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 endedSeptember30, 2008
 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            1-6324
 
  
 
 BNSF
RAILWAY COMPANY
 (Exact
name of registrant as specified in its charter)
 
 Delaware
              
              41-6034000(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 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  [ ]  Accelerated
filer  [  ]   Non-accelerated
filer  [x ] Smaller reporting
company  [  ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the 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.
 Class
              
              Shares
                Outstanding
      at
                October
      14, 2008Common
      stock, $1.00 par value
              
              1,000 shares
 
 Registrant
meets the conditions set forth in General Instruction H (1) (a) and (b) of Form
10-Q and is therefore filing this Form 10-Q with the reduced disclosure format
permitted by General Instruction H (2).
  
  Table of
Contents
  PART
      I
              FINANCIAL
      INFORMATION
              PAGEItem 1.
              Financial Statements.
              3Item 2.
              Management’s Narrative Analysis of Results of
      Operations.
              25Item 4T.
              Controls and Procedures.
              30PART
      II
              OTHER
      INFORMATIONItem 6.
              Exhibits.
              31Signatures
              
              S-1Exhibits
              
              E-1
   2
 Table of Contents
  PART I
 FINANCIAL
INFORMATION
 
 Item
1.    Financial Statements.
 
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME
 (In
millions)
 (Unaudited)
 
 
 Three
      Months Ended
              
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              
              September
      30,2008
              
              
              
              2007
              
              
              
              2008
              
              
              2007(As
      Adjusted)a
              
              
              
              
              
              
              (As
      Adjusted)aRevenues
              
              $
              4,837
              
              
              $
              4,016
              
              
              $
              13,468
              
              
              $
              11,415Operating
      expenses:Fuel
              
              
              1,349
              
              
              
              848
              
              
              
              3,685
              
              
              
              2,332Compensation
      and benefits
              
              
              1,008
              
              
              
              932
              
              
              
              2,932
              
              
              
              2,778Purchased
      services
              
              
              512
              
              
              
              487
              
              
              
              1,553
              
              
              
              1,489Depreciation
      and amortization
              
              
              348
              
              
              
              324
              
              
              
              1,038
              
              
              
              952Equipment
      rents
              
              
              230
              
              
              
              235
              
              
              
              683
              
              
              
              704Materials
      and other
              
              
              193
              
              
              
              180
              
              
              
              787
              
              
              
              598Total
      operating expenses
              
              
              3,640
              
              
              
              3,006
              
              
              
              10,678
              
              
              
              8,853Operating
      income
              
              
              1,197
              
              
              
              1,010
              
              
              
              2,790
              
              
              
              2,562Interest
      expense
              
              
              13
              
              
              
              23
              
              
              
              70
              
              
              
              68Interest
      income, related parties
              
              
              (7
              )
              
              
              (53
              )
              
              
              (14
              )
              
              
              (150
              )Other
      expense, net
              
              
              7
              
              
              
              11
              
              
              
              16
              
              
              
              28Income
      before income taxes
              
              
              1,184
              
              
              
              1,029
              
              
              
              2,718
              
              
              
              2,616Income
      tax expense
              
              
              425
              
              
              
              396
              
              
              
              1,015
              
              
              
              1,007Net
      income
              
              $
              759
              
              
              $
              633
              
              
              $
              1,703
              
              
              $
              1,609a Prior
      year numbers have been adjusted for the merger of BNSF Acquisition, Inc.
      with and into BNSF Railway Company. See Note 1 to the Consolidated
      Financial Statements for additional information.
 
 See
accompanying Notes to Consolidated Financial Statements.
 
  3
 Table of Contents
   BNSF
RAILWAY COMPANY and SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (Dollars
in millions)
 (Unaudited)
 
 September
      30,
              
              
              
              December 31,2008
              
              
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              16
              
              
              $
              24Accounts
      receivable, net
              
              
              689
              
              
              
              805Materials
      and supplies
              
              
              625
              
              
              
              579Current
      portion of deferred income taxes
              
              
              414
              
              
              
              282Other
      current assets
              
              
              468
              
              
              
              325Total
      current assets
              
              
              2,212
              
              
              
              2,015Property
      and equipment, net
              
              
              30,502
              
              
              
              29,560Other
      assets
              
              
              2,766
              
              
              
              1,953Intercompany
      notes receivable
              
              
              4
              
              
              
              –Total
      assets
              
              $
              35,484
              
              
              $
              33,528LIABILITIES
      AND STOCKHOLDER’S EQUITYCurrent
      liabilities:Accounts
      payable and other current liabilities
              
              $
              3,221
              
              
              $
              2,822Long-term
      debt due within one year
              
              
              202
              
              
              
              210Total
      current liabilities
              
              
              3,423
              
              
              
              3,032Long-term
      debt
              
              
              1,690
              
              
              
              1,511Deferred
      income taxes
              
              
              8,916
              
              
              
              8,519Casualty
      and environmental liabilities
              
              
              1,004
              
              
              
              843Pension
      and retiree health and welfare liability
              
              
              454
              
              
              
              444Employee
      separation costs
              
              
              71
              
              
              
              77Other
      liabilities
              
              
              1,658
              
              
              
              1,578Total
      liabilities
              
              
              17,216
              
              
              
              16,004Commitments
      and contingencies (see Notes 2, 4 and 5)Stockholder’s
      equity:Common
      stock, $1 par value, 1,000 shares authorized;
                issued and outstanding
      and paid-in capital
              
              
              6,331
              
              
              
              6,331Retained
      earnings
              
              
              13,493
              
              
              
              11,797Intercompany
      notes receivable
              
              
              (1,377
              )
              
              
              (456
              )Accumulated
      other comprehensive loss
              
              
              (179
              )
              
              
              (148
              )Total
      stockholder’s equity
              
              
              18,268
              
              
              
              17,524Total
      liabilities and stockholder’s equity
              
              $
              35,484
              
              
              $
              33,528
 
 See
accompanying Notes to Consolidated Financial Statements.
  4
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
millions)
 (Unaudited)
 
 Nine Months Ended September 30,
              
              
              2008
              
              
              
              2007(As Adjusted)aOPERATING
      ACTIVITIESNet income
              
              $
              1,703
              
              
              $
              1,609Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              1,038
              
              
              
              952Deferred
      income taxes
              
              
              282
              
              
              
              264Employee
      separation costs paid
              
              
              (11
              )
              
              
              (16
              )Long-term
      casualty and environmental liabilities, net
              
              
              181
              
              
              
              26Other,
      net
              
              
              (17
              )
              
              
              77Changes
      in current assets and liabilities:Accounts
      receivable, net
              
              
              (162
              )
              
              
              (183
              )Changes
      in accounts receivable sales program
              
              
              278
              
              
              
              (100
              )Materials
      and supplies
              
              
              (46
              )
              
              
              (29
              )Other
      current assets
              
              
              (153
              )
              
              
              (68
              )Accounts
      payable and other current liabilities
              
              
              316
              
              
              
              (66
              )Net
      cash provided by operating activities
              
              
              3,409
              
              
              
              2,466INVESTING
      ACTIVITIESCapital
      expenditures
              
              
              (1,711
              )
              
              
              (1,775
              )Net
      increase in intercompany notes receivable
              
              
              (4
              )
              
              
              (237
              )Construction
      costs for facility financing obligation
              
              
              (38
              )
              
              
              (18
              )Other,
      net
              
              
              (619
              )
              
              
              (306
              )Net
      cash used for investing activities
              
              
              (2,372
              )
              
              
              (2,336
              )FINANCING
      ACTIVITIESPayments
      on long-term debt
              
              
              (174
              )
              
              
              (139
              )Proceeds
      from facility financing obligation
              
              
              50
              
              
              
              –Net
      increase in intercompany notes receivable classified as
    equity
              
              
              (921
              )
              
              
              –Net
      increase in intercompany notes payable
              
              
              –
              
              
              
              1Net
      cash used for financing activities
              
              
              (1,045
              )
              
              
              (138
              )Decrease
      in cash and cash equivalents
              
              
              (8
              )
              
              
              (8
              )Cash
      and cash equivalents:Beginning
      of period
              
              
              24
              
              
              
              19End
      of period
              
              $
              16
              
              
              $
              11SUPPLEMENTAL
      CASH FLOW INFORMATIONInterest
      paid, net of amounts capitalized
              
              $
              84
              
              
              $
              61Income
      taxes paid, net of refunds
              
              $
              699
              
              
              $
              668Non-cash
      asset financing
              
              $
              79
              
              
              $
              167a Prior
      year numbers have been adjusted for the merger of BNSF Acquisition, Inc.
      with and into BNSF Railway Company. See Note 1 to the Consolidated
      Financial Statements for additional information.
 
