Burlington Northern Santa Fe Corporation 2001 Annual Report to Shareholders

Contents

2 Message from the CEO

and President

11 A Tribute to Robert D. Krebs

12 BNSF’s Values

13 Financial Review

40 Executive Officers

and Directors

About The Cover

A BNSF coal train, loaded with

coal from the Powder River

Basin in Wyoming, crosses

the Texas Panhandle north of

Amarillo, bound for a coal-fired

utility near Houston, Texas.

• Our owners earn financial

returns that exceed other

railroads and the general

market as a result of BNSF’s

superior revenue growth, an

operating 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 general,

our adherence to the highest

legal and ethical standards,

and the participation of our

company and our employees

in community activities.

• 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 improvement,

share the opportunity for

personal and professional

growth that is available to all

members of our diverse work

force, and take pride in their

association with BNSF.

The BNSF Vision

Our vision is to realize the tremendous potential of The Burlington

Northern and Santa Fe Railway Company by providing transportation

services that consistently meet our customers’ expectations.

We will know we have succeeded when:

1

Consolidated Financial Highlights

Burlington Northern Santa Fe Corporation and Subsidiaries

(Dollars in millions, except per share data)

December 31, 2001 2000 1999 1998 1997

For The Year Ended:

Revenues $ 9,208 $ 9,207 $ 9,195 $ 9,057 $ 8,489

Operating income $ 1,755 $ 2,108 $ 2,205 $ 2,158 $ 1,767

Net income $ 731 $ 980 $ 1,137 $ 1,155 $ 885

Basic earnings per share $ 1.89 $ 2.38 $ 2.46 $ 2.45 $ 1.91

Average shares (in millions) 387.3 412.1 463.2 470.5 464.4

Diluted earnings per share $ 1.87 $ 2.36 $ 2.44 $ 2.43 $ 1.88

Average shares (in millions) 390.7 415.2 466.8 476.2 471.1

Dividends declared per common share $ 0.48 $ 0.48 $ 0.48 $ 0.44 $ 0.40

At Year End:

Total assets $24,721 $24,375 $23,700 $22,646 $21,266

Long-term debt and commercial paper,

including current portion $ 6,651 $ 6,846 $ 5,813 $ 5,456 $ 5,289

Stockholders’ equity $ 7,849 $ 7,480 $ 8,172 $ 7,784 $ 6,822

Total debt to capital 45.9% 47.8% 41.6% 41.2% 43.7%

For The Year Ended:

Total capital expenditures $ 1,459 $ 1,399 $ 1,788 $ 2,147 $ 2,182

Depreciation and amortization $ 909 $ 895 $ 897 $ 832 $ 773

Certain prior period amounts have been reclassified for current presentation.

Effective September 1, 1998, the Company split its common shares three-for-one through a stock dividend of two additional shares for each share outstanding or held in

treasury. All share and per share data for periods prior to this date were adjusted for the stock split.

Free cash flow of $443 million, after dividends

Operating efficiency at 22.9 million gross ton miles per employee

Fuel efficiency of 762 gross ton miles per gallon

Coal volume at 243 million tons

Revenue for soybeans, taconite, petroleum, plastics, aggregates,cement/gypsum/lime, and government/military moves

Revenue for traffic in and out of Mexico

On-time performance in the fourth quarter at 91.2 percent

Car velocity in the fourth quarter of 190 miles per day

Train size in the fourth quarter of 112 cars/units per train

In each of the following categories,BNSF had all-time record highachievements in 2001, comparedwith previous years or comparablefourth quarters:

2 0 0 1 R E C O R D

A C H I E V E M E N T S

2

To Our Shareholders, Customers And Colleagues:

Throughout 2001, BNSFremained committed to the five strategic priorities that weintroduced in last year’s reportand that will guide the Com-pany into the future. In this letter, I’ll discuss the progresswe made on each priority: Peo-ple, Growth, Ease of DoingBusiness, Service and Efficiency.

We finished this economically dif-ficult year with freight revenuesand volumes essentially unchangedfrom 2000. We outperformedmany other Fortune 200 compa-nies during 2001, thanks to thecommitment of 39,000 BNSFwomen and men, and the diver-sity of our customer base and railnetwork. In addition, improvedbusiness processes and innovativeservice offerings introduced in2001 position BNSF for prof-itable growth as the industrial andretail economies begin to improve,which we may see later this year.

Overall, we were disappointedwith our financial performance for2001. We had hoped to increaseour revenues and to maintain our

Safety Severity Ratio 1995-2001 (lost workdays/200,000 hours worked)

The severity ratio measures workdays lost due to injury per 200,000 hours worked. Figures for each calendaryear reflect data available as of January of the following year.

operating ratio in the mid-70percent range. We were not ableto keep operating costs in linewith lower-than-planned revenues,but we were able to maintain ourhigh service standards. At thesame time, we achieved severalrecords in 2001 in service, rev-enue and efficiency, and in thefourth quarter, we operated therailroad at a record 91.2 percenton-time performance and madeprogress in getting our expensesin line with business levels. Thechart on page 1 provides somedetail on these records. We remainoptimistic about BNSF’s per-formance in 2002 and beyond.

As we reflect on the events of2001, we have to point to Sep-tember 11 as a defining momentfor America. I am proud of howBNSF people have pulled togetherto support each other and to pro-vide our customers with timelyinformation and safe, reliableservice. I’m proud of our Com-munity for their unselfishness insupporting blood drives and pro-viding donations at the local andnational level to help the victimsand their families during this try-ing time. I also want to say “thankyou” to the dozens of BNSF

employees who, as reservists andmembers of National Guard units,have been called to active duty todefend our nation and to providea level of homeland security notseen in America for decades.

I have tremendous faith in all of our employees to continuethe commitment and resiliencyshown in 2001. Our five strate-gic initiatives focus our efforts aswe work toward our vision ofproviding transportation servicesthat consistently meet or exceedcustomers’ expectations.

People And SafetyIn all ways, our People initiativespull everything together. It is onlythrough our people that we canprovide better service, which will inturn allow us to grow our revenues.

We made considerable progress in2001 linking our strategic initia-tives to the goals of each memberof our management team throughour revised Performance Manage-ment Process. Every member ofthe team has clear, annual per-formance objectives and measure-ments that define expectations as well as a development planrecognizing strengths and areas for improvement. Our TEAMBNSF program, introduced inDecember, recognizes and buildson our people’s outstanding ability to work together in cross-functional teams focused onmeeting customers’ needs.

Safety is also a part of our Peopleinitiative. Overall, our total num-ber of injuries in 2001 was abouteven with 2000 levels, while theseverity of injuries, as measuredin lost workdays per 200,000

1995 1996 1997 1998 1999 2000 2001

78.9

53.0

38.032.9

43.036.7 34.7

100

80

60

40

20

0

3

work hours, decreased about 6percent compared with 2000. We also saw a 5-percent reduc-tion for the year in the rate of railaccidents per million train miles.Most of our safety progress wasmade during the second half of2001, when we implemented our“WorkSafe” campaign. This cam-paign built on our emphasis onSafe Production by focusing onhigh-risk, high-frequency workactivities—tasks that are performedhundreds or thousands of timeseach day across our network andpose the greatest potential hazards.

Going forward, our safety focuswill continue to be risk reductionthrough targeted workplace andwork practice assessment. In thefall of 2001, we piloted at Birm-ingham, Ala., a structured RiskReduction process that involvescraft people on the local safetyteam observing work practicesand targeting programs for pat-terns of high-risk behavior. Initialresults from this pilot project havebeen promising, and we hope toextend a similar Risk Reductionprocess to other locations in 2002.

We will also continue the progressmade during an unprecedented“safety summit” held in April2001, which brought together thepresidents of BNSF, the UnitedTransportation Union and theBrotherhood of LocomotiveEngineers. We are working withthese groups on an agreementthat ensures the participation ofunion leadership in the safetyprocess for about 18,000 train,engine and yard employees. Thissafety agreement will focus onunion involvement in the pre-vention of injuries and increased

In 2001, BNSF rolled out the railindustry’s first-ever network of loco-motive simulators by installing 15NetSimulators at field locations for“distance learning” opportunities.BNSF has had locomotive simula-tors at its Technical Training Centernear Kansas City since 1986, butNetSimulators bring hands-on loco-motive training to field locationswhere employees live and work. Infact, more than 14,000 BNSF peo-ple were trained in 2001 throughBNSF’s NetSimulator, Intranet andother computer-based training (CBT).NetSimulator training is often com-bined with CBT for intensive trainingon key topics. Locomotive engineerscan dramatically improve their fuelefficiency, for instance, by complet-ing a CBT course on fuel conserva-tion and then practicing their fuelconservation techniques on a Net-Simulator. The NetSimulators alsoallow employees and trainers tocustomize simulations to reflect dif-ferent train types, weather conditions,terrain, track, and times of day, so training can focus on conditionstypically faced by local employees.

P E O P L E

Ice and Snow

Fog and Haze

Clear

635 highway-rail grade crossingsas part of our grade crossing safetyinitiative. In 2001, this effort con-tinued very successfully, bringingimprovements in safety and effi-ciency. Our cross-functional teamfrom safety, public projects andfield operations closed another515 grade crossings, working with the states and local communitiesto identify the best candidates for closure. We have similarlyaggressive goals for 2002. Today,our grade-crossing collision rate is

emphasis on retraining asopposed to traditional discipline.

In addition, we are implementingproven and cost-effective tech-nologies that help engineer outrisk, including a Global Posi-tioning System (GPS) and radio-based tracking system that ensuresour on-track hy-rail vehicles staywithin their authority limits.

In last year’s report, we cited ourindustry-leading program to close

4

G R O W T H

the lowest in our history and thelowest in the industry. We believethat even one grade crossing colli-sion is too many, however, and wewill continue to make grade cross-ing safety and public education a top priority as we go forward.

Growth And Ease Of Doing BusinessAlthough freight revenues wereessentially unchanged year-over-year, BNSF added new cus-tomers and increased business

business over 2000 levels, whichdemonstrates our success in capturing additional freight offthe highways. Our Mexico busi-ness also grew by about 10 per-cent over 2000 levels, and we set revenue records for soybeans,taconite, petroleum, plastics,aggregates, cement/gypsum/lime,and government/military traffic.

Pacific Railroad (UP) as a condi-tion of the UP’s merger withSouthern Pacific in 1996. Sinceearly 1997, BNSF has increasedits business levels on these track-age rights to more than 434,000loads annually.

Other BNSF growth areas includeda 10 percent increase in truckload

In 2001, BNSF inaugurated serv-ice to a new American Soda plant at Parachute, Colo., to han-dle soda ash produced at this 1-million ton capacity plant. BNSFreaches the plant via trackagerights granted on the Union

5

with many customers in 2001.Some of this growth is directlyrelated to product and serviceofferings introduced during the year, as well as to our net-work’s ability to provide moreconsistent service.

Several areas of our business did quite well in 2001. Brightspots included our truckloadbusiness, which was up about10 percent over 2000 levels anddemonstrates that we are cap-turing additional freight off the highways. We also saw a 10 percent growth for our Mexicobusiness, and Industrial Prod-ucts revenue records were set intaconite, petroleum, plastics,aggregates, cement/gypsum/lime,and government/military moves.

We introduced a number of newand expanded services that lay afoundation for continued growth.

For Agricultural Products, wecontinue to expand our grainshuttle network, which providesdedicated locomotives and cov-ered hopper cars for shipperswho have elevators capable of loading 110-car trains in 15hours or less. We now have 73 origin and 30 destinationelevators in our shuttle network.This approach to grain trans-portation dramatically improvestransit times and equipment utilization, and has enabledBNSF to build a domestic grainfranchise to complement ourexport grain business. Currently,about 22 percent of our Agri-cultural Products revenues are derived annually from shut-tle train moves, providing ship-pers with efficient, lower cost

transportation. In 2002, weplan to add shuttle train servicefor fertilizer shipments, whilecontinuing to expand our grainshuttle network.

Our Coal group continues to besuccessful in expanding the mar-ket for Powder River Basin (PRB)low-sulphur coal. BNSF wonseveral major, long-term coalcontracts last year and renegoti-ated several expiring contracts.We also introduced the industry’sfirst Internet monthly auction ofcoal transportation option con-tracts to help coal-burning utili-ties, coal mines and others lockin transportation capacity andprice months in advance. Oursuccessful roll-out of this onlineauction enabled us to test thismarketing concept, which we willrefine in 2002. For the first timein a number of years, several util-ities have proposed constructionof new and expanded coal-firedplants. BNSF is actively negoti-ating to serve several of theseproposed plants with PRB coal.

For Consumer Products, BNSFlaunched several new services in

2001, including coast-to-coastpremium intermodal and double-stack services with CSX andNorfolk Southern, a 48-hourservice offering between Chicagoand Los Angeles, and expandedIce Cold Express service for perishables from Southern Cali-fornia to New York and NewJersey markets via CSX. We alsoexpanded our guaranteed on-time intermodal service programto include 12 lanes and interna-tional shippers. We were thefirst railroad to offer a premium,money-back guarantee option.As of the end of 2001, we movedmore than 4,000 guaranteedloads with a 98 percent on-timeservice record.

To improve transit times andtransborder shipments for cus-tomers moving product in andout of Mexico, we introducedMexi-Modal, a seamless inter-modal service in cooperation with Canadian National Rail-way, CSX, Transportacion Fer-roviaria Mexicana and severalMexican trucking companies.Introduced in July, Mexi-Modalservice grew from virtually nobusiness to 150 intermodal loads

Capital Investment 1995-2001($ in billions)

BNSF spent more than $14 billion in capital investments since the beginning of 1995. After an aggressiveexpenditure program following the merger, BNSF has scaled back its capital investment. BNSF’s 2001 capitalinvestments of $1.6 billion represented a 36 percent decrease compared with the 1998 figure of $2.5 billion.Chart includes operating leases for freight equipment obtained to expand business.

1995 1996 1997 1998 1999 2000 2001

1.8

2.3 2.32.5

2.3

1.81.6

2.5

2.0

1.0

1.5

0.5

0.0

3.0

6

E A S E O F

D O I N G

B U S I N E S S

Some BNSF eBusiness tools attract new business. Other eBusiness toolsimprove “ease of doing business” by enabling customers to transact businesselectronically. In 2001, BNSF continued to increase the percentage of majortransactions completed electronically, as well as the percentage of freight payment dollars received electronically and through other automated processes.

per month in its first threemonths of operation, includingloads from customers who hadnever shipped by rail before,and it continues to establishnew monthly loading records.

We opened our Stockton inter-modal facility in April, whichincreases our intermodal capac-ity in northern California by 50percent to more than 500,000lifts annually, and expeditesmovement of all types of freighton our West Coast routes. Onthe eastern end of our network,construction started on our JolietMultimodal Facility, scheduledto open this fall, which will offerour fourth intermodal facility in the Chicago area.

For Industrial Products, in addi-tion to achieving record highrevenue for several commodities

we made a number of changesto improve the focus on ourcustomers, products and markets.We reorganized this work teaminto marketing and sales groupsto simplify our customer inter-actions. We also worked tostreamline pricing administrationby moving toward public pric-ing. This initiative reduced thenumber of pricing documentsthe group handles by 30 percent,enabling the group to focusmore of their time on customerservice and revenue growth.

We are also exploring ways toimprove the interchange processwith other carriers and trans-portation providers to improveoverall transit performance. This is important because aboutone-fourth of all carload ship-ments moving on our networkinterchange at another railroad’s

terminal at least once beforethey reach their final destina-tion. In 2001, we worked withCSX, for instance, to reducetransit times for interline car-load service through Chicago.

BNSF’s Loading Origin Guar-antees (LOGS) program, anonline auction that allows cus-tomers to secure boxcar andcenterbeam rail car capacity in advance, was expanded toinclude refrigerated boxcars in 2001. More than 43,000loads have now been handledthrough our LOGS program,with a success rate that exceeds99.9 percent.

Our Ease of Doing Business ini-tiative is closely tied to revenuegrowth. To make it easier forcustomers to transact businesswith us, we’ve put a tremendous

Electronic Transactions 1999-2001 (percent of total)

87%

77%

30%

Equipment Requests

2001

2000

1999

92.5%

91%

2001

2000

1999

Shipping Instructions

87%

2001

Freight Payments

2000

1999

57%

50%

35%

Equipment Releases

38%

20%

15%

2001

2000

1999

BNSF was ranked as the leading U.S. railroad and one of the leaders in U.S. industry for its Website technology and eCommerce capabilities

by the following publications in 2001:

Magazine Rank Description

Interactive Week BNSF ranked 13th out of 500 top companies for generating the most revenue from Web operations

InfoWorld BNSF ranked as one of the top 100 companies cited as innovators in information technology

eWeek BNSF ranked as one of the top 500 companies using its Website to connect with customers, suppliers and partners

Smart Business BNSF listed as one of the top 50 U.S. companies using the Internet to enhance and expand their business

7

Advisory Board about ourGrowth, Service and Ease-of-Doing Business initiatives alongwith some excellent suggestionsthat we’ll incorporate into ourplans for 2002.

Our focus on the customer isbringing results. We were nameda Premier Partner by AmericanHonda Motor Co., Inc., for thefourth year in a row, and RailCarrier of the Year by ToyotaNorth American Parts Logistics

emphasis on developing Web-based products and on makingour Website easier to access andnavigate. As you’ll see in theaccompanying feature, moreand more customers are usingthese Web-based tools, andBNSF was recognized in 2001by a number of leading businessand technology publications asan industry leader for the qualityof its eCommerce products.

At the same time, we realizethat Web-enabled tools are nota substitute for personal cus-tomer interactions. These toolsare simply intended to free upa BNSF representative’s time to focus on proactive customercontacts. To further improvethese contacts, we are imple-menting a customer relation-ship management programdesigned to help our peoplebetter respond to customerneeds and concerns, and to better understand our cus-tomers’ business strategies andthe role we can play in theirsupply chain.

The best way to understand ourcustomers’ needs and expecta-tions is to get their direct feed-back and suggestions. This iswhy we formed our CustomerAdvisory Board in 2000, madeup of executives from 30 differ-ent companies that span all ofour business groups. We meetwith this board twice a year tomake sure we’re on the righttrack in our services, productofferings, pricing strategies andrelationship management. Over-all, we’ve received constructivecomments from our Customer

Thanks to solid on-time performanceand service design improvements,BNSF has increased its perishablesbusiness by 6 percent since 2000and by 28 percent since 1999. Per-ishable commodities include freshfruit and vegetables, frozen foods,cheese and other products thatmove in refrigerated boxcars andtrailers. On-time performance for all perishables business averaged in the high 80s in 2001, with the

most service-sensitive segment of the business performing at betterthan 92 percent on-time. Servicedesign improvements include expe-dited run-through service with CSX for transcontinental perishableshipments bound for East Coast locations and use of existing capac-ity on expedited automotive andintermodal trains for perishableshipments on certain corridors.Significant service design improve-ments also contributed to BNSF’s 10 percent growth in Mexico busi-ness during 2001.

Division for the third year. Wewere also named Carrier of theYear by Wal-Mart Stores, Inc.,the nation’s largest retailer, forthe third consecutive year and aPartner in Quality by intermodalpartner Schneider National, Inc.

Service And Efficiency

From a Service perspective, wehad a number of successes. Thepremium intermodal services we initiated, including 48-hourservice between Chicago and

S E R V I C E

Denver

Vancouver

Spokane HavrePasco Helena

Billings

SeattleTacoma

Portland

Klamath Falls

Salt Lake CityGuernsey

Dilworth

Minneapolis/St. Paul

ChicagoGalesburg

AllianceLincoln

Kansas City

Amarillo

Albuquerque

El Paso

Eagle PassLaredo

Houston

Galveston

Brownsville

New OrleansMobile

Dallas/Ft. Worth

Oklahoma City

MemphisBirmingham

Springfield

St. LouisSan Francisco

LosAngeles

Barstow

Phoenix

San Bernardino

San Diego

BNSF Lines and Trackage RightsRegional Connections

8

Southern California andexpansion of our guaranteedservice offerings, are industryfirsts and have attracted busi-ness to rail that previouslymoved on the highway.

We constantly strive to createvalue for our customers, and werealize that different customershave different needs. Some cus-tomers value speed of service,while others emphasize consis-tency over speed. In 2001, ouraverage of 89 percent on-timeperformance met or exceededcustomer expectations for mostcommodities, yet fell short forother customers. BNSF is com-mitted to providing consistent,reliable transportation servicesthat meet each customer’s needs.We are working to ensure weclearly understand the uniqueservice needs of each customerand we have the service prod-ucts and infrastructure to addressthose needs.

