GWR.09.30.2012 10-Q
Table of Contents

 
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 September 30, 2012
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 No. 001-31456
_________________________________________________________________
GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________________
Delaware
 
06-0984624
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
66 Field Point Road,
Greenwich, Connecticut 06830
(Address of principal executive offices)(Zip Code)
(203) 629-3722
(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.    x  YES    o  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).    x  YES    o  NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 
x
 
Accelerated Filer
 
o
 
 
 
 
 
 
 
Non-Accelerated Filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  YES    x  NO
Shares of common stock outstanding as of the close of business on October 31, 2012:
 
Class
 
Number of Shares Outstanding
Class A Common Stock
 
44,963,758
Class B Common Stock
 
1,892,048
 


Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 
 
Part I
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

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Forward-Looking Statements
This report and other documents referred to in this report contain forward-looking statements regarding future events and the future performance of Genesee & Wyoming Inc. that are based on current expectations, estimates and projections about our industry, our business and our performance, management's beliefs, and assumptions made by management. Words such as “anticipates,” “intends,” “plans,” “believes,” “should,” “seeks,” “expects,” “estimates,” “trends,” “outlook,” variations of these words and similar expressions are intended to identify these forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast, including the following risks applicable to all of our operations: risks related to the acquisition and integration of railroads; economic and competitive uncertainties and contingencies and third-party approvals; economic, political and industry conditions (including employee strikes or work stoppages); customer demand and changes in our operations, retention and contract continuation; legislative and regulatory developments, including changes in environmental and other laws and regulations to which we are subject; increased competition in relevant markets; funding needs and financing sources, including our ability to obtain government funding for capital projects; international complexities of operations, currency fluctuations, finance, tax and decentralized management; challenges of managing rapid growth including retention and development of senior leadership; unpredictability of fuel costs; susceptibility to various legal claims and lawsuits; increase in, or volatility associated with expenses associated with estimated claims, self-insured retention amounts and insurance coverage limits; consummation of new business opportunities; exposure to the credit risk of customers or counterparties; severe weather conditions and other natural occurrences, which could result in shutdowns, derailments or other substantial disruption of operations; susceptibility to the risks of doing business in foreign countries; uncertainties as to the timing or approval of our pending application with the Surface Transportation Board to control the railroads of RailAmerica, Inc. (RailAmerica); the conditions, if any, imposed by the Surface Transportation Board in connection with our pending control application; our success integrating the RailAmerica railroads into our operations and our ability to achieve the expected synergies as a result of the merger; and others including, but not limited to, those set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any, and those noted in our 2011 Annual Report on Form 10-K under “Risk Factors.” Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Forward-looking statements speak only as of the date of this report or as of the date they were made. We undertake no obligation to update the current expectations or forward-looking statements contained in this report.

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Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS.
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2012 and DECEMBER 31, 2011 (Unaudited)
(dollars in thousands, except share amounts)
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
516,031

 
$
27,269

Accounts receivable, net
173,408

 
165,768

Materials and supplies
15,713

 
14,445

Prepaid expenses and other
16,651

 
13,332

Deferred income tax assets, net
19,232

 
19,385

Total current assets
741,035

 
240,199

PROPERTY AND EQUIPMENT, net
1,769,467

 
1,643,589

GOODWILL
160,533

 
160,277

INTANGIBLE ASSETS, net
225,495

 
230,628

DEFERRED INCOME TAX ASSETS, net
2,462

 
2,342

OTHER ASSETS, net
21,723

 
17,122

Total assets
$
2,920,715

 
$
2,294,157

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
48,626

 
$
57,168

Accounts payable
140,429

 
134,081

Accrued expenses
73,347

 
69,097

Deferred income tax liabilities, net
138

 
925

Total current liabilities
262,540

 
261,271

LONG-TERM DEBT, less current portion
594,480

 
569,026

DEFERRED INCOME TAX LIABILITIES, net
315,809

 
285,780

DEFERRED ITEMS - grants from outside parties
221,502

 
198,824

CONTINGENT FORWARD SALE CONTRACT
50,106

 

OTHER LONG-TERM LIABILITIES
22,393

 
18,622

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ EQUITY:
 
 
 
Class A Common Stock, $0.01 par value, one vote per share; 180,000,000 shares authorized; 57,273,552 and 52,717,553 shares issued and 44,784,327 and 40,257,656 shares outstanding (net of 12,489,225 and 12,459,897 shares in treasury) on September 30, 2012 and December 31, 2011, respectively
573

 
527

Class B Common Stock, $0.01 par value, ten votes per share; 30,000,000 shares authorized; 1,892,048 and 2,192,473 shares issued and outstanding on September 30, 2012 and December 31, 2011, respectively
19

 
22

Additional paid-in capital
832,899

 
385,473

Retained earnings
780,706

 
741,669

Accumulated other comprehensive income
46,410

 
37,895

Treasury stock, at cost
(206,722
)
 
(204,952
)
Total stockholders’ equity
1,453,885

 
960,634

Total liabilities and stockholders’ equity
$
2,920,715

 
$
2,294,157

The accompanying notes are an integral part of these consolidated financial statements.


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GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011 (Unaudited)
(in thousands, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
OPERATING REVENUES
$
222,745

 
$
217,210

 
$
647,600

 
$
618,710

OPERATING EXPENSES:
 
 
 
 
 
 
 
Labor and benefits
64,022

 
58,986

 
191,145

 
176,034

Equipment rents
9,289

 
11,357

 
28,073

 
32,887

Purchased services
20,962

 
20,316

 
58,297

 
57,463

Depreciation and amortization
18,980

 
16,623

 
54,947

 
48,781

Diesel fuel used in operations
21,511

 
21,441

 
64,643

 
65,516

Diesel fuel sold to third parties
1,359

 
3,662

 
10,460

 
12,241

Casualties and insurance
6,237

 
5,020

 
17,727

 
16,686

Materials
6,241

 
6,844

 
19,131

 
19,517

Net gain on sale of assets
(3,018
)
 
(610
)
 
(10,447
)
 
(2,708
)
Gain on insurance recoveries

 

 
(5,186
)
 
(1,043
)
Other operating expenses
24,287

 
17,548

 
62,148

 
46,945

Total operating expenses
169,870

 
161,187

 
490,938

 
472,319

INCOME FROM OPERATIONS
52,875

 
56,023

 
156,662

 
146,391

Interest income
928

 
853

 
2,759

 
2,486

Interest expense
(8,814
)
 
(10,573
)
 
(26,052
)
 
(30,765
)
Gain on sale of investments

 

 

 
894

Contingent forward sale contract mark-to-market expense
(50,106
)
 

 
(50,106
)
 

Other income/(expense), net
853

 
(1,064
)
 
1,852

 
(595
)
(Loss)/income from continuing operations before income taxes
(4,264
)
 
45,239

 
85,115

 
118,411

Provision for income taxes
15,303

 
12,287

 
46,051

 
32,192

(Loss)/income from continuing operations, net of tax
(19,567
)
 
32,952

 
39,064

 
86,219

Loss from discontinued operations, net of tax

 
(10
)
 
(27
)
 
(10
)
NET (LOSS)/INCOME
$
(19,567
)
 
$
32,942

 
$
39,037

 
$
86,209

BASIC (LOSS)/EARNINGS PER SHARE:
 
 
 
 
 
 
 
Basic (loss)/earnings per common share from continuing operations
$
(0.47
)
 
$
0.82

 
$
0.96

 
$
2.16

Basic loss per common share from discontinued operations

 

 

 

Basic (loss)/earnings per common share
$
(0.47
)
 
$
0.82

 
$
0.95

 
$
2.16

Weighted average shares - basic
41,682

 
40,078

 
40,888

 
39,825

DILUTED (LOSS)/EARNINGS PER SHARE:
 
 
 
 
 
 
 
Diluted (loss)/earnings per common share from continuing operations
$
(0.47
)
 
$
0.77

 
$
0.90

 
$
2.02

Diluted loss per common share from discontinued operations

 

 

 

Diluted (loss)/earnings per common share
$
(0.47
)
 
$
0.77

 
$
0.90

 
$
2.02

Weighted average shares - diluted
41,682

 
42,821

 
43,471

 
42,711

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011 (Unaudited)
(dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
NET (LOSS)/INCOME
$
(19,567
)
 
$
32,942

 
$
39,037

 
$
86,209

OTHER COMPREHENSIVE INCOME/(LOSS):
 
 
 
 
 
 
 
Foreign currency translation adjustment
6,750

 
(34,142
)
 
7,195

 
(17,919
)
Net unrealized gain on qualifying cash flow hedges, net of tax provision of $337, $107, $941 and $359, respectively
592

 
187

 
1,655

 
632

Changes in pension and other postretirement benefits, net of tax (provision)/benefit of ($24), ($23), $190 and $48, respectively
42

 
41

 
(335
)
 
(84
)
Other comprehensive income/(loss)
7,384

 
(33,914
)
 
8,515

 
(17,371
)
COMPREHENSIVE (LOSS)/INCOME
$
(12,183
)
 
$
(972
)
 
$
47,552

 
$
68,838

The accompanying notes are an integral part of these consolidated financial statements.


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GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 and 2011 (Unaudited)
(dollars in thousands)
 
Nine Months Ended
 
September 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
39,037

 
$
86,209

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations
27

 
10

Depreciation and amortization
54,947

 
48,781

Compensation cost related to equity awards
5,763

 
5,584

Excess tax benefit from share-based compensation
(2,842
)
 
(2,090
)
Deferred income taxes
29,735

 
20,063

Net gain on sale of assets
(10,447
)
 
(2,708
)
Gain on sale of investments

 
(894
)
Gain on insurance recoveries
(5,186
)
 
(1,043
)
Insurance proceeds received
21,479

 
24

Contingent forward sale contract mark-to-market expense
50,106

 

Changes in assets and liabilities which provided (used) cash, net of effect of acquisitions:
 
 
 
Accounts receivable, net
(2,110
)
 
(13,650
)
Materials and supplies
(1,063
)
 
(531
)
Prepaid expenses and other
(3,081
)
 
243

Accounts payable and accrued expenses
(10,232
)
 
(14,204
)
Other assets and liabilities, net
3,405

 
(179
)
Net cash provided by operating activities from continuing operations
169,538

 
125,615

Net cash used in operating activities from discontinued operations
(27
)
 
(15
)
Net cash provided by operating activities
169,511

 
125,600

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(170,529
)
 
(106,386
)
Grant proceeds from outside parties
24,929

 
18,773

Cash paid for acquisitions, net of cash acquired
(837
)
 
(89,935
)
Proceeds from sale of investments

 
1,369

Insurance proceeds for the replacement of assets
370

 

Proceeds from disposition of property and equipment
13,673

 
4,054

Net cash used in investing activities from continuing operations
(132,394
)
 
(172,125
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on long-term borrowings, including capital leases
(215,439
)
 
