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EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - BURLINGTON NORTHERN SANTA FE, LLCllc63017-ex321.htm
EX-31.2 - SECTION 302 CERTIFICATION - BURLINGTON NORTHERN SANTA FE, LLCllc63017-ex312.htm
EX-31.1 - SECTION 302 CERTIFICATION - BURLINGTON NORTHERN SANTA FE, LLCllc63017-ex311.htm
EX-12.1 - COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - BURLINGTON NORTHERN SANTA FE, LLCllc63017ratioofearn.htm
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, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from            to            

Commission file number            1-11535
bnsflogo6302017a01.jpg
BURLINGTON NORTHERN SANTA FE, LLC
(Exact name of registrant as specified in its charter)
Delaware
 
27-1754839
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)

2650 Lou Menk Drive
Fort Worth, Texas
(Address of principal executive offices)

76131-2830
(Zip Code)

(800) 795-2673
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
 
 
Yes  [x]  No  [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
Yes  [x]  No  [  ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]  Accelerated filer  [  ]  Non-accelerated filer  [x]  Smaller reporting company  [  ] Emerging growth company  [  ]
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [ ]
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
 
Yes  [  ]  No  [x]
Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format permitted by General Instruction H (2).



Table of Contents
 
 

2


PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements.

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
(Unaudited)
 

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues
 
$
5,250

 
$
4,585

 
$
10,435

 
$
9,352

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
1,242

 
1,134

 
2,525

 
2,342

Purchased services
 
609

 
589

 
1,235

 
1,227

Fuel
 
577

 
431

 
1,182

 
826

Depreciation and amortization
 
592

 
530

 
1,165

 
1,050

Equipment rents
 
196

 
184

 
392

 
372

Materials and other
 
247

 
230

 
555

 
543

Total operating expenses
 
3,463

 
3,098

 
7,054

 
6,360

Operating income
 
1,787

 
1,487

 
3,381

 
2,992

Interest expense
 
256

 
249

 
508

 
494

Other (income) expense, net
 
(6
)
 

 
(9
)
 
2

 
 
 
 
 
 
 
 
 
Income before income taxes
 
1,537

 
1,238

 
2,882

 
2,496

Income tax expense
 
579

 
466

 
1,086

 
940

Net income
 
$
958

 
$
772

 
$
1,796

 
$
1,556


See accompanying Notes to Consolidated Financial Statements.

3


BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
958

 
$
772

 
$
1,796

 
$
1,556

 
 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
 
     Change in Pension and Retiree Health and Welfare benefits, net of tax
 
(1
)
 

 
(1
)
 

    Change in accumulated other comprehensive income (loss) of equity method investees
 
1

 
1

 
(1
)
 
(1
)
Other comprehensive income (loss), net of tax
 

 
1

 
(2
)
 
(1
)
Total comprehensive income
 
$
958

 
$
773

 
$
1,794

 
$
1,555


See accompanying Notes to Consolidated Financial Statements.


4


BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
 
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
 

Current assets:
 
 
 
 
Cash and cash equivalents
 
$
4,135

 
$
3,218

Accounts receivable, net
 
1,289

 
1,272

Materials and supplies
 
819

 
825

Other current assets
 
240

 
235

Total current assets
 
6,483

 
5,550

 
 
 
 
 
Property and equipment, net of accumulated depreciation of $7,936 and $6,130, respectively
 
61,642

 
61,250

Goodwill
 
14,845

 
14,845

Intangible assets, net
 
412

 
430

Other assets
 
2,160

 
2,047

Total assets
 
$
85,542

 
$
84,122

 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and other current liabilities
 
$
3,825

 
$
3,438

Long-term debt due within one year
 
731

 
735

Total current liabilities
 
4,556

 
4,173

 
 
 
 
 
Long-term debt
 
21,821

 
21,309

Deferred income taxes
 
20,100

 
19,866

Casualty and environmental liabilities
 
570

 
584

Intangible liabilities, net
 
519

 
567

Pension and retiree health and welfare liability
 
313

 
321

Other liabilities
 
1,122

 
1,130

Total liabilities
 
49,001

 
47,950

Commitments and contingencies (see Notes 6 and 7)
 

 

Equity:
 
 
 
 
Member’s equity
 
36,424

 
36,053

   Accumulated other comprehensive income
 
117

 
119

Total equity
 
36,541

 
36,172

Total liabilities and equity
 
$
85,542

 
$
84,122


See accompanying Notes to Consolidated Financial Statements.

