Employment Benefit Plans

BNSF provides a funded, noncontributory qualified pension plan, the BNSF Retirement Plan, which covers most non-union employees, and an unfunded non-tax-qualified pension plan, the BNSF Supplemental Retirement Plan, which covers certain officers and other employees. The benefits under these pension plans are based on years of credited service and the highest consecutive sixty months of compensation for the last ten years of salaried employment with BNSF. The Company also provides two funded, noncontributory qualified pension plans which cover certain union employees of the former The Atchison, Topeka and Santa Fe Railway Company. The benefits under these pension plans are based on elections made at the time the plans were implemented. BNSF’s funding policy is to contribute annually not less than the regulatory minimum and not more than the maximum amount deductible for income tax purposes with respect to the funded plans.

Certain salaried employees of BNSF who have met age and years of service requirements are eligible for life insurance coverage and medical benefits, including prescription drug coverage, during retirement. This postretirement benefit plan, referred to as the retiree health and welfare plan, is contributory and provides benefits to retirees, their covered dependents and beneficiaries. Retiree contributions are adjusted annually. The plan also contains fixed deductibles, coinsurance and out-of-pocket limitations. The basic life insurance plan is noncontributory and covers retirees only. Optional life insurance coverage is available for some retirees; however, the retiree is responsible for the full cost. BNSF’s policy is to fund benefits payable under the medical and life insurance plans as they come due. Generally, employees beginning salaried employment with BNSF subsequent to September 22, 1995, are not eligible for medical benefits during retirement.

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



	Pension Benefits
	Successor						Predecessor
	Year Ended			February 13 – December 31, 2010			January 1 – February 12, 2010			Year Ended
	December 31, 2011			February 13 – December 31, 2010			January 1 – February 12, 2010			December 31, 2009
Service cost	$	32		$	28		$	3		$	28
Interest cost	102			95			12			102
Expected return on plan assets	(120		)	(108		)	(14		)	(107		)
Amortization of net loss	—			—			4			24
Settlements	1			—			—			—
Net cost recognized	$	15		$	15		$	5		$	47



	Retiree Health and Welfare Benefits
	Successor				Predecessor
	Year Ended		February 13 – December 31, 2010		January 1 – February 12, 2010		Year Ended
	December 31, 2011		February 13 – December 31, 2010		January 1 – February 12, 2010		December 31, 2009
Service cost	$	1	$	1	$	—	$	3
Interest cost	14		13		2		15
Amortization of net loss	—		—		—		1
Amortization of prior service credit	—		—		—		(6		)
Net cost recognized	$	15	$	14	$	2	$	13

The projected benefit obligation is the present value of benefit earned to date by plan participants, including the effect of assumed future salary increases and expected healthcare cost trend rate increases. The following table shows the change in projected benefit obligation (in millions):



	Pension Benefits
	Successor						Predecessor
	Year Ended			February 13 – December 31, 2010			January 1 – February 12, 2010
Change in Benefit Obligation	December 31, 2011			February 13 – December 31, 2010			January 1 – February 12, 2010
Projected benefit obligation at beginning of period^a	$	2,068		$	1,986		$	1,864
Service cost	32			28			3
Interest cost	102			95			12
Actuarial loss	277			100			—
Benefits paid	(139		)	(126		)	(11		)
Settlements	(16		)	(15		)	—
Projected benefit obligation at end of period	2,324			2,068			1,868
Component representing future salary increases	(95		)	(63		)	(51		)
Accumulated benefit obligation at end of period	$	2,229		$	2,005		$	1,817

a Successor beginning balance includes fair value adjustment under acquisition method accounting.



	Retiree Health and Welfare Benefits
	Successor						Predecessor
	Year Ended			February 13 – December 31, 2010			January 1 – February 12, 2010
Change in Benefit Obligation	December 31, 2011			February 13 – December 31, 2010			January 1 – February 12, 2010
Projected benefit obligation at beginning of period	$	279		$	265		$	266
Service cost	1			1			—
Interest cost	14			13			2
Plan participants’ contributions	6			6			1
Actuarial loss	17			18			—
Medicare subsidy	4			1			—
Benefits paid	(28		)	(25		)	(4		)
Projected benefit obligation at end of period	$	293		$	279		$	265

BNSF’s pension plans had accumulated and projected benefit obligations in excess of plan assets at December 31, 2011 and 2010.

