Railway 6/30/2015 10-Q

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 June 30, 2015



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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
		Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] 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 August 7, 2015
Common 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	PAGE

Item 1.	Financial Statements	3

Item 2.	Management’s Narrative Analysis of Results of Operations	22

Item 4.	Controls and Procedures	25


PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 6.	Exhibits	26

Signatures		S-1

Exhibits		E-1

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PART I

FINANCIAL INFORMATION


Item 1.	Financial Statements.

BNSF RAILWAY COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In millions)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Revenues	$	5,233		$	5,614		$	10,704		$	10,948

Operating expenses:
Compensation and benefits	1,256			1,225			2,583			2,434
Fuel	697			1,156			1,410			2,315
Purchased services	566			539			1,004			1,101
Depreciation and amortization	488			521			983			1,035
Equipment rents	207			225			398			440
Materials and other	295			275			602			590
Total operating expenses	3,509			3,941			6,980			7,915
Operating income	1,724			1,673			3,724			3,033
Interest expense	6			11			12			24
Interest income, related parties	(32		)	(26		)	(60		)	(48		)
Other expense, net	5			2			9			5

Income before income taxes	1,745			1,686			3,763			3,052
Income tax expense	654			640			1,410			1,158
Net income	$	1,091		$	1,046		$	2,353		$	1,894

See accompanying Notes to Consolidated Financial Statements.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015			2014
Net income	$	1,091	$	1,046	$	2,353		$	1,894

Other comprehensive income:
Change in Pension and Retiree Health and Welfare benefits, net of tax benefit of $1 million, $0 million, $1 million and $0 million, respectively	—		—		—			—
Change in accumulated other comprehensive income of equity method investees	—		—		(1		)	3
Other comprehensive income, net of tax	—		—		(1		)	3
Total comprehensive income	$	1,091	$	1,046	$	2,352		$	1,897

See accompanying Notes to Consolidated Financial Statements.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)



	June 30, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	394		$	585
Accounts receivable, net	1,264			1,350
Materials and supplies	852			795
Current portion of deferred income taxes	241			355
Other current assets	494			351
Total current assets	3,245			3,436

Property and equipment, net of accumulated depreciation of $4,411 and $3,547, respectively	57,268			55,788
Goodwill	14,803			14,803
Intangible assets, net	468			506
Other assets	2,032			1,944
Total assets	$	77,816		$	76,477

LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable and other current liabilities	$	2,898		$	3,144
Long-term debt due within one year	151			116
Total current liabilities	3,049			3,260

Deferred income taxes	18,366			18,156
Long-term debt	1,699			1,326
Intangible liabilities, net	721			782
Casualty and environmental liabilities	617			639
Pension and retiree health and welfare liability	380			385
Other liabilities	995			931
Total liabilities	25,827			25,479
Commitments and contingencies (see Notes 6 and 7)
Stockholder’s equity:
Common stock, $1 par value, 1,000 shares authorized; issued and outstanding and paid-in capital	42,920			42,920
Retained earnings	20,396			18,043
Intercompany notes receivable	(11,324		)	(9,963		)
Accumulated other comprehensive income	(3		)	(2		)
Total stockholder’s equity	51,989			50,998
Total liabilities and stockholder’s equity	$	77,816		$	76,477

See accompanying Notes to Consolidated Financial Statements.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Six Months Ended June 30,
	2015			2014
OPERATING ACTIVITIES
Net income	$	2,353		$	1,894
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	983			1,035
Deferred income taxes	322			88
Long-term casualty and environmental liabilities, net	(17		)	(21		)
Other, net	(12		)	(210		)
Changes in current assets and liabilities:
Accounts receivable, net	86			(16		)
Materials and supplies	(57		)	(31		)
Other current assets	(123		)	(112		)
Accounts payable and other current liabilities	(154		)	491
Net cash provided by operating activities	3,381			3,118

INVESTING ACTIVITIES
Capital expenditures excluding equipment	(1,918		)	(1,529		)
Acquisition of equipment	(522		)	(628		)
Purchases of investments	(123		)	—
Other, net	(75		)	(38		)
Net cash used for investing activities	(2,638		)	(2,195		)

FINANCING ACTIVITIES
Proceeds from issuance of long-term debt	500			—
Payments on long-term debt	(71		)	(89		)
Net increase in intercompany notes receivable classified as equity	(1,361		)	(1,073		)
Other, net	(2		)	—
Net cash used for financing activities	(934		)	(1,162		)
Decrease in cash and cash equivalents	(191		)	(239		)
Cash and cash equivalents:
Beginning of period	585			532
End of period	$	394		$	293

SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized	$	22		$	33
Capital investments accrued but not yet paid	$	214		$	196
Income taxes paid, net of refunds	$	1,061		$	498

See accompanying Notes to Consolidated Financial Statements.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

(In millions)

(Unaudited)



	Common Stock and Paid-in Capital		Retained Earnings		Intercompany Notes Receivable			Accumulated Other Comprehensive Income			Total Stockholder’s Equity
Balance at December 31, 2014	$	42,920	$	18,043	$	(9,963	)	$	(2	)	$	50,998
Change in intercompany notes receivable	—		—		(1,361		)	—			(1,361		)
Comprehensive income, net of tax	—		2,353		—			(1		)	2,352
Balance at June 30, 2015	$	42,920	$	20,396	$	(11,324	)	$	(3	)	$	51,989

See accompanying Notes to Consolidated Financial Statements.

