<PAGE>
 
                                                                    EXHIBIT 28.2


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Management's discussion and analysis relates to the financial condition and
results of operations of Burlington Northern Santa Fe Corporation and its
majority-owned subsidiaries (collectively BNSF or Company). The principal
subsidiaries were Burlington Northern Inc. (BNI), Burlington Northern Railroad
Company (BNRR), Santa Fe Pacific Corporation (SFP) and The Atchison, Topeka and
Santa Fe Railway Company (ATSF). SFP and ATSF became subsidiaries of BNSF on
September 22, 1995 as a result of a business combination accounted for as a
purchase. Effective December 1996, BNI was merged with and into SFP, and ATSF
merged with and into BNRR and the name was changed to The Burlington Northern
and Santa Fe Railway Company (BNSF Railway).


RESULTS OF OPERATIONS

The results of operations discussed below include BNSF results for the year
ended December 31, 1996, BNI results for each of the two years ended December
31, 1995 and 1994 and SFP results from the merger date, September 22, 1995,
through December 31, 1995.


YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995

BNSF recorded net income for 1996 of $889 million ($5.70 per common share),
compared with net income of $92 million ($.67 per common share) for 1995.
Results for 1995 include $735 million of merger, severance and asset charges
which reduced net income by approximately $453 million, or $4.24 per common
share. Results for 1995 were further reduced by $100 million (after tax), or
$.94 per common share, for the cumulative effect of an accounting change for
locomotive overhauls and $6 million (after tax), or $.05 per common share, for
an extraordinary loss on early retirement of debt. Excluding the above items,
net income for 1995 would have been $651 million.


REVENUE TABLE

The following table presents BNSF's revenue information by commodity for the
years ended December 31, 1996, 1995 and 1994 and includes certain
reclassifications of prior year information to conform to current year
presentation.

<TABLE>
<CAPTION>
                                           Revenues                 Revenue Ton Miles (RTM)           Revenue Per Thousand RTM
                                -------------------------------   ----------------------------  ----------------------------------
                                 1996          1995        1994     1996      1995     1994      1996         1995          1994
                                          (In Millions)                  (In Millions)
                                ------         ------    ------   -------   -------   -------   ------        ------       ------
<S>                             <C>       <C>            <C>      <C>       <C>       <C>       <C>           <C>          <C>
Intermodal                      $2,088         $1,120    $  758    71,262    38,516    24,671   $29.30        $29.08       $30.72
Coal                             1,973          1,821     1,674   169,380   153,169   136,164    11.65         11.89        12.29
Agricultural Commodities         1,170          1,143       776    59,601    55,356    33,922    19.63         20.65        22.88
Chemicals                          765            443       356    28,896    17,155    13,859    26.47         25.82        25.69
Forest Products                    555            471       452    25,140    19,828    19,495    22.08         23.75        23.19
Consumer and Food Products         469            365       318    18,201    12,332    10,341    25.77         29.60        30.75
Metals                             413            320       256    20,199    13,804    11,503    20.45         23.18        22.66
Automotive                         397            213       156     6,062     3,158     2,031    65.49         67.45        76.81
Minerals and Ores                  319            260       222    12,318    10,119     8,588    25.90         25.69        25.85
Other                               38              7         8        --        --        --       --            --           --
                                ------         ------    ------   -------   -------   -------   ------        ------       ------
 Total                          $8,187         $6,163    $4,976   411,059   323,437   260,574   $19.82        $19.03       $19.07
                                ======         ======    ======   =======   =======   =======   ======        ======       ======
</TABLE>

                                       1

<PAGE>
 
REVENUES

Total revenues for 1996 were $8,187 million compared with revenues of $6,163
million for 1995. The $2,024 million increase primarily reflects inclusion of a
full year of SFP results in 1996. Prior to the business combination, coal and
agricultural made up approximately 50 percent of BNI's revenues while intermodal
shipments comprised approximately 45 percent of total SFP revenues.

