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Jacksonville Business Journal: With coal not king, CSX finds success in new energy environment

Thursday, July 18, 2013

CSX Corp., after years of falling coal volumes, is poised to gain from the new U.S. energy environment, filling its rail cars with shipments of sands used in hydraulic fracturing and petroleum products gained from the process.

The Jacksonville-based railroad posted a 3-cent-per-share jump in second-quarter earnings Tuesday, beating analysts’ expectations.

“We had a record quarter despite the challenges we continue to face in our coal business,” company CFO Fredrik Eliasson said Wednesday, adding that the company was helped by growth in the intermodal and merchandise businesses.

“I would say overall we are executing very well around the things we control the most: putting safe product out there for our customer, putting a very good service product out there and continuing to drive efficiency.”

Between 2006 and 2012, CSX coal volumes dropped 50 percent, and company guidance says it will decline another 5 percent to 10 percent in 2013, Eliasson said. But CSX expects that to stabilize over the next two years going forward.

The decline has been caused by the rise of domestic natural gas, which is now abundant and cheaper than ever. Also, coal from the Powder River Basin, which is carried by western railroads, has been cheaper and higher in demand than Appalachian coal, which comes from older mines and is mined using older technology.

That becomes a negative for the East Coast railroads, Eliasson said.

Also, West Coast railroads have benefited more from the new energy environment, capturing more of the movement of crude-by-rail in the last few years.

“Now we think the new energy environment is a positive for CSX going forward,” Eliasson said. “We’re seeing crude-by-rail coming into the East, and CSX is now moving about seven to nine trains a week.”

Logan Purk, an analyst for Edward Jones, said another bright spot for CSX coal is that the volume sold to utility companies is no longer dropping.

“I think we’ve bottomed out,” he said. “If you look at the carloads and tonnage for CSX, it’s the first quarter-to-quarter increase we’ve seen in two years. So I think the headwinds from utility coal are behind them.”

CSX (NYSE: CSX) has kept its operating ratio, which means total costs divided by total revenue, below 70 percent for the first half of the year, Purk said. And it delivered good volume growth, led by increases in its chemical division, which is moving crude and frac sand by rail, as well as its intermodal division, which is moving cargo containers by rail.

At a transportation conference this week in Jacksonville, CEO Michael J. Ward said CSX sees intermodal as a high-growth area.

In 1980 CSX moved about 3 million intermodal containers. Last year it moved 12 million.

The demand for intermodal shipping is expected to grow dramatically, Ward said. About 18.3 billion tons of freight was moved in 2010, and that is expected to grow to 27.5 billion tons by 2040.

“We’re looking to position ourselves by spending record levels of capital in our system,” Ward said. “This year we’ll spend $2.3 billion on infrastructure. That’s on top of the $8 billion we spent in the four years before that.”

The money will be invested in new tracks, cars, locomotives, technology, and new intermodal terminals, such as a facility now being built in Winterhaven, he said.

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