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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Commission File No. 0-20847

GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

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.

Yes       X         No            

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of the Regulations S-K 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. [ ]

Aggregate market value of Class A Common Stock and Class B Common Stock held by non-affiliates based on closing price on March 20, 2002: $271,267,740.

Shares of common stock outstanding as of the close of business on March 21, 2002:

Documents incorporated by reference and the Part of the Form 10-K into which they are incorporated are listed hereunder.

The remainder of this page is intentionally left blank.

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PART I

ITEM 1. BUSINESS.

     Genesee & Wyoming Inc. (the Registrant or the Company) is a holding company whose subsidiaries and unconsolidated affiliates own and operate short line and regional freight railroads and provide related rail services in North America, South America and Australia. The Company, through its U.S. industrial switching subsidiary, also provides railroad switching and related services to United States industrial companies with extensive railroad facilities within their complexes. The Company’s predecessor, Genesee and Wyoming Railroad Company, was founded in 1899 by E.L. Fuller and his partners. In 1977, when Mortimer B. Fuller, III purchased a controlling interest in the Company and became its Chief Executive Officer, the Company was dependent on a single commodity, salt, produced by a single customer. At that time, the Company generated $3.9 million in operating revenues over its 14 miles of track. In 1978, under the leadership of Mr. Fuller, the Company began a strategy of growth by acquisition that broadened its sources of rail and rail-related revenues. Initial expansion was into the railcar leasing business which was followed by 18 rail line acquisitions in the United States. Significant US acquisitions have included the Rochester & Southern Railroad, Inc. (1986), Louisiana & Delta Railroad, Inc. (1987), Buffalo & Pittsburgh Railroad, Inc. (1988), Allegheny & Eastern Railroad, Inc. (1992), Willamette & Pacific Railroad, Inc. (1993), Portland & Western Railroad, Inc. (1995), Illinois & Midland Railroad, Inc. (1996), Pittsburg & Shawmut Railroad, Inc. (1996), the rail and industrial switching business of Rail Link, Inc. (1996), and most recently, the South Buffalo Railway in October 2001, and Emons Transportation Group, Inc. in February 2002.

     The Company’s domestic growth has been complemented by expansion into privatizing rail markets worldwide. For example, in Australia:

. the Company was awarded a concession by the South Australian government to operate a railroad that provides freight services in South Australia and formed a wholly owned subsidiary, Australia Southern Railroad, or ASR, to operate that concession in 1997;

. the Company acquired the right to operate Broken Hill Proprietary Co. Ltd’s iron ore supply rail-lines and in-plant rail operations in Whyalla, South Australia in 1999;

. the Company, through its recently formed joint venture, Australian Railroad Group Pty. Ltd. (ARG), completed the acquisition of Westrail Freight from the government of Western Australia in December 2000. ARG is a joint venture owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. Westrail Freight was composed of the freight operations of the formerly state-owned railroad of Western Australia.

. the Company acquired a 2.6% equity interest in the Asia Pacific Transport Consortium (APTC), a consortium that obtained the necessary financing to build, own, and operate an 885-mile rail line from Alice Springs to Darwin in the Northern Territory of Australia. The Company contributed its interest in APTC to ARG in April 2001.

     As a result of these acquisitions, and extensions of service to Melbourne and Sydney on the interstate system, ARG is the second largest private freight rail operator in Australia.

     In 1997, the Company formed Genesee Rail-One Inc., a joint-venture for Canadian rail acquisitions, which operates two railroads in Canada. In April 1999, the Company increased its ownership interest in Genesee Rail-One to 95% and began consolidating its operating results, and during the second quarter of 2000, the Company purchased the remaining 5% interest.

     In July 1998, the Company began serving as the operator of a mineral railroad in northern Mexico. The railroad, known as Linea Coahuila Durango, is a concession awarded by the Mexican government to two Mexican industrial firms. Late in 1999, the Company changed its relationship with Linea Coahuila to that of being a provider of technical assistance so that the Company’s management could focus on its new Mexican operation, Compania de Ferrocarriles Chiapas-Mayab, S.A. de C.V. (FCCM), a then wholly owned subsidiary. In August 1999, FCCM, was awarded a concession to operate two railways, the Chiapas line and the Mayab line, which are connected by trackage rights on the transisthmus rail line. FCCM began operations on September 1, 1999. On December 7, 2000, in conjunction with the refinancing of FCCM and its parent company, GW Servicios, S.A. de C.V. (Servicios), the International Finance Corporation invested $1.9 million of equity for a 12.7% indirect interest in FCCM, through its parent company, Servicios. The Company contributed an additional $13.1 million and maintains an 87.3% indirect ownership in FCCM.

