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Tax reform, exports boost rail finances, but gas threatens domestic freight

A strong export market and tax reform helped boost the fourth-quarter 2017 coal business of major U.S. railways, even as low natural gas prices and a mild early winter put a damper on revenues.

Nearly all major railways reported positive effects from the tax reform bill. Union Pacific Corp. said its financial results for 2017 would include a noncash reduction in income tax expense of about $5.8 billion.

While the export market is expected to remain strong through at least part of 2018, railways with operations in Mexico and Canada are keeping a wary eye on the renegotiation talks for the North American Free Trade Agreement.

Norfolk Southern Corp. reported a 6% year-over-year increase in coal revenue in the fourth quarter of 2017 but predicted that low natural gas prices would hobble utility coal shipment growth in the first quarter of 2018.

An executive for the railway said export coal shipments are expected to remain strong through early 2018, though benchmark prices may decline and affect full-year export volumes.

CSX Corp.'s new CEO, James Foote, called coal the "oddball" in its freight business mix but said on an earnings call that he believes that healthy coal volumes will continue to grow in the near term, fueled by export demand.

The railway reported coal revenue of $541 million in the fourth quarter of 2017, an increase year over year excluding an extra week in 2016.

BNSF Railway Co. reported a 3% drop in year-over-year coal revenue in the fourth quarter, blaming low natural gas prices, mild weather, high stockpiles and increased renewable generation.

Market analysts suggested in early 2017 that coal could suffer more than other industries if the U.S. withdraws from NAFTA. Executives from Kansas City Southern and Union Pacific, which both have operations in Mexico, expressed concerns about the ongoing NAFTA renegotiation talks but stressed the flexibility of their networks. KCS President and CEO Patrick Ottensmeyer said on a Jan. 19 earnings call that the railway could scale up or down quickly to preserve profitability and cash flow under a variety of NAFTA outcomes.

KCS utility coal revenue dropped year over year in the fourth quarter despite a record 2017, but a planned coal plant shutdown will mean losing a major customer in 2018.

Union Pacific CEO Lance Fritz said on the railway's Jan. 25 earnings call that he had not yet seen any behavior shifting in its Mexican markets.

The railroad reported fourth-quarter coal revenue of $667 million, a 5% drop from the last quarter of 2016. On its earnings call, a Union Pacific executive said loadings from the Uinta Basin benefited from strong export shipments to the West Coast and Gulf Coast, even though Powder River Basin coal tonnage saw a small drop in the fourth quarter.

Uinta Basin producers enjoy greater access to coal terminals than those in the Powder River Basin, which have limited options outside western Canadian ports.

On the northern side, Canada-based railways believe that if NAFTA were terminated, a previous agreement between the U.S. and Canada would come back into effect.

"It's hard to find out what's real versus what's negotiation in rhetoric," Canadian National Railway Co. CFO and Executive Vice President Ghislain Houle said Feb. 21 at the Barclays Industrials Select Conference. "One day, the U.S. loves Canada, the other day they don't."

Houle said coal is making a comeback, highlighting moves by Virginia Conservation Legacy Fund Inc. affiliate Conuma Coal Resources Ltd. to open the Brule and Wolverine mines and its plans to bring a third mine online in 2018.

"Coal, you could debate whether it's going to be around five, six years or not. But it's good business for us," Houle said.

The railway reported a 7% year-over-year increase in coal revenue in the fourth quarter even as delivered coal carloads fell 17%.

Canadian Pacific Railway Ltd. reported a 1% increase in fourth-quarter coal freight revenue compared to a year ago and a 5.9% drop in coal carloads.