 See
accompanying Notes to Consolidated Financial Statements.
  5
 Table of Contents
  BNSF
RAILWAY COMPANY and SUBSIDIARIES
 CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDER’S EQUITY
 (In
millions)
 (Unaudited)
 
 
 
 Common
      Stock and Paid-in Capital
              
              
              
              Retained
      Earnings
              
              
              
              Inter-
                Company
                Notes
                Receivable
              
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              
              Total
      Stockholder’s EquityBalance
      at December 31, 2007
              
              $
              6,331
              
              
              $
              11,797
              
              
              $
              (456
              )
              
              $
              (148
              )
              
              $
              17,524Adjustment
      to change the measurement date pursuant to Statement of Financial
      Accounting Standards (SFAS) No. 158
              
              
              –
              
              
              
              (7
              )
              
              
              –
              
              
              
              2
              
              
              
              (5
              )Adjustment
      to initially apply SFAS No. 158 to equity method investees
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (2
              )
              
              
              (2
              )Change
      in intercompany notes receivable
              
              
              –
              
              
              
              –
              
              
              
              (921
              )
              
              
              –
              
              
              
              (921
              )Comprehensive
      income:Net
      income
              
              
              –
              
              
              
              1,703
              
              
              
              –
              
              
              
              –
              
              
              
              1,703Amortization
      of prior service costs and actuarial losses, net of tax expense of
      $4
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              6
              
              
              
              6Loss on derivative instruments and other items, net of tax benefit of
      $23
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (36
              )
              
              
              (36
              )Unrealized loss on securities held by equity method investees, net of tax
      benefit of less than $1
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              (1
              )
              
              
              (1
              )Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,672Balance
      at September 30, 2008
              
              $
              6,331
              
              
              $
              13,493
              
              
              $
              (1,377
              )
              
              $
              (179
              )
              
              $
              18,268
 
 See
accompanying Notes to Consolidated Financial Statements.
  6
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
  1.    Accounting
Policies and Interim Results
 
 The
Consolidated Financial Statements should be read in conjunction with BNSF
Railway Company’s Current Report on Form 8-K dated October 8, 2008, and BNSF
Railway Company’s Annual Report on Form 10-K for the year ended December 31,
2007, including the financial statements and notes thereto. The Consolidated
Financial Statements include the accounts of BNSF Railway Company and its
majority-owned subsidiaries (collectively BNSF Railway or the Company). BNSF
Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation
(BNSF), and is the principal operating subsidiary of BNSF.
 
 BNSF Acquisition, Inc.
(BNSF Acquisition), a wholly-owned subsidiary of BNSF was merged with and into
BNSF Railway on March 18, 2008. BNSF Acquisition was formed on April 17, 1996 as
the vehicle to acquire Washington Central Railroad Company, Inc. SFAS No. 141,
Business Combinations,
carries forward without reconsideration the previous guidance related to the
combination of entities under common control in Accounting Principles Board
Opinion No. 16, Business
Combinations. As such, the consolidated balance sheet at December 31,
2007, the related consolidated statements of income for the three-month period
ended September 30, 2007, and each of the nine-month periods ended September 30,
2008 and 2007, and the consolidated statements of cash flows for each of the
nine-month periods ended September 30,  2008 and 2007 have been adjusted to
reflect this transaction as if it had occurred as of the beginning of the
earliest period presented. As a result, the amounts reported in the consolidated
financial statements of BNSF Railway presented herein will differ from the
amounts previously reported in BNSF Railway's Form 10-K for the year ended
December 31, 2007, and Form 10-Q for the quarter ended September 30, 2007. The
effects of this transaction were as follows (in millions):
 
 Consolidated
      Statement of Income
                Three
      Months Ended September 30, 2007
              
              
              As
      Reported
              
              
              
              Impact
      of Adjustment
              
              
              
              As
      AdjustedRevenues
              
              $
              4,015
              
              
              $
              1
              
              
              $
              4,016Total
      operating expenses
              
              
              3,005
              
              
              
              1
              
              
              
              3,006Operating
      income
              
              
              1,010
              
              
              
              –
              
              
              
              1,010Income
      before income taxes
              
              
              1,029
              
              
              
              –
              
              
              
              1,029Income
      tax expense
              
              
              396
              
              
              
              –
              
              
              
              396Net
      income
              
              $
              633
              
              
              $
              –
              
              
              $
              633Consolidated
      Statement of Income
                Nine
      Months Ended September 30, 2007
              
              
              As
      Reported
              
              
              
              Impact
      of Adjustment
              
              
              
              As
      AdjustedRevenues
              
              $
              11,411
              
              
              $
              4
              
              
              $
              11,415Total
      operating expenses
              
              
              8,852
              
              
              
              1
              
              
              
              8,853Operating
      income
              
              
              2,559
              
              
              
              3
              
              
              
              2,562Income
      before income taxes
              
              
              2,613
              
              
              
              3
              
              
              
              2,616Income
      tax expense
              
              
              1,006
              
              
              
              1
              
              
              
              1,007Net
      income
              
              $
              1,607
              
              
              $
              2
              
              
              $
              1,609
  7
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 Consolidated
      Statement of Cash Flows
                Nine
      Months Ended September 30, 2007
              
              
              As
      Reported
              
              
              
              Impact
      of Adjustment
              
              
              
              As
      AdjustedNet
      income
              
              $
              1,607
              
              
              $
              2
              
              
              $
              1,609Depreciation
      and amortization
              
              
              951
              
              
              
              1
              
              
              
              952Accounts
      payable and other current liabilitiesa
              
              
              (64
              )
              
              
              (2
              )
              
              
              (66
              )Net
      cash provided by operating activities
              
              
              2,465
              
              
              
              1
              
              
              
              2,466Decrease
      in cash and cash equivalents
              
              
              (9
              )
              
              
              1
              
              
              
              (8
              )Beginning
      of period
              
              
              20
              
              
              
              (1
              )
              
              
              19End
      of period
              
              $
              11
              
              
              $
              –
              
              
              $
              11aComparative
      prior period amounts have been reclassified to conform to the current
      presentation.
 
 All
significant intercompany accounts and transactions have been
eliminated.
 
 Additionally,
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 except as discussed herein.
 
 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 Railway’s consolidated financial position as of
September 30, 2008, and the results of operations for the three and nine month
periods ended September 30, 2008 and 2007.
 
 Adoption of New Accounting
Pronouncements
 
 Fair
Value Measurements
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosure requirements around fair value
measurements.
 
 SFAS No.
157 specifies a three-level hierarchy of valuation inputs which was established
to increase consistency, clarity and comparability in fair value measurements
and related disclosures.
 
 Ÿ
              Level
      1–Quoted prices for identical assets or liabilities in active markets that
      the Company has the ability to access at the measurement
    date.
 Ÿ
              Level
      2–Quoted prices for similar assets or liabilities in active markets;
      quoted prices for identical or similar assets or liabilities in markets
      that are not active; and model-derived valuations in which all significant
      inputs are observable market data.
 Ÿ
              Level
      3–Valuations derived from valuation techniques in which one or more
      significant inputs are
unobservable.
 
 SFAS No.
157 requires companies to maximize the use of observable inputs (Level 1 and
Level 2), when available, and to minimize the use of unobservable inputs (Level
3) when determining fair value.
 
 The
Company adopted SFAS No. 157 on January 1, 2008 and recorded no financial
statement adjustments as a result of adoption. The Company has applied the
provisions of the standard to its fuel and interest rate hedges (see Note 2 to
the Consolidated Financial Statements).
  8
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 
 However,
the Company has not applied the provisions of the standard to its property and
equipment, goodwill and certain other assets, which are measured at fair value
for impairment assessment, nor to any business combinations or asset retirement
obligations. The Company will apply the provisions of the standard to these
assets and liabilities, beginning January 1, 2009 as required by FASB Staff
Position (FSP) SFAS No. 157-2, Effective Date of FASB Statement No.
157. This adoption is not expected to have a material impact on the
Company’s results of operations, financial condition or liquidity.
 
 2.    Hedging
Activities
 
 The
Company uses derivative financial instruments to hedge against increases in
diesel fuel prices and interest rates. The Company does not hold or issue
derivative financial instruments for trading or speculative purposes. The
Company formally documents the relationship between the hedging instrument and
the hedged item, as well as the risk management objective and strategy for the
use of the hedging instrument. This documentation includes linking the
derivatives that are designated as cash flow hedges to specific assets or
liabilities on the balance sheet, commitments or forecasted transactions. The
Company assesses at the time a derivative contract is entered into, and at least
quarterly thereafter, whether the derivative item is effective in offsetting the
changes in cash flows. Any change in fair value resulting from ineffectiveness,
as defined by SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended,
is recognized in current period earnings. For derivative instruments that are
designated and qualify as cash flow hedges, the effective portion of the gain or
loss on the derivative instrument is recorded in accumulated other comprehensive
loss (AOCL) as a separate component of stockholder’s equity and reclassified
into earnings in the period during which the hedge transaction affects earnings.
Cash flows related to fuel and interest rate hedges are classified as operating
activities in the Consolidated Statements of Cash Flows.
 
 BNSF
Railway monitors its hedging positions and credit ratings of its counterparties
and does not anticipate any losses due to counterparty
nonperformance.
 
 Fuel
 
 Fuel
costs represented 35 percent and 26 percent of total operating expenses during
the nine month periods ended September 30, 2008 and 2007, respectively. Due to
the significance of diesel fuel expenses to the operations of BNSF Railway and
the historical volatility of fuel prices, the Company has entered into hedges to
partially mitigate the risk of fluctuations in the price of its diesel fuel
purchases. The fuel hedges include the use of derivatives that are accounted for
as cash flow hedges. The hedging is intended to protect the Company’s operating
margins and overall profitability from adverse fuel price changes by entering
into fuel-hedge instruments based on management’s evaluation of current and
expected diesel fuel price trends. However, to the extent the Company hedges
portions of its fuel purchases, it may not realize the impact of decreases in
fuel prices. Conversely, to the extent the Company does not hedge portions of
its fuel purchases, it may be adversely affected by increases in fuel prices.
Based on locomotive fuel consumption (which represents substantially all fuel
consumption) during the twelve-month period ended September 30, 2008 and
excluding the impact of the hedges, each one-cent increase in the price of fuel
per gallon would result in approximately $14 million of additional fuel expense
on an annual basis. However, BNSF Railway believes any fuel price increase would
be substantially offset by the Company’s fuel surcharge program.
 
 Total
Fuel-Hedging Activities
 
 As of
September 30, 2008, BNSF Railway’s total fuel-hedging positions covered
approximately 10 percent, 9 percent, 5 percent and 2 percent of estimated
locomotive fuel purchases for the remainder of 2008, 2009, 2010 and 2011,
respectively. Hedge positions are closely monitored to ensure that they will not
exceed actual fuel requirements in any period.
 
