DBRS Confirms Union Pacific Corporation at BBB

Dominion Bond Rating Service (“DBRS”) has today confirmed the rating of Union Pacific Corporation (“UP” or the “Company”) at BBB. The trend is Stable. UP’s financial profile remains on track for the rating, following operating performance improvement over the past year that was in line with expectations.

UP’s credit metrics are compatible with the rating. The Company has made progress in enhancing network efficiency and further gains are expected. However, an improvement to the flow of traffic on many main routes remains a key issue facing UP. Network-related expenses have moderated earnings and cash flow growth relative to the Company’s peers. In addition, further capacity expansion initiatives will continue to require significant investment, which will limit UP’s ability to generate significant free cash flow.

DBRS expects the trend of earnings growth since year-end 2004 to continue over the near term, driven by robust demand across much of its highly diversified revenue base. Rising prices, fuel surcharges, and increasing volumes will remain the primary earnings drivers, and more than offset the impact of high/rising diesel prices. Continuing network capacity initiatives are expected to enhance efficiency, improve service, and support significant growth from global trade and truck market share gains over the longer term.

DBRS notes that UP is expected to fund operations internally over the near term, driven by earnings growth. However, free cash flow (as calculated by DBRS) is expected to be modest, largely due to continuing high capex required primarily for capacity investments and network upgrades. The Company’s credit metrics are expected to strengthen over the near term. In the event of sharper-than-expected growth in earnings and cash flow, combined with flat or lower adjusted debt levels, DBRS would consider a positive rating adjustment. The rating is likely to be constrained until more tangible evidence of network efficiency improvement is demonstrated by UP.

Notes:
This rating is based on public information.
Issuer ratings apply to all general senior unsecured obligations of the issuer in question.