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Union Pacific 2Q profit drops 7 percent as coal demand falls, railroad warns about weak 2015

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OMAHA, Nebraska — A sharp decline in coal shipments drove down Union Pacific's second-quarter profit by 7 percent, and executives predicted that the railroad would fall short of expectations for the year because the challenging conditions will continue.

Its shares lost nearly 6 percent Thursday.

Faltering coal demand has created challenges for all the major freight railroads and in April, natural gas overtook coal as the top source of U.S. electric power generation for the first time ever, according to the U.S. Department of Energy.

Union Pacific Corp. said coal volume dropped 26 percent in the second quarter, and demand for that fuel is likely to remain weak in the rest of the year. Overall shipping volume is also likely to be down from last year's strong levels.

Chief Financial Officer Rob Knight said the railroad's efforts to increase prices and reduce costs won't be enough to generate profits higher than last year's $5.75 per share. Wall Street had been expecting Union Pacific to deliver earnings per share of $5.79 per share in 2015, according to FactSet.

"While we continue to improve, it is not likely at this point that we will achieve record earnings given this year's challenges," Knight said.

Union Pacific's shares fell $5.56, or 5.7 percent, to close at $92.12 Thursday.

Falling natural gas prices and the potential for more restrictions on the use of coal by environmental regulators have curtailed its use and that has weighed on railroads. Last week, rival CSX Corp. said weak coal demand would slow profit growth this year.

Union Pacific reported net income of $1.2 billion, or $1.38 per share, for the second quarter. That's down from $1.29 billion, or $1.43 per share, a year ago.

The Omaha, Nebraska, railroad said that its revenue fell 10 percent to $5.4 billion because its price increases couldn't offset the drop in volume.

While its quarterly profit beat Wall Street expectations by three cents per share, revenue fell short of analyst projections for $5.6 billion, according to FactSet.

Several analysts cut their price targets for Union Pacific Thursday but continued to recommend buying the stock because of the railroad's strong long-term prospects.

S&P Capital IQ analyst Jim Corridore said the environment remains challenging right now, but the stock is attractively valued.

Stifel Nicolaus analyst John Larkin said he expects Union Pacific to cut costs over the next few months and be ready to deliver double-digit profit growth on a regular basis once shipping volume improves.

Union Pacific has furloughed roughly 1,200 workers and reduced the number of people it is training. It has also stored 900 locomotives to reduce costs to match the lower freight demand.

There were only a couple areas where quarterly shipping volume increased for Union Pacific. Automotive shipments increased 7 percent and the number of intermodal containers the railroad hauled grew 2 percent.

Along with the coal declines, shipments of industrial products fell 13 percent and agricultural shipments fell 7 percent.

Union Pacific operates 32,400 miles of track in 23 states from the Midwest to the West and Gulf coasts.

PHOTO: In this Friday, June 6, 2014, photo, an employee performs maintenance on the tracks in front of a Union Pacific train in Council Bluffs, Iowa. Union Pacific’s second-quarter profit declined 7 percent as the railroad hauled 6 percent less freight overall and coal volumes plummeted 26 percent, the company reported, Thursday, July 23, 2015. (AP Photo/Nati Harnik)
In this Friday, June 6, 2014, photo, an employee performs maintenance on the tracks in front of a Union Pacific train in Council Bluffs, Iowa. Union Pacific’s second-quarter profit declined 7 percent as the railroad hauled 6 percent less freight overall and coal volumes plummeted 26 percent, the company reported, Thursday, July 23, 2015. (AP Photo/Nati Harnik)

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