BURLINGTON NORTHERN RAILROAD CO, 10-K, 1997-03-31

BURLINGTON NORTHERN RAILROAD CO
10-K, 1997-03-31
RAILROADS, LINE-HAUL OPERATING

Previous: BRISTOL MYERS SQUIBB CO, 10-K, 1997-03-31

Next: BUTLER MANUFACTURING CO, 10-K405, 1997-03-31

<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _____ to _____ Commission file number 1-6324
------

THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
(Exact name of registrant as specified in its charter)

Delaware 41-6034000
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

2650 Lou Menk Drive
Fort Worth, Texas 76131-2830

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:
(817) 333-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
-----------------------------------------------------------

The securities listed below are registered on the New York Stock Exchange.

Title of each class
-------------------

Burlington Northern Inc. Northern Pacific Railway Company
(Now The Burlington Northern and General Lien Railway and Land Grant 3%
Santa Fe Railway Company) Bonds, due 2047
Consolidated Mortgage Bonds Great Northern Railway Company
9.25%, Series H, due 2006 General Mortgage Bonds
6.55%, Series K, due 2020 3 1/8%, Series O, due 2000
3.80%, Series L, due 2020 2 5/8%, Series Q, due 2010
3.20%, Series M, due 2045
8.15%, Series N, due 2020
6.55%, Series O, due 2020
8.15%, Series P, due 2020 St. Louis-San Francisco Railway Company
Income Debentures, 5%, Series A,
due 2006

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months [or for such shorter period that the
registrant was required to file such reports], and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

Class Outstanding
----- -----------

Common Stock, par value $1.00
as of February 28, 1997* 1,000 shares

*The Burlington Northern and Santa Fe Railway Company is a wholly-owned
subsidiary of Santa Fe Pacific Corporation (SFP) which is a wholly owned
subsidiary of Burlington Northern Santa Fe Corporation; as a result there is no
market data with respect to registrant's shares.

DOCUMENTS INCORPORATED BY REFERENCE

None

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a) AND (b)
OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE
FORMAT PERMITTED BY GENERAL INSTRUCTION J.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I

Items 1 and 2. Business and Properties 1

Item 3. Legal Proceedings 9

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13

Item 7. Management's Narrative Analysis of Results of Operations 13

Item 8. Financial Statements and Supplementary Data 16

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 16

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 16

SIGNATURES 17

REPORTS OF INDEPENDENT ACCOUNTANTS AND CONSOLIDATED FINANCIAL
STATEMENTS AND SCHEDULE F-1

EXHIBIT INDEX E-1
</TABLE>
<PAGE>

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

The Burlington Northern and Santa Fe Railway Company ("BNSF Railway"),
formerly known as Burlington Northern Railroad Company ("BNRR"), was
incorporated in the State of Delaware on January 13, 1961. BNSF Railway is a
subsidiary of Santa Fe Pacific Corporation ("SFP") which in turn is a subsidiary
of Burlington Northern Santa Fe Corporation ("BNSF"). On September 22, 1995,
Burlington Northern Inc. ("BNI") and SFP became subsidiaries of BNSF pursuant to
a business combination of the two companies.

On October 13, 1994, BNI and its subsidiary BNRR, and SFP and its
subsidiary The Atchison, Topeka and Santa Fe Railway Company ("ATSF"), filed a
railroad merger and control application with the Interstate Commerce Commission
("ICC"). On August 23, 1995, the ICC issued its written decision approving and
authorizing BNI's acquisition of control of SFP and the business combination by
which BNI and SFP became subsidiaries of BNSF, the resulting common control of
BNRR and ATSF by BNSF, the consolidation of BNRR and ATSF by BNSF, the
consolidation of BNRR and ATSF operations, and the merger of BNRR and ATSF.
Pursuant to the ICC's permissive authority, the business combination was
effected on September 22, 1995.

On December 30, 1996, BNI merged with and into SFP. On December 31, 1996,
ATSF merged with and into BNRR, and BNRR changed its name to The Burlington
Northern and Santa Fe Railway Company.

BNSF Railway operates one of the largest railroad systems in the United
States. At December 31, 1996, BNSF Railway had approximately 43,000 employees.

TRACK CONFIGURATION

BNSF Railway operates over a railroad system of approximately 35,000 route
miles of track (excluding, among other things, second main track) at December
31, 1996, approximately 27,000 miles of which are owned route miles, including
easements, through 29 states and two Canadian provinces. Approximately 7,900
route miles of BNSF Railway's system consist of trackage rights which permit
BNSF Railway to operate its trains with its crews over another railroad's
tracks.

As of December 31, 1996, the total BNSF Railway system including first,
second, third and fourth main tracks, yard tracks, and sidings consisted of
approximately 52,500 operated miles of track, all of which were owned by or held
under easement by BNSF Railway except for approximately 8,700 miles operated
under trackage rights agreements with other parties. At December 31, 1996,
approximately 28,100 miles of BNSF Railway's track consisted of 112-pound per
yard or heavier rail, including approximately 18,200 track miles of 131-pound
per yard or heavier rail.

1
<PAGE>

EQUIPMENT CONFIGURATION

BNSF Railway owned or had under non-cancelable leases exceeding one year
the following units of railroad rolling stock (represents combined BNRR and ATSF
amounts):

<TABLE>
<CAPTION>
At December 31,
------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Diesel Locomotives 4,434 4,277 4,157
====== ====== ======
Freight Cars:
Box-general purpose 1,082 1,204 1,529
Box-specially equipped 10,719 10,985 10,971
Open Hopper 10,430 10,497 11,630
Covered Hopper 44,112 44,840 43,223
Gondola 11,714 11,467 10,665
Refrigerator 6,817 7,216 6,489
Autorack 3,597 3,600 3,567
Flat 5,508 5,774 5,517
Tank 493 505 552
Caboose 451 485 542
Other 732 734 747
------ ------ ------
Total Freight Cars 95,655 97,307 95,432
====== ====== ======
Domestic Containers 15,595 16,230 16,793
Trailers 821 834 633
Domestic Chassis 5,273 5,274 7,365
Company Service Cars 6,140 6,084 6,218
Commuter Passenger Cars 141 141 141

</TABLE>

In addition to the containers, trailers, and chassis shown above, BNSF
Railway had under short-term leases 6,615 containers, 2,766 trailers, and 16,758
chassis, at December 31, 1996. In addition to the owned and leased locomotives
identified above, BNSF Railway operated 196 freight locomotives under power-
purchase agreements as of December 31, 1996. The average ages from date of
manufacture or remanufacture of the locomotive and freight car fleets at
December 31, 1996, were 12.24 years for locomotives, and 18.83 years for freight
cars. These averages are not weighted to reflect the greater capacities of the
newer equipment.

CAPITAL EXPENDITURES AND MAINTENANCE

BNSF Railway capital expenditures for the periods indicated were as follows
(represents combined BNRR and ATSF amounts for all periods):

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
(In Millions)
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Ties $ 225 $ 161 $ 136
Rail/Other Track Material 406 288 277
Ballast 184 138 131
Facilities and Other Roadway 660 387 391
Locomotives 438 111 93
Freight Cars 55 25 42
Other 279 105 90
------ ------ ------
Cash Capital Expenditures $2,247 $1,215 $1,160
====== ====== ======
</TABLE>

2
<PAGE>

The above expenditures do not include non-cash expenditures of $48 million,
$140 million, and $178 million in 1996, 1995, and 1994, respectively, primarily
relating to directly financed equipment acquisitions, nor do they include
equipment financed through operating leases (principally, locomotives and
rolling stock). BNSF Railway expects 1997 capital expenditures to approximate
$1.85 billion. Approximately $1.1 billion of these expenditures will be for
maintaining productive capacity of the existing route structures. The remainder
will be spent on acquisition of new equipment, including at least 180
locomotives, and capacity expansion projects throughout the system including the
Powder River Basin and the Pacific Northwest.

General Electric Company ("GE") and the Electro-Motive Division of General
Motors Corporation ("EMD") perform locomotive maintenance for BNSF Railway under
various maintenance agreements that covered approximately 1,530 locomotives as
of December 31, 1996. Additionally, BNSF Railway has a similar agreement with
Boise Locomotive Corporation ("Boise") that provides for the overhaul of 277
locomotives and the maintenance for each of the locomotives for a period of
eight years following its overhaul. The agreements with GE, EMD, and Boise
require the work to be done at BNSF Railway's facilities with BNSF Railway
employees.

The majority of maintenance of way expenditures for track have been for
rail and tie refurbishment and resurfacing. The extent of the BNSF Railway track
maintenance program (representing combined BNRR and ATSF amounts for all
periods) is depicted in the following chart:

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Track miles of rail laid (1) 1,139 945 1,010
Cross ties inserted (in thousands) (1) 3,768 2,974 2,879
Track resurfaced miles 12,033 11,088 11,055

</TABLE>

- --------------------
(1) Includes both maintenance of existing route system and expansion projects.

BNSF Railway anticipates that the 1997 track maintenance of way program,
together with expansion projects, will result in the installation of
approximately 1,000 track miles of rail, the replacement of about 3.5 million
ties, and the resurfacing of approximately 12,000 miles of track.

PROPERTY AND FACILITIES

BNSF Railway operates facilities and equipment for maintenance of track,
locomotives and freight cars. It also owns or leases other equipment to support
rail operations, such as highway trailers, containers and vehicles. Support
facilities for rail operations include yards and terminals throughout its rail
network, system locomotive shops to perform continuous locomotive servicing and
maintenance, centralized network operations centers for train dispatching and
network operations monitoring and management in Fort Worth, Texas, and
Schaumburg, Illinois, computers, telecommunications equipment, signal systems,
and other support systems. Transfer facilities are maintained for rail-to-rail
as well as intermodal transfer of containers, trailers and other freight
traffic. These include 39 major intermodal hubs located across the system and
nine intermodal hub centers off-line used in connection with haulage agreements
with other railroads. BNSF Railway's largest intermodal facilities in terms of
volume are Hobart Yard (Los Angeles), Corwith Yard (Chicago), Willow Springs
(Illinois), Chicago Hub Center (Cicero, Illinois), Alliance (Texas), Seattle
International Gateway (SIG), and Tacoma, with approximately 707,500, 535,900,
440,000, 436,000, 292,900, 220,500, and 192,300 lifts, respectively, in 1996.
BNSF Railway also owns 28 automotive distribution facilities where automobiles
are loaded or unloaded from multi-level rail cars and serves eight port
facilities. Argentine Yard in Kansas City, Kansas, Barstow Yard in Barstow,
California, Northtown Yard in Minneapolis, Minnesota and Murray Yard in Kansas
City, Missouri are the largest freight car classification yards.

3
<PAGE>

In December 1996, BNSF acquired Washington Central Railroad Company, Inc.
for shares of BNSF common stock, and BNSF Railway now operates over Washington
Central's route between Kennewick, Washington, an interchange point on BNSF
Railway, and Cle Elum, Washington. This acquisition, and BNSF Railway's
rehabilitation of the 229-mile Stampede Pass line between Pasco and Auburn,
Washington, provides BNSF Railway with a third route linking Central Washington
with the Pacific Coast. During 1996, BNSF Railway also disposed of
approximately 2,000 route miles of secondary lines.

A substantial portion of all railroad property, real or personal, owned by
BNSF Railway is subject to liens, as of December 31, 1996, approximately $544
million of securing mortgage bonds. On January 1, 1997, approximately $77
million of this mortgage debt matured and was paid. Certain locomotives and
rolling stock of BNSF Railway are subject to equipment obligations, as referred
to in Note 10 to the consolidated financial statements.

EMPLOYEES AND LABOR RELATIONS

Productivity as measured by revenue ton miles per employee has risen steadily in
the last three years, while compensation and benefits expense per revenue ton
mile has declined, as shown in the table below (represents combined BNRR and
ATSF operating statistics for all periods):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Thousand revenue ton-miles/average number of
employees 9,398 8,715 7,887
Compensation and benefits expense/thousand
revenue ton-miles $6.23 $6.78 $7.27

</TABLE>

Labor unions represent approximately 88 percent of BNSF Railway employees
under collective bargaining agreements with 13 different labor organizations.
BNRR, ATSF and other major railroads were actively involved in industry-wide
labor contract negotiations beginning in late 1994. Through this process,
wages, health and welfare benefits, work rules and other issues have now been
negotiated for all BNSF Railway union-represented employees. On February 26,
1997, BNSF Railway reached an agreement with the approximately 425 employees
represented by the American Train Dispatchers Department of the Brotherhood of
Locomotive Engineers, to bring the 1995 round of labor contract negotiations to
a close.

The new collective bargaining agreements will remain in effect through at
least December 31, 1999 and until new agreements are reached or the Railway
Labor Act's procedures are exhausted. The new collective bargaining agreements
include provisions for retroactive and prospective wage increases, signing
bonuses and lump-sum payments. Throughout the negotiation process, BNSF accrued
for anticipated retroactive elements of the contract settlements, and these
agreements therefore did not have a material effect on BNSF's 1996 results of
operations.

Railroad industry personnel are covered by the Railroad Retirement System
instead of Social Security. BNSF Railway's contributions under the Railroad
Retirement System are approximately triple those in industries covered by Social
Security.

Railroad industry personnel are also covered by the Federal Employers'
Liability Act ("FELA") rather than by state workers' compensation systems. FELA
is a fault-based system, with compensation for injuries settled by negotiation
and litigation, not subject to specific statutory limitations on the amount of
recovery. By contrast, most other industries are covered under state
administered no-fault plans with standard compensation schedules. BNSF Railway
believes it has adequate reserves for its FELA claims. However, the future costs
of FELA claims are uncertain and such costs could be significantly higher in the
future.

4
<PAGE>

BUSINESS MIX

In serving the Midwest, Pacific Northwest and the Western, Southwestern,
and Southeastern regions of the country, BNSF Railway transports a range of
commodities derived from manufacturing, agricultural, and natural resource
industries. Accordingly, its financial performance is influenced by, among other
things, general and industry economic conditions at the international, national,
and regional levels.

Major markets served directly by BNSF Railway include Albuquerque,
Billings, Birmingham, Cheyenne, Chicago, Corpus Christi, Dallas, Denver, Des
Moines, Duluth/Superior, Fargo/Moorhead, Fort Worth, Houston, Kansas City,
Lincoln, Little Rock, Los Angeles, Memphis, Mobile, New Orleans, Oklahoma City,
Omaha, Pensacola, Phoenix, Portland, Reno, Salt Lake City, San Antonio, the San
Francisco Bay area, St. Louis, St. Paul/Minneapolis, Seattle, Spokane,
Springfield (Missouri), Tacoma, Tulsa, Wichita, Vancouver (British Columbia),
and Winnipeg (Manitoba). Other major cities are served through 24 Intermodal
Market Extension ("IMX") terminals located at various off-line points. Major
ports served include Galveston, Houston, Long Beach, Los Angeles, Mobile, New
Orleans, Portland, Richmond (Oakland), San Diego, Seattle, Duluth/Superior,
Tacoma and Vancouver (British Columbia).

