BURLINGTON NORTHERN INC/DE/, 10-K, 1996-04-01

BURLINGTON NORTHERN INC/DE/
10-K, 1996-04-01
RAILROADS, LINE-HAUL OPERATING

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<PAGE>

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

(Mark One) FORM 10-K

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

For the fiscal year ended December 31, 1995
--------------------------------------------------

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from _______________________ to ________________
Commission file number 1-8159
--------------------------

............................BURLINGTON NORTHERN INC............................
(Exact name of registrant as specified in its charter)

...........Delaware.................... ............41-1400580............
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

3800 Continental Plaza, 777 Main St.
Fort Worth, Texas...................... ..............76102-5384..........
(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:
Title of each class Name of each exchange on which registered
------------------- ------------------------------------------
9% Debentures, due 2016 New York Stock Exchange

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, $1.00 Par Value 2,007 shares
as of February 29, 1996*

*Burlington Northern Inc. is a wholly owned subsidiary of Burlington Northern
Santa Fe Corporation and there is no market data with respect to such
shares.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

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

Table of Contents
-----------------
<TABLE>
<CAPTION>

Item Page
---- ----
<S> <C> <C>
Part I 1. Business................................................ 1

2. Properties.............................................. 1

3. Legal Proceedings....................................... 9

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

7. Management's Narrative Analysis of Results of
Operations............................................ 14

8. Financial Statements and Supplementary Data............. 18

9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................... 38

Part IV 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.............................................. 38
</TABLE>

Note: Part I, Item Four; Part II, Item Six; Part III, Items Ten, Eleven, Twelve
and Thirteen; and Part IV Exhibit 21 have been omitted pursuant to
General Instructions J(1)(a) and (b) of Form 10-K relating to wholly-
owned subsidiaries.
<PAGE>

PART I

ITEMS 1 AND 2 BUSINESS AND PROPERTIES

Burlington Northern Inc. was incorporated in Delaware in 1981 as part of a
holding company reorganization. Burlington Northern Inc. is a wholly-owned
subsidiary of Burlington Northern Santa Fe Corporation (BNSF) which was
incorporated in Delaware in 1994 for the purpose of effecting a business
combination between Burlington Northern Inc. and Santa Fe Pacific Corporation
(SFP). Burlington Northern Inc. and its majority-owned subsidiaries (BNI) are
primarily engaged in the rail transportation business. The principal subsidiary
is Burlington Northern Railroad (BNRR). BN Leasing Corporation, a wholly owned
subsidiary of BNI, was formed during 1989 to acquire railroad rolling stock and
other equipment. Additionally, BNI maintains a 17% ownership in SFP as a result
of the business combination discussed below.

ACQUISITION OF SANTA FE PACIFIC CORPORATION (SFP)
- -------------------------------------------------

On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as
amended on October 26, 1994, December 18, 1994, January 24, 1995 and September
19, 1995, 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 (ICC) issued a written
decision approving the Merger and on September 22, 1995 the Merger was
consummated.

Pursuant to the Merger Agreement, on December 23, 1994, 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. In
addition, BNI borrowed $500 million under a credit facility of which the
proceeds were used to finance BNI's purchase of SFP common stock in the Tender
Offer. The Tender Offer was completed on February 21, 1995.

Also, pursuant to the Merger Agreement, BNI and SFP were entitled to elect to
consummate the Merger through the use of one of two possible structures: (i) a
merger of SFP with and into BNI or (ii) the Holding Company Structure described
below. To ensure that the transaction contemplated by the Merger Agreement
qualified as a tax-free transaction for federal income tax purposes, the parties
utilized the Holding Company Structure.

Under the Holding Company Structure, BNSF created two subsidiaries. One
subsidiary merged with and into BNI, and the other subsidiary merged with and
into SFP. Each holder of one share of BNI common stock received one share of
BNSF common stock and each holder of one share of SFP common stock, excluding
the SFP common stock acquired by BNI in the Tender Offer and the SFP common
stock held by SFP as treasury stock, received 0.41143945 shares of BNSF common
stock. The rights of each stockholder of BNSF were substantially identical to
the rights of a stockholder of BNI, and the Holding Company Structure had the
same economic effect with respect to the stockholders of BNI and SFP as would a
direct merger of BNI and SFP.

RAILROAD TRANSPORTATION

BNI operates the largest railroad system in the United States based on miles
of road and second main track, with approximately 24,400 total miles at December
31, 1995. The principal cities served include Billings, Birmingham, Cheyenne,
Chicago, Denver, Des Moines, Duluth/Superior, Fargo/Moorhead, Fort Worth/Dallas,
Galveston, Houston, Kansas City, Lincoln, Memphis, Mobile, Omaha, Pensacola,
Portland, St. Louis, St. Paul/Minneapolis, Seattle, Spokane, Springfield
(Missouri), Tacoma, Tulsa, Wichita, Vancouver (British Columbia) and Winnipeg
(Manitoba).
<PAGE>

REVENUES (IN MILLIONS)
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Coal..............................$1,757 $1,669 $1,532
Agricultural Commodities.......... 1,042 759 710
Intermodal........................ 736 745 701
Forest Products................... 427 440 419
Chemicals......................... 322 310 315
Consumer and Food Products........ 304 304 291
Metals............................ 280 253 248
Minerals and Ores................. 242 244 230
Automotive........................ 146 152 141
------ ------ ------
Total Freight Revenue............. 5,256 4,876 4,587
Other Revenue..................... 125 119 112
------ ------ ------
TOTAL OPERATING REVENUE...........$5,381 $4,995 $4,699
====== ====== ======

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

CARS/UNITS (IN THOUSANDS)
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Coal.............................. 1,687 1,624 1,468
Agricultural Commodities.......... 519 436 423
Intermodal........................ 1,021 1,027 1,003
Forest Products................... 271 280 276
Chemicals......................... 208 199 197
Consumer and Food Products........ 239 243 217
Metals............................ 315 292 287
Mineral and Ores.................. 214 219 207
Automotive........................ 106 109 97
----- ----- -----
TOTAL CAR/UNITS................... 4,580 4,429 4,175
===== ===== =====
- --------------------------------------------------------------------
</TABLE>

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<PAGE>

AVERAGE REVENUE PER CAR/UNIT
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------

1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Coal $1,042 $1,137 $1,153
Agricultural Commodities 2,008 1,770 1,702
Intermodal 720 729 730
Forest Products 1,575 1,633 1,570
Chemicals 1,550 1,666 1,713
Consumer and Food Products 1,273 1,324 1,428
Metals 887 881 881
Minerals and Ores 1,128 1,156 1,143
Automotive 1,380 1,465 1,519
AVERAGE REVENUE PER
CAR/UNIT $1,148 $1,160 $1,166
====== ====== ======
- --------------------------------------------------------------------
</TABLE>

COAL

The transportation of coal is BNI's largest source of revenues, accounting for
approximately one third of the total. Based on carloadings and tons hauled, BNI
is the largest transporter of western low-sulfur coal in the United States.
Over 90 percent of BNI's coal traffic originated in the Powder River Basin of
Wyoming and Montana during the three years ended December 31, 1995. These coal
shipments were destined for coal-fired electric generating stations located
primarily in the North Central, South Central and Mountain regions of the United
States with smaller quantities exported.

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

AGRICULTURAL COMMODITIES

Agricultural Commodities include barley, corn, wheat, soybeans, oils, feeds,
flour and mill products, specialty grains, malts, and milo. Based on carloadings
and tons hauled, BNI is the largest rail transporters of grain in North
America. BNI's system is strategically located to serve the Midwest and Great
Plains grain producing regions where BNI serves most major terminal, storage,
feeding and food-processing locations. Additionally, BNI has access to major
export markets in the Pacific Northwest, western Great Lakes and Texas Gulf
regions.

INTERMODAL

The Intermodal freight business consists of hauling freight containers or
truck trailers by a combination of water, rail and motor carriers. The
intermodal business is highly service-driven, and in many cases motor carriers
and railroads have begun to jointly market intermodal service. Intermodal
results include revenue from businesses such as direct marketing, truckload,
intermodal marketing companies and international.

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, BNRR 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

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<PAGE>

domestic markets. Customers served include the construction, furniture,
photography, publishing, newspaper, and industrial boxes industries.

CHEMICALS

The Chemicals business is comprised of fertilizer, petroleum and chemical
commodities. Chemicals and plastic resins are transported for industrial and
agricultural use. Industrial chemicals and plastic resins are used by
automotive, housing, and packaging industries, as well as for feedstocks for
other chemical and plastic products.

CONSUMER AND FOOD PRODUCTS

Beverages, canned goods, and perishables are the principal food commodities
moved by BNI. Other consumer products handled include sugars and sweeteners,
cotton, salt, rubber and tires, machinery, aircraft parts, military and
miscellaneous boxcar shipments. Heavy machinery includes primary markets for
aircraft, construction, farm and railroad equipment and secondary markets for
used equipment.

METALS

The Metals business unit handles 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 BNI's primary
input products, while finished steel products range from structural beams and
steel coils to wire and nails. BNI also hauls both ferrous and non-ferrous
products including recyclable metals. Various non-ferrous products such as
copper, lead, and aluminum are transported for the beverage, automotive, and
telecommunications industries.

MINERALS AND ORES

Commodities in this group include clays, cements, aggregates, and other
industrial ores and agricultural minerals. Both the oil and the construction
industries are serviced. Potash is transported to domestic markets. Industrial
ores include various mined and processed commodities such as cement and
aggregates (sand and stone) that generally move to domestic markets for use in
general construction and public work projects, such as highway projects.
Lime and non-metallic ores most often move within domestic markets.

AUTOMOTIVE

The Automotive business unit is responsible for both assembled motor vehicles
and shipments of vehicle parts.

