Consolidated

Net Income – The Corporation reported net income of $810 million ($3.28 per basic share and $3.22 per diluted share) in 1999 compared to a net loss of $633 million ($2.57 per basic and diluted share) in 1998. Improved operations and service levels at the Railroad, which resulted in higher revenues and lower expenses, drove the increase in net income over 1998. Net income for 1999 included a one-time, after-tax gain of $27 million ($0.11 per basic share and $0.10 per diluted share) from the adjustment of a liability established in connection with the discontinued operations of a former subsidiary (see note 3 to the consolidated financial statements). Net loss for 1998 included a one-time revaluation of Overnite's goodwill of $547 million pre- and after-tax ($2.22 per basic and diluted share) (see note 1 to the consolidated financial statements).

Operating Revenues – Operating revenues increased $723 million (7%) to $11.2 billion in 1999, reflecting higher volumes in all the Railroad's commodity lines and increased revenues at Overnite, partially offset by the impact of selling Skyway in November of 1998. Skyway generated $152 million in revenue during 1998.

Operating Expenses – Excluding the $547 million goodwill revaluation in 1998, operating expenses decreased $705 million (7%) to $9.4 billion in 1999, reflecting improved operations and service levels at the Railroad and continuing benefits from the integration of Southern Pacific operations, partially offset by increased expenses at Overnite. Salaries, wages and employee benefits decreased $63 million (1%) in 1999 due to improved productivity and lower corporate expenses, partially offset by higher rail volume and inflation. Equipment and other rents expense decreased $93 million (7%) from 1998 primarily as a result of improved rail cycle times, partially offset by higher rail volumes. Depreciation expense increased $13 million (1%) in 1999 as a result of increased capital spending for the Railroad's extensive capital programs, partially offset by lower overall depreciation rates for equipment and track assets. Fuel and utilities costs were $11 million (1%) lower than 1998 as lower fuel prices, favorable fuel hedging (see note 4 to the consolidated financial statements), and improved fuel efficiency more than offset volume-driven increases in fuel consumption. Materials and supplies increased $25 million (4%) in 1999, due to higher rail volume and increased fleet maintenance. Casualty costs decreased $97 million (20%) in 1999, due to lower than expected settlement costs at the Railroad. The $479 million (33%) decrease in other costs in 1999 reflected the impact in 1998 of customer claims expense, the impact of the 1998 sale of Skyway and lower state and local taxes (primarily sales and property taxes) in 1999.

Operating Income – Operating income increased $2.0 billion to $1.8 billion in 1999, reflecting improved operations and service levels at the Railroad, which resulted in decreased rail operating expenses and increased rail revenues. Operating income for 1998 included a one-time revaluation of Overnite's goodwill of $547 million (see note 1 to the consolidated financial statements).

Non-Operating Items – Other income decreased $58 million (31%), due to the impact in 1998 of a telecommunications contract buyout, sale of a company aircraft, sale of the Southern Pacific headquarters building and an insurance recovery for 1997 flood damage received in 1998. Interest expense increased $19 million (3%) as a result of increased average debt levels year over year caused by increased borrowings in 1998. Income taxes for 1999 increased $482 million as a result of higher income before income taxes, partially offset by settlements related to prior tax years.

Key Measures – Net income as a percentage of operating revenues improved to 7.2% from (0.8%) in 1998 (excluding the one-time revaluation of goodwill at Overnite in 1998). Return on average common shareholders' equity was 10.5% in 1999, up from (1.1%) in 1998 (excluding the one-time revaluation of goodwill at Overnite in 1998), reflecting improved service levels and operations at the Railroad. The Corporation's operating ratio was 83.9% in 1999 compared to 96.3% in 1998 (excluding the $547 million of goodwill revaluation and $15 million goodwill amortization).

Rail

Net Income – During 1999, the Railroad continued the earnings improvement that began in the third quarter of 1998. The Railroad continued to benefit from the service recovery process implemented in 1997 and 1998. Rail operations reported net income of $854 million compared to net income of $27 million in 1998. The increase resulted from improved operations and service levels, increased revenues in all commodity lines and lower operating costs.

