This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods. Except where the context otherwise requires, the terms "we," "us," or "our" refer to the business of RailAmerica, Inc. and its consolidated subsidiaries.
Certain statements in this Quarterly Report on Form 10-Q and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to future events and financial performance. Words such as "anticipates," "expects," "intends," "plans," "projects," "believes," "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, prolonged capital markets disruption and volatility, general economic conditions and business conditions, our relationships with Class I railroads and other connecting carriers, our ability to obtain railcars and locomotives from other providers on which we are currently dependent, legislative and regulatory developments including rulings by the Surface Transportation Board or the Railroad Retirement Board, strikes or work stoppages by our employees, our transportation of hazardous materials by rail, rising fuel costs, acquisition risks, competitive pressures within the industry, risks related to the geographic markets in which we operate; and other risks detailed in our filings with the Securities and Exchange Commission, including our prospectus filed with the Commission on October 13, 2009. 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 its 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 its expectations with regard thereto or change in events, conditions or circumstances on which any statement is based. General
Our Business
We believe that we are the largest owner and operator of short line and regional freight railroads in North America, measured in terms of total track-miles, operating a portfolio of 40 individual railroads with approximately 7,500 miles of track in 27 states and three Canadian provinces. In addition, we provide non-freight services such as railcar storage, demurrage, leases of equipment and real estate leases and use fees.
Managing Business Performance
We manage our business performance by (i) growing our freight and non-freight revenue, (ii) driving financial improvements through a variety of cost savings initiatives, and (iii) continuing to focus on safety to lower the costs and risks associated with operating our business.
Growth in carloads and increases in revenue per carload have a positive effect on freight revenue. Carloads have decreased in 2008 and 2009 due to the global economic slowdown, however, the diversity in our customer base helps mitigate our exposure to severe downturns in local economies. We do not expect carload volumes to recover for the remainder of 2009. We continue to implement more effective pricing by centralizing and carefully analyzing pricing decisions and expect revenue per carload to remain stable for 2009.
Non-freight services offered to our rail customers include switching (or managing and positioning railcars within a customer's facility), storing customers' excess or idle railcars on inactive portions of our rail lines, third party railcar repair, and car hire and demurrage (allowing our customers and other railroads to use our railcars for storage or transportation in exchange for a daily fee). Each of these services leverages our existing customer relationships and generates additional revenue with minimal capital investment. Management also intends to grow non-freight revenue from users of our land holdings for non-transportation purposes.
Our operating costs include labor, equipment rents (locomotives and railcars), purchased services (contract labor and professional services), diesel fuel, casualties and insurance, materials, joint facilities and other expenses. Each of these costs is included in one of the

following functional departments: maintenance of way, maintenance of equipment, transportation, equipment rental and selling, general & administrative.
Management is focused on improving operating efficiency and lowering costs. Many functions such as pricing, purchasing, capital spending, finance, insurance, real estate and other administrative functions are centralized, which enables us to achieve cost efficiencies and leverage the experience of senior management in commercial, operational and strategic decisions. A number of cost savings initiatives have been broadly implemented at all of our railroads targeting lower fuel consumption, safer operations, more efficient locomotive utilization and lower costs for third party services, among others.
Commodity Mix
Each of our 40 railroads operates independently with its own customer base. Our railroads are spread out geographically and carry diverse commodities. For the three months ended September 30, 2009, coal, agricultural products and chemicals accounted for 22%, 15% and 10%, respectively, of our carloads. As a percentage of our freight revenue, which is impacted by several factors, including the length of the haul, agricultural products, chemicals and coal generated 17%, 14% and 11%, respectively, for the three months ended September 30, 2009. For the nine months ended September 30, 2009, coal, agricultural products and chemicals accounted for 22%, 14% and 10%, respectively, of our carloads. As a percentage of our freight revenue, agricultural products, chemicals and coal generated 15%, 14% and 11%, respectively, for the nine months ended September 30, 2009.
Overview
Three months ended September 30, 2009
Operating revenue in the three months ended September 30, 2009, was $110.1 million, compared with $133.4 million in the three months ended September 30, 2008. The net decrease in our operating revenue was primarily due to decreased carloads and lower fuel surcharges, partially offset by negotiated rate increases and an increase in our non-freight revenue.
Freight revenue decreased $27.9 million, or 24.0%, in the three months ended September 30, 2009, compared with the three months ended September 30, 2008, primarily due to a decrease in carloads of 23.0%. Non-freight revenue increased $4.6 million, or 26.2%, in the three months ended September 30, 2009, compared with the three months ended September 30, 2008, primarily due to the restructuring of a Class I contract, and increases in car storage fees and car repair revenue.
Our operating ratio, defined as total operating expenses divided by total operating revenue, was 76.7% in the three months ended September 30, 2009, compared with an operating ratio of 81.5% in the three months ended September 30, 2008, primarily due to a decrease in diesel fuel prices, reductions in labor expenses, maintenance expenditures for right of way improvements as well as our cost savings initiatives as discussed under "- Results of Operations" and a reduction in car hire expense. Operating expenses were $84.5 million in the three months ended September 30, 2009, compared with $108.7 million in the three months ended September 30, 2008, a decrease of $24.2 million, or 22.2%.
Net income in the three months ended September 30, 2009, was $3.5 million, compared with $2.9 million in the three months ended September 30, 2008. Income from continuing operations in the three months ended September 30, 2009, was $3.5 million, compared with $2.0 million in the three months ended September 30, 2008. Net income for the three months ended September 30, 2009 included $5.4 million of tax benefits primarily related to the conversion of certain operating subsidiaries to single member limited liability companies effective September 30, 2009 and the adjustment of our deferred tax balances resulting from a change in estimate of our apportioned state tax rates. Nine months ended September 30, 2009
Operating revenue in the nine months ended September 30, 2009, was $316.6 million, compared with $388.6 million in the nine months ended September 30, 2008. The net decrease in our operating revenue was primarily due to decreased carloads and lower fuel surcharges, partially offset by negotiated rate increases and an increase in our non-freight revenue.
Freight revenue decreased $83.4 million, or 24.5%, in the nine months ended September 30, 2009, compared with the nine months ended September 30, 2008, primarily due to a decrease in carloads of 24.7%. Non-freight revenue increased $11.4 million, or 23.9%, in the nine months ended September 30, 2009, compared with the nine months ended September 30, 2008, primarily due to increases in car storage fees, real estate rental revenue and demurrage charges.

