BURLINGTON NORTHERN RAILROAD CO, 10-K, 1998-03-31

BURLINGTON NORTHERN RAILROAD CO
10-K, 1998-03-31
RAILROADS, LINE-HAUL OPERATING

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<PAGE>

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

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 1997

[ ] 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
incorporation or organization) Identification No.)

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
Santa Fe Railway Company) Land Grant 3% Bonds, due 2047
Consolidated Mortgage Bonds
9.25%, Series H, due 2006 Great Northern Railway Company
6.55%, Series K, due 2020 General Mortgage Bonds
3.80%, Series L, due 2020 3 1/8%, Series O, due 2000
3.20%, Series M, due 2045 2 5/8%, Series Q, due 2010
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, 1998* 1,000 shares

*The Burlington Northern and Santa Fe Railway Company is a wholly-owned
subsidiary of Burlington Northern Santa Fe Corporation (BNSF); 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 I(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 10

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16

Item 7. Management's Narrative Analysis of Results of Operations 16

Item 7A. Quanitative and Qualitative Disclosures About Market Risk 19

Item 8. Financial Statements and Supplementary Data 20

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21

SIGNATURES 22

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 the Burlington Northern Railroad Company ("BNRR"), was
incorporated in the State of Delaware on January 13, 1961. BNSF Railway is a
subsidiary of Burlington Northern Santa Fe Corporation ("BNSF"). On September
22, 1995, Burlington Northern Inc. ("BNI") and Santa Fe Pacific Corporation
("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. Additionally, on January 2, 1998, BNSF
Railway's parent, Santa Fe Pacific Corporation (SFP), merged with and into BNSF
Railway.

Through March 6, 1998, BNSF also had an equity interest in Santa Fe Pacific
Pipeline Partners, L.P. and its operating subsidiary, which operated a 3,300-
mile refined petroleum products pipeline system in six western and southwestern
states, substantially all of which interest has now been sold. See "PIPELINE
INVESTMENT."

BNSF Railway operates one of the largest railroad systems in the United
States. At December 31, 1997, BNSF Railway had approximately 44,500 employees.

Track Configuration

BNSF Railway operates over a railroad system consisting of, at December 31,
1997, approximately 34,000 route miles of track (excluding, among other things,
second main track), approximately 25,400 miles of which are owned route miles,
including easements, through 28 states and two Canadian provinces.
Approximately 7,800 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, 1997, the total BNSF Railway system (including first,
second, third and fourth main tracks, yard tracks, and sidings) consisted of
approximately 51,000 operated miles of track, all of which were owned by or held
under easement by BNSF Railway except for approximately 8,600 miles operated
under trackage rights agreements with other parties. At December 31, 1997,
approximately 28,000 miles of BNSF Railway's track consisted of 112-pound per
yard or heavier rail, including approximately 18,700 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 (1995 represents pro forma BNSF
Railway):

At December 31,
---------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Diesel Locomotives................. 4,697 4,434 4,277
====== ====== ======
Freight Cars:
Box--general purpose.......... 1,042 1,082 1,204
Box--specially equipped....... 10,533 10,719 10,985
Open Hopper................... 10,617 10,430 10,497
Covered Hopper................ 43,145 44,112 44,840
Gondola....................... 11,845 11,714 11,467
Refrigerator.................. 6,606 6,817 7,216
Autorack...................... 3,588 3,597 3,600
Flat.......................... 5,454 5,508 5,774
Tank.......................... 491 493 505
Caboose....................... 389 451 485
Other......................... 732 732 734
------ ------ ------
Total Freight Cars............ 94,442 95,655 97,307
====== ====== ======
Domestic Containers................ 15,513 15,595 16,230
Trailers........................... 721 821 834
Domestic Chassis................... 5,152 5,273 5,274
Company Service Cars............... 5,196 6,140 6,084
Commuter Passenger Cars............ 141 141 141
</TABLE>

In addition to the containers, trailers, and chassis shown above, BNSF
Railway had under short-term leases 11,603 containers, 2,157 trailers, and
18,262 chassis, at December 31, 1997. In addition to the owned and leased
locomotives identified above, BNSF Railway operated 196 freight locomotives
under power-purchase agreements as of December 31, 1997. The average age from
date of manufacture of the locomotive fleet at December 31, 1997, was 10.45
years; the average age from date of manufacture or remanufacture of the freight
car fleet at December 31, 1997, was 19.93 years . 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
(1995 represents pro forma BNSF Railway):

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
(in millions)
<S> <C> <C> <C>
Maintenance of Way
Rail............................... $ 286 $ 188 $ 164
Ties............................... 230 191 163
Surfacing.......................... 124 130 96
Other.............................. 334 345 215
------ ------ ------
Total Maintenance of Way........ 974 854 638
Equipment.............................. 572 544 284
Terminal and Line Expansion............ 428 447 335
Merger Related and Other............... 208 437 98
------ ------ ------
Total Capital Expenditures............. $2,182 $2,282 $1,355

Less Non-Cash Capital Expenditures(1).. - 48 140
------ ------ ------

Net Cash Capital Expenditures.......... $2,182 $2,234 $1,215
====== ====== ======
</TABLE>

(1) Consists primarily of directly financed equipment acquisitions.

2
<PAGE>

The above table does not include expenditures for equipment financed
through operating leases (principally, locomotives and rolling stock). BNSF
Railway expects 1998 capital expenditures to be slightly over $2.0 billion.
Approximately $1.1 billion of these expenditures will be for maintaining BNSF
Railway's track, signals, bridges and tunnels, and to overhaul locomotives and
freight cars. The remainder will be spent on terminal and line expansions,
information system projects and an additional 180 locomotives. In addition to
these capital expenditures on new locomotives, BNSF Railway will acquire 200 new
locomotives under long-term operating leases in 1998.

As of December 31, 1997, General Electric Company, the Electro-Motive
Division of General Motors Corporation and Boise Locomotive Corporation
performed locomotive maintenance and overhauls for BNSF Railway under various
maintenance agreements that covered approximately 2,000 locomotives. These
agreements require the work to be done at BNSF Railway's facilities using BNSF
Railway employees.

The majority of maintenance of way expenditures for track have been for
rail and tie refurbishment and track resurfacing. The extent of the BNSF Railway
track maintenance program (1995 represents pro forma BNSF Railway) is depicted
in the following table:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Track miles of rail laid: (1) .................. 1,035 1,139 945
Cross ties inserted (thousands)(1) ............. 2,941 3,768 2,974
Track resurfaced (miles)(1) .................... 12,430 12,033 11,088
</TABLE>

(1) Includes expenditures for both maintenance of existing route system and
expansion projects. These expenditures are primarily capitalized.

BNSF Railway anticipates that the 1998 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 million
ties, and the resurfacing of approximately 11,000 miles of track.

Property and Facilities

BNSF Railway operates facilities and equipment to maintain its 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 locomotive servicing and
maintenance, a centralized network operations center for train dispatching and
network operations monitoring and management in Fort Worth, Texas, 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 1997 volume are:

Intermodal Facilities Units
--------------------- -----
<S> <C>
Hobart Yard (Los Angeles).............. 824,000
Corwith Yard (Chicago)................. 663,000
Willow Springs (Illinois).............. 555,000
Chicago Hub Center (Cicero, Illinois).. 403,000
Alliance (Texas)....................... 353,000
Seattle International Gateway (SIG).... 207,000
Tacoma................................. 195,000
</TABLE>

3
<PAGE>

BNSF Railway 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, and Northtown Yard in Minneapolis, Minnesota are BNSF Railway's
largest freight car classification yards.

A substantial portion of all railroad property, real or personal, owned
by BNSF Railway is subject to liens securing, as of December 31, 1997,
approximately $467 million of mortgage bonds. Certain locomotives and rolling
stock of BNSF Railway are subject to equipment obligations, as referred to in
Note 11 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 declined from 1995 to 1996, and increased from 1996 to 1997, as
shown in the table below (1995 represents pro forma BNSF Railway):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Thousand revenue ton-miles/average number of employees .......... 9,769 9,398 8,968
Compensation and benefits expense/thousand revenue ton-miles .... $6.30 $6.23 $6.61
</TABLE>

Labor unions represent approximately 88 percent of BNSF Railway employees
under collective bargaining agreements with 13 different labor organizations.
The collective bargaining agreements reached in 1996 and 1997 as a result of
industry-wide and certain local labor contract negotiations 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.

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.

Business Mix

In serving the Midwest, Pacific Northwest and the Western, Southwestern,
and Southeastern regions and ports 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,
Amarillo, Billings, Birmingham, Cheyenne, Chicago, Corpus Christi, Dallas,
Denver, Des Moines, Duluth/Superior, Fargo/Moorhead, Fort Worth, Galveston,
Houston, Kansas City, Lincoln, Little Rock, Los Angeles, Memphis, Mobile, New
Orleans, Oklahoma City, Omaha, 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
Intermodal Market Extension ("IMX") terminals located at various off-line
points. Major ports served include Galveston, Houston, Long Beach, Los Angeles,
New Orleans, Mobile, Portland, Richmond (Oakland), San Diego, Seattle,
Duluth/Superior, Tacoma and

4
<PAGE>

Vancouver (British Columbia). BNSF Railway also accesses the Mexican market
through the United States/Mexico crossings at Brownsville, Eagle Pass and El
Paso, Texas and San Diego, California and, through an agreement with the Texas
Mexican Railway Company, reaches Laredo, Texas, a major border crossing point.

In 1997, approximately 27 percent of revenues were derived from Intermodal
traffic and approximately 23 percent were derived from the transportation of
Coal. About 13 percent of 1997 revenues reflected the transportation of
Agricultural Commodities, with the balance largely accounted for by the
Chemicals, Forest Products, Consumer Goods, Metals, Automotive, and Minerals
business groups.

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 work jointly to provide 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.

Intermodal 1997 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 (Less-Than-Truckload) carriers including Yellow Freight, Roadway
Express, and Consolidated Freightways.

. Truckload. Truckload traffic represented approximately 15 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.

. International. International business consists primarily of traffic from
steamship companies and accounted for approximately 27 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. Approximately 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, 1997. 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.

BNSF Railway also transports 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 by the
year 2000, opportunities for increased shipments of this low-sulfur coal still
exist. Also, deregulation in the electric utility industry is expected to cause
utilities to seek lower cost fuel sources and boost demand for Powder River
Basin coal.

Other coal shipments originate principally in Wyoming, Colorado, and New
Mexico and are moved to electrical generating stations and industrial plants in
the Midwest and Southwest.

5
<PAGE>

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 to produce 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 Goods. 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.