Operating Revenues – Rail operating revenues increased $811 million (9%) to $10.1 billion. Revenue carloads increased 7% over 1998 with gains in each commodity group. The increase in revenue carloads resulted from improved service, market share recovery and a strong economy.

The following tables summarize the year-over-year changes in rail commodity revenue, carloads and average revenue per car by commodity type:

Agricultural – Revenue increased 9%, reflecting an 8% improvement in carloads. Carloads increased primarily due to stronger exports and improved service levels, which resulted in increased shipments of wheat, corn, meals and oils, fresh products and beverages. Carloads also increased due to pre-harvest shipments of stored crops to clear storage. Average revenue per car was flat, as longer hauls in meals and oils and a price increase on wheat shipments were offset by a shift in corn movements to shorter-haul Gulf Coast moves versus longer-haul Pacific Northwest moves.

Automotive – Revenue rose 12%, as a result of a 10% increase in carloads and a 1% rise in average revenue per car. The year-over-year increase was driven by improved market coverage and price increases in a year of record vehicle production. Improvements in service and the negative impact in 1998 of a strike against a major auto manufacturer also contributed to the increase in revenue. These gains were partially offset by the negative impact on rail traffic, due to the implementation of the joint acquisition of Conrail by two other major railroads. Average revenue per car increased 1% due to a change in mix and pricing actions.

Chemicals – A 3% increase in chemical carloads drove a 4% increase in revenue. Shipments increased due to improved service levels and increased demand for plastics, liquid and dry chemicals and phosphorous. These gains were partially offset by lower sulfur moves resulting from decreased production in response to weak demand, and a decline in fertilizer moves resulting from depressed demand for U.S. farm commodities. Average revenue per car was level, reflecting traffic improvements in longer-haul plastics offset by shorter-haul petroleum and export sulfur moves.

Energy – Revenue was up 9%, as a result of a 6% improvement in carloads and a 2% rise in average revenue per car. The volume increase was due to increases in the number of Powder River Basin trains per day, tons per car and average train length. Colorado and Utah volumes also increased, due to improved service. Average revenue per car increased resulting from longer-haul Powder River Basin traffic and an increase in tons per car.

Industrial Products – Revenue increased 6%, due to stronger demand and improved service. Carloads were up 6% because of increases in lumber, stone and cement moves, caused by strong construction demand; shipments of recyclables grew through new business. Gains were partially offset by decreased steel and ferrous scrap carloads due to higher imports of lower-priced foreign steel and lost volumes from a major steel producer who filed for bankruptcy. Gains were also partially offset by the negative impact on rail traffic, due to the implementation of the joint acquisition of Conrail by two other major railroads.

Intermodal – Revenue increased 14%, driven by an 8% increase in carloads and a 5% increase in average revenue per car. Carloads improved due to strong demand from growth in imports from Asia, service improvements and a new premium service offering. Average revenue per car increased, due to longer-haul shipments and demand-driven price increases.

Operating Expenses – Operating expenses decreased $578 million (7%) to $8.3 billion in 1999. The lower expenses reflected improved operating efficiency and service levels and benefits resulting from the continuing integration of Southern Pacific operations.

Salaries, Wages and Employee Benefits – Labor costs decreased $29 million (1%), due to productivity gains that resulted in reduced crew costs and lower recrew rates, partially offset by increases resulting from volume and inflation and one-time costs recorded in 1999 related to the Southern Pacific merger (see note 2 to the consolidated financial statements).

Equipment and Other Rents – Expenses decreased $93 million (7%), due primarily to improvements in cycle time as well as lower prices, partially offset by higher volume.

Depreciation – Expenses increased $31 million (3%), reflecting increased capital spending in recent years, partially offset by lower depreciation rates for equipment and track assets. Capital spending totaled $1.8 billion in 1999 compared to $2.0 billion in 1998.

Fuel and Utilities – Expenses were down $9 million (1%). The decrease was driven by lower fuel prices and improved consumption rates, partially offset by higher volume. The Railroad hedged 68% of its fuel consumption for 1999 at an average of 41 cents per gallon (excluding taxes, transportation charges and regional pricing spreads), which decreased fuel costs by $53 million. At December 31, 1999, expected fuel consumption for 2000 was 10% hedged at an average of 40 cents per gallon (excluding taxes, transportation charges and regional pricing spreads). At December 31, 1998, 64% of 1999 expected fuel consumption was hedged (see note 4 to the consolidated financial statements).

