3712 JACKSON AVENUE, SUITE 331 AUSTIN, TEXAS (512)

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1 3712 JACKSON AVENUE, SUITE 331 AUSTIN, TEXAS (512) March 3, 2016 Mr. Al Alonzi Division Administrator Federal Highway Administration, Texas Division 300 East 8th Street, Room 826 Austin, Texas Dear Mr. Alonzi: The purpose of this letter is to request your approval and distribution of the Burlington Northern and Santa Fe Railway Company s (BNSF) Statement of Costs and Additive Rates for the Cost Year Ended December 31, This request comes from the Texas Department of Transportation (TxDOT) since Texas has been designated as the home state for BNSF. For the cost year ended December 31, 2014, BNSF selected Deloitte & Touche, LLP (D&T) to perform an additive rate audit in conformity with 23 CFR, Chapter 1, Part 140 and 48 CFR, Chapter 1, Part 31. A copy of the complete D&T audit report is enclosed. Based on TxDOT s review of D&T s audit report and related audit documentation, we recommend that the Federal Highway Administration approve and distribute the rates in the enclosures for use by BNSF to recover the incurred costs on their re-billable projects as provided for by 23 CFR, Chapter 1, Part 140, Section 906 (b)(iv). If you have any questions please contact me at (512) Sincerely, Tony Rose Director, External Audit and Advisory Services Section Compliance Office cc: Mr. Jon I. Stevens, Vice President and Controller, BNSF Enclosure: D&T Audit Report and Supplemental Schedules for the Cost Year Ended December 31, 2014 OUR GOALS MAINTAIN A SAFE SYSTEM ADDRESS CONGESTION CONNECT TEXAS COMMUNITIES BEST IN CLASS STATE AGENCY An Equal Opportunity Employer

2 Statement of Costs and Additive Rates For the Cost Year Ended December 31, 2014 Report and Supplemental Schedules

3 Statement of Costs and Additive Rates Index Page(s) Independent Auditors Report Statement of Costs and Additive Rates... 3 Notes to the Statement of Costs and Additive Rates Supplemental Schedule of Engineering Project Costs Additive Rates Supplemental Schedule of Transportation Project Costs Additive Rates Supplemental Schedule of General and Administrative Costs Additive Rates Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit Performed in Accordance with Government Auditing Standards

4 Independent Auditors Report Deloitte & Touche LLP JPMorgan Chase Tower 2200 Ross Avenue, Suite 1600 Dallas, TX USA Tel: To the Board of Directors of BNSF Railway Company Report on the Statement and Supplemental Schedules We have audited the accompanying Statement of Costs and Additive Rates for Train, Engine and Yard, Maintenance of Way, and General and Administrative for the cost year ended December 31, 2014 and the related notes, collectively, the Statement. Management s Responsibility for the Statement and Supplemental Schedules Management is responsible for the preparation and fair presentation of the Statement in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on the Statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Statement is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the Statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the Statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the Statement referred to above presents fairly, in all material respects, the additive rates of the Company for the cost year ended December 31, 2014 in accordance with accounting principles generally accepted in the United States of America and the basis of accounting described in 23 Code of Federal Regulations (CFR) Chapter 1 Part 140,48 CFR Chapter 1 Part 31. 1

5 Other Information Our audit was conducted for the purpose of forming an opinion on the Statement. The Supplemental Schedule of Engineering Project Costs Additive Rates, the Supplemental Schedule of Transportation Project Costs Additive Rates, and the Supplemental Schedule of General and Administrative Costs Additive Rates (collectively, the Supplemental Schedules ) are presented for the purpose of additional analysis and are not a required part of the Statement. The Supplemental Schedules are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the Statement. Such information has been subjected to the auditing procedures applied in the audit of the Statement and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the Statement or to the Statement itself, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Supplemental Schedules are fairly stated, in all material respects, in relation to the Statement as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated January 15, 2016 on our consideration of the Company s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Company s internal control over financial reporting and compliance. This report is solely for the information and use of the Board of Directors and Management of the Company and departments of transportation or equivalent agencies of states that have a right to audit the Company's additive rates. Accordingly, this report is not suitable for any other purposes and is not intended to be and should not be used by anyone other than these specified parties. January 15,

