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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2011,

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)

Registrant’s telephone number, including area code: (800) 342-1131

Securities Registered Pursuant to Section 12(b) of the Act:  None

Securities Registered Pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o   No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  x   No  o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   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):

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

As of March 15, 2012 there were 250,943 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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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, (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 Annual Report to reflect the capital structure of Holdings Corp. for the year ended December 31, 2011. 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 15, 2012.

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TABLE OF CON TENTS

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Certain statements in this Annual Report on Form 10-K 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 ruling 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.

PART I

ITEM 1. BUSINESS

Overview

We own and operate a 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. In 2011, we provided our services to over 500 customers, and transported over 412,000 units. We generate rail-operating revenues primarily from both the movement of freight in conventional freight cars (such products as crushed rock (aggregate), automobiles, food products and other industrial products) and intermodal shipments of containers and trailers on flatcars. We count each move of freight car, container or trailer on our line as one unit. We also generate freight revenue from dray moves (drayage is the movement of containers or trailers by truck to and from the rail yard). We generated total operating revenue and net loss of $213.3 million and $37.3 million respectively, for the year ended December 31, 2011.  As of December 31, 2011, we had assets of $871.8 million.

Company Information

Certain entities commonly owned by private equity funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) acquired all of the outstanding stock of Florida East Coast Industries, Inc. (“FECI”) on July 26, 2007. On December 31, 2007, FECI sold its rail transportation segment, which operated as separate legal entities, to private equity funds managed by affiliates of Fortress (the “Rail Separation”). Concurrent with the Rail Separation, FECR Rail LLC and Florida East Coast Railway Corp. were formed to carry on the activities of the railway.

Florida East Coast Holdings Corp. was incorporated in Florida on January 10, 2011. In January 2011, FECR Rail LLC contributed all of its holdings of the common and preferred shares of Florida East Coast Railway Corp. to Florida East Coast Holdings Corp., whereby Florida East Coast Holdings Corp. became the direct parent of Florida East Coast Railway Corp. Our principal corporate office is located at 7411 Fullerton Street, Suite 100, Jacksonville, Florida 32256, and our telephone number at that location is 1-800-342-1131.

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Business Strategy

We plan to grow our revenue, cash flow and earnings by employing the following strategies:

Continuing Conversion of over the Road Freight: We have continued our focus of converting truck and vessel business to rail. We recognize the efficiencies of rail movement as railroads are estimated to be approximately four times more fuel efficient than truck transportation while a single train can haul the equivalent of up to 280 trucks as reported by the American Association of Railroads, or AAR.  Additionally, as the price of fuel has increased over the past several years, the fuel efficiency advantage of railroads as compared to other forms of freight transportation has grown.

Port Strategies: The Company is participating in major expansions at two south Florida ports which we believe will become a critical component of our strategy to grow our intermodal business in the coming years.  The projects include a plan to restore freight-rail service to the Port of Miami as well as a project to build an intermodal transfer facility at Port Everglades in Fort Lauderdale.

Industrial Development: We believe that continued efforts to gain more local traffic will enable our operations to be successful in the future.  We will work to increase the number of customers along our railway.

Improving our Operating Ratio: We believe with our focus on growing our existing customer base, coupled with our ability to effectively leverage our prices, as well as our cost-savings initiatives, we will be able to improve our operating ratio.  We define our operating ratio as total operating expences divided by total operating revenues.

Freight Revenue

Commodities

We generate freight revenue primarily under two different types of service: local and interchange. Local service, which represented approximately 44% of our total 2011 freight revenue, involves transporting freight that both originates and terminates on our rail line. Examples of local service include most crushed rock aggregates, which originate from South Florida quarries served by us and terminate at various consumption points in the middle and northern portions of the State, as well as retailers and grocers moving their goods from North Florida to retail stores in South Florida. Interchange service represented approximately 48.4% of our total 2011 freight revenue. Interchange services vary by customer shipping needs with freight either (i) originating at the customer’s facility on our line for transport to other destinations in the United States, Canada and Mexico via our Jacksonville interchange with CSX and Norfolk Southern (Class I Railroads) or (ii) being received at our Jacksonville interchange and hauled to a customer’s plant or port, where the freight is subsequently consumed or further distributed.

Products hauled over our rail line include more than 6 major freight groups, such as intermodal units (containers and truck trailers), crushed rock (aggregate), automobiles, food products, chemicals and other industrial products. The chart below provides detail regarding the percentage of 2011 freight revenue that we generated from hauling various products:

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Intermodal (66% of 2011 freight revenue) : We transport intermodal containers and trailers (on piggy-back railcars) for major shippers including retailers, parcel delivery companies, maritime shipping companies, trucking companies, and Intermodal Marketing Companies (“IMCs”) as well as the intermodal business units of Class I railroads. We benefit from the geographic shape of Florida as a peninsula and the location of its largest consumption markets (Miami and Orlando) in the southernmost and central regions, which combine to create an imbalanced lane for the flow of goods into and out of the State. As a net consuming state, this geography makes it undesirable for trucks to transport freight southbound, only to return empty northbound. Additionally, the South Florida Highway network, including Interstate 95 and Route US-1, suffer from severe congestion and delays. Due to the challenges that the traffic flow and road congestion present to major shippers, in several instances, these shippers utilize our service as an extension of their operations to obtain a more reliable and efficient means for transporting products north and south within Florida, and in most cases, our service exceeds that of trucks.

Aggregate (13% of 2011 freight revenue) : We transport aggregate (primarily crushed limestone) from quarries located in South Florida to distribution points in the middle and northern portions of the State. In most cases, we are the only railroad directly serving a particular quarry. Moreover, given the heavy weight and distance hauled of aggregate, we compete favorably with over-the-road (primarily dump trucks) distribution — one “unit train” (a dedicated train consisting entirely of one product) of aggregate can haul the maximum equivalent of approximately 480 trucks.

Food Products (5% of 2011 freight revenue) : We transport three main food commodities which include fruit juice, beer products and high fructose corn sweeteners. These products interchange in our Jacksonville facility, with a Class I railroad and either originate or terminate on our line.

Automobiles (5% of 2011 freight revenue) : We serve as a major conduit for transporting finished automobiles primarily from our interchange with Class I railroads in Jacksonville to points in the central and southern portions of the State. Specifically, we transport automobiles either to our own rail yards where the automobiles are then distributed by truck to nearby dealers and rental companies or to yards located on our rail line but owned directly by the Class I with whom we partner to provide total rail transportation.

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Chemicals (4% of 2011 freight revenue) : We transport a variety of chemical commodities including liquefied petroleum gas (LPG), ethanol and plastics. LPG and ethanol are handled in private tank cars which are then transported to wholesalers for final delivery. Plastics are delivered to manufacturers directly as well as to bulk distribution terminals for final motor carrier delivery.

All other products (7% of 2011 freight revenue) : We transport a variety of other freight including building materials, waste and scrap, and petroleum products. Due to the efficiencies of rail transportation and the nature of the freight that we carry — high volumes of heavy freight shipped long distances — our service is often the most competitive mode of  transportation for customers.

Customers

As of December 31, 2011, we served approximately 500 customers. In 2011, our 10 largest customers accounted for approximately 48.0% of our total freight revenue, with our largest customer accounting for approximately 10.9% (Norfolk Southern) of our total freight revenue.

