How Would Norfolk Southern Be Impacted By A Potential Decline In Coal Shipments With The Implementation Of The Clean Power Plan?

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The Federal Government announced its Clean Power Plan in August of last year. An integral part of the Federal Government’s efforts to lower U.S. carbon dioxide emissions, the Clean Power Plan envisages a 32% reduction in power plant carbon dioxide emissions from 2005 levels by 2030. [1] With some states petitioning the Supreme Court against the Federal regulation, the implementation of the Clean Power Plan was stayed pending judicial review earlier this year. However, if the Clean Power Plan is implemented post judicial review, it could negatively impact the demand for coal from utilities, which would be forced to adopt alternative fuels for electricity generation such as natural gas. This would adversely impact U.S. rail shipments of coal. The following graph illustrates our present expectations for U.S. rail shipments of coal.

In order to model the impact of the implementation of the Clean Power Plan, we have factored in a 30% decline in U.S. rail shipments of coal from the base case by the end of our forecast period. We expect Norfolk Southern’s market share in U.S. rail coal shipments to remain unchanged from the base case. As a result, our forecast for the company’s coal shipments has been lowered by 30% by the end of the forecast period.

See our forecasts for U.S. coal shipments in the Implementation of Clean Power Plan scenario

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With a decline in demand for coal, Norfolk Southern’s revenue per carload for coal shipments is also likely to be adversely impacted. We have factored in a 10% decline in Norfolk Southern’s revenue per carload of coal shipments by the end of the Trefis forecast period. As a result of the changes to our shipment and revenue per carload forecasts, we have suitably modified our margin forecasts for the company, resulting in a 330 basis points reduction by 2023. Factoring in these assumptions into our model for Norfolk Southern, we estimate that the company’s stock would be worth roughly 12% less in this scenario.

See our complete analysis for this scenario for Norfolk Southern here

Have more questions about Norfolk Southern? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Norfolk Southern

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Notes:
  1. Clean Power Plan Final Rule, EPA Website []