UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the quarterly period endedMarch31, 2008


OR





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





For the transition period
from            to





Commission
file
number            1-6324








BNSF
RAILWAY COMPANY


(Exact
name of registrant as specified in its charter)





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





2650
Lou Menk Drive


Fort
Worth, Texas


(Address
of principal executive offices)





76131-2830


(Zip
Code)





(800)
795-2673


(Registrant’s
telephone number, including area code)





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large
accelerated filer  [ ]  Accelerated
filer  [  ]   Non-accelerated
filer  [x ] Smaller reporting
company  [  ]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  [  ]  No[x]





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.


Class
            
            Shares
              Outstanding
      at
              April
      21, 2008Common
      stock, $1.00 par value
            
            1,000 shares





Registrant
meets the conditions set forth in General Instruction H (1) (a) and (b) of Form
10-Q and is therefore filing this Form 10-Q with the reduced disclosure format
permitted by General Instruction H (2).





Table ofContents


PART
      I
            FINANCIAL
      INFORMATION
            PAGEItem 1.
            Financial Statements.
            3Item 2.
            Management’s Narrative Analysis of Results of
      Operations.
            24Item 4T.
            Controls and Procedures.
            29PART
      II
            OTHER
      INFORMATIONItem 6.
            Exhibits.
            30Signatures
            
            S-1Exhibits
            
            E-1














2
 
 
 Table of Contents


PART
I


FINANCIAL
INFORMATION





Item1.    Financial
Statements.





BNSF
RAILWAY COMPANY and SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


(In
millions)


(Unaudited)





Three
      Months Ended March 31,
            
            2008
            
            2007(As
      Adjusted)aRevenues
            $
            4,211
            $
            3,602Operating
      expenses:Fuel
            
            1,009
            
            652Compensation
      and benefits
            
            977
            
            927Purchased
      services
            
            519
            
            500Depreciation
      and amortization
            
            341
            
            307Equipment
      rents
            
            230
            
            232Materials
      and other
            
            253
            
            280Total
      operating expenses
            
            3,329
            
            2,898Operating
      income
            
            882
            
            704Interest
      expense
            
            27
            
            21Interest
      income, related parties
            
            (5)
            
            (49)Other
      expense, net
            
            3
            
            8Income
      before income taxes
            
            857
            
            724Income
      tax expense
            
            330
            
            279Net
      income
            $
            527
            $
            445a  Prior
      year numbers have been adjusted for the merger of BNSF Acquisition, Inc.
      into BNSF Railway Company.  See Note 1to
      the ConsolidatedFinancial
      Statementsfor
      additional information.





See
accompanying Notes to Consolidated Financial Statements.








3
 
 
 Table of Contents


BNSF
RAILWAY COMPANY and SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Dollars
in millions)


(Unaudited)





March
      31,
            
            December 31,2008
            
            2007(As Adjusted)aASSETSCurrent
      assets:Cash
      and cash equivalents
            $
            81
            $
            24Accounts
      receivable, net
            
            887
            
            805Materials
      and supplies
            
            638
            
            579Current
      portion of deferred income taxes
            
            327
            
            282Other
      current assets
            
            479
            
            325Total current assets
            
            2,412
            
            2,015Property
      and equipment, net
            
            29,776
            
            29,560Other
      assets
            
            2,203
            
            1,953Total
      assets
            $
            34,391
            $
            33,528LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      liabilities:Accounts
      payable and other current liabilities
            $
            2,858
            $
            2,822Long-term
      debt due within one year
            
            213
            
            210Total
      current liabilities
            
            3,071
            
            3,032Long-term
      debt
            
            1,502
            
            1,511Deferred
      income taxes
            
            8,669
            
            8,519Casualty
      and environmental liabilities
            
            850
            
            843Pension
      and retiree health and welfare liability
            
            452
            
            444Employee
      separation costs
            
            75
            
            77Other
      liabilities
            
            1,562
            
            1,578Total
      liabilities
            
            16,181
            
            16,004Commitments
      and contingencies (see Notes 2, 4 and 5)Stockholder’s
      equity:Common
      stock, $1 par value, 1,000 shares authorized;
              issued
      and outstanding and paid-in capital
            
            6,331
            
            6,331Retained
      earnings
            
            12,317
            
            11,797Intercompany
      notes receivable
            
            (300)
            
            (456)Accumulated
      other comprehensive loss
            
            (138)
            
            (148)Total
      stockholder’s equity
            
            18,210
            
            17,524Total
      liabilities and stockholder’s equity
            $
            34,391
            $
            33,528a  Prior
      year numbers have been adjusted for the merger of BNSF Acquisition, Inc.
      into BNSF Railway Company.  See Note 1to
      the ConsolidatedFinancial
      Statementsfor
      additional information.





See
accompanying Notes to Consolidated Financial Statements.




4
 
 Table of Contents




BNSF
RAILWAY COMPANY and SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
millions)


(Unaudited)





Three Months Ended March 31,
            
            2008
            
            
            2007(As Adjusted)aOPERATING ACTIVITIESNet
      income
            
            $
            527
            
            
            $
            445Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            341
            
            
            
            307Deferred
      income taxes
            
            
            96
            
            
            
            66Employee
      separation costs paid
            
            
            (4
            )
            
            
            (6
            )Long-term
      casualty and environmental liabilities, net
            
            
            7
            
            
            
            42Other,
      net
            
            
            (19
            )
            
            
            23Changes
      in current assets and liabilities:Accounts
      receivable, net
            
            
            (82
            )
            
            
            28Change
      in accounts receivable sales program
            
            
            –
            
            
            
            300Materials
      and supplies
            
            
            (59
            )
            
            
            (18
            )Other
      current assets
            
            
            (150
            )
            
            
            (140
            )Accounts
      payable and other current liabilities
            
            
            33
            
            
            
            (208
            )Net
      cash provided by operating activities
            
            
            690
            
            
            
            839INVESTING
      ACTIVITIESCapital
      expenditures
            
            
            (468
            )
            
            
            (537
            )Net
      decrease in intercompany notes receivable
            
            
            –
            
            
            
            22Construction
      costs for facility financing obligation
            
            
            (4
            )
            
            
            (1
            )Other,
      net
            
            
            (277
            )
            
            
            (275
            )Net
      cash used for investing activities
            
            
            (749
            )
            
            
            (791
            )FINANCING
      ACTIVITIESPayments
      on long-term debt
            
            
            (58
            )
            
            
            (44
            )Proceeds
      from facility financing obligation
            
            
            18
            
            
            
            –Net
      decrease in intercompany notes receivable
            
            
            156
            
            
            
            –Net
      cash provided by (used for) financing activities
            
            
            116
            
            
            
            (44
            )Increase
      in cash and cash equivalents
            
            
            57
            
            
            
            4Cash
      and cash equivalents:Beginning
      of period
            
            
            24
            
            
            
            20End
      of period
            
            $
            81
            
            
            $
            24SUPPLEMENTAL
      CASH FLOW INFORMATIONInterest
      paid, net of amounts capitalized
            
            $
            32
            
            
            $
            23Income
      taxes paid, net of refunds
            
            $
            310
            
            
            $
            254Non-cash
      asset financing
            
            $
            25
            
            
            $
            15a Prior
      year numbers have been adjusted for the merger of BNSF Acquisition, Inc.
      into BNSF Railway Company.  See Note 1to
      the  ConsolidatedFinancial
      Statementsfor
      additional information.





See
accompanying Notes to Consolidated Financial Statements.





Table of Contents


BNSF
RAILWAY COMPANY and SUBSIDIARIES


CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY


(In
millions)


(Unaudited)











Common
      Stock
              and
      Paid-in
              Capital
            
            Retained
              Earnings
            
            Inter-
              Company
              Notes
              Receivable
            
            Accumulated
              Other
      Comprehensive
              Loss
            
            Total
              Stockholder’s
      EquityBalance
      at December 31, 2007, as adjusted
            
            $
            6,331
            a
            
            $
            11,797
            a
            
            $
            (456
            )
            
            $
            (148
            )
            
            $
            17,524
            aAdjustment
      to change the measurement date pursuant to Statement of Financial
      Accounting Standard (SFAS) No. 158
            
            
            –
            
            
            
            (7
            )
            
            
            –
            
            
            
            2
            
            
            
            (5
            )Adjustment
      to initally apply SFAS No. 158 to equity
              method investees
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (2
            )
            
            
            (2
            )Change
      in intercompany notes receivable
            
            
            –
            
            
            
            –
            
            
            
            156
            
            
            
            –
            
            
            
            156Comprehensive
      income:Net income
            
            
            –
            
            
            
            527
            
            
            
            –
            
            
            
            –
            
            
            
            527Amortization
      of prior service costs and actuarial losses, net of tax expense of
      $1
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            2
            
            
            
            2Gain
      on derivative instruments and other items, net of tax expense of
      $5
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            9
            
            
            
            9Unrealized
      loss on securities held by equity method investees, net of tax benefit of
      less than $1
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (1
            )
            
            
            (1
            )Total comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            537Balance
      at March 31, 2008
            
            $
            6,331
            
            
            $
            12,317
            
            
            $
            (300
            )
            
            $
            (138
            )
            
            $
            18,210a  Prior
      year numbers have been adjusted for the merger of BNSF Acquisition, Inc.
      into BNSF Railway Company.  See Note 1to
      the  ConsolidatedFinancial
      Statementsfor
      additional information.





