stockpiles and higher natural gas prices, CEO Jack Koraleski said.
“And it's nice and hot outside,” he said. “The air-conditioning season is in full bloom.”
The loss of a legacy contract this year will continue to affect coal volumes, said Eric Butler, executive vice president of marketing and sales. But he said that while there's more coal capacity than demand, coal is “hanging in there pretty solidly at 38-39 percent of the market share on electrical generation.”
Butler said he expects coal volumes to increase in the third quarter but, ultimately, the outlook on coal will be determined by the weather, said Rob Knight, chief financial officer.
“For the full year, coal will be slightly down,” he said, reminding investors of coal's 19 percent volume drop in the first quarter.
Koraleski said: “By the time we get to the end of the year, with normal summer weather, (coal will) be slightly down because of a lot of lost business and the first-quarter slump.”
The Omaha-based railroad announced a $1.1 billion second-quarter profit, or $2.37 per diluted share, up 10 percent from $1 billion, or $2.10 per diluted share, this time last year. Operating revenue was $5.5 billion, up 5 percent, and operating income totaled $1.9 billion, up 9 percent.
Ahead of earnings, New York-based independent transportation analyst Tony Hatch said he anticipated U.P.'s second-quarter results to be one of the better ones among U.S. railroads, pointing to the railroad's diversified network. Eastern carriers, for example, heavily rely on the movement of coal and continue to more significantly deal with the lagging market.
Still, the current coal story is “not over for U.P.” either, Hatch said.
Koraleski said he's “looking for economic improvement” overall in the current quarter and his economic outlook is uncertain moving into the second half of 2013. He called the economy during the second quarter “a little sluggish” compared with the first.
For example, lumber volume during the first quarter was up 18 percent and all of U.P.'s equipment was out of storage, while lumber volume during this quarter was up 11 percent and some equipment had to be put away. Koraleski said he's happy with this quarter's lumber result and wouldn't call the economy contracting, but it's just not as strong.
“It felt to us like the second-quarter economic activity slowed. We have some indications that ... become a little more positive,” he said. “We're just not sure.
Overall volume was down 1 percent. Of U.P.'s other business segment volumes:
>> Chemicals increased 10 percent because of continued crude oil growth and increased shipments from west Oklahoma, west Texas and the Bakken oil fields in North Dakota.
>> Agricultural fell 10 percent because of last summer's drought still affecting grain car loadings and domestic grain volumes declining as parts of the country experienced a tight corn supply and reduced their livestock herds.
>> Automotive increased 4 percent as vehicle sales continued to gain momentum. Demand for light trucks rose because of an uptick in housing and construction.
>> Intermodal decreased 3 percent with softer volumes from international markets coming in on the West Coast and domestic retailers cautious about overstocking inventory.
>> Industrial products was flat — a drop in ferrous scrap outpaced gains in lumber shipments.
Discounting the doubt-digit decline in agricultural volumes this quarter, overall volume would have been up 1 percent this quarter, Butler said. Assuming an improving economy and weather, Knight said, the railroad anticipates overall positive volume growth for year-end results.
Koraleski said he's pleased with the all-time record quarter that “translates into value we're creating for our customers and increased return for shareholders.” The company's customer satisfaction index was 93, tying the record set during the second quarter of 2012.
“That's a vote of confidence we have the right strategies,” Koraleski said.