     In November 2000, the Company acquired an indirect 21.9% equity interest in Empresa Ferroviaria Oriental, S.A. increasing its stake in Oriental to 22.6%. Oriental is a railroad serving eastern Bolivia and connecting to railroads in Argentina and Brazil. The Company previously acquired a 0.7% indirect interest in Oriental on September 30, 1999 through its 47.5% ownership interest in Latin American Rail LLC. On July 24, 2001, the Company increased its indirect equity interest in Oriental to 22.9% with an additional investment of $246,000.

INDUSTRY OVERVIEW

     According to the Association of American Railroads Railroad Facts 2000 Edition, the Company believes that there are 555 railroads in the United States operating roughly 170,000 miles of track. U.S. railroads are segmented into one of three categories based on the amount of their revenues. Class I railroads, those with over $258.5 million in revenues, represent over 90% of total rail revenues. Regional and short-line railroads operate approximately 50,000 miles of track in the United States. The primary function of these smaller railroads is to provide feeder traffic to the Class I carriers. In terms of revenue, regional and short-line railroads combined account for approximately 9% of total railroad revenue.

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     The following table shows the breakdown of railroads by classification.

Source: Association of American Railroads Railroad Facts 2000 Edition.

     The railroad industry in the United States has undergone significant change since the passage of the Staggers Rail Act of 1980, which deregulated the pricing and types of services provided by railroads. Following the Staggers Act, Class I railroads in the United States and Canada took steps to improve profitability and recapture market share. In furtherance of that goal, Class I railroads focused their management and capital resources on their long-haul core 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 shippers located on these lines. Divestment 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.

     The efforts of Class I carriers to increase efficiency also led to an increase in merger activity among long-haul railroads, such as, the acquisition of Consolidated Rail Corporation by Norfolk Southern Corp. and CSX Transportation, Inc., in 1999. Such consolidations present both risk and opportunity for the Company. On one hand, service failures resulting from poor system integration negatively impact the Company’s revenues and operating expenses. On the other hand, as efficiencies are achieved by the mergers, the Company benefits from a more fluid and efficient rail system. The Surface Transportation Board issued a 15-month moratorium on Class I rail mergers on March 17, 2000. On June 7, 2001, The Surface Transportation Board issued a new set of regulations governing Class I rail mergers that took effect on July 11, 2001.

     Although the acquisition market is competitive, the Company believes that there will continue to be opportunities to acquire rail properties in the United States and Canada from Class I railroads and from independent short-line and regional railroads. The Company also believes there may be additional acquisition opportunities in Australia, Canada, South America and other markets.

GROWTH STRATEGY

     The Company intends to continue to expand its business by:

. acquiring rail lines that are close to or contiguous with the Company’s existing regional rail systems to improve its asset utilization and reduce its operating costs;

. broadening its geographic presence by acquiring rail lines in new regions where the Company believes there are additional business development and acquisition opportunities;

. expanding its revenue base within each region it serves through focused marketing efforts and a high level of customer service; and

. improving its operating performance through the more efficient use of equipment and facilities and the reduction of overhead and operating expenses.

     Acquisition of and Investment in Rail Properties

     The Company has a disciplined acquisition and investment-driven strategy that focuses on both domestic and international opportunities. From 1985 to 1997, the Company acquired and integrated 12 acquisitions in the United States. From 1997 to 2000, the Company acquired or made investments in seven railroads internationally, including in South Australia (1997), Canada (1997), Mexico (1999), Western Australia (2000) and Bolivia (2000). On October 1, 2001, the Company acquired the South Buffalo and, on February 22, 2002, the Company acquired Emons.

The Company’s recent acquisitions and investments include:

. branch lines of U.S. and Canadian Class I railroads;

. rail lines of industrial companies, such as Bethlehem Steel and Broken Hill Proprietary Co. Ltd.;

. other regional railroads or short-line railroads; and

. the privatization of foreign government-owned rail systems, such as Westrail in Western Australia.