See
accompanying Notes to Consolidated Financial Statements.





6
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 Table of Contents




1.    Accounting
Policies and Interim Results





The
Consolidated Financial Statements should be read in conjunction with BNSF
Railway Company’s Annual Report on Form 10-K for the year ended December 31,
2007, including the financial statements and notes thereto. The Consolidated
Financial Statements include the accounts of BNSF Railway Company and its
majority-owned subsidiaries (collectively BNSF Railway or the Company). BNSF
Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation
(BNSF), and is the principal operating subsidiary of BNSF.




BNSF Acquisition, Inc.
(BNSF Acquisition), a wholly-owned subsidiary of BNSF was merged with and into
BNSF Railway on March 18, 2008. BNSF Acquisition was formed on April 17,
1996 as the vehicle to acquire Washington Central Railroad Company, Inc.
SFAS No. 141, Business
Combinations,
carries forward without reconsideration the previous guidance related to the
combination of entities under common control in Accounting Principles Board
Opinion No. 16, Business
Combinations. As
such, the consolidated balance sheets at March 31, 2008 and December 31, 2007
and the consolidated statements of income and cash flow for the quarters ended
March 31, 2008 and 2007 have been adjusted to reflect this transaction as if it
had occurred as of the beginning of the earliest period presented. As a result,
the amounts reported in the consolidated financial statements of BNSF Railway
presented herein will differ from the amounts previously reported in BNSF
Railway's Form 10-K for the year ended December 31, 2007 and Form 10-Q for the
quarter ended March 31, 2007. The effects of this transaction were as follows
(in millions):


Consolidated
      Statement of Income
              Three
      Months Ended March 31, 2007
            
            As
      Reported
            
            Impact
      of
              Adjustment
            
            As
      AdjustedRevenues
            $
            3,601
            $
            1
            $
            3,602Total
      operating expenses
            
            2,898
            
            –
            
            2,898Operating
      income
            
            703
            
            1
            
            704Income
      before income taxes
            
            723
            
            1
            
            724Income
      tax expense
            
            279
            
            –
            
            279Net
      income
            $
            444
            $
            1
            $
            445Consolidated
      Balance Sheet
              December
      31, 2007
            
            As
      Reported
            
            Impact
      of
              Adjustment
            
            As
      AdjustedProperty
      and equipment, net
            $
            29,513
            $
            47
            $
            29,560Other
      assets
            
            1,927
            
            26
            
            1,953Total
      assets
            
            33,455
            
            73
            
            33,528Accounts
      payable and other current liabilities
            
            2,848
            
            (26)
            
            2,822Total
      current liabilities
            
            3,058
            
            (26)
            
            3,032Deferred
      income taxes
            
            8,501
            
            18
            
            8,519Total
      liabilities
            
            16,012
            
            (8)
            
            16,004Common
      stock issued and outstanding and paid-in capital
            
            6,286
            
            45
            
            6,331Retained
      earnings
            
            11,761
            
            36
            
            11,797Total
      stockholder’s equity
            
            17,443
            
            81
            
            17,524Total
      liabilities and stockholder’s equity
            $
            33,455
            $
            73
            $
            33,528





7
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
 Table of Contents





Consolidated
      Statement of Cash Flows
              Three
      Months Ended March 31, 2007
            
            As
      Reported
            
            Impact  of
              Adjustment
            
            As
      AdjustedNet
      income
            $
            444
            $
            1
            $
            445Operating
      activities other, neta
            
            24
            
            (1)
            
            23Net
      cash provided by operating activitiesa
            $
            839
            $
            –
            $
            839aComparative prior period amounts
      have been reclassified to conform to the current
      presentation.





All
significant intercompany accounts and transactions have been
eliminated.





Additionally,
certain comparative prior period amounts in the Consolidated Financial
Statements have been reclassified to conform to the current period presentation.
These reclassifications had no effect on previously reported operating income or
net income except as discussed herein.





The
results of operations for any interim period are not necessarily indicative of
the results of operations to be expected for the entire year. In the opinion of
management, the unaudited financial statements reflect all adjustments
(consisting of only normal recurring adjustments, except as disclosed) necessary
for a fair statement of BNSF Railway’s consolidated financial position as of
March 31, 2008, and the results of operations for the three-month periods ended
March 31, 2008 and 2007.





Adoption of New Accounting
Pronouncements





Fair
Value Measurements





In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosure requirements around fair value
measurements.





SFAS No.
157 specifies a three-level hierarchy of valuation inputs which was established
to increase consistency, clarity and comparability in fair value measurements
and related disclosures.





Ÿ
            Level
      1–Quoted prices for identical assets or liabilities in active markets that
      the Company has the ability to access at the measurement
    date.


Ÿ
            Level
      2–Quoted prices for similar assets or liabilities in active markets;
      quoted prices for identical or similar assets or liabilities in markets
      that are not active; and model-derived valuations in which all significant
      inputs are observable market data.


Ÿ
            Level
      3–Valuations derived from valuation techniques in which one or more
      significant inputs are
unobservable.





SFAS No.
157 requires companies to maximize the use of observable inputs (Level 1 and
Level 2), when available, and to minimize the use of unobservable inputs (Level
3) when determining fair value.





The
Company adopted SFAS No. 157 on January 1, 2008 and recorded no financial
statement adjustments as a result of adoption. The Company has applied the
provisions of the standard to its fuel and interest rate hedges (see Note 2 to
the Consolidated Financial Statements).




However, the
Company has not applied the provisions of the standard to its property and
equipment, goodwill and certain other assets, which are measured at fair value
for impairment assessment, nor to any business combinations or asset
retirement obligations. The Company will apply the provisions of the standard to
these assets and liabilities, beginning January 1, 2009 as required by FASB
Staff Position (FSP) SFAS No. 157-2, Effective Date of FASB Statement No.
157.


8
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) –
(Continued)
 Table of
Contents




2.    Hedging
Activities





The
Company uses derivative financial instruments to hedge against increases in
diesel fuel prices and interest rates. The Company does not hold or issue
derivative financial instruments for trading or speculative purposes. The
Company formally documents the relationship between the hedging instrument and
the hedged item, as well as the risk management objective and strategy for the
use of the hedging instrument. This documentation includes linking the
derivatives that are designated as cash flow hedges to specific assets or
liabilities on the balance sheet, commitments or forecasted transactions. The
Company assesses at the time a derivative contract is entered into, and at least
quarterly thereafter, whether the derivative item is effective in offsetting the
changes in cash flows. Any change in fair value resulting from ineffectiveness,
as defined by SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended,
is recognized in current period earnings. For derivative instruments that are
designated and qualify as cash flow hedges, the effective portion of the gain or
loss on the derivative instrument is recorded in accumulated other comprehensive
loss (AOCL) as a separate component of stockholder’s equity and reclassified
into earnings in the period during which the hedge transaction affects earnings.
Cash flows related to fuel and interest rate hedges are classified as operating
activities in the Consolidated Statements of Cash Flows.





BNSF
Railway monitors its hedging positions and credit ratings of its counterparties
and does not anticipate any losses due to counterparty
nonperformance.





Fuel





Fuel
costs represented 30 percent and 22 percent of total operating expenses during
the three month periods ended March 31, 2008 and 2007, respectively. Due to the
significance of diesel fuel expenses to the operations of BNSF Railway and the
historical volatility of fuel prices, the Company has entered into hedges to
partially mitigate the risk of fluctuations in the price of its diesel fuel
purchases. The fuel hedges include the use of derivatives that are accounted for
as cash flow hedges. The hedging is intended to protect the Company’s operating
margins and overall profitability from adverse fuel price changes by entering
into fuel-hedge instruments based on management’s evaluation of current and
expected diesel fuel price trends. However, to the extent the Company hedges
portions of its fuel purchases, it may not realize the impact of decreases in
fuel prices. Conversely, to the extent the Company does not hedge portions of
its fuel purchases, it may be adversely affected by increases in fuel prices.
Based on fuel consumption during the first quarter of 2008 and excluding the
impact of the hedges, each one-cent increase in the price of fuel per gallon
would result in approximately $15 million of additional fuel expense on an
annual basis. However, BNSF Railway believes any fuel price increase would
be substantially offset by the Company’s fuel surcharge program.





Total
Fuel-Hedging Activities





As of
March 31, 2008, BNSF Railway’s total fuel-hedging positions covered
approximately 5 percent, 1 percent and 1 percent of estimated fuel
purchases for the remainder of 2008, 2009 and 2010, respectively. Hedge
positions are closely monitored to ensure that they will not exceed actual fuel
requirements in any period.





The
amounts recorded in the Consolidated Statements of Income for fuel-hedge
transactions were as follows (in millions):





Three
      Months Ended
              March
      31,2008
            
            2007Hedge
      benefit
            
            $
            10
            
            
            $
            27Ineffective
      portion of open hedges
            
            
            –
            
            
            
            (1
            )Tax
      effect
            
            
            (4
            )
            
            
            (10
            )Hedge
      benefit, net of tax
            
            $
            6
            
            
            $
            16





Unrealized
gains and losses of the ineffective portion of open hedges are recorded in the
Consolidated Statements of Income as a component of fuel expense.





