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GENESEE & WYOMING INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Annual Report. Our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). G&W acquired RailAmerica on October 1, 2012. Because of the significance of charges related to the RailAmerica acquisition and other matters described herein, in addition to disclosing results for the years ended December 31, 2013, 2012 and 2011, respectively, that are determined in accordance with U.S. GAAP, we also disclose non-GAAP financial measures that exclude these charges from net income, diluted earnings per share, income from operations and operating ratio. We are presenting non-GAAP financial measures excluding these items because we believe it is useful for investors in assessing our financial results compared with the same period in the prior year. Within the text, in connection with each non-GAAP financial measure presented, we have presented the most directly comparable financial measure calculated in accordance with U.S. GAAP and have provided a reconciliation of the differences between the non-GAAP financial measure with its most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. Outlook for 2014 Safety Operating a safe railroad benefits our employees, our customers, our shareholders and the communities we serve. We have led the railroad industry in safety for the past five years and our goal for 2014 is an injury frequency ratio of 0.45 reportable injuries per 200,000 man hours. Financial Expectations We expect growth in our revenues and income due to increases in traffic across most of our commodity groups. In particular, we anticipate growth in petroleum products traffic due to higher volumes of crude oil and liquefied petroleum gas and the full year impact of an Australian iron ore project that ramped up during 2013. We also expect growth in our income from the pending acquisition of the assets comprising the western end of the DM&E and from the full year impact of RailAmerica operating cost synergies that were partially realized in 2013 as the company was being integrated. We expect that this growth in our revenues and income will be partially offset by the negative currency translation impact of the weaker Canadian and Australian dollars on the results of our operations in those countries. We expect our free cash flow in 2014 to increase primarily from an increase in cash from operations. Capital Plan We expect to make capital investments totaling $267 million in 2014. Of this total, $168 million is planned for ongoing railroad track and equipment capital, $15 million is planned for matching capital spending associated with government grant funded projects in seven operating regions (Pacific, Northeast, Canada, Ohio Valley, Southern, Midwest and Rail Link) and $31 million is planned for specific 2014 projects, including certain track upgrades and locomotive lease buyouts. In addition, we expect to spend $53 million on business development related capital, primarily the construction of a new rail spur in Canada and track improvements in Australia associated with a long-term contract extension. United States Short Line Tax Credit The United States Short Line Tax Credit, from which we have benefited since 2005, expired on December 31, 2013. Without an extension to the tax credit, we expect our income tax rate to increase significantly in 2014. While the Short Line Tax Credit has been extended on three separate occasions in the past with retroactive benefits, and there is significant bipartisan support for another extension in 2014, we are unable to predict the outcome of the United States legislative process. Corporate and Business Development We continue to work on a number of potential projects located across the geographic markets in which we currently operate. For example, in Australia, we will continue to work on additional bulk minerals export projects. In the United States, with the expanded rail footprint provided by the RailAmerica acquisition, our industrial development is focused on the goal of adding new customers and/or facilities to our railroads. Specific areas of focus will be on shale oil and gas related projects, as well as, other growth sectors such as agriculture, natural resources and bio-energy. 40 --------------------------------------------------------------------------------Overview We own and operate short line and regional freight railroads and provide railcar switching and other rail-related services in the United States, Australia, Canada, the Netherlands and Belgium. In addition, we operate the Tarcoola to Darwin rail line, which links the Port of Darwin to the Australian interstate rail network in South Australia. Our operations currently include 111 railroads organized into 11 regions, with approximately14,700 miles of owned, jointly owned or leased track and approximately 3,300 additional miles under contractual track access arrangements. In addition, we provide rail service at 35 ports in North America, Australia and Europe and perform contract coal loading and railcar switching for industrial customers. On January 2, 2014, we and Canadian Pacific (CP) jointly announced our entry into an agreement pursuant to which we will purchase the assets comprising the western end of CP's Dakota, Minnesota & Eastern (DM&E) rail line for a cash purchase price of approximately $210 million, subject to certain adjustments including the purchase of materials and supplies, equipment and vehicles. We intend to fund the acquisition with borrowings under our existing Credit Agreement. The acquisition is more fully described in Note 21, Subsequent Events, to our Consolidated Financial Statements included elsewhere in this Annual Report. The asset acquisition is expected to close by mid-2014, subject to approval of the STB and the satisfaction of other customary closing conditions. Upon closing, our new railroad will be named Rapid City, Pierre & Eastern Railroad. We expect to hire approximately 180 employees to staff the new railroad and anticipate these employees will come primarily from those currently working on the rail line. The western end encompasses approximately 670 miles of CP's current operations between Tracy, Minnesota and Rapid City, South Dakota; north of Rapid City to Colony, Wyoming; south of Rapid City to Dakota Junction, Nebraska; and connecting branch lines as well as trackage from Dakota Junction to Crawford, Nebraska, currently leased to the Nebraska Northwestern Railroad (NNW). Customers on the line ship approximately 52,000 carloads annually of grain, bentonite clay, ethanol, fertilizer and other products. The new rail operation will have the ability to interchange with CP, Union Pacific, BNSF and NNW. On October 1, 2012, we completed the acquisition of RailAmerica for $2.0 billion (equity purchase price of $1.4 billion plus net debt of $659.2 million). The shares of RailAmerica were held in a voting trust while the STB considered our control application, which application was approved with an effective date of December 28, 2012. Accordingly, we accounted for the earnings of RailAmerica using the equity method of accounting while the shares were held in the voting trust and our preliminary determination of fair values of the acquired assets and assumed liabilities were included in our consolidated balance sheet at December 31, 2012. The first quarter of 2013 was the first full reporting period in which we controlled the former RailAmerica railroads. For additional information regarding RailAmerica, see "Changes in Operations-United States-RailAmerica" below. Net income in the year ended December 31, 2013 was $272.1 million, compared with net income of $52.4 million in the year ended December 31, 2012. Excluding the impact of the significant items listed in the table below of $30.1 million for the year ended December 31, 2013 and $77.3 million for the year ended December 31, 2012, net income in the year ended December 31, 2013 would have been $242.0 million, compared with net income of $129.7 million in the year ended December 31, 2012. Included in our net income for the year ended December 31, 2013 was a $41.0 million benefit associated with the retroactive extension of the United States Short Line Tax Credit for fiscal year 2012, which was signed into law on January 2, 2013. Excluding the $41.0 million retroactive benefit, our provision for income tax was $87.2 million for the year ended December 31, 2013, which represented 27.4% of income before income taxes. Included in our income before income taxes for the year ended December 31, 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 10, Derivative Financial Instruments, to our Consolidated Financial Statements included elsewhere in this Annual Report for further details on the contingent forward sale contract. Excluding the $50.1 million mark-to-market expense, our provision for income tax was $46.4 million for the year ended December 31, 2012, which represented 34.8% of income before taxes. The decrease in the effective income tax rate for the year ended December 31, 2013 as compared with the year ended December 31, 2012 was primarily attributable to the renewal of the United States Short Line Tax Credit through December 31, 2013. The extension of the United States Short Line Tax Credit produced book income tax benefits of $25.9 million (or $0.46 per share) and $41.0 million (or $0.72 per share) for fiscal years 2013 and 2012, respectively. Since the extension became law in 2013, the 2012 impact was recorded in the first quarter of 2013. 41 -------------------------------------------------------------------------------- Our diluted EPS attributable to our common stockholders in the year ended December 31, 2013 were $4.79 with 56.7 million weighted average shares outstanding, compared with diluted EPS attributable to our common stockholders of $1.02 with 51.3 million weighted average shares outstanding in the year ended December 31, 2012. Excluding the impact of the significant items listed in the table below of $0.53 for the year ended December 31, 2013 and $1.51 for the year ended December 31, 2012, adjusted diluted EPS for the year ended December 31, 2013 was $4.26 with 56.7 million weighted average shares outstanding, compared with adjusted diluted EPS of $2.53 with 51.3 million weighted average shares outstanding for the year ended December 31, 2012. Excluding the impact of the significant items listed in the table below of $0.53 as well as the $0.46 benefit from the United States Short Line Tax Credit for fiscal year 2013, adjusted diluted EPS for the year ended December 31, 2013 would have been $3.80. Our results in the years ended December 31, 2013 and 2012 included certain significant items that are set forth below (dollars in millions, except per share amounts): Diluted Income/(Loss) Before After-Tax Net Earnings/(Loss) Per Taxes Impact Income/(Loss) Impact Common Share Impact 2013 RailAmerica integration/acquisition costs $ (17.0 ) $ (10.7 ) $ (0.19 ) Business development and financing costs $ (2.2 ) $ (1.4 ) $ (0.03 ) Net (gain)/loss on sale and impairment of assets $ 4.7 $ 3.2 $ 0.06 Retroactive Short Line Tax Credit for 2012 $ - $ 41.0 $ 0.72 Impact of 2013 Short Line Tax Credit $ - $ 25.9 $ 0.46 Valuation allowance on FTC $ - $ (2.0 ) $ (0.03 ) 2012RailAmerica integration/acquisition costs $ (29.5 ) $ (21.0 ) $ (0.41 ) Business development and financing costs $ (18.1 ) $ (11.0 ) $ (0.21 ) Acquisition/integration costs incurred by RailAmerica $ - $ (3.5 ) $ (0.07 ) Gain on insurance recoveries $ 0.8 $ 0.5 $ 0.01 Net (gain)/loss on sale and impairment of assets $ 11.2 $ 8.6 $ 0.17 Contract termination expense in Australia $ (1.1 ) $ (0.8 ) $ (0.02 ) Contingent forward sale contract mark-to-market expense $ (50.1 ) $ (50.1 ) $ (0.98 ) Operating revenues increased $694.1 million, or 79.3%, to $1.6 billion in the year ended December 31, 2013, compared with $874.9 million in the year ended December 31, 2012. The increase in our operating revenues included $635.2 million in revenues from new operations and a $58.9 million, or 6.7%, increase in revenues from existing operations. When we discuss a change in existing operations or same railroad, we are referring to the period-over-period change associated with operations that we managed in both periods (i.e., excluding the impact of businesses acquired/initiated, such as those railroads acquired in the RailAmerica acquisition). Our traffic in the year ended December 31, 2013 was 1,886,012 carloads, an increase of 958,918 carloads, or 103.4%, compared with the year ended December 31, 2012. The traffic increase included 909,768 carloads from new operations. Existing operations increased 49,150 carloads, or 5.3%. To provide comparative context for 2013 consolidated traffic volumes, we are providing a "Combined Company" comparison as though the RailAmerica railroads were owned by us during 2012. In doing so, we have reclassified RailAmerica's 2012 information to conform with our presentation. On a Combined Company basis, traffic increased 117,301 carloads, or 6.6%, compared with traffic in the year ended December 31, 2012. Carloads from existing operations increased by 103,174 carloads, or 5.8%, and new operations contributed 14,127 carloads. The same railroad traffic increase was principally due to increases of 26,943 carloads of petroleum products traffic (primarily in the Pacific Region), 20,620 carloads of metallic ores traffic (primarily in the Australia Region), 16,209 carloads of coal and coke traffic (primarily in the Midwest Region), 7,534 carloads of lumber and forest products traffic (primarily in the Pacific and Northeast regions), 7,177 carloads of metals traffic (primarily in the Northeast and Southern regions), 6,960 carloads of intermodal traffic (primarily in the Australia and Canada regions) and 5,168 carloads of autos and auto parts traffic (primarily in the Ohio Valley and Pacific regions). All remaining traffic increased by a net 12,563 carloads. 42 -------------------------------------------------------------------------------- Income from operations in the year ended December 31, 2013 increased $189.9 million, or 99.8%, to $380.2 million, compared with $190.3 million in the year ended December 31, 2012. Excluding the impact of the significant items listed in the previous table of $13.9 million and $20.9 million in the years ended December 31, 2013 and 2012, respectively, adjusted income from operations for the year ended December 31, 2013 was $394.1 million, compared with adjusted income from operations of $211.2 million in the year ended December 31, 2012. Our operating ratio was 75.8% in the year ended December 31, 2013, compared with an operating ratio of 78.2% in the year ended December 31, 2012. Excluding the impact of the significant items listed in the table above, our adjusted operating ratio was 74.9% in the year ended December 31, 2013, compared with an adjusted operating ratio of 75.9% in the year ended December 31, 2012. During the year ended December 31, 2013, we generated $413.5 million in cash flows from operating activities. During the same period, we purchased $249.3 million of property and equipment, including $34.2 million for new business investments. These payments were partially offset by $33.9 million in cash received from government grants and other outside parties for capital spending and $6.7 million in proceeds from the disposition of property and equipment. We also repaid $209.3 million of outstanding debt. Changes in Operations United States RailAmerica, Inc.: On October 1, 2012, we acquired 100% of RailAmerica's outstanding shares for cash at a price of $27.50 per share and, in connection with such acquisition, we repaid RailAmerica's term loan and revolving credit facility. The calculation of the total consideration for the RailAmerica acquisition is presented below (in thousands, except per share amount): RailAmerica outstanding common stock as of October 1, 2012 49,934 Cash purchase price per share $ 27.50 Equity purchase price $ 1,373,184 Payment of RailAmerica's outstanding term loan and revolving credit facility 659,198 Cash consideration 2,032,382 Impact of pre-acquisition share-based awards 9,400 Total consideration $ 2,041,782 We financed the $1.4 billion cash purchase price for RailAmerica's common stock, the refinancing of $1.2 billion of G&W's and RailAmerica's outstanding debt prior to the acquisition as well as transaction and financing-related expenses with $1.9 billion of debt from a new five-year Senior Secured Syndicated Credit Facility Agreement (the Credit Agreement) (see Note 9, Long-Term Debt, to our Consolidated Financial Statements included elsewhere in this Annual Report), $475.5 million of gross proceeds from the public offerings of our Class A common stock and Tangible Equity Units (TEUs) (see Note 4, Earnings Per Common Share, to our Consolidated Financial Statements included elsewhere in this Annual Report) and $350.0 million through a private issuance of Preferred Stock to Carlyle. (See Note 4, Earnings Per Common Share, and Note 10, Derivative Financial Instruments, to our Consolidated Financial Statements included elsewhere in this Annual Report). Commencing on October 1, 2012, the shares of RailAmerica were held in an independent voting trust while the STB considered our control application, which application was approved with an effective date of December 28, 2012. Accordingly, we accounted for the earnings of RailAmerica using the equity method of accounting while the shares were held in the voting trust and our acquisition date fair values of the acquired assets and assumed liabilities have been included in our consolidated balance sheets since December 28, 2012. The results from RailAmerica's operations are included among the various line items in our consolidated statement of operations for the year ended December 31, 2013 and are included in our North American & European Operations segment. In accordance with U.S. GAAP, a new accounting basis was established for RailAmerica on October 1, 2012 for its stand-alone financial statements. Condensed consolidated financial information for RailAmerica as of and for the period ended December 28, 2012 is included in Note 8, Equity Investment, to our Consolidated Financial Statements included elsewhere in this Annual Report. 