6 Statement of Costs and Additive Rates Cost Year Ended December 31, 2014 Effective January 1, 2016 Engineering Description Numerator Denominator Rate Time paid not worked $ 97,037,106 $ 664,952, % Payroll taxes 155,304, ,952, % Health and welfare 148,024, ,952, % Force account insurance 5,296,079 31,551, % Engineering project costs Engineering department project costs 554,618, ,952, % Public project department costs 2,560,401 31,551, % 91.52% Equipment vehicles, roadway machines and work equipment 358,250, ,952, % Equipment vehicles only 158,896, ,952, % Transportation Description Numerator Denominator Rate Time paid not worked $ 764,277,712 $ 1,227,121, % Payroll taxes 371,842,065 1,227,121, % Health and welfare 354,411,969 1,227,121, % Force account insurance 5,296,079 31,551, % Transportation project costs 1,012,014,735 1,227,121, % Equipment - vehicles 10,313,014 1,227,121, % General and Administrative Description Numerator Denominator Rate General and administrative $ 434,633,206 $ 3,104,624, % 3

7 Notes to the Statement of Costs and Additive Rates 1. Organization of the Company and Background of Additive Rates Burlington Northern Santa Fe Corporation was incorporated in the State of Delaware on December 16, 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 (BNSF). BNSF is a holding company that conducts no operating activities and owns no significant assets other than through its interests in its subsidiaries. Through its subsidiaries, BNSF is engaged primarily in the freight rail transportation business. The rail operations of BNSF Railway Company (BNSF Railway), the Company s principal operating subsidiary, comprise one of the largest railroad systems in North America. BNSF Railway operates one of the largest railroad networks in North America with approximately 32,500 route miles of track (excluding multiple main tracks, yard tracks and sidings) in 28 states and three Canadian provinces as of December 31, BNSF transports, through one operating transportation services segment, a range of products and commodities derived from manufacturing, agricultural and natural resource industries. BNSF Railway bills for direct labor, direct project costs and indirect project costs expended on rebillable projects. A unique authority for expenditure ( AFE ) code is established for each re-billable project. When scheduled labor is expended on a particular project, labor dollars are charged to the AFE code that is used by the billing system to identify and bill charges to a re-billable project. Certain direct and indirect costs of re-billable projects are recouped through the additive rates. Additive rates are built in separate studies that are applied to the labor charged directly to the AFE code. The cost study is based on capturing groups of costs by first selecting the costs of Engineering or Transportation activities. Then, allowable costs are isolated by chart of account cost elements. In addition to specific department costs, the study captures project costs from other departments that are allocated to either Engineering or Transportation. The isolated allowable costs and allocated costs are divided by the direct labor of the applicable department to derive the additive rates. The billing process is set to match the appropriate additive rates with the type of labor charged (i.e., Engineering or Transportation labor) and the type of re-billable project. The billing process contains a table of the chart of account cost elements used in the cost study to prevent items from being direct billed if those items are recouped through the additive rates. 2. Description of Engineering Activities Engineering activities include the maintenance and construction of the track structure, road crossings and signals, and buildings and bridges, and the maintenance of roadway machines. Engineering personnel perform the loading and unloading of materials, installation of materials, operation of machinery and tools, removal of existing components installation of new components, testing of components installed and other maintenance activities. Management personnel plan and coordinate projects, estimate project costs, supervise and inspect projects and conduct overall managerial controls. In addition, management personnel coordinate with the state department of transportation contacts to determine what re-billable projects will be performed. 4

