Genesee & Wyoming Inc.
2007 Annual Report
GWIOperations
Oregon Region
Portland & Western Railroad
Contract Coal Loading
Rocky
Mountain Region
Utah Railway
Tomahawk
Railway
Illinois Region
Tazewell & Peoria Railroad
Illinois & Midland Railroad
Short Line Railroads
Dashed lines indicate trackage rights
Canada Region
Chemins de fer
Québec-Gatineau
Huron Central Railway
Chemin de fer St-Laurent
& Atlantique (Québec)
St. Lawrence
& Atlantic Railroad
New York/
Pennsylvania Region
Rochester & Southern Railroad
Buffalo & Pittsburgh Railroad
YR
MMID
Portsmouth, VA
Portsmouth, VA
CWRY
WKR
KWT
ETRY
ATW
M&B
CHAT
BAYL
CIRR
VRY
AN
GC
RS
FC
Wilmington, NC
Wilmington, NC
Savannah, GA
Savannah, GA
Brunswick, GA
Brunswick, GA
Fernandina, FL
Fernandina, FL
Panama City, FL
Panama City, FL
St. Joe, FL
St. Joe, FL
Jacksonville, FL
Jacksonville, FL
Rail Link Region
CWRY Commonwealth Railway
FC First Coast Railroad
GC Georgia Central Railway
MMID Maryland Midland Railway
RS Riceboro Southern Railway
YR York Railway
Port Operations
Industrial Switching
F&P
ALM
L&D
Southern Region
ALM Arkansas Louisiana & Mississippi Railroad
LR&W
AN AN Railway
ATW Atlantic & Western Railway
BAYL The Bay Line Railroad
CHAT Chattahoochee Bay Railroad
CIRR Chattahoochee Industrial Railroad
ETRY East Tennessee Railway
F&P Fordyce & Princeton Railroad
KWT KWT Railway
LR&W Little Rock & Western Railway
L&D Louisiana & Delta Railroad
M&B Meridian & Bigbee Railroad
VRY Valdosta Railway
WKR Western Kentucky Railway
Port Operations
Galveston, TX
Galveston, TX
Baton Rouge, LA
Baton Rouge, LA
Corpus Christi, TX
Corpus Christi, TX
Australia
Genesee & Wyoming Inc. (GWI) is a leading owner and
operator of short line and regional freight railroads in
the United States, Canada and Australia and owns a minority
interest in a railroad in Bolivia. Operations currently include
48 railroads organized in eight regions, with more than
5,700 miles of owned and leased track and approximately
3,000 additional miles under track access arrangements.
GWI provides rail service at 12 U.S. ports and also
performs contract coal loading and railcar switching
for industrial customers.
Australia Region
Genesee & Wyoming Australia (GWA)
GWA-Operated Track
Asia Pacific Transport Consortium (APTC) Line
Interstate Lines with Open Access
PERU
BRAZIL
La Paz
Santa Cruz
Bolivia
Corumba
Corumba
Visit gwrr.com
for detailed maps
Yacuiba
PARAGUAY
CHILE
Rio Paraguay
ARGENTINA
Financial Highlights
(In thousands, except per share amounts)
Years Ended December 31
2007
2006
2005
2004
2003
Income Statement Data
Operating revenues
Income from operations
Net income from continuing operations
Net income
Diluted earnings per common share
from continuing operations
Diluted (loss) earnings per common
share from discontinued operations
Diluted earnings per common share
$516,167
$450,683
$350,401
$270,550
$213,224
96,828
81,657
69,247
55,175
172,647
134,003
69,441
50,511
50,135
46,112
36,629
37,140
32,262
27,165
27,449
1.77
4.07
1.21
0.88
0.64
(0.36)
1.41
(0.91)
3.16
(0.01)
1.20
0.02
0.90
0.04
0.68
Weighted average shares
39,148
42,417
41,712
41,103
40,152
Balance Sheet Data as of Period End
Total assets
Total debt
Stockholders’ equity
$1,077,801 $1,141,064
$980,598
$677,251
$627,173
272,766
430,981
245,685
520,187
338,351
397,820
132,237
341,700
158,022
267,086
Operating Revenues
($ In Millions)
Operating Income
($ In Millions)
Net Income from
Continuing Operations
($ In Millions)
Diluted Earnings Per Share
from Continuing Operations
$516.2
$100
$96.8
$172.6**
$4.07**
R
G
A
C
%
2 4.7
$450.7
$350.4
$270.5
$213.2
$500
400
300
200
100
0
R
G
A
C
%
3 1.6
$81.7
$69.4
$46.1
$32.3
75
50
25
0
$75
50
25
0
R
G
A
C
%
2 6.3
R
G
A
C
%
2 9.0
$69.2**
$2.00
64.0*
65.5*
$50.5
$36.6
$27.2
$0.88
$0.64
1.50
1.00
0.50
0
$1.77**
1.68*
$1.21
1.51*
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
CAGR = Compound Annual Growth Rate
* Net income from continuing operations for the years ended December 31, 2007 and 2006 was $69.2 million and
$172.6 million, respectively. Diluted earnings per share from continuing operations for the years ended December
31, 2007 and 2006 was $1.77 and $4.07, respectively. Excluding the tax benefit associated with the ARG Sale
of $3.7 million (or $0.09 per diluted share), GWI’s net income from continuing operations for the year ended
December 31, 2007 would have been $65.5 million, and diluted earnings per share from continuing operations
would have been $1.68. Excluding the net gain and related effects of the ARG Sale of $196.9 ($114.5 million
after-tax, or $2.70 per diluted share) and the non-cash impairment in Bolivia of $5.9 million ($5.9 million after-tax,
or $0.14 per diluted share), GWI’s net income from continuing operations for the year ended December 31, 2006
would have been $64.0 million, and diluted earnings per share from continuing operations would have been $1.51.
** Reported
2007 Annual Report 1
From the Executive Chairman
To Our Shareholders:
Following Genesee & Wyoming during 2007 was
complicated at times. The uncertainty regarding
the future of our Mexican operations, the impact of
declining forest products and pulp and paper carloads
in a weak U.S. economy, the drought in Australia and
the elimination of haulage traffic on our Meridian
& Bigbee Railroad were themes for much of the year.
In addition, the U.S. acquisition market remained
as competitive as I have seen during my 30 years
in the railroad business.
In the midst of this challenging business environ-
ment, we completed a significant leadership transi-
tion as Jack Hellmann succeeded me as Chief
Executive Officer. I am pleased to report that Jack
and the entire GWI management team handled the
challenges of 2007 with great skill. I am especially
proud of the continuing improvement in our safety
performance and our strong financial results. In
withstanding the challenges of 2007, GWI once
again demonstrated the underlying strength and
stability of our core business.
Mortimer B. Fuller III
Executive Chairman
As we begin 2008, GWI looks much less com-
plicated. With the closure of our Mexican operations,
strong pricing more than offsetting volume declines,
a healthy balance sheet, clearly identified growth
opportunities, and an improving acquisition environ-
ment, GWI is well positioned to continue its growth
trajectory.
It is our core purpose to be the safest and most
respected rail service provider in the world. This can
only be achieved through the actions of every GWI
employee. Thanks to my coworkers, the Board of
Directors, our shareholders, customers and business
partners, I am pleased with our accomplishments in
2007 and enthusiastic about our prospects for 2008.
Thank you,
Mortimer B. Fuller III
Executive Chairman
2007 Annual Report 3
From the CEO
To Our Shareholders:
We start every meeting at GWI with a safety
briefing, and this annual report is no exception.
Our number-one priority is that each GWI
employee returns home injury-free at the end
of the workday. In 2007, I am pleased to report
that our Federal Railroad Administration (FRA)
injury frequency rate was 1.67 per 200,000 man
hours, a 14% improvement over 2006. While these
results are positive and well ahead of our peer
railroads (see sidebar page 7), we still require
plenty of improvement to become injury-free.
As shareholders, it is important to understand
the direct correlation between railroad safety
performance and financial performance. The
conventional wisdom is that safe operations
lead to a reduction in the high cost of injuries
and related insurance expenses. I would add two
other reasons to explain the correlation. First,
employees who know that their company is
John C. Hellmann
President and Chief Executive Officer
committed to their personal well being are going
to do their best work each day. Second, intense
dedication to safe work practices naturally results
in attention to detail in every aspect of operations,
which translates into efficient and profitable
railroads.
To deepen our culture of safety, in October
2007 we introduced a new training seminar with
DuPont, a world leader in safety best practices.
As of today, more than 125 GWI employees have
completed the seminars, and we are confident
that we are introducing effective new ideas and
continually improving our safety programs.
The 2007 winner of our Chairman’s Safety
Award for best safety performance among GWI’s
eight operating regions was our Oregon Region,
which has had two consecutive years of injury-free
operations. The 2007 winner of our President’s
Safety Award for most improved safety perform-
ance was our Rail Link Region, which finished
the year with an FRA reportable index of 1.40,
a 50% improvement over 2006.
2007 Annual Report 5
From the CEO, continued
2007 Financial Results
Despite growing weakness in the U.S. economy,
GWI generated strong earnings and record free
cash flow in 2007. Please note that we have closed
our hurricane-damaged Mexican railroad, and
therefore the highlights below reflect the financial
performance of our core business, or results from
continuing operations.
(cid:1) Revenues increased 14.5% from $450.7
million in 2006 to $516.2 million in 2007;
(cid:1) Operating income increased 18.5%
from $81.7 million in 2006 to $96.8 million
in 2007, and our operating ratio improved
from 81.9% in 2006 to 81.2% in 2007;
(cid:1) Income from continuing operations
decreased from $172.6 million in 2006
to $69.2 million in 2007, primarily due to
a gain of $114.5 million in 2006 resulting
from the sale of our 50% interest in the
Western Australia operations and other
assets of the Australian Railroad
Group (ARG Sale);
(cid:1) Diluted earnings per share (EPS) from
continuing operations decreased from $4.07
in 2006 to $1.77 in 2007, primarily due to
the gain from the ARG Sale of $2.70 per
share in 2006;
(cid:1) Free cash flow increased from $29.5
million in 2006 to a record $79.5 million
in 2007.
When reviewing our 2007 financial performance,
it is helpful to remember that GWI’s total revenues
are composed 64% of freight revenues (e.g., tradi-
tional carload shipments such as coal, pulp and
paper, metals) and 36% of non-freight revenues
(e.g., industrial switching and port railroads,
which have a different contract structure than
traditional carload freight business).
6 Genesee & Wyoming Inc.
In 2007, our freight revenues increased
5.7% to $329.2 million, as strong pricing more
than offset lower shipments. To illustrate,
shipments on our railroads decreased 2.4% to
801,269 carloads in 2007, with traffic declining
in eight out of 11 commodity groups. However,
due to an increase in our average price per carload
of 8.4%, freight revenues actually increased in
nine out of 11 commodity groups. Four particular
commodity trends were worth noting in 2007:
(cid:1) Coal: Our coal traffic is generally stable
and predictable because the majority of our
business is low sulfur “clean coal” that is
shipped to base-load power plants in the
United States (see sidebar page 8). One
anomaly in 2007, however, was the catastrophic
collapse of a coal mine in Utah in which six
miners and three rescue workers were killed.
The tragedy resulted in federal safety reviews
of several coal mines in Carbon County,
Utah, including the temporary closure of a
mine supplying coal to facilities served by
our Utah Railway. We expect this mine to
resume operations in the first quarter of 2008.
(cid:1) Lumber and Forest Products: The weak-
ness in the U.S. housing market adversely
impacts our railroads, since we originate
products such as lumber and plywood in our
Oregon, New York/Pennsylvania, Southern
and Canada Regions. Despite a significant
decline in U.S. housing starts in 2007,
GWI’s lumber and forest products carloads
were down only 5.2%. One reason for this
better-than-expected performance was strong
log shipments. The weakness of the U.S.
dollar relative to other major currencies has
increased the competitiveness of U.S. log
exports, particularly from the Pacific Northwest
to Asia. Overall, GWI’s lumber and forest
GWISafetyFirst
Safety is our number-one priority
at GWI every day. Since our crews
are on and off equipment much more
frequently in short line railroading
and industrial switching, we’re proud
that our safety performance rivals the
Class I railroads. We are committed
to improving, however, since our goal
is for every one of our operating
regions to be injury-free, every day.
Zero
Injuries
Injuries
00Zero
Our Goal Every Day
GWI Injury Frequency Rate
Rate per 200,000
man hours worked
2.01
1.99
1.95
1.67
1.50
3
2
1
2004 2005 2006 2007 2008 Target
2007 Injury Frequency Rate Comparison
Rate per 200,000 man hours worked
0
Injuries
1
2
3
4
Genesee & Wyoming Inc.
1.67
Class I Railroads
1.67
Medium Railroads
3.3
Small Railroads
4.3
2007 Annual Report 7
GWIShortLines
While weakness in the U.S. housing, construction and paper markets
adversely impacted volumes, GWI also ships several commodities that
were stable or increasing in 2007. These include coal for Midwest power
plants, salt for deicing Northeast roads, and iron ore for export from
Australia. A weaker U.S. dollar also contributed to export movements
of logs from Oregon and mining equipment from Illinois.
2007 Freight Mix
by Revenue
21.1% Pulp & Paper
Intermodal & Other 3.0%
18.3% Coal,Coke & Ores
Auto 2.2%
Petroleum 5.0%
Chemicals 7.9%
11.1% Metals
9.4% Minerals
Farm Products 11.1%
10.9% Lumber & Forest Products
Clockwise from top: pelletized iron ore heads
for the blast furnace at Whyalla, South Australia;
heavy equipment bound for export heads for the
Tazewell & Peoria yard in Illinois; deicing salt —
Genesee & Wyoming’s main commodity for its
first 100 years — heads for Northeast roads from
Central New York; coal heads for a base-load
power plant on the Illinois & Midland; and Oregon
logs head for Asia from the Portland & Western.
8 Genesee & Wyoming Inc.
From the CEO, continued
products revenues increased in 2007, as a
9.3% increase in average revenue per carload
more than offset the volume decline.
(cid:1) Pulp and Paper: In 2007, our pulp and
paper volume declined nearly 10% due to
supply chain reorganization and mill rationali-
zation by major pulp and paper producers. With
respect to the supply chain, some customers
switched from rail to truck shipments due, in
part, to excess capacity and lower rates in the
trucking industry. With respect to mill rational-
ization, we experienced several closures of
inefficient paper facilities on our railroads in
New England and Canada, although in some
instances we found that other efficient facili-
ties, also on our railroads, increased output to
fill the supply gap. Overall, GWI’s pulp and
paper revenue increased slightly in 2007, as
an 11.8% increase in average revenue per
carload more than offset the volume decline.
(cid:1) Farm and Food Products: Despite a severe
drought in South Australia, our 2007 grain
business performed well for two reasons.
First, our Canada Region had strong grain
exports through the Port of Quebec City.
Second, our Australian management team did
an outstanding job adding long-haul interstate
grain shipments to the drought-stricken eastern
states of Australia. Moreover, our grain contracts
are often structured to provide some measure
of financial protection against drought years
through fixed payments.
In 2007, our non-freight revenues increased
34.2% to $187.0 million. The most important
growth in non-freight revenues came from our
railcar switching business, which includes both
our port railroads and our industrial switching
contracts. (Note that industrial switching is when
we provide crews and locomotives to switch rail
cars on customer-owned tracks.) Throughout 2007,
our port railroads experienced increasing ship-
ments, including automobiles through Brunswick,
Georgia, containers through Savannah, Georgia,
and grain through Galveston and Corpus Christi,
Texas (see sidebar page 11). Meanwhile, our
industrial switching benefited from higher ship-
ments of South Australian iron ore, which is
exported to China for steel manufacturing. Finally,
our Rocky Mountain Region loaded a company-
record 356 million tons of coal for Class I railroads
in the Powder River Basin in 2007.
Closure of Mexican Operations
In June 2007, after nearly two years of trying
to finalize an agreement with the Mexican
government to rebuild our hurricane-damaged
rail line in the State of Chiapas, we decided to
discontinue railroad operations, commence liqui-
dation of the business and return our 30-year
track concession to the government. The decision
to exit Mexico was painful due to the necessary
termination of 400 employees. However, we
acted decisively when it became clear that the
obstacles to resolution with the government were
insurmountable. There is no question that liquida-
tion was in the best interest of our shareholders.
We could no longer justify absorbing significant
financial losses for an unknown duration.
Acquired in late 1999, the Mexican operations
represent GWI’s first failed investment compared
with 46 successful railroad acquisitions since
1977. The negative impact was substantial, with
losses in 2007 and 2006 totaling $52.7 million. We
are now seeking to recover a portion of that loss
through negotiation and/or assertion of our legal
rights against the Mexican government, which did
not fulfill its obligation to rebuild its track.
2007 Annual Report 9
From the CEO, continued
When investing in developing countries, we set
higher financial return targets to reflect the higher
risks associated with executing our business plan.
The first several years of our Mexican investment
validated this requirement, as building traffic
density proved much more difficult than in other
privatizations, and the railroad was never a stand-
out business for GWI. However, in the face of
a devastating hurricane that destroyed 70 bridges
and severed both road and rail service to Southern
Mexico, we did not expect that the government
would fail to restore its track in a timely manner.
The fact that the demise of a vital piece of infra-
structure could result from a sovereign government’s
inexplicable inaction is a lesson that will remain
in GWI’s institutional memory.
Acquisition Strategy
An important component of GWI’s growth
has always been our acquisition strategy. On
December 31, 2007, we closed on the acquisition
of 87.4% of the Maryland Midland Railway, Inc.
(Maryland Midland). Headquartered 50 miles
northwest of Baltimore, the Maryland Midland
operates over 63 miles of track and has 30
employees and 10 locomotives. With roughly
90% of its traffic in the cement and stone indus-
tries, the railroad’s largest customer is Lehigh
Cement’s recently upgraded facility in Union
Bridge, Maryland. Lehigh Cement has retained
its 12.6% ownership in the railroad.
Although a relatively small transaction, the
Maryland Midland is important because it
represents our first acquisition since August of
2006. From 2006 through mid-2007, the U.S. rail
acquisition market became highly competitive
as financial buyers with ready access to debt
capital aggressively pursued railroad assets.
Other bidders proved willing to pay significantly
higher prices than GWI in several instances.
For much of 2007, we concluded that our own
shares were the best investment of our available
capital and repurchased $175 million of common
stock, or 6.5 million shares at an average price
of $26.81 per share.
As severe problems in the U.S. subprime
loan market have rippled through most major
financial institutions and resulted in a general
reassessment of lending risk, the competitiveness
of certain financial buyers may be lessening.
On one hand, GWI seems to be at an advantage
as a corporate acquirer with a strong balance sheet,
while other acquirers may be more dependent
on debt markets that are in disarray. On the other
hand, we are still determining the precise degree
of competition from other bidders. We are currently
focused on acquisitions in the U.S. and select
international markets as well as natural resource
development projects in the U.S. and Australia.
Regardless of our competition, rest assured that
we will maintain our bidding discipline as a
long-term investor at the right price.
GWI Customer Satisfaction
As a short line railroad, we generally believe
that we are close to our customers and provide
high-quality service. To test this self-perception,
in late 2007 we engaged a leading market research
firm to conduct an in-depth survey of customer
satisfaction at all GWI railroads worldwide. Due
to an exceptional response rate, we received an
excellent statistical sample. The bottom line is
that our customers are generally satisfied, but we
have room for improvement. Compared to other
transportation service providers, GWI’s customer
satisfaction was 7.42 out of 10, while the trucking
industry scored 7.12 and the overall railroad
10 Genesee & Wyoming Inc.
GWIPortOperations
GWI serves 12 U.S. ports, a business
that has benefited from the growing
importance of global trade to the U.S.
economy. In 2007, our Commonwealth
Railway began serving Maersk’s new,
state-of-the-art container terminal in
Portsmouth, Virginia.
Clockwise from top: Maersk’s new container
terminal served by the Commonwealth
Railway in Va.; pipe at the Corpus Christi
Terminal Railroad in Texas; tank cars at
Savannah Wharf, Ga.; auto shipments at
Georgia Ports Authority, Brunswick, Ga.;
farm equipment at Georgia Ports Authority,
Garden City, Ga.; aerial view of Georgia
Ports Authority, Garden City, Ga.
2007 Annual Report 11
GWIService
December 2007 Survey by a Leading Customer-Satisfaction Research Firm
“How much business do you intend to give Genesee & Wyoming in the next 12 months?”
December 2007 Survey by a Leading
Customer-Satisfaction Research Firm
5% Less business
59% About the same
6% Substantially
more business
1% Substantially less business
28% More business
Clockwise from top: serving pulp & paper mills
on the Arkansas, Louisiana & Mississippi; loading
aluminum at Deschambault Mill on the Quebec
Gatineau; switching on the York Railway in
Pennsylvania; serving a wall-board plant at Rainier,
Oregon, on the Portland & Western; serving a pipe
manufacturer on The Bay Line in Florida.
Overall Satisfaction with Genesee & Wyoming
vs. Other Transportation Service Providers
Genesee & Wyoming
Trucking Industry
7.42
7.12
Railroad Industry
5.95
Satisfaction (1-10 scale)
1 2 3 4 5 6 7 8 9
10
December 2007 Survey by a Leading Customer-Satisfaction Research Firm
Genesee & Wyoming’s Top Two
Highest Rated Attributes by Customers:
Professionalism of personnel
Operating personnel demonstrate
a clear commitment to safety
8.17
8.08
Satisfaction (1-10 scale) 1 2 3 4 5 6 7 8 9
10
December 2007 Survey by a
Leading Customer-Satisfaction
Research Firm
How likely would you
be to recommend…
Rail Link
Switching Services
Definitely will 63%
Probably will 37%
Probably will not 0%
Definitely will not 0%
12 Genesee & Wyoming Inc.
From the CEO, continued
industry scored 5.95. Given that a truly happy
customer is typically defined as “higher than 8.0,”
each of our eight operating regions is implementing
steps to surpass this threshold in our next survey.
While the main purpose of the customer
satisfaction survey was to identify areas for
improvement, it was gratifying that customers
rated “professionalism” and “clear commitment
to safety” as our top two attributes, ranking both
above 8.0. Moreover, more than one-third of our
customers said they planned to increase their
business with our railroads over the next
12 months (see sidebar opposite).
2008 Outlook
As we look to 2008, the U.S. economy remains
weak, and we are intensely focused on managing
costs in a slower shipping environment. For
GWI, however, we are fortunate to have several
major new customers coming on-line in 2008,
which we expect to add positively to our financial
results. These customers include a new ethanol
plant in Oregon, a new wooden pellet plant on
The Bay Line, new ores and minerals traffic in
South Australia, and intermodal shipments on
the Commonwealth Railway from Maersk’s
new container terminal in Portsmouth, Virginia.
Most of these industrial projects are opportunities
that we have been cultivating for several years,
so it is with satisfaction that we watch the new
business come on-line.
Also in 2008, there is an important legislative
matter in the U.S. Congress that we will be
closely monitoring. From 2005 through 2007,
the U.S. short line industry received a tax credit
to stimulate investment in track infrastructure.
As I write, the tax credit has not yet been extended,
and consequently GWI expects a major increase
in our book tax rate in 2008. However, the short
line tax credit extension has strong bipartisan
support with 240 cosponsors in the House and
41 cosponsors in the Senate, so we are hopeful
that it finds its way into the appropriate legislation
in the near term.
When starting as CEO of Genesee & Wyoming
in June 2007, I shared with our employees that
assuming leadership of a company with a proud
100 years of railroad history and more than 2,300
people worldwide is both a humbling and an
energizing experience. Humbling because G&W
has a tradition of integrity and excellence that
must be upheld above all else. Energizing because
we have a clear strategy to replicate the growth
and success that we have experienced over the
past decade as a public company.
Our entire management team works tirelessly
to foster a safe work environment for employees,
to deliver strong financial results to shareholders,
and to operate railroads that are well respected
in the communities we serve around the world.
As a fellow shareholder, I can assure you that we
will do everything possible to ensure that we are
effective stewards of your investment in GWI.
Thank you,
John C. Hellmann
President and Chief Executive Officer
March 14, 2008
2007 Annual Report 13
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Í ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2007
or
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File No. 0-20847
Genesee & Wyoming Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
Delaware
06-0984624
66 Field Point Road, Greenwich, Connecticut
(Address of principal executive offices)
06830
(Zip Code)
(203) 629-3722
(Telephone No.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Class A Common Stock, $0.01 par value
NYSE
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Í Yes ‘ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ‘ Yes Í No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Í Yes ‘ No
Indicate by check mark if disclosure of delinquent filers to Item 405 of Regulations S-K (§229.405 of this chapter) is not contained herein
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer Í
Accelerated filer ‘
Non-accelerated filer ‘
Smaller reporting company ‘
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Act). ‘ Yes Í No
Aggregate market value of Class A Common Stock held by non-affiliates based on the closing price as reported by the New York Stock
Exchange on the last business day of Registrant’s most recently completed second fiscal quarter: $996,681,424. Shares of Class A Common Stock
held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate
status is not necessarily a conclusive determinant for other purposes.
Shares of common stock outstanding as of the close of business on February 22, 2008:
Class
Number of Shares Outstanding
Class A Common Stock . . . . . . . . . . . . . . .
Class B Common Stock . . . . . . . . . . . . . . .
31,353,008
3,975,178
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year are incorporated by reference in Part III hereof and made a part hereof.
Genesee & Wyoming Inc.
FORM 10-K
For The Fiscal Year Ended December 31, 2007
INDEX
PAGE NO.
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions and Related Stockholder Matters . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
14
23
23
27
29
30
31
32
60
62
62
62
64
64
64
64
64
64
65
66
67
2
Unless the context otherwise requires, when used in this Annual Report on Form 10-K, the terms
“Genesee & Wyoming,” “we,” “our” and “us” refer to Genesee & Wyoming Inc. and its subsidiaries and
affiliates and when we use the term “ARG” we are referring to the Australian Railroad Group Pty Ltd and its
subsidiaries. Up until June 1, 2006, ARG was our 50% owned affiliate based in Perth, Western Australia. All
references to currency amounts included in this Annual Report on Form 10-K, including the financial statements,
are in United States dollars unless specifically noted otherwise.
Cautionary Statement Regarding Forward-Looking Statements
The information contained in this Annual Report on Form 10-K (Annual Report), including Management’s
Discussion and Analysis of Financial Condition and Results of Operations in Item 7, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, regarding future events and future performance of Genesee &
Wyoming Inc. Words such as “anticipates,” “intends,” “plans,” “believes,” “seeks,” “expects,” “estimates,”
variations of these words and similar expressions are intended to identify these forward-looking statements.
These statements are not guarantees of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to forecast. Actual results may differ materially from those expressed or forecast in
these forward-looking statements. Examples of forward-looking statements include all statements that are not
historical in nature, including statements regarding:
•
•
•
•
•
•
•
our operations, competitive position, growth strategy and prospects;
industry conditions, including downturns in the general economy;
the effects of economic, political or social conditions and changes in foreign exchange policy or rates;
our ability to complete, integrate and benefit from acquisitions, joint ventures and strategic alliances;
governmental policies affecting our railroad operations, including laws and regulations regarding
environmental liabilities;
our funding needs and financing sources; and
the outcome of pending legal proceedings.
These statements are not guarantees of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to forecast. Forward-looking statements may be influenced by risks which exist in
the following areas, among others:
•
•
•
•
•
•
•
•
•
our ability to fund, consummate and integrate acquisitions and investments;
our relationships with Class I railroads and other connecting carriers for our operations;
our ability to obtain railcars and locomotives from other providers on which we are currently
dependent;
competition from numerous sources, including those relating to geography, substitute products, other
types of transportation and other rail operators;
legislative and regulatory developments, including rulings by the Surface Transportation Board (STB);
strikes or work stoppages by our employees and our ability to attract and employ a sufficient number of
skilled employees;
our transportation of hazardous materials by rail as a common carrier;
the occurrence of losses or other liabilities which are not covered by insurance or which exceed our
insurance limits;
rising fuel costs;
3
•
•
•
•
•
•
•
•
customer retention and contract continuation;
our susceptibility to downturns in the general economy;
our susceptibility to severe weather conditions and other natural occurrences;
our ability to obtain funding for capital projects;
the imposition of operational restrictions as the result of covenants in our credit facilities;
acts of terrorism and anti-terrorism measures;
our susceptibility to various legal claims and lawsuits; and
our susceptibility to risks associated with doing business in foreign countries.
The areas in which there is risk and uncertainty are further described under the caption “Risk Factors” in
Item 1A, as well as in documents that we file from time to time with the United States Securities and Exchange
Commission (the SEC), which contain additional important factors that could cause actual results to differ from
current expectations and from the forward-looking statements contained herein. Readers of this document are
cautioned that our forward-looking statements are not guarantees of future performance and the actual results or
developments may differ materially from the expectations expressed in the forward-looking statements.
In light of the risks, uncertainties and assumptions associated with forward-looking statements, you should
not place undue reliance on any forward-looking statements. Additional risks that we may currently deem
immaterial or that are not presently known to us could also cause the forward-looking events discussed in this
Annual Report not to occur. Except as otherwise required by applicable securities laws, we undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new information,
future events, changed circumstances or any other reason after the date of this Annual Report.
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking
statements to encourage companies to provide prospective information about their companies without fear of
litigation. We are taking advantage of the “safe harbor” provisions of the Private Securities Litigation Reform
Act in connection with the forward-looking statements included in this document.
Information set forth in Item 1 as well as in Item 2 should be read in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the discussion of risk
factors in Item 1A.
4
Item 1.
Business
PART I
OVERVIEW
We are a leading owner and operator of short line and regional freight railroads in the United States,
Australia and Canada and own a minority interest in a railroad in Bolivia. In addition, we provide freight car
switching and rail-related services to industrial companies in the United States and Australia. The Company’s
corporate predecessor was founded in 1899 as a 14-mile rail line serving a single salt mine in upstate New York
and since 1977, we have completed 30 acquisitions.
By focusing our corporate and regional management teams on improving our return on invested capital, we
intend to continue to increase our earnings and cash flow. In addition, we expect that acquisitions will adhere to
our return on capital targets and that existing operations will strive to improve year-over-year financial returns
and safety performance.
As of December 31, 2007, we operated over approximately 5,800 miles of owned and leased track and
approximately 3,000 additional miles under track access arrangements. We operate in 27 states in the United
States, four Australian states, and two Canadian provinces and serve 12 United States ports and five Australian
ports. Based on track miles, we believe that we are the second largest operator of short line and regional freight
railroads in North America.
During 2007, we ceased operations in Mexico. Results of our Mexican operations are now included in
results from discontinued operations.
GROWTH STRATEGY
We intend to increase our earnings and cash flow through the execution of our disciplined acquisition
strategy for both domestic and international opportunities. When acquiring railroads in our existing regions, we
target contiguous or nearby rail properties where our local management teams are best able to identify
opportunities to reduce operating costs and increase equipment utilization. In new regions, we target rail
properties that have adequate size to establish a presence in the region, provide a platform for growth in the
region and attract qualified management. To help ensure accountability for the projected financial results of our
potential acquisitions, we typically include the regional manager who would operate the rail property after the
acquisition as part of our due diligence team.
We derive our acquisition, investment and long-term lease opportunities from the following five sources:
•
•
•
•
•
rail lines of industrial companies, such as Bethlehem Steel Corporation and Georgia-Pacific
Corporation (GP);
branch lines of Class I railroads, such as Burlington Northern Santa Fe Corporation (BNSF) and CSX
Corporation (CSX);
other regional railroads or short line railroads, such as Rail Management Corporation (RMC) and
Maryland Midland Railway, Inc. (Maryland Midland);
foreign government-owned railroads that are being privatized, such as those in Australia; and
new rail and infrastructure and/or equipment associated with greenfield industrial and mineral
development, such as potential new mining projects in the United States and South Australia.
5
We believe that additional acquisition opportunities in the United States exist among the more than 500
short line and regional railroads operating approximately 45,100 miles of track, as well as additional lines
expected to be sold or leased by Class I railroads. We also believe that there are additional acquisition candidates
in Australia, Europe, Canada, South America and other markets outside the United States. We believe that we are
well-positioned to capitalize on additional acquisition opportunities.
OPERATING STRATEGY
We intend to increase our earnings and cash flow through the execution of our operating strategy for both
our domestic and international operations. Our railroads operate under strong local management, with centralized
administrative support and oversight. As of December 31, 2007, our continuing operations were organized in
eight businesses, which we refer to as regions. In the United States these regions were Illinois, New York/
Pennsylvania, Oregon, Rail Link (which includes industrial switching and port operations in various geographic
locations), Rocky Mountain and Southern (principally consisting of railroads in the Southern part of the United
States). Outside the United States these regions were Australia and Canada (which includes certain adjacent
properties located in the United States).
In each of our regions, we seek to encourage the entrepreneurial drive, local knowledge and customer
service that we view as prerequisites for us to achieve our financial goals. At the regional level, our operating
strategy consists of the following four principal elements:
•
•
•
•
Focused Regional Marketing. We build each regional rail system on a base of large industrial
customers, seek to grow that business through marketing efforts and pursue additional revenues by
attracting new customers and providing ancillary rail services. These ancillary rail services include
railcar switching, repair, storage, cleaning, weighing and blocking and bulk transfer, which enable
shippers and Class I carriers to move freight more easily and cost-effectively.
Lower Operating Costs. We focus on lowering operating costs and historically have been able to
operate acquired rail lines more efficiently than the companies and governments from whom we
acquired these properties. We typically achieve efficiencies by lowering administrative overhead,
consolidating equipment and track maintenance contracts, reducing transportation costs and selling
surplus assets.
Efficient Use of Capital. We invest in track and rolling stock to ensure that we operate safe railroads
that meet the needs of our customers. At the same time, we seek to maximize our return on invested
capital by focusing on cost effective capital programs. For example, we rebuild older locomotives
rather than purchase new ones and invest in track at levels appropriate for traffic type and density. In
addition, because of the importance of certain of our customers and railroads to the regional
economies, we are able, in some instances, to obtain state and/or federal grants to upgrade track.
Typically, we seek government funds to support investments that would not otherwise be economically
viable for us to fund on a stand alone basis.
Continuous Safety Improvement. We believe that a safe work environment is essential for our
employees and customers and the long-term success of our business. Each year we establish stringent
safety targets as part of our safety program. Through the execution of our safety program, we have
reduced our injury frequency rate from 5.89 injuries per 200,000 man-hours worked in 1998 to 1.67 in
2007.
6
INDUSTRY
According to the Association of American Railroads (AAR), there are 559 railroads in the United States
operating over 139,000 miles of track. The AAR segments railroads operating in the United States into one of three
categories based on the amount of revenues and track miles. Class I railroads, those with over $346.8 million in
revenues, represent approximately 93% of total rail revenues. Regional and local railroads operate approximately
45,100 miles of track in the United States. The primary function of these smaller railroads is to provide feeder traffic
to the Class I carriers. Regional and local railroads combined account for approximately 7% of total rail revenues.
We operate one regional and 42 local (short line) railroads in the United States.
The following table shows the breakdown of railroads operating in the United States by classification.
Classification of Railroads
Number
Class I (1) . . . . . . . . . . . . . . .
Regional
. . . . . . . . . . . . . . . .
Local . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . .
7
33
519
559
Aggregate
Miles
Operated
Revenues and Miles Operated
94,801 Over $346.8 million
16,713
28,415 Less than $39.9 million and less than 350 miles operated
$40.0 to $346.7 million and /or 350 or more miles operated
139,929
(1)
Includes CSX Transportation (CSXT), BNSF Railway Co. (BNSF), Norfolk Southern (NS), Kansas City
Southern Railway Company (KCS), Union Pacific (UP), Canadian National Railway (CN) and Canadian
Pacific Railroad Co. (CP)
Source: Association of American Railroads, Railroad Facts, 2007 Edition.
The railroad industry in the United States has undergone significant change since the passage of the
Staggers Rail Act of 1980 (Staggers Act), which deregulated the pricing and types of services provided by
railroads. Following the passage of the Staggers Act, Class I railroads in the United States took steps to improve
profitability and recapture market share lost to other modes of transportation, primarily trucks. In furtherance of
that goal, Class I railroads focused their management and capital resources on their core long-haul systems, and
some of them sold branch lines to smaller and more cost-efficient rail operators willing to commit the resources
necessary to meet the needs of the customers located on these lines. Divestiture of branch lines enabled Class I
carriers to minimize incremental capital expenditures, concentrate traffic density, improve operating efficiency
and avoid traffic losses associated with rail line abandonment.
Although the acquisition market is competitive in the railroad industry, we believe we will continue to find
opportunities to acquire rail properties in the United States and Canada from Class I railroads, industrial
companies and independent local and regional railroads. We also believe we will continue to find additional
acquisition opportunities in markets outside of North America. For additional information, see the discussion
under “Item 1A. Risk Factors.”
OPERATIONS
As of December 31, 2007, we through our subsidiaries and unconsolidated affiliate, owned, leased or
operated 48 short line and regional freight railroads with approximately 5,800 miles of track in the United States,
Australia, Canada and Bolivia. We generate revenues primarily from the haulage of freight by rail over relatively
short distances. Freight revenues represented 63.8%, 69.1% and 72.9% of our total revenues in 2007, 2006 and
2005, respectively.
Customers
As of December 31, 2007, our operations served more than 770 customers. Freight revenue from our 10
largest freight revenue customers accounted for approximately 22%, 24% and 25% of our revenues in 2007, 2006
7
and 2005, respectively. Four of our 10 largest freight customers operated in the paper and forest products
industry. We typically handle freight pursuant to transportation contracts between us, our connecting carriers and
the customer. These contracts are in accordance with industry norms and vary in duration, with terms ranging
from less than one year to 10 years. These contracts establish a price or, in the case of longer term contracts, a
methodology for determining price, but do not typically obligate the customer to move any particular volume and
are not typically linked to the prices of the commodities being shipped.
Commodities
Our railroads transport a wide variety of commodities. Some of our railroads have a diversified commodity
mix while others transport one or two principal commodities. Our pulp and paper commodity revenues accounted
for 13%, 15% and 17% of our total revenues in the years ended December 31, 2007, 2006 and 2005, respectively.
Our coal, coke and ores commodity revenues accounted for 12%, 13% and 15% of our total revenues in the years
ended December 31, 2007, 2006 and 2005, respectively. For a comparison of freight revenues, carloads and
average freight revenues per carload by commodity group for the years ended December 31, 2007, 2006 and
2005, see the discussion under “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Commodity Group Descriptions
The Pulp and Paper commodity group consists primarily of inbound shipments of pulp and outbound
shipments of newsprint and finished papers and container board.
The Coal, Coke and Ores commodity group consists primarily of shipments of coal to power plants and
industrial customers.
The Metals commodity group consists primarily of scrap metal, finished steel products, coated pipe, slab
and ingots.
The Minerals and Stone commodity group consists primarily of gypsum, salt used in highway ice control,
limestone and sand.
The Lumber and Forest Products commodity group consists primarily of export logs, finished lumber,
plywood, oriented strand board and particle board used in construction and furniture manufacturing and wood
chips and pulpwood used in paper manufacturing.
The Farm and Food Products commodity group consists primarily of wheat, barley, corn and other grains.
The Chemicals-Plastics commodity group consists primarily of chemicals used in manufacturing,
particularly in the paper industry.
The Petroleum Products commodity group consists primarily of liquefied petroleum gases, asphalt and
crude oil.
The Autos and Auto Parts commodity group consists primarily of finished automobiles and stamped auto
parts.
The Intermodal commodity group consists of various commodities shipped in trailers or containers on flat
cars.
The Other commodity group consists of all freight moved not included in the commodity groups set forth
above.
8
Non-Freight Revenues
We generate non-freight revenues primarily through the following activities:
•
Railcar switching, which includes:
•
•
intra-plant switching—revenues earned by providing services dedicated to the movement of
railcars within industrial plants; and
intra-terminal switching—revenues earned for the movement of customer railcars from one track
to another track on the same railroad, primarily at United States ports.
Fuel sales to third parties—revenues earned by Genesee & Wyoming Australia Pty Ltd (GWA) in
South Australia from the sale of diesel fuel to other rail operators.
Car hire and rental services—charges paid by other railroads for the use of our railcars.
Demurrage and storage—charges to customers for holding or storing their railcars.
Car repair services—charges for repairing freight cars owned by others, either under contract or in
accordance with AAR rules.
•
•
•
•
In 2007, 2006 and 2005, non-freight revenues constituted 36.2%, 30.9% and 27.1%, respectively, of our
total operating revenues with railcar switching representing 40.3%, 46.2% and 51.3%, respectively, of total
non-freight revenues. For a comparison of non-freight revenues for the years ended December 31, 2007, 2006
and 2005, see the discussion under “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Geographic Information
For financial information with respect to each of our geographic areas, see Note 16 to our Consolidated
Financial Statements set forth in Part IV, Item 15 of this Annual Report.
Traffic
Rail traffic shipped on our rail lines can be categorized as interline, local or overhead traffic. Interline traffic
either originates or terminates with customers located along a rail line and is interchanged with other rail carriers.
Local traffic both originates and terminates on the same rail line and does not involve other carriers. Overhead
traffic passes over the line from one connecting rail carrier to another without the carload originating or
terminating on the line. Unlike overhead traffic, interline and local traffic provide us with a more stable source of
revenue, because this traffic represents shipments to and/or from customers located along our rail lines and is less
susceptible to competition from other rail routes or other modes of transportation. In 2007, revenues generated
from interline and local traffic constituted approximately 96% of our freight revenues.
Seasonality of Operations
Typically, we experience relatively lower revenues in the first and fourth quarters of each year as the winter
season and colder weather in North America tend to reduce shipments of certain products such as construction
materials. In addition, due to adverse winter weather conditions, we also tend to incur higher operating costs
during the first and fourth quarters. We typically initiate capital projects in North America in the second and third
quarters when weather conditions are more favorable. However, certain of our traffic, such as salt for road
de-icing, often benefits from particularly cold and inclement weather.
Employees
As of December 31, 2007, our railroads and industrial switching locations had 2,307 full time employees.
Of this total, 1,371 railroad employees are members of national labor organizations. Our railroads have 36
9
contracts with these national labor organizations, 10 of which are currently in negotiation. We also entered into
collective employee bargaining agreements with an additional 73 employees who are not represented by a
national labor organization. The Railway Labor Act (RLA) governs the labor relations of employers and
employees engaged in the railroad industry in the United States. The RLA establishes the right of railroad
employees to organize and bargain collectively along craft or class lines and imposes a duty upon carriers and
their employees to exert every reasonable effort to make and maintain collective bargaining agreements. Le Code
Canadian du Travail and the Federal Workplace Relations Act govern the labor relations of employers and
employees engaged in the railroad industry in Canada and Australia, respectively. The RLA and foreign labor
regulations contain detailed procedures that must be exhausted before a lawful work stoppage may occur. We
believe our relationship with our employees is good.
SAFETY
Our safety program involves all employees and focuses on the prevention of accidents and injuries.