  Intermodal revenues increased $968 million compared with 1995, due to
inclusion of a full year of SFP operations. Prospectively, it is expected that
intermodal traffic will continue to represent a significant portion of BNSF's
revenues.

  Coal revenues improved $152 million during 1996. Approximately 85 percent of
the increase was due to the inclusion of a full year of SFP operations.
Additionally, tonnage of low-sulfur coal shipped from the Powder River Basin
increased from 1995. Revenue per thousand revenue ton miles declined principally
as a result of continuing competitive pricing pressures and a change in traffic
mix.

  Agricultural commodities revenues during 1996 were $27 million greater than
1995 reflecting a full year of SFP operations largely offset by lower export
shipments of wheat and corn.

  Chemicals revenues increased $322 million compared with 1995. Approximately 90
percent of the increase was due to inclusion of a full year of SFP operations.
The remaining increase was due to strong petroleum products and agricultural
chemicals demand.

  Revenue increases and changes in revenue per thousand revenue ton miles in all
other commodity groups were principally due to the inclusion of SFP results for
the full year.


EXPENSES

Total operating expenses for 1996 were $6,439 million compared with expenses of
$5,637 million for 1995. The operating ratio for 1996 was 78.6 percent, compared
with an operating ratio of 79.5 percent for 1995, excluding $735 million for
merger, severance and asset charges. The favorable decrease in the operating
ratio reflects synergies from combining operations which resulted in reduced
costs principally within administrative functions. These benefits were partially
offset by higher prices paid for labor, services and materials, including a
significant increase in the cost of diesel fuel during 1996.

  Compensation and benefits expenses of $2,561 million were $494 million above
1995 principally due to the full year of combined operations. The Company began
to realize the benefit of the merger during 1996 as employment, which
approximated 43,000 at the end of 1996, decreased by 5 percent when compared
with the prior year. Salaried employee levels have decreased over 15 percent in
the same time period.

  Purchased services expenses increased $273 million for 1996 compared with
1995, principally reflecting a full year of combined operations.

  Depreciation and amortization expense for 1996 was $240 million higher than
1995 primarily due to the full year depreciation and amortization for combined
operations.

  Equipment rents expenses were $196 million higher than 1995 due to the full
year combined operations as well as an increase in lease rental expense for
freight cars.

  Fuel expenses for 1996 were $247 million or 51 percent higher than 1995
primarily due to an increase in consumption resulting from the full year of
combined operations and an 8 cent increase in the average price per gallon.

                                       2
<PAGE>
 
  Materials and other expenses for 1996 increased $87 million compared with
1995. The increase reflects the full year of combined operations partially
offset by decreases in expenses from cost initiatives including reductions in
employee injuries due to increased focus on employee safety.

  As discussed in Note 3: Merger, severance and asset charges, the Company
recorded $735 million for such costs in 1995. The principal components of the
charge were $287 million related to BNSF's plan to centralize the majority of
its clerical functions and $254 million for severance, pension and other
salaried employee benefits and for employee relocation cost incurred during the
period. Additionally, $105 million was recorded for planned branch line
dispositions. The remaining $89 million included obligations for vacating leased
facilities and the write-off of duplicate and excess assets. Additional accruals
of $138 million were recorded through purchase accounting related to former SFP
employees and assets. When its plans are completed, BNSF expects to have
eliminated over 3,000 positions and disposed of approximately 4,000 miles of low
density track. To date, BNSF has eliminated approximately 1,500 salaried
positions and 500 clerical positions and has disposed of approximately 2,000
miles of low-density track. Also as described in Note 3, costs related to union
employee relocation as well as certain costs for separation and severances were
not included in the charge; therefore, these costs, to the extent incurred, will
be recorded as future operating expenses. Presently, the magnitude of any future
expense is unknown.

  Interest expense increased $81 million compared with 1995, due to the full
year effect of interest on SFP debt in 1996 as well as an increase in the levels
of outstanding debt.

  Other income net was $35 million below 1995. The decrease is due to a full
year of combined operations in 1996 as well as $16 million of equity in earnings
of SFP from February 21, 1995, the date of BNI's initial investment in SFP, to
September 22, 1995, the date of merger consummation.


