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Rating Action:

Moody's affirms ratings of BNSF, senior unsecured at A3; outlook stable

06 Apr 2020

New York, April 06, 2020 -- Moody's Investors Service ("Moody's") affirmed the ratings of railroad operator Burlington Northern Santa Fe, LLC ("BNSF") and its subsidiaries. The ratings include, among others, the A3 senior unsecured rating of BNSF and the Aa2 ratings of the Pass-Through Certificates and Aa3 ratings of Equipment Trust Certificates issued by the company's main operating subsidiary, BNSF Railway Company. The rating outlook is stable.

RATINGS RATIONALE

The A3 senior unsecured rating of BNSF considers the company's importance to the North America's transportation infrastructure, its differentiated financial policy compared to other freight railroads and very attractive operating margins, even though at the low end of the industry peer group. The ratings also incorporate BNSF's ability to contend with a fall in freight demand due to sharply weaker US economic activity as a result of the coronavirus outbreak.

BNSF is one of the two largest freight railroads in North America and operates a strong rail franchise with a diversified freight mix. Coal shipments represent 16% of total revenues, which poses an environmental risk as coal continues a secular decline amid a transition towards energy sources that emit less or no carbon dioxide. Operating margins of around 35% (after Moody's adjustments) are very attractive, even though other US railroads surpassed these levels as their implementation of new operating models based on precision scheduled railroading took hold. Moody's anticipates that BNSF is able to adapt its cost base fairly swiftly to accelerating declines in freight volume, such that any adverse impact on operating margins will be moderate.

BNSF's financial policy is more conservative than most railroad operators in North America. Moody's anticipates that the company funds shareholder distributions entirely from cash flows (net of capital expenditures), even though it did not consistently adhere to this policy in each of the last four years. Debt/EBITDA slowly moderated to 2.3 times at year-end 2019, calculated on an adjusted basis. Moody's expects debt/EBITDA to pick up in the near term, before moderating again to the low 2 times.

Liquidity is very good, despite the lack of a revolving credit facility. The company maintains a cash balance of around $2 billion and typically generates at least $4.5 billion of cash flows, after capital expenditures. Furthermore, shareholder distributions can be more flexibly adapted to adverse business conditions under the company's private ownership of Berkshire Hathaway Inc. Even if freight demand deteriorates rapidly in the near term, Moody's believes that BNSF would be able to generate considerable amounts of cash flows net of capital expenditures.

The ratings of the Pass-Through Certificates and Equipment Trust Certificates that are issued by BNSF Railway Company take into account, among other features, the special benefits provided by Section 1168 of the US Bankruptcy Code. In addition, debt issued by BNSF Railway Company is structurally senior to debt issued by Burlington Northern Santa Fe, LLC, the entity where the preponderance of BNSF's obligations resides.

The stable ratings outlook incorporates Moody's expectation that BNSF is able to adapt its rail operations expeditiously to a deterioration in freight demand, such that operating margins do not decrease well below 35%. Importantly, the outlook is predicated on Moody's expectation that BNSF continues to pursue a policy of funding shareholder distributions entirely from cash flow from operations, net of capital expenditures.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if BNSF is able to increase its operating margin to 40% or more, maintains debt/EBITDA at 2 times or less and increases FFO/debt towards 45%. An improvement in return on assets, measured by EBITA/average assets (excluding goodwill) to at least 15% would also support an upgrade of the ratings.

The ratings could be downgraded in the absence of continuing progress in reducing debt/EBITDA towards the low 2 times or if Moody's expects that operating margins of around 35% are not sustainable. The ratings could also be downgraded if FFO/debt weakens towards 30%, if EBITA/average assets (excluding goodwill) is less than 10%, if cash balances decrease from historical levels, or if the company is unable to maintain network fluidity and good service levels.

Affirmations:

..Issuer: Burlington Northern Santa Fe, LLC

.... Issuer Rating, Affirmed A3

....Senior Unsecured Shelf, Affirmed (P)A3

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

..Issuer: BNSF Railway Company

....Senior Secured Equipment Trust CI. 2009-A (Series A - E), Affirmed Aa3

....Senior Secured Pass-Through Certificates, Affirmed Aa2

....Senior Secured Regular Bond/Debenture, Affirmed A1

..Issuer: BNSF Funding Trust I

....Pref. Stock Preferred Stock, Affirmed Baa2

..Issuer: Burlington Northern, Inc.

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A2

..Issuer: Northern Pacific Railway Company

....Backed Senior Secured Regular Bond/Debenture, Affirmed A1

..Issuer: Unif. Govt. of Wyandotte Co./Kansas City, KS

....Backed Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Westside Intermodal Transportation Corp.

....Backed Senior Unsecured Revenue Bonds, Affirmed A2

Outlook Actions:

..Issuer: Burlington Northern Santa Fe, LLC

....Outlook, Remains Stable

..Issuer: BNSF Railway Company

....Outlook, Remains Stable

..Issuer: BNSF Funding Trust I

....Outlook, Remains Stable

..Issuer: Burlington Northern, Inc.

....Outlook, Remains Stable

..Issuer: Northern Pacific Railway Company

....Outlook, Remains Stable

The principal methodology used in rating Burlington Northern Santa Fe, LLC, BNSF Funding Trust I, Burlington Northern, Inc., Northern Pacific Railway Company, Westside Intermodal Transportation Corp. and Unif. Govt. of Wyandotte Co./Kansas City, KS was Surface Transportation and Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382. The methodologies used in rating BNSF Railway Company were Surface Transportation and Logistics published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113382, and Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://www.moodys.com/research/Enhanced-Equipment-Trust-And-Equipment-Trust-Certificates--PBC_1125852. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Burlington Northern Santa Fe, LLC owns BNSF Railway Company, which operates one of the largest rail transportation networks in North America, with approximately 32,500 route miles of track (excluding multiple main tracks, yard tracks and sidings) in 28 states in the western US and in three Canadian provinces. Total revenues in 2019 were $23.5 billion. Burlington Northern Santa Fe, LLC is an indirect, wholly-owned subsidiary of Berkshire Hathaway Inc.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rene Lipsch
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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