Operating personnel are trained and certified in train operations, the transportation of hazardous materials, safety
and operating rules and governmental rules and regulations. We also participate in safety committees of the
AAR, governmental and industry sponsored safety programs and the American Short Line and Regional Railroad
Association Safety Committee. Our reportable injury frequency ratio, which is defined by the Federal Railroad
Administration (FRA) as reportable injuries per 200,000 man hours worked, was 1.67 and 1.95 in 2007 and 2006,
respectively.
INSURANCE
We maintain insurance coverage for losses arising from personal injury and for property damage in the
event of derailments or other accidents or occurrences. The liability policies have self-insured retentions of up to
$0.5 million per occurrence. In addition, we maintain excess liability policies that provide supplemental coverage
for losses in excess of primary policy limits. Our property policies generally exclude track and roadbed damages
associated with floods, as such coverage is not available on commercially reasonable terms. With respect to the
transportation of hazardous commodities, our liability policy covers sudden releases of hazardous materials,
including expenses related to evacuation. Personal injuries associated with grade crossing accidents are also
covered under our liability policies. The property damage policies have self-insured retentions ranging from $0.1
million to $0.8 million, depending on the category of incident.
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 insurance policies. Employees of
our industrial switching business are covered under workers’ compensation policies.
Employees of our Canadian railroads are covered by the applicable provincial workers’ compensation
policy. Similarly, employees of GWA are covered by the respective state-based workers’ compensation
legislation.
We believe our insurance coverage is adequate in light of our experience and the experience of the rail
industry.
10
COMPETITION
Each of our railroads is typically the only rail carrier directly serving our customers. However, our railroads
compete directly with other modes of transportation, principally highway competition from motor carriers and,
on some routes, ship, barge and pipeline operators. Competition is based primarily upon the rate charged and the
transit time required, as well as the quality and reliability of the service provided. Most of the freight we handle
is interchanged with other railroads prior to reaching its final destination. As a result, to the extent other rail
carriers are involved in transporting a shipment, we cannot necessarily control the cost and quality of such
service. To the extent highway competition is involved, the effectiveness of that competition is affected by
government policy with respect to fuel and other taxes, highway tolls and permissible truck sizes and weights.
To a lesser degree, we also face competition with similar products made in other areas, a kind of
competition commonly known as “geographic competition.” For example, a paper producer may choose to
increase or decrease production at a specific plant served by one of our railroads depending on the relative
competitiveness of that plant versus paper plants in other locations. In some instances, we face “product
competition,” where commodities we transport are exposed to competition from substitutes.
In acquiring rail properties, we generally compete with other short line and regional railroad operators, and
more recently with financial institutions, including private equity firms operating in conjunction with short line
rail operators. Competition for rail properties is based primarily upon price and the seller’s assessment of the
buyer’s railroad operating expertise and financing capability. We believe our established reputation as a
successful acquirer and operator of short line rail properties, combined with our managerial and financial
resources, effectively positions us to take advantage of acquisition opportunities.
United States
REGULATION
In addition to environmental laws, securities laws and other regulations generally applicable to many
businesses, our United States railroads are subject to regulation by:
•
•
•
•
•
the Surface Transportation Board (STB);
the FRA;
federal agencies, including the Department of Homeland Security (DHS) and Department of
Transportation (DOT);
state departments of transportation; and
some state and local regulatory agencies.
The STB is the successor to certain regulatory functions previously administered by the Interstate
Commerce Commission (ICC). Established by the ICC Termination Act of 1995, the STB has jurisdiction over,
among other things, certain freight rates (where there is no effective competition), extension or abandonment of
rail lines, the acquisition of rail lines and consolidation, merger or acquisition of control of rail common carriers.
In limited circumstances, the STB may condition its approval of an acquisition upon the acquirer of a railroad
agreeing to provide severance benefits to certain subsequently terminated employees. The FRA has jurisdiction
over safety, which includes the regulation of equipment standards, track maintenance, handling of hazardous
shipments, locomotive and rail car inspection, repair requirements, operating practices and crew qualifications.
Canada
St. Lawrence & Atlantic Railroad (Quebec) is a federally regulated railroad and falls under the jurisdiction
of the Canada Transportation Agency (CTA) and Transport Canada (TC) and is subject to the Railway Safety
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Act. The CTA regulates construction and operation of federally regulated railways, financial transactions of
federally regulated railway companies, all aspects of rates, tariffs and services and the transferring and
discontinuing of the operation of railway lines. TC administers the Railway Safety Act, which ensures that
federally regulated railway companies abide by all regulations with respect to engineering standards governing
the construction or alteration of railway works and the operation and maintenance standards of railway works and
equipment.
Quebec Gatineau Railway and Huron Central Railway are subject to the jurisdiction of the provincial
governments of Quebec and Ontario, respectively. Provincially regulated railways operate only within one
province and hold a Certificate of Fitness delivered by a provincial authority. In the Province of Quebec, the
Fitness Certificate is delivered by the Ministère des Transports du Quebec, while in Ontario, under the Short Line
Railways Act, a license must be obtained from the Registrar of Short Line Railways. Construction, operation and
discontinuance of operation are regulated, as well as railway services.
Acquisitions of additional railroad operations in Canada, whether federally or provincially regulated, may
be subject to review under the Investment Canada Act (ICA), a federal statute that applies to the acquisition of a
Canadian business or establishment of a new Canadian business by a non-Canadian. In the case of an acquisition
that is subject to review, a non-Canadian investor must observe a statutory waiting period prior to completion and
satisfy the Minister responsible for the administration of the ICA that the investment will be of net benefit to
Canada, considering certain evaluative factors set out in the legislation.
Any contemplated acquisitions may also be subject to Canada’s Competition Act, which contains provisions
relating to pre-merger notification as well as substantive merger provisions.
Australia
In Australia, regulation of rail safety is generally governed by state legislation and administered by state
regulatory agencies. GWA’s assets are subject to the regulatory regimes governing safety in each of the states in
which it operates. Regulation of track access is governed by overriding federal legislation with state-based regimes
operating in compliance with the federal legislation. As a result, with respect to rail infrastructure access, GWA’s
Australian assets are also subject to state-based access regimes and Part IIIA of the Trade Practices Act 1974.
GWA’s interstate access includes the standard gauge tracks in South Australia, as well as connecting standard
gauge tracks in Victoria and the Northern Territory. The interstate network is part of the larger standard gauge
network linking all capital cities in Australia from Brisbane to Perth, as well as Broken Hill in New South Wales
and Alice Springs in the Northern Territory. Certain parts of this larger standard gauge network that are not covered
by the interstate network are governed by the various state access regimes and the national access regime.
ENVIRONMENTAL MATTERS
Our operations are subject to various federal, state, provincial and local laws and regulations relating to the
protection of the environment. In the United States, these environmental laws and regulations, which are
implemented principally by the Environmental Protection Agency and comparable state agencies, govern the
management of hazardous wastes, the discharge of pollutants into the air and into surface and underground
waters and the manufacture and disposal of certain substances. Similarly, in Canada, these functions are
administered at the federal level by Environment Canada and the Ministry of Transport and comparable agencies
at the provincial level. In Australia, these functions are administered primarily by the Department of Transport at
the federal level and by environmental protection agencies at the state level.
The Commonwealth of Australia has acknowledged that certain portions of the leasehold and freehold land
acquired from them contain contamination arising from activities associated with previous operators. The
Commonwealth has carried out certain remediation work to meet existing South Australian environmental
standards.
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There are no material environmental claims currently pending or, to our knowledge, threatened against us or
any of our railroads. In addition, we believe our railroads operate in material compliance with current
environmental laws and regulations. We estimate any expenses incurred in maintaining compliance with current
environmental laws and regulations will not have a material effect on our earnings or capital expenditures.
DISCONTINUED OPERATIONS
In October 2005, our Mexican subsidiary, Compañía de Ferrocarriles Chiapas-Mayab, S.A. de C.V.
(FCCM), was struck by Hurricane Stan which destroyed or damaged approximately 70 bridges and washed out
segments of track in the State of Chiapas between the town of Tonalá and the Guatemalan border, rendering
approximately 175 miles of rail line inoperable. We believe the Mexican government had the obligation to fund
the reconstruction plan for the damaged portion of the rail line.
On June 25, 2007, FCCM formally notified the Secretaria de Comunicaciones y Transportes (SCT) of its
intent to exercise its right to resign its 30-year concession from the Mexican government and to cease its rail
operations. The decision to cease FCCM’s operations was made on June 22, 2007, and was due to the failure of
the Mexican government to fulfill their obligation to fund the Chiapas reconstruction. Without reconstruction of
the hurricane-damaged line, FCCM was not a viable business. During the third quarter of 2007, FCCM ceased its
rail operations and initiated formal liquidation proceedings. There were no remaining employees of FCCM as of
September 30, 2007. The SCT has contested the resignation of the concession and has seized substantially all of
FCCM’s operating assets in response to the resignation. Additional information on the SCT’s claims is set forth
under “Item 3. Legal Proceedings—Mexico.” We believe the SCT’s actions were unlawful and we are pursuing
appropriate legal remedies to recover FCCM’s operating assets. Results of our Mexican operations are now
included in results from discontinued operations.
AVAILABLE INFORMATION
We were incorporated in Delaware on September 1, 1977. We completed our initial public offering in June
1996 and since September 27, 2002, our shares have been listed on the New York Stock Exchange. Our principal
executive offices and corporate headquarters are located at 66 Field Point Road, Greenwich, Connecticut, 06830,
and our telephone number is (203) 629-3722.
Our Internet website address is www.gwrr.com. We make available free of charge, on or through our
Internet website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and all amendments to those reports as soon as reasonably practicable after those materials are electronically
filed with or furnished to the SEC. Also, filings made pursuant to Section 16 of the Exchange Act with the SEC
by our executive officers, directors and other reporting persons with respect to our common shares are made
available, free of charge, through our Internet website. Our Internet website also contains hyperlinks to charters
for each of the committees of our Board of Directors, our corporate governance guidelines and our Code of
Ethics. Our Code of Ethics applies to all directors, officers and employees, including our chief executive officer,
our chief financial officer, our principal accounting officer and our controller. We will post any amendments to
the Code of Ethics, and any waivers that are required to be disclosed by the rules of either the SEC or the New
York Stock Exchange, Inc. (NYSE), on our Internet website.
In addition, you may read and copy any materials we file with the SEC at the SEC’s Public Reference Room
at 100 F Street, NE, Washington, D.C. 20549 and may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains
reports, proxy and information statements and other information regarding issuers that file electronically. The
SEC Internet website address is www.sec.gov.
The information regarding our Internet website and its content is for your convenience only. The
information contained on or connected to our Internet website is not deemed to be incorporated by reference in
this Annual Report or filed with the SEC.
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Item 1A. Risk Factors
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 forecast in our forward-looking statements,
including the risks described below and the risks that may be identified in future documents that are filed or
furnished with the SEC.
GENERAL RISKS ASSOCIATED WITH OUR BUSINESS
If we are unable to consummate additional acquisitions or investments, we may not be able to implement our
growth strategy successfully.
Our growth strategy is based to a large extent on the selective acquisition, development and investment in
rail properties, both in new regions and in regions in which we currently operate. The success of this strategy will
depend on, among other things:
•
•
•
•
•
the availability of suitable opportunities;
the level of competition from other companies that may have greater financial resources;
our ability to value acquisition and investment candidates accurately and negotiate acceptable terms for
those acquisitions and investments;
our ability to identify and enter into mutually beneficial relationships with venture partners; and
the availability of management resources to oversee the integration and operation of the new
businesses.
If we are not successful in implementing our growth strategy, the market price for our Class A common
stock may be adversely affected.
We may need additional capital to fund our acquisitions. If we are unable to obtain additional capital, we may
be required to forego potential acquisitions, which would impair the execution of our growth strategy.
Since January 1, 1996, we have acquired interests in 39 railroads, the majority of which were purchased for
cash. As of December 31, 2007, we had undrawn revolver capacity of $188.9 million and $46.7 million of cash
and cash equivalents available for acquisitions or other activities. We intend to continue to review acquisition
candidates and potential purchases of railroad assets and to attempt to acquire companies and assets that meet our
investment criteria. We expect that, as in the past, we will pay cash for some or all of the purchase price of any
acquisitions or purchases that we make. Depending on the number of acquisitions or purchases and the prices
thereof, we may not generate enough cash from operations to pay for the acquisitions or purchases. We may,
therefore, need to raise substantial additional capital to fund our acquisitions. To the extent that we raise
additional capital through the sale of equity or convertible debt securities, the issuance of such securities could
result in dilution of our existing stockholders. If we raise additional funds through the issuance of debt securities,
the terms of such debt could impose additional restrictions and costs on our operations. Additional capital, if
required, may not be available on acceptable terms or at all. If we are unable to obtain additional capital, we may
be required to forego potential acquisitions, which could impair the execution of our growth strategy.
Our inability to integrate acquired businesses successfully or to realize the anticipated cost savings and other
benefits could have adverse consequences to our business.
We have experienced significant growth through acquisitions and we expect to continue to grow through
additional acquisitions. Acquisitions generally result in increased operating and administrative costs and, to the
extent financed with debt, additional interest costs. We may not be able to manage or integrate the acquired
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companies or businesses successfully. The process of combining acquired businesses may be disruptive to our
business and may cause an interruption or reduction of our business as a result of the following factors, among
others:
•
•
•
•
•
•
loss of key employees or customers;
possible inconsistencies in or conflicts between standards, controls, procedures and policies among the
combined companies and the need to implement company-wide financial, accounting, information
technology and other systems;
failure to maintain the quality of services that have historically been provided;
integrating employees of rail lines acquired from Class I railroads, governments or other entities into
our regional railroad culture;
failure to coordinate geographically diverse organizations; and
the diversion of management’s attention from our day-to-day business as a result of the need to manage
any disruptions and difficulties and the need to add management resources to do so.
These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, revenue
enhancements and other benefits that we expect to result from integrating acquired companies and may cause
material adverse short- and long-term effects on our operating results, financial condition and liquidity.
Even if we are able to integrate the operations of acquired businesses into our operations, we may not realize
the full benefits of the cost savings, revenue enhancements or other benefits that we may have expected at the
time of acquisition. The expected revenue enhancements and cost savings are based on analyses completed by
members of our management. These analyses necessarily involve assumptions as to future events, including
general business and industry conditions, the longevity of specific customer plants and factories served, operating
costs and competitive factors, most of which are beyond our control and may not materialize. While we believe
these analyses and their underlying assumptions to be reasonable, they are estimates that are necessarily
speculative in nature. In addition, even if we achieve the expected benefits, we may not be able to achieve them
within the anticipated time frame. Also, the cost savings and other synergies from these acquisitions may be
offset by costs incurred in integrating the companies, increases in other expenses or problems in the business
unrelated to these acquisitions.
Many of our recent acquisitions have involved the purchase of stock of existing companies. These
acquisitions, as well as acquisitions of substantially all of the assets of a company may expose us to liability for
actions taken by an acquired business and its management before the acquisition. The due diligence we conduct
in connection with an acquisition and any contractual guarantees or indemnities that we receive from the sellers
of acquired companies may not be sufficient to protect us from, or compensate us for, actual liabilities. In
connection with our GP Railroads and Rail Partners acquisitions, most of the representations made by the sellers,
other than certain representations related to fundamental matters, such as ownership of capital stock, have either
expired (in the case of GP) or will expire on or before June 2008 (in the case of Rail Partners). A material
liability associated with an acquisition, especially where there is no right to indemnification, could adversely
affect our financial condition and operating results.
Because we depend on Class I railroads and other connecting carriers for a majority of our operations, our
operating results, financial condition and liquidity may be adversely affected if our relationships with these
carriers deteriorate.
The railroad industry in the United States and Canada is dominated by seven Class I carriers that have
substantial market control and negotiating leverage. In 2007, approximately 88% of our total carloads in the
United States and Canada were interchanged with Class I carriers. A decision by any of these Class I carriers to
use alternate modes of transportation, such as motor carriers, or to cease certain freight movements, could have a
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material adverse effect on our operating results, financial condition and liquidity. The quantitative impact of such
a decision would depend on which Class I carrier made such a decision and which of our routes and freight
movements were affected.
Our ability to provide rail service to customers in the United States and Canada depends in large part upon
our ability to maintain cooperative relationships with connecting carriers with respect to, among other matters,
freight rates, revenue divisions, fuel surcharges, car supply, reciprocal switching, interchange and trackage rights.
Deterioration in the operations of or service provided by those connecting carriers or in our relationship with
those connecting carriers could adversely affect our operating results and financial condition.
Class I carriers also have traditionally been significant sources of business for us, as well as sources of
potential acquisition candidates as they divest branch lines to smaller rail operators. We lease several railroads
from Class I carriers under long-term lease arrangements, which collectively accounted for approximately 13%
of our 2007 revenues. In addition, we own several railroads that also lease portions of the track or right of way
upon which they operate from Class I railroads. Expiration of these leases or failure of our railroads to comply
with the terms of these leases and agreements in all material respects could result in the loss of operating rights
with respect to those rail properties, which would adversely affect our operating results and financial condition.
We face competition from numerous sources, including those relating to geography, substitute products, other
types of transportation and other rail operators.
Each of our railroads is typically the only rail carrier directly serving our customers. Our railroads, however,
compete directly with other modes of transportation, principally motor carriers and, on some routes, ship, barge
and pipeline operators. Transportation providers such as motor carriers and barges utilize public rights-of-way
that are built and maintained by governmental entities, while we must build and maintain our network. In
addition, other rail operators may build new rail lines to access certain of our customers. If competition from
these alternative methods of transportation materially increases, or if legislation is passed providing materially
greater opportunity for motor carriers with respect to size or weight restrictions, we could suffer a material
adverse effect on our operating results, financial condition and liquidity.
We are also subject to geographic and product competition. For example, a customer could shift production
to a region where we do not have operations or could substitute one commodity for another commodity that is not
transported by rail. In either case, we would lose a source of revenues, which could have a material adverse effect
on our operating results, financial condition and liquidity.
The extent of this competition varies significantly among our railroads. Competition is based primarily upon
the rate charged, the relative costs of substitutable products and the transit time required. In addition, competition
is based on the quality and reliability of the service provided. Because a significant portion of our carloads in the
United States and Canada involve interchange with another carrier, we have only limited control over the total
price, transit time or quality of such service. Any future improvements or expenditures materially increasing the
quality of these alternative modes of transportation in the locations in which we operate or legislation granting
materially greater latitude for other modes of transportation could have a material adverse effect on our operating
results, financial condition and liquidity.
It is difficult to quantify the potential impact of competition on our business, since not only each customer,
but also each customer location and each product shipped from such location is subject to different types of
competition.
The loss of important customers or contracts may adversely affect our operating results, financial condition
and liquidity.
Our operations served more than 770 customers in 2007. Freight revenue from our 10 largest freight revenue
customers accounted for approximately 22% of our revenues in 2007. As of December 31, 2007, four of our 10
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largest customers operated in the paper and forest products industry. In 2007, our largest freight revenue
customer was a company in the paper and forest products industry, freight revenue from which accounted for
approximately 6% of our revenues in 2007. We typically handle freight pursuant to transportation contracts
between us, our connecting carriers and the customer. These contracts are in accordance with industry norms and
vary in duration. These contracts establish price or, in the case of longer term contracts, a methodology for
determining price, but do not typically obligate the customer to move any particular volume and are not typically
linked to the prices of the commodities being shipped. In addition, GWA’s largest freight customer, AWB
Limited (AWB), is the subject of a government investigation and is expected to lose its exclusive bulk wheat
exporter status in 2008. Should AWB lose its exclusive exporter status, it has the right to re-negotiate the terms
of the contracts with GWA, which could affect our operating results, financial condition and liquidity.
Substantial reduction in business with or loss of important customers or contracts could have a material adverse
affect on our operating results, financial condition and liquidity.
We are subject to significant governmental regulation of our railroad operations. The failure to comply with
governmental regulations could have a material adverse effect on our operating results, financial condition
and liquidity.
We are subject to governmental regulation with respect to our railroad operations and a variety of health,
safety, security, labor, environmental and other matters by a significant number of federal, state and local
regulatory authorities. In the United States, these agencies include the STB, the Department of Transportation
(DOT), the FRA of the DOT, other federal agencies (including the Department of Homeland Security) and state
departments of transportation. In Australia, we are subject to both Commonwealth and state regulations. In
Canada, we are subject to regulation by the Canada Transportation Agency, Transport Canada and the regulatory
departments of the provincial governments of Quebec and Ontario. In Mexico, we are subject to regulation by the
SCT. Our failure to comply with applicable laws and regulations could have a material adverse effect on our
operating results, financial condition and liquidity.
Rising fuel costs could materially adversely affect our operating results, financial condition and liquidity.
Fuel costs constitute a significant portion of our total operating expenses. Fuel costs for fuel used in
operations were 10.9% of our operating expenses for each of the years ended December 31, 2007 and 2006. Fuel
prices and supplies are influenced by factors beyond our control, such as international political and economic
circumstances. If Class I railroads change their policies regarding fuel surcharges, the compensation we receive
for increases in fuel costs may decrease. In addition, if diesel fuel prices increase dramatically or if a fuel supply
shortage were to arise from production curtailments, a disruption of oil imports or otherwise, these events could
have a material adverse affect on our operating results, financial condition and liquidity.
Changes to the regulatory environment, if adopted, could have a significant impact on our railroad
operations.
There are various legislative actions being considered in the United States that modify or increase regulatory
oversight of the rail industry. The majority of the actions under consideration are directed at Class I railroads;
however, specific initiatives recently introduced in Congress associated with competition, safety, security and
labor regulations could significantly affect our operations and the cost of compliance with the proposed rules and
regulations could be significant. In addition, proposed regulations may require us to obtain and maintain various
licenses, permits and other authorizations, and we may not be able to do so. Federal, state and local regulatory
authorities may change the regulatory framework without providing us with any recourse for the adverse effects
that the changes may have on our operations. As a result, changes to the regulatory environment could have a
material adverse effect on our operating results, financial condition and liquidity.
We could incur significant costs for violations of, or liabilities under, environmental laws and regulations.
Our railroad operations and real estate ownership are subject to extensive foreign, federal, state and local
environmental laws and regulations concerning, among other things, emissions to the air, discharges to waters,
17
the handling, storage, transportation and disposal of waste and other materials and cleanup of hazardous material
or petroleum releases. We may incur environmental liability from conditions or practices at properties previously
owned or operated by us, properties leased by us and other properties owned by third parties, (for example,
properties at which hazardous substances or wastes for which we are responsible have been treated, stored,
spilled or disposed), as well as at properties currently owned by us. Under some environmental statutes, such
liability may be without regard to whether we were at fault and may also be “joint and several,” whereby we are
responsible for all the liability at issue even though we (or the entity that gives rise to our liability) may be only
one of a number of entities whose conduct contributed to the liability.
Environmental liabilities may arise from claims asserted by owners or occupants of affected properties or
other third parties affected by environmental conditions (for example, contractors and current or former
employees) seeking to recover in connection with alleged damages to their property or with personal injury or
death, as well as by governmental authorities seeking to remedy environmental conditions or to enforce
environmental obligations. Environmental requirements and liabilities could obligate us to incur significant costs,
including significant expenses to investigate and remediate environmental contamination, which could have a
material adverse effect on our operating results, financial condition and liquidity.
Some of our employees belong to labor unions, and strikes or work stoppages could adversely affect our
operating results, financial condition and liquidity.
We are a party to collective bargaining agreements with various labor unions in the United States, Australia,
Canada and Bolivia. We are party to 36 contracts with national labor organizations. We are currently engaged in
negotiations with respect to 10 of those agreements. We have also entered into employee bargaining agreements
with an additional 73 employees who represent themselves. GWA has a collective enterprise bargaining
agreement covering the majority of its employees. Our inability to negotiate acceptable contracts with these
unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers.
If the unionized workers were to engage in a strike, work stoppage or other slowdown or other employees were
to become unionized or the terms and conditions in future labor agreements were renegotiated, we could
experience a significant disruption of our operations and/or higher ongoing labor costs, which, in either case,
could materially adversely affect our operating results, financial condition and liquidity. To date, we have
experienced no material strikes or work stoppages. We are also subject to the risk of the unionization of our
non-unionized employees, which could result in higher employee compensation and restrictive working condition
demands that could increase our operating costs or constrain our operating flexibility. In addition, work
interruptions may be threatened, which could cause customers to seek other transportation alternatives, with a
corresponding adverse financial impact.
If we are unable to employ a sufficient number of skilled workers, our operating results, financial condition
and liquidity may be materially adversely affected.
We believe that our success depends upon our ability to employ and retain skilled workers that possess the
ability to operate and maintain our equipment and facilities. The operation and maintenance of our equipment
and facilities involve complex and specialized processes and often must be performed in harsh conditions,
resulting in a high employee turnover rate when compared to many other industries. In addition, our ability to
expand our operations depends in part on our ability to attract and retain skilled workers. Our number of
employees has increased 22.4% from 1,885 at December 31, 2005 to 2,307 at December 31, 2007. Within the
next five years, we estimate approximately 12% of the current workforce will become eligible for retirement.
Approximately three-fourths of these workers hold key operating positions, such as conductors, engineers and
mechanics. In addition, the demand for workers with these types of skills has increased, especially from Class I
railroads, which can usually offer higher wages and better benefits. A significant increase in the wages paid by
competing employers could result in a reduction of our skilled labor force or an increase in the wage rates that we
must pay or both. If either of these events were to occur, our cost structure could increase, our margins could
decrease and our growth potential could be impaired, each of which could have a material adverse effect on our
operating results, financial condition and liquidity.
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Our operations are dependent on our ability to obtain railcars and locomotives from other providers.
In 2007, approximately 63% of our railcars were leased. If the number of available railcars is insufficient or
if the cost of obtaining these railcars increases, we might not be able to obtain replacement railcars on favorable
terms, or at all, and shippers may seek alternate forms of transportation. In addition, in some cases we use third-
party locomotives to provide transportation services to our customers. Without these third-party locomotives, we
would need to invest additional capital in locomotives.
As a common carrier by rail, we are required to transport hazardous materials, regardless of risk.
Transportation of certain hazardous materials could create catastrophic losses in terms of personal injury
and property damage costs and compromise critical parts of our railroads. Legislation introduced in Congress in
early 2005 would give federal regulators increased authority to conduct investigations and levy substantial fines
and penalties in connection with railroad accidents. Federal regulators also would be required to prescribe new
regulations governing railroads’ transportation of hazardous materials. If enacted, such legislation and
regulations could impose significant additional costs on railroads. Additionally, regulations adopted by the
Department of Transportation and the Department of Homeland Security could significantly increase the costs
associated with moving hazardous materials on our railroads. Further, certain local governments have sought to
enact ordinances banning hazardous materials moving by rail within their borders. Some legislators have
contemplated pre-notification requirements for hazardous materials shipments. If promulgated, such ordinances
could require the re-routing of hazardous materials shipments, with the potential for significant additional costs.
Increases in our costs could have a material adverse affect on our operating results, financial condition and
liquidity.
The occurrence of losses or other liabilities that are either not covered by insurance or that exceed our
insurance limits could materially adversely affect our operating results, financial condition and liquidity.
We have obtained for each of our railroads insurance coverage for losses arising from personal injury and
for property damage in the event of derailments or other accidents or occurrences. On certain of the rail lines
over which we operate, freight trains are commingled with passenger trains. Unexpected or catastrophic
circumstances such as accidents involving passenger trains or spillage of hazardous materials could cause our
liability to exceed our insurance limits. Insurance is available from only a very limited number of insurers, and
we may not be able to obtain insurance protection at our current levels or obtain it on terms acceptable to us. In
addition, subsequent adverse events directly and indirectly applicable to us may result in additional increases in
our insurance premiums and/or our self insured retentions and could result in limitations to the coverage under
our existing policies. The occurrence of losses or other liabilities that are not covered by insurance or that exceed
our insurance limits could have a material adverse affect on our operating results, financial condition and
liquidity.
We may be subject to various claims and lawsuits that could result in significant expenditures.
The nature of our business exposes us to the potential for various claims and litigation related to labor and
employment, personal injury, freight loss and other property damage and other matters, including, without
limitation, claims and lawsuits associated with FCCM’s resignation of its operating concession in Mexico. For
example, United States job-related personal injury and occupational claims are subject to FELA, which is
applicable only to railroads. FELA’s fault-based tort system produces results that are unpredictable and
inconsistent as compared with a no-fault worker’s compensation system. The variability inherent in this system
could result in actual costs being very different from the liability recorded.
Any material changes to current litigation trends or a catastrophic rail accident involving material freight
loss or property damage, personal injury and environmental liability could have a material adverse effect on our
operating results, financial condition and liquidity to the extent not covered by insurance. We have obtained
commercial insurance for potential losses for third-party liability and first-party property damages. Specified
levels of risk are retained by us. Insurance is available from a limited number of insurers and may not continue to
be available or, if available, may not be obtainable on terms acceptable to us.
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Our results of operations are susceptible to downturns in the general economy as well as cyclicality of certain
products.
In any given year, we, like other railroads, are susceptible to changes in the economic conditions of the
industries and geographic areas that produce and consume the freight we transport. For instance, a downturn in
the general economy may adversely impact housing starts, which would decrease our lumber and forest products
traffic. In addition, many of the goods and commodities carried by us experience cyclicality in their demand. Our
results of operations can be expected to reflect this cyclicality, and because of the significant fixed costs inherent
in railroad operations the impact could be material. Should an economic slowdown or recession occur in the
countries in which we operate, the volume of rail shipments carried by us is likely to be affected.
Our results of operations are susceptible to severe weather conditions and other natural occurrences.
We are susceptible to adverse weather conditions, including floods, fires, hurricanes, droughts, earthquakes
and other natural occurrences. For example:
•
•
•
Our minerals and stone revenues, which include salt, may be reduced by mild winters in the
Northeastern United States, which lessen demand for road salt.
Our coal, coke and ores revenue may be reduced by mild winters in the Midwestern United States,
which lessen demand for coal.
GWA’s revenues are susceptible to the impact of drought conditions on the South Australian grain
harvest.
Bad weather and natural disasters, such as blizzards in Eastern Canada and the Northeastern United States
and hurricanes in the Southeastern United States, could cause a shutdown or substantial disruption of operations,
which could have a material adverse effect on our operating results, financial condition and liquidity. In addition,
GWA derives a significant portion of its rail freight revenues from shipments of grain. For the year ended
December 31, 2007, grain shipments generated approximately 17% of GWA’s operating revenues. A decrease in
grain shipments as a result of adverse weather or other negative agricultural conditions could have a material
adverse effect on GWA’s operating results, financial condition and liquidity.
Even if a material adverse weather or other condition does not directly affect our operations, it can impact
the operations of our customers or connecting carriers. Such weather conditions could cause our customers or
connecting carriers to reduce or suspend their operations, which could have a material adverse effect on our
results of operations, financial condition and liquidity. Furthermore, our expenses could be adversely impacted
by weather, including, for example, higher track maintenance and overtime costs in the winter in our New York/
Pennsylvania and Canada Regions related to snow removal and mandated work breaks.
Certain of our capital projects may be impacted by our ability to obtain government funding.
Certain of our existing capital projects are and certain of our future capital projects may be partially
dependent on our ability to obtain government funding. During 2007, we obtained government funding for 32
separate projects that were partially funded by United States federal, state and municipal agencies. These funds
represented approximately 39% of our total capital expenditures during 2007. Government funding for our
projects is limited, and there is no guarantee that budget pressure at the federal, state and local level or changing
governmental priorities will not eliminate future funding availability. In addition, competition for government
funding from other short line railroads, Class I railroads and other companies is significant, and the receipt of
government funds is often contingent on the acceptance of contractual obligations that may not be strictly profit
maximizing. In certain jurisdictions, the acceptance of government funds may impose additional legal obligations
on our operations, such as compliance with prevailing wage requirements.
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Our credit facilities contain numerous covenants that impose certain restrictions on the way we operate our
business.
Our credit facilities contain numerous covenants that impose restrictions on our ability to, among other
things:
•
•
•
•
•
•
•
•
•
•
incur additional debt;
create liens on our assets;
make certain types of investments;
repurchase shares or pay dividends;
make expenditures for capital projects;
merge or consolidate with others;
make asset acquisitions other than in the ordinary course of business;
dispose of assets or use asset sale proceeds;
enter into sale and leaseback transactions; and
enter into transactions with affiliates.
Our credit facilities also contain financial covenants that require us to meet a number of financial ratios and
tests. Our failure to comply with the obligations in our credit facilities could result in events of default under the
credit facilities, which, if not cured or waived, could permit acceleration of our indebtedness, allowing our senior
lenders to foreclose on our assets.
Acts of terrorism or anti-terrorism measures may adversely affect us.
Our rail lines, port operations and other facilities and equipment, including rail cars carrying hazardous
materials that we are required to transport under federal law as a common carrier, could be direct targets or
indirect casualties of terrorist attacks. Any terrorist attack or other similar event could cause significant business
interruption and may adversely affect our operating results, financial condition and liquidity. In addition,
regulatory measures designed to control terrorism could impose substantial costs upon us and could result in
impairment to our service, which could also adversely affect our operating results, financial condition and
liquidity.
ADDITIONAL RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We are subject to the risks of doing business in foreign countries.
Some of our significant subsidiaries transact business in foreign countries, namely in Australia and Canada,
and we have a minority investment in Bolivia. In addition, we may consider acquisitions or other investments in
other foreign countries in the future. The risks of doing business in foreign countries include:
•
•
•
•
•
adverse renegotiation or modification of existing agreements or arrangements with governmental
authorities;
adverse changes or greater volatility in the economies of those countries;
adverse effects of currency exchange controls;
adverse currency movements that make goods produced in those countries that are destined for export
markets less competitive;
adverse changes to the regulatory environment of those countries;
21
•
•
•
•
•
•
adverse changes to the tax laws and regulations of those countries;
restrictions on the withdrawal of foreign investment and earnings;
the nationalization of the businesses that we operate, such as threatened nationalization in Bolivia;
the actual or perceived failure by us to fulfill commitments under concession agreements;
the potential instability of foreign governments, including from domestic insurgency; and
the challenge of managing a culturally and geographically diverse operation.
Because some of our significant subsidiaries and affiliates transact business in foreign currencies and
because a significant portion of our net income comes from the operations of our foreign subsidiaries, future
exchange rate fluctuations may adversely affect us and may affect the comparability of our results between
financial periods.
Our operations in Australia and Canada accounted for 18% and 11% of our consolidated operating revenues,
respectively, for the year ended December 31, 2007. The results of operations of our foreign entities are reported
in the local currency—the Australian dollar, and the Canadian dollar—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. The exchange rates between these currencies and the United States dollar have fluctuated
significantly in recent years and may continue to do so in the future. For instance, in the year ended
December 31, 2007, the Australian dollar and Canadian dollar appreciated 11% and 6%, respectively, relative to
the United States dollar.
We cannot assure that we will be able to effectively manage our exchange rate risks, and the volatility in
currency exchange rates may have a material adverse effect on our operating results, financial condition and
liquidity. In addition, because our financial statements are stated in United States dollars, such fluctuations may
affect our results of operations and financial position and may affect the comparability of our results between
financial periods.
Failure to meet concession commitments with respect to operations of our rail lines could result in the loss of
our investment and a related loss of revenues.
Through our subsidiaries and unconsolidated affiliates we have entered into long-term concession and/or
lease agreements with governmental authorities in South Australia and Bolivia. These concession and lease
agreements are subject to a number of conditions, including those relating to the maintenance of certain standards
with respect to safety, service, price and the environment. These concession and lease agreements also typically
carry with them a commitment to maintain the condition of the railroad and to make a certain level of capital
expenditures. Our failure to meet these commitments under the long-term concession and lease agreements could
result in the loss of those concession or lease agreements. The loss of any concession or lease agreement could
result in the loss of our entire investment relating to that concession or lease agreement and the related revenues
and income.
Australia’s open access regime could lead to additional competition for GWA’s business and decreased
revenues and profit margins.
Australia’s open access regime could lead to additional competition for GWA’s business, which could result
in decreased revenues and profit margins. The legislative and regulatory framework in Australia allows third-
party rail operators to gain access to GWA’s railway infrastructure and in turn governs GWA’s access to track
owned by others. Access charges are paid for access onto the track of other companies, and access charges under
state and federal regimes continue to evolve because privatization of railways in Australia is recent. Where GWA
pays access fees to others, if those fees were increased, GWA’s operating margins could be negatively affected.
22
In addition, if the federal government or respective state regulators were to alter a regulatory regime or determine
that access fees charged to current or prospective third-party rail freight operators by GWA did not meet
competitive standards, then GWA’s income from those fees could be negatively affected.
When GWA operates over track networks owned by others, including Commonwealth-owned and State-
owned networks, the owners of the network rather than the operators are responsible for scheduling the use of the
tracks as well as for determining the amount and timing of the expenditures necessary to maintain the network in
satisfactory condition. Therefore, in areas where GWA operates over tracks owned by others, it is subject to train
scheduling set by the owners as well as the risk that the network will not be adequately maintained. Either risk
could affect GWA.
GWA is subject to several contractual restrictions on its ability to compete.
As a result of our June 2006 ARG Sale, GWA is subject to (a) a five-year non-compete in the State of
Western Australia, the Melbourne to Adelaide corridor and certain areas within the State of New South Wales
historically served by ARG; (b) a right of first refusal for the benefit of Queensland Rail on the sale of (i) GWA
or a majority of the ownership of GWA, (ii) a number of high horse-power locomotives and intermodal wagons
owned or operated by GWA and (iii) assets of GWA’s yard and facilities at Port Augusta; and (c) a restriction on
hiring of ARG employees who remain employed by ARG after the sale. These contractual restrictions may place
limits on our ability to grow GWA’s business, which could have a material adverse effect on GWA’s operating
results, financial condition and liquidity.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
Genesee & Wyoming, through our subsidiaries and our unconsolidated affiliate in Bolivia, currently has
interests in 48 short line and regional freight railroads, of which 43 are located in the United States, three are
located in Canada, one is located in Australia and one is located in Bolivia. These rail properties typically consist
of the track and the underlying land. Real estate adjacent to the railroad rights-of-way is generally retained by the
sellers, and our holdings of such real estate are not material. Similarly, the seller typically retains mineral rights
and rights to grant fiber optic and other easements in the properties acquired by us. Several of our railroads are
operated under leases or operating licenses in which we do not assume ownership of the track and the underlying
land.
Our railroads operate over approximately 5,800 miles of track that is owned, jointly owned or leased by us
or our affiliate. We also operate, through various trackage rights agreements, over more than 3,000 miles of track
that is owned or leased by others. The track miles listed below exclude 794 miles of sidings and yards located in
the United States (642 miles), Canada (87 miles), and Australia (65 miles).
23
The following table sets forth certain information as of December 31, 2007, with respect to our and our
affiliate’s railroads, excluding 998 miles associated with our discontinued operations in Mexico:
YEAR
ACQUIRED
TRACK
MILES NOTES
STRUCTURE CONNECTING CARRIERS (1)
RAILROAD AND LOCATION
UNITED STATES:
Genesee and Wyoming Railroad Company . . . . . . .
(GNWR) New York
The Dansville & Mount Morris . . . . . . . . . . . . . . . .
Railroad Company
(DMM) New York
1899
1985
Rochester & Southern Railroad, Inc.
(RSR) New York
. . . . . . . . . . .
1986
Louisiana & Delta Railroad, Inc.
(LDRR) Louisiana
. . . . . . . . . . . . . .
1987
Bradford Industrial Rail, Inc.
(BR) Pennsylvania
. . . . . . . . . . . . . . . . .
1988
Buffalo & Pittsburgh Railroad, Inc.
(BPRR) New York, Pennsylvania
Allegheny & Eastern Railroad, Inc.
(ALY) Pennsylvania
Willamette & Pacific Railroad, Inc.
(WPRR) Oregon
Portland & Western Railroad, Inc.
(PNWR) Oregon
Pittsburg & Shawmut Railroad, Inc.
(PS) Pennsylvania
. . . . . . . . . . . .
1988
. . . . . . . . . . . .
1992
. . . . . . . . . . . .
1993
. . . . . . . . . . . . .
1995
27
8
51
86
4
391
128
184
288
(2)
Owned
CP, DMM, RSR, NS, CSX
(2)
Owned
GNWR
(3)
Owned
BPRR, CP, GNWR, CSX, LAL
(4)
Owned/Leased UP, BNSF
(5)
Owned
BPRR
(6)
Owned/Leased ALY, BR, CN, CP, CSX, NS
PS, RSR, AVR, SB, SBOR
(7)
Owned
BPRR, NS, CSX
(8)
Leased
UP, PNWR, HLSC, AERC
(9)
Owned/Leased BNSF, UP, WPRR, POTB, AERC
. . . . . . . . . . . .
1996
111
(10)
Owned/Leased BPRR, NS
Illinois & Midland Railroad, Inc.
(IMR) Illinois
Commonwealth Railway, Inc.
(CWRY) Virginia
. . . . . . . . . . . . . .
1996
. . . . . . . . . . . . . . . .
1996
Talleyrand Terminal Railroad Company, Inc.
(TTR) Florida
. . . .
1996
Corpus Christi Terminal Railroad, Inc.
(CCPN) Texas
Golden Isles Terminal Railroad, Inc.
(GITM) Georgia
Savannah Port Terminal Railroad, Inc.
(SAPT) Georgia
. . . . . . . . . .
1997
. . . . . . . . . . .
1998
. . . . . . . . . .
1998
South Buffalo Railway Company . . . . . . . . . . . . . . .
(SB) New York
2001
97
17
2
23
13
18
54
(11)
Owned
BNSF, IAIS, CN, NS,
TZPR, TPW, UP, KCS
(12)
Owned/Leased NS, CSX
(13)
Leased
NS, CSX
(14)
Leased
UP, BNSF, TM
(15)
Owned/Leased CSX, NS
(16)
Leased
CSX, NS
(17)
Owned
BPRR, CSX, NS
CP, CN
2002
157
(18)
Owned/Leased GRS, SLQ
St. Lawrence & Atlantic Railroad Company . . . . . .
(SLR) Maine, New Hampshire and Vermont
York Railway Company . . . . . . . . . . . . . . . . . . . . . .
(YRC) Pennsylvania
Utah Railway Company . . . . . . . . . . . . . . . . . . . . . .
(URC) Utah
Salt Lake City Southern Railroad Company . . . . . . .
(SLCS) Utah
Chattahoochee Industrial Railroad . . . . . . . . . . . . . .
(CIRR) Georgia
Arkansas Louisiana and Mississippi Railroad
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(ALM) Arkansas, Louisiana
2002
2002
2002
2003
2003
Fordyce and Princeton R.R. Co.
(F&P) Arkansas
Tazewell & Peoria Railroad, Inc.
(TZPR) Illinois
. . . . . . . . . . . . . . .
2003
. . . . . . . . . . . . . .
2004
(18)
Owned
CSX, NS
(19)
Owned
UP, BNSF
(20)
Owned
UP, BNSF
(21)
Owned
CSX, NS, CHAT
(21)
Owned
UP, KCS, F&P
(21)
Owned
UP, KCS, ALM
(22)
Leased
CN, UP, NS, BNSF, TPW
IAIS, IMRR, CIRY, KJRY
42
47
2
15
53
57
24
24
RAILROAD AND LOCATION
YEAR
ACQUIRED
TRACK
MILES NOTES
STRUCTURE CONNECTING CARRIERS (1)
Golden Isles Terminal Wharf (GITW)
Georgia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
First Coast Railroad Inc.