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<PAGE>

OPERATING STATISTICS

Certain other operating statistics were as follows:
<TABLE>
<CAPTION>

Year ended December 31,
--------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue ton miles (in millions).......... 293,415 260,574 237,339 232,799 232,441
Freight revenue per thousand revenue
ton miles.............................. $17.91 $18.71 $19.33 $19.82 $19.60
Average length of haul (miles)........... 835 793 778 764 770
Gross ton miles, excluding locomotives
(in millions).......................... 490,352 443,440 409,808 400,917 402,527
Operating ratio (excluding the 1995 and
1991 special charges).................. 79% 83% 86% 87% 90%
Revenue ton miles per employee (in
thousands)............................. 9,567 8,485 7,781 7,461 7,317

</TABLE>

PROPERTIES

Additions and replacements to properties were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Track miles of rail additions and
replacements:
New.................................... 593 378 387 461 380
Used................................... 197 253 356 299 281
Track miles surfaced or reballasted...... 8,219 8,183 7,854 7,610 7,710
Ties inserted (in thousands):
Wood................................... 1,395 1,435 1,914 1,684 1,515
Concrete............................... 347 260 195 500 527

</TABLE>

-5-
<PAGE>

EQUIPMENT

BNI owned or leased, under both capital and operating leases, with an initial
lease term in excess of one year, the following units of railroad rolling stock
at December 31, 1995:
<TABLE>
<CAPTION>

Number of Units
---------------------------
Owned Leased Total
------ ------ -----
<S> <C> <C> <C>
Diesel Locomotives.................... 1,153 1,421 2,574
====== ====== =====

Freight Cars:
Box - general purpose............... 369 2,304 2,673
Box - specially equipped............ 5,163 963 6,126
Gondola............................. 6,168 2,077 8,245
Hopper-open top..................... 6,732 392 7,124
Hopper-covered...................... 17,177 16,916 34,093
Refrigerator........................ 3,112 346 3,458
Flat................................ 3,521 1,272 4,793
Tank................................ 207 - 207
Caboose............................. 404 - 404
Other............................... 298 - 298
------ ------ ------
Total freight cars................ 43,151 24,270 67,421
====== ====== ======

Commuter passenger cars.............. - 141 141
====== ====== ======

</TABLE>

In addition to the owned and leased locomotives identified above, BNI operates
197 freight locomotives under power purchase agreements.

The average age of locomotives and freight cars was 15.5 years and 18.3 years,
respectively, at December 31, 1995, compared with 15.0 years and 18.6 years,
respectively, at December 31, 1994.

The average percentage of BNI's locomotives and freight cars awaiting repairs
during 1995 was 6.5 and 2.7, respectively, compared with 7.7 and 3.1,
respectively, in 1994.

BNI entered into an agreement to acquire 434 alternating current traction
motor locomotives. BNI anticipates reduced locomotive operating costs as well
as an increase in both horsepower and traction, meaning fewer locomotives will
be needed for many freight operations. As of February 29, 1996, BNI had
accepted delivery of 324 locomotives and anticipates deliveries under this
agreement of approximately 50 for the remainder of 1996 and 60 in 1997.

EMPLOYEES

BNI employed an average of 30,671 employees in 1995 compared with 30,711 in
1994 and 30,502 in 1993. Approximately 90 percent of BNI's employees are
covered by collective bargaining agreements with 13 different labor
organizations.

In December 1994, BNRR reached an agreement with the Railroad Yardmasters
Division (Yardmasters) of the United Transportation Union (UTU) which is
effective through 1999 with respect to wages, work rules and all other matters
except health and welfare benefits. Health and welfare issues are being
addressed at the national level and will apply to BNRR's approximately 250
Yardmasters. Effective July 1, 1995 the Yardmasters received a three percent
base wage increase under the agreement.

Labor agreements currently in effect for unions other than the Yardmasters
include provisions which prohibited the parties from serving notices to change
wages, health and welfare benefits, work rules and working conditions prior to
November 1, 1994. BNRR joined with the other railroads to negotiate these issues
with the unions on a multi-employer basis on November 1, 1994. At that time, all
unions were served proposals for productivity improvements as well as

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<PAGE>

other changes. Thereafter, unions also served notices on the railroads which
proposed increasing wages and benefits and restoring many of the restrictive
work rules and practices that were modified or eliminated under the current
agreements. One union is also challenging the railroads' right to negotiate on a
multi-employer basis and the issue is currently pending in federal district
court in Washington, D.C. Under labor agreements currently in effect, a cost of
living allowance of nine cents per hour went into effect on July 1, 1995 for
most of the unionized work force. The cost of living allowance was dependent
upon changes in the Consumer Price Index not to exceed three percent.

In December 1995, BNI's multi-employer bargaining representative, the National
Carriers' Conference Committee (NCCC), reached a tentative agreement with the
UTU, the largest single rail union, resolving wage, benefit and work rule issues
through 1999. A similar agreement was reached in February 1996 with the
Brotherhood of Locomotive Engineers ("BLE"). The UTU and BLE agreements are
subject to membership ratification, the results of which should be complete by
May 1996.

At this time, the railroads and most of the unions are proceeding in direct
negotiations on the parties proposals with many in mediation. The National
Mediation Board has scheduled and held meetings with the parties. One or more
of the unions could be released from mediation which would likely start a
cooling-off period and possibly lead to the establishment of a Presidential
Emergency Board before the parties could engage in self-help remedies. Although
the ultimate outcome of the negotiations cannot be predicted, the potential
exists for one or more work stoppages in the railroad industry during 1996 which
may affect BNRR. Existing labor agreements will remain in effect until new
agreements are reached or until the Railway Labor Act's procedures (which
include mediation, cooling-off periods, and the possibility of Presidential
intervention) have been exhausted.

With respect to the permissive authority granted in the Interstate Commerce
Commission's (ICC) August 23, 1995 written decision to consolidate BNRR and The
Atchison, Topeka and Santa Fe Railway Company (ATSF), agreements resolving
operations consolidations issues with the BLE and UTU were finalized in February
and March of 1996. Discussions with the Transportation Communications Union
("TCU") resulted in an agreement resolving all operations consolidations and
other related issues covering BNRR's clerical employees. The TCU agreement will
enable BNRR to centralize most clerical functions. Operations consolidations
negotiations are ongoing with the carman and yardmaster unions.

BNRR is party to service interruption insurance agreements under which it
would be required to pay premiums of up to a maximum of approximately $70
million in the event of work stoppages on other railroads related to ongoing
national bargaining. BNRR is also entitled to receive payments under certain
conditions if a work stoppage occurs on its property.

COMPETITION

The business environment in which BNI operates remains highly competitive.
Depending on the specific market, deregulated motor carriers, other railroads
and river barges exert pressure on various price and service combinations. 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, BNRR and other railroads continue to
develop and implement operating efficiencies to improve productivity.

As railroads streamline, rationalize and otherwise enhance their franchises,
competition among rail carriers intensifies. The primary rail competitors in the
western region of the United States of BNI and its affiliate ATSF consist of CP
Rail Systems; Southern Pacific Transportation Company (SP); and Union

-7-
<PAGE>

Pacific Railroad Company (UP), which now includes the former Chicago & North
Western Transportation Company (C&NW). Numerous regional railroads and motor
carriers operate in parts of the same territories served by BNI. Coal, one of
BNI's primary commodities, has experienced significant pressure on rates due to
competition from the joint effort of C&NW/UP and from BNI's effort to penetrate
new markets.

An application for approval of the proposed merger of the UP and SP is now
pending before the Department of Transportation's Surface Transportation Board.
Approval of that transaction would create an enhanced competitor to BNRR. BNRR
and ATSF have entered into a settlement agreement with UP and SP under which, if
the UP/SP combination is approved as proposed, BNSF would obtain overhead access
and in some instances local access through trackage rights to over 3,500 route
miles of the UP/SP system and UP and SP would sell more than 300 miles of track
to BNRR or ATSF. This would provide BNRR and ATSF access to additional shippers
and would improve its route structure. A decision by the Surface Transportation
Board on the UP/SP transaction is scheduled in 1996.

ENVIRONMENTAL

BNI's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNI'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.

-8-

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

WHEAT AND BARLEY TRANSPORTATION RATES

In September 1980 a class action lawsuit was filed against BNRR in United
States District Court for the District of Montana (Montana District Court)
challenging the reasonableness of BNRR export wheat and barley rates. The class
consists of Montana grain producers and elevators. The plaintiffs sought a
finding that BNRR's 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 District Court
referred the rate reasonableness issue to the ICC. Subsequently, the State of
Montana filed a complaint at the ICC challenging BNRR'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 BNRR owed $9,685,918 in reparations plus interest. In its
last decision, dated November 26, 1991, the ICC found BNRR's total reparations
exposure to be $16,559,012 through July 1, 1991. The ICC also found that BNRR's
current rates were below a reasonable maximum and vacated its earlier rate
prescription order.

BNRR 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. BNRR'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 BNRR 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 Standards in assessing the
reasonableness of BNRR's 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 BNRR exceeded
the stand alone costs of transporting that traffic and that BNRR's rates were
unreasonably high. BNRR filed its evidence March 29, 1995, showing that the
stand alone costs of transporting the traffic exceeded the revenue derived by
BNRR or that consequently its rates were not unreasonably high. The parties
filed briefs simultaneously on August 16, 1995, and the proceeding awaits
decision by the Surface Transportation Board, successor to the ICC.

COAL TRANSPORTATION CONTRACT LITIGATION

On April 26, 1991, an action was filed against BNRR 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 BNRR constituted unusual economic conditions giving rise to a
"gross inequity" because BNRR's costs of providing service have been reduced
over the contracts' terms. On August 2, 1994, plaintiff amended its complaint
to further allege that BNRR 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.

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<PAGE>

BNRR's primary contention was that both parties anticipated productivity gains
in the rail industry when negotiating the contracts and agreed that BNRR would
retain most of its productivity gains. BNRR further contended that there was no
agreement that transportation rates paid by SWEPCO would be based on BNRR's
costs 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, BNRR 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. BNRR 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). SWEPCO has filed a
notice of cross appeal and the case is awaiting review. In the opinion of
outside counsel, BNRR has a substantial likelihood of prevailing of appeal,
although no assurances can be given due to the uncertainties inherent in
litigation.

