Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________
FORM 10-Q
________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
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 001-31456
_________________________________________________________________
GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________________
Delaware
 
06-0984624
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
20 West Avenue, Darien, Connecticut 06820
(Address of principal executive offices)(Zip Code)
(203) 202-8900
(Registrant's telephone number, including area code)
_____________________________________________________________________
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.    x  Yes    o  No
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).    x  Yes    o  No
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.
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No
Shares of common stock outstanding as of the close of business on August 1, 2016:
 
Class
 
Number of Shares Outstanding
Class A Common Stock
 
57,245,676
Class B Common Stock
 
793,138
 


Table of Contents

INDEX
 
 
Page
 
 
 
 
 
 
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 

 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2

Table of Contents

Unless the context otherwise requires, when used in this Quarterly Report on Form 10-Q, the terms "Genesee & Wyoming," "G&W," the "Company," "we," "our" and "us" refer to Genesee & Wyoming Inc. and its subsidiaries. All references to currency amounts included in this Quarterly Report on Form 10-Q, including the financial statements, are in United States dollars unless specifically noted otherwise. The term carload represents physical railcars and the estimated railcar equivalents of commodities transported by metric ton or other measure, as well as intermodal units.
From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding the Company is routinely posted on and accessible at www.gwrr.com/investors. In addition, you may automatically receive email alerts and other information about us by enrolling your email address in the "Email Alerts" section of www.gwrr.com/investors. The information contained on or connected to our Internet website is not deemed to be incorporated by reference in this Quarterly Report or filed with the SEC.    
Forward-Looking Statements
This report and other documents referred to in this report contain forward-looking statements regarding future events and the future performance of Genesee & Wyoming Inc. that are based on current expectations, estimates and projections about our industry, our business and our performance, management's beliefs and assumptions made by management. Words such as "anticipates," "intends," "plans," "believes," "could," "should," "seeks," "expects," "will," "estimates," "trends," "outlook," variations of these words and similar expressions are intended to identify these forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast, including the following: risks related to the operation of our railroads; severe weather conditions and other natural occurrences, which could result in shutdowns, derailments, railroad network congestion or other substantial disruption of operations; customer demand and changes in our operations or loss of important customers; exposure to the credit risk of customers and counterparties; changes in commodity prices; consummation and integration of acquisitions; economic, political and industry conditions, including employee strikes or work stoppages; retention and contract continuation; legislative and regulatory developments, including changes in environmental and other laws and regulations to which we or our customers are subject; increased competition in relevant markets; funding needs and financing sources, including our ability to obtain government funding for capital projects; international complexities of operations, currency fluctuations, finance, tax and decentralized management; challenges of managing rapid growth, including retention and development of senior leadership; unpredictability of fuel costs; susceptibility to various legal claims and lawsuits; increase in, or volatility associated with, expenses related to estimated claims, self-insured retention amounts and insurance coverage limits; consummation of new business opportunities; decrease in revenues and/or increase in costs and expenses; susceptibility to the risks of doing business in foreign countries; our ability to realize the expected synergies associated with acquisitions; risks associated with our substantial indebtedness and others including, but not limited to, those set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any, and those noted in our 2015 Annual Report on Form 10-K under "Risk Factors." Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Forward-looking statements speak only as of the date of this report or as of the date they were made. We do not undertake, and expressly disclaim, any duty to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

3

Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS.
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2016 and DECEMBER 31, 2015 (Unaudited)
(dollars in thousands, except per share and share amounts)
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
24,971

 
$
35,941

Accounts receivable, net
368,704

 
382,458

Materials and supplies
45,873

 
45,790

Prepaid expenses and other
47,277

 
43,197

Total current assets
486,825

 
507,386

PROPERTY AND EQUIPMENT, net
4,208,706

 
4,215,063

GOODWILL
815,532

 
826,575

INTANGIBLE ASSETS, net
1,069,017

 
1,128,952

DEFERRED INCOME TAX ASSETS, net
2,591

 
2,270

OTHER ASSETS, net
37,350

 
22,836

Total assets
$
6,620,021

 
$
6,703,082

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
130,450

 
$
75,966

Accounts payable
238,181

 
282,275

Accrued expenses
188,013

 
169,586

Total current liabilities
556,644

 
527,827

LONG-TERM DEBT, less current portion
2,035,589

 
2,205,785

DEFERRED INCOME TAX LIABILITIES, net
983,383

 
983,136

DEFERRED ITEMS - grants from outside parties
302,269

 
292,198

OTHER LONG-TERM LIABILITIES
150,312

 
174,675

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
 
 
 
Class A Common Stock, $0.01 par value, one vote per share; 180,000,000 shares authorized at June 30, 2016 and December 31, 2015; 70,018,069 and 69,674,185 shares issued and 57,244,493 and 56,945,384 shares outstanding (net of 12,773,576 and 12,728,801 shares in treasury) on June 30, 2016 and December 31, 2015, respectively
700

 
697

Class B Common Stock, $0.01 par value, ten votes per share; 30,000,000 shares authorized at June 30, 2016 and December 31, 2015; 793,138 shares issued and outstanding on June 30, 2016 and December 31, 2015.
8

 
8

Additional paid-in capital
1,369,683

 
1,355,345

Retained earnings
1,620,094

 
1,544,676

Accumulated other comprehensive loss
(168,261
)
 
(153,457
)
Treasury stock, at cost
(230,400
)
 
(227,808
)
Total equity
2,591,824

 
2,519,461

Total liabilities and equity
$
6,620,021

 
$
6,703,082

The accompanying notes are an integral part of these consolidated financial statements.

4

Table of Contents

GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 and 2015 (Unaudited)
(in thousands, except per share amounts)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
OPERATING REVENUES
$
501,375

 
$
542,219

 
$
983,991

 
$
939,249

OPERATING EXPENSES:
 
 
 
 
 
 
 
Labor and benefits
155,948

 
165,296

 
319,062

 
297,414

Equipment rents
38,426

 
43,483

 
76,856

 
65,515

Purchased services
51,632

 
56,177

 
98,134

 
80,558

Depreciation and amortization
50,924

 
48,048

 
100,254

 
90,265

Diesel fuel used in train operations
28,251

 
37,895

 
53,717

 
67,592

Electricity used in train operations
3,304

 
4,977

 
6,669

 
5,366

Casualties and insurance
9,442

 
10,038

 
19,562

 
18,561

Materials
21,393

 
26,929

 
42,984

 
45,624

Trackage rights
21,152

 
22,172

 
41,728

 
35,505

Net (gain)/loss on sale and impairment of assets
(308
)
 
(490
)
 
12,517

 
(807
)
Restructuring costs
4,970

 

 
6,097

 

Other expenses
29,047

 
28,243

 
62,221

 
61,585

Total operating expenses
414,181

 
442,768

 
839,801

 
767,178

OPERATING INCOME
87,194

 
99,451

 
144,190

 
172,071

Interest income
336

 
124

 
411

 
150

Interest expense
(17,741
)
 
(17,772
)
 
(35,716
)
 
(31,280
)
Loss on settlement of foreign currency forward purchase contracts

 

 

 
(18,686
)
Other income, net
722

 
334

 
1,453

 
648

Income before income taxes
70,511

 
82,137

 
110,338

 
122,903

Provision for income taxes
(22,112
)
 
(29,300
)
 
(34,920
)
 
(46,162
)
Net income
$
48,399

 
$
52,837

 
$
75,418

 
$
76,741

Basic earnings per common share
$
0.85

 
$
0.94

 
$
1.32

 
$
1.37

Weighted average shares - Basic
57,187

 
55,976

 
57,106

 
55,902

Diluted earnings per common share
$
0.83

 
$
0.92

 
$
1.30

 
$
1.34

Weighted average shares - Diluted
58,117

 
57,143

 
58,036

 
57,132

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 and 2015 (Unaudited)
(dollars in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
NET INCOME
$
48,399

 
$
52,837

 
$
75,418

 
$
76,741

OTHER COMPREHENSIVE (LOSS)/INCOME:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(32,611
)
 
40,904

 
(1,491
)
 
(5,843
)
Net unrealized (loss)/income on qualifying cash flow hedges, net of tax benefit/(provision) of $4,537, ($1,804), $10,824 and $2,403, respectively
(6,806
)
 
2,706

 
(16,237
)
 
(3,604
)
Changes in pension and other postretirement benefits, net of tax provision of ($271), ($30), ($791) and ($60), respectively
1,000

 
53

 
2,924

 
106

Other comprehensive (loss)/income
(38,417
)
 
43,663

 
(14,804
)
 
(9,341
)
COMPREHENSIVE INCOME
$
9,982

 
$
96,500

 
$
60,614

 
$
67,400

The accompanying notes are an integral part of these consolidated financial statements.



6

Table of Contents

GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 and 2015 (Unaudited)
(dollars in thousands)
 
Six Months Ended
 
June 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
75,418

 
$
76,741

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
100,254

 
90,265

Stock-based compensation
9,525

 
6,961

Excess tax benefit from share-based compensation

 
(1,254
)
Deferred income taxes
16,336

 
22,672

Net loss/(gain) on sale and impairment of assets
12,517

 
(807
)
Loss on settlement of foreign currency forward purchase contracts

 
18,686

Changes in assets and liabilities which provided/(used) cash, net of effect of acquisitions:
 
 
 
Accounts receivable, net
(11,472
)
 
35,744

Materials and supplies
(1,071
)
 
(868
)
Prepaid expenses and other
(2,078
)
 
5,685

Accounts payable and accrued expenses
(46,236
)
 
(73,397
)
Other assets and liabilities, net
8,808

 
4,255

Net cash provided by operating activities
162,001

 
184,683

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(113,321
)
 
(160,226
)
Grant proceeds from outside parties
25,990

 
22,701

Cash paid for acquisitions, net of cash acquired

 
(726,698
)
Net payment from settlement of foreign currency forward purchase contracts related to an acquisition

 
(18,686
)
Insurance proceeds for the replacement of assets
7,741

 
1,421

Proceeds from disposition of property and equipment
1,458

 
1,734

Net cash used in investing activities
(78,132
)
 
(879,754
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on revolving line-of-credit, long-term debt and capital lease obligations
(311,930
)
 
(306,799
)
Proceeds from revolving line-of-credit and long-term borrowings
215,434

 
977,867

Debt amendment/issuance costs

 
(5,933
)
Proceeds from employee stock purchases
3,135

 
4,183

Treasury stock purchases
(2,593
)
 
(2,992
)
Excess tax benefit from share-based compensation

 
1,254

Net cash (used in)/provided by financing activities
(95,954
)
 
667,580

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
1,115

 
(1,899
)
DECREASE IN CASH AND CASH EQUIVALENTS
(10,970
)
 
(29,390
)
CASH AND CASH EQUIVALENTS, beginning of period
35,941

 
59,727

CASH AND CASH EQUIVALENTS, end of period
$
24,971

 
$
30,337

The accompanying notes are an integral part of these consolidated financial statements.

7

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:
The interim consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and are unaudited. They do not contain all disclosures which would be required in a full set of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management, the unaudited financial statements for the three and six months ended June 30, 2016 and 2015 are presented on a basis consistent with the audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods presented. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The consolidated balance sheet data for 2015 was derived from the audited financial statements in the Company's 2015 Annual Report on Form 10-K, but does not include all disclosures required by U.S. GAAP.
The results of operations of the foreign entities are maintained in the local currency of the respective subsidiary and translated into United States dollars at the applicable exchange rates for inclusion in the consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar will impact the Company's results of operations.
The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2015 included in the Company's 2015 Annual Report on Form 10-K. Certain reclassifications have been made to prior period balances to conform to the current year presentation, including (1) debt issuance costs, current portion of long-term debt and long-term debt, less current portion (see Note 5, Long-Term Debt) and (2) current deferred income tax assets, long-term deferred income tax assets and long-term deferred income tax liabilities (see Note 9, Income Taxes).
When comparing the Company's results of operations from one reporting period to another, it is important to consider that the Company has historically experienced fluctuations in revenues and expenses due to acquisitions, changing economic conditions, fluctuations in commodity prices, competitive forces, changes in foreign currency exchange rates, rail network congestion, one-time freight moves, fuel price fluctuations, customer plant expansions and shutdowns, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, tornadoes, high winds, droughts, heavy snowfall, unseasonably hot or cold weather, freezing and flooding, among other factors. In periods when these events occur, the Company's results of operations are not easily comparable from one period to another. Finally, certain of the Company's railroads have commodity shipments that are sensitive to general economic conditions, global commodity prices and foreign exchange rates, such as steel products, iron ore, paper products, lumber and forest products and agricultural products, as well as product specific market conditions, such as the availability of lower priced alternative sources of power generation (coal) and energy commodity price differentials (crude oil). Other shipments are relatively less affected by economic conditions and are more closely affected by other factors, such as winter weather (salt) and seasonal rainfall (agricultural products). As a result of these and other factors, the Company's results of operations in any reporting period may not be directly comparable to the Company's results of operations in other reporting periods.
2. CHANGES IN OPERATIONS:
Australia
Arrium Limited: Between 2011 and 2014, the Company's subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA) invested a total of approximately $78 million to purchase locomotives and railcars, as well as to construct a standard gauge rolling-stock maintenance facility to support iron ore shipments from Arrium Limited's (Arrium) Southern Iron mine and its Whyalla-based operations, which include the Middleback Range iron ore mines and the Whyalla steelworks.
Arrium mothballed its Southern Iron mine in April 2015, citing the significant decline in the price of iron ore. During 2015, GWA carried approximately 8,300 carloads of iron ore from the Southern Iron mine and, in total, generated approximately A$83 million in freight and freight-related revenues (or approximately $62 million at the average exchange rate for the year ended December 31, 2015) under the fixed and variable payment structure that is customary in large contracts in Australia.

