Union Pacific Railroad

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OVERVIEW of Union Pacific and Southern Pacific routes in the South and Southwest pro- duced a single-line rail network serving the rapidly growing population in Union Pacific is the largest railroad in North America, covering 23 states this part of the country. Leveraging the across the western two-thirds of the United States. The merger of Union Pacific, strengths of this broad franchise allows Union Pacific to improve cus- Southern Pacific and Chicago and North Western created a strategically tomer service, grow market share and advantageous route structure that serves customers in critical and fast-growing achieve improved financial returns. markets. That network, combined with a well-balanced and diverse traffic mix, makes Union Pacific the premier rail franchise in North America. FINANCIAL REVIEW

A key strength of the franchise is access to the coal fields in the Powder River Financial performance improved significantly in 1999, as the Railroad Basin (PRB) region of northeastern Wyoming. Growth of PRB coal tonnage hauled rebounded from the effects of the by UP has averaged 8% over the past seven years, due to its low-production cost service difficulties of late 1997 and 1998. Commodity revenue grew 9%, and low-sulfur content. UP’s rail lines in the Midwest and Plains states provide from customers returning business direct routes from major grain-producing areas to domestic markets, Mexico and to the Railroad and from general growth, particularly in coal, inter- to ports of export in the Gulf Coast and Pacific Northwest. Union Pacific also has modal and automobile shipments. broad coverage of the large chemical-producing areas along the Gulf Coast. Service improvements drove operating expenses down 7%, reflecting To handle growing east-west intermodal and automotive traffic, Union Pacific increased system velocity and a has competitive long-haul routes between all major West Coast ports and eastern reduction in service failures. Net income from continuing operations gateways. In addition to directly serving all six major gateways to Mexico, the grew to $754 million in 1999, Railroad has the fastest and most direct route to and from Mexico. The merger capping six consecutive quarters

UNION PACIFIC CORPORATION (excluding Overnite and Skyway) Financial Summary Quarterly Operating Ratio

1999 1998 1997 (percent) 106.1 Operating Revenue (millions of dollars) $10,211 $9,368 $9,981 103.0 98.8 Operating Income (millions of dollars) $1,784 $348 $1,144

Operating Ratio 82.5% 96.3% 88.5% 91.2 89.4

Total Carloads (thousands) 8,556 7,998 8,453 85.8 83.0 80.6 80.8 Average Employees 52,539 53,121 52,587

Capital Investments* (millions of dollars) $1,942 $2,392 $2,297 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 97 98 98 98 98 99 99 99 99

*includes long-term operating leases Customer Claims Provision

2 Power of UP Franchise

The power of the UP rail franchise results from a system of strategic routes, a diverse traffic mix and access to key ports, cities and gateways. Strength also lies in UP’s ability to directly serve the fastest growing regions of the country.

Annual Population Growth .0% to .25% .25% to .75% Union Pacific .75% to 1.25% Former SP >1.25% Former CNW problems and acting quickly to fix them. For example, UP tracks opera- of improvement. Capital spending QUALITY TRANSPORTATION tional performance measures closely decreased to approximately $1.9 The Railroad’s ability to grow and to and focuses resources on regions billion, as merger-related spending where goals are not being met. In compete with other modes of trans- began to taper off. many cases, performance is as good portation depends on providing quality For Union Pacific Corporation, as or better than before the Union transportation service. In 1999, UP free cash flow before dividends grew Pacific/Southern Pacific merger. But regained a focused approach to to $255 million in 1999, a $1.6 further improvement can be made as billion improvement over 1998. The improving service, reducing failure failure costs continue to decline, lease-adjusted debt-to-capital ratio costs and raising customer satisfaction. capacity bottlenecks are removed improved from 58.7% at the end of UP strives continuously to improve and the remaining merger benefits 1998 to 56.9% at the end of 1999. service quality by actively identifying are realized.

