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Article by DailyStocks_admin    (04-16-08 03:29 AM)

The Daily Warren Buffett Stock is BNI. Berkshire Hathaway owns 60,828,818 shares. As of Dec 31,2007, this represents 7.36 percent of portfolio.

BUSINESS OVERVIEW

Burlington Northern Santa Fe Corporation (BNSF, Registrant or Company) was incorporated in the State of Delaware on December 16, 1994. 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).

Through its subsidiaries, BNSF is engaged primarily in the freight rail transportation business. At December 31, 2007, BNSF and its subsidiaries had approximately 4 0 ,000 employees . The rail operations of BNSF Railway, BNSF’s principal operating subsidiary, comprise one of the largest railroad systems in North America.

BNSF’s internet address is www.bnsf.com. Through this internet website (under the “Investors” link), BNSF 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). Filings on Forms 3, 4 and 5 are also available on this website within one day after filing with the SEC. BNSF’s annual CEO certification filed pursuant to the New York Stock Exchange’s Corporate Governance Listing Standards is filed as an exhibit to this Form 10-K. BNSF makes available on its website other previously filed SEC reports, registration statements and exhibits via a link to the SEC’s website at www.sec.gov. The following documents are also made available on the Company’s website:



• Code of Conduct



• Code of Business Conduct and Ethics for Scheduled Employees



• Corporate Governance Guidelines ; and



• Charters of the Audit, Compensation and Development and Directors and Corporate Governance Committees

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

Mr. Whitacre, 66, has served as the Chairman Emeritus of AT&T Inc., San Antonio, Texas (communications holding company) since June 2007. He previously served as the Chairman and Chief Executive Officer of AT&T Inc., from January 1990 until he retired in June 2007. Mr. Whitacre is also a Director of Anheuser-Busch Companies, Inc.

Mr. Boeckmann, 59, has served as the Chairman and Chief Executive Officer of Fluor Corporation, Irving, Texas (professional services holding company offering engineering, construction management and other services) since February 2002. Mr. Boeckmann is also a Director of Fluor Corporation and Archer-Daniels-Midland Company.

Mr. Cook, 61, retired in June 2005 as Commander (General), Air Training and Education Command, United States Air Force, a position he had held from December 2001. Previously, Mr. Cook served as Vice Commander, Air Combat Command, United States Air Force from June 1999 to December 2001. Mr. Cook is also a Director of Crane Corp.

Ms. Martinez, 64, is a partner of Munger, Tolles & Olson, LLP, Los Angeles, California (law firm), a position she has held since September 1982. Ms. Martinez is also a Director of Anheuser-Busch Companies, Inc. and Fluor Corporation.

Mr. Racicot, 59, is the President and Chief Executive Officer of the American Insurance Association, Washington, D.C. (property-casualty insurance trade organization). Previously, he was a partner at Bracewell & Giuliani, L.L.P., Washington, D.C. (law firm) from February 2001 to August 2005; Chairman of Bush-Cheney ’04, Inc. (political organization) from July 2003 to November 2004; Chairman of Republican National Committee (political organization) from January 2002 to July 2003; and Governor of the State of Montana from 1993 to 2001. Mr. Racicot is also a Director of Allied Capital Corporation and Massachusetts Mutual Life Insurance Company.

Mr. Roberts, 68, has served as the Managing Director of Reliant Equity Investors, L.L.C., Chicago, Illinois (private equity firm) since September 2000. In April 2000, he retired from General Motors Corporation, Detroit, Michigan (manufacturer of motor vehicles), where he was Group Vice President, North American Vehicle Sales, Service and Marketing, a position he had held since July 1999. Mr. Roberts is also a Director of Abbott Laboratories.

Mr. Rose, 48, has served as the Chairman, President and Chief Executive Officer of Burlington Northern Santa Fe Corporation, Fort Worth, Texas since March 2002. He is also the Chairman, President and Chief Executive Officer of the Company’s subsidiary, BNSF Railway Company. Mr. Rose is also a Director of AMR Corporation and Centex Corporation.

Mr. Shapiro, 60, retired in September 2003 as Vice Chairman for Finance, Risk Management and Administration of J.P. Morgan Chase & Co., New York, New York (bank holding company), a position he had held since 1997. Currently, Mr. Shapiro is a consultant and non-executive chairman of Chase Bank of Texas. He is also a Director of Kimberly-Clark Corporation and The Mexico Fund, Inc. and a trustee of Weingarten Realty Investors.

Mr. Watts, 50, has served as a senior partner of Oakcrest Capital Partners, LLC, Washington, D.C. (private equity firm), since its founding in 2006, and as the Chairman of J.C. Watts Companies L.L.C./Watts Consulting Group, Inc., Washington, D.C. (public affairs and corporate consulting business) since its founding in January 2003. Previously, Mr. Watts was a member of Congress (R-4th Dist.-Okla.) from January 1995 to January 2003, and Chairman of the House Republican Conference from 1999 to 2003. He is also a Director of Dillards, Inc. and Clear Channel Communications, Inc.

Mr. West, 69, retired in July 1999 as Chairman of Butler Manufacturing Company, Kansas City, Missouri (manufacturer of pre-engineered building systems and specialty components). Previously, he served as the Chairman and Chief Executive Officer of Butler Manufacturing Company from May 1986 to January 1999 and as Chairman from January 1999 until his retirement. He is also a Director of Commerce Bancshares, Inc. and Great Plains Energy, Inc.

Mr. Whisler, 53, retired in March 2007 as the Chairman and Chief Executive Officer of Phelps Dodge Corporation, Phoenix, Arizona (mining and manufacturing company), a position he had held since November 2003. Previously, Mr. Whisler was Chairman, President and Chief Executive Officer of Phelps Dodge Corporation from May 2000 to October 2003. He is also a Director of US Airways Group, Inc. (and its principal subsidiaries, America West Airlines, Inc. and US Airways, Inc.), Brunswick Corporation and International Paper Company.