8

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

On April 7, 2016, Arrium announced it had entered into voluntary administration. As a result of this announcement, during the three months ended March 31, 2016, the Company recorded a $13.0 million non-cash charge related to the impairment of GWA's now idle rolling-stock maintenance facility and an allowance for doubtful accounts charge of $8.1 million associated with accounts receivable from Arrium. As a result of the voluntary administration, all payments to GWA associated with the Southern Iron rail haulage agreement have ceased. GWA is in the process of redeploying rolling-stock previously used to provide service under the Southern Iron rail haulage agreement to serve other customers.
GWA continues to receive payments and provide service under the remaining rail haulage agreement to serve several iron ore mines in the Middleback Range and the Whyalla Steelworks operations, which we expect will represent A$35 million (or approximately $26 million at the current exchange rate) of annual revenue prospectively. Pending the outcome of the voluntary administration process, GWA could lose some or all of the revenue associated with the remaining haulage agreement. In the event of an adverse determination regarding the viability of the Middleback Range or the Whyalla Steelworks operations, or a termination of the remaining rail haulage agreement, all or a portion of GWA's assets deployed to provide service under this agreement, which consist largely of narrow gauge locomotives and wagons, could be redeployed elsewhere in Australia.
Europe
Freightliner Group Limited: On March 25, 2015, the Company completed the acquisition of all of the outstanding share capital of RailInvest Holding Company Limited, the parent company of London-based Freightliner Group Limited (Freightliner), pursuant to the terms of a Share Purchase Agreement dated February 24, 2015. Certain former management shareholders of Freightliner (Management Shareholders) retained an approximate 6% economic interest in Freightliner in the form of deferred consideration. The Company expects to settle the deferred consideration by the end of 2020.
Headquartered in London, England, Freightliner is an international freight rail operator with operations in the United Kingdom (U.K.), Poland, Germany, the Netherlands and Australia. Freightliner's principal business is located in the U.K. where it is the largest maritime intermodal operator and the second largest freight rail operator, providing service throughout England, Scotland and Wales. In Continental Europe, Freightliner Poland primarily serves aggregates and coal customers in Poland. In addition, Freightliner's ERS subsidiary, based in Rotterdam, provides cross-border intermodal services connecting the northern European ports of Rotterdam, Bremerhaven and Hamburg to key cities in Germany, Poland, Italy and beyond. In Australia, Freightliner currently transports coal and containerized agricultural products for its customers in New South Wales. As of the acquisition date, Freightliner employed approximately 2,500 people worldwide and had a fleet of primarily leased equipment, which included approximately 250 diesel locomotives, approximately 45 electric locomotives and 5,500 railcars.
The Company funded the acquisition with borrowings under the Company's Second Amended and Restated Senior Secured Syndicated Credit Facility Agreement, as amended (the Credit Agreement) (see Note 5, Long-Term Debt) and available cash. The foreign exchange rate used to translate the total consideration to United States dollars was $1.49 for one British pound (GBP). The calculation of the total consideration for the Freightliner acquisition is presented below (amounts in thousands):
 
 
GBP
 
USD
Cash consideration
 
£
492,083

 
$
733,006

Deferred consideration
 
24,200

 
36,048

Total consideration
 
£
516,283

 
$
769,054

As of March 25, 2015, the Company recorded a contingent liability within other long-term liabilities of £24.2 million (or $36.0 million at the exchange rate on March 25, 2015). This contingent liability represented the aggregate fair value of the shares transferred to the Company by the Management Shareholders representing an economic interest of approximately 6% on the acquisition date at the Freightliner acquisition price per share, in exchange for the right to receive cash consideration for the representative economic interest in the future (deferred consideration). The Company will recalculate the estimated fair value of the deferred consideration in each reporting period until it is paid in full by using a contractual formula designed to estimate the economic value of the Management Shareholders' retained interest in a manner consistent with that used to derive the Freightliner acquisition price per share on the acquisition date. Accordingly, a change in the fair value of the deferred consideration could have a material effect on the Company's results of operations for the period in which a change in estimate occurs. The fair value of the contingent liability has not materially changed since the March 25, 2015 acquisition date (see Note 7, Fair Value of Financial Instruments).

9

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The results of operations from Freightliner have been included in the Company's consolidated statement of operations since the March 25, 2015 acquisition date. U.K. and Continental Europe operations are included in the Company's U.K./European Operations segment and the results of Freightliner's Australia operations are included in the Company's Australian Operations segment (see Note 13, Segment Information). Freightliner contributed $186.2 million of total revenues and $8.9 million of operating income to the Company's consolidated results during the six months ended June 30, 2015. The Company incurred $0.7 million and $13.3 million of acquisition and integration costs associated with Freightliner during the three and six months ended June 30, 2015, respectively, which were included within other expenses in the Company's consolidated statement of operations. In addition, the Company recorded a loss of $18.7 million on the settlement of foreign currency forward purchase contracts during the six months ended June 30, 2015, which were entered into in contemplation of the Freightliner acquisition (see Note 6, Derivative Financial Instruments).
Pro Forma Financial Results (Unaudited)
The following table summarizes the Company's unaudited pro forma operating results for the six months ended June 30, 2015 as if the acquisition of Freightliner had been consummated as of January 1, 2014. The following pro forma financial information does not include the impact of any costs to integrate the operations or the impact of derivative instruments that the Company has entered into or may enter into to mitigate interest rate risk (dollars in thousands, except per share amounts):
 
 
Six Months Ended June 30, 2015
Operating revenues
 
$
1,095,868

Net income
 
$
100,626

Basic earnings per common share
 
$
1.80

Diluted earnings per common share
 
$
1.76

The unaudited pro forma operating results included the acquisition of Freightliner adjusted, net of tax, for depreciation and amortization expense resulting from the determination of fair values of the acquired property and equipment and amortizable intangible assets, the inclusion of interest expense related to borrowings used to fund the acquisition, the amortization of debt issuance costs related to the Company's entry into the Credit Agreement and the elimination of Freightliner's interest expense related to debt not assumed in the acquisition. Since the pro forma financial results assume the acquisition was consummated on January 1, 2014, the 2015 unaudited pro forma operating results for the six months ended June 30, 2015 excluded $12.6 million ($9.5 million, net of tax) of costs incurred by the Company related to the acquisition of Freightliner, $12.2 million ($9.1 million, net of tax) of transaction-related costs incurred by Freightliner and an $18.7 million ($11.6 million, net of tax) loss on settlement of foreign currency forward purchase contracts directly attributable to the acquisition of Freightliner.
Prior to the acquisition, Freightliner's fiscal year was based on a 52/53 week period ending on the nearest Saturday on or before March 31. Since Freightliner and the Company had different fiscal year end dates, the unaudited pro forma operating results were prepared based on comparable periods. The unaudited pro forma operating results for the six months ended June 30, 2015 were based upon the Company's consolidated statement of operations for the six months ended June 30, 2015 and the sum of Freightliner's historical operating results for the 12 weeks ended March 28, 2015, adjusted for the five days already included in the Company's first quarter results. The foreign exchange rate used to translate Freightliner's historical operating results to United States dollars was $1.51 for one British pound (which was calculated based on average daily exchange rates during the three month period ended March 31, 2015).
The pro forma financial information does not purport to be indicative of the results that actually would have been obtained had the transactions been completed as of January 1, 2014 and for the periods presented and are not intended to be a projection of future results or trends.
United States
Pinsly's Arkansas Division: On January 5, 2015, the Company completed the acquisition of certain subsidiaries of Pinsly Railroad Company (Pinsly) that constituted Pinsly's Arkansas Division (Pinsly Arkansas) for $41.3 million in cash. The Company funded the acquisition with borrowings under the Company's Amended and Restated Senior Secured Syndicated Credit Facility Agreement (the Prior Credit Agreement). The results of operations from Pinsly Arkansas have been included in the Company's consolidated statements of operations since the acquisition date within the Company's North American Operations segment.

10

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Headquartered in Jones Mill, Arkansas, Pinsly Arkansas serves the Hot Springs and Little Rock areas, as well as the southwestern and southeastern portions of Arkansas and includes: (1) Arkansas Midland Railroad Company, Inc. (AKMD), which is comprised of seven non-contiguous branch lines; (2) The Prescott and Northwestern Railroad Company (PNW); (3) Warren & Saline River Railroad Company (WSR); and (4) two Arkansas transload operations. Operations are comprised of 137 miles of owned and leased track, 77 employees and 16 locomotives. The railroads currently haul approximately 30,000 carloads per year and serve a diverse customer base in industries including aluminum, forest products, aggregates, energy and carton board.
3. EARNINGS PER COMMON SHARE:
The following table sets forth the computation of basic and diluted earnings per common share for the three and six months ended June 30, 2016 and 2015 (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
48,399

 
$
52,837

 
$
75,418

 
$
76,741

Denominators:
 
 
 
 
 
 
 
Weighted average Class A common shares outstanding – Basic
57,187

 
55,976

 
57,106

 
55,902

Weighted average Class B common shares outstanding
793

 
915

 
793

 
958

Dilutive effect of employee stock-based awards
137

 
252

 
137

 
272

Weighted average shares – Diluted
58,117

 
57,143

 
58,036

 
57,132

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.85

 
$
0.94

 
$
1.32

 
$
1.37

Diluted earnings per common share
$
0.83

 
$
0.92

 
$
1.30

 
$
1.34

The following total number of Class A Common Stock shares issuable under the assumed exercise of stock-based awards computed based on the treasury stock method were excluded from the calculation of diluted earnings per common share, as the effect of including these shares would have been antidilutive (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Antidilutive shares
1,339

 
617

 
1,340

 
520

4. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
June 30,
2016
 
December 31,
2015
Accounts receivable –trade
$
353,503

 
$
339,100

Accounts receivable – grants from outside parties
12,475

 
22,997

Accounts receivable – insurance and other third-party claims
19,516

 
26,574

Total accounts receivable
385,494

 
388,671

Less: Allowance for doubtful accounts
(16,790
)
 
(6,213
)
Accounts receivable, net
$
368,704

 
$
382,458


As of June 30, 2016, an A$10.9 million (or $8.1 million at the exchange rate on June 30, 2016) was included in the allowance for doubtful accounts associated with an Australian iron ore customer entering into voluntary administration (see Note 2, Changes in Operations for additional information).

11

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Grants from Outside Parties
The Company periodically receives grants for the upgrade and construction of rail lines and the upgrade of locomotives from federal, provincial, state and local agencies in the United States and provinces in Canada in which the Company operates. These grants typically reimburse the Company for 50% to 100% of the actual cost of specific projects. In total, the Company received grant proceeds of $26.0 million and $22.7 million for the six months ended June 30, 2016 and 2015, respectively, from such grant programs. The proceeds were presented as cash inflows from investing activities within each of the applicable periods.
None of the Company's grants represent a future liability of the Company unless the Company abandons the rehabilitated or new track structure within a specified period of time or fails to maintain the upgraded or new track to certain standards, fails to make certain minimum capital improvements or ceases use of the locomotives within the specified geographic area and time period, in each case, as defined in the applicable grant agreement. As the Company intends to comply with the requirements of these agreements, the Company has recorded additions to track property and locomotives and has deferred the amount of the grants. The amortization of deferred grants is a non-cash offset to depreciation expense over the useful lives of the related assets.
The following table sets forth the offset to depreciation expense from the amortization of deferred grants recorded by the Company during the three and six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Amortization of deferred grants
$
2,912

 
$
2,725

 
$
5,861

 
$
5,524

Insurance and Third-Party Claims
Accounts receivable from insurance and other third-party claims at June 30, 2016 included $7.6 million from the Company's North American Operations, $6.0 million from the Company's Australian Operations and $5.9 million from the Company's U.K./European Operations. The balance from the Company's North American Operations resulted predominately from the Company's anticipated insurance recoveries associated with a trestle fire in 2015. The balance from the Company's Australian Operations resulted primarily from the Company's anticipated insurance recoveries associated with derailments in Australia in 2012. The balance from the Company's U.K./European Operations resulted primarily from the Company's anticipated insurance recoveries associated with a rail-related collision in Germany in 2014 that occurred prior to the Company's acquisition of Freightliner. The Company received proceeds from insurance totaling $7.7 million and $1.4 million for the six months ended June 30, 2016 and 2015, respectively.
5. LONG-TERM DEBT:
Credit Agreement
In anticipation of its acquisition of Freightliner, the Company entered into the Credit Agreement on March 20, 2015. The credit facilities under the Credit Agreement are comprised of a $1,782.0 million United States term loan, an A$324.6 million (or $252.5 million at the exchange rate on March 20, 2015) Australian term loan, a £101.7 million (or $152.2 million at the exchange rate on March 20, 2015) U.K. term loan and a $625.0 million revolving credit facility. The revolving credit facility includes borrowing capacity for letters of credit and swingline loans. In connection with entering into the Credit Agreement, the Company wrote-off $2.0 million of unamortized deferred financing fees and deferred $5.8 million of new fees. The maturity date of each of the Company's credit facilities under the Credit Agreement is March 31, 2020.
On January 1, 2016, the Company adopted the Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) 2015-03, Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be recorded as a direct reduction of the debt liability on the balance sheet rather than as an asset. The Company applied this guidance to all of its outstanding debt issuance costs retrospectively to all periods presented. The December 31, 2015 consolidated balance sheet and related disclosures were adjusted to reflect the reclassification of $23.5 million of debt issuance costs from other assets to a reduction in current portion of long-term debt of $6.0 million and a reduction in long-term debt, less current portion, of $17.5 million. There was no other impact on the consolidated financial statements from the adoption of this guidance.

12

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

During the six months ended June 30, 2016, the Company made prepayments on its United States term loan of $102.0 million and Australian term loan of A$16.0 million (or $11.8 million at the exchange rates on the dates the payments were made). As of June 30, 2016, the Company had the following outstanding term loans (amounts in thousands, except percentages):
 
 
Local Currency
 
United States Dollar Equivalent
 
Interest Rate
United States dollar
 
$
1,670,000

 
$
1,670,000

 
2.46
%
Australian dollar
 
A$
273,627

 
$
203,770

 
3.89
%
British pound
 
£
101,681

 
$
134,911

 
2.51
%
The Company's availability to draw from the unused borrowing capacity is subject to covenant limitations. As of June 30, 2016, the Company had the following unused borrowing capacity under its revolving credit facility (amounts in thousands):
 
 
June 30, 2016
Total available borrowing capacity
 
$
625,000

Less: Outstanding revolving loans
 
77,698

Less: Outstanding letter of credit guarantees
 
4,846

Total unused borrowing capacity
 
$
542,456

As of June 30, 2016, the Company had the following outstanding revolving loans (amounts in thousands, except percentages):
 
 
Local Currency
 
United States Dollar Equivalent
 
Interest Rate
British pound (swingline loan)
 
£
3,000

 
$
3,980

 
2.48
%
British pound
 
£
31,000

 
$
41,131

 
2.51
%
Canadian dollar
 
C$
17,000

 
$
13,099

 
2.87
%
Euro
 
17,600

 
$
19,489

 
2.00
%
As of June 30, 2016, the Company was in compliance with the covenants under the Credit Agreement.
6. DERIVATIVE FINANCIAL INSTRUMENTS:
The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and uses derivative financial instruments to manage the impact of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use derivative instruments with the objective of earning financial gains on the interest rate or exchange rate fluctuations alone, nor does the Company use derivative instruments where it does not have underlying exposures. Complex instruments involving leverage or multipliers are not used. The Company manages its hedging position and monitors the credit ratings of counterparties and does not anticipate losses due to counterparty nonperformance. Management believes its use of derivative instruments to manage risk is in the Company's best interest. However, the Company's use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility. The Company's instruments are recorded in the consolidated balance sheets at fair value in prepaid expenses and other, other assets, net, accrued expenses or other long-term liabilities.
The Company may designate derivatives as a hedge of a forecasted transaction or a hedge of the variability of the cash flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). The portion of the changes in the fair value of the derivative used as a cash flow hedge that is offset by changes in the expected cash flows related to a recognized asset or liability (the effective portion) is recorded in other comprehensive income/(loss). As the hedged item is realized, the gain or loss included in accumulated other comprehensive income/(loss) is reported in the consolidated statements of operations on the same line item as the hedged item. The portion of the changes in the fair value of derivatives used as cash flow hedges that is not offset by changes in the expected cash flows related to a recognized asset or liability (the ineffective portion) is immediately recognized in earnings on the same line item as the hedged item.