Metals. The Metals business serves 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
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
produce 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. 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, including highways. 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 foundry and oil
drilling applications.

6
<PAGE>

Freight Statistics. The following tables set forth certain freight
statistics relating to rail operations for the periods indicated. Amounts shown
for 1995 represent pro forma BNSF Railway; 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,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue ton-miles (millions)..................... 424,588 411,059 409,418
Freight revenue per thousand revenue ton-miles... $19.81 $19.71 $19.69
Average haul per ton (miles)..................... 935 875 864
</TABLE>

Revenues

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------ ------ -------
(in millions)
<S> <C> <C> <C>
Intermodal............................ $2,282 $2,039 $1,949
Coal.................................. 1,972 1,973 1,962
Agricultural Commodities.............. 1,087 1,171 1,290
Chemicals............................. 793 765 712
Forest Products....................... 573 556 557
Consumer Goods........................ 505 470 486
Metals................................ 424 413 397
Automotive............................ 422 396 396
Minerals.............................. 352 319 313
------ ------ ------
Total Freight Revenue................. 8,410 8,102 8,062
Other Revenue......................... (1) 38 35
------ ------ ------
Total Revenues........................ $8,409 $8,140 $8,097
====== ====== ======
</TABLE>

Cars/Units

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------ ------ -------
(in thousands)
<S> <C> <C> <C>
Intermodal............................ 2,854 2,570 2,527
Coal.................................. 1,862 1,854 1,878
Agricultural Commodities.............. 577 587 664
Chemicals............................. 467 448 435
Forest Products....................... 335 334 347
Consumer Goods........................ 349 308 332
Metals................................ 374 391 399
Automotive............................ 264 251 264
Minerals.............................. 263 249 257
----- ----- -----
Total Car/Units....................... 7,345 6,992 7,103
===== ===== =====
</TABLE>

Average Revenue Per Car/Unit

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Intermodal............................ $ 800 $ 793 $ 771
Coal.................................. 1,059 1,064 1,045
Agricultural Commodities.............. 1,884 1,995 1,943
Chemicals............................. 1,698 1,708 1,637
Forest Products....................... 1,710 1,665 1,605
Consumer Goods........................ 1,447 1,526 1,464
Metals................................ 1,134 1,056 995
Automotive............................ 1,598 1,578 1,500
Minerals.............................. 1,338 1,281 1,218
------ ------ ------
Average Revenue Per Car/Unit.......... $1,145 $1,159 $1,135
====== ====== ======
</TABLE>

7
<PAGE>

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 Interstate Commerce
Commission, 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 rail 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 will
increase operating and capital costs. Regulations applicable to new and rebuilt
locomotives were issued by the United States Environmental Protection Agency
("EPA") in December 1997. These regulations, which are not yet effective, will
be phased in between 2000 and 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. The State of
California has previously indicated to the EPA that it will support the federal
rule as proposed subject to slight technical modifications; the regulations
issued in December 1997 are similar in most respects to the proposed
regulations.

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 15 to the consolidated financial
statements on pages 33 and 34 of BNSF's 1997 Annual Report to Shareholders,
which information is hereby incorporated by reference.

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.

8
<PAGE>

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. 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 effort of UP as well as from BNSF
Railway's effort to penetrate new markets.

The Surface Transportation Board ("STB") 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, BNSF Railway gained rights to
approximately 4,000 miles of track and purchased more than 335 miles of track
from UP/SP. Additionally, in late 1997, BNSF was granted temporary access to
additional UP/SP lines in the Gulf Coast area by order of the STB. Approval of
the UP/SP transaction created an enhanced competitor to BNSF Railway. The
Board's decision also provided BNSF Railway with greater access to Gulf Coast
and West Coast markets and improved its route structure.

On February 13, 1998, BNSF Railway and UP announced their agreement to
exchange half interests in the two pieces of the former SP rail line between
Houston and New Orleans now separately owned by the two railroads. Under the
agreement, both railroads will have access to all customers, including chemical,
steel, gas and other companies, along the entire line, including former SP
branch lines. The two railroads also agreed to set up a joint regional
dispatching center at Spring, Texas in March 1998 for all of their Gulf Coast
train operations in order to better manage train flows in and through Houston.

BNSF is monitoring the proposed disposition of Consolidated Rail
Corporation (Conrail) between CSX Corporation and Norfolk Southern Corporation
and related filings with the STB 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. In February 1998, Canadian National
Railway Company ("CN") and Illinois Central Corporation ("IC") entered into a
definitive agreement under which CN will acquire IC, subject to STB approval. CN
is Canada's largest railroad and reaches the U.S. cities of Detroit and Chicago,
while IC has operations extending from Chicago to the Gulf of Mexico, and west
through Iowa. BNSF is monitoring the CN/IC proceeding before the STB to
determine any potential competitive impacts.

PIPELINE INVESTMENT

Santa Fe Pacific Pipelines, Inc. ("SFP Pipelines"), an indirect, wholly-
owned subsidiary of BNSF Railway, served as the general partner of Santa Fe
Pacific Pipeline Partners, L.P. (the "Partnership") and of its operating
partnership subsidiary, SFPP, L.P. SFP Pipelines owned a two percent interest as
the Partnership's and SFPP, L.P.'s general partner and an approximate 42 percent
interest as limited partner of the Partnership. As general partner, SFP
Pipelines received two percent of all amounts available for distribution by the
Partnership and an additional incentive depending upon the level of cash
distributions paid to holders of limited partner interests in the Partnership
("Partnership Units"). SFP Pipeline Holdings, Inc., an indirect, wholly-owned
subsidiary of BNSF Railway, ("SFP Holdings"), had outstanding $219 million
principal amount of Variable Rate Exchangeable Debentures due 2010 (the "VREDs")
at December 31, 1997. The VREDs were exchangeable under certain circumstances or
at final maturity, for substantially all of the Partnership Units owned by SFP
Pipelines.

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<PAGE>

SFPP, L.P. Consummation of the transaction caused an "Exchange Event" under the
VRED agreement and VRED holders became eligible to receive either cash equal to
the par value of the VREDs or substantially all of the Kinder Morgan units
received by SFP Pipelines in exchange for its Partnership Units. Kinder Morgan
has agreed to pay and perform all obligations of SFP Holdings related to the
VREDs and has agreed to indemnify and hold harmless BNSF Railway and its
subsidiaries from and against any and all losses, costs, damages, expenses,
liabilities and claims arising or resulting from or relating to, among other
things, the Partnership, SFPP, L.P. or the VREDs.

ITEM 3. Legal Proceedings

Set forth below is a description of certain legal proceedings involving
BNSF and its subsidiaries.

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.

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. In a decision served August 14, 1997, in McCarty Farms, Inc. et
al. v. Burlington Northern Inc., No. 37808, the "STB", successor to the ICC,
found that the challenged rates of BNSF Railway for export wheat and barley were
not shown to exceed a maximum reasonable level. The STB dismissed the proceeding
in its entirety. Plaintiffs have filed petitions to review the STB decision
before the

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<PAGE>

D.C. Circuit and the Montana District Court. The Montana District Court case has
been stayed pending decision by the D. C. Circuit Court where oral argument is
presently scheduled for September 1998.

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 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, and was denied two motions for rehearing before the Court of
Appeals. The Texas Supreme Court subsequently granted SWEPCO's application for
discretionary review of the appellate decision. The matter was argued on October
8, 1997. On March 13, 1998, the Texas Supreme Court affirmed the judgment of the
Court of Appeals in all respects.

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 and
implementing a response with DNR approval.

11
<PAGE>

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 wastewater 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.

Merger-Related Litigation

Numerous complaints were filed arising out of the Agreement and Plan of
Merger dated June 29, 1994, as amended, between BNI and SFP. On June 30, 1994,
shortly after announcement of the proposed BNI-SFP merger ("Merger"), two
purported stockholder class action suits were filed in the Court of Chancery of
the State of Delaware (Miller v. Santa Fe Pacific Corporation, C.A. No. 13587;
Cosentino v. Santa Fe Pacific Corporation, C.A. No. 13588). On July 1, 1994, two
additional purported stockholder class action suits were filed in the Court of
Chancery of the State of Delaware (Fielding v. Santa Fe Pacific Corporation,
C.A. No. 13591; Wadsworth v. Santa Fe Pacific Corporation, C.A. No. 13597).

The actions named as defendants SFP, the individual members of the SFP
Board of Directors, and BNI. In general, the actions variously alleged that
SFP's directors breached their fiduciary duties to the stockholders by agreeing
to the proposed merger for allegedly "grossly inadequate" consideration in light
of recent operating results of SFP, recent trading prices of SFP's common stock
and other alleged factors, by allegedly failing to take all necessary steps to
ensure that stockholders will receive the maximum value realizable for their
shares (including allegedly failing to actively pursue the acquisition of SFP by
other companies or conducting an adequate "market check"), and by allegedly
failing to disclose to stockholders the full extent of the future earnings
potential of SFP, as well as the current value of its assets. The Miller and
Fielding cases further alleged that the proposed Merger was unfairly timed and
structured and, if consummated, would allegedly unfairly deprive the
stockholders of standing to pursue certain pending stockholder derivative
litigation. Plaintiffs also alleged that BNI was responsible for aiding and
abetting the alleged breach of fiduciary duty committed by the SFP Board. The
actions sought certification of a class action on behalf of SFP's stockholders.
In addition, the actions sought injunctive relief against consummation of the
Merger and, in the event that the Merger was consummated, the rescission of the
Merger, an award of compensatory or rescissory damages and other damages,
including court costs and attorneys' fees, an accounting by defendants of all
profits realized by them as a result of the Merger, and various other forms of
relief.

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<PAGE>

On October 6, 1994, shortly after Union Pacific Corporation ("UPC") issued
a press release in which it announced a proposal for UPC to acquire SFP (the
"UPC Proposal"), plaintiffs in the four lawsuits described above filed in the
Court of Chancery of the State of Delaware a Consolidated Amended Complaint
(Miller v. Santa Fe Pacific Corporation, C.A. No. 13587). In their Consolidated
Amended Complaint, plaintiffs repeated the allegations contained in their
earlier lawsuits and further alleged that, in light of the UPC Proposal, SFP's
directors had breached their fiduciary duties by failing to fully inform
themselves about and to adequately explore available alternatives to the merger
with BNI, including the alternative of a merger transaction with UPC, and by
failing to fully inform themselves about the value of SFP. The Consolidated
Amended Complaint sought the same relief sought in plaintiffs' earlier lawsuits
and, in addition, requested that SFP's directors be ordered to explore
alternative transactions and to negotiate in good faith with all interested
persons, including UPC.

