B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

1 9 9 8 A N N U A L R E P O R T T O S H A R E H O L D E R S

A B O U T T H E

C O V E R

New GE Dash

9-44CW

locomotives lead a

BNSF doublestack

intermodal train

near East Glacier in

Northern Montana.

C O N T E N T S

2 Message from

the Chairman

6 Building a Better

Foundation

1 0 Improving

Transportation

Efficiency

1 4 BNSF’s Values

1 5 Financial Review

4 1 Executive Officers

and Directors

4 2 Corporate

Information

T H E B N S F V I S I O N

Our vision is to

realize the tremendous

potential of the

Burlington Northern

and Santa Fe Railway

by providing

transportation services

that consistently

meet our customers’

expectations.

We will know we have

succeeded when:

• Our customers find

it easy to do business

with us, receive 100-

percent on-time,

damage-free service,

accurate and timely

information regarding

their shipment, and

the best value for their

transportation dollar.

• Our employees work

in a safe environment

free of accidents and

injuries, are focused on

continuous improve-

ment, share the oppor-

tunity for personal and

professional growth

that is available to all

members of our

diverse work force, and

take pride in their

association with BNSF.

• Our owners earn

financial returns that

exceed other railroads

and the general

market as a result of

BNSF’s superior rev-

enue growth, an oper-

ating ratio in the low

70s, and a return on

invested capital which

is greater than our cost

of capital.

• The communities

we serve benefit from

our sensitivity to their

interests and to the

environment in gener-

al, our adherence to

the highest legal and

ethical standards, and

the participation of

our company and our

employees in commu-

nity activities.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 1

C O N S O L I D A T E D F I N A N C I A L H I G H L I G H T S

Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data)The selected financial data shown below include BNSF results for each of the years ended December 31, 1998, 1997 and 1996, Burlington Northern Inc. results for each of the two years ended December 31, 1995, and Santa Fe Pacific Corporation resultsfrom September 22, 1995 through December 31, 1995.

December 31, 1998 1997 1996 1995 1994

F O R T H E Y E A R E N D E D :

Revenues $ 8,941 $ 8,370 $ 8,109 $ 6,099 $4,894Operating income (1) 2,158 1,767 1,748 526 853Income before extraordinary item and cumulative

effect of change in accounting method (2) 1,155 885 889 198 426Accounting change/Extraordinary item (3)(4) — — — (106) (10)Net income $ 1,155 $ 885 $ 889 $ 92 $ 416Earnings available for common stockholders $ 1,155 $ 885 $ 889 $ 71 $ 394Basic earnings per share:(5)

Before extraordinary item and change in accounting method $ 2.45 $ 1.91 $ 1.95 $ .57 $ 1.51

Accounting change/Extraordinary item — — — (.34) (.04)Basic earnings per share $ 2.45 $ 1.91 $ 1.95 $ .23 $ 1.47Average shares (in millions) 470.5 464.4 456.3 313.2 267.3

Diluted earnings per share:(5)

Before extraordinary item and change inaccounting method $ 2.43 $ 1.88 $ 1.91 $ .55 $ 1.46

Accounting change/Extraordinary item — — — (.33) (.03)Diluted earnings per share $ 2.43 $ 1.88 $ 1.91 $ .22 $ 1.43Average shares (in millions) 476.2 471.1 464.4 317.7 291.3

Dividends declared per common share (5) $ .44 $ .40 $ .40 $ .40 $ .40

A T Y E A R E N D :

Total assets $22,690 $21,336 $19,763 $18,269 $7,592Long-term debt and commercial paper,

including current portion 5,456 5,289 4,711 4,233 1,819Stockholders’ equity 7,770 6,812 5,981 5,037 2,237Total debt to capital 41% 44% 44% 46% 45%

F O R T H E Y E A R E N D E D :

Capital expenditures $ 2,147 $ 2,182 $ 2,234 $ 890 $ 698Depreciation and amortization 832 773 760 520 362Operating ratio (6) 75.9% 77.8% 78.4% 79.3% 82.6%

(1) 1997 and 1995 include $90 million ($57 million after-tax) and $735 million ($453 million after-tax), respectively, for special charges principallyrelated to employee merger and separation costs.

(2) Includes items in note (1) above. Additionally, 1998 includes a $32 million after-tax gain on the sale of substantially all of the Company’s interestin Santa Fe Pacific Pipeline Partners, L.P. as discussed in Note 2 of the financial statements.

(3) 1995 includes the cumulative effect of the change in accounting method for locomotive overhauls which decreased net income by $100 million.Additionally, 1995 includes an extraordinary loss on retirement of debt of $6 million (after-tax).

(4) 1994 includes the cumulative effect of the implementation of the accounting standard for post-employment benefits. (5) Information for prior periods has been restated to reflect the 1998 three-for-one common stock split. (6) 1997 and 1995 operating ratios exclude the pre-tax charges discussed in note (1) above.

2 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

T O O U R S H A R E H O L D E R S ,

C U S T O M E R S A N D C O L L E A G U E S

No matter what measure is used, 1998

was a record-breaking year for Burlington

Northern Santa Fe Corporation.

Our safety severity ratio – the number of

workdays lost per 200,000 hours worked –

was 29 percent lower compared with 1997. This

was BNSF’s third consecutive year of 25 percent

or better improvement in this key measure.

Our reportable injury frequency, a related

safety ratio measuring injuries per 200,000

hours worked, was 5 percent lower than a year

ago at 1.74, moving us another step closer to our

goal of an injury-free and accident-free work-

place. This was the seventh consecutive year

that BNSF posted a reduction. In 1998, we

worked 4.7 million more man-hours than we

did in 1995 (the year of our merger), yet we

had 540 fewer people injured than in 1995.

This positive trend in personal safety also con-

tributed to an 8 percent reduction in the frequency

of reportable rail accidents and incidents per

one-million train miles in 1998. Between year

end 1995 and 1998, BNSF has achieved a 36

percent improvement in this ratio, significantly

reducing the number of accidents caused by

human factors, track defects and mechanical

malfunctions. Our continuing investments in

track maintenance and new locomotives also

have contributed to this improvement.

While BNSF and its people were recording

the safest year in our history, revenues grew

6.8 percent to a record $8.94 billion compared

with 1997. During our first three full years of

operation, BNSF increased annual revenues by

$862 million. We completed 1998 with a 44.3

percent share of the western rail market, a gain

of more than four share-points, or 1 million

units, in a two-year period.

Almost 7.9 million freight units traveled on

BNSF’s 34,000-route-mile network in 1998, a

7.3 percent increase from 1997. These units

generated a record 469 billion revenue-ton-miles

(the movement of a ton of revenue freight one

mile), a 10.5 percent increase from 1997. Inter-

modal and automotive accounted for a record

3.4 million units; coal represented 2 million loads,

or a record 230 million tons; chemicals, metals

and minerals, forest products and consumer goods

accounted for a record 1.9 million loads, and agri-

cultural commodities represented 581,000 loads.

Adjusted operating income grew $301 mil-

lion, or 16 percent, to a record $2.16 billion

from a year ago. Since 1995, BNSF has gen-

N R O B E R T D . K R E B S

Chairman, President and

Chief Executive Officer,

Burlington Northern

Santa Fe Corporation

$1.86$1.75

$2.16

GROWTH IN ADJUSTED OPERATING INCOMEIn Billions

$8.37

$8.11

$8.94

REVENUE GROWTHIn Billions

1996 1997 19981996 1997 1998

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 3

erated an additional $625 million in adjusted

operating income.

Adjusted net income exceeded $1.12 billion,

or $2.36 per share, a 19 percent improvement

compared with a year ago. Almost $390 million,

or $0.75 per share, has been added to BNSF’s

adjusted net income in the past three years.

Our operating ratio (the amount of operating

expense we spend to generate every dollar of

revenue) was 75.9 percent, our lowest ever and

nearly two points under 1997’s adjusted ratio.

Between 1996 and 1998, BNSF has reduced

this ratio by 5.2 points, reflecting the compound

benefits of significant revenue growth and pro-

ductivity gains from new capital investment and

smart expense management.

On September 1, 1998, BNSF implemented

a three-for-one stock split, the first in its history,

and on October 1, we initiated a 20 percent

increase in our dividend rate, which is now 48

cents per share per year.

I M P R O V I N G Q U A L I T Y

O F L I F E A N D E F F I C I E N C Y

To ensure that BNSF people remain alert on the

job and have sufficient rest, BNSF has been the

pioneer in exploring and piloting initiatives that

study how sleep, rest and work cycles affect

employee productivity and quality of life. Here are

some of the BNSF programs and initiatives which

have been undertaken with the help of our labor

unions and the Federal Railroad Administration:

• During 1997 and early 1998, all BNSF employ-

ees had the opportunity to receive training and

information on circadian rhythms, alertness

strategies, rest environment, diet and exercise.

• During 1999, a series of Fatigue Counter-

measures pamphlets will be distributed to all

employees, as well as to members of communities

and government agencies, reviewing the latest

scientific information on sleep, rest and alertness.

• BNSF piloted six-hour call windows as part of

several crew rest initiatives in 1997 and 1998, and

we will pilot similar programs at several additional

locations in 1999 in an effort to determine how to

best provide predictable work cycles. In1999, BNSF

will roll out a new program that gauges train

lineup accuracy as it relates to crew calling times.

• Predictable off-duty schedules, either 11-days-

on/4-days-off, or 8-on/3-off, are now in place

on 52 extra boards. The 11/4 arrangement is

being offered for implementation on the remain-

ing 200 BNSF extra boards. Assigned rest days

for pool crews are now in place at Fort Madison,

Iowa, and Superior, Wisconsin, and will be

extended to other locations during 1999.

• BNSF continues to guarantee pool crew

employees 14 hours off between trips at their

home terminal.

• BNSF’s napping policy has been in place since

1997 for all train and engine employees, allowing

these people to take up to a 45-minute nap

under certain conditions. This policy is used

on about 15-to-20 percent of all trips.

77.8%78.4% 75.9%

ADJUSTED OPERATING RATIO

44.3% 44.8%

39.6%

50.1%

BNSF

UP

BNSF UP

GROWTH IN WESTERN RAIL MARKET SHARE

1996 1997 1998 1996 1998

4 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

I N V E S T I N G F O R

T O D A Y A N D T O M O R R O W

During 1998, we continued making progress

in two other key areas: investing in our facili-

ties, equipment, and information systems in

order to provide better and more consistent

on-time service; and investing in our people to

help them relate better to one another and to

the entire BNSF Community.

We believe these types of investments are the

keys to revenue growth and efficiency gains

that will provide you with superior returns in

the years ahead and enable BNSF to achieve its

vision: To realize our tremendous potential by

providing transportation services that consis-

tently meet our customers’ expectations.

Between 1996 and 1998, BNSF invested

$7.1 billion to maintain and expand its net-

work to provide customers with more reliable,

consistent train service. In addition, we hired

and trained almost 8,100 people, mostly for

train, yard and engine service, maintenance of

way, shopcraft, and other union-represented

positions. BNSF’s average workforce for year

end 1998 was 44,349 people, a reduction of

1,306 over the past three years.

About $1.4 billion was spent on capacity

expansion projects to remove constraints to

service improvements. Beginning on page 6,

we show in detail, using a map and a train,

where capacity has been expanded on our net-

work over the past three years. We also high-

light how these investments in terminal and

intermodal facilities, main line track capacity,

and the purchase of track from the Union

Pacific (UP) are beginning to produce results.

Another $1.4 billion was spent to acquire 933

road locomotives increasing the horsepower of

our road fleet by 27 percent, which along with

fuel conservation measures have improved fuel

efficiency by 6 percent to 737 gross ton miles/

gallon at year end 1998 from 693 at year end

1995. These investments will eliminate approx-

imately $130 million in annual locomotive

maintenance costs, that otherwise would have

been incurred, by reducing the number of dif-

ferent locomotive models in our road fleet

from 19 to 10, reducing parts inventory, and

simplifying locomotive training.

About $3.7 billion has been spent over this

three-year period on maintaining our track,

signals, bridges and tunnels, and to overhaul

locomotives and freight cars.

Another $143 million has been invested in

a new information system, which today pro-

vides integrated, real-time data for all business

transactions. Our Transportation Support System

is helping us to better manage our rail network

and to improve day-to-day performance. In

addition, customers can now order cars, provide

shipping instructions and arrange billing through

our Internet site at www.bnsf.com. Our goal is

to make it easy for customers to do business

with us and we will be adding new transaction

capabilities continuously to our site.

As a result of a series of shipper forums held

during the last half of 1998, BNSF and the other

Class I railroads have been providing performance

measurement data since January 13, 1999,

to help our customers remain current on how

our railroad is operating, as well as to improve

communications. Data on total cars on line,

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 5

average train speed, average terminal dwell

time and the number of freight cars received

without a bill of lading is being published

weekly on our Internet site as indicators of how

well traffic is moving on the BNSF network.

One annual measure of how well BNSF

serves customers took place in 1998 during the

27-day period preceding Christmas. For our

largest intermodal customer, United Parcel

Service (UPS), we handled 31,786 trailers, or

55 million packages without a single service

failure – the largest UPS peak volume ever

handled by a railroad and a 15 percent increase

over BNSF’s 1997 26-day peak volume, which

was also failure free. Our latest failure-free

streak for UPS began prior to Thanksgiving

and continued through January 4,1999 – 45

days during which we handled 43,394 trailers

without a single service failure.

We expect to invest another $2.5 billion in

BNSF’s network and locomotive and equip-

ment fleets during 1999 to further improve

our ability to provide consistent customer ser-

vice. We will acquire 476 road locomotives, the

largest single-year total in railroad history, which

should alleviate the locomotive shortage we have

struggled with since our merger. Beginning in

2000, we expect new locomotive acquisitions

to significantly decline compared with 1999.

All of our investment programs will not make

a difference, however, unless all BNSF people can

work well together and communicate honestly

with one another. During 1998, we continued

our Town Hall meetings which began in 1996.

During the past three years, I have personally

met with more than 16,000 employees from

Vancouver, British Columbia, to Birmingham,

Alabama. These meetings give me an opportunity

to explain how our Company is doing in pursuit

of our vision and to help make sure that all of

our people understand our values, how we want

to operate and make decisions, and the type of

company we want to be. These meetings also give

me an opportunity to hear from our employees

about their concerns and expectations, as well

as their ideas for improving our company.

To help improve understanding of BNSF’s

Vision and Values (see page 14), all of our 5,200

salaried people have attended a two-day work-

shop over the past 12 months. Now, we will begin

taking this program in a condensed format to the

other 39,000 BNSF people across our system.

It is really the people of BNSF that continu-

ously make the difference in how well our

Company achieves its goals. I am impressed every

day by their desire to do things right and by

their commitment to make BNSF the service

standard for our industry.

Robert D. KrebsChairman, President and Chief Executive Officer

February 18, 1999

B U I L D I N G A B E T T E R F O U N D A T I O N

BNSF has invested nearly $2.8 billion over the past

three years to expand our capacity to provide the

transportation services that consistently meet our

customers’ expectations. We have expanded main line

capacity by constructing 410 miles of double

and triple track on key segments of our

busiest routes, increased our intermodal

lift capacity by 7 percent (562,000 units)

at hub centers across our system, and are

close to ending the locomotive shortage by

increasing the size of our road fleet 27 percent in just

the past three years. We have also retied 9,100 miles

of rail line, relayed rail on 2,450 miles of track and

resurfaced the equivalent of our entire route system —

35,500 miles of track. And we have improved

our ability to manage the performance of our

operations with a new information system.

The map on pages 7 & 8 provides greater

detail on where these investments have

improved BNSF’s foundation.

39.22

59.29

27.80

LOST WORK DAYS RATIOPer 200,000 hours worked

1996 1997 1998

6 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

2.862.66

2.46

BNSF RAIL ACCIDENTS & INCIDENTSFrequency per

million train miles

1996 1997 1998

B

This new concrete bridge

girder was part of a

year’s worth of maintenance

work and improvements

that were completed in

just 12 days on a 250-mile

core route during

the Thayer Blitz project.

7 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 8

Expanded the San BernardinoIntermodal hub center to handle more than 400,000 lifts per year.

Expanded and upgraded the 250-mile core route between Springfield,Missouri and Memphis, Tennessee.

Secured access to three more major gateways to Mexicothrough additionaltrackage rights toBrownsville and Eagle Pass, and access to Laredo, Texas.

Established a joint dispatching centerwith Union Pacific in Spring, Texas toefficiently handle the chemical businesswe gained access to,and to manage trafficon the jointly-ownedBNSF-UP linebetween Houston and New Orleans.

Completed double trackingthe 127-mile Orin line in the Powder River Basin and added 146 miles of 2nd & 3rd main tracks on key segments of BNSF’scoal routes in Wyoming and Nebraska.

Expanded the yardand locomotive facilityat Barstow, California.

Added a new locomotive facility at

Commerce, California.

Added a new automotive facility

in San Diego to accommodate growth in auto-

mobile traffic.

Added 163 moremiles of second main

track to BNSF’s premier Chicago – Los Angeles route

which is now more than 85%

double track.

Added 53 miles of second main trackto key segments of BNSF’s main linebetween Pasco,Washington andShelby, Montana

Added capacity for 40,000 additionalannual lifts to theSouth Seattle Inter-modal hub center.

Expanded inter-modal hub centers in the Chicago area at Willow Springs and Corwith to handle a combined175,000 additionalannual lifts.

Added capacity at the MemphisIntermodal hub center to handle 25,000 more lifts per year.

Added capacity at the Pearland, Texas(Houston) Intermodalhub center to handle35,000 additionalannual lifts.

Expanded the Alliance, Texas (DFW) Inter-

modal hub center to handle 90,000

additional annual lifts.

