Burlington Northern Santa Fe: Why Coal Revenues Rose in 3Q17



BNSF’s coal revenues

In the previous part of this series, we reviewed Burlington Northern Santa Fe’s (or BNSF) (BRK.B) Agricultural Products and its revenues for 3Q17. In this part, we’ll assess the performance of BNSF’s Coal segment for 3Q17. Coal revenues in 3Q17 were $1 billion, a 5.9% rise from $953 million in the corresponding quarter last year.

On a sequential basis, BNSF’s coal revenue growth was much lower in 3Q17 compared to 2Q17. However, in 2017, the company’s coal revenues rose in all three quarters in contrast to all four quarters last year.

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Coal volumes in 3Q17

In the third quarter of 2017, BNSF recorded a slight ~2% rise in coal volumes. Shipments rose to 526,000 railcars compared to 516,000 units on a year-over-year basis. The segment’s average revenue per railcar rose 7.3% to $2,003 in 3Q17, from $1,866 in the same quarter last year.

The Coal segment’s shipments rose primarily due to the positive impact of increased natural gas prices. Higher natural gas prices triggered higher use of utility coal. These rises were impacted by the unfavorable effects of retirements of coal-generating facilities and adjustments for coal inventory at customer facilities.

Peer group coal business

Coal remains the single largest commodity hauled by all US Class I railroads. The EIA (U.S. Energy Information Administration) anticipates the share of coal in US total utility-scale electricity generation to rise from 30% in 2016 to 31% in 2017. The EIA expects a share of natural gas (UGAZ) and coal in US electricity generation at 32% and 31%, respectively in 2018. Annual coal production is forecast at ~790 MMst (million short tons) in both 2017 and 2018, a 10% rise from 2016 levels.

US-originated railroads Norfolk Southern (NSC), Union Pacific (UNP), and CSX (CSX) will be impacted more by coal production and price dynamics than their Canadian counterparts. US-born railroads have more exposure to coal than Canadian railroads.

In the next and final section of this post-earnings series, we’ll compare the company’s 3Q17 operating margins with its peers.


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