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Coal volume that tumbled 14 percent year over year hit Norfolk Southern Corp.'s financial results hard in the third quarter. And that impact was exacerbated by a 7 percent drop in export coal traffic and a 1 percent dip in merchandise volume compared with third-quarter 2011 levels, including a 7 percent decline in metals and construction traffic due to weaker highway and commercial construction activity, NS senior executives said yesterday afternoon during a 3Q earnings conference.

Overall, operating revenue declined 7 percent to $2.7 billion, revenue per unit decreased 5 percent to $1,509, volume dipped 1 percent to 1.79 million units, income from railway operations dropped 22 percent to $731 million, net income plunged 27 percent to $402 million and diluted earnings per share fell 22 percent to $1.24. In addition, NS' operating ratio climbed 5.4 points to 72.9.

As NS had announced in late September, third-quarter earnings fell below last year's level primarily because of coal and merchandise volume declines, and lower fuel surcharge revenue, said Chairman, President and Chief Executive Officer Wick Moorman.

"Third-quarter results reflect weak market conditions," he said, adding that record intermodal volumes partially offset the revenue and income declines.

Even frac sand volume declined in the quarter because drilling activity declined in the Marcellus and Utica shales. Active rig counts in Ohio, Pennsylvania and West Virginia dropped 27 percent.

"Low natural gas prices prompted operators to reduce dry gas production," said Executive Vice President and Chief Marketing Officer Don Seale. "The decline is most pronounced in Pennsylvania, which represents our largest market for the Marcellus and Utica shales, where rig counts fell by over 40 percent, or 56 rigs, since the third quarter of 2011."

Despite the weaker top line, NS held down the bottom line as operating expenses increased only about 1 percent to $1.9 billion, primarily because operations are fluid and efficient, said Moorman.

"While productivity-related efficiency enabled us to do a good job of expense control as related to inflation, the decrease in these expenses, obviously, could not offset the revenue declines," he said.

By sector, coal revenue tumbled 22 percent to $701 million, general merchandise revenue dipped 1 percent to $1.4 billion and intermodal revenue rose 3 percent to a quarterly record $567 million as intermodal volume increased 5 percent to a quarterly record 867,100 units. Ongoing highway conversions and tightening truck capacity helped drive domestic intermodal business, said Seale.

Soft traffic in September accounted for more than 90 percent of the entire third-quarter volume decline as coal and merchandise carloads materially weakened through the month, he said. Those weakening trends likely will carry over through the foreseeable future, said Seale.

"We expect that volume trends in the fourth quarter will be somewhat reflective of those we saw in September, as we work our way through material softening in several of our key markets," he said.

Although the headwinds NS is facing will continue "largely unabated" through the fourth quarter and into the first half of next year, senior execs are optimistic about the railroad's prospects, said Moorman.

"While our outlook for the next few quarters is guarded, over the longer term, we feel confident that we can continue to deliver high levels of service to our customers and superior returns to our shareholders," he said. "We remain focused on controlling costs while continuing to … invest in projects that will support future growth."

NS also announced that it topped all railroads in the 2012 Newsweek Green Rankings released this week and moved up 217 spots from its 2011 ranking to 181 on Newsweek's U.S. 500 list. The Class I also ranked eighth on the U.S. transportation and logistics sector list and was 300th on the Global 500 list. All the rankings recognize companies' environmental efforts.

The U.S. transportation and logistics sector list also includes Union Pacific Railroad at No. 10 ( and No. 246 on the top 500 list) and CSX Corp. at No. 11 (and No. 253 among the top 500). United Parcel Service tops the sector list, which also includes J.B. Hunt Transport Services at No. 18.

— Jeff Stagl