COMPENSATION

Narrative Disclosure To 2007 Director Compensation Table

The following describes material features of the compensation disclosed in the 2007 Director Compensation table.

Annual Retainer. Each non-employee Director receives an annual retainer of $60,000, paid in quarterly installments. The Lead Director is paid a supplemental annual retainer of $20,000. The Chairman of the Audit Committee is paid a supplemental annual retainer of $15,000, and each non-employee Director who chairs any other Board committee is paid a supplemental annual retainer of $10,000. In addition, for attendance at each committee meeting or any inspection trip or similar meeting, a meeting fee of $1,000 plus expenses is paid. Expenses for attendance by spouses of Directors are also paid in connection with certain meetings.

Prior to 2004, Directors were permitted to exchange up to 25% of their annual retainer for 150% of the value in restricted stock under the Non-Employee Directors’ Stock Plan (described below). The last of these restricted stock awards, held by all Directors except Messrs. Cook and Racicot, vested on December 31, 2006. Dividends were paid on restricted stock, and the shares were permitted to be voted.

Non-Employee Directors’ Stock Plan. Under the Non-Employee Directors’ Stock Plan, each non-employee Director receives a grant of 2,100 RSUs as of the date of each annual meeting of the Company’s shareholders (or, if later, two business days after the release of the Company’s first quarter earnings). If an individual becomes a Director after the annual meeting has occurred for the year, he or she will receive a prorated portion of the annual grant of RSUs for the portion of the year following the date on which the individual becomes a Director. Each non-employee Director also receives a one-time grant of 1,000 RSUs after the annual meeting at which he or she is first elected to the Board. RSUs vest on the date of the next annual meeting of shareholders after they are granted if the Director remains on the Board on such date. Early vesting will occur on the date of the Director’s termination of services prior to such annual meeting if the Director’s services terminate by reason of the Director’s retirement, death or disability, or on the date of a change in control, as defined in the change in control agreements described on page 50 of this proxy statement, that occurs prior to such annual meeting. Vested RSUs will be distributed as shares of unrestricted stock — one share of the Company’s common stock for each RSU — upon the date the Director’s term of service ends. Shares underlying RSUs may not be voted, but holders of RSUs have the right to receive a cash payment equivalent to regular dividends with respect to their RSUs at such times and in such amounts as dividends are paid on the Company’s common stock.

The Company previously made equity grants to non-employee Directors in the form of nonqualified stock options, rather than RSUs. The options vested one year from the date of grant or earlier upon retirement, death, disability or change in control. All options held by Directors are vested. Options expire ten years after grant, but no longer than one year after termination of the Director’s services.

Directors’ Retirement Plan. The Directors’ Retirement Plan provided non-employee Directors an annual benefit following retirement if they served as a member of the Board (including service with Company predecessors) for ten consecutive years, attained the mandatory retirement age of 72 or were designated by the Directors and Corporate Governance Committee as eligible for benefits. The plan was terminated on July 17, 2003. However, individuals who were Directors on July 17, 2003, and were eligible for retirement under the Directors’ Retirement Plan on that date will receive annual payments beginning upon their retirement of $40,000 per year, which was the amount of the annual retainer for services as a Board member at the time the plan was terminated. In addition, individuals who were members of the Board on July 17, 2003, but who were not eligible for retirement as of such date, and who have at least ten years of Board service upon their eventual retirement, will be eligible to receive a prorated annual payment under the Directors’ Retirement Plan based on the number of months that they served on the Board as of July 17, 2003. The payments under the plan will be paid in quarterly installments. Payment ceases upon an individual’s death. All Directors, other than Mr. Cook, who joined the Board in 2005, are eligible for a benefit under the Directors’ Retirement Plan.

Deferred Compensation Plan for Directors and 2005 Deferred Compensation Plan for Non-Employee Directors. Directors may defer their annual retainers and meeting fees pursuant to the 2005 Deferred Compensation Plan for Non-Employee Directors and its predecessor, the Deferred Compensation Plan for Directors. Earnings on deferrals track the investment options elected by the Director, which include a Prime Rate interest account, a Company stock-equivalent (phantom stock) account, an S&P 500 index fund account and a long-term capital appreciation fund account. Other investment tracking options may be established. Directors receive, based upon their elections, distributions of their deferrals either in up to ten annual installments or as lump-sum payments after their departure from the Board. If a Director dies prior to payment of all amounts due under the plans, the balance of the amount due will be payable to the Director’s beneficiary in a lump sum.

Directors’ Charitable Award Program. Under the Directors’ Charitable Award Program established by one of our predecessor companies, a $1,000,000 donation to an eligible educational institution designated by Mr. Whitacre will be payable upon his death, retirement or disability, or other circumstances as deemed appropriate by the Directors and Corporate Governance Committee. No amounts are included in the Director Compensation Table with respect to the program. In the event of a change in control of the Company, as defined in the change in control agreements described on page 50 of this proxy statement, and provided that the Board does not direct otherwise, the Company will immediately designate Mr. Whitacre’s recommended educational institution as a beneficiary in connection with the program and place all necessary funds to make the donations into a trust administered by an independent trustee. Except as to the Directors of the predecessor company to which the program applied, the program was discontinued in 1995, and therefore Mr. Whitacre is the only current Director who is eligible to participate.

Amended and Restated Benefits Protection Trust. The Amended and Restated Benefits Protection Trust, described on page 49 of this proxy statement, applies to the Directors’ Retirement Plan, the 2005 Deferred Compensation Plan for Non-Employee Directors and the Deferred Compensation Plan for Directors. In the event of a change in control, the Company is required to deposit in the trust an amount equal to Directors’ accrued benefits under the plans.