(418,907
)
Proceeds from issuance of long-term debt
196,480

 
445,424

Debt amendment costs

 
(4,742
)
Net proceeds from Class A common stock issuance
234,361

 

Net proceeds from TEU issuance
222,856

 

Proceeds from employee stock purchases
12,088

 
13,238

Treasury stock purchases
(1,770
)
 
(1,292
)
Excess tax benefit from share-based compensation
2,842

 
2,090

Net cash provided by financing activities from continuing operations
451,418

 
35,811

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
227

 
(1,083
)
CHANGE IN CASH BALANCES INCLUDED IN CURRENT ASSETS OF DISCONTINUED OPERATIONS

 
1

INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
488,762

 
(11,796
)
CASH AND CASH EQUIVALENTS, beginning of period
27,269

 
27,417

CASH AND CASH EQUIVALENTS, end of period
$
516,031

 
$
15,621

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The interim consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc. and its subsidiaries (the Company). All references to currency amounts included in this Quarterly Report on Form 10-Q, including the consolidated financial statements, are in United States dollars unless specifically noted otherwise. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). They do not contain all disclosures which would be required in a full set of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the unaudited financial statements for the three and nine months ended September 30, 2012 and 2011 are presented on a basis consistent with the audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods presented. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The consolidated balance sheet data for 2011 was derived from the audited financial statements in the Company’s 2011 Annual Report on Form 10-K but does not include all disclosures required by U.S. GAAP.
The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s 2011 Annual Report on Form 10-K. Certain reclassifications have been made to prior period balances to conform to the current year presentation.
2. CHANGES IN OPERATIONS:
United States
RailAmerica, Inc.: On July 23, 2012, RailAmerica, Inc. (RailAmerica) and the Company jointly announced an agreement under which the Company would acquire RailAmerica for a cash purchase price of $27.50 per share. RailAmerica owns and operates short line and regional freight railroads in North America, operating a portfolio of 45 individual railroads with approximately 7,500 miles of track in 28 U.S. states and three Canadian provinces.
On October 1, 2012, the Company completed its previously announced acquisition of RailAmerica. Immediately following consummation of the acquisition, the Company transferred the stock of RailAmerica to a voting trustee to hold such shares of stock in an irrevocable independent voting trust while the United States Surface Transportation Board (STB) considers the Company's pending application to control RailAmerica's railroads. As more fully described in Notes 3 and 14, the acquisition was financed through borrowings under a new five-year Senior Secured Syndicated Facility Agreement (the New Credit Agreement), public offerings of shares of the Company's Class A common stock and Tangible Equity Units (TEUs) and a private issuance of Series A-1 Preferred Stock to Carlyle Partners V, L.P. (together with its affiliates, Carlyle).
During the three and nine months ended September 30, 2012, as discussed more fully under Contingent Forward Sale Contract in Note 5, the Company recorded a $50.1 million non-cash mark-to-market expense and corresponding liability related to an investment agreement governing the sale of $350.0 million of Series A-1 Preferred Stock issued to Carlyle in connection with the funding of the RailAmerica acquisition (the Investment Agreement). The expense is a result of the significant increase in GWI's share price between July 23, 2012 (the date the Company entered into the Investment Agreement) and the end of the third quarter. The Company also incurred $5.2 million and $6.0 million of acquisition costs related to this transaction during the three and nine months ended September 30, 2012, respectively, which were recorded within other expenses.
Commencing on October 1, 2012 and during the period RailAmerica is held in trust, the Company will account for its ownership of RailAmerica under the equity method of accounting.
Columbus & Chattahoochee Railroad, Inc.: In April 2012, the Company's newly formed subsidiary, the Columbus & Chattahoochee Railroad, Inc. (CCH), signed an agreement with Norfolk Southern Railway Company (NS) to lease and operate a 26-mile segment of NS track that runs from Girard, Alabama to Mahrt, Alabama. Operations commenced on July 1, 2012. The CCH interchanges with NS in Columbus, Georgia where the Company's Georgia Southwestern Railroad, Inc. also has operations. The results from CCH’s operations have been included in the Company’s statement of operations effective July 1, 2012 and are included in the Company’s North American & European Operations segment.

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Hilton & Albany Railroad, Inc.: In November 2011, the Company's newly formed subsidiary, the Hilton & Albany Railroad, Inc. (HAL), signed an agreement with NS to lease and operate a 56-mile segment of NS track that runs from Hilton, Georgia to Albany, Georgia. Operations commenced on January 1, 2012. The HAL handles primarily overhead traffic between NS and the Company's following railroads: The Bay Line Railroad, L.L.C.; Chattahoochee Bay Railroad, Inc.; Chattahoochee Industrial Railroad; and Georgia Southwestern Railroad, Inc. In addition, the HAL serves several local agricultural and aggregate customers in southwest Georgia. The results from HAL’s operations have been included in the Company’s statement of operations since January 1, 2012 and are included in the Company’s North American & European Operations segment.
Arizona Eastern Railway Company: On September 1, 2011, the Company acquired all of the capital stock of Arizona Eastern Railway Company (AZER). The Company paid the seller $89.5 million in cash at closing, which included a reduction to the purchase price of $0.6 million for the estimated working capital adjustment. Based on the final working capital adjustment, the Company recorded an additional $0.8 million of purchase price in December 2011, which was paid to the seller in January 2012. The Company incurred $0.6 million of acquisition costs related to this transaction through December 31, 2011, which were expensed as incurred. The results from AZER’s operations have been included in the Company’s statement of operations since September 1, 2011 and are included in the Company’s North American & European Operations segment.
Headquartered near Miami, Arizona, with 43 employees and 10 locomotives, AZER owns and operates two rail lines totaling approximately 200 track miles in southeast Arizona and southwest New Mexico that are connected by 52 miles of trackage rights over the Union Pacific Railroad. The largest customer of AZER is Freeport-McMoRan Copper & Gold Inc. (Freeport-McMoRan). AZER provides rail service to Freeport-McMoRan’s largest North American copper mine and its North American smelter, hauling copper concentrate, copper anode, copper rod and sulfuric acid. In conjunction with the transaction, AZER and Freeport-McMoRan entered into a long-term transportation agreement.
Australia
In May 2012, the Company's subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA), entered into an agreement with Asciano Services Pty Ltd (AIO), a subsidiary of Asciano Pty Ltd, whereby GWA agreed to purchase an intermodal and freight terminal in Alice Springs, Northern Territory from AIO and the Company agreed to sell AIO certain assets in the township of Cook, South Australia that included its third-party fuel-sales business. The Company completed the purchase of the Alice Springs intermodal and freight terminal in June 2012 for A$9.0 million (or $9.2 million at the exchange rate on June 30, 2012) plus A$0.5 million (or $0.6 million at the exchange rate on June 30, 2012) tax liability for stamp duty (an Australian asset transfer tax). Previously, GWA had leased the facility from AIO. The sale of the assets in Cook closed in the third quarter of 2012. The Company received A$4.0 million (or $4.1 million at the exchange rate on September 30, 2012) in pre-tax cash proceeds from the sale and recognized an after-tax book gain of A$1.3 million (or $1.3 million at the exchange rate on September 30, 2012), or approximately $0.03 per share.
In July 2012, GWA announced that it had expanded two existing rail haulage contracts with Arrium Limited (formerly OneSteel) to transport an additional 2.7 million tons per year of export iron ore in South Australia. To support the increased shipments under the two contracts, GWA expects to invest A$60.0 million (or $62.3 million at the exchange rate on September 30, 2012) to purchase narrow gauge locomotives and wagons, as well as to construct a standard gauge rolling-stock maintenance facility.
Canada
On August 2, 2012, the Company announced that its newly formed subsidiary, KeRail Inc. (KeRail), entered into a long-term agreement with Tata Steel Minerals Canada Ltd. (TSMC), for KeRail to provide rail transportation services to the direct shipping iron ore mine TSMC is developing near Schefferville, Quebec in the Labrador Trough (the Mine). In addition, KeRail will construct an approximately 21-kilometer rail line (Rail Line) that will connect TSMC's mine to the Tshiuetin Rail Transportation (TSH) interchange point in Schefferville. Operated as part of the Company's Canada Region, KeRail will haul unit trains of iron ore from its rail connection with the Mine that will then travel over three privately owned railways (two of which are 100% owned directly or indirectly by the Company) to the Port of Sept-Îles for export primarily to Tata Steel's European operations. The agreement and construction are contingent on certain conditions being met, including the receipt of necessary governmental permits and approvals. Once the track construction has commenced, the Rail Line is expected to be completed three to six months thereafter.
Results from Continuing Operations
When comparing the Company’s results from continuing operations from one reporting period to another, it is important to consider that the Company has historically experienced fluctuations in revenues and expenses due to changing economic conditions, acquisitions, competitive forces, changes in foreign currency exchange rates, one-time freight moves, fuel price fluctuations, customer plant expansions and shut-downs, sales of property and equipment, derailments and weather-related

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conditions, such as hurricanes, cyclones, tornadoes, droughts, heavy snowfall, unseasonably warm or cool weather, freezing and flooding. In periods when these events occur, results of operations are not easily comparable from one period to another. Finally, certain of the Company’s railroads have commodity shipments that are sensitive to general economic conditions, such as steel products, paper products and lumber and forest products, as well as product specific economic conditions, such as the availability of lower priced alternative sources of power generation (coal). Other shipments are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at customer plants (coal), winter weather (salt and coal) and seasonal rainfall (South Australian grain). As a result of these and other factors, the Company’s operating results in any reporting period may not be directly comparable to its operating results in other reporting periods.
3. (LOSS)/EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted (loss)/earnings per share for the three and nine months ended September 30, 2012 and 2011 (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Numerators:
 
 
 
 
 
 
 
(Loss)/income from continuing operations, net of tax
$
(19,567
)
 
$
32,952

 
$
39,064

 
$
86,219

Loss from discontinued operations, net of tax

 
(10
)
 
(27
)
 
(10
)
Net (loss)/income
$
(19,567
)
 
$
32,942

 
$
39,037

 
$
86,209

Denominators:
 
 
 
 
 
 
 
Weighted average Class A common shares outstanding - Basic
41,682

 
40,078

 
40,888

 
39,825

Weighted average Class B common shares outstanding

 
2,206

 
2,105

 
2,276

Dilutive effect of employee stock grants

 
537

 
478

 
610

Weighted average shares - Diluted
41,682

 
42,821

 
43,471

 
42,711

Basic:
 
 
 
 
 
 
 
(Loss)/earnings per common share from continuing operations
$
(0.47
)
 
$
0.82

 
$
0.96

 
$
2.16

Loss per common share from discontinued operations

 

 

 

(Loss)/earnings per common share
$
(0.47
)
 
$
0.82

 
$
0.95

 
$
2.16

Diluted:
 
 
 
 
 
 
 
(Loss)/earnings per common share from continuing operations
$
(0.47
)
 
