Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
     
x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended September 30, 2009
     
    OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from            to
Commission file number             1-11535
(BNSF LOGO)
BURLINGTON NORTHERN SANTA FE CORPORATION
(Exact name of registrant as specified in its charter)
     
Delaware   41-1804964
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)
2650 Lou Menk Drive
Fort Worth, Texas
(Address of principal executive offices)
76131-2830
(Zip Code)
(800) 795-2673
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.               Yes  [x]  No  [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                Yes  [x]  No  [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.                    Large accelerated filer  [x]  Accelerated filer  [  ]  Non-accelerated filer  [  ]  Smaller reporting company  [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes  [  ]  No  [x]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
    Shares  
    Outstanding at  
Class   October 13, 2009  
Common stock, $.01 par value
  340,435,006 shares  

 


 

Table of Contents
             
  FINANCIAL INFORMATION     PAGE  
 
           
  Financial Statements.     3  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations.     33  
 
           
  Quantitative and Qualitative Disclosures About Market Risk.     46  
 
           
  Controls and Procedures.     48  
 
           
  OTHER INFORMATION        
 
           
  Legal Proceedings.     49  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds.     49  
 
           
  Exhibits.     49  
 
           
        S-1  
 
           
        E-1  
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Table of Contents

PART I
FINANCIAL INFORMATION
Item 1.      Financial Statements.
BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
                               
 
    Three Months Ended   Nine Months Ended
    September 30,     September 30,
    2009     2008     2009     2008
Revenues
$   3,595   $   4,906   $   10,335   $   13,645
 
                             
Operating expenses:
                             
Compensation and benefits
    872       1,013       2,564       2,947
Fuel
    606       1,349       1,729       3,685
Purchased services
    453       537       1,396       1,600
Depreciation and amortization
    386       349       1,135       1,039
Equipment rents
    194       229       591       682
Materials and other
    183       222       553       896
 
                     
Total operating expenses
    2,694       3,699       7,968       10,849
 
                     
Operating income
    901       1,207       2,367       2,796
Interest expense
    127       122       462       396
Other expense, net
    1       6       5       11
 
                     
 
                             
Income before income taxes
    773       1,079       1,900       2,389
Income tax expense
    285       384       715       889
 
                     
Net income
$   488   $   695   $   1,185   $   1,500
 
                     
 
                             
Earnings per share:
                             
Basic earnings per share
$   1.43   $   2.01   $   3.48   $   4.33
Diluted earnings per share
$   1.42   $   1.99   $   3.45   $   4.28
 
                             
Dividends declared per share
$   0.40   $   0.40   $   1.20   $   1.04
 
                     
See accompanying Notes to Consolidated Financial Statements.
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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, shares in thousands)
(Unaudited)
                 
   
    September 30,     December 31,  
    2009     2008  
ASSETS
               
Current assets:
               
Cash and cash equivalents
$   1,161   $   633  
Accounts receivable, net
    853       847  
Materials and supplies
    523       525  
Current portion of deferred income taxes
    454       442  
Other current assets
    286       218  
 
           
Total current assets
    3,277       2,665  
 
               
Property and equipment, net of accumulated depreciation of $10,453
and $9,912, respectively
    32,135       30,847  
Other assets
    3,141       2,891  
 
           
Total assets
$   38,553   $   36,403  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and other current liabilities
$   2,848   $   3,190  
Long-term debt due within one year
    323       456  
 
           
Total current liabilities
    3,171       3,646  
 
               
Long-term debt
    10,062       9,099  
Deferred income taxes
    9,235       8,590  
Pension and retiree health and welfare liability
    1,020       1,047  
Casualty and environmental liabilities
    963       959  
Employee separation costs
    55       57  
Other liabilities
    1,792       1,874  
 
           
Total liabilities
    26,298       25,272  
 
           
Commitments and contingencies (see Notes 2, 4 and 5)
               
Stockholders’ equity:
               
Common stock, $0.01 par value, 600,000 shares authorized;
543,062 shares and 541,346 shares issued, respectively
    5       5  
Additional paid-in capital
    7,721       7,631  
Retained earnings
    13,541       12,764  
Treasury stock, at cost, 202,640 shares and 202,165 shares, respectively
    (8,424 )     (8,395 )
Accumulated other comprehensive loss
    (588 )     (874 )
 
           
Total stockholders’ equity
    12,255       11,131  
 
           
Total liabilities and stockholders’ equity
$   38,553   $   36,403  
 
           
See accompanying Notes to Consolidated Financial Statements.
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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
                 
   
Nine Months Ended September 30,   2009     2008  
OPERATING ACTIVITIES
               
Net income
$   1,185   $   1,500  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,135       1,039  
Deferred income taxes
    458       248  
Employee separation costs paid
    (10 )     (11 )
Long-term casualty and environmental liabilities, net
    (31 )     181  
Other, net
    26       50  
Changes in current assets and liabilities:
               
Accounts receivable, net
    50       (108 )
Change in accounts receivables sales program
    (50 )     278  
Materials and supplies
    2       (47 )
Other current assets
    (91 )     (142 )
Accounts payable and other current liabilities
    (36 )     315  
 
           
Net cash provided by operating activities
    2,638       3,303  
 
           
INVESTING ACTIVITIES
               
Capital expenditures excluding equipment
    (1,669 )     (1,704 )
Acquisition of equipment
    (615 )     (676 )
Proceeds from sale of equipment financed
    368       190  
Construction costs for facility financing obligation
    (36 )     (38 )
Other, net
    (167 )     (153 )
 
           
Net cash used for investing activities
    (2,119 )     (2,381 )
 
           
FINANCING ACTIVITIES
               
Net decrease in commercial paper and bank borrowings
    (100 )     (261 )
Proceeds from issuance of long-term debt
    825       650  
Payments on long-term debt
    (373 )     (174 )
Dividends paid
    (409 )     (334 )
Proceeds from stock options exercised
    26       87  
Purchase of BNSF common stock
    (15 )     (878 )
Excess tax benefits from equity compensation plans
    18       90  
Proceeds from facility financing obligation
    51       50  
Other, net
    (14 )     (6 )
 
           
Net cash provided by (used for) financing activities
    9       (776 )
 
           
Increase in cash and cash equivalents
    528       146  
Cash and cash equivalents:
               
Beginning of period
    633       330  
 
           
End of period
$   1,161   $   476  
 
           
SUPPLEMENTAL CASH FLOW INFORMATION
               
Interest paid, net of amounts capitalized
$   463   $   406  
Income taxes paid, net of refunds
$   170   $   565  
Non-cash asset financing
$   464   $   79  
 
           
See accompanying Notes to Consolidated Financial Statements.
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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Shares in thousands, dollars in millions, except per share data)
(Unaudited)
                                                           
       
                      Common Stock                     Accumulated
Other
    Total  
    Common     Treasury       and Paid-in     Retained     Treasury     Comprehensive     Stockholders’  
    Shares     Shares       Capital     Earnings     Stock     Loss     Equity  
Balance at December 31, 2008
    541,346       (202,165 )   $   7,636   $   12,764   $   (8,395 ) $   (874 ) $   11,131  
Common stock dividends, $1.20 per share
                            (408 )                 (408 )
Restricted stock and stock options expense
                      32                         32  
Restricted stock activity and related tax expense of $1
    506       1         1                         1  
Exercise of stock options and related tax benefit of $17
    1,210       (243 )       57             (14 )           43  
Purchase of BNSF common stocka
          (233 )                   (15 )           (15 )
Comprehensive income:
                                                         
Net income
                            1,185                   1,185  
Change in unrecognized prior service credit and actuarial losses, net of tax expense of $6
                                        9       9  
Change in fuel/interest hedge mark-to-market and other items, net of tax expense of $155
                                        249       249  
Recognized loss on derivative instruments-discontinued hedges, net of tax benefit of $16
                                        27       27  
Change in unrealized loss on securities held by equity method investees, net of tax expense of $1
                                        1       1  
 
                                           
Total comprehensive income
                                                      1,471  
 
                                           
Balance at September 30, 2009
    543,062       (202,640 )   $   7,726   $   13,541   $   (8,424 ) $   (588 ) $   12,255  
 
                                           
 
   
a Total-to-date share repurchases through September 30, 2009, under the Company’s share repurchase program, were 192 million shares at an average price of $41.53 per share, leaving 18 million shares available for repurchase out of the 210 million shares authorized.
See accompanying Notes to Consolidated Financial Statements.
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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.   Accounting Policies and Interim Results
          The Consolidated Financial Statements should be read in conjunction with Burlington Northern Santa Fe Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008, including the financial statements and notes thereto. Burlington Northern Santa Fe Corporation (BNSF) is a holding company that conducts no operating activities and owns no significant assets other than through its interests in its subsidiaries. The Consolidated Financial Statements include the accounts of BNSF and its majority-owned subsidiaries, all of which are separate legal entities (collectively, the Company). BNSF’s principal operating subsidiary is BNSF Railway Company (BNSF Railway). All significant intercompany accounts and transactions have been eliminated. BNSF was incorporated in Delaware on December 16, 1994.
          The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the entire year. In the opinion of management, the unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments, except as disclosed) necessary for a fair statement of BNSF’s consolidated financial position as of September 30, 2009, and the results of operations for the three and nine month periods ended September 30, 2009 and 2008.
          BNSF has evaluated subsequent events through October 23, 2009, which represents the date the Consolidated Financial Statements were issued.
          Certain comparative prior period amounts in the Consolidated Financial Statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported operating income or net income.
Adoption of New Accounting Pronouncement
          In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative accounting guidance which established the FASB Accounting Standards Codification (Codification or ASC) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities and stated that all guidance contained in the Codification carries an equal level of authority. The authoritative accounting guidance recognized that rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative Generally Accepted Accounting Principles (GAAP) for SEC registrants. The Company adopted the provisions of the authoritative accounting guidance for the interim reporting period ended September 30, 2009, the adoption of which did not have a material effect on the Company’s consolidated financial statements.
 

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
2.   Hedging Activities
          The Company uses derivative financial instruments to hedge against increases in diesel fuel prices and interest rates as well as to convert a portion of its fixed-rate long-term debt to floating-rate debt. 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 fair value or 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 fair value or cash flows. Any change in fair value resulting from ineffectiveness, as defined by authoritative accounting guidance related to derivatives and hedging, 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 stockholders’ equity and reclassified into earnings in the period during which the hedge transaction affects earnings. Cash flows related to fuel and interest rate derivatives are classified as operating activities in the Consolidated Statements of Cash Flows.
          BNSF monitors its hedging positions and credit ratings of its counterparties and does not anticipate any losses due to counterparty nonperformance. All counterparties were financial institutions with credit ratings of A2/A or higher as of September 30, 2009. The maximum amount of loss the Company could incur from credit risk based on the gross fair value of derivative instruments in asset positions as of September 30, 2009 and December 31, 2008, was $63 million and $77 million, respectively. Other than as disclosed under the heading “Fuel; Total Fuel-Hedging Activities,” the Company’s hedge agreements do not include provisions requiring collateral. Certain of the Company’s hedge instruments are covered by master netting arrangements whereby, in the event of a default, the non-defaulting party has the right to setoff any amounts payable against any obligation of the defaulting party under the same counterparty agreement. As such, the Company’s net asset exposure to counterparty credit risk was $51 million and $53 million as of September 30, 2009 and December 31, 2008, respectively.
          Additional disclosure related to derivative instruments is included in Note 9 to the Consolidated Financial Statements.
          The amounts recorded in the Consolidated Balance Sheets for derivative transactions were as follows (in millions). These amounts exclude $8 million and $106 million of collateral posted for certain fuel hedge contracts as of September 30, 2009 and December 31, 2008, respectively.
          
 
                 
    September 30,     December 31,  
    2009     2008  
Short-term hedge asset
  $ 6     $ 5  
Long-term hedge asset
    47       72  
Short-term hedge liability
    (79 )     (387 )
Long-term hedge liability
    (45 )     (193 )
           
Total derivatives
  $ (71 )   $ (503 )
                 
 

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          The tables below contain summaries of all derivative positions reported in the Consolidated Financial Statements, presented gross of any master netting arrangements (in millions).
                       