MANAGEMENT DISCUSSION FROM LATEST 10K

Company Overview
Through its subsidiaries, BNSF is engaged primarily in the freight rail transportation business. BNSF’s primary operating subsidiary, BNSF Railway, operates one of the largest North American rail networks with about 32,000 route miles in 28 states and two Canadian provinces . Through its one operating transportation segment, BNSF Railway transports a wide range of products and commodities including Consumer Products, Industrial Products, Coal and Agricultural Products.

Additional operational information, including weekly intermodal and carload unit reports as submitted to the Association of American Railroads (AAR) and annual reports submitted to the Surface Transportation Board (STB), are available on the Company’s website at www.bnsf.com/investors.

Executive Summary

Fiscal Year 2007 — Financial Overview
•

The Company achieved earnings of $5.10 per share compared with 2006 earnings of $5.11 per share.

•

Freight revenues increased 6 percent to $15. 3 billion, which included revenue increases in each of the Company’s four business groups .

•

Of the 6-percent increase in freight revenue, 6 percent, 1 percent and 1 percent was attributable to price, unit growth and fuel surcharges, respectively. These were partially offset by a decrease due to changes in business mix.

•

Operating expenses for 2007 increased 7 percent compared with 2 006, largely driven by a $ 463 million increase in fuel expense primarily reflecting increased fuel prices and a reduced fuel- hedge benefit .

•

Operating income of $3.5 billion for 2007 decreased $35 million from 2006 despite a $310 million reduction in fuel-hedge benefit.

•

Each year capital expenditures are a significant use of cash for BNSF. In 2007, BNSF increased its cash capital expenditures to $2.25 billion from $2.01 billion in the prior year primarily due to both maintenance of BNSF’s track structure and additional expansion projects undertaken in 2007. Despite the increase in capital expenditures, BNSF’s capital commitments, which includes both cash spent for capital and locomotive leases, decreased approximately $80 million to $2.59 billion in 2007 due to fewer locomotive leases entered into in 2007 as compared to 2006.

Business Outlook for 2008
•

BNSF expects to see revenue growth in the high single digits on about flat unit volumes .

•

Combining projected revenue growth with an ongoing focus on productivity, low dou ble- digit growth in earnings per share is achievable .

•

The Company’s planned capital commitment program for 2008 is approximately $2.45 billion as compared to $2.59 billion in 2007. The decrease in the capital commitment program versus prior year is principally related to lower expansion capital driven by lower anticipated demand.

•

BNSF anticipates leasing 200 locomotives with a cost of about $400 million and investing over $200 million in track and facilities to expand capacity to continue to meet demand for consistent freight rail service. The 2008 capacity expansion program is expected to be approximately $350 million lower than 2007.

•

The Company expects to spend more than $1.8 billion to keep its infrastructure strong by refreshing track, signal systems, structures, freight cars and implementing new technologies.

Year Ended December 31, 2007, Compared with Year Ended December 31, 2006
BNSF recorded net income for 2007 of $ 1,829 million, or $5.10 per share. In comparison, net income for 2006 was $1,889 million, or $5.11 per share.

Revenues

Freight
Freight revenues of $ 15,349 million for 2007 were $804 million, or 6 percent higher than 2006. Freight revenues reflected a 3-percent decrease in unit volumes. Freight revenues included 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 $1,488 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 $95 million, or 3 percent, to $3,684 million for 2007, while unit volumes decline 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 is one of the largest transporters of low-sulfur coal in the United States. More than 90 percent of all BNSF’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 $2,722 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 increased $13 million, or 3 percent, to $453 million for 2007 compared to 2006. This increase was primarily due to volume growth of BNSF Logistics, an indirect, wholly-owned non-rail subsidiary that specializes in providing third-party logist ics and transportation services.

Expenses
Total operating expenses for 2007 were $12,316 million, an increase of $852 million, or 7 percent over 2006.

Compensation and Benefits
Compensation and benefits includes expenses for BNSF 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 $3,773 million were $43 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.

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; professional services; and other contract services provided to BNSF. Purchased services expense also includes purchased transportation costs for BNSF Logistics, an indirect, non-rail subsidiary of BNSF that specializes in providing third-party logistics and transportation services . The expenses are driven by the rates established in the related contracts and the volume of services required.

Purchased services expenses of $2,023 million for 2007 were $117 million, or 6 percent higher than 2006. Beyond general inflation, the largest drivers of this increase were (i) $25 million in haulage payments for transportation over other railroads, principally due to a new southeast intermodal agreement; (ii) $20 million in purchased transportation costs for BNSF Logistics; (iii) $10 million in locomotive maintenance costs; and (iv) $10 million in 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’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 $1,293 million for 2007 were $117 million, or 10 percent higher than 2006. This increase was primarily due to continuing capital expenditures as well as updated depreciation rates for locomotives (see discussion under the heading “Critical Accounting Estimates; Depreciation”).

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, 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 $1,088 million for 2007, which consisted of approximately $ 4 50 million of materials expense with the remainder consisting of numerous other items, were $186 million, or 21 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 principall y 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 (see discussion under the heading “Other Matters; New Mexico Department of Transportation”).

Interest Expense
Interest expense of $511 million for 2007 was $26 million, or 5 percent higher than 2006. This increase was primarily the result of a higher average debt balance, partially offset by lower average rates.

Income Taxes
The effective rate in 2007 was 38.2 percent compared with 36.9 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 with 2007.

