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GWR > SEC Filings for GWR > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for GENESEE & WYOMING INC

Form 10-Q for GENESEE & WYOMING INC


9-Nov-2012

Quarterly Report


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-Īles 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):

                                                                                               Increase/(Decrease) in Total        Increase/(Decrease) in Existing
                                               2012                              2011                   Operations                            Operations
                             Total             New            Existing          Total
                           Operations       Operations       Operations       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):
                                                                                                              Average Freight
                                                                                                               Revenues Per
                            Freight Revenues                                  Carloads                            Carload
                      2012                    2011                   2012                  2011
Commodity                    % of                    % of                  % of                  % of
Group           Amount       Total      Amount       Total     Amount      Total     Amount      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.


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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):

                                                                                               Increase/(Decrease) in Total         Increase/(Decrease) in Existing
                                               2012                              2011                   Operations                             Operations
                             Total             New            Existing          Total                                                                                       Currency
Commodity Group            Operations       Operations       Operations       Operations          Amount               %               Amount                  %             Impact
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 )
. . .
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