As a result of agreements and conditions stemming from the merger of the
Union Pacific and Southern Pacific railroads, BNSF Railway gained new access to
the growing Mexican market. Previously, BNSF reached the United States/Mexico
crossings of Eagle Pass and El Paso, Texas and San Diego, California. As a
result of the UP/SP merger, BNSF Railway now also reaches Brownsville, Texas
and, through connection with the Texas Mexican Railway Company, the major border
crossing point at Laredo, Texas.

In 1996, approximately one quarter of revenues were derived from Intermodal
traffic and another quarter were derived from the transportation of Coal. About
14 percent of 1996 revenues reflected the transportation of Agricultural
Commodities. The transportation of commodities in the areas serviced by
Chemicals, Forest Products, Consumer and Food Products, Metals, Automotive, and
Minerals and Ores, accounted for the rest of 1996 revenues.

Intermodal. The Intermodal freight business consists of the hauling of
freight containers or truck trailers by combinations of water, rail, or motor
carriers. The intermodal business is highly service-driven, and in many cases
motor carriers and railroads jointly market intermodal service. The first such
joint intermodal arrangement was Quantum, through which BNSF Railway and J.B.
Hunt Transport provide customers full service, customized door-to-door
transportation (truck and rail), with a common communication system and
integrated billing at a single rate.

In 1994, major national Less-Than-Truckload ("LTL") carriers and the
Teamsters union signed a new National Master Freight Agreement that allows the
LTL carriers to shift up to 28 percent of their total line-haul miles to
intermodal service. BNSF Railway is a major beneficiary of this service-
sensitive traffic, and it provides transportation services to major LTL carriers
including Yellow Freight, Roadway Express, and Consolidated Freightways.

Intermodal 1996 results include revenue from four types of business:

Direct Marketing. Direct marketing efforts resulted in approximately 33
percent of total intermodal revenue. These center around traffic contracted from
United Parcel Service and the United States Postal Service, and service for
nationwide LTL carriers.

Truckload. Truckload traffic represented approximately 14 percent of total
intermodal revenue. The joint service arrangement with J.B. Hunt, referred to as
Quantum, represented the largest truckload component, while Schneider National
was the next largest.

Intermodal Marketing Companies. Approximately 25 percent of total
intermodal revenue was generated through intermodal marketing companies,
primarily shipper agents and consolidators.

5
<PAGE>

International. International business consists primarily of traffic from
steamship companies and accounted for approximately 28 percent of intermodal
revenues.

Coal. Based on carloadings and tons hauled, BNSF Railway is the largest
transporter of western low-sulfur coal in the United States. Over 90 percent of
BNSF Railway's coal traffic originated in the Powder River Basin of Wyoming and
Montana during the three years ended December 31, 1996. These coal shipments
were destined for coal-fired electric generating stations located primarily in
the North Central, South Central and Mountain regions of the United States with
smaller quantities exported.

BNSF Railway also handles increasing amounts of low-sulfur coal from the
Powder River Basin for delivery to markets in the eastern and southeastern
portion of the United States. The low-sulfur coal from the Powder River Basin is
abundant, inexpensive to mine and clean-burning. Because the Clean Air Act of
1990 requires power plants to reduce harmful emissions either by burning coal
with a lower sulfur content or by installing expensive scrubbing units,
opportunities for increased shipments of this low-sulfur coal still exist.

Other coal shipments originate principally in Wyoming, Colorado, and New
Mexico on the lines of the former ATSF and other rail carriers. These shipments
are moved to electrical generating stations and industrial plants in the Midwest
and Southwest.

Agricultural Commodities. Agricultural Commodities include barley, corn,
wheat, soybeans, oils, feeds, flour and mill products, specialty grains, malts,
and milo. The BNSF Railway system is strategically located to serve the Midwest
and Great Plains grain-producing regions where BNSF Railway serves most major
terminal, storage, feeding and food-processing locations. Additionally, BNSF
Railway has access to major export markets in the Pacific Northwest, western
Great Lakes and Texas Gulf regions.

Chemicals. The Chemicals business is comprised of fertilizer, petroleum and
chemical commodities. Chemicals and plastics resins are transported for
industrial and agricultural use. Industrial chemicals and plastics resins are
used by the automotive, housing, and packaging industries, as well as for
feedstocks for other chemical and plastic products. Access to significant
additional chemicals producers along the Louisiana and Texas Gulf Coasts was
gained as a result of the agreement and conditions resulting from the merger of
the Union Pacific and Southern Pacific railroads. Agricultural minerals include
sulphur that generally moves to the Gulf Coast and from there via vessels to
Florida and overseas markets for use in making phosphatic fertilizers. Potash is
transported to domestic markets and to export points for markets in Canada,
Mexico, and overseas.

Forest Products. The primary commodities in Forest Products are lumber,
plywood, oriented strand board, paper products, pulpmill feedstock, and wood
pulp. Based on carloadings and tonnage hauled, BNSF Railway is the largest rail
transporter of forest products in the United States. Commodity origins are
primarily from the Pacific Northwest, upper Midwest, and the Southeast for
shipment mainly into domestic markets. Industries served include construction,
furniture, photography, publishing, newspaper, and industrial packaging.

Consumer and Food Products. Beverages, canned goods, and perishables are
the principal food commodities moved by BNSF Railway. Other consumer products
handled include sugars and sweeteners, cotton, salt, rubber and tires,
machinery, aircraft parts, military and miscellaneous boxcar shipments.
Shipments of waste, ranging from municipal waste to contaminated soil, move to
landfills and reclamation centers across the country. Distribution services,
including transloading and warehousing services are also offered. A
truck-competitive transportation product in tank containers for customers
shipping specialty chemicals, other liquids and dry material is also offered.

Metals. The Metals business includes virtually all of the commodities
included in or resulting from the production of steel. Taconite, an iron ore
derivative produced in northern Minnesota, scrap steel, and coal coke are BNSF
Railway's primary input products, while finished steel products range from

6
<PAGE>

structural beams and steel coils to wire and nails. BNSF Railway also hauls both
ferrous and non-ferrous products including recyclable metals. BNSF Railway links
the integrated steel mills in the East with fabricators in the West and
Southwest. Service is also provided to various mini-mills in the Southwest that
feed rebar, beams, and coiled rod to the construction industry. Various
non-ferrous products such as copper, lead, and aluminum are transported for the
beverage, automotive, and telecommunications industries.

Automotive. The Automotive group is responsible for both assembled motor
vehicles and shipments of vehicle parts to numerous destinations throughout the
Midwest, Southwest, West and Pacific Northwest.

Minerals and Ores. Commodities in this group include clays, sands, cements,
aggregates, sodium compounds and other industrial minerals. Both the oil and the
construction industries are serviced. Industrial minerals include various mined
and processed commodities such as cement and aggregates (construction sand,
gravel and crushed stone) that generally move to domestic markets for use in
general construction and public work projects, such as highway projects. Borates
and clays move to domestic points as well as to export markets primarily through
West Coast ports. Sodium compounds, primarily soda ash, is moved to domestic
markets for use in the manufacturing of glass and other industrial products.
Sand is utilized in the manufacturing of glass and for use in foundary and oil
drilling applications.

Freight Statistics. The following tables set forth certain freight
statistics relating to rail operations for the periods indicated. Amounts
shown represent combined BNRR and ATSF results for all periods; certain amounts
have been reclassified to reflect changes in the business groups and to conform
to current year presentation.

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenue ton-miles (millions) 411,059 397,902 360,605
Freight revenue per thousand revenue ton-miles $19.82 $20.11 $20.84
Average haul per ton (miles) 875 864 821

</TABLE>

REVENUES (IN MILLIONS)
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Intermodal $2,088 $2,000 $1,956
Coal 1,973 1,962 1,907
Agricultural Commodities 1,170 1,290 955
Chemicals 765 712 701
Forest Products 555 557 569
Consumer and Food Products 469 486 481
Metals 413 397 356
Automotive 397 398 380
Minerals and Ores 319 313 302
------ ------ ------
Total Freight Revenue 8,149 8,115 7,607
Other Revenue 38 35 50
------ ------ ------
Total Revenues $8,187 $8,150 $7,657
====== ====== ======
</TABLE>

CARS/UNITS (IN THOUSANDS)
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Intermodal 2,571 2,527 2,465
Coal 1,854 1,878 1,847
Agricultural Commodities 585 664 578
Chemicals 449 435 431
Forest Products 334 347 357
Consumer and Food Products 309 332 337
Metals 391 399 370
Automotive 250 264 238
Minerals and Ores 249 257 246
------ ------ ------
Total Cars/Units 6,992 7,103 6,869
====== ====== ======
</TABLE>

7
<PAGE>

AVERAGE REVENUE PER CAR/UNIT
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Intermodal $ 812 $ 791 $ 794
Coal 1,064 1,045 1,032
Agricultural Commodities 2,000 1,943 1,652
Chemicals 1,704 1,637 1,626
Forest Products 1,662 1,605 1,594
Consumer and Food Products 1,518 1,464 1,427
Metals 1,056 995 962
Automotive 1,588 1,508 1,597
Minerals and Ores 1,281 1,218 1,228
------ ------ ------
Average Revenue Per Car/Unit $1,165 $1,142 $1,107
====== ====== ======
</TABLE>

GOVERNMENT REGULATION AND LEGISLATION

Rail operations are subject to the regulatory jurisdiction of the Surface
Transportation Board of the United States Department of Transportation ("DOT"),
the Federal Railroad Administration of DOT, the Occupational Safety and Health
Administration ("OSHA"), and state regulatory agencies. The Surface
Transportation Board, which is the successor to the ICC, has jurisdiction over
certain rates, routes, and services, the extension, sale, or abandonment of rail
lines, and consolidation or merger with, or acquisition of control of, rail
common carriers. DOT and OSHA have jurisdiction under several federal statutes
over a number of safety and health aspects of rail operations. State agencies
regulate some aspects of rail operations with respect to health and safety in
areas not otherwise preempted by federal law.

BNSF Railway's operations, as well as those of its competitors, are subject
to extensive federal, state and local environmental regulation. These laws cover
discharges to waters, air emissions, toxic substances, and the generation,
handling, storage, transportation, and disposal of waste and hazardous
materials. This regulation has the effect of increasing the cost and liabilities
associated with rail operations. Environmental risks are also inherent in rail
operations which frequently involve transporting chemicals and other hazardous
materials.

The railroad industry, including BNSF Railway, will become subject to
future requirements regulating air emissions from diesel locomotives that may
increase operating and capital costs. The United States Environmental Protection
Agency ("EPA") issued in early 1997 proposed regulations nationally applicable
to new locomotive engines and certain engines remanufactured after 1999. Final
regulations are to be promulgated by the end of the year. It is anticipated
that these regulations will be effective for locomotive engines installed after
1999 and through 2010. Under some interpretations of federal law, older
locomotive engines may be regulated by states based on standards and procedures
which the State of California ultimately adopts. At this time it is unknown
whether California will adopt any locomotive emission standards.

Many of BNSF Railway's land holdings are and have been used for industrial
or transportation-related purposes or leased to commercial or industrial
companies whose activities may have resulted in discharges onto the property. As
a result, BNSF Railway is now subject and will from time to time continue to be
subject to environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, generally imposes joint and
several liability for cleanup and enforcement costs, without regard to fault or
the legality of the original conduct, on current and former owners and operators
of a site. Accordingly, BNSF Railway may be responsible under CERCLA and other
federal and state statutes for all or part of the costs to clean up sites at
which certain substances may have been released by BNSF Railway, its current
lessees, former owners or lessees of properties, or other third parties. For
further discussion, reference is made to Note 13 to the consolidated financial
statements.

8
<PAGE>

COMPETITION

The business environment in which BNSF Railway operates remains highly
competitive. Depending on the specific market, deregulated motor carriers, other
railroads and river barges exert pressure on various price and service levels.
The presence of advanced, high service truck lines with expedited delivery,
subsidized infrastructure and minimal empty mileage continues to affect the
market for non-bulk, time sensitive freight. The potential expansion of longer
combination vehicles could further encroach upon markets traditionally served by
railroads. In order to remain competitive, BNSF Railway and other railroads
continue to develop and implement operating efficiencies to improve
productivity.

As railroads streamline, rationalize and otherwise enhance their
franchises, competition among rail carriers intensifies. BNSF Railway's primary
rail competitor in the western region of the United States is Union Pacific
Railroad Company ("UP"), which now includes the former Southern Pacific
Transportation Company ("SP") and Chicago & North Western Transportation Company
("C&NW"). Other Class I railroads and numerous regional railroads and motor
carriers also operate in parts of the same territories served by BNSF Railway.
Coal, one of BNSF Railway's primary commodities, has experienced significant
pressure on rates due to competition from the joint effort of C&NW/UP and from
BNSF Railway's effort to penetrate new markets.

The Surface Transportation Board approved the proposed common control and
merger of rail carriers controlled by UP and SP in its written decision dated
August 12, 1996, and the transaction was consummated on September 11, 1996. As
a condition of the merger, the STB imposed the provisions of the rights
agreement between BNSF Railway and UP/SP which grants rights to BNSF Railway to
more than 4,000 miles of track and requires the purchase by BNSF Railway from
UP/SP of more than 335 miles of track for $150 million. Approval of the UP/SP
transaction created an enhanced competitor to BNSF Railway. The Board's
decision also provides BNSF Railway with greater access to Gulf Coast and West
Coast markets and improves its route structure. BNSF Railway has commenced
operations and is handling rail traffic utilizing the rights obtained from
UP/SP.

BNSF Railway is monitoring proposals involving the possible merger with or
other disposition of Consolidated Rail Corporation (Conrail) between CSX
Corporation and Norfolk Southern Corporation and will evaluate any definitive
agreement and related filings with the Surface Transportation Board to determine
the impact, if any, on BNSF Railway. Conrail, CSX and Norfolk Southern operate
the three largest rail systems in the eastern United States.

BNSF Railway is also studying the ongoing privatization of the Mexican rail
network. The northeastern Mexico rail concession has been awarded to a group
including Kansas City Southern Railway; the northwestern Mexico rail concession
is now going through the bid process, with a successful bidder to be announced
by mid-1997.

ITEM 3. LEGAL PROCEEDINGS

Set forth below is a description of certain legal proceedings involving
BNSF Railway.