 9
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 The
amounts recorded in the Consolidated Statements of Income for fuel-hedge
transactions were as follows (in millions):
 
 Three
      Months Ended
              
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              
              September
      30,2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Hedge
      benefit
              
              $
              17
              
              
              $
              –
              
              
              $
              50
              
              
              $
              24Ineffective
      portion of open hedges
              
              
              (6
              )
              
              
              1
              
              
              
              (6
              )
              
              
              1Tax
      effect
              
              
              (4
              )
              
              
              –
              
              
              
              (17
              )
              
              
              (9
              )Hedge
      benefit, net of tax
              
              $
              7
              
              
              $
              1
              
              
              $
              27
              
              
              $
              16
 
 The
ineffective portion of unrealized gains and losses of open hedges are recorded
in the Consolidated Statements of Income as a component of fuel
expense.
 
 The
amounts recorded in the Consolidated Balance Sheets for fuel-hedge transactions
were as follows (in millions):
 
 September
      30,
              
              
              December
      31,2008
              
              
              
              2007Short-term
      fuel-hedging asset
              
              $
              2
              
              
              $
              29Long-term
      fuel-hedging asset
              
              
              5
              
              
              
              10Short-term
      fuel-hedging liability
              
              
              (34
              )
              
              
              –Ineffective
      portion of open hedges
              
              
              6
              
              
              
              –Tax
      effect
              
              
              8
              
              
              
              (15
              )Amount
      included in AOCL, net of tax
              
              $
              (13
              )
              
              $
              24Settled
      fuel-hedging contracts receivable
              
              $
              17
              
              
              $
              6
 
 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 SFAS No. 157 utilizes Level 2 inputs as it uses market data for
similar instruments in active markets.
 
 New York Mercantile
Exchange(NYMEX) #2 Heating Oil (HO) Hedges
 
 As of
September 30, 2008, BNSF Railway 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 Railway’s diesel fuel. Over the
twelve months ended September 30, 2008, the sum of all such costs averaged
approximately 20 cents per gallon.
 
 During
the first nine months of 2008, the Company entered into fuel swap agreements
utilizing HO to hedge the equivalent of 24.02 million gallons of fuel with an
average swap price of $2.44 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, 2008.
 
 Quarter
      Ending2008
              
              December
      31,HO
      SwapsGallons
      hedged (in millions)
              
              
              8.99Average
      swap price (per gallon)
              
              $
              2.47Fair
      value (in millions)
              
              $
              4
 
 
 10
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
  West Texas Intermediate
(WTI) Crude Oil Hedges
 
 In
addition, BNSF Railway 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 Railway’s diesel fuel,
including refining costs. Over the twelve months ended September 30, 2008, the
sum of all such costs averaged approximately 66 cents per gallon.
 
 During
the first nine months of 2008, the Company entered into fuel swap agreements
utilizing WTI to hedge the equivalent of 2.90 million barrels of fuel with an
average swap price of $99.61 per barrel and costless collar agreements utilizing
WTI to hedge the equivalent of 3.29 million barrels of fuel with an average cap
price of $135.09 per barrel and an average floor price of $124.42 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, 2008.
 
 Quarter
      Ending2008
              
              
              December
      31,WTI
      SwapsBarrels
      hedged (in thousands)
              
              
              230Equivalent
      gallons hedged (in millions)
              
              
              9.66Average
      swap price (per barrel)
              
              $
              63.70Fair
      value (in millions)
              
              $
              8WTI
      Costless CollarsBarrels
      hedged (in thousands)
              
              
              445Equivalent
      gallons hedged (in millions)
              
              
              18.69Average
      cap price (per barrel)
              
              $
              140.03Average
      floor price (per barrel)
              
              $
              128.72Fair
      value (in millions)
              
              $
              (13
              )
 
 Quarter
      Ending2009
              
              
              March
      31,
              
              
              
              June
      30,
              
              
              
              September
      30,
              
              
              
              December
      31,
              
              
              
              AnnualWTI
      SwapsBarrels
      hedged (in thousands)
              
              
              235
              
              
              
              185
              
              
              
              185
              
              
              
              245
              
              
              
              850Equivalent
      gallons hedged (in millions)
              
              
              9.87
              
              
              
              7.77
              
              
              
              7.77
              
              
              
              10.29
              
              
              
              35.70Average
      swap price (per barrel)
              
              $
              83.34
              
              
              $
              80.86
              
              
              $
              81.20
              
              
              $
              84.79
              
              
              $
              82.75Fair
      value (in millions)
              
              $
              4
              
              
              $
              4
              
              
              $
              4
              
              
              $
              4
              
              
              $
              16WTI
      Costless CollarsBarrels
      hedged (in thousands)
              
              
              800
              
              
              
              630
              
              
              
              520
              
              
              
              475
              
              
              
              2,425Equivalent
      gallons hedged (in millions)
              
              
              33.60
              
              
              
              26.46
              
              
              
              21.84
              
              
              
              19.95
              
              
              
              101.85Average
      cap price (per barrel)
              
              $
              132.56
              
              
              $
              132.55
              
              
              $
              135.82
              
              
              $
              135.46
              
              
              $
              133.82Average
      floor price (per barrel)
              
              $
              121.86
              
              
              $
              122.11
              
              
              $
              125.55
              
              
              $
              125.38
              
              
              $
              123.41Fair
      value (in millions)
              
              $
              (18
              )
              
              $
              (13
              )
              
              $
              (12
              )
              
              $
              (11
              )
              
              $
              (54
              )
 
 Quarter
      Ending2010
              
              
              March
      31,
              
              
              
              June
      30,
              
              
              
              September
      30,
              
              
              
              December
      31,
              
              
              
              AnnualWTI
      SwapsBarrels
      hedged (in thousands)
              
              
              515
              
              
              
              435
              
              
              
              405
              
              
              
              370
              
              
              
              1,725Equivalent
      gallons hedged (in millions)
              
              
              21.63
              
              
              
              18.27
              
              
              
              17.01
              
              
              
              15.54
              
              
              
              72.45Average
      swap price (per barrel)
              
              $
              95.09
              
              
              $
              100.14
              
              
              $
              100.35
              
              
              $
              100.37
              
              
              $
              98.73Fair
      value (in millions)
              
              $
              4
              
              
              $
              2
              
              
              $
              2
              
              
              $
              2
              
              
              $
              10
 
 11
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 Quarter
      Ending2011
                
                
                March
      31,
                
                
                
                June
      30,
                
                
                
                September
      30,
                
                
                
                December
      31,
                
                
                
                AnnualWTI
      SwapsBarrels
      hedged (in thousands)
                
                
                220
                
                
                
                185
                
                
                
                175
                
                
                
                185
                
                
                
                765Equivalent
      gallons hedged (in millions)
                
                
                9.24
                
                
                
                7.77
                
                
                
                7.35
                
                
                
                7.77
                
                
                
                32.13Average
      swap price (per barrel)
                
                $
                100.45
                
                
                $
                100.44
                
                
                $
                100.35
                
                
                $
                100.58
                
                
                $
                100.46Fair
      value (in millions)
                
                $
                1
                
                
                $
                <1
                
                
                $
                <1
                
                
                $
                <1
                
                
                $
                2
 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 the refinancing of leveraged leases. The
Company uses treasury locks as part of its interest rate risk management
strategy.
 
 BNSF
Railway’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 SFAS No. 157 utilizes Level 2 inputs as it uses market data for similar
instruments in active markets. Unrealized gains and losses for interest rate
hedge transactions are not recorded in the Consolidated Statements of
Income.
 
 Cash
Flow Interest Rate Hedges
 
 The
amounts recorded in the Consolidated Balance Sheets for interest rate cash flow
hedge transactions, which represent the fair value of closed hedges, were as
follows (in millions):
 
 September
      30,
                2008
              
              
              
              December
      31, 2007Unrecognized
      gain on closed hedges
              
              $
              1
              
              
              $
              1Tax
      effect
              
              
              –
              
              
              
              –Unrecognized
      gain in AOCL, net of tax
              
              $
              1
              
              
              $
              1
 
 3.    Accounts
Receivable, Net
 
 BNSF
Railway transfers a portion of its accounts receivable to Santa Fe Receivables
Corporation (SFRC), a special purpose subsidiary. SFRC transfers an undivided
interest in such receivables, with limited exceptions, to a master trust and
causes the trust to issue an undivided interest in the receivables to investors
(the A/R sales program). The undivided interests in the master trust may be in
the form of certificates or purchased interests.
 
 BNSF
Railway’s total capacity to sell undivided interests to investors under the A/R
sales program was $700 million at September 30, 2008, which was comprised of two
$175 million, 364-day accounts receivable facilities and two $175 million,
3-year accounts receivable facilities, which mature in November 2008 and 2010,
respectively. The 364-day facilities are expected to be renewed in November
2008. Outstanding undivided interests held by investors under the A/R sales
program were $578 million and $300 million at September 30, 2008 and
December 31, 2007. There was $144.5 million and $75.0 million outstanding under
each of the four facilities at September 30, 2008 and December 31, 2007,
respectively. These undivided interests in receivables are excluded from
accounts receivable by BNSF Railway in connection with the sale of undivided
interests under the A/R sales program. These undivided interests were supported
by $1,195 million and $1,105 million of receivables transferred by
SFRC to the master trust at September 30, 2008 and December 31, 2007,
respectively. When SFRC transfers these receivables to the master trust, it
retains an undivided interest in the receivables sold, which is included in
accounts receivable in the Company’s Consolidated Financial Statements. The
interest that continues to be held by SFRC of $617 million and $805 million at
September 30, 2008 and December 31, 2007, respectively, less an allowance for
uncollectible accounts, reflected the total accounts receivable transferred by
SFRC to the master trust less $578 million and $300 million at September 30,
2008 and December 31, 2007, respectively, of outstanding undivided interests
held by investors. Due to a relatively short collection cycle, the fair value of
the undivided interest transferred to investors in the A/R sales program
approximated book value, and there was no gain or loss from the
transaction.
  12
 Table of Contents
 BNSF
RAILWAY COMPANY 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 $14.5 billion and $12.3 billion for the nine months ended
September 30, 2008 and 2007, 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 $9 million and $15
million for the nine months ended September 30, 2008 and 2007, respectively.
These costs fluctuate monthly with changes in prevailing interest rates and were
based on weighted average interest rates of 3.3 percent and 5.6 percent for the
nine months ended September 30, 2008 and 2007, respectively. These costs include
interest, discounts associated with transferring the receivables under the A/R
sales program to SFRC, program fees paid to banks, incidental commercial paper
issuing costs and fees for unused commitment availability.
 
