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Moody's: Railroads face $5B revenue loss in next decade as coal declines

Railroads could face $5 billion in lost revenue as utility coal shipments fall over the next decade, according to a new report from Moody's Investors Service.

Moody's analysts expect utility coal demand in the U.S. to drop by more than half by 2030, falling by about 7% per year on average over the next decade, which would take a toll on coal producers as well as their transportation partners. If the decline is gradual, railroad companies may have more manageable credit effects, according to the Sept. 4 report.

"The continuing erosion in thermal coal demand will significantly affect US freight railroads' coal shipments, highlighting that the environmental risks posed by coal extend from miners and users to transporters of coal," Moody's stated. "However, railroads are likely to offset some of the lost coal shipments with growth in other freight, especially intermodal freight, which is the transport of freight in containers using more than one mode of carrier, for example, using trains and trucks."

Year-to-date coal rail traffic was down 6.7% through Aug. 24, according to the Association of American Railroads.

CSX Corp. generated 18.3% of its 2018 revenue from coal, the largest percentage among the major coal railroads, according to the report. Coal accounted for about 13.7% of the company's total 2018 volume as well, and CSX shipped about 43% of its coal to the export market. BNSF Railway Co.'s coal business accounted for 16.8% of its 2018 revenue, while coal made up about 15.9% of Norfolk Southern Corp.'s revenue last year as well. Those three companies are likely the most exposed to a "broader secular decline" in the coal market, Moody's said.

"Over time, however, the risk could emerge that certain parts of a railroad's network will become underutilized, while the railroad would still be required to maintain tracks in accordance with applicable safety standards and to ensure a reliable rail service for customers," the report states. "Railroads would have to evaluate whether some parts of the coal network could be used for the shipment of other freight."

BNSF and Union Pacific are among the most exposed to weakening thermal coal demand, given their dependence on Powder River Basin mines, which are expected to face the most significant drop in utility coal demand, according to the report. Meanwhile, Canadian National Railway Co. and Kansas City Southern have the least exposure to the market's secular decline given their proportion of total revenue and volume. Coal accounted for 4.6% of Canadian Nationals and 6% of Kansas City Southern's coal revenue in 2018.

Moody's expects railroads will become increasingly reliant on export coal, "a more volatile source of revenue," according to the report, which may affect CSX and Norfolk Southern most significantly. Given the weakening export market, Moody's also recently adjusted its outlook for the coal sector from stable to negative.