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July 10, 2007 > Railroads put money on coal

Railroads put money on coal

By Matthew Brown, Associated Press Writer

GILLETTE, Wyo. (AP), Jul 07 The cloud that hangs over the coal industry for its contribution to global warming has yet to cast a shadow here, across the vast network of railroad lines that haul coal from the sun-baked flats of the Powder River Basin.

Railroads across the country are spending hundreds of millions of dollars buying locomotives, adding track and building cars. Much of the activity is focused on upgrades to the nation's coal transportation network, and nowhere is the spending as intense as in the Powder River Basin of northeastern Wyoming and southeastern Montana.

``They're clearly putting their chips on coal remaining the largest source of energy in the United States,'' said railroad industry consultant Anthony Hatch.

The resurgence in spending, after a slowdown earlier this decade, is not the first time the industry has gone on a building binge. What's striking, observers say, is the amount of resources going into coal at a time when utilities across the nation are under pressure to switch to less polluting fuels.

Coal accounts for 21 percent of industry revenues _ $11 billion of $53 billion in 2006. More than 852 million tons were hauled last year by the major railroads, accounting for almost 80 percent of the coal produced in the United States, according to the Association of American Railroads. Almost all of it went to power plants.

So as mining and utility companies wage a public relations campaign to parry rising criticism of their contribution to climate change, railroads are joining the fight. In public speeches, on media tours and in corporate reports, railroad executives are touting the advantages of coal as a low-cost energy source with ample domestic supplies.

Parroting the message of the utility industry, they point out that coal produces an estimated 52 percent of the nation's electricity. They stress future technologies could potentially reduce power plant emissions of carbon dioxide _ a major greenhouse gas. And they remind that rail remains the most efficient way of getting coal from mine to plant.

These actions have not gone unnoticed. Frank Wilner, an economist with the United Transportation Union, has accused the railroads of going a step beyond coal advocacy, to lobby against legislative proposals for a new tax or other restrictions on carbon emissions. Wilner described the utility, mining and rail industries as ``arm in arm, fighting any carbon taxes or any additional costs that might be imposed to clean the coal.''

Rail representatives have rejected those claims, arguing they have lobbied for policies favorable to moving coal _ not against environmental regulations that could affect their bottom line. Tom White with the railroad association said the group opposes carbon taxes, but is not lobbying against any specific legislation at this time.

At the Powder River Basin, more than a dozen surface mines pock the arid landscape. Half the coal moved by the industry comes from the area, where mines work a massive coal seam up to 80 feet thick and spread over hundreds of square miles.

Rail access once was considered the limiting factor in getting this coal to market. Supply interruptions have occurred, in 2005 due to track problems and this past winter due to bad weather.

Rail representatives said 60 miles of new track scheduled to come on line in the basin this year will help offset those challenges. In recent years, production in the basin has increased by 60 to 70 million tons every few years.

``What we're doing is incredible in terms of capital improvements being made,'' said BNSF Railway Chairman Matt Rose. ``The country needs this asset, this resource.''

Fort Worth-based BNSF said capital investments in coal transportation totaled more than $1.3 billion over the last four years, after dropping to zero as recently as 2001. Spending on coal-related projects hit $626 million last year.

Union Pacific Railroad, based in Omaha, Neb., is spending $100 million on new tracks in the basin through a joint venture with BNSF. A company spokesman declined to detail further coal-specific spending.

CSX and Norfolk Southern, which haul coal from eastern mines, are making lesser but still sizable investments to maintain or upgrade lines that take a beating from coal trains. Due to their size _ up to four locomotives pulling as many as 125 cars _ coal trains wear down tracks more quickly than other cargo haulers.

Viewed from Wall Street, the railroads' investment in coal transportation has been a good one, easily divorced from the uncertainties facing coal.

``The facts are pretty simple. It is the single cheapest way to generate a kilowatt hour,'' said Donald Broughton, a railroad analyst with A.G. Edwards & Sons. ``Are there regulatory challenges as a result of environmental concerns? Absolutely. But this is still a fairly free market.''

Added Randy Cousins of BMO Capital Markets: ``What you need is assurance of supply, and one thing coal offers is assurance of supply.''

The analysts also said rail companies are slowly freeing themselves of long-term ``legacy'' coal supply contracts that were favorable to utilities and kept hauling rates low over the last decade. The railroad association said rates paid by utilities have dropped over the last 27 years, following industry deregulation in 1980.

The railroads hope to raise those rates as old contracts expire, Broughton said. Although that would appease Wall Street's demands for more revenue to offset capital improvements, the question of long-term sustainability remains unanswered, he said.

Most investors, Broughton said, look at railroads on a relatively short-term scale, trying to forecast trends one to two years out.

BNSF's Rose and others in the industry said they are putting money into coal for the long haul. Rose said the new track under construction in the Powder River Basin reflects at least a 20-year investment. He predicted production by the mines in the basin could soon grow to 500 million tons a year.

``To think you're going to take (coal) out of the mix short-term, mid-term, even long-term is pretty questionable,'' he said.

Stock prices on the four largest coal haulers _ BNSF, Union Pacific, CSX and Norfolk Southern _ have risen steadily over the last two years. That was driven not just by increased coal movement, but also increased returns from the intermodal transport of manufactured and imported goods.

Hatch, a former Wall Street analyst who now runs a private consulting firm, said investors finally are seeing the wisdom of major capital investments by the railroads.

Railroads spend on average about 20 cents of every revenue dollar on capital projects, Hatch said, from new track to maintenance projects. He said that's a larger percentage than almost any other industry.

``People thought this was insane. They're spending ridiculous amounts of money. But recently returns are beginning to justify those things,'' Hatch said.

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