ENVIRONMENTAL PROCEEDINGS

By letter dated August 31, 1995, the Wisconsin Department of Justice, on
behalf of the State of Wisconsin notified BNRR of its intent to file a complaint
by the end of September 1995 seeking penalties of $200 per day, a penalty
assessment, and an environmental assessment for BNRR's alleged failure, for 964
days, to submit a remedial action plan for the Ashland Railyard, Ashland,
Wisconsin, by May 7, 1993, as established by the Wisconsin Department of Natural
Resources. BNRR undertook groundwater monitoring and removed and disposed of
all former railroad structures on the property, but because of the existence of
contamination from offsite and upgradient sources, did not believe that it would
be prudent or technically reasonable to accomplish site remediation until all
upgradient and contributing sources were properly considered. The property had
been leased for many years to another railroad which operated the railyard
facility. In State of Wisconsin v. Burlington Northern Railroad Company and Soo
Line Railroad Company (Case No. 96CV007), BNRR settled this matter for
$106,580 pursuant to a stipulation and order for judgment entered on January 22,
1996 by the Circuit Court for Ashland County, Wisconsin. This matter is now
considered terminated.

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 BNRR, 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 BNRR. The
proceeding may result in monetary sanctions in excess of $100,000. BNRR and
Beazer East, Inc. have made an offer to the State of Illinois to settle this
matter.

CROW RESERVATION CROSSING ACCIDENT CASE

At approximately 10:15 a.m., on November 22, 1993, there was an accident at a
BNRR railroad 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 crossbuck 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). 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 BNRR for compensatory damages in the total
amount of $250 million.

-10-
<PAGE>

BNRR has filed an appeal to the Crow Court of Appeals in and for the Crow
Indian Reservation where it will seek, among other things, to have the case
dismissed on the basis that the Crow Tribal Court lacks subject matter
jurisdiction over these claims. If the appellate court fails to grant relief to
BNRR, BNRR 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 plaintiffs to enforce the judgment pending appeal through the
tribal court and federal court systems. BNRR was required to post a $5 million
bond with the federal court.

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 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 cases 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.

On October 6, 1994, shortly after the 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. On October 7, 1994, three
more purported stockholder class action suits relating to SFP's proposed

-11-
<PAGE>

participation in the Merger with BNI were filed in the Court of Chancery of the
State of Delaware. All of these lawsuits named as defendants SFP and the
individual members of the SFP Board of Directors and one case, Lifshitz v.
Krebs, C.A. No. 13780 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 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.

On October 14, 1994, the Chancery Court entered an order consolidating all
remaining 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, 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
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.

-12-

<PAGE>

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.

This matter is pending in the Delaware Chancery Court as to the SFP
defendants; this matter is now terminated as to BNI.

ICC MERGER CASE

On October 13, 1994, BNI, BNRR, SFP, and ATSF ("Applicants") filed a railroad
merger and control application with the ICC, Finance Docket No. 32549,
Burlington Northern Inc. and Burlington Northern Railroad Company--Control and
Merger--Santa Fe Pacific Corporation and The Atchison, Topeka and Santa Fe
Railway Company. Applicants sought an order, pursuant to 49 U.S.C. sections
11343-11347 (1988), approving and authorizing BNI's acquisition of control of
and merger with SFP, the resulting common control of BNRR and ATSF by BNSF, the
consolidation of BNRR and ATSF by BNSF, the consolidation of BNRR and ATSF
operations, and the merger of BNRR and ATSF. The ICC approved the application in
its written decision served August 23, 1995, which decision was effective as of
September 22, 1995. Several petitions for reconsideration or to reopen the ICC's
decision were filed by parties to the proceeding and all of these have been
denied. Additionally, eight parties to the proceeding filed petitions for review
of the ICC's approval decision with the United States Court of Appeals for the
District of Columbia, which petitions are now pending before that court. Each of
the petitions for reconsideration or to reopen and for review challenge various
aspects of the ICC's decision, including the extent of conditions imposed on its
approval. None of these petitions is expected to affect materially the benefits
to be realized by the acquisition of common control of BNRR and ATSF by BNSF.

PART II

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

All of BNI's outstanding common stock is owned of record by BNSF and therefore
not traded on any market.

-13-
<PAGE>

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

Management's narrative analysis relates to the financial condition and results
of operations of Burlington Northern Inc. and its majority-owned subsidiaries
(collectively BNI or Company). The principal subsidiary of BNI is Burlington
Northern Railroad Company (BNRR). BNI is a wholly-owned subsidiary of
Burlington Northern Santa Fe Corporation (BNSF).

ACQUISITION OF SANTA FE PACIFIC CORPORATION (SFP)
- -------------------------------------------------

Pursuant to the Merger Agreement, on December 23, 1994, 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. BNI
borrowed $500 million under a credit facility of which the proceeds were used to
finance BNI's purchase of SFP common stock in the Tender Offer. The Tender
Offer was completed on February 21, 1995.

Under the Holding Company Structure, BNSF created two subsidiaries. One
subsidiary merged with and into BNI, and the other subsidiary merged with and
into SFP. Each holder of one share of BNI common stock received one share of
BNSF common stock and each holder of one share of SFP common stock, excluding
the SFP common stock acquired by BNI in the Tender Offer and the SFP common
stock held by SFP as treasury stock, received 0.41143945 shares of BNSF common
stock, which reflects the effects of the repurchase program. The rights of
each stockholder of BNSF were substantially identical to the rights of a
stockholder of BNI, and the Holding Company Structure had the same economic
effect with respect to the stockholders of BNI and SFP as would a direct merger
of BNI and SFP.

BNI retains a 17% ownership interest in SFP as a result of its purchase of 25
million shares of SFP stock in the Tender Offer. BNI accounts for its interest
in SFP using the equity method.

RESULTS OF OPERATIONS
- ---------------------

YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994

BNI recorded net income for 1995 of $40 million compared with net income of $416
million for 1994. Results for 1995 were reduced by $735 million of merger,
severance and asset charges (see Note 3: Merger, severance and asset charges).
The corresponding reduction in net income was approximately $453 million.
Results for 1995 were further reduced by $100 million (after tax) for the
cumulative effect of an accounting change for locomotive overhauls and $6
million (after tax) for an extraordinary loss on early retirement of debt.
Results for 1994 were reduced by $10 million (after tax) for the cumulative
effect of an accounting change for postemployment benefits. Excluding the above
items, net income for 1995 would have been $599 million compared to $426 million
in 1994.

-14-

<PAGE>

Revenue table

The following table presents BNI's revenue information by commodity for the
years ended December 31, 1995 and 1994 and includes certain reclassifications of
prior year information to conform to current year presentation.

Revenue
Revenue Per Thousand
Revenues Ton Miles (RTM) RTM
------------------ ------------------- ------------------
1995 1994 1995 1994 1995 1994
-------- -------- -------- -------- -------- --------
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C> <C>
Coal........................................... $1,757 $1,669 150,335 136,164 $11.69 $12.26
Agricultural Commodities....................... 1,042 759 52,185 33,922 19.97 22.37
Intermodal..................................... 736 745 24,800 24,671 29.68 30.20
Forest Products................................ 427 440 18,448 19,495 23.15 22.57
Chemicals...................................... 322 310 12,438 11,695 25.89 26.51
Consumer and Food Products..................... 304 304 10,392 10,341 29.25 29.40
Metals......................................... 280 253 12,409 11,503 22.56 21.99
Minerals and Ores.............................. 242 244 10,448 10,752 23.16 22.69
Automotive..................................... 146 152 1,960 2,031 74.49 74.84
Other.......................................... 125 119 - - - -
------ ------ ------- ------- ------ ------
Total.......................................... $5,381 $4,995 293,415 260,574 $17.91 $18.71
====== ====== ======= ======= ====== ======
</TABLE>

Revenues

Total revenues for 1995 were $5,381 million compared with revenues of $4,995
million for 1994. The increase of $386 million or 8 percent was primarily due
to improved Coal and Agricultural Commodities revenues.

Coal revenues improved $88 million during 1995 due to higher traffic levels
caused primarily by new business, favorable weather conditions early in the year
and increased demand for low-sulfur coal from the Powder River Basin. Revenue
per thousand revenue ton miles declined as a result of continuing competitive
pricing pressures and a change in traffic mix.

Agricultural Commodities revenues during 1995 were $283 million greater than
1994. The increase was principally caused by improvements in corn and soybean
revenues of $259 million and $41 million, respectively. Corn and soybean
revenues benefited from increased crop production as well as higher traffic
volumes to the Pacific Northwest due to stronger export demand during 1995.
Barley and wheat revenues declined primarily due to weaker export demand when
compared with the strong demand in 1994. The shift in commodities to lower
yielding corn and soybeans from higher yielding wheat led to the aggregate
decrease in revenue per thousand revenue ton miles.

Metals revenues increased $27 million when compared with 1994 primarily due to
increased taconite, aluminum and steel products revenues.

Current year revenues for Forest Products decreased $13 million and Chemicals
revenues increased $12 million when compared to 1994. The decrease in Forest
Product revenues was attributable to lower traffic levels for lumber while the
increase in Chemicals revenues was due to strong petroleum products demand.

Expenses

As discussed in Note 3: Merger, severance and asset charges, BNI recorded $735
million for merger, severance and asset charges in 1995. The principal
components of the charge were $287 million related to BNI's plan to centralize
the majority of its union clerical functions and $254 million related to
salaried employee costs for severance, pension and other employee benefits and
costs for employee relocations during the period. Additionally, $105 million
was recorded for planned branch line dispositions, while the remaining $89
million included obligations for vacating leased facilities and the write-off of
duplicate and excess assets. When its plans are completed, BNI expects to have
eliminated approximately 2,600 positions and disposed of approximately 3,300
miles of low density track. Also as described in Note 3, costs related

-15-

<PAGE>

to union employee relocation as well as certain costs for separation and
severances were not included in the charge; therefore, these costs will be
future operating expenses. Both the timing and magnitude of any future expense
is currently unknown.

Total operating expenses for 1995, including $735 million of merger, severance
and asset charges, were $4,993 million compared with expenses of $4,142 million
for 1994. Excluding the merger, severance and asset charges the operating ratio
for 1995 was 79 percent, an improvement of four percentage points over the
operating ratio of 83 percent for 1994.