Commercial Arrangements

A substantial portion of our freight revenue is generated under contracts and similar arrangements with either customers located on our line or the Class I railroads with which we connect. Contracts and arrangements vary in terms of duration, pricing and volume requirements. We collect the majority of our revenue from Class I railroads and other business entities. Moreover, our railroad is often integrated into a customer’s facility and serves as an important component of that customer’s supply chain. In certain circumstances, our customers have made significant capital investments in facilities on or near our railroad (as in the case of industrial plants or major warehouses) or are geographically unable to relocate (as in the case of rock quarries). We believe the quality of our customers and our level of integration with their facilities provide a stable and predictable revenue base. In addition, due to our captive drayage (local trucking) company, FEC Highway Services, L.L.C., and our alliances with the Class I railroads that we connect with in Jacksonville — Norfolk Southern and CSX — we are able to extend our reach throughout North America. Almost all commercial arrangements are subject to some form of fuel surcharge program that protects us from sudden increases in fuel costs. Commercial agreements that are not subject to a fuel surcharge program can typically be cancelled on short notice. Individual contracts and arrangements vary in terms of duration, pricing and volume requirements, but can generally be categorized as follows:

Contracts directly with customers/shippers : In many cases, we maintain a contract with the customer that we directly serve. Typically, the customer has significant rail infrastructure within its facility and is a major shipper or receiver of industrial freight. Contracts stipulate the term and pricing arrangements, and often include minimum customer volume requirements with liquidated damages paid to us to the extent volumes fall below certain levels.

Contracts directly with Class I railroads : We act as an agent for the connecting Class I railroads, with the Class I typically maintaining a contract directly with the customer/shipper for the entire length of haul. The Class I railroad pays us upon our providing the service for the portion of the total haul that occurs on our railroad, and the Class I, pays us regardless of whether the customer pays the Class I which results in low credit exposure and timely payment.

Quoted rate, or tariff : In the remaining cases, our railroad generates freight revenue using a rate per unit based on the type of freight service and market environment. Rates can typically be adjusted upon 30-days notice although some of our larger customers often request a private rate that provides more price certainty over a longer period of time. While we do not serve customers under signed contracts in these cases, we have long standing relationships with our customers and, in many instances, we are the only rail service provider available to customers. Moreover, the heavy nature of the freight shipped by the customer and/or the long distances carried competitively positions us favorably versus other modes of transportation.

Non-Freight Revenue

In addition to providing freight services, we also generate non-freight revenue from other sources such as 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 (including Class I railroads), ancillary dray charges, switching (managing and positioning railcars within a customer’s facility), and other transportation services.

A summary of our non-freight revenue generated during 2011 and 2010 is presented in the table below:

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Employees

As of December 31, 2011, we had approximately 538 employees, of which approximately 376 employees were represented by the following labor unions: United Transportation Union (“UTU”), representing train and engine service employees, Brotherhood of Maintenance of Way Employees (“BMWE”), representing track maintenance, structures and roadway shop employees, and International Brotherhood of Electrical Workers (“IBEW”), representing agents and clerical, carmen, maintenance of equipment foreman, signals and communications, train dispatchers, electricians, machinists, sheetmetal workers and shop laborers. In total, the Company is party to 9 labor agreements. We have developed a standard template with which to negotiate with the unions and are confident of its ability to satisfy them.

In 2010 and 2011, the Company successfully ratified bargaining agreements with the UTU, IBEW, and BMWE. The UTU and IBEW agreements were extended until the end of 2012 and the BMWE agreement was extended until the end of 2014.  Each of the current agreements contain an annual general wage increase of approximately 2%, and an Incentive Compensation Plan (“ICP”) based on safety results, whereby the employee can earn up to a 6% bonus should the criteria be met.

Safety

We endeavor to conduct safe railroad operations for the benefit and protection of employees, customers and the communities we serve. Our safety program, led by our Operations management team, involves all of our employees and is administered by our safety group. Operating personnel are trained and certified in train operations, hazardous materials handling, personal safety and all other areas subject to federal regulations. Each employee involved in train operations is subject to pre-employment and random drug testing as required by federal regulation. We believe that we comply in all material respects with federal, state, and local regulations. We also participate in committees of the AAR, governmental and industry sponsored safety programs including Operation Lifesaver (the national grade crossing awareness program) and numerous American Short Line and Regional Railroad Association Committees. Our Federal Railroad Administration (“FRA”) reportable injury frequency ratio, measured as reportable injuries per 200,000 man hours worked, was 0.56 in 2011, as compared to 1.58 in 2010. For 2011, the industry average for all railroads was 1.77.

Environmental Matters

We are subject to various federal, state and local laws and regulations relating to pollution and the protection of the environment. These include requirements for governing such matters as the management of wastes, the discharge of pollutants into the air and into surface and underground waters, the manufacture and disposal of regulated substances and remediation of contaminated soil and groundwater. Failure to comply with environmental requirements can result in fines and penalties, and may subject us to third party claims alleging personal injury, and/or property damage or seeking restrictions on our operations. Some environmental laws impose strict, and under some circumstances joint and several, liability for costs of investigation and remediation of contaminated sites on current and prior owners or operators of the sites, and also on entities that sent regulated materials to the sites, and also impose liability for related damages to natural resources.

In September 2006, the Florida Department of Environmental Protection (“FDEP”) notified us and an adjacent property owner that we had been identified as potentially responsible parties, or “PRPs,” with respect to groundwater contaminated with pesticides identified in Fort Pierce, Florida. We are continuing to undertake the environmental investigation of property in Fort Pierce as required by Florida law. Our environmental contractor recently completed supplemental site assessment activities and prepared a site assessment report which was submitted to the FDEP. The FDEP responded in a letter dated February 27, 2012 requesting additional site assessment activity be performed. We are reviewing the FDEP letter and preparing a response accordingly. Due to ongoing investigation, however, we are unable to estimate the total costs to address this site at this time. Based upon available information, as of December 31, 2011, the Company has accrued $1.5 million related to the alleged contamination of which $1.2 million is expected to be paid out over the next 5 to 10 years. In 2011 and 2010, $0.2 million and $0.2 million, respectively, were paid out for testing and site assessment.

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We believe that we operate in material compliance with current environmental laws and regulations. We estimate that any expenses incurred in maintaining compliance with current environmental laws and regulations will not have a material effect on our earnings or capital expenditures. However, there can be no assurance that new, or more stringent enforcement of existing, requirements or discovery of currently unknown conditions will not result in significant expenditures in the future.

Insurance

We maintain liability and property insurance coverage. Our primary liability policies have self-insured retentions of up to $2.0 million per occurrence. In addition, we maintain excess liability policies that provide supplemental coverage for losses in excess of our primary policy limits of up to $200.0 million per occurrence. Due to the location of our assets on Florida’s eastern seaboard, we also maintain windstorm coverage.

With respect to the transportation of hazardous commodities, our liability policies cover sudden releases of hazardous materials, including expenses related to evacuation, up to the same excess coverage limits and subject to the same self-insured retentions. Personal injuries associated with grade crossing accidents are also covered under liability policies.

Our employees are covered by the Federal Employers’ Liability Act (the “FELA”), a fault-based system under which claims resulting from injuries and deaths of railroad employees are settled by negotiation or litigation. FELA-related claims are covered under our liability insurance policies. Drivers of our trucking business are covered under occupational accident policies.