8 Notes to the Statement of Costs and Additive Rates 3. Summary of Significant Additive Components for Engineering Allocation Base An allocation base represents the denominator used to divide related costs in determining the additive rates. The allocation base for Engineering costs includes all regular time and overtime wages for scheduled employees, except clerical staff and those scheduled employees who service and repair equipment (equipment maintainers), in the Engineering Department. Scheduled employees primarily represent union employees that are paid on an hourly basis. Time Paid Not Worked 48 CFR allows BNSF Railway to be reimbursed for compensated personal absence benefits. Time paid not worked represents wages paid to employees for activities such as holiday leave, vacation leave, sick leave, jury duty and training. BNSF Railway has policies and work rules associated with union agreements or is bound by legal requirements that allow employees to be compensated for time paid not worked. The time paid not worked additive rate is developed by dividing the Engineering time paid not worked costs for scheduled employees, except equipment maintainers, by the allocation base. Payroll Associated Costs (Payroll Taxes and Health and Welfare) 48 CFR allows BNSF Railway to be reimbursed for the employer's portion of compensation and benefit elements. Payroll associated costs ( PRAC ) represent BNSF Railway's costs for Railroad Retirement Tax ( RRT ), which is an equivalent to Social Security taxes, health and welfare insurance costs, and other post-employment benefits, including employer costs of retirement savings plans. Actual PRAC is allocated based on the proportional relationship of applied PRAC to actual PRAC. The PRAC additive rate is developed by dividing the PRAC costs for scheduled employees, except equipment maintainers, allocated to Engineering by the allocation base. Force Account Insurance 23 CFR 646 Subpart A, 23 CFR and 48 CFR allow BNSF Railway to be reimbursed for public liability and property damage insurance contracts. BNSF Railway purchases force account insurance for liability claims covering property and medical costs for employees or non-employees that occur on a re-billable project. There is no associated deductible and coverage provides for up to $2,000,000 for any liability claims. Force account insurance coverage is purchased for each re-billable project and the premium is calculated based on 16% of re-billable project base labor. Insurance taxes and fees on premiums are calculated at 0.79% of re-billable project base labor. Project base labor is inclusive of regular time and overtime labor incurred on a re-billable project. Force account insurance is a direct charge that is presented as an additive rate for administrative convenience. Engineering Project Costs 23 CFR and 48 CFR allows BNSF Railway to be reimbursed for costs that are directly and indirectly allocable to re-billable projects. Engineering Project Costs represent those costs that are required to support Engineering employees working on re-billable projects. Project costs are either directly related to re-billable projects or indirectly related through required department supporting functions. The following describes the components of Engineering Project Costs used and the benefit to the re-billable projects as well as how the components of the additive rate are constructed. 5

9 Notes to the Statement of Costs and Additive Rates Supervision and Clerical Labor 48 CFR allows BNSF Railway to be reimbursed for compensation for its personnel. Supervision Labor represents salaried employee wages of Engineering management up to and including the Vice President in the Engineering Department. Supervision Labor on re-billable projects consists of interacting with states to establish projects, negotiating contracts, estimating project cost and overseeing project construction and budgets. Certain re-billable contracts will require the use of contractors to perform preliminary engineering, surveying and some construction. The role of the contractor does not overlap with that of BNSF Railway management. In addition, the Engineering Department includes a Manpower Planning and Field Support group (i.e. Clerical Labor) whose purpose is to assign scheduled employees to specific projects, process union agreement work rule claims, coordinate with the Labor Relations Department ( Labor Relations ), order maintenance and project materials, and perform other administrative tasks to assist the Engineering field personnel in accomplishing work assignments. The Supervision and Clerical Labor portion of the additive rate is developed using Engineering salaried employee wages and the related PRAC plus clerical wages divided by the allocation base. Protective Services 23 CFR allows BNSF Railway to be reimbursed for the cost of essential protective services. Protective Services are defined as those required to ensure safety to railroad operations during the construction of a project. Protective Services costs include employee safety as well as safety and rules. The following describes the purpose of these components, the guidance surrounding the application, as well as how these components of the additive rate are developed. 48 CFR allows BNSF Railway to be reimbursed for safety equipment and related supplies that are necessary to perform work on re-billable projects. BNSF Railway emphasizes safe working practices through training programs and the use of safety equipment and supplies. This emphasis on safety benefits work performed by the Engineering Department for both internal and re-billable projects. This portion of the additive rate is developed using Engineering safety costs divided by the allocation base. 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the ordinary course of business. Safety and rules principally represents compensation, business travel, and supplies and services for management employees engaged in training employees on safety practices and monitoring projects for compliance with safely practices. This portion of the additive rate is developed by safety and rules costs specific to Engineering as segregated by cost center divided by the allocation base. Supplies and Services 48 CFR allows BNSF Railway to be reimbursed for supplies and services necessary in the ordinary course of business. These items are necessary to the overall operation of BNSF Railway and represent routine costs of completing re-billable projects. This portion of the additive rate is developed using Engineering supplies and services costs divided by the allocation base. Business Travel 48 CFR allows BNSF Railway to be reimbursed for costs incurred on official company business, Engineering business travel for both scheduled and management (i.e., exempt) personnel is captured in the additive rate calculation. Business travel includes reimbursement for items claimed on expense reports for meals, lodging, mileage, air and car travel, auto rentals and payments under union agreement for per diem and travel allowances. This portion of the additive rate is developed using Engineering business travel costs divided by the allocation base. 6