(FCRD) Florida, Georgia
. . . . . . . . . . . . . . . . . .
2005
AN Railway, L.L.C. (AN) Florida . . . . . . . . . . .
Atlantic & Western Railway, L.P.
(ATW) North Carolina
. . . . . . . . . .
2005
2005
7
32
96
11
(23)
Owned
CSX
(24)
Leased
CSX, SM
(25)
(25)
Leased
Owned
CSX
CSX, NS
. . . . . . . . . . . . .
2005
108
(25)
Owned
CSX, NS, CHAT
The Bay Line Railroad, L.L.C.
(BAYL) Alabama, Florida
East Tennessee Railway, L.P.
(ETRY) Tennessee
Evansville Belt Railroad, Inc.
(EBLR) Indiana
. . . . . . . . . . . . .
2005
. . . . . . . . . . . . . .
2005
Galveston Railroad, L.P.
(GVSR) Texas
. . . . . . . . . . . . . . . . .
2005
14
6
38
(25)
Owned/Leased CSX, NS
(25)
Owned
(25)
Leased
BNSF, UP
Georgia Central Railway, L.P.
(GC) Georgia
. . . . . . . . . . . . .
2005
171
(25)
Owned/Leased CSX, NS
KWT Railway, Inc.
(KWT) Kentucky, Tennessee
. . . . . . . . . . . . . . . . . . . . .
2005
. . . . . . .
2005
69
79
(25)
Owned
CSX
(25)
Owned
BNSF, UP
. . . . . . . .
2005
148
(25)
Owned/Leased CSX, KCS, NS, AGR, BNSF
Little Rock & Western Railway, L.P.
(LRWN) Arkansas
Meridian & Bigbee Railroad, L.L.C.
(MNBR) Alabama, Mississippi
Riceboro Southern Railway, L.L.C.
(RSOR) Georgia
. . . . . . . . .
2005
Tomahawk Railway, L.P.
(TR) Wisconsin
. . . . . . . . . . . . . . . . .
2005
Valdosta Railway, L.P.
(VR) Georgia
. . . . . . . . . . . . . . . . . . .
2005
Western Kentucky Railway, L.L.C.
(WKRL) Kentucky
. . . . . . . . .
2005
Wilmington Terminal Railroad, L.L.C.
(WTRY) North Carolina
. . . . . .
2005
Chattahoochee Bay Railroad, Inc.
(CHAT) Georgia
Maryland Midland Railway, Inc.
(MMID) Maryland
. . . . . . . . . .
2006
. . . . . . . . . . .
2007
18
6
10
21
17
26
70
(25)
Leased
(25)
Owned
CSX
CN
(25)
Owned
CSX, NS
(25)
Owned
(25)
Leased
CSX
CSX
(26)
Owned
BAYL, NS, CIRR, CSX
(27)
Owned
CSX
CANADA:
Huron Central Railway Inc.
(HCR) Canada
. . . . . . . . . . . . . . .
1997
173
(28)
Leased
CP, CN
Quebec Gatineau Railway Inc.
(QGRY) Canada
. . . . . . . . . . . . .
1997
313
(29)
Owned/Leased CP, CN
St. Lawrence & Atlantic Railroad . . . . . . . . . . .
(Quebec) Inc. (SLQ) Canada
AUSTRALIA:
Genesee & Wyoming Australia Pty Ltd
(GWA)
. . . . . . . . . . . . . . . . . . . . . . . . . .
BOLIVIA (Minority Investment): . . . . . . . . . . .
Ferroviaria Oriental, S.A.
(Oriental)
2002
95
(18)
Owned
CP, CN, MMA, SLR
2006
791
(30)
Leased
2000
773
(31)
Leased
General Belgrano,
Novoeste
(1) See Legend of Connecting Carriers following this table.
(2)
(3)
(4)
Includes 13 miles of track obtained in 1982. The GNWR and DMM are now operated by RSR.
In addition, RSR has haulage contracts over 52 miles of CP and 70 miles of CSX.
Includes 3 miles under a lease with M.A. Patout & Sons expiring in 2011. If the lease terminates, the lessor is obligated to reimburse us
for leasehold improvements based upon stipulations in the agreement. In addition, LDRR operates by trackage rights over 91 miles of UP
under an agreement terminable by either party and has a haulage contract with M.A. Patout & Sons over 4 miles of track.
In addition, BR operates by trackage rights over 14 miles of BPRR. BR merged with BPRR on January 1, 2004.
(5)
25
(6)
Includes 92 miles under perpetual leases and 41 miles, 9 miles and 24 miles under leases with CSX expiring in 2027, 2090 and 2024,
respectively, and 36 miles under a lease with NS expiring in 2027. In addition, BPRR operates by trackage rights over 14 miles of CSX
under an agreement expiring in 2018 and 8 miles of NS under an agreement expiring in 2027. We are seeking to sell or abandon
approximately 25 miles of owned track that parallels track under the NS trackage rights agreement.
(7) ALY operates by trackage rights over 3 miles of NS. ALY merged with BPRR on January 1, 2004.
(8) All under lease with UP expiring in 2013, with renewal options subject to both parties’ consent. If the lease terminates, the lessor is
(9)
obligated to reimburse us for leasehold improvements based upon stipulations in the agreement. In addition, WPRR operates over 41
miles of UP under a concurrent trackage rights agreement.
Includes 59 miles under lease with UP expiring in 2015 with a 10-year renewal unless terminated by either party, 56 miles formerly
under lease which was purchased in November 1997 and is operated under a rail service easement, 92 miles purchased in July 1997 and
76 miles under lease with BNSF expiring in 2017. If the leases terminate, the lessor is obligated to reimburse us for leasehold
improvements based upon stipulations in the agreements. In addition, PNWR operates by trackage rights over 2 miles of UP and 4 miles
of POTB. PNWR also has haulage service contracts over 49 miles of UP, 13 miles of BNSF and 2 miles of PTR.
(10) In addition, PS operates over 11 miles pursuant to an operating contract. PS merged with BPRR on January 1, 2004. In 2005, we sold
approximately 30 miles of owned track that duplicates service provided by BPRR.
(11) In addition, IMR operates by trackage rights over 15 miles of CN, 9 miles of TZPR and 48 miles of UP.
(12) Exercised an option to purchase 12.5 miles of previously leased rail line from Norfolk Southern Corp. on August 25, 2006.
(13) All under lease with Jacksonville Port Authority expiring in 2008.
(14) All under lease with Port of Corpus Christi Authority of Nueces County Texas expiring in 2012. If the lease terminates, the lessor is
obligated to reimburse us for leasehold improvements based upon stipulations in the agreement.
(15) Includes 13 miles which are under lease with Georgia Port Authority expiring in 2010. If the lease terminates, the lessor is obligated to
reimburse us for leasehold improvements based upon stipulations in the agreement.
(16) All under lease expiring in 2010. If the lease terminates, the lessor is obligated to reimburse us for leasehold improvements based upon
stipulations in the agreement.
(17) SB was acquired on October 1, 2001 from Bethlehem Steel.
(18) Subsidiary of Emons Transportation Group, Inc., acquired on February 22, 2002.
(19) URC was acquired on August 28, 2002. In addition, URC operates by trackage rights over 349 miles of UP.
(20) Subsidiary of Utah Railway Company, acquired on August 28, 2002. In addition, SLCS operates by trackage rights over 34 miles of UP.
(21) All acquired on December 31, 2003 from Georgia Pacific Corporation.
(22) All under lease with Peoria and Pekin Union Railway (PPU) expiring in 2024. In addition, TZPR operates by trackage rights over 4 miles
of UP.
(23) The Company purchased the Golden Isles Terminal Wharf in August 2004.
(24) All under lease with CSX expiring in 2025.
(25) All acquired on June 1, 2005 from RMC. Includes certain lines under leases with CSX, Port of Galveston, the City of Wilmington, NC and
the St. Joe Company.
(26) CHAT purchased the Chattahoochee & Gulf Railroad Co., Inc. and the H&S Railroad Company, Inc. on August 25, 2006 from Gulf &
Ohio Railways.
(27) The Company purchased 87.4% of MMID on December 31, 2007.
(28) All under lease with CP expiring in 2017, with renewal options subject to both parties’ consent.
(29) Consists of 295 miles that are owned and 18 miles that are under lease expiring in 2017, with renewal options subject to both parties’
consent. In addition, QGRY operates by trackage rights over 65 miles of CP.
(30) Acquired a 50-year lease from South Australia, which expires in 2047.
(31) All under a 40-year concession agreement expiring in 2036 operating on track structure that is owned by the state-owned rail company
Red Ferroviario Oriental.
Legend of Connecting Carriers
AERC
AGR
AVR
BNSF
CIRY
CN
CP
CSX
GRS
HLSC
IAIS
KCS
KJRY
LAL
MMA
NS
POTB
SBOR
SM
TM
TPW
UP
Albany & Eastern Railroad
Alabama & Gulf Coast Railway LLC
Allegheny Valley Railroad
Burlington Northern Santa Fe Railway Company
Central Illinois Railway
Canadian National
Canadian Pacific Railway
CSX Transportation, Inc.
Guilford Rail System
Hampton Railway
Iowa Interstate Railroad, Ltd.
Kansas City Southern
Keokuk Junction Railway
Livonia, Avon & Lakeville Railroad Corp.
Montreal, Maine & Atlantic Railway, Ltd.
Norfolk Southern Corp.
Port of Tillamook Bay Railroad
Buffalo Southern Railroad
St. Mary’s Railroad
The Texas Mexican Railway Company
Toledo, Peoria & Western Railway Corp.
Union Pacific Railroad Company
26
EQUIPMENT
As of December 31, 2007, the rolling stock of our continuing operations consisted of 515 locomotives, of
which 444 were owned and 71 were leased, and 11,435 freight cars, of which 4,240 were owned and 7,195 were
leased. A breakdown of the types of freight cars owned and leased by our continuing operations is set forth in the
table below. As of December 31, 2007, our discontinued operations in Mexico owned 39 locomotives and 206
freight cars.
Rail Cars by Car Type:
Box . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hoppers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Flats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gondolas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covered Hoppers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tank Cars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance of Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Auto Racks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,818
1,013
685
1,115
398
1,607
473
192
246
821
29 —
25 —
13 —
5,831
1,800
2,005
665
1,067
29
25
13
Owned Leased
Totals
4,240
7,195
11,435
Item 3.
Legal Proceedings
Mexico. On June 25, 2007, FCCM formally notified the SCT of its intent to exercise its right to resign its
30-year concession from the Mexican government and to cease its rail operations. In response to this notification,
on July 24, 2007, the SCT issued an official letter informing FCCM that the SCT did not accept the resignation
of the concession. On August 8, 2007, the SCT issued another official letter to initiate a proceeding to impose
sanctions on FCCM. The amount of the sanctions has not been specified. The proposed sanctions are based, in
part, on allegations that FCCM has violated the Railroad Service Law in Mexico and the terms of its concession.
On August 30, 2007, FCCM filed a brief with the SCT that challenged the proposed sanctions and introduced
evidence supporting FCCM’s right to resign its concession. On September 21, 2007, FCCM also filed a
proceeding in the Tax and Administrative Federal Court in Mexico seeking an annulment of the SCT’s July 24,
2007, official letter and recognition of FCCM’s right to resign its concession. The SCT has also seized
substantially all of FCCM’s operating assets in response to FCCM’s resignation of the concession. On
September 19, 2007, FCCM filed a proceeding in the Second District Court in Merida (District Court)
challenging the SCT’s seizure of its operating assets as unconstitutional. The District Court admitted the
proceeding on October 11, 2007, and issued a provisional ruling upholding the seizure, pending a full review of
the constitutional grounds for the seizure and the legality of the SCT’s actions. In addition to the allegations
made by the SCT, FCCM is subject to claims and lawsuits from aggrieved customers as a result of its cessation
of rail operations and the initiation of formal liquidation proceedings. We believe the SCT and customer actions
are without merit and unlawful and we will continue to pursue appropriate legal remedies to support FCCM’s
resignation of the concession and to recover FCCM’s operating assets. As of December 31, 2007, there was a net
liability of $1.7 million remaining on our balance sheet associated with our Mexican operations.
M&B Arbitration. Meridian & Bigbee Railroad LLC (M&B), our subsidiary, CSX and KCS are parties to a
Haulage Agreement governing the movement of traffic between Meridian, Mississippi, and Burkeville, Alabama.
On November 17, 2007, M&B initiated arbitration with the American Arbitration Association against CSX in an
effort to collect on outstanding claims under the Haulage Agreement. To date, our total claims against CSX under
the Haulage Agreement are $7.1 million, which amount could increase pending receipt of additional information
and resolution of pending legal actions. On December 7, 2007, CSX filed an arbitration response, answering
statement and counterclaim. CSX alleges it has suffered damages in an amount to be determined. We plan to
vigorously defend ourselves against CSX’s claims, which we believe to be without merit, and will pursue
27
insurance recovery as appropriate. Although we believe we are entitled to payment for our claims, and that we
have meritorious defenses against CSX’s claims, arbitration is inherently uncertain, and it is possible that an
unfavorable ruling could have a material adverse impact on our results of operations, financial position or
liquidity as of and for the period in which the determination occurs.
Sheperdsville, Kentucky Litigation. On January 16, 2007, CSX’s freight train Q502-15 derailed in
Sheperdsville, Kentucky. The derailment involved approximately 13 railcars carrying a variety of chemicals. As
a consequence of this derailment, we were named as a defendant in two personal injury lawsuits and one class
action lawsuit. On January 15, 2008, Mr. John Goodwin filed an action against General Electric Capital Services,
Inc. (GECS), General Electric Rail Service Corp. (GERS) and Genesee & Wyoming Inc. (GWI), and on
January 16, 2008, Mr. Bobby Stearns and Ms. Betty Lou Stearns filed an action against GECS, General Electric
Railcar Services Corp. (GE Rail, collectively with GECS and GERS, GE) and GWI. On January 16, 2008,
Roberta Green, individually and on behalf of a class of similarly situated persons, filed a class action lawsuit
against GECS, GE Rail and GWI. All actions are pending in the United States District Court for the Western
District of Kentucky at Louisville. The plaintiffs in these lawsuits allege that the derailment was caused by one or
more defective components on a railcar owned by GE, which railcar bears the railroad operating marks of one of
our subsidiaries. The complaints allege causes of action against GWI for (i) nuisance; (ii) trespass; and
(iii) negligence (with respect to transportation/operations and duty to warn); and seek compensatory and punitive
damages. We believe we are indemnified for these claims by GE. We plan to vigorously defend ourselves against
the claims made in these lawsuits, which we believe to be without merit, and will pursue indemnification and
insurance recovery as appropriate. Although we believe we have meritorious defenses against these claims,
litigation is inherently uncertain, and it is possible that an unfavorable ruling could have a material adverse
impact on our results of operations, financial position or liquidity as of and for the period in which the ruling
occurs.
Canada. As previously discussed, in February 2002, Mr. Paquin, an individual living adjacent to the
Outremont rail yard, filed a motion for authorization of class certification in the Quebec Superior Court in
Canada in connection with a claim against two of the Company’s subsidiaries, Genesee Rail-One Inc. (now
Genesee & Wyoming Canada Inc.) and Quebec-Gatineau Railway Inc., as well as Canadian Pacific Railways
(CP) (collectively, the Parties). Mr. Paquin alleged that the noise emanating from the Outremont rail yard causes
significant nuisance problems to the residents living near the rail yard. The rail yard is owned by CP, part of
which is leased and operated by Quebec-Gatineau Railway Inc. The plaintiff described the proposed class as
comprised of all owners and tenants of dwellings who have lived within a defined section of the Outremont
neighborhood in Montreal, which is adjacent to the rail yard. In December 2007 a settlement agreement for all
outstanding claims was approved by all Parties and the Quebec Superior Court. Neither Genesee & Wyoming
Canada Inc. nor Quebec-Gatineau Railway made any material financial contribution in connection with the
settlement agreement.
Bolivia. As previously disclosed, we indirectly have a 12.52% equity interest in Ferroviaria Oriental S.A.
(Oriental) through its interest in Genesee & Wyoming Chile S.A. (GWC). GWC is an obligor of non-recourse
debt of $12.0 million, which debt is secured by a lien on GWC’s 12.52% indirect equity interest in Oriental held
through GWC’s subsidiary, Inversiones Ferroviarias Bolivianas Ltda (IFB). This non-recourse debt became due
and payable on November 2, 2003. In 2006, certain creditors of GWC, including Banco de Crédito e Inversiones
and Banco de Chile, commenced court proceedings before the 4th and 9th Civil Tribunals of Santiago to (i) collect
on their share of the debt and (ii) exercise their rights pursuant to the lien. Additional information on the value of
our 12.52% equity interest in Oriental is set forth in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Changes in Operations—South America.” In addition, we hold a
10.37% indirect interest in Oriental through other companies. We do not expect these court proceedings to have
any impact on this remaining 10.37% interest, nor do we expect these proceedings to have any additional effect
on our financial statements.
28
Other. In addition to the lawsuits set forth above, from time to time we are a defendant in certain lawsuits
resulting from our operations. Management believes there are adequate provisions in the financial statements for
any expected liabilities that may result from disposition of pending lawsuits. Nevertheless, litigation is subject to
inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact to our results of operations, financial position or liquidity as of and for
the period in which the ruling occurs.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
29
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Stock Market Results. Our Class A common stock publicly trades on the New York Stock Exchange under
the trading symbol GWR. On February 14, 2006, we announced a three-for-two common stock split in the form
of a 50% stock dividend distributed on March 14, 2006, to shareholders of record on February 28, 2006. All
share and per share amounts presented herein have been restated to reflect the retroactive effect of this stock split
as well as any previous stock splits.
The tables below show the range of high and low actual trade prices for our Class A common stock during
each quarterly period of 2007 and 2006.
Year Ended December 31, 2007
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd Quarter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2006
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3rd Quarter
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Our Class B Common Stock is not publicly traded.
High
Low
$29.95
$31.57
$33.40
$28.60
$24.08
$24.57
$25.80
$24.20
High
Low
$29.00
$35.69
$36.75
$32.57
$22.32
$21.00
$26.36
$24.17
Number of Holders. On February 22, 2008, there were 198 Class A common stock record holders and 8
Class B common stock record holders.
Dividends. We did not pay cash dividends in 2007 and 2006. We do not intend to pay cash dividends for the
foreseeable future and intend to retain earnings, if any, for future operation and expansion of our business. Any
determination to pay dividends in the future will be at the discretion of our Board of Directors. For more
information on contractual restrictions on our ability to pay dividends, see “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Senior
United States and Canadian Credit Facilities.”
See “Item 12. Security Ownership of Certain Beneficial Owners and Management” below for the required
equity compensation plan table.
Recent Sales of Unregistered Securities.
None.
Issuer Purchases of Equity Securities
2007
(a) Total Number
of Shares (or
Units) Purchased
(b) Average
Price Paid
per Share
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly announced
Plans or Programs
(d) Maximum Number
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs
October 1 to October 31 . . . . . . . . . . . . .
November 1 to November 30 . . . . . . . . .
December 1 to December 31 . . . . . . . . .
151,070
—
—
$29.27
—
—
151,070
—
—
—
—
—
30
We announced on February 13, 2007 and August 1, 2007, that our Board of Directors authorized the
repurchase of up to 2,000,000 shares and 4,000,000 shares, respectively, of our Class A common stock, which
was in addition to 538,500 shares available for repurchase under a previous authorization in November 2004. The
Board granted management the authority to make purchases in any amount and manner legally permissible,
which, in the aggregate, would offset dilution caused by the issuance of shares in connection with employee and
director stock plans that may occur over time. During the year ended December 31, 2007, we repurchased
6,538,500 shares of our Class A common stock at an average cost of $26.81 per share. As of December 31, 2007,
we had fully exhausted all of our existing authorizations to repurchase shares.
Item 6.
Selected Financial Data
The following selected consolidated income statement data and selected consolidated balance sheet data of
Genesee & Wyoming as of and for the years ended December 31, 2007, 2006, 2005, 2004 and 2003, have been
derived from our consolidated financial statements. Historical information has been reclassified to conform to the
2007 presentation of discontinued operations. All of the information should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K and
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Year Ended December 31,
2007
2006
2005
2004
2003
(In thousands, except per share amounts)
INCOME STATEMENT DATA:
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 516,167 $ 450,683 $350,401 $270,550 $213,224
369,026 280,960 224,438 180,962
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
419,339
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of equity investment in ARG . . . . . . . . . . . . . . . . . . . . . .
Investment loss—Bolivia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity (loss) income of unconsolidated international affiliates . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net
Income from continuing operations before income taxes . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends and cost accretion . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations available to common
96,828
—
—
—
7,813
(14,735)
889
90,795
21,548
69,247
—
81,657
218,845
(5,878)
(10,752)
7,839
(16,007)
252
275,956
103,309
172,647
—
69,441
—
—
14,224
249
(13,335)
95
70,674
20,163
50,511
—
46,112
—
—
21,044
165
(9,266)
(162)
57,893
21,264
36,629
479
32,262
—
—
12,574
180
(6,413)
698
39,301
12,136
27,165
1,270
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income from discontinued operations, net of tax . . . . . . . . . . . .
69,247
(14,072)
172,647
(38,644)
50,511
(376)
36,150
990
25,895
1,554
Net income available to common stockholders . . . . . . . . . . . . . . . . . . . $
55,175 $ 134,003 $ 50,135 $ 37,140 $ 27,449
Basic earnings per common share:
Earnings per common share from continuing operations . . . . . . . $
Weighted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.00 $
4.59 $
1.37 $
1.00 $
34,625
37,609
36,907
36,207
0.73
35,489
Diluted earnings per common share:
Earnings per common share from continuing operations . . . . . . . $
Weighted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.77 $
4.07 $
1.21 $
0.88 $
39,148
42,417
41,712
41,103
0.64
40,152
BALANCE SHEET DATA AT YEAR-END:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,077,801 $1,141,064 $980,598 $677,251 $627,173
245,685 338,351 132,237 158,022
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatorily redeemable convertible preferred stock . . . . . . . . . . . . . .
— 23,994
520,187 397,820 341,700 267,086
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
430,981
272,766
—
—
We have completed a number of acquisitions and a disposition during the periods reported. Because of
variations in the structure, timing and size of these acquisitions and disposition, our results of operations in any
reporting period may not be directly comparable to our results of operations in other reporting periods. See Note
3 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report for a complete
description of our most recent acquisitions and disposition.
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and
related notes included elsewhere in this Annual Report on Form 10-K. The results of operations for the years
ended December 31, 2007, 2006 and 2005, were determined in accordance with accounting principles generally
accepted in the United States (GAAP). Historical information has been reclassified to conform to the 2007
presentation of discontinued operations.
Outlook for 2008
There are certain noteworthy trends that we expect to affect our 2008 results of operations.
In 2008, we expect same railroad carload volumes to be modestly higher than 2007. First, we expect a
reduction in the commodity other traffic due to the discontinuation of haulage traffic on the M&B. Second, we
expect reduced grain traffic at GWA as a result of back to back droughts in Australia. Third, we expect continued
weakness in paper and forest product carloads due to general economic weakness in the United States economy,
the depressed housing market as well as the strong Canadian dollar, which decreases the competitiveness of
Canadian exports to the United States. However, we expect these reductions in same railroad carloads to be offset
by the commencement of new projects in four of our eight operating regions.
We anticipate the continuation of a favorable rail pricing environment in the United States and Canada,
albeit with more moderate gains than those experienced in 2007. Consequently, we expect an increase in freight
revenues in 2008.
Same railroad operating expenses are expected to increase in 2008 primarily due to three factors. First, we
anticipate significantly higher fuel prices in 2008 versus 2007. Second, we expect depreciation expense to
increase given the higher levels of capital spending in 2007. Third, transportation costs are expected to increase
primarily due to increases in freight, switching and crewing services in Australia.
The American Jobs Creation Act (P.L. 108-357) has historically provided a tax credit for Class II and Class
III railroads as an offset to their federal income tax based on qualified railroad track maintenance expenditures
(the “Short Line Tax Credit”). The Short Line Tax Credit expired as of December 31, 2007. Since fiscal year
2004, the Short Line Tax Credit has lowered our effective income tax rate on continuing operations by as much
as 9%. Absent congressional approval of an extension package for the Short Line Tax Credit, we expect a
significant increase in our effective income tax rate in 2008.
Overview
We are a leading owner and operator of short line and regional freight railroads in the United States,
Australia and Canada and own a minority interest in a railroad in Bolivia. In addition, we provide freight car
switching and rail-related services to industrial companies in the United States and Australia.
We commenced the liquidation of our hurricane-damaged operations in Mexico on June 25, 2007, and had
no remaining employees in Mexico as of September 30, 2007. Results from our Mexican operations are now
included in results from discontinued operations.
Net income in the year ended December 31, 2007, was $55.2 million, compared with a net income of $134.0
million in the year ended December 31, 2006. Our diluted earnings per share (EPS) in the year ended
December 31, 2007, was $1.41 with 39.1 million weighted average shares outstanding, compared with diluted
EPS of $3.16 with 42.4 million weighted average shares outstanding in the year ended December 31, 2006.
Income from continuing operations in the year ended December 31, 2007, was $69.2 million, compared with
income from continuing operations of $172.6 million in the year ended December 31, 2006. Our diluted EPS
32
from continuing operations in the year ended December 31, 2007, was $1.77 with 39.1 million weighted average
shares outstanding, compared with diluted EPS from continuing operations of $4.07 with 42.4 million weighted
average shares outstanding in the year ended December 31, 2006. Income from continuing operations in the year
ended December 31, 2007, included a net tax benefit of $3.7 million (or $0.09 per diluted share) associated with
the sale of the Western Australia operations and certain other assets of ARG to Queensland Rail and Babcock &
Brown Limited (ARG Sale) in 2006. Income from continuing operations in the year ended December 31, 2006,
included a net gain from the ARG Sale of $114.5 million after-tax ($2.70 per diluted share), partially offset by an
investment loss in Bolivia of $5.9 million ($0.14 per diluted share), which together increased diluted EPS by
$2.56.
When we discuss same railroad revenues, we are referring to the change in our revenues period-over-period
associated with our existing operations (i.e., excluding the impact of acquisitions). Operating revenues in the year
ended December 31, 2007 were $516.2 million, compared with $450.7 million in the year ended December 31,
2006. The increase in our year-over-year revenues was due to $35.1 million from new operations, primarily
GWA (presented as an acquired business through June 1, 2007 and a part of our same railroad business
thereafter), and an increase in same railroad revenues of $30.4 million, or 6.7%.
Same railroad freight revenues increased $6.8 million, or 2.2%, in the year ended December 31, 2007,
compared with the year ended December 31, 2006, primarily due to an increase in average freight revenues per
carload of 9.6%, partially offset by a 6.8% decrease in carloads. Same railroad non-freight revenues increased
$23.5 million, or 16.9%, in the year ended December 31, 2007, compared with the year ended December 31,
2006, primarily due to our GWA operations.
Our operating income in the year ended December 31, 2007, was $96.8 million, compared with $81.7
million in the year ended December 31, 2006. The operating ratio was 81.2% in the year ended December 31,
2007, compared with an operating ratio of 81.9% in the year ended December 31, 2006.
During the year ended December 31, 2007, we experienced a $193.5 million net decrease in cash and cash
equivalents. We generated $34.5 million in cash from operating activities of continuing operations which was net
of the payment of $95.6 million in Australian taxes related to the ARG Sale. Also during the year ended
December 31, 2007, we repurchased 6,538,500 shares of our Class A common stock at an average cost of $26.81
per share for a total of $175.3 million. We purchased $61.8 million of property and equipment, net of $29.9
million received from current year government grants and $4.4 million in cash received from government grants
for capital spending completed in 2006, and we purchased Maryland Midland for $19.4 million. We received
$1.7 million in insurance proceeds for bridge reconstruction completed in 2006 and $9.4 million in cash proceeds
from the disposition of property and equipment.
Discontinued Operations
During the third quarter of 2007, we ceased our Mexican rail operations and initiated formal liquidation
proceedings of FCCM. The SCT has contested our resignation of the concession and has seized substantially all
of FCCM’s operating assets in response to the resignation. We believe the SCT’s actions were unlawful and we
are pursuing appropriate legal remedies to recover FCCM’s operating assets. As a result of these actions, we
recorded a pre-tax loss in the year ended December 31, 2007, of $25.4 million, including non-cash charges of
$15.0 million. The non-cash charges included $8.9 million related to the write-down of FCCM’s operating assets
and a $5.5 million loss from the cumulative foreign currency translation into United States dollars of the original
investment and FCCM’s reported earnings since 1999. This pre-tax loss was partially offset by a United States
tax benefit of $11.3 million, primarily related to a worthless stock and bad debt deductions to be claimed in the
United States.
Loss from discontinued operations, net of tax, was $14.1 million in the year ended December 31, 2007,
compared with a loss from discontinued operations, net of tax, of $38.6 million in the year ended December 31,
2006. The loss from discontinued operations in the year ended December 31, 2006, included a non-cash charge
33
of $33.1 million ($34.1 million after-tax) reflecting the write-down of non-current assets and related effects of
FCCM. The loss from discontinued operations reduced diluted EPS by $0.36 in the year ended December 31,
2007, compared with a $0.91 negative impact on diluted EPS in the year ended December 31, 2006.
Changes in Operations
United States
Maryland Midland Railway, Inc.: On December 31, 2007, we acquired 87.4% of Maryland Midland for cash
consideration of approximately $19.4 million (net of $7.5 million cash received). An additional $3.6 million was
paid in the first quarter of 2008 to reflect adjustments for final working capital. The purchase price was
preliminarily allocated as follows: current assets ($9.2 million, including cash received), property and equipment
($46.6 million), less current liabilities ($5.4 million), debt assumed ($1.5 million), deferred income tax liabilities
assumed ($17.5 million) and minority interest ($0.8 million). The 12.6% minority shareholder of Maryland
Midland has the option to sell its interest to us for $4.4 million at its discretion over the next five years.
Headquartered 50 miles northwest of Baltimore, the Maryland Midland operates over 63 miles of track between
Glyndon and Highfield, Maryland (near the Pennsylvania border), and between Walkersville and Taneytown,
Maryland. Maryland Midland has 30 employees, 10 locomotives and is an interline carrier with CSX.
Chattahoochee Bay Railroad, Inc.: On August 25, 2006, our newly formed subsidiary, the Chattahoochee
Bay Railroad, Inc. (CHAT), acquired the assets of the Chattahoochee & Gulf Railroad Co., Inc. and the H&S
Railroad Company, Inc. for $6.1 million in cash. The purchase price was allocated between property and
equipment ($5.1 million) and intangible assets ($1.0 million). The rail assets acquired by CHAT connect our Bay
Line Railroad and our Chattahoochee Industrial Railroad.
Commonwealth Railway, Inc.: On August 25, 2006, we exercised an option to purchase 12.5 miles of
previously leased rail line from Norfolk Southern Corp. (NS) for $3.6 million, of which, approximately $2.1
million is expected to be funded by the Commonwealth of Virginia. The 12.5 mile rail line runs through
Portsmouth, Chesapeake and Suffolk, VA. Our subsidiary, the Commonwealth Railway (CWRY), will own and
continue to operate the line upon the final execution of the contract with the Commonwealth of Virginia. In July
2007, we completed a $13.2 million improvement project (including $6.6 million in government grants) to meet
the projected capacity needs of a customer’s new container terminal in Portsmouth.
Rail Partners: On June 1, 2005, we acquired from Rail Management Corporation (RMC) substantially all of
its rail operations (collectively, Rail Partners) for $238.2 million in cash (net of $4.9 million cash received), the
assumption of $1.4 million of non-interest bearing debt and $1.8 million in acquisition costs. During the three
months ended June 30, 2006, we completed our allocation of the purchase price from this acquisition. In the final
allocation, the purchase price was allocated to current assets ($19.4 million, including $4.9 million in cash
received), property and equipment ($186.0 million), intangible assets ($53.8 million) and goodwill ($6.6
million), less current liabilities ($21.3 million) and debt assumed ($1.4 million). The intangible assets consist of
customer contracts and relationships with a weighted average amortization period of 27 years.
First Coast Railroad Inc: On April 8, 2005, our subsidiary, the First Coast Railroad Inc. (FCRD), signed a
20-year agreement to lease 31 miles of rail line between Seals, Georgia and Fernandina, Florida from CSX
Transportation, Inc. (CSX). FCRD commenced operations on April 9, 2005.
Australia
Effective June 1, 2006, we and our former 50% partner in ARG, Wesfarmers Limited (Wesfarmers),
completed the ARG Sale generating a net gain of $218.8 million during the year ended December 31, 2007.
Simultaneous with the ARG Sale, we purchased Wesfarmers’ 50% ownership of the remaining operations of
34
ARG, which are principally located in South Australia, for $15.1 million (GWA Purchase). The GWA Purchase
was accounted for under the purchase method of accounting. However, because we previously held a 50% share
of these assets through our ownership interest in ARG, we applied a step-method to the allocation of value
among the assets and liabilities of GWA. Because the $15.1 million purchase price for Wesfarmers’ 50% share
was lower than 50% of the book value ARG had historically recorded on these assets, we recorded a non-cash
loss of $16.2 million ($11.3 million, net of tax), representing our 50% share of the impairment loss recorded by
ARG, which was included in equity loss of unconsolidated international affiliates in the consolidated statement
of operations in the year ended December 31, 2006. GWA commenced operations on June 1, 2006. Accordingly,
we have included 100% of the value of GWA’s net assets ($30.1 million) in our consolidated balance sheet since
June 1, 2006. We completed our allocation of purchase price for this acquisition during the second quarter of
2007 without material adjustment to our preliminary allocation.
South America
As previously disclosed, we indirectly have a 12.52% equity interest in Oriental through our interest in
GWC, an unconsolidated affiliate. In addition, we hold a 10.37% indirect equity interest in Oriental through other
companies.
During 2006, due to heightened political and economic unrest and uncertainties in Bolivia, GWC advised its
creditors that it was ceasing its efforts to restructure its $12.0 million non-recourse debt obligation. Also in 2006,
the Bolivian government issued a Presidential decree ordering the nationalization of Bolivia’s oil and gas
industry. The government further announced in 2006 that it intends to nationalize, take a partial ownership stake
in or restructure the operations of other local companies, including Oriental.
Accordingly, we determined that our indirect investment in Oriental had suffered an other-than-temporary
decline in value. Based on our assessment of fair value, our $8.9 million investment was written down by $5.9
million with a corresponding charge to earnings in the second quarter of 2006.
As of June 1, 2006, we discontinued equity accounting for the remaining $3.0 million investment in
Oriental. Since then, we have accounted for this investment under the cost method. Historically, Oriental’s
results of operations have not had a material impact on our results of operations. We will continue to monitor the
political situation in Bolivia.
Results from Continuing Operations
When comparing our results from continuing operations from one reporting period to another, you should
consider, in addition to the acquisitions and dispositions discussed above, that we have historically experienced
fluctuations in revenues and expenses due to one-time freight moves, weather related impacts such as hurricanes
or droughts, customer plant expansions and shut-downs, sales of land and equipment, accidents and derailments.
In periods when these events occur, results of operations are not easily comparable to other periods. Recent
transactions include acquisitions in the United States and Australia and the divestiture of our 50% equity
investment in ARG. Because of variations in the structure, timing and size of these transactions, our operating
results in any reporting period may not be directly comparable to our operating results in other reporting periods.
Certain of our railroads have commodity shipments that are sensitive to general economic conditions in the
countries in which we operate, including paper products in Canada and lumber and forest products in the United
States. However, shipments of other commodities are less affected by economic conditions and are more closely
affected by other factors, such as weather and inventory levels maintained at a customer power plant (coal), snow
and ice in the winter (salt) and seasonal rainfall (South Australian grain).
35
Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
Operating Revenues
Overview
Operating revenues were $516.2 million in the year ended December 31, 2007, compared with $450.7
million in the year ended December 31, 2006, an increase of approximately $65.5 million or 14.5%. The $65.5
million increase in operating revenues consisted of approximately $35.1 million in revenues from new operations
and an increase of approximately $30.4 million, or 6.7%, in revenues on existing operations. New operations
consist of current year results of operations from recent acquisitions that did not exist in our financial results for a
comparable period in the prior year. The $30.4 million increase in revenues on existing operations included $6.8
million in freight revenues and $23.5 million in non-freight revenues. Operating revenues in the year ended
December 31, 2007, benefited $11.8 million from the appreciation of the Australian dollar and Canadian dollar
relative to the United States dollar. The following table breaks down our operating revenues into new operations
and existing operations for the years ended December 31, 2007 and 2006 (dollars in thousands):
2007
2006
2007-2006 Variance Information
Total
Operations
New
Operations
Existing
Operations
Total
Operations
Increase in Total
Operations
Increase in
Existing
Operations
Freight revenues . . . . . . . . . . .
Non-freight revenues . . . . . . .
$329,184
186,983
$11,056
24,074
$318,128
162,909
$311,310
139,373
$17,874
47,610
5.7% $ 6,818
2.2%
34.2% 23,536 16.9%
Total operating revenues . . . .
$516,167
$35,130
$481,037
$450,683
$65,484
14.5% $30,354
6.7%
36
Freight Revenues
The following table compares freight revenues, carloads and average freight revenues per carload for the
years ended December 31, 2007 and 2006 (dollars in thousands, except average freight revenues per carload):
Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 2007 and 2006
Commodity Group
Freight Revenues
Carloads
2007
% of
Total
2006
% of
Total
2007
% of
Total
2006
% of
Total
Average
Freight
Revenues
Per Carload
2007
2006
Pulp & Paper . . . . . . . . . . . . . . $ 69,598
60,164
Coal, Coke & Ores . . . . . . . . . .
36,569
Metals . . . . . . . . . . . . . . . . . . . .
36,561
Farm & Food Products . . . . . . .
35,967
Lumber & Forest Products . . . .
30,932
Minerals and Stone . . . . . . . . .
26,014
Chemicals-Plastics . . . . . . . . . .
16,319
Petroleum Products . . . . . . . . .
7,096
Autos & Auto Parts . . . . . . . . .
1,060
. . . . . . . . . . . . . . . .
Intermodal
8,904
. . . . . . . . . . . . . . . . . . . .
Other
21.1% $ 69,049
18.3% 59,367
11.1% 35,558
11.1% 27,355
10.9% 34,714
9.4% 25,995
7.9% 24,708
5.0% 14,460
6,281
2.2%
0.3%
1,651
2.7% 12,172
22.2% 122,706
19.1% 195,393
11.4% 78,191
8.8% 74,095
11.2% 85,309
8.4% 122,006
7.9% 40,928
4.6% 25,750
2.0% 13,853
0.5% 2,108
3.9% 40,930
15.3% 136,128
24.4% 198,075
9.8% 82,938
9.3% 75,574
10.6% 90,017
15.2% 95,759
5.1% 42,680
3.2% 24,873
1.7% 12,839
0.3% 3,936
5.1% 58,203
16.6% $567 $507
300
24.1% 308
429
10.1% 468
362
9.2% 493
386
11.0% 422
271
11.7% 254
579
5.2% 636
581
3.0% 634
489
1.6% 512
419
0.5% 503
209
7.0% 218
Total freight revenues . . . . . . . $329,184 100.0% $311,310 100.0% 801,269 100.0% 821,022 100.0% 411
379
Total carloads decreased by 19,753 carloads, or 2.4%, from 2006 to 2007. The decrease consisted of a
decrease of 55,514 carloads, or 6.8%, from existing operations, partially offset by 35,761 carloads from new
operations.
The overall average revenues per carload increased 8.3% to $411 from 2006 to 2007. Average freight
revenues per carload from existing operations increased 9.6% to $416.
The following table sets forth freight revenues by new operations and existing operations for the years
ended December 31, 2007 and 2006 (dollars in thousands):
Freight revenues
Pulp & Paper . . . . . . . . . . . . . .
Coal, Coke & Ores . . . . . . . . . .
Metals . . . . . . . . . . . . . . . . . . . .
Farm & Food Products . . . . . . .
Lumber & Forest Products . . . .
Minerals and Stone . . . . . . . . . .
Chemicals-Plastics . . . . . . . . . .
Petroleum Products . . . . . . . . .
Autos & Auto Parts . . . . . . . . .
. . . . . . . . . . . . . . . .
Intermodal
Other . . . . . . . . . . . . . . . . . . . . .
2007
2006
2007-2006 Variance Information
Total
Operations
New
Operations
Existing
Operations
Total
Operations
Increase in Total
Operations
Increase in
Existing
Operations
$ 69,598
60,164
36,569
36,561
35,967
30,932
26,014
16,319
7,096
1,060
8,904
$
555
65
92
6,555
23
3,515
82
15
—
—
154
$ 69,043
60,099
36,477
30,006
35,944
27,417
25,932
16,304
7,096
1,060
8,750
$ 69,049
59,367
35,558
27,355
34,714
25,995
24,708
14,460
6,281
1,651
12,172
$
549
797
1,011
9,206
1,253
4,937
1,306
1,859
815
(591)
(3,268)
(6)
0.8% $
732
1.3%
919
2.8%
33.7% 2,651
3.6% 1,230
19.0% 1,422
5.3% 1,224
12.9% 1,844
13.0%
815
(591)
-35.8%
-26.8% (3,422)
0.0%
1.2%
2.6%
9.7%
3.5%
5.5%
5.0%
12.8%
13.0%
-35.8%
-28.1%
Total freight revenues . . . . . . .
$329,184
$11,056
$318,128
$311,310
$17,874
5.7% $ 6,818
2.2%
37
The following information discusses the significant changes in freight revenues by commodity group from
existing operations.
Pulp and paper revenues were flat. A decrease of $7.6 million due to a carload decrease of 13,428, or 9.9%,
was offset by a $7.6 million increase due to a 10.9% increase in average revenues per carload. The carload
decrease was primarily due to higher truck competition resulting from Class I rate increases and a weak
newsprint market.
Coal, coke and ores revenues increased by $0.7 million, or 1.2%. The increase consisted of $1.6 million due
to a 2.6% increase in average revenues per carload, partially offset by $0.8 million due to a carload decrease of
2,682, or 1.4%. The carload decrease was primarily due to coal quality issues at two mine facilities served by us.
Metals revenues increased by $0.9 million, or 2.6%. The increase consisted of $3.3 million due to a 9.2%
increase in average revenues per carload, partially offset by $2.3 million due to a carload decrease of 5,018, or
6.1%. The carload decrease was primarily due to weakness in the galvanized steel market and geographic
competition.
Farm and food products revenues increased by $2.7 million, or 9.7%. The increase consisted of $7.7 million
due to a 28.0% increase in average revenues per carload, partially offset by $5.0 million due to a carload decrease
of 10,825, or 14.3%. The carload decrease was primarily due to GWA’s drought-affected grain traffic. Because
rates for GWA’s grain traffic have both a fixed and variable component, the grain traffic decrease resulted in
higher average revenues per carload.