$
0.77

 
$
0.90

 
$
2.02

Loss per common share from discontinued operations

 

 

 

(Loss)/earnings per common share
$
(0.47
)
 
$
0.77

 
$
0.90

 
$
2.02

In computing diluted loss per share for the three months ended September 30, 2012, all of the Company's Class B common shares outstanding and Class A common stock issuable under the assumed exercise of stock options computed based on the treasury stock method were excluded from the computation of diluted loss per share as a result of their anti-dilutive effect.
The following total number of Class A common stock issuable under the assumed exercise of stock options computed based on the treasury stock method were excluded from the calculation of diluted earnings per common share, as the effect of including these shares would have been anti-dilutive (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Anti-dilutive shares
665

 
156

 
264

 
108


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Offerings
On September 19, 2012, the Company completed a public offering of 3,791,004 shares of Class A common stock at $64.75 per share, which included 525,000 shares issued as a result of the underwriters' exercise of their over-allotment option. The Company received net proceeds of $234.4 million after deducting underwriting discounts and commissions and offering expenses from the sale of its Class A common stock. A selling stockholder also sold 233,966 shares of Class A common stock in the offering. The Company did not receive any proceeds from the selling stockholder's sale.
In addition, as described in more detail below, the Company completed a public offering of 2,300,000 Tangible Equity Units (TEUs), which included 300,000 TEUs issued as a result of the underwriters' exercise of their over-allotment option, with a stated amount of $100 per unit. The Company received net proceeds of $222.9 million after deducting underwriting discounts and commissions and offering expenses from the sale of its TEUs. The increase in the Company's weighted average basic shares outstanding for the three months ended September 30, 2012 compared with the three months ended September 30, 2011, included 453,272 shares as a result of the public offering of Class A common stock and 411,307 shares as a result of the public offering of TEUs. The increase in the Company's weighted average basic shares outstanding for the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011 included 152,194 shares as a result of the public offering of Class A common stock and 138,103 shares as a result of the public offering of TEUs. The Company used the net proceeds from the offerings to partially fund the acquisition of RailAmerica on October 1, 2012. See Note 14 for additional information regarding the Company's acquisition of RailAmerica.
Tangible Equity Units (TEUs)
On September 19, 2012, the Company issued an aggregate 2,300,000 5.00% TEUs. Each TEU initially consisted of a prepaid stock purchase contract (Purchase Contract) and a senior amortizing note due October 1, 2015 (Amortizing Note) issued by the Company, which had an initial principal amount of $14.1023 per Amortizing Note. As of September 30, 2012, the Amortizing Notes have an aggregate principal amount of $32.4 million. On each January 1, April 1, July 1 and October 1, commencing on January 1, 2013, the Company will pay holders of Amortizing Notes equal quarterly installments of $1.25 per Amortizing Note (except for the January 1, 2013 installment payment, which will be $1.4167 per Amortizing Note), which cash payments in the aggregate will be equivalent to a 5.00% cash payment per year with respect to each $100 stated amount of the TEUs. Each installment constitutes a payment of interest (at an annual rate of 4.50%) and a partial repayment of principal on the Amortizing Note, allocated as set forth in the amortization schedule provided in the indenture under which the Amortizing Notes were issued. The Amortizing Notes have a scheduled final installment payment date of October 1, 2015. If the Company elects to settle the Purchase Contracts early, holders of the Amortizing Notes will have the right to require the Company to repurchase such holders' Amortizing Notes, except in certain circumstances as described in the indenture governing the Amortizing Notes.
Unless settled or redeemed earlier, each Purchase Contract will automatically settle on October 1, 2015 (subject to postponement in certain limited circumstances) and the Company will deliver a number of shares of its Class A common stock based on the applicable market value of the Company's common stock, as defined in the Purchase Contract, which will be between 1.2355 shares and 1.5444 shares (subject to adjustment) per each $100 stated amount of the TEUs. Each TEU may be separated into its constituent Purchase Contract and Amortizing Note after the initial issuance date of the TEUs, and the separate components may be combined to create a TEU. The Amortizing Note component of the TEU is recorded as debt and the Purchase Contract component of the TEU is recorded in equity as additional paid-in capital. As of September 30, 2012, $197.6 million, the initial fair value of the Purchase Contracts, was recorded as additional paid-in capital and was partially offset by $6.1 million of underwriting discounts and commissions and offering expenses.
The Company's basic and diluted (loss)/earnings per share calculations reflect the weighted average shares issuable upon settlement of the Purchase Contract component of the TEUs. For purposes of determining the number of shares included in the calculation, the Company used the market price of its Class A common stock at the period end date.

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4. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following as of September 30, 2012 and December 31, 2011 (dollars in thousands):
 
September 30,
2012
 
December 31,
2011
Accounts receivable - trade
$
133,385

 
$
130,486

Accounts receivable - grants
23,220

 
20,753

Accounts receivable - insurance claims
19,395

 
17,336

Total accounts receivable
176,000

 
168,575

Less: Allowance for doubtful accounts
(2,592
)
 
(2,807
)
Accounts receivable, net
$
173,408

 
$
165,768

5. DERIVATIVE FINANCIAL INSTRUMENTS:
The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and uses derivative financial instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the interest rate or exchange rate fluctuations alone, nor does the Company use derivative instruments where it does not have underlying exposures. Complex instruments involving leverage or multipliers are not used. The Company manages its hedging position and monitors the credit ratings of counterparties and does not anticipate losses due to counterparty nonperformance. Management believes its use of derivative instruments to manage risk is in the Company’s best interest. However, the Company’s use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility. The Company’s instruments are recorded in the consolidated balance sheets at fair value in prepaid expenses and other, other assets, net, accrued expenses or other long-term liabilities.
The Company may designate derivatives as a hedge of a forecasted transaction or a hedge of the variability of the cash flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). The portion of the changes in the fair value of the derivative used as a cash flow hedge that is offset by changes in the expected cash flows related to a recognized asset or liability (the effective portion) is recorded in other comprehensive income/(loss). As the hedged item is realized, the gain or loss included in accumulated other comprehensive income is reported in the consolidated statements of operations on the same line item as the hedged item. The portion of the changes in the fair value of derivatives used as cash flow hedges that is not offset by changes in the expected cash flows related to a recognized asset or liability (the ineffective portion) is immediately recognized in earnings on the same line item as the hedged item.
The Company matches the hedge instrument to the underlying hedged item (assets, liabilities, firm commitments or forecasted transactions). At inception of the hedge and at least quarterly thereafter, the Company assesses whether the derivatives used to hedge transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. When it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting, and any gains or losses on the derivative instrument thereafter are recognized in earnings during the periods it no longer qualifies as a hedge.
From time to time, the Company may enter into certain derivative instruments that may not be designated as hedges for accounting purposes. For example, to mitigate currency exposures related to intercompany debt, cross-currency swap contracts may be entered into for periods consistent with the underlying debt. The Company believes such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from the changes in the fair value of derivative instruments not accounted for as hedges are recognized in current period earnings within other income/(expense).
Interest Rate Risk Management
The Company uses interest rate swap agreements to manage its exposure to changes in interest rates of the Company’s variable rate debt. These swap agreements are recorded in the consolidated balance sheets at fair value. Changes in the fair value of the swap agreements are recorded in net (loss)/income or other comprehensive income/(loss) based on whether the agreements are designated as part of a hedge transaction and whether the agreements are effective in offsetting the change in the value of the future interest payments attributable to the underlying portion of the Company’s variable rate debt. Interest payments accrued each reporting period for these interest rate swaps are recognized in interest expense.

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The Company formally documents its hedge relationships, including identifying the hedge instruments and hedged items, as well as its risk management objectives and strategies for entering into the hedge transaction. On October 2, 2008, the Company entered into an interest rate swap agreement to manage its exposure to interest rates on a portion of its outstanding borrowings. The swap has a notional amount of $120.0 million and requires the Company to pay a fixed rate of 3.88% on the notional amount. In return, the Company receives one-month LIBOR on the notional amount of the swap, which is equivalent to the Company’s variable rate portion of its interest obligation on the notional amount under its credit agreement. This swap expires on September 30, 2013. The fair value of the interest rate swap agreement represented a liability of $4.4 million as of September 30, 2012 and was estimated based on Level 2 inputs. The Company’s effectiveness testing during the period ended September 30, 2012 resulted in no amount of gain or loss reclassified from accumulated other comprehensive income into earnings.
In October 2012, the Company entered into multiple interest rate swap agreements to manage its exposure to changes in interest rates on its variable rate debt. See Note 14 for additional information regarding the Company's interest rate swap agreements.
Foreign Currency Exchange Rate Risk
As of September 30, 2012, $223.9 million of third-party debt, related to the Company’s foreign operations, was denominated in the currencies in which its subsidiaries operate, including the Australian dollar, Canadian dollar and Euro. The debt service obligations associated with this foreign currency debt are generally funded directly from those operations. As a result, foreign currency risk related to this portion of the Company’s debt service payments is limited. However, in the event the foreign currency debt service is not paid from the Company’s foreign operations, the Company may face exchange rate risk if the Australian or Canadian dollar or Euro were to appreciate relative to the United States dollar and require higher United States dollar equivalent cash.
The Company is also exposed to foreign currency exchange rate risk related to its foreign operations, including non-functional currency intercompany debt, typically from the Company’s United States operations to its foreign subsidiaries, and any timing difference between announcement and closing of an acquisition of a foreign business to the extent such acquisition is funded with United States dollars. To mitigate currency exposures related to non-functional currency denominated intercompany debt, cross-currency swap contracts may be entered into for periods consistent with the underlying debt. In determining the fair value of the derivative contract, the significant inputs to valuation models are quoted market prices of similar instruments in active markets. To mitigate currency exposures of non-United States dollar denominated acquisitions, the Company may enter into foreign exchange forward contracts. Although these derivative contracts do not qualify for hedge accounting, the Company believes that such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from changes in the fair value of derivative instruments that are not accounted for as hedges are recognized in current period earnings within other income, net.
On December 1, 2010, the Company completed the acquisition of the assets of FreightLink Pty Ltd, Asia Pacific Transport Pty Ltd and related corporate entities (together, FreightLink) for A$331.9 million (or $320.0 million at the exchange rate on December 1, 2010). The Company financed the acquisition through a combination of cash on hand and borrowings under its credit agreement. A portion of the funds was transferred from the United States to Australia through an intercompany loan with a notional amount of A$105.0 million (or $100.6 million at the exchange rate on December 1, 2010). To mitigate the foreign currency exchange rate risk related to this non-functional currency intercompany loan, the Company entered into an Australian dollar/United States dollar floating to floating cross-currency swap agreement (the Swap), effective as of December 1, 2010, which effectively converted the A$105.0 million intercompany loan receivable in the United States into a $100.6 million loan receivable. The Swap requires the Company to pay Australian dollar BBSW plus 3.125% based on a notional amount of A$105.0 million and allows the Company to receive United States LIBOR plus 2.48% based on a notional amount of $100.6 million on a quarterly basis. BBSW is the wholesale interbank reference rate within Australia, which the Company believes is generally considered the Australian equivalent to LIBOR. As a result of these quarterly net settlement payments, the Company realized a net expense of $1.1 million within interest expense, net related to the quarterly settlement for the three months ended September 30, 2012. In addition, the Company recognized a net loss of $0.1 million within other income, net related to the mark-to-market of the derivative agreement and the underlying intercompany debt instrument to the exchange rate on September 30, 2012. The fair value of the Swap represented a current liability of $8.7 million as of September 30, 2012. The fair value of the Swap was estimated based on Level 2 valuation inputs. The Swap expires on December 1, 2012.
Contingent Forward Sale Contract
In conjunction with the Company's announcement on July 23, 2012 of its plan to acquire RailAmerica, the Company entered into the Investment Agreement with Carlyle in order to partially fund the acquisition of RailAmerica. Pursuant to the