 
Fair Value of Derivative Instruments
 
Asset Derivatives

                      Balance Sheet                         September 30,         December 31,  
    Location   2009     2008
Derivatives designated as hedging instruments under ASC 815-20
                     
Fuel Contracts
  Other current assets         $   4           $  
Interest Rate Contracts
  Other current assets     4       5
Fuel Contracts
  Other assets     12      
Interest Rate Contracts
  Other assets     41       72
Fuel Contracts
  Accounts payable and other current
liabilities
    2      
       
Total Asset Derivatives designated as hedging instruments under ASC 815-20
                $   63           $   77
           
                       
Liability Derivatives

                              Balance Sheet                               September 30,     December 31,
    Location   2009     2008
Derivatives designated as hedging instruments under ASC 815-20
                     
 
                     
Fuel Contracts
  Other current assets         $   2           $  
 
                     
Fuel Contracts
  Other assets     6      
Fuel Contracts
  Accounts payable and other current
liabilities
    81       279
Interest Rate Contracts
  Accounts payable and other
current liabilities
          108
Fuel Contracts
  Other liabilities     45       193
       
Total Liability Derivatives designated as hedging instruments under ASC 815-20
                $   134           $   580
           
 

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The Effect of Derivative Instruments Gains and Losses
for the Three Month Periods Ended September 30, 2009 and 2008
                   
Derivatives in   Location of    
ASC 815-20   Gain     Amount of Gain
Fair Value   Recognized in     Recognized
Hedging   Income on     in Income
Relationships   Derivatives     on Derivatives
          2009       2008
Interest Rate
Contracts
    Interest
  expense
  $ 6     $ 4
         
Total derivatives
      $ 6     $ 4
               
                                                         
                                              Amount of Gain  
                                              or (Loss)  
                    Location of           Location of     Recognized in Income  
                    Gain or           Gain or     on Derivatives  
Derivatives in     Amount of Gain or     (Loss)     Amount of Gain or     (Loss)     (Ineffective Portion  
ASC 815-20     (Loss) Recognized     Recognized     (Loss) Recognized     Recognized     and Amount  
Cash Flow     in OCI on     from     from AOCL     in Income     Excluded from  
Hedging     Derivatives     AOCL into     into Income     on     Effectiveness  
Relationships     (Effective Portion)     Income     (Effective Portion)     Derivatives     Testing)a  
      2009       2008           2009       2008           2009       2008  
Fuel
Contracts
  $ (20)   $ (136)   Fuel
expense
  $ (38)   $ 17     Fuel
expense
  $ 3     $ (6)  
Interest Rate
Contracts
    1       8     Interest expense     (1)         Interest expense            
                                       
Total derivatives
  $ (19)   $ (128)       $ (39)   $ 17         $ 3     $ (6)  
 
                                                       
a  No portion of the gain or (loss) was excluded from the assessment of hedge effectiveness for the periods then ended.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
The Effect of Derivative Instruments Gains and Losses
for the Nine Month Periods Ended September 30, 2009 and 2008
 
                   
Derivatives in   Location of    
ASC 815-20   Gain     Amount of Gain
Fair Value   Recognized in     Recognized
Hedging   Income on     in Income
Relationships   Derivatives     on Derivatives
          2009       2008
Interest Rate
Contracts
    Interest
  expense
  $ 16     $ 8
         
Total derivatives
      $ 16     $ 8
               
                                                         
                                              Amount of Gain  
                                              or (Loss)  
                    Location of           Location of     Recognized in Income  
                    Gain or           Gain or     on Derivatives  
Derivatives in     Amount of Gain or     (Loss)     Amount of Gain or     (Loss)     (Ineffective Portion  
ASC 815-20     (Loss) Recognized     Recognized     (Loss) Recognized     Recognized     and Amount  
Cash Flow     in OCI on     from     from AOCL     in Income     Excluded from  
Hedging     Derivatives     AOCL into     into Income     on     Effectiveness  
Relationships     (Effective Portion)     Income     (Effective Portion)     Derivatives     Testing)a  
      2009       2008           2009       2008           2009       2008  
Fuel
Contracts
  $ 152   $ (16)   Fuel
expense
  $ (204)   $ 50     Fuel
expense
  $ 19     $ (6)  
Interest Rate
Contracts
    66           Interest expense     (1)         Interest expense            
                                       
Total derivatives
  $ 218   $ (16)       $ (205)   $ 50         $ 19     $ (6)  
 
                                                       
                 
Derivatives      
Not   Location of  
Designated as   (Loss)  
Hedging   Recognized   Amount of (Loss)
Instruments   in   Recognized
under   Income on   in Income
ASC 815-20   Derivatives   on Derivatives
        2009   2008
Interest Rate Contracts
 
Interest expense
$ (32) $
 
           
Total derivatives
 
 
$ (32) $
 
           
a  No portion of the gain or (loss) was excluded from the assessment of hedge effectiveness for the periods then ended.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          Fuel
          Fuel costs represented 22 percent and 34 percent of total operating expenses during the nine month periods ended September 30, 2009 and 2008, respectively. Due to the significance of diesel fuel expenses to the operations of BNSF 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 locomotive fuel consumption (which represents substantially all fuel consumption) during the twelve-month period ended September 30, 2009, and excluding the impact of the hedges, each one-cent increase in the price of fuel per gallon would result in approximately $12 million of additional fuel expense on an annual basis. However, BNSF believes any fuel price increase would be substantially offset by the Company’s fuel surcharge program.
Total Fuel-Hedging Activities
          As of September 30, 2009, BNSF’s total fuel-hedging positions for the remainder of 2009, 2010, 2011, and 2012 covered approximately 22 percent, 20 percent, 16 percent, and 3 percent, respectively, of the average annual locomotive fuel consumption over the past three years. Hedge positions are closely monitored to ensure that they will not exceed actual fuel requirements in any period.
          The amounts recorded in the Consolidated Balance Sheets for settled fuel-hedge transactions were as follows (in millions):
                   
    September 30,   December 31,  
    2009   2008  
 
                 
Settled fuel-hedging contracts payable
  $ (38)   $ (38 )
 
         
          Certain of the Company’s fuel-hedge instruments are covered by an agreement which includes a provision such that the Company either receives or posts cash collateral if the fair value of the instruments exceeds a certain net asset or net liability threshold, respectively. The threshold is based on a sliding scale, utilizing either the counterparty’s credit rating, if the instruments are in a net asset position, or BNSF’s credit rating, if the instruments are in a net liability position. If the applicable credit rating should fall below Ba3 (Moody’s) or BB- (S&P), the threshold would be eliminated and collateral would be required for the entire fair value amount. All cash collateral paid is held on deposit by the payee and earns interest to the benefit of the payor based on the London Interbank Offered Rate (LIBOR). The aggregate fair value of all open fuel-hedge instruments under these provisions was in a net liability position on September 30, 2009 and December 31, 2008, of $43 million and $131 million, respectively, for which the Company posted collateral of $8 million and $106 million, respectively. Additional collateral of $15 million and $20 million was posted related to settled fuel-hedging contracts payable at September 30, 2009 and December 31, 2008, respectively. The collateral was reflected as a reduction to either accounts payable and other current liabilities or other liabilities in the Consolidated Balance Sheets, depending on the expiration date of the related fuel hedges. The settled fuel-hedge liabilities presented in the table above do not reflect a reduction for the posted collateral.
          The Company uses the forward commodity price for the periods hedged to value its fuel-hedge swaps and costless collars. This methodology is a market approach, which under authoritative accounting guidance related to fair value measurements utilizes Level 2 inputs as it uses market data for similar instruments in active markets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
 
     New York Mercantile Exchange (NYMEX) #2 Heating Oil (HO) Hedges
          As of September 30, 2009, BNSF had entered into fuel swap agreements utilizing NYMEX #2 HO. The hedge prices do not include taxes, transportation costs, certain other fuel handling costs and any differences that may occur between the prices of HO and the purchase price of BNSF’s diesel fuel. Over the twelve months ended September 30, 2009, the sum of all such costs averaged approximately 17 cents per gallon.
          During the first nine months of 2009, the Company entered into fuel swap agreements utilizing HO to hedge the equivalent of approximately 77.35 million gallons of fuel with an average swap price of $1.95 per gallon. The following table provides fuel-hedge data based on the quarter being hedged for all HO fuel hedges outstanding as of September 30, 2009.
                                       
 
    Quarter Ending      
2010   March 31,     June 30,     September 30,     December 31,     Annual
HO Swaps
                                     
Gallons hedged (in millions)
    5.60       8.35       6.10       6.50       26.55
Average swap price (per gallon)
  $ 1.79     $ 1.81     $ 1.87     $ 1.93     $ 1.85
Fair value (in millions)
  $     $ 1     $ 1     $ 1     $ 3
 
 
 
    Quarter Ending      
2011   March 31,     June 30,     September 30,     December 31,     Annual
HO Swaps
                                     
Gallons hedged (in millions)
    8.30       8.30       7.50       7.50       31.60
Average swap price (per gallon)
  $ 1.91     $ 1.89     $ 1.95     $ 2.01     $ 1.94
Fair value (in millions)
  $ 2     $ 2     $ 1     $ 1     $ 6
 
 
 
    Quarter Ending      
2012   March 31,     June 30,     September 30,     December 31,     Annual
HO Swaps
                                     
Gallons hedged (in millions)
    17.20       2.00                   19.20
Average swap price (per gallon)
  $ 2.08     $ 2.18     $     $     $ 2.09
Fair value (in millions)
  $ 2     $     $     $     $ 2
 
     West Texas Intermediate (WTI) Crude Oil Hedges
          In addition, BNSF enters into fuel swap and costless collar 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’s diesel fuel, including refining costs. Over the twelve months ended September 30, 2009, the sum of all such costs averaged approximately 43 cents per gallon.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
 
          During the first nine months of 2009, the Company entered into fuel swap agreements utilizing WTI to hedge the equivalent of approximately 890 thousand barrels of fuel with an average swap price of $76.44 per barrel and costless collar agreements utilizing WTI to hedge the equivalent of approximately 80 thousand barrels of fuel with an average call price of $79.86 per barrel and an average put price of $70.06 per barrel. The following table provides fuel-hedge data based on the quarter being hedged for all WTI fuel hedges outstanding as of September 30, 2009.
         
   
      Quarter Ending  
2009   December 31,  
WTI Swaps
       
Barrels hedged (in thousands)
    1,425  
Equivalent gallons hedged (in millions)
    59.85  
Average swap price (per barrel)
    $ 75.72  
Fair value (in millions)
    $ (7 )
 
       
WTI Costless Collars
       
Barrels hedged (in thousands)
    475  
Equivalent gallons hedged (in millions)
    19.95  
Average cap price (per barrel)
    $ 135.46  
Average floor price (per barrel)
    $ 125.38  
Fair value (in millions)
    $ (25 )
   
                                         
   
    Quarter Ending          
2010   March 31,     June 30,     September 30,     December 31,     Annual  
WTI Swaps
                                       
Barrels hedged (in thousands)
    1,210       1,110       1,125       1,235       4,680  
Equivalent gallons hedged (in millions)
    50.82       46.62       47.25       51.87       196.56  
Average swap price (per barrel)
  $ 85.05     $ 87.89     $ 87.82     $ 86.27     $ 86.71  
Fair value (in millions)
  $ (15 )   $ (15 )   $ (14 )   $ (12 )   $ (56 )
 
                                       
WTI Costless Collars
                                       
Barrels hedged (in thousands)
    420       420       420       320       1,580  
Equivalent gallons hedged (in millions)
    17.64       17.64       17.64       13.44       66.36  
Average cap price (per barrel)
  $ 78.23     $ 79.79     $ 81.33     $ 82.84     $ 80.40  
Average floor price (per barrel)
  $ 72.35     $ 73.84     $ 75.15     $ 76.54     $ 74.34  
Fair value (in millions)
  $ (1 )   $ (1 )   $ (1 )   $ (1 )   $ (4 )
   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
 
                                         
   
    Quarter Ending        
2011   March 31,     June 30,     September 30,     December 31,     Annual  
WTI Swaps
                                       
Barrels hedged (in thousands)
    995       1,000       1,005       1,055       4,055  
Equivalent gallons hedged (in millions)
    41.79       42.00       42.21       44.31       170.31  
Average swap price (per barrel)
  $ 85.59     $ 85.20     $ 85.52     $ 85.88     $ 85.55  
Fair value (in millions)
  $ (8 )   $ (8 )   $ (7 )   $ (8 )   $ (31 )
 