Lumber and forest products revenues increased by $1.2 million, or 3.5%. The increase consisted of $3.2
million due to a 9.3% increase in average revenues per carload, partially offset by $2.0 million due to a carload
decrease of 4,719, or 5.2%. The carload decrease was primarily due to lower product demand attributable to a
decline in the housing market in the United States.
Minerals and stone revenues increased by $1.4 million, or 5.5%. The increase consisted of $1.2 million due
to a 4.5% increase in average revenues per carload and $0.3 million due to a carload increase of 891, or 0.9%.
The increase in carloads was primarily due to higher rock salt traffic in the Northeastern United States and higher
gypsum at GWA.
Chemicals-plastics revenues increased by $1.2 million, or 5.0%. The increase consisted of $2.4 million due
to a 9.7% increase in average revenues per carload, partially offset by $1.2 million due to a carload decrease of
1,856, or 4.3%. The carload decrease was primarily due to an existing customer using more barge transportation
in 2007 as compared to 2006.
Petroleum products revenues increased $1.8 million, or 12.8%. The increase consisted of $1.3 million due to
an 8.9% increase in average revenues per carload and $0.6 million due to a carload increase of 877, or 3.5%.
Other revenues decreased $3.4 million, or 28.1%. The decrease consisted of $3.9 million due to a carload
decrease of 17,940, or 30.8%, partially offset by $0.5 million due to a 3.9% increase in average revenues per carload.
The carload decrease was primarily the result of the discontinuation of haulage traffic on one of our rail lines.
All remaining commodities combined increased by a net $0.2 million, or 2.8%.
Non-Freight Revenues
Non-freight revenues were $187.0 million in the year ended December 31, 2007, compared with $139.4
million in the year ended December 31, 2006, an increase of $47.6 million or 34.2%. The $47.6 million increase
in non-freight revenues consisted of $24.1 million in revenues from new operations and an increase of $23.5
million, or 16.9%, in revenues from existing operations.
38
The following table compares non-freight revenues for the years ended December 31, 2007 and 2006
(dollars in thousands):
Non-Freight Revenues Comparison
Years Ended December 31, 2007 and 2006
Railcar switching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Car hire and rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel sales to third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demurrage and storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Car repair services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
$ 75,399
27,087
28,564
16,980
6,437
32,516
% of
Total
2006
40.3% $ 64,326
21,873
14.5%
13,831
15.3%
13,673
9.1%
5,513
3.4%
20,157
17.4%
% of
Total
46.2%
15.7%
9.9%
9.8%
4.0%
14.4%
Total non-freight revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$186,983
100.0% $139,373
100.0%
The following table sets forth non-freight revenues by new operations and existing operations for the years
ended December 31, 2007 and 2006 (dollars in thousands):
2007
2006
2007-2006 Variance Information
Total
Operations
New
Operations
Existing
Operations
Total
Operations
Increase in Total
Operations
Increase in
Existing
Operations
$ 75,399
$ 5,380
$ 70,019
$ 64,326
$11,073
17.2% $ 5,693
8.9%
27,087
28,564
16,980
6,437
32,516
4,091
9,561
24
—
5,018
22,996
19,003
16,956
6,437
27,498
21,873
13,831
13,673
5,513
20,157
5,214
14,733
3,307
924
12,359
23.8% 1,123
106.5% 5,172
24.2% 3,283
16.8%
924
61.3% 7,341
5.1%
37.4%
24.0%
16.8%
36.4%
Non-freight revenues
Railcar switching . . . . . . . . .
Car hire and rental
income . . . . . . . . . . . . . . .
Fuel sales to third parties . . .
Demurrage and storage . . . .
Car repair services . . . . . . . .
Other operating income . . . .
Total non-freight
revenues . . . . . . . . . . . . . .
$186,983
$24,074
$162,909
$139,373
$47,610
34.2% $23,536
16.9%
The following information discusses the significant changes in non-freight revenues from existing
operations.
Railcar switching revenues increased $5.7 million, or 8.9%, of which $4.0 million was due to an increase in
iron ore services and rates at GWA and $2.1 million was due to increased switching activity at our port terminal
railroads.
Car hire and rental income increased $1.1 million, or 5.1%, primarily due to increased locomotive and
freight car rental at GWA.
Fuel sales to third parties increased $5.2 million, or 37.4%, primarily due to a combination of higher
average fuel prices and increased volumes at GWA.
Demurrage and storage increased $3.3 million, or 24.0%, primarily due to an increase of $3.5 million in
storage, partially offset by a $0.2 million decrease in demurrage.
Other operating income increased $7.3 million, or 36.4%, primarily due to $3.5 million from GWA crewing
and other ancillary charges, $0.9 million from our drayage business and an increase in all other operating
revenues of approximately $2.9 million.
39
Operating Expenses
Overview
Operating expenses were $419.3 million in the year ended December 31, 2007, compared with $369.0
million in the year ended December 31, 2006, an increase of $50.3 million, or 13.6%. The increase was
attributable to $29.4 million from new operations and an increase of $20.9 million on existing operations.
Operating Ratio
Our operating ratio, defined as total operating expenses divided by total operating revenues, improved to
81.2% in the year ended December 31, 2007, from 81.9% in the year ended December 31, 2006. The operating
ratio for the year ended December 31, 2007, benefited from $6.7 million of gains from the sale of assets,
compared with $3.1 million of gains from the sale of assets in the year ended December 31, 2006. The operating
ratio for the year ended December 31, 2006, was also impacted by ARG Sale-related expenses of $5.8 million, a
gain on an insurance settlement of $1.9 million and charges of $1.1 million for a litigation settlement.
The following table sets forth a comparison of our operating expenses in the years ended December 31,
2007 and 2006 (dollars in thousands):
Operating Expense Comparison
Years Ended December 31, 2007 and 2006
2007
2006
Percentage of
Operating
Revenues
$
Percentage of
Operating
Revenues
Labor and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diesel fuel
Diesel fuel sold to third parties . . . . . . . . . . . . . . . . . . . . . . . .
Casualties and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on insurance recovery . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$167,066
37,106
39,583
31,773
45,718
26,975
16,179
23,208
(6,742)
—
38,473
32.4% $152,566
37,561
7.2%
33,728
7.7%
27,907
6.1%
40,061
8.8%
13,189
5.2%
13,062
3.1%
19,718
4.5%
(3,078)
-1.3%
(1,937)
0.0%
36,249
7.5%
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$419,339
81.2% $369,026
33.9%
8.3%
7.5%
6.2%
8.9%
2.9%
2.9%
4.4%
-0.7%
-0.4%
8.0%
81.9%
Labor and benefits expense was $167.1 million in the year ended December 31, 2007, compared with
$152.6 million in the year ended December 31, 2006, an increase of $14.5 million, or 9.5%. The increase was
attributable to $7.7 million from new operations and $6.8 million from existing operations. The increase from
existing operations was attributable to $11.2 million from regular wage and benefit rate increases and the impact
of approximately 44 new hires and $2.6 million due to foreign currency changes. In the year ended December 31,
2006, labor and benefits included $5.8 million in bonus and stock option expense related to the ARG Sale and
$1.2 million in non-cash compensation expense related to the reassessment of accounting measurement dates for
certain stock options in prior years.
Purchased services expense was $39.6 million in the year ended December 31, 2007, compared with $33.7
million in the year ended December 31, 2006, an increase of $5.8 million, or 17.4%. The increase was
attributable to $7.0 million from new operations, partially offset by a decrease of $1.2 million from existing
operations.
40
Depreciation and amortization expense was $31.8 million in the year ended December 31, 2007, compared
with $27.9 million in the year ended December 31, 2006, an increase of $3.9 million, or 13.9%. The increase was
attributable to $1.2 million from new operations and an increase of $2.7 million from existing operations.
Diesel fuel expense was $45.7 million in the year ended December 31, 2007, compared with $40.0 million
in the year ended December 31, 2006, an increase of $5.7 million, or 14.1%. The increase was attributable to
$1.4 million from new operations and an increase of $4.3 million from existing operations. $3.9 million of the
increase from existing operations was attributable to a 9.6% increase in fuel price per gallon and $0.4 million of
the increase was due to a 0.9% increase in fuel consumption.
Diesel fuel sold to third parties was $27.0 million in the year ended December 31, 2007, compared with
$13.2 million in the year ended December 31, 2006, an increase of $13.8 million. The increase was attributable to
an increase in price per gallon and an increase in gallons of fuel sold to third parties at GWA as a result of the
incorporation of a full year of operating results.
Casualties and insurance expense was $16.2 million in the year ended December 31, 2007, compared with
$13.1 million in the year ended December 31, 2006, an increase of $3.1 million, or 23.9%. The increase was due
to a $2.4 million increase in existing operations and $0.7 million from new operations. The increase in existing
operations was due to an increase of $0.7 million in derailment expense, $0.8 million from a tunnel fire on one of
our railroads and an increase of $0.9 million in FELA and other claims.
Materials expense was $23.2 million in the year ended December 31, 2007, compared with $19.7 million in
the year ended December 31, 2006, an increase of $3.5 million, or 17.7%. The increase was attributable to an
increase of $3.2 million from existing operations and $0.3 million from new operations. The increase in existing
operations was primarily due to increased track and bridge repairs.
Net gain on sale of assets was $6.7 million in the year ended December 31, 2007, compared with $3.1
million in the year ended December 31, 2006. The gain of $6.7 million in the year ended December 31, 2007,
included gains resulting from the sale of certain land and track related assets in the Northeastern United States.
Gain on insurance recovery of $1.9 million in the year ended December 31, 2006, was attributable to an
insurance receivable for the replacement of a bridge destroyed by fire at one of our railroads.
Other expenses were $38.5 million in the year ended December 31, 2007, compared with $36.3 million in
the year ended December 31, 2006, an increase of $2.2 million. The increase was primarily attributable to $1.6
million from new operations.
Other Income (Expense) Items
Gain On Sale of ARG
We recorded a pre-tax gain of $218.8 million in the year ended December 31, 2006, related to the ARG
Sale. See Note 3 in the Notes to Consolidated Financial Statements in this report for additional information on
the ARG Sale.
Investment Loss—Bolivia
We recorded an investment loss of $5.9 million in the year ended December 31, 2006, related to our South
America equity investment. See Note 3 in the Notes to Consolidated Financial Statements in this report.
Equity Loss of Unconsolidated International Affiliates
In the year ended December 31, 2006, equity loss of unconsolidated international affiliates was $10.8
million primarily due to our investment in ARG, including a $16.2 million pre-tax impairment loss, representing
41
our 50% share of the impairment loss recorded by ARG. As previously disclosed, we sold our equity investment
in ARG and discontinued equity accounting for our Bolivia investment during the second quarter of 2006. See
Note 3 in the Notes to Consolidated Financial Statements in this report for additional information regarding the
impairment.
Interest Income
Interest income was $7.8 million in the year ended December 31, 2007, which was consistent with interest
income in the year ended December 31, 2006.
Interest Expense
Interest expense was $14.7 million in the year ended December 31, 2007, compared with $16.0 million in
the year ended December 31, 2006, a decrease of $1.3 million, or 7.9%, primarily due to the reduction of debt
resulting from the use of a portion of the cash proceeds from the ARG Sale.
Provision for Income Taxes
Our effective income tax rate in the year ended December 31, 2007, was 23.7% compared with 37.4% in the
year ended December 31, 2006. The decrease in 2007 was primarily attributable to higher United States foreign
tax credits of $6.2 million associated with the ARG Sale in 2006. The determination of the amount of United
States foreign tax credits was dependent upon the payment of the foreign tax and an election made concurrent
with the filing of the 2006 United States tax return, which occurred in June and September 2007, respectively. In
the year ended December 31, 2007, we recorded $2.6 million of additional prior year United States taxes relative
to the ARG Sale. We assessed the effect of the $2.6 million of additional taxes on the consolidated financial
statements taken as a whole and determined that the effect was not material to any period. In addition, in 2007
and 2006, we benefited from the generation of track maintenance credits.
For the year ended December 31, 2007, as a result of ceasing our Mexican rail operations and initiating
formal liquidation proceedings, we recorded a net United States tax benefit of $11.3 million within the loss from
discontinued operations. We also have a related capital loss carryforward that can be used to reduce the impact of
future capital gains. The tax benefit associated with this carryforward of approximately $8.7 million is almost
entirely offset by a valuation allowance. This capital loss carryforward expires in 2012.
Income and Earnings Per Share from Continuing Operations
Income from continuing operations in the year ended December 31, 2007, was $69.2 million, compared with
income from continuing operations of $172.6 million in the year ended December 31, 2006. Our diluted EPS
from continuing operations in the year ended December 31, 2007, were $1.77 with 39.1 million shares
outstanding, compared with diluted EPS from continuing operations of $4.07 with 42.4 million shares
outstanding in the year ended December 31, 2006. Income from continuing operations in the year ended
December 31, 2007, included a net tax benefit associated with the ARG Sale in 2006, which increased diluted
EPS by $0.09. Income from continuing operations in the year ended December 31, 2006, included a net gain
from the ARG Sale of $114.5 million after-tax ($2.70 per diluted share), partially offset by an investment loss in
Bolivia of $5.9 million ($0.14 per diluted share), which together increased diluted EPS by $2.56. Basic EPS from
continuing operations were $2.00 with 34.6 million weighted average shares outstanding in the year ended
December 31, 2007, compared with basic EPS from continuing operations of $4.59 with 37.6 million weighted
average shares outstanding in the year ended December 31, 2006.
42
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
Operating Revenues
Overview
Operating revenues were $450.7 million in the year ended December 31, 2006, compared with $350.4
million in the year ended December 31, 2005, an increase of $100.3 million, or 28.6%. The $100.3 million
increase in operating revenues consisted of $80.5 million in revenues from new operations and an increase of
$19.8 million, or 5.7%, in revenues on existing operations. New operations consist of current year results of
operations from recent acquisitions that did not exist in our financial results for a comparable period in the prior
year. The $19.8 million increase in revenues on existing operations included an increase of $15.4 million in
freight revenues and an increase of $4.4 million in non-freight revenues. The following table breaks down our
operating revenues into new operations and existing operations for the years ended December 31, 2006 and 2005
(dollars in thousands):
2006
2005
2006-2005 Variance Information
Total
Operations
New
Operations
Existing
Operations
Total
Operations
Increase in Total
Operations
Increase in
Existing
Operations
Freight revenues . . . . . . . . . .
Non-freight revenues . . . . . . .
$311,310
139,373
$40,611
39,859
$270,699
99,514
$255,312
95,089
$ 55,998
44,284
21.9% $15,387
46.6% 4,425
6.0%
4.7%
Total operating revenues . . . .
$450,683
$80,470
$370,213
$350,401
$100,282
28.6% $19,812
5.7%
Freight Revenues
The following table compares freight revenues, carloads and average freight revenues per carload for the
years ended December 31, 2006 and 2005 (in thousands, except average revenue per carload):
Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 2006 and 2005
Commodity Group
2006
% of
Total
2005
% of
Total
2006
% of
Total
2005
% of
Total
Freight Revenues
Carloads
Average
Freight
Revenues
Per Carload
2006
2005
Pulp & Paper . . . . . . . . . . . $ 69,049
59,367
Coal, Coke & Ores . . . . . . .
Metals . . . . . . . . . . . . . . . .
35,558
Lumber & Forest
22.2% $ 58,868
19.1% 51,803
11.4% 26,912
23.1% 136,128
20.3% 198,075
10.5% 82,938
16.6% 129,124
24.1% 197,891
10.1% 75,443
18.0% $507 $456
262
27.6% 300
357
10.5% 429
Products . . . . . . . . . . . . .
Farm & Food Products . . .
Minerals and Stone . . . . . .
Chemicals-Plastics . . . . . . .
Petroleum Products . . . . . .
Autos & Auto Parts . . . . . .
. . . . . . . . . . . . .
Intermodal
. . . . . . . . . . . . . . . . .
Other
34,714
27,355
25,995
24,708
14,460
6,281
1,651
12,172
11.2% 34,996
8.8% 14,133
8.4% 19,192
7.9% 20,961
4.6% 13,486
5,831
2.0%
2,151
0.5%
6,979
3.9%
13.7% 90,017
5.5% 75,574
7.5% 95,759
8.2% 42,680
5.3% 24,873
2.3% 12,839
0.8% 3,936
2.8% 58,203
11.0% 96,260
9.2% 46,892
11.7% 59,614
5.2% 39,661
3.0% 23,661
1.6% 13,092
0.5% 4,805
7.0% 29,600
13.5% 386
6.6% 362
8.3% 271
5.5% 579
3.3% 581
1.8% 489
0.7% 419
4.2% 209
Total freight revenues . . . . $311,310 100.0% $255,312 100.0% 821,022 100.0% 716,043 100.0% 379
364
301
322
529
570
445
448
236
357
43
Total carloads increased by 104,979 carloads, or 14.7%, from 2005 to 2006 due to 126,833 carloads from
new operations, partially offset by a decrease of 21,854 carloads, or 3.1%, from existing operations.
The overall average freight revenues per carload increased 6.3% to $379, from 2005 to 2006. Average
freight revenues per carload from existing operations increased 9.4% to $390.
The following table sets forth freight revenues by new operations and existing operations for the years
ended December 31, 2006 and 2005 (dollars in thousands):
Freight revenues
Pulp & Paper . . . . . . . . . . . .
Coal, Coke & Ores . . . . . . .
Metals . . . . . . . . . . . . . . . . .
Lumber & Forest
Products . . . . . . . . . . . . .
Farm & Food Products . . . .
Minerals and Stone . . . . . . .
Chemicals-Plastics . . . . . . .
Petroleum Products . . . . . . .
Autos & Auto Parts . . . . . . .
Intermodal . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . .
2006
2005
2006-2005 Variance Information
Total
Operations
New
Operations
Existing
Operations
Total
Operations
Increase in Total
Operations
Increase in
Existing
Operations
$ 69,049
59,367
35,558
$ 7,735
1,191
3,171
$ 61,314
58,176
32,387
$ 58,868
51,803
26,912
$10,181
7,564
8,646
17.3% $ 2,446
14.6% 6,373
32.1% 5,475
4.2%
12.3%
20.3%
34,714
27,355
25,995
24,708
14,460
6,281
1,651
12,172
3,577
12,317
6,519
2,357
387
180
—
3,177
31,137
15,038
19,476
22,351
14,073
6,101
1,651
8,995
34,996
14,133
19,192
20,961
13,486
5,831
2,151
6,979
(282)
13,222
6,803
3,747
974
450
(500)
5,193
-0.8% (3,859)
905
93.6%
35.4%
284
17.9% 1,390
587
7.2%
270
7.7%
-23.2%
(500)
74.4% 2,016
-11.0%
6.4%
1.5%
6.6%
4.4%
4.6%
-23.2%
28.9%
Total freight revenues . . . . .
$311,310
$40,611
$270,699
$255,312
$55,998
21.9% $15,387
6.0%
The following information discusses the significant changes in freight revenues by commodity group from
existing operations.
Pulp and paper revenues increased by $2.4 million, or 4.2%. The increase consisted of $7.4 million due to a
12.6% increase in average revenues per carload, partially offset by $5.0 million due to a carload decrease of
9,645, or 7.5%. The carload decrease was primarily due to the impact of Class I railroad rate increases, which
caused certain shippers to move traffic from rail to other modes of transportation, principally truck.
Coal, coke and ores revenues increased by $6.4 million, or 12.3%. The increase consisted of $7.0 million
due to a 13.5% increase in average revenues per carload, partially offset by $0.6 million due to a carload decrease
of 2,052, or 1.0%. The carload decrease was primarily due to planned maintenance at a power plant served by us
in November and December of 2006.
Metals revenues increased by $5.5 million, or 20.3%. The increase consisted of $4.4 million due to a 16.5%
increase in average revenues per carload and $1.0 million due to a carload increase of 2,519, or 3.3%. The
carload increase was primarily due to increased customer shipments of pipe and scrap metal.
Lumber and forest products revenues decreased by $3.9 million, or 11.0%. The decrease consisted of $6.3
million due to a carload decrease of 16,212, or 16.8%, partially offset by $2.4 million due to a 7.0% increase in
average revenues per carload. The carload decrease was primarily due to weaker product demand attributable to a
decline in the housing market in the United States and customer shipments moving by truck.
Farm and food products revenues increased $0.9 million, or 6.4%. The increase consisted of $1.4 million
due to a 9.8% increase in average revenues per carload, partially offset by $0.5 million due to a carload decrease
of 1,449, or 3.1%.
44
Minerals and stone revenues increased by $0.3 million, or 1.5%. The increase consisted of $2.3 million due
to an 11.9% increase in average revenues per carload, partially offset by $2.0 million due to a carload decrease of
5,570, or 9.3%. The carload decrease was primarily due to decreased customer shipments of rock salt for ice
control resulting from a relatively mild 2005-2006 winter season in the Northeastern United States.
Chemicals-Plastics revenues increased by $1.4 million, or 6.6%. The increase consisted of approximately
$1.7 million due to an 8.2% increase in average revenues per carload, partially offset by approximately $0.3
million due to a carload decrease of 574, or 1.4%.
Other revenues increased $2.0 million, or 28.9%. The increase consisted of $2.6 million due to a carload
increase of 12,081, partially offset by a $0.6 million due to an 8.5% decrease in average revenues per carload.
The carload increase was primarily due to increased haulage traffic on one of our rail lines.
All remaining commodities combined increased by a net $0.4 million, or 1.7%.
Non-Freight Revenues
Non-freight revenues were $139.4 million in the year ended December 31, 2006, compared with $95.1
million in the year ended December 31, 2005, an increase of $44.3 million, or 46.6%. The $44.3 million increase
in non-freight revenues consisted of $39.9 million in revenues from new operations and an increase of
approximately $4.4 million, or 4.7%, in revenues on existing operations.
The following table compares non-freight revenues for the years ended December 31, 2006 and 2005
(dollars in thousands):
Non-Freight Revenues Comparison
Years Ended December 31, 2006 and 2005
Railcar switching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Car hire and rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fuel sales to third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demurrage and storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Car repair services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
$ 64,326
21,873
13,831
13,673
5,513
20,157
% of
Total
2005
% of
Total
46.2% $48,783
15.7% 15,648
9.9%
—
9.8% 12,275
4.0% 4,856
14.4% 13,527
51.3%
16.5%
0.0%
12.9%
5.1%
14.2%
Total non-freight revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$139,373
100.0% $95,089
100.0%
The following table sets forth non-freight revenues by new operations and existing operations for the years
ended December 31, 2006 and 2005 (dollars in thousands):
Non-freight revenues
Total
Operations
New
Operations
Existing
Operations
Total
Operations
Increase in Total
Operations
Increase in
Existing
Operations
2006
2005
2006-2005 Variance Information
Railcar switching . . . . . . . . .
Car hire and rental income . .
Fuel sales to third parties . . .
Demurrage and storage . . . . .
Car repair services . . . . . . . .
Other operating income . . . .
$ 64,326
21,873
13,831
13,673
5,513
20,157
$10,042
7,533
13,831
946
337
7,170
$54,284
14,340
—
12,727
5,176
12,987
$48,783
15,648
—
12,275
4,856
13,527
$15,543
6,225
13,831
1,398
657
6,630
31.9% $ 5,501
39.8% (1,308)
100.0% —
452
11.4%
13.5%
320
49.0% (540)
11.3%
-8.4%
0.0%
3.7%
6.6%
-4.0%
Total non-freight revenues . .
$139,373
$39,859
$99,514
$95,089
$44,284
46.6% $ 4,425
4.7%
45
The following information discusses the significant changes in non-freight revenues from existing
operations.
Railcar switching revenues increased $5.5 million, or 11.3%, of which $3.3 million was due to an increase
from switching within industrial plants due to new customers and rate increases, and $2.2 million was primarily
due to increased switching activity at our port terminal railroads.
Car hire and rental income decreased $1.3 million or 8.4%, primarily due to the termination of a railcar
lease from which we earned off-line car hire and a net reduction of off-line time for owned and leased railcars.
All other non-freight revenues increased $0.2 million, or 0.8%.
Operating Expenses
Overview
Operating expenses were $369.0 million in the year ended December 31, 2006, compared with $281.0
million in the year ended December 31, 2005, an increase of $88.0 million or 31.3%. The increase was
attributable to $64.1 million from new operations and an increase of $24.0 million on existing operations.
Operating Ratio
Our operating ratio, defined as total operating expenses divided by total operating revenues, increased to
81.9% in the year ended December 31, 2006, from 80.2% in the year ended December 31, 2005.
The following table sets forth a comparison of our operating expenses in the years ended December 31,
2006 and 2005 (dollars in thousands):
Operating Expense Comparison
Years Ended December 31, 2006 and 2005
2006
2005
Percentage of
Operating
Revenues
$
Percentage of
Operating
Revenues
Labor and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .
Diesel fuel
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diesel fuel sold to third parties . . . . . . . . . . . . . . . . . . . . . . . .
Casualties and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on insurance recovery . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$152,566
37,561
33,728
27,907
40,061
13,189
13,062
19,718
(3,078)
(1,937)
36,249
33.9% $115,403
31,392
8.3%
21,574
7.5%
22,372
6.2%
32,110
8.9%
—
2.9%
15,009
2.9%
15,470
4.4%
(3,200)
-0.7%
—
-0.4%
30,830
8.0%
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$369,026
81.9% $280,960
32.9%
9.0%
6.2%
6.4%
9.2%
0.0%
4.3%
4.4%
-0.9%
0.0%
8.7%
80.2%
Labor and benefits expense was $152.6 million in the year ended December 31, 2006, compared with
$115.4 million in the year ended December 31, 2005, an increase of $37.2 million, or 32.2%. The increase was
attributable to $16.4 million in labor and benefits expense from new operations and an increase of $20.7 million
46
from existing operations. The increase from existing operations was primarily attributable to $5.8 million in
bonus and stock option expense related to the ARG Sale, $1.7 million in compensation expense due to the
adoption of Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” (SFAS
123R) as of July 1, 2005, $1.3 million due to foreign currency rate changes, $1.2 million in non-cash
compensation expense related to the reassessment of accounting measurement dates for certain stock options in
prior years and $10.7 million from regular wage and benefit increases and the impact of approximately 90 new
hires.
Equipment rents were $37.6 million in the year ended December 31, 2006, compared with $31.4 million in
the year ended December 31, 2005, an increase of $6.2 million, or 19.7%. The increase was attributable to $4.5
million from new operations and an increase of $1.7 million from existing operations.
Purchased services expense was $33.7 million in the year ended December 31, 2006, compared with $21.6
million in the year ended December 31, 2005, an increase of $12.2 million, or 56.3%. The increase was
attributable to $12.2 million from new operations primarily due to GWA’s outsourcing of track, freight car and
locomotive repairs.
Depreciation and amortization expense was $27.9 million in the year ended December 31, 2006, compared
with $22.4 million in the year ended December 31, 2005, an increase of $5.5 million, or 24.7%. The increase was
attributable to $4.4 million from new operations and an increase of $1.2 million from existing operations.
Diesel fuel used in operations was $40.1 million in the year ended December 31, 2006, compared with $32.1
million in the year ended December 31, 2005, an increase of $8.0 million, or 24.8%. The increase was
attributable to $4.2 million from new operations and an increase of $3.8 million on existing operations. The
increase on existing operations was due to a 13.0% increase in the average price per gallon, partially offset by a
1.5% decrease in fuel consumption.
Diesel fuel sold to third parties was all due to GWA operations.
Casualties and insurance expense was $13.1 million in the year ended December 31, 2006, compared with
$15.0 million in the year ended December 31, 2005, a net decrease of $1.9 million, or 13.0%. The net decrease
was primarily attributable to declines of $2.3 million in derailment expense and $0.9 million in all other
casualties and insurance expense on existing operations, partially offset by an increase of $1.3 million in
casualties and insurance expense from new operations. The $0.9 million decline in all other casualties and
insurance expense on existing operations was primarily due to a decline of approximately $1.7 million in claims
expense, partially offset by the $0.8 million Galveston litigation settlement.
Materials expense was $19.7 million in the year ended December 31, 2006, compared with $15.5 million in
the year ended December 31, 2005, an increase of $4.2 million, or 27.5%. The increase was attributable to $1.9
million in materials expense from new operations and an increase of $2.4 million on existing operations
primarily due to increased track and equipment maintenance.
Net gain on sale of assets was $3.1 million in the year ended December 31, 2006, which was comparable
with the year ended December 31, 2005.
Gain on insurance recovery of $1.9 million in the year ended December 31, 2006, was attributable to
insurance proceeds for the replacement of a bridge destroyed by fire at one of our railroads.
Other expenses were $36.2 million in the year ended December 31, 2006, compared with $30.8 million in
the year ended December 31, 2005, an increase of $5.4 million or 17.6%. The increase was attributable to $6.0
million from new operations, partially offset by a decrease of $0.6 million on existing operations.
47
Other Income (Expense) Items
Gain On Sale of ARG
We recorded a pre-tax gain of $218.8 million in the year ended December 31, 2006, related to the ARG
Sale. See Note 3 in the Notes to Consolidated Financial Statements in this report for additional information on
the ARG Sale.
Investment Loss—Bolivia
We recorded an investment loss of $5.9 million in the year ended December 31, 2006, related to our South
America equity investment. See Note 3 in the Notes to Consolidated Financial Statements in this report.
Equity (Loss) Income of Unconsolidated International Affiliates
Equity (loss) income of unconsolidated international affiliates was a loss of $10.8 million in the year ended
December 31, 2006, including a $16.2 million pre-tax impairment loss, representing our 50% share of the
impairment loss recorded by ARG, compared with income of $14.2 million in the year ended December 31,
2005, primarily due to ARG. See Note 3 in the Notes to Consolidated Financial Statements in this report for
additional information regarding the impairment.
Interest Income
Interest income was $7.8 million in the year ended December 31, 2006, compared with $0.2 million in the
year ended December 31, 2005, an increase of $7.6 million. The increase in interest income was primarily due to
the investment of cash proceeds from the ARG Sale since June 2006.
Interest Expense
Interest expense was $16.0 million in the year ended December 31, 2006, compared with $13.3 million in
the year ended December 31, 2005, an increase of $2.7 million or 20.0%, primarily due to higher outstanding
debt resulting from the June 1, 2005, acquisition of Rail Partners, partially offset by the reduction of debt in June
2006 resulting from the use of a portion of the cash proceeds from the ARG Sale.
Other Income, Net
Other income, net in the year ended December 31, 2006, was income of $0.3 million compared with income
of $0.1 million in the year ended December 31, 2005, an increase of $0.2 million.
Provision for Income Taxes
Our effective income tax rate in the year ended December 31, 2006 was 37.4% compared with 28.5% in the
year ended December 31, 2005. The increase in our effective income tax rate in 2006 was primarily attributable
to the gain on the ARG Sale. In addition, in 2006 and 2005, we benefited from the generation of track
maintenance credits.
Income and Earnings Per Share from Continuing Operations
Income from continuing operations in the year ended December 31, 2006, was $172.6 million, compared
with income from continuing operations of $50.5 million in the year ended December 31, 2005. Our diluted EPS
from continuing operations in the year ended December 31, 2006, were $4.07 with 42.4 million weighted average
shares outstanding, compared with diluted EPS from continuing operations of $1.21, with 41.7 million weighted
average shares outstanding in the year ended December 31, 2005. Income from continuing operations in the year
48
ended December 31, 2006, included a net gain from the ARG Sale of $114.5 million after-tax ($2.70 per diluted
share) and an investment loss in Bolivia of $5.9 million ($0.14 per diluted share), which increased diluted EPS by
$2.56. Basic EPS from continuing operations were $4.59 with 37.6 million weighted average shares outstanding
in the year ended December 31, 2006, compared with basic EPS from continuing operations of $1.37 with
36.9 million weighted average shares outstanding in the year ended December 31, 2005. Basic and diluted
weighted average shares in the year ended December 31, 2005, have been adjusted for the stock split announced
February 14, 2006, and all previous stock splits.
Results from Discontinued Operations
In October 2005, FCCM was struck by Hurricane Stan which destroyed or damaged approximately 70
bridges and washed out segments of track in the State of Chiapas between the town of Tonalá and the
Guatemalan border, rendering approximately 175 miles of rail line inoperable.
On June 25, 2007, FCCM formally notified the SCT of its intent to exercise its right to resign its 30-year
concession from the Mexican government and to cease its rail operations. The decision to cease FCCM’s
operations was made on June 22, 2007, and was due to the failure of the Mexican government to fulfill their
obligation to fund the Chiapas reconstruction. Without reconstruction of the hurricane-damaged line, FCCM was
not a viable business.
During the third quarter of 2007, we ceased our rail operations and initiated formal liquidation proceedings
of FCCM’s operations. There were no remaining employees of FCCM as of September 30, 2007. The SCT has
contested the resignation of the concession and has seized substantially all of FCCM’s operating assets in
response to the resignation. We believe the SCT’s actions were unlawful, and we are pursuing appropriate legal
remedies to recover FCCM’s operating assets. As of December 31, 2007, there was a net liability of $1.7 million
remaining on our balance sheet associated with our Mexican operations.
As a result of these and other actions, we recorded a pre-tax loss in 2007 of $25.4 million, including
non-cash charges of $15.0 million. The non-cash charges included $8.9 million primarily related to the write-
down of FCCM’s operating assets and a $5.5 million loss from the cumulative foreign currency translation into
United States dollars of the original investment and FCCM’s reported earnings since 1999. This pre-tax loss was
partially offset by a tax benefit of $11.3 million primarily related to worthless stock and bad debt deductions to
be claimed in the United States.
Our Mexican operations described above are presented as discontinued operations and its operations are,
therefore, excluded from continuing operations in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (SFAS 144) for the years ended December 31, 2007, 2006 and
2005. The operations and cash flows of FCCM are being eliminated from our ongoing operations, and we will
not have any significant continuing involvement in the operations of FCCM.
Loss from discontinued operations in the year ended December 31, 2007, was $14.1 million, compared with
a loss from discontinued operations of $38.6 million in the year ended December 31, 2006. The loss from
discontinued operations in the year ended December 31, 2006, included a non-cash charge of $33.1 million
($34.1 million after-tax) reflecting the write-down of non-current assets and related effects of FCCM. Our diluted
loss per share from discontinued operations in the year ended December 31, 2007, was $0.36 with 39.1 million
weighted average shares outstanding, compared with diluted loss per share from discontinued operations of $0.91
with 42.4 million weighted average shares outstanding in the year ended December 31, 2006. Basic loss per share
from discontinued operations was $0.41 with 34.6 million weighted average shares outstanding in the year ended
December 31, 2007, compared with basic loss per share from discontinued operations of $1.03 with 37.6 million
weighted average shares outstanding in the year ended December 31, 2006.
Loss from discontinued operations in the year ended December 31, 2006, was $38.6 million, compared with
a loss from discontinued operations of $0.4 million in the year ended December 31, 2005. The loss from
49
discontinued operations in the year ended December 31, 2006, included a non-cash charge of $33.1 million
($34.1 million after-tax) reflecting the write-down of non-current assets and related effects of FCCM. Our diluted
loss per share from discontinued operations in the year ended December 31, 2006, was $0.91 with 42.4 million
weighted average shares outstanding, compared with diluted loss per share from discontinued operations of $0.01
with 41.7 million weighted average shares outstanding in the year ended December 31, 2005. Basic loss per share
from discontinued operations was $1.03 with 37.6 million weighted average shares outstanding in the year ended
December 31, 2006, compared with basic loss per share from discontinued operations of $0.01 with 36.9 million
weighted average shares outstanding in the year ended December 31, 2005.
Liquidity and Capital Resources
During 2007, 2006 and 2005, we generated $34.5 million, $85.2 million and $63.9 million, respectively, of
cash from operating activities from continuing operations. The decrease in 2007 from 2006 was primarily due to
the June 2007 payment of $95.6 million for Australian taxes related to the ARG Sale, partially offset by the
sourcing of cash from working capital. The increase in 2006 over 2005 was primarily due to the following items:
increased net income of $83.9 million, increased depreciation and amortization of $5.5 million, an increase from
non-cash compensation expense related to equity awards of $6.0 million, a $5.9 million write-down of our
investment in Bolivia due to an other-than-temporary decline in value, a decrease of $17.6 million in non-cash
equity earnings and an increase of $86.4 million of Australian income taxes payable primarily as a result of the
ARG Sale, partially offset by a gain on the sale of our equity investment in ARG of $218.8 million.
During 2007 and 2005, our cash flows used in investing activities from continuing operations were $70.0
million and $266.8 million, respectively, and during 2006, our cash flows provided by investing activities were
$230.7 million. For 2007, primary drivers of the cash flows used in investing activities from continuing
operations were $61.8 million of cash used for capital expenditures (net of $29.9 million received from current
year government grants and $4.4 million in cash received from government grants for capital spending completed
in 2006), $19.4 million of cash paid for acquisitions, partially offset by $1.7 million in insurance proceeds for
capital projects completed in 2006 and $9.4 million in cash proceeds from the disposition of property and
equipment. For 2006, primary drivers of the cash flows provided by investing activities from continuing
operations were $306.7 million in proceeds from the ARG Sale and $3.4 million in proceeds from the sale of
assets, partially offset by the purchase of Wesfarmers’ 50% ownership of the remaining ARG operations for
$15.1 million, the purchase of the assets of the Chattahoochee Bay Railroad for $6.1 million and capital
expenditures, net, of $59.5 million. For 2005, primary drivers of the cash used in investing activities from
continuing operations were the purchase of Rail Partners from RMC for $238.2 million, capital expenditures, net,
of $27.1 million and $6.5 million paid in contingent purchase consideration for Genesee Rail-One, which were
partially offset by $4.3 million in proceeds from the sale of assets and $0.7 million of cash received from
unconsolidated international affiliates.
During 2007 and 2006, our cash flows used in financing activities from continuing operations were $137.5
million and $90.1 million, respectively, and during 2005, our cash flows provided by financing activities from
continuing operations were $209.4 million. For 2007, primary drivers of the financing activities from continuing
operations were treasury stock purchases of $175.6 million, which were partially offset by a net increase in
outstanding debt of $33.6 million, cash proceeds of $3.4 million from the exercise of stock options by employees
and directors and stock purchases by employees and $1.2 million from the excess income tax benefit from share-
based payment arrangements. For 2006, primary drivers of the financing activities from continuing operations
were a net decrease in outstanding debt of $90.2 million and treasury stock purchases of $11.3 million, which
were partially offset by cash proceeds of $6.9 million from the exercise of stock options by employees and
directors and stock purchases by employees and $4.5 million from the excess income tax benefit from share-
based payment arrangements. For 2005, primary drivers of the financing activities were a net increase in
outstanding debt of $206.9 million, cash proceeds of $3.8 million from the exercise of stock options by
employees and directors and stock purchases by employees and $0.8 million from the excess income tax benefit
from share-based payment arrangements, which were partially offset by debt issuance cost of $1.6 million and
treasury stock purchases of $0.4 million.
50
At December 31, 2007, we had long-term debt, including current portion, totaling $272.8 million, which
comprised 38.8% of our total capitalization. At December 31, 2006, we had long-term debt, including current
portion, totaling $245.7 million, which comprised 32.1% of our total capitalization.
Senior United States and Canadian Credit Facilities
In 2005, we entered into a Consent and First Amendment to the Amended and Restated Revolving Credit
and Term Loan Agreement, dated November 12, 2004. The consent and amendment expanded the size of our
senior revolving credit facility from $150.0 million to $225.0 million. It also extended the maturity date of the
United States obligations to June 1, 2010. Following the consent and amendment, the amended and restated
credit facilities were composed of a $225.0 million revolving loan and a $32.0 million (C$38.5 million) Canadian
term loan. The revolving loan is due in 2010, and the Canadian term loan is due in 2009. As of December 31,
2007, our $225.0 million revolving credit facility consisted of $36.0 million of outstanding debt, subsidiary letter
of credit guarantees of $0.1 million and $188.9 million of unused borrowing capacity. Interest rates for
borrowings are based on United States or Canadian LIBOR plus a margin, which varies from 0.75% to 1.375%
depending on leverage. As of December 31, 2007, the revolving credit facility had an interest rate of 5.72% and
the Canadian term loan had an interest rate of 5.63%. The credit facilities are unsecured, but the revolving loan is
guaranteed by substantially all of our United States subsidiaries, and the Canadian term loan is guaranteed by
substantially all of our United States and Canadian subsidiaries.
Financial covenants, which are measured for our United States and Canadian operations on a trailing
12-month basis and reported quarterly, are as follows:
(a) Maximum leverage of 3.5 times (measured as Funded Debt (indebtedness plus guarantees including
Letters of Credit, plus the present value of operating leases) to EBITDAR (earnings before interest, taxes,
depreciation, amortization and rental payments on operating leases).
(b) Minimum interest coverage of 3.5 times measured as EBITDA (earnings before interest, taxes,
depreciation and amortization) divided by interest expense.
(c) Minimum consolidated tangible net worth measured as 80% of consolidated tangible net worth of
the borrowers as of March 31, 2006, plus on a cumulative basis, 50% of positive consolidated net income
(excluding the effect of foreign currency transaction gains or losses) for each fiscal quarter ending
subsequent to March 31, 2005.
(d) Maximum annual capital expenditures (excluding acquisitions) of $51.0 million. Fifty percent of
unutilized permitted capital expenditures may be utilized in the succeeding year.
In addition, in connection with our Australia Transactions, we entered into a Consent and Second
Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement, dated February 13, 2006
(the Consent and Second Amendment). The Consent and Second Amendment waived compliance with the
restrictions on the dispositions of assets and adjusted the consolidated tangible net worth calculation to permit
our entry into the Australia Transactions. In addition, the Consent and Second Amendment permitted us to make
restricted payments, consisting of stock repurchases or cash dividends, with the proceeds from the Australia
Transactions through December 1, 2007, as long as certain financial covenants governing distributions were met.
The credit facilities contain a number of covenants restricting our ability to incur additional indebtedness,
make certain investments, sell assets, issue subsidiary stock, restrict distributions from subsidiaries, create certain
liens, enter into certain consolidations or mergers, enter into certain transactions with affiliates and pay dividends
or make distributions. The credit facilities allow us to pay dividends and make distributions provided that Funded
Debt to EBITDAR, including any borrowings made to fund the dividend or distribution, is less than 3.0 to
1.0. As of December 31, 2007, we were in compliance with the provisions of these covenants.
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 bear interest at 5.36% and are due in 2015. The Series C senior
51
notes have a borrowing rate of LIBOR plus 0.70% and are due in 2012. As of December 31, 2007, the Series C
senior notes had an interest rate of 5.765%. On January 26, 2008, the interest rate reset to 3.94% on the Series C
senior notes.
In 2004, we completed a $75.0 million private placement of the Series A senior notes. The Series A senior
notes bear interest at 4.85% and are due in 2011.
The senior notes are unsecured but are guaranteed by substantially all of our United States and Canadian
subsidiaries. The senior notes contain a number of covenants limiting our ability to incur additional indebtedness,
sell assets, create certain liens, enter into certain consolidations or mergers and enter into certain transactions
with affiliates. Financial covenants, which must be satisfied quarterly, include (a) maximum debt to
capitalization of 65% and (b) minimum fixed charge coverage ratio of 1.75 times (measured as EBITDAR for the
preceding twelve months divided by interest expense plus operating lease payments for the preceding twelve
months). As of December 31, 2007, we were in compliance with the provisions of these covenants.