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Investment Agreement, the Company agreed to sell to Carlyle a minimum of $350.0 million of Series A-1 Preferred Stock to partially fund the RailAmerica acquisition. Each share of the Series A-1 Preferred Stock may be converted at any time, at the option of the holder, into approximately 17.1 shares of Class A common stock, subject to customary conversion adjustments. The Series A-1 Preferred Stock will also convert into the relevant number of shares of Class A common stock on the second anniversary of the date of issuance, subject to the satisfaction of certain conditions. Furthermore, the Company has the option to convert some or all of the Series A-1 Preferred Stock prior to the second anniversary of the date of issue of the Series A-1 Preferred Stock if the closing price of the Company's Class A common stock on the New York Stock Exchange exceeds 130% of the conversion price (or $76.03) for 30 consecutive trading days, subject to the satisfaction of certain conditions. The conversion price of the Series A-1 Preferred Stock was set at approximately $58.49, which was a 4.5% premium to the Company's stock price prior to the announcement of the RailAmerica acquisition.
For the period between July 23, 2012 and September 30, 2012, the Series A-1 Preferred Stock was accounted for as a contingent forward sale contract with mark-to-market non-cash income or expense included in the Company's consolidated financial results and the cumulative effect represented as an asset or liability. As a result of the significant increase in the Company's share price between July 23, 2012 and the end of the third quarter of 2012, the Company recorded a $50.1 million non-cash mark-to-market expense and corresponding liability related to the Investment Agreement for the three months ended September 30, 2012. The Company's closing share price was $66.86 on September 28, 2012, which was the last trading day in the third quarter of 2012.
The following table summarizes the fair value of derivative instruments recorded in the consolidated balance sheets as of September 30, 2012 and December 31, 2011 (dollars in thousands):
 
September 30, 2012
 
December 31, 2011
Liability Derivatives:
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedges:
 
 
 
 
 
 
 
Interest rate swap agreement
Accrued expenses
 
$
4,429

 
Accrued expenses
 
$
4,143

Interest rate swap agreement
Other long-term liabilities
 

 
Other long-term liabilities
 
2,882

Total derivatives designated as hedges
 
 
$
4,429

 
 
 
$
7,025

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Cross-currency swap agreement
Accrued expenses
 
$
8,709

 
Accrued expenses
 
$
7,170

Contingent forward sale contract
Other long-term liabilities
 
50,106

 
Other long-term liabilities
 

Total liability derivatives not designated as hedges
 
 
$
58,815

 
 
 
$
7,170

The following table shows the effect of the Company’s derivative instrument designated as a cash flow hedge for the three and nine months ended September 30, 2012 and 2011 in other comprehensive income/(loss) (OCI) (dollars in thousands): 
 
Total Cash Flow Hedge OCI Activity, Net of Tax
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Derivatives Designated as Cash Flow Hedges:
2012
 
2011
 
2012
 
2011
Effective portion of changes in fair value recognized in OCI:
 
 
 
 
 
 
 
Interest rate swap agreement
$
592

 
$
187

 
$
1,655

 
$
632

The following table shows the effect of the Company’s derivative instruments not designated as hedges for the three and nine months ended September 30, 2012 and 2011 in the consolidated statement of operations (dollars in thousands): 
 
 
 
 
Amount Recognized in Earnings
Derivative Instruments Not Designated as Hedges:
 
 
 
Three Months Ended
 
Nine Months Ended
 
Location of Amount Recognized in Earnings
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Cross-currency swap agreement
 
Interest expense, net
 
$
(1,051
)
 
$
(1,566
)
 
$
(3,572
)
 
$
(4,526
)
Cross-currency swap agreement
 
Other income, net
 
(70
)
 
103

 
218

 
222

Contingent forward sale contract
 
Contingent forward sale contract mark-to-market expense
 
(50,106
)
 

 
(50,106
)
 

 
 
 
 
$
(51,227
)
 
$
(1,463
)
 
$
(53,460
)
 
$
(4,304
)

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6. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:
Financial Instruments Carried at Fair Value: Derivative instruments are recorded on the balance sheet as either assets or liabilities measured at fair value. As of September 30, 2012, the Company’s derivative financial instruments consisted of an interest rate swap agreement, a cross-currency swap agreement and a contingent forward sale contract. The Company estimates the fair value of its interest rate swap agreement based on Level 2 valuation inputs, including fixed interest rates, LIBOR implied forward interest rates and the remaining time to maturity. The Company estimates the fair value of its cross-currency swap agreement based on Level 2 valuation inputs, including LIBOR implied forward interest rates, Australian dollar BBSW implied forward interest rates and the remaining time to maturity. The Company estimates the fair value of its contingent forward sale contract based on Level 1 valuation inputs, including the stated conversion price in the Investment Agreement and the Company's stock price.
Financial Instruments Carried at Historical Cost: Since the Company’s long-term debt is not quoted, fair value was estimated using a discounted cash flow analysis based on Level 2 valuation inputs, including borrowing rates the Company believes are currently available to it for loans with similar terms and maturities.
The following table presents the Company's financial instruments that are carried at fair value as of September 30, 2012 and December 31, 2011 (dollars in thousands):
 
September 30,
2012
 
December 31,
2011
Financial liabilities carried at fair value using Level 1 inputs:
 
 
 
Contingent forward sale contract
$
50,106

 
$

Financial liabilities carried at fair value using Level 2 inputs:
 
 
 
Interest rate swap agreement
4,429

 
7,025

Cross-currency swap agreement
8,709

 
7,170

Total financial liabilities carried at fair value
$
63,244

 
$
14,195

The following table presents the carrying value and fair value using Level 2 inputs of the Company’s financial instruments carried at historical cost as of September 30, 2012 and December 31, 2011 (dollars in thousands): 
 
September 30, 2012
 
December 31, 2011
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial liabilities carried at historical cost:
 
 
 
 
 
 
 
Series B senior notes
$
100,000

 
$
109,557

 
$
100,000

 
$
107,704

Series C senior notes

 

 
25,000

 
24,822

Revolving credit facility
223,056

 
223,757

 
191,919

 
186,590

United States term loan
175,000

 
174,192

 
190,000

 
183,869

Canadian term loan
21,017

 
20,980

 
21,983

 
21,226

Australia term loan
83,758

 
84,033

 
89,443

 
88,299

TEUs - amortizing note
32,435

 
31,649

 

 

Other debt
7,840

 
7,966

 
7,849

 
7,775

Total
$
643,106

 
$
652,134

 
$
626,194

 
$
620,285

7. INCOME TAXES:
Included in the Company's income from continuing operations before income taxes for the three and nine months ended September 30, 2012 was a $50.1 million mark-to-market expense associated with a contingent forward sale contract, which is a non-deductible expense for income tax purposes. See Note 5 for further details on the contingent forward sale contract. As a result, the Company's provision for income tax was $15.3 million and $46.1 million for the three and nine months ended September 30, 2012, respectively, which represents 33.4% and 34.1%, respectively, of income from continuing operations other than the mark-to-market expense. The Company’s effective income tax rate was 27.2% in both the three and nine months ended September 30, 2011. The increase in the effective income tax rate for the three and nine months ended September 30, 2012 was primarily attributable to the expiration of the United States Short Line Tax Credit on December 31, 2011.

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The Short Line Tax Credit is a track maintenance income tax credit for Class II and Class III railroads to reduce their federal income tax based on qualified railroad track maintenance expenditures. Qualified expenditures included amounts incurred for maintaining track, including roadbed, bridges and related track structures owned or leased by a Class II or Class III railroad. The credit was equal to 50% of the qualified expenditures, subject to an annual limitation of $3,500 multiplied by the number of miles of railroad track owned or leased by the Class II or Class III railroad as of the end of their tax year. The Short Line Tax Credit was in existence from 2005 through 2011.
8. COMMITMENTS AND CONTINGENCIES:
In connection with the Agreement and Plan of Merger (Merger Agreement) among Genesee & Wyoming, RailAmerica and Jaguar Acquisition Sub Inc., the Company's wholly-owned subsidiary (Merger Sub), five putative stockholder class action lawsuits have been filed in state courts located in Florida and Delaware. On July 26, 2012, John Langan v. RailAmerica Inc., et al. was filed in the Circuit Court of the Fourth Judicial Circuit for Duval County, Florida, Civil Division (Florida Circuit Court), against RailAmerica, the RailAmerica directors, Genesee & Wyoming and Merger Sub. The complaint alleges, among other things, that the RailAmerica directors breached their fiduciary duties in connection with their decision to sell RailAmerica to Genesee & Wyoming via an allegedly flawed process and failed to obtain the best financial and other terms. The complaint also alleges that RailAmerica, Genesee & Wyoming and Merger Sub aided and abetted those alleged breaches of duty. The complaint requests, among other relief, an order to enjoin consummation of the merger of Merger Sub with and into RailAmerica (the Merger or Acquisition), rescission of the Merger Agreement, and attorneys' fees. On July 31, 2012, Nicolas Sambuco v. RailAmerica Inc., et al. was filed in the same court, names the same defendants and alleges substantially similar claims. Also on July 31, 2012, plaintiffs in the Florida actions filed a motion to consolidate the two Florida actions, appoint plaintiffs Langan and Sambuco as lead plaintiffs and appoint lead counsel in the proposed consolidated action. Plaintiffs in the Florida actions also filed an emergency motion for expedited proceedings on August 7, 2012 and filed an amended complaint on August 8, 2012, which included allegations that the information statement filed by RailAmerica on August 3, 2012, omits material information about the proposed Merger. On August 17, 2012, the parties in the Florida actions submitted a stipulation for expedited proceedings, which the Florida Circuit Court ordered on August 20, 2012.
On August 27, 2012, solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the Company and the parties to the Florida actions entered into a Memorandum of Understanding setting forth an agreement in principle to settle all related claims. The settlement is subject to, among other things, a determination of the settlement amount, the execution of a stipulation of settlement and final approval by the Florida Circuit Court.
On August 2, 2012, Ford v. RailAmerica, Inc., et al. (Ford) was filed in the Court of Chancery of the State of Delaware (Delaware Chancery Court). The Ford complaint named the same defendants and alleged substantially similar claims as the Florida actions and sought an order to enjoin consummation of the Merger, attorney's fees and damages. On August 7, 2012, two more actions were filed in Delaware Chancery Court, KBC Asset Management N.V. v. RailAmerica, Inc. et al. (KBC) and Pesochinsky v. RailAmerica, Inc., et al. (Pesochinsky). Both of these actions named the same defendants and alleged substantially similar claims as the Florida actions and requested an order to enjoin consummation of the Merger and attorney's fees. On August 13, 2012, plaintiff in Ford filed an amended complaint. In addition to the allegations asserted in the initial Ford complaint, the amended Ford complaint alleged that the information statement filed by RailAmerica on August 3, 2012 omitted material information about the proposed Merger.
On November 1, 2012, the parties in Ford submitted a stipulation and proposed order of dismissal agreeing to dismissal without prejudice of all claims pending in the action. Also on November 1, 2012, plaintiff in Pesochinsky submitted a notice and proposed order of dismissal agreeing to dismiss the action without prejudice. On November 6, 2012, the parties in KBC submitted a stipulation and proposed order of dismissal agreeing to dismissal of all claims pending in the action. The Delaware Chancery Court has granted all three orders of dismissal for the Delaware actions.
In addition to the lawsuits set forth above, from time to time, the Company is a defendant in certain lawsuits resulting from its operations in the ordinary course. Management believes there are adequate provisions in the financial statements for any probable liabilities that may result from disposition of the pending lawsuits. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to the Company's results of operations or have a material adverse effect on the Company's financial position or liquidity.