43 -------------------------------------------------------------------------------- During the year ended December 31, 2012, as discussed more fully under Contingent Forward Sale Contract in Note 10, Derivative Financial Instruments, to our Consolidated Financial Statements included elsewhere in this Annual Report, we recorded a $50.1 million non-cash mark-to-market expense related to an investment agreement governing the sale of the Series A-1 Preferred Stock to Carlyle in connection with the funding of the RailAmerica acquisition (the Investment Agreement). The expense resulted from the significant increase in G&W's share price between July 23, 2012 (the date we entered into the Investment Agreement) and September 28, 2012 (the last trading date prior to issuing the Preferred Stock). On February 13, 2013, we exercised our option to convert all of the outstanding Series A-1 Preferred Stock into 5,984,232 shares of our Class A common stock. We also incurred $17.0 million and $30.0 million of RailAmerica integration and acquisition-related costs during the years ended December 31, 2013 and 2012, respectively. We recognized $15.6 million of net income from our equity investment in RailAmerica during the three months ended December 31, 2012. The income from our equity investment included $3.5 million of after-tax acquisition/integration costs incurred by RailAmerica in the three months ended December 31, 2012. Headquartered in Jacksonville, Florida with approximately 2,000 employees, RailAmerica owned and operated 45 short line freight railroads in North America with approximately 7,100 miles of track in 28 U.S. states and three Canadian provinces as of the October 1, 2012 acquisition date. Columbus & Chattahoochee Railroad, Inc.: In April 2012, our newly formed subsidiary, 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. 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 consolidated statements of operations since July 1, 2012 and are included in our North American & European Operations segment. Hilton & Albany Railroad, Inc.: In November 2011, our newly formed subsidiary, 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. 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, HAL serves several local agricultural and aggregate customers in southwest Georgia. The results from HAL's operations have been included in our consolidated statements 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 based on the estimated working capital adjustment. Following 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 consolidated statements 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 owned and operated two rail lines totaling approximately 200 track miles in southeast Arizona and southwest New Mexico connected by 52 miles of trackage rights over the Union Pacific Railroad as of the September 1, 2011 acquisition date. The largest customer on 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 operating agreement. Determination of Fair Value We accounted for the RailAmerica and AZER acquisitions using the acquisition method of accounting under U.S. GAAP. Under the acquisition method of accounting: • The assets and liabilities of RailAmerica were recorded at their respective acquisition-date preliminary fair values by RailAmerica as of October 1, 2012, which is referred to as the application of push-down accounting, and were included in G&W's consolidated balance sheet in a single line item following the equity method of accounting as of that date (see RailAmerica as of October 1, 2012 column in the following table). 44 --------------------------------------------------------------------------------• Upon approval by the STB for us to control RailAmerica, our preliminary determination of fair values of the acquired assets and assumed liabilities were consolidated with our assets and liabilities as of December 28, 2012 (see RailAmerica as of December 28, 2012 Preliminary column in the following table). Between October 1, 2012 and December 28, 2012, we recognized income from our equity investment in RailAmerica of $15.6 million and other comprehensive loss of $2.0 million, primarily resulting from foreign currency translation adjustments. In addition, we recognized $21.8 million, representing the change in RailAmerica's cash and cash equivalents from October 1, 2012 to December 28, 2012, as a reduction in net cash paid for the acquisition. • In 2013, we finalized our determination of fair values of RailAmerica's assets and liabilities (see RailAmerica as of December 28, 2012 Final column in the following table). The measurement period adjustments to the fair values were as follows: 1) property and equipment increased $10.7 million, 2) intangible assets decreased $29.9 million, 3) deferred income tax liabilities, net decreased $16.0 million, 4) noncontrolling interest decreased $5.0 million, 5) all other assets, net increased $1.3 million and 6) goodwill decreased $3.1 million as an offset to the above-mentioned changes. This resulted in additional annualized depreciation and amortization expense of approximately $4 million. We do not consider these adjustments material to our consolidated financial statements taken as a whole and as such, prior periods were not retroactively adjusted. • The assets and liabilities of AZER were recorded at their respective acquisition-date fair values and were consolidated with those of G&W as of the September 1, 2011 acquisition date (see AZER column in the following table). The fair values assigned to the acquired net assets of RailAmerica and AZER were as follows (dollars in thousands): RailAmerica AZER As of December 28, 2012 As of As of September 1, October 1, 2012 Preliminary Final 2011 Cash and cash equivalents $ 86,102 $ 107,922 $ 107,922 $ - Accounts receivable 104,839 91,424 90,659 3,096 Materials and supplies 6,406 7,325 7,325 - Prepaid expenses and other 15,146 14,815 15,801 2,319 Deferred income tax assets 49,074 49,074 56,998 - Property and equipment 1,579,321 1,588,612 1,599,282 90,129 Goodwill 474,115 474,115 471,028 - Intangible assets 451,100 446,327 416,427 - Other assets 116 116 116 - Total assets 2,766,219 2,779,730 2,765,558 95,544 Accounts payable and accrued expenses 143,790 135,117 140,160 5,212 Long-term debt 12,158 12,010 12,010 - Deferred income tax liabilities, net 542,210 551,856 535,864 - Other long-term liabilities 20,754 19,618 21,439 - Noncontrolling interest 5,525 5,525 481 - Net assets $ 2,041,782 $ 2,055,604 $ 2,055,604 $ 90,332 Australia Arrium Limited: In July 2012, our subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA), announced that it had expanded two existing rail haulage contracts with Arrium Limited (formerly OneSteel) to transport additional export iron ore in South Australia. To support the increased shipments under the two contracts, during the year ended December 31, 2012, GWA invested A$52.1 million (or $54.1 million at the exchange rate on December 31, 2012) to purchase narrow gauge locomotives and railcars as well as to construct a standard gauge rolling-stock maintenance facility in order to support the increased shipments under the two contracts. During the year ended December 31, 2013, GWA spent an additional A$22.3 million (or $19.9 million at the exchange rate on December 31, 2013) on these projects and does not expect to invest any additional capital in these projects in 2014. 45 -------------------------------------------------------------------------------- Alice Springs and Cook: In May 2012, 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 GWA agreed to sell AIO certain assets in the township of Cook, South Australia that included GWA's third-party fuel-sales business. GWA 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 September 2012. 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). Canada Tata Steel Minerals Canada Ltd.: In August 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 plans to construct an approximately 21-kilometer rail line that will connect the Mine to the Tshiuetin Rail Transportation (TSH) interchange point in Schefferville. Operated as part of our Canada Region, KeRail is expected to haul unit trains of iron ore from its rail connection with the Mine, which will then travel over three privately owned railways to the Port of Sept-Îles for export primarily to Tata Steel Limited'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, weather conditions permitting. Results from Operations When comparing our results from operations from one reporting period to another, it is important to consider that we have historically experienced fluctuations in revenues and expenses due to acquisitions, changing economic conditions, 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, our 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 (agricultural products). As a result of these and other factors, our results of operations in any reporting period may not be directly comparable to our results of operations in other reporting periods. Year Ended December 31, 2013 Compared with Year Ended December 31, 2012 Operating Revenues Overview Operating revenues were $1.6 billion in the year ended December 31, 2013, compared with $874.9 million in the year ended December 31, 2012, an increase of $694.1 million, or 79.3%. The $694.1 million increase in operating revenues consisted of $635.2 million in revenues from new operations and a $58.9 million, or 6.7%, increase in revenues from existing operations. New operations are those that were not included in our consolidated financial results for a comparable period in the prior year. The $58.9 million increase in revenues from existing operations included an increase of $67.9 million in freight revenues, partially offset by a decrease of $9.0 million in non-freight revenues. 46 -------------------------------------------------------------------------------- The following table breaks down our operating revenues and total carloads into new operations and existing operations for the years ended December 31, 2013 and 2012 (dollars in thousands): Increase in Total Increase/(Decrease) in Existing 2013 2012 Operations Operations Total New Existing Total Operations Operations Operations Operations Amount % Amount % Currency Impact Freight revenues $ 1,177,364 $ 484,691 $ 692,673 $ 624,809 $ 552,555 88.4 % $ 67,864 10.9 % $ (16,481 ) Non-freight revenues 391,647 150,516 241,131 250,107 141,540 56.6 % (8,976 ) (3.6 )% (4,456 ) Total operating revenues $ 1,569,011 $ 635,207 $ 933,804 $ 874,916 $ 694,095 79.3 % $ 58,888 6.7 % $ (20,937 ) Carloads 1,886,012 909,768 976,244 927,094 958,918 103.4 % 49,150 5.3 % Freight Revenues The following table compares freight revenues, carloads and average freight revenues per carload for the years ended December 31, 2013 and 2012 (dollars in thousands, except average freight revenues per carload): Average Freight Revenues Per Freight Revenues Carloads Carload 2013 2012 2013 2012 Commodity % of % of % of % of Group Amount Total Amount Total Amount Total Amount Total 2013 2012 Agricultural Products $ 130,577 11.1 % $ 59,378 9.5 % 240,840 12.8 % 96,734 10.4 % $ 542 $ 614 Metallic Ores* 125,928 10.7 % 75,188 12.0 % 72,366 3.8 % 41,918 4.5 % 1,740 1,794 Chemicals & Plastics 128,935 11.0 % 55,146 8.8 % 163,123 8.7 % 68,999 7.4 % 790 799 Metals 127,769 10.9 % 62,129 9.9 % 175,636 9.3 % 94,621 10.2 % 727 657 Pulp & Paper 112,663 9.6 % 65,696 10.5 % 169,708 9.0 % 101,588 11.0 % 664 647 Coal & Coke 110,836 9.4 % 70,052 11.2 % 323,500 17.2 % 168,574 18.2 % 343 416 Minerals & Stone 96,771 8.2 % 48,023 7.7 % 219,163 11.6 % 130,602 14.1 % 442 368 Intermodal** 98,759 8.4 % 94,735 15.2 % 73,666 3.9 % 66,706 7.2 % 1,341 1,420 Lumber & Forest Products 79,035 6.7 % 34,839 5.7 % 133,649 7.1 % 70,896 7.6 % 591 491 Petroleum Products 65,223 5.5 % 25,293 4.1 % 108,901 5.8 % 26,907 2.9 % 599 940 Food or Kindred Products 31,982 2.7 % 5,230 0.8 % 55,084 2.9 % 11,011 1.2 % 581 475 Waste 22,750 1.9 % 13,622 2.2 % 43,166 2.3 % 21,676 2.3 % 527 628 Autos & Auto Parts 26,415 2.2 % 8,313 1.3 % 36,510 1.9 % 10,148 1.2 % 724 819 Other 19,721 1.7 % 7,165 1.1 % 70,700 3.7 % 16,714 1.8 % 279 429 Total $ 1,177,364 100.0 % $ 624,809 100.0 % 1,886,012 100.0 % 927,094 100.0 % 624 674* Carload amounts include carloads and intermodal units ** Carload amounts represent intermodal units Total freight traffic increased 958,918 carloads, or 103.4%, in 2013 compared with 2012. Carloads from existing operations increased by 49,150 carloads, or 5.3%, and new operations contributed 909,768 carloads. The existing traffic increase was principally due to increases of 20,601 carloads of metallic ores traffic, 12,577 carloads of petroleum products traffic, 7,676 carloads of metals traffic, 6,958 carloads of intermodal traffic and 5,625 carloads of agricultural products traffic, partially offset by a 4,250 carload decrease in pulp and paper traffic. All remaining traffic decreased by a net 37 carloads. 47 -------------------------------------------------------------------------------- Average freight revenues per carload decreased 7.4% to $624 in 2013 compared with 2012. Average freight revenues per carload from existing operations increased 5.3% to $710. Changes in the commodity mix and fuel surcharges increased average freight revenues per carload from existing operations by 4.8% and 0.5%, respectively, partially offset by the depreciation of the Australian and Canadian dollars relative to the United States dollar, which decreased average freight revenues per carload from existing operations by 2.9%. Other than the impacts from these factors, average freight revenues per carload from existing operations increased by 2.9%. Average freight revenues per carload were also positively impacted by the changes in the mix of customers within certain commodity groups, primarily metallic ores. The following table sets forth freight revenues by commodity group segregated into new operations and existing operations for the years ended December 31, 2013 and 2012 (dollars in thousands): Increase in Total Increase/(Decrease) in Existing 2013 2012 Operations Operations Total New Existing Total Commodity Group Operations Operations Operations Operations Amount % Amount % Currency Impact Agricultural Products $ 130,577 $ 72,704 $ 57,873 $ 59,378 $ 71,199 119.9 % $ (1,505 ) (2.5 )% $ (2,383 ) Metallic Ores 125,928 6,608 119,320 75,188 50,740 67.5 % 44,132 58.7 % (5,166 ) Chemicals & Plastics 128,935 72,356 56,579 55,146 73,789 133.8 % 1,433 2.6 % (188 ) Metals 127,769 57,599 70,170 62,129 65,640 105.7 % 8,041 12.9 % (352 ) Pulp & Paper 112,663 43,531 69,132 65,696 46,967 71.5 % 3,436 5.2 % (319 ) Coal & Coke 110,836 40,442 70,394 70,052 40,784 58.2 % 342 0.5 % (19 ) Minerals & Stone 96,771 46,029 50,742 48,023 48,748 101.5 % 2,719 5.7 % (827 ) Intermodal 98,759 2 98,757 94,735 4,024 4.2 % 4,022 4.2 % (6,744 ) Lumber & Forest Products 79,035 42,103 36,932 34,839 44,196 126.9 % 2,093 6.0 % (82 ) Petroleum Products 65,223 34,926 30,297 25,293 39,930 157.9 % 5,004 19.8 % (191 ) Food or Kindred Products 31,982 26,788 5,194 5,230 26,752 511.5 % (36 ) (0.7 )% (7 ) Waste 22,750 8,821 13,929 13,622 9,128 67.0 % 307 2.3 % (4 ) Autos & Auto Parts 26,415 18,637 7,778 8,313 18,102 217.8 % (535 ) (6.4 )% (163 ) Other 19,721 14,145 5,576 7,165 12,556 175.2 % (1,589 ) (22.2 )% (36 ) Total freight revenues $ 1,177,364 $ 484,691 $ 692,673 $ 624,809 $ 552,555 88.4 % $ 67,864 10.9 % $ (16,481 ) 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. Agricultural products revenues decreased $1.5 million, or 2.5%. Agricultural products average freight revenues per carload decreased 8.0%, which decreased revenues by $4.7 million, while traffic volumes increased 5,625 carloads, or 5.8%, which increased revenues by $3.2 million. The decrease in average freight revenues per carload included a 3.9%, or $2.4 million, negative impact due to the depreciation of the Australian and Canadian dollars relative to the United States dollar. The carload increase was primarily due to increased export grain traffic in Australia, partially offset by lower volumes of Canadian winter wheat shipments. Because rates for Australian grain traffic have both a fixed and a variable component, the increase in Australian grain traffic resulted in lower average freight revenues per carload. 