UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended September 30, 2018

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the transition period from            to            

Commission file number            1-11535

BURLINGTON NORTHERN SANTA FE, LLC

(Exact name of registrant as specified in its charter)

Delaware	27-1754839
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2650 Lou Menk Drive

Fort Worth, Texas

(Address of principal executive offices)

76131-2830

(Zip Code)

(800) 795-2673

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
	Yes  [x]  No  [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
	Yes  [x]  No  [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]  Accelerated filer  [  ]  Non-accelerated filer  [x]  Smaller reporting company  [  ] Emerging growth company  [  ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
	Yes  [  ]  No  [x]
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	PAGE
Item 1.	Financial Statements	3
Item 2.	Management’s Narrative Analysis of Results of Operations	23
Item 4.	Controls and Procedures	26
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 6.	Exhibits	28
Signatures		S-1

2

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In millions)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues	$	6,147		$	5,314		$	17,649		$	15,749
Operating expenses:
Compensation and benefits	1,378			1,173			4,021			3,725
Fuel	859			595			2,456			1,777
Purchased services	718			608			2,124			1,843
Depreciation and amortization	580			591			1,726			1,756
Equipment rents	183			193			542			585
Materials and other	320			214			1,041			769
Total operating expenses	4,038			3,374			11,910			10,455
Operating income	2,109			1,940			5,739			5,294
Interest expense	262			253			774			761
Other (income) expense, net	(32		)	(23		)	(82		)	(59		)
Income before income taxes	1,879			1,710			5,047			4,592
Income tax expense	486			668			1,200			1,754
Net income	$	1,393		$	1,042		$	3,847		$	2,838

See accompanying Notes to Consolidated Financial Statements.

3

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Net income	$	1,393		$	1,042	$	3,847		$	2,838
Other comprehensive income:
Change in pension and retiree health and welfare benefits, net of tax	(1		)	—		(1		)	(1		)
Change in accumulated other comprehensive income (loss) of equity method investees	—			—		1			(1		)
Other comprehensive income (loss), net of tax	(1		)	—		—			(2		)
Total comprehensive income	$	1,392		$	1,042	$	3,847		$	2,836

See accompanying Notes to Consolidated Financial Statements.

4

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

	September 30, 2018		December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	2,280	$	1,975
Accounts receivable, net	1,576		1,448
Materials and supplies	826		803
Other current assets	249		408
Total current assets	4,931		4,634
Property and equipment, net of accumulated depreciation of $9,596 and $8,627, respectively	62,800		62,313
Goodwill	14,851		14,845
Intangible assets, net	382		394
Other assets	2,343		2,337
Total assets	$	85,307	$	84,523
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable and other current liabilities	$	3,301	$	3,169
Long-term debt due within one year	86		740
Total current liabilities	3,387		3,909
Long-term debt	23,171		21,759
Deferred income taxes	13,734		13,452
Casualty and environmental liabilities	486		499
Intangible liabilities, net	403		471
Pension and retiree health and welfare liability	313		310
Other liabilities	1,110		1,114
Total liabilities	42,604		41,514
Commitments and contingencies (see Notes 7 and 8)
Equity:
Member’s equity	42,447		42,778
Accumulated other comprehensive income (loss)	256		231
Total equity	42,703		43,009
Total liabilities and equity	$	85,307	$	84,523

See accompanying Notes to Consolidated Financial Statements.

5

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Nine Months Ended September 30,
	2018			2017
OPERATING ACTIVITIES
Net income	$	3,847		$	2,838
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,726			1,756
Deferred income taxes	279			426
Long-term casualty and environmental liabilities, net	(24		)	(63		)
Other, net	(106		)	(133		)
Changes in current assets and liabilities:
Accounts receivable, net	(125		)	(99		)
Materials and supplies	(23		)	18
Other current assets	(55		)	11
Accounts payable and other current liabilities	424			14
Net cash provided by operating activities	5,943			4,768
INVESTING ACTIVITIES
Capital expenditures excluding equipment	(2,022		)	(2,107		)
Acquisition of equipment	(134		)	(280		)
Purchases of investments and investments in time deposits	(23		)	(9		)
Proceeds from sales of investments and maturities of time deposits	37			25
Other, net	(114		)	(204		)
Net cash used for investing activities	(2,256		)	(2,575		)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt	1,500			1,250
Payments on long-term debt	(711		)	(710		)
Cash distributions	(4,150		)	(2,625		)
Other, net	(21		)	(20		)
Net cash used for financing activities	(3,382		)	(2,105		)
Increase in cash and cash equivalents	305			88
Cash and cash equivalents:
Beginning of period	1,975			3,218
End of period	$	2,280		$	3,306
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized	$	819		$	833
Capital investments accrued but not yet paid	$	166		$	147
Income taxes paid, net of refunds	$	540		$	1,193
Non-cash asset financing	$	4		$	—

See accompanying Notes to Consolidated Financial Statements. 

6

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In millions)

(Unaudited)

	Member’s Equity			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance at December 31, 2017	$	42,778		$	231		$	43,009
Adoption of ASC Topic 606	(3		)	—			(3		)
Equity method investee adoption of ASU 2016-01a	1			(1		)	—
Reclassification upon early adoption of ASU 2018-02	(26		)	26			—
Cash distributions	(4,150		)	—			(4,150		)
Comprehensive income (loss), net of tax	3,847			—			3,847
Balance at September 30, 2018	$	42,447		$	256		$	42,703

^a Accounting Standards Update No. 2016-01 Financial Instruments- Recognition and Measurement of Financial Assets and Financial Liabilities

See accompanying Notes to Consolidated Financial Statements.

7

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Accounting Policies and Interim Results

The Consolidated Financial Statements should be read in conjunction with Burlington Northern Santa Fe, LLC’s Annual Report on Form 10-K for the year ended December 31, 2017, including the financial statements and notes thereto. Burlington Northern Santa Fe, LLC (BNSF) is a holding company that conducts no operating activities and owns no significant assets other than through its interests in its subsidiaries. The Consolidated Financial Statements include the accounts of BNSF and its majority-owned subsidiaries, all of which are separate legal entities (collectively, the Company). BNSF’s principal operating subsidiary is BNSF Railway Company (BNSF Railway). All intercompany accounts and transactions have been eliminated.

On February 12, 2010, Berkshire Hathaway Inc., a Delaware corporation (Berkshire), acquired 100 percent of the outstanding shares of Burlington Northern Santa Fe Corporation common stock that it did not already own. The acquisition was completed through the merger (Merger) of a Berkshire wholly-owned merger subsidiary and Burlington Northern Santa Fe Corporation with the surviving entity renamed Burlington Northern Santa Fe, LLC. Earnings per share data is not presented because BNSF has only one holder of its membership interests.