Our Service and Efficiency initia-tives go hand-in-hand. As weadvance our efficiency andstreamline our processes, serviceimprovements will continue to follow. One big opportunityto improve efficiency includesincreasing our locomotive and car velocities, in terms of the average miles these assets traveleach day. These asset utilizationmeasures improve as we elimi-nate pinch points and networkcongestion. We also are makingstrategic adjustments to our Ser-vice Scheduling programs andTransportation Service Plan tohelp ensure that the “right car” ison the “right train” every time to

E F F I C I E N C Y

BNSF achieved record fuel effi-ciency in 2001, handling 762 gross ton miles per gallon of fuelin 2001, a 2 percent increaseover 2000 and 8 percent betterthan 1996. This improvement infuel efficiency is due to BNSF’sfleet of newer, more fuel-efficientlocomotives, sized to match

business demands; reduced idletime; and other work practicestargeted to avoid unnecessary fuelconsumption. Another efficiencyinitiative focused on improvingterminal and industry switchingoperations, resulting in 8,500 fewer train starts and substantialreductions in terminal “dwelltime” for railcars. The reduction in train starts alone saved about$10 million in 2001.

9

Free Cash Flow 1995-2001(after dividends, $ in millions)

Efficiency 1995-2001(gross ton miles/employee, in millions)

Negative free cash flow of $1.654 billion in the first three years after the mergerreflects the capital program undertaken to provide shippers with improved service.Cash flow turned positive in 1999, and has continued to increase since then.

A key efficiency measure is the number of gross ton miles (GTMs) of freight handled per employee. In 2001, BNSF handled 22.9 million GTMs/employee, a 40 percent increase compared with 1995.

meet customer expectations acrossour 33,000 route-mile network.

Efficiency also involves control-ling operating costs and otherexpenses. We made continuedprogress with efficiency initia-tives in our Strategic Sourcinggroup, with savings of about$100 million over the past two years. Our Mechanical and Engineering groups alsoimproved productivity throughtheir Six Sigma, Lean and otherprocesses that remove "waste"from maintenance proceduresassociated with locomotives,freight cars, track, signals andbridges. These savings amountedto well in excess of $100 mil-lion in 2001.

In 2001, we expanded customerincentive programs designed toimprove car utilization, includ-ing increasing demurrage collec-tions and reviewing our storagepolicies for privately-owned railcars. We’ve made significantprogress. At the same time,we’ve raised standards for our-selves, and have offered creditsto customers for service failuresin certain cases.

Our fuel initiatives were anotherpiece of good news, but theydid not offset the very high costof fuel we encountered duringthe first nine months of 2001.We achieved record fuel effi-ciency in 2001, as you’ll see inthe feature on page 8. Whenfuel prices dropped to their low-est point in two years, we tookadvantage and hedged about 50percent of our consumption forthe fourth quarter of 2001. Asof January 31, 2002, we hadhedged about 35 percent of our2002 consumption.

One of the toughest decisionswe faced in 2001 was having to reduce our workforce. Weeliminated 400 non-union positions through a voluntaryearly retirement window forqualified employees and aninvoluntary separation programthat included contractors. Inaddition, we reduced our sched-uled workforce by more than1,000 positions. We had hopedthat we would be able to weatherthe tough economic times without having to make such a cutback, but eventually thestagnant economy and lack of

revenue growth necessitatedthese reductions.

In October, we announced areorganization that reduced thenumber of operating divisionsfrom 22 to 13 and removed two layers of management from field operations. These changesimproved the efficiency andaccountability of our operation.

All of these improvements arereflected in our record level ofefficiency, as expressed in grosston miles per employee, whichincreased to 22.9 million, and inour record free cash flow afterdividends of $443 million. Theseachievements are further proofthat even as the economy slowed,we were able to focus on somekey measures and improve onlast year’s record performance.

SummaryFinally, it is important to notethat the 60/30 Railroad Retire-ment reform legislation wasoverwhelmingly approved bythe House of Representativesand the Senate, and was signedinto law by President Bush inDecember 2001. Effective this

1995 1996 1997 1998 1999 2000 2001

22.022.925

16.4 17.1 17.919.2

20.420

15

10

5

01995 1996 1997 1998 1999 2000 2001

600

200

400

0

(200)

(400)

(600)

(800)

(110)

(557)

(700)

(397)

260

431 443

10

year, the legislation modernizesthe investment policies of theRailroad Retirement system,permitting enhanced benefitsfor Railroad Retirement benefi-ciaries while decreasing the pay-roll tax burden on rail employers.Benefits include reducing theage at which employees with 30 years of service can retire toage 60 from age 62, increasingsurviving spouses’ benefits, andreducing the vesting period forRailroad Retirement benefits.We expect Railroad Retirementreform to save BNSF about$20 million in 2002 and thisamount will continue to increasethrough 2005, when it couldrepresent about an $80 millionannual payroll tax savings.

Legislation is now being con-sidered that would phase outthe 4.3-cent per gallon dieselfuel tax, which only railroadsand barges still pay for thenation’s deficit reduction pro-gram. This tax costs BNSFabout $50 million annually.

In closing, I’d like to make acouple of comments aboutchanges to our Board of Directors. In September, weannounced the addition of Alan L. Boeckmann, presidentand chief executive officer ofFluor Corporation, and Marc F. Racicot, a partner with theBracewell & Patterson, L.L.P.,law firm, and chairman of the Republican National Commit-tee, to our Board. Both Alanand Marc are excellent additions to our Board, and we look forward to their contributions

and guidance. Arnold Weber,a Board member since 1986,will retire in March 2002. Weextend our appreciation to himfor his counsel, wise insight and economic advice during hismany years of dedicated serviceon the Board.

I also want to say somethingabout Rob Krebs’ intention to retire from the Board ofDirectors, effective with theannual meeting in April. Rob’sinfluence on the rail industry, BNSF and its predecessor rail-road, the Santa Fe Railway, isimmeasurable. His rigor, hisintelligence and his uncompro-mising attention to customerexpectations and shareholder value have set a very high stan-dard for this company and alegacy that will influence us fordecades to come. Rob was alsothe key driver and architectbehind the Vision and Valuesstatements that appear on page12. Developed in 1997, theyhave shaped our corporate cul-ture and value system, andguide our decision-makingprocess. Rob has also been a

valued friend and mentor tome, and he will be missed.

At the same time, we can alltake what we have learned fromRob and from our experiences of the past several years tomake this very successful fran-chise even better. By focusingon the fundamentals of ourbusiness, we will become morecompetitive. It’s that simple,and that’s where we need to be.We have a lot of strengths and,most of all, an outstandingworkforce and Board of Direc-tors, whose daily support andcommitment give me confi-dence in our future success.When the economic reboundoccurs, we will be in a positionto make great progress.

Matthew K. RoseCEO and PresidentFebruary 20, 2002

A T R I B U T E T O R O B E R T D . K R E B S

“BNSF Chairman Robert D. Krebswill retire from the BurlingtonNorthern Santa Fe CorporationBoard of Directors in April 2002,after a distinguished career in therail industry.

“A native of Sacramento, California,Rob joined the Southern PacificTransportation Company (SP) inJune 1966, after receiving his Master of Business Administration at Harvard Business School. Heworked for SP in various operationspositions and became vice presi-dent of operations in 1980. In1982, he was named president ofSP Transportation Company. Inaddition, in the following 20 years,he served as president, chief execu-tive officer or chairman of SantaFe Southern Pacific Corp., SantaFe Pacific Corp., and the Atchison,Topeka and Santa Fe Railway.

“When Santa Fe Pacific Corp.merged with Burlington NorthernInc. in September 1995 to form the Burlington Northern Santa FeCorporation, Rob was named president and chief executive officer. In April 1997, he wasasked to serve also as chairman of BNSF, a role he has served ever since.

“Throughout his career, Rob hasbeen praised as a visionary leaderin the rail industry, as reflected inthe following quotes:

“He’s savvy and smart. I think he’s the logical choice and a good one.”

– Jeff Stone, analyst forWertheim Schroeder & Co.,quoted July 29, 1987, in theChicago Tribune, on Rob’spromotion to president andchief executive of Santa FeSouthern Pacific

“He is the best railroad top exec-utive over the past five years whenyou look at service to customers,cutting costs and improving share-holder value.”

– NatWest Securities Corp. Analyst Michael Lloyd, quoted March 10, 1995, inthe Wall Street Journal

“He is probably the single best person in the industry to be in therole he is in. From a capabilitystandpoint, there is no one betterout there.”

– James Higgins, analyst withDonaldson, Lufkin & Jenrette,quoted July 21, 1995, in theJournal of Commerce, onRob’s designation as presidentof the planned BurlingtonNorthern Santa Fe Corporation

“He seems to be a shining star inthe industry. One thing I’ve foundout about him from talking with his upper-echelon managers is that he has a great capacity forhandling information. He’s a tireless worker...”

– James Hogan, general chairman of the Brotherhood of Locomotive Engineers,quoted July 21, 1995, in the Journal of Commerce

“[Mr. Krebs is a] very straightshooter. He has one of the highestlevels of integrity of any railroadCEO. He’s very good at settingrealistic expectations. You neverquestion where Rob Krebs standson an issue.”

– James Valentine, analyst forSalomon Brothers, quoted July 21, 1995, in the Journal of Commerce

“It is extraordinarily rare to have a CEO who works an issue [such

11

as safety] for such a long time. Hewould be out of the ordinary.”

– Jeff Lenn, professor of strate-gic management and publicpolicy, George WashingtonUniversity, quoted Oct. 14,1997, in the Washington Poston BNSF’s safety culture

“If you were to be employed by arailroad, invest in one, or ship overone in the century now starting,just what sort of person would youwant leading that enterprise? Well,you’d want someone with vision,who can see beyond today andimagine a different, and better,tomorrow.... You’d want someonewho has been tested by adversityand grown both as a man and aleader. You’d want someone whohas his story straight and tellseveryone the same thing. In otherwords, you’d want someone atleast a bit like Rob Krebs.”

– Fred Frailey, journalist andrail industry observer, in “Dawn of a New Age,” for Trainsmagazine, January 2001

“For me, the excitement of the job is when you see the success, the renaissance of an industry.”

– Rob Krebs

B N S F ’ S V A L U E S T A T E M E N T

12

In 1997, BNSF’s senior management team, led by Chairman Rob Krebs,

developed a set of core values to complement BNSF’s vision. These values

(see below) define and shape BNSF’s culture. A two-day workshop on

Vision and Values was presented in 1998 to salaried employees. A follow-up

class, “Values in Action,” offered in 2000 and 2001 demonstrated how

these values shape BNSF’s leadership and management style. Vision and

Values influences many aspects of BNSF, from transportation and marketing

decisions to town hall meetings to recognition programs.

Shared ValuesAs 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 thingsafely and efficiently

• Celebrating our rich heritageand building on our success aswe shape our promising future

EfficiencyEfficiency is the best collective appli-cation of our resources to meet ourcustomers’ expectations. Each of uscontributes to efficiency when we:

• Understand our customers’expectations and priorities

• Help develop business processesthat best match BNSF resourceswith our customers’ requirements

• Constantly monitor and measure our results in order to continuously improve

• Manage our Community’sresources as if they were our own

Style

As a Community, we are:• Tough-minded optimists• Decisive yet thorough• Open and supportive, and• Confident and proud of

our success

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

EqualityAs 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 toachieve my full potential

CommunityBNSF is a Community of about39,000 mutually dependent members. Each one of us dependsupon BNSF for our livelihood, and through our collective efforts,BNSF depends upon us to defend, sustain and strengthenour Community. We are an effective Community when each of us:

• Believes in our Vision andembraces 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

M a n a g e m e n t ’s Discussion And Analysis Of Financial Condition And Results Of Operations

Ma n a g e m e n t’s discussion and analysis relates to the finan-cial condition and results of operations of Bu r l i n g t o nNo rthern Santa Fe Corporation and its majority-ow n e dsubsidiaries (collective l y, BNSF or Company). The princi-pal subsidiary of BNSF is The Burlington No rthern andSanta Fe Railway Company (BNSF Railway). All earningsper share information is stated on a diluted basis.

Results Of OperationsYear Ended December 31, 2001 C o m p a red With Year Ended December 31, 2000BNSF recorded net income for 2001 of $731 million, or$1.87 per share, after a first quarter extraordinary charge of$6 million, net of tax, related to the early extinguishment of a debt obligation, compared with net income for 2000 of $980 million, or $2.36 per share. The decrease in netincome and earnings per share is primarily due to a $353million decrease in operating income and $75 million inlosses related to non-rail investments. The decrease in operat-ing income reflects increased compensation and benefitscosts, higher fuel expenses and higher materials and othercosts, which included a $66 million fourth quarter chargefor workforce reduction related costs. The favorable effect ofthe common stock repurchase program on earnings per sharep a rtially offset lower earnings in 2001 (see Liquidity andCapital Re s o u rces: Common Stock Re p u rchase Program).

Revenues Total revenues of $9,208 million for 2001 were essentiallyflat compared with 2000. In 2001, the sluggish economy

hampered BNSF’s revenue growth; although, based onreporting to the Association of American Railroads (AAR),BNSF’s share of the western United States rail traffic marketremained essentially unchanged at approximately 43 percent.

Consumer Products re venues of $3,356 million for 2001we re $49 million, or 1 percent, less than 2000 due tod e c reased loadings in the less-than-truckload (LTL) sect o rand the loss in late 2000 of some automotive contract busi-ness as well as decreases in the automotive sector as a re s u l tof sluggish industry-wide sales. Ad d i t i o n a l l y, a significanta u t o m o t i ve contract was lost at the end of the third quart e rof 2001 and is expected to affect future automotive re v-enues. These declines we re partially offset by a ten perc e n tg rowth in the intermodal truckload business, incre a s e dinternational revenues, increases in dry boxcar business dueto strong beverage shipments, and a $32 million favo r a b l et r a n s p o rtation contract settlement in automotive re venues.

Coal revenues of $2,123 million for 2001 decreased $8 mil-lion from 2000 revenues of $2,131 million. The decrease in revenues was primarily a result of lower revenue per car on certain contract renewals, partially offset by a six percentincrease in coal tons shipped due to colder weather, tighteastern coal supplies and high natural gas prices.

Industrial Products re venues of $2,080 million for 2001 we re$34 million, or 2 percent, lower than 2000, despite incre a s e dre venue per car as a result of selected price increases andi n c reased length of haul. Re venues for the year fell due to continued production cutbacks affecting most sectors.These decreases we re partially offset by increases in thepetroleum products sector resulting from increased liquifiedpetroleum gas (LPG) and asphalt shipments.

Financial Contents1 3 Ma n a g e m e n t’s Discussion and Analysis2 3 Re p o rt of Ma n a g e m e n t2 3 Re p o rt of Independent Ac c o u n t a n t s2 4 Consolidated Statements of In c o m e2 5 Consolidated Balance Sh e e t s2 6 Consolidated Statements of Cash Fl ow s2 7 Consolidated Statements of Changes in St o c k h o l d e r s’ Eq u i t y2 8 Notes to the Consolidated Financial St a t e m e n t s

Revenue Ta b l eThe following table presents BNSF’s re venue information by commodity for the years ended December 31, 2001, 2000 and1999, and includes certain reclassifications of prior year information to conform to current year pre s e n t a t i o n .

Average Revenue

Revenues Cars / Units Per Car / Unit2001 2000 1999 2001 2000 1999 2001 2000 1999

(IN MILLIONS) (IN T H O U S A N D S )

Consumer Pro d u c t s $3,356 $3 , 4 0 5 $3 , 1 9 7 3,752 3 , 8 5 0 3 , 5 9 7 $ 894 $ 8 8 4 $ 8 8 9C o a l 2,123 2 , 1 3 1 2 , 2 2 6 2,133 2 , 0 2 3 2 , 1 2 3 995 1 , 0 5 3 1 , 0 4 9Industrial Pro d u c t s 2,080 2 , 1 1 4 2 , 1 0 8 1,442 1 , 5 0 1 1 , 5 0 8 1,442 1 , 4 0 8 1 , 3 9 8Agricultural Pro d u c t s 1,531 1 , 4 6 2 1 , 5 4 3 828 7 9 3 8 3 6 1,849 1 , 8 4 4 1 , 8 4 6Total Freight Re ve n u e s 9,090 9 , 1 1 2 9 , 0 7 4 8,155 8 , 1 6 7 8 , 0 6 4 $1 , 1 1 5 $1 , 1 1 6 $1 , 1 2 5Other Re ve n u e s 118 9 5 1 2 1

Total Operating Re ve n u e s $9,208 $9 , 2 0 7 $9 , 1 9 5

1 3

Agricultural Products re venues of $1,531 million for 2001we re $69 million, or 5 percent, higher than re venues for2000 primarily due to an increased demand for corn, s oybean and oilseed/meals, partially offset by a decline inf e rt i l i zer shipments. Ad d i t i o n a l l y, average re venue per cari n c reased due to increases in length of haul.

Expenses Year Ended December 31, 2001 2000 1999

(IN MILLIONS)

Compensation and benefits $2,850 $2,729 $2,772Purchased services 1,084 1,024 1,051Depreciation and amortization 909 895 897Equipment rents 740 742 752Fuel 973 932 700Materials and other 897 777 818

Total operating expenses $7,453 $7,099 $6,990

Interest expense $ 463 $ 453 $ 387Other expense (income), net $ 110 $ 70 $ (1)

Total operating expenses for 2001 we re $7,453 million, ani n c rease of $354 million, or 5 percent, over 2000 primarilydue to: (i) increased compensation and benefits of $121million related to higher wages and increased health andwe l f a re costs offset by efficiency gains as measured by gro s ston-miles (GTM) per employee and reduced headcounts;(ii) work f o rce reduction related costs of $66 million; (iii)higher fuel prices; and (iv) flooding in the upper Mi d we s tand more seve re winter weather conditions early in 2001which increased expenses compared to 2000.

Compensation and benefits expenses of $2,850 million we re$121 million, or 4 percent, higher than 2000 primarily due to wage rate increases and higher benefit rates. In addition,scheduled wages we re significantly higher in the first and sec-ond quarters as a result of more seve re weather conditionsrequiring increased maintenance and additional crews. T h e s ei n c reases we re partially offset by lower employment leve l s .

Pu rchased services of $1,084 million for 2001 we re $60 m i l-lion, or 6 percent, higher than 2000 due to higher rampi n gexpenses incurred as a result of new services added whichi m p rove efficiency and safety at the intermodal ramp facili-ties, decreased re c overies as compared with the prior ye a r,i n c reased legal expense primarily related to coal rate dis-putes, higher contract equipment maintenance costs due tom o re locomotives under maintenance contracts, incre a s e dhaulage expense, and increased other expenses as a result offlooding in the upper Mi d west in the early part of the ye a r.

De p reciation and amortization expenses of $909 millionfor 2001 we re $14 million, or 2 percent, higher than2000 primarily due to a higher capital base.

Equipment rents expenses for 2001 of $740 million we re $2million lower than 2000 reflecting reduced equipment leve l s ,including cars, trailers, containers and automotive equipment.

Fuel expenses of $973 million for 2001 were $41 million, or4 percent, higher than 2000 primarily as a result of a 3-cent

i n c rease in the average all-in cost per gallon of diesel fuel.Consumption in 2001 was 1,177 million gallons compare dwith 1,173 million gallons in 2000. Howe ve r, GTM pergallon increased to 762 from 746, or 2 percent, compare dwith 2000, attributable to newer locomotive fleet, fueleconomy initiatives during the ye a r, and commodity mix.The 3-cent increase in the average all-in cost per gallon ofdiesel fuel is net of a 6-cent decrease in the average pur-chase price more than offset by a 9-cent decrease in thehedge benefit per gallon as compared with a 13-cent hedgebenefit in 2000.

Materials and other expenses of $897 million for 2001 were$120 million, or 15 percent, higher than 2000 principallyreflecting: (i) work f o rce reduction costs of $66 millionincurred in the fourth quarter of 2001 for severance, pen-sion, medical, benefit and other related costs for approxi-mately 400 positions (see Other Matters: Employee Mergerand Separation Costs); (ii) increases in environmental andcasualty expenses compared with 2000; (iii) lower incomefrom easements; and (iv) increased costs caused by floodingin the upper Mi d west and higher utilities as a result of higherrates and increased consumption due to more seve re winterweather conditions early in 2001. Ad d i t i o n a l l y, during 2000the Company incurred $42 million of charges due to employe erelated severance, medical and other benefit costs and the lossof previously earned state tax incentive s .

In t e rest expense of $463 million for 2001 was $10 mil-lion, or 2 percent, higher than 2000 reflecting highera verage debt levels, partially offset by lower interest rates.

Other expense was $40 million higher compared with 2000primarily due to $75 million in losses recognized related to non-rail investments and fewer land sales in 2001. Thenon-rail investments consisted of Fre i g h t Wise, Inc., an In t e r n e ttransportation exchange; Pathnet Telecommunications, Inc.,a telecommunications venture; a portfolio of other non-corereal-estate investments; and a decline in the cash surrendervalue of company owned life insurance policies. Offsettingthe above were $20 million of the 2000 expenses related tothe termination of the proposed BNSF business combinationwith Canadian National Railway Company (CN).

Year Ended December 31, 2000 C o m p a red With Year Ended December 31, 1999Net income in 2000 was $980 million, or $2.36 per share ,c o m p a red with $1,137 million, or $2.44 per share, for1999. The decrease in earnings per share is primarily dueto the effect on net income of a $232 million increase infuel expenses and recognition in 1999 of a gain of $50million pretax in connection with prior period line sales, less costs of $13 million pretax related to those sales, par-tially offset by the favorable effect of the common stockre p u rchase program (see Liquidity and Capital Re s o u rc e s :Common Stock Re p u rchase Pro g r a m ) .