5



BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
1,796

 
$
1,556

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
1,165

 
1,050

Deferred income taxes
 
232

 
680

Long-term casualty and environmental liabilities, net
 
(19
)
 
(21
)
Other, net
 
(113
)
 
(81
)
Changes in current assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(17
)
 
34

Materials and supplies
 
6

 
(1
)
Other current assets
 
(17
)
 
(155
)
Accounts payable and other current liabilities
 
502

 
(95
)
Net cash provided by operating activities
 
3,535

 
2,967

 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
Capital expenditures excluding equipment
 
(1,296
)
 
(1,542
)
Acquisition of equipment
 
(200
)
 
(457
)
Purchases of investments and investments in time deposits
 
(8
)
 
(4
)
Proceeds from sales of investments and maturities of time deposits
 
15

 
10

Other, net
 
(235
)
 
(281
)
Net cash used for investing activities
 
(1,724
)
 
(2,274
)
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
Proceeds from issuance of long-term debt
 
1,250

 
750

Payments on long-term debt
 
(700
)
 
(252
)
Cash distributions
 
(1,425
)
 
(1,250
)
Other, net
 
(19
)
 
(12
)
Net cash used for financing activities
 
(894
)
 
(764
)
Increase (decrease) in cash and cash equivalents
 
917

 
(71
)
Cash and cash equivalents:
 
 
 
 
Beginning of period
 
3,218

 
2,329

End of period
 
$
4,135

 
$
2,258

 
 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
 
Interest paid, net of amounts capitalized
 
$
530

 
$
516

Capital investments accrued but not yet paid
 
$
103

 
$
122

Income taxes paid, net of refunds
 
$
212

 
$
226


See accompanying Notes to Consolidated Financial Statements. 

6


BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In millions)
(Unaudited)

 
 
Member’s
Equity

 
Accumulated
Other
Comprehensive Income (Loss)

 
Total
Equity

Balance at December 31, 2016
 
$
36,053

 
$
119

 
$
36,172

Cash distributions
 
(1,425
)
 

 
(1,425
)
Comprehensive income (loss), net of tax
 
1,796

 
(2
)
 
1,794

Balance at June 30, 2017
 
$
36,424

 
$
117

 
$
36,541


See accompanying Notes to Consolidated Financial Statements.

7


BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.
Accounting Policies and Interim Results
 
The Consolidated Financial Statements should be read in conjunction with Burlington Northern Santa Fe, LLC’s Annual Report on Form 10-K for the year ended December 31, 2016, including the financial statements and notes thereto. Burlington Northern Santa Fe, LLC (BNSF) is a holding company that conducts no operating activities and owns no significant assets other than through its interests in its subsidiaries. The Consolidated Financial Statements include the accounts of BNSF and its majority-owned subsidiaries, all of which are separate legal entities (collectively, the Company). BNSF’s principal operating subsidiary is BNSF Railway Company (BNSF Railway). All intercompany accounts and transactions have been eliminated.

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

The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the entire year. In the opinion of management, the unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments, except as disclosed) necessary for a fair statement of BNSF’s consolidated financial position as of June 30, 2017, and the results of operations for the three and six months ended June 30, 2017 and 2016.

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 each period ended June 30, 2017 and December 31, 2016, $88 million of such allowances had been recorded.
 
At June 30, 2017 and December 31, 2016, $85 million and $88 million, respectively, of accounts receivable were greater than 90 days old.

3.
Investments

BNSF 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, 2017 and December 31, 2016 (in millions):
 
 
June 30, 2017
 
December 31, 2016
Debt securities
 
$
48

 
$
47

Equity securities
 
60

 
60

  Total
 
$
108

 
$
107


The fair value measurements of BNSF’s debt securities are based on Level 2 inputs and equity securities are based on Level 1 inputs, using a market approach. The following table presents gains and losses recognized in earnings for the Company (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Gains
 
$
3

 
$
2

 
$
7

 
$
7

Losses
 

 

 

 
(4
)
  Net Gain
 
$
3

 
$
2

 
$
7

 
$
3

    

8

BURLINGTON NORTHERN SANTA FE, LLC 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, 2017
 
As of December 31, 2016
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Intangible assets
$
661

 
$
249

 
$
661

 
$
231

Intangible liabilities
$
1,403

 
$
884

 
$
1,403

 
$
836

    
As of June 30, 2017 and December 31, 2016, intangible assets primarily consisted of franchise and customer assets. Intangible liabilities primarily consisted of customer and shortline contracts which were in an unfavorable position at the date of Merger.
 
Amortizable intangible assets and liabilities are amortized based on the estimated pattern in which the economic benefits are expected to be consumed or on a straight-line basis over their estimated economic lives.

Amortization of intangible assets and liabilities was as follows (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Amortization of intangible assets
 
$
9

 
$
9

 
$
18

 
$
19

Amortization of intangible liabilities
 
$
24

 
$
25

 
$
48

 
$
50

 
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 2017
$
18

 
$
48

2018
$
33

 
$
90

2019
$
31

 
$
27

2020
$
31

 
$
26

2021
$
31

 
$
24



9

BURLINGTON NORTHERN SANTA FE, LLC 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. The Company does not provide financial support to the Partnership that it was not previously contractually obligated to provide.    

