UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K




[X]ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2007




OR




[
]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




Exact
name of registrant as specified in its charter




BNSF
Railway Company


State
      of Incorporation
              Delaware
            I.R.S.
      Employer Identification No.
              41-6034000Address
      of principal executive offices, including zip code
              2650
      Lou Menk Drive
              Fort
      Worth, Texas 76131-2830
            Registrant’s
      telephone number, including area code
              (800)
      795-2673Securities
      registered pursuant to Section 12(b) of the Act:
              The
      securities listed below are registered on the New York Stock
      Exchange.
              Title of each
      classBurlington
      Northern Inc.
              (Now
      BNSF Railway Company)
              Consolidated
      Mortgage Bonds
              6.55%,
      Series K, due 2020
              3.80%,
      Series L, due 2020
              3.20%,
      Series M, due 2045
              8.15%,
      Series N, due 2020
              6.55%,
      Series O, due 2020
              8.15%,
      Series P, due 2020
              
              Debenture, 8.75%, due 2022
            Northern
      Pacific Railway Company
              General
      Lien Railway and Land Grant 3% Bonds, due 2047







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.                                                                
Yes[] No [x]




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.                                                            
Yes [] No [x]




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 requirement for
the past 90 days.    Yes [x] No []




Indicate
by check mark whether the registrant is a large accelerated filer, accelerated
filer, non-accelerated filer, or smaller reporting company (as defined in Rule
12b-2 of the 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
Act).                                                                                       
  Yes
[    ] No [x]




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




1,000
shares of Outstanding Common Stock, $1.00 par value, as of February 4,
2008.




*BNSF
Railway Company is a wholly–owned subsidiary of Burlington Northern Santa Fe
Corporation; as a result, there is no market data with respect to registrant’s
shares.




DOCUMENTS
INCORPORATED BY REFERENCE




None





REGISTRANT
MEETS THE CONDITIONS SET FORTH IN THE GENERAL INSTRUCTION (I)(1)(A) AND (B) OF
FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.




i





Table of
Contents





Part
      I
            Item 1.    
      Business
            1Item 1A.  Risk Factors
            1Item 1B.  Unresolved Staff
Comments
            4Item 2.    
    Properties
            5Item 3.     Legal
      Proceedings
            10Part
      II
            Item
      5.     Market for Registrant’s Common Equity, Related
      Stockholder Mattersand
      Issuer Purchases of
              Equity Securities
            11Item 7.     Management’s Narrative
      Analysis of Results of Operations
            11Item 7A.  Quantitative and Qualitative Disclosures
      About Market Risk
            16Item 8.     Financial Statements and
      Supplementary Data
            18Item 9.     Changes in and Disagreements
      With Accountants on Accounting and Financial
Disclosure
            53Item 9A(T).  Controls and Procedures
            53Item 9B.   Other Information
            53Part
      III
            Item 14.    Principal Accountant Fees and
      Services
            54Part
      IV
            Item 15.    Exhibits and Financial Statement
      Schedules
            55Signatures
            S-1Exhibit Index
            E-1





ii
 Table of Contents





Part
I


Item
1. Business




BNSF
Railway Company (BNSF Railway, Registrant or Company), formerly known as The
Burlington Northern and Santa Fe Railway Company and the Burlington Northern
Railroad Company (BNRR) was incorporated in the State of Delaware on January 13,
1961, and is a wholly-owned subsidiary of Burlington Northern Santa Fe
Corporation (BNSF). On September 22, 1995, the shareholders of Burlington
Northern Inc. (BNI) and Santa Fe Pacific Corporation (SFP) became the
shareholders of BNSF pursuant to a business combination of the two
companies.





On
December 30, 1996, BNI merged with and into SFP. On December 31, 1996, The
Atchison, Topeka and Santa Fe Railway Company merged with and into Burlington
Northern Railroad Company (BNRR), and BNRR changed its name to The Burlington
Northern and Santa Fe Railway Company. On January 2, 1998, SFP merged with and
into The Burlington Northern and Santa Fe Railway Company. On January 20, 2005,
The Burlington Northern and Santa Fe Railway Company changed its name to BNSF
Railway Company (BNSF Railway).





BNSF
Railway operates one of the largest railroad systems in North America. At
December 31, 2007, BNSF Railway had approximately 40,000 employees.





BNSF
Railway’s internet address is www.bnsf.com. Through this internet website (under
the “Investors” link), BNSF Railway makes available, free of charge, its Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, as well as all amendments to those reports, as soon as reasonably
practicable after these reports are electronically filed with or furnished to
the Securities and Exchange Commission (SEC).





Further
discussion of the Company’s business, including equipment and business sectors,
is incorporated by reference from Item 2, “Properties.”




Item
1A. Risk Factors




The
Company faces intense competition from rail carriers and other transportation
providers, and its failure to compete effectively could adversely affect its
results of operations, financial condition or liquidity.




The
Company operates in a highly competitive business environment. Depending on the
specific market, the Company faces intermodal, intramodal, product and
geographic competition. For example, the Company believes that high service
truck lines, due to their ability to deliver non-bulk products on an expedited
basis, have had and will continue to have an adverse effect on the Company’s
ability to compete for deliveries of non-bulk, time-sensitive freight. While the
Company must build or acquire and maintain its rail system, trucks and barges
are able to use public rights-of-way maintained by public entities. Any material
increase in the capacity and quality of these alternative methods or the passage
of legislation granting greater latitude to motor carriers with respect to size
and weight restrictions could have an adverse effect on the Company’s results of
operations, financial condition or liquidity. In addition, a failure to
provide the level of service required by the Company’s customers could result in
loss of business to competitors.




A
downturn in the economy or change in government policy could negatively impact
demand for the Company’s services.




Significant,
extended negative changes in economic conditions that impact the producers and
consumers of the commodities transported by the Company may have an adverse
effect on the Company’s operating results, financial condition or liquidity. In
addition, changes in United States and foreign government policies could change
the economic environment and affect demand for the Company’s services. For
example, changes in clean air laws or regulation of carbon dioxide emissions
could reduce the demand for coal. Also, United States and foreign government
agriculture tariffs or subsidies could affect the demand for grain.




As
part of its railroad operations, the Company frequently transports chemicals and
other hazardous materials.




The
Company is required to transport these commodities to the extent of its common
carrier obligation. An accidental release of these commodities could result in a
significant loss of life and extensive property damage as well as environmental
remediation obligations. The associated costs could have an adverse effect on
the Company’s operating results, financial condition or liquidity.




1
 Table of
Contents




Future
acts of terrorism or war, as well as the threat of war, may cause significant
disruptions in the Company’s business operations.




Terrorist
attacks, such as those that occurred on September 11, 2001, as well as the more
recent attacks on the transportation systems in Madrid, London and in India, and
any government response to those types of attacks and war or risk of war may
adversely affect the Company’s results of operations, financial condition or
liquidity. The Company’s rail lines and facilities could be direct targets or
indirect casualties of an act or acts of terror, which could cause significant
business interruption and result in increased costs and liabilities and
decreased revenues, which could have an adverse effect on its operating results
and financial condition. Such effects could be magnified if releases of
hazardous materials are involved. Any act of terror, retaliatory strike,
sustained military campaign or war or risk of war may have an adverse impact on
the Company’s operating results and financial condition by causing or resulting
in unpredictable operating or financial conditions, including disruptions of
rail lines, volatility or sustained increase of fuel prices, fuel shortages,
general economic decline and instability or weakness of financial markets. In
addition, insurance premiums charged for some or all of the coverage currently
maintained by the Company could increase dramatically or certain coverage may
not be available to the Company in the future.




The
Company is subject to stringent environmental laws and regulations, which may
impose significant costs on its business operations.




The
Company’s operations are subject to extensive federal, state and local
environmental laws and regulations concerning, among other things, emissions to
the air; discharges to waters; the generation, handling, storage, transportation
and disposal of waste and hazardous materials; and the cleanup of hazardous
material or petroleum releases. Changes to or limits on carbon dioxide
emissions could result in significant capital expenditures to comply with
these regulations. Further, local concerns on emissions and other forms of
pollution could inhibit the Company’s ability to build facilities in strategic
locations to facilitate growth and efficient operations. In addition, many of
the Company’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.
Environmental liability can extend to previously owned or operated properties,
leased properties and properties owned by third parties, as well as to
properties currently owned and used by the Company. Environmental liabilities
have arisen and may continue to arise from claims asserted by adjacent
landowners or other third parties in toxic tort litigation. The Company has been
and may continue to be subject to allegations or findings to the effect that it
has violated, or is strictly liable under, these laws or regulations. The
Company’s operating results, financial condition or liquidity could be adversely
affected as a result of any of the foregoing, and it may be required to incur
significant expenses to investigate and remediate environmental contamination.
The Company records liabilities for environmental cleanup when the amount of its
liability is both probable and reasonably estimable.




The
Company’s future success depends on its ability to continue to comply with the
significant federal, state and local governmental regulations to which it is
subject.




The
Company is subject to a significant amount of governmental regulation with
respect to its rates and practices, railroad operations and a variety of health,
safety, labor, environmental and other matters. Failure to comply with
applicable laws and regulations could have a material adverse effect on the
Company. Governments may change the legislative framework within which the
Company operates without providing the Company with any recourse for any adverse
effects that the change may have on its business. Also, some of the regulations
require the Company to obtain and maintain various licenses, permits and other
authorizations, and it cannot assure that it will continue to be able to do so.
Increased economic regulation of the rail industry could negatively impact the
Company’s ability to determine prices for rail services and to make capital
improvements to its rail network, resulting in an adverse effect on the
Company’s results of operations, financial condition or liquidity.




The
availability of qualified personnel could adversely affect the Company’s
operations.




Changes
in demographics, training requirements and the availability of qualified
personnel, particularly engineers and trainmen, could negatively impact the
Company’s ability to meet demand for rail service. Recruiting and retaining
qualified personnel, particularly those with expertise in the railroad industry,
are vital to operations. Unpredictable increases in demand for rail services may
exacerbate such risks, which could have a negative impact on operational
efficiency and otherwise have a material adverse effect on the Company’s
operating results, financial condition or liquidity.




2
 
 Table of
Contents




Most
of the Company’s employees are represented by unions, and failure to
successfully negotiate collective bargaining agreements may result in strikes,
work stoppages, or substantially higher ongoing labor costs.




A
significant majority of BNSF Railway’s employees are union-represented. BNSF
Railway’s union employees work under collective bargaining agreements with
various labor organizations. Wages, health and welfare benefits, work rules and
other issues have traditionally been addressed through industry-wide
negotiations. These negotiations have generally taken place over an extended
period of time and have previously not resulted in any extended work stoppages.
The existing agreements have remained in effect and will continue to remain in
effect until new agreements are reached or the Railway Labor Act’s procedures
(which include mediation, cooling-off periods and the possibility of
Presidential intervention) are exhausted. While the negotiations have not yet
resulted in any extended work stoppages, if the Company is unable to negotiate
acceptable new agreements, it could result in strikes by the affected workers,
loss of business and increased operating costs as a result of higher wages or
benefits paid to union members, any of which could have an adverse effect on the
Company’s operating results, financial condition or liquidity.




Severe
weather and natural disasters could disrupt normal business operations, which
would result in increased costs and liabilities and decreases in
revenues.




The
Company’s success is dependent on its ability to operate its railroad system
efficiently. Severe weather and natural disasters, such as tornados, flooding
and earthquakes, could cause significant business interruptions and result in
increased costs and liabilities and decreased revenues. In addition, damages to
or loss of use of significant aspects of the Company’s infrastructure due to
natural or man-made disruptions could have an adverse affect on the Company’s
operating results, financial condition or liquidity for an extended period of
time until repairs or replacements could be made. Additionally, during natural
disasters, the Company’s workforce may be unavailable, which could result in
further delays. Extreme swings in weather could also negatively affect the
performance of locomotives and rolling stock.




Fuel
supply availability and fuel prices may adversely affect the Company’s results
of operations, financial condition or liquidity.




Fuel
supply availability could be impacted as a result of limitations in refining
capacity, disruptions to the supply chain, or rising global demand. A
significant reduction in fuel availability could impact the Company’s ability to
provide transportation services at current levels, increase fuel costs and
impact the economy. Each of these factors could have an adverse effect on the
Company’s operating results, financial condition or liquidity. Additionally, the
Company is expected to be able to offset a significant portion of the
anticipated higher fuel costs through its fuel surcharge program in 2008.
However, to the extent that the Company is unable to maintain and expand its
existing fuel surcharge program, increases in fuel prices could have an adverse
effect on the Company’s operating results, financial condition or
liquidity.




The
Company depends on the stability and availability of its information technology
systems.




The
Company relies on information technology in all aspects of its business. A
significant disruption or failure of its information technology systems could
result in service interruptions, safety failures, security violations,
regulatory compliance failures and the inability to protect corporate
information assets against intruders or other operational difficulties. Although
the Company has taken steps to mitigate these risks, including Business
Continuity Planning, Disaster Recovery Planning and Business Impact Analysis, a
significant disruption could adversely affect the Company’s results of
operations, financial condition or liquidity. Additionally, if the Company is
unable to acquire or implement new technology, it may suffer a competitive
disadvantage, which could also have an adverse effect on the Company’s results
of operations, financial condition or liquidity.




The
Company’s operational dependencies may adversely affect results of operations,
financial condition or liquidity.




Due to
the integrated nature of the United States’ freight transportation
infrastructure, the Company’s operations may be negatively affected by service
disruptions of other entities such as ports and other railroads which
interchange with the Company. A significant prolonged service disruption of one
or more of these entities could have an adverse effect on the Company’s results
of operations, financial condition or liquidity.




3
 Table of
Contents




Personal
injury claims constitute a significant expense, and increases in the amount or
severity of these claims could adversely affect the Company’s operating
results.




The
Company is subject to various personal injury claims by third parties and
employees, including claims by employees who worked around asbestos until 1985,
when its use at BNSF Railway was substantially eliminated. Personal injury
claims by BNSF Railway employees are subject to the Federal Employees’ Liability
Act (FELA), rather than state workers’ compensation laws. The Company believes
that the FELA system, which includes unscheduled awards and a reliance on the
jury system, has contributed to increased expenses in the past. Future events,
such as increases in the number of claims that are filed, developments in
legislative and judicial standards and the costs of settling claims, could
result in an adverse effect on the Company’s operating results.







Item
1B. Unresolved Staff Comments


None.








4
 
 Table of Contents


Item
2. Properties




Track
Configuration


BNSF
Railway operates over a railroad system consisting of approximately 32,000 route
miles of track (excluding multiple main tracks, yard tracks and sidings),
approximately 23,000 miles of which are owned route miles, including easements,
in 28 states and two Canadian provinces as of December 31, 2007. Approximately
9,000 route miles of BNSF Railway’s system consist of trackage rights that
permit BNSF Railway to operate its trains with its crews over other railroads’
tracks.




As of
December 31, 2007, the total BNSF Railway system, including single and multiple
main tracks, yard tracks and sidings, consisted of approximately 50,000 operated
miles of track, all of which are owned by or held under easement by BNSF Railway
except for approximately 10,000 route miles operated under trackage rights. At
December 31, 2007, approximately 26,000 miles of BNSF Railway’s track consisted
of 112-pound per yard or heavier rail, including approximately 20,000 track
miles of 131-pound per yard or heavier rail.




Equipment
Configuration


BNSF
Railway owned or had under non-cancelable leases exceeding one year the
following units of railroad rolling stock and other equipment as of the dates
shown below:




At
      December 31,
            2007
            
            2006
            
            2005Locomotives
            6,400
            
            6,330
            
            5,790Freight
      cars:Covered hopper
            36,439
            
            33,488
            
            34,631Gondola
            13,690
            
            13,998
            
            12,579Open hopper
            11,428
            
            11,277
            
            10,973Flat
            10,470
            
            11,382
            
            8,537Box
            7,948
            
            8,937
            
            8,685Refrigerator
            4,196
            
            4,631
            
            4,983Tank
            427
            
            426
            
            422Autorack
            416
            
            641
            
            748Other
            324
            
            341
            
            323Total freight
    cars
            
            85,338
            
            85,121
            
            81,881Domestic
      chassis
            11,714
            
            12,849
            
            12,649Company
      service cars
            4,070
            
            3,982
            
            4,091Domestic
      containers
            3,253
            
            3,275
            
            10,412Trailers
            1,200
            
            1,209
            
            1,916Commuter
      passenger cars
            163
            
            165
            
            179Average
      age from date of manufacture–locomotive fleet (years)a
            15
            
            15
            
            15Average
      age from date of manufacture–freight car fleet (years)a
            14
            
            14
            
            15a 
      These averages are not weighted to reflect the greater capacities of the
      newer equipment.