13

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Company matches the hedge instrument to the underlying hedged item (assets, liabilities, firm commitments or forecasted transactions). At inception of the hedge and at least quarterly thereafter, the Company assesses whether the derivatives used to hedge transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. When it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting, and any gains or losses on the derivative instrument thereafter are recognized in earnings during the period in which it no longer qualifies for hedge accounting.
From time to time, the Company may enter into certain derivative instruments that may not be designated as hedges for accounting purposes. For example, to mitigate currency exposures related to intercompany debt, cross-currency swap contracts may be entered into for periods consistent with the underlying debt. The Company believes such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from the changes in the fair value of derivative instruments not accounted for using hedge accounting are recognized in current period earnings within other income/(loss), net. Derivative instruments entered into in conjunction with contemplated acquisitions also do not qualify as hedges for accounting purposes.
Interest Rate Risk Management
The Company uses interest rate swap agreements to manage its exposure to the changes in interest rates on the Company's variable rate debt. These swap agreements are recorded in the consolidated balance sheets at fair value. Changes in the fair value of the swap agreements are recorded in net income or other comprehensive income/(loss), based on whether the agreements are designated as part of a hedge transaction and whether the agreements are effective in offsetting the change in the value of the future interest payments attributable to the underlying portion of the Company's variable rate debt. Interest payments accrued each reporting period for these interest rate swaps are recognized in interest expense. The Company formally documents its hedge relationships, including identifying the hedge instruments and hedged items, as well as its risk management objectives and strategies for entering into the hedge transaction.
The following table summarizes the terms of the Company's outstanding interest rate swap agreements entered into to manage the Company's exposure to changes in interest rates on its variable rate debt (dollars in thousands):
 
 
 
 
Notional Amount
 
 
 
 
Effective Date
 
Expiration Date
 
Date
 
Amount
 
Pay Fixed Rate
 
Receive Variable Rate
9/30/2015
 
9/30/2016
 
9/30/2015
 
$
350,000

 
0.93%
 
1-month LIBOR
9/30/2016
 
9/30/2026
 
9/30/2026
 
$
100,000

 
2.79%
 
3-month LIBOR
9/30/2016
 
9/30/2026
 
9/30/2026
 
$
100,000

 
2.79%
 
3-month LIBOR
9/30/2016
 
9/30/2026
 
9/30/2026
 
$
100,000

 
2.80%
 
3-month LIBOR
On November 9, 2012, the Company entered into multiple 10-year forward starting interest rate swap agreements to manage the exposure to changes in interest rates on the Company's variable rate debt. It remains probable that the Company will either issue $300.0 million of fixed-rate debt or have $300.0 million of variable-rate debt under the Company's commercial banking lines throughout the term of the outstanding swap agreements. The forward starting interest rate swap agreements are expected to settle in cash based on the fair market value of the interest rate swaps on September 30, 2016. The Company expects to amortize any gains or losses on the settlements over the life of the respective swap.
The fair values of the Company's interest rate swap agreements were estimated based on Level 2 inputs. The Company's effectiveness testing during the three and six months ended June 30, 2016 and 2015 resulted in no amount of gain or loss reclassified from accumulated other comprehensive loss into earnings due to ineffectiveness. During the three and six months ended June 30, 2016, $0.4 million and $0.7 million, respectively, of existing net losses were realized and recorded as interest expense in the consolidated statements of operations. During the three and six months ended June 30, 2015, $0.8 million and $1.6 million, respectively, of existing net losses were realized and recorded as interest expense in the consolidated statements of operations. Based on the Company's fair value assumptions as of June 30, 2016, it expects to realize $0.4 million of existing net losses that are reported in accumulated other comprehensive loss into earnings within the next 12 months. See Note 11, Accumulated Other Comprehensive Loss, for additional information regarding the Company's cash flow hedges.

14

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Foreign Currency Exchange Rate Risk
As of June 30, 2016, the Company's foreign subsidiaries had $498.7 million of third-party debt, including capital leases, denominated in the local currencies in which the Company's foreign subsidiaries operate, including the Australian dollar, the British pound, the Canadian dollar and the Euro. The debt service obligations associated with this foreign currency debt are generally funded directly from those foreign operations. As a result, foreign currency risk related to this portion of the Company's debt service payments is limited. However, in the event the foreign currency debt service is not paid by the Company's foreign subsidiaries and is paid by its United States subsidiaries, the Company may face exchange rate risk if the Australian dollar, the British pound, the Canadian dollar or the Euro were to appreciate relative to the United States dollar and require higher United States dollar equivalent cash.
The Company is also exposed to foreign currency exchange rate risk related to its foreign subsidiaries, including non-functional currency intercompany debt, typically associated with intercompany debt from the Company's United States subsidiaries to its foreign subsidiaries, associated with acquisitions and any timing difference between announcement and closing of an acquisition of a foreign business. To mitigate currency exposures of non-United States dollar-denominated acquisitions, the Company may enter into foreign currency forward purchase contracts. To mitigate currency exposures related to non-functional currency denominated intercompany debt, cross-currency swaps or foreign currency forward contracts may be entered into for periods consistent with the underlying debt. In determining the fair value of the derivative contract, the significant inputs to valuation models are quoted market prices of similar instruments in active markets. However, cross-currency swap contracts and foreign currency forward contracts used to mitigate exposures on foreign currency intercompany debt may not qualify for hedge accounting. In cases where the cross-currency swap contracts and foreign currency forward contracts do not qualify for hedge accounting, the Company believes that such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from changes in the fair value of derivative instruments that do not qualify for hedge accounting are recognized in current period earnings within other income, net.
On February 25, 2015, the Company announced its entry into an agreement to acquire all of the outstanding share capital of RailInvest Holding Company Limited, the parent company of Freightliner, for cash consideration of approximately £490 million (or approximately $755 million at the exchange rate on February 25, 2015). Shortly after the announcement of the acquisition, the Company entered into British pound forward purchase contracts to fix £307.1 million of the purchase price to US$475.0 million and £84.7 million of the purchase price to A$163.8 million. The subsequent decrease in value of the British pound versus the United States and Australian dollars between the dates the British pound forward purchase contracts were entered into and March 23, 2015, the date that the £391.8 million in funds were delivered, resulted in a loss on settlement of foreign currency forward purchase contracts of $18.7 million for the six months ended June 30, 2015.
On March 25, 2015, the Company closed on the Freightliner transaction and paid cash consideration for the acquisition of £492.1 million (or $733.0 million at the exchange rate on March 25, 2015). The Company financed the acquisition through a combination of available cash and borrowings under the Company's Credit Agreement. A portion of the funds were transferred from the United States to the U.K. through an intercompany loan with a notional amount of £120.0 million (or $181.0 million at the exchange rate on the effective date of the loan) and accrued interest as of June 30, 2016 of £9.5 million (or $12.7 million at the exchange rate on June 30, 2016), each of which are expected to remain until maturity of the loan. To mitigate the foreign currency exchange rate risk related to this non-functional currency intercompany loan and the related interest, the Company entered into British pound forward contracts, which are accounted for as cash flow hedges.
The fair values of the Company's British pound forward contracts were estimated based on Level 2 inputs. The Company's effectiveness testing during the three and six months ended June 30, 2016 and 2015 resulted in no amount of gain or loss reclassified from accumulated other comprehensive income/(loss) into earnings due to ineffectiveness. During the three and six months ended June 30, 2016, $14.5 million ($8.7 million, net of tax) and $18.9 million ($11.4 million, net of tax), respectively, of net gains were recorded as other income in the consolidated statement of operations fully offsetting the corresponding foreign currency losses on the intercompany loan and accrued interest. During the three and six months ended June 30, 2016, $0.3 million of net gains were recorded as interest income in the consolidated statements of operations. Based on the Company's fair value assumptions as of June 30, 2016, it expects to realize $0.8 million of existing net gains that are reported in accumulated other comprehensive loss into earnings within the next 12 months. See Note 11, Accumulated Other Comprehensive Loss, for additional information regarding the Company's cash flow hedges.

15

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the Company's outstanding British pound forward contracts (British pounds in thousands):
Effective Date
 
Settlement Date
 
Notional Amount
 
Exchange Rate
3/25/2015
 
3/31/2020
 
£60,000
 
1.50
3/25/2015
 
3/31/2020
 
£60,000
 
1.51
6/30/2015
 
3/31/2020
 
£2,035
 
1.57
9/30/2015
 
3/31/2020
 
£1,846
 
1.51
12/31/2015
 
3/31/2020
 
£1,873
 
1.48
3/31/2016
 
3/31/2020
 
£1,881
 
1.45
6/30/2016
 
3/31/2020
 
£1,909
 
1.35
The following table summarizes the fair value of the Company's derivative instruments recorded in the consolidated balance sheets as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
 
 
Fair Value
 
Balance Sheet Location
 
June 30,
2016
 
December 31, 2015
Asset Derivatives:
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
British pound forward contracts
Other assets, net
 
$
17,438

 
$
1,530

Total derivatives designated as hedges
 
 
$
17,438

 
$
1,530

 
 
 
 
 
 
Liability Derivatives:
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rate swap agreements
Accrued expenses
 
$
36,433

 
$
846

Interest rate swap agreements
Other long-term liabilities
 

 
11,655

Total liability derivatives designated as hedges
 
 
$
36,433

 
$
12,501

The following table shows the effect of the Company's derivative instruments designated as cash flow hedges for the three and six months ended June 30, 2016 and 2015 in other comprehensive income/(loss) (OCI) (dollars in thousands): 
 
 
Total Cash Flow Hedge OCI Activity,
Net of Tax
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Derivatives Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
 
Effective portion of net changes in fair value recognized in OCI, net of tax:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
(5,064
)
 
$
7,521

 
$
(14,366
)
 
$
1,682

British pound forward contracts
 
(1,742
)
 
(4,815
)
 
(1,871
)
 
(5,286
)
 
 
$
(6,806
)
 
$
2,706

 
$
(16,237
)
 
$
(3,604
)

16

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table shows the effect of the Company's derivative instruments not designated as hedges for the three and six months ended June 30, 2016 and 2015 in the consolidated statements of operations (dollars in thousands): 
 
 
 
 
Amount Recognized in Earnings
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Location of Amount Recognized in Earnings
 
June 30,
 
June 30,
 
 
 
2016
 
2015
 
2016
 
2015
Derivative Instruments Not Designated as Hedges:
 
 
 
 
 
 
 
 
 
 
British pound forward purchase contracts
 
Loss on settlement of foreign currency forward purchase contracts
 
$

 
$

 
$

 
$
(18,686
)
 
 
 
 
$

 
$

 
$

 
$
(18,686
)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company applies the following three-level hierarchy of valuation inputs for measuring fair value:
Level 1 - Quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.
Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs are observable market data.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments held by the Company:
Financial Instruments Carried at Fair Value: Derivative instruments are recorded on the consolidated balance sheets as either assets or liabilities measured at fair value. During the reporting period, the Company's derivative financial instruments consisted of interest rate swap agreements and foreign currency forward contracts. The Company estimated the fair value of its interest rate swap agreements based on Level 2 valuation inputs, including fixed interest rates, LIBOR implied forward interest rates and the remaining time to maturity. The Company estimated the fair value of its British pound forward contracts based on Level 2 valuation inputs, including LIBOR implied forward interest rates, British pound LIBOR implied forward interest rates and the remaining time to maturity.
The Company's recurring fair value measurements using significant unobservable inputs (Level 3) relate solely to the Company's deferred consideration from the Freightliner acquisition. The fair value of the deferred consideration liability was estimated by discounting, to present value, contingent payments expected to be made.
Financial Instruments Carried at Historical Cost: Since the Company's long-term debt is not actively traded, fair value was estimated using a discounted cash flow analysis based on Level 2 valuation inputs, including borrowing rates the Company believes are currently available to it for loans with similar terms and maturities.
The following table presents the Company's financial instruments carried at fair value using Level 2 inputs as of June 30, 2016 and December 31, 2015 (dollars in thousands):
 
June 30,
2016
 
December 31,
2015
Financial instruments carried at fair value using Level 2 inputs:
 
 
 
Financial assets carried at fair value:
 
 
 
British pound forward contracts
$
17,438

 
$
1,530

Total financial assets carried at fair value
$
17,438

 
$
1,530

Financial liabilities carried at fair value:
 
 
 
Interest rate swap agreements
$
36,433

 
$
12,501

Total financial liabilities carried at fair value
$
36,433

 
$
12,501


17

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents the Company's financial instrument carried at fair value using Level 3 inputs as of June 30, 2016 and December 31, 2015 (amounts in thousands):
 
June 30, 2016
 
December 31, 2015
 
GBP
 
USD
 
GBP
 
USD
Financial instrument carried at fair value using Level 3 inputs:
 
 
 
 
 
 
 
Financial liabilities carried at fair value:
 
 
 
 
 
 
 