The Company has accounted for its investment in the Partnership using the effective yield method. The risk of loss of the Company’s investment in the Partnership is considered low as an affiliate of the general partner has provided certain guarantees of tax credits and minimum annual returns. For the six months ended June 30, 2017 and 2016, the Company recognized a reduction to income tax expense of $17 million and $23 million, respectively. The Company’s maximum exposure to loss related to the Partnership is the unamortized investment balance. The following table provides information related to this Partnership (in millions):
 
 
June 30, 2017
 
December 31, 2016
Unamortized investment balance classified as Other Assets
 
$
161

 
$
196

Maximum exposure to loss
 
$
161

 
$
196


Included within Other Assets are capitalized right-to-use fixed assets of $920 million and $895 million, and related accumulated amortization of $276 million and $265 million, at June 30, 2017 and December 31, 2016, respectively.

6.
Debt
 
Notes and Debentures

In March 2017, BNSF issued $500 million of 3.25 percent debentures due June 15, 2027 and $750 million of 4.125 percent debentures due June 15, 2047. The net proceeds from the sale of the debentures will be used for general corporate purposes, which may include but are not limited to working capital, capital expenditures, repayment of outstanding indebtedness and distributions.

In March 2017, the Board of Managers (the Board) of the Company authorized an additional $1.5 billion of debt securities that may be issued pursuant to the debt shelf registration statement filed with the Securities and Exchange Commission (SEC), for a total of $1.75 billion that remains authorized by the Board to be issued through the SEC debt shelf offering process.

The Company is required to maintain certain financial covenants in conjunction with $500 million of certain issued and outstanding junior subordinated notes. As of June 30, 2017, the Company was in compliance with these financial covenants. In the event of non-compliance, the Company would be required to pay any accrued and unpaid interest.

Fair Value of Debt Instruments
 
At June 30, 2017 and December 31, 2016, the fair value of BNSF’s debt, excluding capital leases and unamortized gains on interest rate swaps, was $24,775 million and $23,618 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 and unamortized gains on interest rate swaps, was $22,051 million and $21,509 million, respectively. The fair value of BNSF’s debt is primarily based on market value price models using observable market-based data for the same or similar issues, or on the estimated rates that would be offered to BNSF for debt of the same remaining maturities (Level 2 inputs).

10

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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


Guarantees 

As of June 30, 2017, BNSF has not been called upon to perform under the guarantees specifically disclosed in this footnote and does not anticipate a significant performance risk in the foreseeable future.

Debt and other obligations of non-consolidated entities guaranteed by the Company as of June 30, 2017, were as follows (dollars in millions):
 
Guarantees
 
 
 
 
BNSF
Ownership
Percentage

 
Principal
Amount
Guaranteed

 
Maximum
Future
Payments

 
Maximum
Recourse
Amounta

 
Remaining
Term
(in years)
 
Capitalized Obligations

 
Kinder Morgan Energy Partners, L.P.
0.5
%
 
$
190

 
$
190

 
$

 
Termination of Ownership
 
$
2

b 
Chevron Phillips Chemical Company LP
%
 
N/Ad

 
N/Ad

 
N/Ad

 
10
 
$
21

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 for BNSF’s negligence or the negligence of the indemnified party. However, BNSF could receive reimbursement from certain insurance policies if the liability exceeds a certain amount.

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

Chevron Phillips Chemical Company LP
 
BNSF has an indemnity agreement with Chevron Phillips Chemical Company LP (Chevron Phillips), granting certain rights of indemnity from BNSF, in order to facilitate access to a storage facility. Under certain circumstances, payment under this obligation may be required in the event Chevron Phillips were to incur certain liabilities or other incremental costs resulting from trackage access.

Indemnities
 
In the ordinary course of business, BNSF enters into agreements with third parties that include indemnification clauses. The Company believes that these clauses are generally customary for the types of agreements in which they are included. At times, these clauses may involve indemnification for the acts of the Company, its employees and agents, indemnification for another party’s acts, indemnification for future events, indemnification based upon a certain standard of performance, indemnification for liabilities arising out of the Company’s use of leased equipment or other property, or other types of indemnification. Despite the uncertainty whether events which would trigger the indemnification obligations would ever occur, the Company does not believe that these indemnity agreements will have a material adverse effect on the Company’s results of operations, financial position or liquidity. Additionally, the Company believes that, due to lack of historical payment experience, the fair value of indemnities cannot be estimated with any amount of certainty and that the fair value of any such amount would be immaterial to the Consolidated Financial Statements. Agreements that reflect unique circumstances, particularly agreements that contain guarantees that indemnify for another party’s acts, are disclosed separately, if appropriate. Unless separately disclosed above, no fair value liability related to indemnities has been recorded in the Consolidated Financial Statements.
 