R e v e n u e sTotal revenues for 2000 were $9,207 million or $12 millionhigher than 1999 re venues of $9,195 million. The $12 mil-lion increase primarily reflects increases in the Consumer

1 4

and Industrial Products sectors partially offset by lower Coaland Agricultural Products revenues. Average revenue percar/unit decreased in 2000 to $1,116 from $1,125 in 1999.Volumes increased for the year but experienced a generalslowing late in 2000 based on economic conditions whichcontinued into 2001. During 2000, based on reporting tothe AAR, BNSF’s share of the western United States rail traf-fic market decreased 0.4 point to 43.1 percent.

Consumer Products revenues of $3,405 million improved$208 million, or 7 percent, compared with 1999 reflectingincreases in the automotive, international, truckload, andperishable sectors, partially offset by decreases in the inter-modal marketing companies (IMC) and direct marketingsectors. International revenues were up due to high levels of Tr a n s - Pacific trade as well as market share gains. The grow t hin perishables was from the success of new service offeringsand a partial recapture of the truck market. Automotive rev-enues increases were reflected by industry-wide automobileproduction for most of the year and more profitable longerhaul traffic despite essentially flat volumes year-over-year.Increases in truckload revenues were partially offset bydecreases in the direct marketing sector due to decreasedloadings within the LTL sector and in the IMC sector due to pricing pressures and strong over the road competition.

Coal re venues of $2,131 million for 2000 decreased $95million, or 4 percent, as a result of volume decreases dueto a decrease in demand as a result of milder weather andhigh customer inventories that affected shipments formost of the ye a r, while 1999 benefited from an inve n t o rybuild up in preparation for possible Year 2000 outages.

Industrial Products revenues of $2,114 million for 2000 were $6 million higher than 1999 due to increases from themetals and minerals sectors, partially offset by decreasedchemicals, forest products and machinery re venues. The metals sector increases were a result of a strong market forsteel and increases in minerals were due to higher demandfor clay and sand used in domestic oil production. Theseincreases were partially offset by decreased shipments ofindustrial chemicals, softness in the forest products sector,and lower shipments of heavy machinery.

Agricultural Products revenues of $1,462 million for 2000were $81 million, or 5 percent, lower than 1999 primarilydue to weaker corn export shipments to the Pacific No rt h we s tand Mexico, and decreased shipments of Gulf and PacificNo rt h west wheat, both caused by worldwide crop competition.Re venues we re also lower as a result of decreased shipments ofbulk foods due to an oversupply of sugar and supplier pricecompetition in the syrup market which resulted in less traffic.

E x p e n s e sTotal operating expenses for 2000 we re $7,099 million, an increase of $109 million, or 2 percent, compared withoperating expenses for 1999 of $6,990 million, despite a$232 million increase in fuel expenses.

Compensation and benefits expenses of $2,729 millionwe re $43 million, or 2 percent, lower than 1999 primarily

due to lower employment levels and reduced incentiveexpense partially offset by increased base wages.

Pu rchased services of $1,024 million for 2000 we re $27million, or 3 percent, lower than 1999 primarily as a re s u l tof decreased joint facility and contract switching charges as well as re c overies related to prior periods. This decre a s ewas partially offset by increased contract equipment main-tenance costs due to an increase in the number of locomo-t i ves under maintenance contracts and vo l u m e - re l a t e di n c reases in ramping expenses.

Equipment rents expenses of $742 million we re $10 mil-lion, or 1 percent, lower than 1999 as a result of lower leaserates on rail cars as well as a decrease in the number ofleased agricultural commodity and coal cars, partially offsetby increased locomotive rental expense.

Fuel expenses of $932 million for 2000 we re $232 million,or 33 percent, higher than 1999, as a result of a 20-centi n c rease in the average all-in cost per gallon of diesel fuel,p a rtially offset by a one percent decrease in consumptionf rom 1,187 million gallons to 1,173 million gallons. T h ei n c rease in the average all-in cost per gallon of diesel fuelincludes a 34-cent increase in the average purchase price,p a rtially offset by the increase in hedge benefit of 13 centsper gallon compared with additional expense from hedgingof 1-cent per gallon in 1999.

Materials and other expenses of $777 million for 2000 were$41 million, or 5 percent, lower than 1999 principallyreflecting: (i) reorganization costs of $48 million incurred inthe second quarter of 1999 for severance, pension, medicaland other benefit costs for approximately 325 involuntarilyterminated salaried employees (see Other Matters: EmployeeMerger and Separation Costs); (ii) lower current year envi-ronmental expenses and other materials costs compared with1999; and (iii) higher current year gains from easement sales.Offsetting these decreases we re: (i) $22 million of employe e -related severance, medical and other benefit costs re c o rded inthe second quarter of 2000 for approximately 150 invo l u n t a r i l yterminated employees, primarily material handlers in mechani-cal shops and trainmen re s e rve boards; (ii) $54 million cre d i tfor the re versal of certain liabilities associated with the consol-idation of clerical functions in the second quarter of 1999(see Other Matters: Em p l oyee Merger and Separation Costs);(iii) the loss of previously earned state tax incentives in thesecond quarter 2000; and (iv) higher costs in 2000 related tothe maintenance of leased equipment.

In t e rest expense for 2000 of $453 million increased $66million, or 17 percent, principally reflecting higher debtl e vels resulting from the Company’s share re p u rchase p rogram and higher interest rates. Total debt increased to$6,846 million at December 31, 2000, from $5,813 mil-lion at December 31, 1999.

Other expense was $71 million higher compared with 1999primarily due to a $50 million pretax deferre d gain re c o g n i ze dduring 1999 in connection with the sale of rail lines insouthern California in 1992 and 1993, and the recognition

1 5

in 2000 of $20 million pretax of expenses related to the termination of the proposed combination with CN.

Liquidity And Capital Resourc e sCash generated from operations is BNSF’s principal sourc eof liquidity. BNSF generally funds any additional liquidityre q u i rements through debt issuance including commerc i a lp a p e r, through the leasing of assets, and through the sale ofa portion of its accounts re c e i va b l e .

Operating ActivitiesNet cash provided by operating activities was $2,197 millionduring 2001 compared with $2,317 million during 2000.The decrease in cash from operations was primarily due to adecrease in net income and deferred income taxes, and thereceipt of a non-recurring $43 million special dividend fromthe Company’s equity investment in TTX Company in thefirst quarter 2000. The decrease was partially offset by a$105 million increase in cash from operations resulting fromchanges in working capital. During 2001, the Company soldan additional $25 million of its accounts receivable underthe accounts receivable sales program (A/R sales program).

Investing ActivitiesNet cash used for investing activities was $1,564 millionduring 2001 compared with $1,680 million during 2000.The decrease in cash used primarily reflects the temporaryacquisition of equipment in 2000 that the Company ulti-mately sold and leased back through operating leases in2001 and 2000 expenditures relating to Fre i g h t Wise, In c .These reductions are partially offset by an increase in cashcapital expenditures.

A breakdown of cash capital expenditures during 2001, 2000and 1999 is set forth in the following table:

Year Ended December 31, 2001 2000 1999(IN MILLIONS)

Maintenance of way $ 968 $ 835 $ 810Mechanical 183 221 240Information services 69 66 74Other 101 144 151Total maintenance of business 1,321 1,266 1,275New locomotives and freight cars – – 261Expansion and other 138 133 252

Total $ 1,459 $1,399 $1,788

BNSF acquired all of the 100 locomotives it committed toa c q u i re in 2001 through operating leases.

Financing ActivitiesNet cash used for financing activities during 2001 was $618million primarily related to common stock re p u rchases of $317 million, a net reduction in borrowings of $206 mil-lion and dividend payments of $190 million, partially off-set by proceeds of $113 million resulting from the exe rc i s eof 5.3 million stock options.

In Ma rch 2001, $100 million of 33-year re m a rk e t a b l ebonds issued in 1998 we re called by the holder of the calloption. BNSF subsequently purchased the option from

the holder and re t i red the bonds and incurred an extra-o rd i n a ry loss of $6 million, net of tax, due to early re t i re m e n t .Ad d i t i o n a l l y, in Ma rch 2001, BNSF issued a $12 million,5.96 percent note due April 2004.

In May 2001, the Company increased the amount of debtsecurities under its shelf registration, enabling it to issue debtsecurities in one or more series at an aggregate offering pricenot to exceed $1 billion, and issued $400 million of 6.75 per-cent notes due July 15, 2011. The net proceeds of the debtissuance we re used for general corporate purposes includingthe repayment of outstanding commercial paper. Su b s e q u e n tto this debt issuance, the Company had $600 million ofcapacity under the May 2001 shelf registration statement.

In February 2000, a put option on $100 million of medium-term notes paying a coupon of 6.10 percent was exe rc i s e dby the holders and the Company repaid the holders pri-marily with proceeds from the issuance of commercial paper.

In April 2000, BNSF issued $300 million of 7.88 perc e n tnotes due April 2007 and $200 million of 8.13 perc e n td e b e n t u res due April 2020. The net proceeds of the debtissuance were used for general corporate purposes includingthe repayment of outstanding commercial paper whichi n c reased primarily as a result of higher share re p u rc h a s e s .At the time of issuing the $300 million of 7.88 perc e n tnotes and the $200 million of 8.13 percent debentures discussed above, the Company closed out two tre a s u ry lock transactions, each in an amount of $100 million, atgains of approximately $9 million and $13 million, re s p e c-t i ve l y, which have been deferred and are being amort i zed to interest expense over the lives of the notes and the deben-tures, re s p e c t i ve l y.

In April 2000, BNSF Railway issued $50 million of pri-vately placed debt collateralized by locomotives that we rea c q u i red in 1999. This debt carries an interest rate of 7.77p e rcent and has annual maturities through 2015.

In August 2000, BNSF issued $275 million of 7.95 perc e n td e b e n t u res due August 2030. The net proceeds we re usedfor general corporate purposes including the repayment ofoutstanding commercial paper, which increased primarily asa result of higher share re p u rchases. At the time of issuingthese debentures, the Company closed out a tre a s u ry locktransaction in the amount of $100 million at a gain ofa p p roximately $8 million, which has been deferred and isbeing amort i zed to interest expense over the 30-year life ofthe debentures.

In December 2000, BNSF issued $300 million of 7.13p e rcent notes due December 2010. The net proceeds we re used for general corporate purposes including the re p a y-ment of outstanding commercial paper, which incre a s e dprimarily as a result of higher share re p u rchases. At thetime of issuing these notes, the Company closed out at re a s u ry lock transaction in the amount of $100 million at a gain of approximately $5 million, which has beend e f e r red and is being amort i zed to interest expense ove rthe 10-year life of the notes.

1 6

A g g regate long-term debt to mature in 2002 is $288 mil-lion. BNSF’s ratio of total debt to total capital was 45.9p e rcent at December 31, 2001, compared with 47.8 p e rcent at December 31, 2000, and 41.6 percent atDecember 31, 1999.

F re e Cash FlowBNSF generated free cash flow (calculated as cash flow fro moperations less capital expenditures, other investing activitiesand dividends paid) of $443 million, $431 million and$260 million during 2001, 2000 and 1999, re s p e c t i ve l y.

D i v i d e n d sCommon stock dividends declared were $0.48 per shareannually for 2001, 2000 and 1999. Dividends paid on com-mon stock were $190 million, $206 million and $224 mil-lion during 2001, 2000 and 1999, respectively. On January17, 2002, the Board of Directors (the Board) declared aquarterly dividend of 12 cents per share on outstandingshares of common stock, $0.01 par value, payable April 1,2002, to stockholders of record on March 11, 2002.

Common Stock Repurchase Pro g r a mIn July 1997, the Board authorized the re p u rchase of up to30 million shares of the Company’s common stock fro mtime to time in the open market. In December 1999, Ap r i l2000 and September 2000, the Board authorized exten-sions of the BNSF share re p u rchase program, adding 30million shares at each date to the total shares pre v i o u s l ya u t h o r i zed bringing BNSF’s share re p u rchase program to120 million shares. During 2001, 2000 and 1999, theCompany re p u rchased approximately 11 million, 65 mil-lion, and 22 million shares, re s p e c t i ve l y, of its commonstock at average prices of $27.76 per share, $23.16 pers h a re, and $31.08 per share, re s p e c t i ve l y. Total re p u rc h a s e st h rough December 31, 2001, we re 103 million shares at a total average cost of $25.74 per share, leaving 17 millions h a res available for re p u rchase out of the 120 millions h a res authorize d .

Long Te rm Debt And Lease Obligations The Company’s business is capital intensive. BNSF has his-torically generated a significant amount of cash from operat-ing activities which it uses to fund capital additions, servicedebt and pay dividends. Additionally, the Company relies onaccess to the debt and leasing markets to finance a portion of capital additions on a long-term basis. Free cash flow hasalso been used in recent years to repurchase common stock.

The Company utilizes a commercial paper program backedby bank re volving credit agreements to manage liquidityneeds. The information below summarizes the more signif-icant obligations of the Company at December 31, 2001. For 2002 and the foreseeable future, the Company expectsthat cash flow from operating activities, access to capitalm a rkets and bank re volving credit agreements will be suffi-cient to enable the Company to meet its obligations whendue. The Company believes these sources of funds will alsobe sufficient to fund capital additions that are necessary tomaintain its competitiveness and position the Companyfor future re venue growth.

The Company’s ratio of earnings to fixed charges was 2.73times for the year ended December 31, 2001. Ad d i t i o n a l l y,the Company’s ratio of net cash flow provided by operatingactivities divided by total average debt was 33 percent for the year ended December 31, 2001.

The following table summarizes the Company’s obliga-tions under long-term debt and lease obligations atDecember 31, 2001:

Payments Due By Period1 Year 2 – 3 4 – 5 There-

Total or Less Years Years after(IN MILLIONS)

Long-term debt(a) $ 5,979 $221 $ 248 $1,132 $4,378Capital lease

obligations(b) 856 107 214 205 330Operating leases(b) 5,187 404 769 668 3,346

Total $1 2 , 0 2 2 $7 3 2 $1 , 2 3 1 $2 , 0 0 5 $8 , 0 5 4

(a) Excluding capital lease obligations

(b) Gross payments due which include an interest component

In addition to the obligations described above, the Companyacts as guarantor for certain debt and lease obligations ofothers. BNSF does not expect to perform under theseguarantees in the foreseeable future. See Notes 9 and 11 to the Consolidated Financial St a t e m e n t s .

In the normal course of business, the Company enters intolong-term contractual re q u i rements for future goods ands e rvices needed for the operations of the business. Su c hcommitments are not in excess of expected re q u i re m e n t sand are not reasonably likely to result in perf o r m a n c epenalties or payments that would have a material adve r s eaffect on the Company’s liquidity.

C redit Agre e m e n t sBNSF issues commercial paper from time to time which iss u p p o rted by re volving credit agreements. At December 31,2001 and 2000, there we re no bank borrowings against the re volving credit agreements. Outstanding commerc i a lpaper balances are considered as reducing the amount ofb o r rowings available under these agreements. The bankre volving credit agreements allow borrowings of up to$1.75 billion. Borrowing rates are based upon: (i) LIBORplus a spread determined by BNSF’s senior unsecured debtratings, (ii) money market rates offered at the option ofthe lenders, or (iii) an alternate base rate. The Companygenerally classifies commercial paper as long-term to theextent of its borrowing capacity under these facilities. The commitments of the lenders under the short - t e r ma g reement allow borrowings of up to $1.0 billion and arescheduled to expire in June 2002. The Company has theability to have any amounts then outstanding mature aslate as June 2003. The remaining $750 million of commit-ments of the lenders under the long-term agreement are scheduled to expire in June 2005. Annual facility fees forthe short-term and long-term facilities are currently 0.1p e rcent and 0.125 percent, re s p e c t i ve l y, and are subject tochange based upon changes in BNSF’s senior unsecure ddebt ratings.

1 7

The maturity value of commercial paper outstanding atDecember 31, 2001, was $416 million, reducing the totalcapacity available under the re volving credit agreements to$1,334 million. BNSF must maintain compliance with cert a i nfinancial covenants under its re volving credit agre e m e n t s .

The re volving credit agreements include covenants and eve n t sof default typical for this type of facility, including a minimumconsolidated tangible net worth test, a maximum debt/capitaltest, and a $75 million cross-default provision. At December 31,2001, the Company was in compliance with its debt cove n a n t s .BNSF’s tangible net worth is $3.4 billion greater than theminimum consolidated tangible net worth re q u i red under thea g reement, and the maximum debt/capital test prov i d e sapproximately $4.6 billion of debt capacity above BNSF’soutstanding debt as of December 31, 2001, before an eventof default would occur under these covenants. With theexception of a voluntary bankruptcy or insolvency, any eventof default has either or both, a cure period or notice require-ment before termination of the agreements. A voluntarybankruptcy or insolvency would be considered an immediatetermination event.

Sale Of Accounts ReceivableB N S F ’s A/R sales program, as described in Note 6 of theConsolidated Financial Statements, includes a prov i s i o nthat allows the institutions participating in this program, at their option, to cancel the program if BNSF Railway’ssenior unsecured credit rating falls below investment grade.Upon cancellation, BNSF would not be able to sell addi-tional re c e i vables under this program. If such event we re to occur, BNSF would expect to have sufficient l i q u i d i t yremaining under its re volving credit agreements to fund the full amount of securities outstanding under the sales p rogram. The re c e i vable facility expires in 2002 and theCompany intends to renew this facility under similar terms.

The Company is not aware of any pending significanta d verse changes to its credit rating that would cause it or BNSF Railway to fall below investment grade.

Other MattersCasualty And Enviro n m e n t a lPersonal injury claims, including work-related injuries toemployees, 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 the finding of fault,coupled with unscheduled awards and reliance on the jurysystem, contributed to significant increases in expense in pastyears. BNSF has implemented a number of safety programs toreduce the number of personal injuries as well as the associatedclaims and personal injury expense. BNSF made payments for personal injuries of approximately $173 million, $178 millionand $179 million in 2001, 2000 and 1999, respectively. AtDecember 31, 2001 and 2000, the Company had re c o rded lia-bilities of $458 million and $436 million, re s p e c t i ve l y, re l a t e dto both asserted and unasserted personal injury claims.

The Company’s operations, as well as those of its competitors,are subject to extensive federal, state and local environmental

regulation. BNSF’s operating pro c e d u res include practicesto protect the environment from the risks inherent in rail-road operations, which frequently invo l ve transport i n gchemicals and other hazardous materials. Ad d i t i o n a l l y,many of BNSF’s land holdings are and have been used forindustrial or transport a t i o n - related purposes or leased toc o m m e rcial or industrial companies whose activities mayh a ve resulted in discharges onto the pro p e rt y. As a re s u l t ,BNSF is subject to environmental cleanup and enforc e -ment actions. In part i c u l a r, the Federal Compre h e n s i veEn v i ronmental Response, Compensation and Liability Ac tof 1980 (CERC LA), also known as the Su p e rfund law, as well as similar state laws generally impose joint and seve r a lliability for cleanup and enforcement costs on current andformer owners and operators of a site without re g a rd tofault or the legality of the original conduct. BNSF has beennotified that it is a potentially responsible party (PRP) forstudy and cleanup costs at approximately 30 Su p e rf u n dsites for which investigation and remediation payments areor will be made or are yet to be determined (the Su p e rf u n dsites) and, in many instances, is one of several PRPs. Inaddition, BNSF may be considered a PRP under cert a i nother laws. Ac c o rd i n g l y, under CERC LA and other federaland state statutes, BNSF may be held jointly and seve r a l l yliable for all environmental costs associated with a part i c u-lar site. If there are other PRPs, BNSF generally part i c i-pates in the cleanup of these sites through cost-sharinga g reements with terms that va ry from site to site. Costs a re typically allocated based on re l a t i ve volumetric contri-bution of material, the amount of time the site was ow n e dor operated, and/or the portion of the total site owned oroperated by each PRP.

Environmental costs include initial site surveys and environ-mental studies of potentially contaminated sites as well as costs for remediation and restoration of sites determ i n e dto be contaminated. Liabilities for environmental cleanupcosts are initially recorded when BNSF’s liability for e n v i ro n-mental cleanup is both probable and a reasonable estimateof associated costs can be made. Adjustments to initial esti-mates are recorded as necessary based upon additional i n f o r-mation developed in subsequent periods. BNSF conductsan ongoing environmental contingency analysis, which considers a combination of factors including independentconsulting re p o rts, site visits, legal re v i ews, analysis of thelikelihood of participation in and the ability of other PRPsto pay for cleanup, and historical trend analyses.

BNSF is invo l ved in a number of administrative and judi-cial proceedings and other mandatory cleanup efforts ata p p roximately 390 sites, including the Su p e rfund sites, at which it is participating in the study or cleanup, orboth, of alleged environmental contamination. BNSF paid a p p roximately $72 million, $49 million and $67 millionduring 2001, 2000 and 1999, re s p e c t i ve l y, for mandatoryand unasserted cleanup efforts, including amountsexpended under federal and state vo l u n t a ry cleanup pro-grams. BNSF has re c o rded liabilities for remediation andrestoration of all known sites of $202 million at De c e m b e r31, 2001, compared with $223 million at December 31,2000. BNSF anticipates that the majority of the accrued

1 8

costs at December 31, 2001, will be paid over the next fiveyears. No individual site is considered to be material.