Accrued deferred consideration
£
24,962

 
$
33,120

 
£
24,200

 
$
35,680

The Company's recurring fair value measurements using significant unobservable inputs (Level 3) relate solely to the Company's deferred consideration from the Freightliner acquisition. At the date of acquisition, this contingent liability represented the aggregate fair value of the shares transferred to the Company by the Management Shareholders in exchange for the right to receive cash consideration for the representative economic interest of approximately 6% in Freightliner in the future (deferred consideration). Each of the Management Shareholders may elect to receive one third of their respective deferred consideration valued as of March 31, 2018, 2019 and 2020. The remaining portion of the deferred consideration will be valued as of March 31, 2020 and paid by the end of 2020.
The contingent liability is adjusted each period to represent the fair value of the deferred consideration as of the balance sheet date. To do so, the Company recalculates the estimated fair value of the deferred consideration in each reporting period until it is paid in full by using a contractual formula designed to estimate the economic value of the Management Shareholders' retained interest in a manner consistent with that used to derive the Freightliner acquisition price per share on the acquisition date. This calculation effectively represents the present value of the expected payment to be made upon settlement of the deferred consideration. Accordingly, such recalculations will reflect both the impact of the time value of money and the impact of changes in the expected future performance of the acquired business, as applicable. During the three and six months ended June 30, 2016, the Company recognized $1.0 million and $1.1 million, respectively, through other expenses within the Company's consolidated statement of operations as a result of the change in the estimated fair value of the deferred consideration, which primarily represented the time value of money. The Company expects to recognize future changes in the contingent liability for the estimated fair value of the deferred consideration through other expenses within the Company's consolidated statement of operations. These future changes in the estimated fair value of the deferred consideration are not expected to be deductible for tax purposes.
The following table presents the carrying value and fair value using Level 2 inputs of the Company's financial instruments carried at historical cost as of June 30, 2016 and December 31, 2015 (dollars in thousands): 
 
 
June 30, 2016
 
December 31, 2015
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial liabilities carried at historical cost:
 
 
 
 
 
 
 
 
United States term loan
 
$
1,655,732

 
$
1,654,980

 
$
1,755,736

 
$
1,750,040

Australian term loan
 
202,219

 
202,152

 
209,242

 
210,128

U.K. term loan
 
134,650

 
134,375

 
149,500

 
150,030

Revolving credit facility
 
73,299

 
77,600

 
39,737

 
44,833

Other debt
 
3,053

 
3,027

 
3,123

 
3,090

Total
 
$
2,068,953

 
$
2,072,134

 
$
2,157,338

 
$
2,158,121

8. U.K. PENSION PLAN:
In connection with the acquisition of Freightliner, the Company assumed a defined benefit pension plan for its U.K. employees through a standalone shared cost arrangement within the Railways Pension Scheme (Pension Program). The Pension Program is managed and administered by a professional pension administration company and is overseen by trustees with professional advice from independent actuaries and other advisers. The Pension Program is a shared cost arrangement with required contributions shared between Freightliner and its employees, with Freightliner contributing 60% and the remaining 40% contributed by active employees. The Company engages independent actuaries to compute the amounts of liabilities and expenses relating to the Pension Program subject to the assumptions that the Company selects.

18

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the components of the Pension Program related to the net benefit costs recognized in labor and benefits in the Company's consolidated statement of operations for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
3,436

 
$
3,565

 
$
6,863

 
$
3,775

Interest cost
3,197

 
2,539

 
6,385

 
2,688

Expected return on plan assets
(4,085
)
 
(3,964
)
 
(8,159
)
 
(4,197
)
Net periodic benefit cost
$
2,548

 
$
2,140

 
$
5,089

 
$
2,266

During the six months ended June 30, 2016, the Company contributed $5.2 million to fund the Pension Program. The Company expects to contribute $7.5 million to the Pension Program for the remainder of 2016. The Pension Program's assets may undergo significant changes over time as a result of market conditions. In the event that the Pension Program's projected assets and liabilities reveal additional funding requirements, the shared cost arrangement generally means that the Company will be required to pay 60% of any additional contributions, with active members contributing the remaining 40%, in each case over an agreed recovery period. If the Pension Program was to be terminated and wound up, any deficit would fall entirely on the Company and would not be shared with active members. Currently, the Company has no intention of terminating the Pension Program.
9. INCOME TAXES:
The Company's effective income tax rate for the three months ended June 30, 2016 was 31.4%, compared with 35.7% for the three months ended June 30, 2015. The Company's effective income tax rate for the six months ended June 30, 2016 was 31.6% compared with 37.6% for the six months ended June 30, 2015. The lower effective income tax rate for the three and six months ended June 30, 2016 was driven primarily by the United States Short Line Tax Credit. The Company's provision for income taxes for the three and six months ended June 30, 2016 included an income tax benefit of $7.2 million and $13.5 million, respectively, associated with the United States Short Line Tax Credit. In December 2015, the United States Short Line Tax Credit (which had previously expired on December 31, 2014), was extended for fiscal years 2015 and 2016. As the extension was passed in December 2015 for the full 2015 fiscal year, the United States Short Line Tax Credit associated with results for the three and six months ended June 30, 2015 was recorded in the fourth quarter of 2015.
The United States Short Line Tax Credit is an income tax track maintenance credit for Class II and Class III railroads to reduce their federal income tax based on qualified railroad track maintenance expenditures. Qualified expenditures include amounts incurred for maintaining track, including roadbed, bridges and related track structures owned or leased by a Class II or Class III railroad. The credit is equal to 50% of the qualified expenditures, subject to an annual limitation of $3,500 multiplied by the number of miles of railroad track owned or leased by the Class II or Class III railroad as of the end of its tax year.
The Company's provision for income taxes for the six months ended June 30, 2016 also included a valuation allowance of A$2.6 million (or $2.0 million at the average exchange rate in March of 2016) associated with the impairment of GWA's now idle rolling-stock maintenance facility (see Note 2, Changes in Operations) that was formerly used in connection with the Southern Iron rail haulage agreement.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. For public entities, the amendments in this guidance are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company early adopted the provisions of this ASU as of January 1, 2016 and applied it retrospectively to all periods presented. The December 31, 2015 consolidated balance sheet was adjusted to reflect a reduction of current deferred income tax assets of $69.2 million, an increase in non-current deferred income tax assets of $0.2 million and a reduction in non-current deferred income tax liabilities of $69.0 million. There was no other impact on the consolidated financial statements from the adoption of this guidance.

19

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

10. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is a defendant in certain lawsuits resulting from the Company's operations in the ordinary course as the nature of the Company's business exposes it to the potential for various claims and litigation, including those related to property damage, personal injury, freight loss, labor and employment, environmental and other matters. The Company maintains insurance policies to mitigate the financial risk associated with such claims.
Any material changes to pending litigation or a catastrophic rail accident or series of accidents involving material freight loss or property damage, personal injury and environmental liability or other claims against the Company that are not covered by insurance could have a material adverse effect on the Company's results of operations, financial condition and liquidity.
Management believes there are adequate provisions in the financial statements for any probable liabilities that may result from disposition of the pending lawsuits. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to the Company's results of operations or have a material adverse effect on the Company's financial position or liquidity.
11. ACCUMULATED OTHER COMPREHENSIVE LOSS:
The following tables set forth the components of accumulated other comprehensive loss included in the consolidated balance sheets and consolidated statements of comprehensive income (dollars in thousands): 
 
Foreign Currency Translation Adjustment
 
Defined Benefit Plans
 
Net Unrealized Gain/(Loss) on Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance, December 31, 2015
$
(156,146
)
 
$
11,005

 
$
(8,316
)
 
$
(153,457
)
Other comprehensive loss before reclassifications
(1,491
)
 

 
(4,640
)
 
(6,131
)
Amounts reclassified from accumulated other comprehensive loss, net of tax (provision)/benefit of $(791) and $7,731, respectively

 
2,924

(a)
(11,597
)
(b)
(8,673
)
Current period change
(1,491
)
 
2,924

 
(16,237
)
 
(14,804
)
Balance, June 30, 2016
$
(157,637
)
 
$
13,929

 
$
(24,553
)
 
$
(168,261
)
 
Foreign Currency Translation Adjustment
 
Defined Benefit Plans
 
Net Unrealized Gain/(Loss) on Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance, December 31, 2014
$
(70,746
)
 
$
1,405

 
$
(2,911
)
 
$
(72,252
)
Other comprehensive loss before reclassifications
(5,843
)
 

 
(2,646
)
 
(8,489
)
Amounts reclassified from accumulated other comprehensive loss, net of tax (provision)/benefit of ($60) and $638, respectively

 
106

(a)
(958
)
(b)
(852
)
Current period change
(5,843
)
 
106

 
(3,604
)
 
(9,341
)
Balance, June 30, 2015
$
(76,589
)
 
$
1,511

 
$
(6,515
)
 
$
(81,593
)
(a) Existing net gains realized were recorded in labor and benefits on the consolidated statements of operations.
(b) Existing net losses realized were recorded in interest expense on the consolidated statements of operations (see Note 6, Derivative Financial Instruments).
12. SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
As of June 30, 2016 and 2015, the Company had outstanding receivables from outside parties for the funding of capital expenditures of $12.5 million and $20.9 million, respectively. At June 30, 2016 and 2015, the Company also had $10.4 million and $45.1 million, respectively, of purchases of property and equipment that were not paid and, accordingly, were accrued in accounts payable in the normal course of business.

20

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

13. SEGMENT INFORMATION:
The Company presents the financial results of its 10 operating regions as three distinct reportable segments: North American Operations, Australian Operations and U.K./European Operations. Each of the Company's segments generates the following three categories of revenues from external customers: freight revenues, freight-related revenues and all other revenues. The Company's eight North American regions are aggregated into one segment as a result of having similar economic and operating characteristics. During the second quarter of 2016, the Company's Ohio Valley Region railroads were consolidated into the Company's Northeast and Midwest regions. This consolidation reduced the Company's number of operating regions from 11 to 10.
During 2016, the Company incurred restructuring costs of $6.1 million for the six months ended June 30, 2016, including $4.7 million in our U.K./European Operations, $0.7 million in our Australian Operations and $0.7 million in our North American Operations.
The results of operations of the foreign entities are maintained in the respective local currency (the Australian dollar, the British pound, the Canadian dollar and the Euro) and then translated into United States dollars at the applicable exchange rates for inclusion in the consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar will impact the Company's results of operations.
The following table reflects the average exchange rates used to translate the foreign entities respective local currency results of operations into United States dollars for the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
United States dollar per Australian dollar
$
0.75

 
$
0.78

 
$
0.73

 
$
0.78

United States dollar per British pound
$
1.44

 
$
1.53

 
$
1.43

 
$
1.52

United States dollar per Canadian dollar
$
0.78

 
$
0.81

 
$
0.75

 
$
0.81

United States dollar per Euro
$
1.13

 
$
1.11

 
$
1.12

 
$
1.12

The following tables set forth selected financial data for the Company's reportable segments for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended June 30, 2016
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues
$
227,082

 
$
26,394

 
$
87,306

 
$
340,782

Freight-related revenues
60,978

 
27,129

 
45,581

 
133,688

All other revenues
16,515

 
1,760

 
8,630

 
26,905

Total operating revenues
$
304,575

 
$
55,283

 
$
141,517

 
$
501,375

Operating income/(loss)
$
79,023

 
$
9,381

 
$
(1,210
)
 
$
87,194

Depreciation and amortization
$
37,124

 
$
7,233

 
$
6,567

 
$
50,924

Interest expense, net
$
9,666

 
$
2,398

 
$
5,341

 
$
17,405

Provision for/(benefit from) income taxes
$
20,953

 
$
2,247

 
$
(1,088
)
 
$
22,112

Expenditures for additions to property & equipment, net of grants from outside parties
$
39,523

 
$
4,787

 
$
11,338

 
$
55,648


21

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 
Three Months Ended June 30, 2015
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues
$
238,153

 
$
39,464

 
$
96,998

 
$
374,615

Freight-related revenues
55,589

 
25,173

 
57,129

 
137,891

All other revenues
17,238

 
2,171

 
10,304

 
29,713

Total operating revenues
$
310,980

 
$
66,808

 
$
164,431

 
$
542,219

Operating income
$
76,621

 
$
15,131

 
$
7,699

 
$
99,451

Depreciation and amortization
$
34,936

 
$
7,394

 
$
5,718

 
$
48,048

Interest expense, net
$
9,588

 
$
2,271

 
$
5,789

 
$
17,648

Provision for income taxes
$
24,939

 
$
3,829

 
$
532

 
$
29,300

Expenditures for additions to property & equipment, net of grants from outside parties
$
73,440

 
$
9,159

 
$
5,028

 
$
87,627


 
Six Months Ended June 30, 2016
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues
$
448,907

 
$
51,171

 
$
167,118

 
$
667,196

Freight-related revenues
122,503

 
52,619

 
92,024

 
267,146

All other revenues
32,943

 
3,291

 
13,415

 
49,649

Total operating revenues
$
604,353

 
$
107,081

 
$
272,557

 
$
983,991

Operating income/(loss)
$
149,001

 
$
(2,370
)
 
$
(2,441
)
 
$
144,190

Depreciation and amortization
$
73,313

 
$
13,889

 
$
13,052

 
$
100,254

Interest expense, net
$
20,130

 
$
4,793

 
$
10,382

 
$
35,305

Provision for/(benefit from) income taxes
$
36,962

 
$
(277
)
 
$
(1,765
)
 
$
34,920

Expenditures for additions to property & equipment, net of grants from outside parties
$
64,939

 
$
5,654

 
$
16,738

 
$
87,331

 
Six Months Ended June 30, 2015
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues
$
481,183

 
$
85,822

 
$
105,819

 
$
672,824

Freight-related revenues
113,650

 
36,037

 
66,329

 
216,016

All other revenues
33,771

 
4,891

 
11,747

 
50,409

Total operating revenues
$
628,604

 
$
126,750

 
$
183,895

 
$
939,249

Operating income
$
133,702

 
$
29,367

 
$
9,002

 
$
172,071

Depreciation and amortization
$
70,241

 
$
13,620

 
$
6,404

 
$
90,265

Interest expense, net
$
20,361

 
$
4,604

 
$
6,165

 
$
31,130

Loss on settlement of foreign currency forward purchase contracts
$
16,374

 
$
2,312

 
$

 
$
18,686

Provision for income taxes
$
39,226

 
$
6,757

 
$
179

 
$
46,162

Expenditures for additions to property & equipment, net of grants from outside parties
$
118,710

 
$
13,774

 
$
5,041

 
$
137,525


22

Table of Contents             
GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following tables set forth the property and equipment recorded in the consolidated balance sheets for the Company's reportable segments as of June 30, 2016 and December 31, 2015 (dollars in thousands): 
 
June 30, 2016
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Property and equipment, net
$
3,462,559

 
$
452,455

 
$
293,692

 
$
4,208,706

 
December 31, 2015
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Property and equipment, net
$
3,433,669

 
$
465,123

 
$
316,271

 
$
4,215,063

14. RECENTLY ISSUED ACCOUNTING STANDARDS:
Accounting Standards Not Yet Effective
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and includes the specific steps for recognizing revenue and disclosure requirements. In August 2015, the FASB issued ASU 2015-14, which approved a one-year deferral of the effective date of the new revenue recognition standard. In March 2016, the FASB issued ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, which provides clarification when identifying performance obligations and providing implementation guidance on licensing. In May 2016, the FASB issued ASU 2016-12, which clarifies the objective of the collectability criterion. The new standards will become effective for the Company on January 1, 2018, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require lessees to recognize leases on their balance sheets as a right-of-use asset with a corresponding liability. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of 12 months or less. Lessor accounting under the provisions of the standard is substantially unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by management, will also be required. The amendments are effective for fiscal years beginning after December 15, 2018, requiring a modified retrospective transition approach and include a number of practical expedients. Early application is permitted. The standard will become effective for the Company beginning January 1, 2019. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based compensation arrangements, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The amendments will be effective for the Company January 1, 2017. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.