WHEAT AND BARLEY TRANSPORTATION RATES

In September 1980, a class action lawsuit was filed against BNSF Railway in
United States District Court for the District of Montana ("Montana District
Court") challenging the reasonableness of BNSF Railway export wheat and barley
rates. The class consists of Montana grain producers and elevators. The
plaintiffs sought a finding that BNSF Railway single car export wheat and barley
rates for shipments moving from Montana to the Pacific Northwest were
unreasonably high and requested damages in the amount of $64 million. In March
1981, the Montana District Court referred the rate reasonableness issue to the
ICC. Subsequently, the state of Montana filed a complaint at the ICC challenging
BNSF Railway's multiple car rates for Montana wheat and barley movements
occurring after October 1, 1980.

9
<PAGE>

The ICC issued a series of decisions in this case from 1988 to 1991. Under
these decisions, the ICC applied a revenue to variable cost test to the rates
and determined that BNSF Railway owed $9,685,918 in reparations plus interest.
In its last decision, dated November 26, 1991, the ICC found BNSF Railway's
total reparations exposure to be $16,559,012 through July 1, 1991. The ICC also
found that BNSF Railway's current rates were below a reasonable maximum and
vacated its earlier rate prescription order.

BNSF Railway appealed to the United States Court of Appeals for the
District of Columbia Circuit ("D.C. Circuit") those portions of the ICC's
decisions concerning the post-October 1, 1980 rate levels. BNSF Railway's
primary contention on appeal was that the ICC erred in using the revenue to
variable cost rate standard to judge the rates instead of Constrained Market
Pricing/Stand Alone Cost principles. The limited portions of decisions that
cover pre-October 1, 1980 rates were appealed to the Montana District Court.

On March 24, 1992, the Montana District Court dismissed plaintiffs' case as
to all aspects other than those relating to pre-October 1, 1980 rates. On
February 9, 1993, the D.C. Circuit served its decision regarding the appeal of
the several ICC decisions in this case. The court held that the ICC did not
adequately justify its use of the revenue to variable cost standard as BNSF
Railway had argued and remanded the case to the ICC for further administrative
proceedings.

On July 22, 1993, the ICC served an order in response to the D.C. Circuit's
February 9, 1993 decision. In its order, the ICC stated it would use the
Constrained Market Pricing/Stand-Alone Cost principles in assessing the
reasonableness of BNSF Railway wheat and barley rates moving from Montana to
Pacific Coast ports from 1978 forward. The ICC assigned the case to the Office
of Hearings to develop a procedural schedule. On October 28, 1994, plaintiffs
filed their opening evidence arguing that the revenue received by BNSF Railway
exceeded the stand alone costs of transporting that traffic and that BNSF
Railway rates were unreasonably high. BNSF Railway filed its evidence March 29,
1995, showing that the stand alone costs of transporting the traffic exceeded
the revenue derived by BNSF Railway on that traffic and that consequently, its
rates were not unreasonably high. The parties filed briefs simultaneously on
August 16, 1995, and the proceeding awaits decision by the Surface
Transportation Board, successor to the ICC.

COAL TRANSPORTATION CONTRACT LITIGATION

On April 26, 1991, an action was filed against BNSF Railway in the 102nd
Judicial District Court for Bowie County, Texas, seeking a reduction of the
transportation rates required to be paid under two contracts (Southwestern
Electric Power Company v. Burlington Northern Railroad Company, No.
D-102-CV-91-0720). The plaintiff, Southwestern Electric Power Company
("SWEPCO"), was challenging the contract rates for transportation of coal to its
electric generating facilities at Cason, Texas, and Flint Creek, Arkansas.
SWEPCO contended that productivity gains achieved by BNSF Railway constituted
unusual economic conditions giving rise to a "gross inequity" because BNSF
Railway's costs of providing service have been reduced over the contracts'
terms. On August 2, 1994, plaintiff amended its complaint to further allege that
BNSF Railway had been unjustly enriched by retaining differences between the
rates actually charged and those that SWEPCO alleged should have been charged.
SWEPCO sought both prospective rate relief and recovery of alleged past
overcharges.

BNSF Railway's primary contention was that both parties anticipated
productivity gains in the rail industry when negotiating the contracts and
agreed that BNSF Railway would retain most of its productivity gains. BNSF
Railway further contended that there was no agreement that transportation rates
paid by SWEPCO would be based on BNSF Railway's cost of providing service.

On November 18, 1994, the jury rendered a verdict denying plaintiff's
request for prospective rate relief and that plaintiff take nothing on its
principal claims of "gross inequity." However, BNSF Railway was assessed damages
approximating $56 million relating to plaintiff's alternative claim of

10
<PAGE>

unjust enrichment. On January 20, 1995, the trial court rendered a judgment on
the verdict in an amount approximating $74 million, which included attorneys'
fees and interest. The judgment further awarded post-judgment interest at 10
percent per annum and issued declaratory orders pertaining to the two contracts.
BNSF Railway filed its notice of appeal in the case on February 17, 1995 and
posted a bond staying enforcement of the judgment in the Court of Appeals for
the Sixth Court of Appeals District of Texas, Texarkana, Texas (Burlington
Northern Railroad Company v. Southwestern Electric Power Company, No.
06-95-00024-CV). By decision dated April 30, 1996, the Court of Appeals reversed
the judgment of the trial court and rendered judgment in favor of BNSF Railway.
SWEPCO was assessed costs of appeal. SWEPCO has been denied two motions for
rehearing before the Court of Appeals. On October 14, 1996, SWEPCO applied for
discretionary review of the decision by the Texas Supreme Court.

ENVIRONMENTAL PROCEEDINGS

BNSF Railway has been advised that it is a target of a Grand Jury
investigation in the United States District Court for the Eastern District of
Missouri with respect to former railcar cleaning activities conducted by
independent contractors at Cherryville, Missouri. The proceeding relates to
alleged violations of federal environmental protection statutes with respect to
lead contamination at several sites in the Cherryville area. In addition, BNSF
Railway has received personal injury claims from certain individuals formerly
residing at or near some of these sites. The Missouri Department of Natural
Resources ("DNR") also is investigating the matter with respect to possible
violations of state environmental protection laws and has indicated that it may
seek a civil penalty from BNSF Railway. BNSF Railway and another potentially
responsible party had previously prepared investigation and remediation plans in
conjunction with the DNR. BNSF Railway modified the plans and is expediting a
response and implementing remediation with DNR approval.

On December 18, 1995, the State of Illinois filed a Complaint captioned
People of the State of Illinois v. Burlington Northern Railroad Company, Beazer
East, Inc. and Koppers Industries, Inc. (PCB No. 96-132) before the Illinois
Pollution Control Board against BNSF Railway, Beazer East, Inc. and Koppers
Industries, Inc. alleging violations of the Illinois Environmental Protection
Act with respect to a facility in Galesburg, Illinois. This facility is not
operated by BNSF Railway. The proceeding may result in monetary sanctions in
excess of $100,000. BNSF Railway and Beazer East, Inc. have made an offer to the
State of Illinois to settle this matter.

On December 30, 1996, BNSF Railway was named a defendant in a lawsuit by
the Wisconsin Department of Natural Resources (State of Wisconsin v. Burlington
Northern Railroad Company, Case No. 96 CV403, Circuit Court, Douglas County) in
connection with two separate matters in Superior, Wisconsin. One of the matters
involves the alleged obligation to close a waste water holding pond located on
property which BNSF Railway does not own. The State alleges that BNSF Railway
is an owner or operator of the pond and is subject to the obligation because of
its discharge of treated waste water into the pond. The other matter relates to
petroleum impacts to property formerly owned by BNSF Railway. The current owner
discovered the petroleum and debris when excavating the property. It is
possible that BNSF Railway will be required to pay monetary sanctions to the
State in excess of $100,000 in connection with the resolution of these two
matters.

BNSF Railway has been issued a Notice of Violation by the Texas Natural
Resource Conservation Commission with respect to the alleged failure to timely
file wastewater discharge reports and other deficiencies at a facility in
Silsbee, Texas. The State has made a demand for penalties in excess of $100,000,
calling for the correction of alleged recordkeeping deficiencies and a study of
the ditch receiving the permitted discharges.

ICC MERGER CASE

On October 13, 1994, BNI, BNRR, SFP, and ATSF ("Applicants") filed a
railroad merger and control application with the ICC, Finance Docket No. 32549,
Burlington Northern Inc. and Burlington Northern Railroad Company-Control and
Merger-Santa Fe Pacific Corporation and The Atchison, Topeka and Santa Fe
Railway Company. Applicants sought an order, pursuant to 49 U.S.C. 11343-11347
(1988), approving and authorizing BNI's acquisition of control of and merger
with SFP, the resulting common control of BNRR and ATSF by BNSF, the
consolidation of BNRR and ATSF by BNSF, the consolidation of BNRR and ATSF
operations, and the merger of BNRR and ATSF. The ICC approved the application in
its written decision served August 23, 1995, which decision was effective as of
September 22, 1995. Several petitions for reconsideration or to reopen the ICC's
decision were filed by parties to the proceeding and all of these have

11
<PAGE>

been denied. Additionally, eight parties to the proceeding filed petitions for
review of the ICC's approval decision with the United States Court of Appeals
for the District of Columbia, which petitions are now pending before that court.
Each of the petitions for reconsideration or to reopen and for review challenge
various aspects of the ICC's decision, including the extent of conditions
imposed on its approval. The principal challenges to the ICC decision were
rejected by the Court of Appeals for the District of Columbia on March 28, 1997,
and the remaining challenge is not expected to affect materially the benefits to
be realized by the acquisition of common control of BNRR and ATSF by BNSF.

CROW RESERVATION CROSSING ACCIDENT CASE

At approximately 10:15 a.m. on November 22, 1993, there was an accident at
a BNSF Railway crossing located within the boundaries of the Crow reservation in
which three members of the Crow tribe were killed. The crossing, which is
located on a rural gravel road just south of Lodge Grass, Montana, was protected
by crossbucks and advance warning signs.

A lawsuit was filed in the Crow Tribal Court (Estates of Red Wolf, Red
Horse and Bull Tail v. Burlington Northern Railroad Company, Case No. 94-31) on
behalf of the estates of the driver and the two passengers. One of the passenger
cases was severed and has yet to go to trial. The other two cases proceeded to
trial in January 1996 and, on February 6, 1996, a Crow Tribal Court jury
rendered a verdict against BNSF Railway for compensatory damages in the total
amount of $250 million.

BNSF Railway has filed an appeal to the Crow Court of Appeals in and for
the Crow Indian Reservation, where it will seek, among other things, to have the
case dismissed on the basis that the Crow Tribal Court lacks subject matter
jurisdiction over these claims. If the appellate court fails to grant relief to
BNSF Railway, BNSF Railway will pursue its defenses in federal court. On
February 26, 1996, the Federal District Court for the District of Montana
entered an order enjoining any action by the Tribal Court plaintiffs to enforce
the judgment pending appeal through the tribal court and federal court systems.
BNSF Railway was required to post a $5 million bond with the federal court. The
Tribal Court plaintiffs appealed that decision to the United States Court of
Appeals for the Ninth Circuit.

On January 29, 1997, the Ninth Circuit issued an opinion which reversed the
district court and remanded the matter to that trial court with directions to
dissolve the injunction. The basis for the appellate court's decision was a
determination that BNSF Railway had failed to exhaust its remedies in the tribal
court. BNSF Railway filed a petition for rehearing, which petition is pending
before the Ninth Circuit.

In Tribal Court, the plaintiffs filed a Notice and Request with the Tribal
Appellate Court requesting, among other things, the entry of an order reducing
the amount of the judgment from $250 million to $25 million. On February 7,
1997, the Tribal Appellate court issued an order setting forth its intention to
grant the motion to amend the judgment by remanding the matter to the trial
court for the limited purpose of amending the judgment in accordance with the
request.

OTHER CLAIMS

BNSF Railway and its subsidiaries also are parties to a number of other
legal actions and claims, various governmental proceedings and private civil
suits arising in the ordinary course of business, including those related to
environmental matters and personal injury claims. While the final outcome of
these and other legal actions referred to under Item 3 of this Report on Form
10-K cannot be predicted with certainty, considering among other things the
meritorious legal defenses available, it is the opinion of BNSF Railway
management that none of these items, when finally resolved, will have a material
adverse effect on the annual results of operations, financial position or
liquidity of BNSF Railway, although an adverse resolution of a number of these
items could have a material adverse effect on the results of operations in a
particular quarter or fiscal year.

12
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

All of BNSF Railway's common stock is owned by SFP and therefore is not
traded on any market.

ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

Management's narrative analysis relates to the financial condition and results
of operations of The Burlington Northern and Santa Fe Railway Company and its
majority owned subsidiary companies (BNSF Railway or Company). BNSF Railway was
formerly known as Burlington Northern Railroad Company (BNRR). The Atchison,
Topeka and Santa Fe Railway Company (ATSF) merged with and into BNRR (the
Merger). Subsequent to the Merger, BNRR changed its name to The Burlington
Northern and Santa Fe Railway Company. BNSF Railway is an indirect wholly-owned
subsidiary of Burlington Northern Santa Fe Corporation (BNSF) which was
incorporated in Delaware on December 16, 1994, for the purpose of affecting a
business combination between Burlington Northern Inc. (BNI) and Santa Fe
Pacific Corporation (SFP), which business combination was consummated on
September 22, 1995. The business combination between BNI and SFP was accounted
for by the purchase method. As such, BNSF allocated a proportion of the
purchase price to SFP's and ATSF's assets and liabilities assumed based on their
fair value. BNRR was a wholly-owned subsidiary of BNI. Effective December 30,
1996, BNI merged with and into SFP.

For accounting purposes, the Merger was treated as a combination of subsidiaries
for the periods they were under common control. Accordingly, the results of
operations, cashflows and equity for the year ended December 31, 1996 and the
related balance sheet at December 31, 1996 reflect the combined results of BNSF
Railway. Additionally, the consolidated statements of income, cashflows and
changes in stockholder's equity for the year ended December 31, 1995 and the
consolidated balance sheet at December 31, 1995 have been adjusted to include
the results of ATSF from September 22, 1995 through December 31 1995, and will
differ from amounts reported in the BNRR Form 10-K for the year ended December
31, 1995. Results of operations, cashflows and equity for the year ended
December 31, 1994 reflect only BNRR.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

BNSF Railway recorded net income for 1996 of $1,012 million, compared with net
income of $191 million for 1995. Results for 1995 include $671 million of
merger, severance and asset charges, which reduced net income by approximately
$414 million. Results for 1995 were further reduced by $100 million (after
tax), for the cumulative effect of an accounting change for locomotive
overhauls. Excluding the above items, net income for 1995 would have been $705
million which includes ATSF results for the period September 22, 1995 through
December 31, 1995.