Liabilities re c o rded for environmental costs re p resent BNSF’sbest estimates for remediation and restoration of these sitesand include both asserted and unasserted claims. Un a s s e rt e dclaims are not considered to be a material component of thel i a b i l i t y. Although re c o rded liabilities include BNSF’s bestestimates of all costs, without reduction for anticipated re c ov-eries from third parties, BNSF’s total cleanup costs at thesesites cannot be predicted with certainty due to various factorssuch as the extent of corre c t i ve actions that may be re q u i re d ,e volving environmental laws and regulations, advances ine n v i ronmental technology, the extent of other part i e s’ part i c i-pation in cleanup efforts, developments in ongoing enviro n-mental analyses related to sites determined to be contaminated,and developments in environmental surveys and studies ofpotentially contaminated sites. As a result, future charges toincome for environmental liabilities could have a significanteffect on results of operations in a particular quarter or fiscalyear as individual site studies and remediation and re s t o r a t i o ne f f o rts proceed or as new sites arise. Howe ve r, managementb e l i e ves it is unlikely any identified matters, either individu-ally or in the aggregate, will have a material adverse effect onB N S F ’s results of operations, financial position or liquidity.

Other Claims And LitigationBNSF and its subsidiaries are parties to a number of legalactions and claims, various governmental proceedings andp r i vate civil suits arising in the ord i n a ry course of business,including those related to environmental matters and per-sonal injury claims. While the final outcome of these itemscannot be predicted with cert a i n t y, considering among other things the meritorious legal defenses available, it is the opinion of management that none of these items, whenfinally re s o l ved, will have a material adverse effect on theresults of operations, financial position or liquidity ofBNSF; although, an adverse resolution of a number of theseitems could have a material adverse effect on the results ofoperations in a particular quarter or fiscal ye a r.

Employee Merger And Separation CostsEmployee merger and separation costs activity was as follows(in millions):

2001 2000 1999

Beginning balance at January 1, $310 $356 $474Accruals 30 22 29Payments (55) (58) (93)Other (11) (10) (54)

Ending balance at December 31, $274 $310 $356

Em p l oyee merger and separation liabilities of $274 million and$310 million are included in the consolidated balance sheets atDecember 31, 2001 and 2000, re s p e c t i ve l y, and principallyre p resent: (i) employe e - related severance costs for the consoli-dation of clerical functions, material handlers in mechanicalshops and trainmen on re s e rve boards; (ii) deferred benefitspayable upon separation or re t i rement to certain active con-ductors, trainmen and locomotive engineers; and (iii) cert a i nnon-union employee severance costs. Em p l oyee merger and

separation expenses are recorded in Materials and Other inthe consolidated income statements. At December 31, 2001,$58 million of the remaining liabilities are included in curre n tliabilities for anticipated costs to be paid in 2002.

During the fourth quarter of 2001, the Company recorded a $66 million charge including $61 million for workforcereduction related costs. Of the $61 million, $30 million wasrecorded in Employee Merger and Separation Costs and $31million was recorded for benefits to be received under theCompany’s retirement and medical plans.

Consolidation Of Clerical Fu n c t i o n sLiabilities related to the consolidation of clerical functionswe re $69 million and $96 million at December 31, 2001 and2000, re s p e c t i ve l y, and primarily provide for severance costsassociated with the clerical consolidation plan adopted in 1995upon consummation of the business combination of BNSF’sp redecessor companies Burlington No rthern Inc. and Sa n t aFe Pacific Corporation (the Merger). The consolidation planresulted in the elimination of approximately 1,500 permanentpositions and was substantially completed during 1999.

In 2001, 2000 and 1999, the Company re c o rded $6 mil-lion, $10 million and $54 million, re s p e c t i ve l y, of re ve r s a l sfor certain liabilities associated with the consolidation plan.These liabilities related to planned work f o rce re d u c t i o n sthat are no longer re q u i red due to the Company’s ability toplace certain identified employees in alternate positions.The remaining liability balance at December 31, 2001, re p-resents benefits to be paid to affected employees who didnot re c e i ve lump-sum payments, but instead will be paidover five to ten years or in some cases through re t i rement.

In the fourth quarter of 2001, the Company re c o rded a chargeof $9 million of costs related to the reduction of approx i-mately 40 material handlers and other clerical positions. Inthe second quarter of 2000, the Company recorded a chargeof $17 million for severance, medical and other benefit costsrelated to approximately 140 material handlers in mechanicalshops. Liabilities remaining at December 31, 2001, related to this program reflect elections to receive payments over thenext several years rather than lump-sum payments.

Conductors, Trainmen And Locomotive En g i n e e r sLiabilities related to deferred benefits payable upon separationor re t i rement to certain active conductors, trainmen and loco-m o t i ve engineers we re $170 million and $183 million atDecember 31, 2001 and 2000, re s p e c t i ve l y. These costs we reprimarily incurred in connection with labor agreements re a c h e dprior to the Merger which, among other things, reduced trainc rew sizes and allowed for more flexible work rules. In 2001, the Company re c o rded a $5 million re versal of certain deferre dbenefits payable to reflect a change in estimates.

In the second quarter of 2000, the Company incurred $3 mil-lion of costs for severance, medical and other benefit costsfor approximately 50 trainmen on re s e rve boards. The re m a i n -ing re s e rve of less than $100 thousand at December 31,2001, will be paid during the next year to seve red employe e swho elected to re c e i ve their payments over time.

1 9

No n - Union Em p l oyee Se ve ra n c eLiabilities principally related to certain remaining non-union employee severances resulting from the fourth quar-ter 2001 work f o rce reduction, the second quarter 1999reorganization, and the Merger we re $35 million and $30 million at December 31, 2001 and 2000, re s p e c t i ve l y.These costs will be paid over the next several years based on deferral elections made by the employe e s .

During the fourth quarter of 2001, the Company re d u c e d400 positions through severance, normal attrition and the elimination of contractors. The Company re c o rded $21 million of expenses for severance, medical and otherbenefits associated with the costs of terminating 360e m p l oyees and approximately $31 million for benefits to be re c e i ved under the Company’s re t i rement and medicalplans. Substantially all of these planned reductions we recompleted at December 31, 2001.

In the second quarter of 2000, the Company incurred $2million of costs for severance, medical and other benefit costsfor ten involuntarily terminated non-union positions. T h e seplanned reductions we re completed at December 31, 2000.

In the second quarter of 1999, the Company incurred $45million of reorganization costs for severance, pension, med-ical and other benefit costs for approximately 325 invo l u n-tarily terminated non-union employees. Components of thecosts include approximately $29 million relating to seve r-ance costs for non-union employees and approximately $16million for benefits to be re c e i ved under the Company’sre t i rement and medical plans. Substantially all of theplanned reductions we re made by September 30, 1999.

Hedging ActivitiesOn Ja n u a ry 1, 2001, BNSF adopted Statement of Fi n a n c i a lAccounting St a n d a rds (SFAS) No. 133, Accounting forDe r i va t i ve In s t ruments and Hedging Ac t i v i t i e s , and re c o rded ac u m u l a t i ve transition benefit of $58 million, net of tax, toAccumulated Other Compre h e n s i ve Income (AOCI). T h es t a n d a rd re q u i res that all deriva t i ves be re c o rded on thebalance sheet at fair value and establishes criteria for docu-mentation and measurement of hedging activities.

The Company currently uses deriva t i ves to hedge againsti n c reases in diesel fuel prices and interest rates as well as to conve rt a portion of its fixed-rate long-term debt to floating-rate debt. The Company formally documents the relationship between the hedging instrument and thehedged item, as well as the risk management objective and strategy for the use of the hedging instrument. T h i sdocumentation includes linking the deriva t i ves that aredesignated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet, commitments orf o recasted transactions. The Company assesses at the timea deriva t i ve contract is entered into, and at least quart e r l y,whether the deriva t i ve item is effective in offsetting thechanges in fair value or cash flows. Any change in fairvalue resulting from ineffectiveness, as defined by SFA SNo. 133, is re c o g n i zed in current period earnings. Fo rd e r i va t i ve instruments that are designated and qualify as

cash flow hedges, the effective portion of the gain or losson the deriva t i ve instrument is re c o rded in AOCI as a sep-arate component of stockholders’ equity and re c l a s s i f i e dinto earnings in the period during which the hedge trans-action affects earnings.

B N S F monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due toc o u n t e r p a rty nonperformance.

Fu e lFuel costs re p resented 13 percent of total operatingexpenses during 2001 and 2000. Due to the significance of diesel fuel expenses to the operations of BNSF and thehistorical volatility of fuel prices, the Company maintains a program to hedge against fluctuations in the price of its diesel fuel purchases. The intent of the program is top rotect the Company’s operating margins and overall pro f-itability from adverse fuel price changes by entering intofuel-hedge instruments based on management’s eva l u a t i o nof current and expected diesel fuel price trends. Howe ve r,to the extent the Company hedges portions of its fuel pur-chases, it may not re a l i ze the impact of decreases in fuelprices. Conve r s e l y, to the extent the Company does nothedge portions of its fuel purchases, it may be adve r s e l yaffected by increases in fuel prices. Based on annualize dfuel consumption during 2001 and excluding the impact of the hedging program, each one-cent increase in the priceof fuel would result in approximately $12 million of addi-tional fuel expense on an annual basis.

The fuel-hedging program includes the use of deriva t i ve sthat are accounted for as cash flow hedges. As ofDecember 31, 2001, BNSF had entered into fuel swapa g reements utilizing Gulf Coast #2 heating oil to hedgethe equivalent of approximately 296 million gallons ofdiesel fuel at an average price of approximately 57 centsper gallon. Ad d i t i o n a l l y, as of December 31, 2001, BNSFhad entered into costless collar agreements effectivet h rough 2002 for the equivalent of approximately 50 mil-lion gallons of diesel fuel at an average call price ofa p p roximately 65 cents per gallon and an average put price of approximately 57 cents per gallon. The aboveprices do not include taxes, transportation costs, cert a i nother fuel handling costs, and any differences which may occur from time to time between the prices of com-modities hedged and the purchase price of BNSF’s dieselfuel. At December 31, 2001, BNSF’s fuel-hedging pro-gram cove red an average of 31 percent of estimated fuelpurchases for 2002. Hedge positions are closely monitored to ensure that they will not exceed actual fuel re q u i re m e n t sin any period.

As a result of adopting SFAS No. 133, the Companyre c o rded a cumulative transition benefit of $56 million, net of tax, to AOCI related to deferred gains on transac-tions as of Ja n u a ry 1, 2001. Subsequent changes in fairvalue for the effective portion of deriva t i ves qualifying as hedges are re c o g n i zed in Other Compre h e n s i ve Income (OCI) until the purchase of the related hedgeditem is re c o g n i zed in earnings, at which time changes in

2 0

fair value previously re c o rded in OCI are reclassified to earnings and re c o g n i zed in fuel expense. During 2001, the Company re c o g n i zed a loss of approximately $100thousand related to the ineffective portion of deriva t i ves in fuel expense. At December 31, 2001, AOCI includes ap retax loss of $4 million, all of which relates to deriva t i vetransactions that will expire throughout 2002. Settled fuel-hedging contracts are a $3 million payable and a $50 million re c e i vable at December 31, 2001 and 2000,re s p e c t i ve l y, and are re c o rded in working capital.

BNSF measures the fair value of fuel swaps from daily for-w a rd price data provided by various external counterpart i e s .To value a fuel swap, the Company uses a thre e - m o n t ha verage of forw a rd Gulf Coast #2 heating oil prices for theperiod hedged. The fair value of fuel costless collars is cal-culated and provided by the corresponding counterpart y.

Be t ween December 31, 2001 and Ja n u a ry 31, 2002, theCompany entered into additional fuel hedge transactions to hedge the equivalent of approximately 54 million gallonsof diesel fuel in 2002 at an average price of 55 cents pergallon. At Ja n u a ry 31, 2002, BNSF’s fuel-hedging pro g r a mc ove red approximately 35 percent of estimated fuel pur-chases for 2002.

In addition, between December 31, 2001 and Ja n u a ry 31,2002, the Company entered into fuel swap agreements utilizing West Texas Intermediate (WTI) crude oil to hedgethe equivalent of approximately 101 million and 50 milliongallons of diesel fuel for 2003 and 2004, re s p e c t i ve l y, at ana verage price of $20.58 per barre l .

In t e rest Ra t eFrom time to time, the Company enters into various interestrate hedging transactions for the purpose of managing expo-sure to fluctuations in interest rates and establishing rates inanticipation of future debt issuances as well as to convert aportion of its fixed-rate long-term debt to floating-rate debt.The Company uses interest rate swaps as part of its interestrate risk management strategy.

The cumulative transition benefit of adopting SFAS No. 133as of Ja n u a ry 1, 2001, included $2 million, net of tax, re l a t e dto deferred gains on closed-out deriva t i ves which we re used tolock the tre a s u ry rate on anticipated borrowings. The deferre dgains for cash flow hedges in AOCI are being amort i zed toi n t e rest expense over the amount remaining in AOCI.

Cash Fl ow Hedges The Company uses interest rate swaps tofix the LIBOR component of commercial paper. These swapsare accounted for as cash flow hedges under SFAS No. 133and qualify for the short cut method of recognition. As of December 31, 2001, BNSF had entered into five separateinterest rate swaps to fix the LIBOR component of $200million of commercial paper at an average rate of 3.86 per-cent. The average floating rate BNSF received on the swaps,which fluctuates monthly, was 1.95 percent as of December31, 2001. These swaps will expire in 2002 and 2003. As ofDecember 31, 2001, AOCI included a pretax loss of $2 mil-lion related to the fair value of these interest rate swaps.

Fair Value Hedges The Company also enters into intere s trate swaps to conve rt fixed-rate debt to floating-rate debt.These swaps are accounted for as fair value hedges underS FAS No. 133. These fair value hedges qualify for the shortcut method of recognition and, there f o re, no portion of theswaps is treated as ineffective. As of December 31, 2001,BNSF had entered into five separate swaps on a notionalamount of $500 million in which it pays an average float-ing rate, which fluctuates quart e r l y, based on LIBOR. T h eaverage floating rate to be paid by BNSF as of December 31,2001, was 4.16 percent and the average fixed rate BNSF is to re c e i ve is 7.13 percent. These swaps expire in 2004,2005 and 2007. As of December 31, 2001, BNSF re c o rd e dan asset of $2 million in Other Cu r rent Assets for the fairvalue of these swaps.

B N S F ’s measurement of the fair value of interest rate swaps isbased on estimates of the mid-market values for the trans-actions provided by the counterparties to these agreements.

L a b o rAp p roximately 88 percent of BNSF Railway’s employees areu n i o n - re p resented. BNSF Railway’s union employees workunder collective bargaining agreements with 13 different labororganizations. The negotiating process for new, major collec-t i ve bargaining agreements covering all of BNSF Railway’sunion employees has been underway since the bargaininground was initiated November 1, 1999. Wages, health andwe l f a re benefits, work rules, and other issues have traditionallybeen addressed through industry-wide negotiations. T h e s enegotiations have generally taken place over a number ofmonths and have previously not resulted in any extended workstoppages. The existing agreements have remained in effectand will continue to remain in effect until new agreements a re reached or the Railway Labor Ac t’s pro c e d u res (whichinclude mediation, cooling-off periods, and the possibility ofPresidential intervention) are exhausted. The current agre e-ments provide for periodic wage increases until new agre e-ments are reached. The National Carriers’ Confere n c eCommittee (NCCC), BNSF’s multi-employer collective bar-gaining re p re s e n t a t i ve, reached a final agreement with theBrotherhood of Maintenance of Way Em p l oyes (BMWE)resolving wage, work rule and benefit issues through 2004which was implemented in July 2001. BMWE re p re s e n t sB N S F ’s track, bridge and building maintenance employe e s ,about one-fourth of BNSF’s unionized work f o rce. In Ju n e2001, the NCCC reached a tentative agreement with theInternational Brotherhood of Electrical Wo rkers (IBEW) ,which re p resents approximately five percent of BNSF’s union-i zed work f o rce, addressing wage and work rule issues through 2004, but leaving health and we l f a re benefit issues for settle-ment in separate talks with other railroad unions. IBEWmembers failed to ratify the tentative agreement. No new talks with IBEW are scheduled. During the third quarter of2000, the NCCC reached a tentative agreement with theUnited Tr a n s p o rtation Union (UTU) covering wage andw o rk rule issues through the year 2004 for conductors,brakemen, yardmen, yardmasters and firemen, approx i m a t e l yo n e - t h i rd of BNSF’s unionized work f o rce. This agreement is also subject to ratification by the UTU’s membership. Asin the tentative IBEW agreement, health and we l f a re benefit

2 1

issues we re not re s o l ved with UTU and remain the subjectof continuing negotiations.

R a i l road industry personnel are cove red by the Railro a dRe t i rement System instead of Social Se c u r i t y. BNSF Railway’scontributions under the Railroad Re t i rement System havebeen approximately triple those in industries cove red bySocial Se c u r i t y. The Railroad Re t i rement System, funded primarily by payroll taxes on cove red employers and employ-ees, includes a benefit roughly equivalent to Social Se c u r i t y(Tier I), an additional benefit similar to that allowed in some private defined-benefit plans (Tier II), and other bene-fits. In vestment of Tier II Railroad Re t i rement assets has until recently been limited to special interest-bearing U. S.Tre a s u ry securities. The Railroad Re t i rement and Su rv i vo r s’Im p rovement Act of 2001 (Act) creates a new Na t i o n a lR a i l road Re t i rement In vestment Trust to hold Tier IIR a i l road Re t i rement assets and empowers the trustees toi n vest these assets in the same types of investments ava i l a b l eto private sector re t i rement plans. In addition to liberalizingc e rtain re t i rement benefit re q u i rements for rail employees, the Act reduces Tier II Railroad Re t i rement tax rates on raile m p l oyers beginning in 2002 and eliminates a supplementalannuity tax. The Company expects to re a l i ze savings ofa p p roximately $20 million in 2002 and $50 million in 2003.Fu t u re adjustments in the Tier II Railroad Re t i rement taxrates assessed on both rail employers and rail employees willdepend on Railroad Re t i rement fund levels and annual sav-ings could be as much as $80 million by 2005.

I n f l a t i o nDue 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 we re depreciated at curre n tprice levels would result in substantially greater expensethan historically re p o rted amounts.

Accounting Pro n o u n c e m e n t sThe Financial Accounting Standards Board (FASB) issuedS FAS No. 141, Business Combinations, which was effective forall business combinations initiated after June 30, 2001, andS FAS No. 142, Goodwill and Other Intangible Assets, whichwas effective for fiscal years beginning after December 15,2001. SFAS No. 141 eliminates the pooling method ofaccounting for a business combination and re q u i res that allcombinations be accounted for using the purchase method.SFAS No. 142 addresses accounting for identifiable intangi-ble assets, eliminates the amortization of goodwill, andp rovides specific steps for testing the impairment of good-will. The Company’s historical consolidated financial state-ments will be unaffected by these n ew standard s .

The FASB also issued SFAS No. 143, Accounting for As s e tRe t i rement Ob l i g a t i o n s, and SFAS No. 144, Accounting for

the Im p a i rment or Disposal of Long-Li ved As s e t s. SFAS No.143, which is effective for fiscal years beginning after June 15,2002, addresses financial accounting and re p o rting for obliga-tions associated with the re t i rement of tangible long-live dassets and the associated asset re t i rement costs. The Companyhas not yet completed its analysis of SFAS No. 143; although,it does not currently expect implementation to have a signifi-cant effect on its results of operations or financial condition.

S FAS No. 144 addresses financial accounting and re p o rt-ing for the impairment of long-lived assets, exc l u d i n ggoodwill and intangible assets, to be held and used or dis-posed of. The adoption of SFAS No. 144 during the fourt hquarter of 2001 did not have an impact on the consolidatedfinancial statements.

F o rw a rd-Looking Inform a t i o nTo the extent that statements made by the Company relateto the Company’s future economic performance or businessoutlook, predictions or expectations of financial or opera-tional results, or refer to matters which are not historicalfacts, such statements are forward-looking statements withinthe meaning of the federal securities laws. Forward-lookingstatements involve a number of risks and uncertainties andactual results may differ materially. Factors that could causeactual results to differ materially include, but are not limitedto, economic and industry conditions: material adve r s echanges in economic or industry conditions, both within the United States and globally, customer demand, effects of adverse economic conditions affecting shippers, adverseeconomic conditions in the industries and geographic areasthat produce and consume freight, competition and consoli-dation within the transportation industry, the extent towhich the Company is successful in gaining new long-termrelationships or retaining existing ones, changes in fuelprices, and changes in labor costs and labor difficultiesincluding stoppages; legal and regulatory factors: develop-ments and changes in laws and regulations and the ultimateoutcome of shipper claims, environmental investigations orproceedings and other types of claims and litigation; andoperating factors: technical difficulties, changes in operatingconditions and costs, competition and commodity concen-trations, the Company’s ability to achieve its operational andfinancial initiatives and to contain costs, as well as naturalevents such as severe weather, floods, earthquakes and otherdisruptions involving the Company’s infrastructure, operat-ing systems, and equipment.