11

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Variable Interest Entities - Leases
     
BNSF Railway has entered into various lease transactions in which the structure of the lease contains VIEs. These leases are primarily for equipment. These VIEs were created solely for the lease transactions and have no other activities, assets or liabilities outside of the lease transactions. In some of the arrangements, BNSF Railway has the option to purchase some or all of the leased assets at a fixed price, thereby creating variable interests for BNSF Railway in the VIEs. The future minimum lease payments associated with the VIE leases were approximately $2 billion as of June 30, 2017.
 
In the event the leased asset is destroyed, BNSF Railway is generally obligated to either replace the asset or pay a fixed loss amount. The inclusion of the fixed loss amount is a standard clause within the lease arrangements. Historically, BNSF Railway has not incurred significant losses related to this clause. As such, it is not anticipated that the maximum exposure to loss would materially differ from the future minimum lease payments.
 
BNSF Railway does not provide financial support to the VIEs that it was not previously contractually obligated to provide.
 
BNSF Railway maintains and operates the leased assets based on contractual obligations within the lease arrangements, which set specific guidelines consistent within the industry. As such, BNSF Railway has no control over activities that could materially impact the fair value of the leased assets. BNSF Railway does not hold the power to direct the activities of the VIEs and therefore does not control the ongoing activities that have a significant impact on the economic performance of the VIEs. Additionally, BNSF Railway does not have the obligation to absorb losses of the VIEs or the right to receive benefits of the VIEs that could potentially be significant to the VIEs. Depending on market conditions, the fixed-price purchase options could potentially provide benefit to the Company; however, any benefits potentially received from a fixed-price purchase option are generally expected to be minimal. Based on these factors, BNSF Railway is not the primary beneficiary of the VIEs. As BNSF Railway is not the primary beneficiary and the majority of the VIE leases are operating leases, the assets and liabilities related to the VIEs recorded in the Company’s Consolidated Balance Sheet are immaterial.

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

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

12

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

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

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

Other Personal Injury
 
BNSF estimates its other personal injury liability claims and expense quarterly based on the covered population, activity levels and trends in frequency and the costs of covered injuries. Estimates include unasserted claims except for certain repetitive stress and other occupational trauma claims that allegedly result from prolonged repeated events or exposure. Such claims are estimated on an as-reported basis because the Company cannot estimate the range of reasonably possible loss due to other non-work related contributing causes of such injuries and the fact that continued exposure is required for the potential injury to manifest itself as a claim. BNSF has not experienced any significant adverse trends related to these types of claims in recent years.
    
BNSF monitors quarterly actual experience against the number of forecasted claims to be received, the forecasted number of claims closing with payment and expected claim payments. Adjustments to the Company’s estimates are recorded quarterly as necessary or more frequently as new events or revised estimates develop.
        
The following table summarizes the activity in the Company’s accrued obligations for asbestos and other personal injury matters (in millions):
 
 
Three Months Ended June 30,
 
 
2017
 
2016
Beginning balance
 
$
367

 
$
371

Accruals
 
4

 
17

Payments
 
(7
)
 
(19
)
     Ending balance
 
$
364

 
$
369


 
 
Six Months Ended June 30,
 
 
2017
 
2016
Beginning balance
 
$
367

 
$
375

Accruals
 
18

 
50

Payments
 
(21
)
 
(56
)
     Ending balance
 
$
364

 
$
369


At June 30, 2017 and December 31, 2016, $80 million and $85 million was included in current liabilities, respectively. Defense and processing costs, which are recorded on an as-reported basis, were not included in the recorded liability. The Company is primarily self-insured for personal injury claims.

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 $320 million to $435 million. However, BNSF believes that the $364 million recorded at June 30, 2017 is the best estimate of the Company’s future obligation for the settlement of personal injury claims.

13

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

    
The amounts recorded by BNSF for personal injury liabilities were based upon currently known facts. Future events, such as the number of new claims to be filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding personal injury litigation in the United States, could cause the actual costs to be higher or lower than projected.
 
