Earnings season is now in full swing for the energy patch, and it’s time for an update.

Railroad CSX (NYSE: CSX) reported earnings yesterday morning and hosted its conference call; the company was the first major railroad to report second quarter results and is therefore worth watching carefully. For those unfamiliar with my bullish thesis on the railroads, I outlined the industry in the most recent issue of The Energy Strategist, “Beyond Oil and Gas.”

The story continues to be that the railroads are seeing solid growth in volume coupled with strong pricing power; the industry hasn’t been able to raise prices as quickly for more than 15 years. Strength in the railroad industry is also increasingly led by two key commodities: coal and agriculture.

CSX confirms my rationale for the industry. Overall results came in ahead of expectations by about a penny. Results were driven mainly by pricing increases, not actual growth in volume. Volumes were flat compared to last year as weakness in fertilizer, lumber and paper products offset strength in coal, agriculture and intermodal.

As I stated in the last issue of TES, weakness in paper and lumber has been a developing story for some time; lumber demand in particular is moderating as the housing market cools notably from red-hot activity just a few years ago. This is nothing unexpected or unusual. The fertilizer weakness is mainly a company-specific issue related to a single plant in Florida, served by CSX, that’s been closed since late last year.

In the conference call, management spent considerable time talking up the company’s “One Plan,” which is basically a scheduled railroad plan similar to Wildcatter Union Pacific’s (NYSE: UNP) “unified plan,” discussed in the most recent issue. CSX is roughly one or two quarters ahead of Union on implementing its scheduled railroad plan; the fact that the benefits of this plan are really starting to take hold for CSX is a positive for Union Pacific.

CSX’s One Plan resulted in better originations; the number of trains leaving on time increased. In addition, terminal dwell time–the number of hours trains spent sitting in terminals waiting to be loaded–fell to about 25.5 hours, also a significant improvement. This helped push the overall operating ratio lower once again. CSX’s operating ratios have been holding under 80, a healthy level that represents a significant improvement from the 88, 87 and 82 percent ratios the company posted in 2003, 2004 and 2005, respectively.

Of course, much attention was also focused on coal growth. Coal revenues were up about 10 percent for the quarter, but most of that came from pricing increases, not volume–the volume of coal moved was up only 2 percent. Several analysts asked about this during the call; it seems that this was the one area of concern for CSX.

I don’t see coal volumes as a long-term issue. The second quarter tends to be seasonally a bit weaker in terms of coal volume movements, and management reported that hot weather in the eastern US–where CSX focuses its operations–had started to filter through into higher coal demand this quarter. The company has been able to drive significant pricing increases; as more of its older contracts expire during the next two to three years, this strong trend in pricing should continue.

CSX mentioned ethanol and grain movements specifically as major growth areas. Growth in biofuels represents another significant trend for the rails that’s not particularly dependant on economic growth.

One final point from the call bodes well for Gusher recommendation Wabtec (NYSE: WAB). CSX is openly discussing new technology for railcars that would allow it to cut the actual size of crews on its trains. This technology is obviously encountering some opposition from labor unions, but safety improvements resulting from the technology and better efficiency are starting to carry the debate. This is great news for Wabtec, a leading provider of signaling equipment and advanced train control systems.

As I write, Union Pacific’s results are just hitting the wires, though the conference call won’t take place until later today. My initial reaction is that Union’s results are even more positive than those of CSX with the same basic trends in play. Specifically, Union Pacific beat expectations by 11 cents, a larger margin than CSX. Agricultural revenues were up an astounding 22 percent in the second quarter, while energy revenues (coal) were up 16 percent. Revenues were, in fact, at an all-time high.

The operating ratio improved by more than 4 percentage points to 81.7 percent. This suggests that the company’s unified plan continued to aid operations; despite the higher volume, there wasn’t a notable uptick in terminal dwell time or decline in velocity of trains.

Bottom line: Reports from Union Pacific and CSX are strong and suggest that there’s no slowdown in the commodity transport story I outlined in the last issue of TES. I prefer Union Pacific because of the potential for the company to play catch-up as operational performance improves due to the unified plan. In addition, the company has an excellent franchise transporting low-sulphur western coal to the East. The stock is up sharply pre-market as a result of its strong release; I’m reiterating my buy recommendation on the Union Pacific.

Continued weakness in lumber isn’t good news for the two Canadian rails that tend to be more focused on the lumber and paper markets. For now, I’d recommend steering clear of Canadian National (NYSE: CNI) and Canadian Pacific (NYSE: CP). Both companies are scheduled to report during the next few days.