M A J O R B N S F I N V E S T M E N T S I N C A P A C I T Y E X P A N S I O N 1 9 9 6 – 1 9 9 8

Purchased 335 miles of track,including the Bieber to

Keddie, California, segmentwhich completed our single-

line route from BritishColumbia to San Diego, and

secured access to approxi-mately 3,900 route miles of trackage and haulage rights

from the Union PacificSouthern Pacific merger. Completed expansion

of the Galesburg yard to improve handling of eastbound interchangetrains on BNSF’s system.

BNSF Lines & Trackage Rights

Regional Connections

2nd & 3rd Main Track

B N S F S Y S T E M M A P

Acquired and rebuilt the 229-mileStampede Pass line to add capacityas a third route to and from thePacific Northwest.

Converted Murrayyard in Kansas City to handle coal andgrain traffic.

Added capacity for45,000 additionalannual lifts to the Argentine Inter-modal hub center.

Rebuilt and expandedArgentine yard in KansasCity to improve transittimes and interchangesat a key crossroads terminal.

Vancouver

Seattle

Pasco

Tacoma

PortlandSpokane

Billings

Helena

Alliance

HavreShelby

Denver

Salt Lake City

Sacramento

Keddie

Bieber

San Francisco

Minneapolis/St. Paul

GalesburgOmaha

Lincoln

Dilworth

Amarillo

Oklahoma City

Dallas/ Ft. Worth

KansasCity

Springfield

Memphis

Mobile Pensacola

New Orleans

EaglePass

Laredo

CorpusChristi

Brownsville

IowaJunction

Houston

Galveston

Chicago

St. Louis East St. Louis

Birmingham

AlbuquerqueSan Diego

Phoenix

Barstow

SanBernardino

LosAngeles

El Paso

Guernsey

BNSF’s

traffic

volumes

on UP

trackage

rights have

grown

88% from

their first

full year of

utilization.

1997

Thousands of Units

1998

162

305

UP LINES VOLUME GROWTH

1997 1998

78

103

MEXICO TRAFFICVOLUME GROWTH

Additional

gateways have

helped BNSF’s

traffic volumes

to and from

Mexico grow

nearly 30%.

Thousands of Units

Expanded the coal trainhandling capacities of therail yards in Alliance andLincoln, Nebraska.

Removed the 1,970-footsingle-track tunnel nearGuernsey, Wyoming andexpanded the segment to anopen-cut, double-track line.

1 0 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

I M P R O V I N G T R A N S P O R T A T I O N E F F I C I E N C Y

Over the last three years, we have taken the steps

necessary to eliminate many of the physical

constraints that were impairing BNSF’s ability to

provide improved single-line service through-

out our system. We now have in place both

the management structure and the tools

required to improve BNSF’s transportation

efficiency. BNSF has generated year-over-year

improvements in operating income, net income, and

earnings per share, adjusted for special items, in all

quarters except the first quarter of 1997, which was

impacted by severe winter weather. As the train spread

on pages 11 & 12 indicates, our capital

investments are producing growth in all

major traffic segments. These cumulative

improvements have helped reduce our

operating ratio by more than five points in

the last three years and will help provide

BNSF with the financial capacity needed to continue to

improve customer service and shareholder returns.

$185.4

$192.6

REVENUE PER EMPLOYEE

$201.6

In Thousands

1996 1997 1998

$15.47$15.34

ADJUSTED OPERATING EXPENSE

$14.46

Per thousand revenue ton miles

1996 1997 1998

A BNSF coal train

winds through

Wyoming's Wendover

Canyon carrying

some of the 28 million

tons of coal volumes

BNSF has added

since 1996.

1 1 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 1 2

N E W O P P O R T U N I T I E S F O R G R O W T H

COALMore than 11% of theelectricity produced inthe United States,enough to power oneout of every nine homesand jobs in the nation, is now generated fromcoal hauled by BNSF.

More than 90% of thecoal BNSF hauls comesfrom the Powder RiverBasin (PRB) in Wyomingand Montana, which contains the world’slargest single deposit oflow-sulfur coal.

AG COMMODITIESBNSF serves more of the nation’s majorgrain-producing regions than any other railroad.

Approximately 50%of the agriculturalcommodities trafficBNSF hauled lastyear was transportedto export points in the Pacific Northwest, Gulf ofMexico, Mexico and

the GreatLakes.

BNSF is thelargest grain-

hauling railroad in the UnitedStates. In 1998

BNSF transported581,000 carloads of agricultural commodities, more than 60% of whichwere corn and wheatmovements.

FORESTPRODUCTSBNSF serves moreof North America’sprimary timber-producing regions than any other railroad (PacificNorthwest, Canada,Northern Minnesotaand the Southeast).

BNSF transportsenough lumbereach year to build more than500,000 homes.

…enoughnewsprint toprint 1 billionSunday newspapers.

…enough printing paper to print more than 1 billion catalogs.

…and enoughpaperboard to manufacture more than 2billion card-board boxes.

CONSUMER GOODSBNSF is the largesttransporter of beer and wine by rail in the United States.

BNSF transportsenough sugar to makeover 3 billion batches of cookies a year.

BNSF transported morethan 1.2 billion cans ofcanned goods in 1998.

BNSF transports enoughcanned beverages tosupply every residentof New York,Chicago and LosAngeles with onebeverage a day for

nearly one year.

We transportenough lubeoil to fill 1billion quartsof motor oil.

CHEMICALSBNSF is the rail market share leader intransporting petroleum in the westernUnited States.

…and enough potash in one year to fertilize a field the size of theentire state of Kansas.

…enough propane a year to fill over 66 million five-gallonpropane tanks.

METALSBNSF annually handles enough coiledsheet steel to lay theunrolled coils end toend between NewYork City and Seattle,Washington 12 times.

BNSF transportsenough recycled ironand steel annually toproduce reinforcingbar to rebuild morethan 3,900 miles ofinterstate highway.

MINERALSBNSFtransports

the mineral components ofmany of the products weenjoy everyday, includingthe roads we drive on(cement, asphalt) the build-ings in which we live andwork (gypsum, crushedstone, limestone, iron ore),the glass (soda ash) in thewindows we look through,and even the paper (kaolinclay) used in the documentyou are reading now.

PRB coal is 60% lower in sulfur thanmost other U.S. coalsources, enabling steam-electric utilities tomeet even the tougherPhase II standards ofthe Clean Air Actscheduled to take effectin the year 2000 byswitching to PRB coalinstead of installingexpensive scrubbers.

Merchandisetraffic volumes have grown more than 8% since 1996.

PRB coal is also themost economical fuelsource for many utili-ties. Forty-five of the50 lowest-cost steam-electric plants in theU.S. burn coal, and 31 of those 45 plantsburn coal from thePowder River Basin.

Intermodal

traffic is

the fastest

growing

traffic

segment

for BNSF.

BNSF’s

intermodal

volume

has increased

by 22 percent

since 1996.

3.13

2.57

INTERMODAL UNIT GROWTHMillions of annual units

1996 1998

1.871.73

MERCHANDISEUNIT GROWTHMillions of

annual car loads

19981996

4.67

3.83

3.33

GRADE CROSSING SAFETYCollisions per

milllion train miles

1996 1997 1998

.36

.32

.27

DAMAGE-FREE SERVICELoss and damage costs

per $100 in freight revenue

1996 1997 1998

699

711

737

FUEL EFFICIENCYGross ton miles per gallon

1996 1997 1998

230

202

COAL TONNAGE GROWTHMillions of tons

per year

1996 1998

AUTOMOTIVEA new car or truck wasshipped in a BNSF automobile train approx-imately every 14 secondsin 1998. That amountedto more than 2.2 million vehicles, or about 1 outof every 7 cars and trucksmanufactured or sold inNorth America.

The new vehicles areshipped to 33 destina-tion ramps across BNSF’s system for finaldelivery by truck to local auto dealerships.

INTERMODALIn 1998 a truck trailer or container was loadedonto a BNSF inter-modal train every 10seconds. That addedup to more than 3.1million intermodalshipments (truck trailersor containers) that weredelivered primarily on BNSF’s rail linesinstead of thenation’s congestedhighways.

BNSF moves moreintermodal traffic thanany other rail system in the world. Majorproducts moved in thetrailers and containersBNSF transports includesuch things as mail,small packaged goods,paper products, clothes,

appliances,electronicproducts,

and auto parts.

BNSF’s coal volumes have increased 14% since 1996.

STYLE

As a Community, we are:

•Tough-minded optimists

•Decisive yet thorough

•Open and supportive, and

•Confident and proud

of our success

SHARED VALUES

As a Community, BNSF values:

•Listening to customers and

doing what it takes to meet their

expectations

•Empowering employees and

showing concern for their well-

being, and respect for their talent

and achievements

•Continuously improving by

striving to do the right thing

safely and efficiently

•Celebrating our rich heritage

and building on our success as we

shape our promising future

COMMUNITY

BNSF is a Community of over

40,000 mutually dependent

members. Each one of us depends

upon BNSF for our livelihood,

and through our collective efforts,

BNSF depends upon us to

defend, sustain and strengthen

our Community.

We are an effective Community

when each of us:

•Believes in our Vision and

embraces our Shared Values

•Knows our own role and

strives to fulfill it

•Respects, trusts and openly

communicates with other

Community members

•Is proud of our heritage and

confident in our future

LIBERTY

As a member of the BNSF

Community, each of us has

the right to:

•A safe work environment –

for the sake of ourselves, our

co-workers, our shippers and

the communities we serve

•Feel the satisfaction that comes

from a job well done – by using

our talent, judgment and

initiative, and by performing to

our fullest potential

•Express our individualism,

ideas and concerns – consistent

with the Community’s Vision

and Shared Values, to anyone

in the Community without

fear of retribution

• Participate fully in life outside

of work – by enjoying the fruits

of our own labor

EQUALITY

As a member of the BNSF

Community, I can expect:

•To be treated with dignity

and respect

•To be given equal access

to tools, training and

development opportunities

•To have equal opportunity

to achieve my full potential

EFFICIENCY

Efficiency is the best collective

application of our resources to

meet our customers’ expectations.

Each of us contributes

to efficiency when we:

•Understand our customers’

expectations and priorities

•Help develop business

processes that best match

BNSF resources with our

customers’ requirements

•Constantly monitor and

measure our results in order

to continuously improve

•Manage our Community’s

resources as if they were our own

B N S F ’ S V A L U E S

1 4 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 1 5

M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A L Y S I S O F

F I N A N C I A L C O N D I T I O N A N D R E S U L T S O F O P E R A T I O N S

Management’s discussion and analysis relates to thefinancial condition and results of operations ofBurlington Northern Santa Fe Corporation and its

m a j o r i t y - owned subsidiaries (collectively BNSF or Company).The principal subsidiary of BNSF is The Burlington No rt h e r nand Santa Fe Railway Company (BNSF Railway). All earningsper share information is stated on a diluted basis.

R E S U L T S O F O P E R A T I O N S

Y E A R E N D E D D E C E M B E R 3 1 , 1 9 9 8 C O M P A R E D W I T H

Y E A R E N D E D D E C E M B E R 3 1 , 1 9 9 7

BNSF re c o rded net income for 1998 of $1,155 million ($2.43per share), compared with net income of $885 mill i o n($1.88 per share) for 1997 principally re f l e c t i n g i n c reased re v-enues in intermodal, coal and other sectors. Mo re moderatewinter weather in the first quarter of 1998 relative to 1997,gains on real estate portfolio sales and a first quarter 1998$67 million pre-tax gain ($32 million after-tax or $0.07 pershare) on the sale of substantially all of the Company’s inter-est in Santa Fe Pacific Pipeline Partners, L.P. also contributedto the improvement. In addition, 1997 included a $90 mil-lion pre-tax special charge ($57 million after-tax or $0.12 pershare) principally related to the consolidation of clericalfunctions (see Other Matters: Employee Merger andSeparation Costs).

Excluding the 1998 gain on the pipelines sale and the1997 special charge, BNSF’s adjusted net income for 1998was $1,123 million ($2.36 per share) compared with 1997adjusted net income of $942 million ($2.00 per share).

F I N A N C I A L C O N T E N T S

1 5 Management’s Discussion and Analysis

2 5 Report of Management

2 5 Report of Independent Accountants

2 6 Consolidated Statement of Income

2 7 Consolidated Balance Sheet

2 8 Consolidated Statement of Cash Flows

2 9 Consolidated Statement of Changes in

Stockholders’ Equity

3 0 Notes to Consolidated Financial Statements

R E V E N U E T A B L E

The following table presents BNSF’s revenue information by commodity for the years ended December 31, 1998, 1997 and1996 and includes certain reclassifications of prior year information to conform to current year presentation.

Revenues Cars/Units Average Revenue Per Car/Unit

1998 1997 1996 1998 1997 1996 1998 1997 1996( I N M I L L I O N S ) ( I N T H O U S A N D S )

Intermodal $2,469 $2,282 $2,039 3,126 2,854 2,570 $ 790 $ 800 $ 793Coal 2,239 1,972 1,973 2,078 1,862 1,854 1,077 1,059 1,064Agricultural Commodities 1,077 1,087 1,171 581 577 587 1,854 1,884 1,995Chemicals 841 812 782 504 482 460 1,669 1,685 1,700Metals and Minerals 757 731 693 660 622 628 1,147 1,175 1,104Forest Products 598 564 548 344 335 334 1,738 1,684 1,641Consumer Goods 553 497 468 365 349 308 1,515 1,424 1,519Automotive 388 422 396 226 264 251 1,717 1,598 1,578

Total Freight Revenues 8,922 8,367 8,070 7,884 7,345 6,992 $1,132 $1,139 $1,154

Other Revenues 19 3 39

Total Revenues $8,941 $8,370 $8,109

R E V E N U E S

Total revenues for 1998 were $8,941 million, 7 percent or$571 million higher than revenues of $8,370 million for1997. The increase primarily reflects increases in the inter-modal, coal, chemicals, metals and minerals, forest products,and consumer goods sectors partially offset by lower agricul-tural commodities and automotive revenues. Average revenueper car/unit decreased slightly in 1998 to $1,132 from$1,139 in 1997. During 1998, BNSF’s share of the WesternUnited States (U.S.) rail traffic market, based on reporting tothe Association of American Railroads (AAR), increased 2.9

points to 44.3 percent. This gain was primarily the result ofthe trackage rights gained from Union Pacific Corporation(UP) and operating problems experienced by the UP associat-ed with consolidating operations.

Intermodal revenues of $2,469 million improved $187million or 8 percent compared with 1997 reflecting increasesin the direct marketing, international and truckload sectors.Direct marketing revenues benefited from increased unitsshipped for UPS, less than truckload (LTL) customers andthe United States Postal Service. International revenues wereup due to higher volume associated with market share gains

1 6 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

and new business established with Sealand, NYK, Maerskand K-Line. Truckload revenues increased primarily due tovolume growth from J.B. Hunt and Schneider.

Coal revenues of $2,239 million for 1998 increased$267 million or 14 percent primarily due to strong demand,volume gains associated with market share improvementsand favorable operating conditions as a result of a moremoderate winter in 1998.

Agricultural commodities revenues of $1,077 million for1998 were $10 million or 1 percent lower than 1997 dueto poor Pacific Northwest (PNW) corn and soybeans exportsas well as weak barley exports. This was partially offset byincreased movements of minor oilseeds exports.

Chemicals revenues of $841 million for 1998 were $29million or 4 percent higher than 1997. Increases in industrialchemicals, petroleum products and plastics were partiallyoffset by weak fertilizer markets.

Metals and minerals revenues of $757 million for 1998were $26 million or 4 percent higher than 1997 and were ledprimarily by strength in aluminum and non-ferrous materialsas well as volume increases in steel products, cement androck and specialty minerals.

Forest products revenues of $598 million for 1998 were$34 million or 6 percent higher than 1997 primarily due toprinting paper volume gains as 1997 was impacted by severewinter weather, increased Canadian newsprint importsa n d p u l p b o a rd volume gains as a result of market share gains.Lumber volumes increased due to higher levels of construc-tion activity.

Consumer goods revenues of $553 million for 1998 were$56 million or 11 percent higher than 1997 primarily dueto volume increases in corn syrup traffic to Mexico, Texasand California and increased sugar traffic as 1997 wasimpacted by seve re winter we a t h e r. Government and machineryrevenues increased as a result of increased Boeing traffic.

Automotive revenues of $388 million for 1998 were $ 3 4million or 8 percent lower than 1997 reflecting decre a s e s involumes due to the loss of Ford’s Southwestern U.S. businessand the impact of the 1998 General Motors strike, partiallyoffset by strong Honda loadings.E X P E N S E S

Total operating expenses for 1998 were $6,783 million, anincrease of $180 million or 3 percent higher than 1997. Asdiscussed above, 1997 included a $90 million ($57 millionafter-tax) special charge principally related to the consolida-tion of clerical functions. Excluding the special charge, 1998operating expenses we re $270 million or 4 percent higherthan 1997. The operating ratio improved to 75.9 perc e n tfor 1998 c o m p a red with a 77.8 percent adjusted operatingratio for 19 97.

Compensation and benefits expenses of $2,812 millionwere $137 million or 5 percent higher than 1997. Wageswe re higher due to volume related increases primarily in traincrew costs, wage increases for salaried and union employees,and increased incentive compensation expense. Theseincreases were partially offset by lower labor costs associatedwith repairs to track and equipment as 1997 was unusuallyhigh because of severe winter weather.

Purchased services expenses of $894 million for 1998were $71 million or 9 percent higher than 1997 due princi-pally to higher joint facility costs from increased operationsover trackage rights obtained from UP, increased equipmentmaintenance costs, and higher ramping costs related toincreased intermodal volumes.

Equipment rents expenses of $804 million were $16million or 2 percent lower than 1997. Improved equipmentutilization and lower performance penalties for grain carswere partially offset by volume driven increases for leasedcoal cars and locomotives.