Although the final outcome of personal injury matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded, it is the opinion of BNSF that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, the occurrence of a number of these items in the same period could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

BNSF Insurance Company
 
The Company has a consolidated, wholly-owned subsidiary, Burlington Northern Santa Fe Insurance Company, Ltd. (BNSFIC), that offers insurance coverage for certain risks, FELA claims, railroad protective and force account insurance claims and certain excess general liability and property coverage, and certain other claims which are subject to reinsurance. BNSFIC has entered into annual reinsurance treaty agreements with several other companies. The treaty agreements insure workers compensation, general liability, auto liability and FELA risk. In accordance with the agreements, BNSFIC cedes a portion of its FELA exposure through the treaty and assumes a proportionate share of the entire risk. Each year BNSFIC reviews the objectives and performance of the treaty to determine its continued participation in the treaty. The treaty agreements provide for certain protections against the risk of treaty participants’ non-performance. On an ongoing basis, BNSF and/or the treaty manager reviews the creditworthiness of each of the participants. BNSF does not believe its exposure to treaty participants’ non-performance is material at this time. BNSFIC typically invests in time deposits and money market accounts. At June 30, 2017, there was $490 million related to these third-party investments, which were classified as cash and cash equivalents on the Company’s Consolidated Balance Sheet, as compared with $457 million at December 31, 2016.

Environmental
 
The Company’s operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF’s operating procedures include practices to protect the environment from the risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF’s land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental cleanup and enforcement actions. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also known as the Superfund law, as well as similar state laws, generally impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. BNSF has been notified that it is a potentially responsible party (PRP) for study and cleanup costs at Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF generally participates in the cleanup of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on such factors as relative volumetric contribution of material, the amount of time the site was owned or operated and/or the portion of the total site owned or operated by each PRP.
 
BNSF is involved in a number of administrative and judicial proceedings and other mandatory cleanup efforts for 217 sites, including 17 Superfund sites, at which it is participating in the study or cleanup, or both, of alleged environmental contamination.
    
Liabilities for environmental cleanup costs are recorded when BNSF’s liability for environmental cleanup is probable and reasonably estimable. Subsequent adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. Environmental costs include initial site surveys and environmental studies as well as costs for remediation of sites determined to be contaminated.
    

14

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

BNSF estimates the ultimate cost of cleanup efforts at its known environmental sites on an annual basis during the third quarter. Ultimate cost estimates for environmental sites are based on current estimated percentage to closure ratios, possible remediation work plans and estimates of the costs and likelihood of each possible outcome, historical payment patterns, and benchmark patterns developed from data accumulated from industry and public sources, including the Environmental Protection Agency and other governmental agencies. These factors incorporate into the estimates experience gained from cleanup efforts at other similar sites.
 
Annual studies do not include: (i) contaminated sites of which the Company is not aware; (ii) additional amounts for third-party tort claims, which arise out of contaminants allegedly migrating from BNSF property, due to a limited number of sites; or (iii) natural resource damage claims. BNSF continues to estimate third-party tort claims on a site by site basis when the liability for such claims is probable and reasonably estimable. BNSF’s recorded liability for third-party tort claims as of June 30, 2017 and December 31, 2016 was $9 million and $12 million, respectively.
 
On a quarterly basis, BNSF monitors actual experience against the forecasted remediation and related payments made on existing sites and conducts ongoing environmental contingency analyses, which consider a combination of factors including independent consulting reports, site visits, legal reviews and analysis of the likelihood of other PRPs’ participation in, and their ability to pay for, cleanup. Adjustments to the Company’s estimates will continue to be recorded as necessary based on developments in subsequent periods. Additionally, environmental accruals, which are classified as materials and other in the Consolidated Statements of Income, include amounts for newly identified sites or contaminants, third-party claims, and legal fees incurred for defense of third-party claims and recovery efforts.
        
The following table summarizes the activity in the Company’s accrued obligations for environmental matters (in millions):
 
 
Three Months Ended June 30,
 
 
2017
 
2016
Beginning balance
 
$
335

 
$
362

Accruals
 
(2
)
 

Payments
 
(7
)
 
(7
)
     Ending balance
 
$
326

 
$
355

 
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Beginning balance
 
$
342

 
$
369

Accruals
 
(1
)
 

Payments
 
(15
)
 
(14
)
     Ending balance
 
$
326

 
$
355


At June 30, 2017 and December 31, 2016, $40 million was included in current liabilities for both periods.

BNSF’s environmental liabilities are not discounted. BNSF anticipates that the majority of the accrued costs at June 30, 2017, will be paid over the next ten years, and no individual site is considered to be material.

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

Because of the uncertainty surrounding these factors, it is reasonably possible that future costs for environmental liabilities may range from approximately $260 million to $435 million. However, BNSF believes that the $326 million recorded at June 30, 2017 is the best estimate of the Company’s future obligation for environmental costs.
    

15

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

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

Other Claims and Litigation
 
In addition to asbestos, other personal injury and environmental matters discussed above, BNSF and its subsidiaries are also parties to a number of other legal actions and claims, governmental proceedings and private civil suits arising in the ordinary course of business, including those related to disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for punitive as well as compensatory damages, and from time to time may include proceedings that purport to be class actions. Although the final outcome of these matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, BNSF currently believes that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an unexpected adverse resolution of one or more of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year.