Our property damage policies, including windstorm coverage, provide coverage for track, infrastructure, business interruption, and all locomotives and rail cars in our care custody and control. This policy provides coverage up to $25.0 million per occurrence, subject to self-insurance retention of $0.75 million per occurrence.

Industry

Introduction

The U.S. economy is dependent on the movement of freight ranging from raw materials such as coal, ores, aggregates, lumber and grain to finished goods, such as food products, paper products, automobiles and machinery. Railroads represent the largest component of the freight transportation industry in the United States, carrying more freight than any other mode of transportation. With a network of approximately 138,600 miles of track, railroads link businesses with each other domestically and with international markets through connections with ports and other international terminals. Unlike other modes of transportation, such as trucking (which uses highways, toll roads, etc.) and shipping companies (that utilize ports), railroad operators generally own their infrastructure of track, land and rights of way, and rail yards. This infrastructure, most of which was originally established over 100 years ago, represents a limited supply of assets and a difficult-to-replicate network.

Industry Structure

According to the AAR, there are 565 railroads in the United States operating approximately 138,600 miles of track. The AAR classifies railroads operating in the United States into one of three categories based on the amount of revenues and track miles. Class I railroads, those with over $398.7 million in revenues, represent approximately 94% of total rail revenues. Regional and local/short line railroads operate approximately 43,000 miles of track in the United States. The primary function of these smaller railroads is to provide feeder traffic to the Class I carriers. Regional and local/short line railroads combined account for approximately 6% of total industry rail revenues.

Source: Association of American Railroads, Railroad Facts, 2011 Edition .

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Class I railroads operate across many different states and concentrate largely, though not exclusively, on long-haul, high density intercity traffic lanes. The six largest railroads in North America are BNSF Railway, Union Pacific, Norfolk Southern, CSX, Canadian National Railway, and Canadian Pacific Railroad Company. Regional railroads typically operate 400-650 miles of track and provide service to selected areas of the country, mainly connecting neighboring states and/or economic centers (including intrastate). Typically short line railroads serve as branch lines connecting customers with Class I railroads. Short line railroads have more predictable and straightforward operations as they generally perform point-to-point service over short distances, without the complex networks associated with the large Class I railroads.

Use of regional and short line railroads is largely driven by interchange traffic between carriers. Typically, a Class I railroad will transport the freight the majority of the distance, usually hundreds or thousands of miles and drop it off with the short line, which provides the final step of service directly to the customer. Most short line railroads depend on Class I traffic for a substantial portion of their revenue.

Regional and Short line Railroads

The North American short line and regional railroad industry has experienced steady growth over several decades. Short lines and regional railways have always been a part of the rail industry in North America. In the 1800’s, most North American railroads were constructed to serve a local or regional interest. Today’s Class I railroads are descended from hundreds of short lines and regionals that came together in successive waves of consolidation.

During the 1980’s, the number of regional and short line railroads increased dramatically. Deregulation of U.S. railroads simplified abandonment and sales regulations, allowing the major carriers to gain many of the savings of abandonment while preserving the traffic on the rail lines. Carriers created through this divestiture process now account for the majority of regional and short line railroads. Short line and regional railroads today serve important roles in moving freight within their service areas and function as a critical traffic “feeder” network for the Class I railroads.

Over the past decade, the number of regional and short line railroads has remained relatively constant. While some new entrants were formed through spin-offs or divestitures of Class I railroads, they have generally been offset by other existing regional and short lines either exiting the business or being merged with or acquired by other railroads. With the growth of multi-carrier holding companies, such as RailAmerica, Inc. (“RailAmerica”) and Genesee & Wyoming, the number of operators of regional and short line railroads has decreased. The consolidation brought on by multi-carrier holding companies has induced a number of shippers with private railroads to sell those railroads to the major short line operators. Similarly, Class I railroads sell and lease rail lines to smaller rail entities in order to address a range of issues impacting costs and productivity.

Short lines and regional railroads have a variety of ownership structures and are owned by shippers, governments, and multi-carrier holding companies.

Competition

Short line and regional railroads compete against each other and other forms of freight transportation based on cost, location and service. The cost of transporting goods and services via different forms of freight transportation is a major factor in determining which means of transportation a shipper will utilize. With respect to location, potential customers often experience geographic constraints that significantly impact the relative freight transportation costs of different alternatives. For example, a shipper can be constrained by railroad’s trackage, accessible waterways, access to pipelines, and proximity to airports. As a result, short line and regional railroad operators often evaluate the feasibility of other forms of freight transportation available to a customer when developing their rate and service offerings.

Some short line and regional railroad customers have multiple forms of freight transportation available. Depending on circumstances, truck, water, or other railroads may be competitive alternatives for a shipment. In such instances, customers will compare both the relative costs, reliability of on-time delivery and quality of service when determining what mode(s) of transport to use.

Trucking is often considered as a viable alternative to rail transport. Our intermodal freight services (trailers and containers on flat-rail cars) compete directly with trucking carriers. While trucking provides additional delivery location flexibility due to the geographic diversity of North America’s highway network relative to railway network, railroads are substantially more cost competitive along travel routes they serve. Recently, rail transport has become a more cost efficient alternative for shippers moving bulk goods over long distances, because of volatile fuel costs.

Other factors that enhance rail’s competitive advantage over trucking include:

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Further, for many shipments, transport options that include alternative railroads are competitive, even where direct service by a second rail carrier is not available. Although we are often the only rail carrier directly serving our customers, we compete directly with other railroads that potentially could deliver freight to our markets and customers via different routes and use of multiple modes of transportation. Our primary rail competition for carload traffic is CSX. However, our railroad is the most direct route to Southern Florida and due to this, Florida East Coast Railway (“FECR”) is the most well tailored to handle intermodal traffic and carries CSX’s intermodal traffic.

Options to ship by water are limited geographically, but when available can be very competitive with rail. Factors that enhance rail’s competitiveness over water options include:

The railroad industry has increased its share of freight ton-miles compared to other forms of freight transportation over the past quarter century due to its ability to haul heavy products over long distances more efficiently and at a lower cost. Since 1980, the railroad industry has continually improved its cost competitiveness compared to other forms of freight transportation as it consumes less fuel and has lower labor costs per ton transported than other forms of freight transportation. Railroads’ cost per ton-mile has decreased as a result of significant reductions to labor and rolling stock requirements and the spinning off of less dense network segments. According to the AAR, railroads are estimated to be approximately four times more fuel efficient than truck transportation while a single train can haul the equivalent of up to 280 trucks. Additionally, as the price of fuel has increased over the past several years, the fuel efficiency advantage of railroads as compared to other forms of freight transportation has grown. In 1980, one gallon of diesel fuel moved one ton of freight by rail an average of 235 miles, versus 2009 where the equivalent gallon of fuel moved one ton of freight an average of 480 miles by rail — representing a 104% increase over 1980. As a result, the railroad industry’s share of U.S. freight ton-miles has steadily increased from 30% in 1980 to 43% in 2007.

Regulation

We are subject to various safety and other laws and regulations administered by numerous government agencies, including (1) regulation by the U.S. Department of Transportation (the “USDOT”) and the Surface Transportation Board (the “STB”), successor to the Interstate Commerce Commission, (2) labor related statutes including the Railway Labor Act, the Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the FELA, and (3) some limited regulation by the State of Florida and in the states in which we do business.

