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Norfolk Southern coal freight continues to drop amid new operating plan

Houston — While Norfolk Southern's coal freight and revenue have fallen amid weak domestic and international market conditions, the railroad remains optimistic about its improved productivity driven by its new operating plan, Alan Shaw, the railroad's head of marketing, said Thursday at the Stephens Nashville Investment Conference.

Shaw said coal is in secular decline.

"And what that does for us is we look for every opportunity to provide value into the coal market because it still is important to us. Well, we also look for opportunities for productivity," he said.

Shaw noted NS' implementation of a reservation system at its coal export terminal at Lamberts Point, along with short lines added to some terminals and other changes.

"We're continuing to look at [adding productivity] while recognizing the strengths that we've got in our intermodal and our merchandise franchises," Shaw said.

"Coal is important to us," Shaw said. "It used to be 30% of our revenue. Now it's less than 15% of our revenue."

In the third quarter, coal revenue totaled 13%, Shaw said during the railroad's earnings call last month.

NS' utility portfolio was affected by more domestic natural gas capacity and lower gas prices, which suppressed coal burn. Also, seaborne demand, particularly in Europe, remains weak for both met and thermal coal.

"Export thermal and metallurgical prices remain at low levels, making it difficult for US coals to compete globally," Shaw said during the call.

Overall, the railroad expects continued softness in the freight business into the fourth quarter, with imports and exports weak on both the East and West coasts.

"Commodity prices are obviously pressuring what we see in steel and in coal," Shaw said, adding that the industrial economy is not strong, either, at the moment.

With NS' implementation of PSR and its TOP21 dynamic flexible new operating plan this year, the company remains confident about achieving strong productivity and operating leverage for its shareholders, Shaw added.

During the investor call, Shaw emphasized a record third-quarter operating ratio, in addition to 15 consecutive quarters of year-on-year OR improvement.

In 2020, "we're anticipating continued softness," Shaw said. "Just more broadly, I think you're going to see progression next year. We're going to continue to progress our implementation of PSR. We're going to continue progress our productivity, our pricing strategy and our service product. And when the economy does turn around, we're going to be in a great position to provide growth and strong operating leverage from that growth."

-- Olivia Kalb,

-- Edited by Bill Montgomery,