5
 Table of
Contents




Capital Expenditures and
Maintenance




Capital
Expenditures


A
breakdown of cash capital expenditures during 2007, 2006 and 2005 is set forth
in the following table (in millions):





Year
      ended December 31,
            
            2007
            
            2006
            
            2005Maintenance
      of way:Rail
            
            $
            376
            
            $
            304
            
            $
            232Ties
            
            
            316
            
            
            311
            
            
            284Surfacing
            
            
            235
            
            
            214
            
            
            183Other
            
            
            432
            
            
            397
            
            
            354Total
      maintenance of way
            
            
            1,359
            
            
            1,226
            
            
            1,053Mechanical
            
            
            141
            
            
            152
            
            
            136Information
      services
            
            
            75
            
            
            65
            
            
            64Other
            
            
            105
            
            
            121
            
            
            108Total
      maintenance of business
            
            
            1,680
            
            
            1,564
            
            
            1,361Terminal
      and line expansion
            
            
            568
            
            
            450
            
            
            389Total
            
            $
            2,248
            
            $
            2,014
            
            $
            1,750





The above
table does not include expenditures for equipment financed through operating
leases (principally related to locomotives).





The
extent of the BNSF Railway’s maintenance and capacity program is outlined in the
following table:





Year
      ended December 31,
            
            2008
      Estimate
            
            2007
            
            2006
            
            2005Track
      miles of rail laida
            
            
            908
            
            
            994
            
            
            854
            
            
            711Cross
      ties inserted (thousands)a
            
            
            3,237
            
            
            3,126
            
            
            2,957
            
            
            3,171Track
      resurfaced (miles)
            
            
            13,075
            
            
            11,687
            
            
            12,588
            
            
            12,790a 
      Includes both maintenance of existing route system and expansion projects.
      Expenditures for these maintenance programs are primarily
      capitalized.





Maintenance


As of
December 31, 2007, General Electric Company, Alstom Transportation, Inc. and
Electro-Motive Diesel, Inc. performed locomotive maintenance and overhauls for
BNSF Railway at its facilities under various maintenance agreements that covered
approximately 4,240 locomotives.




6
 Table of
Contents




Property
and Facilities


BNSF
Railway operates various facilities and equipment to support its transportation
system, including its infrastructure and locomotives and freight cars as
previously described. It also owns or leases other equipment to support rail
operations, including containers, chassis and vehicles. Support facilities for
rail operations include yards and terminals throughout its rail network, system
locomotive shops to perform locomotive servicing and maintenance, a centralized
network operations center for train dispatching and network operations
monitoring and management in Fort Worth, Texas, regional dispatching centers,
computers, telecommunications equipment, signal systems and other support
systems. Transfer facilities are maintained for rail-to-rail as well as
intermodal transfer of containers, trailers and other freight traffic. These
facilities include 33 major intermodal hubs located across the system. BNSF
Railway’s largest intermodal facilities in terms of 2007 volume were as
follows:





Intermodal
      Facilities
            
            LiftsHobart
      Yard (Los Angeles, California)
            
            1,243,000Logistics
      Park (Chicago, Illinois)
            
            755,000Corwith
      Yard (Chicago, Illinois)
            
            739,000Willow
      Springs (Illinois)
            
            636,000Alliance
      (Fort Worth, Texas)
            
            567,000Cicero
      (Illinois)
            
            517,000San
      Bernardino (California)
            
            500,000Argentine
      (Kansas City, Kansas)
            
            369,000Seattle
      International Gateway (Seattle, Washington)
            
            305,000Memphis
      (Tennessee)
            
            284,000





BNSF
Railway owns 23 automotive distribution facilities and serves eight port
facilities where automobiles are loaded on or unloaded from multi-level rail
cars in the United States and Canada.





BNSF
Railway’s largest freight car classification yards based on the average daily
number of cars processed (excluding cars that do not change trains at the
terminal, intermodal and coal cars) are shown below:





Classification
      Yards
            
            Daily
      Average
              Cars
      ProcessedArgentine
      (Kansas City, Kansas)
            
            1,807Galesburg
      (Illinois)
            
            1,642Barstow
      (California)
            
            1,349Pasco
      (Washington)
            
            1,274Tulsa
      (Oklahoma)
            
            1,198





As of
December 31, 2007, certain BNSF Railway properties and other assets were subject
to liens securing $102 million of mortgage debt. Certain locomotives and rolling
stock of BNSF Railway were subject to equipment leases and financing
obligations, as referred to in Notes 9 and 10 to the Consolidated Financial
Statements.




7
 Table of
Contents




Productivity


Productivity,
as measured by thousand gross ton miles per employee, is shown in the table
below. Gross ton miles is defined as the product of the number of loaded and
empty miles traveled and the combined weight of the car and
contents. Certain prior period amounts have been adjusted to conform to
current year presentation.





Year
      ended December 31,
            2007
            
            2006
            
            2005Thousand
      gross ton miles divided by average number of employees
            27,222
            
            27,092
            
            26,964




Business
Mix


In
serving the Midwest, Pacific Northwest and the Western, Southwestern and
Southeastern regions and ports of the country, BNSF Railway transports, through
one operating transportation services segment, a range of products and
commodities derived from manufacturing, agricultural and natural resource
industries. Approximately 65 percent of the freight revenues originated by the
Company is covered by contractual agreements of varying duration, while the
balance is subject to common carrier, published prices or quotations offered by
the Company. BNSF Railway’s financial performance is influenced by, among other
things, general and industry economic conditions at the international, national
and regional levels. The following map illustrates the Company’s primary routes,
including trackage rights, which allow BNSF Railway to access major cities and
ports in the western and southern United States as well as Canadian and Mexican
traffic. In addition to major cities and ports, BNSF Railway efficiently serves
many smaller markets by working closely with approximately 200 shortline
partners. BNSF Railway has also entered into marketing agreements with CSX
Transportation, Canadian National Railway Company and Kansas City Southern
Railway Company, expanding the marketing reach for each railroad and their
customers.
















8
 
 Table of
Contents




Consumer
Products:


The
Consumer Products’ freight business provided approximately 37 percent of freight
revenues in 2007.




Industrial
Products:


The
Industrial Products’ freight business provided approximately 24 percent of
freight revenues in 2007.




Coal:


In 2007,
the transportation of coal contributed about 21 percent of freight
revenues.





In
February 2005, the Company received a Civil Investigative Demand from the
Antitrust Division of the Department of Justice requesting information
concerning the Company’s pricing activities relating to the shipment of coal
from the southern Powder River Basin. The Company continues to respond to
requests for information.




Agricultural
Products:


The
transportation of Agricultural Products provided approximately 18 percent of
2007 freight revenues.




Freight
Statistics


The
following table sets forth certain freight statistics relating to rail
operations for the periods indicated. Certain prior period amounts have been
adjusted to conform to current year presentation.





Year
      ended December 31,
            
            2007
            
            
            2006
            
            
            2005Revenue
      ton miles (millions)a
            
            
            657,572
            
            
            
            647,857
            
            
            
            604,656Freight
      revenue per thousand revenue ton miles
            
            $
            23.34
            
            
            $
            22.44
            
            
            $
            20.84Average
      length of haul (miles)
            
            
            1,079
            
            
            
            1,067
            
            
            
            1,068


a 
Revenue ton miles is defined as the product of the number of loaded miles
traveled and the weight of the contents.





Revenue,
cars/units and average revenue per car/unit information for the two years ended
December 31, 2007, is incorporated by reference from a table inItem 7, Management’s Narrative Analysis of Financial Condition and Results of
Operations, under the heading “Results of Operations; Revenue
Table.”




Government Regulation and
Legislation


The
Company is subject to federal, state and local laws and regulations generally
applicable to all businesses. Rail operations are subject to the regulatory
jurisdiction of the Surface Transportation Board (STB) of the United States
Department of Transportation (DOT), the Federal Railroad Administration of the
DOT, the Occupational Safety and Health Administration (OSHA), as well as other
federal and state regulatory agencies. The STB has jurisdiction over disputes
and complaints involving certain rates, routes and services, the sale or
abandonment of rail lines, applications for line extensions and construction and
consolidation or merger with, or acquisition of control of, rail common
carriers. The outcome of STB proceedings can affect the profitability of BNSF
Railway’s business.





DOT and
OSHA have jurisdiction under several federal statutes over a number of safety
and health aspects of rail operations, including the transportation of hazardous
materials. State agencies regulate some aspects of rail operations with respect
to health and safety in areas not otherwise preempted by federal
law.





BNSF
Railway’s rail operations, as well as those of its competitors, are also subject
to extensive federal, state and local environmental regulation. These laws cover
discharges to water, air emissions, toxic substances and the generation,
handling, storage, transportation and disposal of waste and hazardous materials.
This regulation has the effect of increasing the cost and liabilities associated
with rail operations. Environmental risks are also inherent in rail operations,
which frequently involve transporting chemicals and other hazardous
materials.





9
 
 Table of
Contents




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 now subject to, and will from time to time continue to be
subject to, environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as the Superfund law, generally imposes 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. Accordingly, BNSF Railway may be responsible under CERCLA and other
federal and state statutes for all or part of the costs to clean up sites at
which certain substances may have been released by BNSF Railway, its current
lessees, former owners or lessees of properties, or other third parties. Further
discussion is incorporated by reference from Note 10 to the Consolidated
Financial Statements.




Railroad
Retirement


Railroad
industry personnel are covered by the Railroad Retirement System instead of
Social Security. BNSF Railway’s contributions under the Railroad Retirement
System have been almost triple those in industries covered by Social Security.
The Railroad Retirement System, funded primarily by payroll taxes on covered
employers and employees, includes a benefit roughly equivalent to Social
Security (Tier I), an additional benefit similar to that allowed in some private
defined-benefit plans (Tier II) and other benefits. For 2007, the Railroad
Retirement System required up to a 19.75 percent contribution by railroad
employers on eligible wages, while the Social Security and Medicare Acts only
required a 7.65 percent contribution on similar wage bases.




Competition


The
business environment in which BNSF Railway operates is highly competitive.
Depending on the specific market, deregulated motor carriers, other railroads
and river barges may exert pressure on price and service levels. The presence of
advanced, high service truck lines with expedited delivery, subsidized
infrastructure and minimal empty mileage continues to affect the market for
non-bulk, time-sensitive freight. The potential expansion of longer combination
vehicles could further encroach upon markets traditionally served by railroads.
In order to remain competitive, BNSF Railway and other railroads continue to
develop and implement operating efficiencies to improve
productivity.





As
railroads streamline, rationalize and otherwise enhance their franchises,
competition among rail carriers intensifies. BNSF Railway’s primary rail
competitor in the Western region of the United States is the Union Pacific
Railroad Company. Other Class I railroads and numerous regional railroads and
motor carriers also operate in parts of the same territories served by BNSF
Railway.





Based on
weekly reporting by the Association of American Railroads, BNSF Railway’s share
of the western United States rail traffic in 2007 was approximately 49
percent.





Item
3. Legal Proceedings


Beginning
May 14, 2007, 27 similar class action complaints were filed in six federal
district courts around the country against BNSF Railway and four other
Class I railroads (and, in some cases, the Association of American Railroads)
alleging that they have conspired to fix fuel surcharges with respect to
unregulated freight transportation services in violation of the antitrust laws
and seeking injunctive relief and unspecified treble damages.  On
November 6, 2007, the Judicial Panel on Multidistrict Litigation entered an
order to consolidate cases in the federal district court of the District of
Columbia for coordinated or consolidated pretrial proceedings.  (In
re:  Rail Freight Fuel Surcharge Antitrust Litigation, MDL No. 1869).
The Company believes that these claims are without merit and intends to defend
against the allegations vigorously.  The Company is also responding to
a state grand jury subpoena requesting production of information related to fuel
surcharges.  The Company does not believe that the outcome of any of
these proceedings will have a material effect on its financial condition,
results of operations or liquidity.





Information
concerning certain pending tax-related administrative or adjudicative state
proceedings or appeals is incorporated by reference from Note 5 to the
Consolidated Financial Statements, and information concerning other claims and
litigation is incorporated by reference from Note 10 to the Consolidated
Financial Statements.




10
 Table of Contents


Part II


Item
5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities


BNSF Railway’s common stock is owned by BNSF and therefore is not
traded on any market.




Item 7. 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.




Results of
Operations




Revenue
Table


The
following table presents BNSF Railway’s revenue information by business group
for the years ended December 31, 2007, and 2006. Certain prior period amounts
have been adjusted to conform to current year presentation.





Revenues
              (in
      millions)
            
            
            Cars
      / Units
              (in
      thousands)
            
            
            Average
      Revenue
              Per
      Car / UnitYear
      ended December 31,
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006Consumer
      Products
            
            $
            5,664
            
            
            $
            5,613
            
            
            
            5,149
            
            
            
            5,520
            
            
            $
            1,100
            
            
            $
            1,017Industrial
      Products
            
            
            3,682
            
            
            
            3,586
            
            
            
            1,664
            
            
            
            1,686
            
            
            
            2,213
            
            
            
            2,127Coal
            
            
            3,279
            
            
            
            2,916
            
            
            
            2,472
            
            
            
            2,458
            
            
            
            1,326
            
            
            
            1,186Agricultural
      Products
            
            
            2,720
            
            
            
            2,425
            
            
            
            1,033
            
            
            
            973
            
            
            
            2,633
            
            
            
            2,492Total
      freight revenues
            
            
            15,345
            
            
            
            14,540
            
            
            
            10,318
            
            
            
            10,637
            
            
            $
            1,487
            
            
            $
            1,367Other
      revenues
            
            
            260
            
            
            
            271Total operating
      revenues
            
            $
            15,605
            
            
            $
            14,811





Expense
Table


The
following table presents BNSF Railway’s expense information for the years ended
December 31, 2007 and 2006 (in millions).





Year
      ended December 31,
            
            2007
            
            
            2006
            aCompensation
      and benefits
            
            $
            3,754
            
            
            $
            3,800Fuel
            
            
            3,197
            
            
            
            2,734Purchased
      services
            
            
            1,995
            
            
            
            1,894Depreciation
      and amortization
            
            
            1,290
            
            
            
            1,174Equipment
      rents
            
            
            942
            
            
            
            930Materials
      and other
            
            
            920
            
            
            
            740Total operating
      expenses
            
            $
            12,098
            
            
            $
            11,272Interest
      expense
            
            $
            87
            
            
            $
            113Other
      expense, net
            
            $
            31
            
            
            $
            39Income
      tax expense
            
            $
            1,383
            
            
            $
            1,313a 
      Prior year numbers have been adjusted for the retrospective adoption of
      FSP AUG AIR-1, Accounting
      for Planned Major Maintenance Activities.
              See Note 2 to the Consolidated Financial Statements for additional
      information.





Year
Ended December 31, 2007, Compared with Year Ended December 31, 2006


BNSF
Railway recorded net income for 2007 of $2,197 million. In comparison, net
income for 2006 was $2,236 million.





11
 Table of
Contents




Revenues




Freight


Freight
revenues of $15,345 million for 2007 were $805 million, or 6 percent higher than
2006. Freight revenues reflected a 3-percent decrease in unit volumes. Freight
revenues include an increase of approximately $150 million in fuel surcharges
compared with the same 2006 period. Growth in prices and fuel surcharges drove
average revenue per car/unit up 9 percent in 2007 to $1,487 from $1,367 in
2006.




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 $5,664 million for 2007 were $51 million, or 1 percent
higher than 2006. 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 trans-pacific service of a large international
customer.





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 increased $96 million, or 3 percent, to $3,682 million for
2007, while unit volumes declined 1 percent. The 4-percent increase in
average revenue per car was mainly the result of price increases. Strong demand
for petroleum products, chemicals and plastics was offset by a decline in
building products as a result of weakness in the housing market.