Also, on October 6, 1994, five additional purported stockholder class
action suits relating to SFP's proposed participation in the Merger with BNI
were filed in the Court of Chancery of the State of Delaware (Weiss v. Santa Fe
Pacific Corporation, C.A. No. 13779; Lifshitz v. Krebs, C.A. No. 13780; Stein v.
Santa Fe Pacific Corporation, Lewis v. Santa Fe Pacific Corporation, C.A. No.
13783; Abramson v. Lindig, C.A. No. 13784). On October 7, 1994, three more
purported stockholder class action suits relating to SFP's proposed
participation in the Merger with BNI were filed in the Court of Chancery of the
State of Delaware (Graulich v. Santa Fe Pacific Corporation, C.A. No. 13786;
Anderson v. Santa Fe Pacific Corporation, C.A. No. 13787; Green v. Santa Fe
Pacific Corporation, C.A. No. 13788). All of these lawsuits named as defendants
SFP and the individual members of the SFP Board of Directors; the Lifshitz case
further named BNI as a defendant. In general, these actions variously alleged
that, in light of SFP's recent operating results and the UPC Proposal, SFP's
directors breached their fiduciary duties to stockholders by purportedly not
taking the necessary steps to ensure that SFP's stockholders would receive
"maximum value" for their shares of SFP stock, including purportedly refusing to
negotiate with UPC or to "seriously consider" the UPC Proposal and failing to
announce any active auction or open bidding procedures. The actions generally
sought relief that is materially identical to the relief sought in the Miller
case, and in addition sought entry of an order requiring SFP's directors to
immediately undertake an evaluation of SFP's worth as a merger/acquisition
candidate and to establish a process designed to obtain the highest possible
price for SFP, including taking steps to "effectively expose" SFP to the
marketplace in an effort to create an "active auction" in SFP. The Weiss case
further sought entry of an order enjoining SFP's directors from implementing any
poison pill or other device designed to thwart the UPC Proposal or any other
person's proposal to acquire SFP.

The Anderson lawsuit was subsequently withdrawn. On October 14, 1994, the
Chancery Court entered an order consolidating the remaining 11 purported
stockholder class action suits under the heading In Re Santa Fe Pacific
Corporation Shareholder Litigation, C.A. No. 13587 (the "Shareholder
Litigation").

On October 26, 1994, BNI filed a Motion to Dismiss the Consolidated and
Amended Complaint.

On March 6, 1995, plaintiffs in the Shareholder Litigation filed a Revised
Second Consolidated and Amended Complaint, which superseded their previously
filed complaints. The Revised Second Consolidated and Amended Complaint
generally repeated many of the same allegations, and requested relief similar to
that requested in plaintiffs' earlier complaints. In addition, the Revised
Second Consolidated and Amended Complaint alleged that SFP's directors breached
their fiduciary duties: by proceeding with and completing the joint SFP-BNI
Tender Offer; by approving and implementing the Shareholder Rights Plan, which
purportedly resulted in a "premature ending" of the "bidding process" by
allegedly deterring and defeating UPC's acquisition overtures, exempting BNI
from its provisions, and "coercing" SFP stockholders to vote in favor of the
Merger; by approving the termination fee and expense reimbursement provisions of
the Merger Agreement by authorizing the stock repurchase provisions of the
Merger Agreement, which allegedly were designed to "lock-up" the Merger by
providing stockholders with an "illusory promise" that the Merger Agreement
exchange ratio would increase, while reserving SFP's right not to repurchase
such stock; and by purportedly failing to disclose all material facts necessary

13
<PAGE>

for SFP's stockholders to evaluate in an informed manner and vote on the Merger,
including purportedly failing to fully disclose the risks that the ICC would not
approve the Merger and purportedly failing to fully disclose SFP's intentions
with respect to the repurchase of SFP stock, as permitted by the Merger
Agreement, as well as whether there will be a fair opportunity for all SFP
stockholders to "participate" in any SFP stock repurchases, and on what basis.
As additional relief to that requested in the earlier complaints, plaintiffs
requested injunctive and other relief: enjoining consummation of the Merger;
ordering SFP, SFP's directors, and BNI to make unspecified supplemental
disclosures to stockholders; requiring SFP to conduct a new vote on the Merger
subsequent to such disclosures; enjoining SFP from improperly or
discriminatorily implementing the Shareholder Rights Plan or any other
"defensive" tactic; ordering SFP's directors to take all appropriate steps to
enhance SFP's value and attractiveness as a merger or acquisition candidate,
including "effectively exposing" SFP to the marketplace by means of an active
auction on a "level playing field"; and declaring the termination fee and
expense reimbursement provisions of the Merger Agreement invalid and
unenforceable.

On March 13, 1995, SFP and SFP's directors filed a motion to dismiss the
Shareholder Litigation on the grounds that the Plaintiffs failed to state a
cause of action upon which relief may be granted. BNI also filed a motion to
dismiss the Revised Second Consolidated and Amended Complaint. On May 31, 1995,
the Delaware Chancery Court rendered its decision granting the motion to dismiss
that was filed by SFP and SFP's directors on March 13, 1995 and the motion to
dismiss filed by BNI. The plaintiffs appealed the dismissal to the Delaware
Supreme Court.

On November 22, 1995, the Delaware Supreme Court issued an opinion that
affirmed in part and reversed in part the May 31, 1995 decision of the Delaware
Chancery Court. The Delaware Supreme Court reversed the Chancery Court's
dismissal of plaintiffs' claims that, in taking the alleged ''defensive''
actions identified in the Revised Second Consolidated and Amended Complaint,
including approval and implementation of the Shareholder Rights Plan, SFP's
directors violated their fiduciary duties to stockholders. The Delaware Supreme
Court affirmed the Chancery Court's dismissal of all other claims asserted by
plaintiffs in the litigation, including all claims against BNI.

On December 11, 1995, the SFP defendants filed with the Delaware Chancery
Court a motion for summary judgment against plaintiffs' remaining claims in the
Shareholder Litigation, which motion is pending. On December 29, 1995, the SFP
defendants filed their Answer to plaintiffs' Revised Second Consolidated and
Amended Complaint.

BNSF Railway believes this lawsuit is meritless and continues to oppose it
vigorously.

Crow Reservation Crossing Accident Case

In November 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. On August 19, 1997, pursuant to the request of
plaintiffs, the Tribal Court entered an amended judgment reducing the amount of
the judgment from $250 million to $25 million.

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<PAGE>

BNSF Railway has filed an appeal to the Crow Court of Appeals in and for
the Crow Indian Reservation seeking, 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. Following denial of BNSF Railway's petition for rehearing, BNSF Railway
petitioned the United States Supreme Court for a writ of certiorari with respect
to the Ninth Circuit's decision on May 16, 1997. On October 6, 1997, the
Supreme Court issued an order in which it granted BNSF Railway's petition,
vacated the Ninth Circuit's judgment and remanded the case to the Ninth Circuit
for further consideration in light of the Supreme Court's decision in Strate v.
A-1 Contractors, 117 S. Ct. 1404 (1997). In light of the reduction of the
judgment against BNSF Railway to $25 million, this matter is no longer
considered a possible material legal proceeding and therefore no further
information will be given as to this matter.

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 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,
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.

Reference is made to Note 6 to the consolidated financial statements
incorporated herein for information concerning certain pending administrative
appeals with the Internal Revenue Service, which information is hereby
incorporated by reference.

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PART II

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

All of BNSF Railway's common stock is owned by BNSF 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
(BNSF Railway, Registrant or Company). BNSF Railway was formerly known as the
Burlington Northern Railroad Company (BNRR). On December 31, 1996, The Atchison,
Topeka and Santa Fe Railway Company (ATSF) merged with and into Burlington
Northern Railroad Company (BNRR) and the name of the surviving entity, BNRR, was
changed to The Burlington Northern and Santa Fe Railway Company. Additionally,
on January 2, 1998, BNSF Railway's parent, Santa Fe Pacific Corporation (SFP),
merged with and into BNSF Railway.

BNSF Railway is a direct 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 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 of ATSF into BNRR and the subsequent
merger of SFP into BNSF Railway were treated as a combination of subsidiaries
for the periods they were under common control. Accordingly, the consolidated
balance sheets at December 31, 1997 and 1996 and the consolidated statements of
income, cash flows and changes in stockholder's equity for the years ended
December 31, 1997, 1996 and 1995 have been adjusted to include the results of
SFP and ATSF from September 22, 1995. As a result, the amounts reported in the
consolidated financial statements of BNSF Railway will differ from amounts
reported in BNSF Railway's Form 10-K for the year ended December 31, 1996 and
Forms 10-Q for the quarters ended March 31, June 30 and September 30, 1997.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

BNSF Railway recorded net income for 1997 of $929 million, compared with
net income of $919 million for 1996. The $10 million increase in net income is
primarily due to improved operating results largely offset by a fourth quarter
special charge of $90 million ($57 million after tax) principally related to the
consolidation of union clerical functions. Improved operating results in 1997
came despite severe weather conditions in the first quarter of 1997 throughout
the Northern Plains and the Pacific Northwest (PNW). The financial impact of
recurring and protracted outages on many parts of the system, the cost of
repairing track, signals and equipment, and the operating inefficiencies caused
by the weather is virtually impossible to measure with precision. However, the
Company estimates that the severe weather in the first quarter of 1997 resulted
in lost revenue opportunities of approximately $100 million and increased
operating expenses by at least $50 million.

Excluding the fourth quarter special charge, net income for 1997 was $986
million compared with 1996 net income of $919 million.

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REVENUE TABLE

The following table presents BNSF Railway's revenue information by
commodity for the years ended December 31, 1997 and 1996 includes certain
reclassifications of prior year information to conform to current year
presentation.

