UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2013, or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 333-174112

Florida East Coast Holdings Corp.

(Exact name of registrant as specified in its charter)

Florida		27-4591805
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

7411 Fullerton Street, Suite 100, Jacksonville, Florida 32256

(Address of Principal Executive Offices) (Zip Code)

(800) 342-1131

(Registrant’s Telephone Number, Including Area Code)

(Former name, former address and former fiscal year, if changed since last report)

N/A

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 o No o *

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

As of July 30, 2013 there were 252,281 shares of the Registrant’s common stock outstanding.

* The registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), but files reports with the Securities and Exchange Commission voluntarily, as required by the terms of its indentures. The registrant has filed all Exchange Act reports for the preceding 12 months.

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EXPLANATORY NOTE

Unless the context indicates otherwise, the words (i) “Company,” “we,” “our,” and “us” refer collectively to Florida East Coast Holdings Corp. and its consolidated subsidiaries (including FECR Corp.), (ii) “FECR Corp.” refers to Florida East Coast Railway Corp. and its consolidated subsidiaries and predecessor entity, and (iii) “Holdings Corp.” refers to Florida East Coast Holdings Corp. on a stand-alone basis.

Holdings Corp. was incorporated on January 10, 2011. In January 2011, all of the equity interests in FECR Corp. were transferred from FECR Rail LLC to Holdings Corp., whereby Holdings Corp. became the direct parent of FECR Corp. Holdings Corp. is a holding company and has no direct operations or material assets other than its wholly owned interest in FECR Corp. All of Holdings Corp.’s operations are conducted through its subsidiaries. The only material differences between Holdings Corp. and FECR Corp. are the Senior PIK Toggle Notes issued by Holdings Corp. and its related accounts, including deferred financing costs, amortization, payment of interest and payment of taxes. Reclassifications in common stock and additional-paid-in capital have been made to the consolidated financial statements included in this Quarterly Report to reflect the capital structure of Holdings Corp. for the three and six months ended June 30, 2013. Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation. Pursuant to the indenture governing FECR Corp.’s outstanding notes, FECR Corp. is permitted to satisfy its reporting obligations under the indenture with respect to financial information relating to FECR Corp. by furnishing financial information relating to any direct or indirect parent company of FECR Corp. which becomes a guarantor of the notes on the terms and conditions set forth in the indenture. Holdings Corp. became a guarantor of FECR Corp.’s outstanding notes on March 14, 2012.

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FLORIDA EAST COAST HOLDINGS CORP.

INDEX TO FORM 10-Q

QUARTER ENDED JUNE 30, 2013

			Page
Part I.	Financial Information
	Item 1.	Financial Statements and Notes to Consolidated Financial Statements	4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29
	Item 4.	Controls and Procedures	30

Part II.	Other Information
	Item 1.	Legal Proceedings	31
	Item 1A.	Risk Factors	32
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
	Item 3.	Defaults Upon Senior Securities	33
	Item 4.	Mine Safety Disclosures	33
	Item 5.	Other Information	33
	Item 6.	Exhibits	34
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands except for share amounts)

	June 30, 2013			December 31, 2012
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	51,068		$	40,400
Restricted cash	126			126
Accounts receivable, net	39,733			34,380
Materials and supplies	7,353			3,574
Deferred income taxes	2,374			2,374
Prepaid and other current assets	3,959			2,477
Assets held for sale	—			1,839
Total current assets	104,613			85,170
Noncurrent assets:
Property, plant and equipment, less accumulated depreciation	773,633			772,429
Investments in non-affiliates	74			74
Intangible assets, less accumulated amortization	192			220
Other assets	14,068			15,104
Total noncurrent assets	787,967			787,827
Total assets	$	892,580		$	872,997
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	47,966		$	42,193
Taxes payable	3,691			326
Deferred revenue	934			906
Other current liabilities	1,491			1,035
Total current liabilities	54,082			44,460
Deferred income taxes	25,554			24,838
Long-term debt	634,978			625,969
Other long-term liabilities	6,541			12,534
Total liabilities	721,155			707,801
Stockholders’ equity:
Series A Perpetual Preferred Stock, $0.01 par value, 1,000,000 shares authorized, 24,151 shares issued and outstanding as of June 30, 2013 and as of December 31, 2012	—			—
Series B Perpetual Preferred Stock, $0.01 par value, 150,000 shares authorized and none outstanding as of June 30, 2013 and December 31, 2012	—			—
Common stock, $0.01 par value, 1,000,000 shares authorized; 252,281 shares issued and outstanding as of June 30, 2013 and 252,106 shares issued and outstanding as of December 31, 2012	3			3
Additional paid-in capital	286,931			286,085
Accumulated deficit	(114,428		)	(119,770		)
Accumulated other comprehensive loss	(1,081		)	(1,122		)
Total stockholders’ equity	171,425			165,196
Total liabilities and stockholders’ equity	$	892,580		$	872,997

The accompanying notes are an integral part of the Consolidated Financial Statements.

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FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Operating revenue	$	66,904		$	58,499		$	135,670		$	115,844
Operating expenses:
Labor and benefits	13,618			11,922			26,657			24,153
Purchased services	12,409			11,401			25,147			20,437
Fuel	7,739			7,178			16,150			15,069
Depreciation and amortization	6,493			6,700			13,155			13,364
Equipment rents	3,898			3,187			7,916			6,334
Other	4,637			6,344			8,193			12,634
Total operating expenses	48,794			46,732			97,218			91,991
Operating income	18,110			11,767			38,452			23,853
Interest expense, net of interest income	(14,881		)	(14,371		)	(29,846		)	(28,986		)
Other income	4			77			55			79
Income (loss) before income taxes	3,233			(2,527		)	8,661			(5,054		)
Provision (benefit) for income taxes	(526		)	1,563			716			3,535
Net income (loss)	$	3,759		$	(4,090	)	$	7,945		$	(8,589	)

Comprehensive income (loss)	$	3,780		$	(4,076	)	$	7,986		$	(8,565	)

The accompanying notes are an integral part of the Consolidated Financial Statements.

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FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Six Months Ended June 30,
	2013			2012
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)	$	7,945		$	(8,589	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	13,155			13,364
Amortization of debt financing fees	1,784			1,762
Share based compensation costs	845			1,105
Deferred taxes	716			3,535
Interest paid in kind	1,432			7,701
Other	22			(94		)
Changes in operating assets and liabilities:
Change in restricted cash	—			(1		)
Accounts receivable	(4,538		)	(1,435		)
Prepaids and other current assets	(1,482		)	(704		)
Materials and supplies	(3,779		)	(2,238		)
Other assets	(596		)	203
Accounts payable and accrued expenses	(1,363		)	(3,923		)
Accrued interest	7,136			—
Taxes payable	3,365			(3,316		)
Deferred revenue	28			(1,358		)
Other current liabilities	456			345
Other long-term liabilities	1,209			245
Net cash provided by operating activities	26,335			6,602
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of properties and equipment	(14,455		)	(10,060		)
Proceeds from disposition of assets	1,126			379
Net cash used in investing activities	(13,329		)	(9,681		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common shares outstanding	(2,603		)	(535		)
Proceeds from issuance of long-term debt	265			—
Financing costs	—			(36		)
Net cash used in financing activities	(2,338		)	(571		)
Net increase (decrease) in cash and cash equivalents	10,668			(3,650		)
Cash and cash equivalents at beginning of period	40,400			30,905
Cash and cash equivalents at end of period	$	51,068		$	27,255

Supplemental cash flow information:
Cash paid for interest	$	19,297		$	19,277

The accompanying notes are an integral part of the Consolidated Financial Statements.

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FLORIDA EAST COAST HOLDINGS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of the Business and Basis of Presentation

The accompanying Consolidated Financial Statements of Florida East Coast Holdings Corp. and its subsidiaries (the “Company” or “Holdings Corp.”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s rail transportation operations are conducted through its direct wholly owned subsidiary Florida East Coast Railway Corp. (“FECR Corp.”), and its indirect wholly owned subsidiaries, Florida East Coast Railway, L.L.C. and FEC Highway Services, L.L.C. (collectively, the “Railway”). The Railway operates a premiere Class II railroad along 351 miles of mainline track between Jacksonville and Miami, Florida, serving some of the most densely populated areas of Florida. Additionally, the Railway owns and operates approximately 270 miles of branch, switching and other secondary track and 115 miles of yard track, all within Florida. The Railway has the only private coastal right-of-way between Jacksonville and Miami and is the exclusive rail-service provider to the Port of Palm Beach, Port Everglades (Fort Lauderdale), and the Port of Miami.

Fortress Acquisition

On July 26, 2007, private equity funds managed by affiliates of Fortress Investment Group LLC (collectively, “Fortress”) acquired all of the outstanding stock of Florida East Coast Industries, Inc. (“FECI”), a then publicly held company. As part of the acquisition of FECI (herein referred to as the “Fortress Acquisition”), Fortress assumed a portion of FECI’s long-term debt and repaid the remaining outstanding debt and took FECI private.

Formation of Florida East Coast Holdings Corp.

Florida East Coast Holdings Corp., was incorporated in Florida on January 10, 2011 to hold the investments of the Company.

On January 25, 2011, FECR Rail LLC contributed all of its holdings of FECR Corp.’s common and preferred shares in exchange for 250,555 newly issued common shares of Holdings Corp. As a result, FECR Rail LLC became the immediate parent of Holdings Corp., whereas Holdings Corp. became the immediate parent of FECR Corp.