WTI Costless Collars
                                       
Barrels hedged (in thousands)
    200       200       200       200       800  
Equivalent gallons hedged (in millions)
    8.40       8.40       8.40       8.40       33.60  
Average cap price (per barrel)
  $ 84.00     $ 84.70     $ 85.39     $ 86.10     $ 85.05  
Average floor price (per barrel)
  $ 77.75     $ 78.40     $ 79.05     $ 79.70     $ 78.73  
Fair value (in millions)
  $ (1 )   $ (1 )   $ (1 )   $ (1 )   $ (4 )
   
 
   
    Quarter Ending        
2012   March 31,     June 30,     September 30,     December 31,     Annual  
WTI Swaps
                                       
Barrels hedged (in thousands)
    205       200                   405  
Equivalent gallons hedged (in millions)
    8.61       8.40                   17.01  
Average swap price (per barrel)
  $ 76.95     $ 77.52     $     $     $ 77.23  
Fair value (in millions)
  $     $     $     $     $  
 
     NYMEX #2 Heating Oil Refining Spread Hedges
          During the first nine months of 2009, the Company entered into fuel swap agreements utilizing the HO refining spread (HO-WTI) to hedge the equivalent of approximately 250 thousand barrels of fuel with an average swap price of $8.06 per barrel. HO-WTI is the difference in price between HO and WTI; therefore, a HO-WTI swap in combination with a WTI swap is equivalent to a HO swap. The following table provides fuel-hedge data based upon the quarter being hedged for all HO-WTI fuel hedges outstanding as of September 30, 2009.
                                         
   
    Quarter Ending        
2010   March 31,     June 30,     September 30,     December 31,     Annual  
HO-WTI Swaps
                                       
Barrels hedged (in thousands)
    115       90       45             250  
Equivalent gallons hedged (in millions)
    4.83       3.78       1.89             10.50  
Average swap price (per barrel)
  $ 7.70     $ 7.95     $ 9.20     $     $ 8.06  
Fair value (in millions)
  $     $     $     $     $  
   
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, as well as converting a portion of its fixed-rate long-term debt to floating-rate debt. The Company uses interest rate swaps and treasury locks as part of its interest rate risk management strategy.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
 
Total Interest Rate Hedging Program
          All interest rate hedge transactions outstanding are reflected in the following table:
                                                                 
   
    September 30, 2009  
    Maturity Date           Fair  
    2009     2010     2011     2012     2013     Thereafter     Total     Value  
 
                                                               
Fair Value Hedges
                                                               
Fixed to variable swaps
(in millions)
  $     $ 250     $     $     $     $ 400     $ 650     $ 45 a
Average fixed rate
    %     7.13 %     %     %     %     5.75 %     6.28 %        
Average floating rate
    %     3.17 %     %     %     %     1.70 %     2.27 %        
   
a  Fair value includes $4 million of accrued interest.
          BNSF’s measurement of the fair value of interest rate derivatives is based on estimates of the mid-market values for the transactions which are provided by the counterparties to these agreements. BNSF reviews these estimates for reasonableness. This methodology is a market approach, which under authoritative accounting guidance related to fair value measurements utilizes Level 2 inputs as it uses market data for similar instruments in active markets.
     Fair Value Interest Rate Hedges
          The Company enters into interest rate swaps to convert fixed-rate long-term debt to floating-rate debt. These swaps are accounted for as fair value hedges under authoritative accounting guidance related to derivatives and hedging. These fair value hedges qualify for the short-cut method of recognition; therefore, no portion of these swaps is treated as ineffective.
          The gain or loss on the fair value hedges as well as the offsetting loss or gain on the hedged items (fixed-rate debt) attributable to the hedged risk are recorded in current earnings. The Company includes the gain or loss on the fixed-rate debt in the same line item - interest expense - as the offsetting loss or gain on the related interest rate swaps as follows (in millions):
                                                                 
    Gain (Loss) on Interest Rate Swaps     Gain (Loss) on Fixed-rate Debt  
    Three Months     Nine Months     Three Months     Nine Months  
Income Statement   Ended     Ended     Ended     Ended  
Classification   September 30,     September 30,     September 30,     September 30,  
    2009     2008     2009     2008     2009     2008     2009     2008  
Interest expense
  $ 9     $ 7     $ (32 )   $ (3 )   $ (9 )   $ (7 )   $ 32     $ 3  
          As of September 30, 2009 and December 31, 2008, BNSF had entered into nine and eleven separate swaps, respectively, with an aggregate notional amount of $650 million and $850 million, respectively, in which it pays an average floating rate, which fluctuates quarterly, based on LIBOR. The average floating rate to be paid by BNSF as of September 30, 2009, was 2.27 percent, and the average fixed rate BNSF is to receive was 6.28 percent.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
     Cash Flow Interest Rate Hedges
          In September 2009, the Company entered into a treasury lock having a notional amount of $500 million and a locked-in rate of 3.46 percent, to fix a portion of the rate for a 10-year unsecured debt issuance. The treasury lock was terminated in connection with the issuance of $750 million 10-year notes (see Note 4 to the Consolidated Financial Statements). Upon termination, BNSF received approximately $600 thousand from the counterparty, which will be amortized as a reduction to interest expense over the life of the issued debt. This transaction was accounted for as a cash flow hedge. As of September 30, 2009, no cash flow hedges were outstanding.
          In anticipation of a future debt issuance, the Company entered into five treasury locks during 2008 having an aggregate notional amount of $250 million, and an average locked-in rate of 4.18 percent, to fix a portion of the rate for a future 30-year unsecured debt issuance. The Company also entered into six treasury locks during 2008 having an aggregate notional amount of $150 million, and an average locked-in rate of 3.80 percent, to fix a portion of the rate for a future 10-year unsecured debt issuance. These transactions were previously accounted for as cash flow hedges. However, during the first quarter of 2009, the Company determined that it was no longer probable that it would issue debt according to the terms of the hedges. As such, hedge accounting could no longer be applied to the treasury locks. The treasury locks were terminated in early April and $32 million was paid to the counterparties, which was the fair value of the treasury locks at the date of termination. Therefore, a net $32 million loss was recognized as an increase to interest expense.
          AOCL included $8 million and $6 million of unrecognized gains on closed hedges as of September 30, 2009 and December 31, 2008, respectively. These amounts will be amortized to interest expense over the life of the corresponding issued debt.
3.   Accounts Receivable, Net
          BNSF Railway sells a portion of its accounts receivable to Santa Fe Receivables Corporation (SFRC), a special purpose subsidiary. The sole purpose and activity of SFRC is to purchase receivables from BNSF Railway. 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 and are isolated from BNSF Railway which eliminates all of BNSF Railway’s control over the undivided interest. SFRC periodically incurs minor legal fees that are paid by BNSF Railway and are financed through short-term intercompany payables.
          BNSF Railway’s total capacity to sell undivided interests to investors under the A/R sales program was $700 million at September 30, 2009, which was comprised of two $175 million, 364-day accounts receivable facilities and two $175 million, 3-year accounts receivable facilities. Both 364-day facilities will mature in November 2009 and are expected to be renewed. The two 3-year facilities will mature in November 2010. Each of the financial institutions providing credit for the facilities is rated Aa3/A+ or higher. There was no outstanding interest held by investors under the A/R sales program at September 30, 2009. Outstanding undivided interests held by investors under the A/R sales program were $50 million at December 31, 2008, with $12.5 million outstanding under each of the four facilities. 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. As of September 30, 2009 and December 31, 2008, an interest in $864 million and $878 million, respectively, of receivables had been transferred by SFRC to the master trust. When SFRC transfers the interest in these receivables to the master trust, it retains an undivided interest in the receivables, which is included in accounts receivable in the Company’s Consolidated Financial Statements. The interest that continues to be held by SFRC of $864 million and $828 million at September 30, 2009 and December 31, 2008, respectively, less an allowance for uncollectible accounts, reflected the total accounts receivable transferred by SFRC to the master trust less $50 million of outstanding undivided interests held by investors at December 31, 2008. 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          BNSF Railway retains the collection responsibility with respect to the accounts receivable. Proceeds from collections reinvested in the A/R sales program were approximately $11.2 billion and $14.5 billion for the nine months ended September 30, 2009 and 2008, 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 $2 million and $9 million for the nine months ended September 30, 2009 and 2008, respectively. These costs fluctuate monthly with changes in prevailing interest rates as well as unused available commitments and 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 sold by BNSF Railway fluctuates based on borrowing needs and upon the availability of receivables and is directly affected by changing business volumes and credit risks, including dilution and delinquencies. In order for there to be an impact on the amount of receivables BNSF Railway could sell, the combined dilution and delinquency percentages would have to exceed an established threshold. BNSF Railway has historically experienced very low levels of dilution or delinquency and was below the established reserve threshold at September 30, 2009. 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 eligible under the A/R sales program do not include receivables over 90 days past due or concentrations over certain limits with any one customer and certain other receivables. At September 30, 2009 and December 31, 2008, $15 million and $9 million, respectively, of such 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. At September 30, 2009 and December 31, 2008, $31 million and $43 million, respectively, of such allowances had been recorded, of which $31 million and $42 million, respectively, had been recorded as a reduction to accounts receivable, net. The remaining $1 million at December 31, 2008 had been recorded in other current liabilities because it related to the outstanding undivided interests held by investors. During the nine months ended September 30, 2009 and 2008, $6 million and $5 million, respectively, of accounts receivable were written off, net of recoveries. Credit losses are based on specific identification of uncollectible accounts and application of historical collection percentages by aging category.
          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 thresholds for dilution, delinquency, and write-off ratios that, if exceeded, allow the investors participating in this program, at their option, to cancel the program. At September 30, 2009, BNSF Railway was in compliance with these provisions.
          See Note 10 to the Consolidated Financial Statements for information about recent accounting pronouncements that will have an impact on the A/R sales program upon adoption.
4.   Debt
Revolving Credit Facility and Commercial Paper
          As of September 30, 2009, the Company had borrowing capacity of up to $1.2 billion under its long-term revolving bank credit facility, which expires in September 2012. Annual facility fees are currently 0.08 percent for the facility. The rate is subject to change based upon changes in BNSF’s senior unsecured debt ratings. Borrowing rates are based upon (i) LIBOR plus a spread determined by BNSF’s senior unsecured debt ratings; (ii) money market rates offered at the option of the lenders; or (iii) an alternate base rate. BNSF must maintain compliance with certain financial covenants under its revolving bank credit facility. At September 30, 2009, the Company was in compliance with these covenants.
          At September 30, 2009, there were no bank borrowings against the revolving credit agreement.
          BNSF issues commercial paper from time to time that is supported by the revolving bank credit facility. Outstanding commercial paper balances reduce the amount of borrowings available under this agreement. The classification of commercial paper is determined by the Company’s ability and intent to use long-term or short-term funding sources to settle the obligations at maturity. At December 31, 2008, the Company classified outstanding commercial paper as long-term debt.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
 
          No commercial paper was outstanding as of September 30, 2009.
Notes and Debentures
          In September 2009, BNSF issued $750 million of 4.7 percent notes due October 1, 2019. The net proceeds from the sale of the notes are being used for general corporate purposes which may include, but are not limited to, working capital, capital expenditures, repurchase of common stock pursuant to the share repurchase program, and repayment of outstanding indebtedness.
          At September 30, 2009, $750 million remained authorized by the Board of Directors to be issued through a SEC debt shelf registration statement.
Equipment Obligation
          In July 2009, BNSF Railway entered into an 18-year equipment obligation totaling $75 million to finance locomotives and railcars.
Capital Leases
          During the first nine months of 2009, BNSF entered into a 12-year capital lease to finance $368 million of locomotives and freight cars. Additionally, BNSF entered into capital leases totaling $96 million to finance maintenance of way and other vehicles and equipment with lease terms of three to seven years.
Financing Obligation
          In 2005, the Company commenced the construction of an intermodal facility that it intended to sell to a third party and subsequently lease back. As of September 30, 2009, construction of the facility was completed for a cost of approximately $160 million. All improvements have been sold to the third party and BNSF leased the facility from the third party for 20 years. This sale leaseback transaction was accounted for as a financing obligation due to continuing involvement. The outflows from the construction of the facility were classified as investing activities, and the inflows from the associated financing proceeds were classified as financing activities in the Company’s Consolidated Statements of Cash Flows.
Fair Value of Debt Instruments
          At September 30, 2009 and December 31, 2008, the fair value of BNSF’s debt, excluding capital leases and interest rate hedges, was $9,578 million and $8,323 million, respectively, while the book value was $8,772 million and $8,274 million, respectively. The fair value of BNSF’s 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 for debt of the same remaining maturities. The book value of commercial paper approximates fair value due to its short maturity.
Guarantees
          As of September 30, 2009, BNSF Railway has not been called upon to perform under the guarantees specifically disclosed in this footnote and does not anticipate a significant performance risk in the foreseeable future.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          Debt and other obligations of non-consolidated entities guaranteed by the Company as of September 30, 2009, were as follows (dollars in millions):
                                                 
