Union Pacific Corp.

The outlook on UP is stable. We expect UP to fund share repurchases through incremental debt, partially offset by continued strong earnings and cash flow. We expect FFO to debt in the high-20% to low-30% area and debt to EBITDA in the mid-2x area through 2020. Although unlikely, we could lower the rating on UP over the next two years if the company's earnings and cash flow are weaker than we expect, potentially due to a weakening economy, or if the company's share repurchase plan is larger than expected and partially funded through incremental debt, resulting in FFO to debt declining to less than 23% and free operating cash flow (FOCF) to debt declining to less than 10% on a

...Union Pacific Corp.'s (UP's) credit metrics should remain relatively consistent despite lower carloads in 2019. In the first nine months of 2019, UP's carloads declined by 5% compared with the prior year period, driven primarily by energy shipments (frac sand, coal, and coke). Frac sand volumes, in particular, have declined significantly and S&P Global Ratings does not expect the volumes to recover because drilling companies have shifted to using local and regional sand supplies. However, increased pricing has helped offset these lower volumes, resulting in a year-to-date revenue decline of 3.3%. At the same time, improved operating efficiencies resulted in an increase in earnings. Debt rose by close to $8 billion since March 31, 2018, mostly to finance over $13 billion of share repurchases over that period. For the 12 months ended Sept. 30, 2019, UP's funds from operations (FFO) to debt was around 32% compared with the mid-40% area before the large share repurchases. We expect the company...

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