The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the entire year. In the opinion of management, the unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments, except as disclosed) necessary for a fair statement of BNSF’s consolidated financial position as of September 30, 2018, and the results of operations for the three and nine months ended September 30, 2018 and 2017.

2. Revenue from Contracts with Customers

On January 1, 2018, the Company adopted ASC Topic 606 (new revenue guidance) using the modified retrospective transition method and the practical expedient for contracts not completed as of the date of adoption. The Company recorded the cumulative effect of adopting ASC Topic 606 as a $3 million net reduction to member’s equity as of January 1, 2018, primarily due to the timing impacts of variable consideration for certain customer incentives. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for the prior period. The impact of adoption to our Consolidated Statements of Income, Balance Sheets, and Statements of Cash Flows for the current year is immaterial as reflected in the Consolidated Statements of Changes in Equity. Therefore, financial statements showing 2018 reported under previous guidance are not presented.

The Company’s primary source of revenue is freight rail transportation services. The primary performance obligation for the Company is to move freight from a point of origin to a point of destination for its customers. The performance obligations are represented by bills of lading which create a series of distinct services that have a similar pattern of transfer to the customer. The revenues for each performance obligation are based on various factors including the product being shipped, the origin and destination pair, and contract incentives which are outlined in various private rate agreements, common carrier public tariffs, interline foreign road agreements and pricing quotes. The transaction price is generally a per car amount to transport cars from a certain origin to a certain destination.

The associated freight revenues are recognized over time as the service is performed because the customer simultaneously receives and consumes the benefits of the service. The Company recognizes revenue based on the proportion of the service completed as of the balance sheet date. Bills for freight transportation services are generally issued to customers and paid within thirty days or less. As a result, no significant contract assets exist and there are no significant financing components in the Company’s revenue arrangements.

Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to revenue on a pro-rata basis based on actual or projected future customer shipments. A small portion of customer incentive agreements have a component where a different discount amount is provided for different levels of volumes, resulting in variable consideration. To determine transaction price in these cases, the Company estimates the amount of variable consideration at each reporting period utilizing the most likely amount based on historical trends as well as economic and other indicators. These incentives are ratably applied to all units using an estimate of how much volume the customer will ship under the customer incentive agreement. Both the variable consideration and the associated contract liabilities resulting from these types of customer incentives are immaterial.

8

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Other revenues are primarily generated from a wholly owned non-rail logistics subsidiary providing logistics and transportation services and from accessorial services provided to customers which are primarily storage and demurrage. The vast majority of revenues generated by the non-rail logistics subsidiary are recognized over time as the services are performed and accessorial revenues are recognized when the service is performed.

In accordance with ASC Topic 606, the Company disaggregates revenue from contracts with customers based on the characteristics of the services being provided and the types of products being transported and other revenues (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Consumer Products	$	2,002	$	1,792	$	5,841	$	5,214
Industrial Products	1,576		1,268		4,416		3,766
Agricultural Products	1,165		992		3,499		3,174
Coal	1,069		1,009		2,928		2,881
Total freight revenues	5,812		5,061		16,684		15,035
Non-rail logistics subsidiary	235		163		641		458
Accessorial and other	100		90		324		256
Total other revenues	335		253		965		714
Total operating revenues	$	6,147	$	5,314	$	17,649	$	15,749

Contract assets and liabilities are immaterial. Receivables from contracts with customers is a component of accounts receivable, net on the Consolidated Balance Sheets. At September 30, 2018 and January 1, 2018, $1.3 billion and $1.2 billion, respectively, represent net receivables from contracts with customers.

Remaining performance obligations primarily consist of in-transit freight revenues, which will be recognized in the next reporting period. At September 30, 2018 and January 1, 2018, remaining performance obligations were $265 million and $192 million, respectively.

3. Accounts Receivable, Net

Accounts receivable, net consists of freight and other receivables, reduced by an allowance for bill adjustments and uncollectible accounts, based upon expected collectibility. At each period ended September 30, 2018 and December 31, 2017, $87 million of such allowances had been recorded.

At September 30, 2018 and December 31, 2017, $65 million and $82 million, respectively, of accounts receivable were greater than 90 days old.

4. Investments

BNSF holds investments which are included in other assets on the Consolidated Balance Sheets. The following table summarizes the fair value of investments held as of September 30, 2018 and December 31, 2017 (in millions):

	September 30, 2018		December 31, 2017
Debt securities	$	35	$	43
Equity securities	51		54
Total	$	86	$	97

The fair value measurements of BNSF’s debt securities are based on Level 2 inputs and equity securities are based on Level 1 inputs, using a market approach. Gains and losses recognized in other (income) expense, net for the Company for the nine months ended September 30, 2018 and 2017 were not material.

9

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

5. Goodwill and Other Intangible Assets and Liabilities

In July 2018, BNSF Logistics, LLC, a wholly-owned, third-party logistics company, made an immaterial acquisition of a company, resulting in the recognition of $6 million in goodwill. At September 30, 2018 and December 31, 2017, the carrying value of goodwill was $14,851 million and $14,845 million, respectively.

Intangible assets and liabilities were as follows (in millions):

	As of September 30, 2018				As of December 31, 2017
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets	$	662	$	280	$	647	$	253
Intangible liabilities	$	1,403	$	1,000	$	1,403	$	932

As of September 30, 2018 and December 31, 2017, intangible assets primarily consisted of franchise and customer assets. Intangible liabilities primarily consisted of customer and shortline contracts which were in an unfavorable position at the date of Merger.

Amortizable intangible assets and liabilities are amortized based on the estimated pattern in which the economic benefits are expected to be consumed or on a straight-line basis over their estimated economic lives.

Amortization of intangible assets and liabilities was as follows (in millions):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Amortization of intangible assets	$	9	$	9	$	27	$	27
Amortization of intangible liabilities	$	23	$	24	$	68	$	72

Amortization of intangible assets and liabilities for the next five years is expected to approximate the following (in millions):

	Amortization of intangible assets		Amortization of intangible liabilities
Remainder of 2018	$	9	$	22
2019	$	36	$	27
2020	$	36	$	26
2021	$	33	$	24
2022	$	31	$	23

10

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

6. Other Assets

In July 2010, the Company entered into a low-income housing partnership (the Partnership) as the limited partner, holding a 99.9 percent interest in the Partnership. The Partnership is a variable interest entity (VIE), with the purpose of developing and operating low-income housing rental properties. Recovery of the Company’s investment is accomplished through the utilization of low-income housing tax credits and the tax benefits of Partnership losses. The general partner, who holds a 0.1 percent interest in the Partnership, is an unrelated third party and is responsible for controlling and managing the business and financial operation of the Partnership. As the Company does not have the power to direct the activities that most significantly impact the Partnership’s economic performance, the Company is not the primary beneficiary and therefore, does not consolidate the Partnership. The Company does not provide financial support to the Partnership that it was not previously contractually obligated to provide.    