Our operating ratio was 77.6% in the nine months ended September 30, 2009, compared with an operating ratio of 83.0% in the nine months ended September 30, 2008, primarily due to a decrease in diesel fuel prices, reductions in labor expenses, maintenance expenditures for right of way improvements as well as our cost savings initiatives as discussed under "- Results of Operations" and a reduction in car hire expense. Operating expenses were $245.7 million in the nine months ended September 30, 2009, compared with $322.7 million in the nine months ended September 30, 2008, a decrease of $77.0 million, or 23.9%.
Net income in the nine months ended September 30, 2009, was $22.7 million, compared with $7.7 million in the nine months ended September 30, 2008. Income from continuing operations in the nine months ended September 30, 2009, was $9.8 million, compared with $7.1 million in the nine months ended September 30, 2008. Net income for the nine months ended September 30, 2009 included $3.0 million of tax benefits primarily related to the resolution of the Australian tax audit, conversion of certain operating subsidiaries to single member limited liability companies effective September 30, 2009 and the adjustment of our deferred tax balances resulting from a change in estimate of our apportioned state tax rates. In addition, net income for the nine months ended September 30, 2009 includes an adjustment to the gain on disposal of discontinued operations of $12.9 million primarily related to the resolution of the Australian tax matter.
During the nine months ended September 30, 2009, we generated $5.1 million in cash from operating activities, which was net of $55.8 million related to the termination of our interest rate swap. We purchased $34.5 million of property and equipment. We received $20.1 million in cash from the sale of assets. Results of Operations
Comparison of Operating Results for the Three Months Ended September 30, 2009 and 2008
Operating Revenue
Operating revenue decreased by $23.3 million, or 17.4%, to $110.1 million in the three months ended September 30, 2009, from $133.4 million in the three months ended September 30, 2008. Total carloads during the three month period ending September 30, 2009 decreased 23.0% to 208,271 in 2009, from 270,509 in the three months ended September 30, 2008. The decrease in operating revenue was primarily due to the decrease in carloads, lower fuel surcharges, which declined $6.4 million from the prior period and the weakening of the Canadian dollar, partially offset by negotiated rate increases.
The decrease in the average revenue per carload to $423 in the three months ended September 30, 2009, from $428 in the comparable period in 2008 was primarily due to lower fuel surcharge, partially offset by rate and commodity mix.
Non-freight revenue increased by $4.6 million, or 26.2%, to $22.1 million in the three months ended September 30, 2009 from $17.5 million in the three months ended September 30, 2008, primarily due to the restructuring of a Class I contract on one of our Canadian railroads during 2009 which resulted in the revenue shifting from freight revenue to non-freight revenue and an increase in car storage fees and car repair revenue.
The following table compares our freight revenue, carloads and average freight revenue per carload for the three months ended September 30, 2009 and 2008:

