CSX Q4 2015 Earnings Preview: Lower Fuel Expenses And Efficiency Improvements To Partially Offset Impact Of Lower Shipments And Fuel Surcharge Revenues

CSX Corporation (NYSE:CSX) will release its fourth quarter results on January 12 and conduct a conference call with analysts the next day. ^[1] We expect lower shipment volumes across several commodities, particularly coal, and lower fuel surcharge revenues to decrease the company’s quarterly revenues on a year-over-year basis. CSX reported a 6.5% year-over-year decline in its shipment volumes, including intermodal shipments, in Q4 2015. ^[2] The most significant decline was seen in the company’s coal shipments, with CSX reporting a 32.5% year-over-year decline in coal carloads in Q4. ^[2] However, a decline in fuel expenses and improvements in operating efficiency will at least partially offset the negative impact of lower revenues on the company’s profits. In this article, we will take a look at what to expect from CSX’s Q4 results.

Declining Coal Shipments

CSX’s coal shipments have been hit by weakness in demand for both thermal and metallurgical coal. Thermal coal, which is used in electricity generation, accounts for the lion’s share of the company’s coal shipments. Low natural gas prices and an unfavorable regulatory environment have negatively impacted the demand for thermal coal. Benchmark Henry Hub natural gas spot prices averaged less than $3 per million British Thermal Units (MMBtu) in 2015 and are expected to remain in similar territory in 2016, as well. ^[3] These price levels favor the increasing adoption of natural gas as the preferred fuel for electricity generation.

Apart from the weakness in gas prices, the regulatory environment is extremely unfavorable for coal as a fuel for electricity generation. As a part of the federal government’s crackdown on carbon dioxide emissions, new regulations target a 32% reduction in power plant carbon dioxide emissions from 2005 levels by 2030. ^[4] Coal based power plants have a much higher emissions intensity as compared to natural gas based ones, generating more than three times as much carbon dioxide as natural gas based power plants in the U.S. (as illustrated by the table shown below), despite coal and natural gas accounting for a comparable proportion of the country’s electricity generation. With the federal government cracking down on power plant carbon dioxide emissions, the regulatory environment certainly favors a greater proportion of natural gas based electricity generation going forward.

Power Plant Carbon Dioxide Emissions, Source: EIA

Besides weak thermal coal shipments, CSX’s shipments of metallurgical coal, which is used in steelmaking, have also taken a hit. Most of CSX’s met coal shipments are exported. Oversupplied global markets, weak steel prices, and a strong U.S. Dollar have negatively impacted the company’s shipments of metallurgical coal. A combination of weak demand for both thermal and met coal translated into a 32.5% year-over-year decline in CSX’s coal shipments in Q4, which is likely to be a drag on the company’s top line. ^[2]

Impact of Lower Fuel Prices

The decline in fuel prices over the past year or so has had a positive net impact on CSX’s operations in the first nine months of the year. Whereas the decline in fuel prices has lowered CSX’s fuel surcharge revenues, which are based on two month lagged values of highway diesel prices, lower fuel prices have also lowered the company’s fuel expenses, which are based on spot highway diesel prices. Besides lower fuel expenses, CSX has also improved the efficiency of its operations. Lower fuel expenses and more efficient operations have translated into a 230 basis point year-over-year improvement in the company’s operating ratio (operating expenses as a percentage of revenues) in the first nine months of 2015. ^[5] Lower fuel prices and more efficient operations will prop up CSX’s bottom line in Q4 as well, and at least partially offset the impact of weak shipments and fuel surcharge revenues on its results.

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1. CSX Corporation Announces Dates For Earnings Release and Fourth-Quarter Earnings Call, CSX News Release [↩]
2. CSX’s Week 52 2015 Carloading Report, CSX Website [↩] [↩] [↩]
3. Short Term Energy Outlook, EIA [↩]
4. Obama’s New Climate-Change Regulations to Alter, Challenge Industry, Wall Street Journal [↩]
5. CSX’s Q3 2015 10-Q, SEC [↩]