10 Notes to the Statement of Costs and Additive Rates Utilities and Rents 48 CFR allows BNSF Railway to be reimbursed for items necessary in the ordinary course of business. Utilities and rents represent expenditures by Engineering for electricity, natural gas, water, telephones, cellular phones, pagers, freight, and rental of office machines, computer equipment and facilities. This portion of the additive rate is developed using Engineering utilities and rents costs divided by the allocation base. Accounting 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the overall operation of the business. Accounting activities, which include paying employees, processing invoices and issuing bills, are necessary to the overall operation of BNSF Railway and are allocable to re-billable projects. The accounting department is responsible for paying the wages of all employees assigned to re-billable projects as well as paying for any contracted service and accounting for all related transactions on re-billable projects. BNSF Railway accounting costs, excluding costs associated with freight revenue and those costs allowed but billed directly, are allocated to Engineering based on the proportion of Engineering exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed using the accounting costs allocated to Engineering divided by the allocation base. Information Services 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the overall operation of the business. The activities and cost for the Information Services Department ( Information Services ) are necessary to the overall operation of BNSF Railway. Information Services is responsible for all of BNSF Railway's data processing including rebillable project requirements for project estimating, payroll, payments to vendors, issuing invoices, accounting processing and train operations. Information Services' costs are allocated to Engineering based on the proportion of Engineering exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed by using Information Services' costs allocated to Engineering divided by the allocation base. Labor Relations 48 CFR allows BNSF Railway to be reimbursed for costs incurred to maintain satisfactory relations between BNSF Railway and its scheduled (i.e., union) employees. These costs are largely incurred by Labor Relations, which negotiates all labor agreements covering BNSF Railway employees. Labor Relations also trains and counsels local BNSF Railway supervision in compliance with these agreements, both to fulfill BNSF Railway's obligations and to minimize union claims of violation of the agreements. When claims are presented, Labor Relations works with local supervision initially and, if necessary, ultimately with arbitration panels to resolve those claims at the lowest cost possible. Labor Relations' costs are allocated to Engineering based on the proportion of Engineering scheduled wages to the total scheduled wages of BNSF Railway. This portion of the additive rate is developed by using the Labor Relations' costs allocated to Engineering divided by the allocation base. 7

11 Notes to the Statement of Costs and Additive Rates Computer Ownership Costs Computer Ownership Costs includes both depreciation on the Company's computer system and property taxes allocated to the computer system. 48 CFR allows BNSF Railway to be reimbursed for reasonable and allocable depreciation costs and 48 CFR allows BNSF Railway to be reimbursed for property taxes on property used on the project. The depreciation cost for BNSF Railway's computers is determined from support schedules from Schedule 335 of the Annual Report to the Surface Transportation Board ( R -1 ). A property tax rate is calculated and multiplied by the average annual investment for computers to derive the property tax to be allocated. The property tax rate is calculated by dividing the property taxes as shown on Schedule 410 of the R-1 by the total investment in Company assets from support schedules from Schedule 330 of the R-1. Computer Ownership Costs are allocated to Engineering based on the proportion of Engineering exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed by using computer depreciation and property tax costs allocated to Engineering divided by the allocation base. Human Resources I Medical 48 CFR allows BNSF Railway to be reimbursed for costs of operating an employment office needed to secure and maintain an adequate work force. The Human Resources/Medical Department ( Human Resources ) is responsible for hiring employees and administering certain environmental safety and medical programs. Additionally, for exempt employees, Human Resources is responsible for determining compensation, providing health and welfare benefits, fostering development and training programs and dealing with termination issues. Human Resources costs are allocated to Engineering based on the proportion of Engineering exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed by using Human Resources' costs allocated to Engineering divided by the allocation base. Telecommunications 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the overall operation of the business. Telecommunications' costs represent allocable costs to re-billable contracts and are a routine and necessary cost of doing business. Telecommunications' costs are allocated to Engineering based on the proportion of Engineering exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed by using Telecommunications' costs allocated to Engineering divided by the allocation base. Back Pay 23 CFR (6) and 48 CFR (h) allow BNSF Railway to be reimbursed for payments to union employees for the difference in their past and current wage rates for working without a contract or labor agreement during labor management negotiations. BNSF Railway's back pay represents adjustments to wages through union agreements. This portion of the additive rate is developed by dividing the Engineering back pay expense by the allocation base. Incentives 48 CFR (f) allows BNSF Railway to be reimbursed for incentive compensation for management employees. Bonuses represent incentive compensation for management employees based on certain performance measurements. The performance measurements, which typically influence the annual amount of this compensation, include achievement of safety, velocity, and financial performance goals for the Company. Restricted stock represents compensation provided to management personnel. In accordance with 48 CFR (p), the five most highly compensated employees in management positions of the Company have been excluded from the calculation of bonuses and restricted stock costs. The cost of bonuses and restricted stock are allocated to Engineering based on the proportion of Engineering 8