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9. ACCUMULATED OTHER COMPREHENSIVE INCOME:
The following table sets forth accumulated other comprehensive income included in the consolidated balance sheets as of September 30, 2012 and December 31, 2011 (dollars in thousands): 
 
Foreign Currency Translation Adjustment
 
Defined Benefit Plans
 
Net Unrealized (Loss)/Gain on Cash Flow Hedges
 
Accumulated Other Comprehensive Income
Balance, December 31, 2011
$
42,394

 
$
(20
)
 
$
(4,479
)
 
$
37,895

Current period change
7,195

 
(335
)
 
1,655

 
8,515

Balance, September 30, 2012
$
49,589

 
$
(355
)
 
$
(2,824
)
 
$
46,410

10. SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
As of September 30, 2012 and 2011, the Company had outstanding grants receivable from outside parties for capital expenditures of $23.2 million and $15.2 million, respectively. As of September 30, 2012 and 2011, the Company also had approximately $20.5 million and $16.3 million, respectively, of purchases of property and equipment that were not paid and, accordingly, were accrued in accounts payable in the normal course of business.
11. EDITH RIVER DERAILMENT:
On December 27, 2011, a train operated by the Company's subsidiary, GWA, derailed on the Edith River Bridge in Australia's Northern Territory (the Edith River Derailment). Flood waters associated with heavy rainfall from Cyclone Grant washed away the southern portion of the Edith River Bridge while a northbound GWA intermodal train consisting of three locomotives, an unoccupied crew van and 33 wagons was passing over the bridge en route to Darwin. The locomotives were damaged and the crew van and several intermodal containers and wagons containing copper concentrate were derailed into the river.
The railroad segment between Katherine and Darwin remained out of service for approximately 60 days. The Edith River Bridge reopened on February 29, 2012. The 60-day closure of the Edith River Bridge reduced the Company's revenues by approximately $7 million and reduced the Company's operating income from operations by approximately $5 million. In June 2012, the Company recorded a gain on insurance recoveries and a related insurance receivable of A$4.8 million (or $4.8 million at the average exchange rate on June 30, 2012) for a business interruption claim. The Company anticipates further business interruption insurance recovery related to the Edith River Derailment in the fourth quarter of 2012 or first quarter of 2013.
In December 2011, the Company recorded a liability of A$15.0 million (or $15.3 million at the exchange rate on December 31, 2011) for the estimated repair and related costs associated with the Edith River Derailment. Since the Company believes substantially all of these costs will be recovered through insurance, the Company also recorded a receivable of A$14.0 million (or $14.3 million at the exchange rate on December 31, 2011), with the difference representing the Company's insurance deductible. The Company increased its estimate of costs associated with the Edith River Derailment, as well as its estimate of insurance recovery, each by A$12.8 million (or $13.2 million at the exchange rate on September 30, 2012) during the nine months ended September 30, 2012. During the nine months ended September 30, 2012, the Company made cash payments of A$20.5 million (or $21.5 million at the average exchange rate during the period) as a result of the derailment and received cash proceeds from insurance of A$20.0 million (or $20.9 million at the exchange rate on the date received). As of September 30, 2012, the Company's outstanding insurance receivable associated with repair costs was A$6.8 million (or $7.1 million at the exchange rate on September 30, 2012).
The Company believes it is possible that additional claims related to the Edith River Derailment may arise and additional costs may be incurred. The Company is unable to estimate the range of such claims based on currently available information. However, the Company does not anticipate that these additional claims or costs, if any, will have a material adverse effect on its operating results, financial condition or liquidity.
12. SEGMENT INFORMATION:
The Company's various railroad lines are divided into 10 operating regions. All of the regions have similar characteristics; however, the Company presents its financial information as two reportable segments, North American & European Operations and Australian Operations.

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The results of operations of the foreign entities are maintained in the respective local currency (the Australian dollar, the Canadian dollar and the Euro) and then translated into United States dollars at the applicable exchange rates for inclusion in the consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar will impact the Company's results of operations.
The following table sets forth the Company's North American & European Operations and Australian Operations for the three months ended September 30, 2012 and 2011 (dollars in thousands):
 
Three Months Ended September 30, 2012
 
Three Months Ended September 30, 2011
 
North American & European Operations
 
Australian Operations
 
Total Operations
 
North American & European Operations
 
Australian Operations
 
Total Operations
Revenues
$
150,323

 
$
72,422

 
$
222,745

 
$
145,807

 
$
71,403

 
$
217,210

Income from operations
33,571

 
19,304

 
52,875

 
37,963

 
18,060

 
56,023

Depreciation and amortization
12,495

 
6,485

 
18,980

 
11,932

 
4,691

 
16,623

Interest expense
(4,621
)
 
(4,193
)
 
(8,814
)
 
(5,988
)
 
(4,585
)
 
(10,573
)
Interest income
783

 
145

 
928

 
708

 
145

 
853

Provision for income taxes
10,764

 
4,539

 
15,303

 
8,196

 
4,091

 
12,287

Expenditures for additions to property & equipment, net of grants from outside parties
24,023

 
33,320

 
57,343

 
12,054

 
25,194

 
37,248

The following table sets forth the Company's North American & European Operations and Australian Operations for the nine months ended September 30, 2012 and 2011 (dollars in thousands):
 
Nine Months Ended September 30, 2012
 
Nine Months Ended September 30, 2011
 
North American & European Operations
 
Australian Operations
 
Total Operations
 
North American & European Operations
 
Australian Operations
 
Total Operations
Revenues
$
439,451

 
$
208,149

 
$
647,600

 
$
417,449

 
$
201,261

 
$
618,710

Income from operations
104,782

 
51,880

 
156,662

 
98,635

 
47,756

 
146,391

Depreciation and amortization
37,354

 
17,593

 
54,947

 
34,843

 
13,938

 
48,781

Interest expense
(14,107
)
 
(11,945
)
 
(26,052
)
 
(17,879
)
 
(12,886
)
 
(30,765
)
Interest income
2,407

 
352

 
2,759

 
2,215

 
271

 
2,486

Provision for income taxes
33,723

 
12,328

 
46,051

 
21,753

 
10,439

 
32,192

Expenditures for additions to property & equipment, net of grants from outside parties
50,761

 
94,839

 
145,600

 
33,865

 
53,748

 
87,613

The following table sets forth the property and equipment recorded in the consolidated balance sheets for the Company's North American & European Operations and Australian Operations as of September 30, 2012 and December 31, 2011 (dollars in thousands): 
 
September 30, 2012
 
December 31, 2011
 
North American & European Operations
 
Australian Operations
 
Total Operations
 
North American & European Operations
 
Australian Operations
 
Total Operations
Property & equipment, net
$1,162,217
 
$607,250
 
$1,769,467
 
$1,120,121
 
$523,468
 
$1,643,589
13. RECENTLY ISSUED ACCOUNTING STANDARDS:
Accounting Standards Not Yet Effective
In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which gives entities the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

