American Railroads

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Location: Middleburg (Jacksonville), Florida, United States

Published in Trains magazine, Railfan & Railroad, Passenger Train Journal

Monday, August 28, 2006

U.S. rails seek ways
to haul more Wyoming coal

“The long trains that seem to be everywhere in this sparsely populated stretch of land haul nearly 1 million tons of Powder River Basin coal to power plants daily, but that’s simply not enough,” wrote Reuters reporter Nick Carey on Sunday in the Washington Post. He was in Gillette, Wyo.

“Utilities are clamoring for more of this fuel, which has become a popular alternative to costly natural gas. The mines in this region, dubbed the ‘Saudi Arabia of coal,’ say they are able to increase production,” he continued, adding, “The bottleneck lies in the railroads.”

He explained.

Like the miners that unearth the coal, railroads must move mountains over the next few years to match the demand, said Andy Schroder, logistics director at Union Pacific Corp. (NYSE: UNP.N)

Omaha-based UP, the largest U.S. railroad, and second-ranked rival BNSF (BNI.N) own a joint 100-mile section of line here and are hauling record amounts of coal from the 10 mines in the area.

Both railroads are laying new track and are seeking ways to haul more coal, including using longer trains.

“We are adding capacity and are exploring ways to use that track more efficiently,” BNSF spokesman Patrick Hiatte said – but U.S. utilities are unimpressed.

Trade group Edison Electric Institute spokesman Ed Legge said that while coal deliveries were up, many utilities were getting less than they had agreed upon, and not enough to meet demand.

On the other hand, investors say they are pleased with the railroads’ plans. The utilities, they say, are complaining because tight capacity has boosted the freight haulers’ bargaining position.

“The railroads get better terms now, and the utilities don’t like the prices they are being forced to take,” said Michael Santelli, director of Allegiant Asset Management’s $210 million midcap value fund, which owns UP stock. It also holds shares of Peabody Energy Corp. (BTU.N) and Arch Coal, Inc. (ACI.N), which operate mines in the Powder River Basin.

With the mile-and-a-half freight trains and the tall silos of the open-pit mines, the coal industry pervades this part of Wyoming. Just below this dry, high plain of the Powder River Basin lie vast thick coal seams formed millions of years ago when the area was covered in luxuriant forest.

The 10 mines in the area are owned by Anglo-Australian Rio Tinto Ltd. (RIO.AX)(RIO.L), the world’s third-largest mining company, Peabody, Arch Coal and Foundation Coal Holdings Inc.

At its Jacobs Ranch mine, Rio Tinto scrapes away earth to reach seams 60 feet thick up to 220 feet under ground, creating a lunar landscape in the process. The coal is loosened with explosives, hauled to silos in massive trucks capable of carrying 240 tons each, and loaded onto trains.

The mine will produce 40 million tons in 2005. Rio Tinto wants to produce more, but only if the railroads can haul it away.

“We would prefer more (rail) capacity,” said Kendall Glover, the mine’s plant manager.

In 1985, the basin produced 19 million tons, rising to 325 million in 2005. That could reach 500 million tons by 2012 as U.S. demand for coal is set to rise further.

Powder River Basin coal is popular because it is cheap to mine and its low sulfur content means lower emissions.

The railroads have lagged behind rising demand, and utilities complain that they must import coal from countries like Columbia and Indonesia.

“This is unbelievable given the abundance of coal in the Powder River Basin,” said Patrick Lavigne, spokesman for the National Rural Electric Cooperative Association.

The railroads have admitted problems matching demand, especially after two derailments in the basin within 24 hours in May 2005 resulted in a Union Pacific embargo on new coal contracts until “we can ensure consistent service for customers,” said Assistant Vice President for Energy Jeff Maier.

BNSF has not declared an embargo, but remains focused mostly on existing business, spokesman Hiatte said.

The two railroads announced May 8 they would invest $100 million to expand their joint line. They plan to raise the maximum number of railcars per train to 150 from 135 so they can haul 10 percent more coal.

“Unfortunately, many utilities can’t take trains that long,” Maier said.

UP and BNSF say they will work to encourage utilities to lay more track at their power plants so they can accommodate longer trains.

Although the utilities are not happy, investors seem pleased with the railroads’ plans for the Powder River Basin.

“We are encouraged by how the railroads have performed and behaved,” said John Caldwell, chief investment strategist at McDonald Financial Group, which manages assets of $30 billion, holds Peabody stock and has owned Union Pacific shares.

Any new track is expensive and must last decades, he said, so railroads need to plan carefully for future demand.

“If coal demand falls in an economic slowdown,” he said, “the railroads do not want to be left holding the bag.”


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