Fuel expenses of $724 million for 1998 were $23 millionor 3 percent lower than 1997, as a result of a 6 cent or 8percent decrease in the average all-in cost per gallon of dieselfuel, partially offset by a 6 percent volume driven increasein consumption from 1,092 million gallons to 1,155 milliongallons. The decrease in the average all-in cost per gallon ofdiesel fuel includes a 13 cent decrease in the average purc h a s eprice, partially offset by current year losses related to BNSF’sfuel hedging program. Gross ton-miles per gallon of fuelincreased 4 percent reflecting a continuing favorable oper-ating trend resulting from new, fuel efficient locomotivesand more fuel efficient operating practices.

Materials and other expenses of $717 million for 1998were $42 million or 6 percent higher than 1997 principallydue to lower credits from joint facility billings due to lowerUP traffic levels on BNSF facilities. Other expenses in 1997also included more income from the sale of easements andhigher tax incentives from the State of Nebraska related toinvestment and employment levels in the state.

Interest expense for 1998 increased by $10 million to$354 million reflecting higher debt levels which increased to$5,456 million at December 31, 1998 from $5,289 millionat December 31, 1997, partially offset by lower interest rates.

Other income (expense), net was favorable by $64 millioncompared to 1997 primarily due to the $67 million pre-taxgain on the pipeline partnership sale in the first quarter of1998 as discussed in Note 2: Sale of Investment in PipelinePartnership. In addition, lower equity in earnings ofpipelines due to the first quarter sale of this investment wasoffset by gains on real estate portfolio sales.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 1 7

Y E A R E N D E D D E C E M B E R 3 1 , 1 9 9 7 C O M P A R E D W I T H

Y E A R E N D E D D E C E M B E R 3 1 , 1 9 9 6

BNSF re c o rded net income for 1997 of $885 million ($1.88per share), compared with net income of $889 million ($1.91per share) for 1996. The decrease in net income is primarilydue to a fourth quarter special charge of $90 million ($57million after-tax or $0.12 per s h a re) principally related to theconsolidation of clerical functions (see Other Ma t t e r s :Em p l oyee Merger and Separation Costs). This was largely offset by improved operating results in 1997 despite seve reweather conditions in the first quarter of 1997 thro u g h o u tthe No rthern Plains and the PNW. The financial impact ofrecurring and protracted outages on many parts of the system,the cost of repairing track, signals and equipment, and theoperating inefficiencies caused by the weather is virt u a l l yimpossible to m e a s u re with precision. Howe ve r, the Companyestimates that the seve re weather in the first quarter of 1997resulted in lost re venue opportunities of approximately $100million and i n c reased operating expenses by at least $50 mil-lion. Exc l u d i n g the fourth quarter special charge, net incomefor 1997 was $942 million ($2.00 per share) compared with1 9 9 6 net income of $889 million ($1.91 per share ) .R E V E N U E S

Total revenues for 1997 were $8,370 million or 3 percenthigher compared with revenues of $8,109 million for 1996.The $261 million increase primarily reflects increases in theintermodal, consumer goods, metals and minerals, chemicals,automotive, and forest products sectors partially offset bylower agricultural commodities revenues. Average revenueper car/unit decreased slightly in 1997 to $1,139 from $1,1 5 4in 1996. During 1997, BNSF’s share of the Western U.S. railtraffic market, based on re p o rting to the AAR, increased 1.8points to 41.4 percent. This gain was primarily the result ofthe trackage rights gained from UP and operating problemsexperienced by the UP associated with consolidating operations.

Intermodal re venues improved $243 million or 12 perc e n tc o m p a red with 1996, due to increased volume growth in thed i rect, international, truckload, and international mark e t i n gcompanies sectors. The direct sector experienced a 14 p e rc e n tg rowth in re venues primarily due to an 18 percent gain in load-ings. Di rect sector growth was due to volume increases from LT Lshipments led by Ye l l ow Freight, Consolidated Freightways andRo a d w a y. LTL volume from Ye l l ow Freight, ConsolidatedFreightways, and Roadway has grown substantially all year withg rowth accelerating in the 2nd, 3rd, and 4th quarters in part i c-ular due to Ye l l ow Fre i g h t’s change of operations completed inApril 1997. International re venues increased 10 percent fro m1996 due to an 8 percent increase in units moved. In t e r n a t i o n a lg rowth has been the result of a strong import economy andi n c reased market share by steamship lines such as Hy u n d a i ,

OOCL, and Cosco. Truckload re venues increased 21 perc e n tdue to a 20 percent increase in loadings, primarily attributableto strength in the Company’s Chicago to California andSoutheast to California corridors.

Agricultural commodities re venues decreased $84 million,or 7 percent, due primarily to a decrease in shipments ofwheat for export in the first and second quart e r s due to theU.S. uncompetitiveness in the world market and seve reweather conditions in the Northern Plains and PNW in thefirst quart e r. Some of the volume losses we re partially offset byan increased number of shorter haul, lower re venue move m e n t sf rom the southern U.S. plains wheat region. Agricultural commodi-t i e s re venues we re also unfavorably impacted by lower re ve n u eper car for corn movements and volume declines in barley traffic.

Chemicals revenues increased $30 million, or 4 percent,primarily due to higher demand for petroleum productsand plastics. Chemicals carloadings increased 4 percent dueto additional traffic from Texas Gulf Coast shippers. Rateincreases in petroleum products offset average revenue percar decreases in agricultural minerals and industrial products.

Metals and minerals re venues increased $38 million, or 5percent, primarily due to strength in steel products as well as volume increases in clay and aggregates, sand, rock andspecialty minerals and sodium compounds. This was partiallyoffset by a decrease in shipments of cement, gypsum and lime.

Consumer goods revenues increased $29 million, or6 percent, primarily due to growth in the government andmachinery and bulk foods sectors. Overall consumer goodscarloadings increased 13 percent. Volume gains in bulk foodswere the result of strong corn syrup and sugar loadings,while gains in government and machinery was the result ofspecial moves for Boeing and additional military movements.

Automotive revenues increased $26 million, or 7 percent,due to a 5 percent volume gain in motor vehicle and vehicleparts traffic. BNSF experienced gains in units moved forHonda and General Motors which were partially offset byreduced Ford shipments. Revenue per revenue ton miledecreased 9 percent due to changes in the traffic mix.E X P E N S E S

Total operating expenses for 1997 we re $6,603 million or $242million higher compared with expenses of $6,361 million for1996. As discussed above, the Company re c o rded a $90 million($57 million after-tax) special charge in the fourth quarter of1997 primarily related to the consolidation of clerical functions.Excluding the special charge, operating expenses for 1997 we re$6,513 million, $152 million or 2 p e rcent higher than 1 9 9 6 .The adjusted operating ratio for 1997 was 77.8 percent, com-p a red with an operating ratio of 78.4 percent for 1996.

Compensation and benefits expenses of $2,675 millionwere $114 million or 4 percent higher than 1996. A majority

of the increase was due to higher labor costs associated withweather-related repairs to track and equipment and sloweroperations. Wages we re also higher due to volume re l a t e di n c reases in train crew costs and wage increases for salariedand union employees.

Purchased services expenses of $823 million increased $23million, or 3 percent, compared with 1996 due to higherramping and drayage costs related to increased intermodalvolumes. Joint facility costs we re also higher due to operationsover trackage rights gained as a condition of the merger ofUP and Southern Pacific Corporation. This increase was par-tially offset by lower professional service expenses.

Equipment rents expenses of $820 million were $84million, or 11 percent, higher than 1996. Lower equipmentutilization and higher volumes resulted in increased locomo-tive rents and higher time and mileage expenses for rail carand intermodal trailers and flat cars. In addition, equipmentrelated performance penalties for grain cars increased $19million from 1996.

Fuel expenses of $747 million were $20 million higherthan in 1996 due to a 1 percent increase in the average pricepaid per gallon of diesel fuel as well as a 2 percent increase inconsumption due to volume. Gross ton miles per gallon offuel increased by 2 percent due to additional new, fuel-efficient locomotives and the adoption of more fuel-efficientoperating practices.

Materials and other expenses of $675 million were $102million lower than 1996 partially due to lower derailmentand personal injury expenses reflecting the continuing benefitsof employee safety programs. Other expenses we re alsoreduced by income from the sale of signboard easements andtax incentives from the State of Nebraska related to invest-ment and employment levels in the state.

Interest expense of $344 million was $43 million higherthan in 1996, primarily due to higher debt levels, whichincreased from $4,711 million at December 31, 1996 to$5,289 million at December 31, 1997.

Other income (expense), net was $12 million below1996. The increase in expense is due to higher fees from thesale of accounts receivable reflecting an increase in receivablessold and lower profits from land sales.

Income tax expense of $519 million was $32 millionlower in 1997 due to lower pre-tax income and a lower effec-tive tax rate due to adjustments to prior years’ tax estimates.

C A P I T A L R E S O U R C E S A N D L I Q U I D I T Y

Cash generated from operations is BNSF’s principals o u rce of liquidity. BNSF generally funds anyadditional liquidity re q u i rements through debt issuance,

including commercial paper, or leasing of assets.BNSF issues commercial paper from time to time which

is supported by bank revolving credit agreements.Outstanding commercial paper balances are considered asreducing the amount of borrowings available under theseagreements. The bank revolving credit agreements allowborrowings of up to $425 million on a short-term basis and$1.5 billion on a long-term basis. Annual facility fees arecurrently 0.075 percent and 0.09 percent, respectively, andare subject to change based upon changes in BNSF’s seniorunsecured debt ratings. Borrowing rates are based uponi) LIBOR plus a spread based upon BNSF’s senior unsecureddebt ratings, ii) money market rates offered at the option ofthe lenders, or iii) an alternate base rate. The commitmentsof the lenders under the short-term agreement were extendedon November 12, 1998 and are currently scheduled to expireon June 15, 1999. The commitments of the lenders underthe long-term agreement are scheduled to expire onNovember 12, 2002.

At December 31, 1998, there were no borrowings againstthe revolving credit agreements and the maturity value ofcommercial paper outstanding was $474 million, leaving atotal remaining capacity of $1,026 million available underthe long-term revolving credit agreement and $425 millionavailable under the short-term credit agreement.O P E R A T I N G A C T I V I T I E S

Net cash provided by operating activities was $2,218 millionduring 1998 compared with $1,814 million during 1997.The increase in cash from operations was primarily due tohigher net income before depreciation and amortization anddeferred taxes, a decrease in cash used for working capitalreflecting the timing of payments, and a decrease in paymentsfor employee merger and separation costs. I N V E S T I N G A C T I V I T I E S

Net cash used for investing activities during 1998 was$2,418 million, principally comprised of $2,147 millionin capital expenditure s .

A breakdown of cash capital expenditures is set forth inthe following table (in millions):

Year ended December 31, 1998 1997 1996

Maintenance of Way $ 917 $ 974 $ 854Equipment 583 572 514Expansion Projects 488 428 439Other 159 208 427

Total $2,147 $2,182 $2,234

1 8 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 1 9

Maintenance of way expenditures for 1998 decreasedprimarily due to use of a higher proportion of second handrail and reduced tie re n ewal projects. Equipment expenditure swere higher in 1998 reflecting increases for remanufacturedfreight cars, mechanical shops and shop machinery, partiallyoffset by lower locomotive purchases as more locomotiveswere acquried through operating leases. Expansion projectsin both 1998 and 1997 principally reflect double and tripletracking of main line track and expansion of intermodalterminals. Other projects for 1998 decreased primarily as aresult of spending for merger related i m p rovements in 19 9 7which did not occur in 1998, part i a l l y offset by highercapitalized software and computer hardware costs.

BNSF has entered into commitments to acquire 476 loco-m o t i ves in 1999. The locomotives will be financed from oneor a combination of sources including, but not limited to,cash from operations, capital or operating leases, and debtissuances. The decision on the method used will depend uponthe current market conditions and other factors at the time offinancing. Beginning in 2000, the Company expects newl o c o m o t i ve acquistions to significantly decline compared to1999. BNSF has currently committed to acquire 196 and 50l o c o m o t i ves in 2000 and 2001, re s p e c t i ve l y.F I N A N C I N G A C T I V I T I E S

Net cash provided by financing activities during 1998 was$194 million, primarily related to net proceeds from total debtof $440 million and proceeds from stock options exercised of$111 million, partially offset by dividend payments of $197million and common share repurchases of $153 million.

In March 1998, BNSF issued $100 million of 6.05 per-cent medium-term notes due Ma rch 15, 2031, under theAugust 1997 shelf registration of debt securities. The notesincluded a provision that gave the Company a call option top u rchase all of the notes from the holders in 2001. In con-nection with the debt issuance, the Company sold the calloption to a third party and re c e i ved cash of $4 million, whichhas been deferred and is being amort i zed to interest expenseover the life of the debt. If the third party exe rcises the calloption, the t h i rd party will re p u rchase the notes from theholders and re m a rket them. If the call option is not exe rcised, theCompany must re p u rchase the notes from the holders. The netp roceeds f rom the sale of the notes we re used for general cor-porate purposes including the repayment of commercial paper.Subsequent to this transaction, the August 1997 shelf re g i s t r a-tion had $250 million of potential borrowings re m a i n i n g .

In Ma rch 1998, the Company filed a shelf re g i s t r a t i o n ofdebt securities, including medium-term notes that may beissued in one or more series at an aggregate offering price notto exceed $500 million. In April 1998, prior to the effectivedate of the March 1988 shelf registration, the Company

amended the August 1997 shelf registration to combine itwith the March 1998 shelf registration.

In July 1998, BNSF issued $200 million of 6.70 percentd e b e n t u res due August 1, 2028, and in November 1998 BNSFissued $200 million of puttable reset debentures (PURS) dueMay 13, 2029, under the March 1998 shelf registration ofdebt securities. The net proceeds from the sale of the deben-tures were used for general corporate purposes, including therepayment of commercial paper. As of December 31, 1998,the Ma rch 1998 shelf registration had $350 million of poten-tial borrowings remaining.

The PURS included a provision that gave the Company acall option to purchase all of the debentures from the holderson May 13, 1999. In connection with the debt issuance, theCompany sold the call option to a third party and re c e i ve dcash of $12 million, which was deferred and is being amor-t i zed to interest expense over the life of the debt. In addition,the Company closed out $200 million of tre a s u ry lock trans-actions at a loss of approximately $11 million which wasd e f e r red and is being amort i zed to interest expense over thelife of the debt. Until May 13, 1999, the PURS will have afloating interest rate based upon the one month LIBOR rateplus 0.75 percent. On May 13, 1999, either the third part ywill exe rcise the call option or the PURS will be put back tothe Company by the holders. If the third party exe rcises thecall option, the third party will re p u rchase the PURS fro mthe holders and re m a rket them. The interest rate paid by theCompany will be reset to a fixed interest rate until maturityin 2029 of approximately 5.67 percent plus a credit spread tobe determined at that time. If the call option is not e xe rcised, the Company must re p u rchase the PURS fro m the holders.

During 1998, BNSF Railway entered into $258 millionof equipment secured debt of which $173 million was re c o rd e das capital lease obligations.

In Fe b ru a ry 1999, the Company filed a new shelf re g i s t r a-tion of debt securities that may be issued in one or more seriesat an aggregate offering price not to exceed $750 million. A sof Fe b ru a ry 8, 1999, the shelf registration had not yet beend e c l a red effective. When it becomes e f f e c t i ve, the Company willh a ve $1.1 billion of borrowing capacity available through thecombined shelf registrations.

Aggregate long-term debt scheduled to mature in 1999 is$268 million, excluding the $200 million PURS due 2029which may be redeemed in 1999 as discussed above. BNSF’sratio of total debt to total capital was 41 percent at the endof 1998 and 44 percent at the end of both 1997 and 1996.

During 1998, the Company began share re p u rchase activityunder a 30 million share common stock re p u rchase pro g r a ma p p roved by the Board of Di rectors in July 1997.

2 0 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

During 1997 there we re no share re p u rchases made underthis program. During 1998, the Company re p u rchased approx i-mately 5 million s h a res of its common stock at an average priceof $30.75 per share. In connection with its share re p u rc h a s ep rogram, during 1998 BNSF sold equity put options for 3 mil-lion shares of BNSF common stock to an independent thirdp a rty and re c e i ve d cash proceeds of $2 million. All of the equityput options expire d u n e xe rcised. Re p u rchased shares are ava i l a b l eto satisfy future re q u i re m e n t s of various stock-based employe ecompensation p rograms. Management considers many factorswhich include, among other things, economic, market and businessconditions and outlook, alternative uses of cash and debt, balancesheet ratios, and stockholder returns when evaluating the timingo fs h a re re p u rc h a s e s .C O M M O N S T O C K S P L I T

On July 16, 1998, the Board of Di rectors approved a thre e - f o r -one common stock split which was effected in the form of astock dividend of two additional shares of BNSF common s t o c kpayable for each share outstanding or held in tre a s u ry on Se p t e m -ber 1, 1998, to stockholders of re c o rd on August 17, 1998. Allequity-based benefit plans reflect the issuance of additional share sor options due to the declaration of the stock split. All share andper share data have been restated to reflect the stock split.D I V I D E N D S

Common stock dividends declared we re $0.44, $0.40 and$0.40 per share annually for 1998, 1997 and 1996, re s p e c-t i ve l y. Dividends paid on common stock we re $197 million,$185 million and $184 million during 1998, 1997 and 1996,re s p e c t i ve l y. On July 16, 1998, the Board of Di re c t o r si n c reased by 20 p e rcent the amount of its regular quart e r l ydividend from 10 cents per share to 12 cents per share .T h e dividend increase was effective beginning with the 19 9 8t h i rd q u a rt e rd i v i d e n dw h i c h was paid on Oc t o b e r1 ,1 9 9 8 .