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14. SUBSEQUENT EVENTS:
RailAmerica Acquisition
On October 1, 2012, the Company announced the closing of its acquisition of RailAmerica and entered into a new five-year Senior Secured Syndicated Facility Agreement (New Credit Agreement) comprised of a $1.875 billion term loan and $425.0 million revolving credit facility. Immediately following consummation of the acquisition, the Company transferred the stock of RailAmerica to a voting trustee to hold such shares of stock in an irrevocable independent voting trust while the STB considers the Company's pending application to control RailAmerica's railroads. The voting trust will remain in effect until the STB issues its decision on the Company's application to control RailAmerica's railroads. Based on the Company's application and the statutory STB review periods for minor transactions, the STB decision could be issued as early as the fourth quarter of 2012 or as late as the first quarter of 2013. Commencing on October 1, 2012 and during the period that RailAmerica is held in trust, the Company will account for its ownership of RailAmerica under the equity method of accounting. Expected cost savings from the business combination will not be realized unless and until the STB approves the Company's control of RailAmerica's railroads.
The Company financed the $1.4 billion cash purchase price for RailAmerica's shares, the refinancing of $1.2 billion of the Company's and RailAmerica's debt, as well as transaction and financing-related expenses, with $1.8 billion of debt from the New Credit Agreement, $475.5 million of gross proceeds from the Company's recent public offerings of Class A common stock and TEUs and $350.0 million through a private issuance of Series A-1 Preferred Stock to Carlyle.
On October 1, 2012, in connection with the RailAmerica acquisition, the Company repaid in full all outstanding loans, together with interest and all other amounts due under the Company's previously outstanding Third Amended and Restated Revolving Credit and Term Loan Agreement. No penalties were due in connection with such repayments. In addition, the Company repaid in full its Series B senior notes on October 1, 2012, along with an aggregate $12.6 million make-whole payment. In connection with the repayment of the Company's outstanding notes, the Company expects to write off approximately $4 million of unamortized debt issuance costs. The Company used proceeds from the New Credit Agreement to repay its outstanding loans and notes.
Credit Facilities
The New Credit Agreement expanded the size of the Company's credit facilities from $750.0 million to $2.3 billion and has a maturity date of October 1, 2017. The New Credit Agreement includes a $425.0 million revolving loan, a $1.6 billion United States term loan, a C$24.6 million ($25.0 million at the exchange rate on October 1, 2012) Canadian term loan and an A$202.9 million ($210.0 million at the exchange rate on October 1, 2012) Australian term loan. The New Credit Agreement also has borrowing capacity for letters of credit and for borrowings on same-day notice, referred to as swingline loans. As of October 1, 2012, the United States, Australian and Canadian term loans had interest rates of 2.71%, 6.05% and 3.58%, respectively. On October 1, 2012, the Company had outstanding revolving loans of $55.0 million in the United States with an interest rate of 2.71% and €2.9 million in Europe (or $3.7 million at the exchange rate on October 1, 2012) with an interest rate of 2.57%.
The New Credit Agreement provides for borrowings under the revolving loan in United States dollars, Euros, Canadian dollars and Australian dollars. The applicable borrowing spread for the United States base rate loans and Canadian base rate loans under the New Credit Agreement will initially be 1.50% over the base rate through December 31, 2012 and will range from 0.50% to 1.75% over the base rate depending upon the Company's total leverage ratio thereafter. The applicable borrowing spread for the United States LIBOR rate loans, Canadian LIBOR rate loans, the Australian loans and the European loans will initially be 2.50% over the LIBOR rate through December 31, 2012 and will range from 1.50% to 2.75% over the LIBOR rate depending upon the Company's total leverage ratio thereafter.
In addition to paying interest on any outstanding borrowings under the New Credit Agreement, the Company will be required to pay a commitment fee in respect of the unutilized portion of the commitments under the new revolving loan. The commitment fee rate will initially be 0.50% per annum through December 31, 2012 and will range from 0.25% to 0.50% depending upon the Company's total leverage ratio thereafter. The Company will also pay customary letter of credit and agency fees.
The United States term loan will amortize in quarterly installment amounts of $16.4 million in the first eight quarterly payments beginning December 31, 2012, $21.9 million in the succeeding eight quarterly payments and $43.7 million in the next succeeding quarterly payments through September 30, 2017 with the remaining principal balance of the term loan payable on October 1, 2017. The Canadian term loan will amortize in quarterly installment amounts of C$0.2 million in the first eight quarterly payments beginning December 31, 2012, C$0.3 million in the succeeding eight quarterly payments and C$0.7 million in the next succeeding quarterly payments through September 30, 2017 with the remaining principal balance of the term loan

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payable on October 1, 2017. The Australian term loan will amortize in quarterly installment amounts of A$2.0 million in the first eight quarterly payments beginning December 31, 2012, A$2.7 million in the succeeding eight quarterly payments and A$5.4 million in the next succeeding period through September 30, 2017 with the remaining principal balance of the term loan payable on October 1, 2017.
The New Credit Agreement contains a number of customary affirmative and negative covenants that, among other things, limit or prohibit the Company's ability to incur additional indebtedness; create liens; make investments; pay dividends on capital stock or redeem, repurchase or retire capital stock; consolidate or merge or make acquisitions or dispose of assets; enter into sale and leaseback transactions; engage in any business unrelated to the business currently conducted by the Company; sell or issue capital stock of any of the Company's restricted subsidiaries; change the fiscal year; enter into certain agreements containing negative pledges and upstream limitations; engage in certain transactions with affiliates; and modify the voting trust documents or grant certain voting trust consents. In addition, under the New Credit Agreement, the Company may not exceed specified maximum total leverage ratios and may not have less than specified minimum interest coverage ratios.
To hedge certain borrowings under the New Credit Agreement, on October 2, 2012, the Company entered into a one-year interest rate swap agreement effective October 4, 2012 for a notional amount of $1.45 billion. The notional amount reduces to $1.35 billion on January 1, 2013, $1.30 billion on April 1, 2013 and $1.25 billion on July 1, 2013. The swap requires the Company to pay 0.25% and receive one-month LIBOR on the notional amount of the swap.
On October 2, 2012, the Company also entered into a one-year interest rate swap agreement effective September 30, 2013 for a notional amount of $1.35 billion. The notional amount reduces to $1.30 billion on December 31, 2013, $1.25 billion on March 31, 2014 and $1.20 billion on June 30, 2014. The swap requires the Company to pay 0.35% and receive one-month LIBOR on the notional amount of the swap.
On October 2, 2012, the Company entered into a one-year interest rate swap agreement effective September 30, 2014 for a notional amount of $1.15 billion. The notional amount reduces to $1.10 billion on January 1, 2015, $1.05 billion on April 1, 2015 and $1.00 billion on July 1, 2015. The swap requires the Company to pay 0.535% and receive one-month LIBOR on the notional amount of the swap.
Voting Trust Agreement
On September 28, 2012, the Company entered into a Voting Trust Agreement with R. Lawrence McCaffrey as voting trustee. The Voting Trust Agreement sets forth the terms and conditions upon which the Company transferred the stock of RailAmerica to the voting trustee to hold such shares of stock in an irrevocable voting trust while the STB considers the Company's pending application to control RailAmerica's railroads.
Series A-1 Preferred Stock
As part of the financing for the RailAmerica acquisition, on October 1, 2012, the Company completed the issuance of 350,000 shares of Series A-1 Preferred Stock at an issuance price of $1,000.00 per share for $349.4 million, net of issuance costs to Carlyle pursuant to the Investment Agreement. Dividends on the Series A-1 Preferred Stock are cumulative and payable quarterly in arrears in an amount equal to 5.00% per annum of the issuance price per share. See Note 5 for additional information regarding the Series A-1 Preferred Stock.

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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements, related notes and other financial information included in our 2011 Annual Report on Form 10-K.
Overview
We operate short line and regional freight railroads and provide railcar switching services in the United States, Australia, Canada, the Netherlands and Belgium. In addition, we operate a longer-haul railroad that runs approximately 1,400 miles between Tarcoola in South Australia and Darwin in the Northern Territory of Australia. As of September 30, 2012, our operations included 66 railroads organized into 10 regions, with approximately 7,600 miles of owned, jointly owned or leased track (inclusive of the Tarcoola to Darwin rail line operated under a concession agreement) and 1,405 additional miles under other contractual track access arrangements. In addition, we provide rail service at 23 ports in North America, Australia and Europe and perform contract coal loading and railcar switching for industrial customers.
On October 1, 2012, we announced the closing of our acquisition of RailAmerica, Inc. (RailAmerica) and entered into a new five-year Senior Secured Syndicated Facility Agreement (New Credit Agreement) comprised of a $1.875 billion term loan and $425.0 million revolving loan. As more fully described in "Liquidity and Capital Resources," the acquisition was financed through borrowings under the New Credit Agreement, public offerings of shares of our Class A common stock and Tangible Equity Units (TEUs) and a private issuance of Series A-1 Preferred Stock to Carlyle Partners V, L.P. (together with its affiliates, Carlyle). Immediately following the consummation of the acquisition, we transferred the stock of RailAmerica to a voting trustee to hold such shares of stock in an irrevocable independent voting trust while the United States Surface Transportation Board (STB) considers our pending application to control RailAmerica's railroads. The voting trust will remain in effect until the STB issues its decision on our application to control RailAmerica's railroads. Based on our application and statutory STB review periods for a minor transaction, the STB decision could be issued as early as the fourth quarter of 2012 or as late as the first quarter of 2013. Commencing on October 1, 2012 and during the period that RailAmerica is held in trust, we will account for our ownership under the equity method of accounting. Expected cost savings from the business combination will not be initiated until the STB approves our control of RailAmerica's railroads. The RailAmerica acquisition and its related financing are more fully discussed under "Liquidity and Capital Resources."
Although we did not own RailAmerica during the third quarter of 2012, in the three and nine months ended September 30, 2012, as discussed more fully under Contingent Forward Sale Contract in "Liquidity and Capital Resources," we recorded a $50.1 million non-cash mark-to-market expense and corresponding liability related to an investment agreement governing the sale of $350.0 million of Series A-1 Preferred Stock in connection with the acquisition (the Investment Agreement). Our net loss in the three months ended September 30, 2012 was primarily due to a previously disclosed, one-time, non-cash charge whereby we marked-to-market $350.0 million of Series A-1 Mandatorily Convertible Preferred Stock issued to Carlyle (Carlyle Convertible) pursuant to an Investment Agreement to partially fund the RailAmerica acquisition. The non-cash charge of $50.1 million for marking-to-market the Carlyle Convertible was a result of the significant increase in our share price between the execution of the RailAmerica acquisition agreement and the Investment Agreement on July 23, 2012 and the end of the third quarter of 2012. We also incurred $5.2 million and $6.0 million of acquisition costs related to this transaction during the three and nine months ended September 30, 2012, respectively, which were recorded within other expenses.
Net loss in the three months ended September 30, 2012 was $19.6 million, compared with net income of $32.9 million in the three months ended September 30, 2011. Our diluted loss per share in the three months ended September 30, 2012 was $0.47 with 41.7 million weighted average shares outstanding, compared with diluted earnings per share (EPS) of $0.77 with 42.8 million weighted average shares outstanding in the three months ended September 30, 2011. Excluding the $50.1 million ($50.1 million after-tax) one-time, non-cash mark-to-market expense associated with the Investment Agreement with Carlyle, $5.8 million ($3.5 million after-tax) of acquisition-related costs primarily associated with the RailAmerica acquisition and a $3.0 million ($2.0 million after-tax) net gain on sale of assets, our net income for the three months ended September 30, 2012 would have been $32.0 million. Excluding a $1.16 per share negative impact from the mark-to-market expense associated with the Investment Agreement with Carlyle, a $0.08 per share negative impact from acquisition-related costs, a $0.02 per share negative impact from the increased share count resulting from the Class A common stock and TEU offerings in September of 2012 and a $0.05 per share positive impact from the gain on sale of assets, our diluted EPS for the three months ended September 30, 2012 would have been $0.74.
Operating revenues increased $5.5 million, or 2.5%, to $222.7 million in the three months ended September 30, 2012, compared with $217.2 million in the three months ended September 30, 2011. The increase in operating revenues included $6.4 million in revenues from new operations partially offset by a $0.8 million, or 0.4%, decrease in revenues from existing operations. During the three months ended September 30, 2012, the depreciation of the Australian and Canadian dollars and the

