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Rail News: Norfolk Southern Railway

Norfolk Southern copes with soft utility coal volume, sets four financial records in 2Q

Despite slow economic recovery and soft coal business, including a 21 percent decline in utility coal volume, Norfolk Southern Corp. set two second-quarter records and two all-time records in 2Q.

Railway operating revenue, although essentially flat compared with second-quarter 2011, set a 2Q record at $2.87 billion and income from operations rose 7 percent to a 2Q record $934 million. Diluted earnings per share increased 3 percent to an all-time-high $1.60 and NS’ operating ratio improved 2 points to an all-time-best 67.5. But net income tumbled 6 percent to $524 million. Analysts surveyed by FactSet had expected earnings of $1.53 per share and revenue totaling $2.93 billion.

The keys to NS’ financial performance were operating efficiencies and cost controls, said Chairman, President and Chief Executive Officer Wick Moorman during an earnings teleconference and webcast held yesterday afternoon. For example, crew starts declined 2 percent even though volume inched up 1 percent to nearly 1.8 million units.

“We reaped the benefits of improved rail operations, which provided for higher asset velocity, larger roadway maintenance windows and reduced equipment usage,” said Moorman. “These allowed us to hold down cost increases in wages, purchase services and equipment rents, as well as provide a high level of customer service.”

Broken down by revenue category, coal revenue fell 15 percent to $755 million and volume dipped 12 percent to 354,800 units. Continued competition from low-priced natural gas and reduced electrical demand due to mild winter/spring temperatures held down utility coal business, said Executive Vice President and Chief Marketing Officer Don Seale. However, domestic metallurgical coal volume rose 2 percent and export coal volume climbed 6 percent, primarily driven by a 27 percent gain in export coal traffic at the Port of Baltimore, he said.

Merchandise revenue grew 9 percent to $1.6 billion, breaking the previous record set in the first quarter, and volume rose 4 percent to 604,100 units. Agricultural products volume was flat — mostly due to fewer corn shipments — and paper volume dipped 3 percent, but automotive volume soared 16 percent, steel volume climbed 4 percent and chemicals volume increased 3 percent, said Seale.

Intermodal revenue rose 4 percent to $563 million and volume increased 5 percent to 840,400 units primarily because continued highway conversions drove a 10 percent gain in domestic volume, he said.

In terms of costs, railway operating expenses declined 3 percent to $1.94 billion. Fuel costs dropped by $22 million to $390 million as the average price per gallon of diesel dropped 3 percent to $3.15, said EVP and Chief Financial Officer James Squires.

Looking ahead to the remainder of 2012, NS expects the strength shown in most components of its book of business to continue, said Moorman. Even the largest component — coal — figures to post some improvement.

“The weather will normalize and gas prices will eventually go up,” said Moorman. “We're optimistic about the prospects for continued growth in export thermal coal in the near term, as well as for export metallurgical coal over the longer term.”

Seale cited one promising sign: Utility stockpiles have dropped 14 percent in the past month because of hot summer weather.

Jeff Stagl

Contact Progressive Railroading editorial staff.

More News from 7/25/2012