The following is a summary of entities included in the Consolidated Financial Statements:

· Florida East Coast Holdings Corp. (a wholly owned subsidiary of FECR Rail LLC)

· Florida East Coast Railway Corp. (also known as “Railway”) (a wholly owned subsidiary of Florida East Coast Holdings Corp.):

· Florida East Coast Railway, L.L.C., and its subsidiaries;

· FEC Highway Services, L.L.C.

FEC PEVT L.L.C. and FEC PEVT Corporation

On September 26, 2012, the Company, through its wholly owned subsidiaries, FEC PEVT, L.L.C., as borrower, and Florida East Coast Railway, L.L.C., as guarantor, entered into a State Infrastructure Bank loan (the “SIB Loan”) with the Florida Department of Transportation (“FDOT”), as lender (see additional information in Note 6). In conjunction with the SIB Loan, the Company formed FEC PEVT Corporation and FEC PEVT L.L.C. FEC PEVT L.L.C. is owned by Florida East Coast Railway, L.L.C. (99%) and FEC PEVT Corporation (1%). FEC PEVT Corporation is a wholly owned subsidiary of Florida East Coast Railway Corp. The newly formed entities are included in the Consolidated Financial Statements as discussed above.

2. Summary of Significant Accounting Policies

Principles of Consolidated Financial Statements

The accompanying Consolidated Financial Statements of the Company include all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Consolidated Financial Statements include all adjustments which are necessary for a fair presentation of the results for interim periods. All such adjustments are of a normal recurring nature.

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Use of Estimates

The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Disclosures about Fair Value of Financial Instruments

ASC 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. Various inputs are considered when determining the fair values of financial instruments. These inputs are summarized below:

· Level 1 — observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets

· Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)

· Level 3 — significant unobservable inputs (including the Company’s own assumptions in determining the fair value of financial instruments)

The following methods and assumptions were used to estimate the fair value of each class of financial instruments held by the Company:

· Current assets: cash and cash equivalents, as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments (Level 1 inputs).

· Long-term debt: the fair value of the Company’s Senior Secured Notes and Senior Payment in Kind Toggle Notes (the “Senior PIK Toggle Notes”) is based on secondary market indicators (quoted market prices) at the date of measurement (Level 2 inputs). The fair value of the SIB Loan is based on observable market inputs (Level 1 inputs) due to the drawdown occurring within the three months ended June 30, 2013.

The carrying amounts and estimated fair values of the Company’s financial instruments were as follows (in thousands):

	June 30, 2013
	Carrying Amount		Fair Value
Cash and cash equivalents	$	51,068	$	51,068
Senior Secured Notes	475,000		502,550
Senior PIK Toggle Notes	159,713		168,497
SIB Loan	265		265

The Company had no Level 3 inputs as of June 30, 2013.

Accumulated Comprehensive Loss

Comprehensive loss is the changes in equity of an enterprise except those resulting from shareholder transactions. Accumulated other comprehensive loss consists of the following (in thousands):

	June 30,			December 31,
	2013			2012
Actuarial loss associated with pension plan	$	(1,077	)	$	(1,118	)
Unrealized loss on marketable securities	(4		)	(4		)
Accumulated other comprehensive loss	$	(1,081	)	$	(1,122	)

3. Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update to the Comprehensive Income Topic in the Accounting Standards Codifications (“ASC”). This update requires separate presentation of the components that are reclassified out of accumulated other comprehensive income either on the face of the financial statements or in

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the notes to the financial statements. This update also requires companies to disclose the income statement line items impacted by any significant reclassifications, such as the amortization of pension adjustments. These items are required for both interim and annual reporting for public companies and became effective for the Company beginning with the Quarterly Report on Form 10-Q for the three month period ending March 31, 2013.

4. Related-Party Transactions

Management and facility and equipment rents

The Company incurred net charges of $0.4 million and $0.4 million for facility rents to affiliates of FECI for the three months ended June 30, 2013 and 2012, respectively. During the six months ended June 30, 2013 and 2012, the Company incurred net charges of $0.9 million and $0.8 million, respectively for facility rents to affiliates of FECI. In addition, the Company allocated net proceeds of zero and $0.4 million for management services related to our right-of-way and for FECI’s passenger rail program for the three months ended June 30, 2013 and 2012, respectively. The Company allocated net proceeds of $0.1 million and $0.7 million for management services related to our right-of-way and for FECI’s passenger rail program for the six months ended June 30, 2013 and 2012, respectively. As of June 30, 2013 and December 31, 2012, the Company did not have an outstanding net receivable or payable from or to FECI.

In addition, the Company allocated net proceeds of zero and $0.4 million for management services, and facility and equipment rents to affiliates of RailAmerica, Inc. (“RailAmerica”) for the three months ended June 30, 2013, and 2012, respectively. During the six months ended June 30, 2013 and 2012, the Company allocated net proceeds of zero and $0.7 million, respectively. Subsequent to October 1, 2012, RailAmerica is no longer considered a related party, due to a change in ownership.

Effective June 1, 2011, the Company entered into an agreement with RailAmerica’s wholly-owned subsidiary, Atlas Road Construction, L.L.C., to provide engineering and construction services for the Port Miami project (see Note 11). The Company incurred net charges of zero and $0.2 million for the three months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2013 and 2012, the Company incurred net charges of zero and $2.2 million, respectively.

The Company rents chassis equipment for ordinary business operations from TRAC Intermodal, an entity indirectly owned by funds managed by affiliates of Fortress. These rents are based on current market rates for similar assets. During the three months ended June 30, 2013 and 2012, the Company incurred net charges of $0.2 million and $0.1 million, respectively. For the six months ended June 30, 2013 and 2012, the Company incurred net charges of $0.5 million and $0.3 million, respectively. As of June 30, 2013 and December 31, 2012, the Company had an outstanding payable of $0.2 million and $0.1 million, respectively.

Lease of FECI’s rail yard

On January 24, 2011, the Company entered into an amended and restated rail yard lease, which, among other things: extends the date to vacate to December 31, 2035 (unless the Company elects not to renew the lease); commencing on January 1, 2011, provides for an annual rental fee of $4.5 million a year (subject to a 2.5% annual increase); provides the Company the right to purchase certain land from FECI at a mutually determined fair market value; provides FECI with the right to relocate the Company (at its expense) from such land to comparable property with competitive rental rates. The lease is cancellable by the Company after five years with a two year notice requirement. The Railway paid $1.3 million and $1.3 million for the rail yard base rent for the three months ended June 30, 2013 and 2012, respectively. During the six months ended June 30, 2013 and 2012, the Company paid $2.5 million and $2.5 million, respectively, in rail yard base rent.

5. Income Taxes

It is more likely than not that a portion of the net operating loss carryforwards will expire unused. The Company recorded an income tax benefit of $0.5 million and an expense of $1.6 million, for the three months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2013 and 2012, the Company recorded income tax expense of $0.7 million and $3.5 million, respectively. The difference between the statutory rate and the effective rate is primarily driven by the change in the valuation allowance for the three and six month periods ending June 30, 2013 and 2012, respectively.

A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company established a valuation allowance of $48.2 million and $52.5 million as of June 30, 2013 and December 31, 2012, respectively, to reduce deferred tax assets to their expected realizable value.

The Company has net operating loss carryforwards as of June 30, 2013, as follows:

· U. S.—$282.6 million (expiration periods: 2029—2035)

· Florida—$293.9 million (expiration periods: 2029—2035)

The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes. As of June 30, 2013, the Company did not believe that it had any uncertain tax positions. As of December 31, 2012, the U.S. and Florida

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taxing jurisdiction remains open to examination for the years 2011, 2010, and 2009.

6. Long-Term Debt

Debt consisted of the following:

	June 30, 2013		December 31, 2012
	(in thousands)

Senior Secured Notes	$	475,000	$	475,000
Senior PIK Toggle Notes (net of original discount of $1,624)	159,713		150,969
SIB Loan	265		—

Total debt	634,978		625,969
Less: Current maturities	—		—
Long-term debt, less current maturities	$	634,978	$	625,969

Interest expense was $10.5 million on the 8 1/8% Senior Secured Notes (the “Senior Secured Notes” or “8 1/8% Notes”) and $4.4 million on the Senior PIK Toggle Notes for the three months ended June 30, 2013. Interest expense was $21.0 million on the Senior Secured Notes and $8.8 million on the Senior PIK Toggle Notes for the six months ended June 30, 2013. Interest expense was $10.2 million on the Senior Secured Notes and $4.2 million on the Senior PIK Toggle Notes for the three months ended June 30, 2012. Interest expense was $20.6 million on the Senior Secured Notes and $8.4 million on the Senior PIK Toggle Notes for the six months ended June 30, 2012.

In connection with the issuance of the Senior Secured Notes, FECR Corp. and certain of its subsidiaries also entered into the Asset-Based Lending (“ABL”) Facility that matures on January 25, 2015. Availability on the ABL Facility as of June 30, 2013 was $27.0 million available for cash withdrawal, plus an additional $3.0 million standby letter of credit.