48 -------------------------------------------------------------------------------- Metallic ores revenues increased $44.1 million, or 58.7%. Metallic ores traffic volume increased 20,601 carloads, or 49.1%, which increased revenues by $39.3 million, and average freight revenues per carload increased 6.4%, which increased revenues by $4.8 million. The increase in volume and average freight revenues per carload was primarily due to a new iron ore contract in South Australia, which began in the fourth quarter of 2012. The increase in average freight revenues per carload included a 7.9%, or $5.2 million, negative impact due to the depreciation of the Australian and Canadian dollars relative to the United States dollar. Metals revenues increased $8.0 million, or 12.9%. Metals traffic volume increased 7,676 carloads, or 8.1%, which increased revenues by $5.3 million, and average freight revenues per carload increased 4.4%, which increased revenues by $2.8 million. The carload increase was primarily due to increased shipments in the northeastern and southern United States. Pulp and paper revenues increased $3.4 million, or 5.2%. Average freight revenues per carload increased 9.7%, which increased revenues by $6.5 million, while traffic volumes decreased 4,250 carloads, or 4.2%, which decreased revenues by $3.0 million. For the year ended December 31, 2013, as a result of the RailAmerica acquisition, 6,494 carloads of pulp and paper traffic originating on a RailAmerica railroad that is contiguous to a legacy G&W railroad were reported as new operations. Otherwise, pulp and paper traffic volume increased 2,244 carloads, or 2.2%, and average freight revenues per carload increased 3.0%. Minerals and stone revenues increased $2.7 million, or 5.7%. Average freight revenues per carload increased 3.3%, which increased revenues by $1.6 million, and traffic volume increased 2,986 carloads, or 2.3%, which increased revenues by $1.1 million. The increase in volume was primarily related to increased rock salt shipments due to severe winter weather in the United States, partially offset by reduced traffic in Australia. Intermodal revenues increased $4.0 million, or 4.2%. Intermodal traffic volume increased 6,958 carloads, or 10.4%, which increased revenues by $9.3 million, while average freight revenues per carload decreased 5.6%, which decreased revenues by $5.3 million. The carload increase was primarily due to new business converted to rail from road in Australia and new business in Canada. The decrease in average freight revenues per carload included a 7.3%, or $6.7 million, negative impact due to the depreciation of the Australian and Canadian dollars relative to the United States dollar. Petroleum products revenues increased $5.0 million, or 19.8%. Petroleum products traffic volume increased 12,577 carloads, or 46.7%, which increased revenues by $9.7 million, while average freight revenues per carload decreased 18.4%, which decreased revenues by $4.6 million. The carload increase was primarily due to a new crude oil customer in the Pacific Northwest. The decrease in the average freight revenues per carload was due to customer mix. Freight revenues from all remaining commodities combined increased by $2.0 million. Non-Freight Revenues The following table compares non-freight revenues for the years ended December 31, 2013 and 2012 (dollars in thousands): 2013 2012 Amount % of Total Amount % of Total Railcar switching $ 161,942 41.3 % $ 134,929 54.0 % Car hire and rental income 34,721 8.9 % 21,280 8.5 % Fuel sales to third parties 386 0.1 % 11,868 4.7 % Demurrage and storage 58,312 14.9 % 26,125 10.4 % Car repair services 21,078 5.4 % 7,934 3.2 % Construction revenues 41,677 10.6 % - - % Other non-freight revenues 73,531 18.8 % 47,971 19.2 % Total non-freight revenues $ 391,647 100.0 % $ 250,107 100.0 % 49-------------------------------------------------------------------------------- The following table sets forth non-freight revenues by new operations and existing operations for the years ended December 31, 2013 and 2012 (dollars in thousands): Increase/(Decrease) in Increase/(Decrease) in Existing 2013 2012 Total Operations Operations Total New Existing Total Currency Operations Operations Operations Operations Amount % Amount % Impact Railcar switching $ 161,942 $ 20,528 $ 141,414 $ 134,929 $ 27,013 20.0 % $ 6,485 4.8 % $ (1,805 ) Car hire and rental income 34,721 18,250 16,471 21,280 13,441 63.2 % (4,809 ) (22.6 )% (502 ) Fuel sales to third parties 386 - 386 11,868 (11,482 ) (96.7 )% (11,482 ) (96.7 )% - Demurrage and storage 58,312 30,537 27,775 26,125 32,187 123.2 % 1,650 6.3 % (116 ) Car repair services 21,078 12,455 8,623 7,934 13,144 165.7 % 689 8.7 % (22 ) Construction revenues 41,677 41,677 - - 41,677 100.0 % - - % - Other non-freight revenues 73,531 27,069 46,462 47,971 25,560 53.3 % (1,509 ) (3.1 )% (2,011 ) Total non-freight revenues $ 391,647 $ 150,516 $ 241,131 $ 250,107 $ 141,540 56.6 % $ (8,976 ) (3.6 )% $ (4,456 ) Total non-freight revenues increased $141.5 million, or 56.6%, to $391.6 million in the year ended December 31, 2013, compared with $250.1 million in the year ended December 31, 2012. The increase was attributable to $150.5 million from new operations, including construction revenues of $41.7 million from Atlas, a rail construction business acquired in the RailAmerica acquisition, partially offset by a decrease of $9.0 million from existing operations. The decrease in non-freight revenues from existing operations was principally due to a $11.5 million decrease in fuel sales to third parties as a result of the sale of our fuel-sales business in South Australia in the third quarter of 2012 and a $4.5 million decrease due to the net depreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar, partially offset by higher railcar switching revenues of $6.5 million primarily due to new and expanded customer contracts in Australia and the United States. Operating Expenses Overview Operating expenses were $1.2 billion in the year ended December 31, 2013, compared with $684.6 million in the year ended December 31, 2012, an increase of $504.2 million, or 73.7%. Labor and benefits increased $188.3 million in the year ended December 31, 2013, primarily related to the addition of employees from the acquisition of RailAmerica and wage and benefit increases for existing employees. Of the remaining $316.0 million increase in operating expenses, $304.3 million was from new operations and $36.9 million was from existing operations, partially offset by a decrease in RailAmerica integration and acquisition-related costs of $13.0 million and a $12.3 million decrease due to the net depreciation of the Australian and Canadian dollars and Euro relative to the United States dollar. The increase in operating expenses from existing operations was driven primarily by lower net gain on the sale of assets and insurance recoveries, as well as increases in trackage rights expense, depreciation and amortization expense, other operating expenses and materials expense in the year ended December 31, 2013, partially offset by a decrease in diesel fuel sold to third parties, primarily due to the sale of our fuel-sales business in South Australia in the third quarter of 2012. Operating Ratio Our operating ratio, defined as total operating expenses divided by total operating revenues, was 75.8% in the year ended December 31, 2013 compared with 78.2% in the year ended December 31, 2012. Income from operations in the year ended December 31, 2013 included $17.0 million of RailAmerica integration and acquisition-related costs, partially offset by a $4.7 million net gain on the sale of assets. Income from operations in the year ended December 31, 2012 included $30.0 million of RailAmerica integration and acquisition-related costs, partially offset by an $11.2 million net gain on sale of assets. Changes in foreign currency exchange rates can have a material impact on our operating revenues and operating expenses. However, the net impact of these foreign currency translation effects should not have a material impact on our operating ratio. 50--------------------------------------------------------------------------------The following table sets forth a comparison of our operating expenses in the years ended December 31, 2013 and 2012 (dollars in thousands): 2013 2012 % of % of Operating Operating Amount Revenues Amount Revenues Currency ImpactLabor and benefits $ 441,318 28.1 % $ 257,618 29.5 % $ (4,579 ) Equipment rents 77,825 5.0 % 37,322 4.3 % (734 ) Purchased services 120,871 7.7 % 80,572 9.2 % (3,804 ) Depreciation and amortization 141,644 9.0 % 73,405 8.4 % (1,689 ) Diesel fuel used in operations 147,172 9.4 % 88,399 10.1 % - Diesel fuel sold to third parties 368 - % 11,322 1.3 % - Casualties and insurance 40,781 2.6 % 24,858 2.8 % (611 ) Materials 78,243 5.0 % 25,240 2.9 % (178 ) Trackage rights 50,911 3.2 % 28,250 3.2 % (670 ) Net (gain)/loss on sale and impairment of assets (4,677 ) (0.3 )% (11,225 ) (1.3 )% 238 Gain on insurance recoveries (1,465 ) (0.1 )% (5,760 ) (0.7 )% 368 Other expenses 78,797 5.1 % 44,549 5.1 % (656 ) RailAmerica acquisition-related costs 360 - % 18,592 2.1 % - RailAmerica integration costs 16,675 1.1 % 11,452 1.3 % - Total operating expenses $ 1,188,823 75.8 % $ 684,594 78.2 % $ (12,315 ) Labor and benefits expense was $441.3 million in the year ended December 31, 2013, compared with $257.6 million in the year ended December 31, 2012, an increase of $183.7 million, or 71.3%. The increase consisted of $176.8 million due to an increase in the average number of employees, $8.6 million due to annual wage increases and $2.9 million due to an increase in benefit expenses (primarily health care costs), partially offset by $4.6 million due to the net depreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar. Our average number of employees during the year ended December 31, 2013 increased by approximately 2,060 over the prior year, primarily as a result of the RailAmerica acquisition. Equipment rents expense was $77.8 million in the year ended December 31, 2013, compared with $37.3 million in the year ended December 31, 2012, an increase of $40.5 million, or 108.5%. The increase primarily resulted from the newly acquired RailAmerica railroads. Purchased services expense, which consists of the costs of services provided by outside contractors for repairs and maintenance of track property, locomotives, freight cars and other equipment as well as contract labor costs for crewing services, was $120.9 million in the year ended December 31, 2013, compared with $80.6 million in the year ended December 31, 2012, an increase of $40.3 million, or 50.0%. The increase was primarily attributable to the newly acquired RailAmerica railroads. Depreciation and amortization expense was $141.6 million in the year ended December 31, 2013, compared with $73.4 million in the year ended December 31, 2012, an increase of $68.2 million, or 93.0%. The increase was attributable to $62.6 million from new operations, primarily driven by the newly acquired RailAmerica railroads, and an increase of $5.6 million from existing operations, primarily due to depreciation expense related to new locomotives and railcars purchased in Australia in 2012. The cost of diesel fuel used in operations was $147.2 million in the year ended December 31, 2013, compared with $88.4 million in the year ended December 31, 2012, an increase of $58.8 million, or 66.5%. The increase was primarily driven by the newly acquired RailAmerica railroads. The cost of diesel fuel sold to third parties was $0.4 million in the year ended December 31, 2013, compared with $11.3 million in the year ended December 31, 2012, a decrease of $11.0 million. The decrease was primarily due to the sale of our third-party fuel-sales business in South Australia in the third quarter of 2012. 51 -------------------------------------------------------------------------------- Casualties and insurance expense was $40.8 million in the year ended December 31, 2013, compared with $24.9 million in the year ended December 31, 2012, an increase of $15.9 million, or 64.1%. The increase primarily resulted from the newly acquired RailAmerica railroads, as well as an increase in derailment expense and insurance premiums in Australia. Materials expense, which primarily consists of the costs of materials purchased for use in repairing and maintaining our track property, locomotives, rail cars and other equipment as well as costs for general tools and supplies used in our business, was $78.2 million in the year ended December 31, 2013, compared with $25.2 million in the year ended December 31, 2012, an increase of $53.0 million. The increase was attributable to $47.3 million from new operations, including $19.3 million from Atlas, and a $5.7 million increase from existing operations. The increase from existing operations was due to increased track property and locomotive repairs in the year ended December 31, 2013. Trackage rights expense was $50.9 million in the year ended December 31, 2013, compared with $28.3 million in the year ended December 31, 2012, an increase of $22.7 million, or 80.2%. The increase was primarily attributable to $11.4 million from new operations, primarily driven by the newly acquired RailAmerica railroads, and an $11.3 million increase in existing operations, primarily due to new traffic from an iron ore customer in South Australia that moves over a segment of track owned by a third party. Net gain on sale of assets was $4.7 million in the year ended December 31, 2013, compared with $11.2 million in the year ended December 31, 2012. Gain on insurance recoveries of $1.5 million and $5.8 million for the years ended December 31, 2013 and 2012, respectively, related primarily to a business interruption claim associated with the Edith River Derailment (described in Note 5, Accounts Receivable and Allowance For Doubtful Accounts, to our Consolidated Financial Statements included elsewhere in this Annual Report). Other expenses were $78.8 million in the year ended December 31, 2013, compared with $44.5 million in the year ended December 31, 2012, an increase of $34.2 million, or 76.9%. The increase was primarily attributable to the newly acquired RailAmerica railroads. RailAmerica acquisition-related costs of $0.4 million and $18.6 million for the years ended December 31, 2013 and 2012 consisted of acquisition and financing-related expenses from the RailAmerica acquisition. RailAmerica integration costs of $16.7 million and $11.5 million for the years ended December 31, 2013 and 2012, respectively, consisted primarily of RailAmerica employee severance arrangements. Other Income (Expense) Items Interest Income Interest income was $4.0 million in the year ended December 31, 2013, compared with $3.7 million in the year ended December 31, 2012. Interest Expense Interest expense was $67.9 million in the year ended December 31, 2013, compared with $62.8 million in the year ended December 31, 2012. The increase in interest expense was primarily due to a higher debt balance resulting from the acquisition of RailAmerica. Contingent Forward Sale Contract In conjunction with our announcement on July 23, 2012 of our plan to acquire RailAmerica, we entered into the Investment Agreement with Carlyle in order to partially fund the acquisition of RailAmerica. Pursuant to the Investment Agreement, Carlyle agreed to purchase a minimum of $350.0 million of Preferred Stock, which Preferred Stock was convertible into our Class A common stock in certain circumstances. The conversion price of the Preferred Stock was set at approximately $58.49, which was a 4.5% premium to our stock price on the trading day prior to the announcement of the RailAmerica acquisition. For the period between July 23, 2012 and September 30, 2012, this instrument was accounted for as a contingent forward sale contract with mark-to-market non-cash income or expense included in our consolidated financial results and the cumulative effect represented as an asset or liability. Our closing price was $66.86 on September 28, 2012, which was the last trading day prior to issuing the Preferred Stock, and, accordingly, we recorded a $50.1 million non-cash mark-to-market expense related to the Investment Agreement for the year ended December 31, 2012. 