The Company has accounted for its investment in the Partnership using the effective yield method. The risk of loss of the Company’s investment in the Partnership is considered low as an affiliate of the general partner has provided certain guarantees of tax credits and minimum annual returns. For the nine months ended September 30, 2018 and 2017, the Company recognized a reduction to income tax expense of $15 million and $26 million, respectively. The Company’s maximum exposure to loss related to the Partnership is the unamortized investment balance. The following table provides information related to this Partnership (in millions):

	September 30, 2018		December 31, 2017
Unamortized investment balance classified as other assets	$	68	$	118
Maximum exposure to loss	$	68	$	118

Included within other assets are capitalized right-to-use fixed assets of $983 million and $958 million, and related accumulated amortization of $304 million and $287 million, at September 30, 2018 and December 31, 2017, respectively.

7. Debt

Notes and Debentures

In August 2018, BNSF issued $750 million of 4.15 percent debentures due December 15, 2048. The net proceeds from the sale of the debentures will be used for general corporate purposes, which may include but are not limited to working capital, capital expenditures, repayment of outstanding indebtedness and distributions.

In March 2018, BNSF issued $750 million of 4.05 percent debentures due June 15, 2048. The net proceeds from the sale of the debentures were used for general corporate purposes, which may include but are not limited to working capital, capital expenditures, repayment of outstanding indebtedness and distributions.

As of September 30, 2018, $250 million remained authorized by the Board of Managers of the Company to be issued through the Securities and Exchange Commission debt shelf offering process.

The Company is required to maintain certain financial covenants in conjunction with $500 million of certain issued and outstanding junior subordinated notes. As of September 30, 2018, the Company was in compliance with these financial covenants.

Fair Value of Debt Instruments

At September 30, 2018 and December 31, 2017, the fair value of BNSF’s debt, excluding capital leases and unamortized gains on interest rate swaps, was $24.2 billion and $25.1 billion, respectively, while the book value, which also excludes capital leases and the associated unamortized fair value adjustment under acquisition method accounting related to capital leases and unamortized gains on interest rate swaps, was $22.8 billion and $22.0 billion, respectively. The fair value of BNSF’s debt is primarily based on market value price models using observable market-based data for the same or similar issues, or on the estimated rates that would be offered to BNSF for debt of the same remaining maturities (Level 2 inputs).

11

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Guarantees

As of September 30, 2018, BNSF has not been called upon to perform under the guarantees specifically disclosed in this footnote and does not anticipate a significant performance risk in the foreseeable future.

Debt and other obligations of non-consolidated entities guaranteed by the Company as of September 30, 2018, were as follows (dollars in millions):

	Guarantees
	BNSF Ownership Percentage		Principal Amount Guaranteed		Maximum Future Payments		Maximum Recourse Amounta		Remaining Term (in years)	Capitalized Obligations
Kinder Morgan Energy Partners, L.P.	0.5	%	$	190	$	190	$	—	Termination of Ownership	$	2	b
Chevron Phillips Chemical Company LP	—	%	N/Ad		N/Ad		N/Ad		9	$	19	c

^a  Reflects the maximum amount the Company could recover from a third party other than the counterparty.

^b  Reflects capitalized obligations that are recorded on the Company’s Consolidated Balance Sheets.

^c  Reflects the asset and corresponding liability for the fair value of these guarantees required by authoritative accounting guidance related to guarantees.

^d  There is no cap to the liability that can be sought from BNSF for BNSF’s negligence or the negligence of the indemnified party. However, BNSF could receive reimbursement from certain insurance policies if the liability exceeds a certain amount.

Kinder Morgan Energy Partners, L.P.

Santa Fe Pacific Pipelines, Inc., an indirect, wholly-owned subsidiary of BNSF, has a guarantee in connection with its remaining special limited partnership interest in Santa Fe Pacific Pipeline Partners, L.P. (SFPP), a subsidiary of Kinder Morgan Energy Partners, L.P., to be paid only upon default by the partnership. All obligations with respect to the guarantee will cease upon termination of ownership rights, which would occur upon a put notice issued by BNSF or the exercise of the call rights by the general partners of SFPP.

Chevron Phillips Chemical Company LP

BNSF has an indemnity agreement with Chevron Phillips Chemical Company LP (Chevron Phillips), granting certain rights of indemnity from BNSF, in order to facilitate access to a 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.

Indemnities

In the ordinary course of business, BNSF enters into agreements with third parties that include indemnification clauses. The Company believes that these clauses are generally 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. Despite the uncertainty 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 reflect unique circumstances, particularly agreements that contain guarantees that indemnify for another party’s acts, are disclosed separately, if appropriate. Unless separately disclosed above, no fair value liability related to indemnities has been recorded in the Consolidated Financial Statements.

12

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Variable Interest Entities - Leases

BNSF Railway has entered into various lease transactions in which the structure of the lease contains VIEs. These leases are primarily for equipment. These VIEs were created solely for the lease transactions and have no other activities, assets or liabilities outside of the lease transactions. In some of the arrangements, BNSF Railway has the option to purchase some or all of the leased assets at a fixed price, thereby creating variable interests for BNSF Railway in the VIEs. The future minimum lease payments associated with the VIE leases were $1.6 billion as of September 30, 2018.

In the event the leased asset is destroyed, BNSF Railway is generally obligated to either replace the asset or pay a fixed loss amount. The inclusion of the fixed loss amount is a standard clause within the lease arrangements. Historically, BNSF Railway has not incurred significant losses related to this clause. As such, it is not anticipated that the maximum exposure to loss would materially differ from the future minimum lease payments.

BNSF Railway does not provide financial support to the VIEs that it was not previously contractually obligated to provide.