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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 Annual Report on Form 10-K for the year ended December 31, 2014, including the financial statements and notes thereto. The Consolidated Financial Statements include the accounts of BNSF Railway Company and its majority-owned subsidiaries, all of which are separate legal entities (collectively BNSF Railway or the Company). BNSF Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe, LLC (BNSF), and is the principal operating subsidiary of BNSF. All intercompany accounts and transactions have been eliminated.

On February 12, 2010, Berkshire Hathaway Inc., a Delaware corporation (Berkshire), acquired 100% 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 has not been presented because BNSF has not issued stock or membership interests to the public.

Subsequent to December 31, 2014, BNSF Railway added a significant accounting policy for investments. Investments in fixed maturity securities and equity securities are classified at the acquisition date and the classification is re-evaluated at each balance sheet date. Trading securities are investments acquired with the intent to sell in the near term and are carried at fair value. All investments currently held are classified as trading securities and net unrealized gains or losses are recorded in income.

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 June 30, 2015, and the results of operations for the three and six months ended June 30, 2015 and 2014.


2.	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 June 30, 2015 and December 31, 2014, $66 million and $55 million, respectively, of such allowances had been recorded.

At June 30, 2015 and December 31, 2014, $55 million and $33 million, respectively, of accounts receivable were greater than 90 days old.


3.	Investments

BNSF Railway holds investments which are classified as trading securities and included in Other Assets on the balance sheet. The following table summarizes the fair value of investments held as of June 30, 2015 and December 31, 2014 (in millions):



	June 30, 2015		December 31, 2014
Debt securities	$	69	$	—
Equity securities	52		—
Total	$	121	$	—

As of the year-ended December 31, 2014, all investments were primarily held in cash and cash equivalents.

The fair value measurements of BNSF Railway’s debt securities are based on Level 2 inputs and equity securities are based on Level 1 inputs, using a market approach. BNSF Railway recognized $2 million in unrealized losses in earnings in the three months ended and in the six months ended June 30, 2015.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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


4.	Other Intangible Assets and Liabilities

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



	As of June 30, 2015				As of December 31, 2014
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets	$	635	$	167	$	2,017	$	1,511
Intangible liabilities	$	1,403	$	682	$	2,056	$	1,274

As of June 30, 2015, intangible assets primarily consisted of franchise and customer assets. At December 31, 2014, intangible assets also included internally developed software that became fully amortized in the first quarter of 2015. 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):



	Six Months Ended June 30,
	2015		2014
Amortization of intangible assets	$	38	$	153
Amortization of intangible liabilities	$	61	$	89

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 2015	$	16	$	54
2016	$	31	$	101
2017	$	31	$	96
2018	$	31	$	90
2019	$	31	$	27

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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


5.	Other Assets

In July 2010, the Company entered into a low-income housing partnership (the Partnership) as the limited partner, holding a 99.9% 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% 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. As of June 30, 2015 and December 31, 2014, the assets of the unconsolidated Partnership totaled approximately $335 million and $355 million, respectively. 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 both of the periods of the six months ended June 30, 2015 and 2014, the Company recognized a reduction to income tax expense of $18 million. 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):



	June 30, 2015		December 31, 2014
Unamortized investment balance classified as Other Assets	$	299	$	314
Remaining commitment classified as Other Liabilities	$	36	$	18
Maximum exposure to loss	$	299	$	314

The remaining commitment of $36 million is expected to be paid in 2015.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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


6.	Debt

Equipment Obligation

In June 2015, BNSF Railway entered into a 13-year equipment obligation totaling $500 million at 3.442 percent.

Fair Value of Debt Instruments

At June 30, 2015, and December 31, 2014, the fair value of BNSF Railway's debt, excluding capital leases, was $1,185 million and $738 million, 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, was $1,115 million and $651 million, respectively. The fair value of BNSF Railway'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 Railway for debt of the same remaining maturities (Level 2 inputs).

Guarantees

As of June 30, 2015, BNSF Railway has not been called upon to perform under the guarantees specifically disclosed in this footnote and does not anticipate a significant performance risk in the foreseeable future.