The Senior Secured Notes are secured by first-priority liens on substantially all of the tangible and intangible assets of FECR Corp. and its subsidiary guarantors’ (other than the ABL collateral securing the ABL Facility and other than the collateral securing the SIB Loan) and a second-priority lien on ABL collateral and SIB Loan collateral. The guarantors are defined primarily as existing and future wholly owned domestic restricted subsidiaries. FECR Corp. may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes issued during any 12-month period commencing on the issue date and ending on the third anniversary thereof at a price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. FECR Corp. may also redeem some or all of the Senior Secured Notes at any time before February, 2014 at a price equal to 100% of the aggregate principal amount thereof plus a make-whole premium. In addition, prior to February 1, 2014, FECR Corp. may redeem up to 35% of the Senior Secured Notes at a redemption price of 108.125% of the aggregate principal amount thereof with the proceeds from an equity offering. Subsequent to February 1, 2014, FECR Corp. may redeem the Senior Secured Notes at 104.063% of their principal amount. The premium then reduces to 102.031% commencing on February 1, 2015 and then 100% on February 1, 2016 and thereafter.

The ABL Facility and indenture governing the Senior Secured Notes contain various covenants and restrictions that limit FECR Corp. and its restricted subsidiaries’ ability to incur additional indebtedness, pay dividends, make certain investments, sell or transfer certain assets, create liens, designate subsidiaries as unrestricted subsidiaries, consolidate, merge or sell substantially all the assets, and enter into certain transactions with affiliates. It is anticipated that proceeds from any future borrowings will be used for general corporate purposes.

Shareholder Contribution of FECR Rail LLC

In 2011, FECR Rail LLC contributed an aggregate $16.0 million to the Company.

The proceeds of the sale of the Series B Perpetual Preferred Stock and $15.0 million of the FECR Rail LLC contribution to the Company were further contributed to FECR Corp. This contribution of $140.0 million together with the proceeds of the issuance of the Senior Secured Notes were used to repay an amount outstanding of approximately $601.2 million under the former credit facility owed by FECR Corp., to pay certain fees and expenses incurred in connection with the offering of the 8 1/8% Notes, and for general corporate purposes.

Senior PIK Toggle Notes

On February 11, 2011, Holdings Corp. sold $130.0 million of 10 1/2 / 11 1/4% Senior PIK Toggle Notes due 2017 in a private offering, for net proceeds of $127.7 million. The Senior PIK Toggle Notes are senior unsecured obligations that are not guaranteed by any of Holdings Corp.’s subsidiaries.

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Holdings Corp. may redeem the notes in whole or in part at a redemption price of 107.5%, 105%, 102.5%, and 100%, plus accrued and unpaid interest thereon for the subsequent periods after August 1, 2012 as follows: August 1, 2012 through January 31, 2013; February 1, 2013 through January 31, 2014; February 1, 2014 through January 31, 2015; and February 1, 2015 and thereafter, respectively.

The Senior PIK Toggle Notes will pay interest semi-annually in arrears on each February 1 and August 1, commencing on August 1, 2011. Thereafter and up to February 1, 2016, Holdings Corp. may elect to pay interest on the Senior PIK Toggle Notes (1) entirely in cash at a rate of 10.5% , (2) entirely by increasing the principal amount of the note or by issuing new notes for the entire amount of the interest payment, at a rate per annum equal to the cash interest rate of 10.5% plus 75 basis points (in each case, PIK interest), or (3) 50% as cash interest and 50% as PIK interest. After February 1, 2016, interest will be payable entirely in cash.

The Company could be subject to certain interest deduction limitations if the Senior PIK Toggle Notes were treated as “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Internal Revenue Code, as amended. In order to avoid such treatment, the Company would be required to redeem for cash a portion of each Senior PIK Toggle Note then outstanding at the end of the accrual period ending August 1, 2016. The portion of a Senior PIK Toggle Note required to be redeemed is an amount equal to the excess of the accrued original issue discount as of the end of such accrual period, less the amount of interest paid in cash on or before such date, less the first-year yield (the issue price of the debt instrument multiplied by its yield to maturity). The redemption price for the portion of each Senior PIK Toggle Note so redeemed would be 100% of the principal amount of such portion plus any accrued interest on the date of redemption.

The net proceeds of the issuance of the Senior PIK Toggle Notes were used to redeem the Company’s Series B Perpetual Preferred Stock for the carrying value of $125.0 million and accrued interest of $1.1 million. As a result, none of the Series B Perpetual Preferred Stock remains issued and outstanding.

The Senior Secured Notes and Senior PIK Toggle Notes will mature in fiscal 2017.

SIB Loan

On September 26, 2012, FEC PEVT, L.L.C., as borrower, and Florida East Coast Railway, L.L.C., as guarantor, each a wholly owned subsidiary of the Company, entered into the SIB Loan with FDOT. The SIB Loan provides for a loan of $30 million to fund, in part, the costs associated with the construction of a new Florida East Coast Intermodal Container Transfer Facility (the “ICTF”) in Port Everglades, Florida, which will serve the Company’s domestic and international business segments. Proceeds from the SIB Loan will be advanced by FDOT as construction proceeds on the ICTF and when the Company requests drawdown. The Company has borrowed $0.3 million under the SIB Loan for the three and six months ended June 30, 2013. The total construction cost of the ICTF construction project is approximately $53 million, $30 million of which will be funded through the SIB Loan, $18 million of which will be from a FDOT grant (the “FDOT Grant”) and the balance of $5 million from the Company’s capital budget. The Company has been awarded the entire FDOT Grant of $18 million as of December 31, 2012.

Interest will accrue on the advanced principal amount of the SIB Loan at the rate of 3.50% per annum, compounded annually, using an actual-days-elapsed/365 day counting convention. Both principal and interest payments are payable in annual installments as follows: interest payments commence on the SIB Loan on October 1, 2013, and principal repayments commence on the SIB Loan on October 1, 2015. The SIB Loan will be amortized over 20 years.

The SIB Loan is fully and unconditionally guaranteed by the Florida East Coast Railway, L.L.C. In addition, as a condition to making the SIB Loan, FDOT required a first priority lien on certain fixtures (including rail trackage) and equipment included in the collateral securing the Senior Secured Notes. The SIB Loan specifically excludes land, rail equipment and motor vehicles from its lien. As a condition to FDOT making the first loan disbursement under the SIB Loan, FEC PEVT, L.L.C. was required to post as additional collateral through July 1, 2017, a standby letter of credit in the amount of $3.0 million payable to FDOT, as beneficiary (the “Standby Letter of Credit Collateral”). On February 1, 2013, the Company posted the Standby Letter of Credit Collateral by accessing the letter of credit line of the ABL Facility, reducing availability for cash withdrawal under the ABL Facility to $27.0 million. The SIB Loan permits FEC PEVT, L.L.C, in lieu of posting the Standby Letter of Credit Collateral, at any time upon prior notice, to either pay down the principal of the SIB Loan by $3 million or substitute cash collateral.

7. Preferred Stock

The Company has 24,151 shares of Series A Redeemable Preferred Stock (the “preferred shares”) issued and outstanding. These preferred shares are held by FECR Rail LLC. Dividends accumulate at the rate of 15% per annum, subject to limitations on distributions by the Company imposed by the terms of any financing, swap, or other agreement. The Company was able to redeem in whole or in part the preferred shares at any time.

As of June 30, 2013 and December 31, 2012, the total unpaid preferred yield was $9.9 million and $7.5 million, respectively.

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8. Share-Based Compensation

In February 2013, the Company granted 237 restricted share units (“RSUs”) with respect to shares of common stock, par value $0.01 to certain executive officers. The fair value at grant date was $0.5 million and the shares vest over a three-year term. The grant date fair value of the restricted shares is based upon the market value of the Company’s common stock as of the quarterly evaluation. Each restricted stock unit represents the right to receive one share of common stock.

The Company issued 175 net shares of common stock for the six months ended June 30, 2013 resulting from the vesting of RSU awards granted in previous fiscal years.

Exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”), for the foregoing issuances is claimed under Section 4(2) of the Act and Regulation D promulgated thereunder. The foregoing issuances were compensatory in nature and were made without cost to the recipients, other than the provision of services.

Share-based compensation expenses for the three months ended June 30, 2013 and 2012 were $0.5 million and $0.6 million, respectively. Share-based compensation expenses for the six months ended June 30, 2013 and 2012 were $0.8 million and $1.1 million, respectively.

9. Commitments and Contingencies

The Company is the defendant and plaintiff in various lawsuits resulting from its operations. In the opinion of management, appropriate provisions have been made in the Consolidated Financial Statements for the estimated liability that is probable from disposition of such matters. The Company maintains comprehensive liability insurance for bodily injury and property claims, but is self-insured or maintains a significant self-insured retention for these exposures.

In September 2006, the Florida Department of Environmental Protection (“FDEP”) notified the Company and an adjacent property owner that they had been identified as potentially responsible parties (“PRPs”) as a result of an investigation into contaminated groundwater in Fort Pierce, Florida. As of June 30, 2013, and December 31, 2012, the Company had accrued $1.5 million and $1.5 million, respectively, related to the alleged contamination. Of the $1.5 million accrued at June 30, 2013, $0.2 million is expected to be paid over the next year. FDEP and the Company agreed in April 2012 that the Company’s scope of testing is complete and the Company can initiate a pilot remediation of the property. The Company has completed the selection of a contractor and the contractor has initiated the pilot in early 2013.

In addition to the above site, the Company monitors a small number of other sites leased to others, or acquired by the Company or its subsidiaries. Based on management’s ongoing review and monitoring of these sites, and the ability to seek contribution or indemnification from the PRPs, the Company does not expect to incur material additional costs.

It is difficult to quantify future environmental costs as many issues relate to actions by third parties or changes in environmental regulations. However, based on information presently available, management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity, or results of operations of the Company.

In addition, the Company had accrued approximately $0.3 million and $0.6 million related to various other environmental incidents as of June 30, 2013, and December 31, 2012, respectively.

