Union Pacific Expects Q4 OR In Mid-50s, Details Brazos Yard Plans

Union Pacific UNP expects an adjusted operating ratio (OR) of 55.6% for the fourth quarter of 2020, the company said in a filing to the U.S. Securities and Exchange Commission on Friday.

The preliminary figure comes as the company factors into its calculations a noncash impairment charge of approximately $278 million related to its investments in its Brazos yard in Texas. Prior to the changes, Union Pacific calculated an OR of 61%. 

OR, which is a company's operating expenses as a percentage of its revenue, is a metric sometimes used to describe the profitability of a company, with a lower OR implying improved financial health. UP says the OR of 55.6% is a 4.1 point improvement from the fourth quarter of 2019.

UP has decided that instead of proceeding with its plans to make the Brazos yard a major classification yard, it will use the investments it has already made on the property for freight car block swapping activities. 

UP said in May 2019 that it was adding block swapping capability at its Santa Teresa intermodal complex in New Mexico.

"While the company's long-term growth outlook in the southern region of its network remains unchanged, the implementation of Unified Plan 2020 has created capacity at existing facilities to effectively handle that growth," UP said in the filing signed by CFO Jennifer Hamann.

In addition to describing its plans for the Brazos yard and announcing a tentative fourth-quarter OR, UP also gave other preliminary financial results for the fourth quarter. UP expects operating revenues of approximately $5.1 billion, operating expenses of $3.1 billion and an operating income of approximately $2 billion. Excluding the $278 million noncash impairment charge, adjusted operating expenses would be $2.9 billion.

UP will release its fourth-quarter financial results on Jan. 21.

In response to UP's announcement, Deutsche Bank maintained its buy rating for the company.

"The bottom line is this is exactly the release UNP needed to recover for the relatively lackluster performance of 3Q (and Jim Vena's transition announcement)," the Friday note said. "To be sure, much of this reflects the power of recovering revenue and mix, as we highlighted in our positive 4Q preview in [mid-December] … where we specifically called out higher grain and beer volumes as contributors to a likely better-than-expected 4Q. But the more consequential point, in our view, is that UNP is achieving a sub-55% OR in the first inning of a volume recovery, when mix is still challenging, albeit recovering."

UP had initially planned to spend $550 million on the Brazos yard to turn it into one of its highest capacity classification yards on its network, with the ability to switch up to 1,300 railcars per day. But UP's implementation of precision scheduled railroading, an operating model that seeks to streamline operations, may have contributed to UP's decision to slow down the pace of the project. UP expected to spend around $550 million on the facility, and construction was expected to be completed in 2020.

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