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