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UPDATE 1-CSX CEO says coal volumes set to decline further

(Recasts adding CEO's comments, background on coal, stock price)

By Nick Carey

CHICAGO Oct 13 U.S. coal freight volumes, in decline for close to two years, will fall further, though the slowing pace of drop should ease the shock to U.S. railroads, the top executive of No. 3 U.S. railroad CSX Corp said on Thursday.

"If we had to make our best guess today, there will be another decline in coal but it will be much less on a percentage basis and obviously much less on a dollar basis," Chief Executive Michael Ward told Reuters in an interview. "The magnitude (of decline) will be nothing like this year."

Ward spoke the day after CSX posted a better-than-expected profit despite falling freight volumes, in particular coal, where they were down 21 percent.

Jim Corridore, a CFRA Research equity analyst, wrote in a client note after CSX's results that "valuations across the rail group, and at CSX remain at the higher end of their historical ranges. We see no near-term catalyst for the shares to outperform the S&P 500."

U.S. railroads have seen coal volumes plummet since 2014 as utilities switched to burning cheaper natural gas. In addition, a strong U.S. dollar has hurt coal exports.

Ward said the hot summer reduced coal inventories in the southern U.S. states to 105 days from 150 days and to 90 days from 95 days in northern sates - but historically they have been closer to 70 days and 55 days respectively.

The railroads need a long, cold winter to reduce inventories.

CSX executives told analysts on Thursday that fourth-quarter earnings should be "flat to slightly down" with freight volumes to be relatively flat.

"What we really need is some economic growth," Ward said. "Basically for two years the U.S. industrial economy has been shrinking and what we need is for that to turn around."

Hurricane Matthew hit CSX's network last week, affecting 2,900 miles (4,667 km) out of 9,000 miles of CSX track across Florida, Georgia, South Carolina and North Carolina, Ward said.

The railroad has restored service in Florida and Georgia, and on its main line through South Carolina and North Carolina, using generators. Some branch lines in both states, however, remain closed and some may be out of action for up to two weeks as flood waters slowly recede, he said.

Ward said he has put $1 million of his own money toward a fund for employees whose homes were damaged and said he has asked CSX to match his donation.

CSX shares were up 2.7 percent at $31.03 in early afternoon trading. (Reporting by Nick Carey; Editing by Alan Crosby)

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