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     The Company seeks to expand its international and U.S. business through the selective acquisition of and investment in rail properties, both in new regions and in regions in which it currently operates. The Company’s fundamental acquisition strategy is to identify properties that have large industrial customers which will provide it with a stable revenue base and the potential to generate incremental revenues and additional customers upon implementation of a focused marketing plan. In new regions, the Company targets 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. When acquiring rail properties in its existing regions, in addition to seeking properties with large industrial customers, the Company targets contiguous rail properties where it believes there are significant opportunities to realize operating efficiencies.

     In evaluating potential acquisitions and investments, the criteria the Company considers, among others, include:

. projected risk-adjusted return on investment;

. potential for additional revenue and service improvements;

. identifiable cost savings and synergies, such as productivity and asset utilization improvements, consolidation of equipment maintenance and operational improvements;

. diversification of the Company’s overall commodity and geographic mix;

. the size of the rail operations;

. opportunities for expansion;

. revenue stability; and

. connecting carriers.

     The Company also considers acquisition opportunities that have the potential to enable its railroads to provide better or more cost-effective service to major shippers or to increase and diversify the overall customer base of its railroads. The Company develops acquisition prospects through its relationships with Class I carriers and its reputation in the industry. The Company has acquired and integrated twenty one acquisitions of varying sizes and operating characteristics, including short-lines, Class I divestitures, government owned railroads, rail lines of industrial companies and an industrial switching company.

     The Company generally acquires rail properties through the purchase of stock or the purchase or lease of assets/concessions. Typically, the Company bids against other short-line and regional operators for available properties. The structure of each transaction is determined based upon economic and strategic considerations. In addition to the financial terms of the transaction, sellers consider more subjective criteria such as a prospective acquiror’s operating experience, its reputation among shippers and its ability to close a transaction and commence operations smoothly. The Company believe it has established an excellent record in each of these areas. In addition, by growing revenues on its acquired lines and providing improved service to shippers, the Company is often able to provide increased revenue to the Class I carriers that connect with its North American lines. Furthermore, the Company believes that there is a relatively small number of well capitalized operators currently bidding for properties in the international and U.S. rail markets. As a result, the Company believes that it is well positioned to capitalize on additional acquisition opportunities.

     Marketing

     The Company builds each regional railroad business on a base of major industrial customers, grows that base business through marketing efforts directed at its major customers, and creates additional revenues outside the base of major customers by attracting new customers and providing ancillary rail services. The Company believes that over the long term, the strategy of building its regions around a core of major industrial customers provides a stable revenue base and allows the Company to focus its efforts on additional growth opportunities within a region. Through implementation of its marketing strategy, the Company has increased the number of its customers so that, over time, its reliance on any one customer or commodity has been declining. The Company’s marketing strategy also seeks, whenever possible, to divert freight traffic from trucking companies to its railroads, as illustrated by the Company’s local stone shipments for a major customer in the State of Oregon where it moved traffic from road to rail to circumvent the congested I-5 corridor around Portland.

     Consistent with the Company’s decentralized management structure, its sales and marketing activity is coordinated in each region by a marketing manager. The marketing manager works closely with personnel of each of the Company’s railroads and with other department heads to develop marketing plans to increase shipments from existing customers and develop new business. The Company considers all of its employees to be customer service representatives and encourages them to initiate and maintain regular contact with shippers.

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     Because most of the traffic transported by the Company’s railroads in the United States and Canada is interchanged with Class I carriers, the Company’s marketing efforts in these areas are often aimed at enhancing its railroads’ relationships with these Class I carriers as well as shippers. The Company provides related rail services such as railcar leasing, railcar repair, switching, storage, weighing and blocking and bulk transfer, which enable Class I carriers and customers to move freight more easily and cost-effectively. For example, the Company supplies cars to its customers or its railroads when, among other things, a customer has a need which cannot be filled by cars supplied by Class I railroads or the Company has an opportunity to provide cars on a cost basis that both meets customer needs and improves the economics of a freight move to the Company. The Company actively manages its railcar and locomotive portfolio, buying, selling and leasing equipment to take advantage of changes in market value in conjunction with changes in the Company’s customer needs.