Debt and other obligations of non-consolidated entities guaranteed by the Company as of June 30, 2015, were as follows (dollars in millions):



	Guarantees
	BNSF Railway Ownership Percentage		Principal Amount Guaranteed		Maximum Future Payments		Maximum Recourse Amount^a		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/A^d		N/A^d		N/A^d		2	$	4	^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 Sheet.


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


^d	There is no cap to the liability that can be sought from BNSF 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 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 Railway or the exercise of the call rights by the general partners of SFPP.

Chevron Phillips Chemical Company LP

In 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.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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

Indemnities

In the ordinary course of business, BNSF Railway 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.

Variable Interest Entities - Leases

BNSF Railway has entered into various equipment lease transactions in which the structure of the lease contains VIEs. 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 equipment 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 approximately $3 billion as of June 30, 2015.

In the event the leased equipment is destroyed, BNSF Railway is obligated to either replace the equipment or pay a fixed loss amount. The inclusion of the fixed loss amount is a standard clause within equipment 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 equipment 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 equipment. 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 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 VIE leases are classified as operating leases, there are no assets or liabilities related to the VIEs recorded in the Company's Consolidated Balance Sheet.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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


7.	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 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. 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 certain 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 asbestos 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.

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.

Based on BNSF Railway’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 Railway specific data that was the basis for the study. BNSF Railway projects that approximately 60, 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 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 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 Railway has not experienced any significant adverse trends related to these types of claims in recent years.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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

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 claim payments. Adjustments to the Company’s estimates are recorded quarterly as necessary or more frequently as new events or revised estimates develop.

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



	Three Months Ended June 30,
	2015			2014
Beginning balance	$	373		$	386
Accruals	19			18
Payments	(18		)	(19		)
Ending balance	$	374		$	385



	Six Months Ended June 30,
	2015			2014
Beginning balance	$	375		$	387
Accruals	37			36
Payments	(38		)	(38		)
Ending balance	$	374		$	385

At June 30, 2015, $80 million was included in current liabilities. 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.

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 $330 million to $440 million. However, BNSF Railway believes that the $374 million recorded at June 30, 2015 is the best estimate of the Company’s future obligation for the settlement of personal injury claims.

The amounts recorded by BNSF Railway 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.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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

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 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, 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. During the six months ended June 30, 2015 and 2014, BNSF IC wrote insurance coverage with premiums totaling $73 million and $77 million, respectively, for BNSF Railway, net of reimbursements from third parties. During this same time, BNSF Railway recognized $39 million and $41 million, respectively, in expense related to those premiums, which is classified as purchased services in the Consolidated Statements of Income. At June 30, 2015, unamortized premiums remaining on the Consolidated Balance Sheet were $41 million. During the six months ended June 30, 2015 and 2014, BNSF IC made claim payments totaling $195 million and $76 million, respectively, for settlement of covered claims. At June 30, 2015 and December 31, 2014, claims receivables from BNSF IC were $2 million and $10 million, respectively.

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.

BNSF Railway is involved in a number of administrative and judicial proceedings and other mandatory cleanup efforts for 223 sites, including 17 Superfund sites, at which it is participating in the study or cleanup, or both, of alleged environmental contamination.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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

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 current estimated percentage to closure ratios, possible remediation workplans 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 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 June 30, 2015 and December 31, 2014 was $14 million and $15 million, respectively.

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 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 tables summarize the activity in the Company’s accrued obligations for environmental matters (in millions):



	Three Months Ended June 30,
	2015			2014
Beginning balance	$	395		$	427
Accruals	2			3
Payments	(9		)	(14		)
Ending balance	$	388		$	416



	Six Months Ended June 30,
	2015			2014
Beginning balance	$	404		$	435
Accruals	3			5
Payments	(19		)	(24		)
Ending balance	$	388		$	416

At June 30, 2015, $65 million was included in current liabilities.

BNSF Railway’s environmental liabilities are not discounted. BNSF Railway anticipates that the majority of the accrued costs at June 30, 2015, will be paid over the next ten years, and no individual site is considered to be material.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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

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 $290 million to $525 million. However, BNSF Railway believes that the $388 million recorded at June 30, 2015, 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 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, 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 a few proceedings purport to be class actions. Although the final outcome of these matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, BNSF Railway 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.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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


8.	Employment Benefit Plans

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



	Pension Benefits
	Three Months Ended June 30,
Net Cost	2015			2014
Service cost	$	12		$	9
Interest cost	22			24
Expected return on plan assets	(35		)	(33		)
Amortization of net loss	1			—
Net cost recognized	$	—		$	—



	Pension Benefits
	Six Months Ended June 30,
Net Cost	2015			2014
Service cost	$	24		$	19
Interest cost	45			48
Expected return on plan assets	(70		)	(67		)
Amortization of net loss	1			—
Net cost recognized	$	—		$	—



	Retiree Health and Welfare Benefits
	Three Months Ended June 30,
Net Cost	2015		2014
Interest cost	$	3	$	3
Amortization of prior service credits	—		—
Amortization of net loss	—		—
Net cost recognized	$	3	$	3



	Retiree Health and Welfare Benefits
	Six Months Ended June 30,
Net Cost	2015			2014
Interest cost	$	5		$	6
Amortization of prior service credits	(1		)	(1		)
Amortization of net loss	1			1
Net cost recognized	$	5		$	6

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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


9.	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 $1,042 million and $472 million during the six months ended June 30, 2015 and 2014, respectively, which are reflected in changes in working capital in the Consolidated Statement of Cash Flows.