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Euro relative to the United States dollar decreased operating revenues from existing operations by $1.4 million. Other than the impact from the change in foreign currency exchange rates, revenues from existing operations increased $0.6 million, or 0.3%. When we discuss either revenues from existing operations or same railroad revenues, we are referring to the change in our revenues, period-over-period, associated with operations that we managed in both periods (i.e. excluding the impact of businesses acquired/initiated).
Our traffic in the three months ended September 30, 2012 was 242,783 carloads, a decrease of 13,407 carloads, or 5.2%, compared with the three months ended September 30, 2011. The traffic decrease consisted of a decrease of 20,591 carloads, or 8.0%, from existing operations, partially offset by 7,184 carloads from new operations. The decrease from existing operations was principally due to decreases of 9,129 carloads of other commodity traffic primarily due to a decline in coal-related haulage traffic, 8,689 carloads of farm and food products traffic and 6,283 carloads of minerals and stone traffic, partially offset by an increase of 1,932 carloads of lumber and forest products traffic, 1,921 carloads of intermodal traffic and 1,919 carloads of metallic ores traffic. All remaining traffic from existing operations decreased by a net 2,262 carloads.
Income from operations in the three months ended September 30, 2012 was $52.9 million, compared with $56.0 million in the three months ended September 30, 2011, a decrease of $3.1 million, or 5.6%. Our operating ratio, defined as operating expenses divided by operating revenues, was 76.3% in the three months ended September 30, 2012, compared with 74.2% in the three months ended September 30, 2011. Income from operations in the three months ended September 30, 2012 included $5.8 million of acquisition-related costs, primarily related to the RailAmerica acquisition, partially offset by a $3.0 million net gain on sale of assets. Income from operations in the three months ended September 30, 2011 included $1.2 million of acquisition and financing-related costs, partially offset by a $0.6 million gain on sale of assets.
Included in our loss from continuing operations before income taxes for the three months ended September 30, 2012 was a $50.1 million mark-to-market expense associated with a contingent forward sale contract, which is a non-deductible expense for income tax purposes (described in Note 5 to our Consolidated Financial Statements included elsewhere in this Form 10-Q). As a result, our provision for income tax was $15.3 million for the three months ended September 30, 2012, which represents 33.4% of income from continuing operations other than the mark-to-market expense. Our effective income tax rate was 27.2% in the three months ended September 30, 2011. The higher income tax rate for the three months ended September 30, 2012 was driven primarily by the expiration of the United States Short Line Tax Credit (described in Note 7 to our Consolidated Financial Statements included elsewhere in this Form 10-Q) on December 31, 2011.
Operating revenues increased $28.9 million, or 4.7%, to $647.6 million in the nine months ended September 30, 2012 compared with $618.7 million in the nine months ended September 30, 2011. Income from operations in the nine months ended September 30, 2012 was $156.7 million, compared with $146.4 million in the nine months ended September 30, 2011, an increase of $10.3 million, or 7.0%.
Net income from continuing operations in the nine months ended September 30, 2012 was $39.1 million, compared with net income from continuing operations of $86.2 million in the nine months ended September 30, 2011. Our diluted EPS from continuing operations in the nine months ended September 30, 2012 were $0.90 with 43.5 million weighted average shares outstanding, compared with diluted EPS from continuing operations in the nine months ended September 30, 2011 of $2.02 with 42.7 million weighted average shares outstanding. Included in our income from continuing operations for the nine months ended September 30, 2012 was a $50.1 million ($1.16 per share) mark-to-market expense associated with a contingent forward sale contract (described in Note 5 to our Consolidated Financial Statements included elsewhere in this Form 10-Q).
During the nine months ended September 30, 2012, we generated $169.5 million in cash flow from operating activities from continuing operations. During the same period, we purchased $170.5 million of property and equipment, including $80.3 million in Australia, primarily for new equipment to handle new business. These payments were offset by $234.4 million and $222.9 million net proceeds from the issuance of Class A common stock and TEUs respectively, $24.9 million in cash received from outside parties for capital spending and $13.7 million in proceeds from the disposition of property and equipment.
Changes in Operations
United States
RailAmerica, Inc.: On July 23, 2012, we and RailAmerica jointly announced an agreement under which we would acquire RailAmerica for a cash purchase price of $27.50 per share. RailAmerica owns and operates short line and regional freight railroads in North America, operating a portfolio of 45 individual railroads with approximately 7,500 miles of track in 28 U.S. states and three Canadian provinces.
On October 1, 2012, we completed our previously announced acquisition of RailAmerica. Immediately following consummation of the acquisition, we transferred the stock of RailAmerica to a voting trustee to hold such shares of stock in an

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irrevocable independent trust pending formal Surface Transportation Board (STB) approval of our application to control RailAmerica's railroads.
Columbus & Chattahoochee Railroad, Inc.: In April 2012, our newly formed subsidiary, CCH, signed an agreement with Norfolk Southern Railway Company (NS) to lease and operate a 26-mile segment of NS track that runs from Girard, Alabama to Mahrt, Alabama. Operations commenced July 1, 2012. The CCH interchanges with NS in Columbus, Georgia where our Georgia Southwestern Railroad, Inc. also has operations. The results from CCH’s operations have been included in our statement of operations effective July 1, 2012 and are included in our North American & European Operations segment.
Hilton & Albany Railroad, Inc.: In November 2011, our newly formed subsidiary, HAL, signed an agreement with NS to lease and operate a 56-mile segment of NS track that runs from Hilton, Georgia to Albany, Georgia. Operations commenced on January 1, 2012. The HAL handles primarily overhead traffic between NS and our following railroads: The Bay Line Railroad, L.L.C.; Chattahoochee Bay Railroad, Inc.; Chattahoochee Industrial Railroad; and Georgia Southwestern Railroad, Inc. In addition, the HAL serves several local agricultural and aggregate customers in southwest Georgia. The results from HAL’s operations have been included in our statement of operations since January 1, 2012 and are included in our North American & European Operations segment.
Arizona Eastern Railway Company: On September 1, 2011, we acquired all of the capital stock of AZER. We paid the seller $89.5 million in cash at closing, which included a reduction to the purchase price of $0.6 million for the estimated working capital adjustment. Based on the final working capital adjustment, we recorded an additional $0.8 million of purchase price in December 2011, which was paid to the seller in January 2012. We incurred $0.6 million of acquisition costs related to this transaction through December 31, 2011, which were expensed as incurred. The results from AZER’s operations have been included in our statement of operations since September 1, 2011 and are included in our North American & European Operations segment.
Headquartered near Miami, Arizona, with 43 employees and 10 locomotives, AZER owns and operates two rail lines totaling approximately 200 track miles in southeast Arizona and southwest New Mexico that are connected by 52 miles of trackage rights over the Union Pacific Railroad. The largest customer of AZER is Freeport-McMoRan Copper & Gold Inc. (Freeport-McMoRan). AZER provides rail service to Freeport-McMoRan’s largest North American copper mine and its North American smelter, hauling copper concentrate, copper anode, copper rod and sulfuric acid. In conjunction with the transaction, AZER and Freeport-McMoRan entered into a long-term transportation agreement.
Australia
In May 2012, our subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA), entered into an agreement with Asciano Services Pty Ltd (AIO), a subsidiary of Asciano Pty Ltd, whereby GWA purchased an intermodal and freight terminal in Alice Springs, Northern Territory from AIO and sold AIO certain assets in the township of Cook, South Australia that included a fuel-sales business. We completed the purchase of the Alice Springs intermodal and freight terminal in June 2012 for A$9.0 million (or $9.2 million at the exchange rate on June 30, 2012) plus A$0.5 million (or $0.6 million at the exchange rate on June 30, 2012) tax liability for stamp duty (an Australian asset transfer tax). Previously, GWA had leased the facility from AIO. The sale of the assets in Cook closed in the third quarter of 2012 following completion of certain conditions to the closing. We received A$4.0 million (or $4.1 million at the exchange rate on September 30, 2012) in pre-tax cash proceeds from the sale and recognized an after-tax book gain of A$1.3 million (or $1.3 million at the exchange rate on September 30, 2012), or approximately $0.03 per share.
In July 2012, GWA expanded two existing rail haulage contracts with Arrium Limited (formerly OneSteel) to transport an additional 2.7 million tons per year of export iron ore in South Australia. To support the increased shipments under the two contracts, GWA expects to invest A$60.0 million (or $62.3 million at the exchange rate on September 30, 2012) to purchase narrow gauge locomotives and wagons as well as to construct a standard gauge rolling-stock maintenance facility.
Canada
On August 2, 2012, we announced that our newly formed subsidiary, KeRail Inc. (KeRail), entered into a long-term agreement with Tata Steel Minerals Canada Ltd. (TSMC), for KeRail to provide rail transportation services to the direct shipping iron ore mine TSMC is developing near Schefferville, Quebec in the Labrador Trough (the Mine). In addition, KeRail will construct an approximately 21-kilometer rail line (Rail Line) which will connect TSMC's mine to the Tshiuetin Rail Transportation (TSH) interchange point in Schefferville. Operated as part of our Canada Region, KeRail will haul unit trains of iron ore from its rail connection with the Mine that will then travel over three privately owned railways to the Port of Sept-Îles for export primarily to Tata Steel's European operations. The agreement and construction are contingent on certain conditions being met, including the receipt of necessary governmental permits and approvals. Once the track construction has commenced, the Rail Line is expected to be completed three to six months thereafter.

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Discontinued Operations
The net assets, results of operations and cash flows of our remaining Mexican subsidiary, GW Servicios S.A., which were classified as discontinued operations, were not material as of and for the three and nine months ended September 30, 2012 and 2011. We do not expect any material future adverse financial impact from our remaining Mexican subsidiary.
Results from Continuing Operations
When comparing our results from continuing operations from one reporting period to another, it is important to consider that we have historically experienced fluctuations in revenues and expenses due to changing economic conditions, acquisitions, competitive forces, changes in foreign currency exchange rates, one-time freight moves, fuel price fluctuations, customer plant expansions and shut-downs, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, tornadoes, droughts, heavy snowfall, unseasonably warm or cool weather, freezing and flooding. In periods when these events occur, results of operations are not easily comparable from one period to another. Finally, certain of our railroads have commodity shipments that are sensitive to general economic conditions, such as steel products, paper products and lumber and forest products, as well as product specific economic conditions, such as the availability of lower priced alternative sources of power generation (coal). Other shipments are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at customer plants (coal), winter weather (salt and coal) and seasonal rainfall (South Australian grain). As a result of these and other factors, our operating results in any reporting period may not be directly comparable to our operating results in other reporting periods.
Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011
Operating Revenues
The following table breaks down our operating revenues into new operations and existing operations for the three months ended September 30, 2012 and 2011 (dollars in thousands):
 
2012
 
2011
 
Increase/(Decrease) in Total
Operations
 
Increase/(Decrease) in Existing
Operations
 
 
 
Total
Operations
 
New
Operations
 
Existing
Operations
 
Total
Operations
 
Amount
 
%
 
Amount
 
%
 
Currency Impact
Freight revenues
$
160,639

 
$
6,014

 
$
154,625

 
$
154,561

 
$
6,078

 
3.9
 %
 
$
64

 
 %
 
$
(738
)
Non-freight revenues
62,106

 
340

 
61,766

 
62,649

 
(543
)
 
(0.9
)%
 
(883
)
 
(1.4
)%
 
(666
)
Total operating revenues
$
222,745

 
$
6,354

 
$
216,391

 
$
217,210

 
$
5,535

 
2.5
 %
 
$
(819
)
 