The Company cautions against placing undue reliance on forw a rd-looking statements, which reflect its curre n tbeliefs and are based on information currently available to it on the date a forw a rd-looking statement is made. T h eCompany undertakes no obligation to revise forw a rd - l o o k i n gstatements to reflect future events, changes in circumstancesor changes in beliefs.

2 2

R e p o rt Of Management

To The Shareholders Of Burlington Nort h e rn Santa Fe CorporationThe accompanying consolidated financial statements ofBurlington No rthern Santa Fe Corporation and subsidiarycompanies we re pre p a red by management, who are re s p o n-sible for their integrity and objectivity. They we re pre p a re din accordance with generally accepted accounting principlesand properly include amounts that are based on manage-m e n t’s best judgments and estimates. Other financial infor-mation included in this annual re p o rt is consistent withthat in the consolidated financial statements.

The Company maintains a system of internal accountingc o n t rols to provide reasonable assurance that assets are s a f e g u a rded and that the books and re c o rds reflect thea u t h o r i zed transactions of the Company. Limitations existin any system of internal accounting controls based uponthe recognition that the cost of the system should note xceed the benefits derived. The Company believes its system of internal accounting controls, augmented by itsinternal auditing function, appropriately balances thecost/benefit re l a t i o n s h i p.

Independent accountants provide an objective assessmentof the degree to which management meets its re s p o n s i b i l i t yfor fairness of financial re p o rting. They regularly eva l u a t ethe system of internal accounting controls and perf o r msuch tests and other pro c e d u res as they deem necessary toe x p ress an opinion on the fairness of the consolidatedfinancial statements.

The Board of Di rectors pursues its responsibility for the Company’s financial statements through its Au d i tCommittee which is composed solely of directors who arenot officers or employees of the Company. The Au d i tCommittee meets regularly with the independent account-ants, management and internal auditors. The independentaccountants and the Company’s internal auditors haved i rect access to the Audit Committee, with and without the presence of management re p re s e n t a t i ves, to discuss thescope and results of their work and their comments on theadequacy of internal accounting controls and the quality of financial re p o rt i n g .

Ma t t h ew K. Ro s ePresident and Chief Exe c u t i ve Of f i c e r

Thomas N. Hu n dExe c u t i ve Vice President and Chief Financial Of f i c e r

Dennis R. Jo h n s o nVice President and Contro l l e r

R e p o rt Of Independent Accountants

To The Shareholders And Board Of Directors OfBurlington Nort h e rn Santa Fe CorporationAnd SubsidiariesIn our opinion, the accompanying consolidated balancesheets and the related consolidated statements of income,of cash flows and of changes in stockholders’ equity presentf a i r l y, in all material respects, the financial position ofBurlington Northern Santa Fe Corporation and subsidiarycompanies at December 31, 2001 and 2000, and the resultsof their operations and their cash flows for each of the threeyears in the period ended December 31, 2001 in conformitywith accounting principles generally accepted in the UnitedStates of America. These financial statements are the respon-sibility of the Company’s management; our responsibility is to express an opinion on these financial statements basedon our audits. We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstate-ment. An audit includes examining, on a test basis, evidences u p p o rting the amounts and disclosures in the financialstatements, assessing the accounting principles used and sig-nificant estimates made by management, and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLPFort Worth, TexasFebruary 6, 2002

2 3

Consolidated Statements Of Income

Burlington No rthern Santa Fe Corporation and Subsidiaries

( Dollars in millions, except per share data)

Year Ended December 31, 2 0 0 1 2 0 0 0 1 9 9 9

Re ve n u e s $9 , 2 0 8 $9 , 2 0 7 $9 , 1 9 5

Operating expenses:

Compensation and benefits 2 , 8 5 0 2 , 7 2 9 2 , 7 7 2

Pu rchased serv i c e s 1 , 0 8 4 1 , 0 2 4 1 , 0 5 1

De p reciation and amort i z a t i o n 9 0 9 8 9 5 8 9 7

Equipment re n t s 7 4 0 7 4 2 7 5 2

Fuel 9 7 3 9 3 2 7 0 0

Materials and other 8 9 7 7 7 7 8 1 8

Total operating expenses 7 , 4 5 3 7 , 0 9 9 6 , 9 9 0

Operating income 1 , 7 5 5 2 , 1 0 8 2 , 2 0 5

In t e rest expense 4 6 3 4 5 3 3 8 7

Other (income) expense, net 1 1 0 7 0 ( 1 )

Income before income taxes and extraord i n a ry charge 1 , 1 8 2 1 , 5 8 5 1 , 8 1 9

Income tax expense 4 4 5 6 0 5 6 8 2

Income before extraord i n a ry charge 7 3 7 9 8 0 1 , 1 3 7

Ex t r a o rd i n a ry charge, net 6 – –

Net income $ 7 3 1 $ 9 8 0 $1 , 1 3 7

Earnings per share :

Basic earnings per share (before extraord i n a ry charge) $ 1 . 9 0 $ 2 . 3 8 $ 2 . 4 6

Basic earnings per share (after extraord i n a ry charge) $ 1 . 8 9 $ 2 . 3 8 $ 2 . 4 6

Diluted earnings per share (before extraord i n a ry charge) $ 1 . 8 9 $ 2 . 3 6 $ 2 . 4 4

Diluted earnings per share (after extraord i n a ry charge) $ 1 . 8 7 $ 2 . 3 6 $ 2 . 4 4

Average shares (in millions):

Ba s i c 3 8 7 . 3 4 1 2 . 1 4 6 3 . 2

Di l u t i ve effect of stock award s 3 . 4 3 . 1 3 . 6

Di l u t e d 3 9 0 . 7 4 1 5 . 2 4 6 6 . 8

See accompanying Notes to Consolidated Financial St a t e m e n t s .

2 4

Consolidated Balance Sheets

Burlington No rthern Santa Fe Corporation and Su b s i d i a r i e s

( Dollars in millions, shares in thousands )

December 31, 2 0 0 1 2 0 0 0

A s s e t s

Cu r rent assets:

Cash and cash equiva l e n t s $ 2 6 $ 11

Accounts re c e i vable, net 1 7 2 3 1 4

Materials and supplies 1 9 1 2 2 0

Cu r rent portion of deferred income taxe s 3 0 6 2 9 9

Other current assets 2 8 1 3 2

Total current assets 7 2 3 9 7 6

Pro p e rty and equipment, net 2 3 , 1 1 0 2 2 , 3 6 9

Other assets 8 8 8 1 , 0 3 0

Total assets $2 4 , 7 2 1 $2 4 , 3 7 5

Liabilities And Stockholders’ Equity

Cu r rent liabilities:

Accounts payable and other current liabilities $ 1 , 8 7 3 $ 1,954

Long-term debt due within one ye a r 2 8 8 2 3 2

Total current liabilities 2 , 1 6 1 2 , 1 8 6

Long-term debt and commercial paper 6 , 3 6 3 6 , 6 1 4

De f e r red income taxe s 6 , 7 3 1 6 , 4 2 2

Casualty and environmental liabilities 4 2 3 4 3 0

Em p l oyee merger and separation costs 2 1 6 2 6 2

Other liabilities 9 7 8 9 8 1

Total liabilities 1 6 , 8 7 2 1 6 , 8 9 5

Commitments and contingencies (see Notes 3, 9 and 11)

St o c k h o l d e r s’ equity:

Common stock, $0.01 par value 600,000 shares authorized;

492,818 shares and 486,637 shares issued, re s p e c t i ve l y 5 5

Additional paid-in-capital 5 , 5 8 4 5 , 4 2 8

Retained earnings 5 , 0 4 8 4 , 5 0 5

Tre a s u ry stock, at cost, 107,041 shares and 95,045 shares, re s p e c t i ve l y ( 2 , 7 4 5 ) ( 2 , 4 1 3 )

Unearned compensation ( 3 4 ) ( 3 5 )

Accumulated other compre h e n s i ve loss ( 9 ) ( 1 0 )

Total stockholders’ equity 7 , 8 4 9 7 , 4 8 0

Total liabilities and stockholders’ equity $2 4 , 7 2 1 $2 4 , 3 7 5

See accompanying Notes to Consolidated Financial St a t e m e n t s .

2 5

Consolidated Statements Of Cash Flows

Burlington No rthern Santa Fe Corporation and Su b s i d i a r i e s

( Dollars in millions)

Year Ended December 31, 2 0 0 1 2 0 0 0 1 9 9 9

Operating Activities

Net income $ 7 3 1 $ 9 8 0 $ 1 , 1 3 7

Adjustments to reconcile net income to net cash provided by operating activities:

De p reciation and amortization 9 0 9 8 9 5 8 9 7

De f e r red income taxe s 3 0 2 3 5 3 4 4 4

Ex t r a o rd i n a ry charge 9 – –

Em p l oyee merger and separation costs paid ( 5 5 ) ( 5 8 ) ( 9 3 )

Ot h e r, net 8 2 3 3 ( 1 1 2 )

Changes in current assets and liabilities:

Accounts re c e i vable, net 1 4 2 8 3 1 2 7

Materials and supplies 2 9 3 5 ( 1 1 )

Other current assets 1 0 3 ( 6 6 ) ( 3 2 )

Accounts payable and other current liabilities ( 5 5 ) 6 2 6 7

Net cash provided by operating activities 2 , 1 9 7 2 , 3 1 7 2 , 4 2 4

Investing Activities

Capital expenditure s ( 1 , 4 5 9 ) ( 1 , 3 9 9 ) ( 1 , 7 8 8 )

Ot h e r, net ( 1 0 5 ) ( 2 8 1 ) ( 1 5 2 )

Net cash used for investing activities ( 1 , 5 6 4 ) ( 1 , 6 8 0 ) ( 1 , 9 4 0 )

F i n a n c i n g A c t i v i t i e s

Net (decrease) increase in commercial paper and bank borrow i n g s ( 2 2 6 ) 1 6 9 ( 2 3 )

Proceeds from issuance of long-term debt 4 0 0 1 , 1 2 5 6 7 9

Payments on long-term debt ( 3 8 0 ) ( 2 6 0 ) ( 2 9 3 )

Dividends paid ( 1 9 0 ) ( 2 0 6 ) ( 2 2 4 )

Proceeds from stock options exe rc i s e d 1 1 3 1 3 1 2 1

Pu rchase of BNSF common stock ( 3 1 7 ) ( 1 , 4 9 6 ) ( 6 8 8 )

Ot h e r, net ( 1 8 ) 7 ( 5 9 )

Net cash used for financing activities ( 6 1 8 ) ( 6 4 8 ) ( 4 8 7 )

In c rease (decrease) in cash and cash equiva l e n t s 1 5 ( 1 1 ) ( 3 )

Cash and cash equiva l e n t s :

Beginning of ye a r 1 1 2 2 2 5

End of year $ 2 6 $ 11 $ 2 2

Supplemental Cash Flow Inform a t i o n

In t e rest paid, net of amounts capitalize d $ 4 9 4 $ 4 4 7 $ 3 8 5

Income taxes paid, net of re f u n d s $ 1 0 2 $ 3 0 4 $ 1 3 8

See accompanying Notes to Consolidated Financial St a t e m e n t s .

2 6

Consolidated Statements Of Changes In Stockholders’ EquityBurlington No rthern Santa Fe Corporation and Su b s i d i a r i e s( Sh a res in thousands, dollars in millions, except per share data)

C o m m o n Ac c u m u l a t e dStock and Other Com- To t a l

Common Tre a s u ry Pa i d - i n Re t a i n e d Tre a s u ry Un e a r n e d p re h e n s i ve St o c k h o l d e r s’Sh a re s Sh a re s C a p i t a l E a r n i n g s St o c k C o m p e n s a t i o n Income (Loss) Eq u i t y

Balance at December 31, 1998 4 7 7 , 4 3 6 ( 6 , 9 6 1 ) $ 5 , 2 1 8 $ 2 , 8 1 1 $ ( 2 0 6 ) $( 3 1 ) $ ( 8 ) $ 7 , 7 8 4

C o m p re h e n s i ve income:Net income – 1 , 1 3 7 – – – 1 , 1 3 7Minimum pension liability adjustment,

net of tax expense of $0.5 – – – – 1 1Total compre h e n s i ve income – 1 , 1 3 7 – – 1 1 , 1 3 8

Common stock dividends, $0.48 per share – – – ( 2 2 2 ) – – – ( 2 2 2 )Adjustments associated with unearned

compensation, restricted stock 8 1 1 ( 3 3 2 ) 1 4 – – 2 – 1 6Exe rcise of stock options and

related tax benefit of $28 6 , 3 2 5 ( 6 0 0 ) 1 6 3 – ( 1 9 ) – – 1 4 4Pu rchase of BNSF common stock – ( 2 2 , 1 2 0 ) – – ( 6 8 8 ) – – ( 6 8 8 )Balance at December 31, 1999 4 8 4 , 5 7 2 ( 3 0 , 0 1 3 ) 5 , 3 9 5 3 , 7 2 6 ( 9 1 3 ) ( 2 9 ) ( 7 ) 8 , 1 7 2

C o m p re h e n s i ve income:Net income – 9 8 0 – – – 9 8 0Minimum pension liability adjustment,

net of tax benefit of $1.5 – – – – ( 3 ) ( 3 )Total compre h e n s i ve income – 9 8 0 – – ( 3 ) 9 7 7

Common stock dividends, $0.48 per share – – – ( 1 9 7 ) – – – ( 1 9 7 )Adjustments associated with unearned

compensation, restricted stock 8 0 8 ( 2 9 7 ) 1 4 – – ( 6 ) – 8Exe rcise of stock options and

related tax benefit of $8.6 1 , 2 5 7 ( 1 5 4 ) 2 4 – ( 4 ) – – 2 0Sh a res issued from tre a s u ry – 2 – – – – – –Sh a reholder rights re d e m p t i o n – – – ( 4 ) – – – ( 4 )Pu rchase of BNSF common stock – ( 6 4 , 5 8 3 ) – – ( 1 , 4 9 6 ) – – ( 1 , 4 9 6 )Balance at December 31, 2000 4 8 6 , 6 3 7 ( 9 5 , 0 4 5 ) 5 , 4 3 3 4 , 5 0 5 ( 2 , 4 1 3 ) ( 3 5 ) ( 1 0 ) 7 , 4 8 0

C o m p re h e n s i ve income:Net income – 731 – – – 731Cu m u l a t i ve effect of adoption of

S FAS No. 133, net of tax expense of $36 – – – – 58 58Gain on deriva t i ve instruments, included

in net income, net of tax expense of $18 – – – – (30) (30)Change in fair value of deriva t i ve

i n s t ruments, net of tax benefit of $18 – – – – (29) (29)Minimum pension liability adjustment,

net of tax expense of $1.3 – – – – 2 2Total compre h e n s i ve income – 731 – – 1 732

Common stock dividends, $0.48 per share – – – (188) – – – (188)Adjustments associated with unearned

compensation, restricted stock 899 (86) 15 – – 1 – 16Exe rcise of stock options and

related tax benefit of $17 5,282 (478) 141 – (15) – – 126Pu rchase of BNSF common stock – (11,432) – – (317) – – (317)Balance at December 31, 2001 492,818 ( 1 0 7 , 0 4 1 ) $5,589 $5,048 $(2,745) $(34) $ (9) $ 7 , 8 4 9

See accompanying Notes to Consolidated Financial St a t e m e n t s .

2 7

Notes To Consolidated Financial Statements Burlington Nort h e rn Santa Fe Corporation And Subsidiaries

1. The CompanyBurlington Northern Santa Fe Corporation, including itsm a j o r i t y - owned subsidiaries (collective l y, BNSF or Company),is engaged primarily in railroad transportation through itsprincipal subsidiary, The Burlington Northern and Santa FeRailway Company (BNSF Railway), which operates one of thelargest railroad networks in No rth America with approx i m a t e l y33,000 route miles covering 28 states and two Canadianp rovinces. T h rough one operating transportation serv i c e ssegment, BNSF Railway transports a wide range of productsand commodities including the transportation of Consumerand Industrial Products, Coal, and Agricultural Pro d u c t s ,d e r i ved from manufacturing, agricultural and natural re s o u rc eindustries, which constituted 37 percent, 23 percent, 23 per-cent and 17 percent, respectively, of total revenues for theyear ended December 31, 2001.

2. Accounting PoliciesPrinciples Of ConsolidationThe consolidated financial statements include the accountsof BNSF, including its principal subsidiary BNSF Railway,all of which are separate legal entities. All significant inter-company accounts and transactions have been eliminated.

Use Of EstimatesThe preparation of financial statements in accordance withgenerally accepted accounting principles (GAAP) re q u i re smanagement to make estimates and assumptions that affectthe re p o rted amounts of assets and liabilities and disclosureof contingent assets and liabilities at the date of the finan-cial statements and the re p o rted amounts of re venues andexpenses during the periods presented. Actual results coulddiffer from those estimates.

Revenue RecognitionTransportation revenues are recognized based upon the pro-portion of service provided as of the balance sheet date. Rev-enues from ancillary services are recognized when performed.

Cash And Cash EquivalentsAll short-term investments with original maturities of lessthan 90 days are considered cash equivalents. Cash equiva-lents are stated at cost, which approximates market va l u ebecause of the short maturity of these instru m e n t s .

Materials And SuppliesMaterials and supplies, which consist mainly of rail, tiesand other items for construction and maintenance of pro p-e rty and equipment, as well as diesel fuel, are valued at thel ower of average cost or mark e t .

P ro p e rty And Equipment, NetPro p e rty and equipment are depreciated and amort i zed ona straight-line basis over their estimated useful lives. Up o nnormal sale or retirement of depreciable railroad property,cost less net salvage value is charged to accumulated depreci-ation and no gain or loss is recognized. Significant premature

retirements and the disposal of land and non-rail propertyare recorded as gains or losses at the time of their occurrence.

The Company self-constructs portions of its track stru c t u reand rebuilds certain classes of rolling stock. In addition tod i rect labor and material, certain indirect costs are capital-i zed. Ex p e n d i t u res which significantly increase asset va l u e sor extend useful lives are capitalized. Repair and mainte-nance expenditures are charged to operating expense whenthe work is performed. Pro p e rty and equipment are statedat cost.

The Company incurs certain direct labor, contract serv i c eand other costs associated with the development andinstallation of internal-use computer software. Costs forn ewly developed software or significant enhancements to existing software are typically capitalized. Re s e a rc h ,p re l i m i n a ry project, operations, maintenance and train-ing costs are charged to operating expense when the w o rk is perf o r m e d.

L o n g - l i ved assets are re v i ewed for impairment when eve n t sor changes in circumstances indicate that the carry i n gamount of an asset may not be re c overable. If impairmentindicators are present and the estimated future undis-counted cash flows are less than the carrying value of thel o n g - l i ved assets, the carrying value is reduced to the esti-mated fair value as measured by the discounted cash flows.

Personal Injury ClaimsPersonal injury liabilities are estimated on an actuarialbasis. In c u r red but not re p o rted liabilities are included inthe estimates based on historical experience. Estimates forthese liabilities are not discounted.

Stock OptionsThe Company applies Accounting Principles Board (APB)Opinion 25 and related interpretations in accounting for itsstock option plans. Ac c o rd i n g l y, no compensation expenseis re c o g n i zed for its fixed stock option plans as the exe rc i s eprice equals the stock price on the date of grant.

R e c l a s s i f i c a t i o n sCertain comparative prior year amounts in the consolidatedfinancial statements and accompanying notes have beenreclassified to conform to the current year pre s e n t a t i o n .These reclassifications had no effect on previously reportedoperating income and net income.

3. Hedging ActivitiesOn January 1, 2001, BNSF adopted Statement of FinancialAccounting St a n d a rds (SFAS) No. 133, Accounting forDe r i va t i ve In s t ruments and Hedging Ac t i v i t i e s , and re c o rd e da cumulative transition benefit of $58 million, net of tax,to Accumulated Other Compre h e n s i ve Income (AO C I ) .The standard re q u i res that all deriva t i ves be re c o rded onthe balance sheet at fair value and establishes criteria fordocumentation and measurement of hedging activities.

The Company currently uses deriva t i ves to hedge againsti n c reases in diesel fuel prices and interest rates as well as

2 8

to conve rt a portion of its fixed-rate long-term debt tofloating-rate debt. The Company formally documents therelationship between the hedging instrument and thehedged item, as well as the risk management objective andstrategy for the use of the hedging instrument. This docu-mentation includes linking the deriva t i ves that are desig-nated as fair value or cash flow hedges to specific assets orliabilities on the balance sheet, commitments or fore c a s t e dtransactions. The Company assesses at the time a deriva t i vecontract is entered into, and at least quart e r l y, whether thed e r i va t i ve item is effective in offsetting the changes in fairvalue or cash flows. Any change in fair value resulting fro mi n e f f e c t i veness, as defined by SFAS No. 133, is re c o g n i ze din current period earnings. For deriva t i ve instruments thata re designated and qualify as cash flow hedges, the effectivep o rtion of the gain or loss on the deriva t i ve instrument isre c o rded in AOCI as a separate component of stockholders’equity and reclassified into earnings in the period duringwhich the hedge transaction affects earnings.