Effective January 1, 1995, BNI changed its method of accounting for periodic
major locomotive overhauls. Under the new method, overhauls on owned units are
capitalized and depreciated ratably until the next anticipated overhaul. In
addition, estimated costs for overhauls on leased units are accrued on a
straight-line basis over the life of the leases. BNI previously expensed
locomotive overhauls when the costs were incurred. The cumulative effect of this
change for years prior to 1995 was a reduction in net income of $100 million
(after tax) while the effect of this change for the year ended December 31, 1995
was to reduce net income by $26 million (after tax).

Compensation and benefits expenses of $1,832 million were $53 million above
1994. The increase was due to higher traffic levels, a wage increase for union
represented employees effective July 1994, an increase in health and welfare
costs for union employees due primarily to an increase in insurance premium
rates, and increased incentive compensation expense. These increases were
partially offset by operating efficiencies.

Equipment rents expenses were $42 million higher than 1994 due to a $46 million
increase in lease rental expense as a result of a larger fleet of leased freight
cars and an increase in the leasing of locomotives to meet power requirements in
1995.

Purchased services expenses decreased $52 million for 1995 compared with 1994,
primarily attributable to lower intermodal-related expenses.

Depreciation and amortization expense for 1995 was $71 million higher than 1994.
The increase reflects $30 million attributable to the 1995 effect of a change in
accounting for locomotive overhauls. The remainder of the increase was due to
capital additions which increased the Company's asset base.

Fuel expenses for 1995 were $36 million higher compared with 1994 primarily due
to a $29 million increase in consumption resulting from higher traffic volumes
in 1995. An increase in the average price paid per gallon of 1.2 cents in 1995
contributed to the remainder of the increase.

Materials expenses for 1995 decreased $39 million compared with 1994 which was
primarily attributable to the change in accounting for locomotive overhauls in
1995.

Other operating expenses were $5 million higher in 1995 as compared with 1994.
The increase reflects $65 million of expenses associated with the change in
accounting for locomotive overhauls, largely offset by a decrease in personal
injury and other expenses.

Equity in Earnings of SFP/Other Income/Interest Expense:

Equity earnings of SFP represent BNI's percentage of income from February 22,
1995 through December 31, 1995. Summary financial data for SFP is provided in
Note 5: Investment in SFP.

Interest expense increased $33 million compared with 1994, principally due to
interest on the $500 million unsecured debt incurred in 1995 to finance BNI's
investment in SFP.

-16-
<PAGE>

Other income (expense), net was $27 million favorable in 1995 as compared with
1994. This increase was primarily due to interest income on the settlement of a
tax refund and lower fees on the sale of accounts receivable in 1995.

In December 1995, BNSF defeased BNI's 9% debentures due 2016, by placing $166
million of U.S. government securities into an irrevocable trust for the purpose
of repaying the debentures in April 1996. The defeasance resulted in an
extraordinary charge of $6 million (after tax), principally reflecting the call
premium on the debt.

-17-

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED STATEMENTS OF INCOME
Burlington Northern Inc. and Subsidiaries
(Dollars in millions)
<TABLE>
<CAPTION>

Year ended December 31, 1995 1994 1993
- -------------------------------------------------------------------

<S> <C> <C> <C>
Revenues ............................... $5,381 $4,995 $4,699

Operating expenses:
Compensation and benefits ............. 1,832 1,779 1,709
Equipment rents ....................... 471 429 395
Purchased services .................... 420 472 457
Depreciation and amortization ......... 433 362 352
Fuel .................................. 405 369 362
Materials ............................. 266 305 300
Other ................................. 431 426 463
Merger, severance and asset charges ... 735 - -
------ ------ ------
Total operating expenses ............ 4,993 4,142 4,038
------ ------ ------
Operating income ....................... 388 853 661
Equity in earnings of SFP .............. 24 - -
Interest expense ....................... 188 155 145
Other income (expense), net ............ 24 (3) 5
------ ------ ------
Income before income taxes ............. 248 695 521
Income tax expense ..................... 102 269 225
------ ------ ------
Income before extraordinary item and
cumulative effect of change in
accounting method .................... 146 426 296
Extraordinary item, loss on early
retirement of debt, net of tax ....... (6) - -
------ ------ ------
Income before cumulative effect of
change in accounting method .......... 140 426 296
Cumulative effect of change in
accounting method, net of tax ........ (100) (10) -
------ ------ ------
Net income ............................ $ 40 $ 416 $ 296
====== ====== ======
</TABLE>

See accompanying notes to consolidated financial statements.

-18-

<PAGE>

CONSOLIDATED BALANCE SHEETS

Burlington Northern Inc. and Subsidiaries
(Dollars in millions)
<TABLE>
<CAPTION>

December 31, 1995 1994
- ---------------------------------------- ------- -------
ASSETS

Current assets:
<S> <C> <C>
Cash and cash equivalents ............. $ 42 $ 27
Accounts receivable, net .............. 566 697
Materials and supplies ................ 136 100
Current portion of deferred income
taxes ................................ 174 156
Other current assets .................. 38 32
------ ------
Total current assets ................ 956 1,012

Property and equipment, net ............ 6,566 6,311
Investment in SFP ...................... 556 -
Other assets ........................... 323 269
------ ------
Total assets ...................... $8,401 $7,592
====== ======

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
Accounts payable and other current
liabilities .......................... $1,400 $1,325
Long-term debt and commercial paper due
within one year ...................... 33 122
------ ------
Total current liabilities ........... 1,433 1,447

Long-term debt and commercial paper .... 1,709 1,697
Deferred income taxes .................. 1,245 1,456
Advance from parent, net ............... 460 -
Casualty and environmental reserves .... 417 416
Employee merger and separation costs ... 257 -
Other liabilities ...................... 648 339
------ ------
Total liabilities ................... 6,169 5,355
------ ------
Commitments and contingencies (see
Note 12 and 13)

Stockholder's equity:
Convertible preferred stock and
additional paid-in capital ........... - 337
Common stock and additional paid-in
capital............................... 1,797 1,444
Retained earnings ..................... 454 485
Other ................................. (19) (29)
------ ------
Total stockholder's equity .......... 2,232 2,237
------ ------
Total liabilities and stockholder's
equity .......................... $8,401 $7,592
====== ======
</TABLE>

See accompanying notes to consolidated financial statements.

-19-

<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Burlington Northern Inc. and Subsidiaries
(Dollars in millions)

Year ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 40 $ 416 $ 296
Adjustments to reconcile net income to net
cash provided by operating activities:
Cumulative effect of change in accounting method...... 100 10 -
Depreciation and amortization......................... 433 362 352
Deferred income taxes................................. (136) 126 156
Merger, severance and asset charges................... 735 - -
Employee merger and separation costs paid............. (87) - -
Other, net............................................ 55 9 (117)
Changes in current assets and liabilities:
Accounts receivable, net............................. 35 (108) (116)
Materials and supplies............................... (37) (13) 6
Other current assets................................. (6) (5) (4)
Accounts payable and other current liabilities....... 24 11 5
------ ----- -----
Net cash provided by operating activities.................. 1,156 808 578
------ ----- -----

INVESTING ACTIVITIES
Cash used for capital expenditures....................... (741) (698) (676)
Investment in SFP........................................ (514) (18) -
Other, net............................................... 1 16 17
------ ----- -----
Net cash used for investing activities..................... (1,254) (700) (659)
------ ----- -----

FINANCING ACTIVITIES
Net increase in commercial paper......................... 134 64 26
Proceeds from issuance of long-term debt................. 521 310 224
Advances from parent..................................... 460 - -
Payments on long-term debt............................... (878) (346) (88)
Dividends paid........................................... (129) (129) (125)
Other, net............................................... 5 3 4
------ ----- -----
Net cash provided by (used for) financing activities....... 113 (98) 41
------ ----- -----

Increase (decrease) in cash and cash equivalents........... 15 10 (40)
Cash and cash equivalents:
Beginning of year........................................ 27 17 57
------ ----- -----
End of year.............................................. $ 42 $ 27 $ 17
====== ===== =====

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized................ $ 191 $ 149 $ 144
Income taxes paid, net of refunds........................ 252 128 70
Assets financed through capital lease obligations........ 140 50 -
</TABLE>

See accompanying notes to consolidated financial statements.

-20-
<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
Burlington Northern Inc. and Subsidiaries
(Shares in thousands. Dollars in millions, except per share data.)

<TABLE>
<CAPTION>
Convertible
Preferred Common
Stock and Stock and
Outstanding Additional Additional
Common Paid-in Paid-in
Shares Capital Capital
------- ------- -------
<S> <C> <C> <C>
Balance at December 31, 1992............................ 88,024 $ 337 $1,386
Net income
Dividends:
Common stock, $1.20 per share
Convertible preferred stock, $3.125 per share
Adjustments associated with unearned compensation,
restricted stock...................................... 232 12
Exercise of stock options and related tax benefit....... 500 20
Equity adjustment from minimum pension liability
Other................................................... 40 3
------- ----- ------

Balance at December 31, 1993............................ 88,796 337 1,421
Net income
Dividends:
Common stock, $1.20 per share
Convertible preferred stock, $3.125 per share
Adjustments associated with unearned compensation,
restricted stock...................................... 178 12
Exercise of stock options and related tax benefit....... 184 8
Equity adjustment from minimum pension liability
Other................................................... 66 3
------- ----- ------

Balance at December 31, 1994............................ 89,224 337 1,444
Net income
Conversion and redemption of convertible preferred
stock for common stock................................ 7,340 (337) 337
Dividends:
Common stock, $.90 per share
Convertible preferred stock, $2.344 per share
Adjustments associated with unearned compensation,
restricted stock...................................... 244 12
Exercise of stock options and related tax benefit....... 329 16
Equity adjustment from minimum pension liability
Cost to equity investment adjustment
Other................................................... 43 (12)
Reverse stock split..................................... (97,178)
------- ----- ------
Balance at December 31, 1995............................ 2 $ - $1,797
======= ===== ======
</TABLE>

See accompanying notes to consolidated financial statements.