Mexican Financings
On June 8, 2007, we entered into an assignment agreement with International Finance Corporation (IFC)
and Nederlandse Financierings–Maatschappij voor Ontwikkelingslanden N.V. (FMO), pursuant to which, among
other things, (i) IFC and FMO demanded payment of, and we paid, approximately $7.0 million due under the
guarantee agreement related to the loan agreements and promissory notes of the Company’s Mexican subsidiaries
(collectively, the Loan Agreements) (ii) we purchased and assumed the remaining loan amount outstanding under
the Loan Agreements for a price equal to the principal balance plus accrued interest, or approximately $7.3
million. As a result, we recorded a $0.6 million interest charge due to the recognition of previously deferred
financing fees related to the Loan Agreements during the second quarter of 2007.
Also on June 8, 2007, we, IFC and our subsidiary GW Servicios S.A. (Servicios) entered into a put option
exercise agreement pursuant to which IFC sold its 12.7% equity interest in Servicios to us for $1.0 million. In
addition, on June 8, 2007, we, IFC, FMO, Servicios and FCCM entered into a release agreement whereby the
parties agreed to release and waive all claims and rights held against one another that existed or arose prior to the
date thereof. Neither the payment default discussed above, nor the entering into the agreements described above
and the consummation of the transactions contemplated therein, resulted in a default under our outstanding debt
obligations.
South America
We indirectly hold a 12.52% equity interest in Oriental through an interest in GWC. GWC is an obligor of
non-recourse debt of $12.0 million, which debt is secured by a lien on GWC’s 12.52% indirect equity interest in
Oriental held through GWC’s subsidiary, IFB. This debt became due and payable on November 2, 2003. On
April 21, 2006, due to the heightened political and economic unrest and uncertainties in Bolivia, we advised the
creditors of GWC that we were ceasing our efforts to restructure the $12.0 million debt obligation. Accordingly,
during the second quarter of 2006, we reduced the carrying value of our 12.52% equity interest to zero as part of
an overall assessment that our investments in Oriental had suffered an other than temporary decline in value. On
October 27, 2006, Banco de Crédito e Inversiones (one of GWC’s creditors) commenced court proceedings
before the 9th Civil Tribunal of Santiago to (i) collect on its share of the debt (approximately 24% of the $12.0
million) and (ii) exercise its pro-rata rights pursuant to the lien. Notice of this proceeding was given to GWC and
IFB on November 6, 2006. On October 26, 2006, Banco de Chile (another of GWC’s creditors that holds
approximately 15% of the $12.0 million debt) commenced separate court proceedings before the 4th
Civil Tribunal of Santiago with the same objectives. We do not expect these proceedings to have any additional
effect on our financial statements.
We also hold a 10.37% equity interest in Oriental through other companies. We do not expect the
commencement of these court proceedings to have any impact on this remaining 10.37% equity interest.
52
Please refer to Note 3 in the Consolidated Financial Statements in this report for additional information
regarding our investment in Oriental.
Equipment and Property Leases
We are party to several cancelable leases that have automatic renewal provisions, the most significant of
which extends through 2024 and currently requires an annual lease payment of $3.0 million that is subject to
adjustment based on certain economic indicators and customer operations stipulated in the agreement. If we
choose not to renew these leases, we would be obligated to return the underlying rolling stock and pay aggregate
fees of up to approximately $0.5 million. In addition, we have the option, at various dates, to terminate the leases
by purchasing the rolling stock. The maximum aggregate purchase price, at the next available buyout date for
each qualifying lease, is approximately $2.3 million. During 2007, we exercised our option to purchase various
rolling stock for $7.6 million.
Government Grants
Our railroads have received a number of project grants from state and federal agencies for upgrades and
construction of rail lines. 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 that the levels of service and improvements required under the grants
are reasonable. However, we can offer no assurance that government grants will continue to be available or that
even if available, our railroads will be able to obtain them.
2008 Budgeted Capital Expenditures
We have budgeted $61.0 million, net of government grants, in capital expenditures in 2008, which consist of
track and equipment improvements of $48.0 million, business development projects of $12.0 million and
equipment buyouts of $1.0 million. 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 investments in unconsolidated affiliates. We believe that our cash
flow from operations together with amounts available under our credit facilities will enable us to meet our
liquidity and capital expenditure requirements relating to ongoing operations for at least the duration of the credit
facilities.
Contractual Obligations and Commercial Commitments
As of December 31, 2007, we had contractual obligations and commercial commitments that may affect our
financial condition. However, based on our assessment of the underlying provisions and circumstances of our
material contractual obligations and commercial commitments, 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.
53
The following table represents our obligations and commitments for future cash payments under various
agreements as of December 31, 2007 (dollars in thousands):
Payments Due By Period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Contractual Obligations (1)
Long-Term Debt Obligations (2) . . . . . . . . . . . . . . . .
Interest on Long-Term Debt (3) . . . . . . . . . . . . . . . . .
Capital Lease Obligations . . . . . . . . . . . . . . . . . . . . .
Operating Lease Obligations . . . . . . . . . . . . . . . . . . .
Purchase Obligations (4) . . . . . . . . . . . . . . . . . . . . . .
$272,311
71,980
455
179,935
9,741
$ 2,229
14,407
18
17,399
7,477
$ 69,388
25,652
39
25,206
2,264
$100,277
16,130
44
15,016
—
$100,417
15,791
354
122,314
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$534,422
$41,530
$122,549
$131,467
$238,876
(1) Excludes any reserves for income taxes under FIN48, “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109,” because we are unable to reasonably predict the ultimate
amount or timing of settlement of our unrecognized tax benefits. As of December 31, 2007, our reserves for
income taxes totaled approximately $0.8 million.
(2) Excludes capital lease obligations of $0.5 million.
(3) Assumes no change in variable interest rates from December 31, 2007.
(4)
Includes an obligation of $4.4 million in existence for the next five years at the discretion of the 12.6%
minority shareholder of Maryland Midland.
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 consist of operating lease obligations, which are included in the
contractual obligations table above. In 2006, we entered into a guarantee agreement with the Board of Trustees of
the Galveston Wharves, pursuant to which the Company guarantees the complete and timely payment of the
permitted deductible associated with any potential claims under the applicable insurance policies maintained
pursuant to the lease of the Galveston Wharves. The maximum amount of the obligation subject to this guarantee
is $1.0 million per occurrence or claim which expires in 2026. As of December 31, 2007, we had not paid any
amounts under the guarantee.
We also guarantee performance under other lease agreements which expire in 2009 and 2017. The
maximum amounts subject to these guarantees are $5.7 million.
54
Impact of Foreign Currencies on Operating Revenues
As of December 31, 2007, foreign currency translation had a positive impact on consolidated revenues due
to the strengthening of the Australian and Canadian dollars relative the United States dollar. The following table
sets forth the impact of foreign currency translation on reported operating revenues (dollars in thousands):
Operating Revenues
Year Ended December 31, 2007
U.S. Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Australian Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency
Translation
Impact
Revenues
Excluding
Currency
Impact
$ — $364,413
84,292
55,644
(8,995)
(2,823)
As
Reported
$364,413
93,287
58,467
Total Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$516,167
$(11,818) $504,349
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to use judgment and to make estimates and assumptions that
affect 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.
Management has discussed the development and selection of the critical accounting estimates described
below with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure
relating to such estimates in this Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Property and Equipment
We record property and equipment at historical cost and we record acquired railroad property at the
allocated cost. We capitalize major renewals or improvements, but routine maintenance and repairs are expensed
when incurred. We credit or charge to operating expense gains or losses on sales or other dispositions. We
depreciate our property and equipment on the straight-line method over the useful lives of the road property
(5-50 years) and equipment (3-30 years).
55
The following table sets forth the estimated useful lives of our major classes of property and equipment:
Property:
Estimated useful life
Buildings & Leasehold Improvements . . . . .
Bridges/Tunnels/Culverts . . . . . . . . . . . . . . .
Track Property . . . . . . . . . . . . . . . . . . . . . . .
30 years or life of lease
20 – 50 years
5 – 50 years
Equipment:
Computer Equipment
. . . . . . . . . . . . . . . . . .
Locomotives & Freight Cars . . . . . . . . . . . . .
Vehicles & Mobile Equipment . . . . . . . . . . .
Signals & Crossing Equipment . . . . . . . . . . .
Track Equipment . . . . . . . . . . . . . . . . . . . . . .
Other Equipment . . . . . . . . . . . . . . . . . . . . . .
3 years
5 – 20 years
5 – 10 years
5 – 30 years
5 – 10 years
5 – 10 years
We continually evaluate whether events and circumstances have occurred that indicate that 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.
Government Grants
Grants from governmental agencies are recorded as long-term liabilities and are amortized as a reduction to
depreciation expense over the same period during which the underlying purchased assets are depreciated.
Goodwill and Indefinite-Lived Intangible Assets
We account for our business acquisitions using the purchase method of accounting. We allocate the total
cost of an acquisition to the underlying net assets based on their respective estimated fair values. As part of this
allocation process, we identify and attribute values and estimated lives to the 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 will affect the
amount of amortization expense recognized in future periods.
We review the carrying values of identifiable intangible assets with indefinite lives and goodwill at least
annually to assess impairment, since these assets are not amortized. Additionally, we review the carrying value of
any intangible asset or goodwill whenever such events or changes in circumstances indicate that its carrying
amount may not be recoverable. We assess impairment by comparing the fair value of an intangible asset or
goodwill with its carrying value. The determination of fair value involves significant management judgment.
Impairments are expensed when incurred. Specifically, we test for impairments in accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). We perform our annual impairment test as of
November 30th of each year, and in 2007 no impairment was recognized for the year ended December 31, 2007,
2006 and 2005.
For intangible assets, the impairment test compares the fair value of an intangible asset with its carrying
amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be
recognized in an amount equal to that excess.
For goodwill, a two-step impairment model is used. We first compare the fair value of the reporting unit
with its carrying amount, including goodwill. If the fair value of the reporting unit is less than the carrying
56
amount, goodwill would be considered impaired and we would then record the goodwill impairment as the
excess of recorded goodwill over its implied fair value.
Amortizable Intangible Assets
SFAS 144 requires us to perform an impairment test on amortizable intangible assets when specific
impairment indicators, as set-forth in SFAS 144, are present. We have amortizable intangible assets recorded as
customer relationships or contracts. The intangible assets are generally amortized on a straight-line basis over the
expected economic longevity of the customer relationship, the facility served or the length of the customer
contract.
Derailment and Property Damages, Personal Injuries and Third-Party Claims
We maintain insurance, with varying deductibles up to $0.5 million per incident for liability and up to $0.8
million per incident for property damage, for claims resulting from train derailments and other accidents related
to our railroad and industrial switching operations. Accruals for FELA claims by our railroad employees and
third-party personal injury or other claims, limited when appropriate to the applicable deductible, are recorded in
the period when such claims are determined to be probable and estimable. These estimates are updated in future
periods as facts and circumstances change.
Pensions and Other Post-Retirement Benefits
We provide pension and defined contribution medical and life insurance benefits for union and non-union
employees of two of our United States subsidiaries. In order to apply actuarial methods to value the liabilities and
expenses we must make several assumptions. The critical assumptions used to measure pension obligations and
expenses are the discount rate applied to future liabilities and expected future rate of return on pension assets. For
other postretirement benefits, the critical assumptions are the discount rate and healthcare cost trend rate.
We evaluate our critical assumptions annually, and our assumptions are based on the following factors as of
December 31, 2007:
•
•
•
Discount rate is based on a review of long-term bonds, including published indices. The discount rate
determined on that basis was 6.25%.
Expected return on plan assets is based on an assumed long-term asset rate of return of 8.5%.
Health care cost trend rate is based on historical rates of inflation and expected market conditions and
is assumed to be 9.0% in 2007 graded ratably to 5.0% over a seven-year period.
On December 31, 2006, we adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans, an amendment of SFAS 87, 88, 106 and 132(R).” The standard, among other
things, requires companies to:
•
•
Recognize the funded status of defined benefit plans in the consolidated financial statements.
Recognize as a component of other comprehensive income the previously unrecognized prior service
costs/credits, gains/losses and transition assets/obligations that arise during the year and are not
recognized as a component of net periodic benefit cost.
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 grants to our employees
through its 2004 Omnibus Incentive Plan (the Plan). The Plan permits the issuance of stock options, restricted
57
stock and restricted stock units. Restricted stock units constitute a commitment to deliver stock at some future
date as defined by the terms of the awards. Under the terms of the awards, equity grants for employees generally
vest over three years and equity grants for directors vest over their respective terms as directors.
We elected to adopt SFAS 123R in the third quarter of 2005 using the Modified Prospective Application.
SFAS 123R requires us to measure compensation cost for stock awards at fair value and recognize compensation
over the service period for awards expected to vest. Prior to the adoption of SFAS 123R, we accounted for our
stock-based compensation plans under Accounting Principles Board (APB) Opinion 25, “Accounting for Stock
Issued to Employees” (APB 25), under which no compensation cost had been recognized, and disclosed the pro
forma expense for basic and diluted earnings per share as if stock based compensation had been compiled under
SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123).
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 over the requisite service period of the grant. Two
assumptions in the Black-Scholes pricing model that require management judgment are the expected life and
expected volatility of the stock. The expected life is based on historical experience and is estimated for each
grant. The expected volatility of the stock is based on actual historical volatility and adjusted to reflect future
expectations. The fair value of our restricted stock and restricted stock units is based on the closing price on the
date of grant.
During the fourth quarter of 2006, we voluntarily conducted and completed a comprehensive internal review
of our historical stock option practices for stock option grants made during the period from our initial public
offering on June 24, 1996 through the third quarter of 2006, under the direction of the independent members of
the Board of Directors. The review found no evidence of any intentional wrongdoing by our executive officers,
members of our Board of Directors or any other employees. However, the internal review identified certain
administrative procedural deficiencies that resulted in unintentional accounting errors. These errors principally
related to situations where, as of the grant date approved by the Compensation Committee, an aggregate number
of stock options to be granted was approved and the exercise price for the stock options was established, but the
allocation of those stock options to certain individual employee recipients was not finalized until a later date. As
a result, we determined that later measurement dates for accounting purposes for those individuals’ grants should
have been used, and we determined that non-cash stock-based compensation expense was understated by a
cumulative amount of $1.2 million ($0.5 million after-tax), with $1.1 million related to grants to the general
population of employees, none of whom were executive officers at the time of grant. Under the direction of the
Audit Committee of the Board of Directors, the results of the internal review were evaluated by outside counsel,
who concurred with the findings.
For the year ended December 31, 2007, compensation cost from equity awards was $5.4 million pre-tax, or
$3.9 million after-tax. The total compensation cost related to non-vested awards not yet recognized is $7.6
million, which will be recognized over the next three years with a weighted-average period of 1 year. The total
income tax benefit recognized in the consolidated income statement for equity awards was $1.5 million for the
year ended December 31, 2007.
For the year ended December 31, 2006, compensation cost from equity awards was $8.5 million pre-tax, or
$6.4 million after-tax. Of the $8.5 million compensation cost, $2.7 million was attributable to stock option
awards that were part of the transaction bonuses related to the ARG Sale in the quarter ended June 30, 2006, and
$1.2 million was attributable to the unintentional accounting errors associated with the use of incorrect
measurement dates for certain grants, as discussed above. The total income tax benefit recognized in the
consolidated income statement for equity awards was $2.1 million for the year ended December 31, 2006.
For the year ended December 31, 2005, compensation cost from equity awards was $1.8 million pre-tax, or
$1.5 million after-tax.
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Income Taxes
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48,
“Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). FIN 48
prescribes a recognition threshold and measurement attributes for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. After considering our preexisting
reserves for uncertain tax positions, the adoption of FIN 48 did not result in any material adjustments to our
results of operations or financial position.
We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes”
(SFAS 109). SFAS 109 requires 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 book and tax basis
assets and liabilities, as well as available income tax credits and net operating loss carryforwards. In our
consolidated balance sheets, these deferred obligations 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
carryforwards, is classified according to the expected reversal date of the temporary difference as of the end of
the year.
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. The amount of undistributed earnings of our controlled foreign
subsidiaries as of December 31, 2007 was $43.8 million. In 2007, we recorded a valuation allowance of $8.1
million, which represents amounts reserved for a capital loss carryforward, which will expire in 2012. Due to the
uncertainty of realizing future capital gains, we have reduced the related deferred tax benefit with a valuation
allowance.
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 Item 1A. Risk
Factors in this Annual Report on Form 10-K.
Management believes that full consideration has been given to all relevant circumstances to which we may
be currently subject, and the 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
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which is
effective for fiscal years beginning after November 15, 2007, and for interim periods within those years. On
February 12, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2 which delayed the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the
effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands the
related disclosure requirements. We adopted SFAS 157, except as it applies to those nonfinancial assets and
nonfinancial liabilities, as noted in FSP 157-2, on January 1, 2008, and it did not have a material impact on our
consolidated financial statements. We are currently evaluating the provisions of FSP 157-2.
59
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of SFAS No. 115” (SFAS 159). SFAS 159 permits, but does not
require, entities to choose to measure many financial instruments and certain other items at fair value. The
standard provides entities the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is
effective for fiscal years beginning after November 15, 2007, and interim periods within those years. We adopted
the provisions of SFAS 159 on January 1, 2008, and it did not have a material impact on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R
retains the fundamental requirements of the original pronouncement requiring that the acquisition method be
used for all business combinations. SFAS 141R defines the acquirer as the entity that obtains control of one or
more businesses in the business combination, establishes the acquisition date as the date that the acquirer
achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date. SFAS 141R also requires that acquisition-
related costs are expensed as incurred. SFAS 141R is effective for fiscal years beginning after December 15,
2008, and interim periods within those years. Early adoption of SFAS 141R is prohibited. We are currently
evaluating the provisions of SFAS 141R.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial
Statements (an amendment of ARB No. 51)” (SFAS 160). SFAS 160 requires that noncontrolling (minority)
interests be reported as a component of equity, that net income attributable to the parent and to the noncontrolling
interest be separately identified in the income statement, that changes in a parent’s ownership interest while the
parent retains its controlling interest be accounted for as equity transactions, and that any retained noncontrolling
equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS 160 is
effective for fiscal years beginning after December 18, 2008, and shall be applied prospectively. However, the
presentation and disclosure requirements of SFAS 160 shall be applied retrospectively for all periods presented.
We are currently evaluating the provisions of SFAS 160.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
We actively monitor our exposure to interest rate and foreign currency exchange rate risks and use
derivative financial instruments to manage the impact of certain of these risks. We use derivatives only for
purposes of managing risk associated with underlying exposures. We do not trade or use instruments with the
objective of earning financial gains on the interest rate or exchange rate fluctuations alone, nor do we use
instruments where there are no underlying cash exposures. Complex instruments involving leverage or
multipliers are not used. We manage our hedging positions and monitor the credit ratings of counterparties and
do not anticipate losses due to counterparty nonperformance. Management believes that our use of derivative
instruments to manage risk is in our best interest. However, our use of derivative financial instruments may result
in short-term gains or losses and increased earnings volatility.
60
Interest Rate Risk
Our interest rate risk results from issuing variable rate debt obligations, since an increase in interest rates
would result in lower earnings and increased cash outflows. The table below provides amounts outstanding and
corresponding interest rates for our fixed and variable rate debt.
Principal Amount of Debt
(dollars in thousands)
Fixed Rate Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Fixed Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable Rate Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Variable Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Long-Term Debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted Average Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2007
$178,647
5.15%
$ 94,119
5.70%
$272,766
5.35%
Table Assumptions
Variable Interest Rates: The table presents variable interest rates based on United States and Canadian
LIBOR rates (as of December 31, 2007). The borrowing margin is composed of a weighted average of 0.875%
for debt under our United States and Canadian credit facilities and 0.7% for our Series C senior notes.
Interest Rate Sensitivity
Based on the table above, assuming a one percentage point increase in market interest rates, annual interest
expense on our variable rate debt would increase by approximately $0.9 million.
Foreign Currency Risk
Debt related to our Canadian operations is denominated in Canadian dollars. Therefore, foreign currency
risk related to debt service payments generally does not exist at our Canadian operations. However, in the event
that this debt service is funded from our United States operations, we may face exchange rate risk if the Canadian
dollar were to appreciate relative to the United States dollar, thereby requiring higher United States dollar
equivalent cash to settle the outstanding debt, which is due in 2009.
Foreign Currency Hedge
On February 13, 2006, we entered into two foreign currency forward contracts with a total notional amount
of $190.0 million to hedge a portion of our investment in 50% of the equity of ARG. The contracts, which
expired on June 1, 2006, protected a portion of our investment from exposure to large fluctuations in the United
States/Australian Dollar exchange rate. At expiration, excluding the effects of fluctuations in the exchange rate
on our investment, we recorded a loss of $4.3 million from these contracts, which is included in the net gain on
the sale of ARG.
Sensitivity to Diesel Fuel Prices
We are exposed to fluctuations in diesel fuel prices, since an increase in the price of diesel fuel would result
in lower earnings and cash outflows. In the year ended December 31, 2007, fuel costs for fuel used in operations
represented 10.9% of our total expenses. As of December 31, 2007, we had not entered into any hedging
transactions to manage this diesel fuel risk. As of December 31, 2007, each one percentage point increase in the
price of diesel fuel would result in a $0.5 million increase in our annual fuel expense to the extent not offset by
higher fuel surcharges.
61
ITEM 8. Financial Statements and Supplementary Data.
The financial statements and supplementary financial data required by this item are listed under Part IV,
Item 15 and are filed herewith immediately following the signature page hereto.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None
ITEM 9A. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be
disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that
such information is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of
December 31, 2007. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures provided reasonable assurance that the disclosure controls
and procedures were effective as of December 31, 2007 to accomplish their objectives. In addition, there were no
changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
62
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Genesee & Wyoming Inc. is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of
1934. Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. Internal control over
financial reporting includes those written policies and procedures that:
•
•
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of Genesee & Wyoming;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United States
of America;
provide reasonable assurance that our receipts and expenditures are being made only in accordance
with authorization of management and directors of Genesee & Wyoming Inc.; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31,
2007. Management based this assessment on criteria for effective internal control over financial reporting
described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management’s assessment included an evaluation of the design of our internal control
over financial reporting and testing of the operating effectiveness of our internal control over financial reporting.
Management reviewed the results of our assessment with the Audit Committee of our Board of Directors.
Based on this assessment, management determined that, as of December 31, 2007, we maintained effective
internal control over financial reporting.
Management excluded Maryland Midland, whose total assets represented $55.8 million of the related
consolidated financial statement amounts as of the year ended December 31, 2007, from its report on internal
control over financial reporting.
The Company’s internal control over financial reporting as of December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is
included herein.
63
ITEM 9B. Other Information.
None
ITEM 10. Directors and Executive Officers.
PART III
The information required by this Item is incorporated herein by reference to our proxy statement to be
issued in connection with the Annual Meeting of the Stockholders of Genesee & Wyoming to be held on May 28,
2008, under “Election of Directors” and “Executive Officers”, which proxy statement will be filed within 120
days after the end of our fiscal year.
ITEM 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to our proxy statement to be
issued in connection with the Annual Meeting of the Stockholders of Genesee & Wyoming to be held on May 28,
2008, under “Executive Compensation” and “Director Compensation”, which proxy statement will be filed
within 120 days after the end of our fiscal year.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2007
Plan Category
(a)
(b)
Number of Securities
to be Issued upon
Exercise of
Outstanding Options
Weighted-Average
Exercise Price of
Outstanding Options
(c)
Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in Column (a))
Equity Compensation Plans Approved by
Security Holders
Equity Compensation Plans not Approved
by Security Holders
2,276,851
—
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,276,851
$22.93
—
$22.93
2,420,135
—
2,420,135
The remaining information required by this Item is incorporated herein by reference to our proxy statement
to be issued in connection with the Annual Meeting of the Stockholders of Genesee & Wyoming to be held on
May 28, 2008, under “Security Ownership of Certain Beneficial Owners and Management”, which proxy
statement will be filed within 120 days after the end of our fiscal year.
ITEM 13. Certain Relationships and Related Transactions and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference to our proxy statement to be
issued in connection with the Annual Meeting of the Stockholders of Genesee & Wyoming to be held on May 28,
2008, under “Related Person Transactions and Other Information,” which proxy statement will be filed within
120 days after the end of our fiscal year.
ITEM 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to our proxy statement to be
issued in connection with the Annual Meeting of the Stockholders of Genesee & Wyoming to be held on May 28,
2008, under “Approval of the Selection of Independent Auditors,” which proxy statement will be filed within 120
days after the end of our fiscal year.
64
ITEM 15. Exhibits, Financial Statement Schedules
(a) DOCUMENTS FILED AS PART OF THIS FORM 10-K
PART IV
Genesee & Wyoming Inc. and Subsidiaries Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for the Years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
Australian Railroad Group Pty Ltd and Subsidiaries Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of May 31, 2006 and December 31, 2005
Consolidated Statements of Operations for the Five Month Period ended May 31, 2006 and for the
Years Ended December 31, 2005 and 2004
Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income for the Five
Month Period Ended May 31, 2006 and for the Years Ended December 31, 2005 and 2004
Consolidated Statements of Cash Flows for the Five Month Period Ended May 31, 2006 and for
the Years Ended December 31, 2005 and 2004
Notes to Consolidated Financial Statements
See Index to Exhibits
(b) EXHIBITS—SEE INDEX TO EXHIBITS
(c) NONE
65
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date
February 28, 2008
GENESEE & WYOMING INC.
By:
/S/
JOHN C. HELLMANN
John C. Hellmann
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Date
Title
Signature
February 28, 2008
Executive Chairman and Chairman
of the Board of Directors
/s/ MORTIMER B. FULLER, III
Mortimer B. Fuller, III
February 28, 2008
Chief Executive Officer, President
and Director (Principal Executive
Officer)
/s/
JOHN C. HELLMANN
John C. Hellmann
February 28, 2008
Chief Financial Officer
(Principal Financial Officer)
/s/ TIMOTHY J. GALLAGHER
Timothy J. Gallagher
February 28, 2008
Chief Accounting Officer
(Principal Accounting Officer)
/s/ CHRISTOPHER F. LIUCCI
Christopher F. Liucci
February 28, 2008
Director
February 28, 2008
Director
February 28, 2008
Director
February 28, 2008
Director
February 28, 2008
Director
February 28, 2008
Director
February 28, 2008
Director
/s/ DAVID C. HURLEY
David C. Hurley
/s/ OIVIND LORENTZEN III
Oivind Lorentzen III
/s/ ROBERT M. MELZER
Robert M. Melzer
/s/ PHILIP J. RINGO
Philip J. Ringo
/s/ PETER O. SCANNELL
Peter O. Scannell
/s/ MARK A. SCUDDER
Mark A. Scudder
/s/ M. DOUGLAS YOUNG
M. Douglas Young
66
INDEX TO EXHIBITS
(3)
(i) Articles of Incorporation
The Exhibit referenced under 4.1 hereof is incorporated herein by reference.
(ii) By-laws
3.1
(4)
4.1
4.2
4.3
Amended Bylaws, effective as of August 19, 2004, is incorporated herein by reference to Exhibit 2.1 to
the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2004.
Instruments defining the rights of security holders, including indentures
Restated Certificate of Incorporation is incorporated herein by reference to Exhibit I to the Registrant’s
Definitive Information Statement on Schedule 14C filed on February 23, 2004.
Specimen stock certificate representing shares of Class A Common Stock is incorporated herein by
reference to Exhibit 4.1 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1
(Registration No. 333-3972).
Form of Class B Stockholders’ Agreement dated as of May 20, 1996, among the Registrant, its
executive officers and its Class B stockholders is incorporated herein by reference to Exhibit 4.2 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (Registration
No. 333-3972).
(10)
Material Contracts
10.1
10.2
10.3
10.4
10.5
10.6
10.7
The Exhibit referenced under (4.3) hereof is incorporated herein by reference.
Form of Genesee & Wyoming Inc. Employee Stock Purchase Plan is incorporated herein by reference
to Exhibit 10.4 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
(Registration No. 333-3972). **
Memorandum of Lease between Minister for Transport and Urban Planning a Body Corporate Under
the Administrative Arrangements Act, the Lessor and Australia Southern Railroad Pty Ltd., the Lessee,
dated November 7, 1997, is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Report
on Form 10-K for the fiscal year ended December 31, 1997. (SEC File No. 0-20847)
Amendment No. 1. to the Genesee & Wyoming Inc. Employee Stock Purchase Plan is incorporated
herein by reference to Exhibit 10.2 to the Registrant’s Report on Form 10-Q for the quarter ended
June 30, 1998. (SEC File No. 0-20847) **
Purchase and Sale Agreement dated August 17, 1999, between the Federal Government of United
Mexican States, Compañía de Ferrocarriles Chiapas-Mayab, S.A. de C.V. and Ferrocarriles Nacionales
de Mexico is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q
for the quarter ended September 30, 1999.
Agreement and Plan of Merger dated as of December 3, 2001, by and among Genesee & Wyoming
Inc., ETR Acquisition Corporation and Emons Transportation Group, Inc. is incorporated herein by
reference to Exhibit 2.1 to the Registrant’s Report on Form 8-K dated December 3, 2001.
Stock Purchase Agreement by and among Mueller Industries, Inc., Arava Natural Resources Company,
Inc. and Genesee & Wyoming Inc. relating to the purchase and sale of Utah Railway Company, dated
as August 19, 2002, is incorporated herein by reference to Exhibit 2.1 to the Registrant’s Report on
Form 8-K dated August 28, 2002.
Genesee & Wyoming Inc. 2004 Deferred Compensation Plan for highly compensated employees and
directors dated May 7, 2004 is incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Report on Form 10-Q for the quarter end June 30, 2004. **
67
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Genesee & Wyoming Inc. Award Notice for Employees for Options is incorporated herein by
reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended September 30,
2004. **
Genesee & Wyoming Inc. Award Notice for Employees for Restricted Stock Units is incorporated
herein by reference to Exhibit 10.2 to the Registrant’s Report on Form 10-Q for the quarter ended
September 30, 2004. **
Genesee & Wyoming Inc. Award Notice for Directors for Restricted Stock is incorporated herein by
reference to Exhibit 10.3 to the Registrant’s Report on Form 10-Q for the quarter ended September 30,
2004. **
Genesee & Wyoming Inc. Award Notice for Directors for Restricted Stock Units is incorporated
herein by reference to Exhibit 10.4 to the Registrant’s Report on Form 10-Q for the quarter ended
September 30, 2004. **
Amended and Restated Revolving Credit and Term Loan Agreement, dated as of November 12, 2004,
among Genesee & Wyoming Inc., Quebec-Gatineau Railway Inc., certain subsidiaries of Genesee &
Wyoming Inc. as Guarantors, the lenders party thereto, Bank of America, N.A., as Administrative
Agent and JPMorgan Chase Bank as Syndication Agent is incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Report on Form 8-K as of November 18, 2004.
Note Purchase Agreement dated as of November 12, 2004 among Genesee & Wyoming Inc., certain
subsidiaries of Genesee & Wyoming Inc. as Guarantors and note purchasers party thereto is
incorporated herein by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K as of
November 18, 2004.
Securities Purchase Agreement dated as of May 25, 2005 by and among Rail Management
Corporation, Durden 1991 Family Gift Trust, Durden 1991 Family Discretionary Trust, Durden 1991
Family Trust, K. Earl Durden 1991 Gift Trust, Durden 1996 Family Gift Trust, RP Acquisition
Company One, a subsidiary of Genesee & Wyoming Inc. and RP Acquisition Company Two, a
subsidiary of Genesee & Wyoming Inc. is incorporated herein by reference to Exhibit 99.1 to the
Registrant’s Report on Form 8-K as of June 1, 2005.
Consent and First Amendment to Amended and Restated Revolving Credit and Term Loan Agreement
dated as of May 25, 2005 by and among Genesee & Wyoming Inc., Quebec-Gatineau Railway Inc.,
certain subsidiaries of Genesee & Wyoming Inc. as Guarantors, the lenders party thereto and Bank of
America, N.A., as Administrative Agent is incorporated herein by reference to Exhibit 99.2 to the
Registrant’s Report on Form 8-K as of June 1, 2005.
First Supplement to Note Purchase Agreement dated as of June 1, 2005 by and among Genesee &
Wyoming Inc., certain subsidiaries of Genesee & Wyoming Inc. as Guarantors and note purchasers
party thereto is incorporated herein by reference to Exhibit 99.3 to the Registrant’s Report on
Form 8-K as of June 3, 2005.
Second Supplement to Note Purchase Agreement dated as of July 26, 2005 by and among Genesee &
Wyoming Inc., certain subsidiaries of Genesee & Wyoming Inc. as Guarantors and note purchasers
party thereto is incorporated herein by reference to Exhibit 99.1 to the Registrant’s Report on
Form 8-K as of August 1, 2005.
Share Sale Agreement dated February 14, 2006 by and among Genesee & Wyoming Inc., GWI
Holdings Pty Ltd, Wesfarmers Limited, Wesfarmers Railroad Holdings Pty Ltd, Babcock & Brown
WA Rail Pty Ltd, QRNational West Pty Ltd, Australia Southern Railroad Pty Ltd, Australia Western
Railroad Pty Ltd and Australian Railroad Group Pty Ltd is incorporated herein by reference to
Exhibit 99.1 to the Registrant’s Report on Form 8-K as of February 16, 2006.
10.19
Letter Agreement dated February 16, 2006 between Wesfarmers Railroad Holdings Pty Ltd and GWI
Holdings Pty Ltd is incorporated herein by reference to Exhibit 99.2 to the Registrant’s Report on
Form 8-K as of February 16, 2006.
68
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Escrow Agreement dated February 13, 2006 by and among Wesfarmers Railroad Holdings Pty Ltd,
GWI Holdings Pty Ltd, Babcock & Brown WA Rail Pty Ltd, QRNational West Pty Ltd and Mallesons
Stephen Jaques is incorporated herein by reference to Exhibit 99.3 to the Registrant’s Report on
Form 8-K as of February 16, 2006.
Consent and Second Amendment to the Amended and Restated Revolving Credit and Term Loan
Agreement dated as of February 13, 2006 by and among Genesee & Wyoming Inc., Quebec-Gatineau
Railway Inc., certain subsidiaries of Genesee & Wyoming Inc. as Guarantors, the lenders party thereto
and Bank of America, N.A., as Administrative Agents incorporated herein by reference to Exhibit 99.1
to the Registrant’s Report on Form 8-K as of February 16, 2006.
Consulting Agreement between Genesee & Wyoming Inc. and Charles N. Marshall dated as of May 1,
2006 is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K as of
April 28, 2006.
Restated Genesee & Wyoming Inc. Employee Stock Purchase Plan, as Amended through
September 27, 2006, is incorporated herein by reference to Exhibit 4.1(a) to the Registrant’s Report on
Form S-8 as of November 3, 2006. **
Employment Agreement dated as of May 30, 2007 by and between Genesee & Wyoming Inc. and
Mortimer B. Fuller III, together with Exhibit A (Waiver and General Release Agreement) thereto is
incorporated herein by reference to Exhibit 9.01 on Form 8-K as of June 5, 2007. **
Amended and Restated 2004 Omnibus Incentive Plan (incorporated herein by reference to Annex II of
the Company’s Definitive Proxy Statement, filed with the SEC on April 23, 2007) is incorporated
herein by reference to Exhibit 9.01 on Form 8-K as of June 5, 2007. **
Form of Senior Executive Continuity Agreement by and between Genesee & Wyoming Inc., a
Delaware corporation and the Company Senior Executives is incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Report on Form 10-Q as of November 8, 2007. **
Form of Executive Continuity Agreement by and between Genesee & Wyoming Inc., a Delaware
corporation, and the Company Executives is incorporated herein by reference to Exhibit 10.12 to the
Registrant’s Report on Form 10-Q as of November 8, 2007. **
(11)
Not included as a separate exhibit as computation can be determined from Note 2 to the financial
statements included in this Report under Item 8
(14)
Code of Ethics included on the Registrants website, www.gwrr.com
Included on the Company’s website, www.gwrr.com.
*(21.1)
Subsidiaries of the Registrant
*(23.1)
Consent of PricewaterhouseCoopers LLP
*(23.2)
Consent of Ernst & Young
*(31.1)
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
*(31.2)
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
*(32.1)
Section 1350 Certifications
Exhibit filed with this Report.
*
** Management contract or compensatory plan in which directors and/or executive officers are eligible to
participate.
69
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INDEX TO FINANCIAL STATEMENTS
Genesee & Wyoming Inc. and Subsidiaries Financial Statements:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years
Ended December 31, 2007, 2006, and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements
Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent Owned:
Australian Railroad Group Pty Ltd and Subsidiaries Financial Statements:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of May 31, 2006 and December 31, 2005 . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Five Month Period Ended May 31, 2006 and the
Years Ended December 31, 2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income for the
Five Month Period Ended May 31, 2006 and for the Years Ended December 31, 2005 and
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Five Month Period Ended May 31, 2006 and for
the Years Ended December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-49
F-50
F-51
F-52
F-53
F-54
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Genesee & Wyoming Inc.:
In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance
sheets and the related consolidated statements of operations, of cash flows and of stockholders’ equity and
comprehensive income present fairly, in all material respects, the financial position of Genesee & Wyoming Inc.
and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the Report of Management on Internal Control over
Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements and on the Company’s internal control over financial reporting based on our integrated audits. We did
not audit the financial statements of the Australian Railway Group Pty Ltd (ARG), an equity method investment
through May 31, 2006 which statements reflect total assets of $709.7 million as of May 31, 2006, and net loss of
$15.3 million for the five month period ended May 31, 2006, and net income of $18.9 million for the year ended
December 31, 2005. The financial statements of ARG were audited by other auditors whose report thereon has
been furnished to us, and our opinion on the consolidated financial statements expressed herein, insofar as it
relates to the amounts included for ARG, is based solely on the report of the other auditors. We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits and the report of other auditors provide a reasonable basis for our opinions.
As discussed in Note 2 to the financial statements, the Company changed the manner in which it accounts
for share-based compensation effective July 1, 2005. Also as discussed in Note 2, the Company changed the
manner in which it accounts for pension and other post-retirement benefits effective December 31, 2006.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
F-2
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
As described in the Report of Management on Internal Control Over Financial Reporting, management has
excluded Maryland Midland Railway, Inc. from its assessment of internal control over financial reporting as of
December 31, 2007 because it was acquired by the Company in a purchase business combination as of
December 31, 2007. We have also excluded Maryland Midland Railway, Inc. from our audit of internal control
over financial reporting. Maryland Midland Railway, Inc. is a majority-owned subsidiary whose total assets
represent $55.8 million of the related consolidated financial statement amount as of the year ended December 31,
2007.
PricewaterhouseCoopers LLP (signed)
New York, New York
February 28, 2008
F-3
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2007 and 2006
(dollars in thousands, except share amounts)
ASSETS
CURRENTS ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets, net
$
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTMENT IN UNCONSOLIDATED AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . .
GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTANGIBLE ASSETS, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAX ASSETS, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER ASSETS, net
December 31,
2007
2006
46,684
125,934
7,555
18,147
2,213
7,495
208,028
696,990
4,696
39,352
117,106
1,353
10,276
$ 240,206
117,099
11,302
14,695
—
7,617
390,919
573,292
4,644
37,788
120,669
2,697
11,055
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,077,801
$1,141,064
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable—Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities, net
$
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LONG-TERM DEBT, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAX LIABILITIES, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED ITEMS—grants from governmental agencies . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMMITMENTS AND CONTINGENCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MINORITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
STOCKHOLDERS’ EQUITY:
Class A Common Stock, $0.01 par value, one vote per share; 90,000,000 shares
authorized; 43,773,926 and 43,422,957 shares issued and 31,436,607 and
37,635,235 shares outstanding (net of 12,337,319 and 5,787,722 shares in treasury)
on December 31, 2007 and 2006, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B Common Stock, $0.01 par value, ten votes per share; 15,000,000 shares
authorized; 3,975,180 shares issued and outstanding on December 31, 2007 and
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost
2,247
128,038
36,436
1,356
3,919
66
172,062
270,519
93,336
94,651
15,144
—
1,108
$
4,372
98,186
38,364
91,925
—
291
233,138
241,313
72,876
56,588
16,668
—
294
438
434
40
197,463
407,367
25,660
(199,987)
40
187,460
352,192
4,411
(24,350)
520,187
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
430,981
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,077,801
$1,141,064
The accompanying notes are an integral part of these consolidated financial statements.
F-4
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
(dollars in thousands, except per share amounts)
Years Ended December 31,
2007
2006
2005
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$516,167
$450,683
$350,401
OPERATING EXPENSES:
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance of ways and structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diesel fuel sold to third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on insurance recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
166,146
45,364
70,330
26,975
85,493
(6,742)
—
31,773
147,874
40,233
64,419
13,189
80,419
(3,078)
(1,937)
27,907
115,498
31,200
50,922
—
64,168
(3,200)
—
22,372
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
419,339
369,026
280,960
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of equity investment in ARG . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment loss—Bolivia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity (loss) income of unconsolidated international affiliates . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before taxes . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96,828
—
—
—
7,813
(14,735)
889
90,795
21,548
81,657
218,845
(5,878)
(10,752)
7,839
(16,007)
252
275,956
103,309
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . .
69,247
(14,072)
172,647
(38,644)
69,441
—
—
14,224
249
(13,335)
95
70,674
20,163
50,511
(376)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 55,175
$134,003
$ 50,135
Basic earnings per common share from continuing operations . . . . . . . . .
Basic loss per common share from discontinued operations . . . . . . . . . . .
Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares—Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share from continuing operations . . . . . . .
Diluted loss per common share from discontinued operations . . . . . . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2.00
(0.41)
1.59
34,625
1.77
(0.36)
1.41
$
$
$
$
4.59
(1.03)
3.56
37,609
4.07
(0.91)
3.16
$
$
$
$
1.37
(0.01)
1.36
36,907
1.21
(0.01)
1.20
Weighted average shares—Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,148
42,417
41,712
The accompanying notes are an integral part of these consolidated financial statements.
F-5
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
(dollars in thousands)
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Stockholders’
Equity
BALANCE, December 31, 2004 . . . . . . . . . . . . .
$419
$ 40
$160,607 $168,054
$ 25,228
$ (12,648) $ 341,700
Comprehensive income, net of tax:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Currency translation adjustments . . . . . . . . . . . . . —
Fair market value adjustments of cash flow
hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Pension and post-retirement medical
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Comprehensive income . . . . . . . . . . . . . . . . . . . .
Proceeds from employee stock purchases . . . . . .
Tax reductions from share-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . —
Compensation cost related to equity awards . . . .
Excess tax benefits from share-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . —
Treasury stock acquisitions, 23,516 shares . . . . . —
5
1
—
—
—
—
—
—
—
—
—
—
—
—
3,800
364
2,478
758
—
50,135
—
—
—
—
—
—
—
—
—
(3,552)
2,363
136
—
—
—
—
—
—
—
—
—
—
—
—
—
(368)
50,135
(3,552)
2,363
136
49,082
3,805
364
2,479
758
(368)
BALANCE, December 31, 2005 . . . . . . . . . . . . .