The following table shows the change in plan assets of the plans (in millions):



	Pension Benefits
	Successor						Predecessor
	Year Ended			February 13 – December 31, 2010			January 1 – February 12, 2010
Change in Plan Assets	December 31, 2011			February 13 – December 31, 2010			January 1 – February 12, 2010
Fair value of plan assets at beginning of period^a	$	1,828		$	1,342		$	1,319
Actual return on plan assets	86			206			13
Employer contributions^b	58			421			1
Benefits paid	(139		)	(126		)	(11		)
Settlements	(16		)	(15		)	—
Fair value of plan assets at measurement date	$	1,817		$	1,828		$	1,322

a Successor beginning balance includes fair value adjustment under acquisition method accounting.

b Other than contributions to the qualified pension plan, employer contributions were classified as Other, Net under Operating Activities in the Company’s Consolidated Statements of Cash Flows.



	Retiree Health and Welfare Benefits
	Successor						Predecessor
	Year Ended			February 13 – December 31, 2010			January 1 – February 12, 2010
Change in Plan Assets	December 31, 2011			February 13 – December 31, 2010			January 1 – February 12, 2010
Fair value of plan assets at beginning of period	$	—		$	—		$	—
Employer contributions^a	22			19			3
Plan participants’ contributions	6			6			1
Medicare subsidy	—			—			—
Benefits paid	(28		)	(25		)	(4		)
Fair value of plan assets at measurement date	$	—		$	—		$	—

a Employer contributions were classified as Other, Net under Operating Activities in the Company’s Consolidated Statements of Cash Flows.

The following table shows the funded status, defined as plan assets less the projected benefit obligation (in millions):



	Pension Benefits						Retiree Health and Welfare Benefits
	Successor						Successor
	December 31, 2011			December 31, 2010			December 31, 2011			December 31, 2010
Funded status (plan assets less projected benefit obligations)	$	(507	)	$	(240	)	$	(293	)	$	(279	)

Of the combined pension and retiree health and welfare benefits liability of $800 million and $519 million recognized as of December 31, 2011 and 2010, respectively, $31 million and $29 million was included in other current liabilities, respectively.

Actuarial gains and losses and prior service credits are recognized in the Consolidated Balance Sheets through an adjustment to AOCI. The following table shows the pre-tax change in AOCI attributable to the components of the net cost and the change in benefit obligation (in millions):



	Pension Benefits
	Successor					Predecessor
	Year Ended			February 13 – December 31, 2010		January 1 – February 12, 2010			Year Ended
Change in AOCI	December 31, 2011			February 13 – December 31, 2010		January 1 – February 12, 2010			December 31, 2009
Beginning balance^a	$	2		$	—	$	792		$	834
Amortization of actuarial loss	—			—		(3		)	(24		)
Actuarial loss (gain)	310			2		—			(18		)
Settlements	(1		)	—		—			—
Ending balance	$	311		$	2	$	789		$	792

a Upon application of acquisition method accounting due to the Merger, the Company eliminated the beginning balance in AOCI.



	Retiree Health and Welfare Benefits
	Successor				Predecessor
	Year Ended		February 13 – December 31, 2010		January 1 – February 12, 2010		Year Ended
Change in AOCI	December 31, 2011		February 13 – December 31, 2010		January 1 – February 12, 2010		December 31, 2009
Beginning balance^a	$	19	$	—	$	19	$	14
Amortization of actuarial loss	—		—		—		(1		)
Amortization of prior service credit	—		—		—		6
Actuarial loss (gain)	16		19		—		—
Ending balance	$	35	$	19	$	19	$	19

a Upon application of acquisition method accounting due to the Merger, the Company eliminated the beginning balance in AOCI.

Approximately $6 million, net of tax, of the actuarial losses from defined benefit pension plans and approximately $1 million, net of tax, of retiree health and welfare benefit plans in AOCI are required to be amortized into net periodic benefit cost over the next fiscal year. Pre-tax amounts currently recognized in AOCI consist of the following (in millions):



	Pension Benefits					Retiree Health and Welfare Benefits
	Successor					Successor
	2011			2010		2011		2010
Net actuarial loss	$	312		$	2	$	35	$	19
Settlements	(1		)	—		—		—
Pre-tax amount recognized in AOCI at December 31,	$	311		$	2	$	35	$	19
After-tax amount recognized in AOCI at December 31,	$	192		$	1	$	21	$	12

The assumptions used in accounting for the BNSF plans were as follows:



	Pension Benefits
	Successor				Predecessor
	Year Ended		February 13 – December 31, 2010		January 1 – February 12, 2010		Year Ended
Assumptions Used to Determine Net Cost	December 31, 2011		February 13 – December 31, 2010		January 1 – February 12, 2010		December 31, 2009
Discount rate	5.25	%	5.75	%	5.75	%	5.75	%
Expected long-term rate of return on plan assets	7.50	%	8.00	%	8.00	%	8.00	%
Rate of compensation increase	3.80	%	3.80	%	3.80	%	3.80	%



	Retiree Health and Welfare Benefits
	Successor				Predecessor
	Year Ended		February 13 – December 31, 2010		January 1 – February 12, 2010		Year Ended
Assumptions Used to Determine Net Cost	December 31, 2011		February 13 – December 31, 2010		January 1 – February 12, 2010		December 31, 2009
Discount rate	5.25	%	5.75	%	5.75	%	5.75	%
Rate of compensation increase	3.80	%	3.80	%	3.80	%	3.80	%



	Pension Benefits				Retiree Health and Welfare Benefits
	Successor				Successor
Assumptions Used to Determine Benefit Obligations	December 31, 2011		December 31, 2010		December 31, 2011		December 31, 2010
Discount rate	4.50	%	5.25	%	4.50	%	5.25	%
Rate of compensation increase	3.80	%	3.80	%	3.80	%	3.80	%

BNSF determined the discount rate based on a yield curve that utilizes year-end market yields of high-quality corporate bonds whose maturities match expected payments. The discount rate used for the 2012 calculation of net benefit cost decreased to 4.50 percent which reflects market conditions at the December 31, 2011, measurement date.

The expected long-term rate of return is the return the Company anticipates earning, net of plan expenses, over the period that benefits are paid. It reflects the rate of return on present investments and on expected contributions. In determining the expected long-term rate of return, BNSF considered the following: (i) forward looking capital market forecasts; (ii) historical returns for individual asset classes; and (iii) the impact of active portfolio management. The expected rate of return on plan assets was 7.50 percent and 6.75 percent for 2011 and 2012, respectively, and the Company does not expect any near-term significant changes to the current investment allocation of assets. However, unforeseen changes in the investment markets or other external factors could prompt changes in these estimates in future years.

The following table is an estimate of the impact on future net benefit cost that could result from hypothetical changes to the most sensitive assumptions, the discount rate and rate of return on plan assets:



Sensitivity Analysis
	Change in Net Benefit Cost
Hypothetical Discount Rate Change	Pension	Retiree Health and Welfare
50 basis point decrease	$8 million increase	$2 million increase
50 basis point increase	$8 million decrease	$1 million decrease
Hypothetical Rate of Return on Plan Assets Change	Pension
50 basis point decrease	$8 million increase
50 basis point increase	$8 million decrease

The following table presents assumed health care cost trend rates:



	Successor				Predecessor
	Year Ended		February 13 – December 31, 2010		January 1 – February 12, 2010		Year Ended
	December 31, 2011		February 13 – December 31, 2010		January 1 – February 12, 2010		December 31, 2009
Assumed health care cost trend rate for next year	8.70	%	9.00	%	9.00	%	9.00	%
Rate to which health care cost trend rate is expected to decline and remain	4.50	%	4.80	%	5.00	%	5.00	%
Year that the rate reaches the ultimate trend rate	2028		2022		2016		2016

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects (in millions):



	One Percentage- Point Increase		One Percentage- Point Decrease
Effect on total service and interest cost	$	1	$	(1	)
Effect on postretirement benefit obligation	$	26	$	(21	)

BNSF’s asset allocation for its funded pension plans at December 31, 2011 and 2010, and the target allocation for 2011 by asset category are as follows:



	Target Allocation	Percentage of Pension Plan Assets
	Successor
	2011	2011		2010
Equity Securities	45 – 75%	58	%	60	%
Fixed Income Securities	25 – 45%	35		34
Real Estate	0 – 10%	7		6
Total		100	%	100	%

The general investment objective of BNSF’s funded pension plans is to grow the plan assets in relation to the plan liabilities while prudently managing the risk of a decrease in the plan’s assets relative to those liabilities. To meet this objective, the Company’s management has adopted the above asset allocation ranges. This allows flexibility to accommodate market changes in the asset classes within defined parameters.

Assets are primarily managed by external Investment Managers each with a specific asset class mandate as directed by management.