9
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of Contents




The
amounts recorded in the Consolidated Balance Sheets for fuel-hedge transactions
were as follows (in millions):





March
      31,
            
            December
      31,2008
            
            2007Short-term
      fuel-hedging asset
            
            $
            39
            
            
            $
            29Long-term
      fuel-hedging asset
            
            
            14
            
            
            
            10Ineffective
      portion of open hedges
            
            
            –
            
            
            
            –Tax
      effect
            
            
            (20
            )
            
            
            (15
            )Amount
      included in AOCL, net of tax
            
            $
            33
            
            
            $
            24Settled
      fuel-hedging contracts receivable
            
            $
            10
            
            
            $
            6





The
Company uses the forward commodity price for the periods hedged to value its
fuel-hedge swaps. This methodology is a market approach, which under SFAS No.
157 utilizes Level 2 inputs as it uses market data for similar instruments in
active markets.





New York Mercantile
Exchange(NYMEX) #2 Heating Oil (HO) Hedges





As of
March 31, 2008, BNSF Railway had entered into fuel swap agreements utilizing
NYMEX #2 HO. The hedge prices do not include taxes, transportation costs,
certain other fuel handling costs and any differences that may occur between the
prices of HO and the purchase price of BNSF Railway’s diesel fuel. Over the
twelve months ended March 31, 2008, the sum of all such costs averaged
approximately 21 cents per gallon.





During
the first quarter of 2008, the Company entered into fuel swap agreements
utilizing HO to hedge the equivalent of approximately 24.02 million gallons
of fuel with an average swap price of $2.44 per gallon. The following tables
provide fuel-hedge data based on the quarter being hedged for all HO fuel hedges
outstanding as of March 31, 2008.





Quarter
      Ending2008
            
            June
      30,
            
            
            September
      30,
            
            
            December
      31,
            
            
            TotalHO
      SwapsGallons
      hedged (in millions)
            
            
            6.80
            
            
            
            8.23
            
            
            
            8.99
            
            
            
            24.02Average
      swap price (per gallon)
            
            $
            2.42
            
            
            $
            2.42
            
            
            $
            2.47
            
            
            $
            2.44Fair
      value (in millions)
            
            $
            3
            
            
            $
            3
            
            
            $
            4
            
            
            $
            10





West Texas Intermediate
(WTI)Crude Oil
Hedges





In
addition, BNSF Railway enters into fuel swap agreements utilizing WTI crude oil.
The hedge prices do not include taxes, transportation costs, certain other fuel
handling costs and any differences which may occur between the prices of WTI and
the purchase price of BNSF Railway’s diesel fuel, including refining costs. Over
the twelve months ended March 31, 2008, the sum of all such costs averaged
approximately 56 cents per gallon.








10
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
Contents




During
the first quarter of 2008, the Company entered into fuel swap agreements
utilizing WTI to hedge the equivalent of approximately 450 thousand barrels of
fuel with an average swap price of $84.78 per barrel. The following table
provides fuel-hedge data based on the quarter being hedged for all WTI fuel
hedges outstanding as of March 31, 2008.





Quarter
      Ending2008
            
            June
      30,
            September
      30,
            December
      31,
            TotalWTI
      SwapsBarrels
      hedged (in thousands)
            
            
            260
            
            230
            
            230
            
            720Equivalent
      gallons hedged (in millions)
            
            
            10.92
            
            9.66
            
            9.66
            
            30.24Average
      swap price (per barrel)
            
            $
            63.77
            $
            63.70
            $
            63.70
            $
            63.73Fair
      value (in millions)
            
            $
            10
            $
            8
            $
            8
            $
            26





Quarter
      Ending2009
            
            March
      31,
            June
      30,
            September
      30,
            December
      31,
            TotalWTI
      SwapsBarrels
      hedged (in thousands)
            
            
            100
            
            100
            
            100
            
            160
            
            460Equivalent
      gallons hedged (in millions)
            
            
            4.20
            
            4.20
            
            4.20
            
            6.72
            
            19.32Average
      swap price (per barrel)
            
            $
            65.10
            $
            65.10
            $
            65.10
            $
            76.24
            $
            68.97Fair
      value (in millions)
            
            $
            3
            $
            3
            $
            3
            $
            3
            $
            12





Quarter
      Ending2010
            
            March
      31,
            June
      30,
            September
      30,
            December
      31,
            TotalWTI
      SwapsBarrels
      hedged (in thousands)
            
            
            160
            
            90
            
            90
            
            90
            
            430Equivalent
      gallons hedged (in millions)
            
            
            6.72
            
            3.78
            
            3.78
            
            3.78
            
            18.06Average
      swap price (per barrel)
            
            $
            76.06
            $
            84.73
            $
            84.69
            $
            84.68
            $
            81.49Fair
      value (in millions)
            
            $
            3
            $
            1
            $
            1
            $
            <
      1
            $
            5





Interest
Rate





From time
to time, the Company enters into various interest rate hedging transactions for
the purpose of managing exposure to fluctuations in interest rates by
establishing rates in anticipation of the refinancing of leveraged leases. The
Company uses treasury locks as part of its interest rate risk management
strategy.





BNSF
Railway’s measurement of the fair value of interest rate derivatives is based on
estimates of the mid-market values for the transactions provided by the
counterparties to these agreements. This methodology is a market approach, which
under SFAS No. 157 utilizes Level 2 inputs as it uses market data for similar
instruments in active markets. Unrealized gains and losses for interest rate
hedge transactions are not recorded in the Consolidated Statements of
Income.





Cash
Flow Interest Rate Hedges





The
amounts recorded in the Consolidated Balance Sheets for interest rate cash flow
hedge transactions, which represent the fair value of open and closed hedges,
were as follows (in millions):





March
      31, 2008
            
            December
      31, 2007Unrecognized
      gain on closed hedges
            
            $
            1
            
            $
            1Tax
      effect
            
            
            –
            
            
            –Unrecognized
      gain in AOCL, net of tax
            
            $
            1
            
            $
            1




11
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
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3.    Accounts
Receivable, Net





BNSF
Railway transfers a portion of its accounts receivable to Santa Fe Receivables
Corporation (SFRC), a special purpose subsidiary. SFRC transfers an undivided
interest in such receivables, with limited exceptions, to a master trust and
causes the trust to issue an undivided interest in the receivables to investors
(the A/R sales program). The undivided interests in the master trust may be in
the form of certificates or purchased interests.




BNSF
Railway’s total capacity to sell undivided interests to investors under the A/R
sales program was $700 million at March 31, 2008, which was comprised of two
$175 million, 364-day accounts receivable facilities and two $175 million,
3-year accounts receivable facilities, which mature in November 2008 and 2010,
respectively. Outstanding undivided interests held by investors under the A/R
sales program were $300 million at both March 31, 2008 and December 31,
2007, with $75 million under each facility. These undivided interests in
receivables are excluded from accounts receivable by BNSF Railway in connection
with the sale of undivided interests under the A/R sales program. These
undivided interests were supported by $1,161 million and
$1,105 million of receivables transferred by SFRC to the master trust at
March 31, 2008 and December 31, 2007, respectively. When SFRC transfers these
receivables to the master trust, it retains an undivided interest in the
receivables sold, which is included in accounts receivable in the Company’s
Consolidated Financial Statements. The interest that continues to be held by
SFRC of $861 million and $805 million at March 31, 2008 and December 31, 2007,
respectively, less an allowance for uncollectible accounts, reflected the total
accounts receivable transferred by SFRC to the master trust less $300 million at
both March 31, 2008 and December 31, 2007, of outstanding undivided interests
held by investors. Due to a relatively short collection cycle, the fair value of
the undivided interest transferred to investors in the A/R sales program
approximated book value, and there was no gain or loss from the
transaction.





BNSF
Railway retains the collection responsibility with respect to the accounts
receivable. Proceeds from collections reinvested in the A/R sales program were
approximately $4.5 billion and $4.0 billion for the three months ended March 31,
2008 and 2007, respectively. No servicing asset or liability has been recorded
because the fees BNSF Railway receives for servicing the receivables approximate
the related costs. SFRC’s costs of the sale of receivables are included in other
expense, net and were $3 million and $6 million for the three months ended March
31, 2008 and 2007, respectively. These costs fluctuate monthly with changes in
prevailing interest rates and were based on weighted average interest rates of
4.2 percent and 5.6 percent for the three months ended March 31, 2008 and 2007,
respectively. These costs include interest, discounts associated with
transferring the receivables under the A/R sales program to SFRC, program fees
paid to banks, incidental commercial paper issuing costs and fees for unused
commitment availability.





The
amount of accounts receivable transferred by BNSF Railway to SFRC fluctuates
based upon the availability of receivables and is directly affected by changing
business volumes and credit risks, including dilution and delinquencies. In
order for there to be an impact on the amount of receivables BNSF Railway could
sell, the combined dilution and delinquency percentages would have to exceed an
established threshold. BNSF Railway has historically experienced very low levels
of dilution or delinquency and was well below the established threshold rates at
March 31, 2008. Based on the current levels, if dilution or delinquency
percentages were to increase by one percentage point, there would be no impact
to the amount of receivables BNSF Railway could sell.





Receivables
funded under the A/R sales program may not include amounts over 90 days past due
or concentrations over certain limits with any one customer and certain other
receivables. At March 31, 2008 and December 31, 2007, $13 million and $11
million, respectively, of accounts receivable were greater than 90 days
old.





