How Would The Implementation Of The Clean Power Plan Impact Union Pacific?

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The Federal Government’s Clean Power Plan has serious implications for companies involved in mining and transportation of coal. The Clean Power Plan is a part of the Federal Government’s efforts to reduce U.S. carbon dioxide emissions and is specifically aimed at reducing emissions from power plants. This Federal regulation envisages a a 32% reduction in power plant carbon dioxide emissions by 2030 from 2005 levels. [1] The implementation of the Clean Power Plan was stayed by the U.S. Supreme Court earlier this year as a result of petitions by several state governments. However, if the Clean Power Plan is implemented post judicial review, it is likely to adversely impact the demand for coal from utilities since these would be forced to adopt alternative fuels such as natural gas in order to comply with the regulation. Lower demand for coal from utilities would adversely impact U.S. rail shipments of the commodity. Our present forecasts for U.S. rail coal shipments are illustrated by the chart shown below.

In order to model the impact of the implementation of the Clean Power Plan on Union Pacific, we have created a scenario illustrating the same. We have factored in a 30% decline in U.S. rail shipments of coal from the base case by 2023 (the end of our forecast period), reflecting the decline in coal demand in this scenario. We expect Union Pacific’s market share to remain unchanged from the base case, which would result in a 30% reduction in coal shipments from the base case for the company by 2023.

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

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Apart from the decline in coal shipments, a decline in coal demand is also likely to adversely impact the revenue per carload for coal shipments for rail companies. We have factored in a 10% decline in revenue per carload of coal shipments by 2023 for Union Pacific. As a result of lower expectations for shipments and revenue per carload, we have also lowered our margin forecasts for Union Pacific by around 330 basis points by 2023. The following table summarizes our assumptions in the base case and the alternative scenario.

Implementation Of Clean Power Plan

If we factor in the aforementioned assumptions into our model for Union Pacific, it translates into a 10% decline in our price estimate from the base case.

See our complete analysis for this scenario for Union Pacific here

Have more questions about Union Pacific? 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 Union Pacific

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