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

BNSF recorded net income for 1995 of $92 million ($.67 per common share, primary
and fully diluted) compared with net income of $416 million ($4.37 per common
share, primary, and $4.27 per common share, fully diluted) for 1994. As
previously discussed, 1995 included the merger, severance and asset charges, the
accounting change for locomotive overhauls and the extraordinary loss on early
retirement of debt. Excluding these items, net income for 1995 would have been
$651 million. Results for 1994 were reduced by $10 million (after tax), or $.11
per common share, for the cumulative effect of an accounting change for
postemployment benefits. Excluding the accounting change, net income for 1994
would have been $426 million.


REVENUES

Total revenues for 1995 were $6,163 million compared with revenues of $4,976
million for 1994. The $1,187 million increase reflects $802 million of SFP
revenues for the period of September 22, 1995 through December 31, 1995.
Excluding SFP, revenues increased by $385 million or 8 percent primarily due to
higher coal and agricultural commodities revenues.

  Intermodal revenues increased $362 million when compared with 1994, almost
exclusively due to the inclusion of SFP revenues in 1995.

  Coal revenues improved $147 million during 1995 due to higher traffic levels
caused primarily by new business, favorable weather conditions early in the year
and increased demand for low-sulfur coal from the Powder River Basin as well as
the addition of $58 million of SFP revenues in 1995. Revenue per thousand
revenue ton miles declined as a result of continuing competitive pricing
pressures and a change in traffic mix.

                                       3
<PAGE>
 
  Agricultural commodities revenues during 1995 were $367 million greater than
1994. The increase was principally caused by improvements in corn and soybean
revenues which benefited from increased crop production as well as higher
traffic volumes to the Pacific Northwest due to stronger export demand during
1995. Barley and wheat revenues declined primarily due to weaker export demand
compared with the strong demand in 1994. Additionally, agricultural commodities
revenues included $59 million of SFP revenues during 1995. The shift in
commodities to lower yielding corn and soybeans from higher yielding wheat led
to the aggregate decrease in revenue per thousand revenue ton miles.

  Revenues for chemicals increased $87 million and forest products increased $19
million compared with 1994. The addition of $80 million of SFP revenues along
with strong petroleum products demand contributed to the increase in chemicals
revenues. The increase in forest product revenues was due to the addition of $32
million of SFP revenues and was partially offset by lower traffic levels for
lumber.

  Metals revenues increased $64 million due to increased taconite, aluminum and
steel products revenues as well as the addition of $28 million of SFP revenues
in 1995.

  Revenue increases in all other commodity groups are principally due to the
inclusion of SFP revenues from September 22, 1995 to December 31, 1995.


EXPENSES

Total operating expenses for 1995, including $664 million of SFP
operating expenses and $735 million of merger, severance and asset charges, were
$5,637 million compared with expenses of $4,123 million for 1994. Excluding the
merger, severance and asset charges, the operating ratio for 1995 was 79.5
percent, an improvement over the operating ratio of 82.9 percent for 1994.

  Compensation and benefits expenses of $2,067 million were $301 million above
1994 and included $233 million of SFP compensation and benefits expense. The
remaining $68 million of the increase was due to higher traffic levels, a wage
increase for union represented employees effective July 1994, an increase in
health and welfare costs for union employees due primarily to an increase in
insurance premium rates, and increased incentive compensation expense. These
increases were partially offset by operating efficiencies.

  Purchased services expenses increased $64 million for 1995 compared with 1994,
principally reflecting the addition of SFP expenses.

  Depreciation and amortization expense for 1995 was $158 million higher than
1994 primarily due to the inclusion of $86 million of SFP depreciation and
amortization expense for 1995. Additionally, the increase reflects $30 million
attributable to the 1995 effect of a change in accounting for locomotive
overhauls. The remainder of the increase was due to capital additions which
increased the Company's asset base.