52 -------------------------------------------------------------------------------- On February 13, 2013, we exercised our option to convert all of the outstanding Preferred Stock issued to Carlyle in conjunction with the RailAmerica acquisition into 5,984,232 shares of our Class A common stock. On the conversion date, we also paid to Carlyle all accrued and unpaid dividends on the Preferred Stock of $2.1 million, as well as cash in lieu of fractional shares. In November 2013, Carlyle sold all of these outstanding shares of our Class A common stock in a public offering. Provision for Income Taxes Included in our net income for the year ended December 31, 2013 was a $41.0 million benefit associated with the retroactive extension of the United States Short Line Tax Credit for fiscal year 2012, which was signed into law on January 2, 2013. Excluding the $41.0 million retroactive benefit, our provision for income tax was $87.2 million for the year ended December 31, 2013, which represented 27.4% of income before income taxes other than the retroactive benefit. Included in our income before income taxes for the year ended December 31, 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 10, Derivative Financial Instruments, to our Consolidated Financial Statements included elsewhere in this Annual Report for further details on the contingent forward sale contract. Excluding the $50.1 million mark-to-market expense, our provision for income tax was $46.4 million for the year ended December 31, 2012, which represents 34.8% of income before taxes. The decrease in the effective income tax rate for the year ended December 31, 2013 as compared with the year ended December 31, 2012 was primarily attributable to the renewal of the United States Short Line Tax Credit through December 31, 2013. The extension of the United States Short Line Tax Credit produced book income tax benefits of $25.9 million and $41.0 million for fiscal years 2013 and 2012, respectively. Since the extension became law in 2013, the 2012 impact was recorded in the first quarter of 2013. Net Income and Earnings Per Share Attributable to G&W Common Stockholders Net income was $272.1 million in the year ended December 31, 2013, compared with net income of $52.4 million in the year ended December 31, 2012. Our net income in the year ended December 31, 2012 included the $50.1 million mark-to-market expense associated with the contingent forward sale contract. Our basic EPS were $5.00 with 53.8 million weighted average shares outstanding in the year ended December 31, 2013, compared with basic EPS of $1.13 with 42.7 million weighted average shares outstanding in the year ended December 31, 2012. Our diluted EPS in the year ended December 31, 2013 were $4.79 with 56.7 million weighted average shares outstanding, compared with diluted EPS in the year ended December 31, 2012 of $1.02 with 51.3 million weighted average shares outstanding. The following table sets forth the increase in our weighted average basic shares outstanding for the years ended December 31, 2013 and 2012 as a result of our 2012 public offering of Class A common stock, the shares issuable upon settlement of the prepaid stock purchase contract component of the TEUs based on the market price of our Class A common stock at December 31, 2013 and 2012, respectively, and from the February 13, 2013 conversion of the Preferred Stock into our Class A common stock (see Note 4, Earnings Per Common Share, to our Consolidated Financial Statements included elsewhere in this Annual Report): 2013 2012 Class A common stock offering 3,791,004 1,066,867Shares issuable upon settlement of the prepaid stock purchase contract component of the TEUs 2,841,650 850,773 Conversion of Preferred Stock 5,262,845 - Segment Information Our various railroad lines are organized into 11 operating regions. All of the regions have similar economic and other characteristics; however, we present our financial information as two reportable segments - North American & European Operations and Australian Operations. The results of operations of our 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 our consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar can impact our results of operations. 53 -------------------------------------------------------------------------------- The following table sets forth our North American & European Operations and Australian Operations for the years ended December 31, 2013 and 2012 (dollars in thousands): 2013 2012 North North American & American & European Australian Total European Australian Total Operations Operations Operations Operations Operations Operations Revenues: Freight $ 917,971 $ 259,393 $ 1,177,364 $ 412,839 $ 211,970 $ 624,809 Non-freight 325,876 65,385 391,261 173,054 65,185 238,239 Fuel sales to third parties - 386 386 - 11,868 11,868 Total revenues 1,243,847 325,164 1,569,011 585,893 289,023 874,916 Operating expenses: Labor and benefits 374,935 66,383 441,318 197,407 60,211 257,618 Equipment rents 67,297 10,528 77,825 26,298 11,024 37,322 Purchased services 68,632 52,239 120,871 26,330 54,242 80,572 Depreciation and amortization 114,542 27,102 141,644 50,156 23,249 73,405 Diesel fuel used in operations 116,204 30,968 147,172 56,298 32,101 88,399 Diesel fuel sold to third parties - 368 368 - 11,322 11,322 Casualties and insurance 28,937 11,844 40,781 16,244 8,614 24,858 Materials 75,742 2,501 78,243 23,569 1,671 25,240 Trackage rights 29,595 21,316 50,911 17,643 10,607 28,250 Net (gain)/loss on sale and impairment of assets (4,491 ) (186 ) (4,677 ) (9,178 ) (2,047 ) (11,225 ) Gain on insurance recoveries - (1,465 ) (1,465 ) - (5,760 ) (5,760 ) Other expenses 71,297 7,500 78,797 35,695 8,854 44,549 RailAmerica acquisition-related costs 360 - 360 18,592 - 18,592 RailAmerica integration costs 16,675 - 16,675 11,452 - 11,452 Total operating expenses 959,725 229,098 1,188,823 470,506 214,088 684,594 Income from operations $ 284,122 $ 96,066 $ 380,188 $ 115,387 $ 74,935 $ 190,322 Operating ratio 77.2 % 70.5 % 75.8 % 80.3 % 74.1 % 78.2 % Interest expense $ 52,740 $ 15,154 $ 67,894 $ 45,996 $ 16,849 $ 62,845 Interest income $ 3,631 $ 340 $ 3,971 $ 3,219 $ 506 $ 3,725 Contingent forward sale contract mark-to-market expense $ - $ - $ - $ 50,106 $ - $ 50,106 Provision for income taxes $ 24,038 $ 22,258 $ 46,296 $ 28,451 $ 17,951 $ 46,402 Income from equity investment in RailAmerica, net $ - $ - $ - $ 15,557 $ - $ 15,557 Carloads 1,649,914 236,098 1,886,012 723,448 203,646 927,094 Expenditures for additions to property & equipment, net of grants from outside parties $ 163,545 $ 51,860 $ 215,405 $ 69,636 $ 122,426 $ 192,062 54-------------------------------------------------------------------------------- Revenues from our North American & European Operations were $1.2 billion in the year ended December 31, 2013, compared with $585.9 million in the year ended December 31, 2012, an increase of $658.0 million, or 112.3%. The increase in revenues from our North American & European Operations consisted of a $505.1 million increase in freight revenues and a $152.8 million increase in non-freight revenues, in each case, primarily due to the newly acquired RailAmerica railroads. Operating expenses from our North American & European Operations were $959.7 million in the year ended December 31, 2013, compared with $470.5 million in the year ended December 31, 2012, an increase of $489.2 million. In total, labor and benefits increased $177.5 million in the year ended December 31, 2013, primarily related to the newly acquired RailAmerica railroads and wage and benefit increases for existing employees. The remaining $311.7 million increase in operating expenses was primarily driven by the newly acquired RailAmerica railroads, including $17.0 million of RailAmerica integration and acquisition-related expenses. Revenues from our Australian Operations were $325.2 million in the year ended December 31, 2013, compared with $289.0 million in the year ended December 31, 2012, an increase of $36.1 million, or 12.5%. The increase in revenues included a $47.4 million increase in freight revenues, partially offset by an $11.5 million decrease in fuel sales to third parties. The $47.4 million increase in freight revenues consisted of $35.7 million due to a 32,452, or 15.9%, carload increase and an $11.8 million, or 5.6%, increase in average freight revenues per carload. The increase in average freight revenues per carload and volume was primarily driven by the expansion of iron ore shipments and the resumption of traffic in 2013 that had been halted due to the Edith River Bridge outage in 2012. The $11.5 million decrease in fuel sales to third parties was primarily due to the sale of our fuel-sales business in South Australia in the third quarter of 2012. The depreciation of the Australian dollar relative to the United States dollar in the year ended December 31, 2013 compared with the year ended December 31, 2012 resulted in a $19.4 million decrease in revenues. Operating expenses from our Australian Operations were $229.1 million in the year ended December 31, 2013, compared with $214.1 million in the year ended December 31, 2012, an increase of $15.0 million, or 7.0%. The increase in operating expenses included increased labor expense, trackage rights expense and additional expenses for fuel and for maintenance of property and equipment, primarily resulted from the expansion of iron ore shipments in South Australia. Operating expenses in the year ended December 31, 2013 also included additional depreciation expense resulting from the purchase of new equipment and an increase in casualties and insurance expense due to an increase in derailment expense and higher insurance premiums, partially offset by an $11.0 million decrease in diesel fuel sold to third parties, primarily as a result of the sale of our fuel-sales business in South Australia. Operating expenses included a gain on insurance recoveries of $1.5 million and $5.8 million in the years ended December 31, 2013 and 2012, respectively, primarily related to a business interruption claim associated with the 2011 Edith River Derailment (described in Note 5, Accounts Receivable and Allowance For Doubtful Accounts, to our Consolidated Financial Statements included elsewhere in this Annual Report). The depreciation of the Australian dollar relative to the United States dollar in the year ended December 31, 2013 compared with the year ended December 31, 2012 resulted in an $11.5 million decrease in operating expenses. 55 -------------------------------------------------------------------------------- Year Ended December 31, 2012 Compared with Year Ended December 31, 2011 Operating Revenues Overview Operating revenues were $874.9 million in the year ended December 31, 2012, compared with $829.1 million in the year ended December 31, 2011, an increase of $45.8 million, or 5.5%. The $45.8 million increase in operating revenues consisted of $22.7 million in revenues from new operations and a $23.1 million, or 2.8%, increase in revenues from existing operations. New operations are those that were not included in our consolidated financial results for a comparable period in the prior year. The $23.1 million increase in revenues from existing operations included increases of $20.8 million in freight revenues and $2.3 million in non-freight revenues. The following table breaks down our operating revenues and total carloads into new operations and existing operations for the years ended December 31, 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 $ 624,809 $ 21,105 $ 603,704 $ 582,947 $ 41,862 7.2 % $ 20,757 3.6 % $ (257 ) Non-freight revenues 250,107 1,625 248,482 246,149 3,958 1.6 % 2,333 0.9 % (1,257 ) Total operating revenues $ 874,916 $ 22,730 $ 852,186 $ 829,096 $ 45,820 5.5 % $ 23,090 2.8 % $ (1,514 ) Carloads 927,094 20,781 906,313 997,048 (69,954 ) (7.0 )% (90,735 ) (9.1 )% 56-------------------------------------------------------------------------------- Freight Revenues The following table compares freight revenues, carloads and average freight revenues per carload for the years ended December 31, 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 Agricultural Products $ 59,378 9.5 % $ 63,394 10.9 % 96,734 10.4 % 116,443 11.7 % $ 614 $ 544 Metallic Ores* 75,188 12.0 % 56,150 9.7 % 41,918 4.5 % 32,682 3.3 % 1,794 1,718 Chemicals & Plastics 55,146 8.8 % 47,836 8.2 % 68,999 7.4 % 65,137 6.6 % 799 734 Metals 62,129 9.9 % 51,410 8.8 % 94,621 10.2 % 90,088 9.1 % 657 571 Pulp & Paper 65,696 10.5 % 61,793 10.6 % 101,588 11.0 % 97,018 9.7 % 647 637 Coal & Coke 70,052 11.2 % 82,244 14.1 % 168,574 18.2 % 248,460 24.9 % 416 331 Minerals & Stone 48,023 7.7 % 48,214 8.3 % 130,602 14.1 % 138,076 13.8 % 368 349 Intermodal** 94,735 15.2 % 87,657 15.0 % 66,706 7.2 % 61,986 6.2 % 1,420 1,414 Lumber & Forest Products 34,839 5.7 % 31,469 5.4 % 70,896 7.6 % 64,875 6.5 % 491 485 Petroleum Products 25,293 4.1 % 22,948 3.9 % 26,907 2.9 % 24,474 2.5 % 940 938 Food or Kindred Products 5,230 0.8 % 4,574 0.8 % 11,011 1.2 % 10,075 1.0 % 475 454 Waste 13,622 2.2 % 12,012 2.1 % 21,676 2.3 % 21,246 2.1 % 628 565 Autos & Auto Parts 8,313 1.3 % 7,826 1.3 % 10,148 1.2 % 10,425 1.0 % 819 751 Other 7,165 1.1 % 5,420 0.9 % 16,714 1.8 % 16,063 1.6 % 429 337 Total $ 624,809 100.0 % $ 582,947 100.0 % 927,094 100.0 % 997,048 100.0 % 674 585 * Carload amounts include carloads and intermodal units in the 2012 period ** Carload amounts represent intermodal units Total freight traffic decreased by 69,954 carloads, or 7.0%, in 2012 compared with 2011. Carloads from existing operations decreased by 90,735 carloads, or 9.1%, and new operations contributed 20,781 carloads. The existing traffic decrease was principally due to decreases of 79,886 carloads of coal and coke traffic, 20,618 carloads of agricultural products traffic and 10,890 carloads of minerals and stone traffic, partially offset by increases of 6,242 carloads of metallic ores traffic, 5,756 carloads of lumber and forest products traffic and 4,720 carloads of intermodal traffic. All remaining traffic increased by a net 3,941 carloads. Average freight revenues per carload increased 15.2% to $674 in 2012 compared with 2011. Average freight revenues per carload from existing operations increased 13.8% to $666. Changes in the commodity mix and higher fuel surcharges increased average freight revenues per carload from existing operations by 5.9% and 0.5%, respectively, partially offset by the net depreciation of the Australian and Canadian dollars relative to the United States dollar, which decreased average freight revenues per carload from existing operations by 0.2%. Other than the impacts from these factors, average freight revenues per carload from existing operations increased by 7.6%. Average freight revenues per carload were also positively impacted by the changes in the mix of customers within certain commodity groups, primarily coal and coke traffic, metals traffic, waste traffic and other commodities. 57 -------------------------------------------------------------------------------- The following table sets forth freight revenues by commodity group segregated into new operations and existing operations for the years ended December 31, 2012 and 2011 (dollars in thousands): (Decrease)/Increase (Decrease)/Increase in Total in Existing 2012 2011 Operations OperationsCommodity Total New Existing Total Group Operations Operations Operations Operations Amount % Amount % Currency Impact Agricultural Products $ 59,378 $ 354 $ 59,024 $ 63,394 $ (4,016 ) (6.3 )% $ (4,370 ) (6.9 )% $ 23 Metallic Ores 75,188 4,252 70,936 56,150 19,038 33.9 % 14,786 26.3 % (8 ) Chemicals & Plastics 55,146 5,463 49,683 47,836 7,310 15.3 % 1,847 3.9 % (64 ) Metals 62,129 3,874 58,255 51,410 10,719 20.9 % 6,845 13.3 % (80 ) Pulp & Paper 65,696 2,880 62,816 61,793 3,903 6.3 % 1,023 1.7 % (158 ) Coal & Coke 70,052 432 69,620 82,244 (12,192 ) (14.8 )% (12,624 ) (15.3 )% (9 ) Minerals & Stone 48,023 2,762 45,261 48,214 (191 ) (0.4 )% (2,953 ) (6.1 )% (2 ) Intermodal 94,735 - 94,735 87,657 7,078 8.1 % 7,078 8.1 % 124 Lumber & Forest Products 34,839 479 34,360 31,469 3,370 10.7 % 2,891 9.2 % (13 ) Petroleum Products 25,293 426 24,867 22,948 2,345 10.2 % 1,919 8.4 % (13 ) Food or Kindred Products 5,230 5 5,225 4,574 656 14.3 % 651 14.2 % (2 ) Waste 13,622 89 13,533 12,012 1,610 13.4 % 1,521 12.7 % 1 Autos & Auto Parts 8,313 - 8,313 7,826 487 6.2 % 487 6.2 % (61 ) Other 7,165 89 7,076 5,420 1,745 32.2 % 1,656 30.6 % 5 Total freight revenues $ 624,809 $ 21,105 $ 603,704 $ 582,947 $ 41,862 7.2 % $ 20,757 3.6 % $ (257 ) The following information discusses the significant changes in freight revenues by commodity group from existing operations. Changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates, fuel surcharges, net depreciation of the Australian and Canadian dollars relative to the United States dollar, as well as changes in the mix of customer traffic within a commodity group. Agricultural products revenues decreased $4.4 million, or 6.9%. Agricultural products traffic volume decreased 20,618 carloads, or 17.7%, which decreased revenues by $12.7 million, while average revenues per carload increased 13.2%, which increased revenues by $8.3 million. The carload decrease was primarily due to a mechanical failure at an export grain terminal in Australia and a modal shift from rail to truck in the southern United States. 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 $14.8 million, or 26.3%. 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 6,048 carloads for an equivalent volume of product shipped. Otherwise, metallic ores traffic volume increased 194 carloads, or 0.6%, and average freight revenues per carload increased 25.6%. The carload increase was primarily due to a new iron ore contract in Australia, partially offset by a decrease in traffic in Canada. The increase in average freight revenues per carload was primarily driven by higher fuel surcharges and an increase in long-haul iron ore shipments in Australia. Metals revenues increased $6.8 million, or 13.3%. Average freight revenues per carload increased 11.0%, which increased revenues by $5.7 million, and metals traffic volume increased 1,773 carloads, or 2.0%, which increased revenues by $1.1 million. The carload increase was primarily due to the expansion of a plant we serve in the southern United States. The increase in average freight revenues per carload was primarily due to a change in the mix of customer traffic. 