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Rating Action:

Moody's raises Union Pacific's senior unsecured debt rating to A3

17 Apr 2014

New York, April 17, 2014 -- Moody's Investors Service ("Moody's") has raised the senior unsecured debt rating for Union Pacific Corporation ("Union Pacific") to A3 from Baa1. At the same time, Moody's has affirmed the company's Prime-2 short term rating and raised the ratings on the Pass-Through Certificates and Equipment Trust Certificates issued by the company's main operating subsidiary, Union Pacific Railroad Company, by one notch. The ratings outlook is stable. The rating action considers the strength of the company's rail franchise, its track record of excellent financial results and operational efficiency, as well as robust credit metrics.

RATINGS RATIONALE

The A3 senior unsecured rating for Union Pacific is supported by the strength of the company's rail franchise, which benefits from a well-diversified freight mix and a 31,838 route mile rail network with access to key ports along the Pacific Coast and Gulf Coast, interconnections with Canada's rail system and principal border crossings with Mexico. In 2013, no single freight category accounted for more than 20% of the company's freight revenues. Whilst a gradual improvement in the U.S. economy should support broad-based growth across Union Pacific's freight groups, Moody's believes that the specific strength of the company's franchise in certain segments provides additional growth potential.

With a particularly strong presence in the automotive freight segment, Moody's expects Union Pacific to benefit from continuing consumer demand for new vehicles in the near term, while the Industrial Products segment should see strong growth in shipments of sand used in hydraulic fracturing in the U.S. energy sector. In addition, investments by the petro-chemicals industry in the Gulf Coast are likely to increase volumes in Union Pacific's chemicals operations as new facilities come on line in the medium term. Importantly, whilst Union Pacific has not been immune in recent years from material declines in shipments of coal and its revenues from coal remain substantial, its exposure to coal is less than at other larger Class 1 railroads and approximately three-quarters of the coal that the company ships originates from the Powder River Basin, which is generally more cost competitive to natural gas, relative to certain other types of coal.

The ratings for Union Pacific also take into account the improving trend in the company's operating results. At 66.1% in 2013, its operating ratio, a measure of operational efficiency, ranks among the best in the rail industry. As the company continues its disciplined pricing approach, increases volumes on its network and implements additional efficiency initiatives, Moody's expects Union Pacific to be able to improve its operating ratio further over the next 12 to 24 months. Cash flow from operations is very strong and ample to fund substantial levels of capital expenditures that are required to enable volume growth and maintain service levels over the long-term.

Union Pacific's robust credit metrics further support the company's A3 senior unsecured rating. Financial leverage, as measured by Debt to EBITDA, has been approximately 1.5 times over the last three years, while interest coverage was more than 10 times in 2013, as measured by EBIT to Interest. Such levels compare very favorably against other Class 1 railroads in North America.

Moody's believes that Union Pacific has a good liquidity profile but expects that the company is reliant on external sources of cash in the near term to meet its funding needs. Cash flow from operations is expected to be adversely affected in 2014 by the expiration of bonus depreciation for Federal income tax purposes. In addition, with capital expenditures elevated, free cash flow is likely insufficient in 2014 to fund a share repurchase amount that Moody's expects to exceed the $2.2 billion of 2013.

Moody's has raised the ratings for the company's Pass Through Certificates ("PTCs") and Equipment Trust Certificates ("ETCs") by one notch. The PTCs and ETCs are issued by Union Pacific Railroad Company, the main operating subsidiary. Given the substantial amount of debt that resides at this level in the organizational structure, Moody's uses a senior unsecured rating for Union Pacific Railroad Company of A2, one notch higher than senior unsecured debt issued at the level of the holding company.

The stable ratings outlook is predicated on a continuation of Union Pacific's trajectory of revenue growth and margin improvement. The outlook takes into account a possible, albeit small, increase in Debt to EBITDA in 2014, given a partially debt-funded share repurchase program. Measures of cash flow relative to debt are expected to weaken but to remain at a level supportive of the company's ratings.

Ratings could be lowered if freight demand were to weaken substantially and operating margins were to decrease to 30% for a prolonged period of time, compared to 35% currently. Ratings could also be pressured if Debt to EBITDA were to increase to 2.0 times or if FFO to Debt were to decrease below 40%.

Higher ratings are not expected at this time but could be considered if Union Pacific continues to increase its operating margins that would remain at a peer group leading level. In addition, a positive rating action would require the company to fund its shareholder distributions predominantly with internally generated cash, resulting in leverage below current levels. Higher ratings would have to be balanced against the cyclical nature of the freight rail industry as well as the capital intensity of the sector.

