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US railroads face $5 billion in lost revenues as coal demand halves by 2030: report

Highlights

CSX and BNSF derive most revenue from coal

Export markets an opportunity but more volatile

Houston — US railroads are facing roughly $5 billion in lost revenues as utility coal demand declines to roughly half the 2020 level in 2030, according to a report issued Wednesday by Moody's.

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BNSF Railway and Union Pacific have the greatest exposure to a decline in thermal coal demand due to their Powder River Basin franchises, while Canadian National and Kansas City Southern have the least exposure.

Moody's estimates coal's share in US power generation will drop to roughly 10% by 2030, down from roughly 20% in 2020, driven by the ongoing transition in the US to cheaper natural gas as well as increased renewables generation.

Through June, which is the most recent data available, Energy Information Administration data showed coal has accounted for 23.9% of US power generation this year compared with 27.4% for all of 2018.

Historically, coal has been the railroad's biggest commodity by freight group, making up 13% of volume last year, according to the Association of American Railroads.

Of the seven Class I railroads in the US and Canada, coal as a percent of revenue is greatest for CSX and BNSF, at 18.3% and 16.8%, respectively. Norfolk Southern registered 15.9%, while Union Pacific was at 12.5%. The figures are largely based on 2018 data, according to the report.

The report stated the railroads will become increasingly reliant on export coal, which can be a volatile source of demand, though the railroads have shown a willingness to temper that volatility with lower freight rates.

The Canadian railroads, Canadian Pacific and Canadian National, which also operates in the Illinois Basin, have the greatest exposure to exports, with their tonnage equaling 87% and 80%, respectively, of their annual coal revenues, according to the report.

Union Pacific has the least exposure to export coal markets, at 10% of their coal revenue, while BNSF's export exposure was listed as "limited."

US export volumes are largely governed by geography, as there are few export outlets in the western US, which is primarily served by UP and BNSF.

A growth in intermodal demand will cushion revenue losses, as will improving service levels. However, in the long term, railroads are at a risk of network underutilization. As coal demand declines, railroads would have to evaluate whether some parts of the coal network could be used for the shipment of other freight, or even sold or abandoned, the report said.

Coal train speeds might also slow down as a way to minimize rail maintenance, the report said.

-- Andrew Moore, andrew.moore@spglobal.com

-- Edited by Pankti Mehta, newsdesk@spglobal.com

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