Concentration in a single security or credit issuer is generally limited to 5% of each Investment Manager’s portfolio (excluding U.S. government and agencies, authorized commingled funds, and other manager specific exceptions as authorized by management). Real estate investment trust investments may not exceed 10% of any equity manager’s portfolio.

The Fixed Income allocation may include Core, Core “Plus”, and/or Long Duration portfolios. “Plus” strategies (higher risk investments such as high yield, emerging markets, and non-dollar denominated securities) are limited to 30% of the Core Plus portfolio value.

Real Estate is generally accessed through direct investment in one or more commingled funds with reasonable diversification by property type and geographic location.

Derivative investments are permitted under certain circumstances.

Investments are stated at fair value. The various types of investments are valued as follows:

(i) Equity securities are valued at the last trade price at primary exchange close time on the last business day of the year (Level 1 input). If the last trade price is not available, values are based on bid, ask/offer quotes from contracted pricing vendors, brokers, or investment managers (Level 3 input or Level 2 if corroborated).

(ii) Corporate debt securities, government debt securities, and collateralized obligations and mortgage backed securities are valued based on institutional bid evaluations from contracted vendors. Where available, vendors use observable market-based data to evaluate prices (Level 2 input). This also applies to U.S. Treasury securities included in cash and cash equivalents. If observable market-based data is not available, unobservable inputs such as extrapolated data, proprietary models, and indicative quotes are used to arrive at estimated prices representing the price a dealer would pay for the security (Level 3 input).

(iii) Shares of real estate commingled funds are valued at the quarterly net asset value of units held at year end. Net asset value is based on significant unobservable inputs such as discount rates, capitalization rates and cash flows (Level 3 input).

(iv) Registered investment companies and common/collective trusts are valued at the daily net asset value of shares held at year end. Net asset value is considered a Level 1 input if net asset value is computed daily and redemptions at this value are available to all shareholders without restriction. Net asset value is considered a Level 2 input if the fund may restrict share redemptions under limited circumstances or if net asset value is not computed daily. Net asset value is considered a Level 3 input if shares could not be redeemed on the reporting date and net asset value can not be corroborated by trading activity.

The following table summarizes the investments of BNSF’s funded pension plans as of December 31, 2011, based on the inputs used to value them (in millions):



	Total as of
Asset Category	December 31, 2011		Level 1 Inputs ^a		Level 2 Inputs ^a		Level 3 Inputs ^a
Equity securities:
U.S.	$	546	$	546	$	—	$	—
International	298		298		—		—
Corporate debt securities	411		—		411		—
Registered investment companies	95		95		—		—
Government debt securities:
U.S.	151		—		150		1
International	12		—		12		—
Real estate	129		—		—		129
Common/collective trust	107		—		107		—
Collateralized obligations and mortgage backed securities (MBS)	32		—		32		—
Cash and cash equivalents	26		11		15		—
Total^b	$	1,807	$	950	$	727	$	130

a See Note 2 to the Consolidated Financial Statements under the heading “Fair Value Measurements” for a definition of each of these levels of inputs.

b Excludes $10 million accrued for dividend and interest receivable.

The table below sets forth a summary of changes in the fair value of Level 3 assets held by BNSF's funded pension plans for the year ended December 31, 2011 (Successor) (in millions):



Level 3 Inputs	Total			U.S. Government Debt Securities		Real Estate		Collateralized Obligations & MBS
Balance as of December 31, 2010	$	120		$	1	$	116	$	3
Actual return on plan assets:
Relating to assets still held at reporting date	13			—		13		—
Relating to assets sold during the period	—			—		—		—
Purchases, sales and settlements	(1		)	—		—		(1		)
Transfers out of Level 3	(2		)	—		—		(2		)
Balance as of December 31, 2011	$	130		$	1	$	129	$	—

Comparative Prior Year Information

The following table summarizes the investments of BNSF’s funded pension plans as of December 31, 2010, based on the inputs used to value them (in millions):



	Total as of
Asset Category	December 31, 2010		Level 1 Inputs ^a		Level 2 Inputs^a		Level 3 Inputs ^a
Equity securities:
U.S.	$	367	$	367	$	—	$	—
International	322		322		—		—
Corporate debt securities	356		—		356		—
Registered investment companies	298		298		—		—
Government debt securities:
U.S.	150		—		149		1
International	8		—		8		—
Real estate	116		—		—		116
Common/collective trust	108		—		108		—
Collateralized obligations and mortgage backed securities (MBS)	64		—		61		3
Cash and cash equivalents	28		—		28		—
Total ^b	$	1,817	$	987	$	710	$	120

a See Note 2 to the Consolidated Financial Statements under the heading “Fair Value Measurements” for a definition of each of these levels of inputs.

b Excludes $11 million accrued for dividend and interest receivable.