23

Table of Contents

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our 2015 Annual Report on Form 10-K. When comparing our results of operations from one reporting period to another, it is important to consider that we have historically experienced fluctuations in revenues and expenses due to acquisitions, changing economic conditions, commodity prices, competitive forces, changes in foreign currency exchange rates, rail network congestion, one-time freight moves, fuel price fluctuations, customer plant expansions and shutdowns, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, tornadoes, high winds, droughts, heavy snowfall, unseasonably hot or cold weather, freezing and flooding, among other factors. In periods when these events occur, our results of operations are not easily comparable from one period to another. Finally, certain of our railroads have commodity shipments that are sensitive to general economic conditions, global commodity prices and foreign exchange rates, such as steel products, iron ore, paper products, lumber and forest products and agricultural products, as well as product specific market conditions, such as the availability of lower priced alternative sources of power generation (coal) and energy commodity price differentials (crude oil). Other shipments are relatively less affected by economic conditions and are more closely affected by other factors, such as winter weather (salt) and seasonal rainfall (agricultural products). As a result of these and other factors, our results of operations in any reporting period may not be directly comparable to our results of operations in other reporting periods. When we discuss foreign exchange impact, we are referring to the change in our results due to the change in foreign currency exchange rates. We calculate foreign exchange impact by comparing the prior period results translated from local currency to United States dollars using current period exchange rates to the prior period results in United States dollars as reported. Constant currency amounts reflect the prior period results translated at the current period exchange rates. When we discuss results from existing operations or same railroad operations, we are referring to the change in our results, period-over-period, associated with operations that we managed in both periods (i.e., excluding the impact of acquisitions).
Overview
We own and operate 121 freight railroads worldwide that are organized in 10 operating regions with approximately 7,200 employees and more than 2,800 customers. During the second quarter of 2016, our Ohio Valley Region railroads were consolidated into our Northeast and Midwest regions as part of our drive for cost efficiency. This consolidation reduced the number of our operating regions from 11 to 10.
The financial results of our 10 operating regions are reported in the following three reportable segments:
Our North American Operations segment includes eight operating regions that serve 41 U.S. states and four Canadian provinces. This segment includes 114 short line and regional freight railroads with more than 13,000 track-miles.
Our Australian Operations segment provides rail freight services in South Australia, the Northern Territory and New South Wales. Included in the Australian Operations segment is our operation of the 1,400-mile Tarcoola-to-Darwin rail line, which is the sole inland north-south rail corridor and primarily carries intermodal and commodity freight.
Our U.K./European Operations segment includes the majority of the operations of Freightliner Group Limited (Freightliner), which we acquired in March 2015. Freightliner is the United Kingdom's (U.K.) largest rail maritime intermodal operator and the U.K.'s second-largest rail freight company. Our U.K./European Operations segment also includes heavy-haul freight operations in Poland and Germany and cross-border intermodal services connecting Northern European seaports with key industrial regions throughout the continent.
Overview of Three-Month Results
Our operating revenues decreased $40.8 million, or 7.5%, to $501.4 million for the three months ended June 30, 2016, compared with $542.2 million for the three months ended June 30, 2015. Operating income for the three months ended June 30, 2016 was $87.2 million, compared with $99.5 million for the three months ended June 30, 2015. Our operating ratio, defined as operating expenses divided by operating revenues, was 82.6% for the three months ended June 30, 2016, compared with 81.7% for the three months ended June 30, 2015.
Net income for the three months ended June 30, 2016 was $48.4 million, compared with net income of $52.8 million for the three months ended June 30, 2015. Our diluted earnings per common share (EPS) for the three months ended June 30, 2016 were $0.83 with 58.1 million weighted average shares outstanding, compared with diluted EPS of $0.92 with 57.1 million weighted average shares outstanding for the three months ended June 30, 2015.

24

Table of Contents

Our results for the three months ended June 30, 2016 and 2015 included certain items affecting comparability between the periods that are set forth below (dollars in millions, except per share amounts):
 
 
Income/(Loss) Before Taxes Impact
 
After-Tax Net Income/(Loss) Impact
 
Diluted Earnings/(Loss) Per Common Share Impact
Three Months Ended June 30, 2016
 
 
 
 
 
 
Restructuring costs
 
$
(5.0
)
 
$
(4.0
)
 
$
(0.07
)
Corporate development and related costs
 
$
(2.6
)
 
$
(1.8
)
 
$
(0.03
)
Net gain on sale of assets
 
$
0.3

 
$
0.2

 
$

Short Line Tax Credit
 
$

 
$
7.2

 
$
0.12

 
 
 
 
 
 
 
Three Months Ended June 30, 2015
 
 
 
 
 
 
Corporate development and related costs
 
$
(0.8
)
 
$
(0.5
)
 
$
(0.01
)
Net gain on sale of assets
 
$
0.5

 
$
0.3

 
$
0.01

For the three months ended June 30, 2016, our results included restructuring costs of $5.0 million primarily associated with our U.K./European Operations, corporate development and related costs of $2.6 million and a net gain on the sale of assets of $0.3 million. Our results for the three months ended June 30, 2016 also included an income tax benefit of $7.2 million associated with the United States Short Line Tax Credit, which was not in effect for the three months ended June 30, 2015. The Short Line Tax Credit was extended retroactively in the fourth quarter of 2015 for calendar years 2015 and 2016.
For the three months ended June 30, 2015, our results included corporate development and related costs of $0.8 million, primarily related to the Freightliner integration, and a net gain on the sale of assets of $0.5 million.
Operating revenues from our North American Operations decreased $6.4 million, or 2.1%, to $304.6 million for the three months ended June 30, 2016, compared with $311.0 million for the three months ended June 30, 2015. Excluding a $1.2 million decrease from the impact of foreign currency depreciation, our North American Operations revenues decreased by $5.2 million, or 1.7%, primarily due to declines in coal, grain and pulp and paper shipments.
North American Operations traffic decreased 27,765 carloads, or 6.7%, to 386,123 carloads for the three months ended June 30, 2016. The traffic decrease was principally due to decreases of 17,208 carloads of coal and coke traffic (primarily in the Midwest and Northeast regions), 4,360 carloads of agricultural products traffic (primarily in the Midwest and Mountain West regions), 4,174 carloads of pulp and paper traffic (primarily in the Midwest, Northeast, Southern, Canada and Pacific regions) and 3,990 carloads of minerals and stone traffic (primarily in the Northeast Region). All remaining traffic increased by a net 1,967 carloads.
Operating income from our North American Operations for the three months ended June 30, 2016 was $79.0 million, compared with $76.6 million for the three months ended June 30, 2015. The operating ratio from our North American Operations for the three months ended June 30, 2016 was 74.1%, compared with 75.4% for the three months ended June 30, 2015. Operating income for the three months ended June 30, 2016 included $1.7 million of corporate development and related costs and $0.3 million of restructuring costs. Operating income for the three months ended June 30, 2015 included $0.9 million of corporate development and related costs. Despite a 6.7% decline in North American carloads, favorable revenue mix and effective management of costs led to an improvement in our North American operating ratio and a modest increase in our North American operating income. 
Operating revenues from our Australian Operations decreased $11.5 million, or 17.3%, to $55.3 million for the three months ended June 30, 2016, compared with $66.8 million for the three months ended June 30, 2015. Excluding a $2.7 million decrease from the impact of foreign currency depreciation, our Australian Operations operating revenues decreased $8.8 million, or 13.8%, primarily due to the impact of declining metallic ore shipments.
Australian Operations traffic decreased 7,853 carloads, or 15.1%, to 44,251 carloads for the three months ended June 30, 2016. The traffic decrease was principally due to decreases of 5,119 carloads of metallic ores traffic and 4,312 carloads of agricultural products traffic, partially offset by an increase of 1,913 carloads of minerals and stone traffic. All remaining traffic decreased by a net 335 carloads.

25

Table of Contents

Operating income from our Australian Operations for the three months ended June 30, 2016 was $9.4 million, compared with $15.1 million for the three months ended June 30, 2015. Operating income for the three months ended June 30, 2016 included $0.8 million of corporate development and related costs.
Operating revenues from our U.K./European Operations decreased $22.9 million, or 13.9%, to $141.5 million for the three months ended June 30, 2016, compared with $164.4 million for the three months ended June 30, 2015. Excluding a $7.1 million decrease due to the impact of foreign currency depreciation, U.K./European revenues decreased $15.9 million, or 10.1%, primarily due to the rationalization of Continental Europe intermodal routes, declining coal shipments and lower minerals and stone shipments.
U.K./European Operations traffic decreased 5,338 carloads, or 1.9%, to 276,542 carloads for the three months ended June 30, 2016. The traffic decrease was principally due to decreases of 14,130 carloads of coal and coke traffic (primarily in the U.K.) and 6,010 carloads of minerals and stone traffic, partially offset by an increase of 14,316 carloads of intermodal traffic. All remaining traffic increased by 486 carloads.
Our U.K./European Operations had an operating loss of $1.2 million for the three months ended June 30, 2016, compared with operating income of $7.7 million for the three months ended June 30, 2015, primarily due to the restructuring of the U.K. coal business.
As a result of the 10% decline in the British pound following the U.K. referendum to exit the European Union, we reduced our U.K./Europe revenue outlook by approximately $20 million for the second half of 2016.
Overview of Six-Month Results
Our operating revenues increased $44.7 million, or 4.8%, to $984.0 million for the six months ended June 30, 2016, compared with $939.2 million for the six months ended June 30, 2015. Operating income for the six months ended June 30, 2016 was $144.2 million, compared with $172.1 million for the six months ended June 30, 2015, a decrease of $27.9 million, or 16.2%. Our operating ratio was 85.3% for the six months ended June 30, 2016, compared with 81.7% for the six months ended June 30, 2015. Our same railroad operating ratio for the six months ended June 30, 2016 was 83.2%, compared with 81.7% for the six months ended June 30, 2015. When we discuss either operating ratios from existing operations or same railroad operating ratios, we are referring to the change in our operating ratio, period-over-period, associated with operations that we managed in both periods (i.e., excluding the impact of acquisitions, such as Freightliner for the period January 1, 2016 through March 24, 2016).
Net income for the six months ended June 30, 2016 was $75.4 million, compared with net income of $76.7 million for the six months ended June 30, 2015. Our diluted EPS for the six months ended June 30, 2016 were $1.30 with 58.0 million weighted average shares outstanding, compared with diluted EPS of $1.34 with 57.1 million weighted average shares outstanding for the six months ended June 30, 2015. Our results for the six months ended June 30, 2016 included an income tax benefit of $13.5 million associated with the United States Short Line Tax Credit, which was not in effect for the six months ended June 30, 2015.

26

Table of Contents

Our results for the six months ended June 30, 2016 and 2015 included certain items affecting comparability between the periods that are set forth below (dollars in millions, except per share amounts):
 
 
Income/(Loss) Before Taxes Impact
 
After-Tax Net Income/(Loss) Impact
 
Diluted Earnings/(Loss) Per Common Share Impact
Six Months Ended June 30, 2016
 
 
 
 
 
 
Australia impairment and related costs
 
$
(21.1
)
 
$
(16.8
)
 
$
(0.29
)
Restructuring costs
 
$
(6.1
)
 
$
(4.8
)
 
$
(0.08
)
Corporate development and related costs
 
$
(3.1
)
 
$
(2.1
)
 
$
(0.04
)
Net gain on sale of assets
 
$
0.5

 
$
0.4

 
$
0.01

Short Line Tax Credit
 
$

 
$
13.5

 
$
0.23

 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
 
 
 
 
Loss on settlement of foreign currency forward purchase contracts
 
$
(18.7
)
 
$
(11.6
)
 
$
(0.2
)
Freightliner acquisition/integration costs
 
$
(13.3
)
 
$
(9.9
)
 
$
(0.17
)
Credit facility refinancing-related costs
 
$
(2.0
)
 
$
(1.3
)
 
$
(0.02
)
Australia severance
 
$
(1.7
)
 
$
(1.2
)
 
$
(0.02
)
Corporate development and related costs
 
$
(0.2
)
 
$
(0.1
)
 
$

Net gain on sale of assets
 
$
0.8

 
$
0.5

 
$
0.01

During the six months ended June 30, 2016, we generated $162.0 million in cash flows from operating activities. During the same period, we purchased $113.3 million of property and equipment, including $4.0 million for new business investments, partially offset by $26.0 million in cash received from government grants and other outside parties for capital spending. We also paid $96.5 million in net payments on our outstanding debt obligations.
Changes in Operations
Australia
Arrium Limited: Between 2011 and 2014, our subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA) invested a total of approximately $78 million to purchase locomotives and railcars, as well as to construct a standard gauge rolling-stock maintenance facility to support iron ore shipments from Arrium Limited's (Arrium) Southern Iron mine and its Whyalla-based operations, which include the Middleback Range iron ore mines and the Whyalla steelworks.
Arrium mothballed its Southern Iron mine in April 2015, citing the significant decline in the price of iron ore. During 2015, GWA carried approximately 8,300 carloads of iron ore from the Southern Iron mine and, in total, generated approximately A$83 million in freight and freight-related revenues (or approximately $62 million at the average exchange rate for the year ended December 31, 2015) under the fixed and variable payment structure that is customary in large contracts in Australia.
On April 7, 2016, Arrium announced it had entered into voluntary administration. As a result of this announcement, during the three months ended March 31, 2016, we recorded a $13.0 million non-cash charge related to the impairment of GWA's now idle rolling-stock maintenance facility and an allowance for doubtful accounts of $8.1 million associated with accounts receivable from Arrium. As a result of the voluntary administration, all payments to GWA associated with the Southern Iron rail haulage agreement have ceased. GWA is in the process of redeploying rolling-stock previously used to provide service under the Southern Iron rail haulage agreement to serve other customers.
GWA continues to receive payments and provide service under GWA's remaining rail haulage agreement to serve several iron ore mines in the Middleback Range and the Whyalla Steelworks operations, which we expect will represent A$35 million (or approximately $26 million at the exchange rate on June 30, 2016) of annual revenue prospectively. Pending the outcome of the voluntary administration process, GWA could lose some or all of the revenue associated with the remaining haulage agreement. In the event of an adverse determination regarding the viability of the Middleback Range or the Whyalla Steelworks operations, or a termination of the remaining rail haulage agreement, all or a portion of GWA's assets deployed to provide service under this agreement, which consist largely of narrow gauge locomotives and wagons, could be redeployed elsewhere in Australia.

