(The following article by Christopher Dinsmore was posted on the Virginian-Pilot website on October 27.)
NORFOLK, Va. — Not Hurricane Katrina, not soaring fuel prices, not even a massive jury verdict against it could keep Norfolk Southern Corp. from posting a 4.5 percent increase in third-quarter income on Wednesday.
That’s how much the railroad business is growing right now, officials said.
The Norfolk-based railroad, the fourth-largest in the nation, said it earned $301 million in the three months ended Sept. 30, up from $288 million in the same period last year. Per-share earnings rose a penny to 73 cents, just missing by a penny the average estimate of analysts surveyed by Nelson Information.
The comparable third-quarter results from 2004 do include a one-time gain of $53 million, or 13 cents per share, from a reorganization of how Norfolk Southern accounts for its investment in Conrail, the northeastern railroad it split with CSX Corp. in 1999. Setting aside that one-time gain, Norfolk Southern’s earnings from railroad operations in the third quarter were 28 percent higher than a year ago.
The railroad reported that its third-quarter revenue surged 16 percent to $2.16 billion, from $1.86 billion in the previous third quarter, driven by significant rate increases and volume growth.
Norfolk Southern’s volume grew 5 percent in the quarter, second only to Burlington Northern Santa Fe Corp. among major North American railroads, according to the Association of American Railroads. The volume gains were led by a 9 percent increase in intermodal – the shipment of truck trailers and international shipping containers – and a 6 percent increase in coal.
“Like the Starship Enterprise, our revenues and volumes are going where we have not gone before, but we’re enjoying the trip,” said David R. Goode, chairman and chief executive officer of the railroad, which operates a 21,300-mile network in 22 Eastern states, Washington, D.C., and Ontario, Canada.
The railroad’s stock slipped $1.82, or 4.5 percent, to $38.58 a share in New York Stock Exchange trading Wednesday.
“This was not the best performance of all time,” said Tony Hatch, an independent rail analyst in New York. But “the volume and revenue numbers in the third quarter were outstanding.”
Norfolk Southern’s third-quarter results were hampered by damage to its network along the Gulf Coast from Hurricane Katrina, the rising cost of fuel and what it called an “unfavorable jury verdict.”
While the hurricane caused an estimated $44 million of damage to its system in Louisiana, Mississippi and Alabama, Norfolk Southern’s cost will be about $12.5 million after insurance, said Henry C. Wolf, vice chairman and chief financial officer for Norfolk Southern. And only $4 million of that was charged to the third quarter since the remainder qualifies as capital investment that can be paid over a number of years, he said.
The railroad’s major costs include replacing several miles of roadway, including the tracks on the concrete trestle over Lake Pontchartrain in Louisiana; the replacement of wayside signals; repairs to yards in New Orleans and Mobile, Ala.; and the replacement of equipment, vehicles and computer equipment, environmental clean up and the removal of more than 5,000 trees.
After the storm, Norfolk Southern suffered from soaring fuel costs along with consumers at the pump. The diesel used to run its locomotives cost the railroad $91 million more in the third quarter than in the same period a year ago. That’s a 93 percent increase even though its consumption increased just 3 percent, Wolf said.
The “unfavorable jury verdict” was a $17 million decision rendered by a St. Louis jury in a personal-injury case involving a worker in a Chicago rail yard who fell backward from a broken ladder on a railcar, injuring his neck, head and back. The railroad did not comment on the decision and has said it does not plan to appeal.
Overall, Norfolk Southern’s expenses rose 17 percent to $1.6 billion in the third quarter, largely driven by the increased traffic volume.
“While we had some unplanned costs from hurricanes and casualty claims, the quarter was very successful and continued our strong momentum,” Goode said.
That momentum shone through in its intermodal service, where revenue leapt 17 percent to $471 million in the third quarter. The gain was largely driven by a 16 percent surge in shipments of international containers as more cargo moved through the East Coast ports Norfolk Southern serves, including Hampton Roads, said Donald W. Seale, the railroad’s executive vice president for sales and marketing.
Coal revenue surged 22 percent, thanks to significantly higher rates and the 6 percent volume gain. Seale cited increased demand for coal from utilities as a principal driver because of record electricity generation and higher than normal oil and natural gas prices.
But the railroad’s export coal volume – much smaller than utility shipments – fell 19 percent in the third quarter, Seale said. Much of its export coal moves through its Lamberts Point terminal in Norfolk, where volume dropped 28 percent. Seale attributed the export decline to a slowdown in European steel making and the production disruption at Consol Energy’s Buchanan Mine in southwestern Virginia, which was idled in late September by equipment failure but is slated to reopen in November.
Results for the industrial side of Norfolk Southern’s business were mixed. Revenue jumped 13 percent to $1.14 billion in the third quarter, but volume dropped 1 percent. Shipments of agricultural goods and chemicals were off, while automotive, paper, steel and construction material shipments were essentially flat. The revenue gain came from higher rates and fuel surcharges, Seale said.
Some economists and analysts look to rail shipments as an indicator of where the national economy is headed.
“I have some concern about what the merchandise and general carload business is signaling about the economy in general,” said the analyst Hatch.
For 2005’s first nine months, Norfolk Southern’s net income was $919 million, or $2.24 per share, up from $659 million, or $1.66 per share, for the same period of 2004. Nine-month results for 2005 included a benefit of $96 million, or 23 cents per share, from the effects of Ohio tax legislation. Net income for the first nine months of 2004 included the gain on the Conrail reorganization.
Revenue for the first nine months of 2005 reached $6.27 billion, 17 percent more than the $5.36 billion from January to September in 2004.