BNSF Railway maintains and operates the leased assets based on contractual obligations within the lease arrangements, which set specific guidelines consistent within the industry. As such, BNSF Railway has no control over activities that could materially impact the fair value of the leased assets. BNSF Railway does not hold the power to direct the activities of the VIEs and therefore does not control the ongoing activities that have a significant impact on the economic performance of the VIEs. Additionally, BNSF Railway does not have the obligation to absorb losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the VIEs. Depending on market conditions, the fixed-price purchase options could potentially provide benefit to the Company; however, any benefits potentially received from a fixed-price purchase option are generally expected to be minimal. Based on these factors, BNSF Railway is not the primary beneficiary of the VIEs. As BNSF Railway is not the primary beneficiary and the majority of the VIE leases are operating leases, the assets and liabilities related to the VIEs recorded in the Company’s Consolidated Balance Sheets are immaterial.

8. 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, can contribute to increased expenses. Other proceedings include claims by non-employees for punitive as well as compensatory damages, and from time to time may include proceedings that have been certified as or purport to be class actions. The variability present in settling these claims, including non-employee personal injury and matters in which punitive damages are alleged, could result in increased expenses in future years. BNSF has implemented a number of safety programs designed to reduce the number of personal injuries as well as the associated claims and personal injury expense.

BNSF records an undiscounted liability for personal injury claims when the expected loss is both probable and reasonably estimable. The liability and ultimate expense projections are estimated using standard actuarial methodologies. Liabilities recorded for unasserted personal injury claims are based on information currently available. Due to the inherent uncertainty involved in projecting future events such as the number of claims filed each year, developments in judicial and legislative standards and the average costs to settle projected claims, actual costs may differ from amounts recorded. Expense accruals and any required adjustments are classified as materials and other in the Consolidated Statements of Income.

Asbestos

The Company is party to a number of personal injury claims by employees and non-employees who may have been exposed to asbestos. The heaviest exposure for certain BNSF employees was due to work conducted in and around the use of steam locomotive engines that were phased out between the years of 1950 and 1967. However, other types of exposures, including exposure from locomotive component parts and building materials, continued after 1967 until they were substantially eliminated at BNSF by 1985.

13

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

BNSF assesses its unasserted asbestos liability exposure on an annual basis during the third quarter. BNSF determines its asbestos liability by estimating its exposed population, the number of claims likely to be filed, the number of claims that will likely require payment and the estimated cost per claim. Estimated filing and dismissal rates and average cost per claim are determined utilizing recent claim data and trends.

During the third quarters of 2018 and 2017, the Company analyzed recent filing and payment trends to ensure the assumptions used by BNSF to estimate its future asbestos liability were reasonable. In the third quarter of 2018, management determined that the liability remained appropriate, and no change was recorded. In the third quarter of 2017, management recorded a decrease to the liability of $29 million. The Company plans to update its study again in the third quarter of 2019.

Throughout the year, BNSF monitors actual experience against the number of forecasted claims and expected claim payments and will record adjustments to the Company’s estimates as necessary.

Based on BNSF’s estimate of the potentially exposed employees and related mortality assumptions, it is anticipated that unasserted asbestos claims will continue to be filed through the year 2050. The Company recorded an amount for the full estimated filing period through 2050 because it had a relatively finite exposed population (former and current employees hired prior to 1985), which it was able to identify and reasonably estimate and about which it had obtained reliable demographic data (including age, hire date and occupation) derived from industry or BNSF specific data that was the basis for the study. BNSF projects that approximately 65, 80 and 95 percent of the future unasserted asbestos claims will be filed within the next 10, 15 and 25 years, respectively.

Other Personal Injury

BNSF estimates its other personal injury liability claims and expense quarterly based on the covered population, activity levels and trends in frequency and the costs of covered injuries. Estimates include unasserted claims except for certain repetitive stress and other occupational trauma claims that allegedly result from prolonged repeated events or exposure. Such claims are estimated on an as-reported basis because the Company cannot estimate the range of reasonably possible loss due to other non-work related contributing causes of such injuries and the fact that continued exposure is required for the potential injury to manifest itself as a claim. BNSF has not experienced any significant adverse trends related to these types of claims in recent years.

BNSF monitors quarterly actual experience against the number of forecasted claims to be received, the forecasted number of claims closing with payment and expected claim payments. Adjustments to the Company’s estimates are recorded quarterly as necessary or more frequently as new events or changes in estimates develop.

The following table summarizes the activity in the Company’s accrued obligations for asbestos and other personal injury matters (in millions):

	Three Months Ended September 30,
	2018			2017
Beginning balance	$	295		$	364
Accruals / changes in estimates	22			(24		)
Payments	(16		)	(16		)
Ending balance	$	301		$	324

	Nine Months Ended September 30,
	2018			2017
Beginning balance	$	307		$	367
Accruals / changes in estimates	56			(6		)
Payments	(62		)	(37		)
Ending balance	$	301		$	324

At September 30, 2018 and December 31, 2017, $80 million and $85 million was included in current liabilities, respectively. 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 personal injury claims.

14

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Because of the uncertainty surrounding the ultimate outcome of personal injury claims, it is reasonably possible that future costs to settle personal injury claims may range from approximately $265 million to $360 million. However, BNSF believes that the $301 million recorded at September 30, 2018 is the best estimate of the Company’s future obligation for the settlement of personal injury claims.

The amounts recorded by BNSF for personal injury liabilities 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.

Although the final outcome of personal injury matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded, it is the opinion of BNSF that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, the occurrence of a number of these items in the same period could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

BNSF Insurance Company

The Company has a consolidated, wholly-owned subsidiary, Burlington Northern Santa Fe Insurance Company, Ltd. (BNSFIC), that offers insurance coverage for certain risks, FELA claims, railroad protective and force account insurance claims and certain excess general liability and property coverage, and certain other claims which are subject to reinsurance. BNSFIC has entered into annual reinsurance treaty agreements with several other companies. The treaty agreements insure workers compensation, general liability, auto liability and FELA risk. In accordance with the agreements, BNSFIC cedes a portion of its FELA exposure through the treaty and assumes a proportionate share of the entire risk. Each year BNSFIC reviews the objectives and performance of the treaty to determine its continued participation in the treaty. The treaty agreements provide for certain protections against the risk of treaty participants’ non-performance. On an ongoing basis, BNSF and/or the treaty manager reviews the creditworthiness of each of the participants. BNSF does not believe its exposure to treaty participants’ non-performance is material at this time. BNSFIC typically invests in time deposits and money market accounts. At September 30, 2018, there was $511 million related to these third-party investments, which were classified as cash and cash equivalents on the Company’s Consolidated Balance Sheets, as compared with $497 million at December 31, 2017.