On Ja n u a ry 21, 1999, the Board of Di rectors declared aq u a rterly dividend of 12 cents per share upon its outstandings h a res of common stock, $.01 par value, payable April 1, 1999,to stockholders of re c o rd on Ma rch 10, 1999.O T H E R M A T T E R S

C A S U A L T Y A N D E N V I R O N M E N T A L

Personal injury claims, including work - related injuries toe m p l oyees, are a significant expense for the railroad industry.Em p l oyees of BNSF are compensated for work - related injuriesa c c o rding to the provisions of the Federal Em p l oye r s’ LiabilityAct (FELA). FELA’s system of requiring finding of fault, coupledwith unscheduled awards and reliance on the jury system, con-tributed to significant increases in expense in past years. BNSFhas implemented a number of safety programs to reduce thenumber of personal injuries as well as the associated claims andpersonal injury expense. BNSF made personal injury paymentsof approximately $193 million, $210 million, and $249 million

in 1998, 1997 and 1996, re s p e c t i ve l y. As discussed in more detail in Note 12: En v i ronmental and

Other Contingencies, the Company’s operations, as well asthose of its competitors, are subject to extensive federal, stateand local environmental regulation. BNSF’s operating pro c e d u re sinclude practices to protect the environment from the enviro n-mental risks inherent in railroad operations, which fre q u e n t l yi n vo l ve transporting chemicals and other h a z a rdous materials.Many of BNSF’s land holdings are and have been used forindustrial or transport a t i o n - related purposes or leased to com-m e rcial or industrial companies whose activities may haveresulted in discharges onto the pro p e rt y. As a result, BNSF issubject to environmental clean-up and e n f o rcement actions. Inp a rt i c u l a r, the Federal Compre h e n s i ve En v i ronmental Re s p o n s e ,Compensation and Liability Act of 1980, also known as the“ Su p e rf u n d” law, as well as similar state laws generally imposejoint and several liability for clean-up and enforcement costswithout re g a rd to fault or the legality of the original conducton current and former owners and operators of a site.

BNSF is invo l ved in a number of administrative and judicialp roceedings and other clean-up efforts at approximately 400 sites,including the Su p e rfund sites, at which it is participating in thestudy or clean-up, or both, of alleged environmental contami-nation. BNSF paid approximately $64 million, $55 million and$47 million during 1998, 1997 and 1996, re s p e c t i ve l y, for manda-t o ry and unasserted clean-up efforts, including amounts expend-ed under federal and state vo l u n t a ry clean-up programs. BNSFhas accruals of approximately $185 million for remediation andrestoration of all k n own sites. BNSF anticipates that the majorityof the accru e d costs at December 31, 1998 will be paid over thenext five years. No individual site is considered to be material.

During 1998, BNSF settled an environmental matter in theState of Missouri related to the release of a re p o rtable quantityof lead sulfide into a waterw a y. BNSF agreed in the settlementto pay a fine of $7 million, make restitution payments to theState of Missouri of $3 million and committed to spend $9 mil-lion, which includes amounts previously paid, in connectionwith its ongoing remediation efforts. BNSF has made paymentsof approximately $16 million related to this settlement, includ-ing approximately $12 million that was paid during 1998 whichis included in total 1998 payments discussed above .

Liabilities re c o rded for environmental costs re p resent BNSF’sbest estimates for remediation and restoration of these sites andinclude both asserted and unasserted claims. Un a s s e rted claimsa re not considered to be a material component of the liability.Although re c o rded liabilities include BNSF’s best estimates of allcosts, without reduction for anticipated re c overies from thirdp a rties, BNSF’s total clean-up costs at these sites cannot be pre-dicted with certainty due to various factors such as the extentof corre c t i ve actions that may be re q u i red, evolving enviro n m e n-

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 2 1

tal laws and re g u l a t i o n s , a d vances in environmental technology,the extent of other part i e s’ participation in clean-up effort s ,d e velopments in ongoing environmental analyses related tosites determined to be contaminated, and developments ine n v i ronmental surveys and studies of potentially contaminatedsites. As a result, future charges to income for enviro n m e n t a lliabilities could have a significant effect on results of operationsin a particular quarter or fiscal year as individual site studiesand remediation and restoration efforts proceed or as new sitesarise. Howe ve r, management believes that it is unlikely that anyidentified matters, either individually or in the aggregate, willh a ve a material adverse effect on BNSF’s consolidated financialposition or liquidity.

The railroad industry, including BNSF Railway, is subject to future re q u i rements regulating air emissions from diesell o c o m o t i ves. Final regulations applicable to new and re b u i l tl o c o m o t i ve engines we re promulgated by the United St a t e sEn v i ronmental Protection Agency (EPA) and became effectiveJune 15, 1998. The new standards will be phased in betwe e n2000 and 2005. BNSF Railway has evaluated compliancere q u i rements and associated costs and believes the costs will notbe material in any given ye a r. BNSF Railway has also entere dinto agreements with the California State Air Re s o u rces Boardand the EPA re g a rding a program to reduce emissions inSouthern California through accelerated deploy ment of loco-m o t i ves which comply with the federal standard s .O T H E R C L A I M S A N D L I T I G A T I O N

BNSF and its subsidiaries are parties to a number of legalactions and claims, various governmental proceedings and p r i vate civil suits arising in the ord i n a ry course of business,including those related to environmental matters and personali n j u ry claims. While the final outcome of these items cannot bep redicted with cert a i n t y, considering among other things themeritorious legal defenses available, it is the opinion of manage-ment that none of these items, when finally re s o l ved, will havea material adverse effect on the annual results of operations,financial position or liquidity of BNSF, although an adve r s eresolution of a number of these items could have a materiala d verse effect on the results of operations in a particular quart e ror fiscal ye a r.E M P L O Y E E M E R G E R A N D S E P A R A T I O N C O S T S

L I A B I L I T Y B A L A N C E

A N D A C T I V I T Y

Cu r rent and long-term employee merger and separation liabili-ties totaling $474 million and $551 million are included in theconsolidated balance sheet at December 31, 1998 and 19 97,re s p e c t i ve l y, and principally re p resent: (i) employe e - re l a t e d s e ve r-ance costs for the consolidation of clerical functions;( i i ) d e f e r red benefits payable upon separation or re t i rement toc e rtain active conductors, trainmen and locomotive engineers;

and (iii) certain non-union employee severance costs.Liabilities related to the consolidation of clerical functions

(the Consolidation Plan) we re $211 million and $259 millionat December 31, 1998 and 1997, re s p e c t i ve l y. These liabilitiesp rovide for severance costs associated with the ConsolidationPlan adopted in 1995 upon consummation of the merger ofB N S F ’s predecessor companies Burlington No rthern Inc. andSanta Fe Pacific Corporation (the Merger). The ConsolidationPlan will result in the elimination of approximately 1,600 p e r-manent positions, of which approximately 1,500 positions h a vebeen eliminated through 1998, including approximately 250positions that we re eliminated in 1998. Upon adoption i n1995, the Consolidation Plan was expected to be completed byearly 1999. Howe ve r, the Consolidation Plan was part i a l l yd e l a yed as a result of the timing related to completion of merg-er integration and other issues and is now expected to be com-pleted by 2001. Remaining clerical positions to be eliminatedby the Company will result in invo l u n t a ry separations. Be n e f i t spaid to affected employees are in the form of lump-sum pay-ments or payments made over five to ten years or in some casest h rough re t i re m e n t .

Liabilities related to deferred benefits payable upon separa-tion or re t i rement to certain active conductors, trainmen a n dl o c o m o t i ve engineers we re $207 million and $224 million a tDecember 31, 1998 and 1997, re s p e c t i ve l y. These costs we rei n c u r red in connection with labor agreements reached prior tothe Merger which, among other things, reduced train crew size sand allowed for more flexible work ru l e s .

Liabilities principally related to certain remaining non-unione m p l oyee severances resulting from the Merger we re $56 millionand $68 million at December 31, 1998 and 19 97, re s p e c t i ve l y.These costs will be paid over the next several years based ondeferral elections made by affected employees. Ap p rox i m a t e l y1,500 non-union employees re c e i ved or are receiving seve r a n c epayments and special termination benefits under the Company’sre t i rement and health and we l f a re plans resulting from the Me r g e r.

During 1998, 1997 and 1996, BNSF made employee merg-er and separation payments of $77 million, $116 million and$183 million, re s p e c t i ve l y. At December 31, 1998, $65 millionof the remaining liabilities are included within current liabilitiesfor anticipated costs to be paid in 1999.1 9 9 7 S P E C I A L C H A R G E

In the fourth quarter of 1997, the Company re c o rded a $90 mil-lion pre-tax special charge. Ap p roximately $65 million of thecharge related to the Consolidation Plan and the remainder of thecharge related to severance and other costs for non-union employ-ees. BNSF re c o rded an initial charge in 1995 for the ConsolidationPlan, howe ve r, the 1995 charge excluded costs associated with vo l u n t a ry severance for employees who we re given the opport u n i t yto relocate and follow their work, but elected seve r a n c e .

2 2 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

Y E A R 2 0 0 0

B A C K G R O U N D

The Company has established a committee of managers ande m p l oyees, chaired by the Company’s Chief In f o r m a t i o nOf f i c e r, to evaluate and manage the costs and risks associatedwith becoming Year 2000 compliant and to minimize theimpact of the Year 2000 problem on the Company. Be c a u s emany existing computer programs and micro p rocessors re c o g-n i ze only the last two digits of years (and not the century desig-nation), they may be unable to accurately re c o g n i ze and pro c e s sdates beyond December 31, 1999, and consequently may fail orp roduce erroneous data. The Year 2000 problem may adve r s e l yaffect the Company’s operations and financial performance if itsremediation efforts are not successfully implemented or if ther a i l roads with which the Company connects, critical customersor suppliers fail to become Year 2000 compliant.S T A T E O F R E A D I N E S S

Year 2000 issues we re re v i ewed in September 1995 follow i n gthe approval of the merger of the two railroads that now consti-tute BNSF Railway. The core mainframe systems for themerged railroad we re selected in part because they we re sub-stantially Year 2000 compliant. These systems integrate allt r a n s p o rt a t i o n - related activities and computer systems that sup-p o rt BNSF’s transportation network, including operations, cus-tomer information, and re venue data. This merger-re l a t e dinformation systems integration and upgrade activity was sub-stantially completed by July 1997.

Fo l l owing this systems integration, BNSF adopted a thre e -phase approach to Year 2000: In ve n t o ry and Assessment;Remediation; and Certification Testing. Separate teams addre s stechnologies administered or maintained by the In f o r m a t i o nSystems Se rvices department (ISS technologies) and otherenterprise-wide products and technologies used by theC o m p a n y, including embedded micro p rocessor technology( Enterprise technologies). BNSF has completed the In ve n t o ryand Assessment phase for both ISS and Enterprise technologies.During this phase, BNSF inve n t o r i e d all ISS-administere ds o u rce code, hard w a re, software and communications equip-ment that could be affected by the Year 2000 problem, andidentified items potentially needing remediation. In addition,the Enterprise team completed a company-wide audit ofEnterprise technologies and associated suppliers and serv i c ep roviders for potential Year 2000 pro b l e m s .

The Remediation phase is more than thre e - f o u rths complete.Remediation includes conve rting source code and replacing orupgrading purchased software and hard w a re. Remediation issubstantially complete for ISS technologies and is expected to becompleted by July 1999 for Enterprise technologies.

The Certification Testing phase includes validating the perf o r-mance of ISS and Enterprise technologies in a Year 2000 test

e n v i ronment. The Certification Testing phase also includes va l i-dating Year 2000 compliance for critical third party suppliers ands e rvice providers. This phase, which is ongoing, overlaps with theRemediation phase. Certification testing for ISS technologiesbegan in November 1998, with critical applications receiving priority; testing for all applications is scheduled for completionby the end of September 1999. Certification testing of all criticalEnterprise technologies began in May 1998 and is scheduled forcompletion in Fe b ru a ry 1999; testing for non-critical En t e r p r i s et e c h n o l o g i e s is scheduled for completion by July 1999.C O S T S

As a result of its merger-related systems integration that wascompleted in 1997, BNSF achieved substantial Year 2000 com-pliance on its core mainframe systems. In addition, spendingon Year 2000 activities approximates $8 million to date.Cu r re n t l y, the total cost of achieving Year 2000 compliance forthe Company’s ISS and Enterprise technologies is estimated tobe approximately $20 million.Y E A R 2 0 0 0 R I S K S

A N D C O N T I N G E N C Y P L A N S

C e rtain BNSF business processes rely on third parties for theefficient functioning of its transportation network. T h eAssociation of American Railroads (AAR) administers systemsthat benefit all No rth American railroads and their customers,including interline settlement, shipment tracing and waybill pro-cessing. BNSF and other AAR-member railroads are part i c i p a t-ing in a process to test and certify these systems for Year 2000compliance. The AAR expects that these systems will be compli-ant and pilot tested by specific carriers by April 1999, with opencarrier testing conducted promptly there a f t e r. BNSF plans tod e velop contingency plans for the business processes support e dby AAR systems.

C e rtain BNSF routes and resulting re venues are dependenton the use of trackage rights over other railroads, including UP,Montana Rail Link and the Arizona and California Railro a d .Other BNSF traffic may originate or terminate on other carri-e r s’ lines or may otherwise invo l ve use of a foreign connectionen route. Ap p roximately 60 percent of units handled by BNSFrun over BNSF facilities only. BNSF’s traffic levels and re v-enues could be significantly reduced and/or its operational net-w o rk significantly impaired through congestion and other fac-tors if other railroads are not able to accommodate BNSF trainsor interchange traffic for any extended period of time due toYear 2000 problems. Howe ve r, as a result of its work with otherr a i l roads to address Year 2000 problems on an industry -w i d ebasis, management believes that the possibility of extended f a i l-u res on other railroads is not significant. At present, theCompany generally has not determined which of its customersmay have Ye a r 2000 problems that could result in re d u c e dtraffic for the Company.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 2 3

It is the opinion of management that Year 2000 problems inB N S F ’s internal information systems and technology infra-s t ru c t u re will not have a materially adverse effect on the re s u l t sof operations, liquidity or financial position of the Company.Howe ve r, there can be no assurance that the systems or equip-ment of other parties which interact with BNSF’s systems willbe compliant on a timely basis. BNSF believes that the failureof systems or equipment of one or more of its key third part i e sor customers is the most re a s o nably likely worst case Year 2000scenario, and that an extended f a i l u re could have a materiala d verse effect on the results of operations, liquidity or financialposition of the Company. W h e re appropriate, BNSF is deve l-oping contingency plans in the event that BNSF’s key thirdp a rties do not become Year 2000 compliant on a timely basis,which effort includes the formalization of existing disasterre c ove ry plans. Contingency plans are expected to be in placeby the end of the first quarter 1999.H E D G I N G A C T I V I T I E S

F U E L

During 1998, 1997 and 1996 fuel expenses approximated 11p e rcent of total operating expenses. Due to the significance ofdiesel fuel expenses to the operations of the railroad and thehistorical volatility of fuel prices, the Company has establisheda program to hedge against fluctuations in the price of its dieselfuel purchases. The intent of the program is to protect theC o m p a n y’s operating margins and overall profitability fro ma d verse fuel price changes. Howe ve r, to the extent the Companyhedges portions of its fuel purchases, it will not re a l i ze theimpact of decreases in fuel prices. The fuel-hedging pro g r a mincludes the use of commodity swap transactions that areaccounted for as hedges. Any gains or losses associated withchanges in the market value of the fuel swaps are deferred andre c o g n i zed as a component of fuel expense in the period in whichthe fuel is p u rchased and used. Based on 1998 fuel consumptionand excluding the impact of the hedging program, each one-cent increase in the price of fuel would result in approx i m a t e l y$12 million of additional fuel expense on an annual basis.

As of Fe b ru a ry 8, 1999, BNSF had entered into fuel swapsfor approximately 1,776 million gallons at an average price ofa p p roximately 49 cents per gallon. The above price does notinclude taxes, transportation costs, certain other fuel handlingcosts, and any differences which may occur from time to timeb e t ween the prices of commodities hedged and the purc h a s eprice of BNSF’s diesel fuel.

Cu r re n t l y, BNSF’s fuel hedging program covers approx i m a t e l y75 percent, 40 percent, 22 percent and 7 percent of estimatedannual and quarterly fuel purchases for 1999, 2000, 2001, a n d2002, re s p e c t i ve l y. Hedge positions are closely monitore d t oe n s u re that they will not exceed actual fuel re q u i rements in anyperiod. Un re c o g n i zed losses from BNSF’s fuel swap t r a n s a c t i o n s

we re approximately $174 million as of De c e m b e r 31, 1998, ofwhich $120 million relates to swap transactions that will expirein 1999. BNSF also monitors its hedging positions and cre d i tratings of its counterparties and does not anticipate losses dueto counterparty nonperf o r m a n c e .I N T E R E S T R A T E

From time to time, the Company enters into various interest ratehedging transactions for the purpose of managing exposure tofluctuations in interest rates and establishing rates in anticipationof future debt issuances. As of Fe b ru a ry 8, 1999, BNSF hadi n t e rest rate swap transactions which fix the interest rate on thetotal principal amount of $125 million of its commercial paperdebt. The interest rate swap transactions re q u i re payment of aweighted average fixed interest rate of approximately 6.1 perc e n tand the receipt of a variable interest rate based on a commerc i a lpaper composite rate. The swap transactions expire in De c e m b e r1999. Any gains and losses associated with changes in mark e tvalue of these swaps are not re c o g n i zed. BNSF re c o g n i zes, on ana c c rual basis, a fixed rate of interest on the principal amount ofc o m m e rcial paper hedged over the term of the swap agre e m e n t s .Un re c o g n i zed losses from BNSF’s interest rate swap transactionswe re approximately $2 million as of December 31, 1998.