  Equipment rents expenses were $111 million higher than 1994 due to the
inclusion of $70 million of SFP equipment rents expense in 1995 as well as a $46
million increase in lease rental expense as a result of a larger fleet of leased
freight cars and an increase in the leasing of locomotives to meet power
requirements in 1995.

  Fuel expenses for 1995 were $111 million higher compared with 1994 primarily
due to the addition of $74 million of SFP expenses along with a $29 million
increase in consumption resulting from higher traffic volumes in 1995. An
increase in the average price paid per gallon of 1.2 cents in 1995 contributed
to the remainder of the increase.

                                       4
<PAGE>
 
  Materials and other expenses for 1995 increased $34 million compared with
1994, principally reflecting the addition of SFP expenses and expenses
attributable to the change in accounting for locomotive overhauls in 1995.

  Interest expense increased $65 million compared with 1994, principally due to
the addition of $26 million of SFP expense in 1995 as well as interest on the
$500 million of unsecured debt incurred in 1995 to finance BNI's investment in
SFP.

  Other income (expense), net was $31 million favorable in 1995 compared with
1994. This increase was due to BNI's equity in earnings of SFP of $16 million.
The remainder of the increase in other income was principally due to interest
income on the settlement of a tax refund and lower fees on the sale of accounts
receivable in 1995.

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

  Effective January 1, 1995, BNSF changed its method of accounting for periodic
major locomotive overhauls. Under the new method, overhauls on owned units are
capitalized and depreciated ratably until the next anticipated overhaul. In
addition, estimated costs for overhauls on leased units are accrued on a
straight-line basis over the life of the leases. BNSF previously expensed
locomotive overhauls when the costs were incurred. The cumulative effect of this
change for years prior to 1995 was a reduction in net income of $100 million
(after tax) while the effect of this change for the year ended December 31, 1995
was to reduce net income by $25 million (after tax).

ACQUISITION OF SFP

On June 29, 1994, BNI and SFP entered into an Agreement and Plan of Merger (as
amended, the Merger Agreement) pursuant to which SFP would merge with BNI in the
manner set forth below (the Merger). Stockholders of BNI and SFP approved the
Merger Agreement at special stockholders' meetings held on February 7, 1995. On
August 23, 1995, the Interstate Commerce Commission issued a written decision
approving the Merger and on September 22, 1995 the Merger was consummated. As
discussed in Note 2, the business combination with SFP was accounted for by the
purchase method.

  Pursuant to the Merger Agreement, BNI and SFP commenced tender offers
(together, the Tender Offer) to acquire 25 million and 38 million shares of SFP
common stock, respectively, at $20 per share in cash. During 1995, SFP borrowed
$1.0 billion under a credit facility of which $760 million of the proceeds were
used to purchase the 38 million shares pursuant to the Tender Offer. In
addition, BNI borrowed $500 million under a credit facility of which the
proceeds were used to finance BNI's purchase of SFP common stock in the Tender
Offer. The Tender Offer was completed on February 21, 1995.

  To ensure that the transaction contemplated by the Merger Agreement qualified
as a tax-free transaction for federal income tax purposes, the parties utilized
the holding company structure. Under the holding company structure, BNSF created
two subsidiaries. One subsidiary merged with and into BNI, and the other
subsidiary merged with and into SFP. The holding company structure had the same
economic effect with respect to the stockholders of BNI and SFP as would have a
direct merger of BNI and SFP.

CAPITAL RESOURCES AND LIQUIDITY
1996 CASHFLOWS

Cash generated from operations is BNSF's principal source of liquidity. BNSF
generally funds any additional requirements through debt issuance, including
commercial paper, or leasing of assets.

                                       5
<PAGE>
 
  Operating activities provided cash of $1,871 million during 1996 compared with
$1,416 million during 1995. The increase in cash from operations was primarily
attributable to higher earnings before depreciation and amortization, and
deferred income taxes as compared to 1995. The above was partially offset by an
increase in payments for employee, merger and separation costs and a net
increase in working capital.

  BNSF's cash outflows from investing activities for 1996 predominantly
consisted of capital expenditures of $2,234 million which are further discussed
below, while cash inflows from financing activities reflect net proceeds from
borrowings of $445 million partially offset by dividend payments of $184
million.