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 $3,279 million for 2007 increased $363 million, or 12 percent,
versus a year ago due to improved yields, contractual inflation escalators,
increased tons per unit and fuel surcharges. Coal unit volumes increased 1
percent despite mine production and weather-related
issues.





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 $2,720 million for 2007 were $295 million, or 12 percent
higher than revenues for 2006. This increase was primarily due to strong volume
growth, favorable mix of business and price increases with the strongest revenue
growth in wheat, soybeans, bulk foods, ethanol and fertilizer.





Other
Revenues


Other
revenues decreased $11 million, or 4 percent, to $260 million for 2007 compared
to 2006. This decrease was primarily due to a reduction in customer storage
revenues for containers at BNSF Railway intermodal hubs.





Expenses


Total
operating expenses for 2007 were $12,098 million, an increase of $826 million,
or 7 percent over 2006.





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 $3,754 million were $46 million, or 1 percent lower
than 2006, on flat employee headcount. Wages and benefit increases were offset
by lower variable compensation costs and other cost controls.




12
 Table of
Contents




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 $3,197 million for 2007 were $463 million, or 17 percent, higher
than 2006. The increase in fuel expense was due to an increase in the average
all-in cost per gallon of diesel fuel, partially offset by a decline in
consumption related to improved fuel efficiency. The average all-in cost per
gallon of diesel fuel increased by 37 cents to $2.22, or $538 million,
which is comprised of an increase in the average purchase price of 16 cents, or
$228 million, and a decrease in the hedge benefit of 21 cents, or
$310 million (2007 benefit of $31 million less 2006 benefit of
$341 million). Consumption in 2007 decreased 36 million gallons to
1,442 million gallons when compared with consumption in the same 2006
period, resulting in a $75 million decrease in fuel expense.




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; insurance costs; 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
services expenses of $1,995 million for 2007 were $101 million, or 5 percent
higher than 2006. Beyond general inflation, the largest drivers of this increase
were: haulage payments for transportation over other railroads, principally due
to a new southeast intermodal agreement; locomotive maintenance costs; and
ramping costs (lifting of containers onto and off of cars).




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 since depreciation is based on historical cost.





Depreciation
and amortization expenses of $1,290 million for 2007 were $116 million, or 10
percent higher than 2006. This increase was primarily due to continuing capital
expenditures as well as updated depreciation rates for locomotives.





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 for 2007 of $942 million were $12 million, or 1 percent, higher
than 2006, on a 3-percent decline in unit volumes. The variance represents an
increase in locomotive lease expense, partially offset by a decrease in freight
car equipment expense due to the impact of the Company’s privatization efforts,
lower volumes and velocity improvements for freight car equipment.





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 for which the Company is self-insured, 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 $920 million for 2007 were $180 million, or 24 percent
higher than 2006. The increase was primarily due to increases of approximately:
(i) $65 million and $16 million first quarter environmental and technology
charge, respectively (see discussion under the heading “Other Matters; Charge
for Environmental Costs and Technology System Write-Off”); (ii) $40 million in
environmental remediation developments; (iii) $25 million due largely to
rising costs for materials for locomotives, freight cars and track structure;
and (iv) $20 million in crew transportation costs principally due to increased
fuel and insurance-related costs as well as increased usage due to adverse
weather. In addition, a $22 million gain from a line sale to the State of
New Mexico was recorded in 2006.




Interest
Expense


Interest
expense of $87 million for 2007 was $26 million, or 23 percent lower than
2006. This decrease was primarily due to lower average debt balances and
lower average interest rates.




13
 Table of
Contents




Income
Taxes


The
effective rate in 2007 was 38.6 percent compared with 37.0 percent for the prior
year. The increase in the effective tax rate primarily reflects income tax
adjustments that favorably impacted income tax expense in 2006 as compared to
2007.





Other
Matters




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 of claims, litigation, environmental and personal injury costs,
commitments, contingent


liabilities,
and governmental and regulatory investigations and proceedings on the Company’s
financial condition;





•   
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 Item 1A, “Risk
Factors,” of this Annual Report on Form 10-K. 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.






14
 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.


15
 Table of
Contents


Item
7A. Quantitative and Qualitative Disclosures About Market
Risk




In the
ordinary course of business, BNSF Railway utilizes various financial instruments
that inherently have some degree of market risk. The following table summarizes
the impact of these hedging activities on the Company’s results of operations
(in millions):





Year
      ended December 31,
            
            2007
            
            
            2006Fuel-hedge
      benefit (including ineffective portion of unexpired
hedges)
            
            $
            31
            
            
            $
            341Total
      hedge benefit
            
            
            31
            
            
            
            341Tax
      effect
            
            
            (12
            )
            
            
            (131
            )Hedge
      benefit, net of tax
            
            $
            19
            
            
            $
            210





The
Company’s fuel-hedge benefit is due to increases in fuel prices subsequent to
the initiation of various hedges. The information presented in Notes 3 and 9 to
the Consolidated Financial Statements describe significant aspects of BNSF
Railway’s financial instrument activities that have a material market
risk. Additionally, the Company uses fuel surcharges, which it believes
substantially mitigates the risk of fuel price volatility.




Commodity Price
Sensitivity


BNSF
Railway engages in hedging activities to partially mitigate the risk of
fluctuations in the price of its diesel fuel purchases. Existing hedge
transactions as of December 31, 2007, are based on the front month settlement
prices of West Texas Intermediate crude oil (WTI). For swaps, BNSF Railway
either pays or receives the difference between the hedge price and the actual
average price of the hedge commodity during a specified determination period for
a specified number of gallons. Hedge transactions are generally settled with the
counterparty in cash. Based on historical information, BNSF Railway believes
there is a significant correlation between the market prices for diesel fuel and
WTI.





At
December 31, 2007, BNSF Railway had recorded a net fuel-hedging asset of $39
million for fuel hedges covering 2008 through 2010.





The
following table is an estimate of the impact to earnings that could result from
hypothetical price changes during the twelve-month period ending December 31,
2008, and the balance sheet impact from the hypothetical price changes, both
based on the Company’s hedge position at December 31, 2007:





Sensitivity
      AnalysisHedged
      Commodity Price Change
            
            Fuel-Hedge
      Annual Pre-Tax Earnings Impact
            
            Balance
      Sheet Impact of Change in Fuel-Hedge Fair Value10
      percent increase
            
            $9
      million increase
            
            $13
      million increase10
      percent decrease
            
            $9
      million decrease
            
            $13
      million decrease





Based on
fuel consumption during the twelve-month period ended December 31, 2007, of
1,442 million gallons and fuel prices during that same period, excluding the
impact of the Company’s hedging activities, a 10-percent increase or decrease in
the commodity price per gallon would result in an approximate $295 million
increase or decrease, respectively, in fuel expense (pre-tax) on an annual
basis.





At
December 31, 2007, BNSF Railway maintained fuel inventories for use in normal
operations, which were not material to BNSF Railway’s overall financial position
and, therefore, represent no significant market exposure. Further information on
fuel hedges is incorporated by reference from Note 3 to the Consolidated
Financial Statements.




Interest Rate
Sensitivity


From time
to time, BNSF Railway enters into various interest rate hedging transactions for
purposes of managing exposure to fluctuations in interest rates by establishing
rates in anticipation of both future debt issuances and the refinancing of
leveraged leases. These interest rate hedges are accounted for as cash flow
hedges. At December 31, 2007 there were no outstanding interest rate cash flow
hedge transactions for BNSF Railway.





At
December 31, 2007, the fair value of BNSF Railway’s debt, excluding capital
leases, was $835 million.







16
 Table of
Contents
 The
following table is an estimate of the impact to the fair value of total debt,
excluding capital leases, that could result from hypothetical interest rate
changes during the twelve-month period ending December 31, 2008, based on debt
levels as of December 31, 2007:


Sensitivity
      AnalysisHypothetical
      Change
              in
      Interest Rates
            
            
            Change
      in Fair ValueTotal
      Debt1
      percent decrease
            
            
            $66
      million increase1
      percent increase
            
            
            $58
      million decrease





Further
information on interest rate hedges is incorporated by reference from Note 3 to
the Consolidated Financial Statements. Information on the Company’s debt, which
may be sensitive to interest rate fluctuations, is incorporated by reference
from Note 9 to the Consolidated Financial Statements.


17
 Table of Contents


Item
8. Financial Statements and Supplementary Data




The
Consolidated Financial Statements of BNSF Railway and subsidiary companies,
together with the report of the Company’s independent registered public
accounting firm, are included as part of this filing.





The
following documents are filed as a part of this report:





Consolidated
      Financial StatementsReport
      of Independent Registered Public Accounting Firm
            19Consolidated
      Statements of Income for each of the three years in the period ended
      December 31, 2007
            20Consolidated
      Balance Sheets as of December 31, 2007 and 2006
            21Consolidated
      Statements of Cash Flows for each of the three years in the period ended
      December 31, 2007
            22Consolidated
      Statements of Changes in Stockholder’s Equityfor
      each of the three years in the period ended December 31,
    2007
            23Notes
      to Consolidated Financial Statements
            24-52







18
 Table of Contents


Report of Independent
Registered Public Accounting Firm




To
the Shareholder and Board of Directors of BNSF Railway Company




In our
opinion, the accompanying consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of BNSF Railway Company and its subsidiaries (the Company) at December
31, 2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2007, the Company changed the manner in which it accounts for planned major
maintenance activities and the manner in which it accounts for uncertain tax
positions.











Fort
Worth, Texas


February
12, 2008


19
 Table of Contents


BNSF
Railway Company and Subsidiaries




Consolidated
Statements of Income


In millions






Year
      ended December 31,
            
            2007
            
            
            2006
            
            
            2005(As
      Adjusted)a
            
            
            (As
      Adjusted)aRevenues
            
            $
            15,605
            
            
            $
            14,811
            
            
            $
            12,846Operating
      expenses:Compensation and
      benefits
            
            
            3,754
            
            
            
            3,800
            
            
            
            3,501Fuel
            
            
            3,197
            
            
            
            2,734
            
            
            
            1,959Purchased
    services
            
            
            1,995
            
            
            
            1,894
            
            
            
            1,722Depreciation and
      amortization
            
            
            1,290
            
            
            
            1,174
            
            
            
            1,110Equipment rents
            
            
            942
            
            
            
            930
            
            
            
            886Materials and
    other
            
            
            920
            
            
            
            740
            
            
            
            735Total operating
      expenses
            
            
            12,098
            
            
            
            11,272
            
            
            
            9,913Operating
income
            
            
            3,507
            
            
            
            3,539
            
            
            
            2,933Interest
      expense
            
            
            87
            
            
            
            113
            
            
            
            127Interest
      income, related parties
            
            
            (191
            )
            
            
            (162
            )
            
            
            (85
            )Other
      expense, net
            
            
            31
            
            
            
            39
            
            
            
            35Income before income
      taxes
            
            
            3,580
            
            
            
            3,549
            
            
            
            2,856Income
      tax expense
            
            
            1,383
            
            
            
            1,313
            
            
            
            1,075Net income
            
            $
            2,197
            
            
            $
            2,236
            
            
            $
            1,781


a
            Prior
      year numbers have been adjusted for the retrospective adoption of
      Financial Accounting Standards Board (FASB) Staff Position
      (FSP)


AUG
      AIR-1,
      Accounting for Planned Major Maintenance Activities. See Note 2 to
      the Consolidated Financial Statements for additional
      information.




See
accompanying Notes to Consolidated Financial Statements.




20
 Table of Contents


BNSF
Railway Company and Subsidiaries




Consolidated
Balance Sheets


Dollars in millions









December
      31,
            
            2007
            
            
            2006(As
      Adjusted)aAssetsCurrent
      assets:Cash and cash
      equivalents
            
            $
            24
            
            
            $
            20Accounts receivable,
      net
            
            
            805
            
            
            
            932Materials and
      supplies
            
            
            579
            
            
            
            488Current portion of deferred
      income taxes
            
            
            282
            
            
            
            337Other current
      assets
            
            
            325
            
            
            
            285Total current
      assets
            
            
            2,015
            
            
            
            2,062Property
      and equipment, net
            
            
            29,513
            
            
            
            27,871Other
      assets
            
            
            1,927
            
            
            
            1,815Intercompany
      notes receivable
            
            
            –
            
            
            
            3,317Total assets
            
            $
            33,455
            
            
            $
            35,065Liabilities
      and Stockholder’s EquityCurrent
      liabilities:Accounts payable and other
      current liabilities
            
            $
            2,848
            
            
            $
            2,981Long-term debt due within one
      year
            
            
            210
            
            
            
            173Total current
      liabilities
            
            
            3,058
            
            
            
            3,154Long-term
      debt
            
            
            1,511
            
            
            
            1,215Deferred
      income taxes
            
            
            8,501
            
            
            
            8,293Casualty
      and environmental liabilities
            
            
            843
            
            
            
            830Pension
      and retiree health and welfare liability
            
            
            444
            
            
            
            604Employee
      separation costs
            
            
            77
            
            
            
            86Other
      liabilities
            
            
            1,578
            
            
            
            1,171Intercompany
      notes payable
            
            
            –
            
            
            
            35Total
    liabilities
            
            
            16,012
            
            
            
            15,388Commitments
      and contingencies (see Notes 3, 9 and 10)Stockholder’s
      equity:Common stock, $1 par value,
      1,000 shares authorized;
              issued and outstanding and
      paid-in-capital
            
            
            6,286
            
            
            
            6,286Retained
    earnings
            
            
            11,761
            
            
            
            13,677Intercompany notes
      receivable
            
            
            (456
            )
            
            
            –Accumulated other comprehensive
      loss
            
            
            (148
            )
            
            
            (286
            )Total stockholder’s
      equity
            
            
            17,443
            
            
            
            19,677Total liabilities and
      stockholder’s equity
            
            $
            33,455
            
            
            $
            35,065


a
            Prior
      year numbers have been adjusted for the retrospective adoption of FSP AUG
      AIR-1,
      Accounting for Planned Major Maintenance
  Activities.


See
      Note 2 to the Consolidated Financial Statements for additional
      information.




See
accompanying Notes to Consolidated Financial Statements.




21
 Table of Contents


BNSF
Railway Company and Subsidiaries






Consolidated
Statements of Cash Flows


In millions









Year
      ended December 31,
            
            
            2007
            
            
            2006
            
            
            2005(As
      Adjusted)a
            
            (As
      Adjusted)aOperating
      ActivitiesNet
      income
            
            $
            2,197
            
            $
            2,236
            
            $
            1,781Adjustments
      to reconcile net income to net cash providedby
      operating activities:Depreciation
      and amortization
            
            
            1,290
            
            
            1,174
            
            
            1,110Deferred
      income taxes
            
            
            302
            
            
            330
            
            
            211Employee
      separation costs paid
            
            
            (21
            )
            
            (27
            )
            
            (30
            )Long-term
      casualty and environmental liabilities, net
            
            
            26
            
            
            (55
            )
            
            (71
            )Other,
      net
            
            
            101
            
            
            (192
            )
            
            (156
            )Changes
      in current assets and liabilities:Accounts
      receivable, net
            
            
            (120
            )
            
            (129
            )
            
            (106
            )Change
      in accounts receivable sales program
            
            
            –
            
            
            –
            
            
            (350
            )Materials
      and supplies
            
            
            (91
            )
            
            (92
            )
            
            (57
            )Other
      current assets
            
            
            12
            
            
            105
            
            
            13Accounts
      payable and other current liabilities
            
            
            (119
            )
            
            (64
            )
            
            397Net
      cash provided by operating activities
            
            
            3,577
            
            
            3,286
            
            
            2,742Investing
      ActivitiesCapital
      expenditures
            
            
            (2,248
            )
            
            (2,014
            )
            
            (1,750
            )Net
      (increase) in intercompany notes receivable
            
            
            (993
            )
            
            (441
            )
            
            (865
            )Construction
      costs for facility financing obligation
            
            
            (37
            )
            
            (14
            )
            
            (4
            )Other,
      net
            
            
            (115
            )
            
            (130
            )
            
            (364
            )Net
      cash used for investing activities
            
            
            (3,393
            )
            
            (2,599
            )
            
            (2,983
            )Financing
      ActivitiesPayments
      on long-term debt
            
            
            (182
            )
            
            (467
            )
            
            (164
            )Proceeds
      from facility financing obligation
            
            
            41
            
            
            –
            
            
            –Net
      (decrease) increase in intercompany notes payable
            
            
            (35
            )
            
            (224
            )
            
            107Other,
      net
            
            
            (4
            )
            
            –
            
            
            1Net
      cash used for financing activities
            
            
            (180
            )
            
            (691
            )
            
            (56
            )Increase
      (decrease) in cash and cash equivalents
            
            
            4
            
            
            (4
            )
            
            (297
            )Cash
      and cash equivalents:Beginning
      of year
            
            
            20
            
            
            24
            
            
            321End
      of year
            
            $
            24
            
            $
            20
            
            $
            24Supplemental
      Cash Flow InformationInterest
      paid, net of amounts capitalized
            
            $
            75
            
            $
            110
            
            $
            125Income
      taxes paid, net of refunds
            
            $
            929
            
            $
            1,009
            
            $
            636Non-cash
      asset financing
            
            $
            461
            
            $
            109
            
            $
            68Non-cash
      dividend
            
            $
            4,100
            
            $
            –
            
            $
            –


a
            Prior
      year numbers have been adjusted for the retrospective adoption of FSP AUG
      AIR-1,
      Accounting for Planned Major Maintenance
  Activities.