During July 1998, at the time of a $200 million debtissuance, the Company closed out $200 million of t re a s u rylock transactions at a loss of approximately $7 million w h i c hhas been deferred and is being amort i zed to interest expenseover the life of the debt.

As discussed under Capital Re s o u rces and Liquidity:Financing Activities, in November 1998, at the time of the$200 million PURS issuance, the Company closed out $200million of tre a s u ry lock transactions at a loss of approx i m a t e l y$11 million which has been deferred and is being amort i zed to interest expense over the life of the debt.

In anticipation of future debt issuances, BNSF has entere dinto tre a s u ry lock transactions, based on the 10-year and 30-ye a rU.S. tre a s u ry rates, totaling $300 million and $200 million,re s p e c t i ve l y. The 10-year and 30-year tre a s u ry lock transactionsh a ve average interest rates of approximately 4.5 percent and 5.0p e rcent, re s p e c t i ve l y, and expire between 1999 and 2001. T h e s erates do not include a credit spread which will be determined atthe time of the actual debt issuance and included in the all-ini n t e rest rate. The tre a s u ry locks can be closed by BNSF anytimeup to expiration. Un re c o g n i zed gains on the tre a s u ry lock transac-tions we re approximately $19 million as of December 31, 1998.

L A B O R

Labor unions re p resent approximately 88 percent of BNSF Rail-way employees under collective bargaining agreements with 13d i f f e rent labor organizations. The collective bargaining agre e m e n t sreached in 1995 and 1996 as a result of industry-wide laborcontract negotiations will remain in effect through at leastDecember 31, 1999 and until new agreements are reached orthe Railway Labor Ac t’s pro c e d u res are exhausted. I N F L AT I O N

Due to the capital intensive nature of BNSF’s business, thefull effect of inflation is not reflected in operating expensesbecause depreciation is based on historical cost. An assump-tion that all operating assets were depreciated at current pricel e vels would result in substantially greater expense than his-torically re p o rted amounts.R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S

In June 1998, the Financial Accounting St a n d a rds Board issuedStatement of Financial Accounting St a n d a rds (SFAS) No. 1 3 3“Accounting for De r i va t i ve In s t ruments and Hedging Ac t i v i t i e s.”The Statement is effective for the Company’s fiscal year 2000;h owe ve r, early adoption is permitted. SFAS No. 133 re q u i re sthat all deriva t i ve instruments be re c o rded on the balance sheetat their fair value. Changes in fair value of deriva t i ves are re c o rd e deach period in current earnings or other compre h e n s i ve income,depending on whether a deriva t i ve is designated as part of ahedge transaction and, if it is, the type of hedge transaction.For fair value hedge transactions in which the Company ishedging changes in the fair value of an asset, liability or anu n re c o g n i zed firm commitment, changes in the fair value ofthe deriva t i ve instrument will generally be offset in the incomestatement by changes in the hedged item’s fair value. For cash-f l ow hedge transactions in which the Company is hedging thevariability of cash flows related to a variable rate asset, liability,or a forecasted transaction, changes in the fair value of thed e r i va t i ve instrument will be re p o rted in other compre h e n s i veincome to the extent it offsets changes in the cash flows re l a t e dto the variable rate asset, liability or forecasted transaction, withthe difference re p o rted in current period earnings. The gainsand losses on the deriva t i ve instrument that are re p o rted inother compre h e n s i ve income will be reclassified in earnings inthe periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be re c o g n i zed in current-period earnings.

The Company is currently evaluating SFAS No. 133 andwhether it will adopt this pronouncement prior to the effectivedate. Based on interest rate and fuel hedging instruments out-standing at December 31, 1998 and previously deferred l o s s e sf rom past interest rate hedging transactions, all of which a rec a s h - f l ow hedge transactions, the Company currently estimatesthat the impact of SFAS No. 133 would result in a n e t - o f - t a x

c u m u l a t i ve-effect charge to accumulated other compre h e n s i vedeficit of approximately $125 million if adopted December 31,1998. The Company is presently evaluating the impact SFA SNo. 133 will have on its ongoing results of operations.F O R W A R D - L O O K I N G I N F O R M A T I O N

The Year 2000 discussion above contains forw a rd-looking state-ments, including those concerning the Company’s plans andestimated completion dates, cost estimates, assessments of Ye a r2000 readiness of BNSF and third parties, and possible conse-quences of any failure on the part of the Company or thirdp a rties to be Year 2000 compliant on a timely basis. Fo rw a rd -looking statements invo l ve a number of risks and uncert a i n t i e sthat could cause actual results to differ materially from thosep rojected in the forw a rd-looking statements. Such factorsinclude, but are not limited to, the following: continued ava i l-ability of qualified personnel to assess, remediate, and test ISSand Enterprise technologies at current estimated costs; emer-gence of unforeseen software or hard w a re problems, includingw h e re applications interact with each other in ways not antici-pated, which could delay or hinder commercial transactions orother operations; the ability to locate and remediate Year 2000p roblems with software source code and embedded computerchips in equipment; the failure, in whole or in part, of otherr a i l roads or AAR-supported systems to be Year 2000 compliant;the Year 2000 compliance of its business partners and customersand reduced traffic levels due to their failure, in whole or part ,to be Year 2000 compliant; business interruption due to delaysin obtaining supplies, parts, or equipment from key vendors orsuppliers that are affected by Year 2000 problems; the rippleeffect of Year 2000-related failures in industries s u p p o rting then a t i o n’s basic infrastru c t u re, including fuel vendors and pipel-ines, gas, electric, and water utilities, communications compa-nies, banks and financial institutions, and highway, water, andair transportation systems; and any significant downturn in thegeneral economy, and adverse industry-specific economic con-ditions at the international, national, and regional levels, whollyor partially caused by Year 2000 pro b l e m s .

To the extent that all other written statements include pre-dictions concerning future operations and results of operations,such statements are forw a rd-looking statements that invo l verisks and uncertainties, and actual results may differ materially.Factors that could cause actual results to differ materiallyinclude, but are not limited to, general economic downturns,which may limit demand and pricing; labor matters, whichmay affect the costs and feasibility of certain operations; andcompetition and commodity concentrations, which mayaffect traffic and pricing levels.

2 4 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

R E P O R T O F M A N A G E M E N T

T O T H E S T O C K H O L D E R S O F B U R L I N G T O N N O R T H E R N

S A N T A F E C O R P O R A T I O N

The accompanying consolidated financial statements ofBurlington Northern Santa Fe Corporation and sub-sidiary companies were prepared by management, who

are responsible for their integrity and objectivity. They wereprepared in accordance with generally accepted accountingprinciples and properly include amounts that are based onmanagement’s best judgments and estimates. Other financialinformation included in this annual report is consistent withthat in the consolidated financial statements.

The Company maintains a system of internal accountingcontrols to provide reasonable assurance that assets are safe-g u a rded and that the books and re c o rds reflect the authorize dtransactions of the Company. Limitations exist in any systemof internal accounting controls based upon the recognitionthat the cost of the system should not exceed the benefitsderived. The Company believes its system of internalaccounting controls, augmented by its internal auditingfunction, appropriately balances the cost/benefit relationship.

Independent accountants provide an objective assessmentof the degree to which management meets its responsibilityfor fairness of financial reporting. They regularly evaluate thesystem of internal accounting controls and perform such testsand other procedures as they deem necessary to express anopinion on the fairness of the consolidated financial statements.

The Board of Directors pursues its responsibility for theC o m p a n y’s financial statements through its Audit Committeewhich is composed solely of directors who are not officers oremployees of the Company. The Audit Committee meetsregularly with the independent accountants, managementand internal auditors. The independent accountants and theCompany’s internal auditors have direct access to the AuditCommittee, with and without the presence of managementrepresentatives, to discuss the scope and results of their workand their comments on the adequacy of internal accountingcontrols and the quality of financial reporting.

Robert D. KrebsChairman, President and Chief Executive Officer

Denis E. SpringerSenior Vice President and Chief Financial Officer

Thomas N. HundVice President and Controller

R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S

T O T H E S T O C K H O L D E R S A N D B O A R D O F D I R E C T O R S

O F B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

A N D S U B S I D I A R I E S

In our opinion, the accompanying consolidated balancesheet and the related consolidated statements of income,of cash flows and of changes in stockholders’ equity pre-

sent fairly, in all material respects, the financial position ofBurlington Northern Santa Fe Corporation and subsidiarycompanies at December 31, 1998 and 1997, and the resultsof their operations and their cash flows for each of the threeyears in the period ended December 31, 1998, in conformitywith generally accepted accounting principles. These financialstatements are the responsibility of the Company’s manage-ment; our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted ouraudits of these statements in accordance with generallyaccepted auditing standards which require that we plan andp e rform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material mis-statement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in thefinancial statements, assessing the accounting principles usedand significant estimates made by management, andevaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for theopinion expressed above.

PricewaterhouseCoopers LLPFort Worth, TexasFebruary 8, 1999

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 2 5

2 6 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

C O N S O L I D A T E D S T A T E M E N T O F I N C O M E

Burlington Northern Santa Fe Corporation and Subsidiaries (Dollars in millions, except per share data)

Year ended December 31, 1998 1997 1996

Revenues $8,941 $8,370 $8,109Operating expenses:

Compensation and benefits 2,812 2,675 2,561Purchased services 894 823 800Depreciation and amortization 832 773 760Equipment rents 804 820 736Fuel 724 747 727Materials and other 717 675 777Special charge — 90 —

Total operating expenses 6,783 6,603 6,361

Operating income 2,158 1,767 1,748Interest expense 354 344 301Other income (expense), net 45 (19) (7)

Income before income taxes 1,849 1,404 1,440Income tax expense 694 519 551

Net income $1,155 $ 885 $ 889

Earnings per share:Basic $ 2.45 $ 1.91 $ 1.95Diluted $ 2.43 $ 1.88 $ 1.91

Average shares (in millions):Basic 470.5 464.4 456.3Dilutive effect of stock options 5.7 6.7 8.1

Diluted 476.2 471.1 464.4

See accompanying notes to consolidated financial statements.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 2 7

C O N S O L I D A T E D B A L A N C E S H E E T

Burlington Northern Santa Fe Corporation and Subsidiaries(Shares in thousands. Dollars in millions)

December 31, 1998 1997

A S S E T S

Current assets:Cash and cash equivalents $ 25 $ 31Accounts receivable, net 594 635Materials and supplies 244 205Current portion of deferred income taxes 335 333Other current assets 8 30

Total current assets 1,206 1,234

Property and equipment, net 20,662 19,211Other assets 822 891

Total assets $22,690 $21,336

L I A B I L I T I E S A N D S T O C K H O L D E R S ’ E Q U I T Y

Current liabilities:Accounts payable and other current liabilities $ 1,929 $ 1,952Long-term debt due within one year 268 108

Total current liabilities 2,197 2,060

Long-term debt and commercial paper 5,188 5,181Deferred income taxes 5,662 5,175Casualty and environmental liabilities 389 448Employee merger and separation costs 409 469Other liabilities 1,075 1,191

Total liabilities 14,920 14,524

Commitments and contingencies (see Notes 8, 11 and 12)

Stockholders’ equity:Common stock, $.01 par value, 600,000 shares authorized;

477,436 shares and 470,240 shares issued, respectively 5 5Additional paid-in capital 5,177 4,992Retained earnings 2,811 1,863Treasury stock, at cost, 6,961 shares and 1,329 shares, respectively (213) (39)Accumulated other comprehensive deficit (8) (7)Other (2) (2)

Total stockholders’ equity 7,770 6,812

Total liabilities and stockholders’ equity $22,690 $21,336

See accompanying notes to consolidated financial statements.

2 8 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

C O N S O L I D A T E D S T A T E M E N T O F C A S H F L O W S

Burlington Northern Santa Fe Corporation and Subsidiaries(Dollars in millions)

Year ended December 31, 1998 1997 1996

O P E R A T I N G A C T I V I T I E S

Net income $ 1,155 $ 885 $ 889Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 832 773 760Deferred income taxes 489 433 453Special charge — 90 —Employee merger and separation costs paid (77) (116) (183)Other, net (243) (221) (62)

Changes in current assets and liabilities:Accounts receivable:

Sale of accounts receivable 19 301 40Other changes 20 (333) (140)

Materials and supplies (39) 17 (2)Other current assets 22 4 (6)Accounts payable and other current liabilities 40 (19) 122

Net cash provided by operating activities 2,218 1,814 1,871

I N V E S T I N G A C T I V I T I E S

Capital expenditures (2,147) (2,182) (2,234)Other, net (271) (147) (10)

Net cash used for investing activities (2,418) (2,329) (2,244)

F I N A N C I N G A C T I V I T I E S

Net decrease in commercial paper and bank borrowings (242) (235) (98)Proceeds from issuance of long-term debt 794 1,002 626Payments on long-term debt (112) (177) (83)Dividends paid (197) (185) (184)Proceeds from stock options exercised 111 102 118Purchase of BNSF common stock (153) — —Other, net (7) (8) (9)

Net cash provided by financing activities 194 499 370

Decrease in cash and cash equivalents (6) (16) (3)Cash and cash equivalents:

Beginning of year 31 47 50

End of year $ 25 $ 31 $ 47

S U P P L E M E N T A L C A S H F L O W I N F O R M A T I O N

Interest paid, net of amounts capitalized $ 370 $ 346 $ 306Income taxes paid, net of refunds 220 32 69Directly financed asset acquisitions — — 43

See accompanying notes to consolidated financial statements.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 2 9

C O N S O L I D A T E D S T A T E M E N T O F C H A N G E S I N S T O C K H O L D E R S ’ E Q U I T Y

Burlington Northern Santa Fe Corporation and Subsidiaries(Shares in thousands. Dollars in millions, except per share data.)

CommonShares of Stock and Accumulated

Common Shares of Additional OtherStock Treasury Paid-in Retained Treasury Comprehensive

Issued Stock Capital Earnings Stock Deficit Other Total

Balance at December 31, 1995 448,950 (135) $ 4,607 $ 459 $ (3) $ (19) $ (7) $5,037Comprehensive income:

Net income 889 889Minimum pension liability

adjustment (net of tax of $9) 15 15

Total comprehensive income 904

Common stock dividends,$0.40 per share (183) (183)

Adjustments associated withunearned compensation,restricted stock 1,683 (66) 8 (2) 3 9

Exercise of stock options andrelated tax benefit 10,749 (387) 191 (11) 180

Acquisition of a subsidiary 1,089 31 31Other 123 3 3

Balance at December 31, 1996 462,594 (588) 4,840 1,165 (16) (4) (4) 5,981Comprehensive income:

Net income 885 885Minimum pension liability

adjustment (net of taxbenefit of $2) (3) (3)

Total comprehensive income 882

Common stock dividends,$0.40 per share (187) (187)

Adjustments associated withunearned compensation,restricted stock 366 (117) 13 (4) 2 11

Exercise of stock options andrelated tax benefit 7,197 (624) 140 (19) 121

Other 83 4 4

Balance at December 31, 1997 470,240 (1,329) 4,997 1,863 (39) (7) (2) 6,812Comprehensive income:

Net income 1,155 1,155Minimum pension liability

adjustment (net of taxbenefit of $0.5) (1) (1)

Total comprehensive income 1,154

Common stock dividends,$0.44 per share (207) (207)

Adjustments associated withunearned compensation,restricted stock 527 (132) 15 (4) 2 13

Exercise of stock options andrelated tax benefit 6,669 (537) 167 (17) 150

Purchase of BNSF common stock (4,963) (153) (153)Other 3 (2) 1

Balance at December 31, 1998 477,436 (6,961) $5,182 $2,811 $(213) $ (8) $ (2) $7,770

See accompanying notes to consolidated financial statements.

3 0 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

A N D S U B S I D I A R I E S

1A C C O U N T I N G P O L I C I E S

T H E C O M P A N Y A N D P R I N C I P L E S O F C O N S O L I D A T I O N

The consolidated financial statements include theaccounts of Burlington Northern Santa Fe Corporation andits majority-owned subsidiaries, all of which are separate legalentities (collective l y, BNSF or Company). All significant inter-company accounts and transactions have been eliminated.T h rough its principal subsidiary, The Burlington Northernand Santa Fe Railway Company (BNSF Railway), BNSFoperates one of the largest railroad networks in the UnitedStates, with 34,000 route miles covering 28 states and twoCanadian provinces. Through one operating transportationservices segment, BNSF Railway transports a wide range ofproducts and commodities including the transportation ofcontainers and trailers (intermodal), coal and agriculturalcommodities which constituted 28 percent, 25 percent and12 percent, respectively, of total revenues for the year endedDecember 31, 1998. Revenues derived from sources otherthan transportation services are not significant.U S E O F E S T I M A T E S

The preparation of financial statements in accordance withgenerally accepted accounting principles re q u i res managementto make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses duringthe periods presented.R E C L A S S I F I C AT I O N S

Certain comparative prior year amounts in the consolidatedfinancial statements and notes have been reclassified to con-form with the current year presentation.C A S H A N D C A S H E Q U I V A L E N T S

All short-term investments with original maturities of lessthan 90 days are considered cash equivalents. Cash equiva l e n t sare stated at cost, which approximates market value.M A T E R I A L S A N D S U P P L I E S

Materials and supplies, which consist mainly of rail, tiesand other items for construction and maintenance ofproperty and equipment, as well as diesel fuel, are valued atthe lower of average cost or market.P R O P E R T Y A N D E Q U I P M E N T

Property and equipment are depreciated and amortized on astraight-line basis over their estimated useful lives. Upon nor-mal sale or retirement of depreciable railroad property, costless net salvage is charged to accumulated depreciation andno gain or loss is re c o g n i zed. Significant pre m a t u re re t i re m e n t sare recorded as gains or losses at the time of their occurrence.

