Cheap Natural Gas Displaces Coal, Hammers Railroad Revenue, Share Prices

U.S. utilities are switching from coal to less-expensive natural gas to generate electricity, a cost-saving move that results in decreased railway shipments of the fossil fuel and lower revenue for railroads.

Coal's share of U.S. electric generation has reached its lowest point since 1973 as public utilities depend more on cleaner burning and cheaper natural gas, the Energy Information Administration said. Between 2005 and 2010 roughly 216, MW of 407,028 MW of coal's electric generation has been switched to natural gas.

That has resulted in lower railway shipments of coal. For example, Railway America, a Jacksonville, Fla., railroad, said that in April its carloads of coal fell 17.9 percent, on a year-over-year basis.

The upshot has been less revenue for railroads and a resulting share price decline. Since the start of May, share prices of the top four leading rail companies have plummeted: Union Pacific has dropped 4.6 percent, Norfolk Southern Corp., is down 11.4 percent, CSX Corp., fell 7.8 percent and Kansas City Southern tumbled 15.2 percent.

One significant drag has been the recent decline in demand for coal. With natural gas prices remaining depressed and environmental legislation requiring companies to become 'greener,' demand for coal has dropped, said analysts with Stockcall.com. Energy demand as a whole has also been subdued in 2012, as warmer than usual temperatures have kept customers from turning up the heat.

The falling demand for coal also is cutting its price. Deutsche Bank said Friday in a client note that the average year-to-date price for coal is down about 17 percent.

In Friday trading on the New York Mercantile Exchange, the most actively traded contract for Appalachian coal, traded down 50 cents to $56.58 per ton. Natural gas gained four cents to $2.31 per 1,000 cubic feet.