Revenue
Revenue Per Thousand
Revenue Ton Miles (RTM) RTM
--------------- ---------------- -------------
1997 1996 1997 1996 1997 1996
------ ------ ------- ------- ------ ------
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C> <C>
Intermodal................... $2,282 $2,039 79,964 71,262 $28.54 $28.61
Coal......................... 1,972 1,973 169,776 169,380 11.62 11.65
Agricultural Commodities..... 1,087 1,171 57,039 59,601 19.06 19.65
Chemicals.................... 793 765 30,750 28,896 25.79 26.47
Forest Products.............. 573 556 25,876 25,140 22.14 22.12
Consumer Goods............... 505 470 19,814 18,201 25.49 25.82
Metals....................... 424 413 19,958 20,199 21.24 20.45
Automotive................... 422 396 7,102 6,062 59.42 65.32
Minerals..................... 352 319 14,309 12,318 24.60 25.90
Other........................ (1) 38 -- -- -- --
------ ------ ------- ------- ------ ------
Total....................... $8,409 $8,140 424,588 411,059 $19.81 $19.71
====== ====== ======= ======= ====== ======
</TABLE>

REVENUES

Total revenues for 1997 were $8,409 million or 3 percent higher compared
with revenues of $8,140 million for 1996. The $269 million increase primarily
reflects increases in the intermodal, consumer goods, minerals, chemicals,
automotive, forest products and metals segments partially offset by lower
agricultural commodities revenues. Revenue per thousand revenue ton miles, a key
performance statistic, increased slightly in 1997 to $19.81 from $19.71 in 1996.
During 1997, BNSF Railway's share of the western United States (U.S.) rail
traffic market, based on reporting to the Association of American Railroads,
increased 1.8 points to 41.4 percent.

Intermodal revenues improved $243 million or 12 percent compared with 1996,
due to increased volume growth in the Direct, International, Truckload, and IMC
segments. The Direct segment experienced a 14 percent growth in revenues
primarily due to an 18 percent gain in loadings. Direct segment growth was due
to volume increases from less than truckload (LTL) shipments led by Yellow
Freight, Consolidated Freightways and Roadway. LTL volume from Yellow Freight,
Consolidated Freightways, and Roadway has grown substantially all year with
growth accelerating in the 2nd, 3rd, and 4th quarters in particular due to
Yellow Freight's change of operations completed in April 1997. International
revenues increased 10 percent from 1996 due to an 8 percent increase in units
moved. International growth has been the result of a strong import economy and
increased market share by steamship lines such as Hyundai, OOCL, and Cosco that
utilize BNSF Railway. Truckload revenues increased 21 percent due to a 20
percent increase in loadings, primarily attributable to strength in the
Company's Chicago to California and Southeast to California corridors.

Agricultural Commodities revenues were $84 million lower, or 7 percent,
than 1996, due primarily to a decrease in shipments of wheat for export in the
first and second quarters due to the U.S. uncompetitiveness in the world market
and severe weather conditions in the Northern Plains and PNW in the first
quarter. Some of the volume losses were offset by shorter haul, lower revenue
movements from the southern U.S. plains wheat region. Agricultural commodities
revenues were also unfavorably impacted by lower revenue per car for corn
movements and volume declines in barley traffic.

Chemicals revenues increased $28 million, or 4 percent, primarily due
to higher demand for petroleum and plastic products. Chemicals carloadings
increased 4 percent due to additional traffic from Texas Gulf Coast shippers.
Rate increases in petroleum products offset average revenue per car decreases in
agricultural minerals and industrial products.

17
<PAGE>

Consumer Goods revenues were $35 million higher, or 7 percent, as compared
with 1996 primarily due to growth in the government and machinery and bulk foods
segments. Overall consumer goods carloadings increased 13 percent. Volume gains
in bulk foods were the result of strong corn syrup and sugar loadings, while
gains in government and machinery was the result of special moves for Boeing and
additional military movements.

Metals revenues increased $11 million, or 3 percent, due to a 4 percent
increase in revenue per revenue ton mile. Revenue per car gains were realized in
steel due to a shift in traffic mix away from scrap to sheet steel and
structural products.

Automotive revenues increased $26 million, or 7 percent, due to a 5 percent
volume gain in motor vehicle and vehicle parts traffic. BNSF Railway experienced
gains in units moved for Honda and General Motors which were partially offset by
reduced Ford shipments. Revenue per revenue ton mile decreased 9 percent due to
changes in the traffic mix.

Minerals revenues increased $33 million, or 10 percent, compared with 1996
due primarily to a 6 percent increase in shipments. Volume gains in clay and
aggregates, sand, rock and specialty minerals and sodium compounds were
partially offset by a decrease in shipments of cement, gypsum and lime. Clay and
aggregates revenue increases were due to increased movements from Wyoming
producers. Rock and specialty minerals volume gains were led by improvements in
crushed stone from Texas origins. Additional loadings in the sodium compounds
were the result of specific business initiatives to increase the Company's
participation in the market.

EXPENSES

Total operating expenses for 1997 were $6,643 million or $250 million
higher compared with expenses of $6,393 million for 1996. As discussed in Note 3
to BNSF Railway's consolidated financial statements: Special charges, the
Company recorded a $90 million ($56 million after-tax) special charge in the
fourth quarter of 1997 primarily related to the consolidation of union clerical
functions. Excluding the special charge, operating expenses for 1997 were $6,553
million, $160 million or 3 percent higher than 1996. The adjusted operating
ratio for 1997 was 77.9 percent, compared with an operating ratio of 78.5
percent for 1996.

Compensation and benefit expenses of $2,673 million were $112 million or 4
percent higher than 1996. A majority of the increase was due to higher costs
associated with weather-related repairs to track and equipment and slower
operations. Additionally, wages were higher due to volume related increases in
train crew costs and because of 1997 wage increases to both salaried and union
employees.

Purchased services expenses of $866 million increased $34 million, or 4
percent, compared with 1996 due to higher ramping and drayage costs related to
increased intermodal volumes. Joint facility costs were also higher due to
operations over trackage rights gained as a condition of the merger of UP-SP.
The above were partially offset by lower professional service expenses.

Equipment rents expenses of $820 million were $84 million, or 11 percent,
higher than 1996. Lower equipment utilization and higher volumes resulted in
increased locomotive rents and higher time and mileage expenses for rail car and
intermodal trailers and flat cars. Additionally, equipment-related performance
penalties for grain increased $19 million from 1996.

Fuel expenses of $747 million were $20 million higher than in 1996 due to a
1 percent increase in the average price paid per gallon of diesel fuel as well
as a 2 percent increase in consumption due to volume. Gross ton miles per gallon
of fuel increased by 2 percent to 711 gross ton miles per gallon due to
additional new, fuel-efficient locomotives and the adoption of more fuel
efficient operating practices.

18
<PAGE>

Materials and other expenses of $675 million were $102 million lower than
1996 partially due to lower derailment and personal injury expenses reflecting
the continuing benefits of employee safety programs. Additionally, other
expenses were reduced by income from the sale of signboard easements and tax
incentives from the state of Nebraska related to investment and employment
levels in the state.

Interest expense with external and related parties of $281 million was $6
million higher than in 1996, primarily due to higher debt levels, which
increased from $4,502 million at December 31, 1996 to $4,921 million at December
31, 1997.

Other income (expense), net was $12 million lower than 1996. The decrease
is due to higher fees from the sale of accounts receivable reflecting an
increase in receivables sold and lower profits from land sales. See discussion
of Sale of Pipeline Partnerships in Note 4 to the consolidated financial
statements.

Income tax expense of $561 million was $9 million lower in 1997 due to a
lower effective tax rate due to the adjustments to prior years' tax estimates.

ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk

The Company, in the ordinary course of business, utilizes various financial
instruments which inherently have some degree of market risk. The quantitative
information presented below and the additional qualitative information presented
in the Notes 12 and Note 13 to BNSF Railway's consolidated financial statements,
incorporated by reference herein, describe significant aspects of the Company's
financial instrument programs which have material market risk.

Interest Rate Sensitivity

The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including debt
obligations as of December 31, 1997. The table below presents principal cash
flows and related weighted average interest rates by contractual maturity dates.

Long-term Debt

<TABLE>
<CAPTION>
Maturity Date
---------------------------------------------
1998 1999 2000 2001 2002 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt (in millions)...... $108 $256 $138 $204 $258 $1,894 $2,858 $3,000
Average Interest Rate............. 7.78% 7.46% 6.47% 7.96% 7.16% 8.08% 7.84% --
</TABLE>

Commodity Price Sensitivity

BNSF Railway has a program to hedge against fluctuations in the price of
its diesel fuel purchases. This program includes forward purchases for delivery
at fueling facilities, and various commodity swap and collar transactions which
are accounted for as hedges. Swap transactions are typically based on the price
of pipeline delivery Gulf Coast #2 heating oil and require the Company to
purchase a defined quantity at a defined price. Swap transactions are generally
settled in cash with the counterparty. Based on historical information, the
Company believes there is a significant correlation between the market prices of
diesel fuel and Gulf Coast #2 heating oil.

19
<PAGE>

The table below provides information about the Company's diesel fuel
hedging instruments that are sensitive to changes in commodity prices. For
diesel fuel swaps and forward purchase contracts the table presents notional
amounts in gallons and the weighted average contract price by contractual
maturity date as of December 31, 1997. The prices included in the table below,
do not include taxes, transportation costs, certain other fuel handling costs
and any differences which may occur from time to time between the prices of
commodities hedged and the purchase price of BNSF Railway's diesel fuel.

<TABLE>
<CAPTION>
Maturity Date
-------------------------
1998 1999 2000 Total Fair Value(1)
------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Diesel Fuel Swaps:
Gallons (in millions).................... 479 302 189 970 ($24)
Weighted average price per gallon........ $0.5384 $0.5207 $0.5174 $.05288 --

Diesel Fuel Forward Purchase Contracts:
Gallons (in millions).................... 144 -- -- 144 $ 2
Weighted average price per gallon........ $0.4790 -- -- $0.4790 --
</TABLE>

(1) Represents unrealized gain (loss), in millions, based on the price of Gulf
Coast #2 heating oil at December 31, 1997.

Additionally, at December 31, 1997, the Company maintained fuel inventories
for use in normal operations which were not material to the Company's overall
financial position and therefore represented no significant market exposure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The consolidated financial statements of BNSF Railway and the reports thereon of
Price Waterhouse LLP and Coopers & Lybrand L.L.P. are set forth on pages F-1 to
F-22.

ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

None.

20
<PAGE>

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, 1997................................................... F-3

Consolidated Balance Sheet at December 31, 1997 and 1996.............. F-4

Consolidated Statement of Cash Flows for the three years
ended December 31, 1997............................................. F-5

Consolidated Statement of Changes in Stockholder's Equity
for the three years ended December 31, 1997......................... F-6

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

2. Consolidated Financial Statement Schedules for the three years ended
December 31, 1997

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

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

Schedule II - Valuation and Qualifying Accounts....................... F-23

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, 1997, or subsequently.

21
<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, 1998.

