“We Are the Green Solution”

What's a few billion dollars spent on infrastructure when your vehicles get more than 700 mpg? An interview with Robert M. Knight Jr., EVP and CFO, Union Pacific Corp.

We’ve written extensively about the drop in capital spending, but Union Pacific budgeted about $3.1 billion last year for capital improvements. What did you spend it on?

Every year we need to spend more than $2 billion on what we call replacement costs — replacing existing track, ties, and ballast as they wear out. That leaves about $1 billion in 2008 going toward capacity-expansion initiatives, like the Sunset Corridor, a route between Los Angeles and El Paso that is the single largest rail-expansion project in the country right now. It is completely single-tracked; about half is double-tracked, with another 350 miles left to build.

How much does it cost to lay new track?

About $2 million a mile.

How has the credit crunch affected your ability to borrow?

We are in the commercial-paper market, although our costs are a little higher. We recently did a $750 million debt deal; the coupon was about 7.8 percent. We were pleased to get it done. This, along with our strong cash from operations, enables us to continue toward our goal of making capital investments.

Yet you have to be very careful about those investments.

What makes the rails unique is we pay our own way. When we put $3.1 billion into our structure, we have to earn a return on that. Thus the need to get pricing up so we can get adequate returns.

Do you expect further improvements to pricing?

Roughly 20 percent of our total book of revenue comes from what we call legacy contracts. Those are long-term contracts that were negotiated during times when the market was much lower and our service wasn’t as good as it is now. As those contracts term out over the next several years, we’ll be able to [price] them up to market rates.

This past September, a commuter train and a Union Pacific train collided near Los Angeles, with many fatalities. What is the industry now doing to make sharing rails safer?

There’s a technology called positive train control that [the industry is] testing and aggressively working on. It’s a predictive collision-avoidance technology. When you get into areas like Los Angeles, Chicago, and the Northeast, there are multiple conflict points between freight and commuter operations. The technology that is being tested would, simply put, enable one train to know what the other is doing.

What metrics matter most to you?

One gauge of progress that we pay particular attention to is productivity as measured by operating ratio. In the rail industry, operating ratio is the inverse of operating margin. Each point of operating-ratio improvement is equivalent to about $150 million of operating income, and since 2005 we have taken more than 11 points off our operating ratio, so it’s a big improvement. We started at about an 85 percent operating ratio, and in the third quarter we reported a 74.9 percent ratio. By 2012, we expect it to be in the low 70s. By comparison, an outstanding, lights-out ratio would be below 70. We did this by launching an effort that involved every one of our almost 50,000 employees. I’ve had more than 2,000 suggestions for improvements come from our employees around the country.

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