At June 30, 2015 and December 31, 2014, BNSF Railway had $71 million and $44 million, respectively, of intercompany receivables which are reflected in accounts receivable in the respective Consolidated Balance Sheets. At June 30, 2015 and December 31, 2014, BNSF Railway had $44 million and $23 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.

At June 30, 2015 and December 31, 2014, BNSF Railway had $11,324 million and $9,963 million, respectively, of intercompany notes receivable from BNSF. The $1,361 million increase in intercompany notes receivable was due to loans to BNSF during the six months ended June 30, 2015. 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 engages in various transactions with affiliates in the ordinary course of business. The following tables summarize revenues earned by BNSF Railway for services provided to affiliates and expenditures to affiliates (in millions):



	Three Months Ended June 30,
	2015		2014
Revenues	$	50	$	38
Expenditures	$	22	$	25



	Six Months Ended June 30,
	2015		2014
Revenues	$	98	$	86
Expenditures	$	40	$	44


10.	Comprehensive Income

Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income, a component of 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 may include, among other things, unrecognized gains and losses and prior service credit related to pension and other postretirement benefit plans.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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

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



	Pension and Retiree Health and Welfare Benefit Items^a		Equity Method Investments			Total
Balance at December 31, 2014	$	—	$	(2	)	$	(2	)
Other comprehensive income before reclassifications	—		(1		)	(1		)
Amounts reclassified from AOCI	—		—			—
Balance at June 30, 2015	$	—	$	(3	)	$	(3	)

Balance at December 31, 2013	$	251	$	(6	)	$	245
Other comprehensive income before reclassifications	—		3			3
Amounts reclassified from AOCI	—		—			—
Balance at June 30, 2014	$	251	$	(3	)	$	248

^a Amounts are net of tax.



Reclassifications out of AOCI^b

	Three Months Ended June 30,
Details about Accumulated Other Comprehensive Income Components	2015			2014			Income Statement Line Item
Amortization of pension and retiree health and welfare benefit items
Actuarial losses	$	(1	)	$	—		^c
Prior service credits	—			—			^c
	(1		)	—			Total before tax
	1			—			Tax (expense)/benefit
Total reclassifications for the period	$	—		$	—		Net of tax

	Six Months Ended June 30,
Details about Accumulated Other Comprehensive Income Components	2015			2014			Income Statement Line Item
Amortization of pension and retiree health and welfare benefit items
Actuarial losses	$	(2	)	$	(1	)	^c
Prior service credits	1			1			^c
	(1		)	—			Total before tax
	1			—			Tax (expense)/benefit
Total reclassifications for the period	$	—		$	—		Net of tax

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

^cThis accumulated other comprehensive income component is included in the computation of net periodic pension cost and retiree health and welfare (see Note 8 for additional details).

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BNSF RAILWAY COMPANY and SUBSIDIARIES

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


11.	Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606). The guidance in ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition. ASU 2014-09 applies to most contracts with customers. Insurance and leasing contracts are excluded from the scope. ASU 2014-09 prescribes a five-step framework in accounting for revenues from contracts within its scope, including (a) identification of the contract, (b) identification of the performance obligation under the contract, (c) determination of the transaction price, (d) allocation of the transaction price to the identified performance obligation and (e) recognition of revenue as the identified performance obligation is satisfied. ASU 2014-09 also prescribes additional disclosures and financial statement presentations. ASU 2014-09 is effective for public companies in annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July of 2015, the FASB deferred the effective date one year to annual reporting periods beginning after December, 15, 2017. Early adoption is permitted, but not before the original effective date (annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period). ASU 2014-09 may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. The Company has assessed the effects of this standard and does not expect it to have a material impact to the Consolidated Financial Statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. BNSF Railway currently reflects debt issuance costs in Other Assets on the Statement of Financial Position. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. This standard is to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items. Adoption of this guidance will result in a reduction to assets and an equal reduction to debt on the Statement of Financial Position and is not expected to have a material impact to the Company's financial condition or liquidity.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05 (ASU 2015-05), Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015, and interim periods within those years. This standard can be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company has assessed the effects of this standard and does not expect it to have a material impact to the Consolidated Financial Statements.