     Operations

     The Company focuses on lowering operating costs and improving asset efficiency to maximize its return on invested capital, and has historically been able to operate acquired rail lines more efficiently than the Class I railroads and governments from whom it acquired these properties. The Company typically achieves efficiencies through lowering administrative overhead, consolidating equipment and track maintenance contracts and selling unutilized assets. For example, in Australia, the Company improved the financial results of Australia Southern Railroad from an operating loss at the time of purchase in 1997 to an operating ratio of 81.1% in 1998, the first full year of the Company’s ownership.

     The Company intends to continue to improve the operating efficiency of its railroads by track rehabilitation, especially where maintenance has been deferred by the prior owner. Because of the importance of certain of the Company’s shippers to the economic stability and/or development of the regions where they are located, and because of the importance of certain of the Company’s railroads to the economic infrastructure of those regions, approximately $50.0 million in state and federal grants for track rehabilitation and service improvements have been invested in the Company’s North American rail properties since 1987.

MANAGEMENT

     The Company’s Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Executive Vice President — Corporate Development have responsibility for overall strategic and financial planning. The Chief Executive Officer oversees the Company’s global operations including its equity

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investments in Australia and South America, while the Chief Operating Officer manages operations in North America. The Company believes that through its decentralized management structure it has developed a culture that encourages employees to take initiative and responsibility which is rewarded through performance-based profit sharing and bonus programs.

RAILROAD OPERATIONS — NORTH AMERICA

     North American Customers

     The Company’s North American railroads currently serve over 680 customers. A large portion of the Company’s North American railroad operating revenue is attributable to customers operating in the electric utility, mineral and stone, paper, petroleum products, metals, farm and food products, lumber and forest products, and chemicals and plastics industries. As the Company acquires new North American railroad operations, the base of customers served continues to grow and diversify. The largest ten North American customers accounted for approximately 30%, 30% and 34% of the Company’s North American railroad revenues in 2001, 2000 and 1999, respectively. In 2001 and 2000, the Company’s largest North American customer was a coal-fired electricity generating plant owned by Dominion Resources, which accounted for approximately 7% and 6%, respectively, of the Company’s North American railroad revenues. In 1999, the Company’s largest North American customer was Commonwealth Edison, an electric utility, which accounted for approximately 15% of the Company’s North American railroad revenues (see Note 16 to Consolidated Financial Statements). The Company typically ships freight pursuant to transportation contracts among the Company, its connecting carriers and the shipper. These contracts are in accordance with industry norms and vary in duration from one to seven years.

     North American Railroad Commodities

     The Company’s North American railroads transport a wide variety of commodities for their customers. Some of the Company’s railroads have a diversified commodity mix while others transport one or two principal commodities. In 2001, coal, coke and ores and minerals and stone were the two largest commodity groups transported by the Company’s North American railroads, constituting 21.6% and 15.0%, respectively, of total North American revenues (see Item 7. of this Report under the heading “Results of Operations — Year Ended December 31, 2001 Compared to Year Ended December 31, 2000”), and 33.1% and 11.2%, respectively, of total North American carloads. The following table compares North American freight revenues, carloads and average freight revenues per carload for the years ended December 31, 2001 and 2000:

North American Freight Revenues and Carloads Comparison by Commodity Group
Years Ended December 31, 2001 and 2000
(dollars in thousands, except average per carload)

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     Coal, coke and ores consists primarily of shipments of coal to utilities and industrial customers.

     Pulp and paper consists primarily of inbound shipments of pulp and outbound shipments of kraft and fine papers.

     Minerals and stone consists primarily of cement, gravel and stone used in construction, and salt used in highway ice control.

     Metals consists primarily of scrap metal, finished steel products and coated pipe.

     Farm and food products consists primarily of sugar, molasses, rice and other grains and fertilizer.

     Petroleum products consists primarily of fuel oil and crude oil.

     Lumber and forest products consists primarily of finished lumber used in construction, particleboard used in furniture manufacturing, and wood chips and pulpwood used in paper manufacturing.

     Chemicals consists primarily of various chemicals used in manufacturing.

     Autos and auto parts consists primarily of finished automobiles and stamped auto parts.

