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Warren Buffett bets on coal and the economy
Transporting black rocks is a big part of Burlington Northern's railroad business
By Steve Gelsi, MarketWatch
Last Update: 1:31 PM ET Nov 3, 2009
NEW YORK (MarketWatch) -- Berkshire Hathaway Inc.'s $44 billion deal to buy Burlington Northern Santa Fe Corp. is basically a huge bet on coal, a fuel that powers Warren Buffett's power plants at his MidAmerican Energy utility and plays a major role in the railroad business.
While regulatory delays and uncertainty over climate-change legislation has slowed the addition of new U.S. coal plants, plenty of new facilities are expected to come on line in the United States, becoming prospects for future growth for the railroads.
Nine new coal plants have been permitted in the United States as of Oct. 9, and 25 are under construction for a combined generation capacity of nearly 15,000 megawatts, according to a report by the National Energy Technology Laboratory.
Moves by the Obama administration to curb emissions in proposed climate-change legislation are also anticipated to push the generation industry toward wider use of carbon-capture and storage technology at coal plants, which still supply nearly half of America's electricity.
With the U.S. economy poised for a rebound, both the coal-fired electricity industry and the railroads that haul the black rock are primed for growth, leading Buffett to describe his huge purchase as "an all-in wager on the economic future of the United States." See full story.
Hauling coal made up about a quarter of Burlington Northern Santa Fe's BNI third-quarter revenue of $3.6 billion.
A total of 604,000 of the Fort Worth, Texas-based railroad's fleet of train cars shipped coal during the third quarter -- a bigger share than any other single material.
Burlington Northern lists itself as the largest hauler of cleaner-burning, low-sulfur coal, most of which originates in the Powder River Basin of northeastern Wyoming and southeastern Montana.
Though its network of 30,000 miles of track that crosses the lower 48 states, the company hauled 297 million tons of coal last year, enough to produce more than 10% of the nation's total electricity.
The railroad supplies 60 utilities in 28 states, as well as power plants in Canada and Mexico.
At the same time, Berkshire Hathaway's MidAmerican Energy ranks as the largest utility in Iowa, with more than 723,000 electric customers in an area stretching from Sioux Falls, S.D., to the Quad Cities area of Iowa and Illinois.
About half of MidAmerican's 7,200 megawatts of generating capability comes from coal, with the company holding majority ownership in five of the six coal-fueled generating stations in Iowa and 11 plants overall.
Of the largest 15 U.S. electricity generators, Berkshire Hathaway BRKA holds the portfolio with the largest carbon footprint, according to data from energy and utility consultancy Ventyx, cited in a recent presentation by Exelon Corp.
Berkshire Hathaway emits 0.84 metric tons of carbon dioxide for each megawatt of electricity it produces. Ameren Corp. AEE is close behind with 0.81 metric tons of emissions per megawatt; NRG Energy NRG is next with 0.78 metric tons of emissions per megawatt.
Exelon EXC, which operates the largest fleet of nuclear power plants in the United States, carries the lowest carbon footprint with about .06 metric tons of carbon dioxide emitted for each megawatt.
Coal's coattails
In the third quarter, Burlington Northern Santa Fe's coal revenues fell 10%, or $107 million, to $940 million. The company cited "lower unit volumes driven by soft demand due to economic conditions and mild summer weather."
Still, coal producers remain optimistic about an uptick in their business. Alpha Natural Resources Inc. ANR shares rose nearly 5% Tuesday after its third-quarter earnings of 47 cents a share beat analysts' target of 38 cents a share in a survey by FactSet Research.
The Abingdon, Va.-based company increased its 2010 outlook for metallurgical coal shipments to a range of 10 million to 12 million tons, a 1 million ton increase from its previous outlook.
Alpha Natural forecasts strengthening in the U.S. thermal-coal market by the second half of next year as utility inventory levels have stabilized.
Expected growth in the U.S. gross domestic product of 2% to 3% in 2010 would increase industrial demand for electricity, according to Alpha Natural. Several analysts now forecast that domestic coal consumption may increase by 5% to 7% in 2010, the company said.
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