News Release

Impact of Purchase Accounting Valuation on BNSF's Customers is Very Limited

FORT WORTH, Texas, June, 10, 2011:

Summary

As explained below, purchase accounting is a technical accounting and regulatory practice with decades of precedent. Purchase accounting refers to the practice of valuing the assets of a recently acquired company in order to allocate the purchase price paid for that company, including any so-called acquisition premium. Virtually every Class I railroad merger or acquisition that has taken place in the past two decades has involved an acquisition premium and in every instance the acquisition cost has been recorded using purchase accounting, which is required by Generally Accepted Accounting Principles (GAAP). BNSF believes that our assets and liabilities were properly valued following the Berkshire purchase and that the result of that valuation should be used by the STB in its regulatory applications.

Any impact of BNSF's purchase accounting adjustment on BNSF's customers would be very limited. Since BNSF prices its services to the market and not based on regulatory costs, BNSF's prices are largely unaffected by the purchase accounting adjustment. The only customers that would be directly affected by the purchase accounting adjustment would be customers whose rates have been prescribed by the Surface Transportation Board (STB) based on costs derived from the railroad Uniform Rail Costing System (URCS).

There is only one such affected customer, Western Fuels Association/Basin Electric Power Cooperative (WFA/Basin), and WFA/Basin is an active participant in an ongoing proceeding in which the purchase accounting impact could be raised. In a small number of cases, the rates paid by a BNSF customer could fall below the STB's jurisdictional threshold, after the application of purchase accounting. However, such rates are not typically the subject of shipper rate complaints. There is no reason to throw out decades of precedent based on required accounting practices when the potential effects of the purchase accounting adjustment are so small.

What Happened

BNSF was acquired by Berkshire Hathaway Corporation (Berkshire) on February 12, 2010 ("Acquisition Date") as a result of an agreement dated November 2, 2009 ("Agreement Date"). Berkshire paid $100 per share to acquire BNSF. This figure represented a premium of $24 per share to shareholders over the $76 market price of BNSF shares on the Agreement Date and $62 per share more than the $38 per share book value of BNSF on the Acquisition Date. GAAP requires that the premium paid over the book value (the $62 per share or a total of $22 billion) be allocated to the assets and liabilities of the acquired entity (BNSF) as of the acquisition date.

Consistent with GAAP and SEC requirements, BNSF assets and liabilities were valued following the Berkshire purchase. This valuation was conducted by a big four accounting firm and subsequently audited by another, our auditors, Deloitte & Touche. This required valuation established a new book value for BNSF's assets and liabilities. The result was that only $7 billion of the $22 billion premium over book value was allocated to the pre-acquisition assets and liabilities, while $15 billion was attributed to goodwill. Goodwill has no impact on any of the regulatory models that underpin rail economic regulation.

Prior to the Berkshire agreement date, the market had already determined that BNSF's value as a going concern greatly exceeded its book value. In fact, every dollar paid by Berkshire in excess of the $76 market price was attributed to goodwill. Even if Berkshire were to have paid a significantly higher price, BNSF's valuation methodology would have attributed the entire additional amount to goodwill, which would have had no effect on the value of BNSF's physical plant.

In determining the purchase accounting adjustments, only the productive capacity of the railroad was considered in establishing the new book value for property plant and equipment. Any excess or non-productive physical plant and equipment assets were assigned no value. In addition, the valuation was conducted at a low point in the economic cycle which further reduced the amount allocated to hard assets. As an example, some assets, such as locomotives, were written down because they were determined to be excess (non-productive) on the acquisition date.

The BNSF acquisition resulted in an unprecedented amount ($15 billion) of the purchase price being allocated to goodwill. In contrast, previous transactions in the rail industry have seen write-ups of the railroad's physical plant of up to 100% of the premium paid.

Why Does It Matter

BNSF, like all Class I rail carriers, submits annual financial data to the STB in a R-1 ("R-1 data") report, which includes the value of the carrier's assets based on the then current book value of those assets, depreciated over time. This R-1 data is used by the STB in its regulation of the railroads, principally as an input to the STB's annual revenue adequacy determinations and the basis for the STB's determination of variable costs for purposes of its regulatory costing system, URCS. The STB has been statutorily directed to conduct its costing in accordance with GAAP to the maximum extent possible.

In a letter to Senator Al Franken about the application of purchase accounting to the Berkshire acquisition of BNSF, STB Chairman Daniel Elliott explained that the STB regulations currently in place require BNSF's R-1 data to reflect the new basis of accounting for those assets. He further stated that since the late 1980s, railroads have been required by the agency to follow purchase accounting principles, in accordance with GAAP. He also explained that the stated objective of the regulations requiring the use of GAAP was to ensure that the railroads use the most accurate information in reporting their rail assets. BNSF's methodology complies with the STB's expectations.

Who Is Affected

Only one of the thousands of BNSF customers has transportation rates that will be directly affected by the application of purchase accounting to BNSF's net assets, WFA/Basin. WFA/Basin's rate is the only BNSF rate that the STB has prescribed as a revenue to variable cost (R/VC) ratio. In this instance, the increase in the size of the asset base as a result of the purchase price adjustment could ultimately result in a modest increase in the variable costs and, therefore, a modest increase in the prescribed rate. However, the unique nature of WFA/Basin's situation has already been raised in a specific proceeding before the STB.

For BNSF's remaining customers, the purchase price adjustment to BNSF's asset values will have no direct impact on the level of their transportation rates. BNSF transportation rates are market-based rates that are not based on variable costs as determined by the STB. Even if a shipper were to challenge a BNSF rate in the future, BNSF believes that the ultimate regulatory effect of the purchase price adjustment would be modest. For example, of BNSF's more than 9 million units moved in 2010, initial analysis shows that less than two percent of those units represent regulated non-contract moves that, as a result of purchase accounting, could shift below the jurisdictional threshold of 180 percent of variable costs and no longer be subject to rate reasonableness challenge. However, rates that fall close to the jurisdictional threshold are seldom the subject of shipper rate reasonableness complaints.

BNSF Headquarters
BNSF Railway Company
2650 Lou Menk Dr. 2nd Floor
Fort Worth, TX 76131-2830
P.O. Box 961057
Fort Worth, TX 76161-0057
Phone: (817) 352-1000