These liabilities are accrued when estimable and probable in accordance with the Contingencies Topic in the ASC. Actual settlements and claims received could differ. The final outcome of these matters cannot be predicted with certainty. Considering the legal defenses currently available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items individually, when finally resolved, will have a material effect on the Company’s financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, they could have a material effect on the Company’s financial condition, results of operations or liquidity in that particular period.

10. Track Maintenance Agreement

The Company entered into a Track Maintenance Agreement with an unrelated third-party customer (the “Shipper”). Under the agreement, the Shipper paid for qualified railroad track maintenance expenditures during the fiscal year in exchange for the assignment of railroad track miles, which permits the Shipper to claim certain tax credits pursuant to Section 45G of the Internal Revenue Code. The track maintenance tax credit was not renewed until January 2013; however, the extension did include retroactive tax credit reimbursement for 2012 and 2013. Therefore, no 45G maintenance reimbursement was reflected in the 2012 financial statements. For the three and six months ended June 30, 2013, the Company has recorded $1.1 million and $4.1 million, respectively, of maintenance expenditures. The $4.1 million recorded for the six months ended June 30, 2013, includes the credits earned for 2012 and 2013. This amount is included in other expenses as a reduction to expense in the Consolidated Statements of Operations and Comprehensive Income (Loss). As of June 30, 2013, the Company has a net outstanding receivable of $1.7 million.

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11. Port Activity

In October 2010, Miami-Dade County, owner of the Port of Miami, was awarded a $22.8 million federal grant under the U.S. Department of Transportation’s Transportation Investment Generating Economic Recovery II (“TIGER”) program to rehabilitate the port’s rail bridge and construct new rail facilities on port property (“on-port project”). In addition to the $22.8 million TIGER grant, an additional $2.3 million will be funded by Port Miami. These projects will enable cargo to be moved directly from the port’s facility to an inland distribution center and alleviate traffic congestion in and around the port.

On September 20, 2011, Miami-Dade County entered into a Rail Bridge Construction Agreement with the Company. Under this agreement, the Company is responsible for the administration of the construction work for the Bascule Bridge over Biscayne Bay which connects the Company’s Port Lead to the Port of Miami. The Company is reimbursed for all of the costs incurred. For the three months ended June 30, 2013 and 2012, the Company incurred costs of zero and $1.1 million, respectively. For the six months ended June 30, 2013 and 2012, the Company incurred costs of $1.7 million and $1.6 million, respectively. As of June 30, 2013 and December 31, 2012, the Company had an outstanding receivable of $0.5 million and $2.7 million, respectively.

The TIGER grant also includes funding for the Port Rail Intermodal Apron (“apron”). This consists of construction of an intermodal apron running parallel to the full length of the tracks at Port Miami. The apron will include securing fencing, a radiation portal and inspection infrastructure, and crossing improvements. The Company will be reimbursed for all of the costs incurred. For the three months ended June 30, 2013 and 2012, the Company incurred costs of $0.4 million and zero, respectively. For the six months ended June 30, 2013 and 2012, the Company incurred costs of $0.4 million and zero, respectively. As of June 30, 2013 and December 31, 2012, the Company had an outstanding receivable of $0.4 million and zero, respectively.

The Company plans to establish intermodal container rail service on its own rail line leading into Port Miami at an estimated total cost of $18.3 million (“off-port project”). The Company signed an agreement with FDOT on January 24, 2011, in which FDOT will participate in funding of the “off-port project” and will reimburse the Company an estimated $9.1 million of the total cost. As of December 31, 2012, the Company had incurred approximately $18.3 million of capital expenditures related to the Port Miami off-port project. Of this amount, the Company has reduced this capital expenditure by $9.1 million with grant proceeds.

On March 15, 2011, the Company entered into an Assumption Agreement with Miami-Dade County. Under the agreement, the Company will perform track improvements in the Hialeah Yard to better accommodate current and future customers to include double stack containers coming from the Port of Miami. The Company will be reimbursed for all of the costs incurred. For the three months ended June 30, 2013 and 2012, the Company incurred costs of $0.4 million and zero, respectively. For the six months ended June 30, 2013 and 2012, the Company incurred costs of $0.4 million and zero, respectively. As of June 30, 2013 and December 31, 2012, the Company had an outstanding receivable of $0.4 million and zero, respectively.

On January 31, 2012, the Company entered into a Port Everglades Intermodal Container Transfer Facility Lease and Operating Agreement with Broward County. The agreement was ratified by Broward County on March 20, 2012. The term of the agreement is 30 years with two 10-year options. The Agreement was subject to the closing of the SIB Loan with FDOT. The SIB Loan closed on September 26, 2012. The Agreement provides the Company the land needed for the Company to construct an intermodal facility to serve its domestic and international business segments. The total construction cost is approximately $53 million, $30 million of which will be funded through the SIB Loan, $18 million of which will be from a FDOT grant and the balance of $5 million from the Company’s capital budget. The Company has been awarded the entire $18 million FDOT grant as of December 31, 2012. Upon project commencement, the Company will be reimbursed for half of the corresponding expenditures, not to exceed the $18 million FDOT grant. For the three months ended June 30, 2013 and 2012, the Company has incurred costs of $4.8 million and zero, respectively. For the six months ended June 30, 2013 and 2012, the Company has incurred costs of $5.7 million and zero, respectively. As of June 30, 2013 and December 31, 2012, the Company had an outstanding receivable of $2.4 million and zero, respectively.

12. Impairment of Assets

During the fourth quarter of 2012, the Company reviewed the serviceable status of the hopper car fleet. The Company identified 227 hoppers that will no longer be used and recorded an impairment charge of $3.5 million to adjust their carrying value to their fair value (Level 2 fair value measurement) based on current scrap value obtained from third-party price quotations. As a result, the Company classified these hopper cars as held for sale at December 31, 2012. The Company sold 114 hoppers during the first quarter of 2013 for $1.0 million. The remaining 113 hoppers were sold during the second quarter of 2013 for $0.8 million. As of June 30, 2013, the Company has an outstanding receivable of $0.8 million related to the sale of the hoppers in the second quarter.

13. Guarantor Condensed Consolidated Financial Statements

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for each company, such information or explanation has been combined. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation.

The Consolidating Financial Statements herein present consolidating financial data for Holdings Corp. (on a parent only basis), FECR Corp. (on an issuer only basis), an elimination column for adjustments to arrive at the information for the parent company and subsidiaries on a consolidated basis as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012.

Consolidating balance sheets as of June 30, 2013.

	Holdings Corp. (Parent)			FECR Corp. (Issuer)		Eliminations for Consolidation			Consolidation
Current assets:
Cash and cash equivalents	$	34		$	51,034	$	—		$	51,068
Restricted cash	—			126		—			126
Accounts receivable, net	—			39,733		—			39,733
Materials and supplies	—			7,353		—			7,353
Deferred income taxes	(271		)	2,645		—			2,374
Prepaid and other current assets	3			3,956		—			3,959

Total current assets	(234		)	104,847		—			104,613
Noncurrent assets:
Property, plant and equipment, less accumulated depreciation	—			773,633		—			773,633
Investments in affiliates	415,598			—		(415,598		)	—
Investments in non-affiliates	—			74		—			74
Intangible assets, less accumulated amortization	—			192		—			192
Other assets	1,429			17,886		(5,247		)	14,068

Total noncurrent assets	417,027			791,785		(420,845		)	787,967

Total assets	$	416,793		$	896,632	$	(420,845	)	$	892,580
Current liabilities:
Accounts payable and accrued expenses	$	7,059		$	40,907	$	—		$	47,966
Taxes payable	—			3,691		—			3,691
Deferred revenue	—			934		—			934
Other current liabilities	—			1,491		—			1,491

Total current liabilities	7,059			47,023		—			54,082
Deferred income taxes	(271		)	25,825		—			25,554
Long-term debt	159,713			475,265		—			634,978
Other long-term liabilities	5,247			6,541		(5,247		)	6,541

Total liabilities	171,748			554,654		(5,247		)	721,155

Total stockholders’ equity	245,045			341,978		(415,598		)	171,425

Total liabilities and stockholders’ equity	$	416,793		$	896,632	$	(420,845	)	$	892,580

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Consolidating balance sheets as of December 31, 2012.

	Holdings Corp. (Parent)			FECR Corp. (Issuer)		Eliminations for Consolidation			Consolidation
Current assets:
Cash and cash equivalents	$	34		$	40,366	$	—		$	40,400
Restricted cash	—			126		—			126
Accounts receivable, net	—			34,380		—			34,380
Materials and supplies	—			3,574		—			3,574
Deferred income taxes	(271		)	2,645		—			2,374
Prepaid and other current assets	1			2,476		—			2,477
Assets held for sale	—			1,839		—			1,839

Total current assets	(236		)	85,406		—			85,170
Noncurrent assets:
Property, plant and equipment, less accumulated depreciation	—			772,429		—			772,429
Investments in affiliates	415,597			—		(415,597		)	—
Investments in non-affiliates	—			74		—			74
Intangible assets, less accumulated amortization	—			220		—			220
Other assets	1,606			16,139		(2,641		)	15,104

Total noncurrent assets	417,203			788,862		(418,238		)	787,827

Total assets	$	416,967		$	874,268	$	(418,238	)	$	872,997

Current liabilities:
Accounts payable and accrued expenses	$	—		$	42,193	$	—		$	42,193
Taxes payable	—			326		—			326
Deferred revenue	—			906		—			906
Other current liabilities	—			1,035		—			1,035

Total current liabilities	—			44,460		—			44,460
Deferred income taxes	(271		)	25,109		—			24,838
Long-term debt	150,969			475,000		—			625,969
Other long-term liabilities	9,802			5,373		(2,641		)	12,534

Total liabilities	160,500			549,942		(2,641		)	707,801

Total stockholders’ equity	256,467			324,326		(415,597		)	165,196

Total liabilities and stockholders’ equity	$	416,967		$	874,268	$	(418,238	)	$	872,997

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Consolidating statement of operations for the three months ended June 30, 2013.