58 -------------------------------------------------------------------------------- Coal and coke revenues decreased $12.6 million, or 15.3%. Coal and coke traffic volume decreased 79,886 carloads, or 32.2%, which decreased revenues by $33.0 million, while average freight revenues per carload increased 24.8%, which increased revenues by $20.4 million. The decrease in traffic was largely driven by a decline in coal haulage traffic and customer-specific circumstances (such as temporary plant shut-downs, high inventory and a plant closing) as well as by warm winter weather, low natural gas prices and lower levels of export coal. The increase in average freight revenues per carload was primarily due to the change in mix of customer traffic. Minerals and stone revenues decreased $3.0 million, or 6.1%. Minerals and stone traffic volume decreased 10,890 carloads, or 7.9%, which decreased revenues by $3.9 million, while average freight revenues per carload increased 2.0%, which increased revenues by $0.9 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. Intermodal revenues increased $7.1 million, or 8.1%. Intermodal traffic volume increased 4,720 carloads, or 7.6%, which increased revenues by $6.7 million. The carload increase was primarily due to increased traffic in Australia and a new customer in the southern United States. Lumber and forest products revenues increased $2.9 million, or 9.2%. Lumber and forest products traffic volume increased 5,756 carloads, or 8.9%, which increased revenues by $2.8 million. The carload increase was primarily due to an increase in United States housing starts. Waste revenues increased $1.5 million, or 12.7%. The increase was primarily due to an 11.5% increase in average freight revenues per carload, which increased revenues by $1.4 million. The increase in average freight revenues per carload was primarily due to the change in mix of customer traffic. Other freight revenues increased $1.7 million, or 30.6%. The increase was primarily due to a 26.7% increase in average freight revenues per carload, which increased revenues by $1.4 million. The increase in average freight revenues per carload was primarily due to the change in mix of customer traffic. Freight revenues from all remaining commodities combined increased by $5.9 million. Non-Freight Revenues The following table compares non-freight revenues for the years ended December 31, 2012 and 2011 (dollars in thousands): 2012 2011 Amount % of Total Amount % of Total Railcar switching $ 134,929 54.0 % $ 128,326 52.1 % Car hire and rental income 21,280 8.5 % 21,851 8.9 % Fuel sales to third parties 11,868 4.7 % 18,002 7.3 % Demurrage and storage 26,125 10.4 % 22,136 9.0 % Car repair services 7,934 3.2 % 8,224 3.3 % Other non-freight revenues 47,971 19.2 % 47,610 19.4 % Total non-freight revenues $ 250,107 100.0 % $ 246,149 100.0 % 59-------------------------------------------------------------------------------- The following table sets forth non-freight revenues by new operations and existing operations for the years ended December 31, 2012 and 2011 (dollars in thousands): Increase/ Increase/ (Decrease) in (Decrease) in Existing 2012 2011 Total Operations Operations Total New Existing Total Currency Operations Operations Operations Operations Amount % Amount % Impact Railcar switching $ 134,929 $ 732 $ 134,197 $ 128,326 $ 6,603 5.1 % $ 5,871 4.6 % $ (1,165 ) Car hire and rental income 21,280 290 20,990 21,851 (571 ) (2.6 )% (861 ) (3.9 )% 4 Fuel sales to third parties 11,868 - 11,868 18,002 (6,134 ) (34.1 )% (6,134 ) (34.1 )% - Demurrage and storage 26,125 346 25,779 22,136 3,989 18.0 % 3,643 16.5 % (28 ) Car repair services 7,934 251 7,683 8,224 (290 ) (3.5 )% (541 ) (6.6 )% (15 ) Other non-freight revenues 47,971 6 47,965 47,610 361 0.8 % 355 0.7 % (53 ) Total non-freight revenues $ 250,107 $ 1,625 $ 248,482 $ 246,149 $ 3,958 1.6 % $ 2,333 0.9 % $ (1,257 ) Non-freight revenues increased $4.0 million, or 1.6%, to $250.1 million in the year ended December 31, 2012, compared with $246.1 million in the year ended December 31, 2011. The increase in non-freight revenues was attributable to $2.3 million from existing operations and $1.6 million from new operations. The increase in existing operations was principally due to higher railcar switching revenues of $5.9 million due to new and expanded customer service contracts in Australia and the United States, an increase in demurrage and storage revenues of $3.6 million due to an increase in the number of third-party railcars being stored in the United States and Canada, partially offset by a $6.1 million decrease in fuel sales to third parties due to the sale of our fuel-sales business in South Australia in the third quarter of 2012 and a $1.3 million decrease due to the net depreciation of foreign currencies relative to the United States dollar. Operating Expenses Overview Operating expenses were $684.6 million in the year ended December 31, 2012, compared with $637.3 million in the year ended December 31, 2011, an increase of $47.3 million, or 7.4%. The increase in operating expenses was attributable to $33.9 million from existing operations and $13.4 million from new operations. The increase in existing operations was primarily due to $18.6 million of acquisition-related expenses from the RailAmerica acquisition, $11.5 million of severance costs and expenses from the acceleration of stock-based compensation of RailAmerica employees and a $17.9 million increase in labor and benefits, partially offset by a $7.8 million decrease in equipment rents, a $5.6 million increase in net gain on sale of assets and a $4.7 million increase in gain on insurance recoveries. In addition, the net depreciation of foreign currencies relative to the United States dollar resulted in a $0.8 million decrease in operating expenses from existing operations. Operating Ratio Our operating ratio, defined as total operating expenses divided by total operating revenues, was 78.2% in the year ended December 31, 2012 compared with 76.9% in the year ended December 31, 2011. Included in our operating ratio calculation for the year ended December 31, 2012 were $30.0 million of acquisition and integration-related costs associated with the acquisition of RailAmerica and severance costs and expenses from the acceleration of stock-based compensation of RailAmerica employees. Changes in foreign currency exchange rates can have a material impact on our operating revenues and operating expenses. However, the net impact of these foreign currency translation effects should not have a material impact on our operating ratio. 60 --------------------------------------------------------------------------------The following table sets forth a comparison of our operating expenses in the years ended December 31, 2012 and 2011 (dollars in thousands): 2012 2011 % of % of Operating Operating Amount Revenues Amount Revenues Currency ImpactLabor and benefits $ 257,618 29.5 % $ 236,152 28.5 % $ (437 ) Equipment rents 37,322 4.3 % 43,885 5.3 % (22 ) Purchased services 80,572 9.2 % 78,741 9.5 % (160 ) Depreciation and amortization 73,405 8.4 % 66,481 8.0 % (75 ) Diesel fuel used in operations 88,399 10.1 % 88,499 10.7 % - Diesel fuel sold to third parties 11,322 1.3 % 16,986 2.0 % - Casualties and insurance 24,858 2.8 % 22,469 2.7 % 44 Materials 25,240 2.9 % 26,419 3.2 % (69 ) Trackage rights 28,250 3.2 % 23,066 2.8 % (64 ) Net (gain)/loss on sale and impairment of assets (11,225 ) (1.3 )% (5,660 ) (0.7 )% (16 ) Gain on insurance recoveries (5,760 ) (0.7 )% (1,061 ) (0.1 )% 59 Other expenses 44,549 5.1 % 41,340 5.0 % (52 ) RailAmerica acquisition-related costs 18,592 2.1 % - - % - RailAmerica integration costs 11,452 1.3 % - - % - Total operating expenses $ 684,594 78.2 % $ 637,317 76.9 % $ (792 ) Labor and benefits expense was $257.6 million in the year ended December 31, 2012, compared with $236.2 million in the year ended December 31, 2011, an increase of $21.5 million, or 9.1%, of which $17.5 million was from existing operations and $4.0 million was from new operations. The increase from existing operations consisted of $8.2 million due to an increase in the average number of employees, $5.9 million from annual wage increases and $3.8 million of benefit increases (primarily health care costs), partially offset by $0.4 million due to the net depreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar. Our average number of employees during the year ended December 31, 2012 increased by 50 employees compared with our average number of employees during the year ended December 31, 2011. Equipment rents expense was $37.3 million in the year ended December 31, 2012, compared with $43.9 million in the year ended December 31, 2011, a decrease of $6.6 million, or 15.0%. The decrease was primarily due to the replacement of leased locomotives in Australia with new owned units and a decrease in freight car rents in the United States, which was partially offset by $1.3 million from new operations. Purchased services expense, which consists of the costs of services provided by outside contractors for repairs and maintenance of track property, locomotives, freight cars and other equipment as well as contract labor costs for crewing and drayage services, was $80.6 million in the year ended December 31, 2012, compared with $78.7 million in the year ended December 31, 2011, an increase of $1.8 million, or 2.3%. The increase was primarily related to increased use of contract services for repairs and maintenance of the locomotive and railcar fleets in Australia, partially offset by the decrease in expense related to the sale of our drayage business in 2011. Depreciation and amortization expense was $73.4 million in the year ended December 31, 2012, compared with $66.5 million in the year ended December 31, 2011, an increase of $6.9 million, or 10.4%. The increase was attributable to a $4.9 million increase from existing operations, primarily due to new locomotives and railcars in Australia, and $2.0 million from new operations. The cost of diesel fuel used in operations was $88.4 million in the year ended December 31, 2012, compared with $88.5 million in the year ended December 31, 2011, a decrease of $0.1 million. The decrease was attributable to a $2.6 million decrease in existing operations, partially offset by a $2.5 million increase in new operations. The decrease from existing operations was composed of $5.7 million due to a 6.3% decrease in diesel fuel consumption, primarily related to a 9.1% decrease in carloads, partially offset by $3.1 million from a 3.5% increase in average fuel cost per gallon. 61 -------------------------------------------------------------------------------- The cost of diesel fuel sold to third parties was $11.3 million in the year ended December 31, 2012, compared with $17.0 million in the year ended December 31, 2011, a decrease of $5.7 million, or 33.3%. The decrease was primarily due to the sale of our third-party fuel-sales business South Australia in the third quarter of 2012. Net gain on sale of assets was $11.2 million in the year ended December 31, 2012, compared with $5.7 million in the year ended December 31, 2011. The increase was primarily attributable to a $5.3 million gain on sale of land and track in Canada and a $1.8 million gain on sale of certain assets in South Australia in the third quarter of 2012. Gain on insurance recoveries in the year ended December 31, 2012 of $5.8 million was related primarily to a business interruption claim associated with the Edith River Derailment (described in Note 5, Accounts Receivable and Allowance For Doubtful Accounts, to our Consolidated Financial Statements included elsewhere in this Annual Report). Gain on insurance recoveries in the year ended December 31, 2011 of $1.1 million related to a business interruption claim associated with Cyclone Carlos. Other expenses were $44.5 million in the year ended December 31, 2012, compared with $41.3 million in the year ended December 31, 2011, an increase of $3.2 million, or 7.8%. The increase was primarily attributable to an increase in property tax expenses and $0.9 million from new operations. RailAmerica acquisition-related costs in the year ended December 31, 2012 of $18.6 million consisted of acquisition and financing-related expenses from the RailAmerica acquisition. RailAmerica integration costs in the year ended December 31, 2012 of $11.5 million consisted primarily of severance costs and expenses from the acceleration of stock-based compensation of RailAmerica employees. Other Income (Expense) Items Interest Income Interest income was $3.7 million in the year ended December 31, 2012, compared with $3.2 million in the year ended December 31, 2011. Interest Expense Interest expense was $62.8 million in the year ended December 31, 2012, compared with $38.6 million in the year ended December 31, 2011. The increase in interest expense was primarily due to our Credit Agreement entered into in conjunction with the acquisition of RailAmerica, including a $12.6 million make-whole payment resulting from the redemption of pre-existing senior notes, the write-off of $0.5 million of debt issuance costs and higher outstanding debt due to the acquisition. Contingent Forward Sale Contract In conjunction with our announcement on July 23, 2012 of our plan to acquire RailAmerica, we entered into the Investment Agreement with Carlyle in order to partially fund the acquisition of RailAmerica. Pursuant to the Investment Agreement, Carlyle agreed to purchase a minimum of $350.0 million of Preferred Stock, which Preferred Stock was convertible into our Class A common stock in certain circumstances. The conversion price of the Preferred Stock was set at approximately $58.49, which was a 4.5% premium to our stock price on the trading day prior to the announcement of the RailAmerica acquisition. For the period between July 23, 2012 and September 30, 2012, this instrument was accounted for as a contingent forward sale contract with mark-to-market non-cash income or expense included in our consolidated financial results and the cumulative effect represented as an asset or liability. Our closing price was $66.86 on September 28, 2012, which was the last trading day prior to issuing the Preferred Stock, and, accordingly, we recorded a $50.1 million non-cash mark-to-market expense related to the Investment Agreement for the year ended December 31, 2012. See Note 10, Derivative Financial Instruments, to our Consolidated Financial Statements included elsewhere in this Annual Report for further details on the contingent forward sale contract and Note 4, Earnings Per Common Share, to our Consolidated Financial Statements included elsewhere in this Annual Report for details regarding the conversion of the Preferred Stock. 62 -------------------------------------------------------------------------------- Provision for Income Taxes The $50.1 million mark-to-market expense associated with the contingent forward sale contract included in our income before income taxes for the year ended December 31, 2012 is a non-deductible expense for income tax purposes. As a result, our provision for income tax was $46.4 million for the year ended December 31, 2012, which represents 34.8% of income before income taxes other than the mark-to-market expense. Our effective income tax rate was 24.4% in the year ended December 31, 2011. The increase in the effective income tax rate for the year ended December 31, 2012 was primarily attributable to the expiration of the United States Short Line Tax Credit on December 31, 2011. On January 2, 2013, the United States Short Line Tax Credit was extended for 2012 and 2013. The extension of the United States Short Line Tax Credit produced book income tax benefits of $41.0 million for fiscal year 2012 and was recorded in the first quarter of 2013 when the extension became law. Net Income and Earnings Per Share Attributable to G&W Common Stockholders Net income was $52.4 million in the year ended December 31, 2012, compared with net income of $119.5 million in the year ended December 31, 2011. Our net income in the year ended December 31, 2012 included the $50.1 million mark-to-market expense associated with the contingent forward sale contract. Our basic EPS were $1.13 with 42.7 million weighted average shares outstanding in the year ended December 31, 2012, compared with basic EPS of $2.99 with 39.9 million weighted average shares outstanding in the year ended December 31, 2011. Our diluted EPS in the year ended December 31, 2012 were $1.02 with 51.3 million weighted average shares outstanding, compared with diluted EPS in the year ended December 31, 2011 of $2.79 with 42.8 million weighted average shares outstanding. The weighted average shares outstanding in the year ended December 31, 2012 included 1,066,867 shares as a result of the public offering of Class A common stock and 850,773 shares as a result of the public offering of TEUs, which both took place in September of 2012. Segment Information Our various railroad lines are organized into 11 operating regions. Since all of the regions have similar characteristics, they previously had been aggregated into one reportable segment. Beginning January 1, 2011, we decided to present our financial information as two reportable segments - North American & European Operations and Australian Operations. The results of operations of our 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 our consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar can impact our results of operations. 