27

Table of Contents

Europe
Freightliner Group Limited: On March 25, 2015, we completed the acquisition of all of the outstanding share capital of RailInvest Holding Company Limited, the parent company of London-based Freightliner, pursuant to the terms of a Share Purchase Agreement dated February 24, 2015. Management Shareholders retained an approximate 6% economic interest in Freightliner in the form of deferred consideration. We expect to settle the deferred consideration by the end of 2020.
Headquartered in London, England, Freightliner is an international freight rail operator with operations in the United Kingdom (U.K.), Poland, Germany, the Netherlands and Australia. Freightliner's principal business is located in the U.K. where it is the largest maritime intermodal operator and the second largest freight rail operator, providing service throughout England, Scotland and Wales. In Continental Europe, Freightliner Poland primarily serves aggregates and coal customers in Poland. In addition, Freightliner's ERS subsidiary, based in Rotterdam, provides cross-border intermodal services connecting the northern European ports of Rotterdam, Bremerhaven and Hamburg to key cities in Germany, Poland, Italy and beyond. In Australia, Freightliner currently transports coal and containerized agricultural products for its customers in New South Wales. As of the acquisition date, Freightliner employed approximately 2,500 people worldwide and had a fleet of primarily leased equipment, which included approximately 250 diesel locomotives, approximately 45 electric locomotives and 5,500 railcars.
We funded the acquisition with borrowings under the Credit Agreement (see Note 5, Long-Term Debt, to our Consolidated Financial Statements) and available cash. The foreign exchange rate used to translate the total consideration to United States dollars was $1.49 for one British pound. The calculation of the total consideration for the Freightliner acquisition is presented below (amounts in thousands):
 
 
GBP
 
USD
Cash consideration
 
£
492,083

 
$
733,006

Deferred consideration
 
24,200

 
36,048

Total consideration
 
£
516,283

 
$
769,054

For additional information regarding the acquisition of Freightliner, see Note 2, Changes in Operations, to our Consolidated Financial Statements.
United States
Pinsly's Arkansas Division: On January 5, 2015, we completed the acquisition of certain subsidiaries of Pinsly Railroad Company (Pinsly) that constituted Pinsly's Arkansas Division (Pinsly Arkansas) for $41.3 million in cash. We funded the acquisition with borrowings under our Amended and Restated Senior Secured Syndicated Credit Facility Agreement (the Prior Credit Agreement). The results of operations from Pinsly Arkansas have been included in our consolidated statements of operations since the acquisition date within our North American Operations segment. For additional information regarding Pinsly Arkansas, see Note 2, Changes in Operations, to our Consolidated Financial Statements.
Three Months Ended June 30, 2016 Compared with Three Months Ended June 30, 2015
Consolidated Operating Results
Operating Revenues
The following table sets forth our operating revenues and carloads for the three months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended June 30,
 
Decrease in Operating Revenues
 
Currency Impact
 
2016
 
2015
 
Amount
 
%
 
Freight revenues
$
340,782

 
$
374,615

 
$
(33,833
)
 
(9.0
)%
 
$
(6,983
)
Freight-related revenues
133,688

 
137,891

 
(4,203
)
 
(3.0
)%
 
(3,067
)
All other revenues
26,905

 
29,713

 
(2,808
)
 
(9.5
)%
 
(887
)
Total operating revenues
$
501,375

 
$
542,219

 
$
(40,844
)
 
(7.5
)%
 
$
(10,937
)
Carloads
706,916

 
747,872

 
(40,956
)
 
(5.5
)%
 
 

28

Table of Contents

Operating Expenses
Total operating expenses for the three months ended June 30, 2016 decreased $28.6 million, or 6.5%, to $414.2 million, compared with $442.8 million for the three months ended June 30, 2015. The decrease was primarily due to a $9.7 million decrease from the depreciation of foreign currencies relative to the United States dollar as well as decreases of $8.6 million in diesel fuel used in train operations, $5.5 million in labor and benefits, $4.8 million in materials, $3.8 million in equipment rents and $3.7 million in purchased services. These decreases were partially offset by $5.0 million of restructuring costs for the three months ended June 30, 2016, primarily associated with our U.K./European Operations, and a $3.7 million increase in depreciation and amortization.
The following table sets forth our total operating expenses for the three months ended June 30, 2016 and 2015 (dollars in thousands): 
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2015 Constant Currency*
 
Increase/(Decrease)Constant Currency*
 
2016
 
2015
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
Labor and benefits
$
155,948

 
31.1
 %
 
$
165,296

 
30.4
 %
 
$
(9,348
)
 
$
(3,810
)
 
$
161,486

 
$
(5,538
)
Equipment rents
38,426

 
7.7
 %
 
43,483

 
8.0
 %
 
(5,057
)
 
(1,208
)
 
42,275

 
(3,849
)
Purchased services
51,632

 
10.3
 %
 
56,177

 
10.4
 %
 
(4,545
)
 
(893
)
 
55,284

 
(3,652
)
Depreciation and amortization
50,924

 
10.2
 %
 
48,048

 
8.9
 %
 
2,876

 
(850
)
 
47,198

 
3,726

Diesel fuel used in train operations
28,251

 
5.5
 %
 
37,895

 
7.0
 %
 
(9,644
)
 
(1,048
)
 
36,847

 
(8,596
)
Electricity used in train operations
3,304

 
0.7
 %
 
4,977

 
0.9
 %
 
(1,673
)
 
(38
)
 
4,939

 
(1,635
)
Casualties and insurance
9,442

 
1.9
 %
 
10,038

 
1.9
 %
 
(596
)
 
(187
)
 
9,851

 
(409
)
Materials
21,393

 
4.3
 %
 
26,929

 
5.0
 %
 
(5,536
)
 
(713
)
 
26,216

 
(4,823
)
Trackage rights
21,152

 
4.2
 %
 
22,172

 
4.1
 %
 
(1,020
)
 
(484
)
 
21,688

 
(536
)
Net gain on sale of assets
(308
)
 
(0.1
)%
 
(490
)
 
(0.1
)%
 
182

 
7

 
(483
)
 
175

Restructuring costs
4,970

 
1.0
 %
 

 
 %
 
4,970

 

 

 
4,970

Other expenses
29,047

 
5.8
 %
 
28,243

 
5.2
 %
 
804

 
(489
)
 
27,754

 
1,293

Total operating expenses
$
414,181

 
82.6
 %
 
$
442,768

 
81.7
 %
 
$
(28,587
)
 
$
(9,713
)
 
$
433,055

 
$
(18,874
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Operating Income/Operating Ratio
Operating income was $87.2 million for the three months ended June 30, 2016, compared with $99.5 million for the three months ended June 30, 2015. Operating income for the three months ended June 30, 2016 included restructuring costs of $5.0 million, primarily associated with our U.K./European Operations, corporate development and related costs of $2.6 million and a net gain on the sale of assets of $0.3 million. Operating income for the three months ended June 30, 2015 included corporate development and related costs of $0.8 million, primarily related to the Freightliner integration, and a net gain on the sale of assets of $0.5 million.
Our operating ratio was 82.6% for the three months ended June 30, 2016, compared with 81.7% for the three months ended June 30, 2015. The increase in our operating ratio was primarily driven by restructuring costs of $5.0 million primarily associated with our U.K./European Operations.
Interest Expense
Interest expense was $17.7 million for the three months ended June 30, 2016, compared with $17.8 million for the three months ended June 30, 2015.

29

Table of Contents

Provision for Income Taxes
Our effective income tax rate for the three months ended June 30, 2016 was 31.4%, compared with 35.7% for the three months ended June 30, 2015. Our provision for income taxes for the three months ended June 30, 2016 included an income tax benefit of $7.2 million associated with the United States Short Line Tax Credit. The Short Line Tax Credit was in existence from 2005 through 2014 and was further extended in December 2015 for fiscal years 2015 and 2016. As the extension was passed in December 2015 for the full 2015 fiscal year, the Short Line Tax Credit associated with results for the three months ended June 30, 2015 was recorded in the fourth quarter of 2015.
The United States Short Line Tax Credit is an income tax track maintenance credit for Class II and Class III railroads to reduce their federal income tax based on qualified railroad track maintenance expenditures. Qualified expenditures include amounts incurred for maintaining track, including roadbed, bridges and related track structures owned or leased by a Class II or Class III railroad. The credit is equal to 50% of the qualified expenditures, subject to an annual limitation of $3,500 multiplied by the number of miles of railroad track owned or leased by the Class II or Class III railroad as of the end of its tax year.
Net Income and Earnings Per Common Share
Net income for the three months ended June 30, 2016 was $48.4 million, compared with $52.8 million for the three months ended June 30, 2015. Our basic EPS were $0.85 with 57.2 million weighted average shares outstanding for the three months ended June 30, 2016, compared with basic EPS of $0.94 with 56.0 million weighted average shares outstanding for the three months ended June 30, 2015. Our diluted EPS for the three months ended June 30, 2016 were $0.83 with 58.1 million weighted average shares outstanding, compared with diluted EPS of $0.92 with 57.1 million weighted average shares outstanding for the three months ended June 30, 2015. Our results for the three months ended June 30, 2016 and 2015 included certain items affecting comparability between the periods as previously presented in the "Overview."
Operating Results by Segment
Our various rail operations are organized into 10 operating regions. We present our financial information as three reportable segments: North American Operations, Australian Operations and U.K./European Operations. Each of our segments generates the following three categories of revenues from external customers: freight revenues, freight-related revenues and all other revenues. Our eight North American regions are aggregated into one segment as a result of having similar economic and operating characteristics.
The results of operations of our foreign entities are maintained in the respective local currency (the Australian dollar, the British pound, the Canadian dollar and the Euro) and then translated into United States dollars at the applicable exchange rates for inclusion in our consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar can impact our results of operations.

30

Table of Contents

The following tables set forth our North American Operations, Australian Operations and U.K./European Operations for the three months ended June 30, 2016 and 2015 (dollars in thousands): 
 
 
Three Months Ended June 30, 2016
 
 
North
American
Operations
 
Australian
Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
 
Freight revenues
 
$
227,082

 
$
26,394

 
$
87,306

 
$
340,782

Freight-related revenues
 
60,978

 
27,129

 
45,581

 
133,688

All other revenues
 
16,515

 
1,760

 
8,630

 
26,905

Total operating revenues
 
$
304,575

 
$
55,283

 
$
141,517

 
$
501,375

Operating expenses:
 
 
 
 
 
 
 
 
Labor and benefits
 
$
95,587

 
$
16,800

 
$
43,561

 
$
155,948

Equipment rents
 
14,218

 
1,630

 
22,578

 
38,426

Purchased services
 
16,263

 
6,098

 
29,271

 
51,632

Depreciation and amortization
 
37,124

 
7,233

 
6,567

 
50,924

Diesel fuel used in train operations
 
13,837

 
4,538

 
9,876

 
28,251

Electricity used in train operations
 

 

 
3,304

 
3,304

Casualties and insurance
 
7,013

 
1,553

 
876

 
9,442

Materials
 
12,946

 
2,870

 
5,577

 
21,393

Trackage rights
 
8,885

 
2,028

 
10,239

 
21,152

Net gain on sale of assets
 
(236
)
 

 
(72
)
 
(308
)
Restructuring costs
 
335

 
23

 
4,612

 
4,970

Other expenses
 
19,580

 
3,129

 
6,338

 
29,047

Total operating expenses
 
225,552

 
45,902

 
142,727


414,181

Operating income/(loss)
 
$
79,023

 
$
9,381

 
$
(1,210
)

$
87,194

Operating ratio
 
74.1
%
 
83.0
%
 
100.9
%
 
82.6
%
Interest expense, net
 
$
9,666

 
$
2,398

 
$
5,341

 
$
17,405

Provision for/(benefit from) income taxes
 
$
20,953

 
$
2,247

 
$
(1,088
)
 
$
22,112

Carloads
 
386,123

 
44,251

 
276,542

 
706,916

Expenditures for additions to property & equipment, net of grants from outside parties
 
$
39,523

 
$
4,787

 
$
11,338

 
$
55,648


31

Table of Contents

 
 
Three Months Ended June 30, 2015
 
 
North
American
Operations
 
Australian
Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
 
Freight revenues
 
$
238,153

 
$
39,464

 
$
96,998

 
$
374,615

Freight-related revenues
 
55,589

 
25,173

 
57,129

 
137,891

All other revenues
 
17,238

 
2,171

 
10,304

 
29,713

Total operating revenues
 
$
310,980

 
$
66,808

 
$
164,431

 
$
542,219

Operating expenses:
 
 
 
 
 
 
 
 
Labor and benefits
 
100,297

 
18,750

 
46,249

 
165,296

Equipment rents
 
16,485

 
4,020

 
22,978

 
43,483

Purchased services
 
15,220

 
5,718

 
35,239

 
56,177

Depreciation and amortization
 
34,936

 
7,394

 
5,718

 
48,048

Diesel fuel used in train operations
 
19,757

 
6,218

 
11,920

 
37,895

Electricity used in train operations
 

 

 
4,977

 
4,977

Casualties and insurance
 
6,659

 
1,886

 
1,493

 
10,038

Materials
 
15,675

 
2,709

 
8,545

 
26,929

Trackage rights
 
6,249

 
3,424

 
12,499

 
22,172

Net gain on sale of assets
 
(402
)
 
(32
)
 
(56
)
 
(490
)
Other expenses
 
19,483

 
1,590

 
7,170

 
28,243

Total operating expenses
 
234,359

 
51,677

 
156,732


442,768

Operating income
 
$
76,621

 
$
15,131

 
$
7,699


$
99,451

Operating ratio
 
75.4
%
 
77.4
%
 
95.3
%
 
81.7
%
Interest expense, net
 
$
9,588

 
$
2,271

 
$
5,789

 
$
17,648

Provision for income taxes
 
$
24,939

 
$
3,829

 
$
532

 
$
29,300

Carloads
 
413,888

 
52,104

 
281,880

 
747,872

Expenditures for additions to property & equipment, net of grants from outside parties
 