Year Ended December 31, 2006, Compared with Year Ended December 31, 2005
BNSF recorded net income for 2006 of $1,889 million, or $5.11 per share. In comparison, net income for 2005 was $1,534 million, or $4.02 per share, which included a $0.12 per share impairment charge related to an agreement to sell certain line segments to the State of New Mexico (see discussion under heading “Other Matters; New Mexico Department of Transportation”).

Revenues

Freight
Freight revenues of $14,545 million for 2006 were $1,939 million, or 15 percent higher than 2005. Freight revenues reflected a 6-percent increase in volumes. Freight revenues include an increase of approximately $600 million in fuel surcharges compared with the same 2005 period. Growth in prices and fuel surcharges drove average revenue per car/unit up 9 percent in 2006 to $1,367 from $1,258 in 2005.

Consumer Products
Consumer Products revenues of $5,613 million for 2006 were $715 million, or 15 percent greater than 2005. The increase in average revenue per unit of 8 percent was primarily related to price increases and increased fuel surcharges. Additionally, cars/units increased by 6 percent due primarily to growth in international intermodal.

Industrial Products
Industrial Products revenues increased $461 million, or 15 percent, to $3,589 million for 2006. The revenue increase was driven by double-digit growth in four of the five business areas. The 13-percent increase in average revenue per car was the result of price increases and increased fuel surcharges. Units increased 2 percent driven by demand for plastics, petroleum products and steel, partially offset by softness in demand for building products.

Coal
Coal revenues of $2,916 million for 2006 increased $468 million, or 19 percent, versus 2005. The revenue increase was primarily driven by a 10-percent increase in volumes resulting from significant customer demand and greater line throughput due to increased network fluidity. Average revenue per car increased 8 percent driven by contractual price escalations, increased length of haul and fuel surcharges.

Agricultural Products
Agricultural Products revenues of $2,427 million for 2006 were $295 million, or 14 percent higher than revenues for 2005. This increase was primarily due to a 7-percent increase in average revenue per car, which was driven by both price increases and increased fuel surcharges associated with higher fuel prices, and a 6-percent increase in volume driven primarily by an increase in demand for corn.

Other Revenues
Other revenues increased $59 million, or 15 percent, to $440 million for 2006 compared to 2005. This increase was primarily due to increases in demurrage charges and volume growth of BNSF Logistics, an indirect, wholly-owned non-rail subsidiary that specializes in providing third-party logistics and transportation services.

Expenses
Total operating expenses for 2006 were $11,464 million, an increase of $1,404 million, or 14 percent over 2005. The increase in operating expenses was primarily the result of significant fuel price increases and a 6-percent increase in gross-ton miles handled. Operating expenses for 2005 were impacted by a $71 million pre-tax impairment charge related to an agreement to sell certain line segments to the State of New Mexico.

Compensation and Benefits
Compensation and benefits expenses of $3,816 million were $301 million, or 9 percent higher than 2005. The increase was primarily related to 6 percent higher unit volumes, which resulted in a 5-percent increase in the average headcount. Additionally, increased stock-based compensation expense of approximately $30 million, due largely to the adoption of Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment , and increased pension expense of approximately $30 million contributed to the overall increase in compensation and benefits expense as compared with the prior year.

Fuel
Fuel expenses of $2,734 million for 2006 were $775 million, or 40 percent, higher than 2005. The increase in fuel expense is due to an increase in the average all-in cost per gallon of diesel fuel, as well as an increase in consumption driven by higher volumes. The average all-in cost per gallon of diesel fuel increased by 45 cents to $1.85, or $661 million, which is comprised of an increase in the average purchase price of 32 cents, or $471 million, and a decrease in the hedge benefit of 13 cents, or $190 million (2006 benefit of $341 million less 2005 benefit of $531 million). Consumption in 2006 was 1,478 million gallons compared with 1,402 million gallons in 2005, resulting in a $114 million increase in fuel expense.

Purchased Services
Purchased services expenses of $1,906 million for 2006 were $193 million, or 11 percent higher than 2005. This increase was primarily due to increases in the following volume-related costs of approximately (i) $50 million in intermodal ramp costs; (ii) $40 million in haulage payments for transportation over other railroads; (iii) $35 million in locomotive, freight car and equipment maintenance expense; and (iv) $25 million in purchased transportation costs for BNSF Logistics.

Depreciation and Amortization
Depreciation and amortization expenses of $1,176 million for 2006 were $65 million, or 6 percent higher than 2005. This increase was primarily due to ongoing capital expenditures.

Equipment Rents
Equipment rents expenses for 2006 of $930 million were $44 million, or 5 percent higher than 2005 driven by an increase of approximately $45 million in locomotive rents, which was largely the result of an increase in the number of locomotives under operating leases. Freight car equipment was essentially flat year-over-year due to the impact of increasing volumes being offset by the impact of the Company’s privatization efforts, velocity improvements and an increase in off-line receipts.

Materials and Other
Materials and other expenses of $902 million for 2006, which consisted of approximately $425 million of materials expense with the remainder consisting of numerous other items, were $26 million, or 3 percent higher than 2005. The increase was primarily due to increases of approximately (i) $65 million in materials costs for locomotives, freight cars and track structure; (ii) $35 million in crew transportation and lodging expense; (iii) $20 million in property taxes; and (iv) $20 million in expense related to derailments. These increases were offset by a $22 million gain from a line sale to the State of New Mexico recorded in 2006. Expenses for 2005 were impacted by a $71 million pre-tax impairment charge related to an agreement to sell certain line segments to the State of New Mexico (see discussion under the heading “Other Matters; New Mexico Department of Transportation”).

Interest Expense
Interest expense of $485 million for 2006 was $48 million, or 11 percent higher than 2005. This increase was primarily the result of a higher average debt balance.

Income Taxes
The effective rate in 2006 was 36.9 percent compared with 37.5 percent for the prior year. The decrease in the effective tax rate primarily reflects income tax adjustments that favorably impacted income tax expense in 2006 as compared with 2005.