Commodity Revenue Growth Capital Expenditures* Consolidated Debt (percent) (millions of dollars) (billions of dollars) 13.8 $2,392 UP Corporation $2,297 10.2 10.1 11.8 $1,942 8.5 8.0 58.7% 8.9 8.6 8.6 56.9% 56.5% 6.2 55.6% Lease-Adjusted Debt/Capital 3.9 Chemicals Automotive Total Intermodal Agricultural Energy Industrial Convertible Preferred 1997 1998 1999 Maintenance-of-Way 1996 1997 1998 1999 Locomotives Convertible preferred of $1.5 billion Capacity * includes long-term considered 50% debt and 50% equity. Freight Cars & Other operating leases

3 UNION PACIFIC RAILROAD

OPERATING PERFORMANCE Operating Performance Customer service and financial performance are improving as a result of Velocity Recrew Rate Miles Per Hour Percentage more efficient use of railroad assets 22.4% Best Ever 19.7 including track, locomotives, freight 19.1 cars, terminals and crews. Key indi- cators, such as train speed, freight car terminal dwell time, recrew rate and freight car cycle time, gauge asset utilization. Showing particular 9.4% Best Ever 5.1% improvement is the recrew rate, which 12.7 reflects the percentage of crews Mar '97Mar '98 Mar '00 Mar '97 Mar '98 Mar '00 relieved before their train completes its run. This dropped 77% from its Freight Car Cycle Time Freight Car Terminal Dwell worst level in March of 1998. Freight Days Hours 40.0 car terminal dwell measures the time 16.3 a car sits in a rail yard before being switched into an outbound train. This improved 34% to a best-ever 26.5 hours in April 1999. 12.1 28.6 CUSTOMER SATISFACTION 12.1 Best Ever 12.0 Best Ever 26.5 26.8 Union Pacific’s mission statement Mar '97Mar '98 Mar '00 Mar '97 Mar '98 Mar '00 establishes customer satisfaction as a UP achieved dramatic improvement in operations during 1999. This forward momentum has top priority. Monthly customer surveys continued, with further improvement reported for the first quarter of 2000. “Best-ever” results provide feedback regarding the reflect best monthly average performance since the UP/SP merger in September 1996. Railroad’s service performance. As

Customer Satisfaction Index Coal Train Cycle Performance (percent)

2000 75 72 100 1999 1998 62 90 44

1996 1997 1998 1999 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

4 service improved during 1999, the improvements in capacity and by the Our Mission percent of satisfied customers climbed efforts of a process improvement team from 58% in January to 77% in that used targeted problem-solving Union Pacific is committed to be a December. Of critical importance to techniques to reduce service failures. railroad where: future improvement, the number of Customers want to do business dissatisfied customers declined from Employees are proud to work SERVICE VARIABILITY 23% in January to 2% in December. Shareholder value is created Quality service for customers means SERVICE DELIVERY INDEX that shipments arrive quickly and consistently on time. Cars that The most direct measure of how well arrive too early or too late can cause the Railroad is meeting customer logistical problems for customers expectations is the Service Delivery even if the average cycle time meets Index (SDI). Depending on the com- established standards. Eliminating COST OF QUALITY modity, the SDI measures how closely excessive variability also benefits the a car followed its scheduled trip plan Railroad. When trains run on sched- Failure to meet standards of opera- or how well a train performed ule, cars make required connections, tional performance, customer satisfac- against contractual obligations or terminals become less congested and tion or service performance results in agreed-upon transit times. the efficiency of crews, locomotives financial costs to the Railroad in the As the Railroad climbed out of its and track capacity improves. Train form of higher expenses, poor asset service difficulties, the SDI rose from speeds and car cycle times are utilization or lost revenue opportunities. 59 in January of 1999 to 73 in March currently reaching record levels since At Union Pacific, failure costs are of 2000. Performance out of the the UP/SP merger in October 1996. captured by the Cost of Quality system, Powder River Basin was particularly By continuing to focus on reducing which consists of over 100 separate strong and helped drive coal train performance variability, further accounts for tracking performance. cycle performance from 79.8% in improvements in customer service, Measured as a percentage of revenue, January of 1999 to 99.2% in March train performance and asset the Cost of Quality declined by one- of 2000. Results were driven by utilization should be achievable. third to 14% in 1999.