-21-
<PAGE>

<TABLE>
<CAPTION>
Retained
Earnings Other Total
- -------- ----- ------
<S> <C> <C>
$ 30 $(25) $1,728
296 296

(106) (106)
(22) (22)

(6) 6

(6) (6)

3
----- ---- ------

198 (37) 1,919
416 416

(107) (107)
(22) (22)

(1) 11
8
9 9
3
----- ---- ------

485 (29) 2,237
40 40

(81) (81)
(16) (16)

13 25
16
(18) (18)
26 26
15 3

----- ---- ------
$ 454 $(19) $2,232
===== ==== ======
</TABLE>

-22-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Burlington Northern Inc. and Subsidiaries

1. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Burlington
Northern Inc. and its majority-owned subsidiaries (collectively BNI or Company).
As a result of the merger between BNI and Santa Fe Pacific Corporation (SFP) as
discussed below, BNI became a wholly-owned subsidiary of Burlington Northern
Santa Fe Corporation (BNSF) on September 22, 1995. The principal subsidiary of
BNI is Burlington Northern Railroad (BNRR). All significant intercompany
accounts and transactions have been eliminated. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented.

RECLASSIFICATIONS

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

CASH AND CASH EQUIVALENTS

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

MATERIALS AND SUPPLIES

Materials and supplies consist mainly of diesel fuel, 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 stated at cost. 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 generally 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. The weighted average annual depreciation rate in effect at December
31, 1995 was 3.84 percent for track structure, 5.82 percent for equipment and
2.86 percent for other road properties.

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 on October 26, 1994, December 18, 1994, January 24, 1995 and September
19, 1995, 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.

-23-
<PAGE>

Pursuant to the Merger Agreement, on December 23, 1994, 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. During the
first quarter of 1995 BNI borrowed $500 million under a credit facility of which
the proceeds were used to finance BNI's purchase of SFP common stock in the
Tender Offer. The Tender Offer was completed on February 21, 1995.

Under the Holding Company Structure, BNSF created two subsidiaries. One
subsidiary merged with and into BNI, and the other subsidiary merged with and
into SFP. Each holder of one share of BNI common stock received one share of
BNSF common stock and each holder of one share of SFP common stock, excluding
the SFP common stock acquired by BNI in the Tender Offer and the SFP common
stock held by SFP as treasury stock, received 0.41143945 shares of BNSF common
stock. The rights of each stockholder of BNSF are substantially identical to
the rights of a stockholder of BNI, and the Holding Company Structure has the
same economic effect with respect to the stockholders of BNI and SFP as would a
direct merger of BNI and SFP.

As discussed above, the SFP common stock acquired by BNI in the Tender Offer was
not converted into BNSF common stock, as such BNI maintained its 17 percent
ownership of SFP.

3. MERGER, SEVERANCE AND ASSET CHARGES

Included on the Statement of Income for 1995 are operating expenses of $735
million related to merger, severance and asset costs. Significant components
included in these costs are described below.

Employee-related costs of $287 million were recorded related to BNI's plan to
centralize the majority of its union clerical functions which was approved in
1995. This plan includes the reduction of approximately 1,600 employees which,
among other things, requires installation of common information systems. The
Company and the union have entered into an implementation agreement which allows
the Company to abolish the positions and provides separation benefits to
impacted employees. It will take several years to fully implement this plan due
to the geographical complexity of the new combined rail system, and the time
required to develop and install common systems. Most of the position reductions
are expected to occur during 1996 and 1997, and the entire plan is expected to
be completed by the end of 1998. No provision for clerical relocations was
included in the 1995 expense as employees have yet to commit to relocate. As
such, these costs, as well as any separation and severance costs above those
provided will be recorded as operating expenses of future periods. Both the
timing and magnitude of any such future expense is presently unknown.

Costs of $231 million were recorded for salaried employees and reflect
severance, pension and other employee benefits, and costs for employee
relocations incurred during the period. Severance, pension and other employee
benefit costs reflect the elimination of approximately 1,000 BNI employees.
Most of these positions were eliminated in the third and fourth quarters of
1995; remaining positions will be eliminated in 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 are included for branch line dispositions reflecting the
write-off of the net book value of the lines at the anticipated disposal date,
less estimated net proceeds. Approximately 75 line segments, covering 3,300
miles of BNI lines are included. Remaining costs of $89 million include
obligations at leased facilities which expected to be vacated and the write-off

-24-
<PAGE>

of duplicate and excess assets including computer hardware and software and
certain facilities.

Current and long-term employee merger and separation liabilities totaling $379
million are included in the consolidated balance sheet and represent employee-
related components of the above costs.

At December 31, 1995, approximately $122 million of the above total is included
within current liabilities for anticipated costs to be paid in 1996. The
remaining costs are anticipated to be paid over the next five years.

4. ACCOUNTING CHANGES

Effective January 1, 1995, BNI 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.
BNI previously expensed locomotive overhauls when the costs were incurred. BNI
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, (net of a $63
million income tax benefit). The effect of this change for the year ended
December 31, 1995, was to reduce income before extraordinary item and cumulative
effect of change in accounting method by $26 million. The pro forma effect of
this change on 1994 and 1993 would have been to reduce net income by $26 million
and $21 million, respectively and would have reduced net income to $390 million
and $275 million, respectively.

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

In 1994, BNI adopted SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The adoption of this standard had no effect on net
income and no material effect on stockholders' equity.

5. INVESTMENT IN SFP

As discussed in Note 2: Acquisition of SFP, BNI has a 17 percent ownership
interest in SFP. The Company accounts for its investment in SFP under the
equity method. The following table sets forth selected financial data for SFP
for the year ended December 31, 1995 (in millions):

<TABLE>
<CAPTION>
Statement of Income Data
<S> <C>
Revenues......................................... $ 2,789
Operating income................................. 501
Interest expense................................. 161
Income before extraordinary item................. 183
Net income....................................... 159

Balance Sheet Data
Current assets................................... $ 299
Property and equipment, net...................... 9,435
Total assets..................................... 10,383
Current liabilities.............................. 905
Long-term debt................................... 949
Other liabilities................................ 5,145
Total stockholders' equity....................... 3,384
</TABLE>

-25-
<PAGE>

6. OTHER INCOME (EXPENSE), NET

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

Year ended December 31, 1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
Interest income........................ $14 $ 3 $ 6
Gain on property dispositions.......... 12 15 17
Accounts receivable sale fees.......... - (9) (9)
Miscellaneous, net..................... (2) (12) (9)
---- --- ---
Total............................... $24 $(3) $ 5
==== === ===
</TABLE>

7. INCOME TAXES

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

Year ended December 31, 1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>

Current:
Federal...............................$ 207 $124 $ 61
State................................. 31 19 8
----- ---- ----
238 143 69
----- ---- ----

Deferred:
Federal............................... (120) 109 136
State................................. (16) 17 20
----- ---- ----
(136) 126 156
----- ---- ----

Total...............................$ 102 $269 $225
===== ==== ====
</TABLE>

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

Year ended December 31, 1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax
rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of
federal tax benefit.................. 3.9 3.4 3.4
Effect of 1 percent federal tax
rate increase on
deferred tax balances at
January 1, 1993....................... - - 5.0
Other, net............................. 2.2 0.3 (.2)
---- ---- ----
Effective tax rate..................... 41.1% 38.7% 43.2%
==== ==== ====

</TABLE>

In August 1993, the Omnibus Budget Reconciliation Act of 1993 (the Act) was
signed into law. The Act increased the corporate federal income tax rate by 1
percent, effective January 1, 1993. BNI recorded $28 million to income tax
expense representing the impact of the 1 percent increase on BNI's beginning of
the year deferred tax liability.

-26-
<PAGE>

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

<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization............................. $(1,740) $(1,785)
Other..................................................... (109) (106)
------- -------
Total deferred tax liabilities.......................... (1,849) (1,891)
------- -------
Deferred tax assets:
Casualty and environmental reserves....................... 235 255
Employee merger and separation costs...................... 199 -
Pensions.................................................. 69 49
Other..................................................... 275 287
------- -------
Total deferred tax assets............................... 778 591
------- -------
Net deferred tax liability.............................. $(1,071) $(1,300)
======= =======
Noncurrent deferred income tax liability.................... $(1,245) $(1,456)
Current deferred income tax asset........................... 174 156
------- -------
Net deferred tax liability.............................. $(1,071) $(1,300)
======= =======
</TABLE>

In 1995 and 1993, tax benefits of $11 million and $4 million, respectively,
related to the adjustment to recognize the minimum pension liability was
allocated directly to stockholder's equity. In 1994, tax expense of $6 million
related to the adjustment to reduce the minimum pension liability was allocated
directly to stockholder's equity.

BNI's federal income tax returns have been examined through 1991. All years
prior to 1986 are closed. Issues relating to the years 1986-1991 are being
contested through various stages of administrative appeal. In addition BNI has
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 1995.

8. ACCOUNTS RECEIVABLE, NET

BNI maintains an allowance for doubtful accounts based upon the expected
collectibility of all accounts receivable. Allowances for doubtful accounts of
$24 million and $20 million have been recorded at December 31, 1995 and 1994,
respectively.

9. PROPERTY AND EQUIPMENT, NET

Property and equipment, net was as follows (in millions):

<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Road, roadway structures and real estate.................... $ 8,325 $ 7,875
Equipment................................................... 2,528 2,304
------- -------
Total cost................................................ 10,853 10,179
Less accumulated depreciation............................... (4,287) (3,868)
------- -------
Property and equipment, net............................... $ 6,566 $ 6,311
======= =======
</TABLE>

The consolidated balance sheets at December 31, 1995 and 1994 included $191
million and $77 million, respectively, for property and equipment under capital
leases. The related depreciation was included in depreciation expense.
Accumulated depreciation for property and equipment under capital leases was $38
million and $34 million at December 31, 1995 and 1994, respectively.

Capitalized software development costs are generally amortized over a five to
seven-year estimated useful life using the straight-line method. Amortization
expense was $6 million for the year ended December 31, 1995, $2 million for the
year ended December 31, 1994 and no amortization was recorded for the year

-27-
<PAGE>

ended December 31, 1993. Unamortized capitalized software costs were $22 million
and $20 million as of December 31, 1995 and 1994, respectively.

10. ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES

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

<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Accounts and wages payable..................................... $ 300 $ 264
Casualty and environmental reserves............................ 184 221
Employee merger and separation costs........................... 122 -
Taxes other than income taxes.................................. 108 118
Accrued vacations.............................................. 88 89
Other.......................................................... 598 633
------ ------
Total........................................................ $1,400 $1,325
====== ======
</TABLE>

11. DEBT

Debt outstanding was as follows (in millions):

<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
BNI:
8 3/4% debentures, due 2022.................................. $ 200 $ 200
7 1/2% debentures, due 2023.................................. 150 150
7% notes, due 2002........................................... 150 150
7.40% notes, due 1999........................................ 150 150
9% debentures................................................ - 156
Equipment obligations, weighted average rate of 7.20% and
7.08%, respectively, due serially to 2013.................. 200 194

BNRR:
Consolidated mortgage bonds, 3 1/5% to 9 1/4%, due 2006
to 2045..................................................... 321 321
Capitalized lease obligations, weighted average rate of
6.59% and 8.01%, respectively, expiring 1996 to 2008........ 150 46
Equipment and other obligations, weighted average rate
of 8.44% and 9.30%, respectively, due serially to 2009...... 74 91
General mortgage bonds, 3 1/8% and 2 5/8%, due 2000 and 2010,
respectively................................................ 62 62
Prior lien railway and land grant bonds, 4%, due 1997........ 57 57
General lien railway and land grant bonds, 3%, due 2047...... 35 35
First mortgage bonds, series A, 4%, due 1997................. 20 22
Other........................................................ 9 158
Commercial paper, 6.1% (variable)............................ 224 90
Unamortized discount........................................... (60) (63)
------ ------
Total...................................................... 1,742 1,819
Less:
Current portion of long-term debt and commercial paper....... (33) (122)
------ ------
Long-term debt............................................. $1,709 $1,697
====== ======
</TABLE>

In December 1995, BNI's 9% debentures were defeased by placing $166 million of
U.S. government securities into an irrevocable trust for the purpose of repaying
the debentures in April 1996. The defeasance of debt resulted in an
extraordinary charge of $6 million, net of applicable income tax benefits of $3
million, principally reflecting the call premium on the debt.

In 1995, BNRR completed cross-border leveraged leases of equipment for a total

-28-
<PAGE>

amount of $136 million which were recorded as capital lease obligations. These
transactions included the issuance of $108 million of equipment secured debt at
a weighted average yield of 6.39 percent and the receipt of an up front cash
benefit. The up front benefit reduces the effective interest rate on the debt
to 5.76 percent.

In November 1994, BNRR entered into a $150 million three year term loan facility
agreement with a group of commercial banks and used the proceeds to redeem $150
million aggregate principal amount of Railroad Consolidated Mortgage Bonds, 10%,
Series J, due November 1, 1997. In November 1995, this debt was repaid through
the issuance of commercial paper by BNRR.

In May 1994, BNI issued $150 million of 7.4% notes due May 15, 1999 and used the
proceeds to retire $150 million aggregate principal amount of Railroad
Consolidated Mortgage Bonds, 8 7/8%, Series I, due May 30, 1994.

Aggregate long-term debt scheduled maturities are $33 million, $106 million, $32
million, $177 million and $286 million for 1996 through 2000, respectively.

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

12. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of BNI's financial instruments at December 31, 1995
and 1994 and the methods and assumptions used to estimate the fair value of each
class of financial instruments held by BNI, were as follows:

CASH AND CASH EQUIVALENTS

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

MARKETABLE SECURITIES

Marketable securities, which are used to fund liabilities of certain employee
benefit plans, consist of corporate bonds (47 percent of carrying amount) and
United States government or agency issues (53 percent of carrying amount) and
are classified as available for sale. The carrying value of available for sale
securities is adjusted for changes in fair value and any unrealized gains or
losses are recorded as a component of stockholders' equity. At December 31,
1995, the unrealized gains and losses were immaterial. Realized gains or losses
from the sales of marketable securities were also immaterial for 1995. The fair
value for these securities was based on market.

ACCRUED INTEREST PAYABLE

The carrying amount approximated fair value as the majority of interest payments
are made semiannually.

LONG-TERM DEBT AND COMMERCIAL PAPER

The fair value of BNI'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 BNI for debt of the same remaining maturities. The carrying amount
of commercial paper approximated fair value because of the short maturity of
these instruments.

-29-
<PAGE>

The carrying amount and estimated fair values of BNI's financial instruments
were as follows (in millions):

<TABLE>
<CAPTION>
December 31, 1995 1994
- -------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents.................. $ 42 $ 42 $ 27 $ 27
Marketable securities...................... 20 20 20 20

Liabilities:
Accrued interest payable................... 43 43 45 45
Long-term debt and commercial paper........ 1,742 1,878 1,819 1,742
</TABLE>

BNI also holds investments in, and has advances to, several unconsolidated
transportation affiliates. It was not practicable to estimate the fair value of
these financial instruments, which were carried at their original cost of $10
million and $16 million in the December 31, 1995 and 1994 consolidated balance
sheets.

13. HEDGING ACTIVITIES, LEASES AND OTHER COMMITMENTS

Hedging activities

BNI 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. Additionally, this program includes exchange-traded petroleum
futures contracts 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 BNI
hedges portions of its fuel purchases, it may not fully benefit from decreases
in fuel prices.

As of December 31, 1995, BNI had entered into forward purchases for
approximately 69 million gallons at an average price of approximately 49 cents
per gallon. In addition, BNI held petroleum futures contracts representing
approximately 60 million gallons at an average price of approximately 48 cents
per gallon. These contracts have expiration dates ranging from January, 1996 to
October, 1996.

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

BNI's current fuel hedging program covers approximately 20 percent of estimated
1996 fuel purchases. The current and future fuel delivery prices are monitored
continuously and hedge positions are adjusted accordingly. Hedge positions are
also closely monitored to ensure that they will not exceed actual fuel
requirements in any period. Unrealized gains or losses from BNI's fuel hedging
transactions were not material at December 31, 1995 and 1994. BNI monitors its
hedging positions and credit ratings of its counterparties and does not
anticipate losses due to counterparty nonperformance.

Leases

BNI 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

-30-
<PAGE>

payments (which reflect leases having non-cancelable lease terms in excess of
one year) as of December 31, 1995 are summarized as follows (in millions):
<TABLE>
<CAPTION>

Capital Operating
Year ended December 31, Leases Leases
- ------------------------------------------------------------
<S> <C> <C>
1996...................................... $ 20 $ 212
1997...................................... 21 210
1998...................................... 20 175
1999...................................... 19 145
2000...................................... 19 127
Thereafter................................ 114 1,224
---- ------
Total..................................... 213 $2,093
======
Less amount representing interest......... 63
----
Present value of minimum lease payments... $150
====
</TABLE>

Lease rental expense for all operating leases was $274 million, $229 million and
$194 million for the years ended December 31, 1995, 1994 and 1993, respectively.
Contingent rentals and sublease rentals were not significant.

Other commitments

BNI has entered into a commitment to acquire 124 locomotives during 1996 and
1997. In addition, BNI has two power purchase agreements, expiring in 1998 and
2001, that currently involve 197 locomotives. Payments required by the
agreements are based upon usage, subject to specified take-or-pay minimums. The
rates specified in the two agreements are renegotiable every two years. BNI's
1996 minimum commitment obligation is $51 million. Based on projected locomotive
power requirements, BNI's payments in 1996 are expected to be in excess of the
minimum. Payments under the agreements totaled $49 million, $47 million and $53
million in 1995, 1994 and 1993, respectively. In 1990, BNI entered into a letter
of credit for the benefit of a vendor. This letter of credit is a performance
guarantee for up to $15 million for locomotive overhauls.

BNI is party to service interruption insurance agreements under which it would
be required to pay premiums of up to a maximum of approximately $70 million in
the event of work stoppages on other railroads related to ongoing national
bargaining. BNI is also entitled to receive payments under certain conditions if
a work stoppage occurs on its property.

14. ENVIRONMENTAL AND OTHER CONTINGENCIES

Environmental

BNI's operations, as well as those of its competitors, are subject to extensive
federal, state and local environmental regulation. BNI'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 BNI'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, BNI 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. BNI has been
notified that it is a potentially responsible party (PRP) for study and clean-up
costs at approximately 22 Superfund sites for which investigation and
remediation payments are or will be made or are yet to be determined (the
Superfund sites) and, in many instances, is one of several PRPs. In addition,
BNI may be considered a PRP under certain other laws. Accordingly, under CERCLA
and other federal and state statutes, BNI may be held jointly and severally
liable for all environmental costs associated with a particular site. If there
are other PRPs, BNI generally participates in the clean-up of these

-31-
<PAGE>

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 BNI'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. BNI 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.

BNI is involved in a number of administrative and judicial proceedings and other
mandatory clean-up efforts at approximately 180 sites, including the Superfund
sites, at which it is being asked to participate in the study and, or both,
clean-up of alleged environmental contamination. BNI paid approximately $28
million, $21 million and $27 million during 1995, 1994 and 1993, respectively
relating to mandatory clean-up efforts, including amounts expended under federal
and state voluntary clean-up programs. BNI has accruals of approximately $115
million for remediation and restoration of all known sites, including $105
million pertaining to mandated sites, of which approximately $40 million relates
to the Superfund sites. BNI anticipates that the majority of the accrued costs
at December 31, 1995 will be paid over the next five years. No individual site
is considered to be material. Recoveries received from third parties, net of
legal costs incurred, were approximately $31 million during the year ended
December 31, 1995 and were not significant in prior years.

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

BNI expects it will become subject to future requirements regulating air
emissions from diesel locomotives that may increase its operating costs.
Regulations applicable to new locomotive engines are expected to be issued by
the Environmental Protection Agency soon. It is anticipated that these
regulations will be effective for locomotive engines installed after 1999. Under
some interpretations of federal law, older locomotive engines may be regulated
by states based on standards and procedures which the State of California
ultimately adopts. At this time it is unknown whether California will adopt
locomotive emission standards that may differ from federal standards.