12 Notes to the Statement of Costs and Additive Rates exempt wages to the total exempt wages of the Company. This portion of the additive rate is developed by using bonuses and restricted stock costs allocated to Engineering divided by the allocation base. Supervision Pension and Long-term Disability 48 CFR (j) and 48 CFR (m) allow BNSF Railway to be reimbursed for pension and employee long-term disability insurance. Pension costs represent deferred compensation for management employees. Long-term disability is a fringe benefit offered by the Company to its exempt employees to provide a stream of compensation to employees in the event that employees are unable to work due to a disabling incident. Pension and long-term disability costs are allocated to Engineering based on the proportion of Engineering exempt wages to the total exempt wages of the Company. This portion of the additive rate is developed by using Engineering allocated pension and long-term disability costs divided by the allocation base. Public Projects 48 CFR allows BNSF Railway to be reimbursed for activities incurred specifically for the contract. Public Projects principally represents compensation, business travel expenses, and supplies and services for management employees who act as liaisons between the Company and government agencies by negotiating government contracts and coordinating government projects. This portion of the additive rate is developed by dividing Public Projects' costs by the scheduled labor billed to government projects in Audit Fees for 2012 Base Cost Year Government Additive Rate Audit 48 CFR allows BNSF Railway to be reimbursed for professional and consultant service costs. The audit fees included in calculating this portion of the rate are fees billed by the independent audit firm for performing an audit on BNSF Railway's government additive rates for the 2012 base cost year. This audit was performed at the request of the Federal Highway Administration and the Texas Department of Transportation solely for the benefit of government projects and by agreement is only included in the Engineering department project costs. This portion of the additive rate is developed by dividing these audit fees by the scheduled labor billed to government projects in Equipment Vehicles, Roadway Machines and Work Equipment 23 CFR allows BNSF Railway to be reimbursed for the costs of depreciating, operating and repairing equipment. The equipment additive includes the cost of fuel, repairs, maintenance, ownership (taxes and depreciation on owned equipment), lease payments on short and long-term operating leases, and the wages, time paid not worked and PRAC for equipment maintainers. The equipment additive rate is developed by dividing equipment costs by the allocation base. Equipment Vehicles only The equipment- vehicles additive used for signal and crossing re-billable projects only includes BNSF Railway's owned, short and long-term leased vehicles as well as operating and repair costs. 4. Description of Transportation Activities Transportation is a term commonly used within the railroad industry to describe train operations. For re-billable construction projects, work trains may be operated to transport materials such as ties, rail and ballast to the construction site and to distribute those materials at the site. Transportation personnel operate work trains, which may include track under cutter and ballast spreader equipment and the additive rates are applied to this labor when billing work trains. Management involvement includes planning and coordinating projects and managing the union labor force. Transportation involvement is utilized only for major track improvement or construction projects. Signal and crossing projects do not require Transportation involvement. 9