     North American Railroad Employees

     As of December 31, 2001, the Company’s North American railroads had approximately 1,250 full-time employees. Of this total, approximately 560 are members of national labor organizations. The Company’s North American railroads have 14 contracts with these national labor organizations which have expiration dates ranging to 2005. The Company has also entered into collective bargaining agreements with an additional 58 employees who represent themselves, which have expiration dates ranging to 2004. The Company believes that its relationship with its employees is good.

RAILROAD OPERATIONS — AUSTRALIA (Equity Accounting)

     On December 16, 2000, the Company, through its recently formed joint venture, ARG, completed the acquisition of Westrail Freight from the government of Western Australia. ARG is a joint venture owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. Westrail Freight is composed of the freight operations of the formerly state-owned railroad of Western Australia.

     To complete the acquisition, the Company contributed (1) its formerly wholly owned subsidiary, Australia Southern Railroad; (2) its 2.6% interest in the Asia Pacific Transport Consortium, a consortium selected to construct and operate the Alice Springs to Darwin railway line in the Northern Territory of Australia; and (3) $21.4 million in cash. The Company accounts for its 50% ownership in ARG under the equity method of accounting and therefore deconsolidated ASR from its consolidated financial statements as of December 17, 2000.

Australian Railroad Customers

     ARG currently serves over 50 customers. A large portion of ARG’s railroad operating revenue is attributable to customers operating in the grain, ores and minerals, and alumina industries. ARG’s largest ten customers accounted for

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approximately 66.6% of its revenues for the year ended December 31, 2001. ARG’s largest customer in South Australia and Western Australia, the Australian Wheat Board, accounted for 22.0% of its operating revenue for the year ended December 31, 2001. ARG typically ships freight under transportation contracts between ARG and the shipper. The terms of these contracts vary from customer to customer.

Australian Railroad Commodities

     ARG’s railroads transport a wide variety of commodities for its customers. For the year ended December 31, 2001, grain, other ores and minerals, iron ore, alumina and hook and pull (haulage) represented 30.2%, 23.4%, 12.5%, 9.3% and 6.4% of freight revenues, respectively, and 20.2%, 12.0%, 18.8%, 17.1% and 5.2% of ARG’s total carloads, respectively.

     The following table provides ARG’s freight revenues, carloads and average freight revenues per carload for the year ended December 31, 2001.

AUSTRALIAN RAILROAD GROUP REVENUES AND CARLOADS BY COMMODITY GROUP

Year Ended
December 31, 2001
(dollars in thousands, except average per carload)

Australian Railroad Employees

     As of December 31, 2001, ARG had approximately 1,093 full-time employees. Of this total, approximately 35% are members of labor unions. In South Australia, ARG has one collective bargaining agreement that expires in September 2004. In Western Australia, ARG is currently negotiating with its employees and union representatives to reach new agreements.

U.S. INDUSTRIAL SWITCHING OPERATIONS

     U.S. industrial switching operations generate non-freight revenues primarily by providing freight car switching and related rail services such as railcar leasing, railcar repair and storage to industrial companies with extensive railroad facilities within their complexes. The Company’s U.S. industrial switching operation serves 26 customers in 9 states. These

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customers are primarily in the chemicals, paper, grain, mining and power generation industries. The provision of the service generally involves providing a work force and locomotives at the customer’s facility and tailoring the service level to the switching requirements of the site. As of December 31, 2001, the Company’s U.S. industrial switching operations had approximately 236 employees. The Company believes that its relationship with its employees is good.

SAFETY

     The Company’s safety program involves all employees at all levels of the company. Safety focuses on the prevention of accidents/injuries, and the creation of a safety culture within the organization. The Senior Vice President of each region is accountable for the results of the program, and each region has an officer responsible for day-to-day program administration. Line supervisors have direct responsibility for the safety and training of their personnel.

     The Company maintains a corporate-wide safety policy facilitated by the Vice President and Chief Safety Officer. A Compliance Officer and a Safety Director are assigned line responsibilities and report to the Vice President and Chief Safety Officer. The Company’s safety program allows each of its subsidiaries the flexibility to develop safety rules and procedures based on local requirements or statutes. The Company works continuously to comply fully with all federal, state and local government regulations. Operating personnel are trained and certified in train operations, the transportation of hazardous materials, safety and operating rules, and governmental rules and regulations.