BNSF
Railway maintains an allowance for bill adjustments and uncollectible accounts
based upon the expected collectibility of accounts receivable, including
receivables transferred to the master trust. Credit losses are based on specific
identification of uncollectible accounts and application of historical
collection percentages by aging category. At March 31, 2008 and December 31,
2007, $38 million and $36 million, respectively, of such allowances had been
recorded, of which $36 million and $34 million, respectively, had been recorded
as a reduction to accounts receivable, net. The remaining $2 million at both
March 31, 2008 and December 31, 2007, had been recorded in accounts payable and
other current liabilities because they relate to the outstanding undivided
interests held by investors. During the three months ended March 31, 2008 and
2007, less than $1 million and $2 million, respectively, of accounts receivable
were written off.





12
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of Contents
 
 The investors
in the master trust have no recourse to BNSF Railway's other assets except for
customary warranty and indemnity claims. Creditors of BNSF Railway have no
recourse to the assets of the master trust or SFRC unless and until all claims
of their respective creditors have been paid. The A/R sales program includes
provisions that, if triggered, allow the investors participating in this
program, at their option, to cancel the program. At March 31, 2008, BNSF Railway
was in compliance with these provisions.





4.
            Debt





Financing
Obligation





The
Company has commenced the construction of an intermodal facility that it intends
to sell to a third party and subsequently lease back. Once construction of the
facility is complete and all improvements have been sold to the third party,
BNSF Railway will lease the facility from the third party for 20 years.
Construction is expected to be completed in 2010 with an approximate cost of
$160 million. During the first quarter of 2008, the Company sold $18 million of
completed improvements, bringing the total sold to date to $59 million. This
sale leaseback transaction is being accounted for as a financing obligation due
to continuing involvement. The outflows from the construction of the facility
are classified as investing activities, and the inflows from the associated
financing proceeds are classified as financing activities in the Company’s
Consolidated Statements of Cash Flows.





Guarantees




Debt and other obligations of
non-consolidated entities guaranteed by the Company as of March 31, 2008, were
as follows (dollars in millions):


GuaranteesBNSF
      Railway Ownership Percentage
            
            Principal
              Amount
      Guaranteed
            
            Maximum
              Future
      Payments
            
            Maximum
              Recourse
              Amounta
            
            Remaining
      Term
              (in
      years)
            
            Capitalized
      ObligationsKinder
      Morgan Energy Partners, L.P.
            
            0.5%
            
            $
            190
            
            $
            190
            
            $
            –
            
            Termination
      of Ownership
            
            $
            –Kansas
      City Terminal Intermodal Transportation Corporation
            
            0.0%
            
            $
            56
            
            $
            79
            
            $
            79
            
            10
            
            $
            30
            bWestside
      Intermodal Transportation Corporation
            
            0.0%
            
            $
            40
            
            $
            61
            
            $
            –
            
            15
            
            $
            34
            bThe
      Unified Government of Wyandotte County/Kansas City, Kansas
            
            0.0%
            
            $
            13
            
            $
            19
            
            $
            –
            
            15
            
            $
            10
            bChevron
      Phillips Chemical Company, LP
            
            0.0%
            
            
            N/Ad
            
            
            N/Ad
            
            
            N/Ad
            
            10
            
            $
            13
            cVarious
      lessors
              (Residual
      value guarantees)
            
            0.0%
            
            
            N/A
            
            $
            271
            
            $
            271
            
            Various
            
            $
            69
            cAll
      other
            
            0.0%
            
            $
            6
            
            $
            7
            
            $
            2
            
            Various
            
            $
            –


a
      Reflects the maximum amount the Company could recover from a third party
      other than the counterparty.
              b
      Reflects capitalized obligations that are recorded on the Company’s
      Consolidated Balance Sheets.
              c
      Reflects FASB Interpretation (FIN) 45, Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, asset and
      corresponding liability for the fair value of these
      guarantees.
              d
      There is no cap to the liability that can be sought from BNSF Railway for
      BNSF Railway’s negligence or the negligence of the indemnified party.
      However, BNSF Railway could receive reimbursement from certain insurance
      policies if the liability exceeds a certain
  amount.




13
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
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Kinder
Morgan Energy Partners, L.P.





Santa Fe
Pacific Pipelines, Inc., an indirect, wholly-owned subsidiary of BNSF Railway,
has a guarantee in connection with its remaining special limited partnership
interest in Santa Fe Pacific Pipelines Partners, L.P. (SFPP), a subsidiary of
Kinder Morgan Energy Partners, L.P., to be paid only upon default by the
partnership. All obligations with respect to the guarantee will cease upon
termination of ownership rights, which would occur upon a put notice issued by
BNSF Railway or the exercise of the call rights by the general partners of
SFPP.





Kansas
City Terminal Intermodal Transportation Corporation





BNSF
Railway and another major railroad jointly and severally guarantee $56 million
of debt of Kansas City Terminal Intermodal Transportation Corporation, the
proceeds of which were used to finance construction of a double track grade
separation bridge in Kansas City, Missouri, which is operated and used by Kansas
City Terminal Railway Company (KCTRC). BNSF Railway has a 25 percent ownership
in KCTRC, accounts for its interest using the equity method of accounting and
would be required to fund a portion of the remaining obligation upon default by
the original debtor.





Westside
Intermodal Transportation Corporation and The Unified Government of


Wyandotte
County/Kansas City, Kansas





BNSF
Railway has outstanding guarantees of $53 million of debt, the proceeds of which
were used to finance construction of a bridge that connects BNSF Railway’s
Argentine Yard in Kansas City, Kansas, with the KCTRC mainline tracks in Kansas
City, Missouri. The bridge is operated by KCTRC, and payments related to BNSF
Railway’s guarantee of this obligation would only be called for upon default by
the original debtor.





Chevron
Phillips Chemical Company, LP





In the third quarter of
2007, BNSF Railway entered into an indemnity agreement with Chevron Phillips
Chemical Company, LP (Chevron Phillips), granting certain rights of indemnity
from BNSF Railway, in order to facilitate access to a new storage facility.
Under certain circumstances, payment under this obligation may be required in
the event Chevron Phillips were to incur certain liabilities or other
incremental costs resulting from trackage access.





Residual
Value Guarantees (RVG)





In
the normal course of business, the Company enters into leases in which it
guarantees the residual value of certain leased equipment. Some of these leases
have renewal or purchase options, or both, that the Company may exercise at the
end of the lease term. If the Company elects not to exercise these options, it
may be required to pay the lessor an amount not exceeding the RVG. The amount of
any payment is contingent upon the actual residual value of the leased
equipment. Some of these leases also require the lessor to pay the Company any
surplus if the actual residual value of the leased equipment is over the RVG.
These guarantees will expire between 2008 and 2011.





The
maximum future payments, as disclosed in the Guarantees table above, represent
the undiscounted maximum amount that the Company could be required to pay in the
event the Company did not exercise its renewal option and the fair market value
of the equipment had significantly declined. BNSF Railway does not anticipate
such a large reduction in the fair market value of the leased equipment. As of
March 31, 2008, the Company had recorded a $69 million asset and corresponding
liability for the fair value of RVGs.





All
Other





As of
March 31, 2008, BNSF Railway guaranteed $6 million of other debt and leases.
BNSF Railway holds a performance bond and has the option to sub-lease property
to recover up to $2 million of the $6 million of guarantees. These guarantees
expire between 2011 and 2013.





Other
than as discussed above, there is no collateral held by a third party that the
Company could obtain and liquidate to recover any amounts paid under the above
guarantees.





14
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
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Other
than as discussed above, none of the guarantees are recorded in the Consolidated
Financial Statements of the Company. The Company does not expect performance
under these guarantees to have a material effect on the Company in the
foreseeable future.





Indemnities





In the
ordinary course of business, BNSF Railway enters into agreements with third
parties that include indemnification clauses. In general, these clauses are
customary for the types of agreements in which they are included. At times,
these clauses may involve indemnification for the acts of the Company, its
employees and agents, indemnification for another party’s acts, indemnification
for future events, indemnification based upon a certain standard of performance,
indemnification for liabilities arising out of the Company’s use of leased
equipment or other property, or other types of indemnification. Due to the
uncertainty of whether events which would trigger the indemnification
obligations would ever occur, the Company does not believe that these indemnity
agreements will have a material adverse effect on the Company’s results of
operations, financial position or liquidity. Additionally, the Company believes
that, due to lack of historical payment experience, the fair value of
indemnities cannot be estimated with any amount of certainty and that the fair
value of any such amount would be immaterial to the Consolidated Financial
Statements. Agreements that contain unique circumstances, particularly
agreements that contain guarantees that indemnify another party’s acts are
disclosed separately if appropriate. Unless separately disclosed above, no fair
value liability related to indemnities has been recorded in the Consolidated
Financial Statements.





5.
    Commitments and Contingencies





Personal
Injury





Personal
injury claims, including asbestos claims and employee work-related injuries and
third-party injuries (collectively, other personal injury), are a significant
expense for the railroad industry. Personal injury claims by BNSF Railway
employees are subject to the provisions of the Federal Employers’ Liability Act
(FELA) rather than state workers’ compensation laws. FELA’s system of requiring
the finding of fault, coupled with unscheduled awards and reliance on the jury
system, contributed to increased expenses in past years. Other proceedings
include claims by non-employees for punitive as well as compensatory damages. A
few proceedings purport to be class actions. The variability present in settling
these claims, including non-employee personal injury and matters in which
punitive damages are alleged, could result in increased expenses in future
years. BNSF Railway has implemented a number of safety programs designed to
reduce the number of personal injuries as well as the associated claims and
personal injury expense.