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, 1998

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, 1998

/s/ DENIS E. SPRINGER Senior Vice President and
- ------------------------------- Chief Financial Officer
Denis E. Springer (Principal Financial Officer)
and Director March 31, 1998

/s/ THOMAS N. HUND Vice President and Controller
- ------------------------------- (Principal Accounting Officer) March 31, 1998
Thomas N. Hund

/s/ DOUGLAS J. BABB Director March 31, 1998
- -------------------------------
Douglas J. Babb

/s/ JEFFREY R. MORELAND Director March 31, 1998
- -------------------------------
Jeffrey R. Moreland

Dated: March 31, 1998

22
<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 years ended
December 31, 1997 and 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, 1997 and 1996 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1997, 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 audits. We conducted our audits 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 audits provide a reasonable basis for the opinion expressed
above.

Price Waterhouse LLP
Chicago, Illinois
March 31, 1998

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 consolidated financial statements and the financial
statement schedule of The Burlington Northern and Santa Fe Railway Company and
Subsidiaries for the year ended December 31, 1995, listed in Item 14(a) 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
The Burlington Northern and Santa Fe Railway Company and Subsidiaries for the
year 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 7 to the consolidated financial statements, the Company
changed its method of accounting for periodic major locomotive overhauls in
1995.

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 and Subsidiaries
(Dollars in millions)

Year ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues......................................... $8,409 $8,140 $6,117
Operating expenses:
Compensation and benefits....................... 2,673 2,561 2,067
Purchased services.............................. 866 832 547
Equipment rents................................. 820 736 540
Depreciation and amortization................... 772 760 520
Fuel............................................ 747 727 480
Materials and other............................. 675 777 702
Special charges................................. 90 - 735
------ ------ ------

Total operating expenses...................... 6,643 6,393 5,591
- ----------------------------------------------------------------------------------

Operating income................................. 1,766 1,747 526
Interest expense................................. 185 183 211
Interest expense, related parties................ 96 92 8
Other income (expense), net...................... 5 17 29
- ----------------------------------------------------------------------------------
Income before income taxes....................... 1,490 1,489 336

Income tax expense............................... 561 570 137
- ----------------------------------------------------------------------------------

Income before extraordinary item and cumulative
effect of change in accounting method........... 929 919 199
Extraordinary item, loss on early retirement
of debt, net of tax............................. - - (6)
Cumulative effect of change in accounting
method, net of tax.............................. - - (100)
------ ------ ------

Net income....................................... $ 929 $ 919 $ 93
- ----------------------------------------------------------------------------------

</TABLE>
See accompanying notes to consolidated financial statements.

F-3
<PAGE>

Consolidated Balance Sheet
The Burlington Northern and Santa Fe Railway Company and Subsidiaries
(Dollars in millions)

<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:

Cash and cash equivalents............................. $ - $ 20
Accounts receivable, net.............................. 632 626
Materials and supplies................................ 205 222
Current portion of deferred income taxes.............. 333 307
Other current assets.................................. 27 41
- ----------------------------------------------------------------------------------

Total current assets................................ 1,197 1,216

Property and equipment, net............................ 19,152 17,574
Other assets........................................... 850 844
------- -------

Total assets...................................... $21,199 $19,634
- ----------------------------------------------------------------------------------
Liabilities and Stockholder's Equity

Current liabilities:

Accounts payable and other current liabilities........ $ 1,981 $ 2,168
Long-term debt due within one year.................... 108 165
- ----------------------------------------------------------------------------------

Total current liabilities........................... 2,089 2,333

Long-term debt......................................... 2,750 2,551
Intercompany notes payable............................. 2,063 1,786
Deferred income taxes.................................. 5,172 4,721
Casualty and environmental reserves.................... 448 543
Employee merger and separation costs................... 469 466

Other liabilities...................................... 1,185 1,270
------- -------

Total liabilities................................... 14,176 13,670
- ----------------------------------------------------------------------------------
Commitments and contingencies (see Notes 13 and 14)

Stockholder's equity:

Common stock, $1 par value, (1,000 shares authorized
issued and outstanding) and paid-in capital......... 4,699 4,569
Retained earnings..................................... 2,324 1,395
------- -------
Total stockholder's equity.......................... 7,023 5,964
------- -------

Total liabilities and stockholder's equity........ $21,199 $19,634
- ----------------------------------------------------------------------------------

</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

Consolidated Statement of Cash Flows
The Burlington Northern and Santa Fe Railway Company and Subsidiaries
(Dollars in millions)

Year ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities

Net income.............................................. $ 929 $ 919 $ 93
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting method...... - - 100
Depreciation and amortization......................... 772 760 520
Deferred income taxes................................. 451 450 (111)
Special charges....................................... 90 - 735
Employee merger and separation costs paid............. (116) (183) (118)
Other, net............................................ (93) (93) 54
Sale of accounts receivable........................... 301 40 -
Changes in working capital............................ (454) 51 143
------- ------- -------

Net cash provided by operating activities........... 1,880 1,994 1,416
- ------------------------------------------------------------------------------------------
Investing activities

Cash used for capital expenditures...................... (2,182) (2,234) (890)
Other, net.............................................. (146) (4) (476)
------- ------- -------

Net cash used for investing activities................ (2,328) (2,238) (1,366)
- ------------------------------------------------------------------------------------------
Financing activities

Net increase (decrease) in commercial paper............. - (224) 134
Proceeds from issuance of long-term debt................ 327 251 561
Payments on long-term debt.............................. (177) (68) (2,071)
Intercompany notes payable.............................. 277 331 1,450
Other, net.............................................. 1 (2) (125)
------- ------- -------

Net cash provided by (used for) financing activities.. 428 288 (51)
- ------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents.................... (20) (6) (1)
Cash and cash equivalents:

Beginning of year....................................... 20 26 27
------- ------- -------

End of year............................................. $ - $ 20 $ 26
- ------------------------------------------------------------------------------------------
Supplemental cash flow information

Interest paid, net of amounts capitalized............... $ 207 $ 194 $ 189
Income taxes paid, net of refunds....................... 232 8 252
Directly financed asset acquisitions.................... - 43 140
- ------------------------------------------------------------------------------------------
</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 and Subsidiaries
(Shares in thousands. Dollars in millions)

- ----------------------------------------------------------------------------------------
Common
Stock and Capital
Paid-in Retained Contribution
Capital Earnings Receivable Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.......... $ 1,191 $ 1,762 $ - $ 2,953
Merger of ATSF with BNRR.............. 8,859 - (3,558) 5,301
Merger of SFP with BNSF Railway....... (5,481) (1,308) 3,558 (3,231)
Dividends............................. - (97) - (97)
Cost to equity investment adjustment.. - 26 - 26
Net income............................ - 93 - 93
- ----------------------------------------------------------------------------------------
Balance at December 31, 1995.......... 4,569 476 - 5,045
Net income............................ - 919 - 919
- ----------------------------------------------------------------------------------------
Balance at December 31, 1996.......... 4,569 1,395 - 5,964
Capital Contribution from BNSF........ 130 - - 130
Net income............................ - 929 - 929
------- ------- ------- -------
Balance at December 31, 1997.......... $ 4,699 $ 2,324 $ - $ 7,023
- ----------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

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

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 subsidiaries (BNSF
Railway, Registrant or Company). BNSF Railway was formerly known as the
Burlington Northern Railroad Company (BNRR). On December 31, 1996, The Atchison,
Topeka and Santa Fe Railway Company (ATSF) merged with and into Burlington
Northern Railroad Company (BNRR) and the name of the surviving entity, BNRR, was
changed to The Burlington Northern and Santa Fe Railway Company. Additionally,
on January 2, 1998, BNSF Railway's parent, Santa Fe Pacific Corporation (SFP),
merged with and into BNSF Railway.

BNSF Railway is a direct 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 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 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 of ATSF into BNRR and the subsequent merger
of SFP into BNSF Railway were treated as a combination of subsidiaries for the
periods they were under common control. Accordingly, the consolidated balance
sheets at December 31, 1997 and 1996 and the consolidated statements of income,
cash flows and changes in stockholder's equity for the years ended December 31,
1997, 1996 and 1995 have been adjusted to include the results of SFP and ATSF
from September 22, 1995. As a result, the amounts reported in the consolidated
financial statements of BNSF Railway will differ from amounts reported in BNSF
Railway's Form 10-K for the year ended December 31, 1996 and Forms 10-Q for the
quarters ended March 31, June 30 and September 30, 1997.

All significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES

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.

F-7
<PAGE>

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.

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 SFP and 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 SFP

On June 29, 1994, BNI and SFP 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 (the Merger). 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 on December 30, 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 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 SFP and 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 SFP and ATSF, together with the historical cost balances recorded
upon Merger consummation, were as follows (in millions):

- --------------------------------------------------------------------------------
<S> <C>
Property and equipment, net.. $ 9,409
Other assets................. 886
Deferred income taxes........ (2,936)
Long-term debt............... (2,034)
Other liabilities............ (2,006)
-------

Net assets acquired......... $ 3,319
- --------------------------------------------------------------------------------

</TABLE>

F-8
<PAGE>

The purchase price allocation included $138 million for anticipated
nonrecurring costs and expenses for severance and relocation of prior SFP
employees and the planned disposition of excess SFP office space and other SFP
assets.

The consolidated pro forma results presented below were prepared as if the
Merger had occurred on January 1, 1995 and include the historical results of BNI
and SFP, excluding the after tax effect of $309 million for merger-related
charges recorded by BNI in 1995. Additionally, the consolidated pro forma
results include the effects of purchase accounting adjustments and the Tender
Offer. 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 January 1, 1995 or of future results of operations of the combined
entities (dollars in millions):

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

Revenues........................... $8,097
Operating expenses................. 6,771
Income before extraordinary items.. 597
Net income(1)...................... 494

</TABLE>

(1) Pro forma results include approximately $230 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 years prior to 1995 and a $25 million reduction for the effect of the change
on 1995.
- --------------------------------------------------------------------------------

3. SPECIAL CHARGES

Included in the Consolidated Statement of Income for 1997 and 1995 are operating
expenses of $90 million and $735 million, respectively, related to special
charges.

1995 SPECIAL CHARGE

Significant components of the 1995 charge are as follows:

Employee-related costs of $287 million were recorded for anticipated
involuntary separations related to BNSF Railway's plan to centralize its union
clerical functions. The clerical consolidation plan was approved by management
in 1995 and implementation of the plan began in 1996. The Company and union
entered into an implementation agreement in 1995 which allows BNSF Railway to
abolish positions and provide separation benefits to affected employees.
Benefits paid to affected employees are in the form of lump-sum payments or
payments made over several years depending upon seniority level and election of
the employee.

Costs of $254 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 of $231 million 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 and expenses related
to restricted stock which vested upon approval of the Merger. 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 disposition
date, less estimated net proceeds. Approximately 75 line segments, covering
3,300 miles of former BNI lines were included, of which approximately 2,800
miles were disposed of through 1997. Remaining costs of $89 million included in
the $735 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.