The table below sets forth a summary of changes in the fair value of Level 3 assets held by BNSF’s funded pension plans for the period February 13 – December 31, 2010 (Successor) (in millions):



Level 3 Inputs	Total			U.S. Government Debt Securities		Real Estate			Collateralized Obligations & MBS
Balance as of February 13, 2010	$	105		$	—	$	103		$	2
Actual return on plan assets:
Relating to assets still held at reporting date	17			—		17			—
Relating to assets sold during the period	(4		)	—		(4		)	—
Purchases, sales and settlements	3			1		—			2
Transfers out of Level 3	(1		)	—		—			(1		)
Balance as of December 31, 2010	$	120		$	1	$	116		$	3

The table below sets forth a summary of changes in the fair value of Level 3 assets held by BNSF’s funded pension plans for the period January 1 – February 12, 2010 (Predecessor) (in millions):



Level 3 Inputs	Total		Real Estate		Collateralized Obligations & MBS
Balance as of December 31, 2009	$	104	$	103	$	1
Actual return on plan assets:
Relating to assets still held at reporting date	—		—		—
Relating to assets sold during the period	—		—		—
Purchases, sales and settlements	1		—		1
Transfers out of Level 3	—		—		—
Balance as of February 12, 2010	$	105	$	103	$	2

The Company is not required to make contributions to the BNSF Retirement Plan in 2012; however, the Company made a discretionary contribution of $36 million in January 2012. The Company is required to make contributions of $8 million to its other funded pension plans. The Company expects to make benefit payments in 2012 of $8 million from its unfunded non-qualified pension plan.

The following table shows expected benefit payments from its defined benefit pension plans and expected claim payments and Medicare Part D subsidy receipts for the retiree health and welfare plan for the next five fiscal years and the aggregate five years thereafter (in millions):



Fiscal year	Expected Pension Plan Benefit Payments		^a	Expected Retiree Health and Welfare Payments		Expected Medicare Subsidy
2012	$	161		$	23	$	(2	)
2013	$	155		$	23	$	(2	)
2014	$	160		$	23	$	(3	)
2015	$	159		$	23	$	(3	)
2016	$	158		$	23	$	(3	)
2017–2020	$	765		$	114	$	(17	)

a Primarily consists of the BNSF Retirement Plan payments, which are made from the plan trust and do not represent an immediate cash outflow to the Company.

Defined Contribution Plans

BNSF sponsors qualified 401(k) plans that cover substantially all employees and a non-qualified defined contribution plan that covers certain officers and other employees. BNSF matches 50 percent of the first six percent of non-union employees’ contributions and matches 25 percent on the first four percent of a limited number of union employees’ contributions, which are subject to certain percentage limits of the employees’ earnings, at each pay period. Non-union employees are eligible to receive an annual discretionary matching contribution of up to 30 percent of the first six percent of their contributions. Employer contributions are subject to a five-year length of service vesting schedule. BNSF’s 401(k) matching expense was $31 million, $25 million, $3 million and $22 million during the year ended December 31, 2011 (Successor), the periods February 13 – December 31, 2010 (Successor) and January 1 – February 12, 2010 (Predecessor), and the year ended December 31, 2009 (Predecessor), respectively.

Other

Under collective bargaining agreements, BNSF participates in multi-employer benefit plans that provide certain postretirement health care and life insurance benefits for eligible union employees. Insurance premiums paid attributable to retirees, which are generally expensed as incurred, were $73 million, $55 million, $8 million and $54 million during the year ended December 31, 2011 (Successor), the periods February 13 – December 31, 2010 (Successor) and January 1 – February 12, 2010 (Predecessor), and the year ended December 31, 2009 (Predecessor), respectively. The average number of employees covered under these plans were 35 thousand, 33 thousand, 31 thousand and 34 thousand during the year ended December 31, 2011 (Successor), the periods February 13 - December 31, 2010 (Successor) and January 1 - February 12, 2010 (Predecessor), and the year ended December 31, 2009 (Predecessor), respectively.