63 -------------------------------------------------------------------------------- The following table sets forth our North American & European Operations and Australian Operations for the years ended December 31, 2012 and 2011 (dollars in thousands): 2012 2011 North North American & American & European Australian Total European Australian Total Operations Operations Operations Operations Operations Operations Revenues: Freight $ 412,839 $ 211,970 $ 624,809 $ 388,797 $ 194,150 $ 582,947 Non-freight 173,054 65,185 238,239 168,824 59,323 228,147 Fuel sales to third parties - 11,868 11,868 - 18,002 18,002 Total revenues 585,893 289,023 874,916 557,621 271,475 829,096 Operating expenses Labor and benefits 197,407 60,211 257,618 186,467 49,685 236,152 Equipment rents 26,298 11,024 37,322 26,460 17,425 43,885 Purchased services 26,330 54,242 80,572 27,911 50,830 78,741 Depreciation and amortization 50,156 23,249 73,405 47,218 19,263 66,481 Diesel fuel used in operations 56,298 32,101 88,399 57,394 31,105 88,499 Diesel fuel sold to third parties - 11,322 11,322 - 16,986 16,986 Casualties and insurance 16,244 8,614 24,858 14,710 7,759 22,469 Materials 23,569 1,671 25,240 24,138 2,281 26,419 Trackage rights 17,643 10,607 28,250 14,368 8,698 23,066 Net (gain)/loss on sale and impairment of assets (9,178 ) (2,047 ) (11,225 ) (5,167 ) (493 ) (5,660 ) Gain on insurance recoveries - (5,760 ) (5,760 ) (43 ) (1,018 ) (1,061 ) Other expenses 35,695 8,854 44,549 34,519 6,821 41,340 RailAmerica acquisition-related costs 18,592 - 18,592 - - - RailAmerica integration costs 11,452 - 11,452 - - - Total operating expenses 470,506 214,088 684,594 427,975 209,342 637,317 Income from operations $ 115,387 $ 74,935 $ 190,322 $ 129,646 $ 62,133 $ 191,779 Operating ratio 80.3 % 74.1 % 78.2 % 76.8 % 77.1 % 76.9 % Interest expense $ 45,996 $ 16,849 $ 62,845 $ 23,171 $ 15,446 $ 38,617 Interest income $ 3,219 $ 506 $ 3,725 $ 2,950 $ 293 $ 3,243 Contingent forward sale mark-to-market expense $ 50,106 $ - $ 50,106 $ - $ - $ - Provision for income taxes $ 28,451 $ 17,951 $ 46,402 $ 26,181 $ 12,350 $ 38,531 Income from equity investment in RailAmerica, net $ 15,557 $ - $ 15,557 $ - $ - $ - Carloads 723,448 203,646 927,094 785,377 211,671 997,048 Expenditures for additions to property & equipment, net of grants from outside parties $ 69,636 $ 122,426 $ 192,062 $ 59,383 $ 96,643 $ 156,026 64-------------------------------------------------------------------------------- Revenues from our North American & European Operations were $585.9 million in the year ended December 31, 2012, compared with $557.6 million in the year ended December 31, 2011, an increase of $28.3 million, or 5.1%. The $28.3 million increase in revenues from our North American & European Operations included a $24.0 million increase in freight revenues and a $4.2 million increase in non-freight revenues. The $24.0 million increase in freight revenues consisted of an increase of $2.9 million from existing operations and $21.1 million from new operations. Operating expenses from our North American & European Operations were $470.5 million in the year ended December 31, 2012, compared with $428.0 million in the year ended December 31, 2011, an increase of $42.5 million, or 9.9%. The $42.5 million increase in operating expenses from our North American & European Operations included $29.1 million from existing operations and $13.4 million from new operations. The $29.1 million increase in operating expenses from existing operations was primarily due to an increase of $18.6 million of RailAmerica acquisition-related costs and $11.5 million of RailAmerica integration expenses, partially offset by a $1.3 million decrease due to the depreciation of the Canadian dollar and the Euro relative to the United States dollar. Revenues from our Australian Operations were $289.0 million in the year ended December 31, 2012, compared with $271.5 million in the year ended December 31, 2011, an increase of $17.5 million. The increase in revenues included a $17.8 million increase in freight revenues and a $5.9 million increase in non-freight revenues, partially offset by a $6.1 million decrease in fuel sales to third parties. The $17.8 million increase in freight revenues was primarily driven by a new iron ore contact in South Australia which began in October 2012. The $5.9 million increase in non-freight revenues was primarily driven by an increased level of activity with existing customers. The $6.1 million decrease in fuel sales to third parties was primarily due to the sale of our third-party fuel-sales business in South Australia in the third quarter of 2012. Operating expenses from our Australian Operations were $214.1 million in the year ended December 31, 2012, compared with $209.3 million in the year ended December 31, 2011, an increase of $4.7 million. The increase in operating expenses primarily resulted from the additional resources required to support a new iron ore contract in South Australia, including approximately 50 new employees and additional depreciation expense resulting from the purchase of new equipment, as well as an increase in other operating expenses primarily due to increased trackage rights and property tax expenses, partially offset by higher insurance recoveries in 2012 primarily related to a business interruption claim associated with the Edith River Derailment (described in Note 5, Accounts Receivable and Allowance For Doubtful Accounts, to our Consolidated Financial Statements included elsewhere in this Annual Report) and a decrease in equipment rents due to the replacement of leased locomotives with new owned units. Liquidity and Capital Resources We had cash and cash equivalents on hand of $62.9 million and $64.8 million at December 31, 2013 and 2012, respectively. Based on current expectations, we believe our cash and other liquid assets, anticipated future cash flows, availability under our Credit Agreement, access to debt and equity capital markets and sources of available financing will be sufficient to fund expected operating, capital and debt service requirements and other financial commitments for the foreseeable future. During 2014, we expect to fund the pending acquisition of the assets comprising the western end of the DM&E with borrowings under our Credit Agreement. At December 31, 2013, we had long-term debt, including current portion, of $1.6 billion, which comprised 43.1% of our total capitalization, and $406.0 million of unused borrowing capacity. At December 31, 2012, we had long-term debt, including current portion, totaling $1.9 billion, which comprised 49.5% of our total capitalization and $396.3 million of unused borrowing capacity. During 2013, 2012 and 2011, we generated $413.5 million, $170.7 million and $173.5 million, respectively, of cash from operating activities. Changes in working capital decreased net cash flows from operating activities by $25.5 million, $30.9 million and $36.8 million in 2013, 2012 and 2011, respectively. The $25.5 million change for 2013 was attributable to a $44.5 million increase in accounts receivable, partially offset by a $16.4 million increase in accounts payable and accrued expenses. The 2013 period included $12.9 million in cash paid for expenses related to the integration of RailAmerica. Of the $30.9 million change in working capital for 2012, $30.1 million was due to a reduction in accounts payable and accrued expenses, which included $9.1 million associated with the settlement of a cross-currency swap that matured in December 2012 and $6.3 million in net cash payments related to the December 2011 Edith River derailment. Of the $36.8 million change in working capital for 2011, $25.6 million was due to a reduction in accounts payable and accrued expenses and $12.3 million was due to an increase in accounts receivable driven by an increase in business in 2011. The $25.6 million reduction in accounts payable and accrued expenses included $13.0 million associated with the payment of Australian stamp duty for the acquisition of FreightLink in Australia and $10.5 million due to the timing of the payment of Australian income taxes. 65 -------------------------------------------------------------------------------- During 2013, 2012 and 2011, our cash used in investing activities was $208.7 million, $2.1 billion and $235.1 million, respectively. For 2013, primary drivers of cash used in investing activities were $249.3 million of cash used for capital expenditures, including $34.2 million for new business investments, partially offset by $33.9 million in cash received from grants from outside parties for capital spending and $6.7 million in cash proceeds from the sale of property and equipment. For 2012, primary drivers of cash used in investing activities were $1.9 billion of net cash paid for acquisitions, primarily related to the acquisition of RailAmerica, and $231.7 million of cash used for capital expenditures, including $101.9 million for new business investments in Australia, partially offset by $39.6 million in cash received from grants from outside parties and $15.3 million in cash proceeds from the sale of property and equipment. For 2011, primary drivers of cash used in investing activities were $178.7 million of cash used for capital expenditures, including $78.2 million for new business investments in Australia, and $89.9 million in net cash paid for acquisitions, primarily related to the acquisition of AZER, partially offset by $22.6 million in cash received from grants from outside parties and $9.5 million in proceeds from the disposition of property and equipment. During 2013, our cash used in financing activities was $205.9 million, compared with cash provided by financing activities in 2012 and 2011 of $2.0 billion and $62.0 million, respectively. For 2013, primary drivers of cash used in financing activities were a net decrease in outstanding debt of $209.3 million, $2.8 million of debt amendment costs and $2.1 million of dividends paid to Preferred Stockholders, partially offset by net cash inflows of $8.3 million from exercises of stock-based awards. For 2012, primary drivers of cash provided by financing activities were a net increase in outstanding debt of $1.2 billion, net proceeds of $234.3 million from the sale of our Class A common stock, net proceeds of $222.9 million from the sale of our TEUs, net proceeds of $349.4 million from the issuance of our Preferred Stock and net cash inflows of $20.3 million from exercises of stock-based awards, partially offset by $38.8 million of debt amendment costs. For 2011, primary drivers of cash provided by financing activities were a net increase in outstanding debt of $47.9 million and net cash inflows of $18.9 million from exercises of stock-based awards, partially offset by $4.7 million of debt amendment costs. Purchase of Assets Comprising Western End of Canadian Pacific's Dakota, Minnesota & Eastern Rail Line On January 2, 2014, we and Canadian Pacific (CP) jointly announced our entry pursuant to an agreement under which we will purchase the assets comprising the western end of CP's Dakota, Minnesota & Eastern Railroad (DM&E) rail line for a cash purchase price of approximately $210 million, subject to certain adjustments including the purchase of materials and supplies, equipment and vehicles. We intend to fund the acquisition with borrowings under our existing credit facilities. The asset acquisition is expected to close by mid-2014, subject to approval of the STB and the satisfaction of other customary closing conditions. Upon closing, our new railroad will be named Rapid City, Pierre & Eastern Railroad. We expect to hire approximately 180 employees to staff the new railroad and anticipate these employees will come primarily from those currently working on the rail line. The western end encompasses approximately 670 miles of CP's current operations between Tracy, Minnesota and Rapid City, South Dakota; north of Rapid City to Colony, Wyoming; south of Rapid City to Dakota Junction, Nebraska; and connecting branch lines as well as trackage from Dakota Junction to Crawford, Nebraska, currently leased to the Nebraska Northwestern Railroad (NNW). Customers on the line ship approximately 52,000 carloads annually of grain, bentonite clay, ethanol, fertilizer and other products. The new rail operation will have the ability to interchange with CP, Union Pacific, BNSF and NNW. RailAmerica Acquisition and Related Financings On October 1, 2012, we announced the closing of our acquisition of RailAmerica and entered into the Credit Agreement, which was comprised of $1.9 billion in term loans and a $425.0 million revolving credit facility. We financed the $1.4 billion cash purchase price for RailAmerica's shares, the refinancing of $1.2 billion of our and RailAmerica's debt, as well as transaction and financing-related expenses, with $1.8 billion of debt from our Credit Agreement, $475.5 million of gross proceeds from our public offerings of Class A common stock and TEUs and $350.0 million of gross proceeds through the private issuance of Preferred Stock to Carlyle, as more fully described in Note 3, Changes in Operations, and Note 9, Long-Term Debt, to our Consolidated Financial Statements included elsewhere in this Annual Report. On October 1, 2012, in connection with the RailAmerica acquisition, we repaid in full all outstanding loans, together with interest and all other amounts due under our previously outstanding credit agreement. In addition, we repaid in full our outstanding Series B senior notes on October 1, 2012, along with an aggregate $12.6 million make-whole payment. In connection with such repayment, we wrote off $3.2 million of unamortized debt issuance costs. 66 -------------------------------------------------------------------------------- As part of the financing for the RailAmerica acquisition, on October 1, 2012, we completed the issuance of 350,000 shares of 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 Preferred Stock were cumulative and payable quarterly in arrears in an amount equal to 5.00% per annum of the issuance price per share. Each share of the Preferred Stock was convertible 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 Preferred Stock was also mandatorily convertible 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, we had the ability to convert some or all of the Preferred Stock prior to the second anniversary of the date of issue of the Preferred Stock if the closing price of our Class A common stock on the New York Stock Exchange exceeded 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 Preferred Stock was set at approximately $58.49, which was a 4.5% premium to our stock price prior to the announcement of the RailAmerica acquisition. As of February 12, 2013, the closing price of our Class A common stock had exceeded $76.03 for 30 consecutive trading days. On February 13, 2013, we exercised our option to convert all of the outstanding Preferred Stock issued to Carlyle into 5,984,232 shares of our Class A common stock. On the conversion date, we also paid to Carlyle all accrued and unpaid dividends on the Preferred Stock of $2.1 million, as well as cash in lieu of fractional shares. In November 2013, Carlyle sold all of these outstanding shares of our Class A common stock in a public offering. In connection with the funding of the RailAmerica acquisition described above, on September 19, 2012, we issued 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 us, which had an initial principal amount of $14.1023 per Amortizing Note. As of December 31, 2013, the Amortizing Notes had an aggregate principal amount of $21.9 million. On each January 1, April 1, July 1 and October 1, we are required to pay holders of Amortizing Notes equal quarterly installments of $1.25 per Amortizing Note (except for the January 1, 2013 installment payment, which was $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. The Amortizing Notes have a scheduled final installment payment date of October 1, 2015. If we elect to settle the Purchase Contracts early, holders of the Amortizing Notes will have the right to require us 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 we will deliver a number of shares of our Class A common stock based on the applicable market value of our Class A 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 based on our share price at the time of settlement. Each TEU may be separated into its constituent Purchase Contract and Amortizing Note after the initial issuance date of the TEU, 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. On September 19, 2012, we recorded $197.6 million, the initial fair value of the Purchase Contracts, as additional paid-in capital, which was partially offset by $6.1 million of underwriting discounts and commissions and offering expenses. Our basic and diluted 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, we used the market price of our Class A common stock at the period end date. Cash Repatriation At December 31, 2013, we had cash and cash equivalents totaling $62.9 million, of which $26.1 million was held in our foreign subsidiaries. We file a consolidated United States federal income tax return that includes all of our United States subsidiaries. Each of our foreign subsidiaries files income tax returns in each of its respective countries. No provision is made for the United States income taxes applicable to the undistributed earnings of controlled foreign subsidiaries as it is the intention of management to fully utilize those earnings in the operations of foreign subsidiaries. If the earnings were to be distributed in the future, those distributions may be subject to United States income taxes (appropriately reduced by available foreign tax credits) and withholding taxes payable to various foreign countries; however, the amount of the tax and credits is not practically determinable. The amount of undistributed earnings of our controlled foreign subsidiaries as of December 31, 2013 was $268.9 million. 