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October 2013

Rail News: CSX Transportation

CSX counts on crude, intermodal and other burgeoning traffic sectors to help offset declining domestic coal business


— by Jeff Stagl, Managing Editor

On Sept. 10, Patriot Coal Corp. announced plans to idle a CSX Corp.-served surface coal mine, preparation plant and rail load-out facility near Man, W.Va. Company officials made the move to better align production with projected sales.

Patriot Coal is contending with thermal coal prices that have fallen well below production costs at many Central Appalachian mines, said President and Chief Executive Officer Bennett Hatfield in a press release.

"Thermal coal markets are extremely weak due to low natural gas prices and costly regulatory changes that have reduced coal-fueled electricity generation capacity," he said.

The closure reflects a domestic coal market trend that has impacted CSX's business for the past six years — an ongoing erosion in demand and production that's caused the railroad's utility coal volume to dwindle.

CSX's domestic rail-direct utility coal volume totaled 70.8 million tons in 2012, only about half of 2006's 139.4 million tons. And volume in 2013 is similarly contracting on a year-over-year basis, down 6 percent more than midway through the third quarter after declining 5 percent in the first half.

CSX's export coal volume isn't faring well this year, either. The sector is on pace to total about 40 million tons by 2013's end compared with 2012's 48 million tons.

Although there still are opportunities to grow export metallurgical coal volumes and domestic thermal coal traffic is projected to eventually flatten out, it's been clear for quite some time that coal no longer can be the Class I's top traffic generator, as it had been for decades, CSX senior executives say. If a sea change that's been churning the past few years comes to fruition, the portfolio will be more diverse, they say. The objective: rely more on other commodities to help generate traffic and revenue, such as intermodal, automotive, food and beverages, and new energy markets, including crude oil, frac sand and natural gas liquids.

"We knew coal would be a lesser portion of our portfolio one day, but we didn't think it would happen so quickly," says CSX Chairman, President and Chief Executive Officer Michael Ward. "The diversity of our portfolio is helping us grow."

Last year, strong automotive and intermodal business helped offset weak coal volume, and those two sectors are maintaining momentum in 2013, he says. Intermodal traffic in the third quarter (through Sept. 6) was up 5 percent compared with the same 2012 period.

"I think we will continue to grow intermodal business by 5 or 6 percent each year," he says.

In addition, agricultural products traffic has improved after last year's drought and more crude-by-rail facilities are being built in the East, says Ward. Industrial products volume was up 6 percent in the third quarter (through Sept. 6), primarily because petroleum products traffic jumped 44.1 percent in the period.

Although the business generated by other traffic segments won't completely offset the coal decline, it'll help CSX post revenue and volume growth amid strong coal headwinds, senior execs believe.

But to successfully tap other markets, the Class I's service performance can't come up short of new and existing customers' expectations. And large amounts of capital will need to be invested in infrastructure upgrades and capacity expansion projects to ensure the railroad's network can accommodate the traffic that's generated.

So far, the railroad has been doing a pretty good job with bolstering service and committing capital, says Benjamin Hartford, a Robert W. Baird & Co. Inc. analyst who covers CSX.

This year, the Class I has budgeted $2.3 billion for capex after spending $7.8 billion on its network over the past four years, including $2.25 billion in 2012. The railroad continues to invest in information technology, which is helping to improve asset utilization and slightly speed up operations, says Hartford.

"Overall, they can net gains in the merchandise market by being faster [and] obtain productivity gains from adopting technology," he says.

The railroad's better-service and diversified-traffic efforts are coming at the right time, especially since it was difficult to predict the long contraction of the domestic coal market and record-low level of natural gas prices, says Hartford.

"As we've seen with the rails, improving service is key," he says, adding that CSX is trying to be more integrated and interactive with its customers.

Senior execs are counting on one relatively new initiative to not only ingrain customer integration and interaction as vital service-performance objectives, but to generate more non-coal business. If the railroad opens additional lines of communication with shippers, and demonstrates that it clearly recognizes and can meet their stringent transportation demands, traffic opportunities will follow, they believe.