BNSF Railway
records a liability for personal injury claims when the expected loss is both
probable and reasonably estimable. The liability and ultimate expense
projections are estimated using standard actuarial methodologies. Liabilities
recorded for unasserted personal injury claims are based on information
currently available. Due to the inherent uncertainty involved in projecting
future events such as the number of claims filed each year, developments in
judicial and legislative standards and the average costs to settle projected
claims, actual costs may differ from amounts recorded. BNSF Railway has obtained
insurance coverage for certain claims, as discussed under the heading “BNSF
Insurance Company.” Expense accruals and any required adjustments are classified
as materials and other in the Consolidated Statements of Income.





Asbestos





The
Company is party to a number of personal injury claims by employees and
non-employees who may have been exposed to asbestos. The heaviest exposure for
BNSF Railway employees was due to work conducted in and around the use of steam
locomotive engines that were phased out between the years of 1950 and 1967.
However, other types of exposures, including exposure from locomotive component
parts and building materials, continued after 1967 until they were substantially
eliminated at BNSF Railway by 1985.





BNSF
Railway assesses its unasserted liability exposure on an annual basis during the
third quarter. BNSF Railway determines its asbestos liability by estimating its
exposed population, the number of claims likely to be filed, the number of
claims that will likely require payment, and the estimated cost per claim.
Estimated filing and dismissal rates and average cost per claim are determined
utilizing recent claim data and trends.





15
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
Contents




Throughout
the year, BNSF Railway monitors actual experience against the number of
forecasted claims and expected claim payments and will record adjustments to the
Company’s estimates as necessary.





The
following table summarizes the activity in the Company’s accrued obligations for
both asserted and unasserted asbestos matters (in millions):





Three
      Months Ended
              March
      31,2008
            
            2007Beginning
      balance
            
            $
            270
            
            $
            306Accruals
            
            –
            
            
            –Payments
            
            (4)
            
            
            (5)Ending
      balance at March 31,
            
            $
            266
            
            $
            301





Of the
March 31, 2008 obligation, $220 million was related to unasserted claims while
$46 million was related to asserted claims. At March 31, 2008, $17 million was
included in current liabilities. The recorded liability was not discounted. In
addition, defense and processing costs, which are recorded on an as-reported
basis, were not included in the recorded liability. The Company is primarily
self-insured for asbestos-related claims.





The
following table summarizes information regarding the number of asserted asbestos
claims filed against BNSF Railway:





Three
      Months Ended
              March
      31,2008
            
            2007Claims
      unresolved at beginning of period
            
            1,781
            
            1,975Claims
      filed
            
            163
            
            139Claims
      settled, dismissed or otherwise resolved
            
            (117)
            
            (173)Ending
      balance at March 31,
            
            1,827
            
            1,941





Based on
BNSF Railway’s estimate of the potentially exposed employees and related
mortality assumptions, it is anticipated that unasserted claims will continue to
be filed through the year 2050. The Company recorded an amount for the full
estimated filing period through 2050 because it had a relatively finite exposed
population (former and current employees hired prior to 1985), which it was able
to identify and reasonably estimate and about which it had obtained reliable
demographic data (including age, hire date and occupation) derived from industry
or BNSF Railway specific data that was the basis for the study. BNSF Railway
projects that approximately 55, 75 and 95 percent of the future unasserted
asbestos claims will be filed within the next 10, 15 and 25 years,
respectively.





Because
of the uncertainty surrounding the factors used in the study, it is reasonably
possible that future costs to settle asbestos claims may range from
approximately $245 million to $290 million. However, BNSF Railway believes that
the $266 million recorded is the best estimate of the Company’s future
obligation for the settlement of asbestos claims.





The
amounts recorded by BNSF Railway for the asbestos-related liability were based
upon currently known facts. Future events, such as the number of new claims to
be filed each year, the average cost of disposing of claims, as well as the
numerous uncertainties surrounding asbestos litigation in the United States,
could cause the actual costs to be higher or lower than projected.





While the
final outcome of asbestos-related matters cannot be predicted with certainty,
considering among other things the meritorious legal defenses available and
liabilities that have been recorded, it is the opinion of BNSF Railway that none
of these items, when finally resolved, will have a material adverse effect on
the Company’s financial position or liquidity. However, the occurrence of a
number of these items in the same period could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.





16
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
Contents




Other
Personal Injury





BNSF
Railway estimates its other personal injury liability claims and expense
quarterly based on the covered population, activity levels and trends in
frequency and the costs of covered injuries. Estimates include unasserted claims
except for certain repetitive stress and other occupational trauma claims that
result from prolonged repeated events or exposure. Such claims are estimated on
an as-reported basis because, while the Company has concluded that a probable
loss has occurred, it cannot estimate the range of reasonably possible loss due
to other contributing causes of such injuries and the fact that continued
exposure is required for the potential injury to manifest itself as a claim. The
Company believes that the low end of the range of reasonably possible loss, as
that term is used in FIN 14, Reasonable Estimation of the Amount
of a Loss, is immaterial for these repetitive stress and other
occupational trauma claims.





BNSF
Railway monitors quarterly actual experience against the number of forecasted
claims to be received, the forecasted number of claims closing with payment and
expected claims payments. Adjustments to the Company’s estimates are recorded
quarterly as necessary or more frequently as new events or revised estimates
develop.





The
following table summarizes the activity in the Company’s accrued obligations for
other personal injury matters (in millions):





Three
      Months Ended
              March
      31,2008
            
            2007Beginning
      balance
            
            $
            439
            
            $
            439Accruals
            
            46
            
            
            47Payments
            
            (31)
            
            
            (52)Ending
      balance at March 31,
            
            $
            454
            
            $
            434





At March
31, 2008, $163 million was included in current liabilities. BNSF Railway’s
liabilities for other personal injury claims are undiscounted. In addition,
defense and processing costs, which are recorded on an as-reported basis, were
not included in the recorded liability. The Company is substantially
self-insured for other personal injury claims.





The
following table summarizes information regarding the number of personal injury
claims, other than asbestos, filed against BNSF Railway:





Three
      Months Ended
              March
      31,2008
            
            2007Claims
      unresolved at beginning of period
            
            3,322
            
            3,130Claims
      filed
            
            1,534
            
            921Claims
      settled, dismissed or otherwise resolved
            
            (884)
            
            (829)Ending
      balance at March 31,
            
            3,972
            
            3,222





Because
of the uncertainty surrounding the ultimate outcome of other personal injury
claims, it is reasonably possible that future costs to settle other personal
injury claims may range from approximately $395 million to $555 million.
However, BNSF Railway believes that the $454 million recorded is the best
estimate of the Company’s future obligation for the settlement of other personal
injury claims.





The
amounts recorded by BNSF Railway for other personal injury claims were based
upon currently known facts. Future events, such as the number of new claims to
be filed each year, the average cost of disposing of claims, as well as the
numerous uncertainties surrounding personal injury litigation in the United
States, could cause the actual costs to be higher or lower than
projected.





17
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
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While the
final outcome of these other personal injury matters cannot be predicted with
certainty, considering among other things the meritorious legal defenses
available and liabilities that have been recorded, it is the opinion of BNSF
Railway that none of these items, when finally resolved, will have a material
adverse effect on the Company’s financial position or liquidity. However, the
occurrence of a number of these items in the same period could have a material
adverse effect on the results of operations in a particular quarter or fiscal
year.





BNSF
Insurance Company





Burlington
Northern Santa Fe Insurance Company, Ltd. (BNSF IC), a wholly owned subsidiary
of BNSF, provides insurance coverage for certain risks incurred after April 1,
1998, FELA claims, railroad protective, force account insurance claims and
certain excess general liability coverage incurred after January 1, 2002, and
certain other claims which are subject to reinsurance. During the three months
ended March 31, 2008 and 2007, BNSF Railway paid premiums of $149 million and
$146 million, respectively, to BNSF IC for such coverage, net of reimbursements
from third parties and recognized $42 million and $41 million, respectively, in
expense related to those premiums, which is classified as purchased services in
the Consolidated Statements of Income. At March 31, 2008, unamortized premiums
remaining on the Consolidated Balance Sheet were $111 million. During the three
months ended March 31, 2008 and 2007, BNSF IC made claim payments totaling $26
million and $43 million, respectively, for settlement of covered
claims.





Environmental





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





Liabilities
for environmental cleanup costs are recorded when BNSF Railway’s liability for
environmental cleanup is probable and reasonably estimable. Subsequent
adjustments to initial estimates are recorded as necessary based upon additional
information developed in subsequent periods. Environmental costs include initial
site surveys and environmental studies as well as costs for remediation of sites
determined to be contaminated.





BNSF
Railway estimates the ultimate cost of cleanup efforts at its known
environmental sites on an annual basis during the third quarter. Ultimate cost
estimates for environmental sites are based on historical payment patterns,
current estimated percentage to closure ratios and benchmark patterns developed
from data accumulated from industry and public sources, including the
Environmental Protection Agency and other governmental agencies. These factors
incorporate experience gained from cleanup efforts at other similar sites into
the estimates for which remediation and restoration efforts are still in
progress.





18
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
Contents




On a
quarterly basis, BNSF Railway monitors actual experience against the forecasted
remediation and related payments made on existing sites and conducts ongoing
environmental contingency analyses, which consider a combination of factors
including independent consulting reports, site visits, legal reviews and
analysis of the likelihood of participation in, and the ability to pay for,
cleanup of other PRPs. Adjustments to the Company’s estimates will continue to
be recorded as necessary based on developments in subsequent periods.
Additionally, environmental accruals, which are classified as materials and
other in the Consolidated Statements of Income, include amounts for newly
identified sites or contaminants, third-party claims and legal fees incurred for
defense of third-party claims and recovery efforts.