67 -------------------------------------------------------------------------------- Credit Agreement As of October 1, 2012, the Credit Agreement included a $425.0 million revolving credit facility, 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 revolving credit facility also includes borrowing capacity for letters of credit and for borrowings on same-day notice, referred to as swingline loans. The Credit Agreement has a maturity date of October 1, 2017. The Credit Agreement allows for borrowings under the revolving credit facility in United States dollars, Euros, Canadian dollars and Australian dollars. Under the revolving credit facility, the applicable borrowing spread for the United States base rate loans and Canadian base rate loans under the Credit Agreement initially were 1.50% over the base rate through December 31, 2012 and ranged from 0.50% to 1.75% over the base rate depending upon our total leverage ratio through March 27, 2013. The applicable borrowing spread in the case of the United States, Canadian and European loans is the London Interbank Offered Rate (LIBOR) and the Australian loans is the Bank Bill Swap Reference Rate (BBSW), which were initially 2.50% over the LIBOR and BBSW rate through December 31, 2012 and ranged from 1.50% to 2.75% over these rates depending upon our total leverage ratio through March 27, 2013. BBSW is the wholesale interbank reference rate within Australia, which we believe is generally considered the Australian equivalent to LIBOR. On March 28, 2013, we entered into Amendment No. 1 (the Amendment) to the Credit Agreement. As a result of the Amendment, the applicable borrowing spread for the United States and Canadian base rate loans under the revolving credit facility were reduced to 0.25% to 1.50% over the base rate and the applicable borrowing spread for the United States, Canadian, European and Australian term loans were reduced to 1.25% to 2.50% over the respective LIBOR and BBSW rates depending upon our total leverage ratio. The existing term loans and loans under the revolving credit facility are guaranteed by substantially all of our United States subsidiaries for the United States guaranteed obligations and by substantially all of our foreign subsidiaries for the foreign guaranteed obligations. The Credit Agreement is collateralized by a substantial portion of the real and personal property assets of our domestic subsidiaries that have guaranteed the United States obligations under the Credit Agreement and a substantial portion of the personal property assets of our foreign subsidiaries that have guaranteed the foreign obligations under the Credit Agreement. During the three months ended December 31, 2012, we made prepayments on our United States term loan of $47.5 million, prepayments on our Canadian term loan of C$10.0 million (or $10.0 million at the exchange rate on the date it was paid) and prepayments on our Australian term loan of A$18.0 million (or $18.6 million at the exchange rate on the date it was paid). We also made scheduled quarterly principal payments of $16.4 million on our United States term loan, C$0.2 million (or $0.2 million at the average exchange rate during the period in which paid) on our Canadian term loan and A$2.0 million (or $2.1 million at the average exchange rate during the period in which paid) on our Australian term loan during the three months ended December 31, 2012. In March 2013, we prepaid in full the remaining balance on our Canadian term loan, which resulted in the write-off of unamortized deferred financing costs of $0.5 million. In addition, during the year ended December 31, 2013, we made prepayments of $79.0 million and scheduled quarterly principal payments totaling $63.7 million on our United States term loan. During the year ended December 31, 2013, we made prepayments of A$24.0 million (or $23.6 million at the average exchange rates during the periods in which paid) and scheduled quarterly principal payments totaling A$8.1 million (or $7.7 million at the average exchange rates during the periods in which paid) on our Australian term loan. As of December 31, 2013, we had outstanding term loans of $1.4 billion in the United States with an interest rate of 1.92% and A$150.8 million in Australia (or $134.4 million at the exchange rate on December 31, 2013) with an interest rate of 4.40%. As of December 31, 2013, we had outstanding revolving credit facilities of $11.0 million in the United States with an interest rate of 1.92% and €3.6 million in Europe (or $4.9 million at the exchange rate on December 31, 2013) with an interest rate of 1.97%. In addition to paying interest on any outstanding borrowings under the Credit Agreement, we are required to pay a commitment fee in respect of the unutilized portion of the commitments under the revolving credit facility. The commitment fee rate initially was 0.50% per annum through December 31, 2012 and will range from 0.25% to 0.50% depending upon our total leverage ratio thereafter. We also pay customary letter of credit and agency fees. 68 -------------------------------------------------------------------------------- The Credit Agreement also includes (a) a $45.0 million sub-limit for the issuance of standby letters of credit and (b) sub-limits for swingline loans including (i) up to $30.0 million under the United States revolving credit facility, (ii) up to $15.0 million under each of the Canadian revolving credit facility and the Australian revolving credit facility and (iii) up to $10.0 million under the Euro revolving credit facility. The Credit Agreement contains a number of customary affirmative and negative covenants that, among other things, limit or prohibit our ability, subject to certain exceptions, 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 us; sell or issue capital stock of any of our restricted subsidiaries; change our fiscal year; enter into certain agreements containing negative pledges and upstream limitations and engage in certain transactions with affiliates. Under the Credit Agreement, we may not have an interest coverage ratio less than 3.50 to 1.00 as of the last day of any fiscal quarter. In addition, we may not exceed specified maximum total leverage ratios as described in the following table: Period Maximum Total Leverage Ratio Closing Date through September 30, 2013 4.75 to 1.00 October 1, 2013 through September 30, 2014 4.25 to 1.00 October 1, 2014 through September 30, 2015 3.75 to 1.00 October 1, 2015 and thereafter 3.50 to 1.00 As of December 31, 2013, we were in compliance with the covenants under our Credit Agreement. As of December 31, 2013, our $425.0 million revolving credit facility consisted of $15.9 million of outstanding debt, subsidiary letters of credit guarantees of $3.1 million and $406.0 million of unused borrowing capacity. Subject to maintaining compliance with the covenants under the Credit Agreement, the $406.0 million of unused borrowing capacity as of December 31, 2013 is available for working capital, capital expenditures, permitted investments, permitted acquisitions, refinancing existing indebtedness and general corporate purposes. We expect to use a portion of the availability under our Credit Agreement to fund the pending acquisition of the assets comprising the western end of the DM&E. On July 29, 2011, we entered into the Third Amended and Restated Revolving Credit and Term Loan Agreement (Prior Credit Agreement), which replaced our credit agreement then in effect. The Prior Credit Agreement had a borrowing capacity of $750.0 million and a maturity date of July 29, 2016. The Prior Credit Agreement included a $425.0 million revolving credit facility, a $200.0 million United States term loan, an A$92.2 million ($100.0 million at the July 29, 2011 exchange rate) Australian term loan and a C$23.6 million ($25.0 million at the July 29, 2011 exchange rate) Canadian term loan. As described above, in connection with the RailAmerica acquisition, on October 1, 2012, we repaid in full all outstanding loans, together with interest and all other amounts due under the Prior Credit Agreement. No penalties were due in connection with such repayments. In connection with the repayment of the Prior Credit Agreement, we wrote off $2.9 million of unamortized debt issuance costs and incurred $0.5 million of legal expenses during the year ended December 31, 2012. Senior Notes In 2005, we completed a private placement of $100.0 million of Series B senior notes and $25.0 million of Series C senior notes. The Series B senior notes bore interest at 5.36% and were due in July 2015. On October 1, 2012, we repaid the $100.0 million of outstanding Series B senior notes, along with an aggregate $12.6 million make-whole payment, with proceeds from the Credit Agreement. The Series C senior notes had a borrowing rate of three-month LIBOR plus 0.70% and were repaid in July 2012 through borrowings under the Prior Credit Agreement. In addition, we wrote off $0.3 million of unamortized debt issuance costs associated with our senior notes during the year ended December 31, 2012. 69 --------------------------------------------------------------------------------TEUs As discussed above in "RailAmerica Acquisition and Related Financing," each TEU consists of an Amortizing Note due October 1, 2015, with an initial principal amount of $14.1023 per note. As of December 31, 2013, the Amortizing Notes had an aggregate principal amount of $21.9 million. On each January 1, April 1, July 1 and October 1, we are required to pay holders of Amortizing Notes equal quarterly installments of $1.25 per Amortizing Note (except for the January 1, 2013 installment payment, which was $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. The Amortizing Notes have a scheduled final installment payment date of October 1, 2015. If we elect to settle the Purchase Contracts early, holders of the Amortizing Notes will have the right to require us to repurchase such holders' Amortizing Notes, except in certain circumstances as described in the indenture governing the Amortizing Notes. Non-Interest Bearing Loan In 2010, as part of the acquisition of FreightLink, we assumed debt with a carrying value of A$1.8 million (or $1.7 million at the exchange rate on December 1, 2010), which represented the fair value of an A$50.0 million (or $48.2 million at the exchange rate on December 1, 2010) non-interest bearing loan due in 2054. As of December 31, 2013, the carrying value of the loan was A$2.3 million (or $2.0 million at the exchange rate on December 31, 2013) with a non-cash imputed interest rate of 8.0%. Equipment and Property Leases We enter into operating leases for railcars, locomotives and other equipment as well as real property. We also enter into agreements with other railroads and other third parties to operate over certain sections of their track and pay a per car fee to use the track or an annual lease payment. The costs associated with operating leases are expensed as incurred. The number of railcars and locomotives leased by us, including 8,004 railcars and 175 locomotives acquired from RailAmerica in 2012, as of December 31, 2013 and 2012 was as follows: December 31, 2013 2012 Railcars 17,718 18,311 Locomotives 100 182 Our operating lease expense for equipment and real property leases and expense for the use of other railroad and other third parties' track for the years ended December 31, 2013, 2012 and 2011 was as follows (2012 excludes lease expense related to RailAmerica's equipment and real property leases and trackage rights expense included in equity earnings for the period from October 1, 2012 to December 28, 2012) (dollars in thousands): 2013 2012 2011 Equipment $ 32,050 $ 13,386 $ 19,328 Real property $ 8,062 $ 5,055 $ 4,632 Trackage rights $ 50,911 $ 28,250 $ 23,066 We are party to several lease agreements with Class I carriers and other third parties to operate over various rail lines in North America, with varied expirations. Certain of these lease agreements have annual lease payments. Revenues from railroads we lease from Class I carriers and other third parties accounted for approximately 9% of our 2013 total revenues. Leases from Class I railroads and other third parties that are subject to expiration in each of the next 10 years represent less than 2% of our annual revenues in the year of expiration based on our operating revenues for the year ended December 31, 2013. 70 -------------------------------------------------------------------------------- Shelf Registration We have an effective shelf registration statement on file with the SEC for an indeterminate number of securities that is effective for three years (expires September 12, 2015), after which time we expect to be able to file an automatic shelf registration statement that would become immediately effective for another three-year term. Under this universal shelf registration statement, we have the capacity to offer and sell from time to time securities, including common stock, debt securities, preferred stock, warrants and units. Grants from Outside Parties Our railroads have received a number of project grants from federal, provincial, state and local agencies and other outside parties (e.g., customers) for upgrades and construction of rail lines and upgrades of locomotives. We use the grant funds as a supplement to our normal capital programs. In return for the grants, the railroads pledge to maintain various levels of service and improvements on the rail lines that have been upgraded or constructed. We believe the levels of service and improvements required under the grants are reasonable. However, we can offer no assurance that grants from outside parties will continue to be available or that even if available, our railroads will be able to obtain them. Insurance and Third-Party Claims Accounts receivable from insurance and other third-party claims was $33.0 million and $25.0 million as of December 31, 2013 and 2012, respectively. Accounts receivable from insurance and other third-party claims at December 31, 2013 included $16.8 million from our Australian Operations and $14.8 million from our North American & European Operations. The balance from our Australian Operations resulted predominately from a derailment in Australia's Northern Territory (the Edith River Derailment) in December 2011. The balance from our North American & European Operations resulted predominately from a derailment in Alabama (the Aliceville Derailment) in November 2013. We received proceeds from insurance totaling $11.1 million, $21.8 million and $0.6 million for the years ended December 31, 2013, 2012 and 2011, respectively, and recorded related gains on insurance recoveries totaling $1.5 million, $5.8 million and $1.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. 2014 Budgeted Capital Expenditures The following table sets forth our budgeted capital expenditures for the year ending December 31, 2014 (dollars in thousands): Budgeted Capital Expenditures: 2014 Track and equipment, self-funded $ 199,000 Track and equipment, subject to third-party funding 73,000 New business development 53,000 Grants from outside parties (58,000 ) Net budgeted capital expenditures $ 267,000 Our budgeted capital expenditures for the year ending December 31, 2014 include $47 million of capital expenditures for our Australian Operations, including $25 million in capital expenditures for new business development. We have historically relied primarily on cash generated from operations to fund working capital and capital expenditures relating to ongoing operations, while relying on borrowed funds and stock issuances to finance acquisitions and new investments. We believe our cash flow from operations will enable us to meet our liquidity and capital expenditure requirements relating to ongoing operations for at least the duration of the Credit Agreement. Contractual Obligations and Commercial Commitments Based on our assessment of the underlying provisions and circumstances of our material contractual obligations and commercial commitments as of December 31, 2013, there is no known trend, demand, commitment, event or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition or liquidity. 