Striving For 'Excellence'

Launched in first-half 2012, a Service Excellence initiative is designed to help CSX and its customers become more connected and collaborative. Service Excellence is all about CSX better understanding customers' needs, and customers better understanding "why we do what we do," says Executive Vice President and Chief Operating Officer Oscar Munoz.

The railroad holds meetings with customers that involve employees from a variety of departments. Unlike a Total Service Integration initiative conducted in 2011, when CSX sales and marketing teams met with more than 5,200 carload customers, Service Excellence customer meetings involve all types of workers, including sales and marketing representatives, trainmasters and field personnel.

Employees in the field, such as signal workers, often have good ideas on ways to improve service performance, and they don't always voice them, says Munoz. The meetings are a different platform to "engage people," he says.

"We were so 'siloed' before. The meetings are a pulpit to talk about where the company is," says Munoz. "The customer gets an insider perspective, [and] we find out how service is important to them."

There is no standard practice for arranging a Service Excellence meeting or determining whether to conduct a follow-up meeting, he says. Through the ongoing initiative, CSX conducted several hundred meetings last year and is on pace to hold about 370 in 2013.

The meetings so far have led to many minute, implementable service tweaks, such as more frequent switching.

"There are literally hundreds of stories that came from the meetings — we could write a book," says Munoz.

One such chapter would show that if a train arrives at a customer's facility at 4 p.m. but the customer wanted a morning arrival, the day-of-the-week service goal might have been met, yet the railroad didn't fulfill the customer's exact need, says Munoz.

"The day-of-the-week thing doesn't work. It's not good enough," he says.

Improved performance coupled with better communication has led to more non-coal business through Service Excellence. As examples:

  • a building supplies manufacturer in South Carolina is adding rail-car spots to ship more products to the Northeast and Midwest after noticing improved service and gaining CSX's commitment to increase switching frequency at its plant to five days after the capacity expansion project is complete;
  • a Florida chemical receiver has refocused on CSX, and away from barge and truck, due to improved rail performance; and
  • an industrial gases producer in Virginia has increased business with the railroad, citing improved service.

Shippers continue to respond to the get-more-connected, get-more-collaborative efforts, says Munoz.

"We're stressing that a customer isn't a foreign body at the end of a track," he says.

Intertwined With Intermodal

Another major concept CSX is emphasizing to build non-coal business: intermodalism. And not just intermodal services offered by the Class I, says Munoz. Converting highway traffic to rail is the ultimate goal, and CSX officials are trying to help shippers and cargo owners determine what portion of their traffic is adaptable to intermodal in general and to CSX specifically.

"Once we talk to a potential customer, they might decide not to go with us, and that's OK. We let them know we're there to help," says Munoz. "We compete as tough as they come, and we take it when we can. But maybe it will become business for us later."

Highway diversions are the primary goal of CSX's Highway-to-Rail (H2R) program. Now in its third year, the program aims to divert a larger chunk of the 9 million loads in the East that move by truck more than 550 miles.

Through the initiative, sales and marketing personnel try to understand a shipper's unique supply-chain needs and facilitate a more seamless intermodal integration.

H2R involves a regional sales organization that so far has concentrated on the Southeast, says Munoz, adding that the group eventually will focus on other areas. Organization members act as "hunters and gatherers" for potential business, he says.

"We're finding the economies of rail are more evident to people," says Munoz.

H2R has registered tremendous success so far, diverting tens of thousands of loads this year alone, says CSX Vice President of Intermodal Bill Clement, adding that the railroad determined 14 percent of freight-movement choices made by shippers involve the "wrong mode."

"It means we're good at getting the message out," he says. "There are a lot of opportunities in modal shifts out there, and when you think about it, intermodal is the prime candidate."