Liquidity and Capital Resources
Liquidity is a company’s ability to generate cash flows to satisfy current and future obligations. Cash generated from operations is BNSF’s principal source of liquidity. BNSF generally funds any additional liquidity requirements through debt issuance, including commercial paper, through leasing of assets and through the sale of a portion of its accounts receivable.

Operating Activities

2007
Net cash provided by operating activities was $ 3,492 million during 2007 compared with $3,189 million during 2006. The increase was primarily the result of an increase in earnings before depreciation and amortization expense , higher environmental accruals in 2007, and higher contributions to the pension plan in 2006.

2006
Net cash provided by operating activities was $3,189 million during 2006 compared with $2,706 million during 2005. The increase was primarily the result of an increase in earnings before depreciation and amortization expense.

Investing Activities

2007
Net cash used for investing activities was $ 2,415 million during 2007 compared with $2,167 million during 2006. Investing activities for the year included $ 2,248 million of capital expenditures, which were $ 234 million higher than 2006 primarily due to an increase in capital expenditures for maintenance of BNSF’s track structure and for terminal and line expansions as illustrated in the table below.

2006
Net cash used for investing activities was $2,167 million during 2006 compared with $2,120 million during 2005. Investing activities for the year included $2,014 million of capital expenditures, which were $264 million higher than 2005 primarily due to an increase in capital expenditures for maintenance of BNSF’s track structure and for terminal and line expansions as illustrated in the table below. The decrease in cash used for other investing activities primarily reflects timing of equipment financing activities, $50 million in consideration received for the third easement sale to Seattle Sound Transit and $45 million in consideration received for the New Mexico line sale as discussed in the “Other Matters” section. Additionally, 2005 included consideration paid to another carrier for trackage rights and alternative access rights and an investment in Pace Synfuels.

Financing Activities

2007
Net cash used for financing activities during 2007 was $ 1,122 million, primarily related to common stock repurchases of $ 1, 265 million, including $4 3 million to satisfy tax withholding obligations for stock option exercises, and dividend payments of $380 million, which were partially offset by net debt borrowings of $234 million, proceeds from stock options exercised of $142 million, excess tax benefits from equity compensation plans of $121 million and proceeds from a facility financing obligation of $41 million.

Aggregate debt to mature in 2008 is $ 41 1 million. BNSF’s ratio of net debt to total capitalization was 41.2 percent at December 31, 2007, compared with 40.0 percent at December 31, 2006. The Company’s adjusted net debt to total capitalization was 51.8 percent at December 31, 2007, compared with 51.7 percent at December 31, 2006. BNSF’s adjusted net debt to total capitalization is a non-GAAP measure and should be considered in addition to, but not as a substitute or preferable to, the information prepared in accordance with GAAP. However, management believes that adjusted net debt to total capitalization provides meaningful additional information about the ability of BNSF to service long-term debt and other fixed obligations and to fund future growth.

In February 2007, the Board of Directors (the Board) authorized an additional $1.4 billion of debt securities that may be issued through the Securities and Exchange Commission (SEC) debt shelf registration process, for a total of $2.1 billion authorized to be issued.

In April 2007, BNSF issued $650 million of 5.65 percent debentures and $650 million of 6.15 percent debentures due May 1, 2017 and May 1, 2037, respectively. The net proceeds from the sale of the debentures are being used for general corporate purposes including, but not limited to, working capital, capital expenditures, funding the maturity of debt which matured in 2007, the repayment of commercial paper and the repurchase of common stock. The issuance of these debentures reduced the amount of debt authorized to be issued by the Board through the SEC debt shelf registration process to $800 million.

In 2007, BNSF 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.

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 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 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.

2006
Net cash used for financing activities during 2006 was $722 million, primarily related to common stock repurchases of $730 million and dividend payments of $310 million, which were partially offset by net debt borrowings of $116 million, proceeds from stock options exercised of $116 million and excess tax benefits from equity compensation plans of $95 million. Upon adoption of SFAS No. 123R, the excess tax benefits from equity compensation plans were classified in financing activities. However, as the Company adopted SFAS No. 123R prospectively, financial statements prior to January 1, 2006, include excess tax benefits as an operating activity.

In August 2006, BNSF issued $300 million of 6.20 percent debentures due August 15, 2036. The net proceeds from the sale of the debentures are being used for general corporate purposes including but not limited to working capital, capital expenditures and the repayment of outstanding commercial paper. See Note 3 to the Consolidated Financial Statements for information related to the hedges unwound as part of this debt issuance.

2005
Net cash used for financing activities during 2005 was $833 million primarily related to common stock repurchases of $799 million, prepaid forward share repurchases of $600 million and dividend payments of $267 million, which where partially offset by net debt borrowings of $599 million and proceeds from stock options exercised of $244 million.

In December 2005, BNSF issued $500 million of 6.613 percent junior subordinated notes due December 31, 2055. The junior subordinated notes are callable on or after January 15, 2026, at par plus accrued and unpaid interest. On January 15, 2026, if the junior subordinated notes are not called, the interest rate will change to an annual rate equal to the 3-month London Interbank Offered Rate (LIBOR) plus 2.35 percent, reset quarterly. Interest payments may be deferred, at the option of the Company, on a cumulative basis for a period of up to five consecutive years; however, during this time the Company would not be permitted to declare or pay dividends on its common stock. In the event that certain financial covenants are not maintained, the Company would be required to sell common stock, the proceeds of which would be used to pay any accrued and unpaid interest. At December 31, 2007, the Company was in compliance with these covenants. Because of this structure, certain rating agencies provide a considerable degree of equity treatment for purposes of calculating various ratios and metrics. The majority of the net proceeds of the debt issuance were used to repurchase common stock, with the remainder used for general corporate purposes.