BNSF monitors its hedging positions and credit ratings 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 .

Fu e lFuel costs represented 13 percent of total operating expensesduring 2001 and 2000. Due to the significance of dieselfuel expenses to the operations of BNSF and the historicalvolatility of fuel prices, the Company maintains a pro g r a mto hedge against fluctuations in the price of its diesel fuelp u rchases. The intent of the program is to protect theC o m p a n y’s operating margins and overall pro f i t a b i l i t yf rom adverse fuel price changes by entering into fuel-hedgei n s t ruments based on management’s evaluation of curre n tand expected diesel fuel price trends. Howe ve r, to theextent the Company hedges portions of its fuel purchases, it may not re a l i ze the impact of decreases in fuel prices.C o n ve r s e l y, to the extent the Company does not hedgep o rtions of its fuel purchases, it may be adversely affectedby increases in fuel prices. Based on annualized fuel con-sumption during 2001 and excluding the impact of thehedging program, each one-cent increase in the price offuel would result in approximately $12 million of additionalfuel expense on an annual basis.

The fuel-hedging program includes the use of deriva t i ves thata re accounted for as cash flow hedges. As of December 31,2001, BNSF had entered into fuel swap agreements utilizingGulf Coast #2 heating oil to hedge the equivalent of approx i-mately 296 million gallons of diesel fuel at an average price of approximately 57 cents per gallon. Ad d i t i o n a l l y, as ofDecember 31, 2001, BNSF had entered into costless collara g reements effective through 2002 for the equivalent of a p p roximately 50 million gallons of diesel fuel at an ave r a g ecall price of approximately 65 cents per gallon and an ave r a g eput price of approximately 57 cents per gallon. The aboveprices do not include taxes, transportation costs, certain o t h e rfuel handling costs, and any differences which may occur f ro mtime to time between the prices of commodities hedged andthe purchase price of BNSF’s diesel fuel. At December 31 ,2001, BNSF’s fuel-hedging program cove red an average of 31

p e rcent of estimated fuel purchases for 2002. Hedge positionsa re closely monitored to ensure that they will not exceed actualfuel re q u i rements in any period.

As a result of adopting SFAS No. 133, the Company re c o rd e da cumulative transition benefit of $56 million, net of tax, toAOCI related to deferred gains on transactions as of Ja n u a ry 1,2001. Subsequent changes in fair value for the effective port i o nof deriva t i ves qualifying as hedges are re c o g n i zed in Ot h e rC o m p re h e n s i ve Income (OCI) until the purchase of the re l a t e dhedged item is re c o g n i zed in earnings, at which time changes infair value previously re c o rded in OCI are reclassified to earningsand re c o g n i zed in fuel expense. During 2001, the Companyre c o g n i zed a loss of approximately $100 thousand re l a t e dto the ineffective portion of deriva t i ves in fuel expense. AtDecember 31, 2001, AOCI includes a pretax loss of $4 million,all of which relates to derivative transactions that will expiret h roughout 2002. Settled fuel-hedging contracts are a $3 mil-lion payable and a $50 million re c e i vable at December 31, 2001and 2000, respectively, and are recorded in working capital.

BNSF measures the fair value of fuel swaps from daily for-w a rd price data provided by various external counterpart i e s .To value a fuel swap, the Company uses a thre e - m o n t ha verage of forw a rd Gulf Coast #2 heating oil prices for theperiod hedged. The fair value of fuel costless collars is cal-culated and provided by the corresponding counterpart y.

In t e rest Ra t eFrom time to time, the Company enters into various inter-est rate hedging transactions for the purpose of managinge x p o s u re to fluctuations in interest rates and establishingrates in anticipation of future debt issuances as well as toconvert a portion of its fixed-rate long-term debt to floating-rate debt. The Company uses interest rate swaps as part ofits interest rate risk management strategy.

The cumulative transition benefit of adopting SFAS No. 133as of Ja n u a ry 1, 2001, included $2 million, net of tax, re l a t e dto deferred gains on closed-out deriva t i ves which we re used tolock the tre a s u ry rate on anticipated borrowings. The deferre dgains for cash flow hedges in AOCI are being amort i zed toi n t e rest expense over the amount remaining in AO C I.

As discussed in Note 9, at the time of issuing the $300million of 7.88 percent notes and the $200 million of 8.13p e rcent debentures in April 2000, the Company closed outtwo tre a s u ry lock transactions, each in an amount of $100million, at gains of approximately $9 million and $13 mil-lion, re s p e c t i ve l y. These gains have been deferred and arebeing amort i zed to interest expense over the lives of thenotes and the debentures, re s p e c t i ve l y.

Also discussed in Note 9, at the time of issuing the $275million of 7.95 percent debentures in August 2000 and the $300 million of 7.13 percent notes in December 2000,the Company closed out two tre a s u ry lock transactions,each in an amount of $100 million, at gains of $8 millionand $5 million, re s p e c t i ve l y. These gains have been deferre dand are being amort i zed to interest expense over the live sof the debentures and notes, re s p e c t i ve l y.

2 9

Cash Fl ow Hedges The Company uses interest rate swaps tofix the LIBOR component of commercial paper. These swapsare accounted for as cash flow hedges under SFAS No. 133and qualify for the short cut method of recognition. As ofDecember 31, 2001, BNSF had entered into five separatei n t e rest rate swaps to fix the LIBOR component of $200 mil-lion of commercial paper at an average rate of 3.86 percent.The average floating rate BNSF re c e i ved on the swaps, whichfluctuates monthly, was 1.95 percent as of December 31,2001. These swaps will expire in 2002 and 2003. As ofDecember 31, 2001, AOCI included a pretax loss of $2 mil-lion related to the fair value of these interest rate swaps.

Fair Value Hedges The Company also enters into intere s trate swaps to conve rt fixed-rate debt to floating-rate debt.These swaps are accounted for as fair value hedges underS FAS No. 133. These fair value hedges qualify for the shortcut method of recognition and, there f o re, no portion of theswaps is treated as ineffective. As of December 31, 2001,BNSF had entered into five separate swaps on a notionalamount of $500 million in which it pays an average float-ing rate, which fluctuates quart e r l y, based on LIBOR. T h eaverage floating rate to be paid by BNSF as of December 31,2001, was 4.16 percent and the average fixed rate BNSF is to re c e i ve is 7.13 percent. These swaps expire in 2004,2005 and 2007. As of December 31, 2001, BNSF re c o rd e dan asset of $2 million in Other Cu r rent Assets for the fairvalue of these swaps.

BNSF’s measurement of the fair value of interest rate swaps is based on estimates of the mid-market values for the trans-actions provided by the counterparties to these agreements.

4. Other (Income) Expense, NetOther (income) expense, net includes the following (in millions):

Year Ended December 31, 2001 2000 1999

Gain on property dispositions $ (20) $(29) $(26)Write-down of non-rail investments 75 – –Accounts receivable sale fees 30 40 33Merger costs – 20 –Deferred gain on prior period line sale – – (50)Miscellaneous, net 25 39 42

Total $110 $ 70 $ (1)

Losses re c o g n i zed in 2001 related to non-rail inve s t m e n t sconsisted primarily of Fre i g h t Wise, Inc., an Internet trans-p o rtation exchange; Pathnet Telecommunications, Inc., atelecommunications ve n t u re; a decline in the cash surre n d e rvalue of company owned life insurance policies; and a port-folio of other non-core real-estate inve s t m e n t s .

In 1999, BNSF and Canadian National Railway Company(CN) entered into an agreement to combine the two compa-nies. In 2000, BNSF and CN announced their mutual termi-nation of the combination agreement with neither part ypaying any break-up fees. Due to the termination, theCompany re c o rded $20 million pretax in costs related to thecombination. These costs would have been included as part ofthe purchase price had the combination been consummated.

BNSF re c o g n i zed a $50 million deferred gain in 1999 inconnection with the sale of rail lines in southern Californiain 1992 and 1993 that was partially offset by $13 millionof costs related to those sales.

5. Income Ta x e sIncome tax expense was as follows (in millions):

Year Ended December 31, 2001 2000 1999

Current:Federal $130 $225 $213State 11 27 25

Total current 141 252 238Deferred:

Federal 260 303 376State 44 50 68

Total deferred 304 353 444Total $445 $605 $682

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

Year Ended December 31, 2001 2000 1999

Federal statutory income tax rate 3 5 . 0 % 3 5 . 0 % 3 5 . 0 %State income taxes, net of federal tax benefit 3.0 3.2 3.3Other, net (0.3) – (0.8)

Effective tax rate 3 7 . 7 % 3 8 . 2 % 3 7 . 5 %

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

December 31, 2001 2000

Deferred tax liabilities:Depreciation and amortization $(6,671) $(6,382)Other (458) (477)

Total deferred tax liabilities (7,129) (6,859)Deferred tax assets:

Casualty and environmental 274 273Employee merger and separation costs 105 119Post-retirement benefits 99 95Other 226 249

Total deferred tax assets 704 736Net deferred tax liability $(6,425) $(6,123)

Noncurrent deferred income tax liability $(6,731) $(6,422)Current deferred income tax asset 306 299

Net deferred tax liability $(6,425) $(6,123)

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 andthe merger date in September 1995, re s p e c t i ve l y. All ye a r sprior to 1992 for BNI and 1993 for SFP are closed. Issues relating to the years 1992 through 1994 for BNI and foryears 1993 through the merger date September 1995 for SFPare being contested through various stages of administrativeappeal. BNSF is currently under Internal Re venue Se rv i c eexamination for years 1995 through 1999. In addition,BNSF and its subsidiaries have various state income taxreturns in the process of examination, administrative appealor litigation. Management believes that adequate provision

3 0

has been made for any adjustment that might be assessed foropen years through 2001.

6. Accounts Receivable, NetBNSF maintains an allowance for uncollectible accounts re c e i v-able. At December 31, 2001 and 2000, $65 million and $49million, re s p e c t i ve l y, of such allowances had been re c o rd e d .

BNSF Railway, through a special purpose subsidiary, sellsvariable rate certificates that mature in 2002 under itsaccounts re c e i vable sales program (A/R sales pro g r a m ) .The certificates evidence undivided interests in an accountsre c e i vable master trust. The master tru s t’s assets include an ow n e r s h i p i n t e rest in a re volving portfolio of BNSFR a i l w a y’s accounts re c e i vable that are used to support thec e rtificates. In 2001, BNSF Railway increased capacity tosell variable rate certificates under the A/R sales program by $100 million to $700 million.

C e rtificates outstanding under the A/R sales program we re$625 million and $600 million at December 31, 2001 and2000, re s p e c t i ve l y, which provided $25 million of cash for2001. These certificates we re supported by $844 million of re c e i vables at December 31, 2001, and $882 million ofre c e i vables at December 31, 2000. When BNSF sells thesere c e i vables to the master trust, it retains an undivided intere s tin the re c e i vables sold. Due to a re l a t i vely short collectionc ycle, the fair value of this undivided interest is calculated asthe gross amount of re c e i vables less an allowance for uncol-lectible accounts. At December 31, 2001 and 2000, BNSF’sretained interest in these re c e i vables totaled $219 million and$282 million, re s p e c t i ve l y, less the normal allowances foruncollectible accounts. The retained interest in 2001 and2000 reflects the total re c e i vables sold less $625 million and$600 million, re s p e c t i ve l y, of re c e i vables dere c o g n i zed in con-nection with the sale of the certificates. The investors in themaster trust have no recourse to BNSF Railway’s other assets.

BNSF Railway has retained the collection responsibility with respect to the accounts receivable. The costs of the sales of receivables to the master trust vary monthly relativeto certain interest rates. These costs are included in Other(Income) Expense, Net. The costs of these sales in 2001 and2000 were $30 million and $40 million, respectively. Thesecosts we re based on weighted average interest rates of 4.8p e rcent in 2001 and 6.7 percent in 2000. Proceeds from collections reinvested in the A/R sales program were approxi-mately $10 billion in both 2001 and 2000.

B N S F ’s A/R sales program includes a provision that allows the institutions participating in this program, at their option,to cancel the program if BNSF Railway’s senior unsecuredcredit rating falls below investment grade. Upon cancellation, BNSF would not be able to sell additional re c e i vables underthis program. If such event we re to occur, BNSF would havesufficient liquidity remaining under its re volving credit agre e-ments to fund the full amount of securities outstanding underthe A/R sales program at December 31, 2001. The Companyis not aware of any pending significant adverse changes toc redit ratings that would cause BNSF Railway to fall belowi n vestment grade.

7. Pro p e rty And Equipment, NetProperty and equipment, net (in millions), and the weighteda verage annual depreciation rate (%) we re as follow s :

2001 Depreciation

December 31, 2001 2000 Rate

Land $ 1,430 $ 1,420 – %Track structure 12,455 11,900 3.9Other roadway 9,426 9,137 2.5Locomotives 2,759 2,799 5.7Freight cars and

other equipment 1,719 1,821 5.0Computer hardware

and software 266 362 16.2Total cost 28,055 27,439

Less accumulated depre- ciation and amortization (4,945) (5,070)Property and

equipment, net $23,110 $ 22,369

The consolidated balance sheets at December 31, 2001 and2000, included $1,202 million and $1,195 million, re s p e c-t i ve l y, for pro p e rty and equipment under capital leases, primarily for locomotives.

8. Accounts Payable And Other C u rrent LiabilitiesAccounts payable and other current liabilities consisted ofthe following (in millions):

December 31, 2001 2000

Compensation and benefits payable $ 354 $ 352Casualty and environmental liabilities 237 229Tax liabilities 180 143Rents and leases 166 142Accounts payable 160 212Contract allowances 127 109Accrued interest 118 114Employee merger and separation costs 58 49Other 473 604

Total $1,873 $1,954

9. DebtDebt outstanding was as follows (in millions):

December 31, 2001 2 0 0 0Notes and debentures, weighted average

rate of 6.8 percent, due 2002 to 2097 $4,500 $ 4,294Equipment obligations, weighted average

rate of 7.3 percent, due 2002 to 2016 677 742Capitalized lease obligations, weighted

a verage rate of 6.6 percent, due 2002 to 2016 672 736Mortgage bonds, weighted average rate

of 7.9 percent, due 2002 to 2047 425 467Commercial paper, 2.1 percent, variable 416 567Bank borrowings – 74Un a m o rt i zed discount and other, net (39) ( 3 4 )

Total 6,651 6,846Less current portion of long-term debt (288) ( 2 3 2 )

Long-term debt $6,363 $ 6,614

3 1

C e rtain BNSF Railway pro p e rties and other assets are subject to liens securing $425 million of mortgage debt.C e rtain locomotives and rolling stock of BNSF Railway a re subject to equipment obligations and capital leases.

A g g regate long-term debt scheduled maturities for 2002t h rough 2006 are $288 million, $144 million, $252 mil-lion, $860 million (including commercial paper of $416million) and $430 million, re s p e c t i ve l y. Maturities in 2003 exclude $175 million of 6.53 percent notes due2037, which may be redeemed in 2003 at the option ofthe holder. T h e re we re no bank borrowings outstanding at December 31, 2001. BNSF had bank borrowings out-standing at December 31, 2000, with maturity values of$75 million and interest rates similar to commercial paperwhich, upon maturity, was replaced with commercial paperor other bank borrowings.

The carrying amounts of BNSF’s long-term debt and c o m m e rcial paper at December 31, 2001 and 2000, we re$6,651 million and $6,846 million, re s p e c t i ve l y, while theestimated fair values at December 31, 2001 and 2000, were$6,871 million and $6,804 million, re s p e c t i ve l y. The fairvalue of BNSF’s long-term debt is primarily based onquoted market prices for the same or similar issues or onthe current rates that would be offered to BNSF for debt of the same remaining maturities. The carrying amount ofc o m m e rcial paper and bank debt approximates fair va l u ebecause of the short maturity of these instru m e n t s .

Notes And Debenture sIn Ma rch 2001, $100 million of 33-year re m a rk e t a b l ebonds issued in 1998 we re called by the holder of the calloption. BNSF subsequently purchased the option from the holder and re t i red the bonds, and incurred an extraor-d i n a ry loss of $6 million, net of tax, due to early re t i re-ment. Additionally in Ma rch 2001, BNSF issued a $12million, 5.96 percent note due April 2004.

In May 2001, the Company increased the amount of debtsecurities under its shelf registration, enabling it to issuedebt securities in one or more series at an aggregate offeringprice not to exceed $1 billion, and issued $400 million of6.75 percent notes due July 15, 2011. The net proceeds of the debt issuance we re used for general corporate pur-poses including the repayment of outstanding commerc i a lp a p e r. Subsequent to this debt issuance, the Company had$600 million of capacity under the May 2001 shelf re g i s-tration statement.

In December 2001, BNSF entered into five separate inter-est rate swaps to conve rt $500 million of fixed-rate debt to floating-rate debt. The average floating rate to be paidby BNSF as of December 31, 2001, on the five swaps was4.16 percent, and the average fixed rate BNSF is to re c e i veis 7.13 percent. The floating rate fluctuates quarterly. Theseswaps expire in 2004, 2005 and 2007.

In Fe b ru a ry 2000, a put option on $100 million ofmedium-term notes paying a coupon of 6.10 percent was exe rcised by the holders and the Company repaid

the holders primarily with proceeds from the issuance ofc o m m e rcial paper.

In April 2000, BNSF issued $300 million of 7.88 perc e n tnotes due April 2007 and $200 million of 8.13 perc e n td e b e n t u res due April 2020. The net proceeds of the debtissuance we re used for general corporate purposes includingthe repayment of outstanding commercial paper whichi n c reased primarily as a result of higher share re p u rchases. Atthe time of issuing the $300 million of 7.88 percent notesand the $200 million of 8.13 percent debentures discusseda b ove, the Company closed out two tre a s u ry lock transac-tions, each in an amount of $100 million, at gains of approx i-mately $9 million and $13 million, re s p e c t i ve l y, which havebeen deferred and are being amort i zed to interest expenseover the lives of the notes and the debentures, re s p e c t i ve l y.

In August 2000, BNSF issued $275 million of 7.95 perc e n td e b e n t u res due August 2030. The net proceeds we re used forgeneral corporate purposes including the repayment of out-standing commercial paper, which increased primarily as aresult of higher share re p u rchases. At the time of issuing thesedebentures, the Company closed out a treasury lock transac-tion in the amount of $100 million at a gain of approx i m a t e l y$8 million which has been deferred and is being amort i zed to interest expense over the 30-year life of the debentures.

In December 2000, BNSF issued $300 million of 7.13 per-cent notes due December 2010. The net proceeds we re usedfor general corporate purposes including the repayment ofoutstanding commercial paper, which increased primarily as aresult of higher share re p u rchases. At the time of issuing thesenotes, the Company closed out a tre a s u ry lock transaction inthe amount of $100 million at a gain of approximately $5million which has been deferred and is being amort i zed t oi n t e rest expense over the 10-year life of the notes.

Equipment ObligationsIn April 2000, BNSF Railway issued $50 million of pri-vately placed debt collateralized by locomotives that we rea c q u i red in 1999. This debt carries an interest rate of 7.77p e rcent and has annual maturities through 2015.

C o m m e rcial Paper And Bank Borro w i n g sBNSF issues commercial paper from time to time which is supported by bank revolving credit agreements. AtDecember 31, 2001 and 2000, there were no bank borrow-ings against the revolving credit agreements. Outstandingcommercial paper balances are considered as reducing theamount of borrowings available under these agreements. Thebank revolving credit agreements allow borrowings of up to$1.75 billion. Borrowing rates are based upon: (i) LIBORplus a spread determined by BNSF’s senior unsecured debt ratings, (ii) money market rates offered at the option of thelenders, or (iii) an alternate base rate. The Company gener-ally classifies commercial paper as long-term to the extent ofits borrowing capacity under these facilities. The commit-ments of the lenders under the short-term agreement allowborrowings of up to $1.0 billion and are scheduled to expirein June 2002. The Company has the ability to have anyamounts then outstanding mature as late as June 2003. The

3 2

remaining $750 million of commitments of the lendersunder the long-term agreement are scheduled to expire inJune 2005. Annual facility fees for the short-term and long-term facilities are currently 0.1 percent and 0.125 percent,respectively, and are subject to change based upon changes in BNSF’s senior unsecured debt ratings.

In April 2001, BNSF entered into an interest rate swap tofix the LIBOR component of $100 million of commerc i a lpaper at 4.59 percent. The effective date of the swap isApril 19, 2001, and it will expire on April 19, 2002.

In September 2001, BNSF entered into three separatei n t e rest rate swaps of $25 million each to fix the LIBORcomponent of $75 million of commercial paper at an a verage rate of 3.26 percent. Each swap has a term of 18months with monthly resets of the floating interest rate.These swaps will expire in Ma rch 2003.

