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Highlights

Expect continued pressure on coal in Q4

Record third quarter operating ratio of 64.9%

Houston — Norfolk Southern railroad reported lower coal volumes in the third quarter, driven by a weak global market and domestic utility competition, executives said Wednesday

"Our utility portfolio was impacted by additional natural gas capacity and prices that suppressed coal burn," Alan Shaw, executive vice president and chief marketing officer, said during a conference call to discuss earnings. "Export thermal and metallurgical prices remain at low levels, making it difficult for US coals to compete globally."

NS coal carloads totaled $403 million in the third quarter, down 13% year on year.

Coal volumes totaled 218,700, down 15% from the year-ago quarter and the steepest drop of NS traffic in Q3.

Largely, NS assigned this drop in coal traffic to lower natural gas prices, renewables competition and lower seaborne coal prices.

"We expect the same factors affecting third-quarter volume to persist in the fourth quarter," Shaw said.

"Coal will be pressured during the fourth quarter with the reduction of the seaborne coking coal price," he continued, adding that "you should see a sequential decline and export coal pricing as we move into the fourth quarter," which will be particularly hard to compare with the same time last year as the market was "seeing a sequential improvement at export coal pricing."

"[It is] very difficult for US goals to compete in the market with respect to thermal and metallurgical," Shaw said. "We've talked before about some of the thermal contracts are effectively hedged through 2019. And so you'll see pressure in the thermal market as we roll into 2020 and the net market is going to follow demand overseas in the global economy and the more practical pricing."

REVENUE, NET INCOME DROP IN Q3, BUT YEAR-TO-DATE UP

Net income was $657 million in the third quarter, down 6.8% from the year-ago quarter, while revenue totaled over $2.8 billion, down 4%.

"With revenue trending below our expectation in the second half and some unusual costs expected in the fourth quarter, we continued to expect operating ratio improvement for the full year but that improvement now seems likely to be less than our earlier forecast of at least 100 basis points," James Squires, president and CEO, said on the call.

Despite the drops in revenue and net income in the third quarter, over nine months, NS income totaled almost $2.1 billion, up 4.5%, and revenue was $8.6 billion, up 0.5% from the year-ago period.

Although average revenue per unit increased 2%, total NS volumes dropped 6% during the quarter.

The operating ratio came to 64.9% in Q3, a third-quarter record, the railroad said in its earnings release. NS remained confident in its goal to reach an OR of 60% by 2021.

Operationally, NS train speed increased 16% year on year and terminal dwell time dropped 32%.

However, "fuel efficiency continues to be an area of focus, and we know there are opportunities to generate savings through improved efficiency," said Cynthia Earheart, executive vice president and chief financial officer.

-- Olivia Kalb, olivia.kalb@spglobal.com

-- Edited by Derek Sands, newsdesk@spglobal.com