Dividends
Common stock dividends declared were $1.14, $0.90 and $0.74 per share annually for 2007, 2006 and 2005, respectively. Dividends paid on common stock were $380 million, $310 million and $267 million during 2007, 2006 and 2005, respectively. On October 18, 2007, the Board declared a quarterly dividend of $0.32 per share on outstanding shares of common stock, payable January 2, 2008 to shareholders of record on December 12, 2007. On February 13, 2008, the Board declared a quarterly dividend of $0.32 per share on outstanding shares of common stock, payable April 1, 2008, to shareholders of record on March 11, 2008.

Common Stock Repurchase Program
During 2007, 2006 and 2005, the Company repurchased approximately 1 5 million, 18 million and 14 million shares, respectively, of its common stock at average prices of $83. 96 per share, $73.43 per share and $54.95 per share, respectively. Further information on this repurchase program is incorporated by reference from Note 15 to the Consolidated Financial Statements.

In February 2007, the Board authorized the extension of the current BNSF share repurchase program, adding 30 million shares to the total of 180 million shares previously authorized in equal amounts in July 1997, December 1999, April 2000, September 2000, January 2003 and December 2005.

Since 2001, BNSF has primarily utilized free cash flow to repurchase its shares. In February 2007, BNSF announced it would modify its share repurchase approach based on improved credit statistics over the past few years, including interest coverage, debt-to-cash flow and debt-to-capital ratios. These credit statistics have improved sufficiently that BNSF is now devoting additional financial capacity to share repurchases. This difference in approach is expected to result in a moderately higher level of debt.

Long-Term Debt and Other Obligations
The Company’s business is capital intensive. BNSF has historically generated a significant amount of cash from operating activities, which it uses to fund capital additions, service debt, repurchase shares and pay dividends. Additionally, the Company relies on access to the debt and leasing markets to finance a portion of capital additions on a long-term basis.

During 2007, BNSF agreed to acquire an additional 1,025 locomotives, bringing its total commitment to acquire 1,505 new locomotives by 2013. As of December 31, 2007, BNSF had taken delivery of 480 of the 1,505 locomotives, including 200 during 2007.

During 2006, BNSF agreed to acquire 4,000 covered hoppers and 1,400 double-stack cars by 2010. As of December 31, 2007, BNSF had taken delivery of 1,998 of the covered hoppers and 350 of the double-stack cars.

The locomotives and freight cars under these agreements have been or are expected to be financed from one or a combination of sources including, but not limited to, cash from operations, capital or operating leases and debt issuances. The decision on the method used for a particular acquisition financing will depend on market conditions and other factors at that time.

The Company also utilizes a commercial paper program backed by a bank revolving credit agreement to manage liquidity needs. For 2008 and the foreseeable future, the Company expects that cash from operating activities, access to capital markets, the accounts receivable sales program and the bank revolving credit agreement will be sufficient to enable the Company to meet its obligations when due. The Company believes these sources of funds will also be sufficient to fund capital additions that are necessary to maintain its competitiveness and position the Company for future revenue growth.

The Company’s ratio of earnings to fixed charges was 4.62 and 4.90 times for the years ended December 31, 2007 and 2006, respectively. Additionally, the Company’s ratio of net cash provided by operating activities divided by total average debt was 44 percent for the years ended December 31, 2007 and 2006, respectively.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Company Overview

Through its subsidiaries, BNSF is engaged primarily in the freight rail transportation business. BNSF’s principal operating subsidiary, BNSF Railway, operates one of the largest North American rail networks, with about 32,000 route miles in 28 states and two Canadian provinces. Through its one operating transportation segment, BNSF Railway transports a wide range of products and commodities including Consumer Products, Industrial Products, Coal and Agricultural Products.

Additional operational information, including weekly intermodal and carload unit reports as submitted to the Association of American Railroads and annual reports submitted to the Surface Transportation Board, are available on the Company’s website at www.bnsf.com/investors.

Executive Summary

Third Quarter 2007 – Financial Overview:

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Quarterly earnings were $1.48 per diluted share, or 11 percent higher than third-quarter 2006 earnings of $1.33 per diluted share.

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Quarterly freight revenues increased $133 million, or 4 percent, to an all-time quarterly record of $3.95 billion compared with $3.82 billion in the prior year.

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The 4-percent increase in revenue is primarily attributable to strong yields as well as volume growth in BNSF’s Agricultural Products business.

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Unit volumes were 5-percent lower primarily due to a decrease in Consumer Products units of 10-percent resulting from economic softness as well as reduced trans-pacific service of a large international customer.

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Operating expenses for the third quarter of 2007 increased $50 million or 2 percent as compared with the third quarter of 2006.

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Operating income increased to $1 billion, an increase of $80 million or 9 percent, compared with the third-quarter of 2006.

Results of Operations

Three Months Ended September 30, 2007, Compared with Three Months Ended September 30, 2006

Revenues

The following table presents BNSF’s revenue information by business group for the three months ended September 30, 2007 and 2006. Certain comparative prior year revenue amounts have been reclassified between the business groups to conform to the current year presentation. There was no impact to total freight revenues as a result of these reclassifications.

Freight revenues for the third quarter of 2007 were $3,948 million, up 4 percent compared with the same 2006 period, while cars/units declined 5 percent during this same period and revenue ton miles were relatively flat year over year. Freight revenues included a decrease of approximately $10 million in fuel surcharges compared with the same 2006 period. Average revenue per car/unit was up 9 percent in the third quarter of 2007 from the third quarter of 2006 primarily due to mix of business and improved pricing.