                                                  Three Months Ended                                           Three Months Ended
                                                  September 30, 2009                                           September 30, 2008
                                                                       Average Freight                                            Average Freight
                                 Freight                                 Revenue per            Freight                             Revenue per
                                 Revenue            Carloads               Carload              Revenue         Carloads              Carload
                                                 (Dollars in thousands, except carloads and average freight revenue per carload)
Agricultural Products           $   15,370              31,405        $             489        $  17,378           37,081        $             469
Chemicals                           12,112              20,946                      578           15,388           26,456                      582
Coal                                 9,381              46,806                      200            9,516           44,110                      216
Non-Metallic Minerals and
Products                             8,562              20,081                      426           10,020           24,339                      412
Pulp, Paper and Allied
Products                             8,162              16,267                      502           11,679           20,917                      558
Forest Products                      6,748              12,078                      559           10,933           18,431                      593
Food or Kindred Products             6,061              13,042                      465            7,464           14,013                      533
Metallic Ores and Metals             6,049              10,382                      583           12,542           24,439                      513
Waste and Scrap Materials            5,468              14,350                      381            7,191           21,609                      333
Petroleum                            4,648               9,909                      469            5,180           10,541                      491
Other                                3,957               8,958                      442            7,373           24,648                      299
Motor Vehicles                       1,483               4,047                      366            1,194            3,925                      304

Total                           $   88,001             208,271        $             423        $ 115,858          270,509        $             428

Freight revenue was $88.0 million in the three months ended September 30, 2009, compared to $115.9 million in the three months ended September 30, 2008, a decrease of $27.9 million or 24.0%. This decrease was primarily due to the net effect of the following:
• Agricultural products revenue decreased $2.0 million or 12% primarily due to reduced shipments of animal feed into New England and California, poor wheat crops in California and Michigan and a later than normal harvest in the upper Midwest;

• Chemicals revenue decreased $3.3 million or 21% primarily due to widespread weakness in U.S. manufacturing as a result of the economic downturn;

• Coal revenue decreased $0.1 million or 1% primarily due to reduced shipments of import coal to a Canadian utility and the weakening of the Canadian dollar, partially offset by growth in Illinois Basin coal and an increase in Powder River Basin coal destined for Midwest utility plants;

• Non-metallic minerals and products revenue decreased $1.5 million or 15% primarily due to a decrease in construction activity in Texas and reduced demand for minerals used in the paper industry;

• Pulp, paper and allied products revenue decreased $3.5 million or 30% due to widespread declines in paper production in the Southeast and Canada and the weakening of the Canadian dollar;

• Forest products revenue decreased $4.2 million or 38% primarily due to volume declines in the Pacific Northwest stemming from the continued downturn in the housing and construction markets;

• Food or kindred products revenue decreased $1.4 million or 19% primarily due to a decrease in movements of spent grain mash from ethanol plants to animal feed facilities and reduced production of tomato products in California;

• Metallic ores and metals revenue decreased $6.5 million or 52% primarily due to weak demand for plate, slab and sheet products as well as reduced demand for feed stocks and the temporary closure of a customer facility and a production curtailment at a customer plant, both located in Texas;

• Waste and scrap materials revenue decreased $1.7 million or 24% primarily due to a decline in municipal solid waste for landfills in the Southeast, reduced demand for scrap metal and reduced construction debris moves in the Northeast;

• Petroleum revenue decreased $0.5 million or 10% primarily due to a decrease in liquefied petroleum gas, or LPG, production in Canada and California as a result of an overall decrease in LPG demand in Mexico and the U.S.;

• Other revenue decreased $3.4 million or 46% primarily due to a decrease in bridge traffic (where we provide a pass through connection between one Class I railroad and another railroad without freight originating or terminating on the line) in Canada from the restructuring of a Class I contract during 2009, which resulted in the freight revenue shifting to non-freight revenue, partially offset by an increase in movements for Class I railroads in the Southeast and Northeast; and

• Motor vehicles revenue increased $0.3 million or 24% primarily due to a new automobile manufacturing facility in the Midwest partially offset by the general weakness in the automobile industry.

Operating Expenses
     The following table sets forth the operating revenue and expenses, by
natural category, for our consolidated operations for the periods indicated
(dollars in thousands).

                                              Three Months Ended September 30,
                                              2009                       2008
      Operating revenue               $ 110,137       100.0 %    $ 133,400       100.0 %
      Operating expenses:
      Labor and benefits                 35,755        32.4 %       37,114        27.8 %
      Equipment rents                     8,900         8.1 %       10,423         7.8 %
      Purchased services                  7,534         6.8 %       10,751         8.1 %
      Diesel fuel                         8,373         7.6 %       18,692        14.0 %
      Casualties and insurance            4,593         4.2 %        5,262         3.9 %
      Materials                           2,977         2.7 %        2,727         2.0 %
      Joint facilities                    2,497         2.3 %        3,291         2.5 %
      Other expenses                      3,694         3.3 %        9,189         6.9 %
      Net gain on sale of assets           (159 )      (0.1 )%        (434 )      (0.3 )%
      Impairment of assets                    -         0.0 %        1,731         1.3 %
      Depreciation and amortization      10,365         9.4 %        9,959         7.5 %

      Total operating expenses           84,529        76.7 %      108,705        81.5 %

      Operating income                $  25,608        23.3 %    $  24,695        18.5 %

The following table sets forth the reconciliation of the functional categories presented in our consolidated statement of operations to the natural categories discussed below. Management utilizes the natural category format of expenses when reviewing and evaluating our performance and believes that it provides a more relevant basis for discussion of the changes in operations (in thousands).