Environmental

The Company’s operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF’s operating procedures include practices to protect the environment from the risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF’s land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental cleanup and enforcement actions. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also known as the Superfund law, as well as similar state laws, generally impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. BNSF has been notified that it is a potentially responsible party (PRP) for study and cleanup costs at Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF generally participates in the cleanup of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on such factors as relative volumetric contribution of material, the amount of time the site was owned or operated and/or the portion of the total site owned or operated by each PRP.

BNSF is involved in a number of administrative and judicial proceedings and other mandatory cleanup efforts for 206 sites, including 18 Superfund sites, at which it is participating in the study or cleanup, or both, of alleged environmental contamination.

15

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Liabilities for environmental cleanup costs are recorded when BNSF’s liability for environmental cleanup is probable and reasonably estimable. Subsequent adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. Environmental costs include initial site surveys and environmental studies as well as costs for remediation of sites determined to be contaminated.

BNSF estimates the ultimate cost of cleanup efforts at its known environmental sites on an annual basis during the third quarter. Ultimate cost estimates for environmental sites are based on current estimated percentage to closure ratios, possible remediation work plans and estimates of the costs and likelihood of each possible outcome, historical payment patterns, and benchmark patterns developed from data accumulated from industry and public sources, including the Environmental Protection Agency and other governmental agencies. These factors incorporate into the estimates experience gained from cleanup efforts at other similar sites.

Annual studies do not include: (i) contaminated sites of which the Company is not aware; (ii) additional amounts for third-party tort claims, which arise out of contaminants allegedly migrating from BNSF property, due to a limited number of sites; or (iii) natural resource damage claims. BNSF continues to estimate third-party tort claims on a site by site basis when the liability for such claims is probable and reasonably estimable. BNSF’s recorded liability for third-party tort claims as of September 30, 2018 and December 31, 2017 was $8 million and $9 million, respectively.

On a quarterly basis, BNSF monitors actual experience against the forecasted remediation and related payments made on existing sites and conducts ongoing environmental contingency analyses, which consider a combination of factors including independent consulting reports, site visits, legal reviews and analysis of the likelihood of other PRPs’ participation in, and their ability to pay for, cleanup. 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.

The following table summarizes the activity in the Company’s accrued obligations for environmental matters (in millions):

	Three Months Ended September 30,
	2018			2017
Beginning balance	$	310		$	326
Accruals / changes in estimates	(7		)	3
Payments	(4		)	(7		)
Ending balance	$	299		$	322

	Nine Months Ended September 30,
	2018			2017
Beginning balance	$	317		$	342
Accruals / changes in estimates	(5		)	2
Payments	(13		)	(22		)
Ending balance	$	299		$	322

At September 30, 2018 and December 31, 2017, $35 million and $40 million was included in current liabilities, respectively.

During the third quarters of 2018 and 2017, the Company analyzed recent data and trends to ensure the assumptions used by BNSF to estimate its future environmental liability were reasonable. As a result of this study, in the third quarters of 2018 and 2017, management recorded a reduction to expense of $8 million and an additional expense of $2 million as of the respective June 30 measurement dates. The Company plans to update its study again in the third quarter of 2019.

BNSF’s environmental liabilities are not discounted. BNSF anticipates that the majority of the accrued costs at September 30, 2018 will be paid over the next ten years, and no individual site is considered to be material.

16

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Liabilities recorded for environmental costs represent BNSF’s best estimate of its probable future obligation for the remediation and settlement of these sites and include both asserted and unasserted claims. Although recorded liabilities include BNSF’s best estimate of all probable costs, without reduction for anticipated recoveries from third parties, BNSF’s total cleanup costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required, evolving environmental laws and regulations, advances in environmental technology, the extent of other parties’ participation in cleanup efforts, developments in ongoing environmental analyses related to sites determined to be contaminated and developments in environmental surveys and studies of contaminated sites.

Because of the uncertainty surrounding these factors, it is reasonably possible that future costs for environmental liabilities may range from approximately $245 million to $395 million. However, BNSF believes that the $299 million recorded at September 30, 2018 is the best estimate of the Company’s future obligation for environmental costs.

Although the final outcome of these environmental matters cannot be predicted with certainty, it is the opinion of BNSF that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, the occurrence of a number of these items in the same period could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

Other Claims and Litigation

In addition to asbestos, other personal injury and environmental matters discussed above, BNSF and its subsidiaries are also parties to a number of other legal actions and claims, governmental proceedings and private civil suits arising in the ordinary course of business, including those related to disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for punitive as well as compensatory damages, and from time to time may include proceedings that purport to be class actions. Although the final outcome of these matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, BNSF currently believes 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.

17

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

9. Employment Benefit Plans

Components of the net cost (credit) for the periods presented below for certain employee benefit plans were as follows (in millions):

	Pension Benefits
	Three Months Ended September 30,
Net Cost (Credit)	2018			2017
Service cost	$	12		$	10
Interest cost	20			22
Expected return on plan assets	(39		)	(37		)
Net credit recognized	$	(7	)	$	(5	)

	Pension Benefits
	Nine Months Ended September 30,
Net Cost (Credit)	2018			2017
Service cost	$	34		$	31
Interest cost	62			66
Expected return on plan assets	(118		)	(111		)
Net credit recognized	$	(22	)	$	(14	)

	Retiree Health and Welfare Benefits
	Three Months Ended September 30,
Net Cost (Credit)	2018			2017
Service cost	$	1		$	—
Interest cost	2			3
Amortization of prior service credits	(2		)	(1		)
Net cost recognized	$	1		$	2

	Retiree Health and Welfare Benefits
	Nine Months Ended September 30,
Net Cost (Credit)	2018			2017
Service cost	$	1		$	1
Interest cost	6			7
Amortization of prior service credits	(2		)	(2		)
Net cost recognized	$	5		$	6

Service cost is included in compensation and benefits expense and the other components of net periodic benefit costs are included in other (income) expense, net in the Consolidated Statements of Income.

18

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

10. Related Party Transactions

The companies identified as affiliates of BNSF include Berkshire and its subsidiaries. During the nine months ended September 30, 2018 and 2017, the Company declared and paid cash distributions of $4.2 billion and $2.6 billion, respectively, to its parent company. For the nine months ended September 30, 2018 and 2017, the Company received tax refunds of $217 million and $21 million, respectively, from Berkshire, and made tax payments of $591 million and $1.0 billion, respectively, to Berkshire. As of September 30, 2018, the Company had a payable to Berkshire of $74 million. As of December 31, 2017, the Company had a receivable from Berkshire of $235 million recorded in other current assets and a payable to Berkshire of $19 million. Uncertain tax positions will affect the tax payable to Berkshire if and when settled. As of September 30, 2018 and December 31, 2017, the Company had $33 million and $32 million, respectively, payable to Berkshire related to prior year tax audit settlements. 