	Holdings Corp. (Parent)			FECR Corp. (Issuer)			Eliminations for Consolidation		Consolidation
Operating revenue	$	—		$	66,904		$	—	$	66,904
Operating expenses:
Labor and benefits	—			13,618			—		13,618
Purchased services	—			12,409			—		12,409
Fuel	—			7,739			—		7,739
Depreciation and amortization	—			6,493			—		6,493
Equipment rents	—			3,898			—		3,898
Other	—			4,637			—		4,637

Total operating expenses	—			48,794			—		48,794

Operating income	—			18,110			—		18,110

Interest expense (net of interest income)	(4,401		)	(10,480		)	—		(14,881		)
Other income	—			4			—		4

Income (loss) before income taxes	(4,401		)	7,634			—		3,233
Benefit for income taxes	—			(526		)	—		(526		)

Net income (loss)	$	(4,401	)	$	8,160		$	—	$	3,759

Comprehensive income (loss)	$	(4,401	)	$	8,181		$	—	$	3,780

Consolidating statement of operations for the three months ended June 30, 2012.

	Holdings Corp. (Parent)			FECR Corp. (Issuer)			Eliminations for Consolidation		Consolidation
Operating revenue	$	—		$	58,499		$	—	$	58,499
Operating expenses:
Labor and benefits	—			11,922			—		11,922
Purchased services	(6		)	11,407			—		11,401
Fuel	—			7,178			—		7,178
Depreciation and amortization	—			6,700			—		6,700
Equipment rents	—			3,187			—		3,187
Other	—			6,344			—		6,344

Total operating expenses	(6		)	46,738			—		46,732

Operating income	6			11,761			—		11,767

Interest expense (net of interest income)	(4,224		)	(10,147		)	—		(14,371		)
Other expense	—			77			—		77

Income (loss) before income taxes	(4,218		)	1,691			—		(2,527		)
Provision for income taxes	—			1,563			—		1,563

Net (loss) income	$	(4,218	)	$	128		$	—	$	(4,090	)

Comprehensive loss	$	(4,218	)	$	(142	)	$	—	$	(4,076	)

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Consolidating statement of operations for the six months ended June 30, 2013.

	Holdings Corp. (Parent)			FECR Corp. (Issuer)			Eliminations for Consolidation		Consolidation
Operating revenue	$	—		$	135,670		$	—	$	135,670
Operating expenses:
Labor and benefits	—			26,657			—		26,657
Purchased services	—			25,147			—		25,147
Fuel	—			16,150			—		16,150
Depreciation and amortization	—			13,155			—		13,155
Equipment rents	—			7,916			—		7,916
Other	—			8,193			—		8,193

Total operating expenses	—			97,218			—		97,218

Operating income	—			38,452			—		38,452

Interest expense (net of interest income)	(8,820		)	(21,026		)	—		(29,846		)
Other income	—			55			—		55

Income (loss) before income taxes	(8,820		)	17,481			—		8,661
Provision for income taxes	—			716			—		716

Net income (loss)	$	(8,820	)	$	16,765		$	—	$	7,945

Comprehensive income (loss)	$	(8,820	)	$	16,806		$	—	$	7,986

Consolidating statement of operations for the six months ended June 30, 2012.

	Holdings Corp. (Parent)			FECR Corp. (Issuer)			Eliminations for Consolidation		Consolidation
Operating revenue	$	—		$	115,844		$	—	$	115,844
Operating expenses:
Labor and benefits	—			24,153			—		24,153
Purchased services	—			20,437			—		20,437
Fuel	—			15,069			—		15,069
Depreciation and amortization	—			13,364			—		13,364
Equipment rents	—			6,334			—		6,334
Other	—			12,634			—		12,634

Total operating expenses	—			91,991			—		91,991

Operating income	—			23,853			—		23,853

Interest expense (net of interest income)	(8,374		)	(20,612		)	—		(28,986		)
Other expense	—			79			—		79

Income (loss) before income taxes	(8,374		)	3,320			—		(5,054		)
Provision for income taxes	—			3,535			—		3,535

Net loss	$	(8,374	)	$	(215	)	$	—	$	(8,589	)

Comprehensive loss	$	(8,374	)	$	(191	)	$	—	$	(8,565	)

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Consolidating statement of cash flows for the six months ended June 30, 2013.

	Holdings Corp. (Parent)			FECR Corp. (Issuer)			Eliminations for Consolidation			Consolidation
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)	$	(8,820	)	$	16,765		$	—		$	7,945
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	—			13,155			—			13,155
Amortization of debt financing fees	327			1,457			—			1,784
Share-based compensation costs	—			845			—			845
Deferred taxes	—			716			—			716
Interest paid in kind	1,432			—			—			1,432
Other	—			22			—			22
Changes in operating assets and liabilities:
Accounts receivable	—			(4,538		)	—			(4,538		)
Prepaid and other current assets	(2		)	(1,480		)	—			(1,482		)
Materials and supplies	—			(3,779		)	—			(3,779		)
Other assets	—			(3,204		)	2,608			(596		)
Accounts payable and accrued expenses	—			(1,363		)	—			(1,363		)
Accrued interest	7,058			78			—			7, 136
Taxes payable	—			3,365			—			3,365
Deferred revenue	—			28			—			28
Other current liabilities	—			456			—			456
Other long-term liabilities	2,608			1,209			(2,608		)	1,209

Net cash provided by operating activities	2,603			23,732			—			26,335

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of properties and equipment	—			(14,455		)	—			(14,155		)
Proceeds from disposition of assets	—			1,126			—			1,126

Net cash used in investing activities	—			(13,329		)	—			(13,329		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock outstanding	(2,603		)	—			—			(2,603		)
Proceeds from issuance of long-term debt	—			265			—			265

Net cash (used in) provided by financing activities	(2,603		)	265			—			(2,338		)

Net increase in cash and cash equivalents	—			10,668			—			10,668
Cash and cash equivalents at beginning of period	34			40,366			—			40,400

Cash and cash equivalents at end of period	$	34		$	51,034		$	—		$	51,068

Supplemental cash flow information:
Cash paid for interest	$	—		$	19,297		$	—		$	19,297

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Consolidating statement of cash flows for the six months ended June 30, 2012.

	Holdings Corp. (Parent)			FECR Corp. (Issuer)			Eliminations for Consolidation			Consolidation
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss	$	(8,374	)	$	(215	)	$	—		$	(8,589	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization	—			13,364			—			13,364
Amortization of debt financing fees	314			1,448			—			1,762
Share-based compensation costs	—			1,105			—			1,105
Deferred taxes	—			3,535			—			3,535
Interest paid in kind	7,701			—			—			7,701
Other	—			(94		)				(94		)
Changes in operating assets and liabilities:
Change in restricted cash	—			(1		)	—			(1		)
Accounts receivable	—			(1,435		)	—			(1,435		)
Prepaid and other current assets	(2		)	(702		)	—			(704		)
Materials and supplies	—			(2,238		)	—			(2,238		)
Other assets	(5		)	(327		)	535			203
Accounts payable and accrued expenses	(6		)	(3,917		)	—			(3,923		)
Taxes payable	—			(3,316		)	—			(3,316		)
Deferred revenue	—			(1,358		)	—			(1,358		)
Other current liabilities	—			345			—			345
Other long-term liabilities	897			(117		)	(535		)	245

Net cash provided by operating activities	525			6,077			—			6,602

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of properties and equipment	—			(10,060		)	—			(10,060		)
Proceeds from disposition of assets	—			379			—			379

Net cash used in investing activities	—			(9,681		)	—			(9,681		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock outstanding	(535		)	—			—			(535		)
Financing costs	—			(36		)	—			(36		)

Net cash used in financing activities	(535		)	(36		)	—			(571		)

Net decrease in cash and cash equivalents	(10		)	(3,640		)	—			(3,650		)
Cash and cash equivalents at beginning of period	44			30,861			—			30,905

Cash and cash equivalents at end of period	$	34		$	27,221		$	—		$	27,255

Supplemental cash flow information:
Cash paid for interest	$	—		$	19,277		$	—		$	19,277

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our annual consolidated financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on March 13, 2013. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors.”

Overview

We own and operate a premier 351-mile freight railroad along the east coast of Florida from Jacksonville to Miami. Our railroad is one of only two major freight railroads serving Florida. We operate at a high level of density, which means that we carry a high number of units per track mile. In 2012, we carried approximately 1,304 units per mainline track mile, which we believe is more than any of the Class I railroads in the United States.

In 2012, we transported over 457,000 units on our railroad comprising various types of freight for over 500 customers. We transport products such as intermodal containers and trailers, crushed rock (aggregate), automobiles, food, and other industrial products. We are a major hauler of aggregate in the State of Florida and a key conduit for the transportation of automobiles into South Florida.

We provide a direct route through some of the most highly congested regions of the State of Florida, and we believe that we are able to haul freight often more quickly and more cost effectively than other modes of transportation, such as trucking, as one train can haul the equivalent of up to 280 trucks.