$425
$ 40
$168,007 $218,189
$ 24,175
$ (13,016) $ 397,820
Comprehensive income, net of tax:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Currency translation adjustments . . . . . . . . . . . . . —
Sale of ARG investment (recognized gain from
foreign currency translation adjustment) . . . . . —
Fair market value adjustments of cash flow
hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Pension and post-retirement medical
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Comprehensive income . . . . . . . . . . . . . . . . . . . .
Adjustment to initially apply FASB Statement
No. 158, net of tax
Proceeds from employee stock purchases . . . . . .
Tax reductions from share-based
—
9
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . —
Compensation cost related to equity awards . . . . —
Excess tax benefits from share-based
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . —
Treasury stock acquisitions, 465,863 shares . . . . —
—
—
—
—
—
—
—
—
—
—
— 134,003
—
—
—
—
—
—
6,848
(394)
8,455
4,544
—
—
—
—
—
—
—
—
—
—
—
1,503
(22,755)
1,776
(52)
(236)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
134,003
1,503
(22,755)
1,776
(52)
114,475
(236)
6,857
(394)
8,455
—
(11,334)
4,544
(11,334)
BALANCE, December 31, 2006 . . . . . . . . . . . . .
$434
$ 40
$187,460 $352,192
$ 4,411
$ (24,350) $ 520,187
Comprehensive income, net of tax:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Currency translation adjustments . . . . . . . . . . . . . —
Mexico investment (recognized gain from
foreign currency translation adjustment) . . . . . —
Fair market value adjustments of cash flow
hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Pension and post-retirement medical
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Comprehensive income . . . . . . . . . . . . . . . . . . . .
Proceeds from employee stock purchases . . . . . .
Compensation cost related to equity awards . . . . —
Excess tax benefits from share-based
4
compensation . . . . . . . . . . . . . . . . . . . . . . . . . . —
Treasury stock acquisitions, 6,549,597 shares . . . —
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,380
5,183
1,440
—
55,175
—
—
—
—
—
—
—
—
—
15,178
5,426
43
602
—
—
—
—
—
—
—
—
—
—
—
(175,637)
55,175
15,178
5,426
43
602
76,424
3,384
5,183
1,440
(175,637)
BALANCE, December 31, 2007 . . . . . . . . . . . . .
$438
$ 40
$197,463 $407,367
$ 25,660
$(199,987) $ 430,981
The accompanying notes are an integral part of these consolidated financial statements.
F-6
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 and 2005
(dollars in thousands)
Years Ended December 31,
2007
2006
2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
$ 55,175
$ 134,003
$ 50,135
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation cost related to equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit upon exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on insurance recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of equity investment in ARG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment loss—Bolivia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity loss (income) of unconsolidated international affiliates, net of tax . . . . . . . . . . . . . . . .
Changes in assets and liabilities which provided (used) cash, net of effect of acquisitions:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax payable—Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities from continuing operations . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by operating activities from discontinued operations . . . . . . . . . . . . .
14,072
31,773
5,412
(1,159)
7,994
—
—
—
(6,742)
—
—
(5,412)
2,400
(6,159)
29,160
(92,982)
989
34,521
(14,000)
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,521
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grant proceeds from government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from ARG Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance proceeds for the replacement of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from unconsolidated international affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposition of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by investing activities from continuing operations . . . . . . . . . . . . . . .
Net cash used in investing activities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . .
(96,081)
34,307
—
(19,424)
1,747
—
9,404
(70,047)
(517)
38,644
27,907
8,455
(4,544)
13,907
—
(1,937)
(218,845)
(3,078)
5,878
7,500
(7,936)
(1,760)
(5,140)
6,571
86,358
(762)
85,221
(1,843)
83,378
(64,494)
4,949
306,746
(20,354)
—
378
3,447
230,672
(3,232)
376
22,372
2,479
(758)
8,777
364
—
—
(3,200)
—
(10,077)
(15,497)
(280)
8
8,668
—
574
63,941
4,203
68,144
(30,367)
3,222
—
(244,704)
—
677
4,302
(266,870)
(4,938)
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(70,564)
227,440
(271,808)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings, including capital leases . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from employee stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities from continuing operations . . . . . . . . . . . . . . .
Net cash used in financing activities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . .
(21,448)
55,000
—
3,384
(175,637)
1,159
(137,542)
(13,301)
(182,712)
92,500
—
6,857
(11,334)
4,544
(90,145)
(2,478)
(210,923)
417,800
(1,629)
3,805
(368)
758
209,443
(3,052)
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(150,843)
(92,623)
206,391
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS . . . . . . . . . .
7,581
3,342
1,491
CHANGE IN CASH BALANCES INCLUDED IN CURRENT ASSETS OF DISCONTINUED
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(217)
—
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(193,522)
240,206
221,537
18,669
—
4,218
14,451
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 46,684
$ 240,206
$ 18,669
The accompanying notes are an integral part of these consolidated financial statements.
F-7
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND CUSTOMERS:
Genesee & Wyoming Inc., through its subsidiaries and unconsolidated affiliate, currently has interests in 48
railroads, of which 43 are located in the United States, three are located in Canada, one is located in Australia,
and one is located in Bolivia. From January 1, 2005 to December 31, 2007, the Company acquired nineteen
railroads in the United States and Australia, sold its 50% equity interest in Australian Railroad Group Pty Ltd
(ARG) and discontinued its operations in Mexico. The Company also leases and manages railroad transportation
equipment in the United States and Canada and provides freight car switching and ancillary rail services. See
Note 3 for descriptions of the Company’s expansion in recent years.
A large portion of the Company’s operating revenue is attributable to industrial customers operating in the
paper and forest products, electric utility, and farm and food products industries. Freight revenue from the
Company’s ten largest freight revenue customers accounted for approximately 22%, 24% and 25% of the
Company’s operating revenues in 2007, 2006 and 2005, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc.
and its subsidiaries. Historically, the Company’s investments in unconsolidated international affiliates were
accounted for under the equity method. However, in June 2006, the Company sold its 50% interest in ARG and
wrote down its equity interest in Bolivia and simultaneously discontinued equity method accounting. All
significant intercompany transactions and accounts have been eliminated in consolidation.
Revenue Recognition
Railroad revenues are estimated and recognized as shipments initially move onto the Company’s tracks,
which, due to the relatively short length of haul, is not materially different from the recognition of revenues as
shipments progress. Industrial switching and other service revenues are recognized as such services are provided.
Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less when
purchased to be cash equivalents.
Materials and Supplies
Materials and supplies consist of purchased items for improvement and maintenance of road property and
equipment and are stated at the lower of average cost or market. Materials and supplies are removed from
inventory using the average cost method.
Property and Equipment
Property and equipment are carried at historical cost. Railroad property acquired in a purchase acquisition is
recorded at the allocated cost. Major renewals or improvements are capitalized, while routine maintenance and
repairs are expensed when incurred. Gains or losses on sales or other dispositions are credited or charged to
operating expense. Depreciation is provided on the straight-line method over the useful lives of the road property
(5-50 years) and equipment (3-30 years).
F-8
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the estimated useful lives of the Company’s major classes of property and
equipment:
Property:
Estimated useful life
Buildings and Leasehold Improvements . . . .
Bridges/Tunnels/Culverts . . . . . . . . . . . . . . .
Track Property . . . . . . . . . . . . . . . . . . . . . . .
30 years or life of lease
20 – 50 years
5 – 50 years
Equipment:
Computer Equipment
. . . . . . . . . . . . . . . . . .
Locomotives & Freight Cars . . . . . . . . . . . . .
Vehicles and Mobile Equipment . . . . . . . . . .
Signals and Crossing Equipment
. . . . . . . . .
Track Equipment . . . . . . . . . . . . . . . . . . . . . .
Other Equipment . . . . . . . . . . . . . . . . . . . . . .
3 years
5 – 20 years
5 – 10 years
5 – 30 years
5 – 10 years
5 – 10 years
The Company reviews its long-lived tangible assets for impairment whenever events and circumstances
indicate that the carrying amounts of such assets may not be recoverable. When factors indicate that assets may
not be recoverable, the Company uses an estimate of the related undiscounted future cash flows over the
remaining lives of assets in measuring whether or not impairment has occurred. If impairment is identified, a loss
would be reported to the extent that the carrying value of the related assets exceeds the fair value of those assets
as determined by valuation techniques applicable in the circumstances.
Government Grants
Grants from governmental agencies are recorded as long-term liabilities and are amortized as a reduction to
depreciation expense over the same period which the underlying purchased assets are depreciated.
Goodwill and Indefinite-Lived Intangible Assets
The Company accounts for its business acquisitions using the purchase method of accounting and allocates
the total cost of an acquisition to the underlying net assets based on their respective estimated fair values. As part
of this allocation process, the Company identifies and attributes values and estimated lives to the 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.
The Company reviews the carrying values of goodwill and identifiable intangible assets with indefinite lives
at least annually to assess impairment since these assets are not amortized. Additionally, the Company reviews
the carrying value of any intangible asset or goodwill whenever such events or changes in circumstances indicate
that its carrying amount may not be recoverable. The Company assesses impairment by comparing the fair value
of an intangible asset or goodwill with its carrying value. The determination of fair value involves significant
management judgment. Impairments are expensed when incurred. Specifically, the Company tests for
impairment in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and
Other Intangible Assets” (SFAS 142). The Company performs its annual impairment review as of November 30
of each year and no impairment was recognized for the year ended December 31, 2007.
F-9
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For intangible assets the impairment test compares the fair value of an intangible asset with its carrying
amount. If the carrying amount of an intangible assets exceeds its fair value, an impairment loss is recognized in
an amount equal to that excess.
For goodwill, a two-step impairment model is used. The first step compares the fair value of the reporting
unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than the carrying
amount, goodwill would be considered impaired. The second step measures the goodwill impairment as the
excess of recorded goodwill over the asset’s implied fair value.
Amortizable Intangible Assets
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), requires a
company to perform an impairment test on amortizable intangible assets when specific impairment indicators are
present. The Company has amortizable intangible assets recorded as customer relationships or contracts. These
intangible assets are generally amortized on a straight-line basis over the expected economic longevity of the
customer relationship, the facility served, or the length of the customer contract.
Derailment and Property Damages, Personal Injuries and Third Party Claims
The Company maintains insurance, with varying deductibles up to $0.8 million per incident for property
damage and up to $0.5 million per incident for liability, for claims resulting from train derailments and other
accidents related to its railroad and industrial switching operations. Accruals for FELA claims by the Company’s
railroad employees and third party personal injury or other claims, limited when appropriate to the applicable
deductible, 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.
Common Stock Splits
On February 14, 2006, the Company announced a three-for-two common stock split in the form of a 50%
stock dividend distributed on March 14, 2006, to stockholders of record as of February 28, 2006. All share and
per share amounts presented herein have been restated to reflect the retroactive effect of this stock split.
Earnings per Share
Common shares issuable under unexercised stock options and unvested restricted stock, calculated under the
treasury stock method and weighted average Class B Common Shares outstanding are the only reconciling items
between the Company’s basic and diluted weighted average shares outstanding. The total number of options and
restricted stock used to calculate weighted average share equivalents for diluted earnings per share was
2,393,350, 2,224,098 and 2,430,297 for 2007, 2006 and 2005, respectively.
F-10
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the computation of basic and diluted earnings per share (EPS) for the years
ended December 31, 2007, 2006 and 2005 (dollars in thousands, except per share amounts):
2007
2006
2005
Numerators:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 69,247
(14,072)
$172,647
(38,644)
$50,511
(376)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 55,175
$134,003
$50,135
Denominators:
Weighted average Class A Common Shares outstanding—Basic . . . . . . . . . . . .
Weighted average Class B Common Shares outstanding . . . . . . . . . . . . . . . . . . .
Dilutive effect of equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average shares—Dilutive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,625
3,975
548
39,148
37,609
3,975
833
36,907
3,975
830
42,417
41,712
Earnings per common share:
Basic:
Earnings per common share from continuing operations . . . . . . . . . . . . . . . . . . .
Loss per common share from discontinued operations . . . . . . . . . . . . . . . . . . . .
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted:
Earnings per common share from continuing operations . . . . . . . . . . . . . . . . . . .
Loss per common share from discontinued operations . . . . . . . . . . . . . . . . . . . .
Earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
2.00
(0.41)
1.59
1.77
(0.36)
1.41
$
$
$
$
4.59
(1.03)
3.56
4.07
(0.91)
3.16
$
$
$
$
1.37
(0.01)
1.36
1.21
(0.01)
1.20
For 2007, 2006 and 2005, a total of 1,170,485, 721,135 and 10,548 shares, respectively, of Class A common
stock issuable under the assumed exercises of stock options computed based on the treasury stock method were
not included in the calculation of diluted earnings per common share, as the effect of including these shares
would have been anti-dilutive.
Income Taxes
The Company files a consolidated United States federal income tax return, which includes all of its United
State subsidiaries. Each of the Company’s foreign subsidiaries files appropriate income tax returns in their
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. The provision for, or benefit from, income taxes includes deferred taxes resulting
from temporary differences using the liability method. Such temporary differences result primarily from differences
in the carrying value of assets and liabilities for financial reporting and tax purposes. Future realization of deferred
income tax assets requires sufficient taxable income within the carryback and/or carryforward period available
under tax law. The Company evaluates on a quarterly basis whether, based on all available evidence, it is probable
that the deferred income tax assets are realizable. Valuation allowances are established when it is estimated that it is
more likely than not that the tax benefit of the deferred tax asset will not be realized.
Pension and Other Postretirement Benefit Plans
The Company provides pension and postretirement medical and life insurance benefits for union and
non-union employees of two of its United States subsidiaries. In order to use actuarial methods to value the
F-11
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
liabilities and expenses, the Company is required to make several critical assumptions including the discount rate
and expected rate of return on pension assets. For other postretirement benefits, the critical assumptions are the
discount rate and healthcare cost trend rate.
The Company evaluates the critical assumptions annually and its assumptions are based on the following
factors:
•
•
•
Discount rate is based on a review of long-term bonds, including published indices. The 2007 discount
rate determined on that basis was 6.25%.
Expected return on plan assets is based on an assumed long-term asset rate of return and was 8.5% for
2007.
Health care cost trend rate is based on historical rates of inflation and expected market conditions. For
2007, it is assumed to be 9.0% graded ratably to 5.0% over a seven year period.
On December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132R” (SFAS
158). The standard, among other things, requires companies to:
•
•
Recognize the funded status of the Company’s defined benefit plans in its consolidated financial
statements.
Recognize as a component of other comprehensive income the previously unrecognized prior service
costs/credits, gains/losses, and transition assets/obligations that arise during the year and are not
recognized as a component of net periodic benefit cost.
Stock-based Compensation Plans
The Compensation Committee of the Company’s Board of Directors (Compensation Committee) has
discretion to determine grantees, grant dates, amounts of grants, vesting and expiration dates for grants to the
Company’s employees through its 2004 Omnibus Incentive Plan (the Plan). The Plan permits the issuance of
stock options, restricted stock and restricted stock units. Restricted stock units constitute a commitment to deliver
stock at some future date as defined by the terms of the awards. Under the terms of the awards, equity grants for
employees generally vest over three years and equity grants for directors vest over their respective terms as
directors.
The Company elected to adopt SFAS No. 123R, “Share-Based Payment,” (SFAS 123R) in the third quarter
of 2005 using the Modified Prospective Application. SFAS 123R requires the Company to measure
compensation cost for stock awards at fair value and recognize compensation over the service period for awards
expected to vest. Prior to the adoption of SFAS 123R, the Company accounted for its stock-based compensation
plans under Accounting Principles Board (APB) Opinion 25, “Accounting for Stock Issued to Employees,” (APB
25) under which no compensation cost had been recognized and disclosed the pro forma expense for basic and
diluted earnings per share as if stock based compensation had been recorded under SFAS No. 123, “Accounting
for Stock-Based Compensation” (SFAS 123).
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 over the requisite service period of the grant. Two
assumptions in the Black-Scholes pricing model that require management judgment are the expected life and
expected volatility of the stock. The expected life is based on historical experience and is estimated for each
grant. The expected volatility of the stock is based on actual historical volatility and adjusted to reflect future
expectations. The fair value of our restricted stock and restricted stock units are based on the closing price on the
date of grant.
F-12
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial
instrument held by the Company:
•
•
Current assets and current liabilities: The carrying value approximates fair value due to the short
maturity of these items.
Long-term debt: The fair value of the Company’s long-term debt is based on secondary market
indicators. Since the Company’s debt is not quoted, estimates are based on each obligation’s
characteristics, including remaining maturities, interest rate, amortization schedule and liquidity. The
carrying amount of the Company’s fixed rate and variable rate debt approximates its fair value.
Foreign Currency
The financial statements of the Company’s foreign subsidiaries were prepared in the local currency of the
respective subsidiary and translated into United States dollars based on the exchange rate at the end of the period
for balance sheet items and, for the statement of operation items, at the average rate for the statement period.
Currency translation adjustments are reflected as currency translation adjustments in stockholders’ equity and are
included in accumulated other comprehensive income. Cumulative translation adjustments are recognized in the
consolidated statement of operations for substantial or complete liquidation of the underlying investment in the
foreign subsidiary.
Management Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United Sates of America requires management to use judgment and to make estimates and assumptions that
affect reported assets, liabilities, revenues and expenses during the reporting period. Significant estimates using
management judgment are made in the areas of recoverability and useful life of assets, as well as liabilities for
casualty claims and income taxes. Actual results could differ from those estimates.
Reclassifications
Certain prior year balances have been reclassified to conform to the 2007 presentation.
3. CHANGES IN OPERATIONS:
United States
Maryland Midland Railway, Inc.: On December 31, 2007, the Company acquired 87.4% of Maryland
Midland Railway, Inc. (Maryland Midland) for cash consideration of approximately $19.4 million (net of $7.5
million cash received). An additional $3.6 million was paid in the first quarter of 2008 to reflect adjustments for
final working capital. The purchase price was preliminarily allocated as follows: current assets ($9.2 million,
including cash received), property and equipment ($46.6 million), less current liabilities ($5.4 million), debt
assumed ($1.5 million), deferred income tax liabilities assumed ($17.5 million) and minority interest ($0.8
million). The 12.6% minority shareholder of Maryland Midland has the option to sell its interest to the Company
for $4.4 million at its discretion over the next five years. Headquartered 50 miles northwest of Baltimore, the
Maryland Midland operates over 63 miles of track between Glyndon and Highfield, Maryland (near the
Pennsylvania border), and between Walkersville and Taneytown, Maryland. Maryland Midland has 30
employees, 10 locomotives and is an interline carrier with CSX.
F-13
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Chattahoochee Bay Railroad, Inc.: On August 25, 2006, the Company’s newly formed subsidiary, the
Chattahoochee Bay Railroad, Inc. (CHAT), acquired the assets of the Chattahoochee & Gulf Railroad Co., Inc.
and the H&S Railroad Company, Inc. for $6.1 million in cash. The purchase price was allocated between
property and equipment ($5.1 million) and intangible assets ($1.0 million). The rail assets acquired by CHAT
connect the Company’s Bay Line Railroad and the Company’s Chattahoochee Industrial Railroad.
Commonwealth Railway, Inc.: On August 25, 2006, the Company exercised an option to purchase 12.5
miles of previously leased rail line from Norfolk Southern Corp. (NS) for $3.6 million, of which, approximately
$2.1 million is expected to be funded by the Commonwealth of Virginia. The 12.5 mile rail line runs through
Portsmouth, Chesapeake, and Suffolk, VA. The Company’s subsidiary, the Commonwealth Railway (CWRY),
will own and continue to operate the line upon the final execution of the contract with the Commonwealth of
Virginia. In July 2007, the Company completed a $13.2 million improvement project (including $6.6 million in
government grants) to meet the projected capacity needs of a customer’s new container terminal in Portsmouth.
Rail Partners: On June 1, 2005, the Company acquired from Rail Management Corporation (RMC)
substantially all of its rail operations (collectively, Rail Partners) for $238.2 million in cash (net of $4.9 million
cash received), the assumption of $1.4 million of non-interest bearing debt and $1.8 million in acquisition costs,
including an adjustment of $6.6 million to reduce our preliminary estimate of the value of acquired intangible
assets with a corresponding increase in goodwill. During the three months ended June 30, 2006, the Company
completed its allocation of the purchase price from this acquisition. In the final allocation, the purchase price was
allocated to current assets ($19.4 million, including $4.9 million in cash received), property and equipment
($186.0 million), intangible assets ($53.8 million), and goodwill ($6.6 million), less current liabilities ($21.3
million) and debt assumed ($1.4 million). The intangible assets excluding goodwill consist of customer contracts
and relationships with a weighted average amortization period of 27 years.
First Coast Railroad Inc: On April 8, 2005, the Company’s subsidiary, the First Coast Railroad Inc.
(FCRD), signed a 20-year agreement to lease 31 miles of rail line between Seals, Georgia and Fernandina,
Florida from CSX Transportation, Inc. (CSX). FCRD commenced operations on April 9, 2005.
Australia
Effective June 1, 2006, the Company and its former 50% partner in ARG, Wesfarmers Limited
(Wesfarmers), completed the sale of the Western Australia operations and certain other assets of ARG to
Queensland Rail and Babcock & Brown Limited (ARG Sale). As a result of the ARG Sale, the Company
recognized a $218.8 million net gain, including a $22.8 million gain from the cumulative translation of the
foreign currency investment and related equity earnings in ARG into United States dollars since 2000. In
connection with the ARG Sale, the Company also incurred $6.4 million of net transaction-related expenses, of
which $5.8 million related to management bonuses and stock option awards.
Simultaneous with the ARG Sale, the Company purchased Wesfarmers’ 50% ownership of the remaining
ARG operations, which are principally located in South Australia, for $15.1 million (GWA Purchase)
(collectively, Australian Transactions). This business, which is based in Adelaide, South Australia, was renamed
Genesee & Wyoming Australia Pty Ltd (GWA), and is a 100% owned subsidiary. The GWA Purchase was
accounted for under the purchase method of accounting. However, because the Company previously held a 50%
share of these assets through its ownership interest in ARG, it applied a step-method to the allocation of value
among the assets and liabilities of GWA. Because the $15.1 million purchase price for Wesfarmers’ 50% share
was lower than 50% of the book value ARG had historically recorded on these assets, the Company recorded a
non-cash loss of $16.2 million ($11.3 million, net of tax), representing the Company’s 50% share of the
impairment loss recorded by ARG, which was included in equity income of unconsolidated international
F-14
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
affiliates in the consolidated statement of operations during the second quarter of 2006. GWA commenced
operations on June 1, 2006. Accordingly, the Company has included 100% of the value of GWA’s net assets
($30.1 million) in its consolidated balance sheet since June 1, 2006. The Company completed its allocation of
purchase price for this acquisition during the second quarter of 2007 without material adjustment to its
preliminary allocation.
South America
As previously disclosed, the Company indirectly has a 12.52% equity interest in Ferroviaria Oriental S.A.
(Oriental) through its interest in Genesee & Wyoming Chile S.A. (GWC), an unconsolidated affiliate. In
addition, the Company holds a 10.37% indirect equity interest in Oriental through other companies.
During 2006, due to heightened political and economic unrest and uncertainties in Bolivia, GWC advised its
creditors that it was ceasing its efforts to restructure its $12.0 million non-recourse debt obligation. Also in 2006,
the Bolivian government issued a Presidential decree ordering the nationalization of Bolivia’s oil and gas
industry. The government further announced in 2006 that it intends to nationalize, take a partial ownership stake
in or restructure the operations of other local companies, including Oriental.
Accordingly, the Company determined that its indirect investments in Oriental had suffered an other-than-
temporary decline in value. Based on the Company’s assessment of fair value, the Company’s $8.9 million
investment was written down by $5.9 million with a corresponding charge to earnings in the second quarter of
2006.
As of June 1, 2006, the Company discontinued equity accounting for the remaining $3.0 million investment
in Oriental. Since then, the Company has accounted for this investment under the cost method. Historically,
Oriental’s results of operations have not had a material impact on the Company’s results of operations. The
Company will continue to monitor the political situation in Bolivia.
Mexico
During the third quarter of 2007, the Company’s Mexican subsidiary, Ferrocarriles Chiapas-Mayab, S.A. de
C.V.’s (FCCM), ceased its operations and initiated formal liquidation proceedings. Results from the Company’s
Mexican operations for the years ended December 31, 2007, 2006 and 2005, are now included in results from
discontinued operations. See Note 20 for additional information regarding the Company’s discontinued
operations.
Results of Operations
When comparing the Company’s results of operations from one reporting period to another, you should
consider, in addition to the acquisitions and dispositions discussed above, that it has historically experienced
fluctuations in revenues and expenses due to one-time freight moves, weather-related impacts such as hurricanes,
droughts, customer plant expansions and shut-downs, sales of land and equipment, accidents, and derailments. In
periods when these events occur, results of operations are not easily comparable to other periods. Also, the
Company has completed and entered into a number of transactions recently which have changed and will change
its results of operations. Because of variations in the structure, timing and size of these transactions, the
Company’s operating results in any reporting period may not be directly comparable to its operating results in
other reporting periods.
Certain of the Company’s railroads have commodity shipments which are sensitive to general economic
conditions in the countries in which they operate, including paper products in Canada and lumber and forest
F-15
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
products in the United States. However, shipments of other commodities are less affected by economic
conditions and are more closely affected by other factors, such as inventory levels maintained at a customer
power plant (coal), winter weather (salt) and seasonal rainfall (South Australia grain).
Pro Forma Financial Results (unaudited)
The following table summarizes the Company’s unaudited pro forma operating results for the years ended
December 31, 2006 and 2005, as if Rail Partners had been acquired and the Australian Transactions had occurred
as of January 1, 2005 (dollars in thousands, except per share amounts):
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per common share from continuing operations . . . . . . . . . . . .
Diluted earnings per common share from continuing operations . . . . . . . . . . .
$480,808
$ 18,098
1.51
$
1.34
$
$446,179
$ 46,718
1.28
$
1.13
$
2006
2005
The unaudited pro forma operating results include the Australian Transactions, adjusted, net of tax, for the
net gain of $218.8 million from the ARG Sale, certain closing costs incurred from the ARG Sale, and interest
expense savings from the pay down of debt from proceeds received from the ARG Sale. In addition, the
unaudited pro forma operating results include the acquisition of Rail Partners adjusted, net of tax, for
depreciation and amortization expense resulting from the step-up of the Rail Partners property and intangible
assets based on appraised values, capitalization of certain track repairs that were historically expensed, and the
inclusion of incremental interest expense related to borrowings used to fund the acquisition. The Rail Partners
results reflected in these pro forma operating results include certain senior management compensation and other
expenses that the Company does not believe would have continued as ongoing expenses but do not qualify for
elimination under the treatment and presentation of pro forma financials.
The pro forma financial information does not purport to be indicative of the results that actually would have
been obtained had the transactions been completed as of the assumed dates and for the periods presented and are
not intended to be a projection of future results or trends.
4. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable credit losses on existing accounts
receivable. Management determines the allowance based on historical write-off experience within each of the
Company’s regions. Management reviews material past due balances over 90 days on a monthly basis. Account
balances are charged off against the allowance when management determines it is probable that the receivable
will not be recovered.
Receivables consisted of the following at December 31, 2007, 2006 and 2005 (dollars in thousands):
Accounts Receivable—Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts Receivable—Government Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$116,671
11,320
$114,274
5,732
$92,836
188
Total Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$127,991
$120,006
$93,024
2007
2006
2005
F-16
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Activity in the Company’s allowance for doubtful accounts was as follows (dollars in thousands):
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,907
1,574
(924)
(1,500)
$ 1,890 $ 1,451
2,053
—
(1,614)
3,013
—
(1,996)
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,057
$ 2,907 $ 1,890
2007
2006
2005
5. PROPERTY AND EQUIPMENT AND LEASES:
Property and Equipment
Major classifications of property and equipment were as follows (dollars in thousands):
2007
2006
Property:
Land and Land Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and Leasehold Improvements . . . . . . . . . . . . . . . . . . . . . . . .
Bridges/Tunnels/Culverts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Track Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 69,813
24,164
90,521
501,295
$ 49,541
30,722
83,462
397,589
Total Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment:
685,793
561,314
Computer Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Locomotives & Freight Cars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles and Mobile Equipment
Signals and Crossing Equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Track Equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,427
96,865
20,966
10,307
5,513
8,801
3,415
90,717
18,730
8,620
4,423
8,310
Total Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction-in-Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
146,879
37,642
134,215
22,461
Total Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
870,314
(173,324)
717,990
(144,698)
Property and Equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 696,990
$ 573,292
Construction-in-process as of December 31, 2007 and 2006, totaled $37.6 million and $22.5 million,
respectively, and consisted primarily of costs associated with track and equipment rehabilitation projects.
Depreciation expense for 2007, 2006 and 2005 totaled $28.2 million, $24.5 million and $19.6 million,
respectively.
Leases
The Company enters into operating leases for freight cars, locomotives, and other equipment. Related
operating lease expense for the years ended December 31, 2007, 2006 and 2005 was approximately $17.7
million, $18.4 million and $14.4 million, respectively. The Company leases certain real property, which resulted
in additional operating lease expense for the years ended December 31, 2007, 2006 and 2005 of approximately
$4.0 million, $2.9 million and $2.3 million, respectively.
F-17
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company is a party to several cancelable leases which have automatic renewal provisions. If the
Company chose not to renew these leases, it would be obligated to return the underlying rolling stock and pay
aggregate fees of up to approximately $0.5 million. In addition, the Company has the option, at various dates, to
terminate the leases by purchasing the rolling stock. The maximum aggregate purchase price, at the next
available buyout date for each qualifying lease, is approximately $2.3 million. During 2007, the Company
exercised its option to purchase various rolling stock for $7.6 million.
The Company has pre-tax deferred gains from sale-leaseback transactions recorded in Other Liabilities on
the accompanying Consolidated Balance Sheets. Where applicable, these gains are amortized as a non-cash offset
to rent expense over the life of the lease. The remaining balance of such gains (net of amortization) was
approximately $1.8 million and $2.4 million at December 31, 2007 and 2006, respectively.
The Company is a party to several lease agreements with Class I carriers to operate over various rail lines in
North America. Certain of these lease agreements have annual lease payments, which are included in the
non-cancelable section of the schedule of future minimum lease payments shown below. Under certain other of
these leases, no payments to the lessors are required as long as certain operating conditions are met. Through
December 31, 2007, no payments were required under these lease arrangements.
In November 2004, one of the Company’s subsidiaries entered into a 20-year lease agreement for the assets
of the Peoria and Pekin Union Railway Company. Future lease payments of $3.0 million annually are included in
the non-cancelable section of the schedule of future minimum lease payments shown below. These future lease
payments are subject to adjustment based on certain economic indicators and customer operations stipulated in
the agreement.
The following is a summary of future minimum lease payments (without consideration of amortizing
deferred gains from sale/leasebacks) under capital leases, non-cancelable operating leases and cancelable
operating leases (dollars in thousands):
Year
Capital
Non-cancelable
Operating
Cancelable
Operating
Total
$ 19,130
14,479
12,126
8,908
6,590
122,668
$1,713
1,007
353
306
132
—
$3,511
$183,901
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total minimum payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18
19
20
22
22
354
$455
$ 17,399
13,453
11,753
8,580
6,436
122,314
$179,935
F-18
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. INTANGIBLE AND OTHER ASSETS, NET AND GOODWILL:
Intangible and other assets were as follows (dollars in thousands):
December 31, 2007
Gross
Carrying
Amount
Accumulated
Amortization Net Assets
Weighted-
Average
Amortization
Period
INTANGIBLE ASSETS:
Amortizable intangible assets:
Service Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer Contracts and Relationships . . . . . . . . . . . . . . .
$ 37,622
54,859
$ 5,547
5,719
$ 32,075
49,140
28 years
27 years
Non-amortizable intangible assets:
Track Access Agreements . . . . . . . . . . . . . . . . . . . . . . . .
35,891
—
35,891
—
Total Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$128,372
$11,266
$117,106
28 years
OTHER ASSETS:
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,446
7,823
1,993
—
2,453
7,823
7 years
—
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 12,269
$ 1,993
$ 10,276
December 31, 2006
Gross
Carrying
Amount
Accumulated
Amortization Net Assets
Weighted-
Average
Amortization
Period
INTANGIBLE ASSETS:
Amortizable intangible assets:
Service Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer Contracts and Relationships . . . . . . . . . . . . . . .
$ 37,622
54,859
$ 4,215
3,488
$ 33,407
51,371
28 years
27 years
Non-amortizable intangible assets:
Track Access Agreements . . . . . . . . . . . . . . . . . . . . . . . .
35,891
—
35,891
—
Total Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$128,372
$ 7,703
$120,669
28 years
OTHER ASSETS:
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,933
7,374
2,137
115
3,796
7,259
7 years
—
Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,307
$ 2,252
$ 11,055
The Track Access Agreements are perpetual trackage agreements on one of the Company’s railroads. Under
SFAS No. 142, these assets have been determined to have an indefinite useful life and, therefore, are not subject
to amortization. However, these assets are tested for impairment on an annual basis.
F-19
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In 2007, 2006 and 2005, the aggregate amortization expense associated with intangible assets was
approximately $3.6 million, $3.4 million and $2.8 million, respectively. The Company estimates the future
aggregate amortization expense related to intangible assets as of December 31, 2007, will be as follows for the
periods presented (dollars in thousands):
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,512
3,476
3,476
3,476
3,476
63,799
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$81,215
Deferred financing costs are amortized as an adjustment to interest expense over the terms of the related
debt using the effective-interest method for the term debt and using the straight-line method for the revolving
loan portion of debt. In 2007, 2006 and 2005, the Company amortized $0.7 million of deferred financing costs
annually as an adjustment to interest expense.
In accordance SFAS 142, goodwill is not amortized. The changes in the carrying amount of goodwill were
as follows (dollars in thousands):
Goodwill:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment
Year Ended December 31,
2007
2006
$37,788
—
1,564
$31,233
6,564
(9)
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$39,352
$37,788
In 2006, the Company allocated $6.6 million of the final purchase price for the Rail Partners acquisition to
goodwill. The $6.6 million of goodwill will be deductible for tax purposes over a 15-year period.
Under SFAS 142, goodwill and other indefinite-lived intangibles must be tested for impairment annually (or
in interim periods if events indicate possible impairment).
7. INVESTMENTS:
Australian Railroad Group
As discussed in Note 3, the Company and its 50% partner, Wesfarmers, sold the Western Australia
operations and certain other assets of ARG on June 1, 2006. Simultaneously, the Company purchased
Wesfarmers’ 50% ownership of the remaining ARG operations, which are principally located in South Australia.
Accordingly, the following are United States GAAP condensed balance sheets of ARG as of May 31, 2006,
immediately prior to the sale and purchase transactions, and the related condensed consolidated statements of
operations and cash flows for the five-month period ended May 31, 2006, and the year ended December 31, 2005
(in thousands of United States dollars). The periods presented represent those for which the Company accounted
for its investment in ARG under the equity method of accounting.
F-20
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the dates and periods indicated below, one Australian dollar could be exchanged into the following
amounts of United States dollars:
As of May 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average for the five months ended May 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average for the year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.753
$0.743
$0.762
As described in Note 3 regarding the GWA Purchase, because the $15.1 million purchase price for
Wesfarmers’ 50% share was lower than 50% of the book value ARG had historically recorded on these assets,
the Company recorded a non-cash loss of $16.2 million ($11.3 million, net of tax), representing the Company’s
previously held 50% share of the impairment loss recorded by ARG. Accordingly, the ARG financial statements
included below reflect 100% of the non-cash loss or $32.3 million ($22.6 million, net of tax), resulting from the
write downs of an investment, property and equipment and other long-term assets, net.
Australian Railroad Group Pty Ltd
Condensed Consolidated Balance Sheet
(in thousands of U.S. dollars)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAX ASSETS, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER ASSETS, net
May 31,
2006
$ 20,890
45,769
13,901
1,235
4,847
86,642
560,670
60,827
1,574
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$709,713
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 28,733
31,457
1,769
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,959
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAX LIABILITIES, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER LONG-TERM LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FAIR VALUE OF INTEREST RATE SWAPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REDEEMABLE PREFERRED STOCK OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
376,300
13,549
13,237
2,447
405,533
16,251
225,970
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$709,713
F-21
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Australian Railroad Group Pty Ltd
Condensed Consolidated Statements of Operations
(in thousands of U.S. dollars)
Five Months
Ended May 31,
2006
December 31,
2005
Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$147,044
151,715
$344,546
288,488
(Loss) income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment loss—APTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Benefit from) provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,671)
(5,823)
(11,477)
218
(21,753)
(6,503)
56,058
—
(29,430)
600
27,228
8,292
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (15,250)
$ 18,936
F-22
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Australian Railroad Group Pty Ltd
Condensed Consolidated Statements of Cash Flows
(in thousands of U.S. dollars)
Five Months
Ended May 31,
2006
December 31,
2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net (loss) income to net cash provided by operating
$(15,250)
$ 18,936
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment loss—APTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss (gain) on sale and impairment of assets . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
Proceeds from disposition of property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . .
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . . . . . .
14,584
(5,889)
5,823
25,732
10,391
35,391
(35,430)
710
(34,720)
—
7,272
7,272
432
8,375
12,515
32,127
9,726
—
(229)
9,675
70,235
(80,038)
2,147
(77,891)
(7,424)
7,665
241
(1,287)
(8,702)
21,217
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,890
$ 12,515
South America
The Company has a 22.89% indirect ownership interest in Oriental, which is located in eastern Bolivia. As
discussed in Note 3, the Company determined during the second quarter of 2006 that its $8.9 million equity
investment, including the portion held though GWC, had suffered an other than temporary decline in value. Since
then, the Company has accounted for its remaining $3.0 million investment under the cost method. Historically,
Oriental’s results of operations have not had a material impact on the Company’s results of operations. The
Company will continue to monitor the political situation in Bolivia.
F-23
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. LONG-TERM DEBT:
Long-term debt consisted of the following (dollars in thousands):
Senior Credit Facilities with variable interest rates (weighted average of 5.68% and
5.40% before impact of interest rate swaps at December 31, 2006) due 2009 and
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Notes Series A with fixed interest rate of 4.85% due 2011 . . . . . . . . . . . . . . . . . . . .
Senior Notes Series B with fixed interest rate of 5.36% due 2015 . . . . . . . . . . . . . . . . . . . .
Senior Notes Series C with variable interest rate (5.765% at December 31, 2007) due
As of December 31,
2007
2006
$ 69,119
75,000
100,000
$ 29,717
75,000
100,000
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,000
25,000
Limited recourse U.S. dollar denominated promissory notes of Mexican subsidiary with
variable interest rates (8.93% before impact of interest rate swaps at December 31,
2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt and capital leases with interest rates up to 7.25% and maturing at various dates
up to 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
13,301
3,647
2,667
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
272,766
2,247
245,685
4,372
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$270,519
$241,313
Senior United States and Canadian Credit Facilities
In 2005, the Company entered into a Consent and First Amendment to the Amended and Restated
Revolving Credit and Term Loan Agreement, dated November 12, 2004. The consent and amendment expanded
the size of the Company’s senior revolving credit facility from $150.0 million to $225.0 million. It also extended
the maturity date of the United States obligations to June 1, 2010. Following the amendment and consent, the
amended and restated credit facilities are composed of a $225.0 million revolving loan and a $32.0 million
(C$38.5 million) Canadian term loan. The revolving loan is due in 2010 and the Canadian term loan is due in
2009. As of December 31, 2007, our $225.0 million revolving credit facility consisted of $36.0 million of
outstanding debt, subsidiary letter of credit guarantees of $0.1 million and $188.9 million of unused borrowing
capacity. Interest rates for borrowings are based on United States or Canadian LIBOR plus a margin, which
varies from 0.75% to 1.375% depending on leverage. As of December 31, 2007, the revolving credit facility had
an interest rate of 5.72% and the Canadian term loan had an interest rate of 5.63%. The credit facilities are
unsecured, but the revolving loan is guaranteed by substantially all of the Company’s United States subsidiaries
and the Canadian term loan is guaranteed by substantially all of the Company’s United States and Canadian
subsidiaries.
Financial covenants, which are measured on a trailing twelve month basis and reported quarterly, are as
follows:
(a) Maximum leverage of 3.5 times (measured as Funded Debt (indebtedness plus guarantees including
Letters of Credit, plus the present value of operating leases) to EBITDAR (earnings before interest, taxes,
and depreciation, amortization and rental payments on operating leases).
(b) Minimum interest coverage of 3.5 times measured as EBITDA (earnings before interest, taxes,
depreciation and amortization) divided by interest expense.
F-24
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(c) Minimum consolidated tangible net worth measured as 80% of consolidated tangible net worth of
the borrowers as of March 31, 2005, plus on a cumulative basis, 50% of positive consolidated net income
(excluding the effect of foreign currency transaction gains or losses) for each fiscal quarter ending
subsequent to March 31, 2005.
(d) Maximum annual capital expenditures (excluding acquisitions) of $51.0 million. Fifty percent of
unutilized permitted capital expenditures may be utilized in the succeeding year.
In addition, in connection with the Company’s Australia Transactions, the Company entered into a Consent
and Second Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement, dated
February 13, 2006 (the Consent and Second Amendment). The Consent and Second Amendment waived
compliance with the restrictions on the dispositions of assets and adjusted the consolidated tangible net worth
calculation to permit the Company’s entry into the Australia Transactions. In addition, the Consent and Second
Amendment permitted the Company to make restricted payments, consisting of stock repurchases or cash
dividends, with the proceeds from the Australia Transactions through December 1, 2007, as long as certain
financial covenants governing distributions were met.
The credit facilities contain a number of covenants restricting the Company’s ability to incur additional
indebtedness, make certain investments, sell assets, issue subsidiary stock, restrict distributions from subsidiaries,
create certain liens, enter into certain consolidations or mergers, enter into certain transactions with affiliates and
pay dividends or make distributions. The credit facilities allow the Company to pay dividends and make
distributions provided that Funded Debt to EBITDAR, including any borrowings made to fund the dividend or
distribution, is less than 3.0 to 1.0.
The Company was in compliance with the provisions of these covenants as of December 31, 2007.
Senior Notes
In 2005, the Company 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 bear interest at 5.36% and are due 2015. The Series C
senior notes have a borrowing rate of LIBOR plus 0.70% and are due 2012. As of December 31, 2007, the Series
C senior notes had an interest rate of 5.765%.
In 2004, the Company completed a $75.0 million private placement of the Series A senior notes. The Series
A senior notes bear interest at 4.85% and are due in 2011.
The senior notes are unsecured but are guaranteed by substantially all of the Company’s United States and
Canadian subsidiaries. The senior notes contain a number of covenants limiting the Company’s ability to incur
additional indebtedness, sell assets, create certain liens, enter into certain consolidations or mergers and enter into
certain transactions with affiliates. Financial covenants, which must be satisfied quarterly, include (a) maximum
debt to capitalization of 65% and (b) minimum fixed charge coverage ratio of 1.75 times (measured as
EBITDAR for the preceding twelve months divided by interest expense plus operating lease payments for the
preceding twelve months). The Company was in compliance with the provisions of these covenants as of
December 31, 2007.