Expenditures which significantly increase asset values orextend useful lives are capitalized. Repair and maintenancee x p e n d i t u res are charged to operating expense when the workis performed. Property and equipment are stated at cost.

The Company incurs certain direct labor, contract serviceand other costs associated with the development and installa-tion of computer software. Costs for newly developed soft-ware or significant enhancements to existing softwareare typically capitalized. Research, operations and mainte-nance costs are charged to operating expense when the workis performed.R E V E N U E R E C O G N I T I O N

Transportation revenues are recognized based upon the pro-portion of service provided.C O M M O N S T O C K S P L I T

On April 16, 1998, the Company’s stockholders approved anamendment to the Company’s certificate of incorporation toincrease authorized common shares from 300 million to 600million. On July 16, 1998, the Board of Directors approveda three-for-one common stock split which was effected in theform of a stock dividend of two additional shares of BNSFcommon stock payable for each share outstanding or held intreasury on September 1, 1998, to the stockholders of recordon August 17, 1998. All equity-based benefit plans reflect theissuance of additional shares or options due to the declarationof the stock split. All share and per share data have beenrestated to reflect the stock split.

2S A L E O F I N V E S T M E N T I N P I P E L I N E P A R T N E R S H I P

Santa Fe Pacific Pipelines, Inc. (SFP Pipelines), anindirect, wholly-owned subsidiary of BNSF, served as

the general partner of Santa Fe Pacific Pipeline Partners,L.P. (Pipeline Partnership) and of its operating partnershipsubsidiary, SFPP, L.P. SFP Pipelines owned a two percentinterest as the Pipeline Partnership’s and SFPP, L.P.’s generalpartner and an approximate 42 percent interest as limitedpartner of the Pipeline Partnership. As general partner, SFPPipelines received two percent of all amounts available fordistribution by the Partnership and an additional incentivedepending upon the level of cash distributions paid to holdersof limited partner interests in the Pipeline Pa rt n e r s h i p(Partnership Units). SFP Pipeline Holdings, Inc., an indirect,wholly-owned subsidiary of BNSF (SFP Holdings), hadoutstanding $219 million principal amount of Variable RateExchangeable Debentures due 2010 (VREDs) at December31, 1997.

In October 1997, SFP Pipelines and SFP Holdingsentered into an agreement with Kinder Morgan EnergyPartners, L.P. (Kinder Morgan) pursuant to which KinderMorgan acquired substantially all of SFP Pipelines’ interestsin the Pipeline Partnership and SFPP, L.P. for approximately

$84 million in cash on March 6, 1998. The PipelinePartnership was liquidated as part of the transaction andeach Partnership Unit was converted into the right to receive1.39 Kinder Morgan common units. SFP Pipelines’8,148,148 Partnership Units were converted into the right toreceive 11,325,925 Kinder Morgan common units. In addi-tion, the agreement called for the interest of SFP Pipelines inSFPP, L.P. to be partially redeemed for a cash distribution of$5.8 million, with SFP Pipelines retaining only a 0.5 percentspecial limited partnership interest in SFPP, L.P. TheCompany recognized a $67 million one-time pre-tax gain($32 million or $0.07 per share on a diluted basis after-tax)at the time of the sale.

Consummation of the transaction caused an “ExchangeEvent” under the VRED agreement and in June 1998 allVRED holders received either partnership units of KinderMorgan or cash equal to the par value of the VREDs. As aresult of this transaction, substantially all of the Company’si n vestment in the Pipeline Pa rtnership and SFPP, L.P. and theVREDs were removed from the consolidated balance sheet.

3O T H E R I N C O M E ( E X P E N S E ) , N E T

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

Year ended December 31, 1998 1997 1996

Gain on sale of Pipeline Partnership $(67 $ — $ —Gain on property dispositions 48 14 23Equity in earnings of Pipeline Partnership 4 30 24Accounts receivable sale fees (34) (27) (14)Miscellaneous, net (40) (36) (40)

Total $(45 $(19) $ (7)

4I N C O M E T A X E S

Income tax expense was as follows(in millions):

Year ended December 31, 1998 1997 1996

Current:Federal $191 $ 72 $ 81State 14 14 17

205 86 98

Deferred:Federal 410 372 396State 79 61 57

489 433 453

Total $694 $519 $551

Reconciliation of the federal statutory income tax rate tothe effective tax rate was as follow s :

Year ended December 31, 1998 1997 1996

Federal statutory income tax rate 35.0% 35.0% 35.0%State income taxes,

net of federal tax benefit 3.3 3.5 3.4%Other, net (0.7) (1.5) (0.1)

Effective tax rate 37.6% 37.0% 38.3%

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

December 31, 1998 1997

Deferred tax liabilities:Depreciation and amortization $(5,868) $(5,677)Other (417) (331)

Total deferred tax liabilities (6,285) (6,008)

Deferred tax assets:Casualty and environmental 253 270Em p l oyee merger and separation costs 182 213Post-retirement benefits 89 86Non-expiring AMT credit carryforwards — 36Other 434 561

Total deferred tax assets 958 1,166

Net deferred tax liability $(5,327) $(4,842)

Noncurrent deferred income tax liability $(5,662) $(5,175)Current deferred income tax asset 335 333

Net deferred tax liability $(5,327) $(4,842)

BNSF filed its first federal income tax return for 1995.The federal income tax returns of BNSF’s predecessor com-panies, Burlington Northern Inc. (BNI) and Santa Fe PacificCorporation (SFP) have been examined through 1994 and1992, respectively. All years prior to 1989 for BNI and 1991for SFP are closed. Issues relating to the years 1991-1992 forSFP and for the years 1989-1994 for BNI are being contest-ed through various stages of administrative appeal. In addi-tion, BNSF and its subsidiaries have various state income taxreturns in the process of examination, administrative appealor litigation. Management believes that adequate provisionhas been made for any adjustment that might be assessed foropen years through 1998.

5A C C O U N T S R E C E I V A B L E , N E T

Effective June 1997, an accounts receivable sale agree-ment which allowed the sale of up to $300 million in

receivables effective through 1999, was replaced by anamended and restated agreement which allows BNSF Railway,through a special purpose subsidiary, to sell up to $600million of variable rate certificates which mature in 2002 evi-dencing undivided interests in an accounts receivable mastertrust. The master trust’s assets include an ownership interestin a re volving portfolio of BNSF Railway’s accounts re c e i va b l ewhich are used to support the certificates. At December 31,1998, $600 million of certificates were outstanding and weresupported by receivables of approximately $1.1 billion inthe master trust. Certificates outstanding were $581 millionat December 31, 1997. BNSF Railway has retained the col-lection responsibility with respect to the accounts receivableheld in trust. BNSF Railway is exposed to credit loss relatedto collection of accounts receivable to the extent that theamount of receivables in the master trust exceeds the amountof certificates sold. Costs related to such agreements vary on

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 3 1

3 2 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

a monthly basis and are generally related to certain interestrates. These costs are included in Other income (expense), net.

BNSF maintains an allowance for corrections to andcollectibility of freight and other billings. At December 31,1998 and 1997, $84 million and $70 million of suchallowances had been recorded, respectively. BNSF believesthe allowance is adequate to cover disputed and uncollectiblereceivables at December 31, 1998.

6P R O P E R T Y A N D E Q U I P M E N T, N E T

Pro p e rty and equipment, net (in millions), and the we i g h t e da verage annual depreciation rate (%) we re as follow s :

1998Depreciation

December 31, 1998 1997 Rate

Land $ 1,431 $ 1,416 —%Track structure 11,340 10,527 4.0%Other roadway 8,389 7,856 2.5%Locomotives 2,276 1,874 4.9%Freight cars and

other equipment 1,860 1,870 4.0%Computer hardware

and software 405 412 15.5%

Total cost 25,701 23,955Less accumulated depre c i a t i o n

and amortization (5,039) (4,744)

Property and equipment, net $20,662 $19,211

The consolidated balance sheet at December 31, 1998 and1997 included $1,082 million and $875 million, respectively,for property and equipment under capital leases.

7A C C O U N T S P A Y A B L E A N D

O T H E R C U R R E N T L I A B I L I T I E S

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

December 31, 1998 1997

Compensation and benefits payable $ 386 $ 399Casualty and environmental liabilities 272 291Accounts payable 174 222Rents and leases 155 144Tax liabilities 117 132Employee merger and separation costs 65 82Other 760 682

Total $1,929 $1,952

8D E B T

Debt outstanding was as follows(in millions):

December 31, 1998 1997

Notes and debentures, weighted average rate of 7.04%, due 1999 to 2097 $3,073 $2,842

Capitalized lease obligations, weightedaverage rate of 6.65%, due 1999 to 2012 818 695

Equipment obligations, weighted averagerate of 7.62%, due 1999 to 2016 595 565

Mortgage bonds, weighted average rate of7.56%, due 1999 to 2047 498 467

Commercial paper, 5.71% (variable) 471 668Bank borrowings, 5.35% (variable) 25 70Unamortized discount and other, net (24) (18)

Total 5,456 5,289Less current portion of long-term debt (268) (108)

Long-term debt $5,188 $5,181

BNSF issues commercial paper from time to time which iss u p p o rted by bank re volving credit agreements. Ou t s t a n d i n gc o m m e rcial paper balances are considered as reducing theamount of borrowings available under these agreements. T h ebank re volving credit agreements allow borrowings of up to$425 million on a short-term basis and $1.5 billion on a long-term basis. Annual facility fees are currently 0.075 percent and0.09 percent, re s p e c t i ve l y, and are subject to change based uponchanges in BNSF’s senior unsecured debt ratings. Borrow i n grates are based upon i) LIBOR plus a spread based upon BNSF’ssenior unsecured debt ratings, ii) money market rates offered atthe option of the lenders, or iii) an alternate base rate. The com-mitments of the lenders under the short-term agreement we reextended on November 12, 1998 and are currently scheduledto expire on June 15, 1999. The commitments of the lendersunder the long-term agreement are scheduled to expire onNovember 12, 2002.

At December 31, 1998, there we re no borrowings againstthe re volving credit agreements and the maturity value of com-m e rcial paper outstanding was $474 million, leaving a totalremaining capacity of $1,026 million available under the long-term re volving credit agreement and $425 million ava i l a b l eunder the short-term credit agreement. A portion of c o m m e r-cial paper has been hedged to fix interest rates through intere s trate swap transactions (see Note 11: Hedging Activities, Leasesand Other Commitments). The financial covenants of the bankre volving credit agreements re q u i re that BNSF’s consolidatedtangible net worth, as defined in the agreements, be at least $4.4billion, and that its debt cannot exceed 55 percent of its consoli-d a t e d total capital as defined in the agreements. BNSF was incompliance with these financial covenants at December 31, 1998.

In Ma rc h 1998 the Company filed a shelf re g i s t r a t i o n of debtsecurities, including medium-term notes that may be issued inone or more series at an aggregate offering price not to exc e e d

$500 million. In April 1998, prior to the effective date of theMa rch 1998 shelf registration, the Company amended itsAugust 1997 shelf registration to combine it with the Ma rc h1998 shelf registration. As of December 31, 1998, the Ma rc h1998 shelf registration had $350 million of potential borrow i n g sremaining. In Fe b ru a ry 1999, the Company filed a new shelfregistration of debt securities that may be issued in one or moreseries at an aggregate offering price not to exceed $750 million.As of Fe b ru a ry 8, 1999, the shelf registration had not yet beend e c l a red effective. When it becomes effective, the Company willh a ve $1.1 billion of borrowing capacity available through thecombined shelf registrations.

A g g regate long-term debt scheduled maturities are $268million, $146 million, $222 million, $744 million and $130million for 1999 through 2003, re s p e c t i ve l y. Commercial paperof $471 million is included in maturities for 2002. Ma t u r i t i e sin 1999 exclude $200 million of variable rate debentures due2029 and maturities in 2001 exclude $100 million of 6.05 p e rcent notes due 2031, which will either be re m a rketed by theholder of a call option on the debt and mature in 2029 and2031, re s p e c t i vely; or will otherwise be re p u rchased by theCompany in 1999 and 2001, re s p e c t i ve l y. In addition, maturitiesin 2000 exclude $100 million of 6.1 percent notes due 2027and maturities in 2003 exclude $175 million of 6.53 perc e n tnotes due 2037, which may be redeemed in 2000 and 2003,re s p e c t i ve l y, at the option of the holder.

Most BNSF Railway pro p e rties and certain other assets arepledged as collateral to, or are otherwise restricted u n d e r, thevarious BNSF Railway long-term debt agreements. Eq u i p m e n tobligations and capital leases are secured by the underlyingequipment.

An indirect wholly-owned subsidiary of BNSF, in connectionwith its remaining 0.5 percent special limited partner interest ina pipeline part n e r s h i p, is contingently liable for $190 million ofc e rtain debt of the pipeline partnership assumed by KinderMorgan pursuant to the sale discussed in Note 2: Sale of In ve s t -ment in Pipeline Pa rt n e r s h i p. In addition, BNSF and anothermajor railroad jointly and severally guarantee $75 million of debtof KCT In t e rmodal Tr a n s p o rtation Corporation, the proceeds ofwhich are being used to finance the construction of a doubletrack grade separation bridge in Kansas City, Missouri, to beoperated and used by Kansas City Terminal Railway Company.

9E M P L O Y E E M E R G E R A N D S E P A R A T I O N C O S T S

L I A B I L I T Y B A L A N C E A N D A C T I V I T Y

Cu r rent and long-term employee merger and separation l i a-bilities totaling $474 million and $551 million are included i nthe consolidated balance sheet at December 31, 1998 and 1997,re s p e c t i ve l y, and principally re p resent: (i) employe e - related seve r-ance costs for the consolidation of clerical functions; (ii) deferre dbenefits payable upon separation or re t i rement to certain active

conductors, trainmen and locomotive engineers; and (iii) cert a i nnon-union employee severance costs.

Liabilities related to the consolidation of clerical functions(the Consolidation Plan) we re $211 million and $259 million atDecember 31, 1998 and 1997, re s p e c t i ve l y. These liabilities p ro-vide for severance costs associated with the Consolidation Pl a nadopted in 1995 upon consummation of the merger of B N S F ’sp redecessor companies Burlington No rthern Inc. and Santa FePacific Corporation (the Merger). The Consolidation Plan willresult in the elimination of approximately 1,600 permanentpositions, of which approximately 1,500 positions have beeneliminated through 1998, including a p p roximately 250 positionsthat we re eliminated in 1998. Upon adoption in 1995, theC o n s o l i d a t i o n Plan was expected to be completed by early 1999.Howe ve r, the Consolidation Plan was partially delayed as aresult of the timing related to completion of merger integrationand other issues and is now expected to be completed by 2001.Remaining clerical positions to be eliminated by the Companywill result in invo l u n t a ry separations. Benefits paid to affectede m p l oyees are in the form of lump-sum payments or paymentsmade over five to ten years or in some cases through re t i re m e n t .

Liabilities related to deferred benefits payable upon separa-tion or re t i rement to certain active conductors, trainmen a n dl o c o m o t i ve engineers we re $207 million and $224 million a tDecember 31, 1998 and 1997, re s p e c t i ve l y. These costs we rei n c u r red in connection with labor agreements reached prior tothe Merger which, among other things, reduced train crew size sand allowed for more flexible work ru l e s .

Liabilities principally related to certain remaining non-unione m p l oyee severances resulting from the Merger we re $56 millionand $68 million at December 31, 1998 and 19 97, re s p e c t i ve l y.These costs will be paid over the next several years based on defer-r a l elections made by affected employees. Ap p roximately 1,500non-union employees re c e i ved or are receiving severance paymentsand special termination benefits under the Company’s re t i re m e n tand health and we l f a re plans resulting from the Me r g e r.

During 1998, 1997 and 1996, BNSF made employee m e r g e rand separation payments of $77 million, $116 million and $183million, re s p e c t i ve l y. At December 31, 1998, $65 million of theremaining liabilities are included within curre n t liabilities foranticipated costs to be paid in 1999.1 9 9 7 S P E C I A L C H A R G E

In the fourth quarter of 1997, the Company re c o rded a $90 mil-lion pre-tax special charge. Ap p roximately $65 million of the chargerelated to the Consolidation Plan and the remainder of the chargerelated to severance and other costs for non-union employe e s .BNSF re c o rded an initial charge in 1995 for the ConsolidationPlan, howe ve r, the 1995 charge excluded costs associated with vo l u n t a ry severance for employees who we re given the opport u n i t yto relocate and follow their work, but elected seve r a n c e .

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 3 3

3 4 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

10D I S C L O S U R E S A B O U T F A I R V A L U E

O F F I N A N C I A L I N S T R U M E N T S

The estimated fair values of BNSF’s financial instru-ments at December 31, 1998 and 1997 and the methods andassumptions used to estimate the fair value of each class of finan-cial instruments held by BNSF, we re as follows (see also Note 11:Hedging Activities, Leases and Other Commitments re g a rd i n gthe fair values of BNSF’s outstanding hedging instru m e n t s ) :C A S H A N D C A S H E Q U I V A L E N T S

The carrying amount approximated fair value because of theshort maturity of these instruments.L O N G - T E R M D E B T A N D C O M M E R C I A L P A P E R

The fair value of long-term debt was primarily based on quotedmarket prices for the same or similar issues, or on the currentrates that would be offered for debt of the same re m a i n i n gmaturities. The carrying amount of commercial paper approx i-m a t e d fair value because of the short maturity of these instru-ments. The carrying amounts of long-term debt and commer-cial paper at December 31, 1998 and 1997 we re $5,456 mil-lion and $5,289 million, re s p e c t i ve l y, while the estimated fairvalues at December 31, 1998 and 1997 we re $5,712 millionand $5,472 million, re s p e c t i ve l y.