Upgrades:

..Issuer: Union Pacific Corporation

.... Issuer Rating, Upgraded to A3 from Baa1

....Multiple Seniority Shelf Feb 7, 2016, Upgraded to (P)A3 from (P)Baa1

....US$1000M Multiple Seniority Shelf, Upgraded to (P)A3 from (P)Baa1

....US$1000M Multiple Seniority Shelf, Upgraded to (P)A3 from (P)Baa1

....US$1450M Multiple Seniority Shelf, Upgraded to (P)A3 from (P)Baa1

....US$1000M Multiple Seniority Shelf, Upgraded to (P)A3 from (P)Baa1

....US$1000M Multiple Seniority Shelf, Upgraded to (P)Baa1 from (P)Baa2

....US$1000M Multiple Seniority Shelf, Upgraded to (P)Baa2 from (P)Baa3

....US$1000M Multiple Seniority Shelf, Upgraded to (P)Baa2 from (P)Baa3

....US$1000M Multiple Seniority Shelf, Upgraded to (P)Baa1 from (P)Baa2

....US$1450M Multiple Seniority Shelf, Upgraded to (P)Baa2 from (P)Baa3

....US$1450M Multiple Seniority Shelf, Upgraded to (P)Baa1 from (P)Baa2

....US$1000M Multiple Seniority Shelf, Upgraded to (P)Baa2 from (P)Baa3

....US$1000M Multiple Seniority Shelf, Upgraded to (P)Baa1 from (P)Baa2

....US$1225M Senior Unsecured Medium-Term Note Program, Upgraded to (P)A3 from (P)Baa1

....US$400M Senior Unsecured Medium-Term Note Program, Upgraded to (P)A3 from (P)Baa1

....US$200M Senior Unsecured Medium-Term Note Program, Upgraded to (P)A3 from (P)Baa1

....US$200M Senior Unsecured Medium-Term Note Program, Upgraded to (P)A3 from (P)Baa1

....US$200M Senior Unsecured Medium-Term Note Program, Upgraded to (P)A3 from (P)Baa1

....US$250M 6.25% Senior Unsecured Regular Bond/Debenture May 1, 2034, Upgraded to A3 from Baa1

....US$325M 2.75% Senior Unsecured Regular Bond/Debenture Apr 15, 2023, Upgraded to A3 from Baa1

....US$250M 5.375% Senior Unsecured Regular Bond/Debenture May 1, 2014, Upgraded to A3 from Baa1

....US$325M 4.25% Senior Unsecured Regular Bond/Debenture Apr 15, 2043, Upgraded to A3 from Baa1

....US$750M 7.875% Senior Unsecured Regular Bond/Debenture Jan 15, 2019, Upgraded to A3 from Baa1

....US$600M 6.625% Senior Unsecured Regular Bond/Debenture Feb 1, 2029, Upgraded to A3 from Baa1

....US$7.1M 9.2% Senior Unsecured Regular Bond/Debenture Nov 3, 2014, Upgraded to A3 from Baa1

....US$5.25M 9.5% Senior Unsecured Regular Bond/Debenture Mar 15, 2017, Upgraded to A3 from Baa1

....US$11.5M 9.9% Senior Unsecured Regular Bond/Debenture May 15, 2018, Upgraded to A3 from Baa1

....US$375.9M 5.78% Senior Unsecured Regular Bond/Debenture Jun 15, 2040, Upgraded to A3 from Baa1

....US$750M 4.163% Senior Unsecured Regular Bond/Debenture Jul 15, 2022, Upgraded to A3 from Baa1

....US$250M 4.875% Senior Unsecured Regular Bond/Debenture Jan 15, 2015, Upgraded to A3 from Baa1

....US$750M 5.7% Senior Unsecured Regular Bond/Debenture Aug 15, 2018, Upgraded to A3 from Baa1

....US$250M 5.65% Senior Unsecured Regular Bond/Debenture May 1, 2017, Upgraded to A3 from Baa1

....US$250M 6.15% Senior Unsecured Regular Bond/Debenture May 1, 2037, Upgraded to A3 from Baa1

....US$500M 4.75% Senior Unsecured Regular Bond/Debenture Sep 15, 2041, Upgraded to A3 from Baa1

....US$500M 4.75% Senior Unsecured Regular Bond/Debenture Dec 15, 2043, Upgraded to A3 from Baa1

....US$200M 5.375% Senior Unsecured Regular Bond/Debenture Jun 1, 2033, Upgraded to A3 from Baa1

....US$300M 2.95% Senior Unsecured Regular Bond/Debenture Jan 15, 2023, Upgraded to A3 from Baa1

....US$300M 4.3% Senior Unsecured Regular Bond/Debenture Jun 15, 2042, Upgraded to A3 from Baa1

....US$0.31M 9.3% Senior Unsecured Regular Bond/Debenture Jan 17, 2020, Upgraded to A3 from Baa1

....US$4.1M 9.94% Senior Unsecured Regular Bond/Debenture Apr 1, 2020, Upgraded to A3 from Baa1

....US$2.5M 10% Senior Unsecured Regular Bond/Debenture Apr 10, 2020, Upgraded to A3 from Baa1

