New York, June 01, 2018 -- Moody's Investors Service ("Moody's") downgraded
the long-term ratings of Union Pacific Corporation ("Union
Pacific") and its subsidiaries by one notch. The ratings
affected include the senior unsecured rating, downgraded to Baa1
from A3, and the ratings of the Pass-Through Certificates
and Equipment Trust Certificates issued by the company's main operating
subsidiary, Union Pacific Railroad Company. Moody's
also affirmed the short-term rating at P-2. The rating
outlook is stable.
RATINGS RATIONALE
The ratings downgrade reflects Moody's expectation of more elevated
risk given the considerable increase in financial leverage due to Union
Pacific's intent to repurchase in aggregate about $20 billion
of shares through 2020, well in excess of anticipated free cash
flows over this period. The company's revised financial policy,
which includes maintaining debt/EBITDA of up to 2.7 times,
is a marked departure from Union Pacific's prior more conservative
policy that limited debt/EBITDA to up to 2 times.
At the same time, the ratings incorporate the railroad's importance
to North America's transportation infrastructure as one of the most
extensive railways, the strength of the rail franchise and its well-diversified
freight mix. Operating margins of close to 38% rank among
the highest in the industry and are likely to increase gradually as the
company aims to be disciplined on pricing and seeks to implement additional
efficiency initiatives.
Moody's projects free cash flow to be more than $2.5
billion in 2018, boosted by lower cash taxes following the enactment
of the Tax Cuts and Jobs Act of 2017 and a moderation in capital expenditures
to less than 17% of revenues following a peak in investments in
2015.
The ratings of the Pass-Through Certificates and Equipment Trust
Certificates that are issued by Union Pacific Railway Company take into
account, among other features, the special benefits provided
by Section 1168 of the U.S. Bankruptcy Code. In addition,
debt issued by Union Pacific Railway Company is structurally senior to
debt issued by Union Pacific Corporation, the entity where the preponderance
of Union Pacific's obligations reside.
The stable outlook reflects Moody's expectation that freight volumes
will grow moderately and that Union Pacific will increase its operating
margin to more than 38% in 2018, benefiting from an improving
pricing environment, moderating cost inflation and ongoing efficiency
measures.
The ratings could be upgraded if Union Pacific reverts to its prior more
conservative financial policy such that debt/EBITDA is expected to be
maintained at 2.25 times or less and (Retained cash flow minus
capital expenditures)/debt is well in excess of 10%. Operating
margins that are sustained above 35% and EBITA/average assets of
more than 12.5% are also considerations for a ratings upgrade.
The ratings could be downgraded if Moody's expects operating margins
to decrease towards 30% due to an inability to attain pricing in
excess of rail inflation or operational inefficiencies. The ratings
could also be downgraded if Moody's expects debt/EBITDA to exceed
2.75 times, (Retained cash flow minus capital expenditures)/debt
to be less than 10% or EBITA/average assets to be less than 10%.
Downgrades:
..Issuer: Union Pacific Corporation
.... Issuer Rating, Downgraded to Baa1
from A3
....Senior Unsecured Shelf, Downgraded
to (P)Baa1 from (P)A3
....Pref. Shelf, Downgraded to
(P)Baa3 from (P)Baa2
....Subordinate Shelf, Downgraded to
(P)Baa2 from (P)Baa1
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Baa1 from (P)A3
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa1 from A3
..Issuer: Union Pacific Railroad Company
....Senior Secured Equipment Trust,
Downgraded to Aa3 from Aa2
....Senior Secured Pass-Through,
Downgraded to Aa3 from Aa2
....Senior Secured Pass-Through,
Downgraded to A1 from Aa3
..Issuer: Westside Intermodal Transportation Corp.
....Senior Unsecured Revenue Bonds,
Downgraded to A3 from A2
..Issuer: Unif. Govt. of Wyandotte Co./Kansas
City, KS
....Senior Unsecured Revenue Bonds,
Downgraded to A3 from A2
Outlook Actions:
..Issuer: Union Pacific Corporation
....Outlook, Remains Stable
..Issuer: Union Pacific Railroad Company
....Outlook, Remains Stable
Affirmations:
..Issuer: Union Pacific Corporation
.... Commercial Paper, Affirmed at P-2
The methodologies used in these ratings were Global Surface Transportation
and Logistics Companies published in May 2017 and Enhanced Equipment Trust
and Equipment Trust Certificates published in December 2015. Please
see the Rating Methodologies page on www.moodys.com for
a copy of these methodologies.
Union Pacific Corporation operates one of the nation's largest railroad
systems. With approximately 32,100 route miles across the
western two-thirds of the U.S. and access to all
major coast ports and rail gateways, the railroad serves the agricultural,
energy and industrial sectors and offers a premium service for containerized
cargo (intermodal) and the automotive sector. Union Pacific generated
revenues of $21.6 billion in the last 12 months ended March
2018.
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 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.
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
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