 The
amount of accounts receivable transferred by BNSF Railway to SFRC fluctuates
based upon the availability of receivables and is directly affected by changing
business volumes and credit risks, including dilution and delinquencies. In
order for there to be an impact on the amount of receivables BNSF Railway could
sell, the combined dilution and delinquency percentages would have to exceed an
established threshold. BNSF Railway has historically experienced very low levels
of dilution or delinquency and was well below the established threshold rates at
September 30, 2008. Based on the current levels, if dilution or delinquency
percentages were to increase by one percentage point, there would be no impact
to the amount of receivables BNSF Railway could sell.
 
 Receivables
funded under the A/R sales program may not include amounts over 90 days past due
or concentrations over certain limits with any one customer and certain other
receivables. At September 30, 2008 and December 31, 2007, $17 million and $11
million, respectively, of accounts receivable were greater than 90 days
old.
 
 BNSF
Railway maintains an allowance for bill adjustments and uncollectible accounts
based upon the expected collectibility of accounts receivable, including
receivables transferred to the master trust. Credit losses are based on specific
identification of uncollectible accounts and application of historical
collection percentages by aging category. At September 30, 2008 and December 31,
2007, $40 million and $36 million, respectively, of such allowances had been
recorded, of which $36 million and $34 million, respectively, had been recorded
as a reduction to accounts receivable, net. The remaining $4 million and $2
million at September 30, 2008 and December 31, 2007, respectively, had been
recorded in accounts payable and other current liabilities because they relate
to the outstanding undivided interests held by investors. During the nine months
ended September 30, 2008 and 2007, $2 million and $3 million, respectively, of
accounts receivable were written off.
  The investors
in the master trust have no recourse to BNSF Railway's other assets except for
customary warranty and indemnity claims. Creditors of BNSF Railway have no
recourse to the assets of the master trust or SFRC unless and until all claims
of their respective creditors have been paid. The A/R sales program includes
provisions that, if triggered, allow the investors participating in this
program, at their option, to cancel the program. At September 30, 2008, BNSF
Railway was in compliance with these provisions.
 
 4.
              Debt
 
 Financing
Obligation
 
 The
Company has commenced the construction of an intermodal facility that it intends
to sell to a third party and subsequently lease back. Once construction of the
facility is complete and all improvements have been sold to the third party,
BNSF Railway will lease the facility from the third party for 20 years.
Construction is expected to be completed in 2009 with an approximate cost of
$160 million. During the first nine months of 2008, the Company sold $50 million
of completed improvements, bringing the total sold to date to $91 million. This
sale leaseback transaction is being accounted for as a financing obligation due
to continuing involvement. The outflows from the construction of the facility
are classified as investing activities, and the inflows from the associated
financing proceeds are classified as financing activities in the Company’s
Consolidated Statements of Cash Flows.
  13
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 
 Guarantees
  Debt and
other obligations of non-consolidated entities guaranteed by the Company as of
September 30, 2008, were as follows (dollars in millions):
 GuaranteesBNSF
                Railway
      Ownership Percentage
              
              
              
              Principal
                Amount
      Guaranteed
              
              
              
              Maximum
                Future
                Payments
              
              
              
              Maximum
                Recourse
                Amounta
              
              
              
              Remaining
                Term
                (in
      years)
              
              
              
              Capitalized
      ObligationsKinder
      Morgan Energy Partners, L.P.
              
              
              0.5
              %
              
              $
              190
              
              
              $
              190
              
              
              $
              –
              
              
              Termination
      of Ownership
              
              
              $
              –Kansas
      City Terminal Intermodal Transportation Corporation
              
              
              0.0
              %
              
              $
              52
              
              
              $
              74
              
              
              $
              74
              
              
              
              10
              
              
              $
              29bWestside
      Intermodal Transportation Corporation
              
              
              0.0
              %
              
              $
              39
              
              
              $
              59
              
              
              $
              –
              
              
              
              15
              
              
              $
              33bThe
      Unified Government of Wyandotte County/Kansas City, Kansas
              
              
              0.0
              %
              
              $
              12
              
              
              $
              18
              
              
              $
              –
              
              
              
              15
              
              
              $
              10bChevron
      Phillips Chemical Company, LP
              
              
              0.0
              %
              
              N/Ad
              
              
              N/Ad
              
              
              N/Ad
              
              
              
              9
              
              
              $
              13cVarious
      lessors
                (Residual
      value guarantees)
              
              
              0.0
              %
              
              
              N/A
              
              
              $
              271
              
              
              $
              271
              
              
              Various
              
              
              $
              68cAll
      other
              
              
              0.0
              %
              
              $
              5
              
              
              $
              6
              
              
              $
              2
              
              
              Various
              
              
              $
              –a
      Reflects the maximum amount the Company could recover from a third party
      other than the counterparty.
                b
      Reflects capitalized obligations that are recorded on the Company’s
      Consolidated Balance Sheets.
                c
      Reflects FASB Interpretation (FIN) 45, Guarantor’s
      Accounting and Disclosure Requirements for Guarantees, asset and
      corresponding liability for the fair value of these
      guarantees.
                d
      There is no cap to the liability that can be sought from BNSF Railway for
      BNSF Railway’s negligence or the negligence of the indemnified party.
      However, BNSF Railway could receive reimbursement from certain insurance
      policies if the liability exceeds a certain
  amount.
 
 Kinder
Morgan Energy Partners, L.P.
 
 Santa Fe
Pacific Pipelines, Inc., an indirect, wholly-owned subsidiary of BNSF Railway,
has a guarantee in connection with its remaining special limited partnership
interest in Santa Fe Pacific Pipelines Partners, L.P. (SFPP), a subsidiary of
Kinder Morgan Energy Partners, L.P., to be paid only upon default by the
partnership. All obligations with respect to the guarantee will cease upon
termination of ownership rights, which would occur upon a put notice issued by
BNSF Railway or the exercise of the call rights by the general partners of
SFPP.
 
 Kansas
City Terminal Intermodal Transportation Corporation
 
 BNSF
Railway and another major railroad jointly and severally guarantee $52 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 $51 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.
  14
 Table of Contents
 BNSF
RAILWAY COMPANY 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 2009 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 Railway does not anticipate
such a large reduction in the fair market value of the leased equipment. As of
September 30, 2008, the Company had recorded a $68 million asset and
corresponding liability for the fair value of RVGs.
 
 All
Other
 
 As of
September 30, 2008, BNSF Railway guaranteed $5 million of other debt and leases.
BNSF Railway holds a performance bond and has the option to sub-lease property
to recover up to $2 million of the $5 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 Railway enters into agreements with third
parties that include indemnification clauses. In general, these clauses are
customary for the types of agreements in which they are included. At times,
these clauses may involve indemnification for the acts of the Company, its
employees and agents, indemnification for another party’s acts, indemnification
for future events, indemnification based upon a certain standard of performance,
indemnification for liabilities arising out of the Company’s use of leased
equipment or other property, or other types of indemnification. Due to the
uncertainty of whether events which would trigger the indemnification
obligations would ever occur, the Company does not believe that these indemnity
agreements will have a material adverse effect on the Company’s results of
operations, financial position or liquidity. Additionally, the Company believes
that, due to lack of historical payment experience, the fair value of
indemnities cannot be estimated with any amount of certainty and that the fair
value of any such amount would be immaterial to the Consolidated Financial
Statements. Agreements that contain unique circumstances, particularly
agreements that contain guarantees that indemnify another party’s acts are
disclosed separately if appropriate. Unless separately disclosed above, no fair
value liability related to indemnities has been recorded in the Consolidated
Financial Statements.
  15
 Table of Contents
 BNSF
RAILWAY COMPANY 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 Railway has implemented a number of safety programs designed to
reduce the number of personal injuries as well as the associated claims and
personal injury expense.
  BNSF Railway
records a liability for personal injury claims when the expected loss is both
probable and reasonably estimable. The liability and ultimate expense
projections are estimated using standard actuarial methodologies. Liabilities
recorded for unasserted personal injury claims are based on information
currently available. Due to the inherent uncertainty involved in projecting
future events such as the number of claims filed each year, developments in
judicial and legislative standards and the average costs to settle projected
claims, actual costs may differ from amounts recorded. BNSF Railway has obtained
insurance coverage for certain claims, as discussed under the heading “BNSF
Insurance Company.” Expense accruals and any required adjustments are classified
as materials and other in the Consolidated Statements of Income.
 
 Asbestos
 
 The
Company is party to a number of personal injury claims by employees and
non-employees who may have been exposed to asbestos. The heaviest exposure for
BNSF Railway employees was due to work conducted in and around the use of steam
locomotive engines that were phased out between the years of 1950 and 1967.
However, other types of exposures, including exposure from locomotive component
parts and building materials, continued after 1967 until they were substantially
eliminated at BNSF Railway by 1985.
 