We have direct access to the major south Florida ports of Miami, Everglades (Fort Lauderdale) and Palm Beach through which we transport intermodal containers. We believe that our unique positioning to these ports will help us continue our intermodal volume growth.

Our Business

We generate rail-operating revenues primarily from both the movement of freight in conventional freight cars and intermodal shipments of containers and trailers on flatcars. We count each move of a freight car, container or trailer on our line as one unit. We also generate revenue from dray moves (drayage is the movement of containers or trailers by truck to and from the rail yard). Non-freight operating revenues are derived from car hire and demurrage (allowing our customers and other railroads to use our railcars for storage or transportation in exchange for a daily fee), real estate and equipment lease income, ancillary dray charges, switching (managing and positioning railcars within a customer’s facility), and other transportation services.

Our operating expenses consist of salaries (approximately 70% of our work force is covered by collective bargaining agreements), related payroll taxes and employee benefits, depreciation (primarily reflecting our capital requirements for maintaining current operations), insurance and casualty claim expenses, diesel fuel, repairs billed to/from others (generally, a net credit received from repairs of foreign cars on our line less repairs paid by us for our cars on a foreign line), property taxes, material and supplies, purchased services (contract labor and professional services), and other expenses.

Managing Business Performance

We manage our business performance by attempting to (i) grow our freight and non-freight revenue, (ii) drive financial improvements through a variety of cost-savings initiatives, (iii) strive to utilize assets to maximum capacity while still supporting future growth, and (iv) continued focus on safety to lower the risks and costs associated with operating our business.

Changes in units and revenue per unit (“RPU”) have a direct impact on freight revenue. Because we believe there is significant value in the premier, niche railroad that we operate with high efficiency, we will continue to focus on yield management efforts that reflect the value of our freight network. This focus may allow us to improve our freight RPU. As a consequence, our operating ratio, which we define as total operating expenses divided by total operating revenues, continues to be a key metric which we evaluate. We deem operating ratio as an important metric to measure our operational performance, however, operating ratio is not a measure as defined under U.S. GAAP.

Second Quarter 2013 Highlights

· Operating revenue increased $8.4 million primarily driven by higher volume.

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· Expenses increased $2.1 million mostly driven by labor & benefits and purchased services, partially offset by a reduction in other expenses.

· Operating income increased $6.3 million, or 53.9%, to $18.1 million.

· Operating ratio was a second quarter record of 72.9%.

	Three Months ended June 30,						Six Months ended June 30,
	2013			2012			2013			2012
Volume	117,925			109,513			$	249,245		222,063

(dollars in thousands)
Revenue	$	66,904		$	58,499		135,670			$	115,844
Expenses	48,794			46,732			97,218			91,991
Operating income	$	18,110		$	11,767		$	38,452		$	23,853
Operating Ratio	72.9		%	79.9		%	71.7		%	79.4		%

Financial Results of Operations

Comparison of Operating Results for the Three Months Ended June 30, 2013 and 2012

Operating Revenue

The following table compares freight revenues, units, and average freight RPU for the periods indicated (in thousands, except units and RPU):

	Three Months ended June 30,
	Units*				Revenue						RPU
	2013	2012	% Var		2013		2012		% Var		2013		2012		% Var
Intermodal	92,161	88,304	4	%	$	39,335	$	36,142	9	%	$	427	$	409	4	%
Crushed Stone (Aggregate)	14,662	11,807	24	%	9,104		7,525		21	%	621		637		(3	)%
Food Products	2,907	2,629	11	%	3,250		3,014		8	%	1,118		1,146		(2	)%
Motor Vehicles & Equipment	2,388	1,896	26	%	3,337		2,641		26	%	1,397		1,393		—
Chemicals	1,431	1,077	33	%	2,162		1,762		23	%	1,511		1,636		(8	)%
Other	4,376	3,800	15	%	4,563		3,262		40	%	1,043		858		22	%
Carload Subtotal	25,764	21,209	21	%	22,416		18,204		23	%	870		858		1	%
Total Freight Revenue	117,925	109,513	8	%	61,751		54,346		14	%	524		496		6	%
Non-Freight					5,153		4,153		24	%
Total Revenue					$	66,904	$	58,499	14	%

* The units for 2012 have been restated to conform to the 2013 presentation. In June 2012, the Company made a policy change and began including certain Intermodal revenue empty container moves.

Intermodal revenues were up due to both additional volume from new customers and increased business from current customers. The increase in RPU was due to improved yield management as the Company strived to price to the value of our service.

Carload revenues were up driven mostly by volume. In addition, the Company received a retroactive rate increase for a carload customer. Carload revenue increased primarily due to:

· Crushed Stone (Aggregate) revenues increased primarily due to the expansion of the Fort Lauderdale airport.

· Food Products revenues increased driven by additional volumes at one of our customer’s manufacturing facilities due to retooling at a separate facility not served by the Company.

· Motor Vehicles & Equipment revenues increased primarily due to a new multi-year contract that began in the fourth quarter of 2012.

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· Chemicals revenues increased primarily due to new business development, as well as increased volumes.

· Other revenues increased due to increased volumes for metal products.

Non-freight revenues increased due to the settlement of an agreement with a customer.

Operating Expenses

The following table sets forth the operating revenue and expenses for our consolidated operations for the periods indicated (dollars in thousands):

	Three Months ended June 30,
	2013		2012		$ Variance
Operating revenue	$	66,904	$	58,499	$	8,406
Operating expenses:
Labor and benefits	13,618		11,922		(1,696		)
Purchased services	12,409		11,401		(1,008		)
Diesel fuel	7,739		7,178		(562		)
Depreciation and amortization	6,493		6,700		208
Equipment rents	3,898		3,187		(712		)
Other expenses	4,637		6,344		1,707
Total operating expenses	$	48,794	$	46,732	$	(2,063	)
Operating income	$	18,110	$	11,767	$	6,343

Operating expenses increased to $48.8 million for the three months ended June 30, 2013, from $46.7 million for the three months ended June 30, 2012, an increase of $2.1 million, or 4%. Set forth below is additional detail regarding changes in our operating expenses:

· Labor and benefits increased due to additional headcount, as well as annual salary and benefit increases for the three months ended June 30, 2013, compared to the three months ended June 30, 2012.

· Purchased services increased mainly due to an increase in volume related activity.

· Diesel fuel increased for the three months ended June 30, 2013 as compared to the three months ended June, 2012. The increase in diesel fuel was primarily due to an increase in the volume of fuel used, partially offset by a reduction in fuel price for the comparable periods. The average price of fuel was $3.24 per gallon for the three months ended June 30, 2013 compared to the average price per gallon of $3.35 for the three months ended June 30, 2012.

· Depreciation and amortization remained relatively consistent for the comparable periods.

· Equipment rents increased mainly due to increased car hire expense, as well as increased rental expense for leased containers associated with higher volumes.

· Other expenses decreased primarily due to the reinstatement of the track maintenance agreement reimbursement program (Internal Revenue Code Section 45G Tax Credit) of $1.1 million for the three months ended June 30, 2013, which was not in place for the three months ended June 30, 2012; as well as the favorable settlement of personal injury claims of $0.4 million and reductions on other expenses of $0.2 million.

Other Income (Expense)

Interest Expense (net of interest income). Interest expense increased $0.5 million, or 3.5%, to $14.9 million for the three months ended June 30, 2013 from $14.4 million for the three months ended June 30, 2012. The increase in interest expense is due to the increase in the principal amount of the Senior PIK Toggle notes as a result of the interest payments that were paid in kind during 2012.

Other Income (Loss). Other income (loss) remained consistent for the comparable periods.

Provision for Income Taxes. For the three months ended June 30, 2013, we believe that it is more likely than not that some of our net operating loss carryforwards will expire unused. During the three months ended June 30, 2013, the Company recorded an income tax benefit of $0.5 million, which was primarily driven by book income during the quarter, the net impact of the expiration of certain net operating loss carryforwards and consideration of certain tax planning strategies for the quarter ended June 30, 2013. During the three months ended June 30, 2012, the Company recorded an income tax expense of $1.6 million.

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Comparison of Operating Results for the Six Months Ended June 30, 2013 and 2012

Operating Revenue

The following table compares freight revenues, units, and average freight RPU for the periods indicated (in thousands, except units and RPU):

	Six Months ended June 30,
	Units*				Revenue						RPU
	2013	2012	% Var		2013		2012		% Var		2013		2012		% Var
Intermodal	189,262	178,844	6	%	$	80,041	$	69,819	15	%	$	423	$	390	8	%
Crushed Stone (Aggregate)	37,254	23,610	58	%	21,129		15,303		38	%	566		648		(13	)%
Food Products	5,891	5,237	12	%	6,568		6,005		9	%	1,115		1,147		(3	)%
Motor Vehicles & Equipment	5,205	4,304	21	%	7,173		5,802		24	%	1,378		1,348		2	%
Chemicals	2,686	2,153	25	%	4,155		3,601		15	%	1,547		1,673		(8	)%
Other	8,947	7,915	13	%	8,083		6,647		22	%	903		840		8	%
Carload Subtotal	59,983	43,219	39	%	47,108		37,358		26	%	785		864		(9	)%
Total Freight Revenue	249,245	222,063	12	%	127,149		107,177		19	%	510		483		6	%
Non-Freight					8,521		8,667		(2	)%
Total Revenue					$	135,670	$	115,844	17	%

* The units for 2012 have been restated to conform to the 2013 presentation. In June 2012, the Company made a policy change and began including certain Intermodal revenue empty container moves.