Service Delivery Index Service Variability Cost of Quality (conceptual representation) (percent of revenue) 71.6 Frequency 67.3 Increased 65.3 Customer 21 Satisfaction 60.6 19

15 14 13 13 49.2 11 Excessive Variability

1996 1997 1998 1999 2000 Q1 1996 through 1998 results are pro forma UP/SP prior to and during computer systems Early On-Time Late 1995 1996 1997 1998 1999YTD 2000 cutovers. Service Level Feb Goal

5 UNION PACIFIC RAILROAD

UNION PACIFIC FRANCHISE move directly to final destination or Eastport interchange with fewer time-consuming The merger between Union Pacific Hinkle intermediate stops. The Railroad is and Southern Pacific created a rail Portland planning to use this advantage to franchise with substantial benefits to Eugene the Railroad and its customers. introduce new premium manifest Improved equipment utilization and trains that will provide high priority consolidation of work forces and service for perishables and other goods moving east through Chicago. facilities are key benefits that will Roseville To North Platte & eastern gateways continue to improve operational Sacramento Sparks Milpitas Stockton performance and financial returns I-5 MANIFEST SERVICE for shareholders. Customers now San Jose benefit from new or expanded The Union Pacific/Southern Pacific merger created truck-competitive, facilities and train services. Many To Arizona, Texas of these are available following West Colton & eastern gateways single-line rail service along the completion of several major merger I-5 corridor between the Pacific implementation projects during Yards closed Northwest and California, Nevada or downsized the past two years. Major yards and Arizona. Lumber and paper traffic from the PNW is the target ROSEVILLE YARD of another customer offering called ROSEVILLE RATIONALIZATION “5-7-9” Service. To meet customer In May 1999, the J.R. Davis Yard Roseville is the premier classification yard needs, the Railroad will offer service opened in Roseville, California, after on the West Coast. It was built to consolidate a two-year, $145 million reconstruc- from the PNW to Northern California rail traffic from many smaller yards in the in five days, Southern California in tion project. Many smaller rail yards area and sized to handle years of expected seven days and Las Vegas and in the area were closed or downsized growth. The savings from reduced labor costs as rail traffic was consolidated into and improved equipment utilization alone Phoenix in nine days. Consistently Roseville. This allows the Railroad to are estimated to provide a 30% return on meeting that schedule should win build longer, dedicated trains that can investment. increased market share from trucks.

PREMIUM MANIFEST SERVICE “5-7-9” MANIFEST SERVICE

5-Day Service Chicago Roseville Gateway Yard St. Louis 7-Day Service Gateway

9-Day Service

6 I-5 INTERMODAL SERVICE MEMPHIS-TEXAS-CALIFORNIA a lower cost to the shipper, while the INTERMODAL premium service offers better margins No business segment offers a greater to UP. Per container, this priority inter- opportunity to grow market share than In April 1999, UPRR introduced a new premium intermodal service between modal service requires approximately intermodal. Trucks currently handle 1 Memphis and Northern California one-third the fuel and /30 th the about 90% of an approximately $40 via Dallas and Los Angeles. By using labor as comparable truck service. billion western market. Long-term Union Pacific lines in Texas and growth depends upon improvements Arkansas and the former Southern INTERNATIONAL SERVICE in service reliability and new service Pacific Sunset Route, the new service Driven by the North American offerings. One such offering currently saves almost 600 miles over Union Free Trade Agreement (NAFTA), being tested in the I-5 corridor is the Pacific’s old Central Corridor route. international trade between Mexico, “Cascade Connection.” This operates The rail transit time is competitive the U.S. and Canada continues to between Southern California and with the fastest truck service but at outpace domestic economic growth. Portland and Seattle. A unique UPRR’s network stretches from the feature of the service is a fixed Truck versus Rail Canadian border to Mexico and is train configuration that is designed (generic lane comparison) well-positioned to benefit from the to best meet customer demand and growing trade. The Railroad directly avoid service delays caused by serves all six major gateways to equipment shortages. Variable pricing Mexico and has the shortest and will be used to smooth seasonal and Truck fastest route between the key Laredo, day-of-week demand fluctuations Rail Texas, gateway and the northern and to maximize profitability. The interchanges at St. Louis and Chicago. “Cascade Connection” has already Speed and efficiency are enhanced greatly improved customer service on this route by use of directional and the concept will be considered running and the recently completed Time Labor Fuel for implementation in other (Hours) (Cost) (Gallons) hub-and-spoke network. Directional corridors. running places all southbound trains