See
      Note 2 to the Consolidated Financial Statements for additional
      information.




See
accompanying Notes to Consolidated Financial Statements.




22
 Table of Contents




BNSF
Railway Company and Subsidiaries




Consolidated
Statements of Changes in Stockholder’s Equity


In
millions







Common
      Stock and Paid-in-Capital
            
            Retained
      Earnings
            a
            Inter-company
      Notes Receivable
            
            Accumu­lated
      Other
              Compre­hensive
      Income (Loss)
            
            Total
              Stockholder’s
      Equity
            aBalance
      at December 31, 2004, as reported
            
            $
            6,286
            
            $
            9,533
            
            $
            –
            
            $
            7
            
            $
            15,826Cumulative
      effect retrospective application, net of tax expense of $78a
            
            –
            
            
            127
            
            
            –
            
            
            –
            
            
            127Balance at December 31, 2004, as adjusted
            
            6,286
            
            
            9,660
            
            
            –
            
            
            7
            
            
            15,953Comprehensive
      income:Net income
            
            –
            
            
            1,781
            
            
            –
            
            
            –
            
            
            1,781Minimum pension liability adjustment, net of tax expense of
      $25
            
            –
            
            
            –
            
            
            –
            
            
            (39
            )
            
            (39
            )Fuel mark-to-market, net of tax expense of $12
            
            –
            
            
            –
            
            
            –
            
            
            (19
            )
            
            (19
            )Total comprehensive
      income
            
            –
            
            
            1,781
            
            
            –
            
            
            (58
            )
            
            1,723Balance
      at December 31, 2005, as adjusted
            
            
            6,286
            
            
            11,441
            
            
            –
            
            
            (51
            )
            
            17,676Comprehensive
      income:Net income
            
            –
            
            
            2,236
            
            
            –
            
            
            –
            
            
            2,236Minimum
      pension liability adjustment, net of tax benefit of $24
            
            –
            
            
            –
            
            
            –
            
            
            40
            
            
            40Fuel mark-to-market, net of tax benefit of $125
            
            –
            
            
            –
            
            
            –
            
            
            (199
            )
            
            (199
            )Total comprehensive
      income
            
            –
            
            
            2,236
            
            
            –
            
            
            (159
            )
            
            2,077Adjustment
      to initially apply SFAS No. 158, net of tax benefit of $48
            
            
            –
            
            
            –
            
            
            –
            
            
            (76
            )
            
            (76
            )Balance
      at December 31, 2006, as adjusted
            
            
            6,286
            
            
            13,677
            
            
            –
            
            
            (286
            )
            
            19,677Adjustment
      for the adoption of FASB Interpretation No. (FIN) 48
            
            –
            
            
            (13
            )
            
            –
            
            
            –
            
            
            (13
            )Non-cash
      dividend ($4.1 per share)
            
            –
            
            
            (4,100
            )
            
            –
            
            
            –
            
            
            (4,100
            )Intercompany
      notes receivable
            
            –
            
            
            –
            
            
            (456
            )
            
            –
            
            
            (456
            )Comprehensive
      income:Net
      income
            
            –
            
            
            2,197
            
            
            –
            
            
            –
            
            
            2,197Change
      in unrecognized prior service costs and actuarial
              losses, net of tax expense of $76
            
            –
            
            
            –
            
            
            –
            
            
            122
            
            
            122Fuel/interest
      hedge mark-to-market, net of tax expense of $11
            
            –
            
            
            –
            
            
            –
            
            
            16
            
            
            16Total
      comprehensive income
            
            –
            
            
            2,197
            
            
            –
            
            
            138
            
            
            2,335Balance
      at December 31, 2007
            
            $
            6,286
            
            $
            11,761
            
            $
            (456
            )
            $
            (148
            )
            $
            17,443


a
            Prior year numbers have been adjusted for the
      retrospective adoption of FSP AUG AIR-1, Accounting
      for Planned Major Maintenance


Activities.
      See Note 2 to the Consolidated Financial Statements for additional
      information.





See
accompanying Notes to Consolidated Financial Statements.




23
 Table of Contents


BNSF
Railway Company and Subsidiaries




Notes
to Consolidated Financial Statements


1.
The Company


BNSF
Railway Company and its majority-owned subsidiaries, (collectively, BNSF Railway
or Company) is a wholly-owned subsidiary of Burlington Northern Santa Fe
Corporation (BNSF). BNSF Railway operates one of the largest railroad networks
in North America with approximately 32,000 route miles in 28 states and two
Canadian provinces. Through one operating transportation services segment, BNSF
Railway transports a wide range of products and commodities including the
transportation of Consumer Products, Industrial Products, Coal and Agricultural
Products, derived from manufacturing, agricultural and natural resource
industries, which constituted 37 percent, 24 percent, 21 percent and 18 percent,
respectively, of total freight revenues for the year ended December 31,
2007.





BNSF
Railway was formerly known as the Burlington Northern Railroad Company (BNRR).
On December 31, 1996, The Atchison, Topeka and Santa Fe Railway Company (ATSF)
merged with and into BNRR and the name of the surviving entity, BNRR, was
changed to The Burlington Northern and Santa Fe Railway Company. On January 2,
1998, BNSF Railway’s parent, Santa Fe Pacific Corporation (SFP), merged with and
into BNSF Railway. On January 20, 2005, The Burlington Northern and Santa Fe
Railway Company changed its name to BNSF Railway Company.




2.
Significant Accounting Policies




Principles of
Consolidation


The
Consolidated Financial Statements include the accounts of BNSF Railway. All
significant intercompany accounts and transactions have been eliminated. The
Company evaluates its less than majority-owned investments for consolidation
pursuant to FIN 46R, Consolidation of Variable Interest
Entities.




Use of
Estimates


The
preparation of financial statements in accordance with generally accepted
accounting principles in the United States of America (GAAP) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the periods presented. These estimates and assumptions are periodically
reviewed by management. Actual results could differ from those
estimates.




Revenue
Recognition


Transportation
revenues are recognized based upon the proportion of service provided as of the
balance sheet date. Revenues from ancillary services are recognized when
performed. Customer incentives, which are primarily provided for shipping a
specified cumulative volume or shipping to/from specific locations, are recorded
as a reduction to revenue on a pro-rata basis based on actual or projected
future customer shipments. When using projected shipments, the Company relies on
historic trends as well as economic and other indicators to estimate the
liability for customer incentives.




Accounts Receivable,
Net


Accounts
receivable, net includes accounts receivable reduced by an allowance for bill
adjustments and uncollectible accounts. The allowance for bill adjustments and
uncollectible accounts is based on historical experience as well as any known
trends or uncertainties related to customer billing and account
collectibility.




Cash and Cash
Equivalents


All
short-term investments with original maturities of 90 days or less are
considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value because of the short maturity of these
instruments.




Materials and
Supplies


Materials
and supplies, which consist mainly of rail, ties and other items for
construction and maintenance of property and equipment, as well as diesel fuel,
are valued at the lower of average cost or market.




24
 Table of
Contents


Property and Equipment,
Net


Property
and equipment are depreciated and amortized on a straight-line basis over their
estimated useful lives. The Company uses the group method of depreciation in
which a single depreciation rate is applied to the gross investment in a
particular class of property, despite differences in the service life or salvage
value of individual property units within the same class. Upon normal sale or
retirement of certain depreciable railroad property, cost less net salvage value
is charged to accumulated depreciation, and no gain or loss is recognized. The
disposals of land and non-rail property as well as significant premature
retirements are recorded as gains or losses at the time of their
occurrence.





The
Company self-constructs portions of its track structure and rebuilds certain
classes of rolling stock. In addition to direct labor and material, certain
indirect costs are capitalized. Expenditures that significantly increase asset
values or extend useful lives are capitalized. Repair and maintenance
expenditures are charged to operating expense when the work is performed.
Property and equipment are stated at cost.





The
Company incurs certain direct labor, contract service and other costs associated
with the development and installation of internal-use computer software. Costs
for newly developed software or significant enhancements to existing software
are typically capitalized. Research, preliminary project, operations,
maintenance and training costs are charged to operating expense when the work is
performed.





Long-lived
assets are reviewed for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If
impairment indicators are present and the estimated future undiscounted cash
flows are less than the carrying value of the long-lived assets, the carrying
value is reduced to the estimated fair value as measured by the discounted cash
flows.





Leasehold
improvements that meet capitalization criteria are capitalized and amortized on
a straight-line basis over the lesser of their estimated useful lives or the
remaining lease term. Cash flows for capitalized leasehold improvements are
reported in the investing activities other, net line of the Consolidated
Statements of Cash Flows.




Planned Major Maintenance
Activities


Effective
January 1, 2007, the Company transitioned to the deferral method of accounting
for leased locomotive overhauls, which includes the refurbishment of the engine
and related components. Previously, the Company used the accrue-in-advance
method of accounting for these planned major maintenance activities; however,
under FSP AUG AIR-1, Accounting for Planned Major
Maintenance Activities, issued in September 2006, this method is no
longer allowed. This change was applied retrospectively for all periods
presented. Accordingly, BNSF Railway has eliminated the asset and liability
recorded from the accrue-in-advance methodology and established an asset for
overhauls that have been performed. This asset of $245 million, which is
included in property and equipment, net in the December 31, 2006 Consolidated
Balance Sheets, will be amortized to expense using the straight-line method
until the next overhaul is performed or the end of the lease, whichever comes
first, typically between six and eight years. The effects of these adjustments
were as follows (in millions):





Consolidated
Statements of Income


Year
      Ended December 31,
            
            2006
            
            
            2005As
      Reported
            
            
            As
      Adjusted
            
            
            As
      Reported
            
            
            As
      AdjustedDepreciation
      and amortization
            
            $
            1,128
            
            
            $
            1,174
            
            
            $
            1,074
            
            
            $
            1,110Materials
      and other
            
            
            790
            
            
            
            740
            
            
            
            776
            
            
            
            735Total
      operating expenses
            
            
            11,276
            
            
            
            11,272
            
            
            
            9,918
            
            
            
            9,913Operating
      income
            
            
            3,535
            
            
            
            3,539
            
            
            
            2,928
            
            
            
            2,933Income
      before income taxes
            
            
            3,545
            
            
            
            3,549
            
            
            
            2,851
            
            
            
            2,856Income
      tax expense
            
            
            1,311
            
            
            
            1,313
            
            
            
            1,073
            
            
            
            1,075Net
      income
            
            $
            2,234
            
            
            $
            2,236
            
            
            $
            1,778
            
            
            $
            1,781




25
 Table of
Contents





Consolidated
Balance Sheets


December
      31,
            
            2006As
      Reported
            
            
            As
      AdjustedProperty
      and equipment, net
            
            $
            27,626
            
            
            $
            27,871Other
      assets
            
            
            1,906
            
            
            
            1,815Total
      assets
            
            
            34,911
            
            
            
            35,065Deferred
      income taxes
            
            
            8,211
            
            
            
            8,293Other
      liabilities
            
            
            1,231
            
            
            
            1,171Total
      liabilities
            
            
            15,366
            
            
            
            15,388Retained
      earnings
            
            
            13,545
            
            
            
            13,677Total
      stockholder’s equity
            
            
            19,545
            
            
            
            19,677Total
      liabilities and stockholder’s equity
            
            $
            34,911
            
            
            $
            35,065





Consolidated
Statements of Cash Flows


Year
      Ended December 31,
            
            2006
            
            2005As
      Reported
            
            As
      Adjusted
            
            As
      Reported
            
            As
      AdjustedNet
      income
            $
            2,234
            $
            2,236
            $
            1,778
            $
            1,781Depreciation
      and amortization
            
            1,128
            
            1,174
            
            1,074
            
            1,110Deferred
      income taxes
            
            328
            
            330
            
            209
            
            211Operating
      activities other, net
            
            (223
            )
            (192
            )
            (212
            )
            (156
            )Net
      cash provided by operating activities
            
            3,205
            
            3,286
            
            2,645
            
            2,742Investing
      activities other, net
            
            (49
            )
            (130
            )
            (267
            )
            (364
            )Net
      cash used by investing activities
            $
            (2,518
            )  $
            (2,599
            )  $
            (2,886
            )  $
            (2,983
            )





The
effects of the adjustments on years prior to fiscal 2005 resulted in an
adjustment to increase stockholder’s equity as of January 1, 2005 by $127
million.




Environmental
Liabilities


Liabilities
for environmental cleanup costs are initially recorded when BNSF Railway’s
liability for environmental cleanup is both probable and reasonably estimable.
Subsequent adjustments to initial estimates are recorded as necessary based upon
additional information developed in subsequent periods. Estimates for these
liabilities are undiscounted.




Personal Injury
Claims


Liabilities
for personal injury claims are initially recorded when the expected loss is both
probable and reasonably estimable. Subsequent adjustments to initial estimates
are recorded as necessary based upon additional information developed in
subsequent periods. Liabilities recorded for unasserted personal injury claims,
including those related to asbestos, are based on information currently
available. Estimates of liabilities for personal injury claims are
undiscounted.




Income
Taxes


Deferred
tax assets and liabilities are measured using the tax rates that apply to
taxable income in the period in which the deferred tax asset or liability is
expected to be realized or paid. Valuation allowances are established to reduce
deferred tax assets if it is more likely than not that some or all of the
deferred tax asset will not be realized. Investment tax credits are accounted
for using the flow-through method.




26
 Table of
Contents




Uncertain Tax
Positions


In June
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109, Accounting for Income
Taxes. This interpretation addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in
the financial statements. Under FIN 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement. FIN 48 also provides guidance on
derecognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. The Company
adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recorded an $83 million increase in the
liability for unrecognized tax benefits, which is offset by a reduction of the
deferred tax liability of $70 million, resulting in a decrease to the January 1,
2007, retained earnings balance of $13 million (for additional information see
Note 5 to the Consolidated Financial Statements).




Stock-Based
Compensation


Under
various stock incentive plans, BNSF has granted options to BNSF Railway
employees to purchase BNSF common stock at a price not less than fair market
value at the date of grant. Certain employees of the Company also participate in
BNSF’s other long-term incentive plans including, among other things, restricted
stock and a discounted stock purchase program. The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment, on
January 1, 2006. This statement requires BNSF Railway to recognize the cost of
employee services received in exchange for BNSF’s equity instruments. Under SFAS
No. 123R, BNSF Railway is required to record compensation expense over an
award’s vesting period based on the award’s fair value at the date of grant.
BNSF Railway has elected to adopt SFAS No. 123R on a modified prospective basis;
accordingly, the financial statements for periods prior to January 1, 2006, do
not include compensation cost calculated under the fair value method. Since the
adoption of this new guidance, there have been no significant changes in the
quantity or types of instruments used in stock-based compensation programs, nor
have there been any significant changes in the terms of existing stock-based
compensation arrangements. The Company did, however, record a favorable
cumulative adjustment for estimated forfeitures of $3 million, which, due to its
immateriality, was included as a reduction to compensation expense in the first
quarter of 2006.





