Ask The Experts: March 12, 2019

Tony Hatch
Independent Transportation Analyst and Consultant

Q:  The Tennessee Valley Authority’s (TVA) board voted in February to close two coal plants. How do you think this will affect CSX?
A:  The announcement from TVA that they would close two coal-fired plants despite government pressure (to….keep them open) has an immaterial effect on CSX and is really more of a sign of the secular pressure on US utility coal from a cost – and political – perspective.

Q:  What do you think about Norfolk Southern’s Precision Scheduled Railroading (PSR) efforts?
A:  There has been some expressed concern that the coming headcount reductions will reduce institutional knowledge, break longstanding relationships and leave too few sales people (it was noted that there is only one salesman in the NE – but since its NEARS-superman Chad Grinnell, that may be all that is required).

Q:  How does Genesee & Wyoming’s (GWR) performance in Q4/18 affect future expectations?
A:  GWR – Making North America Great Again (for short lines) – riding strong (+6.5%), above Class One trend volume growth, Genesee & Wyoming beat earnings expectations by over 10% in Q4/18 (making it 6 for 6 for the Group).  However, they see volume decelerating (F:+2%), but they still expect a healthy (+12-17%) growth in earnings and a 100bps reduction in consolidated OR to ~80-81%.  In a shift from historic norms, they are presenting themselves as a “North American short-line rail holding company”, at 2/3 assets/sales and 80% of the bottom line. Nonetheless, the Street continues to focus on the “chronic under-performance” (from the webcast Q&A) in the UK.  Management would like us to view the Aussie operations, 51% owned, as, in effect, a dividend, with contractually-structured reduced variability (weather, etc) and run “almost independently”.  Their upside from the coal alliance with Glencore looks good over the next few years (more train sets likely ordered this year, back-stopped by future contracts) – but the intermediate-to-longer term is something to think about in light of Glencore’s astounding announcement that they were capping coal production at 2019 levels.  Both will be overseen in part by their former group COO (see below).  GWR won’t divulge Return on Invested Capital (ROIC)—seen as competitive advantage in M&A, not much discussed, either.

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Alison Babcock