(0.4
)%
 
$
(1,404
)
Carloads
242,783

 
7,184

 
235,599

 
256,190

 
(13,407
)
 
(5.2
)%
 
(20,591
)
 
(8.0
)%
 
 

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Freight Revenues
The following table compares freight revenues, carloads and average freight revenues per carload for the three months ended September 30, 2012 and 2011 (dollars in thousands, except average freight revenues per carload):
 
Freight Revenues
 
Carloads
 
Average Freight
Revenues Per
Carload
 
2012
 
2011
 
2012
 
2011
 
 
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2012
 
2011
Intermodal*
$
25,506

 
15.9
%
 
$
23,329

 
15.1
%
 
17,754

 
7.3
%
 
15,833

 
6.2
%
 
$
1,437

 
$
1,473

Coal & Coke
21,561

 
13.4
%
 
20,831

 
13.4
%
 
52,990

 
21.8
%
 
53,553

 
20.9
%
 
407

 
389

Farm & Food Products
14,640

 
9.1
%
 
16,823

 
10.9
%
 
22,369

 
9.2
%
 
30,843

 
12.0
%
 
654

 
545

Pulp & Paper
17,063

 
10.6
%
 
16,139

 
10.4
%
 
27,042

 
11.1
%
 
24,893

 
9.7
%
 
631

 
648

Metallic Ores**
18,116

 
11.3
%
 
15,094

 
9.8
%
 
11,707

 
4.8
%
 
8,917

 
3.5
%
 
1,547

 
1,693

Metals
14,593

 
9.1
%
 
14,040

 
9.1
%
 
22,182

 
9.1
%
 
22,748

 
8.9
%
 
658

 
617

Minerals & Stone
11,639

 
7.3
%
 
13,875

 
9.0
%
 
32,713

 
13.5
%
 
38,242

 
14.9
%
 
356

 
363

Chemicals & Plastics
13,612

 
8.5
%
 
12,015

 
7.8
%
 
16,665

 
6.9
%
 
15,449

 
6.0
%
 
817

 
778

Lumber & Forest Products
9,230

 
5.7
%
 
8,120

 
5.2
%
 
18,708

 
7.7
%
 
16,614

 
6.5
%
 
493

 
489

Petroleum Products
6,800

 
4.2
%
 
6,583

 
4.3
%
 
8,038

 
3.3
%
 
7,576

 
3.0
%
 
846

 
869

Auto & Auto Parts
2,131

 
1.3
%
 
1,830

 
1.2
%
 
2,574

 
1.1
%
 
2,408

 
0.9
%
 
828

 
760

Other
5,748

 
3.6
%
 
5,882

 
3.8
%
 
10,041

 
4.2
%
 
19,114

 
7.5
%
 
572

 
308

Total
$
160,639

 
100.0
%
 
$
154,561

 
100.0
%
 
242,783

 
100.0
%
 
256,190

 
100.0
%
 
$
662

 
$
603

 ______________________
*
Carload amounts represent intermodal units
**
Carload amounts include carloads and intermodal units in the 2012 period
Total freight traffic decreased 13,407 carloads, or 5.2%, in the three months ended September 30, 2012, compared with the same period in 2011. Carloads from existing operations decreased 20,591 carloads, or 8.0%, and new operations contributed 7,184 carloads. The decrease from existing operations was principally due to decreases of 9,129 carloads of other commodity traffic primarily due to a decline in coal haulage traffic, 8,689 carloads of farm and food products traffic and 6,283 carloads of minerals and stone traffic, partially offset by an increase of 1,932 carloads of lumber and forest products traffic, 1,921 carloads of intermodal traffic and 1,919 carloads of metallic ores traffic. All remaining traffic from existing operations decreased by a net 2,262 carloads.
Average freight revenues per carload increased 9.8% to $662 in the three months ended September 30, 2012, compared with the same period in 2011. Average freight revenues per carload from existing operations increased 8.8% to $656. Changes in the commodity mix increased average freight revenues per carload from existing operations by 3.7%, which was partially offset by lower fuel surcharges and the depreciation of the Australian and Canadian dollars relative to the United States dollar, which each decreased average freight revenues per carload from existing operations by 0.5%. Other than these factors, average freight revenues per carload from existing operations increased by 6.1%. Average freight revenues per carload were also positively impacted by changes in the mix of customers within certain commodity groups, primarily other commodities.

25

Table of Contents

The following table sets forth freight revenues by commodity group segregated into new operations and existing operations for the three months ended September 30, 2012 and 2011 (dollars in thousands): 
 
2012
 
2011
 
Increase/(Decrease) in Total
Operations
 
Increase/(Decrease) in Existing
Operations
 
Currency
Impact
Commodity Group
Total
Operations
 
New
Operations
 
Existing
Operations
 
Total
Operations
 
Amount
 
%
 
Amount
 
%
 
Intermodal
$
25,506

 
$

 
$
25,506

 
$
23,329

 
$
2,177

 
9.3
 %
 
$
2,177

 
9.3
 %
 
$
(238
)
Coal & Coke
21,561

 
78

 
21,483

 
20,831

 
730

 
3.5
 %
 
652

 
3.1
 %
 
(5
)
Farm & Food Products
14,640

 
100

 
14,540

 
16,823

 
(2,183
)
 
(13.0
)%
 
(2,283
)
 
(13.6
)%
 
(130
)
Pulp & Paper
17,063

 
1,140

 
15,923

 
16,139

 
924

 
5.7
 %
 
(216
)
 
(1.3
)%
 
(48
)
Metallic Ores
18,116

 
1,304

 
16,812

 
15,094

 
3,022

 
20.0
 %
 
1,718

 
11.4
 %
 
(168
)
Metals
14,593

 
1,000

 
13,593

 
14,040

 
553

 
3.9
 %
 
(447
)
 
(3.2
)%
 
(41
)
Minerals & Stone
11,639

 
364

 
11,275

 
13,875

 
(2,236
)
 
(16.1
)%
 
(2,600
)
 
(18.7
)%
 
(46
)
Chemicals & Plastics
13,612

 
1,631

 
11,981

 
12,015

 
1,597

 
13.3
 %
 
(34
)
 
(0.3
)%
 
(23
)
Lumber & Forest Products
9,230

 
184

 
9,046

 
8,120

 
1,110

 
13.7
 %
 
926

 
11.4
 %
 
(6
)
Petroleum Products
6,800

 
198

 
6,602

 
6,583

 
217

 
3.3
 %
 
19

 
0.3
 %
 
(14
)
Auto & Auto Parts
2,131

 

 
2,131

 
1,830

 
301

 
16.4
 %
 
301

 
16.4
 %
 
(17
)
Other
5,748

 
15

 
5,733

 
5,882

 
(134
)
 
(2.3
)%
 
(149
)
 
(2.5
)%
 
(2
)
Total freight revenues
$
160,639

 
$
6,014

 
$
154,625

 
$
154,561

 
$
6,078

 
3.9
 %
 
$
64

 
 %
 
$
(738
)
The following information discusses the significant changes in freight revenues from existing operations by commodity group. Changes in average freight revenues per carload in a commodity group can be impacted by changes in customer
rates, fuel surcharges, changes in foreign currency exchange rates, as well as changes in the mix of customer traffic within a commodity group.
Intermodal revenues increased $2.2 million, or 9.3%. Intermodal traffic volume increased 1,921 carloads, or 12.1%, which increased revenues by $2.8 million, primarily due to increased traffic in Australia. Average freight revenues per carload decreased 2.4%, which decreased revenues by $0.6 million, as a result of intra-commodity customer mix.
Farm and food revenues decreased $2.3 million, or 13.6%. Farm and food traffic volume decreased 8,689 carloads, or 28.2%, which decreased revenues by $5.7 million, while average freight revenues per carload increased 20.4%, which increased revenues by $3.4 million. The carload decrease was primarily due to an accelerated shipping schedule earlier in 2012 in Australia, as well as a mechanical failure at an export grain terminal in Australia. Because rates for Australian grain traffic have both a fixed and a variable component, the decrease in Australian grain traffic resulted in higher average freight revenues per carload.
Metallic ores revenues increased $1.7 million, or 11.4%. Effective January 1, 2012, a metallic ores customer in Australia switched its mode of transportation from using railcars to using containers. As a result, our metallic ores traffic count increased 1,572 for an equivalent volume of product shipped. Otherwise, metallic ores traffic volume increased 347 carloads, or 3.9%, and average revenues per carload increased 7.2%.
Minerals and stone revenues decreased $2.6 million, or 18.7%. Minerals and stone traffic volume decreased 6,283 carloads, or 16.4%, which decreased revenues by $2.2 million and average freight revenues per carload decreased 2.8%, which decreased revenues by $0.4 million. The carload decrease was primarily due to a decrease in rock salt shipments due to high stockpiles as a result of mild 2011-2012 winter weather in the northeastern United States.
Lumber and forest products revenues increased $0.9 million, or 11.4%. Lumber and forest products traffic volume increased 1,932 carloads, or 11.6%, which increased revenues by $0.9 million. The carload increase was primarily due to an increase in United States housing starts.
Freight revenues from all remaining commodities increased by $0.1 million.

26

Table of Contents

Non-Freight Revenues
The following table sets forth non-freight revenues for the three months ended September 30, 2012 and 2011 (dollars in thousands):
 
2012
 
2011
 
Amount
 
% of Total
 
Amount
 
% of Total
Railcar switching
$
34,273

 
55.2
%
 
$
32,641

 
52.1
%
Car hire and rental income
5,220

 
8.4
%
 
5,426

 
8.7
%
Fuel sales to third parties
1,339

 
2.2
%
 
3,937

 
6.3
%
Demurrage and storage
6,631

 
10.7
%
 
5,667

 
9.0
%
Car repair services
2,070

 
3.3
%
 
1,997

 
3.2
%
Other non-freight revenues
12,573

 
20.2
%
 
12,981

 
20.7
%
Total non-freight revenues
$
62,106

 
100.0
%
 
$
62,649

 
100.0
%
The following table sets forth non-freight revenues by new operations and existing operations for the three months ended September 30, 2012 and 2011 (dollars in thousands):
 
2012
 
2011
 
Increase/(Decrease) in Total
Operations
 
Increase/ (Decrease) in Existing
Operations
 
Currency
Impact
 
Total
Operations
 
New
Operations
 
Existing
Operations
 
Total
Operations
 
Amount
 
%
 
Amount
 
%
 
Railcar switching
$
34,273

 
$
230

 
$
34,043

 
$
32,641

 
$
1,632

 
5.0
 %
 
$
1,402

 
4.3
 %
 
$
(548
)
Car hire and rental income
5,220

 
25

 
5,195

 
5,426

 
(206
)
 
(3.8
)%
 
(231
)
 
(4.3
)%
 
(17
)
Fuel sales to third parties
1,339

 

 
1,339

 
3,937

 
(2,598
)
 
(66.0
)%
 
(2,598
)
 
(66.0
)%