71 -------------------------------------------------------------------------------- The following table represents our obligations and commitments for future cash payments under various agreements as of December 31, 2013 (dollars in thousands): Payments Due By Period Contractual Less than 1 More than 5 Obligations: Total year 1-3 years 3-5 years years Long-term debt obligations (1) $ 1,657,374 $ 83,490 $ 216,671 $ 1,312,638 $ 44,575 Interest on long-term debt (2) 159,639 35,151 62,286 20,581 41,621 Derivative instruments (3) 838 - 838 - - Capital lease obligations 11,142 876 1,758 8,324 184 Operating lease obligations 235,401 32,414 38,949 26,807 137,231 Purchase obligations (4) 14,469 14,469 - - - Other long-term liabilities (5) 31,312 2,609 2,112 750 25,841 Total $ 2,110,175 $ 169,009 $ 322,614 $ 1,369,100 $ 249,452 (1) Includes an A$50.0 million (or $44.6 million at the exchange rate on December 31, 2013) non-interest bearing loan due in 2054 assumed in the acquisition of FreightLink with a carrying value of A$2.3 million (or $2.0 million at the exchange rate on December 31, 2013). (2) Assumes no change in variable interest rates from December 31, 2013. (3) Includes the fair value of our interest rate swaps of $0.8 million. (4) Includes purchase commitments for future capital expenditures among our existing operations. Excludes the pending purchase of assets on the western end of CP's DM&E line of approximately $210 million (which is subject to STB approval and the satisfaction of other closing conditions), which was announced in January 2014. (5) Includes estimated casualty obligations of $11.4 million, deferred compensation of $11.2 million and certain other long-term liabilities of $8.8 million. In addition, the table includes estimated post-retirement medical and life insurance benefits of $6.9 million and our 2014 estimated contributions of $0.8 million to our pension plans. Off-Balance Sheet Arrangements An off-balance sheet arrangement includes any contractual obligation, agreement or transaction involving an unconsolidated entity under which we (1) have made guarantees, (2) have a retained or contingent interest in transferred assets, or a similar arrangement, that serves as credit, liquidity or market risk support to that entity for such assets, (3) have an obligation under certain derivative instruments, or (4) have any obligation arising out of a material variable interest in such an entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing or hedging services with us. Our off-balance sheet arrangements as of December 31, 2013 consisted of operating lease obligations, which are included in the contractual obligations table above. Impact of Foreign Currencies on Operating Revenues and Expenses When comparing the effects on revenues of average foreign currency exchange rates in effect during the year ended December 31, 2013 versus the year ended December 31, 2012, foreign currency translation had an overall negative impact on our consolidated operating revenues due to the weakening of the Australian and Canadian dollars relative to the United States dollar, partially offset by the strengthening of the Euro relative to the United States dollar in the year ended December 31, 2013. Currency effects related to operating revenues and expenses are presented within the discussion of these respective items included within this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Critical Accounting Policies and Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to use judgment and to make estimates and assumptions that affect business combinations, reported assets, liabilities, revenues and expenses during the reporting period. Management uses its judgment in making significant estimates in the areas of recoverability and useful life of assets, as well as liabilities for casualty claims and income taxes. Actual results could materially differ from those estimates. 72 -------------------------------------------------------------------------------- Business Combinations We account for businesses we acquire using the acquisition method of accounting. Under this method, all acquisition-related costs are expensed as incurred. We record the underlying net assets at their respective acquisition-date fair values. As part of this process, we identify and attribute values and estimated lives to property and equipment and intangible assets acquired. These determinations involve significant estimates and assumptions, including those with respect to future cash flows, discount rates and asset lives, and therefore require considerable judgment. These determinations affect the amount of depreciation and amortization expense recognized in future periods. The results of operations of acquired businesses are included in our consolidated statements of operations beginning on the respective business's acquisition date. Property and Equipment We record property and equipment at cost. We capitalize major renewals or improvements, but routine maintenance and repairs are expensed when incurred. We incur maintenance and repair expenses to keep our operations safe and fit for existing purpose. Major renewals or improvements to property and equipment, however, are undertaken to extend the useful life or increase the functionality of the asset, or both. When assessing spending for classification among capital or expense, we evaluate the substance of the respective spending. For example, costs incurred to modify a railroad bridge, either through individual projects or pre-established multi-year programs, which substantially upgrade the bridge's capacity to carry increased loads and/or to allow for a carrying speed beyond the original or existing capacity of the bridge, are capitalized. However, costs for replacement of routinely wearable bridge components, such as plates or bolts, are expensed as incurred. Other than a de minimis threshold under which costs are expensed as incurred, we do not apply pre-defined capitalization thresholds when assessing spending for classification among capital or expense. Unlike the Class I railroads that operate over extensive contiguous rail networks, our short line and regional railroads are generally geographically dispersed businesses that transport freight over relatively short distances. As a result, we typically incur minimal spending on self-constructed assets and, instead, the vast majority of our capital spending relates to purchased assets installed by professional contractors. We also generally do not incur significant rail grinding or ballast cleaning expenses. However, if and when such costs are incurred, they are expensed. The following table sets forth our total net capitalized major renewals and improvements versus our total maintenance and repair expense for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands): 2013 2012 2011 Gross capitalized major renewals and improvements $ 220,529 $ 116,222 $ 107,419 Grants from outside parties 33,913 39,632 22,642 Net capitalized major renewals and improvements $ 186,616 $ 76,590 $ 84,777 Total repairs and maintenance expense $ 328,991 $ 180,282 $ 172,396 We depreciate our property and equipment on the straight-line method over the useful lives of the property and equipment. The following table sets forth the estimated useful lives of our major classes of property and equipment: Estimated Useful Life (in Years) Property: Minimum Maximum Buildings and leasehold improvements (subject to term of lease) 2 40 Bridges/tunnels/culverts 20 50 Track property 5 50 Equipment: Computer equipment 2 7 Locomotives and railcars 2 30 Vehicles and mobile equipment 2 10 Signals and crossing equipment 4 30 Track equipment 2 10 Other equipment 2 20 73-------------------------------------------------------------------------------- We continually evaluate whether events and circumstances have occurred that indicate that the carrying amounts of our long-lived tangible assets may not be recoverable. When factors indicate that an asset should be evaluated for possible impairment, we use an estimate of the related undiscounted future cash flows over the remaining life of such asset in measuring whether or not impairment has occurred. If we identify impairment of an asset, we would report a loss to the extent that the carrying value of the related asset exceeds the fair value of such asset, as determined by valuation techniques applicable in the circumstances. Losses from impairment of assets are charged to net (gain)/loss on sale and impairment of assets within operating expenses. Gains or losses on sales, including sales of assets removed during track and equipment upgrade projects, or losses incurred through other dispositions, such as unanticipated retirement or destruction, are credited or charged to net (gain)/loss on sale and impairment of assets within operating expenses. Gains are recorded when realized if the sale value exceeds the remaining carrying value of the respective property and equipment. If the estimated salvage value is less than the remaining carrying value, we record the loss incurred equal to the respective asset's carrying value less salvage value. There were no material losses incurred through other dispositions from unanticipated or unusual events in the years ended December 31, 2013, 2012 or 2011. Grants from Outside Parties Grants from outside parties are recorded as long-term liabilities and are amortized as a reduction to depreciation expense over the same period during which the associated assets are depreciated. Goodwill and Indefinite-Lived Intangible Assets We review the carrying values of goodwill and identifiable intangible assets with indefinite lives at least annually to assess impairment since these assets are not amortized. If the carrying amount of the asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. We perform our annual impairment test as of November 30 of each year, and no impairment was recognized for the years ended December 31, 2013, 2012 and 2011, as a result of our annual impairment test. Additionally, we review the carrying value of any intangible asset or goodwill whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The determination of fair value involves significant management judgment including assumptions about operating results, business plans, income projections, anticipated future cash flows and market data. Impairments are expensed when incurred. Amortizable Intangible Assets We perform an impairment test on amortizable intangible assets when specific impairment indicators are present. We have amortizable intangible assets valued primarily as service agreements, customer contracts or relationships and track access agreements. These intangible assets are generally amortized on a straight-line basis over the expected economic longevity of the facility served, the customer relationship, or the length of the contract or agreement including expected renewals. Derailment and Property Damages, Personal Injuries and Third-Party Claims We maintain liability and property insurance coverage to mitigate the financial risk of providing rail and rail-related services. On August 1, 2013, we renewed these annual insurance policies, which now cover all of our operations under one insurance program. Incidents involving entities previously owned by RailAmerica that occurred prior to this renewal would be considered under RailAmerica's legacy liability and property insurance policies. Our primary liability policies currently have self-insured retentions of up to $1.0 million per occurrence. RailAmerica's prior primary liability policies' self-insured retentions were as high as $4.0 million per occurrence. With respect to the transportation of hazardous commodities, our liability policy covers third-party claims and damages associated with sudden releases of hazardous materials, including expenses related to evacuation, as a result of a railroad accident. Personal injuries associated with grade crossing accidents are also covered under our liability policies. Our property damage policies currently have various self-insured retentions, which vary based on type and location of the incident, of up to $1.0 million per occurrence except in Australia where our self-insurance retention for property damage due to a cyclone or flood is A$2.5 million. RailAmerica's primary property damage policies previously had self-insured retentions of up to $1.5 million per occurrence. The property damage policies also provide business interruption insurance arising from covered events. The self-insured retentions under our policies may change with each annual insurance renewal depending on our loss history, the size and make-up of our company and general insurance market conditions. 74 -------------------------------------------------------------------------------- Employees of our United States railroads are covered by the Federal Employers' Liability Act (FELA), a fault-based system under which claims resulting from injuries and deaths of railroad employees are settled by negotiation or litigation. FELA-related claims are covered under our liability policies. Employees of our industrial switching and railroad construction businesses are covered under workers' compensation policies. Accruals for FELA claims by our railroad employees and third-party personal injury or other claims are recorded in the period when such claims are determined to be probable and estimable. These estimates are updated in future periods as information develops. Stock-Based Compensation The Compensation Committee of our Board of Directors (Compensation Committee) has discretion to determine grantees, grant dates, amounts of grants, vesting and expiration dates for stock-based compensation awards to our employees under our Second Amended and Restated 2004 Omnibus Incentive Plan (the Omnibus Plan). The Omnibus Plan permits the issuance of stock options, restricted stock, restricted stock units and any other form of award established by the Compensation Committee, in each case consistent with the Omnibus Plan's purpose. Under the terms of the awards, equity grants for employees generally vest over three years and equity grants for directors vest over their respective remaining terms as directors. The grant date fair value of non-vested shares, less estimated forfeitures, is recorded to compensation expense on a straight-line basis over the vesting period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model and straight-line amortization of compensation expense is recorded over the requisite service period of the grant. Two assumptions in the Black-Scholes pricing model require management judgment: the life of the option and the volatility of the stock over the life of the option. The assumption for the life of the option is based on historical experience and is estimated for each grant. The assumption for the volatility of the stock is based on a combination of historical and implied volatility. The fair value of our restricted stock and restricted stock units is based on the closing market price of our Class A common stock on the date of grant. For the year ended December 31, 2013, compensation cost from equity awards was $11.7 million. We also recorded an additional $5.1 million of costs from the acceleration of equity awards for certain terminated employees related to the integration of RailAmerica. As of December 31, 2013, the compensation cost related to non-vested awards not yet recognized was $14.6 million, which will be recognized over the next 3 years with a weighted average period of 1.3 years. The total income tax benefit recognized in the consolidated statement of operations for equity awards, including the benefit recognized from the acceleration of equity awards related to the integration of RailAmerica, was $5.3 million for the year ended December 31, 2013. For the year ended December 31, 2012, compensation cost from equity awards was $7.9 million. We also recorded an additional $4.1 million of costs from the acceleration of equity awards for certain terminated employees related to the integration of RailAmerica. The total income tax benefit recognized in the consolidated statement of operations for equity awards, including the benefit recognized from the acceleration of equity awards related to the integration of RailAmerica, was $4.5 million for the year ended December 31, 2012. For the year ended December 31, 2011, compensation cost from equity awards was $7.7 million. The total income tax benefit recognized in the consolidated statement of operations for equity awards was $2.6 million for the year ended December 31, 2011. Income Taxes We account for income taxes under a balance sheet approach for the financial accounting and reporting of deferred income taxes. Deferred income taxes reflect the tax effect of temporary differences between the book and tax basis of assets and liabilities, as well as available income tax credits and capital and net operating loss carryforwards. In our consolidated balance sheets, these deferred obligations or benefits are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred income tax obligation or benefit that is not related to an asset or liability for financial reporting, including deferred income tax assets related to tax credit and loss carryforwards, is classified according to the expected reversal date of the temporary difference as of the end of the year. We evaluate on a quarterly basis whether, based on all available evidence, our deferred income tax assets will be realizable. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of a deferred tax asset will not be realized. 75 -------------------------------------------------------------------------------- No provision is made for the United States income taxes applicable to the undistributed earnings of controlled foreign subsidiaries because it is the intention of management to fully utilize those earnings in the operations of foreign subsidiaries. If the earnings were to be distributed in the future, those distributions may be subject to United States income taxes (appropriately reduced by available foreign tax credits) and withholding taxes payable to various foreign countries. Other Uncertainties Our operations and financial condition are subject to certain risks that could cause actual operating and financial results to differ materially from those expressed or forecasted in our forward-looking statements. For a complete description of our general risk factors including risk factors of foreign operations, see "Part I. Item 1A. Risk Factors" in this Annual Report. Management believes that full consideration has been given to all relevant circumstances to which we may be currently subject, and the consolidated financial statements accurately reflect management's best estimate of our results of operations, financial condition and cash flows for the years presented. Recently Issued Accounting Standards See Note 20, Recently Issued Accounting Standards, to our Consolidated Financial Statements included elsewhere in this Annual Report. 76-------------------------------------------------------------------------------- |