-Pricing pressure to remain for merchant electricity generators
--Coal producers to increasingly focus on exports
--Falling domestic coal demand also to affect railroads
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DOW JONES NEWSWIRESMoody's Investors Service expects natural-gas prices to remain low beyond next year, resulting in broad changes for the U.S. energy and railroad sectors over the next decade.
Natural gas prices have been languishing around 10-year lows and continue to erode margins at power companies with generating units that sell electricity at market rates such as Exelon Corp. (EXC), FirstEnergy Corp. (FE) and PPL Corp. (PPL), Moody's said. While investment-grade companies are likely to rebalance their capital structures and dividend policies, junk-territory companies are expected to focus on liquidity.
Jim Hempstead of Moody's said, "Coal will find it increasingly difficult to compete with gas as a power source over the next decade," and Moody's anticipates that producers will continue to shift their focus toward exports.
At the same time, increases in gas-fired power generation won't be strong enough for a sustained increase in natural gas prices.
The retirements of coal-powered electricity generating plants that are being planned amid tougher emissions regulations, are likely to cut demand from the sector by as much as 10% between this year and 2020. Moody's noted that Peabody Energy Corp. (BTU), Arch Coal Inc. (ACI), Consol Energy Inc. (CNX) and Cloud Peak Energy Inc. (CLD) are among those already securing additional port capacity.
Falling domestic coal demand also is expected to spur changes in the railroad sector, where it has been one of the industry's biggest commodity categories. About 20% to 30% of major rail companies' domestic revenue is derived from coal shipments. While domestic coal shipments growth is likely to slow, producers have been moving to take advantage of export opportunities, Moody's said.
Union Pacific Corp. (UNP) and Burlington Northern Santa Fe stand to benefit from increased exports from western coal producers, while CSX Corp. (CSX) and Norfolk Southern Corp. (NSC) are seen as benefiting from increases in Illinois Basin and met coal production in the east, Moody's said.
New natural gas pipelines to connect production for alternative shale plays to markets will create new competitive risks in the pipeline sector, with companies with assets close to the shale regions, such as Dominion Resources Inc. (D) and NiSource Inc. (NI), likely to benefit.
--By Tess Stynes, Dow Jones Newswires; 212-416-2481; Tess.Stynes@dowjones.com