Consumer Products

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

Consumer Products revenues of $1,455 million for the third quarter of 2007 were $39 million, or 3 percent less than the third quarter of 2006. This was principally due to a 10 percent reduction in units resulting from economic softness as well as reduced trans-pacific service of a large international customer. The decrease was offset by improved yields.


Industrial Products

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

Industrial Products revenues of $962 million for the third quarter of 2007 were slightly higher when compared to the third quarter of 2006 while unit volume declined 2 percent. Continued strong demand for petroleum products was offset by a decline in building and construction products as a result of weakness in the housing market.


Coal

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

Coal revenues of $849 million for the third quarter of 2007 increased $101 million, or 14 percent, compared with the same period a year ago due to increased tons per unit, contractual inflation escalators, improved yields and a $14 million accrual adjustment related to favorable coal rate case developments. Coal unit volumes were flat in the third quarter due to mine production constraints.
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 $682 million for the third quarter of 2007 were $60 million, or 10 percent, higher than revenues for the third quarter of 2006. This increase was primarily due to an 8 percent unit volume increase, primarily driven by wheat, ethanol, fertilizer and bulk foods.

Other Revenues

Other revenues decreased $3 million, or 2 percent, to $121 million for the third quarter of 2007. The decrease was primarily due to a reduction in customer storage revenues for containers at BNSF intermodal hubs.

Expenses

Expenses

Total operating expenses for the third quarter of 2007 were $3,068 million, an increase of $50 million, or 2 percent, versus the same period in 2006.

Compensation and Benefits

Compensation and benefits includes expenses for BNSF 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 $937 million in the third quarter of 2007 decreased by $38 million, or 4 percent, from $975 million in the third quarter of 2006 due primarily to lower variable compensation costs for the Company’s salaried and scheduled workforce.

Fuel

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

Fuel expenses of $814 million for the third quarter of 2007 were $22 million, or 3 percent, higher than the third quarter of 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 and lower volumes. The average all-in cost per gallon of diesel fuel increased by 19 cents to $2.31, resulting in a $62 million increase in expense. The increase in the average all-in cost is primarily related to a decrease in the hedge benefit of $75 million (third quarter 2007 benefit of $1 million less third quarter 2006 benefit of $76 million). Consumption in the third quarter of 2007 decreased by 17 million gallons to 353 million gallons when compared with consumption in the same 2006 period.


Purchased Services

Purchased services expense includes ramping (lifting of containers onto and off of cars); drayage (highway movements to and from railway facilities); maintenance of locomotives, freight cars and equipment; transportation costs over other railroads; technology services outsourcing; professional services; and other contract services provided to BNSF. Purchased services expense also includes purchased transportation costs for BNSF Logistics, an indirect, non-rail subsidiary of BNSF that specializes in providing third-party logistics and transportation services. Purchased services expenses are driven by the rates established in the related contracts and the volume of services required.

Purchased service expenses of $501 million remained relatively flat for the third quarter of 2007 compared with the third quarter of 2006.

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’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 $324 million for the third quarter of 2007 were $28 million, or 9 percent, higher than the same period in 2006. This increase in depreciation expense was primarily due to continuing capital expenditures.

Equipment Rents

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

Equipment rents expenses of $235 million for the third quarter of 2007 remained relatively flat for the third quarter of 2007 compared with the third quarter of 2006.

Materials and Other

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

Materials and other expenses of $257 million for the third quarter of 2007, which consisted of $108 million of materials expense with the remainder consisting of numerous other items, were $34 million or 15 percent higher than the third quarter of 2006. The increase was primarily due to environmental expenses, property taxes, crew transportation and lodging expense and a 2006 recovery related to a fuel facility, partially offset by lower asbestos expense.

Interest Expense

Interest expense of $132 million for the third quarter of 2007 was $7 million, or 6 percent, higher than the third quarter of 2006. This was primarily due to a higher average debt balance.

Income taxes

The effective tax rate for the three months ended September 30, 2007 was 38.6 percent compared with 37.8 percent for the same prior year period.


Nine Months Ended September 30, 2007, Compared with Nine Months Ended September 30, 2006

Revenues

The following table presents BNSF’s revenue information by business group for the nine months ended September 30, 2007 and 2006. Certain comparative prior year revenue amounts have been reclassified between the business groups to conform to the current year presentation. There was no impact to total freight revenues as a result of these reclassifications.


Freight revenues for the first nine months of 2007 were $11,228 million, up 4 percent compared with the same 2006 period, while cars/units declined 3 percent during this same period. Freight revenues included an increase of approximately $30 million in fuel surcharges compared with the same 2006 period. Average revenue per car/unit was up 7 percent in the first nine months of 2007 from the first nine months of 2006 primarily due to mix of business and improved pricing.

Consumer Products

Consumer Products revenues of $4,167 million for the first nine months of 2007 were relatively flat compared to the first nine months of 2006.

Industrial Products

Industrial Products revenues of $2,758 million for the first nine months of 2007 were $54 million, or 2 percent, greater than the first nine months of 2006 despite a 2 percent reduction in unit volumes, which were more than offset by improved yields. Continued strong demand for petroleum products, chemicals and plastics and construction products was offset by a decline in building and construction products as a result of weakness in the housing market.

Coal

Coal revenues of $2,385 million for the first nine months of 2007 increased $244 million, or 11 percent, compared with the same period a year ago due to increased tons per unit, contractual inflation escalators and improved yields. Coal unit volumes were relatively flat due to mine production and weather-related issues.

Agricultural Products

Agricultural Products revenues of $1,918 million for the first nine months of 2007 were $137 million, or 8 percent, higher than revenues for the first nine months of 2006. This increase was primarily due to revenue growth in wheat, ethanol, fertilizer and soybeans.

Other Revenues

Other revenues of $329 million for the first nine months of 2007 were relatively flat as compared with the same period of 2006.