 BNSF
Railway assesses its unasserted liability exposure on an annual basis during the
third quarter. BNSF Railway determines its asbestos liability by estimating its
exposed population, the number of claims likely to be filed, the number of
claims that will likely require payment, and the estimated cost per claim.
Estimated filing and dismissal rates and average cost per claim are determined
utilizing recent claim data and trends.
 
 During
the third quarter of 2008 and 2007, the Company analyzed recent filing and
payment trends to ensure the assumptions used by BNSF Railway to estimate its
future asbestos liability were reasonable. In the third quarter of 2007,
management recorded a decrease in expense of $17 million due to a statistically
significant reduction in filing rate experience for non-malignant claims. In the
third quarter of 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 2009.
 
 Throughout
the year, BNSF Railway monitors actual experience against the number of
forecasted claims and expected claim payments and will record adjustments to the
Company’s estimates as necessary.
 
 The
following table summarizes the activity in the Company’s accrued obligations for
both asserted and unasserted asbestos matters (in millions):
 
 Three
      Months Ended
              
              
              
              Nine
      Months EndedSeptember
      30,
              
              
              
              September
      30,2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Beginning
      balance
              
              $
              261
              
              
              $
              297
              
              
              $
              270
              
              
              $
              306Accruals
              
              
              –
              
              
              
              (17
              )
              
              
              –
              
              
              
              (17
              )Payments
              
              
              (5
              )
              
              
              (5
              )
              
              
              (14
              )
              
              
              (14
              )Ending
      balance at September 30,
              
              $
              256
              
              
              $
              275
              
              
              $
              256
              
              
              $
              275
  16
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 
 Of the
September 30, 2008 obligation, $211 million was related to unasserted claims
while $45 million was related to asserted claims. At September 30, 2008, $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 Railway:
 
 Three
      Months Ended
                September
      30,
              
              
              
              Nine
      Months Ended
                September
      30,2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Claims
      unresolved at beginning of period
              
              
              1,800
              
              
              
              1,930
              
              
              
              1,781
              
              
              
              1,975Claims
      filed
              
              
              143
              
              
              
              107
              
              
              
              415
              
              
              
              339Claims
      settled, dismissed or otherwise resolved
              
              
              (83
              )
              
              
              (134
              )
              
              
              (336
              )
              
              
              (411
              )Ending
      balance at September 30,
              
              
              1,860
              
              
              
              1,903
              
              
              
              1,860
              
              
              
              1,903
 
 Based on
BNSF Railway’s estimate of the potentially exposed employees and related
mortality assumptions, it is anticipated that unasserted claims will continue to
be filed through the year 2050. The Company recorded an amount for the full
estimated filing period through 2050 because it had a relatively finite exposed
population (former and current employees hired prior to 1985), which it was able
to identify and reasonably estimate and about which it had obtained reliable
demographic data (including age, hire date and occupation) derived from industry
or BNSF Railway specific data that was the basis for the study. BNSF Railway
projects that approximately 55, 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 $235 million to $280 million. However, BNSF Railway believes that
the $256 million recorded is the best estimate of the Company’s future
obligation for the settlement of asbestos claims.
 
 The
amounts recorded by BNSF Railway for the asbestos-related liability were based
upon currently known facts. Future events, such as the number of new claims to
be filed each year, the average cost of disposing of claims, as well as the
numerous uncertainties surrounding asbestos litigation in the United States,
could cause the actual costs to be higher or lower than projected.
 
 While the
final outcome of asbestos-related matters cannot be predicted with certainty,
considering among other things the meritorious legal defenses available and
liabilities that have been recorded, it is the opinion of BNSF Railway that none
of these items, when finally resolved, will have a material adverse effect on
the Company’s financial position or liquidity. However, the occurrence of a
number of these items in the same period could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.
 
 Other
Personal Injury
 
 BNSF
Railway estimates its other personal injury liability claims and expense
quarterly based on the covered population, activity levels and trends in
frequency and the costs of covered injuries. Estimates include unasserted claims
except for certain repetitive stress and other occupational trauma claims that
result from prolonged repeated events or exposure. Such claims are estimated on
an as-reported basis because, while the Company has concluded that a probable
loss has occurred, it cannot estimate the range of reasonably possible loss due
to other contributing causes of such injuries and the fact that continued
exposure is required for the potential injury to manifest itself as a claim. The
Company believes that the low end of the range of reasonably possible loss, as
that term is used in FIN 14, Reasonable Estimation of the Amount
of a Loss, is immaterial for these repetitive stress and other
occupational trauma claims.
 
 BNSF
Railway monitors quarterly actual experience against the number of forecasted
claims to be received, the forecasted number of claims closing with payment and
expected claims payments. Adjustments to the Company’s estimates are recorded
quarterly as necessary or more frequently as new events or revised estimates
develop.
  17
 Table of Contents
 BNSF
RAILWAY COMPANY 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
                September
      30,
              
              
              
              Nine
      Months Ended
                September
      30,2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Beginning
      balance
              
              $
              474
              
              
              $
              437
              
              
              $
              439
              
              
              $
              439Accruals
              
              
              34
              
              
              
              46
              
              
              
              136
              
              
              
              139Payments
              
              
              (37
              )
              
              
              (48
              )
              
              
              (104
              )
              
              
              (143
              )Ending
      balance at September 30,
              
              $
              471
              
              
              $
              435
              
              
              $
              471
              
              
              $
              435
 
 At
September 30, 2008, $183 million was included in current liabilities. BNSF
Railway’s liabilities for other personal injury claims are undiscounted. In
addition, defense and processing costs, which are recorded on an as-reported
basis, were not included in the recorded liability. The Company is substantially
self-insured for other personal injury claims.
 
 The
following table summarizes information regarding the number of personal injury
claims, other than asbestos, filed against BNSF Railway:
 
 Three
      Months Ended
                September
      30,
              
              
              
              Nine
      Months Ended
                September
      30,2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Claims
      unresolved at beginning of period
              
              
              3,941
              
              
              
              3,131
              
              
              
              3,322
              
              
              
              3,130Claims
      filed
              
              
              994
              
              
              
              1,033
              
              
              
              3,441
              
              
              
              2,899Claims
      settled, dismissed or otherwise resolved
              
              
              (861
              )
              
              
              (918
              )
              
              
              (2,689
              )
              
              
              (2,783
              )Ending
      balance at September 30,
              
              
              4,074
              
              
              
              3,246
              
              
              
              4,074
              
              
              
              3,246
 
 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 $405 million to $585 million.
However, BNSF Railway believes that the $471 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 Railway for other personal injury claims were based
upon currently known facts. Future events, such as the number of new claims to
be filed each year, the average cost of disposing of claims, as well as the
numerous uncertainties surrounding personal injury litigation in the United
States, could cause the actual costs to be higher or lower than
projected.
 
 While the
final outcome of these other personal injury matters cannot be predicted with
certainty, considering among other things the meritorious legal defenses
available and liabilities that have been recorded, it is the opinion of BNSF
Railway that none of these items, when finally resolved, will have a material
adverse effect on the Company’s financial position or liquidity. However, the
occurrence of a number of these items in the same period could have a material
adverse effect on the results of operations in a particular quarter or fiscal
year.
 
 BNSF
Insurance Company
 
 Burlington
Northern Santa Fe Insurance Company, Ltd. (BNSF IC), a wholly owned subsidiary
of BNSF, provides insurance coverage for certain risks incurred after April 1,
1998, FELA claims, railroad protective, force account insurance claims and
certain excess general liability coverage incurred after January 1, 2002, and
certain other claims which are subject to reinsurance. During the nine months
ended September 30, 2008 and 2007, BNSF Railway paid premiums of $167 million
and $164 million, respectively, to BNSF IC for such coverage, net of
reimbursements from third parties and recognized $126 million and $124 million,
respectively, in expense related to those premiums, which is classified as
purchased services in the Consolidated Statements of Income. At September 30,
2008, unamortized premiums remaining on the Consolidated Balance Sheet were $45
million. During the nine months ended September 30, 2008 and 2007, BNSF IC made
claim payments totaling $85 million and $114 million, respectively, for
settlement of covered claims.
  18
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 
 Environmental
 
 The
Company’s operations, as well as those of its competitors, are subject to
extensive federal, state and local environmental regulation. BNSF Railway’s
operating procedures include practices to protect the environment from the risks
inherent in railroad operations, which frequently involve transporting chemicals
and other hazardous materials. Additionally, many of BNSF Railway’s land
holdings are and have been used for industrial or transportation-related
purposes or leased to commercial or industrial companies whose activities may
have resulted in discharges onto the property. As a result, BNSF Railway is
subject to environmental cleanup and enforcement actions. In particular, the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA), also known as the Superfund law, as well as similar state laws,
generally impose joint and several liability for cleanup and enforcement costs
on current and former owners and operators of a site without regard to fault or
the legality of the original conduct. BNSF Railway has been notified that it is
a potentially responsible party (PRP) for study and cleanup costs at Superfund
sites for which investigation and remediation payments are or will be made or
are yet to be determined (the Superfund sites) and, in many instances, is one of
several PRPs. In addition, BNSF Railway may be considered a PRP under certain
other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF
Railway may be held jointly and severally liable for all environmental costs
associated with a particular site. If there are other PRPs, BNSF Railway
generally participates in the cleanup of these sites through cost-sharing
agreements with terms that vary from site to site. Costs are typically allocated
based on such factors as relative volumetric contribution of material, the
amount of time the site was owned or operated and/or the portion of the total
site owned or operated by each PRP.
 
 Liabilities
for environmental cleanup costs are recorded when BNSF Railway’s liability for
environmental cleanup is probable and reasonably estimable. Subsequent
adjustments to initial estimates are recorded as necessary based upon additional
information developed in subsequent periods. Environmental costs include initial
site surveys and environmental studies as well as costs for remediation of sites
determined to be contaminated.
 
