DATE: Thursday, October 23, 1997            TAG: 9710230548

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER 

                                            LENGTH:   86 lines

CONRAIL PURCHASE ERODES OPERATING RESULTS AT NORFOLK SOUTHERN.

Despite a mild summer that weakened coal shipments to utilities, Norfolk Southern Corp. announced Wednesday that it chugged to another record quarter of operating earnings in the period ended Sept. 30.

However, third-quarter results were reduced by expenses related to the Norfolk-based railroad's effort to split Conrail Inc. with CSX Corp. Once Conrail is figured in, Norfolk Southern reported quarterly income of $179.5 million, or 47 cents per share, which is 11 percent lower than last year.

Setting aside the effect of the Conrail transaction, Norfolk Southern would have made a record $203.2 million in the third quarter, compared to $202.3 million reported in the same period a year ago. Per share earnings would have been flat at 54 cents per share.

The Conrail transaction cost Norfolk Southern $23.7 million, or 7 cents per share, in the third quarter.

Those costs include the interest costs on the $5.7 billion Norfolk Southern borrowed in May to buy a 58 percent stake in Conrail. The deal's expenses were offset a little by its share of Conrail's income for the third quarter. That amounted to $41.6 million in the quarter.

Revenue in the third quarter rose 3 percent to nearly $1.33 billion, up from $1.29 billion last year.

``Our solid third-quarter results are remarkable in light of both the mild weather that affected coal traffic and rail service problems being experienced in the West,'' said David R. Goode, Norfolk Southern's chairman.

Problems stemming from Union Pacific Railroad's year-old merger with Southern Pacific have snarled freight traffic at West Coast ports and in Texas. Union Pacific, the nation's largest railroad, is short of locomotives and train crews and is having difficulty tracking shipments.

Union Pacific's problems out west have rippled through the nation's transport system, affecting Norfolk Southern customers in the Southeast and Midwest.

The situation may also prompt greater regulatory scrutiny of the Norfolk Southern/CSX plan to divide Conrail. That $10.2 billion deal is being reviewed by the federal Surface Transportation Board, which is expected to make a decision on it by next June.

Norfolk Southern moved Wednesday to alleviate concerns in the financial and shipping communities that service problems will follow the Conrail deal.

``Norfolk Southern and CSX are committed to assuring the service disruptions in the West will not replay in the East,'' Goode said.

Besides working to make sure the systems integrate smoothly, Norfolk Southern is hiring workers and adding locomotives and freight cars to make sure it doesn't get caught by the same shortages Union Pacific has experienced, said Stephen C. Tobias, executive vice president-operations.

Despite the Union Pacific's troubles and the strike at United Parcel Service, Norfolk Southern reported a 16 percent revenue gain on so-called intermodal shipments to $141.8 million. Intermodal involves the rail transfer of truck trailers and shipping containers that can be readily moved between trucks, ships and rail cars. UPS is one of Norfolk Southern's top five intermodal customers.

The intermodal growth was fueled by the bustling domestic economy and burgeoning international trade.

The third quarter was also marked by strong revenue growth in paper and forest product shipments, up 6 percent to $138 million.

The weakest link in Norfolk Southern's revenue stream was coal, which slipped 0.6 percent to $325.7 million in the quarter. Coal shipments account for nearly a quarter of the company's revenues.

The summer's mild temperatures reduced demand for electricity produced by utilities fed by Norfolk Southern coal.

Coal revenue would have been worse if it hadn't been for the strong export coal market, said L.I. ``Ike'' Prillaman, the railroad's executive vice president-marketing. Nearly all of the railroad's coal exports flow through its Lamberts Point terminal in Norfolk.

Fueled by demand in Europe and Japan for coal used to make steel, exports through Lamberts Point rose 7.3 percent to 6.6 million tons in the third quarter.

``We believe 1997 export coal dumpings at Lamberts Point will finish strong and will exceed last year by 1.8 million tons,'' Prillaman said. Last year the Norfolk facility handled 26.4 million tons of coal.

Norfolk Southern's earnings matched the expectations of rail stock analysts. The company's stock rose 25 cents to $34.125 a share in New York Stock Exchange trading on Wednesday.

So far in 1997, Norfolk Southern has earned $497.4 million, or $1.32 a share. Expenses related to the Conrail deal reduced the year-to-date earnings by $86.3 million, or 23 cents a share.

If it weren't for Conrail, Norfolk Southern would have earned $583.7 million, or $1.55 a share, in the first nine months of 1997. That would be a 2.4 percent gain over the $569.9 million, or $1.50 a share, it earned in the same period last year. KEYWORDS: CONRAIL CSX NORFOLK SOUTHERN MERGER

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