   
    Guarantees        
    BNSF     Principal       Maximum       Maximum     Remaining        
    Ownership     Amount     Future     Recourse     Term     Capitalized
    Percentage     Guaranteed     Payments     Amounta     (in years)     Obligations
Kinder Morgan Energy Partners, L.P.
    0.5%   $ 190     $ 190     $     Termination of Ownership     $  
Kansas City Terminal Intermodal Transportation Corporation
    0.0%   $ 48     $ 67     $ 67       9     $ 27 b
Westside Intermodal Transportation Corporation
    0.0%   $ 37     $ 55     $       14     $ 29 b
The Unified Government of
Wyandotte County/Kansas City, Kansas
    0.0%   $ 12     $ 17     $       14     $ 9 b
Chevron Phillips Chemical Company, LP
    0.0%   N/A d   N/A d   N/A d     8     $ 11 c
Various lessors
(Residual value guarantees)
    0.0%     N/A     $ 270     $ 270     Various     $ 68 c
All other
    0.0%   $ 4     $ 4     $ 1     Various     $  
   
Reflects the maximum amount the Company could recover from a third party other than the counterparty.
Reflects capitalized obligations that are recorded on the Company’s Consolidated Balance Sheet.
Reflects the asset and corresponding liability for the fair value of these guarantees required by authoritative accounting guidance related to guarantees.
There is no cap to the liability that can be sought from BNSF for BNSF’s negligence or the negligence of the indemnified party. However, BNSF 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 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 $48 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 $49 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
     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 2010 and 2011.
          The maximum future payments, as disclosed in the Guarantees table above, represent the undiscounted maximum amount that the Company could be required to pay in the event the Company did not exercise its renewal option and the fair market value of the equipment had significantly declined. BNSF does not anticipate such a large reduction in the fair market value of the leased equipment. As of September 30, 2009, the Company had recorded a $68 million asset and corresponding liability for the fair value of RVG.
     All Other
          As of September 30, 2009, BNSF guaranteed $4 million of other debt and leases. BNSF holds a performance bond and has the option to sub-lease property to recover up to $1 million of the $4 million of guarantees. These guarantees expire between 2011 and 2013.
          Other than as discussed above, there is no collateral held by a third party that the Company could obtain and liquidate to recover any amounts paid under the above guarantees.
          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 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 for 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.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
5.     Commitments and Contingencies
     Personal Injury
          Personal injury claims, including asbestos claims and employee work-related injuries and third-party injuries (collectively, other personal injury), are a significant expense for the railroad industry. Personal injury claims by BNSF Railway employees are subject to the provisions of the Federal Employers’ Liability Act (FELA) rather than state workers’ compensation laws. FELA’s system of requiring the finding of fault, coupled with unscheduled awards and reliance on the jury system, contributed to increased expenses in past years. Other proceedings include claims by non-employees for punitive as well as compensatory damages. A few proceedings purport to be class actions. The variability present in settling these claims, including non-employee personal injury and matters in which punitive damages are alleged, could result in increased expenses in future years. BNSF 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 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. 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 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.
          BNSF assesses its unasserted liability exposure on an annual basis during the third quarter. BNSF 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 quarter of 2009 and 2008, the Company analyzed recent filing and payment trends to ensure the assumptions used by BNSF to estimate its future asbestos liability were reasonable. In the third quarters of 2009 and 2008, management determined that the liability remained appropriate and no change was recorded. The Company plans to update its study again in the third quarter of 2010.
          Throughout the year, BNSF monitors actual experience against the number of forecasted claims and expected claim payments and will record adjustments to the Company’s estimates as necessary.
          The following table summarizes the activity in the Company’s accrued obligations for both asserted and unasserted asbestos matters (in millions):
                                 
   
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Beginning balance
  $ 244     $ 261     $ 251     $ 270  
Accruals
                       
Payments
    (3     (5     (10     (14
 
                       
Ending balance at September 30,
  $ 241     $ 256     $ 241     $ 256  
 
                       

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          Of the September 30, 2009 obligation, $199 million was related to unasserted claims while $42 million was related to asserted claims. At September 30, 2009, $17 million was included in current liabilities. The recorded liability was not discounted. In addition, defense and processing costs, which are recorded on an as-reported basis, were not included in the recorded liability. The Company is primarily self-insured for asbestos-related claims.
          The following table summarizes information regarding the number of asserted asbestos claims filed against BNSF:
                                 
   
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Claims unresolved at beginning of period
    1,750       1,800       1,833       1,781  
Claims filed
    89       143       236       415  
Claims settled, dismissed or otherwise resolved
    (96 )     (83 )     (326 )     (336 )
 
                       
Claims unresolved at September 30,
    1,743       1,860       1,743       1,860  
 
                       
          Based on BNSF’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 specific data that was the basis for the study. BNSF projects that approximately 55, 75 and 95 percent of the future unasserted asbestos claims will be filed within the next 10, 15 and 25 years, respectively.
          Because of the uncertainty surrounding the factors used in the study, it is reasonably possible that future costs to settle asbestos claims may range from approximately $217 million to $262 million. However, BNSF believes that the $241 million recorded is the best estimate of the Company’s future obligation for the settlement of asbestos claims.
          The amounts recorded by BNSF 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 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 Personal Injury
          BNSF 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 allegedly result from prolonged repeated events or exposure. Such claims are estimated on an as-reported basis because the Company cannot estimate the range of reasonably possible loss due to other non-work related contributing causes of such injuries and the fact that continued exposure is required for the potential injury to manifest itself as a claim. BNSF has not experienced any significant adverse trends related to these types of claims in recent years.
          BNSF 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.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          The following table summarizes the activity in the Company’s accrued obligations for other personal injury matters (in millions):
                                 
   
    Three Months Ended       Nine Months Ended
    September 30,     September 30,  
    2009     2008     2009     2008  
Beginning balance
  $ 436     $ 474     $ 442     $ 439  
Accruals
    22       34       76       136  
Payments
    (28     (37     (88     (104
 
                       
Ending balance at September 30,
  $ 430     $ 471     $ 430     $ 471  
 
                       
          At September 30, 2009, $153 million was included in current liabilities. BNSF’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:
                                 
   
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Claims unresolved at beginning of period
    3,155       3,941       3,349       3,322  
Claims filed
    1,175       994       2,632       3,441  
Claims settled, dismissed or otherwise resolved
    (834     (861     (2,485     (2,689
 
                       
Claims unresolved at September 30,
    3,496       4,074       3,496       4,074  
 
                       
          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 $375 million to $530 million. However, BNSF believes that the $430 million recorded is the best estimate of the Company’s future obligation for the settlement of other personal injury claims.
          The amounts recorded by BNSF 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 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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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
     BNSF Insurance Company
          The Company has a consolidated, wholly-owned subsidiary, Burlington Northern Santa Fe Insurance Company, Ltd. (BNSF IC) that provides insurance coverage for certain risks incurred after April 1, 1998, FELA claims, railroad protective and force account insurance claims and certain excess general liability coverage incurred after January 1, 2002, and certain other claims which are subject to reinsurance. Beginning in 2004, BNSF IC entered into annual reinsurance treaty agreements with several other companies. The treaty agreements insure workers compensation, general liability, auto liability and FELA risk. In accordance with the agreements, BNSF IC cedes a portion of its FELA exposure through the treaty and assumes a proportionate share of the entire risk. Each year BNSF IC reviews the objectives and performance of the treaty to determine its continued participation in the treaty. The treaty agreements provide for certain protections against the risk of treaty participants’ non-performance. On an on-going basis, BNSF and/or the treaty manager reviews the credit-worthiness of each of the participants, and BNSF does not believe its exposure to treaty participants’ non-performance is material at this time. BNSF IC typically invests in third-party commercial paper, time deposits and money market accounts as well as in commercial paper issued by BNSF. At September 30, 2009, there was $484 million related to these third-party investments, which were classified as cash and cash equivalents on the Company’s Consolidated Balance Sheet, as compared with approximately $425 million at December 31, 2008.
Environmental
          The Company’s operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF’s operating procedures include practices to protect the environment from the risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF’s land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental 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 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 may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF 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’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 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 into the estimates experience gained from cleanup efforts at other similar sites.
          On a quarterly basis, BNSF 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.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          During the third quarters of 2009 and 2008, the Company analyzed recent data and trends to ensure the assumptions used by BNSF to estimate its future environmental liability were reasonable. As a result of this study, in the third quarters of 2009 and 2008, management recorded additional expense of approximately $25 million and $13 million as of the respective June 30 measurement dates. The Company plans to update its study again in the third quarter of 2010.
          Annual studies do not include (i) contaminated sites of which the Company is not aware; (ii) additional amounts for third-party tort claims, which arise out of contaminants allegedly migrating from BNSF property, due to a limited number of sites; or (iii) natural resource damage claims. BNSF continues to estimate third-party tort claims on a site by site basis when the liability for such claims is probable and reasonably estimable. BNSF’s recorded liability for third-party tort claims as of September 30, 2009, was approximately $14 million.
          BNSF is involved in a number of administrative and judicial proceedings and other mandatory cleanup efforts for 316 sites, including 19 Superfund sites, at which it is participating in the study or cleanup, or both, of alleged environmental contamination.
          The following table summarizes the activity in the Company’s accrued obligations for environmental matters (in millions):
                                 
   
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Beginning balance
  $ 529     $ 545     $ 546     $ 380  
Accruals
    32       26       60       223  
Payments
    (24     (28     (69     (60
 
                       
Ending balance at September 30,
  $ 537     $ 543     $ 537     $ 543  
 
                       
          At September 30, 2009, $75 million was included in current liabilities.
          In the second quarter of 2008, the Company completed an analysis of its Montana sites to determine its legal exposure related to the potential effect of a Montana Supreme Court decision. The decision, which did not involve BNSF, held that restoration damages (damages equating to clean-up costs which are intended to return property to its original condition) may be awarded under certain circumstances even where such damages may exceed the property’s actual value. The legal situation in Montana, the increase in the number of claims against BNSF and others resulting from this decision, and the completion of the analysis caused BNSF to record additional pre-tax environmental expenses of $175 million, or $0.31 per diluted share in the second quarter of 2008 for environmental liabilities primarily related to the effect of the aforementioned Montana Supreme Court decision on certain of BNSF’s Montana sites.
          BNSF’s environmental liabilities are not discounted. BNSF anticipates that the majority of the accrued costs at September 30, 2009, will be paid over the next ten years, and no individual site is considered to be material.
          The following table summarizes the environmental sites:
                                 
   
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
BNSF Sites   2009     2008     2009     2008  
Number of sites at beginning of period
    318       350       336       346  
Sites added during the period
          4       9       16  
Sites closed during the period
    (2     (14     (29     (22
 
                       
Number of sites at September 30,
    316       340       316       340  
 
                       