OTHER CAPITAL RESOURCES

BNSF issues commercial paper from time to time. These borrowings are supported
by bank revolving credit agreements. Outstanding commercial paper balances are
considered as reducing available borrowings under these agreements. The bank
revolving credit agreements allow borrowings of up to $500 million on a short-
term basis and an additional $1.5 billion on a long-term basis. Annual facility
fees are currently .075 percent and .11 percent, respectively, and are subject
to change based upon changes in BNSF's senior unsecured debt ratings. Borrowing
rates are based upon, i) LIBOR plus a spread based upon BNSF's senior unsecured
debt ratings, ii) money market rates offered at the option of the lenders, or
iii) an alternate base rate. The commitments of the lenders to make the loans
are currently scheduled to expire on November 14, 1997 and November 15, 2001,
respectively.

  At December 31, 1996, there were no borrowings against the revolving credit
agreements and the maturity value of commercial paper outstanding was $916
million, leaving a total of $584 million of the long-term revolving credit
agreement available and $500 million of the short-term revolving credit
agreement available.

  In February 1996, BNSF issued $175 million of 6.875% debentures due February
15, 2016. In June 1996, BNSF issued $200 million of 7.29% debentures due June 1,
2036. The net proceeds from the sale of these debentures were used for general
corporate purposes including the repayment of short-term debt. Both debentures
were issued under a BNSF shelf registration which has $475 million remaining.

CAPITAL EXPENDITURES AND RESOURCES

A breakdown of cash capital expenditures is set forth in the following table (in
millions):
<TABLE>
<CAPTION>

Year ended December 31,                      1996      1995    1994
------------------------------------------   ------   -----   -----
<S>                                          <C>      <C>     <C>
Track structure and other roadway property   $1,625   $ 706   $ 544
Equipment                                       609     184     154
------------------------------------------   ------   -----   -----
 Total capital expenditures                  $2,234   $ 890   $ 698
==========================================   ======   =====   =====
</TABLE>
  Track and other roadway capital expenditures for 1996 increased significantly
compared with 1995. This increase reflects a full year of capital projects
required to maintain the capacity of an expanded route system. Additionally,
BNSF significantly expanded capacity throughout its system in 1996, primarily in
the Powder River Basin and in the Pacific Northwest. Also as a result of the
merger of Union Pacific Railroad Company (UP) and Southern Pacific Rail
Corporation (SP) (discussed below) the Company purchased certain prior UP or SP
routes during 1996. Equipment capital expenditures increased in 1996 compared
with 1995 due principally to the purchase of 225 locomotives in 1996. During
1995, the Company acquired nearly all new locomotives through operating leases.
Additionally, equipment capital spending was higher in 1996 due to the ownership
of a substantially larger locomotive and car fleet.

                                       6
<PAGE>
 
  Capital expenditures in 1997 are expected to approximate $1.85 billion.
Approximately $1.1 billion of these expenditures will be for maintaining
productive capacity of the existing route structures. The remainder will be
spent on the acquisition of new equipment, including 180 locomotives, and
capacity expansion projects throughout the system including the Powder River
Basin and the Pacific Northwest.


INFLATION

Due to the capital intensive nature of BNSF's business the full effect
of inflation is not reflected in operating expenses because depreciation is
based on historical cost. An assumption that all operating assets were
depreciated at current price levels would result in substantially greater
expense than historically reported amounts.


DIVIDENDS

Common stock dividends declared were $1.20 per common share annually
for 1996, 1995 and 1994. Dividends paid on common stock during 1996 were $184
million, and $129 million on common and preferred stock during 1995 and 1994.
The increase in 1996 dividends reflects an increase in outstanding shares of
common stock principally due to the Merger. On January 16, 1997, the Board of
Directors declared a dividend of 30 cents per share upon its outstanding shares
of common stock, $.01 par value, payable April 1, 1997, to stockholders of
record on March 10, 1997.