Prior to
January 1, 2006, the Company applied Accounting Principles Board Opinion 25,
Accounting for Stock Issued to
Employees, and, therefore, recorded the intrinsic value of stock-based
compensation as expense. The following table illustrates the effect on net
income if the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation (in
millions) prior to January 1, 2006:





Year
      ended December 31,
            2005
            aNet
      income, as reported
            $
            1,781Stock-based employee
      compensation expense includedin
      reported net income, net of related tax effects
            
            23Total stock-based compensation
      expense determinedunder
      fair value method for all awards, net of related tax
    effects
            
            (42
            )Pro
      forma net income
            $
            1,762


a 
Prior year numbers have been adjusted for the retrospective adoption of FSP AUG
AIR-1,
Accountingfor
Planned Major Maintenance Activities.


See Note 2 to the Consolidated Financial Statementsfor
additional information.




Employment Benefit
Plans


BNSF
Railway estimates liabilities and expenses for the pension and retiree health
and welfare plans. Estimated amounts are based on historical information,
current information and estimates regarding future events and circumstances.
Significant assumptions used in the valuation of pension and/or retiree health
and welfare liabilities include the expected return on plan assets, discount
rate, rate of increase in compensation levels and the health care cost trend
rate.




Reclassifications


Certain
comparative prior year amounts in the Consolidated Financial Statements and
accompanying notes have been reclassified to conform to the current year
presentation. These reclassifications had no effect on previously reported
operating income or net income.





27
 Table of
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3.
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 26 percent, 24 percent and 20 percent of total operating
expenses during 2007, 2006 and 2005, 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 2007 and excluding the impact of the hedges, each
one-cent increase in the price of fuel per gallon would result in approximately
$14 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
December 31, 2007, BNSF Railway’s total fuel-hedging positions covered
approximately 3 percent, 1 percent and less than 1 percent of estimated fuel
purchases for 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):





Year
      ended December 31,
            
            2007
            
            
            2006
            
            
            2005Hedge
      benefit
            
            $
            30
            
            
            $
            342
            
            
            $
            535Ineffective
      portion of open hedges
            
            
            1
            
            
            
            (1
            )
            
            
            (4
            )Tax
      effect
            
            
            (12
            )
            
            
            (131
            )
            
            
            (203
            )Hedge
      benefit, net of tax
            
            $
            19
            
            
            $
            210
            
            
            $
            328




28
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The
amounts recorded in the Consolidated Balance Sheets for fuel-hedge transactions
were as follows (in millions):





December
      31,
            
            2007
            
            
            2006Short-term
      fuel-hedging asset
            
            $
            29
            
            
            $
            13Long-term
      fuel-hedging asset
            
            
            10
            
            
            
            –Short-term
      fuel-hedging liability
            
            
            –
            
            
            
            (2
            )Ineffective
      portion of open hedges
            
            
            –
            
            
            
            1Tax
      effect
            
            
            (15
            )
            
            
            (4
            )Amount
      included in AOCL, net of tax
            
            $
            24
            
            
            $
            8Settled
      fuel-hedging contracts receivable
            
            $
            6
            
            
            $
            37





BNSF
Railway measures the fair value of hedges based upon data provided by various
external counterparties. To value a swap, the Company uses the forward commodity
price for the period hedged.




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


As of
December 31, 2006, BNSF Railway had outstanding fuel swap agreements utilizing
NYMEX #2 HO. No additional HO hedges were entered into during 2007. As of
December 31, 2007, there were no HO hedge positions outstanding.





WestTexasIntermediate (WTI)CrudeOilHedges


At
December 31, 2007, BNSF Railway had outstanding 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 December 31, 2007, the
sum of all such costs averaged approximately 55 cents per gallon.





During
2007, the Company entered into fuel swap agreements utilizing WTI to hedge the
equivalent of approximately 1.5 million barrels of fuel with an average swap
price of $64.12 per barrel. The following tables provide fuel-hedge data based
on the quarter being hedged for all WTI fuel hedges outstanding as of December
31, 2007.





Quarter
      Ending2008
            
            March
      31,
            
            
            June
      30,
            
            
            September
      30,
            
            
            December
      31,
            
            
            AnnualWTI
      SwapsBarrels
      hedged (in thousands)
            
            
            290
            
            
            
            260
            
            
            
            230
            
            
            
            230
            
            
            
            1,010Equivalent
      gallons hedged (in millions)
            
            
            12.18
            
            
            
            10.92
            
            
            
            9.66
            
            
            
            9.66
            
            
            
            42.42Average
      swap price (per barrel)
            
            $
            63.69
            
            
            $
            63.77
            
            
            $
            63.70
            
            
            $
            63.70
            
            
            $
            63.72Fair
      value (in millions)
            
            $
            9
            
            
            $
            8
            
            
            $
            6
            
            
            $
            6
            
            
            $
            29





Quarter
      Ending2009
            
            March
      31,
            
            
            June
      30,
            
            
            September
      30,
            
            
            December
      31,
            
            
            AnnualWTI
      SwapsBarrels
      hedged (in thousands)
            
            
            100
            
            
            
            100
            
            
            
            100
            
            
            
            70
            
            
            
            370Equivalent
      gallons hedged (in millions)
            
            
            4.20
            
            
            
            4.20
            
            
            
            4.20
            
            
            
            2.94
            
            
            
            15.54Average
      swap price (per barrel)
            
            $
            65.10
            
            
            $
            65.10
            
            
            $
            65.10
            
            
            $
            65.00
            
            
            $
            65.08Fair
      value (in millions)
            
            $
            2
            
            
            $
            2
            
            
            $
            2
            
            
            $
            2
            
            
            $
            8




29
 Table of
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Quarter
      Ending2010
            
            March
      31,
            
            
            June
      30,
            
            
            September
      30,
            
            
            December
      31,
            
            
            AnnualWTI
      SwapsBarrels
      hedged (in thousands)
            
            
            70
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            70Equivalent
      gallons hedged (in millions)
            
            
            2.94
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            2.94Average
      swap price (per barrel)
            
            $
            64.80
            
            
            $
            –
            
            
            $
            –
            
            
            $
            –
            
            
            $
            64.80Fair
      value (in millions)
            
            $
            2
            
            
            $
            –
            
            
            $
            –
            
            
            $
            –
            
            
            $
            2





SummarizedComparativePriorYearInformation




The
following table provides summarized comparative information for hedge
transactions outstanding as of December 31, 2006.





Year
      ended December 31,
            
            2007HO
      SwapsGallons
      hedged (in millions)
            
            
            55.65Average
      swap price (per gallon)
            
            $
            2.11Fair
      value (in millions)
            
            $
            (16
            )HO
      CollarsGallons
      hedged (in millions)
            
            
            40.95Average
      cap price (per gallon)
            
            $
            1.17Average
      floor price (per gallon)
            
            $
            1.07Fair
      value (in millions)
            
            $
            23WTI
      CollarsBarrels
      hedged (in thousands)
            
            
            150Equivalent
      gallons hedged (in millions)
            
            
            6.30Average
      cap price (per barrel)
            
            $
            33.00Average
      floor price (per barrel)
            
            $
            29.00Fair
      value (in millions)
            
            $
            4





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 both future debt issuances and the
refinancing of leveraged leases. The Company uses treasury locks as part of its
interest rate risk management strategy.





CashFlowInterestRateHedges


In
anticipation of a future refinancing of several leveraged leases, the Company
had entered into six treasury locks having an aggregate notional amount of $147
million to fix the interest rate inherent in the operating lease payments. The
treasury locks were terminated in May 2007 in connection with the refinancing of
the leveraged leases, and the resulting $0.5 million gain on these hedges will
be amortized to equipment rents over the remaining life of the leases. These
transactions are accounted for as cash flow 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):




December
      31,
            
            2007
            
            
            2006Unrecognized
      gain on closed hedges
            
            $
            –
            
            
            $
            1Tax
      effect
            
            
            –
            
            
            
            –Unrecognized
      gain in AOCL, net of tax
            
            $
            –
            
            
            $
            1





30
 Table of
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4.
Other Expense, Net


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





Year
      ended December 31,
            
            2007
            
            
            2006
            
            
            2005Accounts
      receivable sales fees
            
            $
            19
            
            
            $
            23
            
            
            $
            15Loss
      from participation in synthetic fuel partnership
            
            
            5
            
            
            
            9
            
            
            
            14Miscellaneous,
      net
            
            
            7
            
            
            
            7
            
            
            
            6Total
            
            $
            31
            
            
            $
            39
            
            
            $
            35





The
decrease in other expense, net was predominantly due to lower accounts
receivable sales fees and a decrease in losses on BNSF Railway’s participation
in a synthetic fuel partnership.





During
the fourth quarter of 2004, BNSF Railway indirectly purchased a 4.17 percent
ownership of a synthetic fuel partnership through a 50 percent interest in a
limited liability company with an unrelated entity. The synthetic fuel
partnership generates Section 29 synthetic fuel tax credits, which reduce the
Company’s effective tax rate (see Note 5 to the Consolidated Financial
Statements for additional information). In 2007, 2006 and 2005, BNSF Railway
received a tax benefit from its participation in the partnership of
approximately $7 million, $11 million and $16 million, respectively, related to
the fuel tax credits and the deduction of partnership operating losses. In 2007,
2006 and 2005, the Company recorded approximately $5 million, $9 million and $14
million, respectively, of other expense, net related to the Company’s share of
the partnership’s losses under the equity method of accounting. The partnership
does not qualify for consolidation under FIN 46R, as BNSF Railway is not the
primary beneficiary of the partnership. The partnership’s activities terminated
on December 31, 2007; therefore, the Company will not have any
additional exposure to loss from the synthetic fuel
partnership.





5.
Income Taxes


Income
tax expense was as follows (in millions):





Year
      ended December 31,
            
            2007
            
            2006
            a
            2005
            aCurrent:Federal
            
            $
            949
            
            $
            869
            
            $
            763State
            
            
            132
            
            
            114
            
            
            101Total current
            
            
            1,081
            
            
            983
            
            
            864Deferred:Federal
            
            
            248
            
            
            316
            
            
            181State
            
            
            54
            
            
            14
            
            
            30Total deferred
            
            
            302
            
            
            330
            
            
            211Total
            
            $
            1,383
            
            $
            1,313
            
            $
            1,075


a 
Prior year numbers have been adjusted for the retrospective adoption of FSP AUG
AIR-1,
Accounting for Planned Major Maintenance Activities.


See Note 2 to the Consolidated Financial Statements for additional
information.




Reconciliation
of the federal statutory income tax rate to the effective tax rate was as
follows:





Year
      ended December 31,
            
            2007
            
            2006
            
            2005Federal
      statutory income tax rate
            
            35.0
            %
            35.0
            %
            35.0
            %State
      income taxes, net of federal tax benefit
            
            3.4
            
            2.5
            
            3.0Tax
      law change
            
            –
            
            (0.2
            )
            –Synthetic
      fuel credits
            
            (0.1
            )
            (0.2
            )
            (0.4
            )Other,
      net
            
            0.3
            
            (0.1
            )
            –Effective tax
    rate
            
            38.6
            %
            37.0
            %
            37.6
            %





31
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The
components of deferred tax assets and liabilities were as follows (in
millions):





December
      31,
            
            2007
            
            2006
            aDeferred
      tax liabilities:Depreciation
      and amortization
            
            $
            (8,958
            )
            $
            (8,719
            )Hedging
            
            
            (22
            )
            
            (12
            )Other
            
            
            (179
            )
            
            (210
            )Total deferred tax
      liabilities
            
            
            (9,159
            )
            
            (8,941
            )Deferred
      tax assets:Casualty
      and environmental
            
            
            328
            
            
            313Pension
      and retiree health and welfare benefits
            
            
            184
            
            
            247Compensation
      and benefits
            
            
            145
            
            
            157Employee
      separation costs
            
            
            35
            
            
            39Other
            
            
            248
            
            
            229Total deferred tax
      assets
            
            
            940
            
            
            985Net deferred tax
      liability
            
            $
            (8,219
            )
            $
            (7,956
            )Non-current
      deferred income tax liability
            
            $
            (8,501
            )
            $
            (8,293
            )Current
      portion of deferred income taxes
            
            
            282
            
            
            337Net deferred tax
      liability
            
            $
            (8,219
            )
            $
            (7,956
            )


a 
Prior year numbers have been adjusted for the retrospective adoption of FSP AUG
AIR-1,
Accounting for Planned Major Maintenance Activities.


See Note 2 to the Consolidated Financial Statements for additional
information.




In
accordance with the income tax allocation agreement between BNSF and BNSF
Railway Company, the Company makes payments to or receives refunds from BNSF
based on its separate consolidated tax liabilities.





All
federal income tax returns of BNSF’s predecessor companies, Burlington Northern
Inc. and Santa Fe Pacific Corporation, are closed through 1994 and the business
combination date of September 22, 1995, respectively. Internal Revenue Service
(IRS) examination of the years 1995 through 1999 for BNSF Railway is completed,
and the un-agreed issues are pending before IRS Appeals.  It is
anticipated that a settlement with the IRS for the years 1995 through 1999 may
be reached within the next twelve months.  Examination of the years
2000 through 2002 and 2003 through 2005 for BNSF are completed and protests of
the un-agreed issues are pending before IRS Appeals.  BNSF Railway is
currently under examination for year 2006.





BNSF
Railway and its subsidiaries have various state income tax returns in the
process of examination, administrative appeal or litigation. State income tax
returns are generally subject to examination for a period of three to five years
after filing of the respective return.  The state impact of any
federal changes remains subject to examination by various states for a period of
up to one year after formal notification to the states.





Due to
the capital-intensive nature of BNSF Railway’s business, a significant portion
of the audit issues with the IRS and other taxing authorities relate to whether
expenditures are classified as maintenance or capital and whether certain asset
valuations are appropriate. A provision for taxes resulting from ongoing and
future federal and state audits is based on an estimation of aggregate
adjustments that may be required as a result of the audits. The Company believes
that adequate provision has been made for any adjustment that might be assessed
for open years through 2007.





32
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UncertainTaxPositions


The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company recorded an $83 million increase in the
liability for unrecognized tax benefits, which is offset by a reduction of the
deferred tax liability of $70 million, resulting in a decrease to the January 1,
2007, retained earnings balance of $13 million. The amount of unrecognized tax
benefits at December 31, 2007 was $125 million, of which $91 million would
impact the Company’s effective tax rate if recognized. A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in
millions):





Balance
      at January 1, 2007
            
            $
            87Additions
      for tax positions related to current year
            
            
            29Additions/reductions
      for tax positions taken in prior years
            
            
            12Reductions
      for tax positions as a result of:Settlements
            
            
            –Lapse
      of statute of limitations
            
            
            (3
            )Balance
      at December 31, 2007
            
            $
            125





It is
expected that the amount of unrecognized tax benefits will change in the next
twelve months; however, BNSF Railway does not expect the change to have a
significant impact on the results of operations or the financial position of the
Company.





The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in income tax expense in the Consolidated
Statements of Income, which is consistent with the recognition of these items in
prior reporting periods. The Company had recorded a liability of approximately
$41 million and $65 million for the payment of interest and penalties for the
years ending December 31, 2007, and 2006, respectively. For the year ended
December 31, 2007, the Company recognized a reduction of approximately $7
million in interest and penalty expense. For the years ended December 31, 2006,
and 2005, the Company recognized approximately $5 million and $9 million in
interest and penalty expense, respectively.





6.
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 December 31, 2007, which was comprised of two
$175 million, 364-day accounts receivable facilities and two $175 million 3-year
accounts receivable facilities. BNSF Railway amended the two 364-day facilities
in November 2007, reducing the committed amounts to $175 million each and
modifying their maturities to November 2008. The two 3-year facilities were
entered into in November 2007 concurrently with the amendment and extension of
the two 364-day facilities and will mature in November 2010. Outstanding
undivided interests held by investors under the A/R sales program were $300
million at December 31, 2007 and 2006, respectively, with $75 million in 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 $1,105
million and $1,030 million of receivables transferred by SFRC to the master
trust at December 31, 2007 and 2006, 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 $805 million and $730 million at December 31, 2007 and 2006,
respectively, less an allowance for uncollectible accounts, reflected the total
accounts receivable transferred by SFRC to the master trust less $300 million at
both December 31, 2007 and 2006 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.




