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The Union Pacific Railway Company, Southern Branch was organized on September 25, 1865 to build a line from Junction City, Kansas, on the projected line of the Union Pacific Railroad, Eastern Division (later and better known as the Kansas Pacific Railroad), southeasterly to the southern border of the state and onward towards Texas. In July of 1866 the United States Congress gave the UPSB a right of way and a land grant to help finance the project. (Part of the land grant was later rescinded.)

During 1866 the United States negotiated several treaties with the various Indian tribes in Indian Territory calling for the construction of a railroad across the Territory from Kansas to Texas. Congress then turned around and authorized not one, but three different railroads, to build across the Territory to Texas: the Union Pacific Southern Branch, the Leavenworth Lawrence & Galveston, and the Missouri River Fort Scott & Gulf. The Indians protested that they had approved only one railroad, not three, so the government ruled that whichever of the three railroads authorized first reached the northern border of Indian Territory, in the lands of the Cherokee Nation would be the one permitted to build through to Texas. This set the stage for a classic railroad race.

The Union Pacific Southern Branch seemed least likely of the three railroads to win the race to the border, for it was both the last of the threee to get organized and had the farthest to build. The railroad started construction work in October of 1867 but soon ran out of money and had to halt work. Meanwhile, a group of eastern financiers led by Judge Levi Parsons of New York had been looking for railroad projects they could undertake and their eyes soon fell on the UPSB. It's current prospects did not look very bright, but it had a potentially valuable land grant in Kansas and a chance at a much bigger and more valuable grant in Indian Territory. In October of 1868 Parsons proposed to take over the UPSB and complete it. The road's original promoters, unable to get any further on their own, agreed.

Construction work on the UPSB was resumed in December of 1868 by the Parsons group, under the auspices of their contruction and financing company, the Land Grant Railway & Trust Company of New Tork. In December of 1869 the line was completed from Junction City to Emporia and tracklaying continued steadily southward through early 1870, passing New Chicago (now Chanute) in April of 1870.

Meanwhile, on May 4, 1870 construction crews of the Missouri River Fort Scott & Gulf Railroad completed that line to the Indian Territory border south of Baxter Springs, Kansas, and it looked like the race to the territory line was over, with the UPSB still 30 miles out. But all was not quite as it seemed, and UPSB kept building until it too crossed the Indian Territory line on June 10, 1870, south of Chetopa, Kansas.

The promoters of the Fort Scott line had kept their route relatively close to the Missouri - Kansas border in order to boost the value of lands they owned in that area. In doing so, they had made a crucial mistake, for when the Fort Scott line crossed the border south of Baxter Springs it did so into the lands of the Quapaw tribe. The treaties and the Congressional authorizations all called for a line through the lands of the Cherokee tribe.

Shortly after the UPSB reached the territory line the Secretary of the Interior certified that it was the first railroad to meet the conditions of the Indian Territory grant and authorized it, and not the Missouri River Fort Scott & Gulf, to build across Indian Territory. This was approved by President Grant on July 20, 1870.

Almost as soon as they had taken over the Union Pacific Railroad, Southern Branch the Parsons group realized that it was very poorly located for handling the expected traffic from St. Louis and Chicago to Texas. Junction City was much too far west to serve as an adequate terminus. So they immediately began looking to build a line to the northeast from some point in southern Kansas. The charter and incomplete road bed of the Tebo & Neosho Railroad in Missouri immediately caught their attention.

The Tebo & Neosho Railroad Company was chartered on January 16, 1860 to build from the vicinity of the newly established town of Sedalia southwesterly through Henry County towards Fort Scott in Kansas. After the Civil War the project was revived, largely throughn the efforts of Ludge Thomas L. "Tebo" Wilson of Fort Scott, Kansas. Under Wilson's leadership the counties along the route in Missouri voted bond issues to aid the Tebo & Neosho project.

