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

BURLINGTON NORTHERN SANTA FE CORPORATION

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

PART I		FINANCIAL INFORMATION			PAGE
Item 1.		Financial Statements.			3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.			33
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.			46
Item 4.		Controls and Procedures.			48
PART II		OTHER INFORMATION
Item 1.		Legal Proceedings.			49
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.			49
Item 6.		Exhibits.			49
Signatures					S-1
Exhibits					E-1

2

		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.

3

		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.

4

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.

5

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.

6

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.

 

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	)

 

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

 

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – (Continued)

The Effect of Derivative Instruments Gains and Losses

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.

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.

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

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.

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

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.

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

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	)

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

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.

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

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.

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.

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

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.

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

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.

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				$	–

a	Reflects the maximum amount the Company could recover from a third party other than the counterparty.
b	Reflects capitalized obligations that are recorded on the Company’s Consolidated Balance Sheet.
c	Reflects the asset and corresponding liability for the fair value of these guarantees required by authoritative accounting guidance related to guarantees.
d	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.

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

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.

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

          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.

          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.

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.