Norfolk Southern Corp.

The outlook on Norfolk Southern is stable. We expect continued modest improvement in overall carloads and pricing, along with cost reduction efforts, to aid the company's operating performance over the next two years (barring a much tougher economic/trade landscape). We expect credit metrics to remain relatively consistent over this period, with funds from operations (FFO) to debt in the low-30% area and debt to EBITDA in the low-2x area. Although unlikely, we could lower the rating over the next two years if the company's earnings decline sharply, driven by potential tariffs or weaker-than-expected auto sales and/or pricing (particularly for coal or autos). We could also lower the rating if larger-than-expected share repurchases lead FFO to debt to decline to 23%

...Norfolk Southern's credit metrics should remain relatively consistent despite an increased level of share repurchases. During the first nine months of 2018, Norfolk Southern Corp. repurchased $2.3 billion of its shares compared with $712 million in the prior-year period, yet its credit metrics improved modestly because of its strong cash flow, and S&P Global Ratings expects such trends to continue. The company's free cash flow benefited from tax reform enacted in December 2017, under which its tax rate declined to 23% in 2018 compared with 36% previously. Operating performance should continue to benefit from strong economic and industry trends, barring a material slowing of the U.S. economy. We expect Norfolk Southern, similar to the other North American railroads, to continue to benefit from increased traffic levels due to a strong economy and demand for freight transportation. Intermodal (particularly domestic container) traffic levels should also continue to benefit from diversion of...

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