33
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BNSF
Railway retains the collection responsibility with respect to the accounts
receivable. Proceeds from collections reinvested in the A/R sales program were
approximately $16.8 billion, $15.8 billion and $13.6 billion in 2007, 2006 and
2005, 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 $19 million, $23 million and $15 million for the years
ended December 31, 2007, 2006 and 2005, respectively. These costs fluctuate
monthly with changes in prevailing interest rates and were based on weighted
average interest rates of 5.6 percent, 5.3 percent and 3.3 percent for the years
ended December 31, 2007, 2006 and 2005, 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 for the combined dilution and delinquency percentages.
BNSF Railway has historically experienced very low levels of default or dilution
and was well below the established rate at December 31, 2007. 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 December 31, 2007 and 2006, $11 million and $26 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 both December 31, 2007 and 2006,
$36 million of such allowances had been recorded, of which $34 million had been
recorded as a reduction to accounts receivable, net. The remaining $2 million at
December 31, 2007 and 2006, respectively, had been recorded in accounts payable
and other current liabilities because they relate to the outstanding undivided
interests held by investors. During the years ended December 31, 2007 and 2006,
$4 million and $8 million, respectively, of accounts receivable were written
off.





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 December 31, 2007, BNSF
Railway was in compliance with these provisions.




34
 Table of Contents


7.
Property and Equipment, Net


Property
and equipment, net (in millions), and the weighted average annual depreciation
rates (%) were as follows:





December
      31,
            
            2007
            
            
            2006
            a
            
            2007
      Depreciation
              RatesLand
            
            $
            1,718
            
            
            $
            1,679
            
            
            –
            %Track
      structure
            
            17,982
            
            
            17,080
            
            
            3.2
            %Other
      roadway
            
            12,370
            
            
            11,589
            
            
            2.4
            %Locomotives
            
            4,003
            
            
            3,704
            
            
            6.4
            %Freight
      cars and other equipment
            
            2,034
            
            
            1,939
            
            
            5.2
            %Computer
      hardware and software
            
            573
            
            
            489
            
            
            13.9
            %Total cost
            
            38,680
            
            
            36,480Less
      accumulated depreciation and amortization
            
            (9,167
            )
            
            (8,609
            )Property and equipment,
      net
            
            $
            29,513
            
            
            $
            27,871


a 
Prior year numbers have been adjusted for the retrospective adoption of FSP AUG
AIR-1,
Accounting for Planned Major Maintenance
Activities.


See Note 2 to the Consolidated Financial Statements for additional
information.





The
Consolidated Balance Sheets at December 31, 2007 and 2006, included $1,507
million, net of $469 million of amortization and $1,039 million, net of $409
million of amortization, respectively, for property and equipment under capital
leases, primarily for locomotives.





The
Company capitalized $17 million, $14 million and $13 million of interest for the
years ended December 31, 2007, 2006 and 2005, respectively.




8.
Accounts Payable and Other Current Liabilities


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





December
      31,
            
            2007
            
            2006Compensation
      and benefits payable
            
            $
            568
            
            $
            698Accounts
      payable
            
            335
            
            330Income
      tax liabilities
            
            303
            
            356Rents
      and leases
            
            303
            
            350Casualty
      and environmental liabilities
            
            246
            
            233Customer
      incentives
            
            145
            
            163Property
      tax liabilities
            
            141
            
            132Other
            
            807
            
            719Total
            
            $
            2,848
            
            $
            2,981







35
 Table of Contents


9.
Debt


Debt
outstanding was as follows (in millions):




December
      31,
            
            2007a
            
            
            
            2006aNotes
      and debentures, due 2022
            $
            200
            
            8.8
            %
            
            $
            200
            
            8.8
            %Equipment
      obligations, due 2008 to 2016
            
            297
            
            6.6
            
            
            
            347
            
            6.7Capitalized
      lease obligations, due 2008 to 2027
            
            938
            
            6.3
            
            
            
            609
            
            6.9Mortgage
      bonds, due 2008 to 2047
            
            102
            
            5.6
            
            
            
            106
            
            5.7Financing
      obligations, due 2008 to 2028
            
            211
            
            6.3
            
            
            
            153
            
            6.3Unamortized
      discount and other, net
            
            (27
            )
            
            
            
            
            (27
            )Total
            
            1,721
            
            
            
            
            
            1,388Less
      current portion of long-term debt
            
            (210
            )
            7.2
            %
            
            
            (173
            )
            7.4
            %Long-term debt
            $
            1,511
            
            
            
            
            $
            1,215a  Amounts
      represent debt
      outstanding and weighted average interest ratesfor 2007 and 2006,
      respectively.Maturities are as of December 31,
      2007.




As of
December 31, 2007, certain BNSF Railway properties and other assets were subject
to liens securing $102 million of mortgage debt. Certain locomotives and rolling
stock of BNSF Railway were subject to equipment obligations and capital
leases.





The
following table provides fair value information for the Company’s debt
obligations including principal cash flows and related weighted average interest
rates by contractual maturity dates.





December
      31, 2007Maturity
      Date2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            Thereafter
            
            Total Including
      Capital Leases
            
            Total
      Excluding Capital Leases
            
            Fair
      Value Excluding Capital LeasesFixed-rate
      debt(in
      millions)
            
            $
            210
            
            
            $
            188
            
            
            $
            156
            
            
            $
            116
            
            
            $
            93
            
            
            $
            958
            
            
            $
            1,721
            
            
            $
            783
            
            
            $
            835Average
      interest rate
            
            
            7.2
            %
            
            
            6.9
            %
            
            
            6.7
            %
            
            
            6.4
            %
            
            
            6.4
            %
            
            
            6.6
            %
            
            
            6.7
            %





The fair
value of BNSF Railway’s long-term debt is primarily based on quoted market
prices for the same or similar issues, or on the current rates that would be
offered to BNSF Railway for debt of the same remaining maturities. Capital
leases have been excluded from the calculation of fair value.




At
December 31, 2006, BNSF Railway had $35 million of intercompany notes payable to
BNSF at a variable interest rate of 1.0 percent above the monthly average of the
daily effective Federal Funds rate. During 2007, BNSF Railway made net
repayments of $35 million of variable rate notes. Interest expense on
intercompany notes payable is reflected in interest income, related parties in
the Consolidated Income Statements. No intercompany notes payable were
outstanding at December 31, 2007.




At
December 31, 2007 and 2006, BNSF Railway had $456 million and $3,317 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 $2,861 million decrease in intercompany notes receivable
is due to repayments of $715 million and an in-kind dividend of $3,854 million
partially offset by $1,708 million of loans to BNSF during 2007. 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.




As a
result of the in-kind dividend in December 2007, BNSF Railway reclassified the
remaining intercompany notes receivable to equity.




Capital
Leases


In 2007,
BNSF Railway entered into several capital leases totaling approximately $325
million to finance locomotives and freight cars. The terms of the leases are
between 15 and 20 years.




36
 Table of
Contents




Financing
Obligation


In 2005,
the Company 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 by early 2009 with an approximate cost
of $160 million. As of December 31, 2007, BNSF Railway has sold $41 million of
completed improvements. 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
December 31, 2007, were as follows (dollars in millions):





GuaranteesBNSF
      Railway  Ownership Percentage
            
            
            Principal
              Amount
      Guaranteed
            
            
            Maximum
              Future
      Payments
            
            
            Maximum
              Recourse
              Amount
      a
            
            
            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
            
            
            $
            81
            
            
            $
            81
            
            
            11
            
            $
            31
            bWestside
      Intermodal Transportation Corporation
            
            0.0
            %
            
            $
            40
            
            
            $
            61
            
            
            $
            –
            
            
            16
            
            $
            34
            bThe
      Unified Government of Wyandotte County/Kansas City, Kansas
            
            0.0
            %
            
            $
            13
            
            
            $
            19
            
            
            $
            –
            
            
            16
            
            $
            10
            bChevron
      Phillips Chemical Company, LP
            
            0.0
            %
            
            
            N/A
            d
            
            
            N/A
            d
            
            
            N/A
            d
            
            10
            
            $
            14
            cVarious
      lessors
              (Residual
      value guarantees)
            
            0.0
            %
            
            
            N/A
            
            
            $
            271
            
            
            $
            271
            
            
            Various
            
            $
            68
            cAll
      other
            
            0.0
            %
            
            $
            6
            
            
            $
            7
            
            
            $
            3
            
            
            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
      the 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.





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.




37
 Table of
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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 BNSF Railway 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 December 31, 2007, the Company had recorded a $68 million asset
and corresponding liability for the fair value of the RVG.




All
Other


As of
December 31, 2007, 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 $3 million of the $6 million of guarantees. These guarantees
expire between 2008 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.





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.




38
 Table of
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  10.
Commitments and Contingencies
 Lease
Commitments
 BNSF
Railway has substantial lease commitments for locomotives, freight cars,
trailers and containers, office buildings, operating facilities and other
property, and many of these leases provide the option to purchase the leased
item at fair market value at the end of the lease. However, some provide fixed
price purchase options. Future minimum lease payments as of December 31, 2007,
are summarized as follows (in millions):


December
      31,
            
            Capital
      Leases
            
            Operating
      Leases
            a2008
            
            $
            204
            
            $
            
            6992009
            
            175
            
            6812010
            
            138
            
            6292011
            
            96
            
            5822012
            
            78
            
            525Thereafter
            
            518
            
            4,382Total
            
            1,209
            
            $
            
            7,498Less
      amount representing interest
            
            (271
            )Present value of minimum lease
      payments
            
            $
            938a 
      Excludes leases having non-cancelable lease terms of less than one year
      and per diem leases.




Lease
rental expense for all operating leases, excluding per diem leases, was $706
million, $665 million and $565 million for the years ended December 31, 2007,
2006 and 2005, respectively. When rental payments are not made on a
straight-line basis, the Company recognizes rental expense on a straight-line
basis over the lease term. Contingent rentals and sublease rentals were not
significant.




Other
Commitments


In the
normal course of business, the Company enters into long-term contractual
requirements for future goods and services needed for the operations of the
business. Such commitments are not in excess of expected requirements and are
not reasonably likely to result in performance penalties or payments that would
have a material adverse effect on the Company’s liquidity.




PersonalInjury andEnvironmentalCosts


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 by 1985.




39
 Table of
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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.
  During
the third quarters of 2007, 2006 and 2005, the Company analyzed recent filing
and payment trends to ensure the assumptions used by BNSF Railway to estimate
its future asbestos liability were reasonable. In 2007, management recorded a
decrease in expense of $17 million due to a statistically significant reduction
in filing rate experience for non-malignant claims. In 2006 and 2005, management
recorded no additional expense. The Company plans to update its study again in
the third quarter of 2008.


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):




2007
            
            
            2006
            
            
            2005Beginning
      balance
            
            $
            306
            
            
            $
            326
            
            
            $
            345Accruals
            
            
            (17
            )
            
            
            –
            
            
            
            –Payments
            
            
            (19
            )
            
            
            (20
            )
            
            
            (19
            )Ending
      balance at December 31,
            
            $
            270
            
            
            $
            306
            
            
            $
            326




Of the
obligation at December 31, 2007, $226 million was related to unasserted claims
while $44 million was related to asserted claims. At December 31, 2007 and 2006,
$17 million and $22 million were included in current liabilities, respectively.
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 presently self-insured for
asbestos-related claims.




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




2007
            
            2006Claims
      unresolved at January 1,
            
            
            1,975
            
            2,121Claims
      filed
            
            
            376
            
            530Claims
      settled, dismissed or otherwise resolved
            
            
            (570
            )
            (676
            )Claims
      unresolved at December 31,
            
            
            1,781
            
            1,975





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, 70 and 90 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 $295 million. However, BNSF Railway believes that
the $270 million recorded at December 31, 2007, 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.




40
 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
ofaLoss, 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):





2007
            
            
            2006
            
            
            2005Beginning
      balance
            
            $
            439
            
            
            $
            422
            
            
            $
            459Accruals
            
            
            190
            
            
            
            188
            
            
            
            181Payments
            
            
            (190
            )
            
            
            (171
            )
            
            
            (218
            )Ending
      balance at December 31,
            
            $
            439
            
            
            $
            439
            
            
            $
            422





At
December 31, 2007 and 2006, $163 million and $153 million were included in
current liabilities, respectively. 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:





2007
            
            
            2006Claims
      unresolved at January 1,
            
            3,130
            
            
            3,617Claims
      filed
            
            3,894
            
            
            3,516Claims
      settled, dismissed or otherwise resolved
            
            (3,702)
            )
            
            (4,003
            )Claims
      unresolved at December 31,
            
            3,322
            
            
            3,130





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 $380 million to $530 million.
However, BNSF Railway believes that the $439 million recorded at December 31,
2007, 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.




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.





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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 years ended
December 31, 2007, 2006 and 2005, BNSF Railway paid premiums of $165 million,
$162 million and $157 million, respectively, to BNSF IC for such coverage, net
of reimbursements from third parties and recognized $165 million, $162 million
and $157 million, respectively, in expense related to those premiums, which is
classified as purchased services in the Consolidated Statements of Income. At
December 31, 2007 and 2006, unamortized premiums remaining on the Consolidated
Balance Sheets were $4 million, respectively. During 2007, 2006 and 2005, BNSF
IC made claim payments totaling $150 million, $130 million and $133 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.




During
the third quarter of 2007, 2006 and 2005, the Company analyzed recent data and
trends to ensure the assumptions used by BNSF Railway to estimate its future
environmental liability were reasonable.  As a result of this study,
in the third quarter of 2007, 2006 and 2005, management recorded additional
expense of approximately $20 million, $5 million and $12 million as of the June
30 measurement date, respectively.  The Company plans to update its
study again in the third quarter of 2008.




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 December 31, 2007, is approximately $21
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.




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The
following table summarizes the activity in the Company’s accrued obligations for
environmental matters (in millions):
 
 2007
              
              
              2006
              
              
              2005Beginning
      balance
              
              $
              318
              
              
              $
              370
              
              
              $
              385Accruals
              
              
              126
              
              
              
              20
              
              
              
              33Payments
              
              
              (64
              )
              
              
              (72
              )
              
              
              (48
              )Ending
      balance at December 31,
              
              $
              380
              
              
              $
              318
              
              
              $
              370


At
December 31, 2007 and 2006, $66 million and $58 million was included in current
liabilities, respectively. 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 December 31, 2007, will be paid over
the next ten years, and no individual site is considered to be
material.




The
following table summarizes the environmental sites:




BNSF
      Railway Sites
            
            
            Superfund
      Sites2007
            
            
            2006
            
            
            2007
            
            
            2006Number
      of sites at January 1,
            
            
            375
            
            
            
            369
            
            
            
            20
            
            
            
            20Sites
      added during the period
            
            
            16
            
            
            
            23
            
            
            
            –
            
            
            
            –Sites
      closed during the period
            
            
            (45
            )
            
            
            (17
            )
            
            
            –
            
            
            
            –Number
      of sites at December 31,
            
            
            346
            
            
            
            375
            
            
            
            20
            
            
            
            20





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 $380 million
recorded at December 31, 2007, 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.




43
 Table of
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  11.
Employee Separation Costs


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





2007
            
            
            2006
            
            
            2005Beginning
      balance at January 1,
            
            $
            107
            
            
            $
            132
            
            
            $
            154Accruals
            
            
            5
            
            
            
            2
            
            
            
            8Payments
            
            
            (21
            )
            
            
            (27
            )
            
            
            (30
            )Ending balance at December
      31,
            
            $
            91
            
            
            $
            107
            
            
            $
            132





Employee
separation liabilities of $91 million were included in the Consolidated Balance
Sheet at December 31, 2007, and principally represent the following: (i) $86
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)
$4 million for certain non-union employee severance costs. Employee separation
expenses are recorded in materials and other in the Consolidated Statements of
Income. At December 31, 2007, $14 million of the remaining liabilities were
included in current liabilities.





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 December 31, 2007, the
Company had updated its estimate and recorded an additional liability of
$4 million related to deferred benefits (see (i) above) and a liability of
$1 million related to non-union severance costs (see (iii) above). The remaining
costs for (ii) above are expected to be paid out between 2008 and approximately
2011, and the costs for (iii) above will be paid over the next several years
based on deferral elections made by the affected employees.