CAPITAL STRUCTURE

BNSF's ratio of total debt to total capital was 44 percent at
the end of 1996 compared with 46 and 45 percent at the end of 1995 and 1994,
respectively.


OTHER MATTERS
CASUALTY AND ENVIRONMENTAL

Personal injury claims, including work-related injuries to employees, are a
significant expense for the railroad industry. Employees of BNSF are compensated
for work-related injuries according to the provisions of the Federal Employers'
Liability Act (FELA). For several years prior to 1992, the trend of significant
increases in BNSF's personal injury expense reflected the combined effects of
increasing frequency of claims, rising medical expenses, legal judgments and
settlements. FELA's system of requiring finding of fault, coupled with
unscheduled awards and reliance on the jury system, contributed to these
significant increases in expense in past years. BNSF implemented a number of
safety programs to reduce the number of personal injury claims and personal
injury expense. The total amount of personal injury expenses were $162 million,
$143 million, and $170 million in 1996, 1995 and 1994, respectively. Expenses in
1996 reflect a full year of combined operations while 1995 includes SFP expenses
from September 22, 1995 through December 31, 1995. Expenses in 1994 reflect only
BNI.

  As discussed in more detail in Note 13: Environmental and other contingencies,
the Company's operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNSF's operating
procedures include practices to protect the environment from the environmental
risks inherent in railroad operations, which frequently involve transporting
chemicals and other hazardous materials. Additionally, many of BNSF'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 is subject to
environmental clean-up and enforcement actions. In particular, the Federal

                                       7
<PAGE>
 
Comprehensive Environmental Response Compensation and Liability Act of 1980,
also known as the "Superfund" law, as well as similar state laws generally
impose joint and several liability for clean-up and enforcement costs without
regard to fault or the legality of the original conduct on current and former
owners and operators of a site.

  BNSF is involved in a number of administrative and judicial proceedings and
other mandatory clean-up efforts at approximately 345 sites at which it is being
asked to participate in the study and/or clean-up of alleged environmental
contamination. BNSF paid approximately $47 million, $31 million, and $21 million
during 1996, 1995 and 1994, respectively for mandatory clean-up efforts,
including amounts expended under federal and state voluntary clean-up programs.
BNSF has accruals of approximately $225 million for remediation and restoration
of all known sites. BNSF anticipates that the majority of the accrued costs at
December 31, 1996 will be paid over the next five years. No individual site is
considered to be material.

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

  The railroad industry, including BNSF Railway, will become subject to future
requirements regulating air emissions from diesel locomotives that may increase
their operating costs. Regulations applicable to new locomotive engines were
issued by the Environmental Protection Agency in early 1997, with final
regulations to be promulgated by the end of the year. It is anticipated that
these regulations will be effective for locomotive engines installed after 1999
and through 2010. Under some interpretations of federal law, older locomotive
engines may be regulated by states based on standards and procedures which the
State of California ultimately adopts. At this time, it is unknown whether
California will adopt locomotive emission standards that may differ from federal
standards.


OTHER CLAIMS AND LITIGATION

BNSF and its subsidiaries are parties to a number of legal actions and claims,
various governmental proceedings and private civil suits arising in the ordinary
course of business, including those related to environmental matters and
personal injury claims. While the final outcome of these items cannot be
predicted with certainty, considering among other things the meritorious legal
defenses available, it is the opinion of management that none of these items,
when finally resolved, will have a material adverse effect on the annual results
of operations, financial position or liquidity of BNSF, although an adverse
resolution of a number of these items could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.

                                       8
<PAGE>

LABOR

Labor unions represent approximately 88 percent of BNSF Railway employees
under collective bargaining agreements with 13 different labor organizations.
BNRR, ATSF and other major railroads were actively involved in industry-wide
labor contract negotiations beginning in late 1994. Through this process, wages,
health and welfare benefits, work rules and other issues have now been
negotiated for substantially all BNSF Railway union-represented employees. BNSF
Railway remains in negotiations with approximately 425 employees represented by
the American Train Dispatchers Department of the Brotherhood of Locomotive
Engineers.

