U.S. Coal Market Erodes Norfolk Southern's Second-Quarter 2013 Results, but Other Businesses Shine

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Researched by Industrial Info Resources (Sugar Land, Texas)--Leading North American railroad company Norfolk Southern Corporation (NYSE:NSC) (Norfolk, Virginia) reported overall declines in profits and revenues in the second quarter of 2013, as continuing problems in the U.S. coal market offset growth in the company's intermodal, chemical and automotive businesses. Net income was reported to be $465 million, an 11.26% decrease from second-quarter 2012.

Total revenues stood at $2.8 billion, a 2.51% decrease from the same period last year. Although railway shipment volumes actually increased 2%, revenues declined mostly due to the Coal segment, which saw a 4% decline in volumes as natural gas provided strong domestic competition and global demand for U.S. metallurgical and thermal coal tumbled. A decline in domestic steel production, including last year's bankruptcy of RG Steel LLC, also weakened the segment. However, the Merchandise segment reported stronger chemical and automotive shipments, including a growth in crude oil-related business. The Intermodal segment benefited from domestic and international growth, such as the opening of new lanes in the Crescent Corridor between Louisiana and New Jersey.

Industrial Info is tracking $848 million in active projects in the U.S. involving Norfolk Southern, including several state-wide upgrade and rehabilitation programs for freight rail systems. The projects involve performing upgrades, modifications and rehabilitation to tracks, intermodal terminals, rail yards, hump yards, sidings, transloading facilities and automotive distribution to maintain a state of good repair and improve safety throughout network. They include $41 million worth of work in Ohio, $35 million in Pennsylvania, $32.5 million in North Carolina, $25 million in Virginia, and $21 million in Georgia.

"We continued to face a difficult environment in export coal, with loadings down 16% in the quarter," said Donald W. Seale, the executive vice president and chief marketing officer of Norfolk Southern, in a conference call. "In addition, we had a $65 million headwind associated with fuel revenue lag; the second quarter of last year has a $61 million favorable fuel lag, compared with this year's $4 million unfavorable. Despite these two factors, the majority of our other businesses performed well in the quarter."

Norfolk Southern executives are optimistic about the Merchandise segment's outlook for the remainder of 2013, with the U.S. corn and soybean crop expected to recover from 2012's losses, as well as continued growth in the domestic automotive and housing markets. Increasing project activity for crude oil and shale-related liquid petroleum gases is also expected to boost the segment. The company also expects to see new intermodal service lanes as more corridor terminals open, and intermodal business with international shipping partners is expected to grow.

However, the outlook remains dim for the Coal segment, at least in the near term. Lower domestic demand for electricity and competition from natural gas is expected to weaken demand for utility coal, while steel-related business is expected to suffer from a diminished metallurgical market. European demand is expected to soften for both metallurgical and steam coal.

"We expect that our diverse market base will generate volume growth ahead, despite continuing challenges in the coal market and a slow-growth economy," Seale said in the conference call. "We also remain committed to market-based pricing, at level that equal or exceed the levels or rail inflation. Obviously, with current conditions in our coal business, this is a short-term challenge, but that doesn't alter the value of our strong service product across a very diverse set of markets, where our pricing remains solid."

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Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.