Derivative Activities

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Fuel

Derivative Activities

Fuel

Fuel costs represented 30 percent, 30 percent, 24 percent, and 25 percent of total operating expenses during the year ended December 31, 2012 (Successor), the year ended December 31, 2011 (Successor), the period February 13 – December 31, 2010 (Successor) and the period January 1 – February 12, 2010 (Predecessor), respectively. The Company may enter into fuel hedge instruments from time to time; however, the Company has not entered into any new derivative contracts subsequent to the Merger and all previously open derivatives expired by June 30, 2012. As of December 31, 2011, BNSF had existing fuel-derivative agreements covering approximately 36 million gallons.

Derivative Activities

The Company had formally documented the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation included linking the derivatives that were designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet, commitments or forecasted transactions. The Company assessed at the time a derivative contract was entered into, and at least quarterly thereafter, whether the derivative item was effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting from ineffectiveness, as defined by authoritative accounting guidance related to derivatives and hedging, was recognized in current period earnings. For derivative instruments that were designated and qualified as cash flow hedges, the effective portion of the gain or loss on the derivative instrument was recorded in accumulated other comprehensive loss (AOCL) as a separate component of equity and reclassified into earnings in the period during which the hedge transaction affects earnings. Cash flows related to fuel and interest rate derivatives are classified as operating activities in the Consolidated Statements of Cash Flows.

The maximum amount of loss the Company could have incurred from credit risk based on the gross fair value of derivative instruments in asset positions and the Company's net asset exposure to counterparty credit risk was $24 million as of December 31, 2011. As of December 31, 2011, the amount recorded for derivative transactions, net of any master netting arrangements, was the same amount as derivative positions presented gross of any master netting arrangements.

The table below contains a summary of all derivative positions reported in the Consolidated Financial Statements, presented gross of any master netting arrangements (in millions):

Fair Value of Derivative Instruments
Asset Derivatives
	Successor
	December 31, 2012		December 31, 2011		Balance Sheet Location
Asset derivatives designated as hedging instruments under ASC 815-20
Fuel Contracts	$	—	$	24	Other current assets
Total asset derivatives designated as hedging instruments under ASC 815-20	$	—	$	24
Total asset derivatives	$	—	$	24

The Effects of Derivative Instruments Gains and Losses for the Year Ended December 31, 2012 (Successor), the Year Ended December 31, 2011 (Successor), the Period February 13 – December 31, 2010 (Successor) and the Period January 1 – February 12, 2010 (Predecessor)
Derivatives in ASC 815-20 Cash Flow Hedging Relationships
	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)
	Successor						Predecessor
	Year Ended		Year Ended		February 13 - December 31, 2010		January 1 - February 12, 2010
	December 31, 2012		December 31, 2011
Fuel Contracts	$	7	$	50	$	93	$	(79	)
Total derivatives	$	7	$	50	$	93	$	(79	)

		Amount of Gain or (Loss) Recognized from AOCL into Income (Effective Portion)
		Successor						Predecessor
	Location of Gain or (Loss) Recognized from AOCL into Income	Year Ended		Year Ended		February 13 - December 31, 2010		January 1 - February 12, 2010
		December 31, 2012		December 31, 2011
Fuel Contracts	Fuel expense	$	25	$	98	$	26	$	(6	)
Total derivatives		$	25	$	98	$	26	$	(6	)

		Amount of Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)a
		Successor								Predecessor
	Location of Gain or (Loss) Recognized in Income on Derivatives	Year Ended			Year Ended			February 13 - December 31, 2010		January 1 - February 12, 2010
		December 31, 2012			December 31, 2011
Fuel Contracts	Fuel expense	$	(3	)	$	(16	)	$	10	$	(7	)
Total derivatives		$	(3	)	$	(16	)	$	10	$	(7	)

^a  No portion of the gain or (loss) was excluded from the assessment of hedge effectiveness for the periods then ended.

The Company utilized a market approach using the forward commodity price for the periods hedged to value its fuel-derivative swaps and costless collars. As such, the fair values of these instruments were classified as Level 2 valuations under authoritative accounting guidance related to fair value measurements.

Additional disclosure related to derivative instruments is included in Note 18 to the Consolidated Financial Statements.

Interest Rate

From time to time, the Company enters into various interest rate derivative transactions for the purpose of managing exposure to fluctuations in interest rates by establishing rates in anticipation of both future debt issuances and the refinancing of leveraged leases, as well as converting a portion of its fixed-rate, long-term debt to floating-rate debt. The Company has previously used and may use interest rate swaps and treasury locks as part of its interest rate risk management strategy.

Fair Value Interest Rate Hedges

The Company entered into interest rate swaps to convert fixed-rate long-term debt to floating-rate debt. These swaps were accounted for as fair value hedges under authoritative accounting guidance related to derivatives and hedging. Upon application of acquisition method accounting due to the Merger, the outstanding swaps were re-designated as fair value hedges. However, the swaps no longer qualified for the short-cut method of recognition; therefore, effectiveness was measured at least quarterly and any resulting ineffectiveness was recognized in current period earnings.

The gain or loss on the fair value hedges as well as the offsetting loss or gain on the hedged items (fixed-rate debt) attributable to the hedged risk were recorded in current earnings. The Company included the gain or loss on the fixed-rate debt in the same line item (interest expense) as the offsetting loss or gain on the related interest rate swaps as follows (in millions):

	Gain on Interest Rate Swaps
	Successor						Predecessor
	Year Ended		Year Ended		February 13 - December 31, 2010		January 1 - February 12, 2010
Income Statement Classification	December 31, 2012		December 31, 2011
Interest expense	$	—	$	—	$	14	$	6

	Loss on Fixed-rate Debt
	Successor							Predecessor
	Year Ended		Year Ended		February 13 - December 31, 2010			January 1 - February 12, 2010
Income Statement Classification	December 31, 2012		December 31, 2011
Interest expense	$	—	$	—	$	(13	)	$	(6	)

In July 2010, BNSF unwound four interest rate swaps, due 2018, resulting in a recognized gain of $45 million, which will be amortized as a reduction of interest expense over the remaining term of these notes.

As of December 31, 2012, 2011 and 2010, BNSF had no outstanding interest rate swaps.