13 Notes to the Statement of Costs and Additive Rates 5. Summary of Significant Additive Components for Transportation Allocation Base An allocation base represents the denominator used to divide related costs in determining the additive rates. The allocation base for Transportation costs includes all regular time and overtime wages for scheduled employees, except clerical staff, in the Transportation department. Scheduled employees primarily represent union employees that are paid on an hourly basis. Time Paid Not Worked 48 CFR allows BNSF Railway to be reimbursed for compensated personal absence benefits. Time paid not worked represents wages paid to employees for activities such as holiday leave, vacation leave, sick leave, jury duty and training. BNSF Railway has policies and work rules associated with union agreements or is bound by legal requirements that allow employees to be compensated for time paid not worked. The time paid not worked additive rate is developed by dividing the Transportation time paid not worked costs by the allocation base. Payroll Associated Costs (Payroll Taxes and Health and Welfare) 48 CFR allows BNSF Railway to be reimbursed for the employer's portion of compensation and benefit elements. PRAC represents BNSF Railway's costs for RRT, health and welfare insurance costs, and other post-employment benefits, including employer costs of retirement savings plans. Actual PRAC has been allocated based on the proportional relationship of applied PRAC to actual PRAC. The PRAC additive rate is developed by dividing the PRAC costs allocated to Transportation by the allocation base. Force Account Insurance 23 CFR 646 Subpart A, 23 CFR and 48 CFR allow BNSF Railway to be reimbursed for public liability and property damage insurance contracts. BNSF Railway purchases force account insurance for liability claims covering property and medical costs for employees or non-employees that occur on a re-billable project. There is no associated deductible and coverage provides for up to $2,000,000 for any liability claims. Force account insurance coverage is purchased for each re-billable project and the premium is calculated based on 16% of re-billable project base labor. Insurance taxes and fees on premiums are calculated at 0.79% of re-billable project base labor. Project base labor is inclusive of regular time and overtime labor incurred on a re-billable project. Force account insurance is a direct billed charge that is presented as an additive rate. Transportation Project Costs 23 CFR and 48 CFR allows BNSF Railway to be reimbursed for costs that are directly and indirectly allocable to re-billable projects. Transportation Project Costs represent those costs that are required to support Transportation employees working on re-billable projects. Project costs are either directly related to re-billable projects or related through required department supporting functions. The following describes the components of the Transportation Project Costs used and the benefits to re-billable projects as well as how the components of the additive rate are constructed. 10

14 Notes to the Statement of Costs and Additive Rates Supervision and Clerical Labor 48 CFR allows BNSF Railway to be reimbursed for compensation for its personnel. Supervision Labor represents salaried employee wages of Transportation management up to and including the Vice President in the Transportation Department. Supervision Labor on rebillable projects consists of coordinating the work train schedule with Engineering personnel coordinating locomotives and fueling for work trains, and overseeing the project to ensure that material is delivered to the site on a timely basis. Crew calling represents the compensation of clerical employees engaged in arranging the assignment of train crews. Other clerical labor represents the compensation of other employees engaged in assisting in the coordination of work train cars and materials, processing union agreement work rule claims, coordinating with Labor Relations, and performing other administrative tasks to assist the Transportation field personnel in accomplishing work assignments. This portion of the additive rate is developed using Transportation salaried employee wages and the related PRAC plus clerical wages divided by the allocation base. Protective Services 23 CFR allows BNSF Railway to be reimbursed for the cost of essential protective services. Protective Services are defined as those required to ensure safety to railroad operations during the construction of a project. Protective Services costs include employee safety as well as safety and rules. The following describes the purpose of these components, the guidance surrounding the application, as well as how these components of the additive rate are developed. 48 CFR allows BNSF Railway to be reimbursed for safety equipment and supplies that are necessary to perform work on re-billable projects. BNSF Railway emphasizes safe working practices through training programs and the use of safety equipment and supplies. This emphasis on safety benefits work performed by the Transportation Department for both internal and re-billable projects. This portion of the additive rate is developed using Transportation safety costs divided by the allocation base. 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the ordinary course of business. Safety and rules principally represents compensation, business travel, and supplies and services for management employees engaged in training employees on safety practices and monitoring projects for compliance with safety practices. This portion of the additive rate is developed by using safety and rules costs specific to Transportation segregated by cost center divided by the allocation base. Supplies and Services 48 CFR allows BNSF Railway to be reimbursed for supplies and services necessary in the ordinary course of business. These items are necessary to the overall operation of BNSF Railway and represent routine costs of completing re-billable projects. This portion of the additive rate is developed using Transportation supplies and services costs divided by the allocation base. Business Travel 48 CFR allows BNSF Railway to be reimbursed for costs incurred on official company business. Transportation business travel for both scheduled and management personnel is captured in the additive rate calculation. Business travel includes reimbursement for items claimed on expense reports for meals, lodging, mileage, air and car travel, auto rentals and payments under union agreement for per diem and travel allowances. This portion of the additive rate is developed using Transportation business travel costs divided by the allocation base. 11