The STB, established by the ICC Termination Act of 1995 (the “ICC Termination Act”), has jurisdiction over, among other matters, the construction, acquisition, or abandonment of rail lines, the consolidation or merger of railroads, the assumption of control of one railroad by another railroad, the use by one railroad of another railroad’s tracks through lease, joint use or trackage rights, the rates charged for regulated transportation services, and the service provided by rail carriers.

As a result of the 1980 Staggers Rail Act (the “Staggers Rail Act”), the rail industry is trusted with considerable rate and market flexibility including the ability to obtain wholesale exemptions from numerous provisions of the Interstate Commerce Act. The Staggers Rail Act allowed the deregulation of all containerized and truck trailer traffic handled by railroads. Requirements for the creation of new short line railroads or the expansion of existing short line railroads were substantially expedited and simplified under the exemption process. On regulated traffic, railroads and shippers are permitted to enter into contracts for rates and provision of transportation services without the need to file tariffs. Moreover, on regulated traffic, the Staggers Rail Act allows railroads considerable freedom to raise or lower rates without objection from captive shippers, although certain proposed shipper-backed legislative initiatives threaten to limit some of that pricing freedom. While the ICC Termination Act retained maximum rate regulation on traffic over which railroads have exclusive control, the new law relieved railroads from the requirements of filing tariffs and rate contracts with the STB on all traffic other than agricultural products.

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The FRA regulates railroad safety and equipment standards, including track maintenance, handling of hazardous shipments, locomotive and rail car inspection and repair requirements, and operating practices and crew qualifications.

Railroad Retirement

Railroad industry personnel are covered by the Railroad Retirement System instead of Social Security. Our contributions under the Railroad Retirement System have been approximately triple those of employees in industries covered by Social Security. The Railroad Retirement System, funded primarily by payroll taxes on covered employers and employees, includes a benefit roughly equivalent to Social Security (“Tier I”), an additional benefit similar to that allowed in some private defined-benefit plans (“Tier II”), and other benefits. For 2011, the Railroad Retirement System required up to a 19.75% contribution by railroad employers on eligible wages, while the Social Security and Medicare Acts only required a 7.65% contribution on similar wage bases.

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ITEM 1A.                                     RISK FACTORS

Our operations and financial condition are subject to certain risks that could cause actual operating and financial results to differ materially from those expressed or forecast in our forward-looking statements, including the risks described below and the risks that may be identified in future documents that are filed or furnished to the SEC.

Risks Related to Our Business

Adverse macroeconomic and business conditions, particularly in the State of Florida and the southeast, have and could continue to have an adverse impact on our business.

The decline in economic activity in the United States and throughout the world over the past two and a half years has had an adverse impact on our business. The global financial markets recently have undergone and may continue to experience significant volatility and disruption. The sustainability of an economic recovery is uncertain and additional macroeconomic, business and financial disruptions could have a material adverse effect on our operating results, financial condition and liquidity. In particular, our freight traffic is generally affected by overall economic conditions in Florida and the southeast, which have been severely impacted by the recent economic downturn. Our largest carload market, aggregates, is highly dependent upon the residential construction market, the commercial construction market and state and federal highway construction, each of which have been negatively affected by the recent economic conditions. The pace of residential construction as well as the level of state and federal highway and other public projects affect the amount of aggregate loadings that our customers request. During the recent economic downturn, the State of Florida has experienced an unprecedented decline in homebuilding. The condition of international economies, including the Caribbean, South America, Europe and Asian economies, can also affect our intermodal traffic.

We receive significant business from our customers who utilize the Port of Miami and Port Everglades for shipping and cargo activity. Our railroad relies on these Ports to serve cargo ships on behalf of our customers for import and export freight. The decline of imports or exports at these Ports could have material adverse affect on our operating results. The Company plans to establish intermodal container rail service on its own rail line leading into the Port of Miami for an estimated cost to the Company of $10.9 million (see Note 15). This investment could be at risk should the volumes not support the investment.

In addition, certain of our customers and suppliers are directly affected by the economic downturn, are facing credit issues and could experience cash flow problems that have and could continue to give rise to payment delays, increased credit risk, bankruptcies and other financial hardships that could decrease the demand for our rail services or delay our receipt of payment from certain customers. Adverse economic conditions could also affect our costs for insurance and our ability to acquire and maintain adequate insurance coverage for risks associated with the railroad business if insurance companies experience credit downgrades or bankruptcies. In addition, changes in governmental banking, monetary and fiscal policies to stimulate the economy, restore liquidity and increase credit availability may not be effective. It is difficult to determine the depth and duration of the economic and financial market problems and the many ways in which they may impact our customers, suppliers and our business in general. Moreover, given the asset-intensive nature of our business, the economic downturn increases the risk of significant asset impairment charges since we are required to assess for potential impairment of non-current assets whenever events or changes in circumstances, including economic circumstances, indicate that the respective asset’s carrying amount may not be recoverable. This may limit our ability to sell our assets to the extent we need, or find it desirable, to do so.

Furthermore, our railroad competes directly with other modes of transportation, including motor carriers, and ship, barge and pipeline operators. If these alternative methods of transportation become more cost-effective to our customers due to macroeconomic changes, or if legislation is passed providing materially greater opportunity for motor carriers with respect to size or weight restrictions, our operating results, financial condition and liquidity could be materially adversely affected.

Continuation or further worsening of current macroeconomic, business and financial conditions, particularly in the State of Florida and the southeast, could have a material adverse effect on our operating results, financial condition and liquidity.

Rising fuel costs could materially adversely affect our business.

Fuel costs were approximately 13.5%, 10.8% and 9.1% of our total operating revenue for the years ended December 31, 2011, 2010, and 2010, respectively.  Fuel prices and supplies are influenced significantly by international, political and economic circumstances. If fuel supply shortages or unusual price volatility were to arise for any reason, the resulting higher fuel prices would significantly increase our operating costs. Increases in fuel price may be passed along to customers through a “fuel surcharge” or otherwise, though often with delayed effect. However, there are no assurances that these surcharges will cover the entire fuel price increase for a given period, or that competitive market conditions will effectively allow us to pass along this cost.

As part of our railroad operations, we frequently transport hazardous materials, the accidental release of which could have an adverse effect on our operating results.

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We are required to transport hazardous materials to the extent of our common carrier obligation. An accidental release of hazardous materials could result in significant loss of life and extensive property damage. The associated costs could have an adverse effect on our operating results, financial condition or liquidity. In 2011, approximately 1.0% of our moves were related to hazardous materials.

A majority of our employees belong to labor unions, and strikes or work stoppages could adversely affect our operations.

Many of our employees are union-represented. Our union employees work under collective bargaining agreements with various labor organizations.  Our inability to negotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers. If our union-represented employees were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized or their terms and conditions in future labor agreements were renegotiated, we could experience significant disruption of our operations and higher ongoing labor costs.

Because we depend on Class I railroads and certain other customers for a significant percentage of our operations, our business and financial results may be adversely affected if our relationships with Class I carriers and such customers deteriorate.

