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
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Information sources used to prepare the rating are the following :
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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