Expenses

Total operating expenses for the first nine months of 2007 were $9,021 million, an increase of $496 million, or 6 percent, versus the same 2006 period.

Compensation and Benefits

Compensation and benefits expenses of $2,794 million were $28 million, or 1 percent, lower than the first nine months of 2006. This decrease was primarily related to lower variable compensation costs, partially offset by wage inflation.

Fuel

Fuel expenses of $2,237 million for the first nine months of 2007 were $206 million, or 10 percent, higher than the first nine months of 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 and lower volumes. The average all-in cost per gallon of diesel fuel increased by 25 cents to $2.09, resulting in a $272 million increase in expense. The increase in the average all-in cost primarily reflects a decrease in the hedge benefit of $278 million (first nine months 2007 benefit of $25 million less first nine months 2006 benefit of $303 million). Consumption in the first nine months of 2007 decreased 31 million gallons to 1,069 million gallons when compared with consumption in the same 2006 period.

Purchased Services

Purchased service expenses of $1,510 million for the first nine months of 2007 were $65 million, or 4 percent, higher than the same 2006 period. This increase was primarily due to increases in the following costs: haulage payment for transportation over other railroads, purchased transportation costs for BNSF Logistics and locomotive and ramping costs (lifting of containers onto and off of cars).

Depreciation and Amortization

Depreciation and amortization expenses of $953 million for the first nine months of 2007 were $78 million, or 9 percent, higher than the same period in 2006. This increase in depreciation expense was primarily due to continuing capital expenditures.

Equipment Rents

Equipment rents expenses of $704 million for the first nine months of 2007 were $9 million, or 1 percent, higher than the first nine months of 2006. 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 and velocity improvements for freight car equipment.

Materials and Other

Materials and other expenses of $823 million for the first nine months of 2007, which consisted of $330 million of materials expense with the remainder consisting of numerous other items, were $166 million, or 25 percent, higher than the first nine months of 2006. The increase was primarily due to the environmental and technology charge of $81 million (see discussion under the heading “Other Matters; Charge for Environmental Costs and Technology System Write-Off”), as well as higher materials, crew transportation and lodging expense and environmental expenses.

Interest Expense

Interest expense of $385 million for the first nine months of 2007 was $21 million, or 6 percent, higher than the third quarter of 2006. This was primarily due to a higher average debt balance.

Income taxes

The effective tax rate for the nine months ended September 30, 2007 was 38.5 percent compared with 37.3 percent for the same prior year period. The increase in the effective tax rate is primarily due to favorable prior period income tax adjustments recorded in the second quarter of 2006.

Liquidity and Capital Resources

Cash generated from operations is BNSF’s principal source of liquidity. BNSF generally funds any additional liquidity requirements through debt issuance, including commercial paper, through leasing of assets and through the sale of a portion of its accounts receivable.

Operating Activities

Net cash provided by operating activities was $2,465 million for the nine months ended September 30, 2007, which was relatively flat compared with $2,366 million for the nine months ended September 30, 2006.

Investing Activities

Net cash used for investing activities was $2,111 million for the nine months ended September 30, 2007, compared with $1,845 million for the nine months ended September 30, 2006. Investing activities for the nine months ended September 30, 2007, included $1,775 million of capital expenditures, as discussed below, and $336 million of cash used for other investing activities. The increase in cash used for other investing activities primarily reflects the timing of equipment financing activities. Additionally, cash used for other investing activities included a cash source of $18 million and $45 million for the nine months ended September 30, 2007 and September 30, 2006, respectively, related to line sales to the State of New Mexico, which occurred in the first quarters of 2007 and 2006, respectively.

The increase in cash capital expenditures in the first nine months of 2007 was primarily due to an increase in capital expenditures to maintain BNSF’s track structure and for terminal and line expansions. The above table does not include expenditures for equipment financed through operating leases.

Financing Activities

Nine Months Ended September 30, 2007

Net cash used for financing activities during the first nine months of 2007 was $354 million, primarily related to the common stock repurchases of $964 million, including $33 million to satisfy tax withholding obligations for stock option exercises, dividend payments of $268 million, partially offset by net borrowings of $659 million, proceeds from stock options exercised of $126 million and excess tax benefits from equity compensation plans of $105 million.

Aggregate debt due to mature within one year is $403 million. BNSF’s ratio of net debt to total capitalization was 41.9 percent at September 30, 2007, compared with 40.0 percent at December 31, 2006. The Company’s adjusted net debt to total capitalization was 52.9 percent at September 30, 2007, compared with 51.7 percent at December 31, 2006. BNSF’s adjusted net debt to total capitalization is a non-GAAP financial measure and should be considered in addition to, but not as a substitute or preferable to, the information prepared in accordance with GAAP. However, management believes that adjusted net debt to total capitalization provides meaningful additional information about the ability of BNSF to service long-term debt and other fixed obligations and to fund future growth.


In February 2007, the Board of Directors (the Board) authorized an additional $1.4 billion of debt securities that may be issued through the Securities and Exchange Commission (SEC) debt shelf registration process, for a total of $2.1 billion authorized to be issued.

In April 2007, BNSF issued $650 million of 5.65 percent debentures and $650 million of 6.15 percent debentures due May 1, 2017 and May 1, 2037, respectively. The net proceeds from the sale of the debentures are being used for general corporate purposes including, but not limited to, working capital, capital expenditures, funding the maturity of debt which matures in 2007, the repayment of commercial paper and the repurchase of common stock. The issuance of these debentures reduced the amount of debt authorized to be issued by the Board through the SEC debt shelf registration process to $800 million.

In October 2007, BNSF entered into a 20-year capital lease to finance approximately $225 million of locomotives and freight cars.

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