     The Company also participates in governmental and industry sponsored safety programs. For example, members of the Company’s management serve or have served on the Board of Directors of Operation Lifesaver (the national grade crossing awareness program), the New Program Committee of Operation Lifesaver, and the American Short Line & Regional Railroad Association Safety Committee.

     In addition, the Company has created two working safety groups. The first group, the Focus Team, consisting of the general managers and the Vice President and Chief Safety Officer, develops the corporate safety strategy and ensures consistency of implementation for policies within the organization. The second group, the GWI Team, includes safety representatives of each region, a general manager as team leader, and the Vice President and Chief Safety Officer as the facilitator working together to refine the Company’s safety program. Each team coordinates with the Company’s subsidiaries to ensure compliance with and implementation of all safety rules and regulations. The objective of both teams is to sponsor the Company’s initiatives to make it the safest carrier with regard to its employees, customers, assets, the public and the environment.

INSURANCE

     The Company has obtained 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 ranging from $50,000 to $400,000 per occurrence. In addition, the Company maintains excess liability policies which provide supplemental coverage for losses in excess of primary policy limits. With respect to the transportation of hazardous commodities, the Company’s liability policy covers sudden releases of hazardous materials, including expenses related to evacuation. Personal injuries associated with grade crossing accidents are also covered under the Company’s liability policies. The Company also maintains property damage

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coverage, subject to a standard pollution sub-limit and self-insured retentions ranging from $10,000 to $250,000.

     Employees of the Company’s United States railroads are covered by the Federal Employers’ Liability Act (FELA), a fault-based system under which injuries and deaths of railroad employees are settled by negotiation or litigation based on the comparative negligence of the employee and the employer. FELA-related claims are covered under the Company’s liability insurance policies. Employees of the Company’s industrial switching business are covered under workers’ compensation policies.

     The Company believes its insurance coverage is adequate in light of its experience and the experience of the rail industry. However, there can be no assurance as to the adequacy, availability, or cost of insurance in the future.

COMPETITION

     In acquiring rail properties, the Company competes with other short line and regional railroad operators, some of which are larger and have greater financial resources than the Company. Competition for rail properties is based primarily upon price, operating history and financing capability. The Company believes its established reputation as a successful acquiror and operator of short line rail properties, in combination with its managerial and financial resources, effectively positions it to take advantage of acquisition opportunities.

     Each of the Company’s railroads is typically the only rail carrier directly serving its customers; however, the Company’s railroads compete directly with other modes of transportation, principally motor carriers and, to a lesser extent, ship and barge operators. The extent of this competition varies significantly among the Company’s railroads. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided, for an origin-to-destination transportation service. To the extent other carriers are involved in transporting a shipment, the Company cannot control the cost and quality of such service. Cost reductions achieved by major rail carriers over the past several years have generally improved their ability to compete with alternate modes of transportation.

REGULATION

United States

     The Company’s U.S. railroads are subject to regulation by:

     . The Surface Transportation Board;

     . the Federal Railroad Administration;

     . state departments of transportation; and

     . some state and local regulatory agencies.

     The Surface Transportation Board is the successor to certain regulatory functions previously administered by the Interstate Commerce Commission. Established by the ICC Termination Act of 1995, The Surface Transportation Board has jurisdiction over, among other things, service levels and compensation of carriers for use of their railcars by other carriers. It also must authorize 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, it may condition such authorization upon the payment of severance benefits to affected employees. The Surface Transportation Board may review rail carrier pricing only in response to a complaint concerning rates charged for transportation where there is an absence of effective competition. The Federal Railroad Administration has jurisdiction over safety and railroad equipment standards and also assists in coordinating projects for railroad route simplification.

     In 1980, the Staggers Rail Act fundamentally changed U.S. federal regulatory policy by emphasizing the promotion of revenue adequacy, the opportunity to earn revenues sufficient to cover costs and attract capital and allowing competition to determine to a greater extent rail prices and route and service options. The ICC Termination Act of 1995 continues the trend towards limiting regulation of rail prices. As a result of these changes in legislative policy, the railroad industry’s rate structure has evolved from a system of interrelated prices that applied over different routes between the same points to a combination of market based prices that are now subject to limited regulatory constraints. While U.S. federal regulation of rail prices has been significantly curtailed, U.S. federal regulation of services continues to affect cost and competitiveness in the railroad industry.