The railroad industry in the United States is dominated by a small number of Class I carriers that have substantial market control and negotiating leverage. Approximately 57.8% of our traffic for the year ended December 31, 2011 was interchanged from CSX and Norfolk Southern, each a Class I carrier, and South Central Florida Express, a regional short line railroad. In addition, approximately 47.4% of our total freight revenue for the year ended December 31, 2011 was derived from Class I traffic and Norfolk Southern accounted for 11% of our total freight revenue for the same period. Approximately 1.0% of our total freight revenue for the year ended December 31, 2011 was derived from the regional short line traffic. No other customer represented more than 10% of our total freight revenue for the year ended December 31, 2011. Our ability to provide rail service to our customers depends in large part upon our ability to maintain cooperative relationships with Class I carriers and certain other customers with respect to, among other matters, freight rates, car supply, switching, interchange, fuel surcharges and trackage rights (an arrangement where the Company that owns the line retains all rights, but allows another company to operate over certain sections of its track). In addition, loss of customers or service interruptions or delays by our Class I and other interchange partners relating to customers who ship over our track may decrease our revenue. Furthermore, the ability of Class I carriers, in particular CSX and Norfolk Southern, to market and service southbound traffic into the Florida market will affect the amount of traffic we move.

Our Class I interchange partners are involved in negotiations with certain labor unions at the present time. A Presidential Emergency Board (PEB) issued a report to the parties that proffered a solution.  The parties extended the thirty day period cooling off period until February 8, 2012, and agreed to continue to negotiate outstanding issues.  The parties reached an agreement in February 2012. Though unlikely, any possible work stoppage should be recognized as a risk.

Although our operations served approximately 500 customers in 2011, freight revenue from our 10 largest freight revenue customers accounted for approximately 48.0% of our total freight revenues for the year ended December 31, 2011. In addition, we have three primary aggregate customers with operations in south Florida whose freight revenues represented approximately 12.3% of our total freight revenues for the year ended December 31, 2011 (of the three primary aggregate customers, none accounted for more than 10% of total freight revenue individually). Our revenues are affected by the demand for aggregate material, primarily in Florida, and the ability of these customers to supply this natural raw material efficiently and effectively. Substantial reduction in business with or loss of important customers could have a material adverse effect on our business and financial results.

The track maintenance tax credit was not renewed by Congress upon its expiration on December 31, 2011, currently we are no longer able to earn or assign credits for track maintenance. Several legislative efforts to extend various tax credits that expired at the end year are being pursued by short line and regional railroads.  However, at this time there is no clarity as to whether the tax credits will be extended and, if they are, whether the extension would be retroactive to January 1, 2012.

In 2010, we received approximately $2.4 million from the assignment of tax credits for certain track maintenance expenditures pursuant to Section 45G of the Internal Revenue Code. Section 45G expired at the end of 2009, but was subsequently and retroactively reinstated on December 17, 2010, when President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law, which includes provisions to extend several tax provisions through 2010 and 2011, including Section 45G. Accordingly, the Section 45G tax credit had been extended until December 31, 2011 to cover expenditures paid or incurred in the 2010 and 2011 taxable years.  There can be no assurances that legislation renewing the availability of the Section 45G tax credit will be enacted.

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We are subject to environmental and other governmental regulation of our railroad operations, which could impose significant costs.

Our operations and properties are subject to federal, state and local environmental laws and regulations that impose strict, and in certain cases joint and several, liability for such costs, including, among other things, discharge of pollutants into the air, water and soil, the generation, handling, storage, transportation, treatment and disposal of waste and other regulated materials, and the cleanup of contaminated properties and human health and safety. The failure to comply with environmental and other governmental regulations could have a material adverse effect on us. We could incur significant costs, fines and penalties as a result of any allegations or findings to the effect that we have violated or are strictly liable under these laws or regulations. We may be required to incur significant expenses to investigate and remediate environmental contamination. We are also subject to governmental regulation by a significant number of federal, state and local regulatory authorities with respect to our railroad operations and a variety of health, safety, labor, maintenance and other matters.

New legislation or regulatory changes could impact our or restrict our ability to independently negotiate prices.

Legislation passed by Congress or new regulations issued by federal agencies can significantly affect the revenues, costs and profitability of our business. For instance, in December 2009, a proposed bill called the “Surface Transportation Board Reauthorization Act of 2009” was introduced in the Senate but not advanced. In January 2011, the bill now referred to as the Surface Transportation Board Reauthorization Act of 2011 (“STB Reauthorization Bill”) was reintroduced. The STB Reauthorization Bill, if adopted, could increase government involvement in railroad pricing, service and operations. The proposed legislation also includes provisions that would reduce the ability to price at market levels, and open a carrier’s privately-owned and maintained rail network to competitors where certain conditions are met.

If adopted as proposed, this bill could significantly change the federal regulatory framework of the railroad industry. Several of the changes under consideration could have a significant negative impact on our ability to determine prices for rail services, meet service standards and could force a reduction in capital spending. Statutes imposing price constraints or affecting rail-to-rail competition could adversely affect our profitability.

Severe weather and natural disasters could disrupt normal business operations, which could result in increased costs and liabilities and decreases in revenues.

Our operating assets are located on Florida’s eastern seaboard. Severe weather conditions and other natural phenomena, including hurricanes and other severe storms, fires and floods, may cause significant damage, destruction and business interruptions and result in increased costs, increased liabilities and decreased revenue. Additionally, the operations and properties of some of our customers (especially aggregate suppliers) are also subject to natural disasters, which could significantly reduce the volumes they ship and result in decreased revenue.

We face possible catastrophic loss and liability, and our insurance may not be sufficient to cover our damages or damages to others.

The operation of any railroad carries with it an inherent risk of catastrophe, mechanical failure, collision, and property loss. In the course of our operations, spills or other environmental mishaps, cargo loss or damage, business interruption due to political developments, as well as labor disputes, strikes and adverse weather conditions, could result in a loss of revenues or increased liabilities and costs. Collisions, cargo leaks or explosions, environmental mishaps, or other accidents can cause serious bodily injury, death, and extensive property damage, particularly when such accidents occur in heavily populated areas. Additionally, our operations may be affected from time to time by natural disasters such as hurricanes and other severe storms and floods. The occurrence of a major natural disaster could have a material adverse effect on our operations and financial condition. We maintain insurance that is consistent with industry practice against the accident-related risks involved in the conduct of our business and business interruption due to natural disaster. In addition, due to the location of our assets on Florida’s eastern seaboard, we also maintain windstorm coverage. However, our insurance is subject to a number of limitations on coverage, depending on the nature of the risk insured against. This insurance may not be sufficient to cover our damages or damages to others and this insurance may not continue to be available at commercially reasonable rates. In addition, we are subject to the risk that one or more of our insurers may become insolvent and would be unable to pay a claim that may be made in the future. Even with insurance, if any catastrophic interruption of service occurs, we may not be able to restore service without a significant interruption to operations which could have an adverse effect on our financial condition.

We may face liability for casualty losses that are not covered by insurance.