Annual
studies do not include (i) contaminated sites of which the Company is not aware;
(ii) additional amounts for third-party claims, which arise out of contaminants
allegedly migrating from BNSF Railway property, due to a limited number of
sites; or (iii) natural resource damage claims. BNSF Railway continues to
estimate third-party claims on a site by site basis when the liability for such
claims is probable and reasonably estimable. BNSF Railway’s recorded liability
for third-party claims as of March 31, 2008, is approximately $22
million.





BNSF
Railway is involved in a number of administrative and judicial proceedings and
other mandatory cleanup efforts for 346 sites, including Superfund sites, at
which it is participating in the study or cleanup, or both, of alleged
environmental contamination.





The
following table summarizes the activity in the Company’s accrued obligations for
environmental matters (in millions):





Three
      Months Ended
              March
      31,2008
            
            2007Beginning
      balance
            
            $
            380
            
            $
            318Accruals
            
            15
            
            
            67Payments
            
            (19)
            
            
            (15)Ending
      balance at March 31,
            
            $
            376
            
            $
            370





At March
31, 2008, $66 million was included in current liabilities. In the first quarter
of 2007, the Company recorded a $65 million pre-tax charge due to an
increase in environmental costs primarily related to a final resolution with the
State of Washington and its Department of Ecology on clean-up of an existing
environmental site at Skykomish and an adverse reversal of a trial court
decision on appeal regarding a site at Arvin, California.





BNSF
Railway’s environmental liabilities are not discounted. BNSF Railway anticipates
that the majority of the accrued costs at March 31, 2008, will be paid over the
next ten years, and no individual site is considered to be
material.





The
following table summarizes the environmental sites:





Three
      Months Ended March 31,BNSF
      Railway Sites
            
            Superfund
      Sites2008
            
            2007
            
            2008
            
            2007Number
      of sites at beginning of period
            
            346
            
            375
            
            20
            
            20Sites
      added during the period
            
            6
            
            5
            
            –
            
            –Sites
      closed during the period
            
            (6)
            
            (12)
            
            –
            
            –Number
      of sites at March 31,
            
            346
            
            368
            
            20
            
            20








19
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
Contents




Liabilities
recorded for environmental costs represent BNSF Railway’s best estimate of its
probable future obligation for the remediation and settlement of these sites and
include both asserted and unasserted claims. Unasserted claims are not a
material component of the liability. Although recorded liabilities include BNSF
Railway’s best estimate of all probable costs, without reduction for anticipated
recoveries from third parties, BNSF Railway’s total cleanup costs at these sites
cannot be predicted with certainty due to various factors such as the extent of
corrective actions that may be required, evolving environmental laws and
regulations, advances in environmental technology, the extent of other parties’
participation in cleanup efforts, developments in ongoing environmental analyses
related to sites determined to be contaminated and developments in environmental
surveys and studies of contaminated sites.





Because
of the uncertainty surrounding these factors, it is reasonably possible that
future costs for environmental liabilities may range from approximately $300
million to $525 million. However, BNSF Railway believes that the $376 million
recorded at March 31, 2008, is the best estimate of the Company’s future
obligation for environmental costs.





While the
final outcome of these environmental matters cannot be predicted with certainty,
it is the opinion of BNSF Railway that none of these items, when finally
resolved, will have a material adverse effect on the Company’s financial
position or liquidity. However, the occurrence of a number of these items in the
same period could have a material adverse effect on the results of operations in
a particular quarter or fiscal year.





Other
Claims and Litigation





In
addition to asbestos, other personal injury and environmental matters discussed
above, BNSF Railway and its subsidiaries are also parties to a number of other
legal actions and claims, various governmental proceedings and private civil
suits arising in the ordinary course of business, including those related to
disputes and complaints involving certain transportation rates and charges
(including complaints seeking refunds of prior charges paid for coal
transportation and the prescription of future rates for such movements and
claims relating to service under contract provisions or otherwise). Some of the
legal proceedings include claims for punitive as well as compensatory damages,
and a few proceedings purport to be class actions. While the final outcome of
these matters cannot be predicted with certainty, considering among other things
the meritorious legal defenses available and liabilities that have been recorded
along with applicable insurance, it is the opinion of BNSF Railway that none of
these items, when finally resolved, will have a material adverse effect on the
Company’s financial position or liquidity. However, an unexpected adverse
resolution of one or more of these items could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.





6.    Employee
Separation Costs





Employee
separation costs activity was as follows (in millions):





Three
      Months Ended March 31,2008
            
            2007Beginning
      balance at January 1,
            
            $
            91
            
            $
            107Accruals
            
            
            1
            
            
            2Payments
            
            
            (4)
            
            
            (6)Ending
      balance at March 31,
            
            $
            88
            
            $
            103





Employee
separation liabilities of $88 million were included in the Consolidated
Balance Sheet at March 31, 2008, and principally represent the following: (i)
$84 million for deferred benefits payable upon separation or retirement to
certain active conductors, trainmen and locomotive engineers; (ii)
$1 million for employee-related severance costs for the consolidation of
clerical functions, material handlers in mechanical shops and trainmen on
reserve boards; and (iii) $3 million for certain non-union employee
severance costs. Employee separation expenses are recorded in materials and
other in the Consolidated Statements of Income. At March 31, 2008,
$13 million of the remaining liabilities were included in current
liabilities.




20
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
Contents




The
deferred benefits payable upon separation or retirement to certain active
conductors, trainmen and locomotive engineers were primarily incurred in
connection with labor agreements reached prior to the business combination of
BNSF’s predecessor companies, Burlington Northern Inc. and Santa Fe Pacific
Corporation (the Merger). These agreements, among other things, reduced train
crew sizes and allowed for more flexible work rules. The majority of the
remaining costs will be paid between 2008 and 2020. As of March 31, 2008, the
Company had updated its estimate and recorded an additional liability of
$1 million related to deferred benefits. The remaining costs for (ii) above
are expected to be paid out between 2008 and approximately 2011, and the costs
for (iii) above are expected be paid out between 2008 and 2021 based on deferral
elections made by the affected employees.





7.    Employment
Benefit Plans





In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans–an amendment of FASB Statements
No. 87, 88, 106 and 132R, which requires the recognition of the
overfunded or underfunded status of a defined benefit postretirement plan in the
Company’s balance sheet. This portion of the new guidance was adopted by the
Company on December 31, 2006. Additionally, the pronouncement eliminates the
option for the Company to use a measurement date prior to the Company’s fiscal
year-end effective December 31, 2008. SFAS No. 158 provides two approaches to
transition to a fiscal year-end measurement date, both of which are to be
applied prospectively. BNSF Railway has elected to apply the transition option
under which a 15-month measurement was determined as of September 30, 2007 that
covers the period until the fiscal year-end measurement is required on December
31, 2008. As a result, the Company recorded a $7 million decrease to retained
earnings in January 2008 to reflect the proportionate allocation of the net
periodic benefit cost to cover the transition period.




Components
of the net periodic benefit cost for the three months ended March 31, 2008 and
2007 were as follows (in millions):





Pension
      Benefits
            
            Retiree
      Health and Welfare BenefitsNet
      Periodic Benefit Cost
            
            2008
            
            2007
            2008
            
            2007Service
      cost
            
            $
            6
            
            $
            6
            
            $
            1
            
            $
            1Interest
      cost
            
            26
            
            24
            
            4
            
            4Expected
      return on plan assets
            
            (28)
            
            (26)
            
            –
            
            –Amortization
      of net loss
            
            4
            
            9
            
            1
            
            1Amortization
      of prior service cost
            
            
            –
            
            
            –
            
            
            (2)
            
            
            (2)Net
      periodic benefit cost recognized
            
            $
            8
            
            $
            13
            
            $
            4
            
            $
            4





Due to
changes in the Company's funding methodology, the Company is no longer required
to make contributions to BNSF's qualified pension plan in 2008.





8.    Related
Party Transactions





BNSF
Railway is involved with BNSF and certain of its subsidiaries in related party
transactions in the ordinary course of business, which include payments made on
each other’s behalf and performance of services. Under the terms of a tax
allocation agreement with BNSF, BNSF Railway made federal and state income tax
payments, net of refunds, of $310 million and $254 million during the first
three months of 2008 and 2007, respectively, which are reflected in changes in
working capital in the Consolidated Statement of Cash Flows.





At March
31, 2008 and December 31, 2007, BNSF Railway had $58 million and $44 million,
respectively, of intercompany receivables which are reflected in accounts
receivable in the respective Consolidated Balance Sheets. At March 31, 2008 and
December 31, 2007, BNSF Railway had $10 million and $14 million of intercompany
payables, respectively, which are reflected in accounts payable in the
respective Consolidated Balance Sheets. Net intercompany balances are settled in
the ordinary course of business.




21
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
  Table of
Contents




At March
31, 2008 and December 31, 2007, BNSF Railway had $300 million and $456 million,
respectively, of intercompany notes receivable from BNSF with a variable
interest rate of 1.0 percent above the monthly average of the daily effective
Federal Funds rate. The $156 million decrease in intercompany notes receivable
is due to repayments of $312 million partially offset by $156 million of loans
to BNSF during 2008. Interest is collected semi-annually on all intercompany
notes receivable. Interest income from intercompany notes receivable is
presented in interest income, related parties in the Consolidated Income
Statements.





