Markets: News  

Burlington Northern slowed by empty coal cars

An earlier version of this story misspelled the name of Burlington Northern Santa Fe. The story has been corrected.

SAN FRANCISCO (MarketWatch) -- Burlington Northern Santa Fe hauls a lot of coal. In fact, electricity flowing to one out of every 10 homes in the United States is generated using coal hauled by Berkshire Hathaway Inc.'s Burlington Northern Santa Fe.

And as power plant demand for coal drops in favor of cheaper natural gas, Burlington Northern is seeing a decline in loadings which in turn could drag down Berkshire Hathaway's results.

BNSF accounted for roughly 19% of Berkshire Hathaway's (BRK.A) (BRK.B) pretax earnings in 2009 and about 11% of the holding company's revenue, according to analysts at Barclays Capital.

"I think it's a moderate headwind," said Meyer Shields, an analyst at Stifel Nicolaus who covers Berkshire Hathaway.

Berkshire Hathaway is scheduled to release its quarterly earnings on Aug. 3.

More than 90% of coal transported by BNSF comes from the Powder River Basin in eastern Wyoming and Montana. The price of Powder River Basin coal has fallen to $8.50 a ton as of July 6 from $12.90 a ton on Jan. 6.

"Warren Buffett said in an interview recently that housing is picking up and everything else is flat. What that means, I guess, is that growth in freight is flat," said Bill Smead, chief executive officer of Smead Capital Management.

Buffett told CNBC last week that freight car loadings were down moderately in the eastern region due mostly to less coal being hauled.

The railroad declined to comment on its coal revenue but if it is like other railroad companies, its earnings are expected to reflect the impact of utility coal's fall from grace.

CSX Corp. (CSX) reported after the bell that its second-quarter profit rose to 49 cents a share from 46 cents a share in the same period a year earlier despite weakness in its utility coal business.

Kansas City Southern(KSU) on Tuesday also reported its second-quarter profit jumped to $1.09 a share from 64 cents a share in the year-ago period on revenue of $545.3 million. The company credited the slight rise in revenue to a 4% increase in carloads which helped to offset a lower-than-anticipated coal traffic.

The slump in demand for coal was underscored by data from the Energy Information Administration last week that showed that for the first time ever, gas-fired power plants generated as much electricity as coal-fired plants in April. Read more on how coal is no longer king.

The preference for natural gas and a warm winter has led to a glut of coal at many utilities, said Timna Tanners, a research analyst at Bank of America Merrill Lynch.

"We remain cautious on U.S. thermal coal, and expect further updates on curtailment plans and elevated costs in Q2 earnings results and conference calls," said Tanners in a report.

Indeed, the best hope for coal's recovery is for natural gas price to rebound, she said.

Natural-gas futures for August delivery (NGQ12) lost 0.5 cent, or 0.2%, to $2.80 per million British thermal units on Tuesday.

MidAmerican Energy Co., a utility company that serves the Midwest, is another Berkshire Hathaway company that has a lot of exposure to coal.

Its generation portfolio includes 45% coal, 17% natural gas, 31% wind, and around 7% nuclear, said Ann Thelen, director of communications at MidAmerican Energy Holdings Co. She declined to comment on whether the company plans to lower its reliance on coal.

MidAmerican contributed 11% to Berkshire Hathaway's 2009 pretax earnings and 9% to its revenue, the Barclays analysts said.