 BNSF
Railway estimates the ultimate cost of cleanup efforts at its known
environmental sites on an annual basis during the third quarter. Ultimate cost
estimates for environmental sites are based on historical payment patterns,
current estimated percentage to closure ratios and benchmark patterns developed
from data accumulated from industry and public sources, including the
Environmental Protection Agency and other governmental agencies. These factors
incorporate experience gained from cleanup efforts at other similar sites into
the estimates for which remediation and restoration efforts are still in
progress.
 
 On a
quarterly basis, BNSF Railway monitors actual experience against the forecasted
remediation and related payments made on existing sites and conducts ongoing
environmental contingency analyses, which consider a combination of factors
including independent consulting reports, site visits, legal reviews and
analysis of the likelihood of participation in, and the ability to pay for,
cleanup of other PRPs. Adjustments to the Company’s estimates will continue to
be recorded as necessary based on developments in subsequent periods.
Additionally, environmental accruals, which are classified as materials and
other in the Consolidated Statements of Income, include amounts for newly
identified sites or contaminants, third-party claims and legal fees incurred for
defense of third-party claims and recovery efforts.
 
 During
the third quarters of 2008 and 2007, the Company analyzed recent data and trends
to ensure the assumptions used by BNSF Railway to estimate its future
environmental liability were reasonable. As a result of this study, in the third
quarters of 2008 and 2007, management recorded additional expense of
approximately $13 million and $20 million as of the respective June 30
measurement dates. The Company plans to update its study again in the third
quarter of 2009.
  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 Railway property, due to a limited
number of sites; or (iii) natural resource damage claims. BNSF Railway 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 Railway’s recorded
liability for third-party tort claims as of September 30, 2008, is approximately
$17 million.
 
 BNSF
Railway is involved in a number of administrative and judicial proceedings and
other mandatory cleanup efforts for 340 sites, including 21 Superfund sites, at
which it is participating in the study or cleanup, or both, of alleged
environmental contamination.
  19
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
  The following
table summarizes the activity in the Company’s accrued obligations for
environmental matters (in millions):
 
 Three
      Months Ended
                September
      30,
              
              
              
              Nine
      Months Ended
                September
      30,2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Beginning
      balance
              
              $
              545
              
              
              $
              362
              
              
              $
              380
              
              
              $
              318Accruals
              
              
              26
              
              
              
              32
              
              
              
              223
              
              
              
              106Payments
              
              
              (28
              )
              
              
              (15
              )
              
              
              (60
              )
              
              
              (45
              )Ending
      balance at September 30,
              
              $
              543
              
              
              $
              379
              
              
              $
              543
              
              
              $
              379
 
 At
September 30, 2008, $66 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 Railway, 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 recent increase in the number of claims
against BNSF Railway and others resulting from this decision, and the completion
of the analysis have caused BNSF Railway to record additional pre-tax
environmental expenses of $175 million 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 Railway’s Montana
sites.
 
 In the
first quarter of 2007, the Company recorded additional pre-tax environmental
expenses of $65 million due to an increase in environmental costs primarily
related to a final resolution with the State of Washington and its Department of
Ecology on clean-up of an existing environmental site at Skykomish and an
adverse reversal of a trial court decision on appeal regarding a site at Arvin,
California.
 
 BNSF
Railway’s environmental liabilities are not discounted. BNSF Railway anticipates
that the majority of the accrued costs at September 30, 2008, will be paid over
the next ten years, and no individual site is considered to be
material.
 
 The
following tables summarize the environmental sites:
 
 Three
      Months Ended
                September
      30,
              
              
              
              Nine
      Months Ended
                September
      30,BNSF
      Sites
              
              
              2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Number
      of sites at beginning of period
              
              
              350
              
              
              
              347
              
              
              
              346
              
              
              
              375Sites
      added during the period
              
              
              4
              
              
              
              2
              
              
              
              16
              
              
              
              14Sites
      closed during the period
              
              
              (14
              )
              
              
              (4
              )
              
              
              (22
              )
              
              
              (44
              )Number
      of sites at September 30,
              
              
              340
              
              
              
              345
              
              
              
              340
              
              
              
              345
  Liabilities
recorded for environmental costs represent BNSF Railway’s best estimate of its
probable future obligation for the remediation and settlement of these sites and
include both asserted and unasserted claims. Although recorded liabilities
include BNSF Railway’s best estimate of all probable costs, without reduction
for anticipated recoveries from third parties, BNSF Railway’s total cleanup
costs at these sites cannot be predicted with certainty due to various factors
such as the extent of corrective actions that may be required, evolving
environmental laws and regulations, advances in environmental technology, the
extent of other parties’ participation in cleanup efforts, developments in
ongoing environmental analyses related to sites determined to be contaminated
and developments in environmental surveys and studies of contaminated
sites.
 
 Because
of the uncertainty surrounding these factors, it is reasonably possible that
future costs for environmental liabilities may range from approximately $395
million to $860 million. However, BNSF Railway believes that the $543 million
recorded at September 30, 2008, is the best estimate of the Company’s future
obligation for environmental costs.
  20
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 
 While the
final outcome of these environmental matters cannot be predicted with certainty,
it is the opinion of BNSF Railway that none of these items, when finally
resolved, will have a material adverse effect on the Company’s financial
position or liquidity. However, the occurrence of a number of these items in the
same period could have a material adverse effect on the results of operations in
a particular quarter or fiscal year.
 
 Other
Claims and Litigation
 
 In
addition to asbestos, other personal injury and environmental matters discussed
above, BNSF Railway and its subsidiaries are also parties to a number of other
legal actions and claims, various governmental proceedings and private civil
suits arising in the ordinary course of business, including those related to
disputes and complaints involving certain transportation rates and charges
(including complaints seeking refunds of prior charges paid for coal
transportation and the prescription of future rates for such movements and
claims relating to service under contract provisions or otherwise). Some of the
legal proceedings include claims for punitive as well as compensatory damages,
and a few proceedings purport to be class actions. While the final outcome of
these matters cannot be predicted with certainty, considering among other things
the meritorious legal defenses available and liabilities that have been recorded
along with applicable insurance, it is the opinion of BNSF Railway that none of
these items, when finally resolved, will have a material adverse effect on the
Company’s financial position or liquidity. However, an unexpected adverse
resolution of one or more of these items could have a material adverse effect on
the results of operations in a particular quarter or fiscal year.
 
 6.    Employee
Separation Costs
 
 Employee
separation costs activity was as follows (in millions):
 
 Nine
      Months Ended September 30,
              
              
              2008
              
              
              
              2007Beginning
      balance at January 1,
              
              $
              91
              
              
              $
              107Accruals
              
              
              3
              
              
              
              5Payments
              
              
              (11
              )
              
              
              (16
              )Ending
      balance at September 30,
              
              $
              83
              
              
              $
              96
 
 Employee
separation liabilities of $83 million were included in the Consolidated
Balance Sheet at September 30, 2008, 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)
$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) $3 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, 2008,
$12 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 (the Merger). These agreements, among other things, reduced train
crew sizes and allowed for more flexible work rules. The majority of the
remaining costs will be paid between 2008 and 2020. As of September 30, 2008,
the Company had updated its estimate and recorded an additional liability of
$3 million related to deferred benefits. The remaining costs for (ii) above
are expected to be paid out between 2008 and approximately 2011, and the costs
for (iii) above are expected be paid out between 2008 and 2021 based on deferral
elections made by the affected employees.
  21
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 
 7.    Employment
Benefit Plans
 
 In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans–an amendment of FASB Statements
No. 87, 88, 106 and 132R, which requires the recognition of the
overfunded or underfunded status of a defined benefit postretirement plan in the
Company’s balance sheet. This portion of the new guidance was adopted by the
Company on December 31, 2006. Additionally, the pronouncement eliminates the
option for the Company to use a measurement date prior to the Company’s fiscal
year-end effective December 31, 2008. SFAS No. 158 provides two approaches to
transition to a fiscal year-end measurement date, both of which are to be
applied prospectively. BNSF Railway has elected to apply the transition option
under which a 15-month measurement was determined as of September 30, 2007, that
covers the period until the fiscal year-end measurement is required on December
31, 2008. As a result, the Company recorded a $7 million decrease to retained
earnings in January 2008 to reflect the proportionate allocation of the net
periodic benefit cost to cover the transition period.
  Components
of the net periodic benefit cost were as follows (in millions):
 
 Pension
      BenefitsThree
      Months Ended
                September
      30,
              
              
              
              Nine
      Months Ended
                September
      30,Net
      Periodic Cost
              
              
              2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Service
      cost
              
              $
              7
              
              
              $
              7
              
              
              $
              19
              
              
              $
              19Interest
      cost
              
              
              25
              
              
              
              24
              
              
              
              76
              
              
              
              73Expected
      return on plan assets
              
              
              (28
              )
              
              
              (26
              )
              
              
              (84
              )
              
              
              (79
              )Amortization
      of net loss
              
              
              4
              
              
              
              8
              
              
              
              12
              
              
              
              26Net
      periodic benefit cost
              
              $
              8
              
              
              $
              13
              
              
              $
              23
              
              
              $
              39
 
 Retiree
      Health and Welfare BenefitsThree
      Months Ended
                September
      30,
              
              
              
              Nine
      Months Ended
                September
      30,Net
      Periodic Cost
              
              
              2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Service
      cost
              
              $
              1
              
              
              $
              –
              
              
              $
              2
              
              
              $
              2Interest
      cost
              
              
              4
              
              
              
              4
              
              
              
              13
              
              
              
              12Amortization
      of net loss
              
              
              1
              
              
              
              1
              
              
              
              3
              
              
              
              4Amortization
      of prior service cost
              
              
              (1
              )
              
              
              (1
              )
              
              
              (5
              )
              
              
              (5
              )Net
      periodic benefit cost
              
              $
              5
              
              
              $
              4
              
              
              $
              13
              
              
              $
              13
 
 Due to
changes in the Company's funding methodology, the Company is no longer required
to make contributions to BNSF's qualified pension plan in 2008.
 