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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.

The following narrative analysis of results of operations includes a comparative analysis of the six months ended June 30, 2015 and 2014.

Results of Operations

Revenues Summary

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



	Revenues (in millions)				Cars / Units (in thousands)
	Six Months Ended June 30,				Six Months Ended June 30,
	2015		2014		2015	2014
Consumer Products	$	3,200	$	3,474	2,455	2,481
Industrial Products	2,819		2,942		925	944
Coal	2,391		2,441		1,146	1,113
Agricultural Products	2,092		1,952		507	479
Total Freight Revenues	10,502		10,809		5,033	5,017
Other Revenues	202		139
Total Operating Revenues	$	10,704	$	10,948



	Average Revenue Per Car / Unit
	Six Months Ended June 30,
	2015		2014
Consumer Products	$	1,303	$	1,400
Industrial Products	3,048		3,117
Coal	2,086		2,193
Agricultural Products	4,126		4,075
Total Freight Revenues	$	2,087	$	2,154

Fuel Surcharges

Freight revenues include both revenue for transportation services and fuel surcharges. Where BNSF Railway’s fuel surcharge program is applied, it is intended to recover its incremental fuel costs when fuel prices exceed a threshold fuel price. Fuel surcharges are calculated differently depending on the type of commodity transported. BNSF Railway 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 significantly differ.

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



	Six Months Ended June 30,
	2015		2014
Total fuel expense ^a	$	1,410	$	2,315
BNSF Railway fuel surcharges	$	801	$	1,467


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

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Six Months Ended June 30, 2015 vs. the Six Months Ended June 30, 2014

Revenues

Revenues for the six months ended June 30, 2015, were $10,704 million, a decrease of $244 million, or 2 percent as compared with the six months ended June 30, 2014. The change in revenues is due to the following:


▪	Average revenue per car / unit decreased 3 percent primarily as a result of lower fuel surcharges partially offset by increased rate per car / unit as well as business mix changes.


▪	Consumer Products unit volumes decreased as some freight diverted to other import gateways, due to the U.S. West Coast port productivity slow-down.


▪	Industrial Products unit volumes decreased primarily due to the impact of lower crude oil prices on petroleum products and frac sand in addition to less steel products.


▪	Coal unit volumes increased primarily due to higher demand.


▪	Agricultural Products unit volumes increased due to increased domestic grain shipments and Gulf exports.

Expenses

Operating expenses for the six months ended June 30, 2015, were $6,980 million, a decrease of $935 million, or 12 percent, as compared with the six months ended June 30, 2014. A significant portion of this change is due to the following, which includes increased costs in the prior year related to severe weather issues and service-related challenges:


▪	Compensation and benefits expense increased primarily due to higher average headcount and wage inflation.


▪	Fuel expense decreased due to lower average prices and improved efficiency, partially offset by higher volumes.


▪	Purchased services decreased primarily due to a favorable insurance recovery.


▪	Depreciation and amortization expense decreased primarily due to internally developed software becoming fully amortized during the first quarter of 2015. See Footnote 4 for additional details.


▪	There were no significant changes in equipment rents and materials and other expense.


▪	The effective tax rate was 37.5 percent and 37.9 percent for the six months ended June 30, 2015 and 2014, respectively. The 2015 effective tax rate was impacted by a favorable state tax settlement and favorable state income tax legislation enacted in 2015.

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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. 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 Railway’s supplier base; effects due to more stringent regulatory policies such as the regulation of carbon dioxide emissions that could reduce the demand for coal or governmental tariffs or subsidies that could affect the demand for grain; 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 fuel prices 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 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, 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 Railway 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 petroleum-based fuel 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.

• Operating factors: 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 Railway’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 Railway’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.

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Item 4.	Controls and Procedures.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, BNSF 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 BNSF Railway’s second fiscal quarter that have materially affected, or are reasonably likely to materially affect, BNSF Railway's internal control over financial reporting.

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BNSF RAILWAY COMPANY and SUBSIDIARIES

PART II OTHER INFORMATION


Item 1.	Legal Proceedings.

As reported in the Form 10-Q for the quarter ended March 31, 2015, on March 5, 2015, a loaded BNSF Railway crude oil train derailed near Galena, IL. Some of the derailed railcars released crude oil in and around a wetland and a number of the derailed cars caught fire at the derailment location. On June 30, 2015, the Illinois Attorney General’s office and the Illinois Environmental Protection Agency filed a complaint and an interim enforcement order against BNSF Railway with regard to the derailment and release of crude oil. The total penalties proposed under the complaint and interim enforcement order exceed $100,000.


Item 6.	Exhibits.

See Index to Exhibits on page E-1 for a description of the exhibits filed as part of this report.

