Union Pacific Q3 Earnings Preview: Weak Coal Shipments To Weigh On Results

Union Pacific (NYSE:UNP) will announce its third quarter results and conduct a conference call with analysts on Thursday, October 22. ^[1] We expect weak shipment volumes, particularly coal shipments, to negatively impact the company’s revenues and profitability. As per Union Pacific’s carload report for the third quarter ending September 26, the company’s shipment carloads, including intermodal shipments, declined 6% year-over-year, with coal carloads declining around 18%. ^[2] In addition, lower fuel surcharge revenues, as a result of the decline in oil prices over the past twelve months, will negatively impact the company’s top line. However, lower fuel expenses will offset most of the impact of lower fuel surcharge revenues on the company’s profits. In this article, we will take a look at what to expect from Union Pacific’s Q3 results.

Declining Coal Shipments

Weak demand for coal has negatively impacted the company’s coal shipments. An adverse regulatory environment and weak natural gas prices have tempered the demand for coal. As a part of the U.S. government’s efforts to reduce carbon dioxide emissions, new regulations target a 32% reduction in power plant carbon dioxide emissions below 2005 levels by 2030. ^[3] Coal has a much higher emissions intensity as compared to natural gas. This is illustrated by the following table. Though coal and natural gas account for nearly equal proportions of U.S. electricity generation, coal accounts for a much higher share of power plant carbon dioxide emissions. Given the adverse regulatory environment, there is a definite shift towards natural gas power generation in the U.S.

U.S. Power Plant Carbon Dioxide Emissions, Source: EIA

In addition to the adverse regulatory environment, low natural gas prices are accelerating the pace of adoption of natural gas as the preferred fuel for electricity generation. Natural gas prices are expected to average below $3 per million British Thermal Units (MMBtu) in 2015, a level which favors increasing adoption of natural gas as the preferred fuel for electricity generation. ^[4] A combination of low natural gas prices and the adverse regulatory environment has dampened the demand for coal and Union Pacific’s coal shipments. Declining coal revenues will negatively impact the company’s Q3 results.

Declining Fuel Prices Will Lower Revenues

The decline in crude oil prices and consequently, highway diesel prices, over the last twelve months, will negatively impact Union Pacific’s fuel surcharge revenues. The company’s fuel surcharge revenues are based on two month lagged highway diesel prices. U.S. highway diesel prices for the period ranging from May to July, which would impact Union Pacific’s Q3 results, declined roughly 27% year-over-year. ^[5] In contrast to fuel surcharge revenues, which are linked to two month lagged values of highway diesel prices, fuel expenses for the company are based on spot prices of highway diesel. With diesel prices having weakened over the course of the last twelve months, the decline in fuel prices may benefit Union Pacific on a net basis.

In the last quarter, Union Pacific reported an operating ratio (operating expenses as a percentage of operating revenues) of 64.1, which was 60 basis points worse off than in the corresponding period of last year. ((Union Pacific’s 2015 Q2 News Release, Union Pacific Website)) It would be interesting to note whether the net impact of fuel would be enough to counter the impact of the decline in shipments on the company’s operating ratio in Q3. With Union Pacific’s coal shipments likely to decline going forward, the company would be looking to improve the productivity of its operations in order to maintain its profitability. We will be keenly looking out for any information on plans to improve productivity in the earnings conference call.

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1. Union Pacific Corporation Invites You to Join Its Third Quarter 2015 Earnings Release Broadcast, Union Pacific News Release [↩]
2. Union Pacific’s Week 38 2015 Carloading Report, Union Pacific Website [↩]
3. Obama’s New Climate-Change Regulations to Alter, Challenge Industry, Wall Street Journal [↩]
4. Short Term Energy Outlook, EIA [↩]
5. U.S. On-Highway Diesel Fuel Prices (dollars per gallon), EIA [↩]