In October 2001, BNSF entered into an interest rate swapto fix the LIBOR component of $25 million of commerc i a lpaper at 2.77 percent. The effective date of this swap wasOctober 5, 2001, and it will expire on April 7, 2003.

The maturity value of commercial paper outstanding atDecember 31, 2001 and 2000, was $416 million and $573 million, re s p e c t i ve l y, leaving a total remaining capacitya vailable under the re volving credit agreements of $1,334 mil-lion and $1,177 million as of December 31, 2001 and 2000,re s p e c t i ve l y. BNSF must maintain compliance with cert a i nfinancial covenants under its re volving credit agreements. At December 31, 2001, the Company was in compliance.

O t h e rSanta Fe Pacific Pipelines, Inc., an indirect wholly-ow n e ds u b s i d i a ry of BNSF, in connection with its remaining 0.50p e rcent special limited partner interest in SFPP, L.P., iscontingently liable for $190 million of certain KinderMorgan Energy Pa rtners, L.P. debt.

BNSF and another major railroad jointly and severally guar-antee $75 million of debt of KCT Intermodal TransportationCorporation, the proceeds of which we re used to finance the construction of a double track grade separation bridgein Kansas City, Missouri, operated and used by Kansas CityTerminal Railway Company (KC T RC). BNSF has a 25p e rcent ownership in KC T RC and accounts for its intere s tusing the equity method of accounting.

During 2001, the Company entered into agreements to forma partnership (the Partnership) with subsidiaries of threechemical manufacturing companies that ship their productson the BNSF Railway. The purpose of this Partnership is to construct and operate a 13-mile railroad which will serviceseveral chemical and plastics manufacturing facilities in theHouston, Texas, area. BNSF owns a 48 percent limited part-nership interest and a one percent general partnership intere s tin the Pa rtnership and will act as the general partner and oper-ator of this facility. The Company has agreed to guaranteedebt incurred by the Pa rt n e r s h i p, which is expected to bea p p roximately $85 million in connection with the constru c t i o n

of this line, and will provide up to $15 million of interimfinancing during the construction period. As of December 31,2001, BNSF had no guarantees outstanding under this agre e-ment and had advanced approximately $6 million to thePa rtnership under the interim financing arrangement.

BNSF guarantees $14 million of other debt and leasesrelated to various facilities.

BNSF does not expect to perform under the above guaran-tees in the foreseeable future .

10. Employee Merger And Separation CostsEmployee merger and separation costs activity was as follows(in millions):

2001 2000 1999

Beginning balance at January 1, $310 $356 $474Accruals 30 22 29Payments (55) (58) (93)Other (11) (10) (54)

Ending balance at December 31, $274 $310 $356

Employee merger and separation liabilities of $274 millionand $310 million are included in the consolidated balancesheets at December 31, 2001 and 2000, respectively, and principally represent: (i) employee-related severance costs forthe consolidation of clerical functions, material handlers inmechanical shops and trainmen on re s e rve boards; (ii) deferre dbenefits payable upon separation or retirement to certainactive conductors, trainmen and locomotive engineers; and(iii) certain non-union employee severance costs. Employeemerger and separation expenses are recorded in Materials andOther in the consolidated income statements. At December 31,2001, $58 million of the remaining liabilities are included incurrent liabilities for anticipated costs to be paid in 2002.

During the fourth quarter of 2001, the Company recorded a $66 million charge including $61 million for work f o rc ereduction related costs. Of the $61 million, $30 millionwas re c o rded in Em p l oyee Merger and Separation C o s t sand $31 million was re c o rded for benefits to be re c e i ve dunder the Company’s re t i rement and medical plans.

Consolidation Of Clerical Fu n c t i o n sLiabilities related to the consolidation of clerical functionswe re $69 million and $96 million at December 31, 2001 and2000, re s p e c t i ve l y, and primarily provide for severance costsassociated with the clerical consolidation plan adopted in 1995upon consummation of the business combination of BNSF’sp redecessor companies Burlington No rthern Inc. and Santa FePacific Corporation (the Merger). The consolidation planresulted in the elimination of approximately 1,500 permanent positions and was substantially completed during 1999.

In 2001, 2000 and 1999, the Company recorded $6 million,$10 million and $54 million, re s p e c t i ve l y, of re versals forc e rtain liabilities associated with the consolidation plan.These liabilities related to planned work f o rce re d u c t i o n sthat are no longer required due to the Company’s ability toplace certain identified employees in alternate positions. The

3 3

remaining liability balance at December 31, 2001, re p re s e n t sbenefits to be paid to affected employees who did not receivelump-sum payments, but instead will be paid over five to ten years or in some cases through retirement.

In the fourth quarter of 2001, the Company re c o rded a chargeof $9 million of costs related to the reduction of approx i-mately 40 material handlers and other clerical positions. In thesecond quarter of 2000, the Company re c o rded a charge of$17 million for severance, medical and other benefit costsrelated to approximately 140 material handlers in mechanicalshops. Liabilities remaining at December 31, 2001, related tothis program reflect elections to re c e i ve payments over the nexts e veral years rather than lump-sum payments.

Conductors, Trainmen And Locomotive En g i n e e r sLiabilities related to deferred benefits payable upon separationor re t i rement to certain active conductors, trainmen and loco-m o t i ve engineers we re $170 million and $183 million atDecember 31, 2001 and 2000, re s p e c t i ve l y. These costs we reprimarily incurred in connection with labor agreements re a c h e dprior to the Merger which, among other things, reduced trainc rew sizes and allowed for more flexible work rules. In 2001,the Company re c o rded a $5 million re versal of cert a i nd e f e r red benefits payable to reflect a change in estimates.

In the second quarter of 2000, the Company incurred $3million of costs for severance, medical and other benefitcosts for approximately 50 trainmen on reserve boards. Theremaining re s e rve of less than $100 thousand at December 31,2001, will be paid during the next year to severed employeeswho elected to receive their payments over time.

No n - Union Em p l oyee Se ve ra n c eLiabilities principally related to certain remaining non-unionemployee severances resulting from the fourth quarter 2001workforce reduction, the second quarter 1999 reorganiza-tion, and the Merger were $35 million and $30 million atDecember 31, 2001 and 2000, respectively. These costs willbe paid over the next several years based on deferral electionsmade by the employees.

During the fourth quarter of 2001, the Company reduced 400positions through severances, normal attrition and the elimi-nation of contractors. The Company re c o rded $21 million ofexpense for severance, medical and other benefits associatedwith the costs of terminating 360 employees and approx i m a t e l y$31 million for benefits to be re c e i ved under the Company’sre t i rement and medical plans. Substantially all of theseplanned reductions we re completed at December 31, 2001.

In the second quarter of 2000, the Company incurred $2million of costs for severance, medical and other benefit costsfor ten involuntarily terminated non-union positions. T h e s eplanned reductions we re completed at December 31, 2000.

In the second quarter of 1999, the Company incurred $45 million of reorganization costs for severance, pension,medical and other benefit costs for approximately 325 invol-untarily terminated non-union employees. Components of the costs include approximately $29 million relating to

severance costs for non-union employees and approximately$16 million for benefits to be received under the Company’sre t i rement and medical plans. Substantially all of the plannedreductions were made by September 30, 1999.

11. Commitments And ContingenciesLease CommitmentsBNSF has substantial lease commitments for locomotive s ,f reight cars, trailers and containers, office buildings and otherp ro p e rt y, and many of these leases provide the option to pur-chase the leased item at fair market value at the end of thelease. Howe ve r, some provide fixed price purchase options.Fu t u re minimum lease payments (which reflect leases havingnon-cancelable lease terms in excess of one year) as ofDecember 31, 2001, are summarized as follows (in millions):

Capital Op e r a t i n gDecember 31, Leases Leases

2002 $107 $ 4042003 107 3942004 107 3752005 103 3442006 102 324T h e re a f t e r 3 3 0 3 , 3 4 6

To t a l 8 5 6 $ 5 , 1 8 7Less amount re p resenting intere s t 1 8 4

Present value of minimum lease payments $6 7 2

Lease rental expense for all operating leases was $432 mil-lion, $424 million and $435 million for the years endedDecember 31, 2001, 2000 and 1999, re s p e c t i ve l y. Contingentrentals and sublease rentals we re not significant.

Casualty And Enviro n m e n t a lPersonal injury claims, including work-related injuries toemployees, 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 the finding of fault,coupled with unscheduled awards and reliance on the jury system, contributed to significant increases in expense in pastyears. BNSF has implemented a number of safety programs toreduce the number of personal injuries as well as the associatedclaims and personal injury expense. BNSF made payments forpersonal injuries of approximately $173 million, $178 millionand $179 million in 2001, 2000 and 1999, re s p e c t i ve l y. AtDecember 31, 2001 and 2000, the Company had re c o rd e dliabilities of $458 million and $436 million, re s p e c t i ve l y,related to both asserted and unasserted personal injury claims.

The Company’s operations, as well as those of its competitors,a re subject to extensive federal, state and local enviro n m e n t a lregulation. BNSF’s operating pro c e d u res include practices to p rotect the environment from the risks inherent in railro a doperations, which frequently invo l ve transporting chemicalsand other hazardous materials. Ad d i t i o n a l l y, many of BNSF’sland holdings are and have been used for industrial or trans-p o rt a t i o n - related purposes or leased to commercial or indus-trial companies whose activities may have resulted in dischargesonto the pro p e rt y. As a result, BNSF is subject to enviro n m e n-tal cleanup and enforcement actions. In part i c u l a r, the Fe d e r a l

3 4

C o m p re h e n s i ve En v i ronmental Response, Compensation andLiability Act of 1980 (CERC LA), also known as the Su p e rf u n dlaw, as well as similar state laws generally impose joint and s e veral liability for cleanup and enforcement costs on curre n tand former owners and operators of a site without regard tofault or the legality of the original conduct. BNSF has beennotified that it is a potentially responsible party (PRP) forstudy and cleanup costs at approximately 30 Superfund sitesfor which investigation and remediation payments are or willbe made or are yet to be determined (the Su p e rfund sites) and,in many instances, is one of several PRPs. In addition, BNSFmay be considered a PRP under certain other laws. Ac c o rd i n g l y,under CERC LA and other federal and state statutes, BNSFmay be held jointly and severally liable for all enviro n m e n t a lcosts associated with a particular site. If there are other PRPs ,BNSF generally participates in the cleanup of these sitest h rough cost-sharing agreements with terms that va ry from siteto site. Costs are typically allocated based on re l a t i ve vo l u m e t-ric contribution of material, the amount of time the site wasowned or operated, and/or the portion of the total site ow n e dor operated by each PRP.

Environmental costs include initial site surveys and environ-mental studies of potentially contaminated sites as well ascosts for remediation and restoration of sites determined tobe contaminated. Liabilities for environmental cleanup costsare initially recorded when BNSF’s liability for environmen-tal cleanup 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 ongo-ing environmental contingency analysis, which considers acombination of factors including independent consultingreports, site visits, legal reviews, analysis of the likelihood ofp a rticipation in and the ability of other PRPs to pay forc l e a n u p, and historical trend analyses.

BNSF is invo l ved in a number of administrative and judicialp roceedings and other mandatory cleanup efforts at approx i-mately 390 sites, including the Su p e rfund sites, at which it is participating in the study or cleanup, or both, of allegede n v i ronmental contamination. BNSF paid approximately $72million, $49 million and $67 million during 2001, 2000 and1999, re s p e c t i ve l y, for mandatory and unasserted cleanupe f f o rts, including amounts expended under federal and statevo l u n t a ry cleanup programs. BNSF has re c o rded liabilities forremediation and restoration of all known sites of $202 mil-lion at December 31, 2001, compared with $223 million atDecember 31, 2000. BNSF anticipates that the majority ofthe accrued costs at December 31, 2001, will be paid over thenext five years. No individual site is considered to be material.

Liabilities recorded for environmental costs represent BNSF’sbest estimates for remediation and restoration of these sitesand include both asserted and unasserted claims. Unassertedclaims are not considered to be a material component of the liability. Although recorded liabilities include BNSF’sbest estimates of all costs, without reduction for anticipatedrecoveries from third parties, BNSF’s total cleanup costs atthese sites cannot be predicted with certainty due to variousfactors such as the extent of corrective actions that may be

re q u i red, evolving environmental laws and re g u l a t i o n s ,a d vances in environmental technology, the extent of otherp a rt i e s’ participation in cleanup efforts, developments inongoing environmental analyses related to sites determinedto be contaminated, and developments in environmental surveys 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 it is unlikely any iden-tified matters, either individually or in the aggregate, willhave a material adverse effect on BNSF’s results of opera-tions, financial position or liquidity.

Other CommitmentsIn the normal course of business, the Company enters into long-term contractual requirements for future goods and servicesneeded for the operations of the business. Such commitmentsa re not in excess of expected re q u i rements and are not re a s o n-ably likely to result in performance penalties or payments thatwould have a material adverse affect on the Company’s liquidity.

Other Claims And LitigationBNSF and its subsidiaries are parties to a number of legalactions and claims, various governmental proceedings and pri-vate civil suits arising in the ord i n a ry course of business, includ-ing those related to environmental matters and personal injuryclaims. While the final outcome of these items cannot be pre-dicted with cert a i n t y, considering among other things the meri-torious legal defenses available, it is the opinion of managementthat none of these items, when finally re s o l ved, will have amaterial adverse effect on the results of operations, financialposition or liquidity of BNSF; although, an adverse re s o l u t i o nof a number of these items could have a material adverse effecton the results of operations in a particular quarter or fiscal ye a r.

12. Earnings Per ShareBasic earnings per share is based on the weighted average num-ber of common shares outstanding. Diluted earnings per shareis based on basic earnings per share adjusted for the effect ofpotential common shares outstanding that we re dilutive duringthe period, arising from employee stock awards and incre-mental shares calculated using the tre a s u ry stock method.

Weighted average stock options totaling 13.3 million, 8.5million, 26.5 million and 26.2 million for the first, second,third and fourth quarters of 2001, respectively, 25.0 million,35.6 million, 35.3 million and 31.6 million for the first, sec-ond, third and fourth quarters of 2000, respectively, and 8.9million and 21.4 million for the third and fourth quarters of1999, respectively, were not included in the computation of diluted earnings per share, because the options’ exercise priceexceeded the average market price of the Company’s stockfor those periods.

13. Retirement Plans And OtherPostemployment Benefit PlansBNSF sponsors two significant defined benefit pension plans:a funded, noncontributory qualified BNSF Re t i rement Pl a n ,which covers substantially all non-union employees, and an

3 5

unfunded, nonqualified BNSF Supplemental Re t i rement Pl a n ,which covers certain officers and other employees. The bene-fits under BNSF’s plans are based on years of credited serv i c eand the highest five - year average compensation levels. BNSF’sfunding policy is to contribute annually not less than the re g u-l a t o ry minimum and not more than the maximum amountdeductible for income tax purposes.

Certain salaried employees of BNSF that have met certainage and years of service requirements 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 we re asf o l l ows (in millions):

Medical and LifePension Benefits Benefits

December 31, 2 0 0 1 2 0 0 0 1 9 9 9 2 0 0 1 2 0 0 0 1 9 9 9

Se rvice cost $ 13 $ 13 $ 1 5 $ 4 $ 4 $ 5In t e rest cost 102 1 0 0 1 0 0 18 1 8 1 7Expected return

on plan assets (136) ( 1 2 9 ) ( 1 2 6 ) – – –Cu rt a i l m e n t s /

s e t t l e m e n t s 10 – – 3 – –Special termination

b e n e f i t s 18 – 1 0 – – 6Actuarial loss 1 – – – – –Net amortization

a n d d e f e r red a m o u n t s 2 3 3 – 1 1Net cost (benefit) $ 10 $ (13) $ 2 $25 $23 $2 9

The following tables show the change in benefit obligationand plan assets of the plans based on a September 30 meas-u rement date (in millions):

Pension Medical and LifeBenefits Benefits

Change in Benefit Obligation 2001 2000 2001 2000

Benefit obligation at beginning of period $1,419 $1,387 $247 $244

Service cost 13 13 4 4Interest cost 102 100 18 18Plan part i c i p a n t s’ contributions – – 5 3Amendments – – – (7)Actuarial loss 68 39 60 7Curtailments/settlements 8 – 3 –Special termination benefits 18 – – –Benefits paid (121) (120) (23) (22)

Benefit obligation at end of period $1,507 $1 , 4 1 9 $3 1 4 $247

Pension Medical and LifeBenefits Benefits

Change in Plan Assets 2001 2000 2001 2 0 0 0

Fair value of plan assets at beginning of period $1,577 $1,530 $ – $ –

Actual return on plan assets (115) 162 – –Employer contribution 4 5 19 19Plan participants’ contributions – – 4 3Benefits paid (121) (120) (23) (22)

Fair value of plan assets atend of period $1,345 $1,577 $ – $ –

The following table shows the reconciliation of the fundedstatus of the plans with amounts re c o rded in the consoli-dated balance sheet (in millions):

Pension Medical and LifeBenefits Benefits

December 31, 2001 2000 2001 2000

Funded status $(162) $ 158 $(314) $(247)Unrecognized net (gain) loss 169 (146) 60 (1)Unrecognized prior service cost (6) (6) (1) (1) Unamortized net

transition obligation 3 5 – –Net amount recognized $ 4 $ 11 $(255) $(249)

Pension Medical and LifeBenefits Benefits

December 31, 2001 2000 2001 2000

Amounts recognized in the consolidated balance sheets consist of:

Prepaid benefit cost $ 42 $ 45 $ – $ –Accrued benefit liability (50) (50) (255) (249)Accumulated other

comprehensive loss 12 16 – –Net amount recognized $ 4 $ 11 $(255) $(249)

The assumptions used in accounting for the BNSF plans we reas follow s :

Pension Medical and LifeBenefits Benefits

Assumptions 2001 2000 2001 2000

Discount rate 7 . 0 % 7 . 5 % 7 . 0 % 7. 5 %Rate of increase in

compensation levels 4.0% 4.0% – –Expected return on plan assets 9.5% 9.5% – –

For purposes of the medical and life benefits calculations for2001, the assumed health care cost trend rate for both man-aged care and non-managed care medical costs is 12 percentand is assumed to decrease one percent for each future ye a runtil the ultimate rate of five percent is reached in 2008 andremain constant there a f t e r. In c reasing the assumed healthc a re cost trend rates by one percentage point would incre a s ethe accumulated post-re t i rement benefit obligation by $26million and the combined service and interest componentsof net post-retirement benefit cost recognized in 2001 by $2million. Decreasing the assumed health care cost trend ratesby one percentage point would decrease the accumulated post-re t i rement benefit obligation by $22 million and the combined

3 6

s e rvice and interest components of net post-re t i rement benefitcost recognized in 2001 by $2 million.

Other PlansUnder collective bargaining agreements, BNSF part i c i p a t e sin multi-employer benefit plans which provide certain post-re t i rement health care and life insurance benefits for eligi-ble union employees. Insurance premiums paid attributableto re t i rees, which are generally expensed as incurred, we re$18 million, $15 million and $14 million, in 2001, 2000and 1999, re s p e c t i ve l y.

Defined Contribution PlansBNSF sponsors 401(k) thrift and profit sharing planswhich cover substantially all non-union employees and c e rtain union employees. BNSF matches 50 percent of the first six percent of non-union employe e s’ contribu-tions, which are subject to certain percentage limits of thee m p l oye e s’ earnings, at each pay period. Depending onB N S F ’s performance, an additional matching contributionof up to 30 percent of the first six percent can be made atthe end of the ye a r. Em p l oyer contributions for all non-union employees are subject to a five - year length of serv i c evesting schedule. BNSF’s 401(k) matching expense was $14 million, $16 million and $18 million in 2001, 2000and 1999, re s p e c t i ve l y.

14. Stock Options And Other Incentive PlansOn April 15, 1999, BNSF shareholders approved theBNSF 1999 Stock In c e n t i ve Plan and authorized 20 mil-lion shares of BNSF common stock to be issued in connec-tion with stock options, restricted stock, restricted stockunits and performance stock. On April 18, 2001, BNSFs h a reholders approved the amended BNSF 1999 St o c kIn c e n t i ve Plan, which authorized additional awards not toe xceed 29 million shares of BNSF common stock to beissued in connection with stock options, restricted stock,restricted stock units and performance stock. Ap p rox i m a t e l yf i ve million common shares we re available for future grantat December 31, 2001.

Stock OptionsUnder BNSF’s stock option plans, options may be granted to officers and salaried employees at the fair market value of the Company’s common stock on the date of grant. Priorto April 2001, all options generally vested in one year andexpired within ten years after the date of grant. Stock optiongrants awarded in April 2001 vest ratably over three ye a r sand expire within ten years after the date of grant. Sh a re sissued upon exercise of options may be issued from treasuryshares or from authorized but unissued shares.