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SIGNATURES

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



	BNSF Railway Company (Registrant)

	By:		/s/ Julie A. Piggott
			Julie A. Piggott Executive Vice President & Chief Financial Officer (On behalf of the Registrant and as principal financial officer)

Date: August 7, 2015

S-1

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BNSF RAILWAY COMPANY and SUBSIDIARIES

Exhibit Index



		Incorporated by Reference (if applicable)
	Exhibit Number and Description	Form	File Date	File No.	Exhibit

3.1	Restated Certificate of Incorporation of BNSF Railway Company, dated January 17, 2005.	10-Q	7/26/2005	001-06324	3.1

3.2	By-Laws of BNSF Railway Company, as amended February 28, 2014.	10-K	2/27/2015	001-06324	3.2

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 the BNSF Railway Company's Form 10-Q for the three and six months ended June 30, 2015, formatted in XBRL includes: (i) the Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014, (ii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2015 and 2014 (iii) the Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014, (v) the Consolidated Statements of Changes in Equity as of June 30, 2015, and (vi) the Notes to the Consolidated Financial Statements. *

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

__________________

*Filed herewith

E-1



		Six Months Ended June 30,
		2015		2014
Earnings:
Income before income taxes	$	3,763	$	3,052
Add:
Interest and other fixed charges, excluding capitalized interest		12		24
Reasonable approximation of portion of rent under long-term operating leases representative of an interest factor		100		96
Distributed income of investees accounted for under the equity method		4		4
Amortization of capitalized interest		2		1
Less:
Equity in earnings of investments accounted for under the equity method		8		7
Total earnings available for fixed charges	$	3,873	$	3,170
Fixed charges:
Interest and fixed charges	$	31	$	37
Reasonable approximation of portion of rent under long-term operating leases representative of an interest factor		100		96
Total fixed charges	$	131	$	133
Ratio of earnings to fixed charges		29.56x		23.84x

Debt Fair Value of Debt Instruments (Details) - USD ($) $ in Millions	Jun. 30, 2015	Dec. 31, 2014
Debt Instrument [Line Items]
Debt, fair value	$ 1,185	$ 738
Debt, book value	1,115	$ 651
Equipment Trust Certificate [Member] \| Three Point Four Four Two Percent 13-Year Equipment Obligation [Member]
Debt Instrument [Line Items]
Debt instrument issued amount	$ 500
Debt instrument interest Rate	3.442%

Commitments and Contingencies - Insurance (Details) - USD ($) $ in Millions	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Insurance [Line Items]
Expense related to insurance premiums	$ 39	$ 41
Unamortized insurance premiums	41
Insurance claims receivable	2		$ 10
BNSF Insurance Company
Insurance [Line Items]
Insurance coverage premiums	73	77
Insurance claims paid	$ 195	$ 76

Accounting Policies and Interim Results	6 Months Ended
Accounting Policies and Interim Results	Jun. 30, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Accounting Policies and Interim Results	Accounting Policies and Interim Results The Consolidated Financial Statements should be read in conjunction with BNSF Railway Company’s Annual Report on Form 10-K for the year ended December 31, 2014, including the financial statements and notes thereto. The Consolidated Financial Statements include the accounts of BNSF Railway Company and its majority-owned subsidiaries, all of which are separate legal entities (collectively BNSF Railway or the Company). BNSF Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe, LLC (BNSF), and is the principal operating subsidiary of BNSF. All intercompany accounts and transactions have been eliminated. On February 12, 2010, Berkshire Hathaway Inc., a Delaware corporation (Berkshire), acquired 100% 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 has not been presented because BNSF has not issued stock or membership interests to the public. Subsequent to December 31, 2014, BNSF Railway added a significant accounting policy for investments. Investments in fixed maturity securities and equity securities are classified at the acquisition date and the classification is re-evaluated at each balance sheet date. Trading securities are investments acquired with the intent to sell in the near term and are carried at fair value. All investments currently held are classified as trading securities and net unrealized gains or losses are recorded in income. 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 June 30, 2015, and the results of operations for the three and six months ended June 30, 2015 and 2014.

Accounts Receivable, Net (Details) - USD ($) $ in Millions	Jun. 30, 2015	Dec. 31, 2014
Receivables [Abstract]
Allowance for bill adjustments and uncollectible accounts	$ 66	$ 55
Accounts receivable greater than 90 days old	$ 55	$ 33


1.	I have reviewed this quarterly report on Form 10-Q of BNSF Railway Company;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and


(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.




