CHICAGO (Reuters) - Facing a possible proxy battle over a hostile bid from Canadian Pacific (>> Canadian Pacific Railway Limited), Norfolk Southern Corp (>> Norfolk Southern Corp.) must persuade shareholders of its viability when it reports quarterly results on Wednesday.

The No. 4 U.S. railroad must accomplish this while navigating a freight recession that is pummeling the rail industry.

"This is a very important time for NS to prove to the Street that it can post significant improvements, but it must do that in a very tough environment," said Mark Levin, a managing director at BB&T Capital Markets. "It looks like 2016 will be a brutally tough year for the entire industry, but the onus will be on NS management to prove investors wrong."

Canadian Pacific in mid-November disclosed its $28 billion offer to buy Norfolk Southern, touting major savings from synergies.

Norfolk Southern has rejected the advances, saying it can offer solid returns as a standalone entity. Last month it said it aims for compound earnings per share growth in the double digits this year, though that forecast assumes stabilizing commodity volumes.

But commodities continue to slide, especially coal, which affects Norfolk Southern in particular. Low fuel prices have encouraged utilities to burn cheaper natural gas, and the strong U.S. dollar hurts exports.

Railroad coal volumes fell nearly 12 percent in 2015 and the slide has continued. In the week ending Jan. 16, coal volumes were down 32.6 percent versus the year-ago week.

"Coal is like catching a falling knife" in 2016, Matt Rose, chairman of No. 2 U.S. railroad BNSF, which is owned by Berkshire Hathaway Inc (>> Berkshire Hathaway Inc.), told Reuters earlier this month.

"The question is how to manage that (declining coal) best for shareholders," said Cowen & Co analyst Jason Seidl. "You have to judge how many years a (rail) line has left in it and that's not easy no matter who's in charge."

Norfolk Southern announced Jan. 12 it was combining two divisions to streamline costs. Seidl said the railroad "might have some wiggle room" for more cuts.

A big question is how dogged Canadian Pacific will be in pursuing Norfolk Southern. Chief Executive Hunter Harrison has not ruled out that the railroad could abandon its bid.

Analyst Levin said the fact Norfolk Southern shares are down more than its peers - nearly 19 percent year to date - suggests "investors see less and less possibility of a deal ever happening and that they doubt NS can achieve their long-term strategies."

(Editing by Matthew Lewis)

By Nick Carey