We have obtained insurance coverage, including windstorm coverage, for losses sustained by our railroad arising from personal injury and for property damage in the event of derailments or other incidents. Personal injury claims made by our railroad employees are subject to

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the Federal Employers’ Liability Act (FELA) rather than state workers’ compensation laws. Currently, we are responsible for the first $2.0 million of expenditures per each incident under our general liability insurance policy and $0.75 million of expenditures per each incident under our property insurance policy. Severe accidents or personal injuries could cause our liability to exceed our insurance limits which might have a material adverse effect on our business and financial condition. Our annual insurance limits are $200.0 million and $25.0 million on liability and property, respectively. In addition, adverse events directly and indirectly attributable to us, including such things as derailments, accidents, discharge of toxic or hazardous materials, or other like occurrences in the industry, can be expected to result in increases in our insurance premiums or our self insured retentions and could result in limitations to the coverage under our existing policies. Furthermore, the market for windstorm coverage remains very limited and costly. It is unknown how much windstorm coverage we will purchase in the future, and it is possible that our property will experience windstorm damage and utility service interruption in excess of insurance limits.

Our inability to efficiently utilize our rail car and intermodal fleet could have an adverse effect on our operations and financial condition.

We earn per diem rents on the use of our rail car and intermodal fleet of equipment based on other railroads’ or transportation service providers’ use of the equipment. Future significant downturns in the overall U.S. economy, equipment obsolescence or reduced market demand for our car and/or intermodal fleet, or efforts by other railroads or transportation providers to improve equipment utilization practices or increase or decrease the size of their equipment fleets could affect the utilization of and per diem rents for our equipment.

Also, we, through operating agreements, currently lease approximately 3,222 rail cars from Greenbrier Leasing Corporation (“Greenbrier”), The CIT Group (formerly, Bombardier Capital) and other entities, with lease lengths generally of three, five and ten years. Under the terms of the lease, the counterparty bills us an hourly rate based upon the length of time the car is on our railroad (on-line) or on another railroad (off-line). As a car goes off-line, a per diem rent sharing arrangement goes into effect whereby we and the counterparty apportion the rent based upon the length of time the car is off-line. Certain of these leases provide that we must pay the counterparty a base rent payment if the car remains on our line for a specified number of days. As a result, if a car remains on our line beyond certain periods of time, we may be required to pay our applicable counterparty a base rent amount even though we have not received any revenue under the contract because the car has not been off our line, which would reduce our operating results. Rents from Greenbrier, CIT, and other entities received by the Company were $6.5 million, $6.8 million, and $5.5 million in 2011, 2010, and 2009, respectively. By contrast, to date, the base rent payments that we have made to counterparties—i.e., payments we have made to counterparties in excess of the amount of revenue we have generated under the applicable lease—have been minimal.

Shared use of our railroad corridor with passenger railroad operations could have an adverse effect on our ability to utilize our railway efficiently, which could impact our operations and financial condition.

In December 2007, we granted to FDG Passenger ROW Holdings LLC (“FDG Passenger”), a subsidiary of FECI, a permanent, perpetual and exclusive easement for purposes consistent with, or relating to, commuter rail and transit passenger railroad operations, subject to certain exceptions. If FDG Passenger were to commence operating a passenger railroad on our railway corridor pursuant to the right granted by the passenger rail easement, without infrastructure improvement and additional capacity on our network we could be required to reduce our levels of freight volume as a result of sharing the corridor, which could have an adverse effect on our ability to utilize our railway efficiently, which may impact our operations and financial condition. We may also incur additional liability, casualty and property risks as a result of shared use of the corridor with passenger railroad operations, which could also adversely effect our operations and financial condition.

We depend on our management and key personnel, and we may not be able to operate and grow our business effectively if we lose the services of our management or key personnel or are unable to attract qualified personnel in the future.

The success of our business is heavily dependent on the continued services and performance of our current management and other key personnel and our ability to attract and retain qualified personnel in the future. The loss of key personnel could affect our ability to run our business effectively. Competition for qualified personnel is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. Although we have entered into employment agreements with certain of our key personnel, these agreements do not ensure that our key personnel will continue in their present capacity with us for any particular period of time. The loss of any key personnel could require one or more remaining key personnel to divert immediate and substantial attention to seeking a replacement or performing the duties of the departed executive. An inability to find a suitable replacement for any departing executive officer on a timely basis could adversely affect our ability to operate and grow our business.

Future acts of terrorism or war, as well as the threat of war, may cause significant disruptions in our business operations.

Terrorist attacks, such as those that occurred on September 11, 2001, as well as the more recent attacks on the transportation systems in Madrid and London, any government response to those types of attacks and war or risk of war may adversely affect our results of operations,

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financial condition or liquidity. Our rail lines and facilities could be direct targets or indirect casualties of an act or acts of terror. Such acts could cause significant business interruption and result in increased costs and liabilities and decreased revenues, which could have an adverse effect on our operating results and financial condition. Such effects could be magnified where releases of hazardous materials are involved. Any act of terror, retaliatory strike, sustained military campaign or war or risk of war may have an adverse effect on our operating results and financial condition by causing or resulting in unpredictable operating or financial conditions, including disruptions of rail lines, volatility or sustained increase of fuel prices, fuel shortages, general economic decline and instability or weakness of financial markets which could restrict our ability to raise capital. In addition, insurance premiums charged for some or all of our coverage could increase dramatically or certain coverage may not be available to us in the future.

The availability of qualified personnel and an aging workforce may adversely affect our operations.

Changes in demographics, training requirements and the availability of qualified personnel, particularly train crew members, could negatively affect our service levels. Unpredictable increases in demand for rail services may exacerbate these risks and may have an adverse effect on our operating results, financial condition or liquidity.

Risks Related to Our Indebtedness

We have a substantial amount of indebtedness, which may adversely affect our cash flow and our ability to operate our business.

As of December 31, 2011, our total indebtedness was approximately $610 million, including the Senior PIK Toggle Notes and the 8 ⅛% Notes, which represented approximately 70% of our total capitalization. Our substantial indebtedness could have important consequences, including:

·                           increasing our vulnerability to adverse economic, industry or competitive developments;

·                           requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

·                           making it more difficult for us to satisfy our obligations with respect to the notes;

·                           restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

·                           limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and

·                           limiting our flexibility in planning for, or reacting to, changes in our business or the industry in which we operate, placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who therefore may be able to take advantage of opportunities that our leverage prevents us from exploiting.

Holdings Corp. is a holding company and, therefore, depends on its subsidiaries to service its financial obligations.

Holdings Corp. has no operations of its own and it derives all of its revenues and cash flow from FECR Corp. and its subsidiaries. FECR Corp. is a separate and distinct legal entity and has no obligation, contingent or otherwise, to make any funds available to pay Holdings Corp., whether by dividend, distribution, loan or other payments.  Holdings Corp. will depend on FECR Corp. (and any other subsidiaries that Holdings Corp. may form in the future) for dividends and other payments to generate the funds necessary to meet Holdings Corp.’s financial obligations, including payments of principal and interest on 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 FECR Corp., may limit Holdings Corp.’s ability to obtain cash from FECR Corp. The indenture governing the 8 ⅛ % Notes 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 Senior PIK Toggle Notes when such payments are due. In addition, even if such earnings were sufficient, the agreements governing the current and future indebtedness of FECR Corp. may not permit FECR Corp. to provide us with sufficient dividends, distributions or loans to fund interest and principal payments on the Senior PIK Toggle Notes when due.