13
<PAGE>

REVENUE TABLE

The following table presents BNSF Railway's revenue information by commodity for
the years ended December 31, 1996 and 1995 and includes certain
reclassifications of prior year information to conform to current year
presentation.

Revenue
Revenue Per Thousand
Revenues Ton Miles (RTM) RTM
---------------- ------------------- ------------------
1996 1995 1996 1995 1996 1995
------ ------ ------- ------- ------ ------
(In Millions) (In Millions)

<S> <C> <C> <C> <C> <C> <C>
Intermodal $2,088 $1,120 71,262 38,516 $29.30 $29.08
Coal 1,973 1,821 169,380 153,169 11.65 11.89
Agricultural Commodities 1,170 1,143 59,601 55,356 19.63 20.65
Chemicals 765 443 28,896 17,155 26.47 25.82
Forest Products 555 471 25,140 19,828 22.08 23.75
Consumer and Food Products 469 365 18,201 12,332 25.77 29.60
Metals 413 320 20,199 13,804 20.45 23.18
Automotive 397 213 6,062 3,158 65.49 67.45
Minerals and Ores 319 260 12,318 10,119 25.90 25.69
Other 38 7 - - - -
------ ------ ------- ------- ------ ------
Total $8,187 $6,163 411,059 323,437 $19.82 $19.03
====== ====== ======= ======= ====== ======
</TABLE>

REVENUES

Total revenues for 1996 were $8,187 million compared with revenues of $6,163
million for 1995. The $2,024 million increase primarily reflects inclusion of a
full year of ATSF results in 1996. Prior to the business combination, coal and
agricultural commodities made up approximately 50 percent of BNRR's revenues
while intermodal shipments comprised approximately 45 percent of total ATSF
revenues.

Intermodal revenues increased $968 million compared with 1995, due to inclusion
of a full year of ATSF operations. Prospectively, it is expected that
intermodal traffic will continue to represent a significant portion of BNSF
Railway's revenues.

Coal revenues increased $152 million during 1996. Approximately 85 percent of
the increase was due to inclusion of a full year of ATSF operations.
Additionally, tonnage of low-sulfur coal shipped from the Powder River Basin
increased from 1995. Revenue per thousand revenue ton miles declined
principally as a result of continuing competitive pricing pressures and a change
in traffic mix.

Agricultural commodities revenues during 1996 were $27 million greater than 1995
reflecting a full year of ATSF operations largely offset by lower export
shipments of wheat and corn.

Chemicals revenues increased $322 million compared with 1995. Approximately 90
percent of the increase was due to inclusion of a full year of ATSF operations.
The remaining increase was due to strong petroleum products and agricultural
chemicals demand.

Revenue increases and changes in revenue per thousand revenue ton miles in all
other commodity groups are principally due to the inclusion of ATSF results for
the full year.

EXPENSES

Total operating expenses for 1996 were $6,485 million compared with expenses of
$5,611 million for 1995. The operating ratio for 1996 was 79.2 percent,
compared with an operating ratio of 80.2 percent for 1995, excluding $671
million for merger, severance and asset charges. The favorable decrease in the
operating ratio reflects synergies from combining operations which resulted in
reduced costs principally within administrative functions. These benefits were
partially offset by higher prices paid for labor, services and materials,
including a significant increase in the cost of diesel fuel during 1996.

14
<PAGE>

Compensation and benefits expenses of $2,561 million were $495 million above
1995 principally due to the full year of combined operations. The Company began
to realize the benefit of the merger during 1996 as employment, which
approximated 43,000 at the end of 1996, decreased by 5 percent when compared
with the prior year. Salaried employee levels have decreased over 15 percent in
the same time period.

Purchased services expenses increased $268 million for 1996 compared with 1995,
principally reflecting a full year of combined operations.

Depreciation and amortization expense for 1996 was $241 million higher than 1995
primarily due to the full year depreciation and amortization for combined
operations.

Equipment rents expenses were $201 million higher than 1995 due to the full year
combined operations as well as an increase in lease rental expense for freight
cars.

Fuel expenses for 1996 were $248 million or 51 percent higher than 1995
primarily due to an increase in consumption resulting from the full year of
combined operations and an 8 cent increase in the average price per gallon.

Materials and other expenses for 1996 increased $92 million compared with 1995.
The increase reflects the full year of combined operations partially offset by
decreases in expenses from cost initiatives including reductions in employee
injuries due to increased focus on employee safety.

As discussed in Note 3 to the consolidated financial statements: Merger,
severance and asset charges, the Company recorded $671 million for such costs in
1995. The principal components of the charge were $287 million related to BNSF
Railway's plan to centralize the majority of its clerical functions and $190
million for severance, pension and other salaried employee benefits and for
employee relocation cost incurred during the period. Additionally, $105 million
was recorded for planned branch line dispositions. The remaining $89 million
included obligations for vacating leased facilities and the write-off of
duplicate and excess assets. Additional accruals of $138 million were recorded
through purchase accounting related to former ATSF employees and assets. When
its plans are completed, BNSF Railway expects to have eliminated over 3,000
positions and disposed of approximately 4,000 miles of low density track. To
date, BNSF Railway has eliminated approximately 1,500 salaried positions and 500
clerical positions and has disposed of approximately 2,000 miles of low density
track. Also as described in Note 3, costs related to union employee relocation
as well as certain costs for separation and severances were not included in the
charge; therefore, these costs, to the extent incurred, will be recorded as
future operating expenses. Presently, the magnitude of any future expense is
unknown.

Interest income, related parties increased $21 million compared with 1995, due
to the full year effect of interest on ATSF intercompany notes receivable with
SFP.

Other income, net was $15 million lower than 1995. The decrease is primarily
due to lower interest income (1995 was higher due to receipt of interest income
associated with a tax refund) and increased accounts receivable sales fees,
partially offset by increased gains on property distributions.

15
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The consolidated financial statements of BNSF Railway and the reports thereon of
Price Waterhouse LLP dated February 7, 1997, and Coopers & Lybrand L.L.P. dated
February 15, 1996, are set forth on pages F-1 to F-21.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Reference is made to BNSF Railway's Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 26, 1996, regarding BNSF
Railway's change in its independent accountants.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as a part of this report:

1. Consolidated Financial Statements

Report of Price Waterhouse LLP . . . . . . . . . . . . . . . . . F-1

Report of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . . F-2

Consolidated Statement of Income for the three years ended
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated Balance Sheet at December 31, 1996 and 1995 . . . . F-4

Consolidated Statement of Cash Flows for the three years
ended December 31, 1996 . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statement of Changes In Stockholder's Equity
for the three years ended December 31, 1996 . . . . . . . . . F-6

Notes to Consolidated Financial Statements . . . . . . . . . . . F-7

2. Consolidated Financial Statement Schedules

Report of Price Waterhouse LLP . . . . . . . . . . . . . . . . F-1

Report of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . F-2

Schedule II - Valuation and Qualifying Accounts . . . . . . . . F-22

Schedules other than that listed above are omitted because they are not
required or applicable, or the required information is included in the
consolidated financial statements or related notes.

3. Exhibits:

See Index to Exhibits on page E-1 for a description of the exhibits filed
as a part of this Report.

(b) Reports on Form 8-K

BNSF Railway filed no Current Reports on Form 8-K during the quarter ended
December 31, 1996, or subsequently.

16
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, The Burlington Northern and Santa Fe Railway Company has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on this 31st day of March, 1997.

THE BURLINGTON NORTHERN AND
SANTA FE RAILWAY COMPANY

/s/ ROBERT D. KREBS
-------------------------------
Robert D. Krebs
Chairman, President and Chief
Executive Officer (Principal
Executive Officer) and Director

Dated: March 31, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of The
Burlington Northern and Santa Fe Railway Company and in the capacities and on
the dates indicated.

/s/ ROBERT D. KREBS Chairman, President and
- ----------------------------- Chief Executive Officer
Robert D. Krebs (Principal Executive
Officer) and Director March 31, 1997

/s/ DENIS E. SPRINGER Senior Vice President and
- ----------------------------- Chief Financial Officer
Denis E. Springer (Principal Financial Officer)
and Director March 31, 1997

/s/ THOMAS N. HUND Vice President and Controller
- ----------------------------- (Principal Accounting Officer) March 31, 1997
Thomas N. Hund

/s/ DOUGLAS J. BABB Director March 31, 1997
- -----------------------------
Douglas J. Babb

/s/ JEFFREY R. MORELAND Director March 31, 1997
- -----------------------------
Jeffrey R. Moreland

/s/ JEFFREY R. MORELAND
------------------------
Jeffrey R. Moreland
Senior Vice President-Law and
General Counsel
Attorney in Fact

Dated: March 31, 1997

17
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder and Board of Directors of
The Burlington Northern and Santa Fe Railway Company and Subsidiaries

In our opinion, the consolidated financial statements for the year ended
December 31, 1996 listed in the index appearing under Item 14(a) 1. and 2. of
this Form 10-K present fairly, in all material respects, the financial position
of The Burlington Northern and Santa Fe Railway Company and subsidiary companies
at December 31, 1996 and the results of their operations and their cash flows
for the year in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.

Price Waterhouse LLP
Chicago, Illinois
February 7, 1997

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder and Board of Directors of
The Burlington Northern and Santa Fe Railway Company and Subsidiaries

We have audited the accompanying consolidated balance sheet of The Burlington
Northern and Santa Fe Railway Company and Subsidiaries as of December 31, 1995
and the related consolidated statements of income, changes in stockholder's
equity and cash flows for each of the two years in the period ended December 31,
1995. We have also audited the financial statement schedule for each of the two
years in the period ended December 31, 1995, listed in Item 14 of this Form
10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Burlington
Northern and Santa Fe Railway Company and Subsidiaries as of December 31, 1995
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.

As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for periodic major locomotive overhauls in
1995 and for postemployment benefits in 1994.

Coopers & Lybrand L.L.P.

Fort Worth, Texas
February 15, 1996

F-2

<PAGE>

CONSOLIDATED STATEMENT OF INCOME
The Burlington Northern and Santa Fe Railway Company
(Dollars in millions)

Year ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $8,187 $6,163 $4,976

Operating expenses:
Compensation and benefits 2,561 2,066 1,756
Purchased services 871 603 535
Depreciation and amortization 722 481 335
Equipment rents 798 597 478
Fuel 727 479 369
Materials and other 806 714 672
Merger, severance and asset charges - 671 -
------ ------ ------
Total operating expenses 6,485 5,611 4,145
------ ------ ------

Operating income 1,702 552 831
Interest expense 99 95 79
Interest income, related parties 34 13 7
Other income, net 3 18 10
------ ------ ------

Income before income taxes 1,640 488 769
Income tax expense 628 197 300
------ ------ ------
Income before cumulative effect of change
in accounting method 1,012 291 469
Cumulative effect of change in accounting
method, net of tax - (100) (10)
------ ------ ------

Net income $1,012 $ 191 $ 459
====== ====== ======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

CONSOLIDATED BALANCE SHEET
The Burlington Northern and Santa Fe Railway Company
(Dollars in millions)

December 31, 1996 1995
- -------------------------------------------------------------------------------
ASSETS

<S> <C> <C>
Current assets:
Cash and cash equivalents $ 95 $ 54
Accounts receivable, net 757 602
Materials and supplies 222 220
Current portion of deferred income taxes 306 319
Other current assets 30 40
------- -------
Total current assets 1,410 1,235

Property and equipment, net 17,164 15,583
Intercompany notes receivable 529 666
Other assets 559 530
------- -------
Total assets $19,662 $18,014
======= =======

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable and other current liabilities $ 2,421 $ 2,206
Long-term debt due within one year 157 73
------- -------
Total current liabilities 2,578 2,279

Long-term debt and commercial paper 1,243 1,336
Deferred income taxes 4,473 4,016
Casualty and environmental liabilities 543 626
Employee merger and separation costs 466 564
Other liabilities 957 803
------- -------
Total liabilities 10,260 9,624
------- -------

Commitments and contingencies (see
Notes 3, 12 and 13)

Stockholder's equity:
Common stock, $1 par value, (1,000 shares
authorized, issued and outstanding) and
paid-in capital 10,312 10,093
Retained earnings 2,910 1,898
Capital contribution receivable (3,820) (3,601)
------- -------
Total stockholder's equity 9,402 8,390
------- -------
Total liabilities and stockholder's equity $19,662 $18,014
======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS
The Burlington Northern and Santa Fe Railway Company
(Dollars in millions)

Year ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>

OPERATING ACTIVITIES
Net income $1,012 $ 191 $ 459
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting
method - 100 10
Depreciation and amortization 722 481 335
Deferred income taxes 456 (91) 109
Merger, severance and asset charges - 671 -
Employee merger and separation costs paid (183) (69) -
Other, net (57) (2) (24)
Changes in current assets and liabilities:
Accounts receivable, net (143) 70 (111)
Materials and supplies (2) (41) (13)
Other current assets 5 8 (4)
Accounts payable and other current
liabilities 380 141 (14)
------ ------ ------
Net cash provided by operating activities 2,190 1,459 747
------ ------ ------

INVESTING ACTIVITIES
Cash used for capital expenditures (2,247) (847) (626)
Other, net 13 (21) 14
------ ------ ------

Net cash used for investing activities (2,234) (868) (612)
------ ------ ------

FINANCING ACTIVITIES
Net (decrease) increase in commercial paper (224) 134 64
Proceed from the issuance of long-term debt 251 - 150
Payments on long-term debt (76) (299) (336)
Dividends paid - (81) -
Net decrease (increase) in intercompany
notes receivable 137 (357) -
Other, net (3) (2) (3)
------ ------ ------
Net cash provided by (used for) financing
activities 85 (605) (125)
------ ------ ------

Increase (decrease) in cash and cash
equivalents 41 (14) 10
Cash and cash equivalents:
Beginning of year 54 27 17
ATSF cash acquired - 41 -
------ ------ ------

End of year $ 95 $ 54 $ 27
====== ====== ======

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount capitalized $ 88 $ 86 $ 78
Income taxes paid, net of refunds 5 288 192
Assets financed through capital lease
obligations 43 140 50

</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
The Burlington Northern and Santa Fe Railway Company
(Dollars in millions)

Common
Stock and Capital
Paid-in Retained Contribution
Capital Earnings Receivable Total
------- -------- ---------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ 1,191 $1,303 $ - $2,494
Net income - 459 - 459
------- ------ ------- ------

Balance at December 31, 1994 1,191 1,762 - 2,953
Merger of ATSF with BNRR 8,859 - (3,558) 5,301
Cost to equity investment adjustment - 26 - 26
Interest on demand note receivable 43 - (43) -
Dividends - (81) - (81)
Net income - 191 - 191
------- ------ ------- ------

Balance at December 31, 1995 10,093 1,898 (3,601) 8,390
Interest on demand note receivable 219 - (219) -
Net income - 1,012 - 1,012
------- ------ ------- ------

Balance at December 31, 1996 $10,312 $2,910 $(3,820) $9,402
======= ====== ======= ======
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Burlington Northern and Santa Fe Railway Company

1. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of The Burlington
Northern and Santa Fe Railway Company and its majority owned subsidiary
companies (BNSF Railway or Company). BNSF Railway was formerly known as
Burlington Northern Railroad Company (BNRR). On December 31, 1996, The
Atchison, Topeka and Santa Fe Railway Company (ATSF) merged with and into BNRR
(the Merger). In connection with the Merger, BNRR changed its name to The
Burlington Northern and Santa Fe Railway Company. BNSF Railway is an indirect
wholly-owned subsidiary of Burlington Northern Santa Fe Corporation (BNSF) which
was incorporated in Delaware on December 16, 1994, for the purpose of effecting
a business combination between Burlington Northern Inc. (BNI) and Santa Fe
Pacific Corporation (SFP) which was consummated on September 22, 1995. The
business combination between BNI and SFP was accounted for by the purchase
method. As such, BNSF allocated a proportion of the purchase price to SFP's and
ATSF's assets and liabilities assumed based on their fair value. BNRR was a
wholly-owned subsidiary of BNI. Effective December 1996, BNI merged with and
into SFP.

All significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented.

RECLASSIFICATIONS

Certain comparative prior year amounts in the consolidated financial statements
and notes have been reclassified to conform with the current year presentation.

CASH AND CASH EQUIVALENTS

All short-term investments with original maturities of less than 90 days are
considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value.

MATERIALS AND SUPPLIES

Materials and supplies consist mainly of diesel fuel and repair parts for
equipment and other railroad property and are valued at the lower of average
cost or market.

F-7
<PAGE>

PROPERTY AND EQUIPMENT

Property and equipment are depreciated and amortized on a straight-line basis
over their estimated useful lives. Upon normal sale or retirement of
depreciable railroad property, cost less net salvage is charged to accumulated
depreciation and no gain or loss is recognized. Significant premature
retirements are recorded as gains or losses at the time of their occurrence.
Expenditures which significantly increase asset values or extend useful lives
are capitalized. Repair and maintenance expenditures are charged to operating
expense when the work is performed. Property and equipment are stated at cost
including property values of ATSF, which were adjusted in applying purchase
accounting. Additionally, the Company incurs certain direct labor, contract
service and other costs associated with the development and installation of
computer software. Costs for newly developed software or significant
enhancements to existing software are typically capitalized. Research,
operations and maintenance costs are charged to operating expense when the work
is performed.

REVENUE RECOGNITION

Transportation revenues are recognized based upon the proportion of service
provided.

2. ACQUISITION OF ATSF

On June 29, 1994, BNI and SFP (ATSF's parent) entered into an Agreement and Plan
of Merger (as amended, the Merger Agreement) pursuant to which SFP would merge
with BNI in the manner set forth below. Stockholders of BNI and SFP approved
the Merger Agreement at special stockholders' meetings held on February 7, 1995.
On August 23, 1995, the Interstate Commerce Commission issued a written decision
approving the Merger and on September 22, 1995 the Merger was consummated. As
discussed in Note 1, BNI merged with and into SFP in December 1996.

Pursuant to the Merger Agreement, BNI and SFP commenced tender offers (together,
the Tender Offer) to acquire 25 million and 38 million shares of SFP common
stock, respectively, at $20 per share in cash. The Tender Offer was completed
on February 21, 1995. At merger consummation, the remainder of the SFP common
stock was exchanged for BNI common stock at a ratio of .4114 BNI shares for each
SFP share.

The 1995 business combination with SFP was accounted for by the purchase method.
As such, the accompanying consolidated financial statements include assets,
liabilities and financial results of ATSF after Merger consummation. The total
purchase price of $3.319 billion was allocated to SFP's and ATSF's assets and
liabilities based on fair values. The portion of the purchase price applicable
to ATSF, together with the historical cost balances recorded upon Merger
consummation, were as follows (in millions):

Property and equipment, net $9,430
Other assets 803
Deferred income taxes (2,718)
Long-term debt (617)
Other liabilities (1,597)
------
Increase in BNSF Railway's stockholder's equity $5,301
======

The consolidated pro forma results presented below were prepared as if the
merging of BNRR and ATSF had occurred on January 1, 1995 and include the
historical results of BNRR and ATSF, excluding the after-tax effect of $340
million for merger-related charges recorded by BNRR in 1995. Additionally, the
consolidated pro forma results include the effects of purchase accounting
adjustments. Pro forma adjustments reflecting merger benefits are not included.
This unaudited consolidated pro forma information is not necessarily indicative
of the results of operations that might have occurred had the Merger actually
taken place on the date indicated, or of future results of operations of the
combined entities (dollars in millions):

F-8
<PAGE>

Year ended December 31, 1995
- ------------------------------------------------ ------
Revenues $8,150
Operating expenses 6,737
Income before accounting changes 743
Net income (1) 643

(1) Pro forma results include approximately $105 million (pre-tax) related to
the merger severance and asset charge which are not considered directly
attributable to the Merger. Additionally, pro forma net income includes the
$100 million cumulative effect for the change in accounting for locomotive
overhauls for the years prior to 1995 and a $25 million reduction for the effect
of the change on 1995.

3. MERGER, SEVERANCE AND ASSET CHARGES

Included in the Consolidated Statement of Income for 1995 were operating
expenses of $671 million related to merger, severance and asset costs.
Significant components included in these costs are described below.

Employee-related costs of $287 million were recorded related to BNSF's plan to
centralize the majority of its union clerical functions which was approved in
1995. This plan includes the reduction of approximately 1,600 employees which,
among other things, requires installation of common information systems. The
Company and the union entered into an implementation agreement which allows the
Company to abolish the positions and provide separation benefits to affected
employees. Benefits paid to affected employees may be in the form of lump-sum
payments or payments made over several years depending on the seniority level
and election of the employee. Implementation of the plan began in 1996;
however, the plan is not expected to be fully implemented until 1998 due to the
geographical complexity of the combined rail system, and the time required to
finish development and installation of common systems. Approximately 500
positions were abolished in 1996 and the remaining position reductions are
expected to occur during 1997 and 1998. No comparable costs were accrued in
applying purchase accounting, as ATSF's operations had previously been
centralized. Also, no provision for voluntary separation or severance costs
above those provided was included in the 1995 charge. Presently, the magnitude
of any such future expense is presently unknown. Additionally, relocation costs
for clerical employees are charged to expense in the period incurred.

Costs of $190 million were recorded for salaried employees and reflect
severance, pension and other employee benefits, and costs for employee
relocations incurred during the period. Severance, pension and other employee
benefit costs reflect the elimination of approximately 1,000 former BNI
employees. Most of these positions were eliminated in 1995 and 1996. Additional
components of salaried employee costs include special termination benefits to be
received under the Company's retirement plan. Relocation expenses of $23
million reflect costs incurred in 1995 for relocating approximately 300 former
BNI employees.

Costs of $105 million were included for branch line dispositions reflecting the
write-off of the net book value of the lines at the anticipated disposal date,
less estimated net proceeds. Approximately 75 line segments, covering 3,300
miles of former BNI lines were included, of which approximately 2,000 miles were
disposed of during 1996. Remaining costs of $89 million included in the $671
million charge related to obligations at leased facilities, a majority of which
have been vacated, and the write-off of duplicate and excess assets including
computer hardware and software and certain facilities.

Additional accruals of $138 million were recorded through purchase accounting
related to former ATSF employees and assets. Approximately $105 million of
these costs related to termination of approximately 500 salaried employees for
severance payments and special termination benefits to be received under the
Company's retirement and health and welfare plans. Salaried employee costs also
include amounts to relocate approximately 500 former SFP employees. The
remaining $33 million of costs relate to the sale or abandonment of 500 miles of
branch lines, rents on vacated leased facilities and the write-off of excess
assets.

Current and long-term employee merger and separation liabilities totaling $580
million are included in the consolidated balance sheet at December 31, 1996 and
principally represent employee-related costs for the centralization of clerical

F-9
<PAGE>

functions, as well as remaining liabilities for actions taken by ATSF in prior
periods. The majority of these prior ATSF costs are associated with deferred
benefits payable upon separation or retirement to certain active conductors and
trainmen incurred in connection with an agreement which, among other things,
reduced crew sizes. Additionally, certain locomotive engineers are eligible for
a deferred benefit payable upon separation or retirement, associated with an
agreement with ATSF which allowed for more flexible work rules.

During 1996, BNSF Railway paid $183 million for i) employee merger and
separation payments, principally related to the reduction of approximately 1,000
salaried employees and 500 clerical employees, ii) salaried employee relocations
committed to in 1995, and iii) deferred benefits for ATSF conductors, trainmen
and locomotive engineers. At December 31, 1996, $114 million of the remaining
accrual is included within current liabilities for anticipated costs to be paid
in 1997. The remaining costs are expected to be paid over the next several
years, except for certain costs related to conductors, trainmen and locomotive
engineers of ATSF which will be paid upon the employees' separation or
retirement, as well as certain benefits for clerical employees which may be paid
on an installment basis, generally over five to ten years.

4. ACCOUNTING CHANGES

Effective January 1, 1995, BNSF Railway changed its method of accounting for
periodic major locomotive overhauls. Under the new method, costs of owned
locomotives relating to components requiring major overhaul are depreciated, on
a straight-line basis, to the first major overhaul date. The remaining cost of
the owned locomotive is depreciated, on a straight-line basis, over the
estimated economic life of the locomotive. The cost of overhauls on owned units
are then capitalized when incurred and depreciated, on a straight-line basis,
until the next anticipated overhaul. In addition, estimated costs for major
overhauls on leased units are accrued on a straight-line basis over the life of
the leases. BNSF Railway previously expensed locomotive overhauls when the
costs were incurred. BNSF Railway believes that this change is preferable
because it improves the matching of expenses incurred to revenues earned. The
cumulative effect of this change on years prior to 1995 was a reduction in net
income of $100 million. The effect of this change for the year ended December
31, 1995, was to reduce income before cumulative effect of change in accounting
method by $25 million. The pro forma effect of this change on 1994 would have
been to reduce net income by $26 million.

Effective January 1, 1994, BNSF Railway adopted Statement of Financial
Accounting Standards (SFAS) No. 112, "Employers' Accounting for Postemployment
Benefits." The cumulative effect, net of $7 million income tax benefit, of this
change in accounting attributable to years prior to 1994, at the time of
adoption, was to decrease 1994 net income by $10 million.

5. OTHER INCOME, NET

Other income, net includes the following (in millions):

Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on property dispositions $23 $11 $17
Accounts receivable sale fees (14) (4) (9)
Interest income 2 14 3
Miscellaneous, net (8) (3) (1)
--- --- ---
Total $ 3 $18 $10
=== === ===
</TABLE>

F-10
<PAGE>

6. INCOME TAXES

Income tax expense, excluding the cumulative effect of change in accounting
method, was as follows (in millions):

Year ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 144 $ 252 $ 167
State 28 36 24
----- ----- -----
172 288 191
----- ----- -----

Deferred:
Federal 400 (82) 93
State 56 (9) 16
----- ----- -----
456 (91) 109
----- ----- -----

Total $ 628 $ 197 $ 300
===== ===== =====
</TABLE>

Reconciliation of the federal statutory income tax rate to the effective tax
rate, excluding the cumulative effect of change in accounting method and
extraordinary item, was as follows:

Year ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 3.3 3.7 3.4
Other, net - 1.7 0.6
---- ---- ----
Effective tax rate 38.3% 40.4% 39.0%
==== ==== ====
</TABLE>

The components of deferred tax assets and liabilities were as follows (in
millions):

December 31, 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $(5,183) $(4,992)
Other (118) (94)
------- -------
Total deferred tax liabilities (5,301) (5,086)
------- -------

Deferred tax assets:
Casualty and environmental liabilities 300 360
Employee merger and separation costs 214 359
Postretirement benefits 96 81
Non-expiring AMT credit carryforwards 44 133
Pensions 16 45
Other 464 411
------- -------
Total deferred tax assets 1,134 1,389
------- -------

Net deferred tax liability $(4,167) $(3,697)
======= =======

Noncurrent deferred income tax liability $(4,473) $(4,016)
Current deferred income tax asset 306 319
------- -------

Net deferred tax liability $(4,167) $(3,697)
======= =======
</TABLE>

In accordance with the income tax allocation agreement between SFP and BNSF
Railway, the Company makes payment to or receives refunds from SFP based on its
separate consolidated tax liability. SFP makes payments or receives refunds
pursuant to the same intercompany tax allocation agreement with its parent,
BNSF. During 1996, BNSF Railway did not make any intercompany federal tax
payments to SFP, such settlement occurred in the first quarter of 1997.

F-11
<PAGE>

BNRR's and ATSF's federal income tax returns have been examined through 1991 and
1992, respectively. All years prior to 1986 are closed for BNRR and ATSF.
Issues relating to the years 1986-1992 are being contested through various
stages of administrative appeal. In addition, BNSF Railway and its subsidiaries
have various state income tax returns in the process of examination,
administrative appeal or litigation. Management believes that adequate
provision has been made for any adjustment that might be assessed for open years
through 1996.

7. ACCOUNTS RECEIVABLE, NET

A special purpose subsidiary of BNSF Railway has sold, with limited recourse,
variable rate certificates which mature in December 1999 evidencing undivided
interests in an accounts receivable master trust. The master trust's assets
include an ownership interest in a revolving portfolio of BNSF Railway's
accounts receivable which are used to support the certificates. At December 31,
1996, $280 million of certificates sold were outstanding and were supported by
receivables in the master trust of $347 million. A maximum of $300 million of
certificates can be sold if the master trust balance is increased by receivables
which are eligible for sale. BNSF Railway has retained the collection
responsibility with respect to the accounts receivable held in trust. BNSF
Railway is exposed to credit loss related to collection of accounts receivable
to the extent that the amount of receivables in the master trust exceeds the
amount of certificates sold. Upon the merger of ATSF and BNRR, BNRR's
receivables were added to the accounts receivable master trust, effective
January 1, 1997, but the $300 million maximum amount of certificates which can
be sold was not increased. Costs related to such agreements vary on a monthly
basis and are generally related to certain interest rates. These costs are
included in Other income, net.

BNSF Railway maintains an allowance for doubtful accounts based upon the
expected collectibility of all accounts receivable, including accounts
receivable sold. Allowances for doubtful accounts of $57 million and $50
million have been recorded at December 31, 1996 and 1995, respectively.