 8.    Related
Party Transactions
 
 BNSF
Railway is involved with BNSF and certain of its subsidiaries in related party
transactions in the ordinary course of business, which include payments made on
each other’s behalf and performance of services. Under the terms of a tax
allocation agreement with BNSF, BNSF Railway made federal and state income tax
payments, net of refunds, of $699 million and $668 million during the first nine
months of 2008 and 2007, respectively, which are reflected in changes in working
capital in the Consolidated Statement of Cash Flows.
 
 At
September 30, 2008 and December 31, 2007, BNSF Railway had $105 million and $44
million, respectively, of intercompany receivables which are reflected in
accounts receivable in the respective Consolidated Balance Sheets. At September
30, 2008 and December 31, 2007, BNSF Railway had $10 million and $14 million of
intercompany payables, respectively, which are reflected in accounts payable in
the respective Consolidated Balance Sheets. Net intercompany balances are
settled in the ordinary course of business.
  22
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -
(Continued)
 
 At
September 30, 2008 and December 31, 2007, BNSF Railway had $1,377 million and
$456 million, respectively, of intercompany notes receivable from BNSF. The $921
million increase in intercompany notes receivable is due to $1,296 million of
loans to BNSF, partially offset by repayments of $375 during the first nine
months of 2008. Additionally, at September 30, 2008, BNSF Railway had $4 million
of intercompany notes receivable from BNSF Logistics, a wholly-owned subsidiary
of BNSF that specializes in third-party logistics services. The $4 million
increase in the BNSF Logistics note is due to $12 million of loans to BNSF
Logistics, partially offset by repayments of $8 million during the first nine
months of 2008. All intercompany notes have a variable interest rate of 1.0
percent above the monthly average of the daily effective Federal Funds rate.
Interest is collected semi-annually on all intercompany notes receivable.
Interest income from intercompany notes receivable is presented in interest
income, related parties in the Consolidated Statements of Income.
 
 BNSF
Railway earned revenues of $31 million and $21 million for the nine months ended
September 30, 2008 and 2007, respectively, for transportation services provided
to BNSF Logistics by BNSF Railway. Additionally, BNSF Railway purchased truck
transportation services for the Company’s materials and supplies from BNSF
Logistics of $29 million  and $24 million for the nine month periods
ended September 30, 2008 and 2007.
 
 Under
various stock incentive plans, BNSF has granted options to employees to purchase
its common stock at a price not less than the fair market value at the date of
grant. Certain employees of BNSF Railway participate in these plans. In
addition, under these plans BNSF has other long-term incentive plans to certain
BNSF Railway employees, including, among other things, restricted stock and a
discounted stock purchase program.
 
 9.    Comprehensive
Income
 
 Other
comprehensive income (loss) refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income, a component of Stockholder’s Equity within the Consolidated Balance
Sheets, rather than net income on the Consolidated Statements of Income. Under
existing accounting standards, other comprehensive income (loss) may include,
among other things, unrecognized gains and losses and prior service cost 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
                September
      30,
              
              
              
              Nine
      Months Ended
                September
      30,2008
              
              
              
              2007
              
              
              
              2008
              
              
              
              2007Net
      income
              
              $
              759
              
              
              $
              633
              
              
              $
              1,703
              
              
              $
              1,609Other
      comprehensive income:Amortization
      of prior service costs and actuarial losses, net of tax (see Note
      7)
              
              
              2
              
              
              
              5
              
              
              
              6
              
              
              
              15(Loss)
      gain on derivative instruments and other items, net of tax (see Note
      2)
              
              
              (89
              )
              
              
              3
              
              
              
              (36
              )
              
              
              3Unrealized
      loss on securities held by equity method investees, net of
    tax
              
              
              (1
              )
              
              
              –
              
              
              
              (1
              )
              
              
              –Total
      comprehensive income
              
              $
              671
              
              
              $
              641
              
              
              $
              1,672
              
              
              $
              1,627
 
 10.    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.
  23
 Table of Contents
  Report
of Independent Registered Public Accounting Firm
 
 To the
Shareholder and Board of Directors of
 BNSF
Railway Company:
 
 
 We have
reviewed the accompanying consolidated balance sheet of BNSF Railway Company and
its subsidiaries ("BNSF Railway" or the "Company") as of September 30, 2008, and
the related consolidated statements of income for each of the three-month and
nine-month periods ended September 30, 2008 and 2007, the consolidated
statements of cash flows for each of the nine-month periods ended September 30,
2008 and 2007 and the consolidated statement of changes in stockholder’s equity
for the nine-month period ended September 30, 2008. 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, 2007, and the related consolidated statements of income, of changes
in stockholder’s equity, and of cash flows for the year then ended (not
presented herein), and in our report dated February 12, 2008, except as
described in Note 1 as to which the date is October 8, 2008, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2007, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
  
 
 Fort
Worth, Texas
 October
23, 2008
 
  24
 Table of Contents
  Item 2.    Management’s Narrative Analysis of
Results of Operations.
 
 Management’s
narrative analysis relates to the results of operations of BNSF Railway Company
and its majority-owned subsidiaries (collectively BNSF Railway, Registrant or
Company). The following narrative analysis should be read in conjunction with
the Consolidated Financial Statements and the accompanying notes. All prior
period financial information has been adjusted as appropriate for the
transaction described in Note 1 to the Consolidated Financial
Statements.
 
 Results of Operations
 
 Nine
Months Ended September 30, 2008, Compared with Nine Months Ended September 30,
2007
 
 Revenues
 
 The
following table presents BNSF Railway’s revenue information by business group
for the nine months ended September 30, 2008 and 2007.
  Revenues
                  (in
      millions)
                
                
                
                Cars
      / Units
                  (in
      thousands)
                
                
                
                Average
      Revenue
                  Per
      Car / Unit2008
                
                
                
                2007
                
                
                
                2008
                
                
                
                2007
                
                
                
                2008
                
                
                
                2007Consumer
      Products
                
                $
                4,643
                
                
                $
                4,167
                
                
                
                3,655
                
                
                
                3,882
                
                
                $
                1,270
                
                
                $
                1,073Industrial
      Products
                
                
                3,109
                
                
                
                2,758
                
                
                
                1,245
                
                
                
                1,252
                
                
                
                2,497
                
                
                
                2,203Coal
                
                
                2,903
                
                
                
                2,385
                
                
                
                1,868
                
                
                
                1,832
                
                
                
                1,554
                
                
                
                1,302Agricultural
      Products
                
                
                2,603
                
                
                
                1,918
                
                
                
                817
                
                
                
                752
                
                
                
                3,186
                
                
                
                2,551Total
      Freight Revenues
                
                
                13,258
                
                
                
                11,228
                
                
                
                7,585
                
                
                
                7,718
                
                
                $
                1,748
                
                
                $
                1,455Other
      Revenues
                
                
                210
                
                
                
                187Total
      Operating Revenues
                
                $
                13,468
                
                
                $
                11,415
 
 Freight
revenues for the first nine months of 2008 were $13,258 million, up 18 percent
compared with the same 2007 period, while cars/units decreased by 2 percent
during this same period. Freight revenues included an increase of approximately
$1,250 million in fuel surcharges compared with the same 2007 period. Average
revenue per car/unit was up 20 percent in the first nine months of 2008 from the
first nine months of 2007 primarily due to fuel surcharges and improved
pricing.
 
 Consumer
Products
 
 The
Consumer Products’ freight business includes a significant intermodal component
and consists of the following three business areas: international intermodal,
domestic intermodal and automotive.
  Consumer
Products revenues of $4,643 million for the first nine months of 2008 were $476
million, or 11 percent, greater than the first nine months of 2007. This was
principally due to higher fuel surcharges, improved yields and increased
domestic intermodal traffic, which was partially offset by lower international
volumes related to economic softness as well as reduced transpacific service of
a large international customer.
 
 Industrial
Products
 
 Industrial
Products’ freight business consists of five business areas: construction
products, building products, petroleum products, chemicals and plastic products
and food and beverages.
 Industrial
Products revenues of $3,109 million for the first nine months of 2008 were $351
million, or 13 percent, greater than the first nine months of 2007, due
mainly to higher fuel surcharges, improved yields and demand for construction
products, which more than offset the decline in building products as a result of
weakness in the housing market.
 
 25
 Table of Contents
  Coal
 
 BNSF
Railway is one of the largest transporters of low-sulfur coal in the United
States. More than 90 percent of all BNSF Railway’s coal tons originate from the
Powder River Basin of Wyoming and Montana.
 
 Coal
revenues of $2,903 million for the first nine months of 2008 increased $518
million, or 22 percent, compared with the same 2007 period. The increase was
primarily driven by improved yields, contractual inflation escalators, higher
fuel surcharges and higher unit volumes. Strong coal unit volumes were driven by
organic growth of existing customers as well as new eastern
conversion.
 
 Agricultural
Products
 
 The
Agricultural Products’ freight business transports agricultural products
including corn, wheat, soybeans, bulk foods, ethanol, fertilizer and other
products.
  Agricultural
Products revenues of $2,603 million for the first nine months of 2008 were $685
million, or 36 percent, higher than revenues for the first nine months of 2007.
This increase was primarily due to improved yields, higher fuel surcharges and
strong unit volumes in ethanol, corn and wheat.
 
 Other
Revenues
 
 Other
revenues increased $23 million, or 12 percent, to $210 million for the first
nine months of 2008. This was primarily due to an increase in demurrage
charges.
 