CSX also is trying to provide more reliable intermodal service and expand its market reach to generate business. The railroad now scours both mid-tier and major markets, instead of just major ones, for intermodal opportunities, says Clement, adding that new markets also are targeted. An opportunity in mid-tier markets might involve moving loads from Louisville, Ky., to Jacksonville or Orlando, Fla., or perhaps to Indianapolis, he says.

The various business-generation approaches have helped intermodal become a bigger part of CSX's overall volume since the coal decline began. In 2006, intermodal accounted for 30 percent of the Class I's total volume; now, it accounts for 38 percent, says Clement.

In A Constructive Phase

Infrastructure investments have made a difference, as well, and figure to keep playing a major role in generating intermodal traffic. Over the past few years, CSX has completed terminal projects in Chambersburg, Pa., Worcester, Mass., Charlotte, N.C., Louisville, Ky., and Detroit. The Class I now is finishing an expansion of its Atlanta terminal, and is in the design process for new terminals in Baltimore and Pittsburgh.

In addition, major terminals are slated to open in Winter Haven, Fla., in spring 2014 and in Salaberry-de- Valleyfield, Quebec, by 2014's end. The Winter Haven facility features 1,000 acres for development, such as for warehouses or distribution centers, which will enable the terminal to become a logistics center, says Ward.

Over the next few years, CSX also plans to expand the Northwest Ohio Intermodal Terminal in North Baltimore, Ohio, which has experienced explosive volume growth since it opened in 2011.

"We will get 50 percent more capacity from the expansion," says Clement.

The Class I recently gained quite a bit of intermodal capacity from the completion of the National Gateway's first phase, which CSX commemorated on Sept. 5. Completed clearance projects and terminal work have paved the way for double-stack service between the Chambersburg and North Baltimore terminals, says Clement.

Launched in 2008, the $850 million National Gateway public-private partnership initiative calls for establishing a double-stack corridor between mid-Atlantic ports and the Midwest. Every segment of the route will pay dividends for intermodal business, says Ward.

"The benefit of completing the first phase is the economies of moving two containers per car instead of one. We can grow container business faster," he says. "The efficiency of the Chambersburg terminal is increased [as well]."

The first phase provided long-awaited clearances in the Chambersburg marketplace, adds Clement. The second phase, which includes clearance projects from Chambersburg to Baltimore to mid-Atlantic ports, involves one very large and expensive portion of work: modifications to the Virginia Avenue Tunnel in Washington, D.C., to provide room for a second track. That project might take several years to complete, says Clement.

A Crude 'Tude

It also might take a while for more crude-by-rail (CBR) terminals to be built in the East before CSX can count on crude as a major make-up-for-coal contributor. Yet, the Class I already is tapping a good chunk of the 1 million barrels that are transported to the East Coast each day as refiners complete rail infrastructure, says Dean Piacente, CSX's vice president of chemicals and fertilizer.

The transportation cost of rail versus pipeline from the Bakken Shale in North Dakota to the East now is quite favorable, but a number of eastern refineries have no access to rail, he says.

"We try to educate refiners on the value of rail and how we can bridge the transportation gap," he says.

For example, Philadelphia Energy Solutions (PES) — which aims to become the single-largest consumer of Bakken crude — opened a CBR loading facility in Philadelphia on Oct. 2 that can accommodate two CSX unit trains per day. To bridge the rail-transportation gap until the facility opened, CSX worked with PES to build a TRANSFLO transload facility at the railroad's adjacent yard.

"We had a lot of dialogue with them at first, and came up with this interim solution," says Piacente. "If we hadn't done it, [the crude] would have all flowed by water."

CSX also helped Buckeye Partners L.P. and Irving Oil Ltd. set up a CBR facility in Albany, N.Y., last year, and is working with two other companies to open facilities in the coming months. By year's end, Plains All American Pipeline L.P. plans to establish a CBR facility that can accommodate one unit train per day in Yorktown, Va., while Enbridge Inc. plans to open one in Eddystone, Pa., early next year that initially would handle one unit train per day, then two unit trains per day by 2014's end.

