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Rating Action:

Moody's assigns Aa2 rating to Union Pacific's Pass Through Certificates, Series 2016-1

02 May 2016

New York, May 02, 2016 -- Moody's Investors Service ("Moody's") assigned a Aa2 rating to the $151 million Pass Through Certificates, Series 2016-1 (the "Certificates") that Union Pacific Railroad Company ("UPRR") plans to issue through the Union Pacific Railroad Company 2016-1 Pass Through Trust. Moody's also affirmed the A3 senior unsecured and P-2 short term ratings of Union Pacific Corporation ("Union Pacific") and all ratings of its subsidiaries, including UPRR. The rating outlook is stable.

RATINGS RATIONALE

UPRR plans to issue the Certificates through the Union Pacific Railroad Company 2016-1 Pass Through Trust (the "Trust"). The Trust will use the proceeds from the sale of the Certificates to purchase Equipment Trust Certificates, which will be issued by UPRR to help finance the acquisition of certain new locomotives. The Equipment Trust Certificates are direct obligations of UPRR and are collateralized by a perfected security interest in the new locomotives. The locomotives will consist of 59 GE ES44AC locomotives, with an aggregate cost of approximately $180 million. The locomotives were acquired from the manufacturer in November and December 2015. The GE ES44AC locomotive is a high-horsepower, general purpose locomotive that is used by UPRR as well as other Class 1 railroad operators in North America.

In applying Moody's methodology for Enhanced Equipment Trust and Equipment Trust Certificates to assign the Aa2 rating to the Certificates, Moody's incorporated: (i) an A2 senior unsecured rating for UPRR, which is the operating railroad and the principal subsidiary of Union Pacific Corporation; (ii) an estimated loan-to-value of the Equipment Trust Certificates of approximately 85%, based on the cost of the equipment, the expected depreciation, and the amortization of the Equipment Trust Certificates; (iii) the special benefits to holders of the Equipment Trust Certificates provided by Section 1168 of the U.S. Bankruptcy Code; (iv) that the Equipment Trust Certificates will each be cross-collateralized and cross-defaulted, structural features that can enhance the potential for affirmation of the Equipment Trust Certificates and the recovery rate, relative to transactions that lack these features; and (v) that the equipment being financed consists only of locomotives, a critical asset for the railroad, and no other rolling stock.

The ratings of the Certificates could change as a result of changes in the underlying credit quality of UPRR or as a result of changes in the ratings for Union Pacific Corporation. The ratings could also change if there was a material change in the fair market value of the locomotives.

The A3 senior unsecured rating of Union Pacific is supported by the strength of the company's rail franchise, which benefits from a diversified freight mix and an approximately 32,000 route mile track network in the western U.S. Its network provides access to key ports along the Pacific Coast and Gulf Coast, interconnects with Canada's rail system and has principal border crossings with Mexico. Union Pacific's operating ratio, a measure of operational efficiency, ranks among the best in the industry. Moody's expects the company to improve its operating ratio further in 2016, to 62.4%, despite declining freight volumes of approximately 5%, led by continuing steep declines in coal shipments. Free cash flow is expected to be around $1.4 billion, benefiting from a considerable reduction in capital expenditures to approximately $3.7 billion. Assuming share repurchases at the pace in the first quarter of $706 million, Moody's anticipates leverage to be 1.9 times in 2016, up from 1.7 times at year-end 2015.

The stable rating outlook is predicated on Moody's expectation that Union Pacific Corporation remains able to adapt its operations swiftly to the challenges posed by declining freight volumes, such that the company continues its gradual improvement in operating margins. The outlook also takes into account the increase in debt/EBITDA, but Moody's expects leverage to remain below 2 times. Measures of cash flow relative to debt could weaken in the near-term but, over time, remain at a level supportive of the company's ratings.

Higher ratings could be considered if Union Pacific continues to increase and sustain its operating margins at a peer group leading level of more than 35%. In addition, a positive rating action could follow if the company were to fund its shareholder distributions predominantly with internally generated cash, resulting in leverage that remains below 1.75 times over time. FFO/debt of at least 45% would also be supportive of higher ratings.

Ratings could be downgraded if Moody's expects freight demand or pricing to weaken substantially and operating margins to decrease towards 30.0%, for a prolonged period of time. Ratings could also be pressured if Moody's expects debt/EBITDA to increase to 2.0 times or more, or FFO/debt to decrease below 40.0%.

The methodologies used in these ratings were Global Surface Transportation and Logistics Companies published in April 2013, and Enhanced Equipment Trust and Equipment Trust Certificates published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Union Pacific Railroad Company is the principal operating company of Union Pacific Corporation and operates one of the nation's largest railroad systems. With approximately 32,000 route miles across the western U.S. and access to all major coast ports and rail gateways, the railroad serves the coal, chemicals, automotive, agriculture and general manufacturing industries.

Assignment:

..Issuer: Union Pacific Railroad Company

....Senior Secured Equipment Trust Series 2016-1, Assigned Aa2

Affirmations:

..Issuer: Union Pacific Corporation

....Commercial Paper, Affirmed P-2

....Issuer Rating, Affirmed A3

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

....Preferred Shelf, Affirmed (P)Baa2

....Subordinate Shelf, Affirmed (P)Baa1

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

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

..Issuer: Union Pacific Railroad Company

....Senior Secured Equipment Trust Series 2009-1, Affirmed Aa3

....Senior Secured Equipment Trust Series 2014-1, Affirmed Aa2

....Senior Secured Equipment Trust Series 2005-1, Affirmed Aa2

....Senior Secured Equipment Trust Series 2007-3, Affirmed Aa2

....Senior Secured Equipment Trust Series 2001-1, Affirmed Aa2

....Senior Secured Equipment Trust Series 1998-A, Affirmed Aa2

....Senior Secured Equipment Trust Series 1998-C, Affirmed Aa2

....Senior Secured Equipment Trust Series 1998-B, Affirmed Aa2

....Senior Secured Equipment Trust Series 1999-A, Affirmed Aa2

....Senior Secured Equipment Trust Series 2000-1, Affirmed Aa2

....Senior Secured Equipment Trust Series 2015-1, Affirmed Aa2

....Senior Secured Equipment Trust Series 2002-1, Affirmed Aa2

....Senior Secured Pass-Through Series 2006-1, Affirmed Aa2

....Senior Secured Pass-Through Series 2004-1, Affirmed Aa2

....Senior Secured Pass-Through Series 2003-1, Affirmed Aa2

..Issuer: Missouri Pacific Railroad Co.

....Senior Unsecured General Income Debentures Series A and B, Affirmed A1

....Senior Unsecured Income Debentures, Affirmed A2

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

....Senior Unsecured Revenue Bonds, Affirmed A2

..Issuer: Westside Intermodal Transportation Corp.

....Senior Unsecured Revenue Bonds, Affirmed A2

Outlook Actions:

..Issuer: Union Pacific Corporation

....Outlook, Remains Stable

..Issuer: Union Pacific Railroad Company

....Outlook, Remains Stable

..Issuer: Missouri Pacific Railroad Co.

....Outlook, Remains Stable

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

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
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns Aa2 rating to Union Pacific's Pass Through Certificates, Series 2016-1
No Related Data.
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