/s/ Carl R. Ice		/s/ Julie A. Piggott

Carl R. Ice		Julie A. Piggott
President and Chief Executive Officer		Executive Vice President & Chief Financial Officer

Employment Benefit Plans (Details) - USD ($) $ in Millions	3 Months Ended		6 Months Ended
Employment Benefit Plans (Details) - USD ($) $ in Millions	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Pension Plans, Defined Benefit
Net Cost
Service cost	$ 12	$ 9	$ 24	$ 19
Interest cost	22	24	45	48
Expected return on plan assets	(35)	(33)	(70)	(67)
Amortization of net loss	1	0	1
Net cost (benefit) recognized	0	0	0	0
Retiree Health and Welfare Benefits
Net Cost
Interest cost	3	3	5	6
Amortization of prior service credits	0	0	(1)	(1)
Amortization of net loss	0	0	1	1
Net cost (benefit) recognized	$ 3	$ 3	$ 5	$ 6

Accounting Policies and Interim Results (Details)	Feb. 12, 2010
Burlington Northern Santa Fe Corporation [Member]
Business Acquisition [Line Items]
Acquired remaining outstanding shares, percentage	100.00%

Investments (Details) - USD ($) $ in Millions	3 Months Ended	6 Months Ended
Investments (Details) - USD ($) $ in Millions	Jun. 30, 2015	Jun. 30, 2015	Dec. 31, 2014
Schedule of Trading Securities and Other Trading Assets [Line Items]
Trading Securities, Debt	$ 69	$ 69	$ 0
Trading Securities, Equity	52	52	0
Trading Securities	121	121	$ 0
Trading Securities, Change in Unrealized Holding Gain (Loss)	$ (2)	$ (2)

Consolidated Statements of Changes in Stockholders' Equity - 6 months ended Jun. 30, 2015 - USD ($) $ in Millions	Total	Common Stock and Paid-in Capital [Member]	Retained Earnings [Member]	Intercompany Notes Receivable	Accumulated Other Comprehensive Income
Balance at Dec. 31, 2014	$ 50,998	$ 42,920	$ 18,043	$ (9,963)	$ (2)
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Change in intercompany notes receivable	(1,361)			(1,361)
Comprehensive income, net of tax	2,352	0	2,353	0	(1)
Balance at Jun. 30, 2015	$ 51,989	$ 42,920	$ 20,396	$ (11,324)	$ (3)

Other Assets (Details) - USD ($) $ in Millions	1 Months Ended	6 Months Ended
Other Assets (Details) - USD ($) $ in Millions	Jul. 31, 2010	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Variable Interest Entity, Not Primary Beneficiary
Variable Interest Entity [Line Items]
Company limited partner holding interest, percentage	99.90%
Assets of unconsolidated Partnership		$ 335		$ 355
Affordable Housing Tax Credits and Other Tax Benefits, Amount		18	$ 18
Unamortized investment balance classified as Other Assets		299		314
Remaining commitments classified as Other Liabilities		36		18
Maximum exposure to loss		299		$ 314
Remaining commitments expected to be paid in 2015		$ 36
Variable Interest Entity, Primary Beneficiary
Variable Interest Entity [Line Items]
General partner holding interest, percentage	0.10%

Consolidated Statements of Income - USD ($) $ in Millions	3 Months Ended		6 Months Ended
Consolidated Statements of Income - USD ($) $ in Millions	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Revenues	$ 5,233	$ 5,614	$ 10,704	$ 10,948
Operating expenses:
Compensation and benefits	1,256	1,225	2,583	2,434
Fuel	697	1,156	1,410	2,315
Purchased services	566	539	1,004	1,101
Depreciation and amortization	488	521	983	1,035
Equipment rents	207	225	398	440
Materials and other	295	275	602	590
Total operating expenses	3,509	3,941	6,980	7,915
Operating income	1,724	1,673	3,724	3,033
Interest expense	6	11	12	24
Interest income, related parties	(32)	(26)	(60)	(48)
Other expense, net	5	2	9	5
Income before income taxes	1,745	1,686	3,763	3,052
Income tax expense	654	640	1,410	1,158
Net income	$ 1,091	$ 1,046	$ 2,353	$ 1,894

Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) $ in Millions	Jun. 30, 2015	Dec. 31, 2014
Accumulated depreciation	$ 4,411	$ 3,547
Stockholders' Equity:
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized (in shares)	1,000	1,000
Common stock, shares issued (in shares)	1,000	1,000
Common stock, shares outstanding (in shares)	1,000	1,000

Debt Variable Interest Entities - Leases (Details) $ in Billions	Jun. 30, 2015 USD ($)
Variable Interest Entity, Not Primary Beneficiary \| Equipment [Member]
Operating Leased Assets [Line Items]
Future minimum lease payments	$ 3

Document and Entity Information - shares	6 Months Ended
Document and Entity Information - shares	Jun. 30, 2015	Aug. 07, 2015
Entity Information [Line Items]
Entity Registrant Name	BNSF RAILWAY CO
Entity Central Index Key	0000015511
Document Type	10-Q
Document Period End Date	Jun. 30, 2015
Amendment Flag	false
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		1,000

