Norfolk Southern's Q2 energy volumes fall on weak coal shipments amid COVID-19

Norfolk Southern's second-quarter energy volumes declined sharply, dragged by weak shipments in its metallurgical and thermal coal segment following competition from natural gas and impact from the coronavirus pandemic, executives said on a call July 29.

"We expect energy to remain depressed," Alan Shaw, executive vice president and chief marketing officer, said. "Continued low natural gas prices and unfavorable crude oil spreads are creating additional headwinds across all of our energy markets."

"Natural gas prices in June were at an inflation-adjusted low for the last 30 years," Shaw continued. "So that's created some headwinds, as we talked about. And I also had talked about before that we fully expected that the economic shutdown would negatively impact load in commercial and industrial markets for our utility customers."

Coal revenues were $209 million in the second quarter, down 55.3% from the year-ago quarter due to sustained low energy prices alongside impacts from the global pandemic.

Utility coal volumes dropped 57% year on year as shipments to the industrial and commercial markets deteriorated, and coal generation competed with low natural gas prices.

According to Shaw, the decline in coal volumes was slightly offset by a 3% gain in revenue per unit.

"There were two factors that primarily drove RPU in the second quarter," Shaw said. "One was volume shortfalls, the other was mix. And you can see that punctuated where utility was down 67%, whereas export was down 45%. So just there, you get some positive mix."

Shaw added that its utility South franchise contributed about 54% to its domestic volumes in the quarter, up from 50% in the year-ago period.

Additionally, met coal was 74% of the export volumes, up from 56% in Q2 2019.

"Export coal is expected to continue to be negatively impacted by the worldwide pandemic and geopolitical tensions," Shaw said. "Our expectations are tempered with the ever-present uncertainty surrounding COVID-19 and fiscal policy."

"This quarter was marked with a sharp difference between the first six weeks and the last," Shaw continued. "We understand that our volumes will fluctuate as our customers and their customers are impacted by potential future state and local restrictions in response to increasing COVID infections."

Q2 revenues totaled $2.1 billion, down 29% year on year, and net income was $392 million, down 49.7%.

According to Shaw, railroad has short lined some of its properties in its coal fields, reorganized operations, in addition to improving service and efficiency.

"There's going to be 0.5 billion tons of coal produced in the US this year," James Squires, president and CEO, added.