BNSF engages in various transactions with related parties in the ordinary course of business. The following tables summarize revenues earned by BNSF for services provided to related parties and expenditures to related parties (in millions):

	Three Months Ended September 30,
	2018		2017
Revenues	$	39	$	32
Expenditures	$	95	$	82

	Nine Months Ended September 30,
	2018		2017
Revenues	$	106	$	100
Expenditures	$	281	$	243

BNSF owns 17.3 percent of TTX Company (TTX) while other North American railroads own the remaining interest. As BNSF possesses the ability to exercise significant influence, but not control, over the operating and financial policies of TTX, BNSF applies the equity method of accounting to its investment in TTX. In applying the equity method, the investment is recorded in other assets. Equity income or losses are recorded in materials and other in the Consolidated Statements of Income. North American railroads pay TTX car hire to use TTX’s freight equipment to serve their customers. BNSF’s car hire expenditures incurred with TTX are included in the table above. BNSF had $598 million and $554 million recognized as investments related to TTX in its Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, respectively.

19

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

11. Accumulated Other Comprehensive Income

Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in accumulated other comprehensive income, a component of equity within the Consolidated Balance Sheets, rather than net income on the Consolidated Statements of Income. Under existing accounting standards, other comprehensive income may include, among other things, unrecognized gains and losses and prior service credit related to pension and other postretirement benefit plans.

The following tables provide the components of accumulated other comprehensive income (loss) (AOCI) by component (in millions):

	Pension and Retiree Health and Welfare Benefit Itemsa			Equity Method Investments			Total
Balance at December 31, 2017	$	234		$	(3	)	$	231
Other comprehensive income (loss) before reclassifications	—			1			1
Amounts reclassified from AOCI	25			(1		)	24
Balance at September 30, 2018	$	259		$	(3	)	$	256
Balance at December 31, 2016	$	122		$	(3	)	$	119
Other comprehensive income (loss) before reclassifications	—			(1		)	(1		)
Amounts reclassified from AOCI	(1		)	—			(1		)
Balance at September 30, 2017	$	121		$	(4	)	$	117

^a Amounts are net of tax.

Reclassifications out of AOCIb
	Three Months Ended September 30,
Details about AOCI Components	2018			2017			Income Statement Line Item
Amortization of pension and retiree health and welfare benefit items
Prior service credits	$	2		$	1		c
	2			1			Total before tax
	(1		)	(1		)	Tax benefit / (expense)
Total reclassifications for the period	$	1		$	—		Net of tax
	Nine Months Ended September 30,
Details about AOCI Components	2018			2017			Income Statement Line Item
Amortization of pension and retiree health and welfare benefit items
Prior service credits	$	2		$	2		c
Reclassification due to ASU 2016-01 adoption	1			—
Reclassification due to ASU 2018-02 adoption	(26		)	—
	(23		)	2			Total before tax
	(1		)	(1		)	Tax benefit / (expense)
Total reclassifications for the period	$	(24	)	$	1		Net of tax

^b Amounts in parentheses indicate debits to the income statement.

^c This accumulated other comprehensive income component is included in the computation of net periodic pension and retiree health and welfare cost (see Note 9 for additional details).

20

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

12. Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. At December 31, 2017, BNSF had long-term operating leases with $3.0 billion of remaining minimum lease payments, and is assessing these contracts and others for lease qualification under the new standard. This new standard will require the present value of these leases to be recorded in the Consolidated Balance Sheets as a right of use asset and lease liability. Management is currently evaluating the impacts of the new guidance on its financials, disclosures and internal control framework and is in the process of implementing a lease accounting system to support the new reporting requirements.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires an entity to present the service cost component of net benefit cost in the same line item as other current employee compensation costs (including being capitalized, if appropriate, as part of an asset). The other components of net benefit cost are presented below income from operations. BNSF adopted the standard as of January 1, 2018. Other components of net benefit costs previously recorded in compensation and benefits expense were reclassified to other income. See Note 9 to the Consolidated Financial Statements. The retrospective impact of the adoption is shown in the table below (in millions):

	Three Months Ended September 30, 2017
	As Previously Reported			Adjustments			As Revised
Operating expenses	$	3,361		$	13		$	3,374
Operating income	$	1,953		$	(13	)	$	1,940
Other (income) expense, net	$	(10	)	$	(13	)	$	(23	)

	Nine Months Ended September 30, 2017
	As Previously Reported			Adjustments			As Revised
Operating expenses	$	10,415		$	40		$	10,455
Operating income	$	5,334		$	(40	)	$	5,294
Other (income) expense, net	$	(19	)	$	(40	)	$	(59	)

In February 2018, the FASB issued Accounting Standards Update No. 2018-02 (ASU 2018-02), Income Statement - Reporting Comprehensive Income (Topic 220). The guidance in ASU 2018-02 allows an entity to elect to reclassify the stranded tax effects related to the Tax Cuts and Jobs Act of 2017 from accumulated other comprehensive income into retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company early adopted the guidance in ASU 2018-02 during the quarter ended March 31, 2018, and elected to reclassify $26 million of tax from accumulated other comprehensive income to retained earnings. See the Consolidated Statements of Changes in Equity.

In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14), Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in ASU 2018-14 modify the disclosure requirements for employers that sponsor defined benefit pension and other postretirement plans. ASU 2018-14 is effective for the Company for the fiscal year ending after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statement disclosures.

21

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

In August 2018, the FASB issued Accounting Standards Update No. 2018-15 (ASU 2018-15), Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance requires an entity in such an arrangement to capitalize costs for certain implementation activities in the application development stage, expense the capitalized implementation costs over the term of the hosting arrangement, and present the expense with the associated hosting fees in the Consolidated Statements of Income. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements.

22

Item 2. Management’s Narrative Analysis of Results of Operations.

Management’s narrative analysis relates to the results of operations of Burlington Northern Santa Fe, LLC and its majority-owned subsidiaries (collectively BNSF, Registrant or Company). The principal operating subsidiary of BNSF is BNSF Railway Company (BNSF Railway) through which BNSF derives substantially all of its revenues. The following narrative analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes.

The following narrative analysis of results of operations includes a brief discussion of the factors that materially affected the Company’s operating results in the nine months ended September 30, 2018, and a comparative analysis to the nine months ended September 30, 2017.