Accounting Pronouncements	6 Months Ended
Accounting Pronouncements	Jun. 30, 2015
New Accounting Pronouncements and Changes in Accounting Principles [Abstract]
Accounting Pronouncements	Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers (Topic 606). The guidance in ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition. ASU 2014-09 applies to most contracts with customers. Insurance and leasing contracts are excluded from the scope. ASU 2014-09 prescribes a five-step framework in accounting for revenues from contracts within its scope, including (a) identification of the contract, (b) identification of the performance obligation under the contract, (c) determination of the transaction price, (d) allocation of the transaction price to the identified performance obligation and (e) recognition of revenue as the identified performance obligation is satisfied. ASU 2014-09 also prescribes additional disclosures and financial statement presentations. ASU 2014-09 is effective for public companies in annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July of 2015, the FASB deferred the effective date one year to annual reporting periods beginning after December, 15, 2017. Early adoption is permitted, but not before the original effective date (annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period). ASU 2014-09 may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. The Company has assessed the effects of this standard and does not expect it to have a material impact to the Consolidated Financial Statements. In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs. This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. BNSF Railway currently reflects debt issuance costs in Other Assets on the Statement of Financial Position. ASU 2015-03 is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. This standard is to be applied on a retrospective basis, wherein the balance sheet of each individual period presented is adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items. Adoption of this guidance will result in a reduction to assets and an equal reduction to debt on the Statement of Financial Position and is not expected to have a material impact to the Company's financial condition or liquidity. In April 2015, the FASB issued Accounting Standards Update No. 2015-05 (ASU 2015-05), Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40), Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of the arrangement should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015, and interim periods within those years. This standard can be adopted either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The Company has assessed the effects of this standard and does not expect it to have a material impact to the Consolidated Financial Statements.

Consolidated Balance Sheets - USD ($) $ in Millions	Jun. 30, 2015	Dec. 31, 2014
Current assets:
Cash and cash equivalents	$ 394	$ 585
Accounts receivable, net	1,264	1,350
Materials and supplies	852	795
Current portion of deferred income taxes	241	355
Other current assets	494	351
Total current assets	3,245	3,436
Property and equipment, net of accumulated depreciation of $4,411 and $3,547, respectively	57,268	55,788
Goodwill	14,803	14,803
Intangible assets, net	468	506
Other assets	2,032	1,944
Total assets	77,816	76,477
Current liabilities:
Accounts payable and other current liabilities	2,898	3,144
Long-term debt due within one year	151	116
Total current liabilities	3,049	3,260
Deferred income taxes	18,366	18,156
Long-term debt	1,699	1,326
Intangible liabilities, net	721	782
Casualty and environmental liabilities	617	639
Pension and retiree health and welfare liability	380	385
Other liabilities	995	931
Total liabilities	$ 25,827	$ 25,479
Commitments and contingencies (see Notes 6 and 7)
Stockholder’s equity:
Common stock, $1 par value, 1,000 shares authorized; issued and outstanding and paid-in-capital	$ 42,920	$ 42,920
Retained earnings	20,396	18,043
Intercompany notes receivable	(11,324)	(9,963)
Accumulated other comprehensive income	(3)	(2)
Total stockholder’s equity	51,989	50,998
Total liabilities and stockholder's equity	$ 77,816	$ 76,477

Accounts Receivable, Net	6 Months Ended
Accounts Receivable, Net	Jun. 30, 2015
Receivables [Abstract]
Accounts Receivable, Net	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 June 30, 2015 and December 31, 2014, $66 million and $55 million, respectively, of such allowances had been recorded. At June 30, 2015 and December 31, 2014, $55 million and $33 million, respectively, of accounts receivable were greater than 90 days old.

Commitments and Contingencies - Environmental (Details) $ in Millions	3 Months Ended		6 Months Ended
	Jun. 30, 2015 USD ($) sites	Jun. 30, 2014 USD ($)	Jun. 30, 2015 USD ($) sites	Jun. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Loss Contingencies [Line Items]
Accrued obligations for environmental matters, current liabilities	$ 65		$ 65
Accrual for Environmental Loss Contingencies [Roll Forward]
Beginning balance	395	$ 427	404	$ 435
Accruals	2	3	3	5
Payments	(9)	(14)	(19)	(24)
Ending balance	$ 388	$ 416	$ 388	$ 416
Environmental Issue [Member]
Loss Contingencies [Line Items]
Number of alleged environmental contamination sites (in sites) \| sites	223		223
Number of environmental superfund sites (in sites) \| sites	17		17
Liability for third-party environmental tort claims	$ 14		$ 14		$ 15
Future costs of environmental liabilities, minimum	290		290
Future costs of environmental liabilities, maximum	$ 525		$ 525
Site Contingency, Estimated Time Frame for Accrued Cost Distributions			10 years