11H E D G I N G A C T I V I T I E S , L E A S E S

A N D O T H E R C O M M I T M E N T S

H E D G I N G A C T I V I T I E S

F U E L

During 1998, 1997 and 1996 fuel expenses approximated 11p e rcent of total operating expenses. Due to the significance ofdiesel fuel expenses to the operations of the railroad and the historical volatility of fuel prices, the Company has established ap rogram to hedge against fluctuations in the price of its dieselfuel purchases. The intent of the program is to protect theC o m p a n y’s operating margins and overall profitability fro ma d verse fuel price changes. Howe ve r, to the extent the Companyhedges portions of its fuel purchases, it will not re a l i ze theimpact of decreases in fuel prices. The fuel-hedging pro g r a mincludes the use of commodity swap transactions that areaccounted for as hedges. Any gains or losses associated withchanges in the market value of the fuel swaps are deferred andre c o g n i zed as a component of fuel expense in the period inwhich the fuel is purchased and used. Based on 1998 fuel consumption and excluding the impact of the hedging pro g r a m ,each one-cent increase in the price of fuel would result ina p p rox im a t e l y $12 million of additional fuel expense on anannual basis.

As of Fe b ru a ry 8, 1999, BNSF had entered into fuel swaps fora p p roximately 1,776 million gallons at an average price of approx i-mately 49 cents per gallon. The above price does not include taxe s ,t r a n s p o rtation costs, certain other fuel handling costs, and any dif-f e rences which may occur from time to time between the prices of

commodities hedged and the purchase price of BNSF’s diesel fuel.Cu r re n t l y, BNSF’s fuel hedging program covers approx i m a t e-

ly 75 percent, 40 percent, 22 percent and 7 percent of e s t i m a t e dannual and quarterly fuel purchases for 1999, 2000, 2001, and2002, re s p e c t i ve l y. Hedge positions are closely monitored toe n s u re that they will not exceed actual fuel re q u i rements in anyperiod. Un re c o g n i zed losses from BNSF’s fuel swap t r a n s a c t i o n swe re approximately $174 million as of De c e m b e r 31 ,1998, ofwhich $120 million relates to swap transactions that will expirein 1999. BNSF also monitors its hedging positions and credit rat-ings of its counterparties and does not anticipate losses due toc o u n t e r p a rty nonperf o r m a n c e .I N T E R E S T R A T E

From time to time, the Company enters into various intere s trate hedging transactions for the purpose of managing exposureto fluctuations in interest rates and establishing rates in anticipa-tion of future debt issuances. As of Fe b ru a ry 8, 1999, BNSFhad interest rate swap transactions which fix the interest rate onthe total principal amount of $125 million of its commerc i a lpaper debt. The interest rate swap transactions re q u i re paymentof a weighted average fixed interest rate of approximately 6.1p e rcent and the receipt of a variable interest rate based on ac o m m e rcial paper composite rate. The swap transactions expirein December 1999. Any gains and losses associated withchanges in market value of these swaps are not re c o g n i ze d .BNSF re c o g n i zes, on an accrual basis, a fixed rate of interest onthe principal amount of commercial paper hedged over the termof the swap agreements. Un re c o g n i zed losses from BNSF’s inter-est rate swap transactions we re approximately $2 million as ofDecember 31, 1998.

In anticipation of future debt issuances, BNSF has entere dinto tre a s u ry lock transactions, based on the 10-year and 30-ye a rU.S. tre a s u ry rates, totaling $300 million and $200 million,re s p e c t i ve l y. The 10-year and 30-year tre a s u ry lock transactionsh a ve average interest rates of approximately 4.5 percent and 5.0p e rcent, re s p e c t i ve l y, and expire between 1999 and 2001. T h e s erates do not include a credit spread which will be determined atthe time of the actual debt issuance and included in the all-ini n t e rest rate. The tre a s u ry locks can be closed by BNSF anytimeup to expiration. Un re c o g n i zed gains on the tre a s u ry lock trans-actions we re approximately $19 million as of December 31, 1998.

During 1998, at the time of issuing $400 million of debt, theCompany closed out $400 million of tre a s u ry lock transactions ata loss of approximately $18 million which has been deferred andis being amort i zed to interest expense over the life of the debt.

L E A S E S

BNSF has substantial lease commitments for locomotives,freight cars, trailers, office buildings and other property.Most of these leases provide the option to purchase theequipment at fair market value at the end of the lease.However, some provide fixed price purchase options. Futureminimum lease payments (which reflect leases having non-cancelable lease terms in excess of one year) as of December31, 1998 are summarized as follows (in millions):

Capital OperatingYear ended December 31 Leases Leases

1999 $116 $3502000 105 2562001 116 2062002 110 1752003 109 164Thereafter 594 1,814

Total 1,150 $2,965

Less amount representing interest 332

Present value of minimum lease payments $ 818

Lease rental expense for all operating leases was $503million, $456 million and $446 million for the years endedDecember 31, 1998, 1997 and 1996, respectively.Contingent rentals and sublease rentals were not significant.O T H E R C O M M I T M E N T S

BNSF has entered into commitments to acquire 476 locomo-t i ves in 1999. The locomotives will be financed from one ora combination of sources including, but not limited to, cashf rom operations, capital or operating leases, and debt issuances.The decision on the method used will depend upon the curre n tmarket conditions and other factors at the time of financing.Additionally, BNSF has committed to acquire 196 and 50locomotives in 2000 and 2001, respectively.

In connection with the closing of the sale of rail lines inSouthern California in 1992 and 1993, BNSF has a $50million liability recorded for an obligation retained by BNSFwhich under certain conditions requires the Company torepurchase a portion of the properties sold.

12E N V I R O N M E N T A L A N D

O T H E R C O N T I N G E N C I E S

E N V I R O N M E N TA L

BNSF’s operations, as well as those of its competitors, aresubject to extensive federal, state and local environmentalregulation. BNSF’s operating procedures include practicesto protect the environment from the environmental risksinherent in railroad operations, which frequently involvetransporting chemicals and other hazardous materials.Additionally, many of BNSF’s land holdings are and havebeen used for industrial or transportation-related purposes orleased to commercial or industrial companies whose activitiesmay have resulted in discharges onto theproperty. As a result,

BNSF is subject to environmental clean-up and enforcementactions. In particular, the Federal Comprehensive Environ-mental Response, Compensation and Liability Act of 1980(CERCLA), also known as the “Superfund” law, as well assimilar state laws generally impose joint and several liabilityfor clean-up and enforcement costs without regard to fault orthe legality of the original conduct on current and formerowners and operators of a site. BNSF has been notified thatit is a potentially responsible party (PRP) for study andclean-up costs at approximately 32 Superfund sites for whichinvestigation and remediation payments are or will be madeor are yet to be determined (the Superfund sites) and, inmany instances, is one of several PRPs. In addition, BNSFmay be considered a PRP under certain other laws.Accordingly, under CERCLA and other federal and statestatutes, BNSF may be held jointly and severally liable for allenvironmental costs associated with a particular site. If thereare other PRPs, BNSF generally participates in the clean-upof these sites through cost-sharing agreements with termsthat vary from site to site. Costs are typically allocated basedon relative volumetric contribution of material, the amountof time the site was owned or operated, and/or the portionof the total site owned or operated by each PRP.

Environmental costs include initial site surveys and envi-ronmental studies of potentially contaminated sites as well ascosts for remediation and restoration of sites determined tobe contaminated. Liabilities for environmental clean-up costsare initially recorded when BNSF’s liability for environmen-tal clean-up is both probable and a reasonable estimate ofassociated costs can be made. Adjustments to initial estimatesare recorded as necessary based upon additional informationdeveloped in subsequent periods. BNSF conducts an on-going environmental contingency analysis, which considers acombination of factors including independent consultingreports, site visits, legal reviews, analysis of the likelihood ofparticipation in and the ability of other PRPs to pay forclean-up, and historical trend analyses.

BNSF is involved in a number of administrative andjudicial proceedings and other clean-up efforts at approxi-mately 400 sites, including the Superfund sites, at which it isparticipating in the study or clean-up, or both, of allegedenvironmental contamination. BNSF paid approximately$64 million, $55 million and $47 million during 1998,1997 and 1996 respectively, for mandatory and unassertedclean-up efforts, including amounts expended under federaland state voluntary clean-up programs. BNSF has accruals ofapproximately $185 million for remediation and restorationof all known sites. BNSF anticipates that the majority of theaccrued costs at December 31, 1998, will be paid over thenext five years. No individual site is considered to be material.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 3 5

During 1998, BNSF settled an environmental matter inthe State of Missouri related to the release of a reportablequantity of lead sulfide into a waterway. BNSF agreed in thesettlement to pay a fine of $7 million, make restitution pay-ments to the State of Missouri of $3 million and committedto spend $9 million, which includes amounts previouslypaid, in connection with its ongoing remediation efforts.BNSF has made payments of approximately $16 millionrelated to this settlement, including approximately $12 mil-lion that was paid during 1998, which is included in total1998 payments discussed above.

Liabilities recorded for environmental costs representBNSF’s best estimates for remediation and restoration ofthese sites and include both asserted and unasserted claims.Unasserted claims are not considered to be a material com-ponent of the liability. Although recorded liabilities includeBNSF’s best estimates of all costs, without reduction foranticipated recoveries from third parties, BNSF’s total clean-up costs at these sites cannot be predicted with certainty dueto various factors such as the extent of corrective actions thatmay be required, evolving environmental laws and regula-tions, advances in environmental technology, the extent ofother parties’ participation in clean-up efforts, developmentsin ongoing environmental analyses related to sites determinedto be contaminated, and developments in environmentalsurveys and studies of potentially contaminated sites. As aresult, future charges to income for environmental liabilitiescould have a significant effect on results of operations in aparticular quarter or fiscal year as individual site studies andremediation and restoration efforts proceed or as new sitesarise. However, management believes that it is unlikely thatany identified matters, either individually or in the aggregate,will have a material adverse effect on BNSF’s consolidatedfinancial position or liquidity.

The railroad industry, including BNSF Railway, is subjectto future requirements regulating air emissions from diesellocomotives. Final regulations applicable to new and rebuiltlocomotive engines were promulgated by the United StatesEn v i ronmental Protection Agency (EPA) and became effectiveJune 15, 1998. The new standards will be phased in between2000 and 2005. BNSF Railway has evaluated compliancerequirements and associated costs and believes the costs willnot be material in any given year. BNSF Railway has alsoe n t e red into agreements with the California State Air Re s o u rc e sBoard and the EPA regarding a program to reduce emissionsin Southern California through accelerated deployment oflocomotives which comply with the federal standards.O T H E R C L A I M S A N D L I T I G A T I O N

BNSF and its subsidiaries are parties to a number of legalactions and claims, various governmental proceedings andprivate civil suits arising in the ordinary course of business,

including those related to environmental matters and per-sonal injury claims. While the final outcome of these itemscannot be predicted with certainty, considering among otherthings the meritorious legal defenses available, it is the opin-ion of management that none of these items, when finallyresolved, will have a material adverse effect on the annualresults of operations, financial position or liquidity of BNSF,although an adverse resolution of a number of these itemscould have a material adverse effect on the results of opera-tions in a particular quarter or fiscal year.

13R E T I R E M E N T P L A N S

A N D O T H E R P O S T E M P L O Y M E N T

B E N E F I T P L A N S

BNSF sponsors two significant defined benefit pension plans:the noncontributory qualified BNSF Retirement Plan, whichcovers substantially all non-union employees, and the non-qualified BNSF Supplemental Retirement Plan, which coverscertain officers and other employees. The benefits underBNSF’s plans are based on years of credited service and thehighest five-year average compensation levels. BNSF’sfunding policy is to contribute annually not less than theregulatory minimum and not more than the maximumamount deductible for income tax purposes.

C e rtain salaried employees of BNSF that have met cert a i nage and years of service re q u i rements are eligible for medicalbenefits and life insurance coverage during re t i rement. T h ere t i ree medical plan is contributory and provides benefits tore t i rees, their cove red dependents and beneficiaries. Re t i ree con-tributions are adjusted annually. The plan also contains fixe ddeductibles, coinsurance and out-of-pocket limitations. The lifeinsurance plan is noncontributory and covers re t i rees only.B N S F ’s policy is to fund benefits payable under the medical andlife insurance plans as they come due. Em p l oyees beginningsalaried employment with BNSF subsequent to September 22,1995 are not eligible for benefits under these plans.

Components of the net benefit costs for these plans were asfollows (in millions):

Pension Benefits

Year ended December 31, 1998 1997 1996

Service cost $ 15 $ 14 $ 17Interest cost 101 100 97Expected return on plan assets (117) (112) (113)Net amortization and deferred amounts 4 4 8

Net benefit cost $ 3 $ 6 $ 9

Medical and Life Benefits

Year ended December 31, 1998 1997 1996

Service cost $ 4 $ 4 $ 5Interest cost 16 14 16Net amortization and deferred amounts — (1) —

Net benefit cost $ 20 $ 17 $ 21

3 6 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

The following tables show the change in benefit obligationand plan assets of these plans (in millions):

Pe n s i o n Medical andBenefits Life Benefits

Change in benefit obligation 1998 1997 1998 1997

Benefit obligation atbeginning of year $1,404 $1,286 $190 $210

Service cost 15 14 4 4Interest cost 101 100 16 14Plan part i c i p a n t s’ contributions — — 3 5Amendments — — 13 —Actuarial (gain) loss 85 117 39 (22)Benefits paid (118) (113) (16) (21)

Benefit obligation at year end $1,487 $1,404 $249 $190

Pe n s i o n Medical andBenefits Life Benefits

Change in plan assets 1998 1997 1998 1997

Fair value of plan assetsat beginning of year $1,540 $1,320 $ — $ —

Actual return on plan assets 43 329 — —Employer contribution 4 4 13 16Plan part i c i p a n t s’ c o n t r i b u t i o n s — — 3 5Benefits paid (118) (113) (16) (21)

Fair value of plan assetsat year end $1,469 $1,540 $ — $ —

The following tables show the reconciliation of the fundedstatus of these plans with amounts recorded in theconsolidated balance sheet (in millions):

Pe n s i o n Medical andBenefits Life Benefits

December 31, 1998 1997 1998 1997

Funded status $(18) $ 136 $(249) $(190)Unrecognized net (gain) loss 7 (151) 4 (16)Unrecognized prior service cost (8) (8) 13 —Unamortized net

transition obligation 11 14 — —

Net amount recognized $ (8) $ (9) $(232) $(206)

Pe n s i o n Medical andBenefits Life Benefits

December 31, 1998 1997 1998 1997

Amounts recognized in theconsolidated balance sheet:

Prepaid benefit cost $ 20 $ 17 $ — $ —Accrued benefit liability (43) (39) (232) (206)Intangible asset 2 2 — —Accumulated other

comprehensive income 13 11 — —

Net amount recognized $ (8) $ (9) $(232) $(206)

BNSF uses a September 30 measurement date. The assump-tions used in accounting for the BNSF plans were as follows:

Pe n s i o n Medical andBenefits Life Benefits

Assumptions 1998 1997 1998 1997

Discount rate 7.0% 7.5% 7.0% 7.5%Rate of increase in

compensation levels 4.0% 4.0% N/A N/A

Expected return on plan assets 9.5% 9.5% N/A N/A

For purposes of the medical and life benefits calculationsfor 1998, the assumed health care cost trend rate for bothmanaged care and non-managed care medical costs is 9 perc e n tand is assumed to decrease gradually to 5 percent by 2005and remain constant thereafter. Increasing the assumedhealth care cost trend rates by one percentage point wouldincrease the accumulated postretirement benefit obligationby $18 million and the combined service and interest compo-nents of net postretirement benefit cost recognized in 1998by $1 million. Decreasing the assumed health care cost trendrates by one percentage point would decrease the accumulatedpostretirement benefit obligation by $17 million and thecombined service and interest components of net postretire-ment benefit cost recognized in 1998 by $1 million.O T H E R P L A N S

Under collective bargaining agreements, BNSF participatesin multiemployer benefit plans which provide certain post-retirement health care and life insurance benefits for eligibleunion employees. Insurance premiums paid attributable toretirees, which are generally expensed as incurred, were $18million, $15 million and $14 million, in 1998, 1997 and1996, respectively.D E F I N E D C O N T R I B U T I O N P L A N S

BNSF sponsors 401(k) thrift and profit sharing plans whichcover substantially all non-union employees and certainunion employees. BNSF matches 50 percent of the first 6percent of non-union employees’ contributions, which aresubject to certain percentage limits of the employe e s’ earnings,at each pay period. Depending on BNSF’s performance, anadditional matching contribution of up to 30 percent of thefirst 6 percent can be made at the end of the year. Employercontributions for all non-union employees are subject toa five year length of service vesting schedule. BNSF’s 401(k)matching expense was $16 million, $14 million and $13million in 1998, 1997 and 1996, respectively.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 3 7

3 8 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

A summary of the status of the stock option plans as of December 31, 1998, 1997 and 1996, and changes during the yearsthen ended, is presented below:

1998 1997 1996

Weighted Average Weighted Average Weighted AverageOptions Exercise Prices Options Exercise Prices Options Exercise Prices

Balance at beginning of year 25,761,369 $20.98 24,765,855 $16.49 28,795,959 $12.48 Granted 9,587,926 29.33 8,778,036 29.40 7,318,140 25.26Exercised (6,666,864) 18.66 ( 7 , 0 9 2 , 6 9 0 ) 15.46 (10,748,892) 11.46Cancelled (546,562) 26.25 (689,832) 23.58 (599,352) 21.34

Balance at end of year 28,135,869 $24.27 25,761,369 $20.98 24,765,855 $16.49

Options exercisable at year end 17,763,770 $21.45 16,419,858 $16.31 17,082,372 $13.06

The following table summarizes information regarding stock options outstanding at December 31, 1998:Options Outstanding Options Exercisable

Range of Number Weighted Average Weighted Average Number Weighted AverageExercise prices Outstanding Remaining Life Exercise Prices Exercisable Exercise Prices

$03.01 to $16.55 4,091,142 3.6 Years $7.93 4,091,142 $7.93$16.86 to $29.08 8,407,778 6.6 Years $22.70 7,259,231 $21.90$29.10 to $29.10 8,595,519 9.0 Years $29.10 — —$29.38 to $35.19 7,041,430 8.0 Years $29.76 6,413,397 $29.56

$03.01 to $35.19 28,135,869 7.2 Years $24.27 17,763,770 $21.45

14S T O C K O P T I O N S A N D

O T H E R I N C E N T I V E P L A N S

Under BNSF’s stock option plans, options may begranted to officers and salaried employees at the fair marketvalue of the Company’s common stock on the date of grant.Approximately 3.9 million common shares were availablefor future grant at December 31,1998. All options generallyvest within one year and expire within 10 years from thed a t e of grant. Sh a res issued upon exe rcise of options mayb e issued from tre a s u ry shares or from authorized butunissued share s .

