Headline: Norfolk Southern Earnings Fell 84 Percent in Fourth Quarter

Source: Associated Press, 24 Jan 2001

[My comments:

Note especially the last two sentences: "Norfolk Southern has been struggling since it and Richmond-based CSX carved up Conrail's northeastern freight routes in a $10.3 billion takeover in June 1999. The company also plans to redesign its service network; sell or abandon 3,000 to 4,000 underutilized or duplicate track miles, or about 10 percent of its total track miles, over the next two years; and consolidate or dispose of up to 10 underutilized or redundant support facilities."

Two points:

1. You may recall the extensive problems relating to railroad corporate mergers in the run-up to Rollover 2000 and failures of the merged computer systems to locate railway cars and even engines. That computer problem would seem to part of the "struggle" refered to in the article. These things don't just get better overnight, the impact can echo down to the bottom line for years.

2. Along with the power problems in California and warnings about the problems of the trucking industry everywhere, this article is another important harbinger of an economy and society on the edge. Power, trucking, railroads...these are the core of the physical infrastructure that keeps modern civilization going.

End my comments.]

NORFOLK, Va. (AP) - Norfolk Southern Corp. said Wednesday that fourth-quarter net income fell 84 percent, depressed by the costs of an early retirement program.

The earnings report came a day after the railroad company announced it will cut up to 2,000 jobs and sell 1,200 surplus freight cars to reduce costs and improve financial performance amid a slowing economy.

It earned $5 million, or a penny per share, in the three months ended Dec. 31, compared with $31 million, or 8 cents a share, a year earlier.

The latest results were affected by a work force reduction charge due to a voluntary early retirement program chosen by 370 of 846 eligible employees and voluntary separation programs elected by 157 employees.

Without the work force reduction charge, quarterly income grew 42 percent to $44 million, or 11 cents per diluted share.

Last month, the company warned that fourth-quarter earnings would not meet Wall Street's expectations, citing a decline in car loadings due to weakness in the economy and soaring fuel prices. In response, analysts surveyed by First Call/Thomson Financial reduced their estimates to 7 cents per share.

In late trading on the New York Stock Exchange, Norfolk Southern fell 81 cents a share to $15.50.

Our results reflect both the successes of improved operations and the challenges of significantly higher diesel fuel prices and a slowing economy," said David R. Goode, chairman, president and chief executive. "We are taking aggressive steps to improve our financial performance while reaffirming our commitment to safety and customer service."

Last year, the company eliminated 3,500 jobs through layoffs and early retirements, paring its payroll to 33,000.

Railway operating revenues for the fourth quarter were $1.5 billion, up 2 percent from the same quarter a year earlier.

For the year, Norfolk Southern reported net income of $172 million, or 45 cents per diluted share, down 28 percent from $239 million, or 63 cents a share, in 1999.

Excluding work force reduction charges, yearly income grew 14 percent to $273 million, or 71 cents per diluted share.

In 2000, railway operating revenues of $6.2 billion were 17 percent higher than in 1999.

Railway operating expenses, excluding the work force reduction charges, were $1.3 billion, down 1 percent, for the quarter, and $5.4 billion, up 19 percent, for the year. Diesel fuel costs, which were more than 50 percent above 1999 levels, had a significant impact on expenses, the company said.

The earnings slide and the restructuring are no surprise, said rail analyst Robert L. Banks with R.L. Banks & Associates Inc. in Washington, D.C.

"They're finally coming to grips with a situation that has been festering for months ever since they overpaid for Conrail," Banks said. "What is astonishing is that they have not shaken up their (top) people."

Norfolk Southern has been struggling since it and Richmond-based CSX carved up Conrail's northeastern freight routes in a $10.3 billion takeover in June 1999.

The company also plans to redesign its service network; sell or abandon 3,000 to 4,000 underutilized or duplicate track miles, or about 10 percent of its total track miles, over the next two years; and consolidate or dispose of up to 10 underutilized or redundant support facilities.

-- Andre Weltman (aweltman@state.pa.us), January 24, 2001

Answers

Fuel Costs Hit Railroad Earnings Thursday January 25, 4:44 PM EST NEW YORK (Reuters) - Rail giant CSX Corp. (CSX) rounded out a difficult week of earnings reports for U.S. railroads on Thursday, saying that, like its rivals, higher fuel costs and falling demand pressured its fourth quarter. Industry leaders were cautiously optimistic about forecasting future earnings for the railroads as continued weakness in the economy coupled with high fuel costs and winter weather conditions plagued profit margins.

"We knew this was going to be a week of bad news and now it's over," said Michael Lloyd, railroad analyst at Deutsche Bank Alex. Brown. "Those railroads that are cutting their costs and reducing their cost structure in line with lower economic growth will be well- positioned for much better earnings once we get past this first- quarter of uncertainty."

He said most railroads will probably report earnings that are flat to down in the first quarter as fuel costs are still higher than a year ago and the economy remains weak.

