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Norfolk Southern's 4th-quarter profit falls 33%

The railroad now estimates the total costs related to the East Palestine derailment will top $1.1 billion, but that total will only continue to grow.
Norfolk Southern locomotives.
Posted at 5:57 PM, Jan 26, 2024

Norfolk Southern's fourth-quarter profit fell 33% because of the ever-growing costs of the cleanup of last year's fiery derailment in eastern Ohio, but the railroad did deliver 3% more shipments during the quarter and even without the costs related to that toxic crash its profits still would have been down 14%.

The Atlanta-based railroad said it earned $527 million, or $2.32 per share, during the quarter. That's down from $790 million, or $3.42 per share, a year earlier. Without the $150 million in additional derailment costs, Norfolk Southern would have made $677 million, or $2.83 per share.

The analysts surveyed by FactSet Research predicted that Norfolk Southern would make $2.86 per share, so the results fell just short of that.

The railroad now estimates the total costs related to the East Palestine derailment last February near the Ohio-Pennsylvania border will top $1.1 billion, but that total will only continue to grow over time because the cleanup is still ongoing and Norfolk Southern faces lawsuits and additional penalties that haven't been settled.

The railroad said it did receive an additional $76 million in insurance payments related to the derailment during the quarter, and it expects those policies to eventually cover most of the cost of the derailment that forced thousands of people to evacuate their homes and left residents with worries about possible long-term health effects. Norfolk Southern has now received $101 million of insurance payments.

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Norfolk Southern plans to cut 7% of its managers this year and find ways to run more trains with the same number of crews by speeding up how quickly cargo moves across the railroad to help reduce its costs. The railroad is trying to catch up to its more profitable peers, but all the other freight railroads are also cutting costs.

"No one is standing still in the industry," said Edward Jones analyst Jeff Windau. "They're committing to making improvements, and they want to have industry-competitive margins, but the bar keeps moving."

Norfolk Southern CEO Alan Shaw said he's proud that his team "responded decisively and responsibly" to the derailment to help East Palestine and make the railroad safer.

"Last year was historically challenging, with a major derailment to start off the year, followed by network disruptions and compounded by a stubbornly weak freight market. The eastern Ohio incident tested our resolve," Shaw said.

The volume growth the railroad reported is an encouraging signal about the economy, but even with that Norfolk Southern's revenue slipped 5% to $3.07 billion. That was also behind the $3.087 billion that the analysts surveyed by FactSet predicted.

The railroad does predict that its revenue will grow about 3% in 2024, and it will continue to work to become more productive throughout the year. If it can continue getting its trains to run more smoothly, that will allow the railroad to cut overtime, reduce the number of times it has to drive new crews out to a train and make its customers happier.

To that end, Norfolk Southern said the average speed of its trains continued to creep up in the fourth quarter to 21.9 mph, and the average amount of time rail cars sitting idle in rail yards decreased to 24.8 hours.

In addition to the derailment, Norfolk Southern's financial picture is complicated by its $1.65 billion acquisition of the Cincinnati Southern Railroad that voters approved in November, so it will happen early this year.

A Norfolk Southern subsidiary has long leased the railroad from the city of Cincinnati and runs as many as 30 trains a day on it, making it a crucial piece of the railroad's network between Ohio and Tennessee.

Buying it will allow Norfolk Southern to stop paying lease payments that it worried might increase significantly, but the railroad took out additional debt late last year to finance the purchase, leaving it saddled with about $210 million in interest payments every quarter. Because of that, Norfolk Southern suspended its share repurchases while it absorbs the regional railroad.

Cincinnati officials have said they planned to use the cash they receive to set up an infrastructure trust fund that will be invested and generate money to be used for future projects in the city.