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CSX faces tough headwinds in coal business

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CSX Corp. knows it faces "headwinds" in its coal business, but it will need recovery in its coal business to meet its growth targets in the next two years.

In the quarterly conference call with investment analysts on Oct. 16, CSX's top executives described the challenges facing the coal business, from market forces to what it sees as an administration unfriendly to coal.

The afternoon before, CSX issued its earnings report for the third quarter. The company said higher volume and pricing gains in merchandise and intermodal traffic offset continued declines in coal revenue as it posted third-quarter net income of $463 million, up from $455 million in the same quarter a year ago.

Third-quarter earnings were helped by strong operating results and higher revenues that included benefits from customer contract settlements, the earnings report said.

"CSX posted historically high financial results as it continued to effectively manage ongoing challenges in the coal market and leverage growth opportunities in merchandise and intermodal," Michael J. Ward, CSX chairman, president and CEO, said in the earnings release.

"The third quarter performance is an ongoing reflection of the company's ability to capitalize on the modest improvement in the economy with a relentless focus on customer service and asset efficiency."

Operating income in the quarter was virtually unchanged from the same quarter last year at $854 million. Revenues were up, but so was total expense. One difference was income tax, which was $6 million less in this year's quarter.

For the first three quarters, CSX reported net income of $1.457 billion, up slightly from $1.416 billion a year ago.

In the third quarter, coal volumes were down 7 percent and coal revenue was down 9 percent. Year-to-date coal volumes are down 8 percent and revenue 9 percent.

Domestic utility coal shipments fell to 17.3 million tons in the quarter from 18.7 million tons a year ago. Export volumes of both metallurgical and thermal coal were down, about 9 percent each.

"Export declines were driven by decreased shipments of U.S. thermal and metallurgical coal, as a result of global oversupply and lower coal prices. Shipments of domestic coal declined due to decreased electrical generation and utility stockpiles above target levels," the earnings release said.

Coal accounts for 18 percent of the volume carried on CSX, but the coal business makes up 26 percent of the railroad's revenue.

Because of low demand levels and high inventories, the railroad expects the coal headwinds to persist into 2014, Clarence Gooden, executive vice president of sales and marketing, said in the conference call.

CSX sees a major impact to its coal business in its utility business in the South, where stockpiles are high and likely to remain that way through mid-2014 and beyond, Gooden said.

Gooden said the demand among Southern utilities for Illinois Basin coal remains strong.

"Illinois Basin and Powder River Basin (coal) is accounting for nearly half of the coal burned on CSX," he said.

Gooden also said he expects export markets for thermal coal to remain tough in 2014. He said the level of coal exports in the third quarter were at about the low end of the economic level for export coal.

Ward was asked about CSX management's thoughts on how the White House and the Environmental Protection Agency view coal.

"We knew there were going to be some issues come 2015. Natural gas was going to accelerate that with low prices," Ward said.

"Clearly this administration doesn't favor the use of coal," Ward said.

He added time is on coal's side as other sources of electricity, such as the construction of new nuclear facilities, works through problems.

"Over time, we'll find once again we'll play a role, but it's going to be a tough few years with the administration's war on coal," Ward said.