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Despite our substantial indebtedness level, we and our subsidiaries will still be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

Subject to specified limitations, the indenture governing the notes permits Holding Corp. to incur additional debt. Further, the indenture governing the Senior PIK Toggle Notes, the indenture governing the 8 ⅛ % Notes and the ABL Facility each permit our subsidiaries to incur additional debt. As of the date of this filing, FECR Corp. had $30.0 million of available borrowings under its ABL Facility. If new debt is added to our or any such subsidiary’s current debt levels, the risks described above could intensify.

Our debt agreements contain restrictions that will limit our flexibility in operating our business.

The indenture governing the 8 ⅛ % Notes, Senior PIK Toggle Notes and our ABL Facility contain various covenants that will limit our ability to engage in specified types of transactions. The indenture and the ABL Facility covenants will limit our and our restricted subsidiaries’ ability to, among other things:

·                           incur additional indebtedness;

·                           pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

·                           make certain investments;

·                           sell, transfer or convey certain assets;

·                           create liens;

·                           enter into sale and leaseback transactions;

·                           issue or sell preferred stock;

·                           in the case of our restricted subsidiaries, restrict them from making dividends or other payments to us;

·                           in the case of our restricted subsidiaries, guarantee or secure debt;

·                           engage in transactions with affiliates;

·                           create unrestricted subsidiaries; and

·                           consolidate, merge, sell or otherwise dispose of all or substantially all of our assets and the assets of our subsidiaries (if any) on a consolidated basis.

These covenants could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities.

In addition, if availability under the ABL Facility is below $7.5 million, we will be subject to a minimum fixed charge coverage ratio (as defined in the ABL Facility) of 1.1 to 1.0. If this covenant becomes operative in the future, events beyond our control, including changes in general economic and business conditions, may affect our ability to meet this financial ratio test. There can be no assurance that we will meet this potential financial ratio test or that our lenders will waive any failure to meet this test.

A breach of any of these covenants or any other restrictive covenants contained in FECR Corp.’s ABL Facility or the indenture governing the Senior PIK Toggle Notes and the indenture governing the 8 ⅛ % Notes could result in an event of default. If an event of default under FECR Corp.’s ABL Facility, the indenture governing the Senior PIK Toggle Notes or the indenture governing the 8 ⅛ % Notes occurs, the holders of the affected indebtedness could declare all amounts outstanding, together with accrued interest, to be immediately due and payable, which, in turn, could cause the default and acceleration of the maturity of our or FECR Corp.’s other indebtedness. If we were unable to pay such amounts, the lenders under FECR Corp.’s ABL Facility and noteholders of the 8 ⅛ % Notes could proceed against the collateral pledged to them.

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We may not be able to generate sufficient cash to service the 8 ⅛ % Notes or our other indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on the notes or our other indebtedness. Any payments we make directly or indirectly to our parent companies would reduce the level of cash available to us to make the scheduled payments in respect of the 8 ⅛ % Notes.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance the 8 ⅛% Notes or our other indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of the indenture governing the 8 ⅛% Notes and existing or future debt instruments may restrict us from adopting some of these alternatives. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

ITEM 1B. UNRESOVLED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Track and Equipment

Track

We own a railroad right-of-way, generally 100-feet wide, along the east coast of Florida extending for 351 miles from Jacksonville to Miami, used for our railroad operations. We also own/lease and operate approximately 235 miles of branch, switching and other secondary track, 115 miles of yard track, various rail car marshalling yards, trailer/container and automobile loading and unloading facilities, signaling system facilities, and a number of operating offices, shops and service house buildings.

The mainline is, in general, constructed of 136-pound per yard continuous welded rail supported on concrete cross-ties. The facilities provide a reliable infrastructure for rail operations suited to the business demands of our customers, including unrestricted movement of double-stacked containers, tri-level automobiles and heavier rail axle cars. The branch mainlines, way switching and yard tracks are, for the most part, constructed of 115-pound per yard materials supported by wood ties.

Locomotives and Railcars (“Rolling Stock”)

As of December 31, 2011, the Company owned or leased 59 diesel electric locomotives, 4,660 freight cars, 1,322 trailers, containers and chassis for highway revenue service, numerous pieces of rail-mounted work equipment and numerous automobiles used in maintenance and transportation operations. Generally, the Company’s equipment is in good physical condition, considering its years of service and operating utilization.

A summary of the rolling stock owned and leased by us at the end of 2011 is presented in the table below:

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In 2009, the Company began to lease out our excess locomotives. During 2011, the Company sold 26 locomotives and at the end of 2011, the Company had leased out 6 locomotives of its fleet. Most of these leases are on one-year terms.

The average age of our locomotives and railcars is 29 years as compared to a depreciable life of 50 years for new locomotives. The average of our railcars is 24 years as compared to depreciable life of 50 years for a new railcar.

In addition to the rolling stock that the Company owns, the Company currently manages 3,222 rail cars from Greenbrier Leasing Corporation and other entities, with lease lengths generally of three, five and ten years. The lease terms call for the Company to be billed an hourly rate based upon the length of time the car is on our railroad (on-line) or on another railroad (off-line). As a car goes off-line, a per diem rent sharing arrangement goes into effect whereby Greenbrier and the Company apportion the rent based upon the length of the time the car is off-line. Rents from Greenbrier and other entities received by the Company were $6.5 million, $6.8 million, and $5.5 million in 2011, 2010, and 2009, respectively.

ITEM 3. 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 Annual Report on Form 10-K, we are not a party to any material legal or adverse regulatory proceedings.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

FECR Rail Holdings, LLC, our ultimate parent, an entity wholly owned by private equity funds managed by affiliates of Fortress, owns approximately 99.8% of our outstanding common stock. There is no established public trading market for our common stock.

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ITEM 6. SELECTED FINANCIAL DATA

The following tables summarize selected historical consolidated financial information for our business. You should read these tables along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business”, and our consolidated historical financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

Certain entities commonly-owned by private equity funds managed by affiliates of Fortress acquired all of the outstanding stock of Florida East Coast Industries, Inc. (“FECI”) on July 26, 2007 (herein referred to as the “Acquisition”). On December 31, 2007, FECI sold its rail transportation segment, which operated as separate legal entities (“Florida East Coast Railway, L.L.C.” and “FEC Highway Services, L.L.C.”), to private equity funds managed by affiliates of Fortress (herein referred to as the “Rail Separation”). Concurrent with the Rail Separation, FECR Rail LLC and the Company were formed to carry on the activities of Florida East Coast Railway, L.L.C.  In January 2011, FECR Rail LLC contributed all of its holdings of the Company’s common and preferred shares to Florida East Coast Holdings Corp. (“Holdings Corp.”), whereby Holdings Corp. became the immediate parent of FECR Corp.

The selected historical consolidated financial data presented for the period from January 1, 2007 to July 26, 2007 (the “Predecessor” period) have been derived from the audited historical Consolidated Financial Statements of FECR Corp. prior to the Acquisition. The selected historical consolidated financial data for the period July 27, 2007 to December 31, 2007, and the years ended December 31, 2008, 2009, 2010, and 2011 (the “Successor” period), have been derived from the audited historical Consolidated Financial Statements of FECR subsequent to the Acquisition. As a result of the Acquisition, our current capital structure and our basis of accounting differ from those prior to the Acquisition. Our historical consolidated financial data in respect of reporting periods subsequent to July 26, 2007, reflect the Acquisition under the purchase method of accounting. Therefore, our historical consolidated financial data for the Predecessor period may not be comparable to our financial data for the Successor period.