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          Liabilities recorded for environmental costs represent BNSF’s best estimate of its probable future obligation for the remediation and settlement of these sites and include both asserted and unasserted claims. Although recorded liabilities include BNSF’s best estimate of all probable costs, without reduction for anticipated recoveries from third parties, BNSF’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 $390 million to $850 million. However, BNSF believes that the $537 million recorded at September 30, 2009, 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 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 and its subsidiaries are also parties to a number of other legal actions and claims, 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. Although 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 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.
     Coal Rate Case Decision
          On February 17, 2009, the United States Surface Transportation Board (STB) issued a new decision in a rate dispute between Western Fuels Association, Inc. and Basin Electric Power Cooperative, Inc. (collectively, WFA) and BNSF Railway Company (BNSF Railway). (Western Fuels Association, Inc. and Basin Electric Power Cooperative v. BNSF Railway Company, STB Docket No. 42088). The dispute relates to the reasonableness of rates BNSF Railway charges to WFA for the transportation of approximately 8 million tons of coal a year from Powder River Basin mines in Wyoming to the Laramie River Station Plant at Moba Junction, Wyoming. The STB previously ruled in this matter in 2007 that the challenged rates were not shown unreasonable. During the pendency of the case, the STB issued new guidelines for reviewing the reasonableness of rates in cases such as this and then permitted WFA to submit new evidence. In its new 2009 decision, the STB found that these same challenged rates were not commercially reasonable. The STB ordered BNSF Railway to reimburse WFA for amounts previously collected above the new levels prescribed for prior periods. The STB also prescribed maximum rates through 2024 at levels substantially below the rates previously set by BNSF Railway. In compliance with the STB’s decision, BNSF Railway published new rates to the Laramie River Station effective March 20, 2009. WFA challenged BNSF Railway’s methodology for implementing those rates before the STB and on July 27, 2009, the STB issued a decision that largely adopted the methodology advocated for by BNSF Railway. The final amount of approximately $120 million in reparations, which includes interest, was submitted by WFA to the STB with BNSF Railway’s concurrence. The STB approved the final amount of reparations on October 22, 2009, with the Company to pay the reparations within 30 days. On March 4, 2009, BNSF Railway filed a petition for judicial review of the 2009 decision of the STB to the United States Court of Appeals for the District of Columbia Circuit (Western Fuels Association, Inc. and Basin Electric Power Cooperative v. Surface Transportation Board and United States of America, Consolidated Docket Nos. 08-1167 and 09-1092), and briefing is underway.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
          In accordance with the final amount of reparations, during the third quarter of 2009 BNSF recorded an adjustment to amounts previously accrued in the first quarter of 2009, resulting in a gain of $31 million, or $0.06 per diluted share, of which $30 million and $1 million were recorded as an increase to freight revenues and a reduction to interest expense, respectively. As such, the net impact in the first nine months of 2009 resulting from the STB’s decision was a loss of $74 million, or $0.13 per diluted share, in excess of amounts previously accrued. Of the total loss, $66 million and $8 million were recorded as a reduction to freight revenues and an increase to interest expense, respectively.
6.     Employee Separation Costs
          Employee separation costs activity was as follows (in millions):
                 
   
Nine Months Ended September 30,   2009     2008  
Beginning balance at January 1,
  $ 79     $ 91  
Accruals
    12       3  
Payments
    (10     (11
 
           
Ending balance at September 30,
  $ 81     $ 83  
 
           
          Employee separation liabilities of $81 million were included in the Consolidated Balance Sheet at September 30, 2009, and principally represent the following: (i) $79 million for deferred benefits payable upon separation or retirement to certain active conductors, trainmen and locomotive engineers; (ii) less than $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) $2 million for certain non-union employee severance costs. Employee separation expenses are recorded in materials and other in the Consolidated Statements of Income. At September 30, 2009, $26 million of the remaining liabilities was 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. 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 2009 and 2020. As of September 30, 2009, the Company had updated its estimate and recorded an additional liability of $12 million related to deferred benefits. The remaining costs for (ii) above are expected to be paid out between 2009 and approximately 2011, and the costs for (iii) above are expected be paid out between 2009 and 2021 based on deferral elections made by the affected employees.
7.     Employment Benefit Plans
          Components of the net cost were as follows (in millions):
                                 
   
    Pension Benefits  
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
Net Cost   2009     2008     2009     2008  
Service cost
  $ 7     $ 7     $ 21     $ 19  
Interest cost
    25       25       76       76  
Expected return on plan assets
    (27     (28     (80     (84
Amortization of net loss
    7       4       19       12  
 
                       
Net cost recognized
  $ 12     $ 8     $ 36     $ 23  
 
                       

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
                                 
   
    Retiree Health and Welfare Benefits  
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
Net Cost   2009     2008     2009     2008  
Service cost
  $ 1     $ 1     $ 2     $ 2  
Interest cost
    4       4       11       13  
Amortization of net loss
          1       1       3  
Amortization of prior service credit
    (1     (1     (4     (5
 
                       
Net cost recognized
  $ 4     $ 5     $ 10     $ 13  
                         
          In the second quarter of 2009, the Company made a voluntary contribution of $33 million to BNSF’s qualified pension plan. The Company is not required to make any additional contributions to BNSF’s qualified pension plan in 2009.
8.     Earnings Per Share
          Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on basic earnings per share adjusted for the effect of potential common shares outstanding that were dilutive during the period, arising from employee stock awards and incremental shares calculated using the treasury stock method.
          Weighted average stock options totaling 4.4 million and 5.1 million for the three and nine months ended September 30, 2009, respectively, and 1.8 million and 1.6 million for the three and nine months ended September 30, 2008, respectively, were not included in the computation of diluted earnings per share because the options’ exercise price exceeded the average market price of the Company’s stock for those periods.
          The Company adopted authoritative accounting guidance which requires non-vested shares that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be considered participating securities, and therefore be included in computing earnings per share using the two-class method. The Company has retrospectively applied the provisions to the financial information included herein, which resulted in a reduction in earnings per diluted share of $0.01 and $0.02 for the three months and nine months ended in September 30, 2008, respectively.
          The following table is a reconciliation of net income available to common stockholders used in the basic and diluted EPS computations for the three months and nine months ended September 30, 2009 and 2008 (in millions, except per share amounts):
                                 
   
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
 
Income Statement:
                               
Net income
$   488   $   695   $   1,185   $   1,500  
Net income allocated to participating securities
    (2     (3     (4     (6
 
                     
Net income available to common stockholders
$   486   $   692   $   1,181   $   1,494  
 
                       
 
                               
Average Shares:
                               
Basic
    340.2       343.5       339.8       344.9  
Diluted
    342.7       347.2       342.2       349.2  
 
                       
Earnings Per Share:
                               
Basic
$   1.43   $   2.01   $   3.48   $   4.33  
Diluted
$   1.42   $   1.99   $   3.45   $   4.28  
   

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
9.     Comprehensive Income
          Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income, a component of Stockholders’ Equity within the Consolidated Balance Sheets, rather than net income on the Consolidated Statements of Income. Under existing accounting standards, other comprehensive income may include, among other things, unrecognized gains and losses and prior service credit related to pension and other postretirement benefit plans and accounting for derivative financial instruments, which qualify for cash flow hedge accounting.
          The following table provides a reconciliation of net income reported in the Consolidated Statements of Income to total comprehensive income (in millions):
                                 
      Three Months Ended     Nine Months Ended  
    September 30,   September 30,  
    2009     2008     2009     2008  
             
Net income
  $ 488     $ 695     $ 1,185     $ 1,500  
Other comprehensive income:
                               
Change in unrecognized prior service credit and actuarial losses, net of tax (see Note 7)
    3       2       9       6  
Change in fuel/interest hedge mark-to-market and other items, net of tax (see Note 2)
    9       (85 )     249       (37 )
Recognized loss on derivative instruments-discontinued hedges, net of tax (see Note 2)
                27        
Change in unrealized loss on securities held by equity method investees, net of tax
    1       (1 )     1       (1 )
 
                       
Total comprehensive income
  $ 501     $ 611     $ 1,471     $ 1,468  
 
                       
          The following table provides the components of accumulated other comprehensive loss (in millions):
                 
    September 30,     December 31,  
    2009     2008  
Unrecognized prior service credit and actuarial losses, net of tax (see Note 7)
  $ (514 )   $ (523 )
Fuel/interest hedge mark-to-market and other items, net of tax (see Note 2)
    (68 )     (344 )
Unrealized loss on securities held by equity method investees, net of tax
    (6 )     (7 )
 
           
Total Accumulated other comprehensive loss
  $ (588 )   $ (874 )
 
           

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)
10.    Accounting Pronouncements
          In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140. SFAS 166 limits the circumstances in which financial assets can be derecognized and requires enhanced disclosures regarding transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. SFAS No. 166 also eliminates the concept of a qualifying special-purpose entity (QSPE), which will require companies to evaluate former QSPEs for consolidation.
          In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends existing guidance used to determine whether or not a company is required to consolidate a variable interest entity (VIE) and requires enhanced disclosures. SFAS No. 167 eliminates quantitative-based assessments and will require companies to perform ongoing qualitative assessments to determine whether or not the VIE should be consolidated.
          Both SFAS 166 and SFAS 167 are effective for the Company on January 1, 2010.
          As discussed in Note 3, the Company’s A/R sales program involves a master trust that issues an undivided interest in receivables to investors. The A/R sales master trust is not currently consolidated in the Company’s financial statements and the undivided interest in receivables that have been sold to investors is derecognized. These new pronouncements will require the Company to consolidate the A/R sales master trust and to no longer derecognize the undivided interest sold to investors effective January 1, 2010. As a result, the Company’s Consolidated Balance Sheets will reflect an increase in accounts receivable, net and an increase in current liabilities for the amount of undivided interest sold to investors and any related cash flow impacts will be included in Financing Activities rather than Operating Activities in the Consolidated Statements of Cash Flows. There was no outstanding interest held by investors under the A/R sales program at September 30, 2009. Outstanding undivided interests held by investors under the A/R sales program was $50 million at December 31, 2008.
11.    Report of Independent Registered Public Accounting Firm
          PricewaterhouseCoopers LLP’s review report is included in this quarterly report; however, PricewaterhouseCoopers LLP does not express an opinion on the unaudited financial information. Accordingly, such report is not a “report” or “part of a registration statement” within the meaning of Sections 7 and 11 of the Securities Act of 1933 and PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of such Act with respect to the review report.

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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Burlington Northern Santa Fe Corporation:
We have reviewed the accompanying consolidated balance sheet of Burlington Northern Santa Fe Corporation and its subsidiaries (“the Company”) as of September 30, 2009, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2009 and 2008, consolidated statements of cash flows for the nine-month periods ended September 30, 2009 and 2008 and consolidated statement of changes in stockholders’ equity for the nine-month period ended September 30, 2009. These interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2008, and the related consolidated statements of income, of changes in stockholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 12, 2009 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2008, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
October 23, 2009

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
          Management’s discussion and analysis relates to the financial condition and results of operations of Burlington Northern Santa Fe Corporation and its majority-owned subsidiaries (collectively BNSF, Registrant or Company). The principal operating subsidiary of BNSF is the BNSF Railway Company (BNSF Railway) through which BNSF derives substantially all of its revenues. All earnings per share information is stated on a diluted basis.
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, Coal, Industrial Products 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 Web site at www.bnsf.com/investors.
Executive Summary
Overview:
Ø  
Quarterly earnings were $1.42 per diluted share, which included a $0.06 per share impact related to a favorable coal rate case adjustment. Third-quarter 2008 earnings were $1.99 per diluted share.
 
Ø  
Quarterly freight revenues of $3.49 billion were $1.28 billion, or 27 percent lower than third-quarter 2008 revenues of $4.77 billion, and include a $30 million favorable coal rate case accrual adjustment. The 27-percent decrease in revenues included a decrease in fuel surcharges of $725 million. The remaining variance was due to 17 percent lower unit volumes as a result of the economic downturn, partially offset by improved yields.
 
Ø  
Operating expenses of $2.69 billion for the third quarter of 2009 were $1.01 billion, or 27 percent lower than third-quarter 2008 operating expenses of $3.70 billion. About half of the reduction in operating expenses was due to lower fuel prices, with the remainder due to strong cost controls and decreased unit volumes.

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Results of Operations
    Three Months Ended September 30, 2009, Compared with Three Months Ended September 30, 2008
        Revenues Summary
          The following table presents BNSF’s revenue information by business group for the three months ended September 30, 2009 and 2008.
                                                 
    Revenues     Cars / Units     Average Revenue  
    (in millions)     (in thousands)     Per Car / Unit  
    2009     2008     2009     2008     2009     2008  
 
                                               
  Consumer Products
  $ 1,087     $ 1,686       978       1,254     $ 1,111     $ 1,344  
  Coal
    940       1,047       604       645       1,556       1,623  
  Industrial Products
    747       1,124       308       420       2,425       2,676  
  Agricultural Products
    715       909       247       271       2,895       3,354  
 
                                   
  Total Freight Revenues
    3,489       4,766       2,137       2,590     $ 1,633     $ 1,840  
 
                                       
  Other Revenues
    106       140                                  
 
                                           
  Total Operating Revenues
  $ 3,595     $ 4,906                                  
 
                                           
     Fuel Surcharges
          Freight revenues include both revenue for transportation services and fuel surcharges. BNSF’s fuel surcharge program is intended to recover its incremental fuel costs when fuel prices exceed a threshold fuel price. Fuel surcharges are calculated differently depending on the type of commodity transported. In certain commodities, fuel surcharge is calculated using a fuel price from a time period that can be up to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel surcharge may significantly differ.
          The following table presents fuel surcharge and fuel expense information for the three months ended September 30, 2009 and 2008 (in millions).
                 