Results of Operations

Revenues Summary

The following tables present BNSF’s revenue information by business group:

	Revenues (in millions)				Cars / Units (in thousands)
	Nine Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018	2017
Consumer Products	$	5,841	$	5,214	4,198	4,041
Industrial Products	4,416		3,766		1,483	1,337
Agricultural Products	3,499		3,174		908	822
Coal	2,928		2,881		1,401	1,438
Total freight revenues	16,684		15,035		7,990	7,638
Other revenues	965		714
Total operating revenues	$	17,649	$	15,749

	Average Revenue Per Car / Unit
	Nine Months Ended September 30,
	2018		2017
Consumer Products	$	1,391	$	1,290
Industrial Products	2,978		2,817
Agricultural Products	3,854		3,861
Coal	2,090		2,003
Total freight revenues	$	2,088	$	1,968

Fuel Surcharges

Freight revenues include both revenue for transportation services and fuel surcharges. Where BNSF’s fuel surcharge program is applied, it is intended to recover BNSF’s incremental fuel costs when fuel prices exceed a threshold fuel price. Fuel surcharges are calculated differently depending on the type of commodity transported. BNSF has two standard fuel surcharge programs – Percent of Revenue and Mileage-Based. In addition, in certain commodities, fuel surcharge is calculated using a fuel price from a time period that can be up to 60 days earlier. In a period of volatile fuel prices or changing customer business mix, changes in fuel expense and fuel surcharge may differ significantly.

The following table presents fuel surcharge and fuel expense information (in millions):

	Nine Months Ended September 30,
	2018		2017
Total fuel expense a	$	2,456	$	1,777
BNSF fuel surcharges	$	1,015	$	594

^a  Total fuel expense includes locomotive and non-locomotive fuel.

23

Nine Months Ended September 30, 2018vs. theNine Months Ended September 30, 2017

Revenues

Revenues for the nine months ended September 30, 2018 were $17.6 billion, an increase of $1.9 billion, or 12 percent, as compared with the nine months ended September 30, 2017. The increase in revenue is primarily due to a 5 percentincrease in unit volume and an increase in average revenue per car / unit. The change in revenues is due to the following:

▪ Average revenue per car / unit increased6 percent as a result of business mix changes, higher fuel surcharges driven primarily by higher fuel prices, and increased rates per car / unit.

▪ Consumer Products volumes increased due to higher intermodal volumes, which were driven by economic growth and tight truck capacity leading to conversion from highway to rail, as well as growth in imports and containerized agricultural product exports, offset by a contract loss.

▪ Industrial Products volumes increased primarily due to strength in the industrial and energy sectors which drove higher demand for petroleum products, sand, rocks, taconite, steel, and plastics.

▪ Agricultural Products volumes increased due to strong export and domestic grain shipments, as well as higher fertilizer and other grain products volumes.

▪ Coal volumes decreased due mainly to plant retirements combined with competition from natural gas and renewables, partially offset by market share gains and improved export volumes.

Expenses

Operating expenses for the nine months ended September 30, 2018 were $11.9 billion, an increase of $1.4 billion, or 13 percent, as compared with the nine months ended September 30, 2017. A significant portion of this increase is due to the following changes in underlying trends in expenses:

▪ Compensation and benefits expense increased primarily due to wage inflation, including a change in estimate of a pending labor agreement recorded in 2017, increased headcount, and higher training costs.

▪ Fuel expense increased primarily due to higher average fuel prices and increased volumes.

▪ Purchased services expense increased as a result of higher purchased transportation costs of our logistics services business, which are offset in other revenues, as well as increased intermodal ramping, drayage, and other volume-related costs.

▪ Materials and other expense increased primarily as a result of higher locomotive materials, personal injury expenses, derailment-related costs, and property taxes.

▪ There were no significant changes in depreciation and amortization and equipment rents expense.

▪ The effective tax rate was 23.8 percent and 38.2 percent for the nine months ended September 30, 2018 and 2017, respectively. The reduction in the U.S. statutory income tax rate under the Tax Cuts and Jobs Act, effective January 1, 2018, drove most of the effective income tax rate reduction. In addition, certain states enacted income tax rate reductions in 2018.

24

Other Matters

On October 5, 2018, BNSF received a confidential interim award from the Arbitration Panel in its arbitration with J.B. Hunt Transport Services, Inc. (JBHT). While there are still matters to be finalized by the panel, the Company is pleased with the decision which, when final, should result in favorable revenue division adjustments to BNSF for historic periods and going forward. Since the receipt of the confidential interim award, the Company has provided JBHT with calculations for payments due to BNSF for the historic periods in excess of $100 million consisting of additional revenue owed BNSF for 2016 and 2017 and certain charges claimed by BNSF for specific services for customers from April 2014 through May 2018, which JBHT contests. Those amounts are not reflected in the third quarter financial results as they are a gain contingency; any future increases in revenues will be reflected in financial results in the period they are realized.

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.

Forward-looking statements involve a number of risks and uncertainties, and actual performance or results may differ materially. For a discussion of material risks and uncertainties that the Company faces, see the discussion in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K and in this report. 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; volatility in the capital or credit markets including changes affecting the timely availability and cost of capital; changes in customer demand; effects of adverse economic conditions affecting shippers or BNSF’s supplier base; effects due to more stringent regulatory policies such as the regulation of greenhouse gas emissions that could reduce the demand for coal or governmental tariffs or subsidies that could affect the demand for products BNSF hauls; the impact of low natural gas or oil prices on energy-related commodities demand; changes in environmental laws and other laws and regulations that could affect the demand for drilling products and products produced by drilling; changes in prices of fuel and other key materials, the impact of high barriers to entry for prospective new suppliers and disruptions in supply chains for these materials; competition and consolidation within the transportation industry; and changes in crew availability, labor and benefits costs and labor difficulties, including stoppages affecting either BNSF’s operations or customers’ abilities to deliver goods to BNSF for shipment.

•   Legal, legislative and regulatory factors: developments and changes in laws and regulations, including those affecting train operations, the marketing of services or regulatory restrictions on equipment; the ultimate outcome of shipper and rate claims subject to adjudication; 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 or properties owned by others impacted by BNSF operations; losses resulting from claims and litigation relating to personal injuries, asbestos and other occupational diseases; the release of hazardous materials, environmental contamination and damage to property; regulation, restrictions or caps, or other controls on transportation of energy-related commodities or other operating restrictions that could affect operations or increase costs; the availability of adequate insurance to cover the risks associated with operations; and changes in tax rates and tax laws.