BNSF
Logistics is a wholly-owned subsidiary of BNSF that specializes in providing
third-party logistics services. BNSF Railway earned revenues of $10 million and
$7 million for the three months ended March 31, 2008 and 2007, respectively, for
transportation services provided to BNSF Logistics by BNSF Railway.
Additionally, BNSF Railway purchased truck transportation services for the
Company’s materials and supplies from BNSF Logistics of $8 million for each of
the three month periods ended March 31, 2008 and 2007.





Under
various stock incentive plans, BNSF has granted options to employees to purchase
its common stock at a price not less than the fair market value at the date of
grant. Certain employees of BNSF Railway participate in these plans. In
addition, under these plans BNSF has other long-term incentive plans to certain
BNSF Railway employees, including, among other things, restricted stock and a
discounted stock purchase program.





9.    Comprehensive
Income





Other
comprehensive income (loss) refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income, a component of Stockholder’s Equity within the Consolidated Balance
Sheets, rather than net income on the Consolidated Statements of Income. Under
existing accounting standards, other comprehensive income (loss) may include,
among other things, unrecognized gains and losses and prior service cost related
to pension and other postretirement benefit plans and accounting for derivative
financial instruments, which qualify for cash flow hedge
accounting.





The
following table provides a reconciliation of net income reported in the
Consolidated Statements of Income to total comprehensive income (in
millions):





Three
      Months Ended March 31,2008
            
            2007Net
      income
            $
            527
            $
            445Other
      comprehensive income (loss):Amortization
      of prior service costs and
              actuarial losses, net of tax (see Note 7)
            
            2
            
            5Gain
      (loss) on derivative instruments and
              other items, net of tax (see Note 2)
            
            9
            
            (7)Unrealized
      loss on securities held by equity
              method investees, net of tax
            
            (1)
            
            –Total
      comprehensive income
            $
            537
            $
            443




10.    Report
of Independent Registered Public Accounting Firm





PricewaterhouseCoopers
LLP’s review report is included in this quarterly report; however,
PricewaterhouseCoopers LLP does not express an opinion on the unaudited
financial information. Accordingly, such report is not a “report” or “part of a
registration statement” within the meaning of Sections 7 and 11 of the
Securities Act of 1933 and PricewaterhouseCoopers LLP is not subject to the
liability provisions of Section 11 of such Act with respect to the review
report.


22
 
 
 Table of Contents


Report
of Independent Registered Public Accounting Firm





To the
Shareholder and Board of Directors of


BNSF
Railway Company:








We have
reviewed the accompanying consolidated balance sheet of BNSF Railway Company and
its subsidiaries ("BNSF Railway" or the "Company") as of March 31, 2008, and the
related consolidated statements of income and of cash flows for the three-month
periods ended March 31, 2008 and 2007 and the consolidated statement of changes
in stockholder’s equity for the three-month period ended March 31, 2008. These
interim financial statements are the responsibility of the Company’s
management.





We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.





Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.





We
previously audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2007, and the related consolidated statements of income, of changes
in stockholder’s equity, and of cash flows for the year then ended (not
presented herein), and in our report dated February 12, 2008, we expressed an
unqualified opinion on those consolidated financial statements. As discussed in
Note 1 to the accompanying consolidated financial statements, a wholly-owned
subsidiary of Burlington Northern Santa Fe Corporation was merged into the
Company and treated as a combination of entities under common control. The
accompanying consolidated balance sheet at December 31, 2007 reflects this
change. We have not audited the accompanying December 31, 2007 consolidated
balance sheet.




/s/
PricewaterhouseCoopers LLP




Fort
Worth, Texas


April 23,
2008





23
 
 
 Table of Contents


Item 2.    Management’s Narrative Analysis of
Results of Operations.





Management’s
narrative analysis relates to the results of operations of BNSF Railway Company
and its majority-owned subsidiaries (collectively BNSF Railway, Registrant or
Company). The following narrative analysis should be read in conjunction with
the Consolidated Financial Statements and the accompanying notes. All prior
period financial information has been adjusted as appropriate for the
transaction described in Note 1 to the Consolidated Financial
Statements.





Results of Operations





Three
Months Ended March 31, 2008, Compared with Three Months Ended March 31,
2007





Revenues





The
following table presents BNSF Railway’s revenue information by business group
for the three months ended March 31, 2008 and 2007.





Revenues
              (in
      millions)
            
            
            Cars
      / Units
              (in
      thousands)
            
            
            Average
      Revenue
              Per
      Car / Unit2008
            
            
            2007
            
            
            2008
            
            
            2007
            
            
            2008
            
            2007Consumer
      Products
            
            $
            1,384
            
            
            $
            1,312
            
            
            
            1,165
            
            
            
            1,276
            
            
            $
            1,188
            
            
            $
            1,028Coal
            
            
            954
            
            
            
            760
            
            
            
            634
            
            
            
            594
            
            
            
            1,505
            
            
            
            1,279Industrial
      Products
            
            
            939
            
            
            
            846
            
            
            
            403
            
            
            
            390
            
            
            
            2,330
            
            
            
            2,169Agricultural
      Products
            
            
            866
            
            
            
            626
            
            
            
            284
            
            
            
            247
            
            
            
            3,049
            
            
            
            2,534Total
      Freight Revenues
            
            
            4,143
            
            
            
            3,544
            
            
            
            2,486
            
            
            
            2,507
            
            
            $
            1,667
            
            
            $
            1,414Other
      Revenues
            
            
            68
            
            
            
            58Total
      Operating Revenues
            
            $
            4,211
            
            
            $
            3,602





Freight
revenues for the first quarter of 2008 were $4,143 million, up 17 percent
compared with the same 2007 period, on relatively flat unit volumes. Freight
revenues included an increase of approximately $280 million in fuel surcharges
compared with the same 2007 period. Average revenue per car/unit was up 18
percent in the first quarter of 2008 from the first quarter of 2007 primarily
due to improved pricing as well as fuel surcharges.





Consumer
Products





The
Consumer Products’ freight business includes a significant intermodal component
and consists of the following three business areas: international intermodal,
domestic intermodal and automotive.





Consumer
Products revenues of $1,384 million for the first quarter of 2008 were $72
million, or 5 percent, greater than the first quarter of 2007. Higher revenue
per unit due to improved yields and fuel surcharges was partially offset by
lower volumes related to economic softness as well as reduced transpacific
service of a large international customer.





Coal





BNSF
Railway is one of the largest transporters of low-sulfur coal in the United
States. More than 90 percent of all BNSF Railway’s coal tons originate from the
Powder River Basin of Wyoming and Montana.





Coal
revenues of $954 million for the first quarter of 2008 increased $194 million,
or 26 percent, compared with the same period a year ago. The revenue increase
was primarily driven by an increase in the average revenue per car of 18 percent
driven by improved yields, contractual inflation escalators, increased tons per
unit and fuel surcharges. Additionally, unit volumes increased by 7 percent as a
result of strong customer demand.





24
 
 Table of
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Industrial
Products





Industrial
Products’ freight business consists of five business areas: construction
products, building products, petroleum products, chemicals and plastic products
and food and beverages.





Industrial
Products revenues of $939 million for the first quarter of 2008 were $93
million, or 11 percent, greater than the first quarter of 2007, due to strong
demand for construction products and petroleum products, which were
partially offset by weakness in the housing market. The 7-percent increase in
average revenue per unit was the result of higher fuel surcharges and improved
yields.





Agricultural
Products





The
Agricultural Products’ freight business transports agricultural products
including corn, wheat, soybeans, bulk foods, ethanol, fertilizer and other
products.





Agricultural
Products revenues of $866 million for the first quarter of 2008 were $240
million, or 38 percent, higher than revenues for the first quarter of 2007. This
increase was primarily due to a 15-percent increase in unit volume growth
principally in wheat, soybeans, corn and ethanol and a 20-percent increase
in average revenue per unit. The increase in revenue per unit is the result of
improved yields and higher fuel surcharges.





Other
Revenues





Other
revenues increased $10 million, or 17 percent, to $68 million for the first
quarter of 2008. This was primarily due to an increase in demurrage
charges.





Expenses





Total
operating expenses for the first quarter of 2008 were $3,329 million, an
increase of $431 million, or 15 percent, versus the same period in
2007.





Fuel





Fuel
expense is driven by market price, the level of locomotive consumption of diesel
fuel and the effects of hedging activities.





Fuel
expenses of $1,009 million for the first quarter of 2008 were $357 million
higher than the first quarter of 2007. The increase in fuel expense was due to
an increase in the average all-in cost per gallon of diesel fuel. The average
all-in cost per gallon of diesel fuel increased by 96 cents to $2.77, resulting
in a $350 million increase in expense. The increase in the average all-in cost
reflected an increase in the average purchase price of 92 cents, or a $334
million increase in fuel expenses, and a decrease in the hedge benefit of 4
cents, or $16 million (first quarter 2008 benefit of $10 million less first
quarter 2007 benefit of $26 million). Fuel consumption in the first quarter of
2008 increased by 4 million gallons to 364 million gallons, when compared with
consumption in the same 2007 period.





Compensation
and Benefits





Compensation
and benefits includes expenses for BNSF Railway employee wages, health and
welfare, payroll taxes and other related items. The primary factors influencing
the expenses recorded are volume, headcount, utilization, wage rates, incentives
earned during the period, benefit plan participation and pension
expenses.