....US$0.525M 9.9% Senior Unsecured Regular Bond/Debenture Apr 15, 2020, Upgraded to A3 from Baa1

....US$0.25M 9.9% Senior Unsecured Regular Bond/Debenture Apr 15, 2020, Upgraded to A3 from Baa1

....US$400M 6.125% Senior Unsecured Regular Bond/Debenture Feb 15, 2020, Upgraded to A3 from Baa1

....US$439.192M 3.646% Senior Unsecured Regular Bond/Debenture Feb 15, 2024, Upgraded to A3 from Baa1

....US$300M 2.25% Senior Unsecured Regular Bond/Debenture Feb 15, 2019, Upgraded to A3 from Baa1

....US$400M 3.75% Senior Unsecured Regular Bond/Debenture Mar 15, 2024, Upgraded to A3 from Baa1

....US$300M 4.85% Senior Unsecured Regular Bond/Debenture Jun 15, 2044, Upgraded to A3 from Baa1

....US$700M 4.821% Senior Unsecured Regular Bond/Debenture Feb 1, 2044, Upgraded to A3 from Baa1

....US$500M 4% Senior Unsecured Regular Bond/Debenture Feb 1, 2021, Upgraded to A3 from Baa1

....US$250M 7.125% Senior Unsecured Regular Bond/Debenture Feb 1, 2028, Upgraded to A3 from Baa1

....US$250M 7% Senior Unsecured Regular Bond/Debenture Feb 1, 2016, Upgraded to A3 from Baa1

....US$500M 5.75% Senior Unsecured Regular Bond/Debenture Nov 15, 2017, Upgraded to A3 from Baa1

..Issuer: Union Pacific Railroad Company

....US$95.01978M Senior Secured Equipment Trust Oct 15, 2024, Upgraded to Aa3 from A1

....US$338.951M 5.082% Senior Secured Equipment Trust Jan 2, 2029, Upgraded to Aa2 from Aa3

....US$479.312M 6.176% Senior Secured Equipment Trust Jan 2, 2031, Upgraded to Aa2 from Aa3

....US$109.916M 6.63% Senior Secured Equipment Trust Jan 27, 2022, Upgraded to Aa2 from Aa3

....US$174.2M 6.7% Senior Secured Equipment Trust Feb 28, 2019, Upgraded to Aa2 from Aa3

....US$109.75M 7.6% Senior Secured Equipment Trust Jan 2, 2020, Upgraded to Aa2 from Aa3

....US$101.507M 6.85% Senior Secured Equipment Trust Jan 2, 2019, Upgraded to Aa2 from Aa3

....US$123.826M 6.33% Senior Secured Equipment Trust Jan 2, 2020, Upgraded to Aa2 from Aa3

....US$193.324M 8% Senior Secured Equipment Trust Jan 10, 2021, Upgraded to Aa2 from Aa3

....US$108.894M 6.061% Senior Secured Equipment Trust Jan 17, 2023, Upgraded to Aa2 from Aa3

....US$349.274M 5.866% Senior Secured Pass-Through Jul 2, 2030, Upgraded to Aa2 from Aa3

....US$188.815M 5.404% Senior Secured Pass-Through Jul 2, 2025, Upgraded to Aa2 from Aa3

....US$147.503M 4.698% Senior Secured Pass-Through Jan 2, 2024, Upgraded to Aa2 from Aa3

..Issuer: Westside Intermodal Transportation Corp.

....US$16.78M 7.216% Senior Unsecured Revenue Bonds Oct 1, 2022, Upgraded to A2 from A3

..Issuer: Missouri Pacific Railroad Co.

....US$69.926M 4.75% Senior Unsecured Regular Bond/Debenture Jan 1, 2020, Upgraded to A3 from Baa1

....US$67.604M 4.75% Senior Unsecured Regular Bond/Debenture Jan 1, 2030, Upgraded to A3 from Baa1

....US$100M 5% Senior Unsecured Regular Bond/Debenture Jan 1, 2045, Upgraded to A3 from Baa1

..Issuer: California Pollution Control Financing Auth.

....US$3.45M 9.5% Revenue Bonds Jan 1, 2022, Upgraded to A3 from Baa1

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

....US$40M 7.216% Senior Unsecured Revenue Bonds Oct 1, 2022, Upgraded to A2 from A3

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

Affirmations:

..Issuer: Union Pacific Corporation

....US$2000M Commercial Paper, Affirmed P-2

The principal methodology used in this rating was Global Surface Transportation and Logistics Companies published in April 2013 and Enhanced Equipment Trust And Equipment Trust Certificates published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Union Pacific Corporation, headquartered in Omaha, Nebraska, 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.

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.

Renier Michael 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

Michael J Mulvaney
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 raises Union Pacific's senior unsecured debt rating to A3
No Related Data.
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