$
73,440

 
$
9,159

 
$
5,028

 
$
87,627

North American Operations
Operating Revenues
The following table sets forth our North American Operations operating revenues and carloads for the three months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
2016
 
2015
 
Amount
 
%
 
Freight revenues
$
227,082

 
$
238,153

 
$
(11,071
)
 
(4.6
)%
 
$
(793
)
Freight-related revenues
60,978

 
55,589

 
5,389

 
9.7
 %
 
(239
)
All other revenues
16,515

 
17,238

 
(723
)
 
(4.2
)%
 
(155
)
Total operating revenues
$
304,575

 
$
310,980

 
$
(6,405
)
 
(2.1
)%
 
$
(1,187
)
Carloads
386,123

 
413,888

 
(27,765
)
 
(6.7
)%
 
 

32

Table of Contents

Freight Revenues
The following table sets forth the changes in our North American Operations freight revenues by commodity group for the three months ended June 30, 2016, compared with the three months ended June 30, 2015 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
2015 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
 
Commodity Group
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
Agricultural Products
$
27,178

 
12.0
%
 
$
30,742

 
12.9
%
 
$
(3,564
)
 
$
(60
)
 
$
30,682

 
$
(3,504
)
Autos & Auto Parts
4,980

 
2.2
%
 
4,749

 
2.0
%
 
231

 
(35
)
 
4,714

 
266

Chemicals & Plastics
35,743

 
15.7
%
 
35,354

 
14.8
%
 
389

 
(143
)
 
35,211

 
532

Coal & Coke
15,051

 
6.6
%
 
22,136

 
9.3
%
 
(7,085
)
 
(32
)
 
22,104

 
(7,053
)
Food & Kindred Products
7,973

 
3.5
%
 
8,280

 
3.5
%
 
(307
)
 
(9
)
 
8,271

 
(298
)
Intermodal
1

 
%
 
1

 
%
 

 

 
1

 

Lumber & Forest Products
20,842

 
9.2
%
 
20,496

 
8.6
%
 
346

 
(38
)
 
20,458

 
384

Metallic Ores
4,615

 
2.0
%
 
4,910

 
2.1
%
 
(295
)
 
(37
)
 
4,873

 
(258
)
Metals
27,157

 
12.0
%
 
27,015

 
11.3
%
 
142

 
(134
)
 
26,881

 
276

Minerals & Stone
29,502

 
13.0
%
 
30,653

 
12.9
%
 
(1,151
)
 
(45
)
 
30,608

 
(1,106
)
Petroleum Products
17,180

 
7.6
%
 
15,194

 
6.4
%
 
1,986

 
(64
)
 
15,130

 
2,050

Pulp & Paper
26,062

 
11.5
%
 
28,952

 
12.1
%
 
(2,890
)
 
(158
)
 
28,794

 
(2,732
)
Waste
5,551

 
2.4
%
 
4,709

 
2.0
%
 
842

 
(6
)
 
4,703

 
848

Other
5,247

 
2.3
%
 
4,962

 
2.1
%
 
285

 
(32
)
 
4,930

 
317

Total freight revenues
$
227,082

 
100.0
%
 
$
238,153

 
100.0
%
 
$
(11,071
)
 
$
(793
)
 
$
237,360

 
$
(10,278
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

33

Table of Contents

The following table sets forth our North American Operations freight revenues, carloads and average freight revenues per carload for the three months ended June 30, 2016 and 2015 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2016
 
2015*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2016
 
2015
 
2016
 
2015
 
2015* Constant Currency
Agricultural Products
$
27,178

 
12.0
%
 
$
30,682

 
12.9
%
 
49,330

 
53,690

 
$
551

 
$
573

 
$
571

Autos & Auto Parts
4,980

 
2.2
%
 
4,714

 
2.0
%
 
8,146

 
7,450

 
611

 
637

 
633

Chemicals & Plastics
35,743

 
15.7
%
 
35,211

 
14.8
%
 
44,875

 
45,637

 
797

 
775

 
772

Coal & Coke
15,051

 
6.6
%
 
22,104

 
9.3
%
 
46,237

 
63,445

 
326

 
349

 
348

Food & Kindred Products
7,973

 
3.5
%
 
8,271

 
3.5
%
 
14,448

 
14,726

 
552

 
562

 
562

Intermodal
1

 
%
 
1

 
%
 
12

 
12

 
83

 
83

 
83

Lumber & Forest Products
20,842

 
9.2
%
 
20,458

 
8.6
%
 
34,561

 
34,966

 
603

 
586

 
585

Metallic Ores
4,615

 
2.0
%
 
4,873

 
2.1
%
 
6,122

 
6,114

 
754

 
803

 
797

Metals
27,157

 
12.0
%
 
26,881

 
11.3
%
 
35,881

 
35,136

 
757

 
769

 
765

Minerals & Stone
29,502

 
13.0
%
 
30,608

 
12.9
%
 
51,882

 
55,872

 
569

 
549

 
548

Petroleum Products
17,180

 
7.6
%
 
15,130

 
6.4
%
 
25,462

 
23,855

 
675

 
637

 
634

Pulp & Paper
26,062

 
11.5
%
 
28,794

 
12.1
%
 
41,128

 
45,302

 
634

 
639

 
636

Waste
5,551

 
2.4
%
 
4,703

 
2.0
%
 
11,520

 
10,224

 
482

 
461

 
460

Other
5,247

 
2.3
%
 
4,930

 
2.1
%
 
16,519

 
17,459

 
318

 
284

 
282

Total
$
227,082

 
100.0
%
 
$
237,360

 
100.0
%
 
386,123

 
413,888

 
$
588

 
$
575

 
$
573

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our North American Operations decreased 27,765 carloads, or 6.7%, for the three months ended June 30, 2016, compared with the same period in 2015. The traffic decrease was principally due to decreases of 17,208 carloads of coal and coke traffic, 4,360 carloads of agricultural products traffic, 4,174 carloads of pulp and paper traffic and 3,990 carloads of minerals and stone traffic. All remaining traffic decreased by a net 1,967 carloads.
The following information discusses the significant changes in our North American Operations freight revenues by commodity group excluding the impact of foreign currency. Other changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group.
Average freight revenues per carload from our North American Operations increased 2.6% to $588 for the three months ended June 30, 2016, compared with the same period in 2015. A change in the mix of commodities increased average freight revenues per carload 2.0%, while lower fuel surcharges decreased average freight revenues per carload 2.7%. Excluding these factors, average freight revenues per carload increased 3.3%.
Agricultural products revenues decreased $3.5 million, or 11.4%. Agricultural products traffic volume decreased 4,360 carloads, or 8.1%, which decreased revenues by $2.4 million, and average freight revenues per carload decreased 3.5%, which decreased revenues by $1.1 million. The decrease in average freight revenues per carload was primarily driven by lower fuel surcharges. The carload decrease was primarily due to reduced grain shipments in the midwestern and western United States due to depressed grain prices and the strong United States dollar.
Coal and coke revenues decreased $7.1 million, or 31.9%. Coal and coke traffic volume decreased 17,208 carloads, or 27.1%, which decreased revenues by $5.6 million, and average freight revenues per carload decreased 6.3%, which decreased revenues by $1.5 million. The carload decrease was due to lower demand for steam coal, primarily as a result of competition from natural gas power generation. The decrease in average freight revenues per carload was primarily due to a change in customer mix.

34

Table of Contents

Minerals and stone revenues decreased $1.1 million, or 3.6%. Minerals and stone traffic volume decreased 3,990 carloads, or 7.1%, which decreased revenues by $2.3 million, while average freight revenues per carload increased 3.8%, which increased revenues by $1.2 million. The decrease in carloads was primarily due to decreased shipments of frac sand in the northeastern and midwestern United States and lower rock salt shipments in the northeastern United States due to mild winter weather that reduced the need to replenish stockpiles, partially offset by stronger aggregates traffic in the central United States.
Petroleum products revenues increased $2.1 million, or 13.5%. Petroleum products traffic volume increased 1,607 carloads, or 6.7%, which increased revenues by $1.1 million, and average freight revenues per carload increased 6.5%, which increased revenues by $1.0 million. The carload increase was primarily due to increased shipments of natural gas liquids and liquid petroleum gases in the midwestern and northeastern United States and a short-term movement of refined petroleum products in Canada.
Pulp and paper revenues decreased $2.7 million, or 9.5%, primarily due to a traffic volume decrease of 4,174 carloads, or 9.2%. The carload decrease was primarily due to truck competition and the closure of several plants we served due to consolidation within the paper industry.
Freight revenues from all remaining commodities combined increased by a net $2.1 million.
Freight-Related Revenues
Excluding a $0.2 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our North American Operations, which includes revenues from railcar switching, track access rights, crewing services, storage and other ancillary revenues related to the movement of freight, increased $5.6 million, or 10.2%, to $61.0 million for the three months ended June 30, 2016. The increase was primarily driven by a change in the presentation of revenues from certain of our port terminal operations, which were previously presented net of the related costs incurred, and an increase in storage revenue.
All Other Revenues
Excluding a $0.2 million decrease due to the impact of foreign currency depreciation, all other revenues from our North American Operations, which includes revenues from third-party railcar and locomotive repairs, property rentals, railroad construction and other ancillary revenues not directly related to the movement of freight, decreased $0.6 million, or 3.3%, to $16.5 million for the three months ended June 30, 2016.
Operating Expenses
Total operating expenses from our North American Operations decreased $8.8 million, or 3.8%, to $225.6 million for the three months ended June 30, 2016, compared with $234.4 million for the three months ended June 30, 2015. The decrease in operating expenses for the three months ended June 30, 2016 was primarily due to lower freight volumes and effective management of operating costs. The depreciation of the Canadian dollar relative to the United States dollar resulted in a $1.1 million decrease in operating expenses.

35

Table of Contents

The following table sets forth operating expenses from our North American Operations for the three months ended June 30, 2016 and 2015 (dollars in thousands): 
 
Three Months Ended June 30,
 
 
 
 
 
 
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
Currency
Impact
 
2015 Constant Currency*
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Increase/(Decrease)
 
 
 
Labor and benefits
$
95,587

 
31.4
 %
 
$
100,297

 
32.3
 %
 
$
(4,710
)
 
$
(429
)
 
$
99,868

 
$
(4,281
)
Equipment rents
14,218

 
4.7
 %
 
16,485

 
5.3
 %
 
(2,267
)
 
(53
)
 
16,432

 
(2,214
)
Purchased services
16,263

 
5.3
 %
 
15,220

 
4.9
 %
 
1,043

 
(59
)
 
15,161

 
1,102

Depreciation and amortization
37,124

 
12.2
 %
 
34,936

 
11.2
 %
 
2,188

 
(231
)
 
34,705

 
2,419

Diesel fuel used in train operations
13,837

 
4.5
 %
 
19,757

 
6.4
 %
 
(5,920
)
 
(116
)
 
19,641

 
(5,804
)
Casualties and insurance
7,013

 
2.3
 %
 
6,659

 
2.1
 %
 
354

 
(52
)
 
6,607

 
406

Materials
12,946

 
4.4
 %
 
15,675

 
5.0
 %
 
(2,729
)
 
(82
)
 
15,593

 
(2,647
)
Trackage rights
8,885

 
2.9
 %
 
6,249

 
2.0
 %
 
2,636

 
(5
)
 
6,244

 
2,641

Net gain on sale of assets
(236
)
 
(0.1
)%
 
(402
)
 
(0.1
)%
 
166

 
6

 
(396
)
 
160

Restructuring costs
335

 
0.1
 %
 

 
 %
 
335

 

 

 
335

Other expenses
19,580

 
6.4
 %
 
19,483

 
6.3
 %
 
97

 
(88
)
 
19,395

 
185

Total operating expenses
$
225,552

 
74.1
 %
 
$
234,359

 
75.4
 %
 
$
(8,807
)
 
$
(1,109
)
 
$
233,250

 
$
(7,698
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our North American Operations excluding a decrease of $1.1 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $95.6 million for the three months ended June 30, 2016, compared with $99.9 million for the three months ended June 30, 2015, a decrease of $4.3 million, or 4.3%. The decrease in labor and benefits expense was primarily due to a decrease in the average number of employees.
Equipment rents expense was $14.2 million for the three months ended June 30, 2016, compared with $16.4 million for the three months ended June 30, 2015, a decrease of $2.2 million, or 13.5%. The decrease was primarily due to reduced car hire expense and reduced railcar lease expense as a result of the purchase of railcars in 2015.
Purchased services expense was $16.3 million for the three months ended June 30, 2016, compared with $15.2 million for the three months ended June 30, 2015, an increase of $1.1 million, or 7.3%.
Depreciation and amortization expense was $37.1 million for the three months ended June 30, 2016, compared with $34.7 million for the three months ended June 30, 2015, an increase of $2.4 million, or 7.0%. The increase was primarily attributable to capital expenditures in 2015.
The cost of diesel fuel used in train operations was $13.8 million for the three months ended June 30, 2016, compared with $19.6 million for the three months ended June 30, 2015, a decrease of $5.8 million, or 29.6%. The decrease was primarily attributable to a 24.2% decrease in average fuel cost per gallon.
Materials expense, which primarily consists of the costs of materials purchased for use in repairing and maintaining our track property, locomotives, railcars and other equipment as well as costs for general tools and supplies used in our business, was $12.9 million for the three months ended June 30, 2016, compared with $15.6 million for the three months ended June 30, 2015, a decrease of $2.6 million, or 17.0%. The decrease was primarily attributable to a reduction in the number of external construction projects and reduced locomotive materials purchased.
Trackage rights expense was $8.9 million for the three months ended June 30, 2016, compared with $6.2 million for the three months ended June 30, 2015, an increase of $2.6 million, or 42.3%. Other than a $3.5 million increase resulting from a change in the presentation of certain costs incurred to operate within certain of our port terminal railroad operations, which costs were previously presented as an offset to the revenues generated from the operations, trackage rights expense decreased $0.8 million to $5.4 million.