The issue of bonds in aid of railroads was a common practice for the period. (The Union Pacific Southern Branch had obtained bonds from several counties in Kansas.) Between 1865 and 1873 the various counties and cities in Missouri issued no less than $17,000,000 of bonds to aid in the construction of railroads in the state. As it was usually done, the county would issue bonds - which being backed by the taxing power of the county or city were readily salable - in exchange for the railroads stock - which generally had no market until the line was complete. In theory, once the line was built and running the stock would become valuable and could be used to pay off the bonds. In practice it rarely worked out so neatly, as Henry County would find out. Most often the stock brought in far less than the amount of the bonds issued and in a number of cases the stock received was worthless. Then the taxpayers of the county were forced to make up the difference.

Henry County in January of 1867 had voted to issue $150,000 of county bonds to be exchanged for Tebo & Neosho stock, provided that the line ran through the county seat of Clinton. Work was started on grading the line but the funds raised by the county bond issues soon proved insufficient to complete the project. In May of 1869 the county voted a further bond issue of $250,000 in aid of the Tebo & Neosho. By the end of 1869 more than 100 miles of grading had been done between Sedalia and state line west of Nevada but funds had again run out with the line still facing its heaviest expenditure, namely the purchase of rail and equipment.

The T&N line could be readily linked to existing UPSB line in Kansas and would provide a good connection for St. Louis with the Missouri Pacific Railroad at Sedalia. The T&N charter was very flexible and would allow building northeast in the direction of Chicago if this proved necessary. So Parsons proposed that his group take over the T&N, as it had taken over the UPSB before it, and complete the line. Unable to do more on their own, the local directors of the T&N approved in April of 1870.

Union Pacific Railroad, Southern Branch was not a very descriptive name and it might leave the impression that the company was part of the Union Pacific Railway, recently completed from Omaha to Promontory, Utah as the eastern half of the Transcontinental Railway. So in February of 1870 the Parsons group decided to rename the UPSB. The system as it was then planned would make a "Y" shape, one corner at Sedalia, Missouri, another at Junction City, Kansas, and the third somewhere on the northern border of Texas. So the UPSB officially became the Missouri Kansas & Texas Railway Company. It wasn't long before the initials M K T produced the road's enduring nickname - the "Katy."

As soon as the track had been completed to the Indian Territory border, securing the right to build south to Texas, the construction crews were shifted northeast to Sedalia, Missouri, to start laying track on the T&N line. The Sedalia line was considered to be so important that rail and equipment originally intended for the push to Texas would be used to complete this line first and the construction work south of Chetopa towards Texas postponed until the job was done.

End of track on the Sedalia Division of the MK&T reached the Henry County border at Windsor on June 30, 1870. Track reached the county seat at Clinton on July 18, 1870 and the newly laid out town of Montrose was passed on August 20.Nevada was reached on October 26, 1870 and tracklaying continued across the state line into Kansas. Tracklaying started northeast from the new junction town of Parsons, Kansas on the original UPSB line in January of 1871 and on February 3, 1871 the last rail was laid on the Sedalia Division line near Flatrock Creek in Kansas. Meanwhile, on October 19, 1870 the Missouri Kansas & Texas Railway had officially acquired the Sedalia line from the Tebo & Neosho Railroad, which, however, retained its corporate existence

The Sedalia Division line, running through Clinton, immediately became the main line of the Katy, with the original route to Junction City relegated to branch status. Initially one daily through passenger train operated over the line from Sedalia to "End of Track".

Construction south of Chetopa towards Texas was resumed in February of 1871, as soon as the Sedalia Division line was completed, and pushed steadily southwards. On December 26, 1872 the big bridge over the Red River near Colbert's Ferry was completed and the first MKT train rolled south over the bridge and into Denison, Texas - the first railroad train to reach Texas from the north. The Katy actually got to Denison quicker than Texas' own Houston & Texas Central Railroad, which rolled belatedly into Denison on March 6, 1873, two and half months later. Initial service over the route comprised the daily through passenger and a daily mixed train. In August of 1873 this was expanded by the addition of a local passenger train from Sedalia to Parsons while the mixed was dropped from the schedule. (However, on the MK&T as on most western railroads of this time, passengers could ride the caboose on any freight train. As the land became more settled, such practices tended to disappear.)

