Letter From Doug Glass, Vice President & General Manager - Energy

October 10, 2006

Dear Shipper:

We are all committed to quality improvement and the reduction of all incidents that run the risk of an injury or loss of life, as well as the loss of coal delivery opportunities.  In response to a disturbing trend in derailments several years ago, Union Pacific Railroad began studying how to prevent incidents associated with high-mileage, heavy-wheel load equipment.  This letter reports on our success to date and what the next steps will be.

A formal and comprehensive mechanical evaluation of heavy-haul cars was initiated in 2002 and was in response to a large number of broken wheel and axle derailments that Union Pacific was experiencing — primarily on coal trains.  With considerable research at hand, Union Pacific Railroad recommended several improvements to the AAR Car Standards, which included enhanced axle finish and condemning criteria at wheel shops, and ultrasonic wheel testing standards.  The improvements were adopted on all Union Pacific owned and leased rail cars that operate in heavy-haul service.  The results speak for themselves.  From 2002 to 2005, we experienced a 50% decrease in coal car derailments due to broken wheels, axles and hot bearings.  In addition, we have not had a single wheel set failure on cars with replacement wheels since implementing these standards.  We are pleased with this progress, but will not be satisfied until we have eliminated all equipment-caused derailments.

In April 2005, we asked our customers to voluntarily adopt recommended inspection and repair standards that we believed would prevent more derailments.  Union Pacific Car Maintenance Instruction CMI 950302 describes in detail the enhanced defect and inspection requirements.  The requirements call for mechanical inspection of rail cars used in coal service every twelve months.  In the interest of further reducing incidents due to broken wheels, axles and hot bearings, we have decided to formally adopt these standards as maintenance requirements that will apply to all new commercial agreements with Union Pacific Railroad effective November 1, 2006 and thereafter.  Union Pacific Railroad is amending Item 225 and adding Item 226 in UP Circulars 6602, 6603 and 6605 to incorporate the new rail car inspection standards.  These inspection standards will remain maintenance recommendations for current contracts and UP 111 Option 2 Rate Items already in effect. 

Reduced derailments and cars set-out en route increases coal train velocity and efficiency for all customers, in addition to the obvious safety benefits and reduced property damage to your coal trains.  We feel that the standards being adopted will continue to promote these objectives.  While the standards are required for new commercial agreements, we still encourage customers moving coal under existing contracts to voluntarily embrace these preventive maintenance measures.

If you have any questions concerning this issue, please feel free to call your Union Pacific account manager.  Thank you for your ongoing support and cooperation.