16

BURLINGTON NORTHERN SANTA FE, LLC 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 (Credit)
 
2017
 
2016
Service cost
 
$
11

 
$
11

Interest cost
 
22

 
24

Expected return on plan assets
 
(37
)
 
(36
)
Net credit recognized
 
$
(4
)
 
$
(1
)

 
 
Pension Benefits
 
 
Six Months Ended June 30,
Net Cost (Credit)
 
2017
 
2016
Service cost
 
$
21

 
$
23

Interest cost
 
44

 
48

Expected return on plan assets
 
(74
)
 
(72
)
Net credit recognized
 
$
(9
)
 
$
(1
)

 
 
Retiree Health and Welfare Benefits
 
 
Three Months Ended June 30,
Net Cost
 
2017
 
2016
Service cost
 
$
1

 
$
1

Interest cost
 
2

 
2

Amortization of prior service credits
 
(1
)
 
(1
)
Net cost recognized
 
$
2

 
$
2


 
 
Retiree Health and Welfare Benefits
 
 
Six Months Ended June 30,
Net Cost
 
2017
 
2016
Service cost
 
$
1

 
$
1

Interest cost
 
4

 
5

Amortization of prior service credits
 
(1
)
 
(1
)
Net cost recognized
 
$
4

 
$
5



17

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

9.
Related Party Transactions

The companies identified as affiliates of BNSF include Berkshire and its subsidiaries. During the six months ended June 30, 2017 and 2016, the Company declared and paid cash distributions of $1.425 billion and $1.250 billion, respectively, to its parent company. For the six months ended June 30, 2017 and 2016, the Company received tax refunds of $0 million and $138 million, respectively, from Berkshire, and made tax payments of $91 million and $307 million, respectively, to Berkshire. As of June 30, 2017 and December 31, 2016, the Company has a payable to Berkshire of $698 million and $109 million, respectively.

BNSF engages in various transactions with related parties in the ordinary course of business. The following table summarizes revenues earned by BNSF for services provided to related parties and expenditures to related parties (in millions):
 
 
Three Months Ended June 30,
 
 
2017
 
2016
Revenues
 
$
31

 
$
32

Expenditures
 
$
82

 
$
67


 
 
Six Months Ended June 30,
 
 
2017
 
2016
Revenues
 
$
68

 
$
73

Expenditures
 
$
161

 
$
137


10.
Accumulated Other Comprehensive Income
 
Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in accumulated other comprehensive income, a component of equity within the Consolidated Balance Sheets, rather than net income on the Consolidated Statements of Income. Under existing accounting standards, other comprehensive income may include, among other things, unrecognized gains and losses and prior service credit related to pension and other postretirement benefit plans.

The following tables provide the components of accumulated other comprehensive income / (loss) (AOCI) by component (in millions):
 
 
Pension and Retiree Health and Welfare Benefit Itemsa
 
Equity Method Investments
 
Total
Balance at December 31, 2016
 
$
122

 
$
(3
)
 
$
119

Other comprehensive (loss) before reclassifications
 

 
(1
)
 
(1
)
Amounts reclassified from AOCI
 
(1
)
 

 
(1
)
Balance at June 30, 2017
 
$
121

 
$
(4
)
 
$
117

 
 
 
 
 
 
 
Balance at December 31, 2015
 
$
50

 
$
(2
)
 
$
48

Other comprehensive (loss) before reclassifications
 

 
(1
)
 
(1
)
Amounts reclassified from AOCI
 

 

 

Balance at June 30, 2016
 
$
50

 
$
(3
)
 
$
47

a Amounts are net of tax.

18

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

Reclassifications out of AOCIb
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
Details about AOCI Components
 
2017
 
2016
 
Income Statement Line Item
Amortization of pension and retiree health and welfare benefit items
 
 
 
 
 
 
Prior service credits
 
$
1

 
$
1

 
c 
 
 
1

 
1

 
Total before tax
 
 

 
(1
)
 
Tax benefit / (expense)
Total reclassifications for the period
 
$
1

 
$

 
Net of tax
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
Details about AOCI Components
 
2017
 
2016
 
Income Statement Line Item
Amortization of pension and retiree health and welfare benefit items
 
 
 
 
 
 
Prior service credits
 
$
1

 
$
1

 
c 
 
 
1

 
1

 
Total before tax
 
 

 
(1
)
 
Tax benefit / (expense)
Total reclassifications for the period
 
$
1

 
$

 
Net of tax
b Amounts in parenthesis indicate debits to the income statement.
c This accumulated other comprehensive income component is included in the computation of net periodic pension and retiree health and welfare cost (see Note 8 for additional details).


