Railroads Diversify to Cope With Coal Losses

A strong business needs multiples sources of revenue, so that if one declines, another source can pick up the slack. Railroads are wrestling with this challenge. For years, two eastern railroads have made over a fourth of their revenues from coal, but they got hammered when coal volumes dropped off. Smart railroads haul a more diverse mix of freight, and have been growing shipments of crude oil and intermodal containers from ports and truckers.

Railroaders Norfolk Southern and CSX saw big declines in coal revenues in 2012 and 2013, amid an oversupply of thermal coal and utilities' increasing switch to natural gas.

CSX's coal revenues fell 9.2% year to date through Sept. 27. While that shortfall took a chunk out of its top line, higher volumes of merchandise and intermodal cargo still helped the company increase third-quarter earnings by 4.5% year over year.

Partly because of 17% declines in coal, Norfolk Southern's operating revenues fell 2.17% through the second quarter. The company reports third-quarter results on Wednesday Oct. 23.

Of the five railroads examined here, CSX depends on coal the most; it represents 24.55% of the company's year-to-date operating revenue through Sept. 27, dropping three percent from a year ago. Here is how CSX compares with four other railroads in coal revenues and total operating revenues:

Source: Railroad financial reports

BNSF Railway, owned by Berkshire Hathaway , gets 22.53% of its revenue from coal, based on year-to-date results through the second quarter. But BNSF Railway saw the need to diversify 10 years ago when it launched new construction of intermodal logistics centers in busy places like Chicago. BNSF opened its new 443-acre Kansas City Logistics Park last week to improve the flow of intermodal transportation.

Union Pacific gets 19.45% of revenue from coal, while Kansas City Southern has the lowest exposure at 11.38% of revenue from coal. Both Union Pacific and Kansas City Southern actually posted 2% year-to-date revenue gains in coal through Sept. 30, but the number of carloads carrying coal dropped 9% for Union Pacific, and 4% for Kansas City Southern. Basically, those two railroads are making more money per coal carload by charging more to haul it.

The growing revenues
While coal is sluggish, smart railroaders are concentrating on moving intermodal, crude by rail, and autos -- all of which have been growing as the U.S. economy slowly improves.

U.S. rail shipments of oil and petroleum products were up 35.4% year to date through Oct. 12, according to the Association for American Railroads. Coal was down 4.2% year to date, compared with a 3.7% gain in intermodal and a 4.2% gain for motor vehicles and parts, the association said.

Source: Association of American Railroads

Grain shipments were down 14.1% year to date. Grain shipments should rebound over the next two quarters, but with a much larger harvest than last year's drought-stricken season.

The big driver behind intermodal shipping is trade with China and the Asia-Pacific region. Asian countries send millions of tons of freight in shipping containers to ports in Long Beach, Calif., San Francisco, and Seattle, where it is put on railroads for shipments eastward to Minneapolis, Kansas City, and Chicago.

Railways with easy access to ports on the West Coast have a big Asian-market advantage over CSX and Norfolk Southern, which cover only the eastern third of the United States. Union Pacific and BNSF Railway have direct access to Seattle, San Francisco, and Long Beach, while Kansas City Southern has access to the Asia-Pacific region through delivery to the Port of Lázaro Cárdenas on the west coast of Mexico. Western railroads take coal to the West Coast, where some of it is put on ships bound for Asia.

BNSF Railway's third quarter will be reported with Berkshire Hathaway's third quarter. Last year the report came out Nov. 2.

Final thoughts
Diversity of revenue acts as a defense mechanism, shielding a company's entire revenue picture from disaster. CSX actually managed to grow revenue year to date through the third quarter even though it is clearly dependent on coal. BNSF Railway, Union Pacific, and Kansas City Southern have handled coal trends better than CSX and Norfolk Southern. Norfolk Southern's earnings report on Wednesday should give investors an idea how it is coping with coal declines.

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The article Railroads Diversify to Cope With Coal Losses originally appeared on Fool.com.

Michael Hooper owns shares of Berkshire Hathaway and Union Pacific. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and CSX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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