12.
Employment Benefit Plans


BNSF
sponsors a funded, noncontributory qualified pension plan, the BNSF Retirement
Plan, which covers most non-union employees, and an unfunded non-tax-qualified
pension plan, the BNSF Supplemental Retirement Plan, which covers certain
officers and other employees. The benefits under these pension plans are based
on years of credited service and the highest consecutive sixty months of
compensation for the last ten years of salaried employment with BNSF. BNSF’s
funding policy is to contribute annually not less than the regulatory minimum
and not more than the maximum amount deductible for income tax purposes with
respect to the funded plan.





Certain
salaried employees of BNSF Railway that have met age and years of service
requirements are eligible for life insurance coverage and medical benefits,
including prescription drug coverage, during retirement. This postretirement
benefit plan, referred to as the retiree health and welfare plan, is
contributory and provides benefits to retirees, their covered dependents and
beneficiaries. Retiree contributions are adjusted annually. The plan also
contains fixed deductibles, coinsurance and out-of-pocket limitations. The basic
life insurance plan is noncontributory and covers retirees only. Optional life
insurance coverage is available for some retirees; however, the retiree is
responsible for the full cost. BNSF Railway’s policy is to fund benefits payable
under the medical and life insurance plans as they come due. Generally,
employees beginning salaried employment with BNSF Railway subsequent to
September 22, 1995, are not eligible for medical benefits during
retirement.





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.




44
 Table of
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The
following table shows the incremental effect of applying SFAS No. 158 to both
the Company’s pension and retiree health and welfare plans on individual line
items in the Consolidated Balance Sheet as of December 31, 2006, (in millions):




Pension
      and Retiree Health and Welfare BenefitsBalances
      Prior to Adoption of SFAS No. 158 and the Minimum Liability
      Adjustment
            
            
            Minimum
      Liability Adjustment
            
            
            Balances
      Prior to Adoption of SFAS No. 158
            
            
            SFAS
      No. 158 Adoption Adjustments
            
            
            Ending
      Balances After Adoption of SFAS No. 158Pension
      asset
            
            $
            156
            
            
            $
            –
            
            
            $
            156
            
            
            $
            (156
            )
            
            $
            –Total
      assets
            
            $
            35,221
            
            
            $
            –
            
            
            $
            35,221
            
            
            $
            (156
            )
            
            $
            35,065Pension
      liability
            
            $
            52
            
            
            $
            –
            
            
            $
            52
            
            
            $
            (52
            )
            
            $
            –Additional
      minimum pension liability
            
            $
            417
            
            
            
            (64
            )
            
            $
            353
            
            
            
            (353
            )
            
            $
            –Liability
      for retiree health and welfare benefits
            
            $
            257
            
            
            
            –
            
            
            $
            257
            
            
            
            (257
            )
            
            $
            –Pension
      and retiree health and welfare liability
            
            $
            –
            
            
            
            –
            
            
            $
            –
            
            
            
            630
            
            
            $
            630Deferred
      income taxes
            
            $
            8,317
            
            
            
            24
            
            
            $
            8,341
            
            
            
            (48
            )
            
            $
            8,293Total
      liabilities
            
            $
            15,508
            
            
            $
            (40
            )
            
            $
            15,468
            
            
            $
            (80
            )
            
            $
            15,388AOCL
            
            $
            (250
            )
            
            $
            40
            
            
            $
            (210
            )
            
            $
            (76
            )
            
            $
            (286
            )Total
      stockholder’s equity
            
            $
            19,713
            
            
            $
            40
            
            
            $
            19,753
            
            
            $
            (76
            )
            
            $
            19,677







Components
of the net cost for these plans were as follows (in millions):





Pension
      Benefits
            
            
            Retiree
      Health and Welfare BenefitsYear
      ended December 31,
            
            2007
            
            
            2006
            
            
            2005
            
            
            2007
            
            
            2006
            
            
            2005Service
      cost
            
            $
            25
            
            
            $
            25
            
            
            $
            20
            
            
            $
            2
            
            
            $
            3
            
            
            $
            2Interest
      cost
            
            
            97
            
            
            
            94
            
            
            
            95
            
            
            
            17
            
            
            
            15
            
            
            
            17Expected
      return on plan assets
            
            
            (105
            )
            
            
            (97
            )
            
            
            (102
            )
            
            
            –
            
            
            
            –
            
            
            
            –Amortization
      of net loss
            
            
            35
            
            
            
            46
            
            
            
            25
            
            
            
            6
            
            
            
            3
            
            
            
            –Amortization
      of prior service cost
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (8
            )
            
            
            (7
            )
            
            
            (8
            )Net cost
    recognized
            
            $
            52
            
            
            $
            68
            
            
            $
            38
            
            
            $
            17
            
            
            $
            14
            
            
            $
            11





45
 Table of
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The
projected benefit obligation is the present value of benefit earned to date by
plan participants, including the effect of assumed future salary increases and
expected healthcare cost trend rate increases. The following table shows the
change in projected benefit obligation based on the September 30 measurement
date (in millions):





Pension
      Benefits
            
            Retiree
      Health and Welfare BenefitsChange
      in Benefit Obligation
            
            2007
            
            2006
            
            2007
            
            2006Benefit
      obligation at beginning of period
            
            $
            1,830
            
            $
            1,858
            
            $
            311
            
            $
            295Service
      cost
            
            25
            
            25
            
            2
            
            3Interest
      cost
            
            97
            
            94
            
            17
            
            15Plan
      participants' contributions
            
            –
            
            –
            
            8
            
            8Actuarial
      (gain) loss
            
            (59
            )
            (18
            )
            (3
            )
            19Medicare
      subsidy
            
            –
            
            –
            
            2
            
            1Benefits
      paid
            
            (130
            )
            (129
            )
            (33
            )
            (30
            )Projected
      benefit obligation at end of period
            
            
            1,763
            
            
            1,830
            
            
            304
            
            
            311Component
      representing future salary increases
            
            
            (57
            )
            
            (76
            )
            
            –
            
            
            –Accumulated
      benefit obligation at end of period
            
            $
            1,706
            
            $
            1,754
            
            $
            304
            
            $
            311





Both the
BNSF Retirement Plan and the BNSF Supplemental Retirement Plan had accumulated
and projected benefit obligations in excess of plan assets at September 30, 2007
and 2006.





The
following table shows the change in plan assets of the plans based on the
September 30 measurement date (in millions):





Pension
      Benefits
            
            Retiree
      Health and Welfare BenefitsChange
      in Plan Assets
            
            2007
            
            2006
            
            2007
            
            2006Fair
      value of plan assets at beginning of period
            
            $
            1,394
            
            $
            1,347
            
            $
            –
            
            $
            –Actual
      return on plan assets
            
            208
            
            126
            
            –
            
            –Employer
      contribution
            
            116
            
            50
            
            23
            
            21Plan
      participants' contributions
            
            –
            
            –
            
            8
            
            8Medicare
      subsidy
            
            –
            
            –
            
            2
            
            1Benefits
      paid
            
            (130
            )
            (129
            )
            (33
            )
            (30
            )Fair value of plan assets at
      measurement date
            
            $
            1,588
            
            $
            1,394
            
            $
            –
            
            $
            –Adjustment
      for fourth quarter contribution
            
            $
            2
            
            $
            111
            
            $
            5
            
            $
            6





The
following table shows the funded status, defined as plan assets less the
projected benefit obligation, as of December 31 (in millions):





Pension
      Benefits
            
            
            Retiree
      Health and Welfare Benefits2007
            
            
            2006
            
            
            2007
            
            
            2006Funded
      status (plan assets less projected benefit obligations)
            
            $
            (173
            )
            
            $
            (325
            )
            
            $
            (299
            )
            
            $
            (305
            )




Of the
combined pension and retiree health and welfare benefits liability of $472
million recognized as of December 31, 2007, $28 million was included in other
current liabilities.





46
 Table of
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Prior to
December 31, 2006, actuarial gains and losses and prior service costs were not
recognized in the Company’s Consolidated Balance Sheets, but were only included
in the footnote disclosures. Beginning on December 31, 2006, upon adoption of
SFAS No. 158, the Company began recognizing these costs in the Consolidated
Balance Sheets through an adjustment to AOCL. Beginning in 2007, the Company
recognized actuarial gains and losses and prior service costs in AOCL as they
arose. The following table shows the pre-tax change in AOCL attributable to the
components of the net cost and the change in benefit obligation (in
millions):





Pension
      Benefits
            
            
            Retiree
      Health and Welfare BenefitsChange
      in AOCL
            
            2007
            
            
            2006
            
            
            2005
            
            
            2007
            
            
            2006
            
            
            2005Balance
      at January 1,
            
            $
            429
            
            
            $
            417
            
            
            $
            353
            
            
            $
            48
            
            
            $
            –
            
            
            $
            –Increase
      (decrease) in minimum liability included in other comprehensive loss prior
      to adoption of SFAS No. 158
            
            
            –
            
            
            
            (64
            )
            
            
            64
            
            
            
            –
            
            
            
            –
            
            
            
            –SFAS
      No. 158 adoption adjustment
            
            
            –
            
            
            
            76
            
            
            
            –
            
            
            
            –
            
            
            
            48
            
            
            
            –Amortization
      of actuarial loss
            
            
            (35
            )
            
            
            –
            
            
            
            –
            
            
            
            (6
            )
            
            
            –
            
            
            
            –Amortization
      of prior service costs
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            8
            
            
            
            –
            
            
            
            –Actuarial
      gain
            
            
            (161
            )
            
            
            –
            
            
            
            –
            
            
            
            (4
            )
            
            
            –
            
            
            
            –Balance at December
      31,
            
            $
            233
            
            
            $
            429
            
            
            $
            417
            
            
            $
            46
            
            
            $
            48
            
            
            $
            –





The
estimated net actuarial loss and prior service credit for these defined benefit
pension plans that will be amortized from AOCL into net periodic benefit cost
over the next fiscal year is expected to be $16 million and less than $1
million, respectively. The estimated net actuarial loss and prior service credit
for the retiree health and welfare benefit plans that will be amortized from
AOCL into net periodic benefit cost over the next fiscal year is expected to be
$4 million and $8 million, respectively. Pre-tax amounts currently recognized in
AOCL consist of the following (in millions):





Pension
      Benefits
            
            Retiree
      Health and Welfare Benefits2007
            
            2006
            
            
            2007
            
            2006Net
      actuarial loss
            
            $
            234
            
            $
            430
            
            
            $
            67
            
            $
            77Prior
      service cost
            
            (1
            )
            (1
            )
            
            (21
            )
            (29
            )Pre-tax
      amount recognized in AOCL at December 31,
            
            
            233
            
            
            429
            
            
            
            46
            
            
            48After-tax
      amount recognized in AOCL at December 31,
            
            $
            143
            
            $
            264
            
            
            $
            28
            
            $
            29





The
expected long-term rate of return is the return the Company anticipates earning,
net of plan expenses, over the period that benefits are paid. It reflects the
rate of return on present investments and on expected contributions. In
determining the expected long-term rate of return, BNSF Railway considered the
following: (i) forward looking capital market forecasts; (ii) historical returns
for individual asset classes; and (iii) the impact of active portfolio
management.




47
 Table of
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The
assumptions used in accounting for the BNSF plans were as follows:




Pension
      Benefits
              
              
              Retiree
      Health and Welfare BenefitsAssumptions
      used to determine net
                cost
      for fiscal years ended December 31,
              
              2007
              
              
              2006
              
              
              2005
              
              
              2007
              
              
              2006
              
              
              2005Discount
      rate
              
              
              5.50
              %
              
              
              5.25
              %
              
              
              5.75
              %
              
              
              5.50
              %
              
              
              5.25
              %
              
              
              5.75
              %Expected
      long-term rate of return on plan assets
              
              
              8.00
              %
              
              
              8.00
              %
              
              
              8.00
              %
              
              
              –
              %
              
              
              –
              %
              
              
              –
              %Rate
      of compensation increase
              
              
              3.90
              %
              
              
              3.90
              %
              
              
              3.90
              %
              
              
              3.90
              %
              
              
              3.90
              %
              
              
              3.90
              %
 Pension
      Benefits
              
              
              Retiree
      Health and Welfare BenefitsAssumptions
      used to determine benefit
                obligations
      at September 30,
              
              2007
              
              
              2006
              
              
              2007
              
              
              2006Discount
      rate
              
              
              6.00
              %
              
              
              5.50
              %
              
              
              6.00
              %
              
              
              5.50
              %Rate
      of compensation increase
              
              
              3.80
              %
              
              
              3.90
              %
              
              
              3.80
              %
              
              
              3.90
              %





The
following table presents assumed health care cost trend rates:




December
      31,
            
            2007
            
            
            2006
            
            
            2005Assumed
      health care cost trend rate for next year
            
            
            10.50
            %
            
            
            10.00
            %
            
            
            10.50
            %Rate
      to which health care cost trend rate is expected to decline and
      remain
            
            
            5.00
            %
            
            
            5.00
            %
            
            
            5.00
            %Year
      that the rate reaches the ultimate trend rate
            
            2016
            
            
            2012
            
            
            2012





Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one percentage point change in assumed health care
cost trend rates would have the following effects (in millions):




One
      Percentage-Point Increase
            
            
            One
      Percentage-Point DecreaseEffect
      on total service and interest cost
            
            $
            2
            
            
            $
            (2
            )Effect
      on postretirement benefit obligation
            
            $
            23
            
            
            $
            (20
            )





The
qualified BNSF Retirement Plan asset allocation at September 30, 2007 and 2006
and the target allocation for 2007 by asset category are as
follows:




Target
      Allocation
            
            
            Percentage
      of Pension Plan
              Assets
      at September 30,Plan
      Asset Allocation
            
            2007
            
            
            2007
            
            
            2006Equity
      Securities
            
            
            45
      – 75
            %
            
            
            63
            %
            
            
            63
            %Fixed
      Income Securities
            
            
            20
      – 40
            %
            
            
            27
            
            
            
            28Real
      Estate
            
            
            5
      – 15
            %
            
            
            10
            
            
            
            9Total
            
            
            
            
            
            
            100
            %
            
            
            100
            %





The
general investment objective of the BNSF Retirement Plan is to grow the plan
assets in relation to the plan liabilities while prudently managing the risk of
a decrease in the plan’s assets relative to those liabilities. To meet this
objective, the Company’s management has adopted the above asset allocation
ranges. This allows flexibility to accommodate market changes in the asset
classes within defined parameters.





Based on
its current assumptions and funding methodology, the Company is expected to be
required to make contributions of $34 million to the BNSF Retirement Plan
in 2008. The Company expects to make benefit payments in 2008 of approximately
$7 million and $25 million from its non-qualified defined benefit and
retiree health and welfare plans, respectively.




48
 Table of
Contents


The
following table shows expected benefit payments from its defined benefit pension
plans and expected claim payments and Medicare Part D subsidy receipts for the
retiree health and welfare plan for the next five fiscal years and the aggregate
five years thereafter (in millions):




Fiscal
      year
            
            Expected
      Pension Plan Benefit Payments
            a
            Expected
      Retiree Health and Welfare Payments
            
            Expected
      Medicare Subsidy2008
            
            $
            131
            
            $
            25
            
            $
            (3
            )2009
            
            
            133
            
            
            26
            
            
            (3
            )2010
            
            
            134
            
            
            27
            
            
            (3
            )2011
            
            
            135
            
            
            28
            
            
            (3
            )2012
            
            
            136
            
            
            28
            
            
            (3
            )2013–2017
            
            
            691
            
            
            144
            
            
            (20
            )a 
      Primarily consists of Qualified Defined Benefit Plan payments, which are
      made from the plan trust and do not represent an immediate cash outflow to
      the Company.





Defined Contribution
Plans


BNSF and
BNSF Railway sponsor qualified 401(k) plans that cover substantially all
employees and a non-qualified defined contribution plan that covers certain
officers and other employees. The Company matches 50 percent of the first six
percent of non-union employees’ contributions and matches 25 percent on the
first four percent of a limited number of union employees’ contributions, which
are subject to certain percentage limits of the employees’ earnings, at each pay
period. Non-union employees are eligible to receive an annual discretionary
matching contribution of up to 30 percent of the first six percent of their
contributions. Employer contributions for all non-union employees are subject to
a five-year length of service vesting schedule. The Company’s 401(k) matching
expense was $21 million, $28 million and $20 million in 2007, 2006 and 2005,
respectively.