19

BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

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

11.
Accounting Pronouncements
 
In May 2014, the 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 (ASC) 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, 2017. 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 expects to use the modified retrospective method when implementing this standard in first quarter 2018. The Company has completed a review of the impacts of the application of the new standard to its existing customer contracts. Under the new standard, the Company will continue to recognize transportation revenues based upon the proportion of the service provided as of the balance sheet date. Furthermore, the Company will assess variable consideration at each reporting period. Based on the Company’s review, the adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
  
In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. At December 31, 2016, BNSF had long-term operating leases with approximately $3.4 billion of remaining minimum lease payments. This new standard will require the present value of these leases to be recorded in the Consolidated Balance Sheets as a right of use asset and lease liability.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 requires an entity to present the service cost component of net benefit cost in the same line item as other current employee compensation costs (including being capitalized, if appropriate, as part of an asset). The other components of net benefit cost would be presented separately in the statements of income and below income from operations. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. This new standard will be applied retrospectively for the presentation of the service cost component and other components of net periodic pension and posretirement benefit cost in the income statement. ASU 2017-07 is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.




20


Item 2.
Management’s Narrative Analysis of Results of Operations.
 
Management’s narrative analysis relates to the results of operations of Burlington Northern Santa Fe, LLC and its majority-owned subsidiaries (collectively BNSF, Registrant or Company). The principal operating subsidiary of BNSF is BNSF Railway Company (BNSF Railway) through which BNSF derives substantially all of its revenues. The following narrative analysis should be read in conjunction with the Consolidated Financial Statements and the accompanying notes.
 
The following narrative analysis of results of operations includes a brief discussion of the factors that materially affected the Company’s operating results in the six months ended June 30, 2017, and a comparative analysis to the six months ended June 30, 2016.

Results of Operations

Revenues Summary
 
The following tables present BNSF’s revenue information by business group:
 
 
Revenues (in millions)
 
Cars / Units (in thousands)
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Consumer Products
 
$
3,422

 
$
3,151

 
2,654

 
2,511

Industrial Products
 
2,498

 
2,364

 
878

 
858

Agricultural Products
 
2,182

 
1,958

 
565

 
524

Coal
 
1,872

 
1,434

 
912

 
763

Total Freight Revenues
 
9,974

 
8,907

 
5,009

 
4,656

Other Revenues
 
461

 
445

 
 
 
 
Total Operating Revenues
 
$
10,435

 
$
9,352

 
 
 
 

 
 
Average Revenue Per Car / Unit
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Consumer Products
 
$
1,289

 
$
1,255

Industrial Products
 
2,845

 
2,755

Agricultural Products
 
3,862

 
3,737

Coal
 
2,053

 
1,879

Total Freight Revenues
 
$
1,991

 
$
1,913


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

The following table presents fuel surcharge and fuel expense information (in millions):
 
 
Six Months Ended June 30,
 
 
2017
 
2016
Total fuel expense a
 
$
1,182

 
$
826

BNSF fuel surcharges
 
$
394

 
$
230

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

21


Six Months Ended June 30, 2017 vs. the Six Months Ended June 30, 2016

Revenues
 
Revenues for the six months ended June 30, 2017 were $10,435 million, an increase of $1,083 million, or 12 percent, as compared with the six months ended June 30, 2016. The increase in revenue is primarily due to an 8 percent increase in unit volume and an increase in average revenue per car/unit. The change in revenues is due to the following:

Average revenue per car / unit increased 4 percent primarily as a result of higher fuel surcharges and business mix changes as well as increased rates per car/unit.

Consumer Products volumes increased due to higher domestic intermodal, international intermodal, and automotive volumes. The increases were primarily due to higher market share, improving economic conditions, and normalizing of retail inventories.

Industrial Products volumes increased primarily due to higher minerals, steel, and other commodities that support domestic drilling activity as well as higher taconite. The volume increase was partly offset by lower petroleum products volume due to pipeline displacement of U.S. crude traffic and lower plastics volume.

Agricultural Products unit volumes increased primarily due to higher grain exports.

Coal volumes increased due to mild winter weather in the first quarter of 2016 and higher natural gas prices in the first half of 2017, which led to increased utility coal usage, partially offset by the effects of unit retirements of coal generating facilities.

Expenses
 
Operating expenses for the six months ended June 30, 2017 were $7,054 million, an increase of $694 million, or 11 percent, as compared with the six months ended June 30, 2016. A significant portion of this increase is due to the following changes in underlying trends in expenses:
 
Compensation and benefits expense increased primarily due to higher health and welfare costs, wage inflation, and increased volumes.

Fuel expense increased due to higher average fuel prices and increased volumes, partially offset by improved efficiency.

Depreciation expense increased due to a larger depreciable asset base.