  The new collective bargaining agreements will remain in effect through at
least December 31, 1999 and until new agreements are reached or the Railway
Labor Act's procedures are exhausted. The new collective bargaining agreements
include provisions for retroactive and prospective wage increases, signing
bonuses and lump-sum payments. Throughout the negotiation process, the Company
had been providing reserves related to potential union agreements; therefore,
payments related to the retroactive portion of these agreements did not have a
material effect on the Company's 1996 results of operations.


HEDGING ACTIVITIES
FUEL

BNSF has a program to hedge against fluctuations in the price of its diesel fuel
purchases. This program includes forward purchases for delivery at fueling
facilities. Additionally, this program includes various commodity swap and
collar transactions which are accounted for as hedges. Any gains or losses
associated with changes in market value of these hedges are deferred and
recognized as a component of fuel expense in the period in which the hedged fuel
is purchased and used. To the extent BNSF hedges portions of its fuel purchases,
it may not fully benefit from decreases in fuel prices. However, throughout 1996
and the beginning of 1997, BNSF Railway has seen a continued increase in the
price of fuel, which has resulted in an increase in fuel expense for unhedged
purchases. Based on 1996 fuel consumption, each one cent increase in the price
of fuel would result in approximately $10 million in additional fuel expense on
an annual basis.

  As of February 7, 1997, BNSF had entered into fuel swaps for approximately 635
million gallons at an average price of approximately 54 cents per gallon. These
contracts have expiration dates ranging from March 1997 to December 1998.

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

  BNSF's fuel hedging program covers approximately 35 percent of estimated 1997
fuel purchases and 25 percent of estimated 1998 fuel purchases. Quarterly hedges
in 1997 range from 20 percent to 40 percent of anticipated fuel purchases while
1998 hedges approximate 25 percent each quarter. Hedge positions are closely
monitored to ensure that they will not exceed actual fuel requirements.
Unrecognized gains from BNSF's fuel hedging transactions were approximately $17
million at December 31, 1996 and were not material at December 31, 1995. BNSF
also monitors its hedging positions and credit ratings of its counterparties and
does not anticipate losses due to counterparty nonperformance.


INTEREST RATE

As of February 7, 1997, BNSF has interest rate swap transactions with a total
principal amount of $875 million to fix interest rates on commercial paper debt.
The interest rate swap transactions require payment of a weighted average fixed
interest rate of approximately 5.8 percent, and the receipt of a variable
interest rate based on a commercial paper composite rate. Swap transactions of
$625 million, $250 million and $125 million will mature during the years ended
December 31, 1997, 1998 and 1999, respectively.

                                       9
<PAGE>
 
UP-SP MERGER

The Surface Transportation Board (STB) approved the proposed common control and
merger of rail carriers controlled by Union Pacific Corporation and SP in its
written decision dated August 12, 1996. The transaction was consummated on
September 12, 1996. As a condition of the merger, the STB imposed provisions
which grant BNRR and ATSF access to approximately 3,900 miles of UP-SP track.
The STB decision provides the Company's subsidiaries with greater access to Gulf
Coast and West Coast markets. The Company is currently evaluating the STB
decision and the impact of the UP-SP merger. Additionally, BNSF management is
evaluating market opportunities and alternatives. The ultimate net effect of the
UP-SP merger on BNSF is presently unknown.


RECENT ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" which establishes the
accounting and reporting requirements for recognizing and measuring impairment
of long-lived assets to be either held and used or held for disposal. In the
first quarter of 1996, BNSF adopted SFAS No. 121 which had no impact on the
Company's financial position or 1996 results of operations.


FORWARD-LOOKING INFORMATION

To the extent that these written statements include predictions concerning
future operations and results of operations, such statements are forward-looking
statements that involve risks and uncertainties, and actual results may differ
materially. Factors that could cause actual results to differ materially
include, but are not limited to, general economic downturns, which may limit
demand and pricing; labor matters, which may affect the costs and feasibility of
certain operations; and competition and commodity concentrations, which may
affect traffic and pricing levels.

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