                                                                                       Three Months Ended September 30,
                                                                 2009                                                                    2008
                                                                                           Total                                                                  Total
                                                             Selling, general            Operating                                   Selling, general           Operating
                                    Transportation          and administrative           Expenses           Transportation          and administrative           Expenses
Operating expenses:
Labor and benefits                  $        19,539         $            16,216         $    35,755         $        22,456         $            14,658         $   37,114
Equipment rents                               8,799                         101               8,900                  10,321                         102             10,423
Purchased services                            4,299                       3,235               7,534                   5,920                       4,831             10,751
Diesel fuel                                   8,384                         (11 )             8,373                  18,660                          32             18,692
Casualties and insurance                      2,957                       1,636               4,593                   3,339                       1,923              5,262
Materials                                     2,779                         198               2,977                   2,434                         293              2,727
Joint facilities                              2,497                           -               2,497                   3,291                           -              3,291
Other expenses                               (1,730 )                     5,424               3,694                   3,943                       5,246              9,189
Net gain on sale of assets                        -                           -                (159 )                     -                           -               (434 )
Impairment of assets                              -                           -                   -                       -                           -              1,731
Depreciation and amortization                     -                           -              10,365                       -                           -              9,959

Total operating expenses            $        47,524         $            26,799         $    84,529         $        70,364         $            27,085         $  108,705

Operating expenses decreased to $84.5 million in the three months ended September 30, 2009, from $108.7 million in the three months ended September 30, 2008. The operating ratio was 76.7% in 2009 compared to 81.5% in 2008. The improvement in the operating ratio was primarily due to our continuing cost saving initiatives, which include reductions in labor expenses, maintenance expenditures for right of way improvements in addition to a reduction in car hire expense and a decrease in fuel prices in the three months ended September 30, 2009 as compared to the same period in 2008. During the three months ended September 30, 2009 and 2008, operating expenses also include $0.4 million and $2.9 million, respectively, of costs related to the restructuring and relocation of our corporate headquarters to Jacksonville, Florida. The costs incurred during the three months ended September 30, 2009 and 2008 are included within labor and benefits ($0.4 million and $2.0 million, respectively), purchased services ($0 million and $0.6 million, respectively) and other expenses ($0 million and $0.3 million, respectively).
The net decrease in operating expenses was due to the following:
• Labor and benefits expense decreased $1.4 million, or 4% primarily due to a reduction in labor force as a result of the decline in carload volumes and additional cost savings initiatives implemented by management. Benefits expense decreased as the three months ended September 30, 2008, included accrued termination benefits related to the restructuring and relocation of corporate headquarters;

• Equipment rents expense decreased $1.5 million, or 15% primarily due to a reduction in car hire expense as a result of the decline in carload volume;

• Purchased services expense decreased $3.2 million, or 30% primarily due to cost reduction initiatives implemented by management during 2009 and restructuring costs incurred in 2008;

• Diesel fuel expense decreased $10.3 million, or 55% primarily due to lower average fuel costs of $2.07 per gallon in 2009 compared to $3.74 per gallon in 2008, resulting in a $6.5 million decrease in fuel expense and a favorable consumption variance of $3.7 million;

• Casualties and insurance expense decreased $0.7 million, or 13% primarily due to a decrease in FRA reportable personal injuries and train accidents to 7 and 11, respectively, in the three months ended September 30, 2009 from 16 and 13, respectively, in the three months ended September 30, 2008;

• Materials expense increased $0.3 million, or 9% primarily due to an increase in car repair material purchases as a result of an increase in car repair revenue, partially offset by a decrease in locomotive materials as a result of fewer repairs;

• Joint facilities expense decreased $0.8 million, or 24% primarily due to the decline in carload volume;

• Other expenses decreased $5.5 million, or 60% primarily due to a reduction in expense as a result of the execution of the Track Maintenance Agreement in 2009 as mentioned previously. For the three months ended September 30, 2009, the Shipper paid for $4.6 million of maintenance expenditures;

• Asset sales resulted in net gains of $0.2 million and $0.4 million in the . . .