15 Notes to the Statement of Costs and Additive Rates Utilities and Rents 48 CFR allows BNSF Railway to be reimbursed for items necessary in the ordinary course of business. Utilities and rents represent expenditures by Transportation for electricity, natural gas, water, telephones, cellular phones, pagers, freight, and rental of office machines, computer equipment, and facilities. This portion of the additive rate is developed using Transportation utilities and rent costs divided by the allocation base. Accounting 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the overall operation of the business. Accounting activities, which include paying employees, processing invoices and issuing bills, are necessary to the overall operation of BNSF Railway and are allocable to re-billable projects. The accounting department is responsible for paying the wages of all employees assigned to re-billable projects as well as paying for any contracted services and accounting for all related transactions on re-billable projects. BNSF Railway accounting costs, excluding costs associated with freight revenue and those costs allowed but billed directly, are allocated to Transportation based on the proportion of Transportation exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed using the accounting costs allocated to Transportation divided by the allocation base. Information Services 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the overall operation of the business. The activities and cost for Information Services are necessary to the overall operation of BNSF Railway. Information Services is responsible for all of BNSF Railway's data processing including re-billable project requirements for project estimating, payroll, payments to vendors, issuing invoices, accounting processing and train operations. Information Services' costs are allocated to Transportation based on the proportion of Transportation exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed by using Information Services' costs allocated to Transportation divided by the allocation base. Labor Relations 48 CFR allows BNSF Railway to be reimbursed for costs incurred to maintain satisfactory relations between BNSF Railway and its scheduled (i.e. union) employees. These costs are largely incurred by Labor Relations, which negotiates all labor agreements covering BNSF Railway employees. Labor Relations also trains and counsels local BNSF Railway supervision in compliance with these agreements, both to fulfill BNSF Railway's obligations and to minimize union claims of violation of the agreements. When claims are presented, Labor Relations works with local supervision initially and, if necessary, ultimately with arbitration panels to resolve those claims at the lowest cost possible. Labor Relations' costs are allocated to Transportation based on the proportion of Transportation scheduled wages to the total scheduled wages of BNSF Railway. This portion of the additive rate is developed by using Labor Relations' costs allocated to Transportation divided by the allocation base. 12

16 Notes to the Statement of Costs and Additive Rates Computer Ownership Costs Computer Ownership Costs includes both depreciation on the Company's computer system and property taxes allocated to the computer system. 48 CFR allows BNSF Railway to be reimbursed for reasonable and allocable depreciation costs and 48 CFR allows BNSF Railway to be reimbursed for property taxes on property used on the project. The depreciation cost for BNSF Railway's computers is from support schedules from Schedule 335 of the R-1. A property tax rate is calculated and multiplied by the average annual investment for computers to derive the property tax to be allocated. The property tax rate is calculated by dividing the property taxes as shown on Schedule 410 of the R-1 by the total investment in Company assets from support schedules from Schedule 330 of the R-1. Computer Ownership Costs are allocated to Transportation based on the proportion of Transportation exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed by using computer depreciation and property tax costs allocated to Transportation divided by the allocation base. Human Resources / Medical 48 CFR allows BNSF Railway to be reimbursed for costs of operating an employment office needed to secure and maintain an adequate work force. Human Resources is responsible for hiring employees and administering certain environmental safety and medical programs. Additionally, for exempt employees, Human Resources is responsible for determining compensation, providing health and welfare benefits, fostering development and training programs and dealing with termination issues. Human Resources costs are allocated to Transportation based on the proportion of Transportation exempt and scheduled wages to total exempt and scheduled wages of BNSF Railway. This portion of the additive rate is developed by using Human Resources' costs allocated to Transportation divided by the allocation base. Telecommunications 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the overall operation of the business. Telecommunications' costs represent allocable costs to re-billable contracts and are a routine and necessary cost of doing business. Telecommunications' costs are allocated to Transportation based on the proportion of Transportation exempt and scheduled wages to the total exempt and scheduled wages of BNSF Railway. This portion of the additive rate developed by using Telecommunications costs allocated to Transportation divided by the allocation base. Transportation Support 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the ordinary course of business. Transportation Support principally represents the compensation, business travel, and supplies and services for the management employees supervising the operations of the railroad, including the timing and scope of projects. It also represents the compensation of management employees engaged in supervising the dispatching employees who control train traffic, including work trains assigned to re-billable projects, operating on BNSF Railway's system. This portion of the additive rate is developed by dividing Transportation Support costs by the allocation base. Dispatching 48 CFR allows BNSF Railway to be reimbursed for activities and costs necessary in the ordinary course of business. Dispatching principally represents the compensation of employees engaged in controlling train traffic, including work trains assigned to re-billable projects, operating on BNSF Railway's system. This portion of the additive rate is developed using Dispatching's costs divided by the allocation base. 13