8. PROPERTY AND EQUIPMENT, NET

Property and equipment, net (in millions), and the weighted average annual
depreciation rate (%) was as follows:

<TABLE>
<CAPTION>
1996
Depreciation
December 31, 1996 1995 Rate
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 1,385 $ 1,344 -
Track structure 9,489 8,885 3.5%
Other roadway 7,197 6,402 2.8
Locomotives 1,304 1,073 6.9
Freight cars and other equipment 1,693 1,671 4.5
Computer hardware and software 402 286 18.1
------- -------
Total cost 21,470 19,661
Less accumulated depreciation and amortization (4,306) (4,078)
------- -------
Property and equipment, net $17,164 $15,583
======= =======
</TABLE>

The consolidated balance sheet at December 31, 1996 and 1995 included $523
million and $231 million, respectively, for property and equipment under capital
leases.

In the first quarter of 1996, BNSF Railway adopted Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The adoption of
SFAS No. 121 had no impact on the Company's financial position or 1996 results
of operations.

F-12
<PAGE>

9. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES

Accounts payable and other current liabilities consisted of the following (in
millions):

December 31, 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Accounts and wages payable $ 435 $ 360
Casualty and environmental liabilities 267 290
Accounts payable to related parties 173 14
Income taxes payable to BNSF 163 25
Accrued vacations 145 139
Taxes other than income taxes 122 121
Equipment leases 118 83
Employee merger and separation costs 114 215
Other 884 959
------ ------
Total $2,421 $2,206
====== ======
</TABLE>

10. DEBT

Debt outstanding was as follows (in millions):

December 31, 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Bonds
- --------------
Consolidated mortgage bonds, 3 1/5% to 9 1/4%, due
2006 to 2045 $ 321 $ 321
General mortgage bonds, 3 1/8% and 2 5/8%, due 2000
and 2010, respectively 62 62
Prior lien railway and land grant bonds, 4%, due 1997 57 57
General lien railway and land grant bonds, 3%, due 2047 35 35
Mortgage notes, 10.325%, due 1997 to 2014 31 32
First mortgage bonds, series A, 4%, due 1997 20 20
Mortgage notes, 8 5/8%, due 2008 18 20

Equipment Obligations
- ---------------------
Equipment obligations, weighted average rate of 8.02%,
due 1997 to 2013 436 461
Capitalized lease obligations, weighted average rate
of 6.87%, expiring 1997 to 2009 400 154

Commercial paper - 224
Other 28 29

Unamortized purchase accounting adjustment 34 40
Unamortized discount (42) (46)
------ ------
Total 1,400 1,409
Less: Current portion of long-term debt (157) (73)
------ ------
Long-term debt $1,243 $1,336
====== ======
</TABLE>

In 1996, BNSF Railway completed cross-border leveraged leases of equipment for a
total amount of $311 million which were recorded as capital lease obligations.
These transactions included the issuance of $242 million of equipment secured
debt. In 1995, BNRR completed cross-border leveraged leases of equipment for a
total amount of $136 million which were recorded as capital lease obligations.
These transactions included the issuance of $108 million of equipment secured
debt.

In November 1994, BNRR entered into a $150 million three-year term loan facility
agreement. In November 1995, this debt was repaid through the issuance of
commercial paper by BNRR.

Aggregate long-term debt scheduled maturities are $157 million, $89 million, $78
million, $108 million and $82 million for 1997 through 2001, respectively.

F-13
<PAGE>

A substantial portion of all railroad property, real and personal, owned by BNSF
Railway is subject to liens securing, as of December 31, 1996, approximately
$544 million of mortgage bonds. On January 1, 1997, approximately $77 million
of this mortgage debt was paid off. Additionally, equipment obligations and
capital leases are secured by the underlying equipment.

11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of BNSF Railway's financial instruments at December
31, 1996 and 1995 and the methods and assumptions used to estimate the fair
value of each class of financial instruments held by BNSF Railway, were as
follows:

Cash and cash equivalents

The carrying amount approximated fair value because of the short maturity of
these instruments.

Long-term debt and commercial paper

The fair value of BNSF Railway's long-term debt was primarily based on quoted
market prices for the same or similar issues, or on the current rates that would
be offered to BNSF Railway for debt of the same remaining maturities. The
carrying amount of commercial paper approximated fair value because of the short
maturity of these instruments. The carrying amounts of BNSF Railway's long-term
debt and commercial paper at December 31, 1996 and 1995 were $1,400 million and
$1,409 million, respectively, while the estimated fair values at December 31,
1996 and 1995 were $1,402 million and $1,484 million, respectively.

12. HEDGING ACTIVITIES, LEASES AND OTHER COMMITMENTS

Hedging activities

BNSF Railway has a program to hedge against fluctuations in the price of its
diesel fuel purchases. This program includes various commodity swap
transactions which are accounted for as hedges. Any gains or losses associated
with changes in market value of these hedges are deferred and recognized as a
component of fuel expense in the period in which the hedged fuel is purchased
and used. To the extent BNSF Railway hedges portions of its fuel purchases, it
may not fully benefit from decreases in fuel prices.

As of February 7, 1997, BNSF Railway had entered into fuel swaps for
approximately 635 million gallons at an average price of approximately 54 cents
per gallon. These contracts have expiration dates ranging from March 1997 to
December 1998.

The above prices do not include taxes, fuel handling costs, certain
transportation costs and any differences which may occur from time to time
between the prices of commodities hedged and the purchase price of BNSF's diesel
fuel.

BNSF Railway's fuel hedging program covers approximately 35 percent of estimated
1997 fuel purchases and 25 percent of estimated 1998 fuel purchases. Quarterly
hedges in 1997 range from 20 percent to 40 percent of anticipated purchases
while 1998 hedges approximate 25 percent each quarter. Hedge positions are also
closely monitored to ensure that they will not exceed actual fuel requirements
in any period. Unrecognized gains from BNSF's fuel hedging transactions were
approximately $17 million at December 31, 1996 and were not material at December
31, 1995. BNSF Railway monitors its hedging positions and credit ratings of its
counterparties and does not anticipate losses due to counterparty
nonperformance.

Leases

BNSF Railway has substantial lease commitments for locomotives, freight cars,
trailers, office buildings and other property. Most of these leases provide the
option to purchase the equipment at fair market value at the end of the

F-14
<PAGE>

lease. However, some provide fixed price purchase options. Future minimum lease
payments (which reflect leases having non-cancelable lease terms in excess of
one year) as of December 31, 1996 are summarized as follows (in millions):

Capital Operating
Year ended December 31, Leases Leases
- --------------------------------------------------------------------------
<S> <C> <C>
1997 $ 55 $ 366
1998 59 317
1999 55 260
2000 50 212
2001 50 182
Thereafter 311 1,611
---- ------
Total 580 $2,948
Less amount representing interest 180 ======
----
Present value of minimum lease payments $400
====
</TABLE>

Lease rental expense for all operating leases was $505 million, $408 million and
$325 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Contingent rentals and sublease rentals were not significant.

Other commitments

BNSF Railway has entered into commitments to acquire 180 locomotives in 1997.
The locomotives will be financed from one or a combination of sources including,
but not limited to, cash from operations, leases and debt issuances. The
decision on the method used will depend upon the current market conditions and
other factors.

In connection with the closing of the sale of ATSF rail lines in southern
California in 1992 and 1993, BNSF Railway has entered into various shared use
agreements with the agencies, which require BNSF Railway to pay the agencies
approximately $6 million annually to maintain track structure and facilities.
Additionally, BNSF Railway has recorded a $50 million liability for an
obligation retained by BNSF Railway, which under certain conditions requires a
repurchase of a portion of the properties sold.

13. ENVIRONMENTAL AND OTHER CONTINGENCIES

Environmental

BNSF Railway's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNSF Railway's
operating procedures include practices to protect the environment from the
environmental risks inherent in railroad operations, which frequently involve
transporting chemicals and other hazardous materials. Additionally, many of
BNSF Railway's land holdings are and have been used for industrial or
transportation related purposes or leased to commercial or industrial companies
whose activities may have resulted in discharges onto the property. As a
result, BNSF Railway is subject to environmental clean-up and enforcement
actions. In particular, the Federal Comprehensive Environmental Response
Compensation and Liability Act of 1980 (CERCLA), also known as the "Superfund"
law, as well as similar state laws generally impose joint and several liability
for clean-up and enforcement costs without regard to fault or the legality of
the original conduct on current and former owners and operators of a site. BNSF
Railway has been notified that it is a potentially responsible party (PRP) for
study and clean-up costs at approximately 32 Superfund sites for which
investigation and remediation payments are or will be made or are yet to be
determined (the Superfund sites) and, in many instances, is one of several PRPs.
In addition, BNSF Railway may be considered a PRP under certain other laws.
Accordingly, under CERCLA and other federal and state statutes, BNSF Railway may
be held jointly and severally liable for all environmental costs associated with
a particular site. If there are other PRPs, BNSF Railway generally participates
in the clean-up of these sites through cost-sharing agreements with terms that
vary from site to site. Costs are typically allocated based on relative
volumetric contribution of material, the amount of time the site was owned or
operated, and/or the portion of the total site owned or operated by each PRP.

F-15
<PAGE>

Environmental costs include initial site surveys and environmental studies of
potentially contaminated sites as well as costs for remediation and restoration
of sites determined to be contaminated. Liabilities for environmental clean-up
costs are initially recorded when BNSF Railway's liability for environmental
clean-up is both probable and a reasonable estimate of associated costs can be
made. Adjustments to initial estimates are recorded as necessary based upon
additional information developed in subsequent periods. BNSF Railway conducts
an ongoing environmental contingency analysis, which considers a combination of
factors including independent consulting reports, site visits, legal reviews,
analysis of the likelihood of participation in and the ability of other PRPs to
pay for clean-up, and historical trend analyses.

BNSF Railway is involved in a number of administrative and judicial proceedings
and other mandatory clean-up efforts at approximately 345 sites, including the
Superfund sites, at which it is being asked to participate in the study and/or
clean-up of the environmental contamination. BNSF Railway paid approximately
$47 million, $31 million and $21 million during 1996, 1995 and 1994,
respectively relating to mandatory clean-up efforts, including amounts expended
under federal and state voluntary clean-up programs. BNSF Railway has accruals
of approximately $225 million for remediation and restoration of all known
sites, including $215 million pertaining to mandated sites, of which
approximately $55 million relates to the Superfund sites. BNSF Railway
anticipates that the majority of the accrued costs at December 31, 1996 will be
paid over the next five years. No individual site is considered to be material.
Recoveries received from third parties, net of legal costs incurred, were
approximately $31 million during 1995 and were not significant in the years
ended December 31, 1996 and 1994.

Liabilities recorded for environmental costs represent BNSF Railway's best
estimates for remediation and restoration of these sites and include both
asserted and unasserted claims. Unasserted claims are not considered to be a
material component of the liability. Although recorded liabilities include
BNSF Railway's best estimates of all costs, without reduction for anticipated
recoveries from third parties, BNSF Railway's total clean-up costs at these
sites cannot be predicted with certainty due to various factors such as the
extent of corrective actions that may be required, evolving environmental laws
and regulations, advances in environmental technology, the extent of other PRPs'
participation in clean-up efforts, developments in ongoing environmental
analyses related to sites determined to be contaminated, and developments in
environmental surveys and studies of potentially contaminated sites. As a
result, future charges to income for environmental liabilities could have a
significant effect on results of operations in a particular quarter or fiscal
year as individual site studies and remediation and restoration efforts proceed
or as new sites arise. However, expenditures associated with such liabilities
are typically paid out over a long period; therefore, management believes that
it is unlikely that any identified matters, either individually or in the
aggregate, will have a material adverse effect on BNSF Railway's consolidated
financial position or liquidity.

The railroad industry, including BNSF Railway, will become subject to future
requirements regulating air emissions from diesel locomotives that may increase
their operating costs. Regulations applicable to new locomotive engines were
issued by the Environmental Protection Agency in early 1997, with final
regulations to be promulgated by the end of the year. It is anticipated that
these regulations will be effective for locomotive engines installed after 1999
and through 2010. Under some interpretations of federal law, older locomotive
engines may be regulated by states based on standards and procedures which the
State of California ultimately adopts. At this time, it is unknown whether
California will adopt locomotive emission standards that may differ from federal
standards.

OTHER CLAIMS AND CONTINGENCIES

BNSF Railway and its subsidiaries are parties to a number of legal actions and
claims, various governmental proceedings and private civil suits arising in the
ordinary course of business, including those related to environmental matters
and personal injury claims. While the final outcome of these items cannot be
predicted with certainty, considering among other things the meritorious legal

F-16
<PAGE>

defenses available, it is the opinion of management that none of these items,
when finally resolved, will have a material adverse effect on the annual results
of operations, financial position or liquidity of BNSF Railway, although an
adverse resolution of a number of these items could have a material adverse
effect on the results of operations in a particular quarter or fiscal year.

14. RETIREMENT PLANS

BNSF Railway and its subsidiaries are included with certain other BNSF
affiliates in the qualified BNSF Retirement Plan and the nonqualified BNSF
Supplemental Retirement Plan.

Prior to October 1, 1996, BNSF sponsored noncontributory defined benefit pension
plans through its subsidiaries BNI and SFP and covering substantially all
non-union employees. Additionally, BNI and SFP sponsored nonqualified defined
benefit plans for certain officers and other employees. On October 1, 1996, the
respective BNI and SFP qualified defined benefit pension plans were merged,
creating the qualified BNSF Retirement Plan. The corresponding nonqualified
defined benefit plans were merged on October 1, 1996, creating the nonqualified
BNSF Supplemental Retirement Plan. The benefits under BNSF's plans are based on
years of credited service and the highest five-year average compensation levels.
BNSF's funding policy is to contribute annually not less than the regulatory
minimum, and not more than the maximum amount deductible for income tax
purposes.

Components of the net pension cost for BNSF plans, including the prior BNI and
SFP plans, were as follows (in millions):

Year ended December 31, BNSF 1996 BNSF 1995 (1) BNI 1994 (2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost, benefits earned during
the period $ 17 $ 11 $ 12
Interest cost on projected benefit
obligation 97 65 50
Actual return on plan assets (148) (114) (25)
Net amortization and deferred amounts 43 61 (1)
Curtailment costs - 10 -
Cost of special termination benefits - 32 -
---- ---- ----
Net pension cost $ 9 $ 65 $ 36
==== ==== ====
</TABLE>

(1) Represents full year BNI combined with SFP for the period from September
22, 1995 through December 31, 1995.

(2) Represents historical BNI only.