Other claims and litigation

BNI 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

-32-
<PAGE>

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 BNI, 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

BNI has a noncontributory defined benefit pension plan covering substantially
all non-union employees. BNI also has a nonqualified defined benefit plan for
certain officers and other employees. The benefits are based on years of
credited service and the highest five-year average compensation levels. BNI'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 were as follows (in millions):
<TABLE>
<CAPTION>

Year ended December 31, 1995 1994 1993
- ------------------------------------------------------------

<S> <C> <C> <C>
Service cost, benefits earned during
the period............................. $ 9 $ 12 $ 9
Interest cost on projected benefit
obligation ............................ 54 50 50
Actual return on plan assets............ (93) (25) (57)
Net amortization and deferred amounts... 57 (1) 24
Curtailment costs....................... 10 - -
Cost of special termination benefits.... 32 - -
---- ---- ----
Net pension cost....................... $ 69 $ 36 $ 26
==== ==== ====
</TABLE>

The following table shows the reconciliation of BNI's funded status of the plans
with amounts recorded in the consolidated balance sheets (in millions):
<TABLE>
<CAPTION>

December 31, 1995 1994
- ----------------------------------------------------------

<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation.................. $(641) $(481)
===== =====
Accumulated benefit obligation............. $(696) $(553)
===== =====
Projected benefit obligation............... $(758) $(628)
Plan assets at fair value, primarily
marketable equity and debt securities..... 534 467
----- -----
Projected benefit obligation in excess
of plan assets............................ (224) (161)
Unrecognized net loss...................... 93 41
Unrecognized prior service cost............ 2 5
Unamortized net transition obligation...... 20 29
Adjustment required to recognize
minimum liability......................... (53) (12)
----- -----
Accrued pension liability................. $(162) $ (98)
===== =====
</TABLE>

BNI uses a December 31 measurement date. The assumptions used in accounting for
BNI's plans were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate....................................... 7.0% 9.0% 7.0%
Rate of increase in compensation levels............. 4.0% 5.5% 5.5%
Expected long-term rate of return on plan assets.... 9.5% 9.5% 9.5%
</TABLE>

BNI sponsors 401(k) thrift and profit sharing plans which cover substantially
all non-union employees. BNI matches 35 percent of the first 6 percent of the
employees' contributions, which is subject to certain percentage limits of the
employees' earnings, at the end of each quarter. Depending on BNI's performance,
an additional matching contribution of 20 to 40 percent can be made at the end
of the year. BNI's expense was $12 million, $8 million and $6 million in 1995,
1994 and 1993, respectively.

16. OTHER POSTEMPLOYMENT BENEFIT PLANS

BNI provides life insurance benefits to eligible non-union employees. The life
insurance plan is noncontributory and covers retirees only. Components of

-33-
<PAGE>

BNI's postretirement benefit cost were $1 million in each of the three years
ended December 31, 1995, 1994 and 1993, respectively.

BNI's policy is to fund benefits payable under the life insurance plan as they
come due. The following table presents the status of BNI's life insurance plan
and the accrued postretirement benefit cost reflected in the consolidated
balance sheets (in millions). BNI uses a December 31 measurement date.

<TABLE>
<CAPTION>
December 31,
1995 1994
- ------------------------------------------------------------

<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................... $14 $11
Fully eligible active participants.......... 1 1
Other active participants................... 2 2
--- ---
17 14
Unrecognized net gain.......................... 1 4
--- ---
Accrued postretirement benefit cost......... $18 $18
=== ===
</TABLE>

The discount rate used in determining the benefit obligation was 7 percent at
December 31, 1995 and 9 percent at December 31, 1994.

Other Plans

Under collective bargaining agreements, BNI 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 $10
million in 1995, 1994 and 1993.

17. COMMON STOCK, ADDITIONAL PAID-IN CAPITAL AND PREFERRED CAPITAL STOCK

Pursuant to the terms of the Merger Agreement, on September 22, 1995, each share
of the outstanding BNI common stock was converted into the right to receive one
share of BNSF common stock and each share of BNI common stock held by BNI as
treasury stock was canceled. Accordingly, BNSF became the holder of 100 percent
of BNI's common stock. In conjunction with the Merger, the per share par value
of BNI common stock became $1.00.

In November 1992, BNI issued 6,900,000 shares of 6 1/4% Cumulative Convertible
Preferred Stock, Series A, No Par Value. The convertible preferred stock was
not redeemable prior to December 26, 1995. On September 22, 1995, the
outstanding BNI shares were converted to 6,878,607 shares of BNSF 6 1/4%
Cumulative Convertible Preferred Stock, $.01 par value.

In connection with the Merger on September 22, 1995, a new issue of BNI 6 1/4%
Cumulative Convertible Preferred Stock, $0.01 par value, was issued to BNI's
sole stockholder, BNSF. In December 1995, the BNI 6 1/4% Cumulative Convertible
Preferred Stock, $0.01, was converted into shares of BNI common stock. Also in
December 1995, the BNI Board of Directors voted on a reverse stock split
converting all outstanding shares into a total of 2,007 shares of BNI common
stock, all of which shares are held by BNSF.

18. STOCK OPTIONS, OTHER INCENTIVE PLANS AND OTHER STOCKHOLDER'S EQUITY

Stock options

As of September 21, 1995, BNI had approximately 4.5 million stock options
outstanding at an average exercise price of $44.51 which were converted to BNSF

-34-

<PAGE>

stock options upon consummation of the Merger at a one to one ratio. Activity
in stock option plans, prior to the Merger, was as follows:

<TABLE>
<CAPTION>
Exercise
Options Price per Share
- -------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1992.......... 3,251,324 $10.32 to $44.24
Granted............................. 947,125 55.56 to 55.94
Exercised........................... (508,476) 10.32 to 44.24
Cancelled........................... (54,882) 22.50 to 55.94
---------
Balance at December 31, 1993.......... 3,635,091 12.49 to 55.94
Granted............................. 752,690 53.69 to 55.94
Exercised........................... (184,088) 12.49 to 55.94
Cancelled........................... (83,962) 20.48 to 55.94
---------
Balance at December 31, 1994.......... 4,119,731 15.26 to 55.94
Granted............................. 786,030 52.00 to 59.38
Exercised........................... (329,436) 15.26 to 55.94
Cancelled........................... (31,015) 30.31 to 59.38
---------
Balance at September 21, 1995......... 4,545,310 17.83 to 59.38
</TABLE>

Other incentive plans

BNI has various other incentive plans, in addition to stock options, which were
also effectively adopted by BNSF following the Merger, with associated grants
awarded in BNSF common stock. It is possible that these individual plans will
be discontinued in 1996 and will be replaced by a combined BNSF plan.

BNI has restricted stock award plans under which up to 1,700,000 common shares
could be awarded to eligible employees and directors of BNI. No cash payment is
required by the individual. Shares awarded under the plan may not be sold,
transferred or used as collateral by the holder until the shares awarded become
free of the restrictions, generally by one-third on the third, fourth and fifth
anniversaries of the date of grant. All shares still subject to restrictions
are generally forfeited and returned to the plan if the employee or director's
relationship with BNI is terminated. If the employee or director retires,
becomes disabled or dies, the restrictions will lapse at that time. Restricted
stock awards under these plans, net of forfeitures, were 243,763, 177,670 and
232,354 shares in 1995 (prior to the Merger), 1994 and 1993, respectively. A
total of 228,592, 780,694 and 870,525 restricted common shares were outstanding
at September 21, 1995, and December 31, 1994 and 1993, respectively. As a result
of the Merger, outstanding restricted shares became fully vested in February
1995 resulting in $24 million operating expense reflected in merger, severance
and asset charges. Compensation expense for 1994 and 1993 was not significant.

Additionally, BNI adopted an employee stock purchase plan in 1992, effective in
1993, as a means to encourage employee ownership of BNSF common stock. A total
of 500,000 shares of common stock were authorized for distribution under this
plan. The plan allows eligible BNI employees to use the proceeds of incentive
compensation awards to purchase shares of BNSF common stock at a discount from
the market price and may require that the shares purchased be held for a
specific time period. The difference between the market price and the
employees' purchase price is recorded as additional compensation expense.
During the period ended September 21, 1995 and the years ended December 31, 1994
and 1993, 39,421, 31,832 and 34,629 shares were purchased under this plan. The
related compensation expense was not significant. BNI also has a stock award
plan which provided for grants of shares of BNSF's common stock to full-time
employees, excluding officers, based upon performance. A total of 100,000
shares of common stock was authorized for these awards. During the period ended
September 21, 1995, and the years ended December 31, 1994 and 1993, 2,965, 3,900
and 5,540 shares were awarded under this plan. The related compensation expense
was not significant.

Other stockholder's equity

As a result of the Merger, certain investments in third parties held by both BNI
and SFP, which were previously recorded on the cost method, were converted to
the equity method due to BNSF's combined ownership position and ability to

-35-

<PAGE>

exercise significant influence. As such, $26 million, which is net of deferred
taxes of $17 million, was recorded as an increase to retained earnings to
reflect BNI's undistributed equity in earnings since initial investment.

19. RELATED PARTY TRANSACTIONS

BNI and BNSF are involved in related party transactions in the ordinary course
of business which include payments made on each other's behalf and performance
of services. At December 31, 1995, BNI had net advances from BNSF of $460
million, 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. During
1995, BNI incurred interest expense on obligations owed to BNSF of $3 million
and had interest income on obligations owed from BNSF of $6 million.

Additionally, BNRR and SFP's railroad subsidiary, The Atchison, Topeka and Santa
Fe Railway Company (ATSF) are involved in related party transactions in the
ordinary course of business. It is possible that BNRR and ATSF will be merged in
the future, with BNI and SFP each maintaining a combined ownership interest in
the merged railroad.

