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Rating Action:

MOODY'S CONFIRMS UNION PACIFIC CORP COMMERCIAL PAPER AT PRIME-2, SR. UNSEC. DEBT AT Baa2

22 Jan 1998
MOODY'S CONFIRMS UNION PACIFIC CORP COMMERCIAL PAPER AT PRIME-2, SR. UNSEC. DEBT AT Baa2 New York, 01-22-98 -- Moody's Investors Service confirmed the Prime-2 short-term rating of Union Pacific Corporation ("UP") and the Baa2 rating of its senior unsecured debt, as well as the ratings of UP's principal subsidiaries. This confirmation follows the announcement of a $152 million net loss during the 4th quarter of 1997, substantially all of which was attributed to operating difficulties resulting from persistent congestion in the system due to slow integration of the former Southern Pacific ("SP") line. The ratings anticipate significant improvement in operating performance over the near-term, but with some continued drag on earnings during the 1st quarter of 1998. Moody's also noted that UP is weakly positioned in the rating category and the integration process would be closely monitored for any further delays in restoring service or deterioration in operating cash flow which could have rating implications. However, Moody's believes that the economic basis for the Southern Pacific merger remains intact, although realization of these benefits is likely to be pushed further out.

Since UP filed its Service Recovery Plan with the Surface Transportation Board, the railroad has made slow but steady progress towards clearing the system congestion which first developed in the SP East Corridor during the 3rd quarter of 1997. Although UP failed to restore pre-merger service levels within the timetable set forth in the Service Recovery Plan, Moody's believes that UP has strategies in place which are expected to show improvement in other key measures of progress - such as number of trains held for crew and train speed - and that these programs should reduce the number of cars on UP's system to an optimal level over the near term. The addition of approximately 1,000 trained crew and 280 locomotives as well as the implementation of directional routing between the Houston yard and St. Louis, all of which are expected to be in place by mid-1998, are anticipated to have a substantial impact in restoring service levels. Nonetheless, weak operating results over the near-term if coupled with lack of continuous, meaningful improvement toward restoration of full service to the shippers could weaken the rating. Over the intermediate term, rating stability will be a function of UP's ability to achieve the expected top-line growth by demonstrating retention of existing business and recovery of any lost business, as well as regaining the confidence of the shippers. Safety is also expected to remain a high priority of senior management, with continued oversight by Federal agencies; while the UP was affected by a number of serious crashes during 1997, the company has a lengthy track record of attention to safety matters.

UP is expected to maintain a relatively aggressive capital expenditure program to add power, and continue maintenance and upgrade to the roadway. With the high level of dividends, currently at approximately $420 million annually, and the service related weakening of cash flow the consolidated indebtedness is moderately higher than planned at the time of the SP acquisition resulting in relatively weaker debt protection measures. Moody's noted that UP has considerable non-core assets which could be monetized to contain debt levels, especially if operating cash flow does not improve. While the near term debt maturity schedule is manageable, UP may take advantage of market opportunities to lengthen the maturity profile of its debt capital.

Union Pacific Corporation is a holding company headquartered in Dallas, Texas. Through its wholly-owned subsidiaries, UP is engaged in railroad and truck transportation.

No Related Data.
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