The Company applies Accounting Principles Board (APB)Opinion 25 and related interpretations in accounting for itsstock option plans. Accordingly, no compensation expensehas been recognized for its fixed stock option plans as thee xe rcise price equals the stock price on the date of grant. Ha dcompensation expense been determined for stock optionsgranted in 1998, 1997 and 1996 based on the fair value at

grant dates consistent with Statement of Fi n a n c i a lAccounting Standards No. 123 “Accounting for Stock BasedCompensation,” the Company’s pro forma net income andearnings per share would have been as follows:

1998 1997 1996

Net income (in millions) $1,124 $ 857 $ 871Basic earnings per share $ 2.39 $1.85 $1.91Diluted earnings per share $ 2.36 $1.82 $1.88

The pro forma amounts were estimated using the Black-Scholes option pricing model with the following assumptions:

1998 1997 1996

Weighted average expected life (years) 3.0 3.0 3.0

Expected volatility 20% 20% 20%Annual dividend per share $0.48 $0.40 $0.40Risk free interest rate 5.11% 5.81% 6.11%Weighted average fair value

of options granted $5.13 $5.15 $4.45

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 3 9

O T H E R I N C E N T I V E P L A N S

BNSF has other long-term incentive programs in additionto stock options which are administered separately on behalfof employees.

Under the BNSF 1996 Stock In c e n t i ve Plan and the No n -Employee Directors’ Stock Plan (NEDS), up to 30 millionand 900,000 shares of BNSF common stock, respectively,h a ve been authorized to be issued in the form of stock options,restricted stock, performance shares and performance units.

During 1996, BNSF awarded a total of approximately1.2 million shares of restricted stock to eligible employeesand directors. No cash payment is required by the individual.Shares awarded under the plans may not be sold, transferredor used as collateral by the holder until the shares awardedbecome free of restrictions. The restrictions will be lifted inthirds over three years beginning on the third anniversary ofthe grant date if certain stock price based performance goalsare met. If, however, the performance goals are not met, therestricted shares will be forfeited. All shares still subject torestrictions are generally forfeited and returned to the plan ifthe employee’s or director’s relationship is terminated. A totalof approximately 934,000 restricted shares related to thisa w a rd we re outstanding as of December 31, 1998. Ad d i t i o n a l l y,in De c e m b e r 1997, BNSF issued 90,000 restricted shares ofstock. The shares are time-vesting and vest ratably over thefive year period ending December 31, 2002. At December31, 1998, 72,000 restricted shares related to this award wereoutstanding.

Under the BNSF 1996 Stock In c e n t i ve Plan certain eligiblee m p l oyees may defer the cash payment of their bonus paid underthe In c e n t i ve Compensation Plan (ICP) and will re c e i ve re s t r i c t e dstock which restrictions lapse in three years or in two years ifc e rtain performance goals are met. The number of re s t r i c t e ds h a res awarded are based on the amount of bonus deferred, plusi n c remental shares, using the market price of BNSF commonstock on the date of grant. Restricted a w a rds granted under thisp rogram totaled approximately 380,000 shares in 1998. A totalof approximately 936,000 awards we re outstanding under thisa n dp r i o rp ro g r a m so n De c e m b e r3 1 ,19 9 8 .

In addition, all regularly-assigned salaried employees noteligible to participate in deferrals of ICP are eligible to part i c-ipate in the BNSF Discounted Stock Pu rchase Program. T h i sp rogram allows employees to use their bonus earned underthe ICP to purchase BNSF common stock at a discount fro mthe market price and re q u i res that the stock be restricted for at h ree year period. During the years ended December 31,1998, 1997 and 1996, approximately 54,000, 84,000 and87,000 shares, re s p e c t i ve l y, we re purchased under this plan.

Compensation expense is recorded under the BNSF StockIncentive Plan in accordance with APB Opinion 25 and wasnot material in 1998, 1997 or 1996.

15C O M M O N S T O C K A N D

P R E F E R R E D C A P I T A L S T O C K

C O M M O N S T O C K

BNSF is authorized to issue 600 million shares of commonstock, $.01 Par Value. At December 31, 1998, there were470.5 million shares of common stock outstanding. Eachholder of common stock is entitled to one vote per share inthe election of directors and on all matters submitted to avote of stockholders. Subject to the rights and preferences ofany future issuances of preferred stock, each share of com-mon stock is entitled to receive dividends as may be declaredby the Board of Directors out of funds legally available andto share ratably in all assets available for distribution tostockholders upon dissolution or liquidation. No holder ofcommon stock has any preemptive right to subscribe for anysecurities of BNSF.P R E F E R R E D C A P I T A L S T O C K

At December 31, 1998, BNSF had 50 million shares of ClassA Preferred Stock, $.01 Par Value and 25 million shares ofPreferred Stock, $.01 Par Value a vailable for issuance. T h eB o a rd of Di rectors has the authority to issue such stock inone or more series, to fix the number of shares and to fix thedesignations and the powers, rights, and qualifications andrestrictions of each series.S H A R E R E P U R C H A S E P R O G R A M

In July 1997, the Board of Di rectors of BNSF authorized there p u rchase of up to 30 million shares of the Company’s commonstock from time to time in the open market. Repurchasedshares will be available to satisfy future requirements of vari-ous stock-based employee compensation programs. Du r i n g1998, the Company re p u rchased approximately 5 millionshares of its common stock at an average price of $30.75 per share. Total repurchases through February 8, 1999, were6.1 million shares at a total average cost of $31.29 per share.

In November 1997, BNSF sold equity put options for 1.5 million shares of the Company’s common stock to anindependent third party and re c e i ved cash proceeds of $1million. The option contracts had an exe rcise price of $29.33and an expiration date of May 5, 1998. The option contractspermitted a net-share or net-cash settlement method at BNSF’selection. These options expired unexe rc i s e d .

During the second and third quarters of 1998, BNSF soldequity put options for 3 million shares of the Company’scommon stock to an independent third party and re c e i ve dcash proceeds of $2 million. The option contracts had exe rc i s eprices ranging from $29.00 to $30.00 per share with expirationdates ranging from November 1998 to Fe b ru a ry 1999. T h eoption contracts permitted a net-share or net-cash settlementmethod at BNSF’s election. These options expired unexe rc i s e d .

The Company accounted for the effects of these equity puto p t i o n transactions within stockholders’ equity.

4 0 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

16Q U A R T E R L Y

F I N A N C I A L D A T A —

U N A U D I T E D

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

1998Revenues (1) $2,294 $2,294 $2,205 $2,148

Operating income 568 614 529 447

Net income (2) $ 296 $ 317 $ 277 $ 265

Basic earnings per share (3) $ .63 $ .67 $ .59 $ .56Diluted earnings per share (3) $ .63 $ .66 $ .58 $ .56Dividends declared per share(3) $ .12 $ .12 $ .10 $ .10Common stock price:

High(3) $34.81 $35.58 $35.71 $35.65Low(3) 28.63 26.87 31.25 28.08

1997Revenues(1) $2,174 $2,125 $2,055 $2,016

Operating income(4) 438 541 459 329

Net income(4) $ 217 $ 283 $ 235 $ 150

Basic earnings per share (3) $ .47 $ .61 $ .51 $ .32Diluted earnings per share (3) $ .46 $ .60 $ .50 $ .32Dividends declared per share(3) $ .10 $ .10 $ .10 $ .10Common stock price:

High(3) $33.46 $32.67 $30.50 $29.83Low(3) 30.44 30.19 23.63 24.67

(1) Amounts do not agree to previously reported amounts due to certain reclassifications between revenues and expenses which are not significant.(2) First quarter 1998 results include a $67 million pre-tax gain ($32 million after-tax) on the sale of substantially all of the Company’s interest in Santa Fe

Pacific Pipeline Partners, L.P. as discussed in Note 2–Sale of Investment in Pipeline Partnership.(3) Information for prior periods presented has been restated to reflect the 1998 three-for-one common stock split as discussed in Note 1–Accounting Policies.(4) Fourth quarter 1997 results include a $90 million pre-tax charge ($57 million after-tax) as discussed in Note 9–Employee Merger and Separation Costs.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N 4 1

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N D I R E C T O R S * *

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N O F F I C E R S

R O B E R T D . K R E B S *

Chairman, President and

Chief Executive Officer

D O U G L A S J . B A B B *

Senior Vice President-

Merchandise Business Unit

J E F F R E Y R . M O R E L A N D *

Senior Vice President-

Law and Chief of Staff

M A T T H E W K . R O S E *

Senior Vice President and

Chief Operations Officer

C H A R L E S L . S C H U L T Z *

Senior Vice President-

Intermodal and

Automotive Business Unit

D E N I S E . S P R I N G E R *

Senior Vice President and

Chief Financial Officer

G R E G O R Y T . S W I E N T O N *

Senior Vice President-

Coal and Agricultural

Commodities Business Unit

G A R Y L . C R O S B Y

Vice President-

Litigation

A . R . ( S K I P ) EN D R ES , J R .

Vice President-

Government Relations

B R U C E E . F R E E M A N

Vice President and

Chief Information Officer

T H O M A S N. H U N D *

Vice President and

Controller

M A R S H A K . M O R G A N

Vice President-

Investor Relations and

Corporate Secretary

P A T R I C K J .

O T T E N S M E Y E R

Vice President-

Finance and Treasurer

R I C H A R D A . R U S S A C K

Vice President-

Corporate Relations

R I C H A R D E . W E I C H E R

Vice President and

General Counsel

D A N I E L J . W E S T E R B E C K

Vice President and

General Tax Counsel

*Exe c u t i ve Officer of

Bu rlington No rt h e rn

Santa Fe Corpora t i o n

J O S E P H F . A L I B R A N D I

( 1 ) ( 2 )

Chairman and Chief

Executive Officer, Whittaker

Corporation (aerospace),

Los Angeles, California.

Board member since 1982.

J A C K S . B L A N T O N

( 2 ) ( 4 )

Chairman and Chief

Executive Officer, Houston

Endowment, Inc. (charitable

foundation), Houston, Texas.

Board member since 1989.

J O H N J . B U R N S , J R

( 1 ) ( 2 )

President and Chief Executive

Of f i c e r, Alleghany Corpora t i o n(holding company with

investment management,

reinsurance, industrial

minerals, steel fastener

operations, and an i n ve s t m e n t

position in BNSF),

New York, New York.

Board member since 1995.

G E O R G E D E U K M E J I A N

( 3 ) ( 4 )

Partner, Sidley and

Austin (law firm) and

former Governor of the

State of California,

Los Angeles, California.

Board member since 1991.

R O B E R T D . K R E B S

( 1 )

Chairman, President

and Chief Executive Officer,

Burlington Northern

Santa Fe Corporation,

Fort Worth,Texas.

Board member since 1983.

B I L L M . L I N D I G

( 2 ) ( 4 )

C h a i rman and Chief Exe c u t i ve

Officer, SYSCO Corporation

(marketer and distributor

of foodservice products),

Houston, Texas.

Board member since 1993.

V I L M A S . M A R T I N E Z

( 3 ) ( 4 )

Partner, Munger, Tolles

and Olson LLP (law firm),

Los Angeles, California.

Board member since 1998.

R O Y S . R O B E R T S

( 3 ) ( 4 )

Vice President and Group

Executive, North American

Vehicle Sales, Service

and Marketing, General

Motors Corporation

(motor vehicle manufacturer),

Detroit, Michigan.

Board member since 1993.

M A R C J. S H A P I R O

( 3 ) ( 4 )

Vice Chairman for Finance

and Risk Management,

The Chase Manhattan

C o r p o ra t i o n (banking),

New York, New York.

Board member since 1995.

A R N O L D R . W E B E R

( 1 ) ( 3 )

President Emeritus,

Northwestern University,

Evanston, Illinois.

Board member since 1986.

R O B E R T H . W E S T

( 2 ) ( 3 )

Chairman of the Board,

Butler Manufacturing

Company (manufacturer

of pre-engineered

building systems and

specialty components),

Kansas City, Missouri.

Board member since 1980.

J . S T E V E N W H I S L E R

( 3 ) ( 4 )

President and Chief

Operating Officer,

Phelps Dodge Corporation

(mining and manufacturing),

Phoenix, Arizona.

Board member since 1995.

E D W A R D E. W H I T A C R E , J R .

( 1 ) ( 4 )

Chairman and Chief

Executive Officer,

SBC Communications Inc.

(telecommunications),

San Antonio, Texas.

Board member since 1993.

R O N A L D B . W O O D A R D

( 2 ) ( 3 )

Retired President, Boeing

Commercial Airplane Group

( a e rospace), Seattle, Washington.

Board member since 1995.

M I C H A E L B . Y A N N E Y

( 1 ) ( 2 )

Chairman and Chief

Executive Officer,

America First Companies

L.L.C. (investments),

Omaha, Nebraska.

Board member since 1989.

Committee Assignments:

(1) Executive Committee

(2) Compensation Committee

(3) Audit Committee

(4) Directors and Corporate

Governance Committee

** Years of Board service

includes service on Boards

of Burlington Northern

Inc. and Santa Fe Pacific

Corporation and

predecessor corporations.

4 2 B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T I O N

S H A R E S L I S T E D

New York StockExchange, ChicagoStock Exchange,Pacific StockExchange. TickerSymbol: BNI

P R I N C I P A L

C O R P O R A T E O F F I C E

2650 Lou Menk Dr i ve ,Second Floor,Fort Worth, Texas76131-2830(817) 333-2000w w w. b n s f. c o m

S T O C K T R A N S F E R

A G E N T A N D R E G I S T R A R

First Chicago Trust Company of New York, c/o EquiServe, P.O. Box 2500,Jersey City,New Jersey 07303-2500(800) 526-5678

S H A R E H O L D E R S

As of Ja n u a ry 31,1 9 9 9 , there wereapproximately 56,000shareholders of record.

S H A R E H O L D E R

S E R V I C E S

You are encouraged tocontact our TransferAgent directly for theshareholder serviceslisted below:

Change in CertificateRegistration, DividendReinvestment Service,Change of MailingAddress, Lost orStolen Certificates,Replacement ofDividend Checks,Direct Deposit of Dividends,Consolidation ofMultiple Accounts,Elimination ofDuplicate ReportMailings, Replacementof Form 1099-DIV.

D I V I D E N D

R E I N V E S T M E N T P L A N

A dividend reinvest-ment plan is providedfor registered share-holders as a conve n i e n tway to purchase moreshares through invest-ment of dividends or voluntary cash pay-ments. A bookletdescribing the plan is available from thetransfer agent.

F O R M 1 0 - K

A copy of theCompany’s AnnualReport on Form10-K when filed withthe Securities andExchange Commissionwill be available toshareholders free ofcharge upon request to the Company’sInvestor RelationsDepartment at 2650 Lou Menk Dr i ve ,Second Floor,Fort Worth, Texas76131-2830.

I N S T I T U T I O N A L

I N V E S T O R S

Inquiries fromsecurity analysts andinvestment profession-als should be directedto the Company’sinvestor relationscontact: Ms. MarshaK. Morgan, VicePresident-InvestorRelations andCorporate Secretary(817) 352-6452

A N N U A L M E E T I N G

The Annual Meetingof Shareholders willbe held at theWorthington Hotel,200 Main Street,Fort Worth, Texas, on Thursday, April 15,1999 at 9:00 a.m.

B U R L I N G T O N N O R T H E R N S A N T A F E C O R P O R A T E I N F O R M A T I O N

PH

OT

OG

RA

PH

Y: L

OU

IS B

EN

CZ

E,

CH

AR

LIE

DIS

CH

ING

ER

ILL

US

TR

AT

ION

S:

WIL

L N

EL

SO

N,

JEF

F W

ES

T

PR

INT

ING

:A

ND

ER

SO

N L

ITH

OG

RA

PH

B U R L I N G T O N N O R T H E R N S A N T A F E 1 5 0 T H A N N I V E R S A R Y

The BurlingtonNorthern and Santa FeRailway (BNSF) is cele-brating a symbolic 150thanniversary in 1999.

BNSF’s two oldest predecessor railroads,the Aurora Branch Line (which eventuallybecame the Chicago,Burlington and Quincy [CB&Q]), and the PacificRailroad of Missouri(whose SouthwestBranch became the St. Louis-San FranciscoRailway,) were bothfounded in 1849.

There are more than330 different railroadnames in BNSF’s familytree includingBurlington Northern;Santa Fe; the CB&Q;Great Northern;Northern Pacific; the‘Frisco’; Spokane,Portland and Seattle;Colorado & Southernand the Fort Worth & Denver. As some of the most storiednames in the industry,they helped develop the nation, its economy,and in one way oranother touched thelives of generations of Americans.