Other


Under
collective bargaining agreements, BNSF Railway participates in multi-employer
benefit plans that provide certain post-retirement health care and life
insurance benefits for eligible union employees. Insurance premiums paid
attributable to retirees, which are generally expensed as incurred, were $46
million, $44 million and $43 million, in 2007, 2006 and 2005, respectively (see
Note 11 to the Consolidated Financial Statements for other deferred benefits
payable to certain conductors, trainmen and locomotive engineers).





13.
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 $929 million, $1,009 million and $636 million
during 2007, 2006 and 2005, respectively, which are reflected in changes in
working capital in the Consolidated Statement of Cash Flows.





In
December 2007, BNSF Railway declared an in-kind dividend of $4.1 billion, or
$4.1 million per share, to BNSF, which reduced notes receivable and accounts
receivable by $3,854 million and $246 million, respectively.





At
December 31, 2007 and 2006, BNSF Railway had $44 million and $148 million,
respectively, of intercompany receivables which are reflected in accounts
receivable in the respective Consolidated Balance Sheets. At December 31, 2007
and 2006, BNSF Railway had $41 million and $61 million of intercompany payables,
respectively, which are reflected in accounts payable in the respective
Consolidated Balance Sheets. Included in the $104 million decrease in
intercompany receivables is an in-kind dividend of $246 million which was
partially offset by additional borrowings by BNSF.  Net intercompany
balances are settled in the ordinary course of business.





At
December 31, 2006, BNSF Railway had $35 million of intercompany notes payable to
BNSF at a variable interest rate of 1.0 percent above the monthly average of the
daily effective Federal Funds rate. BNSF Railway did not have an outstanding
intercompany notes payable balance at December 31, 2007.  During 2007,
BNSF Railway had additional borrowings of $1 million and made $36 million of
additional repayments of variable rate notes. Borrowings and repayments on the
intercompany notes payable are reflected as financing activities in the
Consolidated Statements of Cash Flows. Interest expense on intercompany
notes payable is reflected in interest income, related parties in the
Consolidated Income Statements.





49
 Table of
Contents




At
December 31, 2007 and 2006, BNSF Railway had $456 million and $3,317 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 $2,861 million decrease in intercompany notes receivable
is due to repayments of $715 million and an in-kind dividend of $3,854 million
partially offset by $1,708 million of loans to BNSF during 2007. During the
first quarter of 2007, the Company revised its classification of repayments and
borrowings on the intercompany notes receivable from its parent in the
Consolidated Statement of Cash Flows to an appropriate classification as
investing activities rather than financing activities, as previously reported.
For the years ended December 31, 2006 and 2005, the revisions of $441
million and $865 million, respectively, increased cash used for investing
activities and decreased cash used for financing activities. 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.




As a
result of the in-kind dividend in December 2007, BNSF Railway reclassified the
remaining intercompany notes receivable to equity.





BNSF
Logistics is a wholly-owned subsidiary of BNSF that specializes in providing
third-party logistics services. BNSF Railway earned revenues of $28 million, $38
million and $26 million for the years ended December 31, 2007, 2006 and 2005,
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 $30 million, $31
million and $22 million for the years ended December 31, 2007, 2006 and
2005.





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. See Notes 2 and 14 for additional information
regarding compensation expense recorded for stock incentive plans.





14.
Stock-Based Compensation


On April
15, 1999, BNSF shareholders approved the Burlington Northern Santa Fe 1999 Stock
Incentive Plan and authorized 20 million shares of BNSF common stock to be
issued in connection with stock options, restricted stock, restricted stock
units and performance stock. On April 18, 2001, April 17, 2002, April 21, 2004
and April 19, 2006, BNSF shareholders approved the amendments to the Burlington
Northern Santa Fe 1999 Stock Incentive Plan, which authorized additional awards
of 9 million, 6 million, 7 million and 11 million shares, respectively, of BNSF
common stock to be issued in connection with stock options, restricted stock,
restricted stock units and performance stock. Approximately 10 million common
shares were available for future grant at December 31, 2007.





Additionally,
on April 18, 1996, BNSF shareholders approved the non-employee directors’ stock
plan and authorized 900,000 shares of BNSF common stock to be issued in
connection with this plan. Approximately 450,000 common shares were available
for future grant at December 31, 2007.




Stock
Options


Under
BNSF’s stock plans, options may be granted to directors, officers and salaried
employees at the fair market value of BNSF’s common stock on the date of grant.
Stock option grants generally vest ratably over three years and expire within
ten years after the date of grant. Shares issued upon exercise of options may be
issued from treasury shares or from authorized but unissued shares.





The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions apply to the
options granted for the periods presented:





Year
      ended December 31,
            
            2007
            
            
            2006
            
            
            2005Weighted
      average expected life (years)
            
            
            4.6
            
            
            
            4.5
            
            
            
            4.5Weighted
      average expected volatility
            
            
            24.0
            %
            
            
            24.0
            %
            
            
            24.0
            %Weighted
      average dividend per share
            
            $
            1.02
            
            
            $
            0.81
            
            
            $
            0.69Weighted
      average risk free interest rate
            
            
            4.31
            %
            
            
            4.76
            %
            
            
            3.75
            %Weighted
      average fair value of options granted per share
            
            $
            21.91
            
            
            $
            20.51
            
            
            $
            11.33





Expected
volatilities are based on historical volatility of BNSF’s stock, implied
volatilities from traded options on BNSF’s stock and other factors. The Company
uses historical experience with exercise and post-vesting employment termination
behavior to determine the options’ expected life. The expected life represents
the period of time that options granted are expected to be outstanding. The
risk-free rate is based on the U.S. Treasury rate with a maturity date
corresponding to the options’ expected life.





50
 Table of
Contents




A summary
of the status of stock options as of, and for the year ended December 31, 2007,
is presented below (options in thousands, aggregate intrinsic value in
millions):





Year
      ended December 31, 2007
            
            Options
            
            Weighted
      Average Exercise Prices
            
            Weighted
      Average Remaining Contractual Term (in years)
            
            Aggregate
      Intrinsic ValueBalance
      at beginning of year
            
            15,060
            
            $
            38.37Granted
            
            1,777
            
            
            88.33Exercised
            
            (5,249
            )
            
            32.34Cancelled
            
            (244
            )
            
            73.95Balance at end of
      year
            
            11,344
            
            $
            48.22
            
            5.32
            
            $
            407Options
      exercisable at year end
            
            8,459
            
            $
            38.04
            
            4.26
            
            $
            384





The total
intrinsic value of options exercised was $281 million, $222 million and $232
million for the years ended December 31, 2007, 2006 and 2005, respectively.





Other Incentive
Programs


BNSF has
other long-term incentive programs that utilize restricted shares/units. A
summary of the status of restricted shares/units and the weighted average grant
date fair values as of, and for the year ended December 31, 2007, is presented
below (shares in thousands):





Year
      ended
              December
      31, 2007
            
            Time
      Based
            
            Performance
      Based
            
            BNSF
      Incentive Bonus Stock Program
            
            BNSF
      Discounted Stock Purchase Program
            
            TotalBalance
      at
              beginning
      of year
            
            1,267
            
            $
            48.40
            
            765
            
            $
            53.50
            
            861
            
            $
            46.19
            
            64
            
            $
            49.79
            
            2,957
            
            $
            49.10Granted
            
            59
            
            
            86.38
            
            560
            
            
            88.80
            
            –
            
            
            –
            
            7
            
            
            79.28
            
            626
            
            
            88.47Vested
            
            (557
            )
            
            33.96
            
            (235
            )
            
            32.72
            
            (219
            )
            
            32.16
            
            (20
            )
            
            34.62
            
            (1,031
            )
            
            33.31Cancelled
            
            (51
            )
            
            60.73
            
            (74
            )
            
            78.33
            
            (3
            )
            
            50.83
            
            –
            
            
            –
            
            (128
            )
            
            70.64Balance at end of
      year
            
            718
            
            $
            61.83
            
            1,016
            
            $
            75.97
            
            639
            
            $
            50.98
            
            51
            
            $
            59.73
            
            2,424
            
            $
            64.85





A summary
of the weighted average grant date fair market values of the restricted
share/units as of, and for the years ended December 31, 2006 and 2005, is
presented below:




Grant
      Date Fair Market Value of Awards Granted
            
            Time
      Based
            
            Performance
      Based
            
            BNSF
      Incentive Bonus Stock Program
            
            BNSF
      Discounted Stock Purchase ProgramYear
      ended December 31, 2006
            
            $
            79.88
            
            $
            80.17
            
            $
            81.31
            
            $
            81.31Year
      ended December 31, 2005
            
            $
            49.23
            
            $
            49.21
            
            $
            47.58
            
            $
            46.91





A summary
of the fair value of the restricted share/units vested during the years ended
December 31, 2007, 2006 and 2005 is presented below:




Total
      Fair Value of Shares Vested
              (in
      millions)
            
            Time
      Based
            
            Performance
      Based
            
            BNSF
      Incentive Bonus Stock Program
            
            BNSF
      Discounted Stock Purchase Program
            
            TotalYear
      ended December 31, 2007
            
            $
            49
            
            $
            21
            
            $
            18
            
            $
            1
            
            $
            89Year
      ended December 31, 2006
            
            $
            42
            
            $
            –
            
            $
            25
            
            $
            1
            
            $
            68Year
      ended December 31, 2005
            
            $
            44
            
            $
            11
            
            $
            8
            
            $
            1
            
            $
            64





Time-based
awards are granted to senior managers within BNSF Railway primarily as a
retention tool and to encourage ownership in BNSF. They generally vest over
three years, although in some cases up to five years, and are contingent on
continued salaried employment.





51
 Table of
Contents




Performance-based
awards are granted to senior managers within BNSF Railway to encourage ownership
in BNSF and to align management’s interest with those of its shareholders.
Performance-based awards generally vest over three years and are contingent on
the achievement of certain predetermined corporate performance goals (e.g.,
return on invested capital (ROIC)) and continued salaried
employment.





Additionally,
related to the 2007, 2006 and 2005 performance-based grant, eligible employees
may also earn performance stock that will be granted in 2010, 2009 and 2008,
respectively, contingent upon achievement of higher ROIC goals and continued
salaried employment. BNSF has committed to a maximum grant of approximately
279,000, 235,000 and 316,000 shares, respectively.





Certain
employees were eligible to exchange through the Burlington Northern Santa Fe
Incentive Bonus Stock Program the cash payment of their bonus for grants of
restricted stock. In September 2005, the program was amended so that exchanges
of cash bonus payments for awards of restricted stock were no longer permitted
after February 2006.





Certain
other salaried employees may participate in the BNSF Discounted Stock Purchase
Program and use their bonus to purchase BNSF common stock at a discount from the
market price. These shares immediately vest but are restricted for a three-year
period.





Shares
awarded under each of the plans may not be sold or used as collateral and are
generally not transferable by the holder until the shares awarded become free of
restrictions. Compensation cost, net of tax, recorded under the BNSF Stock
Incentive Plans is shown in the following table (in millions):




2007
            
            
            2006
            
            
            2005Compensation
      cost
            
            $
            66
            
            
            $
            72
            
            
            $
            37Income
      tax benefit
            
            
            (23
            )
            
            
            (25
            )
            
            
            (14
            )Total
            
            $
            43
            
            
            $
            47
            
            
            $
            23Compensation
      cost capitalized
            
            $
            7
            
            
            $
            6
            
            
            $
            3





At
December 31, 2007, there was $105 million of total unrecognized compensation
cost related to unvested share-based compensation arrangements. That cost is
expected to be recognized over a weighted-average period of 1.19
years.





15.
Quarterly Financial Data—Unaudited




Dollars
      in millions
            
            Fourth
            
            Third
            
            Second
            
            First2007Revenues
            
            $
            4,194
            
            $
            4,015
            
            $
            3,795
            
            $
            3,601Operating
      income
            
            $
            948
            
            $
            1,010
            
            $
            846
            
            $
            703Net
      income
            
            $
            590
            
            $
            633
            
            $
            530
            
            $
            4442006aRevenues
            
            $
            3,841
            
            $
            3,887
            
            $
            3,657
            
            $
            3,426Operating
      income
            
            $
            947
            
            $
            919
            
            $
            876
            
            $
            797Net
      income
            
            $
            617
            
            $
            573
            
            $
            557
            
            $
            489a 
      Prior year numbers have been adjusted for the retrospective adoption of
      FSP AUG AIR-1,
      Accounting for Planned Major Maintenance
      Activities.
              See Note 2 to the Consolidated Financial Statements for additional
      information.




52
 Table of Contents


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




None.







Item
9A(T). Controls and Procedures




Disclosure Controls and
Procedures


Based on
their evaluation as of the end of the period covered by this annual report on
Form 10-K, 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.





Management’s Report onInternal
Control Over Financial Reporting


The
management of BNSF Railway is responsible for establishing and maintaining
adequate internal control over financial reporting. BNSF Railway’s internal
control over financial reporting was designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of BNSF
Railway’s financial statements for external reporting purposes in accordance
with generally accepted accounting principles in the United States of
America.




Management
assessed the effectiveness of the BNSF Railway’s internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control – Integrated
Framework. Based on management’s assessment, BNSF Railway concluded that
as of December 31, 2007, BNSF Railway’s internal control over financial
reporting was effective based on those criteria.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




Changes in Internal ControlOver Financial
Reporting


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 BNSF Railway's fourth fiscal quarter that have materially
affected, or are reasonably likely to materially affect, BNSF Railway's internal
control over financial reporting.







Item
9B. Other Information




None.








53
 Table of Contents


Part
III


Item
14. Principal Accountant Fees and Services


BNSF
Railway is a wholly owned subsidiary of Burlington Northern Santa Fe Corporation
(BNSF) and does not have an audit committee of its Board of Directors. Services
provided by the registrant's principal accountant and all fees are subject to
pre-approval policies and procedures of the Audit Committee of the Board of
Directors of BNSF. Information concerning principal accounting fees and services
for BNSF including its wholly-owned subsidiary, BNSF Railway, will be provided
under the heading "Item 2: Appointment of Independent Auditor; Independent
Auditor Fees" in BNSF's proxy statement for its 2008 annual meeting of
shareholders, which will be filed with the Securities and Exchange Commission no
later than 120 days after the end of the fiscal year, and the information under
that heading is hereby incorporated by reference.





54
 Table of Contents


Part IV


Item 15. Exhibits and Financial Statement Schedules






(a) 
      The following documents are filed as part of this
  report:




1. 
      Consolidated Financial Statements—see Item
8.




Schedules are omitted because they are not required or applicable, or the
required information is included in the Consolidated Financial Statements or
related notes.




2. 
      Exhibits:




See Index to Exhibits beginning on page E-1 for a description of the exhibits
filed as a part of this Report on Form 10-K.












55
 Table of Contents


Signatures


Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, BNSF Railway Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





BNSF
      Railway CompanyBy:
            /s/
      Matthew K. RoseDated:
      February 14, 2008
            
            Matthew
      K. RoseChairman,
      President and ChiefExecutive
      Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of BNSF Railway Company and in
the capacities and on the date indicated.





Signature                                                                             
Title




/s/ Matthew K.
Rose                                                          
 Chaiman, President and Chief Executive Officer


Matthew
K.
Rose                                                                  (Principal
Executive Officer), and Director





/s/ Thomas N.
Hund                                                        
Executive Vice President and Chief Financial Officer


Thomas N.
Hund                                                                  
(Principal Financial Officer), and Director





/s/ Paul W.
Bischler                                                        
Vice President and Controller


Paul W.
Bischler                                                                   
(Principal Accounting Officer)





/s/ Carl R.
Ice                                                                         Director


Carl R.
Ice





/s/ John P.
Lanigan                                                             
 Director


John
Lanigan





/s/ Roger
Nober                                                                 
  Director


Roger
Nober










Dated:  February
14, 2008













S-1
 Table of Contents


BNSF
Railway Company and Subsidiaries




Exhibit Index





Exhibit
      Number and Description
            
            Incorporated
      by Reference
              (if
      applicable)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).**Filedherewith








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