The following table shows the reconciliation of BNSF's and SFP's funded status
of the qualified plans and BNI's qualified and nonqualified plans with amounts
recorded in BNSF's consolidated balance sheet (in millions):

December 31, BNSF 1996 BNI 1995 SFP 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $(1,081) $(641) $(547)
======= ===== =====
Accumulated benefit obligation $(1,161) $(696) $(575)
======= ===== =====
Projected benefit obligation $(1,247) $(758) $(614)
Plan assets at fair value, primarily marketable
equity and debt securities 1,320 534 718
------- ----- -----
Plan assets in excess of (less than) projected
benefit obligation 73 (224) 104
Unrecognized net (gain) loss (63) 93 -
Unrecognized prior service cost (10) 2 -
Unamortized net transition obligation 15 20 -
Adjustment required to recognize minimum liability - (53) -
------- ----- -----
Prepaid (accrued) pension asset (liability) $ 15 $(162) $ 104
======= ===== =====
</TABLE>

F-17
<PAGE>

BNSF uses a September 30 measurement date. The prior BNI and SFP plans used
measurement dates of December 31 and September 30, respectively. The
assumptions used in accounting for the BNSF, BNI and SFP qualified and
nonqualified plans were as follows:

<TABLE>
<CAPTION>
BNSF 1996 BNI 1995 SFP 1995 BNI 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate Discount rate 7.75% 7.0% 7.5% 9.0%
Rate of increase in compensation
levels 4.0% 4.0% 4.0% 5.5%
Expected long-term rate of return
on plan assets 9.5% 9.5% 9.75% 9.5%

</TABLE>

The following table shows the reconciliation of the BNSF and SFP funded status
of the nonqualified supplemental plan with amounts recorded in the BNSF
consolidated balance sheet (in millions):

December 31, BNSF 1996 SFP 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (31) $ (7)
====== =====
Accumulated benefit obligation $ (32) $ (8)
====== =====
Projected benefit obligation $ (39) $ (11)
------ -----
Unrecognized net loss 14 3
Unrecognized prior service cost 1 -
Unamortized net transition obligation 1 -
Adjustment required to recognize minimum liability (9) -
------ -----
Accrued pension liability $ (32) $ (8)
====== =====
</TABLE>

Prior to December 31, 1996, BNSF sponsored 401(k) thrift and profit sharing
plans through its subsidiaries, BNI and SFP, which covered substantially all
non-union employees and certain union employees. The plans covering non-union
employees were merged on December 31, 1996. Under the merged plan, BNSF matches
50 percent of the first 6 percent of non-union employees' contributions, which
are subject to certain percentage limits of the employees' earnings, at each pay
period. Depending on BNSF's performance, an additional matching contribution of
up to 30 percent of the first 6 percent can be made at the end of the year. The
prior BNI plan matched 35 percent of the first 6 percent of non-union employees'
contributions, at the end of each quarter and depending on BNI's performance,
matched an additional 20 to 40 percent at the end of the year. The prior SFP
plan matched 100 percent of the first 4 percent of non-union employees'
contributions and 25 percent of the first 4 percent of union employees'
contributions. Under the prior plans, BNI employees were immediately fully
vested in the employer match, while SFP employees became vested on a five year
schedule based on length of service. As part of the transition to the BNSF
plan, former SFP employees became fully vested in the employee match made
through December 31, 1996. Employer contributions made subsequent to December
31, 1996, for all non-union employees, are subject to the five year length of
service vesting schedule. BNSF's 401(k) matching expense was $13 million in
1996 and 1995, and $8 million in 1994.

15. OTHER POSTEMPLOYMENT BENEFIT PLANS

BNSF provides life insurance benefits to eligible former BNI non-union
employees. The life insurance plan is noncontributory and covers retirees only.
The postretirement benefit cost related to former BNI employees were $1 million
in each of the three years ended December 31, 1996, 1995 and 1994, respectively.

BNSF's policy is to fund benefits payable under the life insurance plan as they
come due. The accumulated postretirement benefit obligation related to the
former BNI plan was approximately $17 million at December 31, 1996 and 1995.

Salaried employees of the former SFP who have rendered 10 years of service after
attaining age 45 are eligible for both medical benefits and life insurance
coverage during retirement. The retiree medical plan is contributory and
provides benefits to retirees, their covered dependents and beneficiaries.

F-18
<PAGE>

Retiree contributions are adjusted annually. The plan also contains fixed
deductibles, coinsurance and out-of-pocket limitations. The life insurance plan
is noncontributory and covers retirees only. Components of SFP's postretirement
benefit cost related to former SFP employees relating to its medical and life
insurance plans were as follows (in millions):

<TABLE>
<CAPTION>
Life
Insurance Plan Medical Plan
--------------------- ---------------------
1996 1995(1) 1996 1995(1)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service cost $ - $ - $ 5 $ 1
Interest cost 4 1 12 3
Net amortization and deferred amounts - - - (2)
--- --- --- ---
Net postretirement benefit cost $ 4 $ 1 $17 $ 2
=== === === ===
</TABLE>

(1) Includes only the components of postretirement benefit cost from September
22, 1995 to December 31, 1995.

BNSF's policy is to fund benefits payable under the medical and life insurance
plans as they come due. The following table shows the reconciliation of the
plans' obligations to amounts accrued at December 31, 1996 and 1995 (in
millions). The former SFP plan uses a September 30 measurement date.

<TABLE>
<CAPTION>
Life
Insurance Plan Medical Plan
--------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees $43 $45 $119 $130
Fully eligible active participants - - 11 15
Other active participants 4 4 33 40
--- --- ---- ----
47 49 163 185
Unrecognized net loss (1) (2) (3) (8)
--- --- ---- ----
Accrued postretirement benefit cost $46 $47 $160 $177
=== === ==== ====
</TABLE>

For 1996, the assumed health care cost trend rate for managed care medical costs
is 10.5 percent and is assumed to decrease gradually to 5 percent by 2006 and
remain constant thereafter. For medical costs not in managed care, the assumed
health care cost trend rate is 12 percent and is assumed to decrease gradually
to 5 percent by 2006 and remain constant thereafter. Increasing the assumed
health care cost trend rates by one percentage point would increase the
accumulated postretirement benefit obligation for the medical plan by $20
million and the combined service and interest components of net periodic
postretirement benefit cost recognized in 1996 by $2 million.

For 1996, the weighted-average discount rate assumed in determining the
accumulated postretirement benefit obligation was 7.75 percent and the assumed
weighted-average salary increase was 4.0 percent.

Other Plans

Under collective bargaining agreements, BNSF Railway participates in
multiemployer benefit plans which provide certain postretirement health care and
life insurance benefits for eligible union employees. Insurance premiums paid
attributable to retirees, which are generally expensed as incurred, were $14
million in 1996, $11 million in 1995 and $10 million in 1994.

16. COMMON STOCK AND STOCKHOLDER'S EQUITY

BNSF Railway is authorized to issue 1,000 shares of common stock, $1 Par Value.
At December 31, 1996 all 1,000 shares were issued and outstanding.

Prior to December 31, 1996 (the date BNRR and ATSF merged), BNRR had 1,000
shares of no par value common stock authorized, issued and outstanding, and ATSF
had 100 shares of $10 par value common stock authorized, issued and outstanding.

As discussed previously, the 1995 business combination with SFP was accounted
for by the purchase method. The historical costs of ATSF's net assets, together
with fair value adjustments, resulted in a capital contribution to

F-19
<PAGE>

BNSF Railway of $5,301 million on September 22, 1995. Note 17 discusses the
capital contribution receivable from SFP that BNSF Railway assumed from ATSF.

As a result of the merger, certain investments in third parties held by both
BNRR and ATSF, which were previously recorded on the cost method, were converted
to the equity method due to BNSF Railways's combined ownership position and
ability to exercise significant influence. As such, $26 million, which is net
of deferred taxes of $17 million, was recorded in 1995 as an increase to
retained earnings to reflect BNRR's undistributed equity in earnings since
initial investment. ATSF's investments were adjusted to fair value upon the
application of purchase accounting.

17. RELATED PARTY TRANSACTIONS

In addition to various corporate-related transactions with SFP and BNSF as
described in various notes to the consolidated financial statements, BNSF
Railway rents, under operating leases, rolling stock and other property from BN
Leasing Corporation (BNLC), a wholly owned subsidiary of SFP. During 1996, 1995
and 1994, lease expense of $59 million, $56 million and $49 million was recorded
by BNSF Railway for operating leases with BNLC.

Additionally, BNSF Railway has various intercompany borrowings with affiliates
above the BNSF Railway level. The following is a summary of intercompany notes
receivable balances (in millions):

December 31, 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Note receivable from Parent $460 $597
Note receivable from BNLC for hub centers 28 28
Note receivable from BNLC for rail facilities 41 41
---- ----

Total intercompany notes receivable $529 $666
==== ====
</TABLE>

Intercompany advances to Parent are payable on demand with semi-annual interest
payments at a variable rate of 1.0% above the monthly average of the daily
effective Federal Funds rate. Interest income is reflected in Interest income,
related parties.

In prior years, BNRR transferred the Denver and Houston hub centers to
Burlington Northern Railroad Holdings,Inc.(BNRRHI), a wholly owned subsidiary of
BNRR. BNRRHI subsequently sold the hub centers to BNLC. The hub centers, with a
combined book value of $22 million, were sold for the fair market value of $28
million. BNRRHI received two promissory notes due October 31, 2000, with
interest at 10.05 percent from BNLC for the total sale price. No gain was
recorded on the sale of the property.

In prior years, BNRR purchased certain rail facilities at and between
Ortonville, Minnesota and Terry, Montana from the South Dakota Rail Authority.
These properties were subsequently sold to BNLC for the recorded net book value
of the property. BNRR received a promissory note from BNLC for the purchase
price of $41 million. Interest at a rate of 10.0 percent is due annually.
Principal is due at maturity on August 31, 2001. No gain or loss was recorded
on the sale of the property.

In 1989, the stock of Santa Fe Financial Holdings ("Financial Holdings") was
contributed to the capital of ATSF. The assets of Financial Holdings include a
demand note receivable from SFP including accrued interest, net of tax. This
note had previously been contributed to the capital of Financial Holdings by
SFP. For financial reporting purposes, this note is presented in the
consolidated financial statements of BNSF Railway as a capital contribution
receivable. The demand note bears interest payable semi-annually at 1.0% above
the monthly average of the effective Federal Funds rate.

Under various plans, BNSF has granted options to employees to purchase its
common stock at a price not less than the fair market value at the date of
grant. Certain employees of BNSF Railway participate in these plans. In
addition, BNSF has other long-term incentive plans administered separately on
behalf of employees which are participated in by certain BNSF Railway

F-20
<PAGE>

employees. These plans include, among other things, incentive compensation,
issuance of restricted stock and a discounted stock purchase program.
Compensation expense is recorded for these plans in accordance with Accounting
Principles Board Opinion 25 and was not material in 1996, 1995 or 1994.

18. QUARTERLY FINANCIAL DATA-UNAUDITED

(Dollars in millions, except per share data)
- -----------------------------------------------------------------------------------------------------------
Fourth Third Second First
------ ----- ------ -----

<S> <C> <C> <C> <C>
1996 (1)
Revenues (2) $2,092 $2,044 $2,024 $2,027
Operating income (3) 461 460 407 374
Net income (4) 271 277 241 223

1995 (1)
Revenues (2) $2,087 $1,455 $1,279 $1,342
Operating income (loss) (3) (5) (182) 275 234 225
Income (loss) before cumulative effect
of change in accounting method (129) 155 137 128
Cumulative effect of change in accounting
method, net of tax (6) - - - (100)
Net income (loss) (4) (129) 155 137 28

</TABLE>

(1) Amounts do not agree to previously reported amounts due to certain
reclassifications between revenues and expenses and the inclusion of ATSF
results.

(2) Amounts previously reported for the first, second and third quarters of
1996 did not include ATSF revenues of $711 million, $729 million and $750
million, respectively. Additionally, includes ATSF revenues for the third
and fourth quarters of 1995 of $73 million and $729 million, respectively.

(3) Amounts previously reported for the first, second and third quarters of
1996 did not include ATSF operating income of $133 million, $143 million
and $168 million, respectively. Additionally, includes ATSF operating
income for the third and fourth quarters of 1995 of $16 million and $123
million, respectively. (4) Amounts previously reported for the first,
second and third quarters of 1996 did not include ATSF net income of $77
million, $79 million and $97 million, respectively. Additionally, includes
ATSF net income for the third and fourth quarters of 1995 of $9 million and
$71 million, respectively.

(5) Results include pre-tax charges of $587 million, $72 million and $12
million for the fourth, third and second quarters of 1995, respectively
related to merger, severance and asset charges as discussed in Note 3.

(6) Effective January 1, 1995, BNSF Railway changed its accounting for
locomotive overhauls. The cumulative effect of this change attributable to
years prior to 1995 was to decrease net income by $100 million.

F-21
<PAGE>

SCHEDULE II

THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN MILLIONS)

Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- --------
Balance at Additions Addition Balance at
Beginning Charged to of ATSF End of
Description of Period Income Accrual (1) Deductions (2) Period (3)
- ----------- ---------- ---------- ----------- -------------- ----------

<S> <C> <C> <C> <C> <C>
December 31, 1996:
Casualty and
environmental liabilities $916 $262 $ - $368 $810
==== ==== ==== ==== ====

December 31, 1995:
Casualty and
environmental liabilities $636 $165 $320 $205 $916
==== ==== ==== ==== ====

December 31, 1994:
Casualty and
environmental liabilities $689 $183 $ - $236 $636
==== ==== ==== ==== ====
</TABLE>

Notes:

(1) Represents ATSF's recorded liability at date of Merger.

(2) Principally represents cash payments.

(3) Classified in the consolidated balance sheets as follows:

1996 1995 1994
---- ---- ----
Casualty and environmental liabilities (current) $267 $290 $221
Casualty and environmental liabilities (noncurrent) 543 626 415
---- ---- ----
$810 $916 $636
==== ==== ====

F-22
<PAGE>

BURLINGTON NORTHERN SANTA FE CORPORATION

INDEX OF EXHIBITS

EXHIBIT
- -------
NUMBER DESCRIPTION
- ------ -----------

2 Agreement and Plan of Merger dated December 30, 1996 between Burlington
Northern Railroad Company and The Atchison, Topeka and Santa Fe Railway
Company.

3.1 Restated Certificate of Incorporation of The Burlington Northern and
Santa Fe Railway Company effective December 31, 1996.

3.2 By-Laws as amended through July 17, 1991. Incorporated by reference to
Exhibit 3.2 to BNRR's Report on Form 10-K for the fiscal year ended
December 31, 1991.

4 BNSF Railway is not filing any instruments evidencing indebtedness
because the total amount of securities authorized under any single such
instrument does not exceed ten percent of BNSF Railway's total assets.
Copies of any such material instruments will be furnished to the
Securities and Exchange Commission upon request.