The Company applies APB Opinion 25 and related interpre-tations in accounting for its stock option plans. Ac c o rd i n g l y,no compensation expense has been re c o g n i zed for its fixe dstock option plans as the exe rcise price equals the stock priceon the date of grant. Had compensation expense been deter-mined for stock options based on the fair value at grant datesconsistent with SFAS No. 123, Accounting for Stock BasedC o m p e n s a t i o n , the Company’s pro forma net income and earn-ings per share would have been as follow s:

Year Ended December 31, 2001 2000 1999

Net income (in millions) $ 720 $ 933 $1,092Basic earnings per share $1.86 $2.26 $ 2.36Diluted earnings per share $1.84 $2.25 $ 2.34

The pro forma amounts we re estimated using the Bl a c k -Scholes option-pricing model with the following assumptions:

Year Ended December 31, 2001 2000 1999

Weighted average expected life (ye a r s ) 4 . 0 3 . 0 3 . 0Expected vo l a t i l i t y 35.0% 3 5 . 0 % 3 0 . 0 %Annual dividend per share $0.48 $0 . 4 8 $0 . 4 8Risk free interest rate 4.21% 5 . 3 6 % 6 . 6 3 %Weighted average fair value

of options granted $8.44 $6 . 7 0 $8 . 4 3

A summary of the status of the stock option plans as ofDecember 31, 2001, 2000 and 1999, and changes duringthe years then ended, is presented below :

2 0 0 1 2 0 0 0 1 9 9 9Weighted Ave r a g e Weighted Ave r a g e Weighted Average

Year Ended December 31, Op t i o n s Exe rcise Pr i c e s Op t i o n s Exe rcise Pr i c e s Op t i o n s Exe rcise Pr i c e s

Balance at beginning of ye a r 38,422,602 $27.22 2 9 , 8 0 8 , 1 5 7 $27.37 2 8 , 1 3 5 , 8 6 9 $2 4 . 2 7Gr a n t e d 7,423,682 29.02 1 1 , 5 2 1 , 0 4 5 2 5 . 5 6 9 , 8 5 7 , 3 4 5 3 2 . 9 6Exe rc i s e d (5,282,337) 23.31 ( 1 , 2 5 5 , 6 4 3 ) 1 2 . 7 3 ( 6 , 3 1 5 , 2 3 8 ) 2 1 . 2 4C a n c e l l e d (724,651) 30.29 ( 1 , 6 5 0 , 9 5 7 ) 2 9 . 9 5 ( 1 , 8 6 9 , 8 1 9 ) 3 0 . 9 4

Balance at end of ye a r 39,839,296 $28.02 3 8 , 4 2 2 , 6 0 2 $27.22 2 9 , 8 0 8 , 1 5 7 $2 7 . 3 7Options exe rcisable at year end 32,893,456 $27.80 2 6 , 7 2 9 , 2 2 0 $2 7 . 9 0 2 0 , 7 1 0 , 6 7 9 $2 5 . 0 0

The following table summarizes information re g a rding stock options outstanding at December 31, 2001:

Options Ou t s t a n d i n g Options Exe rc i s a b l eNu m b e r Weighted Ave r a g e Weighted Ave r a g e Nu m b e r Weighted Ave r a g e

Range of Exe rcise Pr i c e s Ou t s t a n d i n g Remaining Life Exe rcise Pr i c e s Exe rc i s a b l e Exe rcise Pr i c es

$4.23 to $24.83 5 , 2 4 3 , 8 1 0 3.8 Ye a r s $1 9 . 9 2 5 , 2 4 3 , 8 1 0 $1 9 . 9 2$25.66 to $28.73 8 , 5 3 6 , 9 3 0 7.7 Ye a r s $2 5 . 7 8 8 , 4 8 6 , 0 6 6 $2 5 . 7 7$28.76 to $30.98 1 7 , 7 5 9 , 7 2 2 6.6 Ye a r s $2 9 . 1 7 1 0 , 8 8 3 , 8 0 7 $2 9 . 2 5$31.00 to $36.73 8 , 2 9 8 , 8 3 4 6.9 Ye a r s $3 2 . 9 6 8 , 2 7 9 , 7 7 3 $3 2 . 9 6$4.23 to $36.73 3 9 , 8 3 9 , 2 9 6 6.6 Ye a r s $2 8 . 0 2 3 2 , 8 9 3 , 4 5 6 $2 7 . 8 0

3 7

Other Incentive PlansBNSF has other long-term incentive programs in additionto stock options, which are administered separately onbehalf of employe e s .

BNSF awarded a total of approximately 1.2 million share sof restricted stock subject to performance periods to eligiblee m p l oyees and directors during 1996. No cash payment isre q u i red by the individuals. The restrictions will be lifted int h i rds over three years beginning on the third annive r s a ryof the grant date if certain stock price-based perf o r m a n c egoals are met. If, howe ve r, the performance goals are notmet, the restricted shares will be forfeited. All shares stillsubject to restrictions are generally forfeited and re t u r n e dto the plan if the employe e’s or dire c t o r’s relationship is ter-minated. Ap p roximately 577 thousand restricted share srelated to this award we re outstanding as of December 31,2001, and most we re forfeited on Ja n u a ry 18, 2002, as aresult of stock price perf o r m a n c e .

Under the BNSF 1999 and 1996 Stock In c e n t i ve Plans c e rtain eligible employees may defer through the BNSFIn c e n t i ve Bonus Stock Program (IBSP) the cash payment of their bonus paid under the In c e n t i ve Compensation Plan (ICP) and re c e i ve restricted stock for which re s t r i c-tions lapse in three years (or in two years if certain per-formance goals are met). The number of restricted share sa re based on the amount of bonus deferred, plus incre m e n-tal shares, using the market price of BNSF common stock on the date of grant. Restricted awards granted under thisp rogram totaled approximately 162 thousand, 350 thou-sand and 400 thousand shares in 2001, 2000 and 1999,re s p e c t i ve l y. A total of approximately 1.1 million share swe re outstanding under this and prior programs of thistype on December 31, 2001.

In addition, all regularly assigned salaried employees noteligible to participate in the IBSP are eligible to participatein 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 discountf rom the market price and re q u i res that the stock berestricted for a thre e - year period. During the years endedDecember 31, 2001, 2000 and 1999, approximately 7thousand, 45 thousand and 65 thousand shares, re s p e c-tively, were purchased under this program. As of December31, 2001, 117 thousand restricted shares related to thesea w a rds we re outstanding.

Ad d i t i o n a l l y, the Company periodically issues time-vesting restricted shares, which generally vest ratably ove rt h ree to five years. Restricted stock awards under theseplans, net of forf e i t u res, we re approximately 100 thousand and 116 thousand for the years ended December 2001 and 2000, re s p e c t i ve l y. A total of 476 thousand re s t r i c t e ds h a res related to these awards we re outstanding onDecember 31, 2001.

On Ja n u a ry 1, 2001, approximately 625 thousand re s t r i c t e ds h a res we re granted. As of December 31, 2001, 611 thousandrestricted shares related to these awards we re outstanding.

Sh a res awarded under the plans may not be sold or used as collateral, and are generally not transferable, by theholder until the shares awarded become free of restrictions.Compensation expense was re c o rded under the BNSFStock In c e n t i ve Plans in accordance with APB Opinion 25 and was not material in 2001, 2000 or 1999.

15. Common Stock And Pre f e rred Capital StockCommon Stock BNSF is authorized to issue 600 million shares of commonstock, $0.01 par value. At December 31, 2001, there we re385.8 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 pre f e re n c e sof any future issuances of pre f e r red stock, each share ofcommon stock is entitled to re c e i ve dividends as may bed e c l a red by the Board of Di rectors (the Board) out of fundslegally available and to share ratably in all assets ava i l a b l efor distribution to stockholders upon dissolution or liqui-dation. No holder of common stock has any pre e m p t i veright to subscribe for any securities of BNSF.

S h a reholder Rights PlanIn December 1999, the Board approved a shareholder rightsplan (Rights Plan). In connection with the Rights Plan, theBoard declared a dividend of one Preferred Stock PurchaseRight (Right or Rights) for each outstanding share of BNSFcommon stock to shareholders of record on December 31,1999. Shareholders were automatically entitled to the Rightscorresponding to their shares owned. The distribution wasnot taxable to shareholders under current United States taxlaws. Adoption of the Rights Plan was required by the termsof the proposed combination between BNSF and CN, whichwas terminated on July 20, 2000.

Under the Rights Plan, Rights we re redeemable for $0.01per Right, subject to adjustment, before the acquisition ofc o n t rol, by a person or gro u p, of 15 percent or more ofBNSF common stock. On December 7, 2000, the Boardvoted to redeem all Rights under the Rights Plan. As aresult of the redemption, the Rights could no longer bee xe rcised and shareholders we re only entitled to re c e i ve aredemption payment of $0.01 per Right. The re d e m p t i o npayment was distributed on April 2, 2001, to shareholders of re c o rd as of Ma rch 12, 2001.

P re f e rred Capital StockAt December 31, 2001, BNSF had 50 million shares ofClass A Pre f e r red Stock, $0.01 par value and 25 millions h a res of Pre f e r red Stock, $0.01 par value available for issuance. The Board has the authority to issue such stock inone or more series, to fix the number of shares and to fixthe designations and the powers, rights, and qualificationsand restrictions of each series.

S h a re Repurchase Pro g r a mIn July 1997, the Board authorized the repurchase of up to 30 million shares of the Company’s common stock from time to time in the open market. In December

3 8

1999, April 2000 and September 2000, the Board authorizedextensions of the BNSF share repurchase program, adding 30 million shares at each date to the total shares previouslyauthorized bringing BNSF’s share repurchase program to 120million shares. During 2001, 2000 and 1999, the Companyrepurchased approximately 11 million, 65 million and 22

million shares, respectively, of its common stock at averageprices of $27.76, $23.16 and $31.08 per share, respectively.Total repurchases through December 31, 2001, were 103million shares at a total average cost of $25.74 per share,leaving 17 million shares available for repurchase out of the120 million shares authorized.

C e rtain amounts in the table above have been reclassified to conform to the current presentation which is different than previously re p o rted on Form 10-Q.

3 9

16. Quarterly Financial Data—Unaudited(Dollars in millions, except per share data) Fourth Third Second First

2 0 0 1Re venues $2 , 3 0 1 $2 , 3 4 3 $2 , 2 7 1 $ 2 , 2 9 3Operating income $ 4 0 6 $ 5 0 2 $ 4 2 8 $ 4 1 9Net income $ 1 7 7 $ 2 2 5 $ 1 9 5 $ 1 3 4Basic earnings per share $ 0.46 $ 0 . 5 8 $ 0 . 5 0 $ 0 . 3 4Diluted earnings per share $ 0 . 4 6 $ 0 . 5 8 $ 0 . 5 0 $ 0 . 3 4Dividends declared per share $ 0 . 1 2 $ 0 . 1 2 $ 0 . 1 2 $ 0 . 1 2

Common stock price:High $2 9 . 9 6 $3 1 . 6 6 $3 4 . 0 0 $ 3 1 . 1 8L ow $2 5 . 0 1 $2 2 . 4 0 $2 7 . 8 1 $ 2 6 . 2 6

2 0 0 0Re venues $ 2 , 3 3 9 $ 2 , 3 4 3 $ 2 , 2 6 1 $ 2 , 2 6 4Operating income $ 5 4 4 $ 5 7 1 $ 4 8 3 $ 5 1 0Net income $ 2 5 5 $ 2 5 9 $ 2 2 3 $ 2 4 3Basic earnings per share $ 0 . 6 5 $ 0 . 6 5 $ 0 . 5 3 $ 0 . 5 5Diluted earnings per share $ 0 . 6 5 $ 0 . 6 4 $ 0 . 5 3 $ 0 . 5 5Dividends declared per share $ 0 . 1 2 $ 0 . 1 2 $ 0 . 1 2 $ 0 . 1 2

Common stock price:High $ 2 9 . 5 6 $ 2 7 . 4 4 $ 2 6 . 2 5 $ 2 7 . 5 0L ow $ 2 0 . 8 8 $ 2 0 . 3 8 $ 2 1 . 6 3 $ 1 9 . 0 6

4 0

Matthew K. Rose ( 2 )

President and Chief Exe c u t i ve Officer

Thomas N. Hund ( 2 )

Exe c u t i ve Vice President and Chief Financial Of f i c e r

Carl R. Ice ( 2 )

Exe c u t i ve Vice President and Chief Operations Of f i c e r

J e ff rey R. Moreland ( 2 )

Exe c u t i ve Vice President Law &Government Affairs and Se c re t a ry

Charles L. Schultz ( 2 )

Exe c u t i ve Vice Pre s i d e n tand Chief Ma rketing Of f i c e r

A. P. (Skip) Endres, Jr.Vice President - Government Affairs

G re g o ry C. FoxVice President - Technology Se rv i c e sand Chief Information Of f i c e r

Paul R. Hofere rVice President and General Counsel

Linda J. HurtTre a s u re r

Dennis R. Johnson ( 2 )

Vice President and Contro l l e r

Kenneth J. KempkerVice President - Corporate Audit Se rv i c e s

Marsha K. Morg a nVice President - In vestor Re l a t i o n s

Peter J. RickershauserVice President - Ne t w o rk De ve l o p m e n t

R i c h a rd A. RussackVice President - Corporate Re l a t i o n s

Shelley J. Ve n i c kVice President and General Tax Counsel

R i c h a rd E. We i c h e rVice President and Se n i o rRe g u l a t o ry Counsel

Gloria A. ZamoraVice President - Human Re s o u rc e s

(1) These officers hold similar positions with The Bu rl i n g t o nNo rt h e rn and Santa Fe Railway Company.

(2) Exe c u t i ve Officer of Bu rl i n g t o nNo rt h e rn Santa Fe Corpora t i o n .

Burlington Nort h e rn Santa Fe Corporation Corporate Officers ( 1 )

Stevan B. BobbGroup Vice Pre s i d e n t -Agricultural Pro d u c t s

Stephen G. BranscumGroup Vice President - Consumer Pro d u c t s

Rollin D. Bre d e n b e rgVice President - Se rvice De s i g nand Pe rf o r m a n c e

J e ff rey J. CampbellVice President and Chief So u rcing Of f i c e r

M. David DealyVice President - Tr a n s p o rt a t i o n

F rederick G. (Fritz) DraperVice President - Business Un i tOperations and Su p p o rt

G e o rge T. DugganVice President - Chemicals

John J. FlepsVice President - Labor Re l a t i o n s

Ricci L. Gard n e rVice President - Au t o m o t i ve

David L. GarinGroup Vice President - Industrial Pro d u c t s

Craig HillVice President - Mechanical and Value En g i n e e r i n g

Thomas G. KraemerGroup Vice President - Coal

Kathleen A. ReganVice President - eBu s i n e s sDe ve l o p m e n t

Sami M. ShalahVice President - Coal Ma rk e t i n g

Denis SmithVice President - Industrial Pro d u c t sMa rk e t i n g

G re g o ry W. StengemVice President - Sa f e t y, Training and Operations Su p p o rt

Burlington Nort h e rn Santa Fe Corporation Operating Company Off i c e r s

Burlington Nort h e rn Santa Fe Corporation Dire c t o r s *

Alan L. Boeckmann ( 3 )

President and Chief Exe c u t i veOf f i c e r, Fluor Corporation( p rofessional services holding company offering engineering, p ro c u rement, construction management and other services), Aliso Viejo, California.B o a rd member since 2001.

John J. Burns, Jr. ( 1 ) ( 2 )

President and Chief Exe c u t i veOf f i c e r, Alleghany Corporation(holding company with reinsurance, industrial minerals,steel fastener operations, and ani n vestment position in BNSF), New Yo rk, New Yo rk. B o a rd member since 1995.

R o b e rt D. Kre b s ( 1 )

Chairman, Burlington No rthern Santa Fe Corporation,Fo rt Wo rth, Te x a s .B o a rd member since 1983.

Bill M. Lindig ( 2 ) ( 4 )

Re t i red Chairman, SYSCOCorporation (marketer and distributor of foodservice products), Houston, Te x a s .B o a rd member since 1993.

Vilma S. Martinez ( 3 ) ( 4 )

Pa rt n e r, Mu n g e r, To l l e sand Olson LLP (law firm),Los Angeles, California.B o a rd member since 1998.

M a rc F. Racicot ( 4 )

Pa rt n e r, Br a c ewell & Patterson L.L.P.(law firm), Washington, D.C.and Chairman, Republican National Committee. B o a rd member since 2001.

Roy S. Roberts ( 2 ) ( 4 )

Re t i red Group Vice Pre s i d e n t ,No rth American Ve h i c l eSales, Se rvice and Ma rk e t i n g ,General Motors Corporation(motor vehicle manufacture r ) ,De t roit, Mi c h i g a n .B o a rd member since 1993.

Matthew K. RosePresident and Chief Exe c u t i ve Of f i c e r,Burlington No rthern Santa Fe Corporation,Fo rt Wo rth, Te x a s .B o a rd member since 2000.

M a rc J. Shapiro ( 3 ) ( 4 )

Vice Chairman for Finance, RiskManagement and Ad m i n i s t r a t i o n ,J . P. Morgan Chase & Co.(bank holding company),New Yo rk, New Yo rk .B o a rd member since 1995.

A rnold R. Weber ( 1 ) ( 2 )

President Em e r i t u s ,No rt h western Un i ve r s i t y, Evanston, Il l i n o i s .B o a rd member since 1986.

R o b e rt H. West ( 2 ) ( 3 )

Re t i red Chairman of the Board ,Butler Manufacturing Company( m a n u f a c t u rer of pre - e n g i n e e re dbuilding systems and specialty c o m p o n e n t s ) ,Kansas City, Mi s s o u r i .B o a rd member since 1980.

J. Steven Whisler ( 3 ) ( 4 )

Chairman, President and Chief Exe c u t i ve Of f i c e r, Phelps Dodge Corporation (mining and manufacturing),Phoenix, Arizo n a .B o a rd member since 1995.

Edward E. Whitacre, Jr. (1)(4)

Chairman and Chief Exe c u t i ve Of f i c e r,SBC Communications In c .(communications holding company), San Antonio, Te x a s .B o a rd member since 1993.

Michael B. Yanney (1)(2)

Chairman and Chief Exe c u t i ve Of f i c e r,America First Companies L.L.C.( i n ve s t m e n t s ) ,Omaha, Ne b r a s k a .B o a rd member since 1989.

Committee Assignments:(1) Exe c u t i ve Committee(2) Compensation and

De velopment Committee(3) Audit Committee(4) Di rectors and Corporate

Governance Committee

* Years of Board service includes s e rvice on Boards of Bu rl i n g t o nNo rt h e rn Inc. and Santa Fe Pacific Corporation and p redecessor corpora t i o n s .

S h a res ListedNew Yo rk Stock Exc h a n g e ,Chicago Stock Exchange, Pacific Exc h a n g e .Ticker Symbol: BNI

Principal Corporate Off i c e2650 Lou Menk Dr i ve ,Fo rt Wo rth, Texas 76131-2830(817) 333-2000w w w. b n s f. c o m

Stock Transfer Agent And RegisterEq u i Se rve Trust Company, N.A.P.O. Box 2500,Jersey City, New Je r s e y7 0 3 0 3 - 2 5 0 0(800) 526-5678

S h a re h o l d e r sAs of Ja n u a ry 31, 2002, there we rea p p roximately 41,000 share h o l d e r sof re c o rd .

S h a reholder Serv i c e sYou are encouraged to contact ourTransfer Agent directly for thes h a reholder services listed below :

Change in Certificate Re g i s t r a t i on ,Dividend Re i n vestment Se rv i c e ,Change of Mailing Ad d ress, Lostor Stolen Certificates, Re p l a c e m e ntof Dividend Checks, Direct Depositof Dividends, Consolidation ofMultiple Accounts, Elimination of Duplicate Re p o rt Ma i l i n g s ,Replacement of Form 1099-DIV.

Dividend Reinvestment PlanA dividend re i n vestment plan isp rovided for re g i s t e red share h o l d e r sas a convenient way to purc h a s em o re shares through investment of dividends or vo l u n t a ry cash payments. A booklet describing the plan is available from theTransfer Agent.

F o rm 10-KA copy of the Company’s AnnualRe p o rt on Form 10-K filed withthe Securities and Exc h a n g eCommission is available to share -holders free of charge upon request to the Company’s In ve s t o rRelations De p a rtment at 2500 Lou Menk Dr i ve, Fo rt Wo rt h ,Texas 76131-2828.

Institutional InvestorsInquiries from security analystsand investment pro f e s s i o n a l sshould be directed to the Company’sIn vestor Relations contact:

Ms. Marsha K. Mo r g a n ,Vice President - In vestor Re l a t i o n s ,(817) 352-6452

Annual MeetingThe Annual Meeting ofSh a reholders will be held at the Fo rt Wo rth Club,306 West 7th St reet, Fo rt Wo rth, Texas, on We d n e s d a y, April 17, 2002, at 2:00 p. m .

S h a reholder Inform a t i o n

Copyright © 2002 Burlington No rthern Santa Fe Corporation; Cover and Principal Photography: Ed Lallo; Additional Photography: Wyatt Mc Spadden, Glenn E. Ellman; Design: Pentagram Design Inc.; Map Illustration: Will Nelson; Printing: Williamson Printing Corporation; Printed on Re c ycled Pa p e r.

Burlington Northern Santa Fe Corporation 2650 Lou Menk Drive

Fort Worth, Texas 76131-2830