The Class I also is trying to convince Phillips 66 Co. and Delta Petroleum Group Ltd. to adopt CBR at their refineries, which would involve the Conrail Shared Assets Area in New Jersey and Pennsylvania with Norfolk Southern Railway, says Piacente.

One way to entice refiners is CSX's transit speed — the Class I offers the "premier route" into the Northeast, with two-day service from the Bakken, he says. The railroad also can stage trains ahead for refiners. Train-ahead staging isn't a perfect science because various things can happen and delays can occur when staging trains, says Piacente.

"In Philadelphia, we do some train-ahead staging, which covers for some slack in the system," he says.

In addition, CSX can promote additional rail capacity in the Northeast. The railroad is spending $26 million this year to add passing sidings on the River Line between Jersey City, N.J., and Selkirk, N.Y. A multi-year project calls for continuing to build sidings on the line to "stay ahead of our capacity needs," says Piacente.

Fixated On Frac Sand

CSX is spending capital to boost frac sand business, too — another traffic segment that's helping make up for the coal decline. The Class I works with several short lines to deliver frac sand from Illinois and Wisconsin mines to natural gas wells in the Marcellus and Utica shales.

The railroad recently acquired 900 hopper cars to add to its frac-sand fleet, which totals several thousand cars, says Piacente. In addition, CSX subsidiary TRANSFLO Terminal Services in early September opened a new frac sand storage facility at its Fairmont, W.Va., terminal in association with U.S. Silica Holdings Inc. The facility adds about 10,000 tons of frac sand storage capacity at the terminal.

CSX currently is registering volume growth in frac sand and expects to increase the amount it transports to the shales, says Piacente.

There's also a high expectation that another traffic segment involving the shales will prosper, and perhaps help displace weak coal volume: natural gas liquids (NGLs). Naturally occurring elements that are separated from natural gas, NGLs include propane, butane, ethane and diluents. Williams Partners L.P. operates a CSX-served fractionator — a plant that produces NGLs — in Moundsville, W.Va., and three other fractionators have been built along short lines, says Piacente.

"We've seen propane and diluents grow by double digits," he says. "Propane is going farther to the East."

Petrochemicals used to produce plastics also might pose growth opportunities for CSX because of growing access to affordable NGLs in the East, says Piacente.

Shell Oil Co. is building an ethylene/polyethylene petrochemicals plant near Pittsburgh to serve the plastics market after it opens in 2017 or 2018, while Appalachian Resins Inc. plans to build an ethylene/polyethylene plant in West Virginia, he says.

"There will be a 30 percent increase in the nation's plastics production capacity by 2018," says Piacente. "The U.S. is becoming a big exporter of plastics, which is bringing some manufacturing back to the U.S."

Chemical Reaction

Baird's Hartford believes the United States can be a lower-cost provider of petrochemicals to developing nations.

"Crude by rail is getting attention, but we're seeing a structure for more petrochemical manufacturing," he says.

Analysts also are starting to notice moderation in domestic coal fundamentals, as volumes aren't contracting at the same rate as in the near past, says Hartford. If utility coal demand could bounce back a bit, it could be boon of sorts for CSX to garner more coal traffic in addition to the carloads generated by their diversification efforts, he says.

Domestic coal is "taking the hit now," but there still are reasons to believe in the "railroad renaissance," says Ward. Chief among them: a plethora of intermodal opportunities.

"We need to get the truck-to-rail interface at a customer," says Ward, adding that the interface usually is a siding, but could be a transload.

The pursuit of new business ultimately comes down to good service performance, be it in intermodal or any other promising traffic segments, he says. If the Class I can prove its service is better than that offered by other options, customers for the most part will come to and/or stick with CSX, senior execs believe. So far, more customers — especially those outside the coal sector — are noticing, says Ward.

"They can see we are meeting their expectations and are more reliable," he says.


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