Norfolk Southern's Earnings Decline On Coal Volumes, Fuel
1. Norfolk Southern's Earnings Decline On Coal Volumes, Fuel
Norfolk Southern announced its first quarter 2015 results on Wednesday, April 29. A few days ahead
of its earnings, the railroad had provided its expectations for the quarter in a bid to prepare the
market for a disappointment. Despite this, its stock fell 1.14% through the day. Plagued by declining
coal volumes and fuel surcharge revenues, the railroad reported a 5% year-on-year decline in
revenues, just under $2.6 billion.
Norfolk Southern's operating expenses declined 3% due to a lower fuel bill. However, its operating
ratio increased 120 basis points, to 76.4%, as the decline in operating expenses was not
commensurate with the revenue loss. This also led to a decline in net profits, which reduced
earnings per diluted share by 15% year-on-year, to $1.00.
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Low Fuel Prices Eat Into Top Line
Norfolk Southern reported a decline in its top line primarily due to the loss of $132 million in fuel
2. surcharge revenues as a result of the steep decline in oil prices. This also reduced the railroad's
revenue per unit, which declined 7%. In the first quarter, the average price of the U.S. on-highway
diesel fuel and WTI declined 26% and 51% year-on-year, respectively. However, the declining fuel
prices led to a net positive benefit for Norfolk Southern as its fuel bill declined $168 million. This is
because fuel surcharge is based on two month lagged values of highway diesel prices or WTI, while
fuel expenses are based on spot prices. Since fuel prices have declined continuously, spot prices are
lower than prices two months back, leading to lower fuel expenses than fuel surcharge revenues.
Going forward, we expect Norfolk Southern's revenue per unit to continue to suffer from the low fuel
price environment. Around 85% of the railroad?s revenue base yields fuel surcharge revenue, with
an even split between WTI and on-highway diesel-based programs. More than two-thirds of the
contracts tied to the WTI have a trigger price of $64 per barrel. These contracts will likely not yield
any fuel surcharge in 2015 since crude oil prices have already fallen way below the trigger price.
Light, sweet crude listed on the New York Mercantile Exchange for June delivery traded at around
$59 a barrel on Wednesday. The remaining WTI and on-highway diesel based contracts are likely to
generate lower revenues. Norfolk Southern generated $1.3 billion in fuel surcharge revenue in 2014.
Weak Coal Carloads
U.S. railroads have been suffering from weak metallurgical and thermal coal prices in the global
market. Coal prices have slumped due to high exports from Australian coal suppliers and low
demand from China. Additionally, the strong U.S. dollar has also presented headwinds. U.S. coal
suppliers have either had to lower their prices in order to remain competitive or have stopped
exporting. Norfolk Southern's coal carloads, which accounted for 20.5% of its revenues in 2014,
have also been suffering due to these trends. Its coal volumes declined 7.4% in the first quarter and
the weakness is likely to persist in the short term.
The price of metallurgical coal is likely to decline to a six year low in the second quarter of the year
as Australian coal producers have agreed to sell met coal at around $109.50 per metric ton to
Japanese steel mills in the second quarter, compared to $117 in the first quarter. This will likely
keep U.S. met coal producers at bay. Thermal coal traded at around $54 in the beginning of April,
significantly lower than the cost of production at many U.S. mines, which is likely to lead to a decline
in Norfolk Southern?s thermal coal shipments.
http://www.forbes.com/sites/greatspeculations/2015/05/01/norfolk-southerns-earnings-decline-on-coa
l-volumes-fuel/
