Norfolk Southern Skids on Weak Coal Market in First-Quarter 2015, Sees Improvement in Second Half of Year

Researched by Industrial Info Resources (Sugar Land, Texas)--Eastern U.S. freight railway Norfolk Southern Corporation (NYSE:NSC) (Norfolk, Virginia) reported a dip in revenues and profits for first-quarter 2015, as continued weakness in international coal markets and harsher-than-expected winter weather offset stronger volumes in the Intermodal and General Merchandise segments. Net income was reported to be $310 million, a 15.76% decrease from first-quarter 2014.

Industrial Info is tracking $1.77 billion in active projects involving Norfolk Southern, including $68 billion in upcoming replacements on the Portageville Freight Rail Bridge in Buffalo, New York. The project involves building 963 feet of bridge sections, l-beams and other components. Modjeski and Masters (Harrisburg, Pennsylvania) is performing design-engineering services, and the New York State Department of Environmental Conservation (Albany, New York) is serving as a consultant.

Total operating revenues stood at $2.57 billion, a 4.54% decrease from the same period last year. Despite stronger traffic in Norfolk Southern's intermodal and merchandise businesses, including a 5% volume increase in the former and improved shipments for chemical and automotive products in the latter, the company's results were weighed down by a 7% decline in coal volumes. Decreased domestic demand from utilities and a weak global export market eroded results for the Coal segment. However, the company benefited from lower fuel costs.

Capital expenditures for the quarter were reported to be $392 million, compared with $382 million in first-quarter 2014.

"Coal burning at eastern [U.S.] utilities was down 14.5% in the first quarter, due to lower national and regional natural gas prices, causing our utility volumes to decline 6%," said James Squires , the president of Norfolk Southern, in a conference call. "Volumes to northern [U.S.] utilities were down nearly 9%, while volumes to southern [U.S.] utilities were down 2%. Though handling a greater percentage of volume to our southern utilities generally increases our coal revenue per unit, this positive mix impact was more than offset by a 20% decline in export coal volumes in the first quarter."

Norfolk Southern executives expect service levels to be much stronger in the second half of 2015, with domestic consumers spending more and results strengthening in the construction and automotive businesses. Ethanol and soybean exports are expected to grow, as are domestic crude-oil shipments to East Coast refiners. Executives also see better opportunities ahead for highway conversions. However, the Coal segment likely will continue to suffer from low natural gas prices and high stockpiles, with competition strengthening in global markets and domestic steel production declining.

"We continue to obtain price increases at or above rail inflation in most areas of our business, and should see negative price mix effects abate in the second half [of the year]," Squires said in the conference call. "However, higher fuel surcharges in the comparable periods last year are likely to result in lower revenue in the second and third quarters, and for the full year. By the final quarter of 2015, however, we expect top-line growth to resume."

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