Compensation
and benefits expenses of $977 million were $50 million, or 5 percent, higher
than the first quarter of 2007. This increase was primarily related to wage
inflation and higher incentive compensation costs.





25
 
 Table of Contents




Purchased
Services





Purchased
services expense includes ramping (lifting of containers onto and off of cars);
drayage (highway movements to and from railway facilities); maintenance of
locomotives, freight cars and equipment; transportation costs over other
railroads; technology services outsourcing; professional services; and other
contract services provided to BNSF Railway. The expenses are driven by the rates
established in the related contracts and the volume of services
required.





Purchased
service expenses of $519 million for the first quarter of 2008 were $19 million,
or 4 percent, higher than the first quarter of 2007. This increase was primarily
due to increases in the following costs: haulage payments for transportation
over other railroads and locomotive and freight car contract maintenance
expense.





Depreciation
and Amortization





Depreciation
and amortization expenses for the period are determined by using the group
method of depreciation, applying a single rate to the gross investment in a
particular class of property. Due to the capital-intensive nature of BNSF
Railway’s operations, depreciation expense is a significant component of the
Company’s operating expense. The full effect of inflation is not reflected in
operating expenses because depreciation is based on historical
cost.





Depreciation
and amortization expenses of $341 million for the first quarter of 2008 were $34
million, or 11 percent, higher than the same period in 2007. This increase in
depreciation expense was primarily due to continuing capital expenditures as
well as updated depreciation rates for locomotives that went into effect April
1, 2007.





Equipment
Rents





Equipment
rents expense includes long-term and short-term payments primarily for
locomotives, freight cars, containers and trailers. The expense is driven
primarily by volume, lease and rental rates, utilization of equipment and
changes in business mix resulting in equipment usage variances.





Equipment
rents expenses of $230 million for the first quarter of 2008, were $2 million,
or 1 percent lower than the first quarter of 2007 due in part to improved
velocity and asset utilization.





Materials
and Other





Material
expenses consist mainly of the costs involved to purchase mechanical and
engineering materials, in addition to other items for construction and
maintenance of property and equipment. Other expenses include personal injury
claims, environmental remediation and derailments as well as utilities,
impairments of long-lived assets, locomotive overhauls, property and
miscellaneous taxes and employee separation costs. The total is offset by gains
on land sales and insurance recoveries.





Materials
and other expenses of $253 million for the first quarter of 2008, were $27
million, or 10 percent, lower than the first quarter of 2007. The decrease was
primarily due to $52 million of decreased environmental costs and a $16 million
write-off of a technology system in 2007, partially offset by current year
increases in expense related to casualties, property taxes and inflationary
increases associated with non-locomotive fuel costs.





Interest
Expense





Interest
expense of $27 million for the first quarter of 2008 was $6 million, or 29
percent, higher than the same 2007 period. This was primarily due to a higher
average debt balance.





Income
Taxes





The
effective tax rate for the each of the three month periods ended March 31, 2008
and 2007 was 38.5 percent.





26
 
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Forward-Looking
Information





To the
extent that statements made by the Company relate to the Company’s future
economic performance or business outlook, projections or expectations of
financial or operational results, or refer to matters that are not historical
facts, such statements are “forward-looking” statements within the meaning of
the federal securities laws. These forward-looking statements include, but are
not limited to, statements regarding:





•              Expectations
as to operating results, such as revenue growth and earnings per
share;





•   Expectations
      as to the effect on the Company’s financial condition of claims,
      litigation, environmental and personal injury costs, commitments,
      contingent liabilities,
              and
      governmental and regulatory investigations and
  proceedings;





•              Plans
and goals for future operational improvements and capital commitments;
and





•              Future
market conditions or economic performance.





Forward-looking
statements involve a number of risks and uncertainties, and actual performance
or results may differ materially. For a discussion of material risks and
uncertainties that the Company faces, see the discussion in the Annual Report on
Form 10-K titled “Risk Factors.” Important factors that could cause actual
results to differ materially include, but are not limited to, the
following:





•              
Economic and industry
conditions: material adverse changes in economic or industry conditions,
both in the United States and globally, changes in customer demand, effects of
adverse economic conditions affecting shippers or BNSF Railway’s supplier base,
adverse economic conditions in the industries and geographic areas that produce
and consume freight, changes in demand due to more stringent regulatory policies
such as the regulation of carbon dioxide emissions that could reduce the
demand for coal, governmental tariffs or subsidies that could affect the demand
for grain, competition and consolidation within the transportation industry, the
extent to which BNSF Railway is successful in gaining new long-term
relationships with customers or retaining existing ones, level of service
failures that could lead customers to use competitors' services, changes in fuel
prices and other key materials and disruptions in supply chains for these
materials, changes in the securities and capital markets and changes in crew
availability, labor costs and labor difficulties, including stoppages affecting
either BNSF Railway’s operations or customers’ abilities to deliver goods to
BNSF Railway for shipment;





•              Legal, legislative and regulatory
factors: developments and changes in laws and regulations, including
those affecting train operations or the marketing of services, the ultimate
outcome of shipper and rate claims subject to adjudication or claims,
investigations or litigation alleging violations of the antitrust laws,
increased economic regulation of the rail industry through legislative action
and revised rules and standards applied by the U.S. Surface Transportation Board
in various areas including rates and services, developments in environmental
investigations or proceedings with respect to rail operations or current or past
ownership or control of real property, and developments in and losses resulting
from other types of claims and litigation, including those relating to personal
injuries, asbestos and other occupational diseases, the release of hazardous
materials, environmental contamination and damage to property; and





•Operating
factors:technical difficulties, changes in
operating conditions and costs, changes in business mix, the availability of
equipment and human resources to meet changes in demand, the extent of the
Company’s ability to achieve its operational and financial initiatives and to
contain costs, the effectiveness of steps taken to maintain and improve
operations and velocity and network fluidity, including the management of the
amount of traffic on the system to meet demand and the ability to acquire
sufficient resources to meet that demand, the ability to expand the capacity of
the system, congestion on other railroads and capacity constraints affecting all
links in the transportation chain that feed traffic and goods to BNSF Railway’s
systems, restrictions on development and expansion plans due to
environmental concerns, disruptions to BNSF Railway’s technology network
including computer systems and software, as well as natural events such as
severe weather, fires, floods and earthquakes or man-made or other disruptions
of BNSF Railway’s operating systems, structures, or equipment including the
effects of acts of terrorism on the Company’s system or other railroads’
systems.




27
 
 
 Table of Contents




The
Company cautions against placing undue reliance on forward-looking statements,
which reflect its current beliefs and are based on information currently
available to it as of the date a forward-looking statement is made. The Company
undertakes no obligation to revise forward-looking statements to reflect future
events, changes in circumstances, or changes in beliefs. In the event the
Company does update any forward-looking statement, no inference should be made
that the Company will make additional updates with respect to that statement,
related matters, or any other forward-looking statements. Any corrections or
revisions and other important assumptions and factors that could cause actual
results to differ materially from forward-looking statements made by the Company
may appear in the Company’s public filings with the SEC, which are accessible at
www.sec.gov, and on the Company’s website at www.bnsf.com, and which investors
are advised to consult.







28
 
 Table of
Contents


Item 4T.    Controls and
Procedures.





Based on
their evaluation as of the end of the period covered by this quarterly report on
Form 10-Q, BNSF Railway’s principal executive officer and principal financial
officer have concluded that BNSF Railway’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934) are effective to ensure that information required to be disclosed by BNSF
Railway in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in Securities and Exchange Commission rules and forms and that
such information is accumulated and communicated to BNSF Railway’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
Additionally, as of the end of the period covered by this report, BNSF Railway's
principal executive officer and principal financial officer have concluded that
there have been no changes in BNSF Railway's internal control over financial
reporting that occurred during the fiscal quarter that have materially affected,
or are reasonably likely to materially affect, BNSF Railway's internal control
over financial reporting.


29
 
 
 Table of Contents


BNSF
RAILWAY COMPANY and SUBSIDIARIES





PART
II OTHER INFORMATION











Item 6.    Exhibits.





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


30
 
 
 Table of Contents


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





BNSF
      Railway Company
              (Registrant)By:
            
            /s/    Thomas
      N. HundThomas
      N. Hund
              Executive
      Vice President and Chief Financial Officer
              (On
      behalf of the Registrant and
              as
      principal financial officer)


Dated:  April
      29, 2008








S-1
 
 
 Table of Contents


BNSF
RAILWAY COMPANY and SUBSIDIARIES





Exhibit Index





Incorporated by
      Reference
              (if
      applicable)Exhibit Number and
      Description
            
            Form
            File
      Date
            File
      No.
            Exhibit3.1
            
            Restated
      Certificate of Incorporation of BNSF Railway Company, dated January 17,
      2005.
            
            10-Q
            7/26/2005
            001-06324
            3.13.2
            
            By-Laws
      of BNSF Railway Company, as amended August 30, 2005.
            
            10-Q
            10/25/2005
            001-06324
            3.112.1
            
            Computation of Ratio of Earnings to Fixed
      Charges.*31.1
            
            Principal Executive Officer’s Certifications Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
            
            Principal Financial Officer’s Certifications Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
            
            Certification Pursuant to 18 U.S.C. § 1350 (Section 906
      of the Sarbanes-Oxley Act of 2002).*





__________________


*Filed
herewith