While Sedalia was much better as a terminus than Junction City, it still lacked a great deal. The only eastern connection available was the Missouri Pacific, going east to St. Louis. The situation was complicated by the maneuverings of Andrew Pierce, president of the Atlantic & Pacific Railroad. The A&P, the chief predecessor of the St. Louis & San Francisco (or Frisco) RR, had built from Pacific, Missouri, near St. Louis southwest through Springfield and Neosho, Missouri to a junction with the MK&T at Vinita in Indian Territory. The line had plans to continue west across Indian Territory into New Mexico and Arizona and on through California to San Francisco, but it was currently stymied in Indian Territory both for lack of funds and for lack of traffic. If Pierce could force the MK&T to turn over its traffic to his A&P for handling to St. Louis, it would have its needed traffic.

The MK&T naturally was not inclined to short haul itself simply for the beneift of Pierce's A&P, and set rates that made it advantageous for shippers to ship via Sedalia and the Missouri Pacific connection. Then Pierce and his allies gained control of the Missouri Pacific, enabling them to have the MP set rates at Sedalia in such a fashion as to force the traffic to take the Vinita route and shut out the MK&T.

So Katy President Levi Parsons dusted off the charter of the Tebo & Neosho, which had legal authority to build virtually anywhere in the state of Missouri it wanted to, and projected a line northeasterly from Sedalia to Moberly, Missouri, crossing the Missouri River at Boonville. At Moberly this line would connect with the St. Louis, Kansas City & Northern Railroad, providing a connection easterly into St. Louis entirely independent of Pierce's A&P and MP combination. It would also connect with the Hannibal & Central Missouri Railroad, then under construction from Moberly to Hannibal, Missouri, where connections could be made for Chicago via the Chicago Burlington & Quincy RR or Toledo via the Toledo Wabash & Western RR.

Construction work on the Northeast Extension got underway as soon as the line into Texas had been completed, and on May 31st the line was completed from Sedalia north to Boonville. Work had started already from Moberly south, and on June 20th the crews from north and south met near Fayette, Missouri, completing the new route to Moberly. The MK&T then proceeded to buy out the Hannibal & Central Missouri Railroad, which had juct completed its line from Moberly to Hannibal. All that remained was to get across the Missouri River at Boonville.

The Boonville Bridge Company was chartered in 1873 to build the bridge across the Missouri River. Construction work began in September of 1873 and was pushed rapidly and great bridge was completed on January 10, 1874. It had an 84-ft fixed span, a 363-ft swing span (providing 160 feet of clearance for river boats), 3 225 ft and 2 258 ft fixed spans, for a total length of 1,638 feet, and cost nearly a millionn dollars to build.

With the completion of the Boonville bridge, the Katy began operating a daily through train from Hannibal to Denison, Texas, with through sleeping cars from Chicago via the Chicago Burlington & Quincy, and from St. Louis via the Missouri Pacific. A second daily train ran only from Hannibal to Parsons, Kansas. With the Northeast Extension in place Pierce's Missouri Pacific had to treat reasonably with the Katy, or it would simply send the traffic north to the St. Louis Kansas City & Northern and leave the MP with nothing.

Seeing financial disaster looming on the horizon, Levi Parsons bailed out of the Katy in the summer of 1873. The Katy paid off its debts to Parson's Land Grant Railway & Trust Company with Second Mortgage bonds. Parsons and company were well gone when the big crash came in September of 1873 came, but the Katy was left heavily in debt and only partly completed. A proposed link between the Sedalia and Junction City lines had had its middle section completed, from Holden, Missouri to Paola, Kansas, partly in order to pick up some offered bond subsidies, but the Katy lacked the funds to complete the other two sections, leaving the existing segment largely useless. On the north the Katy had to rely on connections to reach all three of its main sources of traffic - Chicago, St. Louis, and Kansas City. On the south it also had to rely on connections to reach the major cities of the state. And the entire system had been built with such haste that a great deal of of the line had been laid with too light track on too narrow a roadbed with too few culverts for drainage.