    2009     2008  
 
               
  Total fuel expense a
  $ 606     $ 1,349  
  BNSF fuel surcharges
  $ 312     $ 1,037  
   
a Total fuel expense includes locomotive and non-locomotive fuel as well as gains and losses from fuel hedges, which do not impact the fuel surcharge program.
     Revenues
          Freight revenues for the third quarter of 2009 were $3,489 million, 27 percent lower than the same 2008 period, on a 17-percent decline in unit volumes resulting from the economic downturn. Average revenue per car/unit was 11 percent lower in the third quarter of 2009 than the third quarter of 2008 primarily due to a decrease in fuel surcharges.

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       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 $1,087 million for the third quarter of 2009 were $599 million, or 36 percent less than the third quarter of 2008. This reflects lower international intermodal, domestic intermodal and automotive volumes due to the economy and lower average revenue per unit due primarily to decreased fuel surcharges.
 
(PIE CHART)
       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 $940 million for the third quarter of 2009 declined $107 million, or 10 percent, compared with the same 2008 period due to decreased fuel surcharges and lower unit volumes driven by soft demand due to economic conditions and mild summer weather, partially offset by a $30 million favorable adjustment to amounts previously accrued related to an unfavorable coal rate case decision in the first quarter of 2009 (see Note 5 to the Consolidated Financial Statements under the heading “Coal Rate Case Decision”) and improved yields.
       Industrial Products
     
          The Industrial Products’ freight business consists of five business areas: construction products, building products, petroleum products, chemicals & plastic products and food & beverages.

          Industrial Products revenues of $747 million for the third quarter of 2009 were $377 million, or 34 percent less than the third quarter of 2008 due to lower unit volumes, driven by lower demand for construction and building products, and decreased fuel surcharges, partially offset by improved yields.
 
(PIE CHART)
 
       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 $715 million for the third quarter of 2009 decreased $194 million, or 21 percent, compared with the same 2008 period. This decrease was due mainly to lower fuel surcharges, as well as lower unit volumes predominately due to reduced domestic loadings and international grain shipments.
 
(PIE CHART)
       Other Revenues
          Other revenues decreased $34 million, or 24 percent, to $106 million for the third quarter of 2009. The decline was primarily due to a decrease in revenues from BNSF Logistics, which is a wholly-owned, third-party logistics company, and a decrease in charges for storage costs.

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     Expenses
          Total operating expenses for the third quarter of 2009 were $2,694 million, a decrease of $1,005 million, or 27 percent, from the same period in 2008.
       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 $872 million in the third quarter of 2009 were $141 million, or 14 percent lower than the same prior year period. This reduction was primarily the result of decreased volumes, effective cost controls, as well as lower incentive compensation costs, which cover all non-union and about one quarter of union employees. The average number of employees decreased 9 percent compared to the third quarter of 2008.
       Fuel
          Fuel expense is driven by market price, the level of locomotive consumption of diesel fuel and the effects of hedging activities. Substantially all fuel expense consists of fuel used in locomotives for transportation services. Fuel expense also includes non-locomotive fuel-related costs such as fuel used in vehicles (maintenance of way and other vehicles/equipment), fuel used in refrigerated cars, intermodal facilities’ fuel, and fuel-based products used in servicing locomotives.
          Fuel expenses of $606 million for the third quarter of 2009 were $743 million, or 55 percent lower than the third quarter of 2008. The decrease in fuel expense was primarily due to a decrease in the average all-in cost per gallon of locomotive diesel fuel. The average all-in cost per gallon of locomotive diesel fuel decreased by $1.73 to $1.99, resulting in a $500 million decrease in expense. The decrease in the average all-in cost reflected a decrease in the average purchase price per gallon of $1.88, or a $546 million decrease in locomotive fuel expense, offset by an increase in the hedge loss of 15 cents per gallon, or $46 million (third quarter 2009 loss of $35 million less third quarter 2008 benefit of $11 million). Locomotive fuel consumption in the third quarter of 2009 decreased by 59 million gallons to 290 million gallons, when compared with consumption in the same 2008 period, resulting in a decrease in expense of $221 million. The remainder of the decrease was primarily due to lower non-locomotive fuel prices.
       Purchased services
          Purchased services expense includes the following: ramping (lifting of containers onto and off of rail 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. The expenses are driven by the rates established in the related contracts and the volume of services required.
          Purchased service expenses of $453 million for the third quarter of 2009 were $84 million, or 16 percent lower than the third quarter of 2008. Variable expenses on lower volumes led to decreased costs in ramping, drayage, locomotive maintenance, car repairs and other volume-related costs.
       Depreciation and amortization
          Depreciation and amortization expenses for the period are determined by using the group method of depreciation, which applies 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 expenses. The full effect of inflation is not reflected in operating expenses because depreciation is based on historical cost.
          Depreciation and amortization expenses of $386 million for the third quarter of 2009 were $37 million, or 11 percent higher than the same period in 2008. This increase in depreciation expense was primarily due to ongoing capital expenditures.

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       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 $194 million for the third quarter of 2009 were $35 million, or 15 percent lower than the third quarter of 2008. Improved car velocity, lower volumes and the return of leased equipment all contributed to the decrease.
       Materials and other
          Material expenses consist mainly of the costs involved to purchase mechanical and engineering materials, in addition to other items for maintenance of property and equipment. Other expenses principally include personal injury claims, environmental remediation and derailments as well as utilities, 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 $183 million for the third quarter of 2009 were $39 million, or 18 percent lower than the third quarter of 2008 due largely to lower derailment and personal injury costs, reduced volumes and effective cost controls.
       Interest expense
          Interest expense of $127 million for the third quarter of 2009 was $5 million, or 4 percent higher than the third quarter of 2008. This increase was primarily attributable to a higher average debt balance, partially offset by a decrease to interest expense of $1 million related to a favorable coal rate case adjustment (see Note 5 to the Consolidated Financial Statements under the heading “Coal Rate Case Decision”) in the third quarter of 2009. Favorable tax settlements impacted interest expense for both of the third quarters ended September 30, 2009 and 2008.
       Income taxes
          The effective tax rate for the three months ended September 30, 2009, was 36.9 percent compared with 35.6 percent for the same prior year period. Favorable tax settlements impacted both of the third quarters ended September 30, 2009 and 2008.
   Nine Months Ended September 30, 2009, Compared with Nine Months Ended September 30, 2008
     Revenues Summary
          The following table presents BNSF’s revenue information by business group for the nine months ended September 30, 2009 and 2008.
                                                 
    Revenues     Cars / Units     Average Revenue  
    (in millions)     (in thousands)     Per Car / Unit  
    2009     2008     2009     2008     2009     2008  
 
  Consumer Products
  $ 3,176     $ 4,643       2,912       3,655     $ 1,091     $ 1,270  
  Coal
    2,678       2,903       1,820       1,868       1,471       1,554  
  Industrial Products
    2,152       3,109       888       1,245       2,423       2,497  
  Agricultural Products
    2,012       2,603       686       817       2,933       3,186  
 
                                   
  Total Freight Revenues
    10,018       13,258       6,306       7,585     $ 1,589     $ 1,748  
 
                                       
  Other Revenues
    317       387                                  
 
                                           
  Total Operating Revenues
  $ 10,335     $ 13,645                                  
 
                                           

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     Fuel Surcharges
          The following table presents fuel surcharge and fuel expense information for the nine months ended September 30, 2009 and 2008 (in millions).
                 
   
    2009     2008  
 
  Total fuel expense a
  $ 1,729     $ 3,685  
  BNSF fuel surcharges
  $ 859     $ 2,500  
   
a Total fuel expense includes locomotive and non-locomotive fuel as well as gains and losses from fuel hedges, which do not impact the fuel surcharge program.
     Revenues
          Freight revenues for the first nine months of 2009 were $10,018 million, 24 percent lower than the same 2008 period, on a 17-percent decline in unit volumes resulting from the economic downturn. Average revenue per car/unit was 9 percent lower in the first nine months of 2009 than the first nine months of 2008 primarily due to a decrease in fuel surcharges.
       Consumer Products
          Consumer Products revenues of $3,176 million for the first nine months of 2009 were $1,467 million, or 32 percent less than the first nine months of 2008. This reflects lower international intermodal, domestic intermodal and automotive volumes due to the economy and a reduction in average revenue per unit due primarily to lower fuel surcharges.
       Coal
          Coal revenues of $2,678 million for the first nine months of 2009 declined $225 million, or 8 percent, compared with the same 2008 period. The decline was due to decreased fuel surcharges, lower unit volumes and a $66 million loss in excess of amounts previously accrued related to the unfavorable coal rate case decision during the first quarter of 2009 (see Note 5 to the Consolidated Financial Statements under the heading “Coal Rate Case Decision.”) These declines were partially offset by improved yields from renewed contracts and a $22 million favorable coal rate case decision during the second quarter of 2009.
       Industrial Products
          Industrial Products revenues of $2,152 million for the first nine months of 2009 were $957 million, or 31 percent less than the first nine months of 2008 due to lower unit volumes, driven primarily by decreased demand for construction and building products, and lower fuel surcharges, partially offset by improved yields.
       Agricultural Products
          Agricultural Products revenues of $2,012 for the first nine months of 2009 decreased $591 million, or 23 percent. This decrease was due mainly to lower fuel surcharges, as well as lower unit volumes predominately due to reduced domestic loadings and international grain shipments, partially offset by improved yields.
       Other Revenues
          Other revenues decreased $70 million, or 18 percent, to $317 million for the first nine months of 2009. The decline was primarily due to a decrease in revenues from BNSF Logistics, which is a wholly-owned, third-party logistics company, and a decrease in charges for storage costs.

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     Expenses
          Total operating expenses for the first nine months of 2009 were $7,968 million, a decrease of $2,881 million, or 27 percent, from the same period in 2008.
       Compensation and benefits
          Compensation and benefits expenses of $2,564 million in the first nine months of 2009 were $383 million, or 13 percent lower than the same prior year period. This reduction was primarily the result of decreased volumes, effective cost controls, as well as lower incentive compensation costs, which cover all non-union and about one quarter of union employees. The average number of employees decreased 8 percent compared to the same 2008 period.
     Fuel
          Fuel expenses of $1,729 million for the first nine months of 2009 were $1,956 million, or 53 percent lower than the first nine months of 2008. The decrease in fuel expense was primarily due to a decrease in the average all-in cost per gallon of locomotive diesel fuel. The average all-in cost per gallon of locomotive diesel fuel decreased by $1.50 to $1.83, resulting in a $1,340 million decrease in expense. The decrease in the average all-in cost reflected a decrease in the average purchase price per gallon of $1.75, or a $1,569 million decrease in locomotive fuel expense, offset by an increase in the hedge loss of 25 cents per gallon, or $229 million (first nine months 2009 loss of $185 million less first nine months 2008 benefit of $44 million). Locomotive fuel consumption for the first nine months of 2009 decreased by 168 million gallons to 900 million gallons, when compared with consumption in the same 2008 period, resulting in a decrease in expense of $566 million. The remainder of the decrease was primarily due to lower non-locomotive fuel prices.
     Purchased services
          Purchased service expenses of $1,396 million for the first nine months of 2009 were $204 million, or 13 percent lower than the first nine months of 2008. Variable expenses on lower volumes led to decreased costs in ramping, drayage, car repairs and other volume related costs.
     Depreciation and amortization
          Depreciation and amortization expenses of $1,135 million for the first nine months of 2009 were $96 million, or 9 percent higher than the same period in 2008. This increase in depreciation expense was primarily due to capital expenditures and due to updated depreciation rates that went into effect in April 2008 for other roadway property, which includes items such as bridges, office buildings and facilities, telecommunication and information technology systems and machinery.
     Equipment rents
          Equipment rents expenses of $591 million for the first nine months of 2009 were $91 million, or 13 percent lower than the first nine months of 2008. Improved car velocity, lower volumes and the return of leased equipment all contributed to the decrease.
     Materials and other
          Materials and other expenses of $553 million for the first nine months of 2009 were $343 million or 38 percent lower than the first nine months of 2008 due largely to expenses in connection with environmental matters in Montana during the second quarter of 2008, lower derailment and personal injury costs, reduced volumes and effective cost controls.

