Letter From Jack Koraleski

March 11, 2005

To Our Customers:

This is the second report to our customers in 2005 and the 12th in the series we began in 2004 to provide you with information on our operations at Union Pacific.

We have largely recovered from the severe January storm in the West:

A monumental effort by our engineering and maintenance crews has restored basic service to our lines on the coastal route in California and the South Central route between Las Vegas and Salt Lake City. Working around the clock in very rough terrain, we were able to open these lines by the end of January. We continue to work on restoring the permanent signal systems and sidings as we return these lines to full capacity. Near-record rainfall in the Los Angeles area has made this work difficult and caused additional washouts on a recently repaired portion of the Coast Line.

Carloadings and volume continue to set records:

Our 7-day carloadings for February were just over 188,000 cars per week, which is a significant increase over the 174,434 cars for February of 2004. It was also an increase from just under 172,000-per-week carloadings in January. Overall service metrics have rebounded from the effects of the flood, but have remained stable since then. Our system train speed for February averaged 21.3 compared with 20.6 in January 2005 and 22.1 for February 2004. We continue to be concerned about the inventory of railcars on our system as a result of heavy demand for rail service. This is a key indicator of congestion, and we are actively trying to reduce these levels.

We had record deliveries of Powder River Basin coal and substantial increases in deliveries of Colorado coal. We are beating our projections for deliveries in the South Texas rock network, and we are handling a huge – nearly 20 percent – increase in container traffic through West Coast ports so far this year.

We are commencing a complete restructuring of our operations:

We began a comprehensive replan of our operations last October, using sophisticated software called MultiRail. We are calling this our Unified Plan and we expect to begin the rollout of these changes later this month, continuing through June. This effort is intended to increase capacity by reducing the number of work events each day across the system. By increasing our velocity and reducing terminal dwell we expect to measurably increase our throughput.

A Strong Capital Spending Program is planned for 2005:

We are planning a capital-spending program in excess of $2.0 billion for 2005 that includes $295 million in spending on additional capacity. This includes critical projects on the Sunset Route such as terminal expansions and additional double tracking. Approximately $220 million is planned for commercial facilities such as the intermodal facilities in Dallas and Salt Lake City. In addition, our plans call for the acquisition of 315 new locomotives and 4200 new freight cars. $1.34 billion is planned for track structure maintenance.

Substantial investment will require increased rates for our service:

There is now little doubt that this nation’s infrastructure for moving freight is out of capacity in some key corridors and regions. In fact, highway officials predict that this condition will worsen in coming decades. The nation needs substantial public and private investment in transportation infrastructure in order to avoid severe congestion that will limit mobility and impose major costs on our economy.

Union Pacific’s ability to invest in our system is directly related to our ability to earn a financial return necessary to pay for those investments. This means that prices for our service are rising. It also will require that we work with our customers to become more efficient in switching and scheduling and that we take steps to ensure that our construction work is done efficiently.

Demand in the Phoenix area remains strong:

Our manifest business in and out of Phoenix is running 42% above a year ago, and we are working with receivers to manage the flow in and out of that region. When a receiver has more cars than can be handled, the overflow fills our terminals and thus impedes our ability to switch all customers. We are attempting to regulate the amount of traffic for those receivers with a backlog of cars on hand in the Phoenix terminal area in an effort to keep all receivers as current as possible. We are communicating regularly with our customers in this area about our efforts to manage this volume. We anticipate that more changes in the operations there will be required as the rapid growth in that region continues.

As in the past, we appreciate your willingness to continue to work with us on these challenges and we will continue to keep you apprised of our progress.