Norfolk Southern Railway Expects Coal, Fuel-Surcharge Headwinds in 2015, Sees $2.4 Billion in Capex

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Researched by Industrial Info Resources (Sugar Land, Texas)--Eastern U.S. freight railway Norfolk Southern Corporation (NYSE:NSC) (Norfolk, Virginia) reported fourth-quarter 2014 net income of $511 million, a 0.4% drop from the same quarter a year earlier. Revenues totaled $2.9 billion, about the same when compared with fourth-quarter 2013, as gains in intermodal and merchandise shipments offset a 15% drop in coal revenue.

Industrial Info is tracking 40 active Norfolk Southern projects worth $1.32 billion. This includes 21 projects, valued at $892 million, that are in the engineering phases; one project, valued at $20 million, which is under construction; and 18 projects, valued at $406 million, in the planning phase, where plenty of factors still could increase, decrease or eliminate expected spending.

Norfolk Southern's Pennsylvania statewide 2015 network upgrade/rehabilitation program at Greencastle has a total investment value of $92 million. The railway was defining the project scope for the program, which involves work across 2,281 miles of track, including intermodal terminals, rail yards, hump yards, sidings, transloading facilities and automotive distribution, plus supporting equipment and systems. The project is scheduled for kick off in first-quarter 2015, with completion in the fourth quarter this year.

General merchandise revenues were $1.7 billion for the quarter, the railway reported, 3% higher than in fourth-quarter 2013. Volume increased 5%. The railway reported gains in shipments for chemicals, metals and construction products, while revenues were down for agriculture products and paper and forest products. Automotive revenues were even with the 2013 fourth quarter, according to the railway.

Intermodal revenue for the quarter ended December 31 increased 5% from a year earlier to $649 million, on a 6% increase in traffic volume.

Fourth-quarter coal revenue fell 15% to $543 million on a 6% drop in volume, as a result of a weak global export market and fewer shipments to utilities, according to the earnings results.

For all of fiscal 2014, net income totaled $2 billion, compared with $1.9 billion for 2013. Revenues for the year totaled $11.62 billion, compared with $11.25 billion in 2013. Revenues rose in all categories except coal, paper, clay and forest products. Coal revenues for the year dropped to $2.38 billion, from $2.54 billion in 2013. Revenue from paper, clay and forest products totaled $794 million, compared with $795 million in 2013.

Looking forward, Chief Executive Officer Wick Moorman said the railway plans to make $2.4 billion in capital expenditures this year, compared with $2.1 billion in 2014. Norfolk Southern operates in 22 states and the District of Columbia.

Chief Marketing Officer Donald Seale said during the company's earnings conference call that the railway expects to see overall gains in intermodal and merchandise traffic revenue in 2015, but cautioned that financial headwinds will result from lower fuel-surcharge and coal-shipment revenues.

Fuel surcharges to customers, which totaled $1.3 billion last year, are expected to be only half that amount this year as a result of lower crude oil prices, Seale said. He explained that more than 85% of the railroad's revenue includes fuel surcharges to customers, which are based on the costs of West Texas Intermediate (WTI) crude and highway diesel-based programs. In most cases, the WTI-based fuel surcharge is triggered when WTI reaches $64 per barrel. At current and expected crude oil prices, that trigger level won't be reached, he said.

Coal shipments will continue to be impacted by weaker markets, which have been beset by low natural gas prices, global oversupply and unfavorable foreign currency exchange rates, he said.

However, Seale said that continued revenue growth is expected in crude-by-rail shipments to East Coast refineries this year, but perhaps at a slower rate due to current oil prices. "And we expect continued gains in NGLs [natural gas liquids] and drilling materials, such as frac sand and pipe due to strong activity in the Marcellus and Utica shale regions," he said.

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