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     Interest expense
          Interest expense of $462 million for the first nine months of 2009 was $66 million, or 17 percent higher than the first nine months of 2008. This increase was primarily attributable to a net $32 million loss for terminated treasury locks (see Note 2 to the Consolidated Financial Statements). The unfavorable coal rate case decision further increased interest expense by $8 million (see Note 5 to the Consolidated Financial Statements under the heading “Coal Rate Case Decision”). The remainder of the increase was primarily due to a higher average debt balance. Favorable tax settlements impacted interest expense for both of the nine month periods ended September 30, 2009 and 2008.
     Income taxes
          The effective tax rate for the nine months ended September 30, 2009, was 37.6 percent compared with 37.2 percent for the same prior year period. Favorable tax settlements impacted both of the nine month periods ended September 30, 2009 and 2008.
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
          Net cash provided by operating activities was $2,638 million for the nine months ended September 30, 2009, compared with $3,303 million for the nine months ended September 30, 2008. The decrease was primarily the result of a decrease in earnings before depreciation and amortization expense, environmental related matters in Montana during the second quarter of 2008 and changes in working capital.
     Investing Activities
          Net cash used for investing activities was $2,119 million for the nine months ended September 30, 2009, compared with $2,381 million for the nine months ended September 30, 2008. The decrease in cash used for investing activities is related to higher proceeds from the sale of equipment financed, in addition to a $96 million decrease in capital expenditures. The following table presents a breakdown of capital expenditures for the nine months ended September 30, 2009 and 2008 (in millions):
               
 
 Nine Months Ended September 30,   2009     2008
 Engineering
  $ 1,358     $ 1,220
 Mechanical
    86       116
 Other
    88       87
 
         
Total replacement capital
    1,532       1,423
Information services
    59       71
Terminal and line expansion
    78       210
 
         
Total capital expenditures excluding equipment
  $ 1,669     $ 1,704
 
         
 
 Acquisition of equipment
  $ 615     $ 676
 
          Acquisition of equipment includes the acquisition of locomotives, freight cars and other equipment, some or all of which may be sold and leased back by the Company through either an operating or capital lease. The cash received from any such sale-leaseback transaction is included in proceeds from sale of equipment financed in the Consolidated Statements of Cash Flows.

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Financing Activities
Nine Months Ended September 30, 2009
          Net cash provided by financing activities during the first nine months of 2009 was $9 million, primarily related to net debt borrowings of $352 million, proceeds from a facility financing obligation of $51 million, proceeds from stock options exercised of $26 million and excess tax benefits from equity compensation plans of $18 million, partially offset by dividend payments of $409 and common stock repurchases to satisfy tax withholding obligations for stock option exercises of $15 million.
          Aggregate debt due to mature within one year was $323 million. BNSF’s ratio of net debt to total capitalization was 42.9 percent at September 30, 2009, compared with 44.5 percent at December 31, 2008. The Company’s adjusted net debt to total capitalization was 52.4 percent at September 30, 2009, compared with 54.7 percent at December 31, 2008. 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 for 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.
          The following table presents a reconciliation of the calculation of adjusted net debt to total capitalization percentage:
                 
   
    September 30,     December 31,  
    2009     2008  
Net debt to total capitalization a
    42.9 %     44.5 %
Adjustment for long-term operating leases and other debt equivalents b
    9.1       9.7  
Adjustment for unfunded pension and retiree health and welfare liability
    1.4       1.5  
Adjustment for junior subordinated notes c
    (1.0 )     (1.0 )
 
           
Adjusted net debt to total capitalization
    52.4 %     54.7 %
 
           
a
Net debt to total capitalization is calculated as total debt (long-term debt plus long-term debt due within one year) less cash and cash equivalents divided by the sum of net debt and total stockholders’ equity.
b
Primarily represents an adjustment for the net present value of future operating lease commitments.
c
Junior subordinated notes are included in total debt on the respective Consolidated Balance Sheets; however, as they include certain equity characteristics, they have been assigned 50 percent equity credit for purposes of this calculation.
          In September 2009, BNSF issued $750 million of 4.7 percent notes due October 1, 2019. The net proceeds from the sale of the notes are being used for general corporate purposes which may include, but are not limited to, working capital, capital expenditures, repurchase of common stock pursuant to the share repurchase program, and repayment of outstanding indebtedness.
          At September 30, 2009, $750 million remained authorized by the Board of Directors to be issued through a SEC debt shelf registration statement.
          In July 2009, BNSF Railway entered into an 18-year equipment obligation totaling $75 million to finance locomotives and railcars.
          During the first nine months of 2009, BNSF entered into a 12-year capital lease to finance $368 million of locomotives and freight cars. Additionally, BNSF entered into capital leases totaling $96 million to finance maintenance of way and other vehicles and equipment with lease terms of three to seven years.
          In 2005, the Company commenced the construction of an intermodal facility that it intended to sell to a third party and subsequently lease back. As of September 30, 2009, construction of the facility was completed for a cost of approximately $160 million. All improvements have been sold to the third party and BNSF leased the facility from the third party for 20 years. This sale leaseback transaction was accounted for as a financing obligation due to continuing involvement. The outflows from the construction of the facility were classified as investing activities, and the inflows from the associated financing proceeds were classified as financing activities in the Company’s Consolidated Statements of Cash Flows.

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Nine Months Ended September 30, 2008
          Net cash used for financing activities during the first nine months of 2008 was $776 million, primarily related to common stock repurchases of $878 million, including $60 million to satisfy tax withholding obligations for stock option exercises, and dividend payments of $334 million, which were partially offset by net debt borrowings of $215 million, excess tax benefits from equity compensation plans of $90 million, proceeds from stock options exercised of $87 million and proceeds from a facility financing obligation of $50 million.
Dividends
          Common stock dividends declared for the nine months ended September 30, 2009 and 2008 were $1.20 and $1.04 per share, respectively. Dividends paid on common stock during the first nine months of 2009 and 2008 were $409 million and $334 million, respectively. On July 23, 2009, the Board declared a quarterly dividend of $0.40 per share on outstanding shares of common stock, payable October 1, 2009 to shareholders of record on September 10, 2009. On October 22, 2009, the Board declared a quarterly dividend of $0.40 per share on outstanding shares of common stock, payable January 4, 2010 to shareholders of record on December 14, 2009.
Share Repurchase Program
          BNSF did not repurchase shares related to its share repurchase program during the first nine months of 2009. Program-to-date repurchases through September 30, 2009, were 192 million shares at an average price of $41.53 per share, leaving 18 million shares available for repurchase out of the 210 million shares authorized. During the nine months ended September 30, 2009, the Company acquired shares from employees at a cost of $15 million to satisfy tax withholding obligations.
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.
          In the third quarter of 2009, BNSF took delivery of 73 locomotives under a long-term commitment. At September 30, 2009, BNSF’s remaining commitment was to acquire 595 locomotives by 2013.
          In connection with a transaction entered into in 2006, as amended, BNSF has remaining railcar purchase obligations for 837 covered hopper cars through 2010.
          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.
          In the normal course of business, the Company enters into long-term contracts 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.
Credit Agreement
          Information concerning the Company’s outstanding commercial paper balances and revolving credit agreement is incorporated by reference from Note 4 to the Consolidated Financial Statements.

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Off-Balance Sheet Arrangements
Sale of Accounts Receivable
          The accounts receivable sales program of Santa Fe Receivables Corporation, as described in Note 3 to the Consolidated Financial Statements, includes thresholds for dilution, delinquency and write-off ratios that, if exceeded, would allow the investors participating in this program, at their option, to cancel the program. These provisions include a maximum debt-to-capital test, which is the same as in BNSF’s revolving credit agreements. At September 30, 2009, BNSF Railway was in compliance with these provisions.
          The accounts receivable sales program provides efficient financing at a competitive interest rate as compared with traditional borrowing arrangements and provides diversification of funding sources. Since the funding is collateralized by BNSF receivables, the risk of exposure is only as great as the risk of default on these receivables (see Note 3 to the Consolidated Financial Statements for additional information). See Note 10 to the Consolidated Financial Statements for information about recent accounting pronouncements that will have an impact on the A/R sales program upon adoption.
Guarantees
          The Company acts as guarantor for certain debt and lease obligations of others. During the past few years, the Company has primarily utilized guarantees to allow third-party entities to obtain favorable terms to finance the construction of assets that will benefit the Company. Additionally, in the ordinary course of business, BNSF enters into agreements with third parties that include indemnification clauses. The Company does not expect performance under these guarantees or indemnities to have a material adverse effect on the Company’s liquidity in the foreseeable future (see Note 4 to the Consolidated Financial Statements for additional information).
Other Matters
Hedging Activities
          The Company uses derivatives to hedge against increases in diesel fuel prices and interest rates as well as to convert a portion of its fixed-rate long-term debt to floating-rate debt. 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 fair value or 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 fair value or cash flows. Any change in fair value resulting from ineffectiveness, as defined by authoritative accounting guidance related to derivatives and hedging, 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 stockholders’ equity and reclassified into earnings in the period during which the hedge transaction affects earnings. Cash flows related to fuel and interest rate derivatives are classified as operating activities in the Consolidated Statements of Cash Flows.
          BNSF monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. As of September 30, 2009, BNSF’s counterparties have credit ratings of A2/A or higher.
Fuel
          BNSF measures the fair value of fuel hedges from data provided by various external counterparties. The Company uses the forward commodity price for the periods hedged to value its fuel-hedge swaps and costless collars. This methodology is a market approach, which under authoritative accounting guidance related to fair value measurements utilizes Level 2 inputs as it uses market data for similar instruments in active markets. Certain of the Company’s fuel-hedge instruments are covered by an agreement which includes a provision such that the Company either receives or posts cash collateral if the fair value of the instruments exceeds a certain net asset or net liability threshold, respectively. Further information on BNSF’s fuel hedging program is incorporated by reference from Note 2 to the Consolidated Financial Statements.

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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, as well as converting a portion of its fixed-rate long-term debt to floating-rate debt. The Company uses interest rate swaps and treasury locks as part of its interest rate risk management strategy.
          BNSF’s measurement of the fair value of interest rate derivatives is based on estimates of the mid-market values for the transactions provided by the counterparties to these agreements. This methodology is a market approach, which under authoritative accounting guidance related to fair value measurements utilizes Level 2 inputs as it uses market data for similar instruments in active markets. Further information on BNSF’s interest hedging program is incorporated by reference from Note 2 to the Consolidated Financial Statements.
Employee and Labor Relations
          A significant majority of BNSF Railway’s employees are union-represented. Final agreements were reached in the most recent bargaining round covering 100 percent of BNSF’s unionized workforce. These agreements resolved all wage, work rule and benefit issues through December 31, 2009, and will remain in effect until new agreements are reached in the next bargaining round or the Railway Labor Act’s procedures (which include mediation, cooling-off periods and the possibility of U.S. Presidential intervention) are exhausted. The next bargaining round will begin November 1, 2009.
Accounting Pronouncements
          See Note 10 to the Consolidated Financial Statements for information about recent accounting pronouncements that will have an impact on BNSF.
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 revenues and earnings per share;
 
   
Expectations as to the effect on the Company’s financial condition of claims, litigation, environmental and personal injury costs, commitments, contingent liabilities, U.S. Surface Transportation Board and other governmental and regulatory investigations and proceedings, and changes in the economic laws and regulations applicable to the rail industry;
 
   
Plans and goals for future operational improvements and capital commitments; and
 
   
Current or future volatility in the credit market and future market conditions or economic performance.
          Forward-looking statements involve a number of risks and uncertainties, and actual performance or results may differ materially. For a discussion of material risks and uncertainties that the Company faces, see the discussion in the Annual Report on Form 10-K titled “Risk Factors.” Important factors that could cause actual results to differ materially include, but are not limited to, the following:

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              Economic and industry conditions: material adverse changes in economic or industry conditions, both in the United States and globally, volatility in the capital or credit markets including changes affecting the timely availability and cost of capital, changes in customer demand, effects of adverse economic conditions affecting shippers or BNSF’s supplier base and 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 or governmental tariffs or subsidies that could affect the demand for grain, competition and consolidation within the transportation industry, the extent to which BNSF 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, increased customer bankruptcies, closures or slowdowns, and changes in crew availability, labor costs and labor difficulties, including stoppages affecting either BNSF’s operations or customers’ abilities to deliver goods to BNSF 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, other more general legislative actions, developments in environmental investigations or proceedings with respect to rail operations or current or past ownership or control of real property or properties owned by others impacted by BNSF Railway operations, 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; the availability of adequate insurance to cover the risks associated with operations; 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 in response to changes in demand and other factors, the effectiveness of steps taken to maintain and improve operations and velocity and network fluidity, operational and other difficulties in implementing positive train control technology, restrictions on development and expansion plans due to environmental concerns, constraints due to the nation’s aging infrastructure, disruptions to BNSF’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 or other links in the transportation chain.
          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 Web site at www.bnsf.com, and which investors are advised to consult.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
          In the ordinary course of business, BNSF 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):
                 