Limited Recourse Promissory Notes—Mexico
See Note 20, Discontinued Operations, for a discussion of the Company’s payment of the Mexico limited
recourse promissory notes.
F-25
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Schedule of Future Payments Including Capital Leases
The following is a summary of the maturities of long-term debt, including capital leases, as of December 31,
2007 (dollars in thousands):
Future minimum payments
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,247
32,866
36,561
75,158
25,163
100,771
$272,766
9. DERIVATIVE FINANCIAL INSTRUMENTS:
The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and
uses derivative financial instruments to manage the impact of certain of these risks. The Company uses
derivatives only for purposes of managing risk associated with underlying exposures. The Company does not
trade or use instruments with the objective of earning financial gains on the interest rate or exchange rate
fluctuations alone, nor does the Company use derivative instruments where there are not underlying exposures.
Complex instruments involving leverage or multipliers are not used. The Company manages its hedging position
and monitors the credit ratings of counterparties and does not anticipate losses due to counterparty
nonperformance. Management believes that its use of derivative instruments to manage risk is in the Company’s
best interest. However, the Company’s use of derivative financial instruments may result in short-term gains or
losses and increased earnings volatility.
The Company designates derivatives as a hedge of a forecasted transaction or of the variability of the cash
flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). The portion
of the changes in the fair value of the derivative that is designated as a cash flow hedge that is offset by changes
in the expected cash flows related to a recognized asset or liability (the effective portion) is recorded in
accumulated other comprehensive income. When the hedged item is realized, the gain or loss included in
accumulated other comprehensive income is reported in the consolidated statements of operations on the same
line as the hedged item. In addition, the portion of the changes in fair value of derivatives used as cash flow
hedges that is not offset by changes in the expected cash flows related to a recognized asset or liability (the
ineffective portion) is immediately recognized.
The Company formally documents its hedge relationships, including identifying the hedge instruments and
hedged items, as well as its risk management objectives and strategies for entering into the hedge transaction.
Derivatives are recorded in the consolidated balance sheets at fair value in prepaid expenses and other assets, net,
accrued expenses or other long-term liabilities. This process includes matching the hedge instrument to the
underlying hedged item (assets, liabilities, firm commitments or forecasted transactions). At hedge inception and
at least quarterly thereafter, the Company assesses whether the derivatives used to hedge transactions are highly
effective in offsetting changes in either the fair value or cash flows of the hedged item. When it is determined
that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting, and any
gains or losses on the derivative instrument are recognized in earnings during the period it no longer qualifies as
a hedge. Summarized below are the specific accounting policies by market risk category.
F-26
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Interest Rate Risk Management
The Company uses interest rate swap agreements to manage its exposure to changes in interest rates of the
Company’s floating rate debt. Interest rate swaps are accounted for as cash flow hedges. Gains or losses on the
swaps, representing interest rate differentials to be received or paid on the swaps, are recognized in the
consolidated statements of operations as a reduction or increase in interest expense.
The Company’s swaps for fixed interest rates on its variable LIBOR interest rates on long-term debt expired
in September 2007 and September 2006. At December 31, 2006, the notional amount under the agreement was
$21.4 million and represented a liability with a fair value of less than $0.1 million.
Foreign Currency Exchange Rate Risk
The Company purchases options to manage foreign currency exchange rate risk related to certain projected
cash flows related to foreign operations. Foreign currency exchange rate options are accounted for as cash flow
hedges. As of December 31, 2007, the Company had no foreign currency exchange rate options.
Foreign Currency Hedge
On February 13, 2006, the Company entered into two foreign currency forward contracts with a total
notional amount of $190 million to hedge a portion of its investment in 50% of the equity of ARG. The contracts,
which expired on June 1, 2006, protected the hedged portion of the Company’s net investment from exposure to
large fluctuations in the Unites States Dollar/Australian Dollar exchange rate. At expiration, excluding the effects
of fluctuations in the exchange rate on the Company’s net investment, the Company recorded a loss of $4.3
million from these contracts, which was included in the net gain on the ARG Sale in the second quarter of 2006.
10. COMMON STOCK:
The authorized capital stock of the Company consists of two classes of common stock designated as Class A
common stock and Class B common stock. The holders of Class A common stock and Class B common stock are
entitled to one vote and ten votes per share, respectively. Each share of Class B common stock is convertible into
one share of Class A common stock at any time at the option of the holder. In addition, pursuant to the Class B
Stockholders’ Agreement dated as of May 20, 1996, certain transfers of the Class B common stock, including
transfers to persons other than our executive officers, will result in automatic conversion of Class B common
stock into shares of Class A common stock. Holders of Class A common stock and Class B common stock shall
have identical rights in the event of liquidation.
Dividends declared by the Company’s Board of Directors are payable on the outstanding shares of Class A
common stock or both Class A common stock and Class B common stock, as determined by the Board of
Directors. If the Board of Directors declares a dividend on both classes of stock, then the holder of each share of
Class A common stock is entitled to receive a dividend that is 10% more than the dividend declared on each
Class B common stock. Stock dividends declared can only be paid in shares of Class A common stock. The
Company currently intends to retain all earnings to support its operations and future growth and, therefore, does
not anticipate the declaration or payment of cash dividends on the common stock in the foreseeable future.
The Company announced on February 13, 2007 and August 1, 2007, that its Board of Directors authorized
the repurchase of up to 2,000,000 shares and 4,000,000 shares, respectively, of the Company’s Class A common
stock, which was in addition to 538,500 shares available for repurchase under a previous authorization in
November 2004. The Board granted management the authority to make purchases in any amount and manner
F-27
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
legally permissible. During the year ended December 31, 2007, the Company repurchased 6,538,500 shares of
the Company’s Class A common stock available for repurchase under the repurchase plan. The shares were
repurchased at an average cost of $26.81 per share. During the year ended December 31, 2006, the Company
repurchased 450,000 shares of the Company’s Class A common stock available for repurchase under the
repurchase plan. The shares were repurchased at an average cost of $24.33 per share. During the year ended
December 31, 2005, the Company repurchased 11,500 shares of the Company’s Class A common stock available
for repurchase under the repurchase plan. The shares were repurchased at an average cost of $23.48 per share.
The aggregate cost of these shares is reflected as treasury stock in the Company’s consolidated balance sheet. As
of December 31, 2007, the Company had fully exhausted all of its existing authorizations to repurchase shares.
11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:
The Company administers two noncontributory defined benefit plans for union and non-union employees of
two United States subsidiaries. Benefits are determined based on a fixed amount per year of credited service. The
Company’s funding policy requires contributions for pension benefits based on actuarial computations which
reflect the long-term nature of the plans. The Company has met the minimum funding requirements according to
the Employee Retirement Income Security Act (ERISA).
During the year ended December 31, 2007, the Company froze the pension benefits of substantially all
remaining eligible employees (Frozen Participants). As a result, the Company recorded a $0.1 million
curtailment gain. Effective with the curtailment, new employees will not be eligible to participate in the plan.
Future earnings of the Frozen Participants will not be considered in the computation of benefits.
The Company provides health care and life insurance benefits for certain retired employees, including union
employees of one of the Company’s United States subsidiaries. As of December 31, 2007, twenty-four
employees were participating and eighteen current employees may become eligible for these benefits upon
retirement if certain combinations of age and years of service are met. The Company funds the plan on a
pay-as-you-go basis.
F-28
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following provides a reconciliation of benefit obligation, plan assets and funded status of the plans
(dollars in thousands):
Pension
Other Retirement
Benefits
2007
2006
2007
2006
Change in benefit obligations:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment (gain)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,636
2
203
138
(384)
(131)
$3,704
108
198
(21)
(233)
(120)
$ 4,179
65
214
(141)
(447)
(83)
$ 4,336
137
252
(462)
—
(84)
Benefit obligation at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,464
$3,636
$ 3,787
$ 4,179
Change in plan assets:
Fair value of plan assets at beginning of year
. . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,657
305
390
(131)
$1,935
206
636
(120)
$ — $ —
—
84
(84)
—
83
(83)
Fair value of assets at end of year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,221
2,657
—
—
Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (243) $ (979) $(3,787) $(4,179)
Amounts recognized in the balance sheet consist of:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 140
103
$
89
890
$
97
3,690
$
83
4,096
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 243
$ 979
$ 3,787
$ 4,179
Amounts recognized in accumulated other comprehensive income
consist of:
Unrecognized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 242
(84)
Other comprehensive income at end of year, net of tax . . . . . . . . . . . . . . . .
$ 158
$ (118)
41
$
(77)
The accumulated benefit obligation for all defined benefit pension plans was $3.5 million and $3.6 million
at December 31, 2007 and 2006, respectively.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets:
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,464
$3,451
$3,221
$3,636
$3,582
$2,657
2007
2006
F-29
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Pension
Other Retirement Benefits
2007
2006
2005
2007
2006
2005
Components of net periodic benefit cost and other amounts
recognized in other comprehensive income:
Net periodic benefit cost
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of transition liability . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost
Amortization of loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2
203
(231)
143
(17)
18
$ 108
198
(186)
143
(16) —
11
(142) —
$ 65
$ 152
194
214
(103) —
112 —
—
17
—
(14)
—
$ 137
252
—
—
—
44
—
$ 112
223
—
—
—
39
—
Net periodic benefit (income) cost . . . . . . . . . . . . . . . . . . . . . . .
$ (24) $ 258
$ 341
$ 296
$ 433
$ 374
Other changes in plan assets and benefit obligations
recognized in other comprehensive income
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost
Amortization of transition liability . . . . . . . . . . . . . . . . . . . . . . .
$(163)
59
(218)
Total recognized in other comprehensive income . . . . . . . . . . .
$(322)
Total recognized in net periodic benefit cost and other
comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(346)
$(604)
—
—
$(604)
$(308)
Weighted-average assumptions used to determine
benefit obligations as of December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average assumptions used to determine net
periodic benefit cost for the years ended December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . .
6.25% 5.75% 5.75% 6.25% 5.75% 5.75%
7.5% 8.5% 8.5% N/A
3.5% 3.5% 3.5% N/A
N/A
N/A
N/A
N/A
5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
8.5% 8.5% 8.5% N/A
3.5% 3.5% 3.5% N/A
N/A
N/A
N/A
N/A
The Company uses December 31 as a measurement date for the plans. The estimated net loss for the defined
benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic
benefit cost over the next year is less than $0.1 million. The estimated net loss for the other defined benefit
postretirement plan that will be amortized from accumulated other comprehensive income into net periodic
benefit cost over the next year is less than $0.1 million.
Assumed health care cost trend rates
Health care cost trend rate assumed next year
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate to which the cost trend is assumed to decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year that the rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
2006
9.0% 9.0%
5.0% 5.0%
2014
2013
F-30
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing
(decreasing) the assumed health care cost trend rates by one percentage point in each year would increase
(decrease) the aggregate of the service and interest cost components of the net periodic postretirement benefit
cost and the end of the year accumulated postretirement benefit obligation as follows (dollars in thousands):
1 Percentage
Point Increase
1 Percentage
Point Decrease
(In thousands)
Effect on total service and interest cost . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . .
$ 29
$448
$ (25)
$(381)
Plan Assets:
The Company’s pension plans’ weighted-average asset allocations at December 31, 2007, and 2006, by
asset category are as follows:
Asset Category
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64%
35%
1%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
58%
36%
6%
100%
Plan Assets at December 31,
2007
2006
Cash Flows:
Contributions
The Company expects to contribute $0.2 million to its pension plan in 2008.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid (dollars in thousands):
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years 2013-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Retirement
Benefits
$ 97
100
103
113
116
657
Pension
$ 141
154
168
180
216
1,267
The discount rate that the Company uses for determining future pension obligations is based on a review of
long-term bonds, including published indices. The discount rate determined on that basis as of December 31,
2007 was 6.25%.
For 2007, the Company assumed a long-term asset rate of return of 8.5%. The Company will utilize a 7.5%
long-term asset rate of return assumption in 2008. In developing the Company’s expected long-term rate of
F-31
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
return assumption, the Company reviewed the asset allocation, the asset class return expectations and long-term
inflation assumptions. The 8.5% long-term asset return assumption for 2007 is based on an asset allocation
assumption of 60% equity securities and 40% fixed income securities. The Company believes that its long-term
asset allocation, on average, will approximate the targeted allocation. At December 31, 2007, the Company’s
actual asset allocation was consistent with its asset allocation assumption.
Employee Bonus Programs
The Company has performance-based bonus programs that include a majority of non-union employees.
Approximately $8.2 million, $4.5 million and $6.1 million were awarded under the various performance-based
bonus plans in 2007, 2006 and 2005, respectively. In addition, the Company awarded $3.3 million of cash
bonuses in connection with the ARG Sale in 2006.
401(k) Plans and Profit Sharing
Under the Genesee & Wyoming Inc. 401(k) Savings Plan, the Company matches participants’ contributions
up to 4% of the participants’ salary on a before-tax basis. The Company’s contributions to the plan in 2007, 2006
and 2005 were approximately $1.2 million, $0.9 million and $0.8 million, respectively.
The Company’s Canadian subsidiaries administer two different retirement benefit plans. Both plans qualify
under Section 146 of the federal and provincial income tax law and are Registered Retirement Savings Plans
(RRSP). Under each plan employees may elect to contribute a certain percentage of their salary on a pre-tax
basis. Under the first plan, the Company matches 5% of gross salary up to a maximum of $1,778 per year for
transportation employees and $1,591 for all other employees. Under the second plan, the Company matches 50%
of the employee’s contribution up to a maximum of 3% of gross salary. Company contributions were
approximately $0.4 million, $0.3 million and $0.2 million for the years 2007, 2006 and 2005, respectively.
The Company’s Australian subsidiary administers a statutory retirement benefit plan. The Company is
required to contribute the equivalent of 9% of an employee’s base salary into a registered superannuation fund.
Employees may elect to make additional contributions either before or after tax. Company contributions were
approximately $1.4 million and $0.6 million for the years ended December 31, 2007 and 2006, respectively.
12. INCOME TAXES:
The components of income before income taxes are as follows (dollars in thousands):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$67,627
23,168
$ 49,471
226,485
$50,849
19,825
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$90,795
$275,956
$70,674
2007
2006
2005
The Company files a consolidated United States federal income tax return that includes all of its United
States subsidiaries. Each of the Company’s foreign subsidiaries files appropriate income tax returns in their
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
F-32
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
taxes payable to various foreign countries, however, the amount of the tax and credits is not practically
determinable. The amount of undistributed earnings of the Company’s controlled foreign subsidiaries as of
December 31, 2007 was $43.8 million.
The components of the provision for income taxes are as follows (dollars in thousands):
2007
2006
2005
United States:
Current
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,524
1,455
$ 10,099
1,119
$ 5,441
983
Deferred
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,045
2,151
3,707
2,553
5,438
2,029
Foreign:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,175
17,478
13,891
6,051
322
6,373
88,222
(2,391)
85,831
1,667
4,605
6,272
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,548
$103,309
$20,163
The provision for income taxes differs from that which would be computed by applying the statutory United
States federal income tax rate to income before taxes. The following is a summary of the effective tax rate
reconciliation:
Tax provision at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of ARG Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit of track maintenance credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
2007
2006
2005
35.0% 35.0% 35.0%
0.0%
4.5%
-4.1%
0.0%
0.8%
0.0%
-1.9% -0.2% -0.9%
2.2%
2.4%
0.7%
-8.6% -4.2% -8.9%
0.9%
0.8%
1.1%
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.7% 37.4% 28.5%
F-33
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred income taxes reflect the effect of temporary differences between the book and tax basis of assets
and liabilities as well as available income tax credit and capital and net operating loss carryforwards. The
components of net deferred income taxes are as follows (dollars in thousands):
Deferred tax benefits:
Accruals and reserves not deducted for tax purposes until paid . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital loss carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Track maintenance credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax obligations:
Property and investment basis difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
2006
$
3,803
2,004
8,684
965
2,417
22,385
2,223
42,481
(8,089)
$ 7,326
1,143
—
1,602
1,704
7,932
12
19,719
—
(118,946)
—
(82,325)
(247)
Net deferred tax obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (84,554)
$(62,853)
In the accompanying consolidated balance sheets, these deferred benefits and deferred obligations are
classified as current or non-current based on the classification of the related asset or liability for financial
reporting. A deferred tax obligation or benefit that is not related to an asset or liability for financial reporting,
including deferred tax assets related to carryforwards, are classified according to the expected reversal date of the
temporary difference as of the end of the year.
The Company generated $11.8 million of state net operating loss carryforwards from its United States
operations in 2007. It is anticipated that the Company will be able to fully utilize these losses prior to expiration.
These state net operating losses exist in different states and expire between 2022 and 2027.
As of December 31, 2007 and 2006, the Company had track maintenance credit carryforwards of $22.4
million and $7.9 million, respectively. These tax credit carryforwards will expire in 2026 and 2027.
The valuation allowance represents amounts reserved for a capital loss carryforward that will expire in
2012. Due to the uncertainty of realizing future capital gains, the Company has reduced the related deferred tax
benefit with a valuation allowance.
On January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation
(FIN) No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”
(FIN 48). FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. After considering the
Company’s preexisting reserves for uncertain tax positions, the adoption of FIN 48 did not result in any material
adjustments to the Company’s results of operations or financial position.
F-34
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (dollars in
thousands):
Balance at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,030
(213)
Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 817
At December 31, 2007, the Company’s liability for uncertain tax positions was $0.8 million, $0.5 million of
which would reduce its effective tax rate if recognized. The Company does not anticipate that the total amounts
of the unrecognized tax benefits will significantly increase or decrease over the next twelve months.
The Company recognizes interest and penalties related to uncertain tax positions in its provision for income
taxes. During the year ended December 31, 2007, the Company recognized less than $0.1 million in interest and
penalties. As of December 31, 2007 and 2006, the Company had $0.2 million of accrued interest related to such
uncertain tax positions.
As of December 31, 2007, the following tax years remain open to examination by the major taxing
jurisdictions to which the Company or its subsidiaries are subject:
Jurisdiction
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Open Tax Year(s)
2004 – 2007
2006 – 2007
2003 – 2007
2002 – 2007
13. GRANTS FROM GOVERNMENT AGENCIES:
The Company periodically receives grants for the upgrade and construction of rail lines from federal, state
and local agencies in the United States and Australia and provinces in Canada in which the Company operates.
These grants typically reimburse the Company for 70% to 100% of the actual cost of specific projects. In total,
the Company collected $34.3 million, $4.9 million and $3.2 million in 2007, 2006 and 2005, respectively, from
such grant programs.
None of the Company’s grants represent a future liability of the Company unless the Company abandons the
rehabilitated or new track structure within a specified period of time or fails to maintain the upgraded or new
track to certain standards and to make certain minimum capital improvements, as defined in the respective
agreements. As the Company intends to comply with these agreements, the Company has recorded additions to
road property and has deferred the amount of the grants. The amortization of deferred grants is a non-cash offset
to depreciation expense over the useful lives of the related assets. During the years ended December 31, 2007,
2006 and 2005, the Company recorded offsets to depreciation expense from grant amortization of $2.6 million,
$2.5 million and $2.2 million, respectively.
F-35
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
14. COMMITMENTS AND CONTINGENCIES:
Litigation
Mexico
On June 25, 2007, FCCM formally notified the Secretaria de Comunicaciones y Transportes (SCT) of its
intent to exercise its right to resign its 30-year concession from the Mexican government and to cease its rail
operations. In response to this notification, on July 24, 2007, the SCT issued an official letter informing FCCM
that the SCT did not accept the resignation of the concession. On August 8, 2007, the SCT issued another official
letter to initiate a proceeding to impose sanctions on FCCM. The amount of the sanctions has not been specified.
The proposed sanctions are based, in part, on allegations that FCCM has violated the Railroad Service Law in
Mexico and the terms of its concession. On August 30, 2007, FCCM filed a brief with the SCT that challenged
the proposed sanctions and introduced evidence supporting FCCM’s right to resign its concession. On
September 21, 2007, FCCM also filed a proceeding in the Tax and Administrative Federal Court in Mexico
seeking an annulment of the SCT’s July 24, 2007, official letter and recognition of FCCM’s right to resign its
concession. The SCT has also seized substantially all of FCCM’s operating assets in response to FCCM’s
resignation of the concession. On September 19, 2007, FCCM filed a proceeding in the Second District Court in
Merida (District Court) challenging the SCT’s seizure of its operating assets as unconstitutional. The District
Court admitted the proceeding on October 11, 2007, and issued a provisional ruling upholding the seizure,
pending a full review of the constitutional grounds for the seizure and the legality of the SCT’s actions. In
addition to the allegations made by the SCT, FCCM is subject to claims and lawsuits from aggrieved customers
as a result of its cessation of rail operations and the initiation of formal liquidation proceedings. The Company
believes the SCT and customer actions are without merit and unlawful and the Company will continue to pursue
appropriate legal remedies to support FCCM’s resignation of the concession and to recover FCCM’s operating
assets. As of December 31, 2007, there was a net liability of $1.7 million remaining on the Company’s balance
sheet associated with its Mexican operations.
M&B Arbitration
Meridian & Bigbee Railroad LLC (M&B), the Company’s subsidiary, CSX and KCS are parties to a
Haulage Agreement governing the movement of traffic between Meridian, Mississippi, and Burkeville, Alabama.
On November 17, 2007, M&B initiated arbitration with the American Arbitration Association against CSX in an
effort to collect on outstanding claims under the Haulage Agreement. To date, the Company’s total claims
against CSX under the Haulage Agreement are $7.1 million, which amount could increase pending receipt of
additional information and resolution of pending legal actions. On December 7, 2007, CSX filed an arbitration
response, answering statement and counterclaim. CSX alleges it has suffered damages in an amount to be
determined. The Company plans to vigorously defend itself against CSX’s claims, which it believes to be without
merit, and will pursue insurance recovery as appropriate. Although the Company believes it is entitled to
payment for its claims, and that it has meritorious defenses against CSX claims, arbitration is inherently
uncertain, and it is possible that an unfavorable ruling could have a material adverse impact on the Company’s
results of operations, financial position or liquidity as of and for the period in which the determination occurs.
Sheperdsville, Kentucky Litigation
On January 16, 2007, CSX’s freight train Q502-15 derailed in Sheperdsville, Kentucky. The derailment
involved approximately 13 railcars carrying a variety of chemicals. As a consequence of this derailment, the
Company was named as a defendant in two personal injury lawsuits and one class action lawsuit. On January 15,
2008, Mr. John Goodwin filed an action against General Electric Capital Services, Inc. (GECS), General Electric
Rail Service Corp. (GERS) and Genesee & Wyoming Inc. (GWI), and on January 16, 2008, Mr. Bobby Stearns
and Ms. Betty Lou Stearns filed an action against GECS, General Electric Railcar Services Corp. (GE Rail,
collectively with GECS and GERS, GE) and GWI. On January 16, 2008, Roberta Green, individually and on
behalf of a class of similarly situated persons, filed a class action lawsuit against GECS, GE Rail and GWI. All
F-36
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
actions are pending in the United States District Court for the Western District of Kentucky at Louisville. The
plaintiffs in these lawsuits allege that the derailment was caused by one or more defective components on a
railcar owned by GE, which railcar bears the railroad operating marks of one of our subsidiaries. The complaints
allege causes of action against GWI for (i) nuisance; (ii) trespass; and (iii) negligence (with respect to
transportation/operations and duty to warn); and seek compensatory and punitive damages. The Company
believes it is indemnified for these claims by GE. The Company plans to vigorously defend itself against the
claims made in these lawsuits, which it believes to be without merit, and will pursue indemnification and
insurance recovery as appropriate. Although the Company believes it has meritorious defenses against these
claims, litigation is inherently uncertain, and it is possible that an unfavorable ruling could have a material
adverse impact on the Company’s results of operations, financial position or liquidity as of and for the period in
which the ruling occurs.
Canada
As previously discussed, in February 2002, Mr. Paquin, an individual living adjacent to the Outremont rail
yard, filed a motion for authorization of class certification in the Quebec Superior Court in Canada in connection
with a claim against two of the Company’s subsidiaries, Genesee Rail-One Inc. (now Genesee & Wyoming
Canada Inc.) and Quebec-Gatineau Railway Inc., as well as Canadian Pacific Railways (CP) (collectively, the
Parties). Mr. Paquin alleged that the noise emanating from the Outremont rail yard causes significant nuisance
problems to the residents living near the rail yard. The rail yard is owned by CP, part of which is leased and
operated by Quebec-Gatineau Railway Inc. The plaintiff described the proposed class as comprised of all owners
and tenants of dwellings who have lived within a defined section of the Outremont neighborhood in Montreal,
which is adjacent to the rail yard. In December 2007 a settlement agreement for all outstanding claims was
approved by all Parties and the Quebec Superior Court. Neither Genesee & Wyoming Canada Inc. nor Quebec-
Gatineau Railway made any material financial contribution in connection with the settlement agreement.
Bolivia
As previously disclosed, the Company indirectly has a 12.52% equity interest in Oriental through its interest
in GWC. GWC is an obligor of non-recourse debt of $12.0 million, which debt is secured by a lien on GWC’s
12.52% indirect equity interest in Oriental held through GWC’s subsidiary, Inversiones Ferroviarias Bolivianas
Ltda. This non-recourse debt became due and payable on November 2, 2003. In 2006, certain creditors of GWC,
including Banco de Crédito e Inversiones and Banco de Chile, commenced court proceedings before the 4th and
9th Civil Tribunals of Santiago to (i) collect on their share of the debt and (ii) exercise their rights pursuant to the
lien. Additional information on the value of the Company’s 12.52% equity interest in Oriental is set forth in
Note 3. In addition, the Company holds a 10.37% indirect interest in Oriental through other companies. The
Company does not expect these court proceedings to have any impact on this remaining 10.37% interest, nor
does it expect these proceedings to have any additional effect on its financial statements.
Other
In addition to the lawsuits set forth above, from time to time the Company is a defendant in certain lawsuits
resulting from its operations. Management believes there are adequate provisions in the financial statements for
any expected liabilities that may result from disposition of pending lawsuits. Nevertheless, litigation is subject to
inherent uncertainties, and unfavorable rulings could occur. Were an unfavorable ruling to occur, there exists the
possibility of a material adverse impact on the Company’s results of operations, financial position or liquidity as
of and for the period in which the ruling occurs.
Guarantees
In 2006, the Company entered into a guarantee agreement with the Board of Trustees of the Galveston
Wharves, pursuant to which it guarantees the complete and timely payment of the permitted deductible
F-37
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
associated with any potential claims under the applicable insurance policies maintained pursuant to the lease of
the Galveston Wharves. The maximum amount of the obligation subject to this guarantee is $1.0 million per
occurrence which expires in 2026. As of December 31, 2007, the Company had not paid any amounts under the
guarantee.
The Company also guarantees performance under other lease agreements which expire in 2009 and 2017.
The maximum amounts subject to these guarantees are $5.7 million.
15. STOCK-BASED COMPENSATION PLANS:
The Compensation Committee has discretion to determine grantees, grant dates, amounts of grants, vesting,
and expiration dates for the issuance of up to an aggregate of 11.4 million shares of Class A common stock-based
awards to its employees through its 2004 Omnibus Incentive Plan (the Plan). The Plan permits the issuance of
stock options, restricted stock, and restricted stock units and any other form of award established by the
Compensation Committee which is consistent with the Plan’s purpose. Restricted stock units constitute a
commitment to deliver stock at some future date as defined by the terms of the awards. Under the terms of the
awards, equity grants for employees generally vest based on three years of continuous service and equity grants
for directors vest over their respective terms as directors. Stock-based awards generally have 5-year contractual
terms. At December 31, 2007, there were 2,420,135 Class A shares available for future issuance under the Plan.
Stock-based compensation for the six months ended June 30, 2005, was determined using the intrinsic value
method (note the pro forma expense for basic and diluted earnings per share in 2005 was for the six months
ended June 30, 2005). The following table provides supplemental information for the year ended December 31,
2005, as if stock-based compensation had been recorded under SFAS 123 (dollars in thousands, except EPS):
Net Income—As reported: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct: Total stock-based employee compensation expense as determined under
2005
$50,135
SFAS 123 had compensation cost been recognized, net of related tax effects . . .
(1,385)
Pro Forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$48,750
Basic EPS: As Reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro Forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted EPS: As Reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro Forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
1.36
1.32
1.20
1.17
A summary of option activity under the Plan as of December 31, 2007, and changes during the year then
ended is presented below:
Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
2,102,699
479,091
(272,550)
(5,536)
(26,853)
Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . .
2,276,851
Exercisable at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,362,921
Weighted average fair value of options granted . . . . . . . . . .
F-38
Wtd. Avg.
Exercise
Price
Weighted-Average
Remaining
Contractual Term
Aggregate
Intrinsic
Value (in
thousands)
$19.11
32.08
10.54
11.49
23.82
22.93
19.11
$ 8.62
2.8 Years
$10,559
2.2 Years
$ 9,416
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted-average grant date fair value of options granted during the years 2007, 2006 and 2005 was
$8.62, $8.67 and $5.28, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2007, 2006 and 2005, was $4.6 million, $15.9 million and $6.4 million, respectively.
The following table summarizes information about stock options outstanding at December 31, 2007:
Exercise Price
Number of Options
Options Outstanding
Weighted Average
Remaining
Contractual Life
Options Exercisable
Weighted Average
Exercise Price
Number of Options
Weighted Average
Exercise Price
$
0 – $ 7.12
7.12 – 10.68
10.68 – 14.23
14.23 – 17.79
17.79 – 21.35
21.35 – 24.91
24.91 – 28.47
28.47 – 32.03
32.03 – 35.59
20,252
281,733
10,040
708,039
72,100
1,500
25,131
707,652
450,404
0 – 35.59
2,276,851
1.8 Years
0.9 Years
0.6 Years
1.9 Years
2.4 Years
2.9 Years
4.2 Years
3.4 Years
4.4 Years
2.8 Years
$ 2.65
10.11
10.96
16.18
19.08
22.41
26.37
29.81
32.37
$22.93
20,252
281,733
10,040
577,082
43,176
1,000
2,000
427,638
—
1,362,921
$ 2.65
10.11
10.96
16.08
19.15
22.41
26.77
30.06
—
$19.11
The Company determines the fair value of each option award on the date of grant using the Black-Scholes
option-pricing model. There are six input variables to the Black-Scholes model: stock price, strike price,
volatility, term, risk free interest rate, and dividend yield. Both the stock price and strike price inputs are the
closing stock price on the date of grant. The assumption for expected future volatility is based primarily on an
analysis of historical volatility of the Company’s Class A common stock. The expected term of options is derived
from the vesting period of the award, as well as historical exercise data, and represents the period of time that
options granted are expected to be outstanding. The expected risk-free rate is calculated using the United States
Treasury yield curve over the expected term of the option. The expected dividend yield is 0% for all periods
presented, based upon the Company’s historical practice of not paying cash dividends on its common stock. The
Company uses historical data, as well as management’s current expectations, to estimate forfeitures.
The following weighted-average assumptions were used to estimate the grant date fair value of options
granted during the years ended December 31, 2007, 2006 and 2005 using the Black-Scholes option pricing
model:
Risk-Free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
2006
2005
4.82% 4.95% 3.67%
0.00% 0.00% 0.00%
3.30
3.00
28.2% 34.0% 41.0%
3.00
F-39
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the status of the Company’s non-vested stock options as of December 31, 2007, and changes
during the year ended December 31, 2007, is presented below:
Non-vested Shares
Non-vested at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
1,021,219
479,091
(559,527)
(26,853)
Non-vested at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
913,930
Weighted-
Average
Grant-Date
Fair value
$6.68
8.62
6.14
7.25
$8.01
During the fourth quarter of 2006, the Company voluntarily initiated and completed a comprehensive
internal review of its historical stock option practices for stock option grants made during the period from its
initial public offering on June 24, 1996, through the third quarter of 2006. The review found no evidence of any
intentional wrongdoing by the Company’s executive officers, members of the Company’s Board of Directors or
any other employees. The internal review identified certain administrative and procedural deficiencies that
resulted in unintentional accounting errors. These errors principally related to situations where, as of the grant
date approved by the Compensation Committee, an aggregate number of stock options to be granted were
approved and the exercise price for the stock options was established, but the allocation of those stock options to
certain individual employee recipients was not finalized until a later date. As a result, the Company determined
that later measurement dates for accounting purposes for those individuals’ grants should have been used. As a
result, the Company recorded non-cash stock-based compensation expense of $1.2 million ($0.5 million after-
tax) in the fourth quarter of 2006, with $1.1 million related to grants to the general population of employees,
none of whom were executive officers at the time of grant. Under the direction of the Audit Committee of the
Board of Directors, the results of the internal review were evaluated by outside counsel, who concurred with the
findings.
The Company determines fair value of its restricted stock and restricted stock units based on the closing
stock price on the date of grant. The following table summarizes the Company’s restricted stock and restricted
stock unit activity for the year ended December 31, 2007:
Non-vested at January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Shares
133,932
50,850
(63,948)
Non-vested at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
120,834
Weighted-Average
Fair Value Granted
During Year
$24.73
32.07
22.81
$28.84
The weighted-average grant date fair value of restricted stock and restricted stock units during the years
ended December 31, 2007, 2006 and 2005 was $32.07, $29.80 and $16.68, respectively. The total intrinsic value
of restricted stock that vested during the years ended December 31, 2007, 2006 and 2005, was $1.8 million, $1.3
million and $0.4 million, respectively.
For the year ended December 31, 2007, compensation cost from equity awards was $5.4 million pre-tax, or
$3.9 million after-tax. The total compensation cost related to non-vested awards not yet recognized was
F-40
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
$7.6 million as of December 31, 2007, which will be recognized over the next three years with a weighted-
average period of one year. The total income tax benefit recognized in the consolidated income statement for
equity awards was $1.5 million for the year ended December 31, 2007.
For the year ended December 31, 2006, compensation cost from equity awards was $8.5 million pre-tax, or
$6.4 million after-tax. Of the $8.5 million compensation cost, $2.7 million was attributable to stock option
awards that were part of the transaction bonuses related to the ARG Sale in the quarter ended June 30, 2006, and
$1.2 million was attributable to the unintentional accounting errors associated with the use of incorrect
measurement dates for certain grants, as discussed above. The total income tax benefit recognized in the
consolidated income statement from equity awards was $2.1 million for the year ended December 31, 2006.
For the year ended December 31, 2005, compensation cost from equity awards was $1.8 million pre-tax, or
$1.5 million after-tax.
The total tax benefit realized from the exercise of equity awards was $1.9 million, $5.2 million and $1.3
million for the years ended December 31, 2007, 2006 and 2005, respectively.
The Company has reserved 1,265,625 shares of Class A common stock that the Company may sell to its
full-time employees under its Employee Stock Purchase Plan (ESPP) at 90% of the stock’s market price at date
of purchase. At December 31, 2007, 110,423 shares had been purchased under this plan. In accordance with
SFAS 123R, the Company recorded compensation expense for the 10% purchase discount of less than $0.1
million in the year ended December 31, 2007.
16. GEOGRAPHIC AREA INFORMATION:
The Company has various operating regions that manage its various railroad lines. However, each region
has similar characteristics so they have been aggregated into one segment. Summarized financial information for
each geographic area for the years ended December 31, 2007, 2006 and 2005, and long-lived assets for each
geographic area as of December 31, 2007 and December 31, 2006 are as follows (dollars in thousands):
Geographic Data
For the Years Ended December 31,
2007
2006
2005
Operating revenues:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$364,413
58,467
93,287
70.6% $348,608
55,555
11.3%
46,520
18.1%
77.4% $299,441
50,960
12.3%
—
10.3%
85.5%
14.5%
0.0%
Total operating revenues . . . . . . . . . . . . . . . . . . . . .
$516,167
100.0% $450,683
100.0% $350,401
100.0%
Long-lived assets located in:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$717,971
97,047
53,402
—
82.7% $629,955
77,090
11.2%
33,667
6.1%
6,736
0.0%
84.3%
10.3%
4.5%
0.9%
Total long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$868,420
100.0% $747,448
100.0%
December 31,
2007
2006
F-41
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
17. QUARTERLY FINANCIAL DATA (Unaudited):
Quarterly Results
(dollars in thousands, except per share data)
2007
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of tax . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted loss per common share from discontinued operations . . . .
Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . .
2006
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of tax . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss)
Diluted earnings per common share from continuing
operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted loss per common share from discontinued operations . . . .
Diluted earnings (loss) per common share . . . . . . . . . . . . . . . . . . .
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$125,107
23,385
16,083
(1,763)
14,320
$125,294
21,314
15,602
(4,859)
10,743
$131,224
29,661
23,038
(6,872)
16,166
$134,542
22,467
14,524
(578)
13,946
$
$
0.38
(0.04)
0.34
$
$
0.39
(0.12)
0.27
$
$
0.60
(0.18)
0.42
$
$
0.40
(0.02)
0.38
$105,526
22,364
14,061
(47)
14,014
$106,436
17,409
118,840
(1,091)
117,749
$121,019
23,141
24,007
(36,113)
(12,106)
$117,702
18,743
15,739
(1,393)
14,346
$
$
0.33
—
0.33
$
$
2.79
(0.03)
2.76
$
$
$
0.56
(0.85)
0.37
(0.03)
(0.29) $
0.34
The first quarter of 2007 included a $0.4 million after tax expense as a result of a tunnel fire in Oregon.
The second quarter of 2007 included a $0.5 million tax benefit associated with the ARG Sale.
The third quarter of 2007 included: (i) $3.3 million of after-tax gains from the sale of assets, and (ii) a net
tax benefit of $3.2 million associated with the ARG Sale.
The fourth quarter of 2007 included: (i) $0.6 million of benefit from a Canadian tax rate change and
(ii) $0.5 million after-tax gain on sale of assets.
The first quarter of 2006 included: (i) $1.0 million after tax expense from transaction costs associated with
the ARG Sale and (ii) $0.8 million of after-tax expense from track washouts due to Cyclone Clare in Western
Australia.
The second quarter of 2006 included: (i) $123.0 million of after-tax gain on the ARG Sale, (ii) $3.4 million
of after-tax expense for ARG transaction related costs, including management bonuses, (iii) $11.3 million of
after-tax impairment loss on its investment in ARG, which reflects the difference between the Company’s
previously held 50% share of the book value of the assets acquired from ARG in South Australia and the price
paid for the remaining 50% of those assets and (iv) $5.9 million of after-tax impairment on its investment in
Oriental.
F-42
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The third quarter of 2006 included a $6.8 million of after-tax gain in relation to the receipt of payment for
its share of the post closing adjustments from the ARG Sale.
The fourth quarter of 2006 included: (i) $1.9 million of after-tax gain on sale of assets and (ii) $1.2 million
net tax benefit, primarily associated with regulations issued in late 2006 clarifying the calculation of the short
line tax credit.
18. COMPREHENSIVE INCOME:
Comprehensive income is the total of net income and all other non-owner changes in equity. The following
table sets forth the Company’s comprehensive income, net of tax, for the years ended December 31, 2007, 2006
and 2005 (dollars in thousands):
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale of ARG investment (recognized gain from foreign currency translation) . . .
Mexico investment (recognized loss from foreign currency translation)
. . . . . . .
Net unrealized losses on qualifying cash flow hedges, net of tax provision of
$19, $60 and $231, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized losses on qualifying cash flow hedges of Australian Railroad
Group, net of tax provision of $710, and $758, respectively
Changes in pension and other postretirement benefit, net of tax provision
(benefit) of $324, ($28) and $53, respectively . . . . . . . . . . . . . . . . . . . . . . . . . .
2007
2006
2005
$55,175
$134,003
$50,135
15,178
—
5,426
1,503
(22,755)
—
(3,552)
—
—
43
—
602
120
595
1,656
1,768
(52)
136
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$76,424
$114,475
$49,082
Accumulated other comprehensive income, net of tax, included in the consolidated balance sheets as of
December 31, 2007 and December 31, 2006, respectively (dollars in thousands):
Foreign
Currency
Translation
Adjustment
Defined Benefit
Plans
Balances, December 31, 2006 . . . . . . . . . . . . . . . . . . .
Current period change . . . . . . . . . . . . . . . . . . . . . . . . .
$ 5,137
20,604
Balances, December 31, 2007 . . . . . . . . . . . . . . . . . . .
$25,741
$(683)
602
$ (81)
Net
Unrealized
Losses on
Cash Flow
Hedges
$ (43)
43
$—
Accumulated Other
Comprehensive
Income
$ 4,411
21,249
$25,660
The change in the foreign currency translation adjustment for the year ended December 31, 2007, relates
primarily to the Company’s operations with a functional currency in Australian and Canadian dollars and the
recognized loss from the cumulative foreign currency translation into United States dollars of the original
Mexico investment and FCCM’s reported earnings since 1999.
F-43
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
19. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for (dollars in thousands):
Interest paid, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,142
$104,491
$17,397
$ 6,012
$12,479
$ 7,127
2007
2006
2005
Income taxes paid in 2007 included Australian taxes for the ARG Sale totaling $95.6 million.
20. DISCONTINUED OPERATIONS:
In October 2005, the Company’s wholly-owned subsidiary, FCCM, was struck by Hurricane Stan which
destroyed or damaged approximately 70 bridges and washed out segments of track in the State of Chiapas
between the town of Tonala and the Guatemalan border, rendering approximately 175 miles of rail line
inoperable.
On June 25, 2007, FCCM formally notified the SCT of its intent to exercise its right to resign its 30-year
concession from the Mexican government and to cease its rail operations. The decision to cease FCCM’s
operations was made on June 22, 2007, and was due to the failure of the Mexican government to fulfill their
obligation to fund the Chiapas reconstruction. Without reconstruction of the hurricane-damaged line, FCCM was
not a viable business. During the third quarter of 2007, FCCM ceased its operations and initiated formal
liquidation proceedings. There were no remaining employees of FCCM as of September 30, 2007 of FCCM. The
SCT has contested the resignation of the concession and has seized substantially all of FCCM’s operating assets
in response to the resignation.
As a result of these and other actions, the Company recorded a pre-tax loss in the year-ended December 31,
2007, of $25.4 million, including non-cash charges of $15.0 million. The non-cash charges included $8.9 million
related to the write-down of FCCM’s operating assets and a $5.5 million loss from the cumulative foreign
currency translation into United States dollars of the original investment in Mexico and FCCM’s reported
earnings since 1999. This pre-tax loss was partially offset by a United States tax benefit of $11.3 million,
primarily related to worthless stock and bad debt deductions to be claimed in the Company’s consolidated
income tax return in the United States.
The Company believes the SCT’s actions were unlawful and is pursuing appropriate legal remedies to
recover its operating assets. See Note 14 for additional information regarding these actions and legal remedies.
As of December 31, 2007, there was a net liability of $1.7 million remaining on the Company’s balance sheet
associated with its Mexican operations.
The Company’s Mexican operations described above are presented as discontinued operations and its
operations are, therefore, excluded from continuing operations in accordance with SFAS 144. The operations and
cash flows of FCCM are being eliminated from the ongoing operations of the Company and the Company will
not have any significant continuing involvement in the operations of FCCM.