F-9
<PAGE>

Additional accruals of $138 million were recorded through purchase accounting
related to former SFP 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.

1997 SPECIAL CHARGE

In the fourth quarter of 1997, the Company recorded a $90 million pre-tax
special charge. Approximately $65 million of the charge related to the
consolidation of union clerical employees and the remainder of the charge
related to severance and other costs for exempt employees. As discussed above,
BNSF Railway recorded an initial charge of $287 million in 1995 for the
consolidation of clerical functions. However, the 1995 charge excluded costs
associated with voluntary severances for employees who were given the
opportunity to relocate and follow their work, but elected severance. During the
fourth quarter of 1997, the Company completed substantially all of the
consolidation from field locations. All voluntary severances associated with the
plan have now been completed. Remaining clerical positions to be eliminated by
the Company will be at central locations and will result in involuntary
separations. The Company anticipates that completion of the plan will result in
the elimination of 1,800 employees including 1,600 permanent positions.
Approximately 1,250 positions have been eliminated through 1997 and the
remaining position eliminations are anticipated to occur in 1998 and early 1999.
The costs to complete the consolidation, including future involuntary
severances, have now been provided for by the 1995 and 1997 charges.
Additionally, the Company has relocated approximately 350 clerical employees
from field to central locations. Relocation costs have been charged to operating
expense in the period incurred.

LIABILITY BALANCE AND ACTIVITY

Current and long-term employee merger and separation liabilities totaling $551
million are included in the consolidated balance sheet at December 31, 1997 and
principally represent employee-related costs for the centralization of clerical
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 1997, BNSF Railway made $116 million of employee merger and separation
payments principally related to the reduction of approximately 750 clerical
employees, payments of salaried employee separations, and deferred benefits for
ATSF conductors, trainmen and locomotive engineers. At December 31, 1997, $82
million of the remaining accrual is included within current liabilities for
anticipated costs to be paid in 1998. 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 the former ATSF which will be
paid upon the employees' separation or retirement, as well as certain benefits
for clerical employees which will be paid on an installment basis, generally
over five to ten years or in some cases through retirement.

4. SALE OF INVESTMENT IN PIPELINE PARTNERSHIPS

F-10
<PAGE>

As general partner, SFP Pipelines received two percent of all amounts available
for distribution by the Partnership and an additional incentive depending upon
the level of cash distributions paid to holders of limited partner interests in
the Partnership ("Partnership Units"). SFP Pipeline Holdings, Inc., an indirect,
wholly-owned subsidiary of BNSF Railway, ("SFP Holdings"), had outstanding $219
million principal amount of Variable Rate Exchangeable Debentures due 2010 (the
"VREDs") at December 31, 1997. The VREDs were exchangeable under certain
circumstances or at final maturity, for substantially all of the Partnership
Units owned by SFP Pipelines.

On October 18, 1997, SFP Pipelines and SFP Holdings, entered into an agreement
with Kinder Morgan Energy Partners, L.P. ("Kinder Morgan") pursuant to which
Kinder Morgan acquired substantially all of SFP Pipelines' interests in the
Partnership and SFPP, L.P. for of approximately $84 million on March 6, 1998.
In addition, the agreement called for the interest of SFP Pipelines in SFPP,
L.P. to be partially redeemed for a cash distribution of $5.8 million, with SFP
Pipelines retaining only a .5% special limited partnership interest in SFPP,
L.P. Consummation of the transaction caused an "Exchange Event" under the VRED
agreement and VRED holders became eligible to receive either cash equal to the
par value of the VREDs or substantially all of the Kinder Morgan units received
by SFP Pipelines in exchange for its Partnership Units. Kinder Morgan has
agreed to pay and perform all obligations of SFP Holdings related to the VREDs
and has agreed to indemnify and hold harmless BNSF Railway and its subsidiaries
from and against any and all losses, costs, damages, expenses, liabilities and
claims arising or resulting from or relating to, among other things, the
Partnership, SFPP, L.P. or the VREDs.

5. OTHER INCOME (EXPENSE), NET

Other income (expense), net includes the following (in millions):
<TABLE>
<CAPTION>

Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>

Equity in earnings of Pipeline Partnerships.. $ 30 $ 24 $ 9
Gain on property dispositions................ 14 23 12
Accounts receivable sale fees................ (27) (14) (4)
Interest income.............................. 1 2 2
Miscellaneous, net........................... (13) (18) 10
----- ----- -----

Total....................................... $ 5 $ 17 $ 29
- -----------------------------------------------------------------------------

</TABLE>

6. INCOME TAXES

Income tax expense, excluding the 1995 cumulative effect of change in accounting
method and extraordinary item, was as follows (in millions):

Year ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>

Current:

Federal................. $ 104 $ 95 $ 216
State................... 6 30 32
----- ----- -----

Total................... 110 125 248
- -----------------------------------------------------------------------------
Deferred:
Federal................. 365 398 (100)
State................... 86 47 (11)
----- ----- -----

451 445 (111)
----- ----- -----

Total................... $ 561 $ 570 $ 137
- -----------------------------------------------------------------------------

</TABLE>

F-11
<PAGE>

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, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>

Federal statutory income tax rate...................................................... 35.0% 35.0% 35.0%
State income taxes,
net of federal tax benefit............................................................ 4.0 3.4 4.1%

Other, net............................................................................. (1.3) (0.1) 1.7%
---- ------- -------

Effective tax rate.................................................................... 37.7% 38.3% 40.8%
---------------------------------------------------------------------------------------------------------------------

</TABLE>

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

December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization......................................................... $(5,677) $(5,110)
Other................................................................................. (331) (397)
------- -------

Total deferred tax liabilities...................................................... (6,008) (5,507)
---------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Casualty and environmental liabilities................................................ 270 300
Employee merger and separation costs.................................................. 213 214
Postretirement benefits............................................................... 86 96
Non-expiring AMT credit carryforwards................................................. 36 44
Other................................................................................. 564 439
------- -------
Total deferred tax assets........................................................... 1,169 1,093
------- -------

Net deferred tax liability.......................................................... $(4,839) $(4,414)
- ---------------------------------------------------------------------------------------------------------------------

Noncurrent deferred income tax liability............................................... $(5,172) $(4,721)

Current deferred income tax asset...................................................... 333 307
------- -------

In accordance with the income tax allocation agreement between BNSF and BNSF
Railway, the Company makes payment to or receives refunds from BNSF based on its
separate consolidated tax liabilities. In 1997 and 1995, tax benefits of $2
million and $11 million, respectively, related to the adjustment to recognize
the minimum pension liability were allocated directly to stockholders' equity.
In 1996, tax expense of $9 million related to the adjustment to reduce the
minimum pension liability was allocated directly to stockholders' equity.

BNI's and SFP's federal income tax returns have been examined through 1991 and
1992, respectively. All years prior to 1986 are closed for SFP and all years
prior to 1989 are closed for BNI. Issues relating to the years 1986-1992 for SFP
and for the years 1989-1991 for BNI 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 1997.

7. ACCOUNTING CHANGE

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

F-12
<PAGE>

reduce income before extraordinary item and cumulative effect of change
in accounting method by $25 million.

8. ACCOUNTS RECEIVABLE, NET

Effective June 1997, an accounts receivable sale agreement which allowed the
sale of up to $300 million in receivables effective through 1999, was replaced
by an amended and restated agreement which allows BNSF Railway, through a
special purpose subsidiary, to sell up to $600 million of variable rate
certificates which mature in 2002 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, 1997, $581 million of certificates
were outstanding and were supported by receivables of approximately $1.1 billion
in the master trust. Certificates outstanding were $280 million at December 31,
1996. 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. 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 (expense), net.

During 1997, BNSF Railway installed a new revenue management system, replacing
separate BNRR and ATSF systems. Primarily as a result of this integration,
accounts receivable balances have risen above historical levels. Railway
maintains an allowance for corrections to and collectibility of freight and
other billings. At December 31, 1997 and 1996, $70 million and $57 million of
such allowances had been recorded, respectively. Railway believes the allowance
is adequate to cover disputed and uncollectible receivables at December 31,
1997.

9. PROPERTY AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
1997
Depreciation
December 31, 1997 1996 Rate
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land............................................ $ 1,404 $ 1,406 -
Track structure................................. 10,500 9,641 3.9%
Other roadway................................... 7,836 7,211 2.5
Locomotives..................................... 1,873 1,525 4.5
Freight cars and other equipment................ 1,870 1,879 4.0
Computer hardware and software.................. 412 402 15.6
- -----------------------------------------------------------------------------------------------

Total cost...................................... 23,895 22,064
Less accumulated depreciation and amortization.. (4,743) (4,490)
------- -------

Property and equipment, net..................... $19,152 $17,574
- -----------------------------------------------------------------------------------------------
</TABLE>

The consolidated balance sheet at December 31, 1997 and 1996 included $875
million and $471 million, respectively, for property and equipment under capital
leases.

10. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES

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

<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>

Compensation and benefits payable................. $ 399 $ 393
Accounts payable.................................. 350 310
Casualty and environmental reserves............... 291 309
Rents and leases.................................. 144 206
Tax liabilities................................... 111 153
Employee merger and separation costs.............. 82 114
Other............................................. 604 683
------ ------

Total............................................. $1,981 $2,168

- --------------------------------------------------------------------------
</TABLE>

F-13
<PAGE>

11. Debt

Debt outstanding was as follows (in millions):

December 31, 1997 1996
- -------------------------------------------------------------------------
Notes and Debentures

Pipeline exchangeable debentures,
11.2% (variable), due 2010 (1)................. $ 219 $ 219
8 3/4% debentures, due 2022...................... 200 200
7.40% notes, due 1999............................ 150 150
7% notes, due 2002............................... 150 150
7 1/2% debentures, due 2023...................... 150 150
8 3/8% notes, due 2001........................... 100 100
8 5/8% notes, due 2004........................... 100 100
Other............................................ 25 28

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%...... - 57
General lien railway and land grant bonds,
3%, due 2047................................... 35 35
Mortgage notes, 10.325%, due 1998 to 2014........ 31 31
First mortgage bonds, series A, 4%............... - 20
Mortgage notes, 8 5/8%, due serially to 2009..... 18 18

Equipment Obligations
Equipment obligations, weighted average
rate of 7.98%, due 1998 to 2013................ 565 629

Capitalized lease obligations, weighted average
rate of 6.84% expiring 1998 to 2010............ 695 400

Unamortized purchase accounting adjustment........ 89 101

Unamortized discount.............................. (52) (55)
- ------------------------------------------------------------------------------
Total............................................ 2,858 2,716

Less: Current portion of long-term debt........... (108) (165)
------ ------

Long-term debt................................... $2,750 $2,551
- ------------------------------------------------------------------------------

(1) Discussion of the disposition of the Pipeline Debentures is discussed in
Note 4: Sale of Investment in Pipeline Partnerships

BNSF Railway and its predecessors, BNRR and ATSF, completed cross-border
leveraged leases of equipment for a total amount of $411 million, $311 million
and $136 million in 1997, 1996 and 1995, respectively, which were recorded as
capital lease obligations. These transactions included the issuance of $326
million, $242 million, and $108 million of equipment secured debt in 1997, 1996
and 1995, respectively.