Australia

     In Australia, regulation of rail is generally governed by State legislation and administered by State regulatory agencies. ARG’s assets are therefore subject to the regulatory regimes governing safety and access in each of Western Australia, South Australia, the Northern Territory, Victoria and New South Wales. In addition, with respect to access to rail infrastructure, ARG’s Australian assets, except its interest in the Alice Springs to Darwin railway line, which is subject only to an individual access regime, are subject to the national access regime under Part IIIA of the Trade Practices Act 1974 (Cwth), which is administered by the Australian Competition and Consumer Commission.

     There are a number of regulators who are responsible for the regulation of rail safety and accreditation. Similarly, there are a number of regulators who are responsible for administering the access regimes of each State. In addition, as noted above, the Australian Competition and Consumer Commission administers the national access regime under Part IIIA of the Trade Practices Act 1974 (Cwth). The State and the national access regimes operate concurrently until such time as a State regime is certified under Part IIIA of the Trade Practices Act 1974 (Cwth) as being “effective”. Such certification precludes the operation of Part IIIA with respect to the services provided via the infrastructure to which the relevant certified regime relates. Currently, the only regime which has been certified as effective is the access regime governing the Alice Springs to Darwin track.

     The State access regimes cover the intrastate rail network of the relevant State. The interstate network is governed by Part IIIA of the Trade Practices Act 1974 (Cwth). The Australian Rail Track Corporation, a corporation owned by the Commonwealth Government of Australia formed as a result of an agreement among the States and the Commonwealth, has submitted an undertaking to the Australian Competition and Consumer Commission which is intended to operate as the exclusive access regime for the interstate network while it is in force. On November 22, 2001, the Australian Competition and Consumer Commission issued a draft determination accepting the undertaking. A final decision is anticipated in March 2002, when it is expected that the undertaking will become effective as the governing access regime for the interstate network. ARG’s interstate network covered by the undertaking is the standard gauge tracks linking Wodonga (in Victoria), Melbourne (in Victoria), Adelaide (in South Australia), Broken Hill (in New South Wales), Tarcoola (in South Australia) and Kalgoorlie (in Western Australia). 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. Those parts of this larger standard gauge network which are not covered by the interstate network are governed by the various State access regimes and the national access regime.

     The State rail access regimes and the interstate rail access regime are similar in that terms and conditions of access are in all cases determined through a process of negotiation and arbitration. However, there is variation across jurisdictions as to the independence of the arbitrator and the scope to appeal the arbitrator’s decisions. The regimes also differ in the pricing principles underpinning the negotiate-arbitrate approach to access charges. The Western Australian, South Australian, Victorian, New South Wales and interstate rail access regimes each adopt “floor/ceiling” limits to access pricing, although the cost and valuation basis for calculation of the limits can vary between jurisdictions. The access regime governing the Alice Springs to Darwin track adopts a benchmark approach against competing non-rail freight as well as a “floor/ceiling” limit for the determination of access charges.

Mexico

     In Mexico, railways are considered to be a priority area for the national economy, thus, they are considered to be national assets that may only be operated by private individuals or entities by means of a concession or authorization, depending on the activity, granted by the Federal Government through the Ministry of Communications and Transport. Since it is a priority area for the national economy, railroad services and their providers are subject to regulation by different branches of the executive branch of government. With respect to the rendering of the service itself, railroads are subject to Regulatory Law for Railroad Service and its Regulations, and the Ministry of Communications and Transport is the federal authority in charge of overseeing their compliance by all railroad service providers. The Ministry of Communications and Transport has jurisdiction over, among others:

     . the preparation and enforcement of policies and programs related to the railroad system;

     . the granting of the corresponding concessions;

     . regulating the concessions and resolving any issues regarding amendments or terminations to the concessions;

     . regulation of tariff application; and

     . if applicable, applying the corresponding sanctions when operators have not complied with the regulations or the terms of the
       corresponding concession.

     With respect to the service provider itself, it is subject to, in addition to the Regulatory Law for Railroad Service and its Regulations mentioned above, the Mexican Foreign Investments Law and the Federal Law of Economic Competition or Antitrust Law. The Mexican Foreign Investments Law regulates the percentage of foreign investment an entity may have when engaged in specific activities. For railroads, the Mexican Foreign Investments Law s