12 Statement regarding the computation of ratio of earnings to fixed
charges.

27 Financial Data Schedule.

E-1

<PAGE>

EXHIBIT 2

AGREEMENT AND PLAN OF MERGER

BETWEEN

BURLINGTON NORTHERN RAILROAD COMPANY

AND

THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY

AGREEMENT AND PLAN OF MERGER, dated as of December 30, 1996 (the
"Agreement"), between BURLINGTON NORTHERN RAILROAD COMPANY, a Delaware
corporation ("BNRR") and THE ATCHISON, TOPEKA AND SANTA FE RAILWAY COMPANY, a
Delaware corporation ("ATSF").

WHEREAS, the respective Boards of Directors of BNRR and ATSF have resolved
that the transactions described herein are in the best interests of the parties
and their sole stockholder and have approved the transactions described herein;

WHEREAS, all of the outstanding stock of BNRR is owned by Santa Fe Pacific
Corporation ("SFP") and all of the outstanding stock of ATSF is owned by SFP;

WHEREAS, SFP has duly approved, by written consent, the transactions
described herein;

WHEREAS, ATSF, pursuant to Section 251 of the General Corporation Law of
the State of Delaware ("DGCL"), will merge with and into BNRR ("the Merger");
and

WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of section 368 of the
Internal Revenue Code of 1986, as amended.

NOW THEREFORE, in consideration of the promises and the mutual agreements
herein contained, the parties hereto agree as follows:

ARTICLE 1

1.1 The Merger. At the Effective Time (as defined in paragraph 1.2
below), ATSF shall be merged with and into BNRR (the "Merger") in accordance
with the laws of the State of Delaware ("Delaware Law"), whereupon the separate
existence of ATSF shall cease, and BNRR shall be the surviving corporation (the
"Surviving Corporation").
<PAGE>

1.2 Effective Time. The Merger shall become effective at the hour and
on the date specified in the duly executed Certificate of Merger delivered to
and filed with the Secretary of State of the State of Delaware as provided in
Sections 251 and 103 of the DGCL (the "Effective Time"); such filing shall be
made as soon as practicable after the execution of this Agreement.

1.3 Effect of the Merger. From and after the Effective Time, the
Surviving Corporation shall possess all the rights, privileges, powers and
franchises as well of a public as of a private nature and will be subject to all
the restrictions, disabilities and duties of each of ATSF and BNRR and all
property, real, personal and mixed, and all debts due to ATSF or BNRR on
whatever account, as well as for stock subscriptions as all other things in
action or belonging to ATSF or BNRR shall be vested in the Surviving
Corporation; and all property rights, privileges, powers and franchises, and all
and every other interest shall be thereafter as effectually the property of the
Surviving Corporation as they were of ATSF and BNRR, and the title to any real
estate vested by deed or otherwise, under Delaware Law, in ATSF or BNRR, shall
not revert or be in any way impaired by reason of the DGCL; but all rights of
creditors and liens upon any property of ATSF or BNRR shall be preserved
unimpaired, and all debts, liabilities and duties of ATSF and BNRR shall
thenceforth attach to the Surviving Corporation and may be enforced against it
to the same extent as if said debts, liabilities and duties had been incurred or
contracted by it.

ARTICLE 2

2.1 Certificate of Incorporation; By-Laws.

(a) At the Effective Time, the Restated Certificate of Incorporation of
the Surviving Corporation shall be amended to read in its entirety as set forth
in Exhibit A hereto.

(b) The By-laws of BNRR, as in effect at the Effective Time, shall be
the By-laws of the Surviving Corporation until thereafter amended in accordance
with applicable law.

2.2 Directors and Officers.

(a) The directors of the Surviving Corporation at the Effective Time, in
each case to hold office until their respective successors are duly elected and
qualified, or their prior resignation, removal or death, shall be the following:

Robert D. Krebs
Douglas J. Babb
Jeffrey R. Moreland
Denis E. Springer

-2-
<PAGE>

(b) The officers of the Surviving Corporation at the Effective Time, in
each case to hold office until their prior resignation, removal or death in
accordance with the Certificate of Incorporation and By-Laws of the Surviving
Corporation, shall be the following:

Robert D. Krebs Chairman, President and Chief Executive Officer
Douglas J. Babb Senior Vice President and Chief of Staff
James B. Dagnon Senior Vice President - Employee Relations
Donald G. McInnes Senior Vice President and Chief Operations Officer
Jeffrey R. Moreland Senior Vice President - Law and General Counsel
Matthew K. Rose Senior Vice President - Merchandise Business Unit
Charles L. Schultz Senior Vice President - Intermodal and Automotive
Business Unit
Denis E. Springer Senior Vice President and Chief Financial Officer
Gregory T. Swienton Senior Vice President - Coal and Grain Business
Unit
Vincent M. Accardo Vice President - Marketing, Revenue and Financial
Systems
Thad Baham Vice President - Safety
Steve Bobb Vice President - Minerals
Steve Branscum Vice President - Intermodal Marketing
Rollin Bredenberg Vice President - Transportation
Gary L. Crosby Vice President - Litigation
M. David Dealy Vice President - Santa Fe Lines
Fritz Draper Vice President - Intermodal Operations
A. R. (Skip) Endres, Jr. Vice President - Government Relations
John J. Fleps Vice President - Labor Relations
Michael W. Franke Vice President and Chief Engineer
Bruce E. Freeman Vice President - Transportation Systems
Ricci L. Gardner Vice President - Property and Facilities Management
David L. Garin Vice President - Minerals
Frank C. Green Vice President - Internal Audit
Michael L. Holsteen Vice President - Northern Lines
Ernest (Buck) L. Hord Vice President - Operations for UP/SP Lines
John M. Hovis Vice President - Merchandise Operations
Thomas N. Hund Vice President and Controller
Carl R. Ice Vice President and Chief Mechanical Officer
Thomas G. Kraemer Vice President - Coal and Grain Operations
E. (Tay) Lyman, Jr. Vice President - Customer Service and Support
Leslie K. Moll Vice President - Metals
Marsha K. Morgan Vice President - Investor Relations and Secretary
Richard G. Nelson Vice President - Consumer Goods
William E. Nordberg Vice President - Forest Products
Patrick J. Ottensmeyer Vice President - Finance and Treasurer

-3-
<PAGE>

Peter J. Rickershauser Vice President - Marketing for UP/SP Lines
Richard A. Russack Vice President - Corporate Relations
William R. Smith Vice President - Automotive
Gregory W. Stengem Vice President - Burlington Lines
Phillip F. Weaver Vice President - Agricultural Commodities
Richard E. Weicher Vice President and General Counsel
Daniel J. Westerbeck Vice President and General Tax Counsel
Shelley J. Venick General Counsel
Linda Hurt Assistant Vice President - Finance and Assistant
Treasurer
Paul Weyandt Assistant Vice President - Finance and Assistant
Treasurer
Margaret R. Aclin Assistant Secretary
Peter M. Lee Assistant Secretary
Gary L. Reynolds Assistant Secretary
Craig N. Smetko Assistant Secretary
Sarah J. Whitley Assistant Secretary
Jeffrey T. Williams Assistant Secretary

ARTICLE 3

3.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of SFP, ATSF or BNRR:

(a) Each share of common stock, $10 par value, of ATSF (the "ATSF Common
Stock") outstanding immediately prior to the Effective Time and each share of
ATSF Common Stock held by ATSF, or any subsidiary of ATSF, as treasury stock
shall be canceled and no payments or conversions shall be made with respect
thereto.

(b) The shares of common stock, no par value, of BNRR (the "BNRR Common
Stock") outstanding immediately prior to the Effective Time shall be converted
into 1,000 shares of validly issued, fully paid and non-assessable shares of the
common stock, $1.00 par value, of the Surviving Corporation (the "Surviving
Corporation Common Stock").

ARTICLE 4

4.1 Amendment. The parties hereto, by mutual consent, may amend, modify
or supplement this Agreement in such manner as may be agreed upon by them in
writing at any time; provided, however, that no such amendment, modification or
supplement not adopted and approved by SFP shall affect the rights of SFP in a
manner which is materially adverse to SFP, in the sole judgment of the Board of
Directors of SFP, and provided further, that any such amendment, modification or
supplement made subsequent to the adoption and approval of this Agreement by SFP
complies with the provisions of Section 251(d) of the DGCL.

-4-
<PAGE>

4.2 Termination. The parties hereto, by mutual consent, may terminate
this Agreement.

ARTICLE 5

5.1 Counterparts. This Agreement may be executed in one or more
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.

5.2 Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.

5.3 Governing Law. This Agreement shall be governed by, and construed
in accordance with, Delaware Law (without regard to principles of conflicts of
laws).

IN WITNESS WHEREOF, each of the parties hereto, pursuant to authority duly
granted by its Board of Directors has caused this Agreement to be executed on
its behalf as of the day first written above.

THE ATCHISON, TOPEKA AND SANTA FE
RAILROAD COMAPNY

By: ____________________________________
Name: Robert D. Krebs
Title: Chairman, President and Chief
Executive Officer

BURLINGTON NORTHERN RAILROAD COMPANY

By: ____________________________________
Name: Robert D. Krebs
Title: Chairman, President and Chief
Executive Officer

-5-

<PAGE>

EXHIBIT 3.1

RESTATED
CERTIFICATE OF INCORPORATION
OF
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY

FIRST: The name of the Corporation is The Burlington Northern and Santa
Fe Railway Company.

SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New
Castle, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.

THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware as the same exists or may hereafter be amended
("Delaware Law").

FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is one thousand (1,000) shares of common stock, having a
par value of $1.00 per share.

FIFTH: In furtherance and not in limitation of the powers conferred by
law, the Board of Directors is expressly authorized:

1. To make, amend or repeal the By-Laws of the Corporation, subject to
the power of the stockholders of the Corporation having voting power to amend or
repeal By-Laws whether adopted by them or otherwise.

2. To remove at any time any officer elected or appointed by the Board
of Directors by such vote of the Board of Directors as may be provided for in
the By-Laws. Any other officer of the Corporation may be removed at any time by
a vote of the Board of Directors, or by any committee or superior officer upon
whom such power of removal may be conferred by the By-Laws or by a vote of the
Board of Directors.

3. To establish bonus, profit, sharing, stock option, stock purchase,
retirement or other types of incentive or compensation plans for the employees
(including officers and directors) of the Corporation and to fix the terms of
such plans and to determine, or

-1-
<PAGE>

prescribe the method for determining, the persons to participate in any such
plans and the amount of their respective participations.

4. To authorize, and to cause to be executed mortgages, pledges, liens
and charges upon the real and personal property of the Corporation and to issue
obligations secured thereby.

Both stockholders and directors shall have power to hold their
meetings, and the Corporation may have one or more offices, within or without
the State of Delaware, and the books of the Corporation may, subject to the laws
of the State of Delaware, be kept outside of such State at such places as may be
from time to time determined by the Board of Directors.

SEVENTH: (1) A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permitted by Delaware Law.

(2) (a) Each person (and the heirs, executors or administrators of such
person) who was or is a party or is threatened to be made a party to, or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified and held harmless by the Corporation to the fullest extent permitted
by Delaware Law. The right to indemnification conferred in this ARTICLE SEVENTH
shall also include the right to be paid by the Corporation the expenses incurred
in connection with any such proceeding in advance of its final disposition of
the fullest extent permitted by Delaware Law. The right to indemnification
conferred in this ARTICLE SEVENTH shall be a contract right.

(b) The Corporation may, by action of its Board of Directors,
provide indemnification to such of the directors, officers, employees and agents
of the Corporation to such extent and to such effect as the Board of Directors
shall determine to be appropriate and authorized by Delaware Law.

(3) The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any expense, liability or loss
incurred by such person in any such capacity or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under Delaware Law.

-2-
<PAGE>

(4) The rights and authority conferred in this ARTICLE SEVENTH shall not
be exclusive of any other right which any person may otherwise have or hereafter
acquire.

(5) Neither the amendment nor repeal of this ARTICLE SEVENTH, nor the
adoption of any provision of this Certificate of Incorporation or the By-laws of
the Corporation, nor, to the fullest extent permitted by Delaware Law, any
modification of law, shall eliminate or reduce the effect of this ARTICLE
SEVENTH in respect of any acts or omissions occurring prior to such amendment,
repeal, adoption or modification.

EIGHTH: The Corporation reserves the right to amend this Restated
Certificate of Incorporation in any manner permitted by Delaware Law and, with
the sole exception of those rights and powers conferred under the above ARTICLE
SEVENTH, all rights and powers conferred herein on stockholders, directors and
officers, if any, are subject to this reserved power.

-3-

<PAGE>

EXHIBIT 12

THE BURLINGTON NORTHERN and SANTA FE RAILWAY COMPANY and SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN MILLIONS, EXCEPT RATIO AMOUNTS)
(UNAUDITED)

Year Ended
December 31,
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Earnings:

Pre-tax income $1,640 $ 488 $ 769

Add:
Interest and fixed charges,
excluding capitalized interest 99 95 77

Portion of rent under long-term
operating leases representative
of an interest factor 203 175 123

Amortization of capitalized interest 3 1 -

Less: Undistributed equity in earnings
of investments accounted for
under the equity method (12) (6) (4)
------- ------- -------

Total earnings available for fixed charges $1,933 $ 753 $ 965
======= ======= =======
Fixed charges:

Interest and fixed charges $ 112 $ 102 $ 79

Portion of rent under long-term operating
leases representative of an interest
factor 203 175 123
------- ------- -------

Total fixed charges $ 315 $ 277 $ 202
======= ======= =======

Ratio of earnings to fixed charges 6.14x 2.72x(1) 4.78x
======= ======= =======
</TABLE>

(1) Earnings for the year ended December 31, 1995, include merger,
severance and asset charges of $671 million. Excluding these costs, the ratio
would have been 5.16x

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Burlington Northern and Santa Fe Railway Company's Consolidated Financial
Statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 95
<SECURITIES> 0
<RECEIVABLES> 814
<ALLOWANCES> 57
<INVENTORY> 222
<CURRENT-ASSETS> 1,410
<PP&E> 21,470
<DEPRECIATION> 4,306
<TOTAL-ASSETS> 19,662
<CURRENT-LIABILITIES> 2,578
<BONDS> 1,243
0
0
<COMMON> 0
<OTHER-SE> 9,402
<TOTAL-LIABILITY-AND-EQUITY> 19,662
<SALES> 0
<TOTAL-REVENUES> 8,187
<CGS> 0
<TOTAL-COSTS> 6,485
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99
<INCOME-PRETAX> 1,640
<INCOME-TAX> 628
<INCOME-CONTINUING> 1,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,012
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>