Aggregate long-term debt scheduled maturities are $108 million, $256 million,
$138 million, $204 million and $258 million for 1998 through 2002, respectively.

Substantially all BNSF Railway properties and certain other assets are pledged
as collateral to, or are otherwise restricted under, the various BNSF Railway
long-term debt agreements. Equipment obligations and capital leases are secured
by the underlying equipment.

In addition, a wholly-owned subsidiary of BNSF Railway was contingently liable
as general partner for $355 million of long-term debt issued by Santa Fe Pacific
Pipeline Partners, L.P. This contingent liability has been reduced by
consummation of the transaction discussed in Note 4: Potential sale of
investment in pipeline partnerships.

F-14
<PAGE>

12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of BNSF Railway's financial instruments at December
31, 1997 and 1996 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

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 amounts of BNSF Railway's long-term debt at December 31, 1997 and 1996
were $2,858 million and $2,716 million, respectively, while the estimated fair
values at December 31, 1997 and 1996 were $3,000 million and $2,812 million,
respectively.

13. HEDGING ACTIVITIES, LEASES AND OTHER COMMITMENTS

HEDGING ACTIVITIES

FUEL

BNSF Railway has a program to hedge against fluctuations in the price of its
diesel fuel purchases. This program includes forward purchases for delivery at
fueling facilities, and various commodity swap and collar 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 will not realize the impact of
increases or decreases in fuel prices.

As of March 30, 1998, BNSF Railway had entered into forward purchases for
approximately 402 million gallons at an average price of approximately 53 cents
per gallon, and fuel swaps for approximately 1,323 million gallons at an average
price of approximately 52 cents per gallon.

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

BNSF Railway's fuel hedging program covers approximately 80 percent, 35
percent, 24 percent and 9 percent of estimated fuel purchases for 1998, 1999,
2000, and 2001, respectively. Quarterly hedges in 1998 range from 66 percent to
91 percent of anticipated fuel purchases. Hedges for 1999, 2000, and 2001
approximate 35 percent, 24 percent and 9 percent of estimated consumption for
each quarter, respectively. Hedge positions are closely monitored to ensure that
they will not exceed actual fuel requirements in any period. Unrecognized losses
from BNSF Railway's fuel hedging transactions were approximately $24 million as
of December 31, 1997 and unrecognized gains as of December 31, 1996 were
approximately $17 million. BNSF Railway also monitors its hedging positions and
credit ratings of its counterparties and does not anticipate losses due to
counterparty nonperformance.

F-15
<PAGE>

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 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, 1997 are summarized as follows (in millions):
<TABLE>
<CAPTION>

Capital Operating
Year ended December 31 Leases Leases
- --------------------------------------------------------------------------
<S> <C> <C>
1998..................................... $ 95 $ 313
1999..................................... 95 233
2000..................................... 91 177
2001..................................... 90 146
2002..................................... 90 121

Thereafter............................... 544 1,210
------ ------

Total.................................... 1,005 $2,200
------

Less amount representing interest........ 310
------

Present value of minimum lease payments.. $ 695
- --------------------------------------------------------------------------
</TABLE>

Lease rental expense for all operating leases was $456 million, $446 million
and $352 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Contingent rentals and sublease rentals were not significant.

OTHER COMMITMENTS

BNSF Railway has entered into commitments to acquire 380 locomotives in 1998.
The locomotives will be financed from one or a combination of sources including,
but not limited to, cash from operations, capital or operating leases, and debt
issuances. The decision on the method used will depend upon then current market
conditions and other factors. Additionally, BNSF Railway has committed to
acquire 325, 76 and 50 locomotives in each of 1999, 2000, and 2001,
respectively.

In connection with the closing of the sale of 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 recorded a $50 million liability in 1993 for an
obligation retained by BNSF Railway which under certain conditions requires a
repurchase of a portion of the properties sold.

14. 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 34 Superfund sites for which investigation and
remediation payments are or will be made or are yet to be determined (the
Superfund

F-16
<PAGE>

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.

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 353 sites, including the
Superfund sites, at which it is being asked to participate in the study or
clean-up, or both, of alleged environmental contamination. BNSF Railway paid
approximately $51 million, $47 million and $31 million during 1997, 1996 and
1995 respectively, for mandatory clean-up efforts, including amounts expended
under federal and state voluntary clean-up programs. BNSF Railway has accruals
of approximately $202 million for remediation and restoration of all known
sites. BNSF Railway anticipates that the majority of the accrued costs at
December 31, 1997, will be paid over the next five years. No individual site is
considered to be material.

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
parties' 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, 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 will increase
their operating costs. Regulations applicable to new and rebuilt locomotive
engines were issued by the Environmental Protection Agency in December 1997.
These regulations, which are not yet effective, will be phased in between 2000
and 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. The State of California has previously indicated
to the Environmental Protection Agency that it will support the federal rule as
proposed subject to slight technical modifications. Presently, the magnitude of
any future expense is unknown.

F-17
<PAGE>

OTHER CLAIMS AND LITIGATION

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
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.

15. 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, 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 Railway's plans are
based on years of credited service and the highest five-year average
compensation levels. BNSF Railway'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 Railway plans, including the prior
BNI and SFP plans, were as follows (in millions):

Year ended December 31, 1997 1996 1995(1)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>

Service cost, benefits earned
during the period..................... $ 14 $ 17 $ 11
Interest cost on projected obligation.. 100 97 65
Actual return on plan assets........... (329) (148) (114)
Net amortization and deferred amounts.. 221 43 61
Curtailment costs...................... - - 10
Cost of special termination benefits... - - 32
----- ----- -----

Net pension cost...................... $ 6 $ 9 $ 65
- ---------------------------------------------------------------------------

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

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

December 31, 1997 1996
- -----------------------------------------------------------------------
Vested benefit obligation............... $(1,221) $(1,081)
------- -------

Accumulated benefit obligation.......... $(1,269) $(1,161)

- -----------------------------------------------------------------------
Projected benefit obligation............ $(1,357) $(1,247)
------- -------

Plan assets at fair value, primarily
marketable equity and debt securities.. 1,540 1,320
- -----------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation..................... 183 73
Unrecognized net gain................... (169) (63)
Unrecognized prior service cost......... (10) (10)

Unamortized net transition obligation... 13 15
------- -------

Prepaid pension asset................... $ 17 $ 15
- -----------------------------------------------------------------------

F-18
<PAGE>

BNSF Railway 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:

BNSF BNSF BNI SFP
1997 1996 1995 1995
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate.............. 7.5% 7.75% 7.0% 7.5%
Rate of increase in
compensation levels....... 4.0% 4.0% 4.0% 4.0%

Expected long-term rate
of return on plan assets.. 9.5% 9.5% 9.5% 9.75%
- ------------------------------------------------------------------------

</TABLE>

The following table shows the reconciliation of the BNSF Railway funded status
of the nonqualified supplemental plan with amounts recorded in the consolidated
balance sheet (in millions):
<TABLE>
<CAPTION>

December 31, 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:

Vested benefit obligation........................... $ (38) $ (31)
----- -----

Accumulated benefit obligation...................... $ (39) $ (32)
----- -----

Projected benefit obligation........................ $ (47) $ (39)
- ------------------------------------------------------------------------
Unrecognized net loss............................... 19 14
Unrecognized prior service cost..................... 1 1
Unamortized net transition obligation............... 1 1
Adjustment required to recognize minimum liability.. (13) (9)
----- -----

Accrued pension liability........................... $ (39) $ (32)
- ------------------------------------------------------------------------
</TABLE>

BNSF sponsors 401(k) thrift and profit sharing plans which cover substantially
all non-union employees and certain union employees. 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. 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 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
employer 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 Railway's 401(k) matching
expense was $14 million in 1997 and $13 million in 1996 and 1995.

16. 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 costs related to former BNI employees were $1 million
in each of the three years ended December 31, 1997, 1996 and 1995, 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, 1997 and 1996.

F-19
<PAGE>

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.
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. The combined 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):

Life Insurance
and Medical Plan
----------------------------
1997 1996 1995 (1)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service cost........................... $ 4 $ 5 $ 1
Interest cost.......................... 14 16 4
Net amortization and deferred amounts.. (1) - (2)
----- ----- ---

Net postretirement benefit cost....... $ 17 $ 21 $ 3
- --------------------------------------------------------------------
</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 become due. The following table shows the reconciliation of the
plans' obligations to amounts accrued at December 31, 1997 and 1996 (in
millions). The former SFP plan uses a September 30 measurement date.
<TABLE>
<CAPTION>

Life Insurance Medical
Plan Plan
--------------- ------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:

Retirees............................ $ 44 $ 43 $ 111 $ 119
Fully eligible active participants.. - - 6 11
Other active participants........... 3 4 26 33
- ---------------------------------------------------------------------------
47 47 143 163

Unrecognized net gain (loss).......... (2) (1) 18 (3)
----- ----- ----- -----

Accrued postretirement
benefit cost....................... $ 45 $ 46 $ 161 $ 160
- ---------------------------------------------------------------------------
</TABLE>

For purposes of the above calculations, the assumed health care cost trend
rate for both managed care and non-managed care medical costs is 10 percent in
1997 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 $15 million and the combined service and
interest components of net periodic postretirement benefit cost recognized in
1997 by $2 million.

For 1997 and 1996, the weighted-average discount rate assumed in determining
the accumulated postretirement benefit obligation was 7.5 percent and 7.75
percent, respectively, and the assumed weighted-average salary increase was 4
percent for both 1997 and 1996.

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 $15
million, $14 million and $11 million, in 1997, 1996 and 1995, respectively.