17 Notes to the Statement of Costs and Additive Rates Back Pay 23 CFR (6) and 48 CFR (h) allow BNSF Railway to be reimbursed for payments to union employees for the difference in their past and current wage rates for working without a contract or labor agreement during labor management negotiations. BNSF Railway's back pay represents adjustments to wages through union agreements. This portion of the additive rate is developed by dividing the Transportation back pay expense by the allocation base. Incentives 48 CFR (f) allows BNSF Railway to be reimbursed for incentive compensation for management employees. Bonuses represent incentive compensation for management employees based on certain performance measurements. The performance measurements, which typically influence the annual amount of this compensation, include achievement of safety, velocity, and financial performance goals for the Company. Restricted stock represents compensation provided to management personnel. In accordance with 48 CFR (p), the five most highly compensated employees in management positions of the Company have been excluded from the calculation of bonuses and restricted stock costs. The cost of bonuses and restricted stock are allocated to Transportation based on the proportion of Transportation exempt wages to the total exempt wages of the Company. This portion of the additive rate is developed by using bonuses and restricted stock costs allocated to Transportation divided by the allocation base. Supervision Pension and Long-Term Disability 48 CFR (j) and 48 CFR (m) allow BNSF Railway to be reimbursed for pension and employee long-term disability insurance. Pension costs represent deferred compensation for management employees. Long-term disability is a fringe benefit offered by the Company to its exempt employees to provide a stream of compensation to employees in the event that employees are unable to work due to a disabling incident. Pension and long-term disability costs are allocated to Engineering based on the proportion of Engineering exempt wages to the total exempt wages of the Company. This portion of the additive rate is developed by using Engineering allocated pension and long-term disability costs divided by the allocation base. Equipment - Vehicles 23 CFR allows BNSF Railway to be reimbursed for the depreciating, operating and repairing costs of vehicles, which are necessary to re-billable government projects. The equipment additive includes the cost of fuel, repair, maintenance, ownership (taxes and depreciation on owned vehicles) and short and long-term operating leases. These vehicles allow Trainmasters and division superintendents a means to stay in contact with crews in their geographic area of responsibility. Trainmasters and division superintendents are typically responsible for a territory spanning several hundred miles. Vehicles are used to make train handling observations and tests across their territories in order to ensure crews are performing safely and efficiently. The equipment additive rate is developed by dividing the Transportation equipment costs by the allocation base. 14

18 Notes to the Statement of Costs and Additive Rates 6. General and Administrative 23 CFR and 48 CFR allow BNSF Railway to be reimbursed for overhead costs necessary in the overall operation of the business. 48 CFR addresses specific items for which reimbursement is disallowed. If a cost is not specifically disallowed, it is considered to be an allowable expense. The general and administrative additive rate is developed by using costs for departments that support re-billable projects and the overall operation of the Company but are not included in the Engineering or Transportation additive rates. General and administrative expenses exclude expenses associated with revenue accounting costs and those expenses allocated to the department project costs additive rates as previously discussed. The general and administrative additive rate is developed by dividing general and administrative costs by total exempt and scheduled wages for BNSF Railway. 7. Use of Estimates and Allocations BNSF Railway develops the additive rates from information obtained from the accounting system used to develop the Company s financial statements prepared in accordance with generally accepted accounting principles. The preparation of financial information in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of costs used in calculating the additive rates. The allocation of costs to specific departments requires management to make assumptions about the relationship of costs to departments. 15