(Dow Jones Newswires circulated the following story by Doug Cameron on June 3.)
CHICAGO — U.S. railroad capacity will be adequate for the annual fall traffic spike, though the booming export coal market could face some congestion issues, according to the head of CSX Corp. (CSX).
Surging exports of coal and agricultural commodities are compensating for declines in auto and housing-related products, with overall volumes across the largest U.S. railroads expected to be flat this year.
“I think we are in pretty good shape to handle the fall peak,” said Michael Ward, chairman and chief executive of Florida-based CSX, the third-largest U.S. railroad operator by revenue, and target of a proxy battle by two private-equity groups.
The surge in rail demand that started in 2003 had left the system short of capacity during the annual peak created by the North American harvest and increased demand from retailers ahead of the holiday shopping season.
However, Ward said only the coal segment was requiring extra effort from operators that have invested billions of dollars over the past five years to remove bottlenecks and improve operating efficiency.
CSX has hired extra staff, leased extra locomotives and accelerated its purchase of open-top hoppers to carry coal on its East Coast network.
“Everyone on the coal side of the business is bullish,” said Ward in an interview with Dow Jones Newswires.
CSX and larger rival Norfolk Southern Corp. (NSC) are viewed as the prime beneficiaries of the surge in coal exports from the U.S. to Asia and Europe, driven by high prices and rising energy needs.
Ward said CSX exports are running 50% above last year’s level and expected to reach 30 million tons this year, compared with around 21 million tons for Norfolk Southern. Both carry coal from fields in West Virginia and surrounding states to East Coast ports, as well as to domestic customers.
Court Ruling Ahead
While export coal accounts for around only 3% of CSX revenues, high yields from the business have helped the company and its rivals boost profitability despite the overall outlook for flat volumes this year.
CSX is under pressure to perform amid a nine-month campaign by activist shareholders for governance and operational changes.
The Children’s Investment Fund, or TCI, and 3G Capital Partners have proposed an alternative slate of directors at a shareholders’ meeting on June 25. The funds claim their plan could double CSX earnings over existing management plans within five years.
Both sides have been courting investors in recent weeks, with exchanges on both sides becoming increasingly acrimonious through suits and countersuits.
Ward said CSX was trying to limit the management time devoted to the proxy battle as it focused on the core business. Ward, two other senior executives and 12 more managers and advisors are devoted to fending off TCI and its partner.
“Clearly they don’t have a plan to run the company,” said Ward of the funds, who in turn claim their five proposed directors have more than 50 years combined experience of operating railroads.
The latest twist in the battle is expected in a New York court this week after CSX alleged the funds misled shareholders by acquiring derivative positions in the railroad, in addition to their equity holdings.
The case is being closely watched by the mergers and acquisitions community as swaps and derivatives are commonly used in takeover battles, but is not expected to curtail the funds’ pursuit of CSX if a ruling goes against them.
CSX shares were recently trading down 3.7% at $65.93. The company sent another letter to shareholders Tuesday, outlining operational improvements and financial targets in response to similar circulars from TCI and 3G.