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02 Dec 2002
MOODY'S CONFIRMS NORFOLK SOUTHERN RATINGS (SENIOR UNSECURED AT Baa1); CHANGES OUTLOOK TO STABLE FROM NEGATIVE
New York, December 02, 2002 -- Moody's Investors Service confirmed the debt ratings of Norfolk
Southern Corporation (NS) - senior unsecured at Baa1 --
and changed the outlook to stable from negative. The stable outlook
reflects Moody's view that the initial problems NS experienced integrating
its share of the Conrail assets have been substantially resolved,
that still further productivity gains are expected with strong revenue
growth once the industrial economy recovers, and that the company
is now free cash flow positive and will continue its efforts to reduce
Ratings confirmed are:
Norfolk Southern Corporation senior unsecured at Baa1; subordinated
at (P)Baa2; preferred at (P)Baa3; short term at Prime-2
Norfolk Southern Railway equipment trust certificates at Aa3
Norfolk Southern Capital Trust preferred at (P) Baa2
NS' railroad operations have been increasingly fluid since late
2001. Key operating measures such as train velocity, cars
on line and terminal dwell have all improved significantly since the depths
of NS' problems in 1999. Train operations are now above the
levels prior to the Conrail integration, when NS set the industry
standard. Moody's anticipates further productivity improvement
as the company continues to gain experience in fine-tuning its
key operating systems - the Thoroughbred Operating Plan,
its yard management system and, especially, the car blocking
system. Train on-time performance improved in tandem over
the last two years, which is now at about 85% on-time
and is expected to continue to record gains. Over time, we
expect NS' operating ratio will continue to improve from the 80.5%
posted in 3Q, 2002.
Pricing appropriate for the quality of service continues to be an important
criterion in maintaining NS' ratings, in our view.
Moody's will continue to monitor NS' ability to increase prices
going forward. As service improved, NS focused on yield improvements.
In certain segments, such as Agricultural Products and Chemicals,
increased yield offset weak volume over the past year.
However, coal, which generates the largest single component
of NS' revenue, has been weak this year in volume as well
as pricing. Carloadings have been stronger recently as the utilities
have worked off their excess supplies of the past year. Nonetheless,
we expect that coal will continue be a solid long term business for NS
with good economic returns.
We expect NS to generate positive free cash flow this year and going forward.
Moody's notes that capital spending is now essentially at maintenance
levels and we expect that CAPEX will increase, starting with fiscal
2003. Nonetheless, we also anticipate that cash flow increases
from productivity improvements and revenue gains will much more than offset
the incremental CAPEX.
With fluid railroad operations now and the company beginning to realize
the merger synergies from the Conrail assets, prospective recovery
in the industrial sector could produce a very significant free cash flow
increase. For NS, we continue to expect that the larger proportion
of merger synergies from the Conrail assets will be revenue gains rather
than cost benefits. In time, we expect that NS will realize
a substantial portion of the annual merger benefits initially anticipated
with the Conrail acquisition.
Moody's believes that NS will continue to maintain its conservative
financial policies. In particular, we anticipate the cash
flow and proceeds from asset sales will continue to be applied to debt
reduction. The company reduced adjusted debt (including leases
and receivables sold) by approximately $450 million in the first
nine months of 2002. As well, NS has not issued commercial
paper for some time, took steps earlier this year to improve the
quality of its bank credit facilities, and has advised that its
pension fund remains over funded by several hundred million dollars.
However, financial leverage remains high for the rating and the
company will need to continue making measured progress to reduce debt
in order to support the rating.
Norfolk Southern Corporation is based in Norfolk Virginia.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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