Fueling Scrutiny for Union Pacific’s Norfolk Southern Deal

A recent filing by Union Pacific Corporation has raised eyebrows in the world of railroads. The company reported a $91 million surplus in fuel-surcharge revenue compared to its actual fuel costs, a discrepancy that takes on greater significance given the proposed acquisition of Norfolk Southern.

The numbers are striking: in the second quarter, Union Pacific generated more in fuel surcharges than it paid out in fuel expenses. This surplus accounted for about 4% of its quarterly net income. In comparison to its eastern rivals – Norfolk Southern and CSX – Union Pacific’s $91 million surplus is substantial.

The Regulatory Narrative Takes Shape

The timing of this revelation is particularly noteworthy, as Union Pacific seeks approval for the massive acquisition of Norfolk Southern. Critics argue that the consolidation of power in the railroad industry could lead to higher prices and reduced competition. In this context, the fuel-surcharge surplus takes on a different light.

Opponents of the merger may seize on this discrepancy as evidence that Union Pacific is engaging in questionable accounting practices. The fact that regulators have questioned Union Pacific’s formulas for calculating fuel surcharges only adds to the scrutiny.

A Temporary Reprieve or a Lasting Earnings Source?

Union Pacific management attributes $0.14 of earnings per share (EPS) to the net difference between fuel expense and surcharge revenue. While this may seem like a small amount, it contributes to other operating gains – including a 12% increase in second-quarter revenue and a 4% rise in freight revenue excluding fuel surcharges.

However, some analysts are skeptical about the long-term implications of this surplus. As one analyst noted, “A single quarter does not establish a permanent earnings source.” This is especially true given Union Pacific’s past struggles with fuel costs, including a $34.8 million deficit during the first quarter of this year.

A Coast-to-Coast Network: Promises and Pitfalls

Proponents argue that a coast-to-coast network would reduce interchange delays, save shippers an estimated $3.5 billion annually, and shift 2.1 million annual truckloads from road to rail. However, opponents have raised concerns about the potential for higher prices and reduced competition.

In this environment, Union Pacific’s fuel-surcharge surplus becomes a lightning rod for criticism. While it may not be enough to reshape the long-term financial case for the merger, it certainly provides ammunition for those opposed to the deal.

The Bear Case: A Surplus of Scrutiny

The problem for Union Pacific is not simply whether its formulas comply with existing rules, but rather about perception and politics. Opponents will seize on this discrepancy as evidence that Union Pacific is engaging in questionable accounting practices.

As regulatory scrutiny continues, it’s clear that the spotlight is shining brightly on Union Pacific’s accounting practices, and the company would do well to explain itself clearly and transparently. The fuel-surcharge surplus has ignited a firestorm of controversy surrounding the proposed acquisition of Norfolk Southern, and its implications will undoubtedly be closely watched as the deal moves forward.