CASCADE CONNECTION INTERMODAL MEMPHIS TO OAKLAND INTERMODAL Seattle

Portland

Oakland Oakland

Memphis Los Angeles Los Angeles

Dallas

Intermediate Stops Intermediate Stops

7 UNION PACIFIC RAILROAD

on the former SP route between CENTRAL CORRIDOR CAPACITY Marysville, Kansas, and over the Illinois and Texas and all northbound Kansas Pacific line. The benefits of The heaviest density of rail freight in all this new capacity support antici- trains on the parallel UP route. This the world can be found traversing pated growth in coal traffic and all eliminates thousands of train meets the Union Pacific’s Central Corridor other traffic relying on these routes. and passes. The hub-and-spoke net- in Nebraska. In August 1999, a work greatly increases crew efficiency multi-year project to install 108 miles in major cities by qualifying crews of triple track was completed, remov- INFORMATION TECHNOLOGY on multiple line segments. ing a key bottleneck. The fluid capacity & THE INTERNET By taking advantage of these of this segment grew from approxi- TECHNOLOGY APPLICATIONS efficiencies, UP and the TFM in mately 95 trains per day to 160 to Mexico have teamed up to offer 180 trains per day, and average train At Union Pacific, technology has five-day premium intermodal service speed grew 40% to 34 miles per hour. always been embraced as a valuable between Mexico City and Chicago. Track capacity is also being added tool for increasing productivity, improv- The primary target of this service is between the PRB mines in Wyoming ing customer service and simplifying northbound auto parts shipments and North Platte, Nebraska, and business practices. Because of the destined for U.S. assembly plants. between Gibbon, Nebraska, and Railroad’s large asset base and heavy reliance on transaction-based process- es, new technologies can be scaled upward immediately to deliver strong financial returns. Examples include two new systems recently developed to monitor train events and manage the locomotive fleet. These systems provide managers with real-time information regarding train and locomotive location and status, and assists them in making decisions to Intermodal, coal and manifest trains at the outskirts of Bailey Yard west of North Platte, Nebraska. improve both utilization and on-time

ROUTES TO MEXICO CENTRAL CORRIDOR CAPACITY UPRR Southbound 1,401 miles Chicago UPRR Northbound 1,339 miles BNSF 1,670 miles Powder CN/IC 1,655 miles River St. Louis Basin UPRR South Morrill BNSF Omaha BNSF Trackage Rights Chicago CN/IC Cheyenne Gibbon Memphis North Platte CN/IC Trackage Rights Little Rock Pine Bluff Marysville Denver Topeka Kansas City Jackson on KCS

Double Track Under Construction San Antonio Houston on UPRR Laredo

8 on TexMex performance. Exciting new applications are now being developed, highlighted by a next-generation computer-aided dispatching system, CAD III.

THE INTERNET

Use of Internet applications to simplify and improve business-to-business transactions is one of the fastest growing areas in the technology industry today. Union Pacific is a railroad industry leader in developing innova- tive business-to-business applications. At Union Pacific, the Internet is viewed as a tool both to improve the efficiency and accuracy of tens of thousands of daily business-to-business transactions and to make these transactions simpler for customers. Many powerful services are already available. Customers can perform price inquiries, order freight cars, submit shipping instructions and trace car movements to destination. as use of the Railroad’s web site has For example, crews can check train Once customers are finished loading or increased by over 480% during the line-ups from home to help them unloading a car, they can submit past two years. anticipate work assignments. And instructions via the Internet to have it Applications are not limited just to many new applications and picked up by the Railroad. customers. Many employee services customer-specific sites are being Customers have reacted positively, have also migrated to the web. developed.

Internet Document Hits (monthly)

2,313,000

399,000

Jan 1998 Jan 2000