F-44
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The operating results of the Mexican operations classified as discontinued operations in the Consolidated
Statement of Operations are as follows (dollars in thousands):
Year Ended December 31,
2007
2006
2005
Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 14,621
$ 28,163
$34,988
Loss from discontinued operations before income taxes . . . . . . . . . . . . . . . . . . .
Tax (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,406)
(11,334)
(37,587)
1,057
(638)
(262)
Loss from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(14,072) $(38,644) $ (376)
For the year ended December 31, 2007, in connection with the shut down of FCCM’s rail operations, the
Company recorded $5.8 million of restructuring and other related charges within loss from discontinued
operations. These restructuring and other related charges consisted of $1.2 million related to early lease
termination fees, $3.2 million for severance and termination benefits in accordance with SFAS No. 112
“Employers Accounting for Postemployment Benefits” (SFAS 112), and $1.4 million of other expenses directly
related to the liquidation. The loss from discontinued operations in the year ended December 31, 2006, included a
non-cash charge of $33.1 million ($34.1 million after-tax) reflecting the write-down of non-current assets and
related effects of FCCM.
Having met the criteria outlined in SFAS 144, the assets and liabilities of FCCM and the Company’s
Mexican subsidiary, GW Servicios S.A. (Servicios), were classified as discontinued operations on the
Company’s Consolidated Balance Sheet as of December 31, 2007. The major classes of assets (at estimated fair
value less cost to sell) and liabilities classified as discontinued operations in the Consolidated Balance Sheets are
as follows (dollars in thousands):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2007
$ 217
815
1,053
128
$2,213
$ 651
3,223
45
$3,919
On June 8, 2007, the Company entered into an assignment agreement with International Finance
Corporation (IFC) and Nederlandse Financierings—Maatschappij voor Ontwikkelingslanden N.V. (FMO),
pursuant to which, among other things, (i) IFC and FMO demanded payment of, and the Company paid,
approximately $7.0 million due under the guarantee agreement related to certain amended loan agreements and
promissory notes of the Company’s Mexican subsidiaries (collectively, the Loan Agreements) and (ii) the
Company purchased and assumed the remaining loan amount outstanding under the Loan Agreements for a price
equal to the principal balance plus accrued interest, or approximately $7.3 million. As a result, the Company
recorded a $0.6 million interest charge due to the recognition of previously deferred financing fees related to the
Loan Agreements during the year ended December 31, 2007.
F-45
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Also on June 8, 2007, the Company, IFC and Servicios entered into a put option exercise agreement
pursuant to which IFC sold its 12.7% equity interest in Servicios to the Company for $1.0 million. In addition, on
June 8, 2007, the Company, IFC, FMO, Servicios and FCCM entered into a release agreement whereby the
parties agreed to release and waive all claims and rights held against one another that existed or arose prior to the
date thereof. Neither the payment default discussed above, nor the entering into the agreements described above
and the consummation of the transactions contemplated therein, resulted in a default under the Company’s
outstanding debt obligations.
21. RECENTLY ISSUED ACCOUNTING STANDARDS:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which is
effective for fiscal years beginning after November 15, 2007, and for interim periods within those years. On
February 12, 2008, the FASB issued FSP FAS 157-2 which delayed the effective date of SFAS 157 for all non
financial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of SFAS
157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. SFAS 157
defines fair value, establishes a framework for measuring fair value and expands the related disclosure
requirements. The Company adopted SFAS 157, except as it applies to those nonfinancial assets and nonfinancial
liabilities, as noted in FSP 157-2, on January 1, 2008, and it did not have a material impact on the Company’s
consolidated financial statements. The Company is currently evaluating the provisions of FSP 157-2.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of SFAS No. 115” (SFAS 159). SFAS 159 permits, but does not
require, entities to choose to measure many financial instruments and certain other items at fair value. The
standard provides entities the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is
effective for fiscal years beginning after November 15, 2007, and interim periods within those years. The
Company adopted the provisions of SFAS 159 on January 1, 2008, and it did not have a material impact on the
Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (SFAS 141R). SFAS 141R
retains the fundamental requirements of the original pronouncement requiring that the acquisition method be
used for all business combinations. SFAS 141R defines the acquirer as the entity that obtains control of one or
more businesses in the business combination, establishes the acquisition date as the date that the acquirer
achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition date. SFAS 141R also requires that acquisition-
related costs are expensed as incurred. SFAS 141R is effective for fiscal years beginning after December 15,
2008, and interim periods within those years. Early adoption of SFAS 141R is prohibited. The Company is
currently evaluating the provisions of SFAS 141R.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial
Statements (an amendment of ARB No. 51)” (SFAS 160). SFAS 160 requires that noncontrolling (minority)
interests are reported as a component of equity, that net income attributable to the parent and to the
non-controlling interest is separately identified in the income statement, that changes in a parent’s ownership
interest while the parent retains its controlling interest are accounted for as equity transactions, and that any
retained noncontrolling equity investment upon the deconsolidation of a subsidiary is initially measured at fair
value. SFAS 160 is effective for fiscal years beginning after December 18, 2008, and shall be applied
prospectively. However, the presentation and disclosure requirements of SFAS 160 shall be applied
retrospectively for all periods presented. The Company is currently evaluating the provisions of SFAS 160.
F-46
Australian Railroad Group
Pty Ltd
(Incorporated in Australia)
ABN 68 080 579 308
Financial Report
for the five month period ended May 31, 2006 and the years ended December 31, 2005, 2004
F-47
INDEX TO FINANCIAL STATEMENTS
Australian Railroad Group Pty Ltd and Subsidiaries:
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-49
Consolidated Balance Sheets as of May 31, 2006 and December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . F-50
Consolidated Statements of Operations for the Five Month Period Ended May 31, 2006 and for the
Years Ended December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-51
Consolidated Statements of Stockholders’ Equity and Comprehensive (Loss) Income for the Five
Month Period Ended May 31, 2006 and for the Years Ended December 31, 2005 and 2004 . . . . . . F-52
Consolidated Statements of Cash Flows for the Five Month Period Ended May 31, 2006 and for the
Years Ended December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-53
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-54
Page
F-48
Ernst &Young
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Australian Railroad Group Pty Ltd
We have audited the accompanying consolidated balance sheets of Australian Railroad Group Pty Ltd and
subsidiaries as of May 31, 2006, and December 31, 2005, and the related consolidated statements of operations,
stockholders’ equity and comprehensive (loss) income and cash flows for the five month period ended May 31,
2006, and the two years ended December 31, 2005, and 2004. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Australian Railroad Group Pty Ltd and subsidiaries at May 31, 2006, and
December 31, 2005, and the consolidated results of their operations and their cash flows for the five month
period ended May 31, 2006, and the two years ended December 31, 2005, and 2004, in conformity with U.S.
generally accepted accounting principles.
Ernst & Young
Perth, Western Australia
25 January 2007
F-49
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT MAY 31, 2006 and DECEMBER 31, 2005
May 31,
2006
December 31,
2005
$000 USD
$000 USD
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,890
45,769
13,901
1,235
4,847
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86,642
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
560,670
60,827
1,574
$ 12,515
54,257
11,226
2,323
4,918
85,239
5,768
551,849
62,916
2,031
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$709,713
$707,803
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for employee entitlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 28,733
23,263
8,194
—
1,769
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,959
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
376,300
13,237
13,549
2,447
—
Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
405,533
$ 25,473
25,651
7,239
10
2,523
60,896
359,415
11,121
22,076
4,735
—
397,347
Redeemable preferred stock of the stockholders, 11,704,462 shares authorized,
issued and outstanding at May 31, 2006 and December 31, 2005 . . . . . . . . . . . . . . . .
16,251
15,838
Stockholders’ equity
Common stock, no par value, 92,000,002 shares authorized, issued and
outstanding at May 31, 2006 and December 31, 2005 . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79,029
97,557
49,384
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
225,970
79,029
112,807
41,886
233,722
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$709,713
$707,803
The accompanying notes are an integral part of these financial statements.
F-50
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FIVE MONTH PERIOD ENDED MAY 31, 2006 and YEARS ENDED DECEMBER 31, 2005 and 2004
Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating Expenses
May 31,
2006
December 31,
2005
December 31,
2004
$000 USD
$147,044
$000 USD
$344,546
$000 USD
$333,647
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance of ways and structures . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss (gain) on sale and impairment of assets . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,914
17,691
11,700
25,094
25,732
14,584
136,002
41,230
29,312
50,046
(229)
32,127
125,279
39,097
32,849
41,467
(336)
27,346
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
151,715
288,488
265,702
(Loss) Income from Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment loss—APTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) Income before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from (provision) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
(4,671)
(5,823)
218
(11,477)
(21,753)
6,503
56,058
—
600
(29,430)
27,228
(8,292)
67,945
—
1,227
(28,438)
40,734
(12,264)
Net (Loss) Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (15,250)
$ 18,936
$ 28,470
The accompanying notes are an integral part of these financial statements.
F-51
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE (LOSS)
INCOME
$000 USD
Balance, December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss), net of tax:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . .
Fair market value adjustments of cash flow hedges . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss), net of tax:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . .
Fair market value adjustments of cash flow hedges . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss), net of tax:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . .
Fair market value adjustments of cash flow hedges . . . . . . . .
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
$79,029
$ 65,401
$ 44,120
$188,550
—
—
—
28,470
—
—
—
10,014
(459)
28,470
10,014
(459)
38,025
$79,029
$ 93,871
$ 53,675
$226,575
—
—
—
18,936
—
—
—
(15,326)
3,537
18,936
(15,326)
3,537
7,147
$79,029
$112,807
$ 41,886
$233,722
—
—
—
(15,250)
—
—
—
5,897
1,601
(15,250)
5,897
1,601
(7,752)
Balance, May 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$79,029
$ 97,557
$ 49,384
$225,970
The accompanying notes are an integral part of these financial statements.
F-52
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
FIVE MONTH PERIOD ENDED MAY 31, 2006 and YEARS ENDED DECEMBER 31, 2005 and 2004
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
May 31,
2006
December 31,
2005
December 31,
2004
$000 USD
$000 USD
$000 USD
$(15,250)
$ 18,936
$ 28,470
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss (gain) on sale and impairment of assets . . . . . . . . . . . . . . . .
Investment loss—APTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization and write off of deferred finance charges . . . . . . . . . . .
Changes in assets and liabilities
Accounts receivable, prepaid expenses and other . . . . . . . . . . . .
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, provisions, accrued expenses and other . . . .
14,584
25,732
5,823
(5,889)
39
11,316
(2,340)
1,376
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .
35,391
32,127
(229)
—
9,726
197
(8,004)
(386)
17,868
70,235
Cash Flows from Investing Activities
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . .
(35,430)
710
(80,038)
2,147
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(34,720)
(77,891)
Cash Flows from Financing Activities
Repayment of subordinated stockholders’ loans . . . . . . . . . . . . . . . . . . . . .
Proceeds from debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . .
Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . .
Cash and Cash Equivalents, beginning of year . . . . . . . . . . . . . . . . . . . .
—
7,272
—
7,272
7,943
432
12,515
—
7,665
(7,424)
241
(7,415)
(1,287)
21,217
27,346
(336)
—
11,847
451
(2,310)
(1,057)
7,745
72,156
(69,519)
2,570
(66,949)
(10,710)
—
—
(10,710)
(5,503)
102
26,618
Cash and Cash Equivalents, end of year
. . . . . . . . . . . . . . . . . . . . . . . . .
$ 20,890
$ 12,515
$ 21,217
Cash paid (received) during year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 11,260
$ 28,834
$ 29,512
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
86
(2,315)
(4,275)
The accompanying notes are an integral part of these financial statements.
F-53
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1
Principal activities
Australian Railroad Group Pty Ltd (the Company) was jointly owned by Genesee & Wyoming Inc. (GWI)
and Wesfarmers Ltd (Wesfarmers) with each partner holding a 50% interest. Effective June 1, 2006, GWI and
Wesfarmers completed the sale of the Western Australia operations and certain other assets of the Company to
Queensland Rail and Babcock & Brown Limited (Western ARG Sale). Simultaneous with the Western ARG
Sale, GWI purchased Wesfarmers’ 50-percent ownership of the remaining ARG operations, which are principally
located in South Australia. This business, which is based in Adelaide, South Australia, was renamed Genesee &
Wyoming Australia Pty Ltd (GWA), and is a 100-percent owned subsidiary of GWI.
The principal activity of the Company during the period was to provide rail freight transport and ancillary
logistics services to the mining and agricultural industries and to the general freight market within Western
Australia and South Australia. There was no significant change in the nature of these activities during the five
month period ended May 31, 2006 and the two years ended December 31, 2005 other than the sales transactions
discussed above.
2
Summary of significant accounting policies
Basis of Preparation
The consolidated financial statements of the Company have been prepared in accordance with U.S.
generally accepted accounting principles.
Principles of Consolidation
The consolidated financial statements include the accounts of Australian Railroad Group Pty Ltd and its
wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated.
Revenue Recognition
Due to the relatively short length of haul, revenues are estimated and recognized as shipments initially move
onto the tracks. Other service revenues are recognized as such services are provided.
Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less when purchased
to be cash equivalents.
Materials and Supplies
Materials and supplies consist of purchased items for improvement and maintenance of railroad property
and equipment, and are stated at the lower of cost or market value, computed on a first-in-first-out basis.
Investments
Investments comprise the Company’s interest in Asia Pacific Transport Consortium (APTC). The Company
has a 2% investment in this privately-held consortium that owns a concession to operate the Tarcoola to Darwin
rail line in South Australia and the Northern Territory. This investment totalled $5.8 million as of May 31, 2006.
In March 2006, Freightlink Pty Ltd (Freightlink), the operating company for the consortium, advised the
Company that it did not have sufficient cash flows to meet its current operating needs and was pursuing
F-54
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
additional financing. On May 3, 2006, Freightlink announced it was seeking a strategic equity partner; however,
Freightlink was not successful in attaining the needed financing as of May 31, 2006. Accordingly, the Company
determined during the second quarter of 2006 that the $5.8 million investment had suffered an other than
temporary decline in value. Based on the Company’s assessment of the fair value of the investment as of May 31,
2006, the Company recorded a non-cash investment loss of $5.8 million ($4.1 million net of tax). See Note 11 for
additional information regarding this investment.
Property and Equipment
Property and equipment are carried at historical cost. Acquired railroad property is recorded at the
purchased cost. Major renewals or betterments are capitalized while routine maintenance and repairs are charged
to expenses when incurred. Gains or losses on sales or other dispositions are credited or charged to operating
expenses upon disposition. Depreciation is provided on the straight-line method over the useful lives of the
railroad property (20-40 years), equipment (3-20 years) and lease premium (49 years). The Company continually
evaluates whether events and circumstances have occurred that indicate that its long-lived assets may not be
recoverable. When factors indicate that assets should be evaluated for possible impairment, the Company uses an
estimate of the related undiscounted future cash flows over the remaining lives of assets in measuring whether or
not impairment has occurred.
As described in Note 1, simultaneous with the Western ARG Sale, GWI purchased Wesfarmers’ 50-percent
ownership of the remaining ARG operations, which are principally located in South Australia, for approximately
$15.1 million. The negotiated purchase price for Wesfarmers’ 50-percent share was lower than 50-percent of the
historical book value of these assets. As a result of these negotiations, the Company had an indication that these
assets were impaired. Therefore, the Company recorded a non-cash impairment loss of $25.6 million ($18.0
million net of tax) on these assets as of May 31, 2006.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial
instrument held by the Company:
Current assets and current liabilities: The carrying value approximates fair value due to the short maturity
of these items.
Long-term debt: The fair value of the Company’s long-term debt is based on secondary market indicators.
Since the Company’s debt is not quoted, estimates are based on each obligation’s characteristics, including
remaining maturities, interest rate, credit rating, collateral, amortization schedule and liquidity. The carrying
amount approximates fair value.
Interest rate swaps: The Company uses derivative financial instruments in the form of interest rate swaps to
hedge its risks associated with interest rate fluctuations. The carrying amount approximates fair value. The fair
value of the interest rate swap contracts is the estimated amount the Company would pay to terminate the swaps
at the balance sheet date, taking into account current interest rate and the creditworthiness of the swap
counterparties.
Income Taxes
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be
recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amounts are
those in effect at the balance sheet date.
F-55
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred income taxes reflect the net income tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
In our consolidated balance sheets, these deferred benefits and deferred obligations are classified as current or
non-current based on the classification of the related asset or liability for financial reporting. A deferred tax
obligation or benefit not related to an asset or liability for financial reporting, including deferred tax assets
related to carryforwards, are classified according to the expected reversal date of the temporary difference as of
the end of the year.
Employee Benefits
The Company provides for benefits accruing to employees in respect of wages and salaries, annual leave
and long service leave when it is probable that payment will be required and the amounts can be reliably
estimated.
Contributions to the defined contribution employee benefit plans are expensed when incurred.
Derivative Instruments and Hedging Activities
SFAS No. 133 “Accounting for Derivatives Instruments and Hedging Activities” requires all contracts that
meet the definition of a derivative to be recognized on the balance sheet as either assets or liabilities and recorded
at fair value. Gains or losses arising from remeasuring derivatives to fair value each period are to be accounted
for either in the consolidated statement of operations or in other comprehensive income, depending on the use of
the derivative and whether it qualifies for hedge accounting. The key criterion that must be met in order to
qualify for hedge accounting is that the derivative must be highly effective in offsetting the change in the fair
value or cash flows of the hedged item. See footnote 6 to the consolidated financial statements for a full
description of ARG’s hedging activities and related accounting policies.
Management Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses during the reporting period. Significant estimates using
management judgement are made in the areas of recoverability and useful lives of assets, as well as liabilities for
casualty claims and income taxes. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of the Company is the Australian dollar. Foreign currency transactions are
translated at the applicable rates of exchange prevailing at the transaction dates. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange
prevailing at that date. All exchange gains and losses are reflected in the consolidated statement of operations.
Cumulative translation gains or losses arising from translating the Australian dollar denominated financial
statements into US dollars are reported in other comprehensive income as a component of stockholders’ equity.
Leased Assets
Leases are classified at their inception as either operating or capital leases based on the economic substance
of the agreement so as to reflect the risks and benefits of ownership. Operating leased assets are not capitalized
and rental payments are charged against operating profits in the period in which they are incurred.
F-56
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3
Property and Equipment
Major classifications of property and equipment are as follows:
Land and buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Track improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment and other
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
May 31,
2006
December 31,
2005
$000 USD
$000 USD
$ 36,201
257,741
237,534
153,893
$ 30,996
237,771
246,800
149,983
685,369
(124,699)
665,550
(113,701)
$ 560,670
$ 551,849
The lease premium represents the cost paid to the Government of Western Australia as part of the purchase
price for Westrail Freight, for access to the track infrastructure network for a period of 49 years.
4 Other Assets
Major classifications of other assets are as follows:
Loan receivable from joint venture entity . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 31,
2006
December 31,
2005
$000 USD
$000 USD
$ —
2,802
(1,228)
$ 1,574
$ 296
2,731
(996)
$2,031
Deferred financing costs are amortized over terms of the related debt using the straight-line method, which
approximates the effective interest method. In connection with the write-down of the investment in APTC (see
footnote 2), the loan of $463 thousand ($324 thousand net of tax) receivable from the joint venture was written
off.
5
Long-Term Debt
Current—interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current—interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 31,
2006
$000 USD
$ —
376,300
December 31,
2005
$000 USD
$ —
359,415
Total long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$376,300
$359,415
Credit facilities
Total facility commenced in December 2003 and comprises a 5 year tranche of $90.3 million, a 5 year
revolver tranche of $150.5 million, a 7 year tranche of $150.5 million and a $7.5 million working capital tranche.
Unused facilities at May 31, 2006 amount to $22.6 million. The loans are non amortizing but prepayable at the
F-57
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
discretion of Australian Railroad Group Pty Ltd. The minimum future repayments are set out in the schedule
below. Loan covenants require the company to adhere to minimum interest cover and debt ratios. All loan
covenants have been complied with.
The interest rate is derived from the bank bill bid rate. The weighted average interest rate on secured loans
during the five months ended May 31, 2006 and year ended December 31, 2005 was 6.61% and excludes any
interest hedging adjustments. Including the effect of the interest rate swaps the effective interest rate was 7.48%
for the five months ended May 31, 2006 and 7.82% for the year ended December 31, 2005.
Schedule of Future Minimum Payments
The following is a summary of the scheduled maturities of long-term debt:
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter
$ —
225,780
—
150,520
—
—
$ —
212,715
—
146,700
—
—
$376,300
$359,415
6
Financial Risk Management
(a) Interest rate risk
The Company uses derivative financial instruments principally to manage the risk that changes in interest
rates will affect the amount of its future interest payments. Interest rate swap contracts are used to adjust the
proportion of total debt that is subject to variable interest rates. Under an interest rate swap contract, the
Company agrees to pay an amount equal to a specified fixed-rate of interest times a notional principal amount,
and to receive in return an amount equal to a specified variable-rate of interest times the same notional amount.
For interest rate swap contracts under which the Company agrees to pay fixed-rates of interest, these
contracts are considered to be a cash flow hedge against changes in the amount of future cash flows associated
with the Company’s interest payments of variable-rate debt obligations. Accordingly, the interest rate swap
contracts are reflected at fair value in the Company’s consolidated balance sheet and the related gains or losses
on these contracts are deferred in stockholders’ equity (as a component of comprehensive income). However, to
the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the
value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of these
contracts are immediately recognized as an interest expense in the consolidated statement of operations. The
accounting for hedge effectiveness is measured at least quarterly based on the relative change in fair value
between the derivative contract and the hedged item over time. The net effect of this accounting in the
Company’s operating results is that interest expense on the portion of variable-rate debt being hedged is recorded
based on fixed interest rates. Hedge ineffectiveness for cash flow hedges were not material for the five month
period ended May 31, 2006 and the years ended December 31, 2005 and 2004.
The Company entered into interest rate swap agreements on its $225.8 million variable rate debt due
December 18, 2008 and its $150.5 million variable rate debt due December 18, 2010. These interest rate swap
contracts were entered for interest rate exposure management purposes and mature on December 18, 2007. At
F-58
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
May 31, 2006, the Company had interest rate swap contracts to pay a weighted average fixed rate of 6.61% and
receive a weighted average variable rate of interest of 5.66% on $280.3 million notional amount of indebtedness.
(b) Fair value
The carrying amounts of financial assets and financial liabilities at May 31, 2006, approximate the
aggregate fair value of the financial instruments.
(c) Credit risk exposures
The Company’s maximum exposures to credit risk at May 31, 2006, in relation to each class of recognized
financial asset is the carrying amount of those assets as indicated in the balance sheet.
In relation to derivative financial instruments, credit risk arises from the potential failure of counterparties to
meet their obligations under the contract or arrangements. The Company’s maximum credit risk exposure in
relation to interest rate swap contracts is limited to the net amounts to be received on contracts that are
favourable to the Company, which were none at May 31, 2006.
Concentration of credit risk
For the period ending May 31, 2006, the Company’s primary location of business was within the south west
corner of Western Australia, South Australia, the Northern Territory and New South Wales, which therefore
represents the location of the Company’s credit risk. Trade payables/receivables are normally payable/collectable
within 30 days.
Except for securities held to ensure the performance of contractor guarantees or warrantees, amounts due
from major receivables are not normally secured by collateral, however the creditworthiness of receivables is
regularly monitored. Securities held to ensure the performance of contractor guarantees or warrantees include
Bank Guarantees, Personal (Directors) Guarantees or cash. The value of securities held is dependent on the
nature, including the complexity and risk of the contract.
7
Income Taxes
The prima facie tax on income before income taxes differs from the
income tax provided in the financial statements as follows:
Prima facie tax at 30% on income before income taxes . . . . . . . . . . . . . . .
Tax effect of permanent differences:
May 31,
2006
December 31,
2005
December 31,
2004
$000 USD
$000 USD
$000 USD
$(6,526)
$8,168
$12,220
Non-allowable items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43
(20)
80
44
17
27
Total income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(6,503)
$8,292
$12,264
F-59
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company is governed by the taxation laws of the Commonwealth Government of Australia, which has a
statutory tax rate of 30%.
May 31,
2006
December 31,
2005
December 31,
2004
$000 USD
$000 USD
$000 USD
$
342
11,922
$12,264
Total income tax expense includes:
Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0
(6,503)
$
11
8,281
$ (6,503)
$ 8,292
May31,
2006
December31,
2005
$000 USD
$000 USD
The deferred income tax balance comprises:
Current deferred income tax assets
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expense accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee leave provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
632
4,215
—
$
108
313
1,718
2,779
$ 4,847
$ 4,918
Non-current deferred income tax assets
Tax vs. book values of property and equipment . . . . . . . . . . . . . . . . .
Income tax losses carried forward . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealised losses on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,357
9,736
734
(— )
51,534
9,961
1,421
(— )
$ 60,827
$ 62,916
Current deferred income tax liabilities:
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,769)
$
—
—
(840)
(327)
(1,356)
$ (1,769)
$ (2,523)
Non-current deferred income tax liability
Equity investment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax vs. book values of property and equipment . . . . . . . . . . . . . . . . .
1,259
(14,808)
(568)
(21,508)
$(13,549)
$(22,076)
Operating loss carry forward have no expiry date and the Company expects to recover all operating losses.
Consequently, no valuation allowance is provided for the deferred tax assets for 2006 and 2005.
8
Preferred Stock
Redeemable preferred shares are fully paid and earn a dividend at the declaration of the Directors from time
to time. The shares are redeemable at the option of the Directors of the Company. Upon redemption the
shareholder is entitled to receive the paid up amount of the preferred shares. In the event of the winding up of the
Company, the holders of redeemable preferred shares are entitled in priority to the holders of any other classes of
F-60
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
shares to payment of the paid up amount of the shares and the amount of any declared but unpaid dividends at
that date, but shall not otherwise have any rights to participate in surplus assets. Preferred shares carry no voting
rights.
9
Accumulated Other Comprehensive Income
May 31,
2006
December 31,
2005
December 31,
2004
$000 USD
$000 USD
$000 USD
The components of other comprehensive income, net of income tax,
included in the consolidated balance sheet are as follows:
Net foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . .
Unrealised losses on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$51,097
(2,447)
734
$45,201
(4,735)
1,420
$60,527
(9,788)
2,936
Net unrealised losses on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . .
(1,713)
(3,315)
(6,852)
Accumulated Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . .
$49,384
$41,886
$53,675
10 Expenditure Commitments
May 31,
2006
December 31,
2005
$000 USD
$000 USD
(a) Future minimum lease payments under all non-cancellable operating leases are as
follows:
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ —
868
1,233
—
—
—
$
$ 2,101
$
885
—
—
—
—
—
885
(b) Other capital expenditures:
Not later than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Later than one year, but not later than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Later than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,235
4,864
—
$23,104
4,401
—
$14,099
$27,505
Operating leases are entered into for rollingstock and office equipment. Rental payments are fixed for the
life of the lease for all types of operating leases. Purchase options and renewal terms exist at the Company’s
discretion and no operating lease contains restrictions on financing or other leasing activities. Operating lease
expense was $0.6 million for the five months ended May 31, 2006, and $1.2 million for the years ended
December 31, 2005, and 2004.
Under the agreement for the acquisition of the Westrail Freight business, there was an obligation to upgrade
the Katanning to Nyabing, and Yilliminning to Bruce Rock lines by July 1, 2004. This obligation has been
extended until July 2008 and is subject to additional conditions which allow for renegotiation.
F-61
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
11 Contingent Liabilities
GWA Northern Pty Ltd, a wholly owned subsidiary of the Company, unconditionally and irrevocably
guarantees the due and punctual payment of the secured debt of the Asia Pacific Transport Joint Venture,
severally in accordance with its participating interest, which was 0.88% as of May 31, 2006 and December 31,
2005, amounting to $3.4 million and $3.5 million, respectively.
ARG Sell Down No 1 Pty Limited, a wholly owned subsidiary of the Company, unconditionally and
irrevocably guarantees the due and punctual payment of the secured debt of the Asia Pacific Transport Joint
Venture, severally in accordance with its participating interest, which was 1.11% as of May 31, 2006 and
December 31, 2005 periods, amounting to $4.3 million and $4.4 million, respectively.
The Company and all of its subsidiaries have entered into a deed of cross guarantee pursuant to the
Australian Securities and Investment Commission Class Orders, whereby they covenant with a trustee for the
benefit of each creditor, that they guarantee to each creditor payment in full of any debt on the event of any
entity, including the Company, being wound up.
12 Employee Benefit Plans
The following Employee Benefit Plans have been established:
Plan
Benefit Type
Australian Railroad Group Superannuation Plan . . . . . . . Accumulated lump sum / defined contribution plan
Westscheme Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated lump sum / defined contribution plan
West Super Plus Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated lump sum / defined contribution plan
Employees contribute to the funds at various percentages of their remuneration. The consolidated entity’s
contributions are not legally enforceable other than those payable in terms of notified award and superannuation
guarantee levy obligations. The related expense for the year charged to the consolidated statement of operations
was $2.1 million for the five months ended May 31, 2006 and $4.9 million and $4.0 million for the years ended
December 31, 2005 and 2004, respectively.
13 Economic Dependency
Approximately 30.6%, 17.2%, and 24.5% of the Company’s revenue for the five month period ended
May 31, 2006 and the years ended December 31, 2005 and 2004, respectively, were generated from freight
services rendered to Australian Wheat Board Ltd, respectively.
14 Segment Information
Industry Segment
The group operates in only one industry, being rail transport.
15 Related Party Disclosures
Services to the group by Wesfarmers Ltd of $0.9 million and $1.4 million and Genesee & Wyoming Inc of
$0.1 million and $0.6 million for the five months ended May 31, 2006 and the year ended December 31, 2006,
respectively, are recovered at cost. At May 31, 2006 and December 31, 2005, the balance owing to Wesfarmers
Ltd was $0.1 million and $0.4 million and to Genesee and Wyoming Inc $32,000 and $0.1 million, respectively.
F-62
AUSTRALIAN RAILROAD GROUP PTY LTD AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16 Subsequent Events
The joint shareholders of the Australian Railroad Group Pty Ltd, Genesee & Wyoming Inc ( a company
incorporated in the United States of America) and Wesfarmers Limited, have announced finalisation of an
agreement to sell their shareholding in the Australian Railroad Group to Queensland Rail and Babcock & Brown.
The sale is made up of three parts as follows:
1. Queensland Rail will acquire the above rail operations in Western Australia, New South Wales and some
specific services in South Australia and Victoria,
2. Babcock & Brown will acquire the below rail business and assume responsibility for the rail
infrastructure leases in Western Australia; and
3. Genesee & Wyoming Inc will acquire the Wesfarmers share in the South Australian business.
The sale process satisfied all conditions and took effect from midnight on 31 May 2006.
17 Recently Issued Accounting Standards
The Financial Accounting Standards Board’s (FASB) recently issued Statements of Financial Accounting
Standards (SFAS) were reviewed and none are applicable to Australian Railroad Group Pty Ltd.
F-63
Exhibit 31.1
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
I, John C. Hellmann, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Genesee & Wyoming Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including our consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluations; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2008
/S/
JOHN C. HELLMANN
John C. Hellmann,
President and Chief Executive Officer
Exhibit 31.2
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
I, Timothy J. Gallagher, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Genesee & Wyoming Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including our consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluations; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2008
/S/ TIMOTHY J. GALLAGHER
Timothy J. Gallagher,
Chief Financial Officer
Section 1350 Certification
Exhibit 32.1
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(“Section 906”), John C. Hellmann and Timothy J. Gallagher, President and Chief Executive Officer and Chief
Financial Officer, respectively, of Genesee & Wyoming Inc., certify that (i) the Annual Report on Form 10-K for
the year ended December 31, 2007, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and (ii) the information contained in such report fairly presents, in all material
respects, the financial condition and results of operations of Genesee & Wyoming Inc.
/S/
JOHN C. HELLMANN
John C. Hellmann
President and Chief Executive Officer
Date: February 28, 2008
/S/ TIMOTHY J. GALLAGHER
Timothy J. Gallagher
Chief Financial Officer
Date: February 28, 2008
CORPORATE HEADQUARTERS
STOCK REGISTRAR AND TRANSFER AGENT
LaSalle Bank, N.A.
480 Washington Boulevard
Jersey City, NJ 07310
877-219-7077
www.lasalleshareholderservices.com
AUDITORS
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, New York 10019
646-471-4000
www.pwc.com
OTHER INFORMATION
The Company has included as Exhibits 31 and 32 to
its Annual Report on Form 10-K for the fiscal year
ending December 31, 2007, filed with the Securities and
Exchange Commission, certificates of the Chief Executive
Officer and Chief Financial Officer of the Company
certifying the quality of the Company’s public disclosure.
The Company has submitted to the New York Stock
Exchange a certificate of the Chief Executive Officer of
the Company certifying that as of June 30, 2007, he was
not aware of any violation by the Company of New York
Stock Exchange corporate governance listing standards.
Genesee & Wyoming Inc.
66 Field Point Road
Greenwich, Connecticut 06830
203-629-3722
Fax 203-661-4106
www.gwrr.com
NYSE: GWR
COMMON STOCK
The Company’s Class A common stock publicly trades
on the New York Stock Exchange under the trading
symbol GWR. The Class B common stock is not
publicly traded.
The tables below show the range of high and low
actual trade prices for our Class A common stock
during each quarterly period of 2007 and 2006.
YEAR ENDED DECEMBER 31, 2007: HIGH LOW
$24.08
4th Quarter
$24.57
3rd Quarter
$25.80
2nd Quarter
$24.20
1st Quarter
$29.95
$31.57
$33.40
$28.60
YEAR ENDED DECEMBER 31, 2006: HIGH LOW
$22.32
4th Quarter
$21.00
3rd Quarter
$26.36
2nd Quarter
$24.17
1st Quarter
$29.00
$35.69
$36.75
$32.57
As of February 22, 2008, there were 198 Class A common
stock record holders and eight Class B common stock
record holders.
Prior to its initial public offering, the Company paid
dividends on its common stock. However, since its initial
public offering, the Company has not paid dividends on
its common stock, and the Company does not intend to
pay cash dividends for the foreseeable future.
STOCK PRICE PERFORMANCE GRAPH
Comparison of Five-Year Cumulative Total Return
Assumes Initial Investment of $100
December 2007
300.00
250.00
200.00
150.00
100.00
50.00
0.00
Years Ending
2002 2003 2004 2005 2006 2007
Genesee & Wyoming Inc. Class A 100.00
100.00
S&P 1500 Railroad Index
100.00
Russell 2000 Index
2002
2003
154.79
121.74
147.35
2004
207.24
152.15
174.24
2005
276.64
202.04
182.18
2006
289.83
232.39
215.64
2007
266.97
281.53
212.22
Note: Peer group indices use beginning of period market capitalization weighting.
We can offer no assurance that our stock performance will continue in the future with the same or similar trends
depicted in the graph or table above.
Mortimer B. Fuller III
John C. Hellmann
David C. Hurley
Øivind Lorentzen
Robert M. Melzer
Philip J. Ringo
Peter O. Scannell
Mark A. Scudder
BOARD OF DIRECTORS
As of December 31, 2007
Mortimer B. Fuller III
Executive Chairman
John C. Hellmann
President and Chief Executive Officer
David C. Hurley
Vice Chairman, PrivatAir Holdings, SA
Member of Compensation Committee
Øivind Lorentzen
President and Chief Executive Officer
Northern Navigation International, Ltd.;
Chairman, NFC Shipping Funds
Chairman of Audit Committee
Robert M. Melzer
Retired, former President and Chief Executive Officer
Property Capital Trust
Member of Audit Committee
Member of Compensation Committee
Philip J. Ringo
Chairman and Chief Executive Officer
RubberNetwork.com, LLC
Member of Audit Committee
Member of Governance Committee
Peter O. Scannell
Founder and Managing General Partner
Rockwood Holdings LP
Chairman of Governance Committee
Mark A. Scudder
President, Scudder Law Firm, P.C., L.L.O.
Chairman of Compensation Committee
Hon. M. Douglas Young, P.C.
Chairman, Summa Strategies Canada Inc.
Member of Governance Committee
Hon. M. Douglas Young, P.C.
CORPORATE OFFICERS
SENIOR EXECUTIVES
Mortimer B. Fuller III
Executive Chairman
John C. Hellmann
President and Chief Executive Officer
Timothy J. Gallagher
Chief Financial Officer
James W. Benz
Chief Operating Officer
Allison M. Fergus
General Counsel and Secretary
Christopher F. Liucci
Chief Accounting Officer
and Global Controller
Mark W. Hastings
Executive Vice President
Corporate Development
Mario Brault
Senior Vice President
Canada Region
A. Bruce Carswell
Senior Vice President
Oregon Region
David J. Collins
Senior Vice President
New York/Pennsylvania Region
James N. Davis
Senior Vice President
Rocky Mountain Region
Gerald T. Gates
Senior Vice President
Southern Region
William A. Jasper
Senior Vice President
Rail Link Region
Matthew O. Walsh
Senior Vice President
Corporate Development and Treasurer
Spencer D. White
Senior Vice President
Illinois Region
Matthew C. Brush
Chief Human Resource Officer
Shayne L. Magdoff
Senior Vice President
Administration and Human Resources
Jack N. Brown
Vice President, Compliance and Security
Billy C. Eason
Vice President, Service Development
Tyrone C. James
Vice President, Safety and Compliance
Tony D. Long
Vice President, Customer Service and Car Management
Mike Meyers
Vice President, Information Technology
Richard T. O’Donnell
Vice President, Tax
David L. Powell
Vice President, Motive Power
Gerald A. Sattora
Vice President, Accounting and Controller
Jerry E. Vest
Vice President, Government and Industry Affairs
Corporate Headquarters
Genesee & Wyoming Inc.
66 Field Point Road
Greenwich, Connecticut 06830
203-629-3722
Administrative Headquarters
Genesee & Wyoming Railroad
Services, Inc.
1200-C Scottsville Road, Suite 200
Rochester, New York 14624
585-328-8601
Genesee & Wyoming Inc. Operations
Australia Region
Genesee & Wyoming Australia Pty Ltd
320 Churchill Road
Kilburn, South Australia 5084
+61-8-8343 5455
Canada Region
Québec Gatineau Railway Inc.
/ Chemins de fer Québec-Gatineau inc.
6700, Av. du Parc, Bureau 110
Montréal, Québec H2V 4H9
Canada
514-948-6999
Huron Central Railway Inc.
30 Oakland Avenue
Sault Ste. Marie, Ontario P6A 2T3
Canada
705-254-4511
St. Lawrence & Atlantic
Railroad Company
415 Rodman Road
Auburn, Maine 04210
207-782-5680
St. Lawrence & Atlantic Railroad
(Québec) Inc. / Chemin de fer
St-Laurent & Atlantique (Québec) inc.
6700, Av. du Parc, Bureau 110
Montréal, Québec H2V 4H9
Canada
514-948-6999
Illinois Region
Illinois & Midland Railroad, Inc.
1500 North Grand Avenue East
Springfield, Illinois 62702
217-788-8601
Tazewell & Peoria Railroad, Inc.
301 Wesley Road
Creve Coeur, Illinois 61610
309-694-8619
Tomahawk Railway, L.P.
301 Marinette Street
Tomahawk, Wisconsin 54487
715-453-2303
New York/
Pennsylvania Region
Buffalo & Pittsburgh Railroad, Inc.
1200-C Scottsville Road, Suite 200
Rochester, New York 14624
585-328-8601
Rochester & Southern Railroad, Inc.
1200-C Scottsville Road, Suite 200
Rochester, New York 14624
585-328-8601
Oregon Region
Portland & Western Railroad, Inc.
650 Hawthorne Avenue SE, Suite 220
Salem, Oregon 97301
503-365-7717
Rail Link Region
Rail Link, Inc.
4337 Pablo Oaks Court, Suite 200
Jacksonville, Florida 32224
904-223-1110
Commonwealth Railway, Inc.
1136 Progress Road
Suffolk, Virginia 23434
757-538-1200
First Coast Railroad Inc.
404 Gum Street
Fernandina, Florida 32034
904-261-0888
Georgia Central Railway, L.P.
186 Winge Road
Lyons, Georgia 30436
912-526-6165
Maryland Midland Railway, Inc.
40 N. Main Street
Union Bridge, Maryland 21791
410-775-7719
Riceboro Southern Railway, L.L.C.
186 Winge Road
Lyons, Georgia 30436
912-884-2935
A R Y LAN
A R Y LAN
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MID L A N
MID L A N
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York Railway Company
2790 West Market Street
York, Pennsylvania 17404
717-771-1742
Rocky Mountain Region
Utah Railway Company
4692 North 300 West, Suite 220
Provo, Utah 84604
801-221-7460
Southern Region
AN Railway, L.L.C.
190 Railroad Shop Road
Port St. Joe, Florida 32456
850-229-7411
Arkansas Louisiana & Mississippi
Railroad Company
P.O. Box 757
140 Plywood Mill Road
Crossett, Arkansas 71635
870-364-9000
Atlantic & Western Railway, L.P.
317 Chatham Street
Sanford, North Carolina 27330
919-776-7521
The Bay Line Railroad, L.L.C.
2037 Industrial Drive
Panama City, Florida 32405
850-785-4609
Chattahoochee Bay Railroad, Inc.
2037 Industrial Drive
Panama City, Florida 32405
334-792-0970
T A HOOCH
T A HOOCH
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Southern Region Continued
Chattahoochee Industrial Railroad
P.O. Box 253
Georgia Highway 370
Cedar Springs, Georgia 39832
229-793-4546
East Tennessee Railway, L.P.
132 Legion Street
Johnson City, Tennessee 37601
423-928-3721
Fordyce and Princeton R.R. Co.
P.O. Box 757
140 Plywood Mill Road
Crossett, Arkansas 71635
870-364-9000
E N T UCKY
E N T UCKY
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KWT Railway, Inc.
908 Depot Street
Paris, Tennessee 38242
731-642-7942
E R I DIA
E R I DIA
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BIG B E E
BIG B E E
Little Rock & Western Railway, L.P.
306 West Choctaw Avenue
Perry, Arkansas 72125
501-662-4878
Louisiana & Delta Railroad, Inc.
402 West Washington Street
New Iberia, Louisiana 70560
337-364-9625
Meridian & Bigbee Railroad, L.L.C.
119 22nd Avenue South
Meridian, Mississippi 39301
601-693-4351
Valdosta Railway, L.P.
200 Madison Highway
Clyattville, Georgia 31601
229-559-7984
Western Kentucky Railway, L.L.C.
4337 Pablo Oaks Court, Suite 102
Jacksonville, Florida 32224
904-223-1110
Bolivian Operations
Ferroviaria Oriental S.A.
Av. Montes final s/n
Casilla 3569
Santa Cruz de la Sierra
Bolivia
+591-3-338-7000
(The Bolivian operations are
an unconsolidated investment.)
NYSE: GWR
www.gwrr.com
Genesee & Wyoming Inc.
66 Field Point Road
Greenwich, Connecticut 06830
Phone: 203-629-3722
Fax: 203-661-4106
www.gwrr.com
NYSE: GWR