 Expenses
 
 Total
operating expenses for the first nine months of 2008 were $10,678 million, an
increase of $1,825 million, or 21 percent, versus the same period in
2007.
 
 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 $3,685 million for the first nine months of 2008 were $1,353
million, or 58 percent, higher than the first nine months of 2007. The increase
in fuel expense was primarily due to an increase in the average all-in cost per
gallon of locomotive diesel fuel. The average all-in cost per gallon of
locomotive diesel fuel increased by $1.24 to $3.33, resulting in a $1,318
million increase in expense. The increase in the average all-in cost reflected
an increase in the average purchase price per gallon of $1.26, or a $1,337
million increase in locomotive fuel expenses, offset by an increase in the hedge
benefit of 2 cents per gallon, or $19 million (first nine months 2008 benefit of
$44 million less first nine months 2007 benefit of $25 million). Locomotive fuel
consumption was relatively flat as compared with consumption in the same 2007
period.
 
 Compensation
and benefits
 
 Compensation
and benefits includes expenses for BNSF Railway employee wages, health and
welfare, payroll taxes and other related items. The primary factors influencing
the expenses recorded are volume, headcount, utilization, wage rates, incentives
earned during the period, benefit plan participation and pension
expenses.
 
 Compensation
and benefits expenses of $2,932 million for the first nine months of 2008 were
$154 million, or 6 percent, higher than the same prior year period. This
increase was primarily related to higher incentive compensation costs, which
covers all non-union and about 25 percent of union employees. Wage
inflation was partially offset by improved productivity. The average number of
employees decreased 1 percent compared to the first nine months of
2007.
  26
 Table of Contents
 
 Purchased
services
 
 Purchased
services expense includes ramping (lifting of containers onto and off of cars);
drayage (highway movements to and from railway facilities); maintenance of
locomotives, freight cars and equipment; transportation costs over other
railroads; technology services outsourcing; professional services; and other
contract services provided to BNSF Railway. The expenses are driven by the rates
established in the related contracts and the volume of services
required.
 
 Purchased
service expenses of $1,553 million for the first nine months of 2008 were $64
million, or 4 percent, higher than the first nine months of 2007. This increase
was due to haulage payments for transportation over other railroads and
locomotive and freight car contract maintenance expense.
 
 Depreciation
and amortization
 
 Depreciation
and amortization expenses for the period are determined by using the group
method of depreciation, applying a single rate to the gross investment in a
particular class of property. Due to the capital-intensive nature of BNSF
Railway’s operations, depreciation expense is a significant component of the
Company’s operating expense. The full effect of inflation is not reflected in
operating expenses because depreciation is based on historical
cost.
 
 Depreciation
and amortization expenses of $1,038 million for the first nine months of 2008
were $86 million, or 9 percent, higher than the same period in 2007. This
increase in depreciation expense was primarily due to continuing capital
expenditures, updated depreciation rates for locomotives that went into effect
in April 2007 and updated depreciation rates for other roadway property that
went into effect in April 2008.
 
 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 $683 million for the first nine months of 2008 were $21
million, or 3 percent, lower than the first nine months of 2007 due to lower
volumes, improved velocity and increased asset utilization.
 
 Materials
and other
 
 Material
expenses consist mainly of the costs involved to purchase mechanical and
engineering materials, in addition to other items for construction and
maintenance of property and equipment. Other expenses 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 $787 million for the first nine months of 2008 were $189
million, or 32 percent, higher than the first nine months of 2007. The increase
was primarily due to higher environmental costs.
 
 Interest
expense
 
 Interest
expense of $70 million for the first nine months of 2008 was $2 million, or 3
percent, higher than the same 2007 period. This was primarily due to a higher
average debt balance, offset by the interest associated with a favorable tax
settlement.
 
 Income
taxes
 
 The
effective tax rate for the nine months ended September 30, 2008, was 37.3
percent compared with 38.5 percent for the same prior year period. The decrease
in the effective tax rate primarily reflects a favorable tax
settlement.
  27
 Table of Contents
 
 Forward-Looking
Information
 
 To the
extent that statements made by the Company relate to the Company’s future
economic performance or business outlook, projections or expectations of
financial or operational results, or refer to matters that are not historical
facts, such statements are “forward-looking” statements within the meaning of
the federal securities laws. These forward-looking statements include, but are
not limited to, statements regarding:
  •               
Expectations as to operating results, such as revenue growth and earnings per
share;
 
 •               
Expectations as to the effect on the Company's financial condition of claims,
litigation, environmental and personal injury costs, commitments, contingent
liabilities,
 
 •               
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:
 
 •              
Economic and industry
conditions: material adverse changes in economic or industry conditions,
both in the United States and globally, continuing volatility in the capital or
credit markets and other changes in the securities and capital markets, changes
in customer demand, effects of adverse economic conditions affecting shippers or
BNSF Railway’s supplier base, adverse economic conditions in the industries and
geographic areas that produce and consume freight, changes in demand due to more
stringent regulatory policies such as the regulation of carbon dioxide
emissions that could reduce the demand for coal, governmental tariffs or
subsidies that could affect the demand for grain, competition and consolidation
within the transportation industry, the extent to which BNSF Railway is
successful in gaining new long-term relationships with customers or retaining
existing ones, level of service failures that could lead customers to use
competitors' services, changes in fuel prices and other key materials and
disruptions in supply chains for these materials, changes in the securities and
capital markets and changes in crew availability, labor costs and labor
difficulties, including stoppages affecting either BNSF Railway’s operations or
customers’ abilities to deliver goods to BNSF Railway for shipment;
 
 •              Legal, legislative and regulatory
factors: developments and changes in laws and regulations, including
those affecting train operations or the marketing of services, the ultimate
outcome of shipper and rate claims subject to adjudication or claims,
investigations or litigation alleging violations of the antitrust laws,
increased economic regulation of the rail industry through legislative action
and revised rules and standards applied by the U.S. Surface Transportation Board
in various areas including rates and services, developments in environmental
investigations or proceedings with respect to rail operations or current or past
ownership or control of real property, and developments in and losses resulting
from other types of claims and litigation, including those relating to personal
injuries, asbestos and other occupational diseases, the release of hazardous
materials, environmental contamination and damage to property; 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, the effectiveness of steps taken to maintain and improve
operations and velocity and network fluidity, including the management of the
amount of traffic on the system to meet demand and the ability to acquire
sufficient resources to meet that demand, the ability to expand the capacity of
the system, congestion on other railroads and capacity constraints affecting all
links in the transportation chain that feed traffic and goods to BNSF Railway’s
systems, restrictions on development and expansion plans due to
environmental concerns, disruptions to BNSF Railway’s technology network
including computer systems and software, as well as natural events such as
severe weather, fires, floods and earthquakes or man-made or other disruptions
of BNSF Railway’s operating systems, structures, or equipment including the
effects of acts of terrorism on the Company’s system or other railroads’
systems.
  28
 Table of Contents
  The
Company cautions against placing undue reliance on forward-looking statements,
which reflect its current beliefs and are based on information currently
available to it as of the date a forward-looking statement is made. The Company
undertakes no obligation to revise forward-looking statements to reflect future
events, changes in circumstances, or changes in beliefs. In the event the
Company does update any forward-looking statement, no inference should be made
that the Company will make additional updates with respect to that statement,
related matters, or any other forward-looking statements. Any corrections or
revisions and other important assumptions and factors that could cause actual
results to differ materially from forward-looking statements made by the Company
may appear in the Company’s public filings with the SEC, which are accessible at
www.sec.gov, and on the Company’s website at www.bnsf.com, and which investors
are advised to consult.
  29
 Table of Contents
  Item 4T.    Controls and
Procedures.
 
 Based on
their evaluation as of the end of the period covered by this quarterly report on
Form 10-Q, BNSF Railway’s principal executive officer and principal financial
officer have concluded that BNSF Railway’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934) are effective to ensure that information required to be disclosed by BNSF
Railway in the reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized, and reported within the time
periods specified in Securities and Exchange Commission rules and forms and that
such information is accumulated and communicated to BNSF Railway’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure.
Additionally, as of the end of the period covered by this report, BNSF Railway's
principal executive officer and principal financial officer have concluded that
there have been no changes in BNSF Railway's internal control over financial
reporting that occurred during the fiscal quarter that have materially affected,
or are reasonably likely to materially affect, BNSF Railway's internal control
over financial reporting.
  30
 Table of Contents
  BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 PART
II OTHER INFORMATION
 
 
 Item 6.    Exhibits.
 
 See Index to Exhibits on page E-1 for a
description of the exhibits filed as part of this
report.
  31
 Table of Contents
  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.
 
 BNSF
      Railway Company(Registrant)By:
              
              /s/    Thomas
      N. HundThomas
      N. Hund
                Executive
      Vice President and Chief Financial Officer
                (On
      behalf of the Registrant and
                as
      principal financial officer)
 Dated:  October
      23, 2008  S-1
 
 Table of Contents
 BNSF
RAILWAY COMPANY and SUBSIDIARIES
 
 Exhibit Index
 
 Incorporated by
      Reference
                (if
      applicable)Exhibit Number and
      Description
              Form
              File
      Date
              File No.
              Exhibit3.1
              
              Restated
      Certificate of Incorporation of BNSF Railway Company, dated January 17,
      2005.
              10-Q
              7/26/2005
              001-06324
              3.13.2
              
              By-Laws
      of BNSF Railway Company, as amended August 30, 2005.
              10-Q
              10/25/2005
              001-06324
              3.112.1
              
              Computation of Ratio of Earnings to Fixed
      Charges.*31.1
              
              Principal Executive Officer’s Certifications Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
              
              Principal Financial Officer’s Certifications Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
              
              Certification Pursuant to 18 U.S.C. § 1350 (Section 906
      of the Sarbanes-Oxley Act of 2002).*
 
 __________________
 *Filed
herewith