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Rating Action:

Moody's raises ratings of Union Pacific, senior unsecured to A3 at UPRR

26 Oct 2012

Approximately $9 billion of debt affected

New York, October 26, 2012 -- Moody's Investors Service raised the senior unsecured debt ratings of Union Pacific Corporation ('UP') to Baa1 from Baa2; the senior unsecured debt rating of UP's main operating subsidiary Union Pacific Railroad Company ('UPRR') has been raised to A3 from Baa1. Union Pacific's Prime-2 short term rating is unaffected by the rating action. The ratings outlook is stable.

RATINGS RATIONALE

The upgrade of UP's ratings considers the company's improved operating trends with an operating ratio which at 68% is among the best in the rail industry. Moody's expects that the company will be able to sustain an operating ratio in the range of 70% or lower throughout the economic cycle, despite potential headwinds that could adversely affect demand for rail freight in general. Moody's anticipates that, because of strong margins, UP will be able to generate operating cash flow in the range of $4 to $6 billion through 2013, even in the event of a mild recessionary scenario, which is critical to the company's ability to sustain system and equipment spending at amounts necessary to maintain service levels. The rating action also considers that UP will maintain a prudent financial policy, with share repurchases being largely funded with free cash flow rather than through incremental borrowing. As a result, we expect that UP's credit metrics will continue to map well against Baa1 rated companies: Debt to EBITDA of approximately 1.5 times, EBIT to Interest of over 8 times, and Retained Cash Flow to Debt in excess of 35%.

UP's strengthened operating performance will help to mitigate certain challenges that most Class I railroads will face in the near term. In particular, approximately 20% of UP's revenue is derived from its coal freight franchise, which has experienced a dramatic drop in volume (approximately 12% YTD through September 2012, versus prior year) due primarily to lower demand by customers in the utility sector. However, the loss of coal revenue in 2012 has largely been offset by strong growth at solid yields in freight related to oil and gas production in the Bakken and Eagle Ford shale regions. Another area of concern lies in UP's large intermodal business, which also represents about 20% of revenue. Consumer demand is a key driver of intermodal freight volume, which means that this segment would be vulnerable to a loss of business in the event of a recession. Nonetheless, Moody's believes that UP's record of good cost management and the strong pricing environment in a diverse range of freight groups will limit the amount of margin deterioration that may ensue if any of its freight segments face a short run downturn.

The ratings also take into consideration UP's significant, but manageable shareholder return policy. Since the end of 2009, UP has repurchased approximately $3.8 billion of its shares . While sizeable, UP has been able to use its cash flow to fund its share repurchases; UP generated over $4 billion of free cash flow over this period. This allowed the company to carry out its share purchases without use of incremental debt. Because of this, UP was able to reduce debt levels by approximately 5% over this time, which was an important factor in the reduction in leverage over this period. Going forward, Moody's expects that UP will continue to prudently pursue share repurchases at levels that will not likely result in a material increase in leverage or reduction in liquidity.

The ratings of most ETC's were confirmed at Aa3. With the senior unsecured rating of UPRR at A3, the ratings of these instruments are more directly influenced by the credit quality of the issuer than by the protection provided by its underlying collateral.

The stable ratings outlook reflects Moody's expectations that UP will be able to maintain operating margins at or below 70% as well as strong operating cash flows over the near term, even if the railroad sector experiences a short, mild downturn, with credit metrics sustained at levels commensurate with the Baa1 rating. We expect that the company will continue to exercise a prudent share repurchase program over the next few years, directing operating cash flow primarily towards network investments while keeping leverage roughly in-line with current levels.

Higher ratings are not expected at this time, but could be considered if UP is able to sustain favorable operating metrics throughout the industry cycle, including effectively responding to spikes in demand that occur during economic upturns without risking deterioration in service levels that could weaken customer satisfaction and pricing potential. Upgrades would also be dependent on demonstration of continued conservative financial management and maintenance of strong liquidity.

Ratings could be lowered if operating conditions sharply deteriorate unexpectedly over the near term, particularly if this were to coincide with a substantial increase in debt or the implementation of a more aggressive shareholder return policy. An Operating Ratio approaching 75%, Debt to EBITDA of above 2.0 times, or Retained Cash Flow to Debt that approaches 25% would warrant lower rating consideration.

Upgrades:

..Issuer: Union Pacific Corporation

.... Issuer Rating, Upgraded to Baa1 from Baa2

....Multiple Seniority Shelf, Upgraded to a range of (P)Baa3 to (P)Baa1 from a range of (P)Ba1 to (P)Baa2

....Senior Unsecured Medium-Term Note Program, Upgraded to (P)Baa1 from (P)Baa2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

..Issuer: Union Pacific Railroad Company

....Senior Secured Equipment Trust, Upgraded to A1 from A2

..Issuer: Westside Intermodal Transportation Corp.

....Senior Unsecured Revenue Bonds, Upgraded to A3 from Baa1

..Issuer: Missouri Pacific Railroad Co. (assumed by Union Pacific Railroad Company)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2

..Issuer: California Pollution Control Financing Auth.

....Revenue Bonds , Upgraded to Baa1 from Baa2

..Issuer: Lincoln (County of) WY

....Revenue Bonds , Upgraded to Baa1 from Baa2

..Issuer: Port of Corpus Christi Authority TX

....Revenue Bonds , Upgraded to Baa1 from Baa2

..Issuer: Uinta (County of) WY

....Revenue Bonds , Upgraded to Baa1 from Baa2

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

....Senior Unsecured Revenue Bonds, Upgraded to A3 from Baa1

Affirmed:

..Issuer: Union Pacific Railroad Company

....Senior Secured Equipment Trust, at Aa3

Outlook Actions:

..Issuer: Missouri Pacific Railroad Co.

....Outlook, Changed To Stable From Positive

..Issuer: Union Pacific Corporation

....Outlook, Changed To Stable From Positive

..Issuer: Union Pacific Railroad Company

....Outlook, Changed To Stable From Positive

The principal methodology used in rating Union Pacific Corporation was the Global Freight Railroad Industry Methodology published in March 2009 and the Enhanced Equipment Trust And Equipment Trust Certificates Industry Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Union Pacific Corporation, based in Omaha, Nebraska, operates a Class I railroad in the western United States.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

David Berge
VP - Senior Credit Officer
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 ratings of Union Pacific, senior unsecured to A3 at UPRR
No Related Data.
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