Materials and Supplies – Costs increased $25 million (5%), reflecting higher volumes and increased fleet maintenance.

Casualty Costs – Costs declined $89 million (21%), primarily due to the effect of lower settlement costs. The decline also reflected an insurance refund received in 1999 and decreased costs for repairs on cars from other railroads.

Other Costs – Costs decreased $414 million (33%), reflecting lower state and local taxes (primarily sales and property taxes), and the impact in 1998 of customer claims expense.

Operating Income – Operating income increased $1.4 billion to $1.8 billion in 1999. Both 1999 and 1998 operating income included the impact of one-time costs related to the Southern Pacific merger for severance, relocation and training of employees. The operating ratio in 1999 was 82.0%, 13.4 percentage points better than 1998's 95.4% operating ratio.

Non-Operating Items – Other income decreased $71 million (38%) in 1999, due to the impact in 1998 of a telecommunications contract buyout, sale of a company aircraft, sale of the Southern Pacific headquarters building and an insurance recovery for 1997 flood damage received in 1998. Interest expense increased $15 million (2%) in 1999, as a result of higher average debt levels year over year caused by increased borrowings during 1998. Income taxes increased $476 million in 1999, reflecting higher income before income taxes, partially offset by settlements related to prior tax years.

Other Operations

Trucking Product Line

Net Income – Trucking net income was $29 million in 1999 compared to a $522 million net loss in 1998. Overnite's 1998 loss included $15 million of goodwill amortization and a $547 million charge for a revaluation of goodwill related to the acquisition of Overnite by UPC in 1986 (see note 1 to the consolidated financial statements). Overnite's 1999 net income was adversely impacted by a 7% reduction in volume in the fourth quarter and expenses related to Overnite's contingency plan in response to activity by the Teamsters.

Operating Revenues – Trucking revenues increased $28 million (3%) to $1.1 billion in 1999. The revenue increase resulted from yield initiatives as well as a new product offering in the northeast United States and Texas.

Operating Expenses – Trucking operating expenses increased $62 million (6%) to $1.0 billion in 1999 (excluding the $547 million goodwill revaluation and $15 million goodwill amortization in 1998), approximately $27 million of which relates to expenses incurred implementing the work stoppage contingency plan. Salaries, wages and employee benefit costs increased $35 million (6%) to $651 million, reflecting wage and benefit enhancements. Fuel and utilities costs increased $3 million (7%) to $49 million in 1999, due to higher consumption and increased fuel price per gallon (54 cents per gallon in 1999 compared to 53 cents per gallon in 1998, including taxes, transportation charges and regional pricing spreads), partially offset by favorable hedge activity. Overnite hedged 40% of 1999 fuel consumption at an average price of 45 cents per gallon (excluding taxes, transportation charges and regional pricing spreads), which decreased fuel costs by $1 million. At December 31, 1999, 10% of Overnite's estimated 2000 fuel consumption was hedged at an average of 39 cents per gallon (excluding taxes, transportation charges and regional pricing spreads). At December 31, 1998, 41% of Overnite's expected 1999 fuel consumption was hedged (see note 4 to the consolidated financial statements). Equipment and other rents increased $12 million (14%) over 1998 due to contingency plan activity and initial expenses in connection with new business gained as a result of closure of a regional competitor.

Operating Income – Trucking operations generated operating income of $20 million in 1999. In 1998, Overnite reported an operating loss of $508 million (including the $547 million of goodwill revaluation and $15 million goodwill amortization). The operating ratio for trucking operations increased to 98.1% in 1999 from 94.8% in 1998 (excluding the $547 million of goodwill revaluation and $15 million goodwill amortization).

Other Product Lines

In 1999, operating revenue declined $116 million (77%) over 1998, due primarily to the sale of Skyway in November 1998. Operating expenses decreased $174 million (70%), reflecting the absence of 1999 costs associated with Skyway and the consolidation of portions of the corporate staff with the Railroad's staff in Omaha, Nebraska. Operating losses declined $58 million (60%), and losses from continuing operations declined $38 million (28%), due to the corporate consolidation and improved operations at the Corporation's technology product line.