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Notes:

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS O F 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 included in this Annual Report on Form 10-K.  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.”

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 immediate 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 Holdings Corp.’s separate debt obligations and 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 to reflect the capital structure for Holdings Corp. for the year ended December 31, 2011.

Overview

We own and operate a 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 2011, we carried approximately 1,176 units per mainline track mile, which we believe is more than any of the Class I railroads in the United States.

In 2011, we transported over 412,000 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 volume growth of intermodal containers.

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 rail 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, and other expenses.  Our operating expenses include labor, equipment rents (locomotives and railcars), purchased services (contract labor and professional services), diesel fuel, casualties and insurance, materials, property taxes, 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, and (iii) continued focus on safety to lower the costs and risks associated with operating our business.

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Changes in units and revenue per unit (“RPU”) have a direct impact on freight revenue.  We continue to implement more effective pricing by carefully analyzing pricing decisions to improve our freight revenue per unit.  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.

Non-freight services offered to our rail customers include switching (or managing and positioning railcars within a customer’s facility), car hire and demurrage (allowing our customers and other railroads to use our railcars for storage or transportation in exchange for a daily fee), realty and equipment lease rentals, and dray ancillary charges (detention, lumper, and other). Each of these services leverages our existing customer relationships and generates additional revenue with minimal capital investment.

Acquisition and Rail Separation

On July 26, 2007, Fortress acquired all of the outstanding capital stock of FECI in the Acquisition, which was accounted for using the purchase method of accounting in accordance with the Business Combinations Topic of the Financial Accounting Standards Board (“FASB”). Under the purchase method of accounting, the assets acquired and liabilities assumed from FECI were recorded at the date of acquisition at their respective fair values.

As of December 31, 2007, subsequent to the Acquisition, we acquired all of the assets and liabilities of Florida East Coast Railway, L.L.C. and FEC Highway Services L.L.C. in the Rail Separation for a cash consideration of $246.4 million.

Highlights for the Years ended December 31, 2011 and 2010

Highlights for the Years ended December 31, 2010 and 2009

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Results of Operations

Comparison of Operating Results for the Year Ended December 31, 2011 and 2010

Operating Revenue

Operating revenues increased $13.3 million, or 6.6%, to $213.3 million for the year ended December 31, 2011 from $200.0 million for the year ended December 31, 2010. The net increase was primarily due to an increase in intermodal revenues, negotiated rate increases, and increased fuel surcharge recovery, partially offset by decreased carload revenues.

Freight revenues increased $13.9 million, or 7.7%, to $194.5 million for the year ended December 31, 2011 from $180.7 million for the year ended December 31, 2010.  The increase was primarily due to increased negotiated rates and volumes (intermodal volume increases were offset by a decrease in carload volumes), as well as increased fuel surcharge recovery.  Total units increased 1.0% to 412,791 for the year ended December 31, 2011, from 410,096 for the year ended December 31, 2010.

The increase in average revenue per unit to $471 for the year ended December 31, 2011 from $441 for the year ended December 31, 2010 was due to an increase in price and fuel surcharge recovery, offset by a decrease related to traffic mix. Carload traffic, which has a higher average revenue per unit, was 18.8% of the traffic in 2011 as compared to 20.8% in 2010.

The following table compares freight revenues, units, and average freight revenue per unit for the year ended December 31, 2011 and 2010:

Intermodal revenues increased $16.3 million (Rate/Mix increase—$12.7 million; Volume increase—$3.6 million) for the year ended December 31, 2011, compared to the year ended December 31, 2010. Rate/Mix represents the change in price per unit charged to the customer as well as the change in price per unit due to the mix in traffic as the rate per unit may vary per the commodity handled and the length of the haul. Our Rate/Mix increase was driven by an increase in actual price offset by a change in mix. Overall, Intermodal shipments increased 3.2% or 10,482 units for the year ended December 31, 2011, compared to the year ended December 31, 2010. This growth was attributable to our international business (which primarily includes our customers that ship freight through maritime ports), freight with our Class I partners, as well as conversion of truckload traffic to rail.

Carload revenues for the year ended December 31, 2011 decreased $2.4 million (Rate/Mix increase—$3.8 million; offset by Volume decrease—$6.2 million) compared to the year ended December 31, 2010.  Overall, carload shipments declined 9.1%, or 7,787 units, for the year ended December 31, 2011 compared to the year ended December 31, 2010. This decrease in carload revenue was primarily due to the net effect of the following:

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Non-freight revenues decreased $0.6 million, or 3.1%, to $18.8 million for the year ended December 31, 2011 from $19.4 million for the year ended December 31, 2010. The primary decrease in non-freight revenues was due to the sale of locomotives that were previously under lease.

Operating Expenses

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

Operating expenses increased to $178.3 million for the year ended December 31, 2011, from $157.0 million for the year ended December 31, 2010, an increase of $21.3 million, or 13.6%. The operating ratio was 83.6% for the year ended December 31, 2011 compared to 78.5% for the year ended December 31, 2010. Set forth below is additional detail regarding changes in our operating expenses:

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Other Income (Expense)

Interest Expense (net of interest income). Interest expense decreased $8.9 million, or 13.3%, to $57.4 million for the year ended December 31, 2011 from $66.3 million for the year ended December 31, 2010. The decrease was primarily due to a change in the combined interest rates in connection with refinancing the $1.656 billion Senior Secured Credit Facility (the “Old Facility”) with proceeds of $475.0 million from the sale of the 8 ⅛% Notes (9.75% interest rate on the Old Facility as compared to a rate of 8.125% on the 8 ⅛% Notes), as well as the $130.0 million gross proceeds from the sale of the Senior PIK Toggle Notes (interest rate on the Senior PIK Toggle Notes is 10 ½% / 11 ¼%).

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

Provision for Income Taxes. For the year ended December 31, 2011, we believe that it is more likely than not that our net operating losses expected to be generated by the Company in 2011 will expire unused. Accordingly, we recognized tax expense in the amount of $14.9 million for the year ended December 31, 2011. For the year ended December 31, 2010, we expected that our net operating losses would be fully utilized.

Comparison of Operating Results for the Year Ended December 31, 2010 and 2009

Operating Revenue

Operating revenue increased $18.9 million, or 10.5%, to $200.0 million for the year ended December 31, 2010 from $181.1 million for the year ended December 31, 2009. The net increase was primarily due to increased volumes, increased fuel surcharge and an increase in non-freight revenues.

Freight revenues increased $12.7 million, or 7.6%, to $180.7 million for the year ended December 31, 2010 from $168.0 million for the year ended December 31, 2009. The increase freight revenues resulted from increased fuel prices and higher volumes of traffic. Total units increased 10.1% to 410,096 in 2010 from 372,487 in 2009 (increased intermodal volumes were offset by decreased carload volumes).

The decrease in the average revenue per unit to $441 for the year ended December 31, 2010 from $451 for the year ended December 31, 2009 was primarily due to the decrease in traffic mix (our volume growth has been driven by shorter haul moves), and, to some extent, the change in mix from carload traffic to intermodal traffic, partially offset by the increase in price and fuel surcharges. Carload traffic, which has a higher average revenue per unit, was 20.8% of the total volume in 2010 as compared to 25.6% in 2009.

The following table compares freight revenues, units, and average freight revenue per unit for the years ended December 31, 2010 and 2009: