Coal Transportation Outlook for the Railroads

Implications:     Although the year-to-date and outlook for many of the items transported by the U.S. railroads are down, coal transportation has been positive.  The commentary section below discusses the positives of coal transportation for the railroads.

Analysis:     Below are the positive year-to-date and outlook items for coal rail transportation:
 
     *Powder River Basin coal volumes are up year-to-date on demand, fuel blending with Eastern coal and some fuel switching at Eastern coal plants, new coal plants that have come on line in 2008, and continued coal pile replenishment from the 2005 – 2006 rail transportation delivery meltdown that decimated coal inventories at power plants.  This volume growth primarily advantages the two Western Class I Railroads—BNSF and UP.
 
     *Exports in 2008 are forecast to be up nearly 20 to 23 million tons over 2007 exports.  A majority of these exports are from the Eastern mines through the Eastern terminals.  This volume growth primarily advantages the two Eastern Class I Railroads—CSX and NS.
 
     *Coal plants are running at a higher capacity factor to meet load requirements.  This accounts for approximately 10 to 15 million more tons per year in additional demand.  This volume growth should advantage the railroads equally.
 
     *An additional amount of the legacy coal transportation rates across all of the railroads will be reset on January 1, 2009 at 60% to 80% (or more) increases in the base rates, plus a fuel surcharge.  The other coal transportation agreements with remaining terms will have adjustments of a few percent.
 
     *Six coal plants are coming on-line in 2009 requiring coal transportation of approximately 13 million tons on a full-year basis.  This new volume also will be priced at the new high base rates, including fuel surcharges.
 
     *The lagging nature of collecting for diesel costs through the fuel surcharge mechanism in a majority of the coal transportation agreements will advantage the railroads as a result of the lower oil costs the last few months versus actual fuel expenditures during these months.  This will flow to the railroads’ earnings.