Intermodal revenues were up due to both additional volume from new customers and increased business from current customers. The increase in RPU was due to both mix of traffic and improved yield management as the Company strived to price to the value of our service.

Carload revenues were up driven mostly by volume. In addition, the Company received a retroactive rate increase for a carload customer. The increase was primarily due to:

· Crushed Stone (Aggregate) revenues increased primarily due the expansion of the Fort Lauderdale airport.

· Food Products revenues increased driven by additional volumes at one of our customer’s manufacturing facilities due to retooling at a separate facility not served by the Company.

· Motor Vehicles & Equipment revenues increased primarily due to a new multi-year contract that began in the fourth quarter of 2012.

· Chemicals revenues increased primarily due to new business development, as well as increased volumes.

· Other revenues increased due to increased volumes for metal products.

Non-freight revenues remained consistent for the comparable periods.

Operating Expenses

The following table sets forth the operating revenue and expenses for our consolidated operations for the periods indicated (dollars in thousands):

	Six Months ended June 30,
	2013		2012		$ Variance
Operating revenue	$	135,670	$	115,844	$	19,826
Operating expenses:
Labor and benefits	26,657		24,153		(2,504		)
Purchased services	25,147		20,437		(4,710		)
Diesel fuel	16,150		15,069		(1,081		)
Depreciation and amortization	13,155		13,364		209
Equipment rents	7,916		6,334		(1,582		)
Other expenses	8,193		12,634		4,441
Total operating expenses	$	97,218	$	91,991	$	(5,227	)
Operating income	$	38,452	$	23,853	$	14,599

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Operating expenses increased to $97.2 million for the six months ended June 30, 2013, from $92.0 million for the six months ended June 30, 2012, an increase of $5.2 million, or 6%. Set forth below is additional detail regarding changes in our operating expenses:

· Labor and benefits increased due to additional headcount, as well as annual salary and benefit increases for the six months ended June 30, 2013, compared to the six months ended June 30, 2012.

· Purchased services increased mainly due to an amendment in contract terms with a major customer, coupled with an increase in lift costs due to increased volumes.

· Diesel fuel increased for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. The increase in diesel fuel was primarily due to an increase in the volume of fuel used, partially offset by a reduction in fuel price for the comparable periods. The average price of fuel was $3.38 per gallon for the six months ended June 30, 2013 compared to the average price per gallon of $3.41 for the six months ended June 30, 2012.

· Depreciation and amortization remained consistent for the comparable periods.

· Equipment rents increased mainly due to increased car hire expense, as well as increased rental expense for leased containers associated with higher volumes.

· Other expenses decreased primarily due to the reinstatement of the track maintenance agreement reimbursement program (Internal Revenue Code Section 45G Tax Credit) of $4.1 million for the six months ended June 30, 2013, which was not in place for the six months ended June 30, 2012; coupled with decreases in various expenses for the comparable periods.

Other Income (Expense)

Interest Expense (net of interest income). Interest expense increased $0.8 million, or 3%, to $29.8 million for the six months ended June 30, 2013 from $29.0 million for the six months ended June 30, 2012. The increase in interest expense is due to the increase in the principal amount of the Senior PIK Toggle notes as a result of the interest payments that were paid in kind during 2012 and 2013.

Other Income (Loss). Other income (loss) remained relatively consistent for the comparable periods.

Provision for Income Taxes. For the six months ended June 30, 2013, we believe that it is more likely than not that some of our net operating loss carryforwards will expire unused. Accordingly, we recognized tax expense based on the results of the six months ended June 30, 2013. As such, the Company recorded an income tax expense of $0.7 million and $3.5 million, for the six months ended June 30, 2013 and 2012, respectively. The reduction in tax expense for the six months ended June 30, 2013 compared to 2012 is due to the utilization of net operating loss carryforwards as a result of improved operating results for the current year.

Liquidity and Capital Resources

The discussion of liquidity and capital resources that follows reflects our consolidated results and includes all of our subsidiaries. We have historically met our liquidity requirements primarily from cash generated from operations and borrowings under our credit agreements which are used to fund capital expenditures and debt service requirements. For the six months ended June 30, 2013 and 2012, there was a net cash inflow from operations of $26.3 million and $6.6 million, respectively.

We meet our liquidity requirements primarily from the following sources:

· Operating revenues generated from freight and non-freight revenues. Freight revenues include revenues derived from intermodal transports and carload shipments of a variety of goods such as aggregates (crushed stones), motor vehicles and food products. Non-freight revenues include car hire and demurrage, real estate and equipment lease income, ancillary dray charges, switching, administration fees and other transportation services.

· Borrowings and lines of credits, under which $475.0 million, principal amount of Senior Secured Notes, was outstanding, $159.7 million, principal amount of the Senior PIK Toggle Notes, $0.3 million, principal amount of the SIB Loan and

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$27.0 million was available for borrowing under the ABL Facility as of June 30, 2013. As of December 31, 2012, $626.0 million was outstanding under its borrowing facilities and there were no funds drawn on the ABL Facility for the period then ended.

We expect that our cash flows from operations and existing credit facilities will be sufficient to meet our ongoing operating requirements, to fund capital expenditures for property, plant and equipment, and to satisfy our debt requirements. In addition, we closed the $30 million State Infrastructure Bank loan (the “SIB Loan”) on September 26, 2012. The purpose of the SIB Loan is to fund, in part, the costs associated with the Company’s construction of a new Florida East Coast Intermodal Transfer Facility (the “ICTF”) at Port Everglades which will serve the Company’s domestic and international segments. The ICTF is expected to cost $53 million to complete. Proceeds of the SIB Loan will be advanced by the Florida Department of Transportation (“FDOT”) as construction proceeds on the ICTF. The total construction costs of the ICTF are expected to be $53 million, $30 million of which will be funded by the SIB Loan, $18 million of which will be funded by a grant from FDOT, and the balance of $5 million from the Company’s capital budget. Our current projections of cash flows from operations and the availability of funds under our ABL Facility (as further described below) are expected to be sufficient to fund our maturing debt and contractual obligations in the next several years. No assurance, however, can be made that we will be able to meet our financing and liquidity needs as currently contemplated. See “Risk Factors—Risks Related to Our Indebtedness” in the Company’s most recent Annual Report on Form 10-K.

Holdings Corp. is a holding company and, therefore, depends upon the performance of and distributions from our subsidiaries to meet its debt service obligations (including interest payments) under the Senior PIK Toggle Notes. Legal and contractual restrictions in agreements governing current and future indebtedness, as well as the financial condition and operating requirements of our direct subsidiary, FECR Corp., may limit Holdings Corp.’s ability to obtain cash from FECR Corp. The indenture governing the 8 1/8% Notes and the ABL Facility contain covenants that restrict FECR Corp.’s ability to pay cash dividends and make other distributions or loans to Holdings Corp. The earnings from, or other available assets of, FECR Corp. may not be sufficient to pay dividends or make distributions or loans to enable Holdings Corp. to make payments in respect of the notes when such payments are due. In addition, even if such earnings were sufficient, we cannot assure you that the agreements governing the current and future indebtedness of FECR Corp. will permit FECR Corp. to provide us with sufficient dividends, distributions or loans to fund interest and principal payments on the notes when due. Holdings Corp. will be forced to accrue interest on a “paid-in-kind” basis, to the extent that distributions from FECR Corp. are not sufficient to fulfill the interest obligations under the Senior PIK Toggle Notes. Any interest accrued on a “paid-in-kind” basis will increase the overall cost of Holdings Corp.’s borrowings, as well as the cash ultimately required to fully satisfy Holdings Corp.’s obligations, under the Senior PIK Toggle Notes. We expect to pay $8.5 million in cash for the interest payment due on August 1, 2013.

We have implemented capital spending programs designed to assure the ability to provide safe, efficient and reliable transportation services. For 2013, we anticipate that over half of the remaining estimated capital investments will be used to sustain core infrastructure. We will fund these capital investments through cash generated from operations.

The remaining capital investments are for locomotives, freight cars, technology and high return growth or productivity investments such as the new construction of the ICTF in Port Everglades which will serve the Company’s growing intermodal line of business.

We are continually evaluating market and regulatory conditions that could affect our ability to generate sufficient returns on capital investments. We may revise our future estimates for capital spending as a result of changes in business conditions, tax legislation or the enactment of new laws or regulations. Although new legislation or regulations could have a material adverse effect on our operations and financial performance in the future, we cannot predict the manner or severity of such impact. However, we continue to take steps and explore opportunities to reduce the impact of our operations on the environment, including investments in new technologies, reducing fuel consumption and increasing fuel efficiency and lowering emissions.

Cash Flow Information for the Six Months ended June 30, 2013 and 2012

Operating Activities

Cash provided by operating activities was $26.3 million for the six months ended June 30, 2013 compared to cash provided by operating activities of $6.6 million for the six months ended June 30, 2012. For the six months ended June 30, 2013, we had net income of $7.9 million, whereas for the six months ended June 30, 2012, we had a net loss of $8.6 million. In addition, in 2012, a property tax payment was made that was not required in the first quarter of 2013 thereby showing an increase in cash provided by operating activities. This increase was slightly offset by changes in working capital.

Investing Activities

Cash used in investing activities was $13.3 million for the six months ended June 30, 2013 compared to cash used in investing activities of $9.7 million for the six months ended June 30, 2012. The increase in cash used in investing activities of $3.6 million was primarily related to an increase in capital expenditures for various projects in 2013, mainly related to ties, bridges and undercutting projects, coupled with expenditures for the ICTF of approximately $4.4 million. This increase in capital expenditures for the six months ended June 30, 2013, was partially offset by proceeds from the sale of assets of $0.8 million in 2013 related to the sale of hopper freight cars.

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Financing Activities

Cash used in financing activities was $2.3 million for the six months ended June 30, 2013 compared to cash used in financing activities of $0.6 million for the six months ended June 30, 2012. The increase in cash used in financing activities of $1.7 million was primarily due to the purchase of common shares outstanding for the comparable periods, partially offset by proceeds from the issuance of long-term debt related to the SIB Loan.

Long-term Debt

On January 25, 2011, FECR Corp. sold $475.0 million of 8 1/8% Senior Secured Notes due 2017 (the “Senior Secured Notes” or “8 1/8% Notes”) in a private offering, for gross proceeds of $475.0 million.

In connection with the issuance of the Senior Secured Notes, FECR Corp. and certain of its subsidiaries also entered into the Asset-Based Lending (“ABL”) Facility. The ABL Facility matures on January 25, 2015 and bears interest at FECR Corp.’s option of: (a) a base rate determined in the greater of (1) the prime rate of the administrative agent, (2) federal funds effective rate plus 1 / 2 of 1%, or (b) a LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits in London interbank market for the interest period relevant to such borrowing. The applicable margin with respect to (a) base rate borrowings will be 2.25%, and (b) LIBOR borrowings will be 3.25%. Obligations under the ABL Facility are secured by a first-priority lien on the ABL Collateral.

The Senior Secured Notes are secured by first-priority liens on substantially all of the tangible and intangible assets of FECR Corp. and its subsidiary guarantors’ (other than the ABL collateral securing the ABL Facility and other than the collateral securing the SIB Loan) and a second-priority lien on ABL collateral and SIB Loan collateral. The guarantors are defined primarily as existing and future wholly owned domestic restricted subsidiaries. FECR Corp. may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes issued during any 12-month period commencing on the issue date and ending on the third anniversary thereof at a price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. FECR Corp. may also redeem some or all of the Senior Secured Notes at any time before February 2014 at a price equal to 100% of the aggregate principal amount thereof plus a make-whole premium. In addition, prior to February 1, 2014, FECR Corp. may redeem up to 35% of the Senior Secured Notes at a redemption price of 108.125% of the aggregate principal amount thereof with the proceeds from an equity offering. Subsequent to February 1, 2014, FECR Corp. may redeem the Senior Secured Notes at 104.063% of their principal amount. The premium then reduces to 102.031% commencing on February 1, 2015 and then 100% on February 1, 2016 and thereafter.

State Infrastructure Bank Loan

On September 26, 2012, FEC PEVT, L.L.C., as borrower, and Florida East Coast Railway, L.L.C., as guarantor, each a wholly owned subsidiary of the Company, entered into a SIB Loan with FDOT. The SIB Loan provides for a loan of $30 million to fund, in part, the costs associated with the construction of a new Florida East Coast ICTF in Port Everglades which will serve the Company’s domestic and international business segments. Proceeds of the SIB Loan will be advanced by FDOT as construction proceeds on the ICTF and the Company requests funds from FDOT. Borrowings under the SIB Loan were $0.3 million for the three and six months ended June 30, 2013. The total cost of the ICTF construction project is approximately $53 million, $30 million of which will be funded through the SIB Loan, $18 million of which will be from a FDOT grant (the “FDOT Grant”) and the balance of $5 million from the Company’s capital budget. The Company has been awarded the entire $18 million of the FDOT Grant as of December 31, 2012.

The SIB Loan is fully and unconditionally guaranteed by the Florida East Coast Railway, L.L.C. In addition, as a condition to making the SIB Loan, FDOT required a first priority lien on certain fixtures (including rail trackage) and equipment included in the collateral securing the Senior Secured Notes. The SIB Loan specifically excludes land, rail equipment and motor vehicles from its lien. As a condition to FDOT making the first loan disbursement under the SIB Loan, FEC PEVT, L.L.C. was required to post as additional collateral through July 1, 2017, a standby letter of credit in the amount of $3.0 million payable to FDOT, as beneficiary (the “Standby Letter of Credit Collateral”). On February 1, 2013, the Company posted the Standby Letter of Credit Collateral by accessing the letter of credit line of the ABL Facility, reducing availability under the ABL Facility to $27.0 million. The SIB Loan permits FEC PEVT, L.L.C, in lieu of posting the Standby Letter of Credit Collateral, at any time upon prior notice, to either pay down the principal of the SIB Loan by $3 million or substitute cash collateral.

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Senior PIK Toggle Notes

On February 11, 2011, Holdings Corp. sold $130.0 million of 10 1/2% / 11 1/4% Senior Payment in Kind Toggle Notes due 2017 (the “Senior PIK Toggle Notes”) in a private offering, for net proceeds of $127.7 million. The Senior PIK Toggle Notes are senior unsecured obligations that are not guaranteed by any of Holdings Corp.’s subsidiaries.

Covenants

The indentures governing the Senior PIK Toggle Notes, the 8 1/8% Notes and our ABL Facility contain certain covenants that limit and restrict us, and our restricted subsidiaries’ ability to, among other things, incur additional indebtedness; issue preferred and disqualified stock; purchase or redeem capital stock; make certain investments; pay dividends or make other payments on loans or transfer property; sell assets; enter into certain types of transactions with affiliates involving consideration in excess of $5.0 million; create liens on certain assets; and sell all, or substantially all, of our assets or merge with or into another company. In addition, if availability under the ABL Facility is below $7.5 million during any future period, FECR Corp. will be subject to a minimum fixed charge coverage ratio (as defined in the ABL Facility) of 1.1 to 1.0. As of June 30, 2013, the Company was in compliance with all debt covenants.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United Stated requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Consistent with the prior year, significant estimates using management judgment are made for the following areas:

· casualty, environmental and legal reserves;

· depreciation policies for assets under the group-life method; and

· income taxes.

For further discussion of the Company’s critical accounting policies and estimates, see the Company’s most recent Annual Report on Form 10-K. There were no material changes in the second fiscal quarter of 2013 regarding the Company’s critical accounting policies and estimates.

Forward-Looking Statements

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements

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that involve risks and uncertainties. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our annual consolidated financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on March 13, 2013. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors.”

Certain statements in this Quarterly Report on Form 10-Q and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to future events and financial performance. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “appears,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. We can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this report. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from our expectations include, but are not limited to, number of external variables over which management has little or no control, including: domestic and international economic conditions; the business environment in industries that produce and consume rail freight; rising fuel costs; competition and consolidation within the transportation industry; the operations of carriers with which the Company interchanges traffic; our transportation of hazardous materials by rail; fluctuation in prices or availability of key materials, in particular diesel fuel; labor difficulties, including strikes and work stoppages; legislative and regulatory developments including rulings by the Surface Transportation Board or the Railroad Retirement Board; disruptions to our technology infrastructure, including computer systems; natural events such as severe weather, hurricanes and floods; and other risks detailed in our filings with the SEC. In addition, new risks and uncertainties emerge from time to time, and it is not possible for us to predict or assess the impact of every factor that may cause actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from the information provided under Part II, Item 7A (Quantitative and Qualitative Disclosures about Market Risk) of the Company’s most recent Annual Report on Form 10-K.

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ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 2013, under the supervision and with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that, as of June 30, 2013, the Company’s disclosure controls and procedures were effective at the reasonable assurance level in timely alerting them to material information required to be included in the Company’s periodic SEC reports. There were no changes in the Company’s internal controls over financial reporting during the second quarter of 2013 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Items 3, 4, and 5 are not applicable and have been omitted.

ITEM 1. LEGAL PROCEEDINGS

We have been, and may from time to time, be involved in litigation and claims incidental to the conduct of our business in the ordinary course. Our industry is also subject to scrutiny by governmental regulators, which could result in enforcement proceedings or litigation related to regulatory compliance matters. We maintain insurance policies in amounts and with the coverage and deductibles we believe are adequate, based on the nature and risks of our business, historical experience and industry standards. As of the date of this Quarterly Report on Form 10-Q, we are not a party to any material legal or adverse regulatory proceedings.

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ITEM 1A. RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our most recent Annual Report on Form 10-K in evaluating our business, financial position, future results, and prospects. Although there have been no material changes to the risk factors described in the Annual Report on Form 10-K, the risks described therein are not the only risks facing our Company. Additional risks that we do not presently know or that we currently believe are not material could also materially adversely affect our business, financial position, future results and prospects.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

For information regarding unregistered sales of equity securities and the use of proceeds, see Note 8 in the Consolidated Financial Statements herein.

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ITEM 6. EXHIBITS

Exhibits

31.1		Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer

32.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

32.2		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

101.INS †		XBRL Instance Document

101.SCH †		XBRL Taxonomy Extension Schema Document

101.CAL †		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF †		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB †		XBRL Taxonomy Extension Label Linkbase Document

101.PRE †		XBRL Taxonomy Extension Presentation Linkbase Document

† XBRL (eXtensible Business Reporting Language) information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	FLORIDA EAST COAST HOLDINGS CORP.
Date: July 30, 2013	By:	/s/ John Brenholt
		John Brenholt, Executive Vice President and
		Chief Financial Officer
		(on behalf of Registrant and as Principal Financial Officer)

Florida East Coast Holdings Corp. 10-Q