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Rail exec: Coal stable, but new plants unlikely without help of Trump, Congress

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A CSX coal locomotive waits on a raised track in Richmond, Va. The railroad company's business is outlook is closely intertwined with that of the coal mining sector.
Source: S&P Global Market Intelligence

Absent orders from the president and his administration or the U.S. Congress, it is unlikely new coal-fired power plants will be built in the United States, a railroad executive said June 13.

CSX Corp. is doing "everything we can" to work with coal miners and power plants, the company's Executive Vice President and CFO Frank Lonegro said at a transportation conference in New York City, but the company still views the U.S. coal sector as being in long-term decline. While the rail line is anticipating some volatility related to weather and gas prices, the latest efforts by President Donald Trump's administration to boost older coal and nuclear plants struggling to compete might deliver a "curveball" that would reverse the direction of the utility coal sector.

"Our job is to optimize the bottom line, and that business is really good for us," Lonegro said. "So we want to stay in that business as long as we possibly can."

The company currently holds a "stable" outlook for domestic utility coal demand. That outlook, Lonegro said, is based on no "real major plant closures in the next couple of years" affecting CSX. At the same conference, Union Pacific Corp. Executive Vice President and CFO Robert Knight said that after watching coal rapidly fall from around 50% to around 30% of the share of U.S. power generation, the railroad is expecting that share to now hover around the high 20s to 30s in the long term.

"Yes, there's probably going to be more downward pressure. There's going to be some retirements of some utility units. How much coal that means does or does not move in our franchise remains to be seen," Knight said. "So it feels — I'm not going to call out that it's stable as a definitive term, but it feels more stable certainly than what we've experienced."

Cloud Peak Energy Inc. President and CEO Colin Marshall said in April that the pure-play Powder River Basin coal producer was "optimistic" that the "rapid rate" of coal-fired power plant closures is slowing.

Linda Brandl, Union Pacific's vice president and general manager of energy, said at a May 31 investor day that the railroad service is also adapting to the increasing need for coal plants to meet cyclical demand to compete with natural gas. She also added the company was encouraged by the administration's recent policy discussions in support of coal and nuclear plants, citing coal's contributions to reliability and resilience.

Better than anticipated markets for coal have benefited CSX, President and CEO James Foote said at a separate conference on June 7. Strength in seaborne coal markets, he added, is expected to continue through the second half of the year.

At a May 31 conference, one executive noted that strong coal prices abroad and increased Asian demand for coal had allowed Union Pacific to seize an opportunity to export Uinta Basin coal to the Guaymas Port on the Gulf of California in Mexico. The railroad company moved more coal export volume in 2017 than in any of the previous 20 years and 2018 started on a similar pace, Brandl said.

"Recall that coal exports are not a huge portion of our coal base, but the increase in total U.S. tons desired by the global marketplace is a welcome development," Brandl said. "As source competition changes in one market, we adapt to others."