There were no significant changes in purchased services, equipment rents, and materials and other expense.

Interest expense increased primarily due to a higher average debt balance.

The effective tax rate was 37.7 percent for the six months ended June 30, 2017 and 2016.

22


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’s supplier base; effects due to more stringent regulatory policies such as the regulation of greenhouse gas emissions that could reduce the demand for coal or governmental tariffs or subsidies that could affect the demand for 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 prices of fuel and other key materials, the impact of high barriers to entry for prospective new suppliers and disruptions in supply chains for these materials; competition and consolidation within the transportation industry; and changes in crew availability, labor and benefits costs and labor difficulties, including stoppages affecting either BNSF’s operations or customers’ abilities to deliver goods to BNSF for shipment.
 
•   Legal, legislative and regulatory factors: developments and changes in laws and regulations, including those affecting train operations, the marketing of services or regulatory restrictions on equipment; the ultimate outcome of shipper and rate claims subject to adjudication; claims, investigations or litigation alleging violations of the antitrust laws; increased economic regulation of the rail industry through legislative action and revised rules and standards applied by the U.S. Surface Transportation Board in various areas including rates and services; developments in environmental investigations or proceedings with respect to rail operations or current or past ownership or control of real property or properties owned by others impacted by BNSF operations; losses resulting from claims and litigation relating to personal injuries, asbestos and other occupational diseases; the release of hazardous materials, environmental contamination and damage to property; regulation, restrictions or caps, or other controls on transportation of energy-related commodities or other operating restrictions that could affect operations or increase costs; the availability of adequate insurance to cover the risks associated with operations; and changes in tax rates and tax laws.
 
•   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’s technology network including computer systems and software, such as cybersecurity intrusions, misappropriation of assets or sensitive information, corruption of data or operational disruptions; network congestion, including effects of greater than anticipated demand for transportation services and equipment; as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of BNSF’s or other railroads’ operating systems, structures, or equipment including the effects of acts of terrorism on the Company’s system or other railroads’ systems or other links in the transportation chain.
 
The Company cautions against placing undue reliance on forward-looking statements, which reflect its current beliefs and are based on information currently available to it as of the date a forward-looking statement is made. The Company undertakes no obligation to revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs. In the event the Company does update any forward-looking statement, no inference should be made that the Company will make additional updates with respect to that statement, related matters, or any other forward-looking statements.


23


Item 4.
Controls and Procedures.
 
Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that BNSF’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by BNSF in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to BNSF’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Additionally, as of the end of the period covered by this report, BNSF’s principal executive officer and principal financial officer have concluded that there have been no changes in BNSF’s internal control over financial reporting that occurred during BNSF’s second fiscal quarter that have materially affected, or are reasonably likely to materially affect, BNSF’s internal control over financial reporting.


24


BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

PART II OTHER INFORMATION


Item 6.
Exhibits.
 
See Exhibit Index on page E-1 for a description of the exhibits filed as part of this report.

25


SIGNATURES

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

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

Date:  August 4, 2017


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BURLINGTON NORTHERN SANTA FE, LLC and SUBSIDIARIES

Exhibit Index

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






3.1
Certificate of Formation dated November 2, 2009.
8-K
2/16/2010
001-11535
3.1
 
 
 
 
 
 
3.2
Amended and Restated Limited Liability Company Operating Agreement of Burlington Northern Santa Fe, LLC, dated as of February 12, 2010.
8-K
2/16/2010
001-11535
3.2
 
 
 
 
 
 
3.3
Written Consent of Sole Member, dated April 8, 2010, amending the Amended and Restated Limited Liability Company Operating Agreement.
8-K
4/13/2010
001-11535
3.1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101
eXtensible Business Reporting Language (XBRL) documents submitted electronically:

101.INS - XBRL Instance Document
101.SCH - XBRL Taxonomy Extension Schema Document
101.CAL - XBRL Extension Calculation Linkable Document
101.DEF - XBRL Taxonomy Extension Definition Linkable Document
101.LAB - XBRL Taxonomy Extension Label Linkbase
101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 
 
 
 
The following unaudited information from Burlington Northern Santa Fe, LLC’s Form 10-Q for the three and six months ended June 30, 2017, formatted in XBRL includes: (i) the Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016, (ii) the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016, (iii) the Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016, (v) the Consolidated Statements of Changes in Equity as of June 30, 2017, and (vi) the Notes to the Consolidated Financial Statements. *
 
 
 
 
Certain instruments evidencing long-term indebtedness of BNSF are not being filed as exhibits to this Report because the total amount of securities authorized under any single instrument does not exceed 10% of BNSF’s total assets. BNSF will furnish copies of any material instruments upon request of the Securities and Exchange Commission.
__________________
* Filed herewith

E-1