F-20
<PAGE>

17. COMMON STOCK AND STOCKHOLDER'S EQUITY

BNSF Railway is authorized to issue 1,000 shares of common stock, $1 Par
Value. At December 31, 1997 and 1996 all 1,000 shares were 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 and SFP's net assets,
together with fair value adjustments, resulted in a capital contribution to BNSF
Railway of $2,070 on September 22, 1995. Note 18 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 Railway'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. SFP's and ATSF's investments were adjusted to fair value
upon the application of purchase accounting.

18. RELATED PARTY TRANSACTIONS

BNSF Railway has intercompany borrowings with affiliates. The following is a
summary of intercompany notes payable balances (in millions):

December 31, 1997 1996
---- ----
<S> <C> <C>
Note payable to Parent $2,063 $1,786

</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. However, it is not anticipated that BNSF Railway
will be required to pay this obligation in 1998.

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. Due
to the merger of SFP into BNSF Railway, this note is now eliminated on a
consolidated BNSF Railway basis.

SFP Pipelines Holdings, Inc. had a $130 million intercompany note receivable
from SFP. During 1997, BNSF assumed the note payable from SFP and SFP recognized
the assumption as a capital contribution from BNSF.

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 employees.
These plans include, among other things, incentive compensation, issuance of
restricted stock and a discounted stock purchase program. Compensation expense
is recorded for stock incentive plans in accordance with Accounting Principles
Board Opinion 25 and was not material in 1997, 1996 or 1995.

19. QUARTERLY FINANCIAL DATA - UNAUDITED

(Dollars in millions, except per share data) Fourth Third Second First
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Revenues(1) $2,186 $2,137 $2,063 $2,023
Operating income (2) 38 541 458 329
Net income (2)(3) $ 227 $ 291 $ 246 $ 165
- --------------------------------------------------------------------------------------
1996
Revenues(1) $2,079 $2,032 $2,013 $2,016
Operating income(3) 468 476 418 385
Net income (3) $ 244 $ 253 $ 218 $ 204
- --------------------------------------------------------------------------------------
</TABLE>
(1) Amounts do not agree to previously reported amounts due to certain
reclassifications between revenues and expenses which were not significant.
(2) Fourth quarter 1997 results include a $90 million pre-tax charge ($56
million after tax) as discussed in Note 3.
(3) Amounts do not agree to the previously reported amounts due to the inclusion
of SFP to reflect its merger into BNSF Railway on January 2, 1998, as
discussed in Note 1.

F-21
<PAGE>

Schedule II

The Burlington Northern and Santa Fe Railway Company
Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1996, and 1995
(In millions)

<TABLE>
<CAPTION>
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, 1997:
Casualty and
environmental liabilities $810 $165 $ - $264 $711
============= ================ ============== ================= ==============

December 31, 1996:
Casualty and
environmental liabilities $916 $188 $ - $294 $810
============= ================ ============== ================= ==============

December 31, 1995:
Casualty and
environmental liabilities $637 $164 $320 $205 $916
============= ================ ============== ================= ==============
</TABLE>

Notes:

(1) Represents ATSF's recorded liability at date of merger of BNI and SFP.

(2) Principally represents cash payments.

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

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Casualty and environmental liabilities (current) liabilities) $ 263 $ 267 $ 290
448 543 626
Casualty and environmental liabilities (noncurrent) ----- ----- -----
liabilities)
$ 711 $ 810 $ 916
===== ===== =====
</TABLE>

F-22
<PAGE>

BURLINGTON NORTHERN SANTA FE CORPORATION

INDEX OF EXHIBITS

Exhibit
- -------
Number Description
- -------- -----------

2.1 Agreement and Plan of Merger dated December 30, 1996 between
Burlington Northern Railroad Company and The Atchison, Topeka and
Santa Fe Railway Company incorporated by reference to The Burlington
Northern and Santa Fe Railway Company's Report on Form 10-K for the
fiscal year ended December 31, 1996.

2.2 Certificate of Ownership and Merger Merging Santa Fe Pacific
Corporation and The Burlington Northern and Santa Fe Railway Company
filed on December 30, 1997.

3.1 Restated Certificate of Incorporation of The Burlington Northern and
Santa Fe Railway Company effective December 31, 1996 incorporated by
reference to The Burlington Northern and Santa Fe Railway Company's
Report on Form 10-K for the fiscal year ended December 31, 1996.

3.2 By-Laws as amended through July 17, 1991. Incorporated by reference to
Exhibit 3.2 to Burlington Northern Railroad Company'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 2.2

CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
SANTA FE PACIFIC CORPORATION
INTO
THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY
--------------------------------

Pursuant to Section 253 of the General
Corporation Law of the State of Delaware
--------------------------------

Santa Fe Pacific Corporation, a Delaware corporation (the "Corporation"),
desiring to merge itself with and into The Burlington Northern and Santa Fe
Railway Company, a Delaware corporation and a wholly owned subsidiary of the
Corporation (the "Subsidiary"), pursuant to the provisions of Section 253 of the
General Corporation Law of the State of Delaware, as amended (the "DGCL"), DOES
HEREBY CERTIFY AS FOLLOWS:

FIRST: That the Corporation owns all of the outstanding shares of each
class of capital stock of the Subsidiary.

SECOND: That the Board of Directors of the Corporation, by the following
resolutions duly adopted by unanimous written consent (but subject to the
approval of the sole stockholder of the Corporation) as of the 15th day of
December 1997, determined to merge itself with and into the Subsidiary:

RESOLVED, that the Corporation merge itself with and into The
Burlington Northern and Santa Fe Railway Company, a Delaware corporation
and a wholly owned subsidiary of the Corporation (the "Subsidiary"), which,
as the surviving corporation upon consummation of the merger, assume all of
the Corporation's liabilities and obligations; and that the Certificate of
Incorporation and by-laws of the Subsidiary as in force and effect at the
effective time of the merger shall continue to be, respectively, the
Certificate of Incorporation and by-laws of the surviving corporation until
amended as therein provided and in the manner prescribed by the provisions
of the General Corporation Law of the State of Delaware;

FURTHER RESOLVED, that the directors and officers in office of the
Subsidiary at the effective time of the merger shall be, respectively, the
members of the Board of Directors and the officers of the surviving
corporation, all of whom shall hold their respective directorships and
offices until the election and qualification of their respective successors
or until their tenure is

1
<PAGE>

otherwise terminated in accordance with the by-laws of the surviving
corporation;

FURTHER RESOLVED, that each share of common stock of the Corporation
issued and outstanding immediately prior to the effective time of the
merger shall, at the effective time of the merger, by virtue of the merger
and without any action on the part of the holder thereof, be converted into
one (1) share of common stock, par value $1.00 per share, of the
Subsidiary, certificates for which shall be issued to the sole stockholder
of the Corporation upon surrender to the Subsidiary of any certificates for
shares of capital stock of the Corporation, and such shares of common stock
of the Subsidiary shall be fully paid and non-assessable;

FURTHER RESOLVED, that each share of common stock of the Subsidiary
issued and outstanding immediately prior to the effective time of the
merger shall, at the effective time of the merger, by virtue of the merger
and without any action on the part of the holder thereof, be canceled and
retired, and cease to exist, and shall not be converted into any shares of
capital stock of the Subsidiary or the right to receive cash or other
property;

FURTHER RESOLVED, that the proposed merger be submitted to the sole
stockholder of the Corporation for its approval and it is recommended that
such merger be so approved by such sole stockholder;

FURTHER RESOLVED, that the officers of the Corporation be, and each of
them hereby is, authorized and directed to make, execute and acknowledge,
in the name and on behalf of the Corporation, and to file in the proper
public offices, a Certificate of Ownership and Merger, setting forth a copy
of these resolutions;

FURTHER RESOLVED, that the merger of the Corporation with and into the
Subsidiary shall become effective as of the close of business on January 2,
1998;

FURTHER RESOLVED, that at any time prior to the filing of the
Certificate of Ownership and Merger with the Secretary of State of
Delaware, the Board of Directors of the Corporation, or any duly authorized
committee thereof, may determine not to effect the merger of the
Corporation with and into the Subsidiary;

FURTHER RESOLVED, that the officers of the Corporation be, and each of
them hereby is, authorized and directed to take such further action and

2
<PAGE>

to execute such certificates and other documents as any such officer, in
his or her discretion, shall deem necessary or advisable to consummate the
merger of the Subsidiary into the Corporation and to effect the foregoing
resolutions.

THIRD: That the merger has been approved by the sole stockholder of all of
the outstanding capital stock of the Corporation entitled to vote by written
consent in accordance with Section 228 of the DGCL.

FOURTH: That the Corporation does hereby merge itself with and into the
Subsidiary, as the surviving corporation, effective as of the close of business
on January 2, 1998.

IN WITNESS WHEREOF, Santa Fe Pacific Corporation has caused this
Certificate to be executed by the undersigned as of this 15th day of December
1997.

SANTA FE PACIFIC CORPORATION

By: /s/ ROBERT D. KREBS
-------------------------------------
Robert D. Krebs
Chairman, President and
Chief Executive Officer

<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,
------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings:

Pre-tax income $1,490 $1,489 $ 336

Add:
Interest and fixed charges,
excluding capitalized interest 281 275 219

Portion of rent under long-term
operating leases representative
of an interest factor 183 179 129

Amortization of capitalized interest 3 3 1

Less: Undistributed equity in earnings
of investments accounted for
under the equity method 17 5 27
------ ------ -----

Total earnings available for fixed charges $1,940 $1,941 $ 658
====== ====== =====

Fixed charges:

Interest and fixed charges $ 299 $ 288 $ 226

Portion of rent under long-term operating
leases representative of an interest factor 183 179 129
------ ------ -----

Total fixed charges $ 482 $ 467 $ 355
====== ====== =====

Ratio of earnings to fixed charges 4.02x (1) 4.16x 1.85x (1)
====== ====== =====
</TABLE>

(1) Earnings for the years ended December 31, 1997 and 1995, include special
charge of $90 million and $671 million (before tax, respectively). Excluding
these charges, the ratio for 1997 and 1995 would have been 4.21x and 3.74x,
respectively.

<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

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 702
<ALLOWANCES> (70)
<INVENTORY> 205
<CURRENT-ASSETS> 1,197
<PP&E> 23,895
<DEPRECIATION> 4,743
<TOTAL-ASSETS> 21,199
<CURRENT-LIABILITIES> 2,089
<BONDS> 2,750
<COMMON> 0
0
0
<OTHER-SE> 7,023
<TOTAL-LIABILITY-AND-EQUITY> 21,199
<SALES> 0
<TOTAL-REVENUES> 8,409
<CGS> 0
<TOTAL-COSTS> 6,643
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 281
<INCOME-PRETAX> 1,490
<INCOME-TAX> 561
<INCOME-CONTINUING> 929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>