•   Operatingfactors: changes in operating conditions and costs; operational and other difficulties in implementing positive train control technology, including increased compliance or operational costs or penalties; restrictions on development and expansion plans due to environmental concerns; disruptions to BNSF’s technology network including computer systems and software, such as cybersecurity intrusions, misappropriation of assets or sensitive information, corruption of data or operational disruptions; network congestion, including effects of greater than anticipated demand for transportation services and equipment; as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of BNSF’s or other railroads’ operating systems, structures, or equipment including the effects of acts of terrorism on the Company’s system or other railroads’ systems or other links in the transportation chain.

The Company cautions against placing undue reliance on forward-looking statements, which reflect its current beliefs and are based on information currently available to it as of the date a forward-looking statement is made. The Company undertakes no obligation to revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs. In the event the Company does update any forward-looking statement, no inference should be made that the Company will make additional updates with respect to that statement, related matters, or any other forward-looking statements.

25

Item 4. Controls and Procedures.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that BNSF’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by BNSF in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to BNSF’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Additionally, as of the end of the period covered by this report, BNSF’s principal executive officer and principal financial officer have concluded that there have been no changes in BNSF’s internal control over financial reporting that occurred during BNSF’s third fiscal quarter that have materially affected, or are reasonably likely to materially affect, BNSF’s internal control over financial reporting.

26

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

On June 22, 2018, a loaded BNSF Railway train derailed in Doon, Iowa due to flooding. Some of the derailed railcars released petroleum hydrocarbons into floodwaters. The extent of the damage from the derailment was largely limited to properties adjacent to the rail line. The Company is working with federal and state authorities to remediate property impacted by the incident. In addition, although no notice of penalty has yet been issued, regulatory penalties could exceed $100,000. While the costs of resolving this matter are subject to further developments, the Company does not believe that the outcome will have a material adverse effect on its financial position, results of operations or liquidity.

Beginning May 14, 2007, some 30 similar class action complaints were filed in six federal district courts around the country by rail shippers against BNSF Railway and other Class I railroads alleging that they have conspired to fix fuel surcharges with respect to unregulated freight transportation services in violation of the antitrust laws. The complaints seek injunctive relief and unspecified treble damages. These cases were consolidated and are currently pending in the federal District Court for the District of Columbia for coordinated or consolidated pretrial proceedings. (In re: Rail Freight Fuel Surcharge Antitrust Litigation, MDL No. 1869). Consolidated amended class action complaints were filed against BNSF Railway and three other Class I railroads in April 2008. On June 21, 2012, the District Court certified the class sought by the plaintiffs. BNSF Railway and the other three Class I railroads appealed the class certification decision to the U.S. Court of Appeals. On August 9, 2013, the U.S. Court of Appeals vacated the District Court’s class certification decision and remanded the case to permit the District Court to reconsider its decision in light of the United States Supreme Court case of Comcast Corp. v. Behrend. In September 2016, the District Court held a hearing to determine whether to certify a class. On October 10, 2017, the District Court denied the plaintiffs’ motion to certify a class. The plaintiffs appealed the denial of class certification to the U.S. Court of Appeals. In September 2018, the U.S. Court of Appeals held a hearing on the appeal of the denial of class certification, but no order has been issued. The Company continues to believe that these claims are without merit and continues to defend against the allegations vigorously. The Company does not believe that the outcome of these proceedings will have a material effect on its financial condition, results of operations or liquidity.

Item 1A. Risk Factors.

In addition to the information set forth in this report, see the risks discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, under the headings Item 1, “Business,” Item 1A, “Risk Factors,” (as modified by the risk factor below) and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

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

The Company is subject to a significant amount of governmental laws and regulations with respect to its rates and practices, taxes, railroad operations and a variety of health, safety, labor, environmental and other matters. Failure to comply with applicable laws and regulations could have a material adverse effect on the Company. Governments may change the legislative and/or regulatory framework within which the Company operates without providing the Company with any recourse for any adverse effects that the change may have on its business. For example, federal legislation enacted in 2008 and amended in 2015 mandates the implementation of positive train control technology (PTC) by December 31, 2018, on certain mainline track where intercity and commuter passenger railroads operate and where toxic-by-inhalation (TIH) hazardous materials are transported. Due to the Federal Railroad Administration’s interpretation of the PTC mandate as requiring all railroads that run on the Company’s tracks to be compliant before the Company can be compliant, the Federal Railroad Administration has confirmedan extension of the deadline for the Company to December 31, 2020. Complying with legislative and regulatory changes may pose significant operating and implementation risks and require significant capital expenditures.

27

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Item 6. Exhibits.

		Incorporated by Reference (if applicable)
	Exhibit Number and Description	Form	File Date	File No.	Exhibit
3.1	Certificate of Formation dated November 2, 2009.	8-K	2/16/2010	001-11535	3.1
3.2	Amended and Restated Limited Liability Company Operating Agreement of Burlington Northern Santa Fe, LLC, dated as of February 12, 2010.	8-K	2/16/2010	001-11535	3.2
3.3	Written Consent of Sole Member, dated April 8, 2010, amending the Amended and Restated Limited Liability Company Operating Agreement.	8-K	4/13/2010	001-11535	3.1
12.1	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).*
101	eXtensible Business Reporting Language (XBRL) documents submitted electronically: 101.INS - XBRL Instance Document 101.SCH - XBRL Taxonomy Extension Schema Document 101.CAL - XBRL Extension Calculation Linkable Document 101.DEF - XBRL Taxonomy Extension Definition Linkable Document 101.LAB - XBRL Taxonomy Extension Label Linkbase 101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document
	The following unaudited information from Burlington Northern Santa Fe, LLC’s Form 10-Q for the three and nine months ended September 30, 2018, formatted in XBRL includes: (i) the Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017, (ii) the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, (iii) the Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017, (iv) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, (v) the Consolidated Statements of Changes in Equity as of September 30, 2018, and (vi) the Notes to the Consolidated Financial Statements. *

Certain instruments evidencing long-term indebtedness of BNSF are not being filed as exhibits to this report because the total amount of securities authorized under any single instrument does not exceed 10 percent of BNSF’s total assets. BNSF will furnish copies of any material instruments upon request of the Securities and Exchange Commission.

__________________

* Filed herewith

28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BURLINGTON NORTHERN SANTA FE, LLC (Registrant)
By:	/s/    Julie A. Piggott
	Julie A. Piggott Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as principal financial officer)

Date:  November 2, 2018

S-1