Union Pacific’s Cleaner Locomotives Could Squeeze Margins Over Time
Union Pacific (NYSE:UNP) has recently displayed a new experimental locomotive UP 9900 to meet the Environmental Protection Agency’s requirements. As per the requirements, 2015 onwards all new locomotives will need to comply with the Tier 4 emission standard, which asks for a 90% reduction in emissions from engines. Union Pacific is investing nearly $20 million for 25 experimental locomotives, all of which will either run on Roseville railyard or in the San Bernardino County community of Colton. 
Our price estimate for Union Pacific stands at $128, which now stands at 5% premium to the current market price.
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UP 9900 gives away nearly 25% of power compared with that of a standard engine. It makes room for three on-board emission filters, eating some cargo space. These kind of engines will become necessary for all new locomotives to be introduced after 2015.
While the evolution of the environmentally friendlier rail engines is in process and much better engines are still to come, we believe these engines will increase the company’s costs. The reason for that is less power of these engines compared with that of the traditional ones. This is largely because of a part of the energy consumed will be directed towards cutting emissions, leading to less cargo being carried per unit of fuel, which will in turn result in an increase in operational expenses for the company. Operating these engines could reduce Union Pacific’s EBITDA margin, however, the extent to which margins may reduce will depend upon the efficiency of the engines. Better the efficiency of the engine, lower will the reduction in margin.
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- Union Pacific unveils cleaner, less-powerful locomotives, sacbee.com, August 23, 2012 [↩]