 
Three Months Ended September 30,
  2009     2008  
Fuel hedge (loss) benefit (including ineffective portion of unexpired hedges)
  $ (35 )   $ 11  
Interest rate hedge benefit
    5       4  
 
Total hedge and derivative (loss) benefit
    (30 )     15  
Tax effect
    11       (6 )
 
Hedge and derivative (loss) benefit, net of tax
  $ (19 )   $ 9  
 
           
 
 
Nine Months Ended September 30,
  2009     2008  
Fuel hedge (loss) benefit (including ineffective portion of unexpired hedges)
  $ (185 )   $ 44  
Interest rate hedge benefit
    15       8  
Interest rate derivative loss
    (32 )      
 
Total hedge and derivative (loss) benefit
    (202 )     52  
Tax effect
    77       (20 )
 
Hedge and derivative (loss) benefit, net of tax
  $ (125 )   $ 32  
 
           
          The Company’s fuel-hedge loss was due to decreases in average fuel prices subsequent to the initiation of various hedges and through their termination. The interest rate hedge benefit was the result of lower interest rates. The interest rate derivative loss was related to terminated treasury locks (see Note 2 to the Consolidated Financial Statements). The information presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and Notes 2 and 4 to the Consolidated Financial Statements describes significant aspects of BNSF’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 engages in hedging activities to partially mitigate the risk of fluctuations in the price of its diesel fuel purchases. Existing hedge transactions as of September 30, 2009, are based on the front month settlement prices of New York Mercantile Exchange (NYMEX) #2 heating oil (HO), West Texas Intermediate (WTI) crude oil, or the HO refining spread (HO-WTI), which is the difference between HO and WTI. A WTI hedge combined with a HO-WTI hedge will result in the equivalent of a HO hedge. For swaps, BNSF 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. For costless collars, if the average hedge commodity price for a specified determination period is greater than the cap price, BNSF receives the difference for a specified number of gallons. If the average commodity price is less than the floor price, BNSF pays the difference for a specified number of gallons. If the commodity price is between the floor price and the cap price, BNSF neither makes nor receives a payment. Hedge transactions are generally settled with the counterparty in cash. Based on historical information, BNSF believes there is a significant correlation between the market prices for diesel fuel, HO and WTI.
          At September 30, 2009, BNSF had recorded a net fuel-hedging liability of $116 million for fuel hedges covering 2009 through 2012.

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          The following table is an estimate of the impact to earnings that could result from hypothetical price changes during the twelve-month period ending September 30, 2010, and the balance sheet impact from the hypothetical price changes on all open hedges, both based on the Company’s hedge position at September 30, 2009:
         
 
Sensitivity Analysis
 
Hedged commodity   Fuel-hedge annual pre-tax   Balance Sheet impact of change
price change   earnings impact   in fuel-hedge fair value
10-percent increase
  $45 million increase   $114 million increase
10-percent decrease   $52 million decrease   $113 million decrease
 
          Based on locomotive fuel consumption during the twelve-month period ending September 30, 2009, of 1,247 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 $203 million increase or decrease, respectively, in fuel expense (pre-tax) on an annual basis. Additionally, the Company uses fuel surcharges, which it believes substantially mitigates the risk of fuel price volatility.
          At September 30, 2009, BNSF maintained fuel inventories for use in normal operations, which were not material to BNSF’s overall financial position and, therefore, represent no significant market exposure. The frequency of BNSF’s fuel inventory turnover also reduces market exposure, should fuel inventories become material to BNSF’s overall financial position. Further information on fuel hedges is incorporated by reference from Note 2 to the Consolidated Financial Statements.
Interest Rate Sensitivity
          From time to time, BNSF 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, as well as to convert a portion of its fixed-rate long-term debt to floating-rate debt. These interest rate hedges are accounted for as cash flow or fair value hedges. BNSF’s measurement of the fair value of these hedges is based on estimates of the mid-market values for the transactions provided by the counterparties to these agreements.
          At September 30, 2009, the fair value of BNSF’s debt, excluding capital leases and a net fair value interest rate hedge benefit of $41 million, was $9,578 million.
          The following table is an estimate of the impact to earnings and the fair value of the total debt, excluding capital leases, and interest rate hedges that could result from hypothetical interest rate changes during the twelve-month period ending September 30, 2010, based on debt levels and outstanding hedges as of September 30, 2009:
             
 
Sensitivity Analysis
 
    Floating rate debt -    
Hypothetical change   Annual pre-tax earnings   Change in fair value
in interest rates   impact   Total debta   Interest rate hedges
 
1-percent decrease   $7 million increase   $869 million increase   $35 million increase
1-percent increase   $7 million decrease   $745 million decrease   $32 million decrease
 
a Excludes the impact of interest rate hedges.
          Further information on interest rate hedges is incorporated by reference from Note 2 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 4 to the Consolidated Financial Statements.

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Item 4. Controls and Procedures.
          Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, BNSF’s principal executive officer and principal financial officer have concluded that BNSF’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 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’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. As discussed below, management effected changes in BNSF’s internal control over financial reporting that occurred during BNSF’s third fiscal quarter that have materially affected, or are reasonably likely to materially affect, BNSF’s internal control over financial reporting. There were no other changes in BNSF’s internal control over financial reporting that occurred during BNSF’s third fiscal quarter that have materially affected, or are reasonably likely to materially affect, BNSF’s internal control over financial reporting.
          In July 2009, the Company implemented a new Enterprise Resource Planning (ERP) system. The implementation of this new ERP system involved changes to the Company’s procedures for internal control over financial reporting. The Company followed a system implementation life cycle process that required pre-implementation planning, design and testing. The Company conducted post-implementation monitoring, testing and process modifications to ensure the effectiveness of internal control over financial reporting. The Company does not believe that this ERP system implementation had an adverse effect on the Company’s internal control over financial reporting.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
          Reference is made to the Company’s Form 10-Q for the quarter ending March 31, 2009, with respect to the February 17, 2009 decision of the United States Surface Transportation Board (STB) in Western Fuels Association, Inc. and Basin Electric Power Cooperative v. BNSF Railway Company, STB Docket No. 42088), and BNSF Railway Company’s appeal of this STB decision to the United States Court of Appeals for the District of Columbia Circuit (Western Fuels Association, Inc. and Basin Electric Power Cooperative v. Surface Transportation Board and United States of America, Consolidated Docket Nos. 08-1167 and 09-1092). For information relating to these matters, see Note 5, Commitments and Contingencies under Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Common Stock Repurchases
          The following table presents repurchases by the Company of its common stock for each of the three months for the quarter ended September 30, 2009 (shares in thousands):
                                 
 
Issuer Purchases of Equity Securities
                    Total Number of   Maximum Number
                    Shares Purchased   of Shares that May
    Total Number   Average   as Part of Publicly   Yet Be Purchased
    of Shares   Price Paid   Announced Plans   Under the Plans or
Period   Purchaseda   Per Share   or Programsb   Programsb
July 1 – 31
      34   $   77.67             17,816
August 1 – 31
      3   $   83.41             17,816
September 1 – 30
        $               17,816
 
               
Total
      37   $   78.17              
 
                   
a   Total number of shares purchased includes 37 thousand shares where employees delivered already owned shares or used an attestation procedure to satisfy the exercise price of stock options or the withholding of tax payments. Total number of shares purchased does not include 36 thousand shares acquired from employees to satisfy tax withholding obligations that arose on the vesting of restricted stock or the exercise of stock options.
 
b   On July 17, 1997, the Board initially authorized and the Company announced the repurchase of up to 30 million shares of the Company’s common stock from time to time in the open market. On December 9, 1999, April 20, 2000, September 21, 2000, January 16, 2003, December 8, 2005 and February 14, 2007, the Board authorized and the Company announced extensions of the BNSF share repurchase program, adding 30 million shares at each date for a total of 210 million shares authorized. The share repurchase program does not have an expiration date.
Item 6. Exhibits.
          See Index to Exhibits on page E-1 for a description of the exhibits filed as part of this report.

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SIGNATURES
          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  BURLINGTON NORTHERN SANTA FE CORPORATION
  (Registrant)    
       
       
       
  By:   /s/ Thomas N. Hund    
    Thomas N. Hund
Executive Vice President and Chief Financial Officer
(On behalf of the Registrant and
as principal financial officer)
 
 
Dated: October 23, 2009

S-1


Table of Contents

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
Exhibit Index
                             
            Incorporated by Reference
            (if applicable)
        Exhibit Number and Description   Form   File Date   File No.   Exhibit
 
  3.1    
Amended and Restated Certificate of Incorporation of Burlington Northern Santa Fe Corporation, dated December 21, 1994, as amended.
  10-Q   8/13/1998   001-11535     3.1  
       
 
                   
  3.2    
By-Laws of Burlington Northern Santa Fe Corporation, as amended and restated, dated December 11, 2008.
  8-K   12/12/2008   001-11535     3.2  
       
 
                   
  4.1    
Fourth Supplemental Indenture, dated as of September 24, 2009, to Indenture dated as of December 1, 1995, between Burlington Northern Santa Fe Corporation and The Bank of New York Trust Company, N.A., as Trustee, including the form of BNSF’s 4.700% Notes due October 1, 2019.
  8-K   09/24/2009   001-11535     4.1  
       
 
                   
  4.2    
Certificate of Determination as to the terms of BNSF’s 4.700% Notes due October 1, 2019.
  8-K   09/24/2009   001-11535     4.2  
       
 
                   
  12.1    
Computation of Ratio of Earnings to Fixed Charges.*
                   
       
 
                   
  15.1    
Independent Registered Public Accounting Firm’s Awareness Letter.*
                   
       
 
                   
  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).*
                   
       
 
                   
  101    
The following financial information from Burlington Northern Santa Fe Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Statements of Income for each of the three-month and nine-month periods ended September 30, 2009 and 2008, (ii) the Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008, (iii) the Consolidated Statements of Cash Flows for each of the nine-month periods ended September 30, 2009 and 2008, (iv) the Consolidated Statement of Changes in Stockholders’ Equity for the nine-month period ended September 30, 2009, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.*
                   
Certain instruments defining the rights of the holders of long-term debt of the Company and of its subsidiaries, involving a total amount of indebtedness not in excess of 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request.
 
* Filed herewith
E-1
 
 
 
 
Exhibit 12.1
BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In millions, except ratio amounts)
(Unaudited)
                 
   
    Nine Months Ended  
    September 30,  
    2009     2008  
Earnings:
               
 
               
Income before income taxes
  $ 1,900     $ 2,389  
 
               
Add:
               
Interest and other fixed charges, excluding capitalized interest
    462       396  
 
               
Reasonable approximation of portion of rent under long-term operating leases representative of an interest factor
    204       207  
 
               
Distributed income of investees accounted for under the equity method
    4       4  
 
               
Amortization of capitalized interest
    3       3  
 
               
Less: Equity in earnings of investments accounted for under the equity method
    7       15  
 
           
 
               
Total earnings available for fixed charges
  $ 2,566     $ 2,984  
 
           
 
               
Fixed charges:
               
 
               
Interest and fixed charges
  $ 476     $ 409  
 
               
Reasonable approximation of portion of rent under long-term operating leases representative of an interest factor
    204       207  
 
           
 
               
Total fixed charges
  $ 680     $ 616  
 
           
 
               
Ratio of earnings to fixed charges
    3.77x       4.84x  
 
           
E-2
 
 
 
 
Exhibit 31.1
Principal Executive Officer’s Certifications
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Matthew K. Rose, certify that:
  1.  
I have reviewed this quarterly report on Form 10-Q of Burlington Northern Santa Fe Corporation;
 
  2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods covered by this report;
 
  4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 23, 2009
/s/ Matthew K. Rose     
Matthew K. Rose
Chairman, President and
Chief Executive Officer
E-4
 
 
 
 
Exhibit 31.2
Principal Financial Officer’s Certifications
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Thomas N. Hund, certify that:
  1.  
I have reviewed this quarterly report on Form 10-Q of Burlington Northern Santa Fe Corporation;
 
  2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods covered by this report;
 
  4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: October 23, 2009
/s/ Thomas N. Hund     
Thomas N. Hund
Executive Vice President and
Chief Financial Officer
E-5