"The only hope will be that coal bails some of them out," Lloyd said.

Nick Kovich, a former portfolio manager with Morgan Stanley Dean Witter and a major railroad investor, said he has much of his investment riding on a resurgence in coal. Coal is a main commodity that railroads transport and demand for it has dropped as the economy stalled last year.

"The prospects for coal have clearly brightened...given what's going on in the energy market with California and natural gas," said Kovich, who says he owns "thousands" of shares of Union Pacific Corp. (UNP) stock.

Kovich also thinks the worst is over in terms of soaring fuel prices.

WEEK OF EARNINGS REPORTS

A week ago, Union Pacific, the nation's largest railroad, reported its earnings fell 5.3 percent, in line with lowered forecasts, as it succumbed to surging fuel prices and dropping demand because of the softening economy.

Omaha, Neb.-based Union Pacific reported earnings of $229 million, or 90 cents per share, before a one-time charge resulting from its Dec. 27 decision to cut 4 percent of its workforce. That compared with net income of $242 million, or 95 cents per share, a year earlier, it said.

Union Pacific "confirmed what everybody knows, which is that it's a tough economy and fuel prices are going to remain high," said Jill Evans, an analyst at J.P. Morgan Chase.

Fort Worth, Texas-based Burlington Northern Santa Fe Corp. (BNI) on Tuesday said its fourth-quarter earnings fell 19 percent because of poor winter weather conditions slowing down rail service. It also experienced high fuel costs and dramatic drops in shipping due to a weakening economy.

Burlington Northern still managed to edged out Wall Street expectations by a penny, reporting net income of $255 million, or 65 cents per share. That compared with net income of $315 million, or 69 cents per share, a year earlier, it said.

On Wednesday, National Steel Corp. (NS) called its fourth-quarter results "disappointing" and it said it was pessimistic about its near- term outlook as a weaker auto and construction market would curb demand for rail shipments.

Also on Wednesday, Norfolk, Va.-based railroad Norfolk Southern Corp. (NSC) said its fourth-quarter earnings rose, but its stock plunged as investors reacted to its announcement on Tuesday that it would cut 6 percent of its workforce, slash its dividend and get rid of 12,000 freight cars as part of a restructuring made necessary by the slowdown in the economy.

Norfolk's earning results, while still in the black, "reflect both the successes of improved operations and the challenges of significantly higher diesel fuel prices and a slowing economy," said David Goode, chief executive, in a statement.

IMPACT OF SURGING FUEL COSTS

Norfolk Southern paid 45 percent, or $43 million, more for fuel in the fourth quarter compared with a year-earlier. The railroad said it even consumed 3 million gallons less than in the fourth quarter than it did a year earlier.

"We are experiencing the highest diesel fuel costs in the past 10 years, even higher than during the Persian Gulf War," said Henry Wolf, chief executive, during an analyst meeting Wednesday.

Norfolk Southern said remained "hopeful" diesel fuel prices would moderate. It wasn't the only rail company to shell out more cash for the same amount of fuel consumption quarter-to-quarter.

Union Pacific's fuel costs rose 73 percent from a year-ago to $335 million on almost the same amount of fuel usage a year ago. The average price per gallon of fuel rose to $1.03 from 60 cents in the fourth quarter of 1999, it said.

On Thursday, CSX reported a 29 percent rise in fourth-quarter operating profits as it cleared up traffic congestion on its lines and improved service. The railroad, however, missed Wall Street expectations as soaring fuel costs and falling demand pressured earnings.

CSX Corp. (CSX), based in Richmond, Va. and which runs the largest rail operation on the U.S. East Coast, paid $55 million more in the fourth quarter, compared with a year earlier, to cover the high fuel costs. The railroad said it paid $1.10 per gallon for diesel fuel in the fourth quarter compared with 74-cents a gallon a year-earlier for virtually the same amount of fuel consumed.

RESTRUCTURING THE ANSWER

While Norfolk Southern has already announced a restructuring move, Kovich calls it defensive because the railroad was already in a weakened position when it made the decision to restructure to maintain its financial viability.

"All these companies are aggressively attempting to raise prices to offset energy, labor and other costs increases," Kovich said. "Several of these companies have announced restructurings or will announce restructurings."

He said Canadian Pacific (CP), which saw its fourth-quarter profit nearly double from its huge earnings in its oil and gas unit, would possibly restructure its portfolio and do a share repurchase to boost up the stock price.

Some of the smaller railroads, such as, Wisconsin Central and Kansas City Southern could become targets for larger railroads to acquire later this year, Kovich said.

http://money.iwon.com/jsp/nw/nwdt_rt_top.jsp? cat=TOPBIZ&src=202&feed=reu§ion=news&news_id=reu- 93352&date=20010125&alias=/alias/money/cm/nw

-- Martin Thompson (mthom1927@aol.com), January 26, 2001.