20. QUARTERLY FINANCIAL DATA-UNAUDITED

<TABLE>
<CAPTION>
(Dollars in millions, except per share data)
- -----------------------------------------------------------------------------
Fourth Third Second First
------ ------ ------ ------
<S> <C> <C> <C> <C>
1995
Revenues..................................... $1,363 $1,387 $1,284 $1,347
Operating income (loss) (1)(3)............... (298) 239 242 205
Income (loss) before extraordinary item and
cumulative effect of change in
accounting method........................ (206) 127 124 101
Extraordinary item, loss on early
retirement of debt, net of tax (2)....... (6) -- -- --
Cumulative effect of change in accounting
method, net of tax (3)................... -- -- -- (100)
------ ------ ------ ------
Net income (loss)............................ $ (212) $ 127 $ 124 $ 1
====== ====== ====== ======

1994
Revenues..................................... $1,344 $1,249 $1,192 $1,210
Operating income............................. 264 229 178 182
Income before cumulative effect of change
in accounting method..................... 142 115 82 87
Cumulative effect of change in accounting
method, net of tax (4)................... -- -- -- (10)
------ ------ ------ ------
Net income................................... $ 142 $ 115 $ 82 $ 77
====== ====== ====== ======
</TABLE>

(1) Results include pre-tax charges of $587 million, $106 million, $10 million
and $32 million for the fourth, third, second and first quarters of 1995,
respectively related to merger, severance and asset charges as discussed in
Note 3.

(2) Results for the fourth quarter include the loss on defeasance of BNI 9%
debentures of $6 million, net of $3 million income tax benefit, treated as
an extraordinary item.

(3) Effective January 1, 1995, BNI changed its accounting for locomotive
overhauls. The cumulative effect of this change attributable to years prior
to 1995 was to decrease net income by $100 million. Additionally, first,
second and third quarter results were restated for the impact of the change
on 1995 by reducing operating income and net income as follows: first
quarter-$12 million and $7 million; second quarter-$9 million and $6
million; and third quarter-$11 million and $7 million, respectively.

(4) Effective January 1, 1994, BNI adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits." The
cumulative effect of this change attributable to years prior to 1994, was to
decrease net income by $10 million.

-36-

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder and Board of Directors of
Burlington Northern Inc. and Subsidiaries

We have audited the consolidated financial statements and financial statement
schedule of Burlington Northern Inc. and Subsidiaries listed in Item 14 of this
Form 10-K. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Burlington Northern Inc. and Subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information required to be included therein.

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

COOPERS & LYBRAND L.L.P.

Fort Worth, Texas
February 15, 1996

-37-

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None

PART IV

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements
Consolidated Statements of Income for the three years ended
December 31, 1995..................................................... 18
Consolidated Balance Sheets at December 31, 1995 and 1994................. 19
Consolidated Statements of Cash Flows for the three years ended
December 31, 1995..................................................... 20
Consolidated Statements of Changes in Stockholder's Equity for
the three years ended December 31, 1995............................... 21
Notes to Consolidated Financial Statements................................ 23

Report of Independent Accountants......................................... 37

Consolidated Financial Statement Schedule for the three years
ended December 31, 1995:
Schedule II-Valuation and Qualifying Accounts....................... 41
</TABLE>

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

-38-

<PAGE>

Exhibit Index

Exhibit
Number Description
- ------- -----------
<S> <C>
2 Agreement and Plan of Merger dated as of June 29, 1994 between
Burlington Northern Inc. and Santa Fe Pacific Corporation as
amended by Amendments 1 and 2 thereto, together with Amendments 3
and 4 thereto. Schedules have been omitted. Schedules will be
furnished supplementally to the Securities and Exchange Commission
upon request. Incorporated by reference to Exhibit 2.1 to BNSF's
Report on Form 8-K (Date of earliest event reported:
September 22, 1995).

3.1 Amended and Restated Certificate of Incorporation of BNI (amended
as of September 11, 1995). Incorporated by reference to Exhibit 3.1
to BNI's Report on Form 10-Q for the quarter ended September 30,
1995.

3.2 By-Laws of BNI. Incorporated by reference to Exhibit 3.2 to BNI's
Report on Form 10-Q for the quarter ended September 30, 1995.

4.1 BNI is not filing any instruments evidencing indebtedness because
the total amount of securities authorized under any single such
instrument does not exceed 10% of BNI's total assets. BNI will
furnish copies of any material instruments upon request of the
Securities and Exchange Commission.

18 Letter Regarding Change in Accounting Principles

23 Consent of Coopers & Lybrand, L.L.P.

24 Powers of Attorney

27 Financial Data Schedule

</TABLE>

REPORTS ON FORM 8-K

NONE

-39-
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Burlington Northern Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on this 29th
day of March, 1996.

BURLINGTON NORTHERN INC.

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

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

/s/ ROBERT D. KREBS March 29, 1996
- ---------------------------- Chairman, President and
Robert D. Krebs Chief Executive Officer
(Principal Executive
Officer) and Director

/s/ DENIS E. SPRINGER March 29, 1996
- ---------------------------- Senior Vice President and
Denis E. Springer Chief Financial Officer
(Principal Financial Officer)

/s/ THOMAS N. HUND
- ---------------------------- Vice President and Controller March 29, 1996
Thomas N. Hund (Principal Accounting Officer)

/s/ DOUGLAS J. BABB Director March 29, 1996
- ----------------------------
Douglas J. Babb

/s/ JEFFREY R. MORELAND Director March 29, 1996
- ------------------------
Jeffrey R. Moreland

-40-
<PAGE>

SCHEDULE II

BURLINGTON NORTHERN INC. and SUBSIDIARIES
Valuation and Qualifying Accounts
For the years ended December 31, 1995, 1994 and 1993
(In Millions)

Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------

Balance at Additions Balance at
Beginning Charged to End of
Description of Period Income Deductions (1) Period (2)
- ----------- --------- ---------- -------------- -----------
<S> <C> <C> <C> <C>

DECEMBER 31, 1995
Casualty and
environmental reserves $637 $159 $195 $601
==== ==== ==== ====

DECEMBER 31, 1994
Casualty and
environmental reserves $689 $183 $235 $637
==== ==== ==== ====

DECEMBER 31, 1993
Casualty and
environmental reserves $713 $227 $251 $689
==== ==== ==== ====

</TABLE>

(1) Principally represents cash payments

(2) Classified in the consolidated balance sheet as follows:

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Casualty and environmental reserves (current liabilities) $184 $221 $263
Casualty and environmental reserves (noncurrent liabilities) 417 416 426
---- ---- ----
$601 $637 $689
==== ==== ====

</TABLE>

-41-

<PAGE>

EXHIBIT 18

February 15, 1996

Mr. Denis E. Springer
Senior Vice President and Chief Financial Officer
Burlington Northern Inc.
1700 East Golf Road
Schaumburg, Illinois 60173-5860

Dear Mr. Springer:

We are providing this letter to you for inclusion as an exhibit to the
Burlington Northern Inc. (the Company) Form 10-K filing pursuant to Item 601 of
Regulation S-K.

We have read management's justification for the change in accounting from the
expensing of locomotive overhaul costs as incurred to the capitalization/
accrual of such costs and depreciating/amortizing them over their estimated
period of future benefit as contained in the Company's Form 10-K for the year
ended December 31, 1995. Based on our reading of the data and discussions with
Company officials of the business judgment relating to the change, we believe
management's justification to be reasonable. Accordingly, in reliance on
management's determination as regards elements of business judgment, we concur
that the newly adopted accounting principle described above is preferable in the
Company's circumstances to the method previously applied.

Very truly yours,

COOPERS & LYBRAND L.L.P.

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statement of
Burlington Northern Inc. on Form S-3 (File No. 33-51705) of our report dated
February 15, 1996, on our audits of the consolidated financial statements and
financial statement schedule of Burlington Northern Inc. and Subsidiaries as of
December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994 and
1993, which reports are included in this Annual Report on Form 10-K.

COOPERS & LYBRAND L.L.P

Fort Worth, Texas
March 29, 1996

<PAGE>

EXHIBIT 24

POWER OF ATTORNEY

WHEREAS, BURLINGTON NORTHERN INC. ("BNI") will file with the Securities and
Exchange Commission, under the provisions of the Securities Exchange Act of
1934, as amended, its Annual Report on Form 10-K for the fiscal year ended
December 31, 1995; and

WHEREAS, the undersigned serve BNI in the capacity indicated;

NOW, THEREFORE, the undersigned hereby constitute and appoint each of DENIS
E. SPRINGER, THOMAS N. HUND and JEFFREY R. MORELAND, his attorney, with full
power to act for him in his name, place and stead, to sign his name in the
capacity set forth below, to the Annual Report on Form 10-K of BNI for the
fiscal year ended December 31, 1995, and to any and all amendments to such
Annual Report on Form 10-K, and hereby ratifies and confirms all that said
attorney may or shall lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney
this 27th day of March, 1996.

/s/ ROBERT D. KREBS /s/ DENIS E. SPRINGER
- ------------------------------------ ------------------------------------
Robert D. Krebs, Director, Denis E. Springer, Director,
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)

/s/ DOUGLAS J. BABB /s/ JEFFREY R. MORELAND
- ------------------------------------ -------------------------------------
Douglas J. Babb, Director Jeffrey R. Moreland, Director

<PAGE>

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

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 42
<SECURITIES> 0
<RECEIVABLES> 590
<ALLOWANCES> 24
<INVENTORY> 136
<CURRENT-ASSETS> 956
<PP&E> 10,853
<DEPRECIATION> 4,287
<TOTAL-ASSETS> 8,401
<CURRENT-LIABILITIES> 1,433
<BONDS> 1,709
<COMMON> 1,797
0
0
<OTHER-SE> 435
<TOTAL-LIABILITY-AND-EQUITY> 8,401
<SALES> 0
<TOTAL-REVENUES> 5,381
<CGS> 0
<TOTAL-COSTS> 4,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 188
<INCOME-PRETAX> 248
<INCOME-TAX> 102
<INCOME-CONTINUING> 146
<DISCONTINUED> 0
<EXTRAORDINARY> (6)
<CHANGES> (100)
<NET-INCOME> 40
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>