36

Table of Contents

Operating Income/Operating Ratio
Operating income from our North American Operations was $79.0 million for the three months ended June 30, 2016, compared with $76.6 million for the three months ended June 30, 2015. Operating income for the three months ended June 30, 2016 included corporate development and related costs of $1.7 million, restructuring costs of $0.3 million and net gain on the sale of assets of $0.2 million. Operating income for the three months ended June 30, 2015 included corporate development and related costs of $0.9 million and net gain on the sale of assets of $0.4 million. The operating ratio was 74.1% for the three months ended June 30, 2016, compared with 75.4% for the three months ended June 30, 2015.
Australian Operations
Operating Revenues
The following table sets forth our Australian Operations operating revenues and carloads for the three months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
2016
 
2015
 
Amount
 
%
 
Freight revenues
$
26,394

 
$
39,464

 
$
(13,070
)
 
(33.1
)%
 
$
(1,503
)
Freight-related revenues
27,129

 
25,173

 
1,956

 
7.8
 %
 
(1,103
)
All other revenues
1,760

 
2,171

 
(411
)
 
(18.9
)%
 
(88
)
Total operating revenues
$
55,283

 
$
66,808

 
$
(11,525
)
 
(17.3
)%
 
$
(2,694
)
Carloads
44,251

 
52,104

 
(7,853
)
 
(15.1
)%
 
 
Freight Revenues
The following table sets forth the changes in our Australian Operations freight revenues by commodity group for the three months ended June 30, 2016, compared with the three months ended June 30, 2015 (dollars in thousands): 
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
2015 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
 
Commodity Group
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
Agricultural Products
$
4,411

 
16.7
%
 
$
6,658

 
16.9
%
 
$
(2,247
)
 
$
(264
)
 
$
6,394

 
$
(1,983
)
Intermodal
17,044

 
64.6
%
 
18,917

 
47.9
%
 
(1,873
)
 
(792
)
 
18,125

 
(1,081
)
Metallic Ores
2,867

 
10.9
%
 
11,865

 
30.1
%
 
(8,998
)
 
(362
)
 
11,503

 
(8,636
)
Minerals & Stone
1,901

 
7.2
%
 
1,716

 
4.3
%
 
185

 
(73
)
 
1,643

 
258

Petroleum Products
171

 
0.6
%
 
308

 
0.8
%
 
(137
)
 
(12
)
 
296

 
(125
)
Total freight revenues
$
26,394

 
100.0
%
 
$
39,464

 
100.0
%
 
$
(13,070
)
 
$
(1,503
)
 
$
37,961

 
$
(11,567
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

37

Table of Contents

The following table sets forth our Australian Operations freight revenues, carloads and average freight revenues per carload for the three months ended June 30, 2016 and 2015 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2016
 
2015*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2016
 
2015
 
2016
 
2015
 
2015* Constant Currency
Agricultural Products
$
4,411

 
16.7
%
 
$
6,394

 
16.9
%
 
10,504

 
14,816

 
$
420

 
$
449

 
$
432

Intermodal
17,044

 
64.6
%
 
18,125

 
47.9
%
 
15,320

 
15,657

 
1,113

 
1,208

 
1,158

Metallic Ores
2,867

 
10.9
%
 
11,503

 
30.1
%
 
2,018

 
7,137

 
1,421

 
1,662

 
1,612

Minerals & Stone
1,901

 
7.2
%
 
1,643

 
4.3
%
 
16,337

 
14,424

 
116

 
119

 
114

Petroleum Products
171

 
0.6
%
 
296

 
0.8
%
 
72

 
70

 
2,375

 
4,400

 
4,229

Total
$
26,394

 
100.0
%
 
$
37,961

 
100.0
%
 
44,251

 
52,104

 
$
596

 
$
757

 
$
729

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our Australian Operations decreased 7,853 carloads, or 15.1%, for the three months ended June 30, 2016, compared with the same period in 2015. The decrease was principally due to decreases of 5,119 carloads of metallic ores traffic and 4,312 carloads of agricultural products traffic. All remaining traffic increased by a net 1,578 carloads.
The following information discusses the significant changes in our Australian Operations freight revenues by commodity group excluding the impact of foreign currency. Other changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group.
Average freight revenues per carload from our Australian Operations decreased 18.2% to $596 for the three months ended June 30, 2016, compared with the same period in 2015. The decrease in average freight revenues per carload was primarily due to decreased iron ore and manganese shipments.
Agricultural products revenues decreased $2.0 million, or 31.0%, primarily due to a traffic volume decrease of 4,312 carloads, or 29.1%. The decrease in carloads was primarily driven by low global crop prices.
Metallic ores revenues decreased $8.6 million, or 75.1%. Metallic ores traffic volume decreased 5,119 carloads, or 71.7%, which decreased revenues by $7.3 million, and average freight revenues per carload decreased 11.8%, which decreased revenues by $1.4 million. The decrease in carloads was primarily driven by a decrease in iron ore and manganese shipments as a result of multiple customer mine closures in 2015.
Freight revenues from all remaining commodities combined decreased by a net $0.9 million.
Freight-Related Revenues
Excluding a $1.1 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our Australian Operations, which includes revenues from railcar switching, track access rights, crewing services, storage and other ancillary revenues related to the movement of freight, increased $3.1 million, or 12.7%, to $27.1 million for the three months ended June 30, 2016, compared with $24.1 million for the three months ended June 30, 2015. The increase in freight-related revenues was primarily due to shipments of manganese stockpiled at a customer mine facility that will not recur unless the mine is reopened in the future, partially offset by the loss of the fixed payments from Arrium associated with our rail haulage agreement to serve their Southern Iron mine that is in care and maintenance.
All Other Revenues
Excluding a $0.1 million decrease due to the impact of foreign currency depreciation, all other revenues from our Australian Operations, which includes revenues from third-party railcar and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, decreased $0.3 million, or 15.5%, to $1.8 million for the three months ended June 30, 2016, compared with $2.1 million for the three months ended June 30, 2015. The decrease was primarily due to reduced third-party railcar and locomotive repair revenues.

38

Table of Contents

Operating Expenses
Total operating expenses from our Australian Operations for the three months ended June 30, 2016 decreased $5.8 million, or 11.2%, to $45.9 million, compared with $51.7 million for the three months ended June 30, 2015. The decrease in operating expenses for the three months ended June 30, 2016 was due to lower freight volumes, effective management of operating costs and a $2.1 million decrease due to the depreciation of the Australian dollar relative to the United States dollar.
The following table sets forth operating expenses from our Australian Operations for the three months ended June 30, 2016 and 2015 (dollars in thousands): 
 
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
2016
 
2015
 
Increase/(Decrease)
 
Currency Impact
 
2015 Constant Currency*
 
Increase/(Decrease)
Constant Currency*
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
16,800

 
30.4
%
 
$
18,750

 
28.0
%
 
$
(1,950
)
 
$
(757
)
 
$
17,993

 
$
(1,193
)
Equipment rents
1,630

 
2.9
%
 
4,020

 
6.0
%
 
(2,390
)
 
(163
)
 
3,857

 
(2,227
)
Purchased services
6,098

 
11.0
%
 
5,718

 
8.6
%
 
380

 
(229
)
 
5,489

 
609

Depreciation and amortization
7,233

 
13.1
%
 
7,394

 
11.1
%
 
(161
)
 
(304
)
 
7,090

 
143

Diesel fuel used in train operations
4,538

 
8.2
%
 
6,218

 
9.3
%
 
(1,680
)
 
(261
)
 
5,957

 
(1,419
)
Casualties and insurance
1,553

 
2.8
%
 
1,886

 
2.8
%
 
(333
)
 
(76
)
 
1,810

 
(257
)
Materials
2,870

 
5.2
%
 
2,709

 
4.1
%
 
161

 
(109
)
 
2,600

 
270

Trackage rights
2,028

 
3.7
%
 
3,424

 
5.1
%
 
(1,396
)
 
(114
)
 
3,310

 
(1,282
)
Net gain on sale of assets

 
%
 
(32
)
 
%
 
32

 

 
(32
)
 
32

Restructuring costs
23

 
%
 

 
%
 
23

 

 

 
23

Other expenses
3,129

 
5.7
%
 
1,590

 
2.4
%
 
1,539

 
(72
)
 
1,518

 
1,611

Total operating expenses
$
45,902

 
83.0
%
 
$
51,677

 
77.4
%
 
$
(5,775
)
 
$
(2,085
)
 
$
49,592

 
$
(3,690
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our Australian Operations excluding a $2.1 million decrease from the depreciation of the Australian dollar relative to the United States dollar.
Labor and benefits expense was $16.8 million for the three months ended June 30, 2016, compared with $18.0 million for the three months ended June 30, 2015, a decrease of $1.2 million, or 6.6%. The decrease was primarily due to a decrease in the average number of employees as a result of changes made to the operating plans in Australia associated with mine closures.
Equipment rents expense was $1.6 million for the three months ended June 30, 2016, compared with $3.9 million for the three months ended June 30, 2015, a decrease of $2.2 million, or 57.7%. The decrease was primarily attributable to a change in classification of maintenance expense associated with certain leased equipment from equipment rents expense in 2015 to purchased services expense in 2016, as well as reduced leased freight car expense associated with lower grain shipments.
Purchased services expense was $6.1 million for the three months ended June 30, 2016, compared with $5.5 million for the three months ended June 30, 2015, an increase of $0.6 million, or 11.1%. The increase was primarily attributable to a change in classification of maintenance expense associated with certain leased equipment from equipment rents expense in 2015 to purchased services expense in 2016, partially offset by insourcing of maintenance of way activities in 2015.
The cost of diesel fuel used in train operations was $4.5 million for the three months ended June 30, 2016, compared with $6.0 million for the three months ended June 30, 2015, a decrease of $1.4 million, or 23.8%. The decrease was primarily due to a 28.1% decrease in average fuel cost per gallon.
Trackage rights expense was $2.0 million for the three months ended June 30, 2016, compared with $3.3 million for the three months ended June 30, 2015, a decrease of $1.3 million, or 38.7%. The decrease was primarily attributable to decreased shipments as a result of a customer iron ore mine closure in South Australia.

39

Table of Contents

Other expenses were $3.1 million for the three months ended June 30, 2016, compared with $1.5 million for the three months ended June 30, 2015, an increase of $1.6 million. The increase was primarily due to increased corporate development costs.
Operating Income/Operating Ratio
Our Australian Operations had operating income of $9.4 million for the three months ended June 30, 2016, compared with operating income of $15.1 million for the three months ended June 30, 2015. Operating income for the three months ended June 30, 2016, included $0.8 million of corporate development and related costs. The operating ratio was 83.0% for the three months ended June 30, 2016, compared with 77.4% for the three months ended June 30, 2015.
U.K./European Operations
Operating Revenues
The following table sets forth our U.K./European Operations operating revenues and carloads for the three months ended June 30, 2016 and 2015 (dollars in thousands):
 
Three Months Ended June 30,
 
Decrease
 
Currency Impact
 
2016
 
2015
 
Amount
 
%
 
Freight revenues
$
87,306

 
$
96,998

 
$
(9,692
)
 
(10.0
)%
 
$
(4,687
)
Freight-related revenues
45,581

 
57,129

 
(11,548
)
 
(20.2
)%
 
(1,725
)
All other revenues
8,630

 
10,304

 
(1,674
)
 
(16.2
)%
 
(644
)
Total operating revenues
$
141,517

 
$
164,431

 
$
(22,914
)
 
(13.9
)%
 
$
(7,056
)
Carloads
276,542

 
281,880

 
(5,338
)
 
(1.9
)%
 
 
Freight Revenues
The following table sets forth the changes in our U.K./European Operations freight revenues by commodity group for the three months ended June 30, 2016, compared with the three months ended June 30, 2015 (dollars in thousands): 
 
Three Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
2015 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
 
Commodity Group
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
Agricultural Products
$
393

 
0.5
%
 
$
129

 
0.1
%
 
$
264

 
$
(5
)
 
$
124

 
$
269

Coal & coke
3,408

 
3.9
%
 
9,039

 
9.3
%
 
(5,631
)
 
(539
)
 
8,500

 
(5,092
)
Intermodal
68,919

 
78.9
%
 
70,395

 
72.6
%
 
(1,476
)
 
(3,230
)
 
67,165

 
1,754

Lumber & Forest products
59

 
0.1
%
 

 
%
 
59

 

 

 
59

Metals
40

 
%
 

 
%
 
40

 

 

 
40

Minerals & Stone
14,487

 
16.6
%
 
17,435

 
18.0
%
 
(2,948
)
 
(913
)
 
16,522

 
(2,035
)
Total freight revenues
$
87,306

 
100.0
%
 
$
96,998

 
100.0
%
 
$
(9,692
)
 
$
(4,687
)
 
$
92,311

 
$
(5,005
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

40

Table of Contents

The following table sets forth our U.K./European Operations freight revenues, carloads and average freight revenues per carload for the three months ended June 30, 2016 and 2015 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
 
2016
 
2015*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2016
 
2015
 
2016
 
2015
 
2015* Constant Currency
Agricultural Products
$
393

 
0.5
%
 
$
124

 
0.1
%
 
448

 
190

 
$
877

 
$
679

 
$
653

Coal & Coke
3,408

 
3.9
%
 
8,500

 
9.2
%
 
9,250

 
23,380

 
368

 
387

 
364

Intermodal
68,919

 
78.9
%
 
67,165

 
72.8
%
 
228,543

 
214,227

 
302

 
329

 
314

Lumber & Forest Products
59

 
0.1
%
 

 
%
 
135

 

 
437

 
N/A
 
N/A
Metallic Ores
40

 
%
 

 
%
 
93

 

 
430

 
N/A
 
N/A
Minerals & Stone
14,487

 
16.6
%
 
16,522

 
17.9
%
 
38,073

 
44,083

 
381

 
396

 
375

Total
$
87,306

 
100.0
%
 
$
92,311

 
100.0
%
 
276,542

 
281,880

 
$
316

 
$
344

 
$
327

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our U.K./European Operations decreased 5,338 carloads, or 1.9%, for the three months ended June 30, 2016, compared with the same period in 2015. The traffic decrease was principally due to decreases of 14,130 carloads of coal and coke traffic (primarily in the U.K.) and 6,010 carloads of minerals and stone traffic, partially offset by an increase of 14,316 carloads of intermodal traffic (primarily in the U.K.). All remaining traffic increased by 486 carloads.
The following information discusses the significant changes in our U.K./European Operations freight revenues by commodity group excluding the impact of foreign currency. Other changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group.
Average freight revenues per carload from our U.K./European Operations decreased 3.4% to $316 for the three months ended June 30, 2016, compared with the same period in 2015.
Coal and coke revenues decreased $5.1 million, or 59.9%, primarily due to a traffic volume decrease of 14,130 carloads, or 60.4%. The carload decrease was primarily due to lower demand for steam coal in the U.K. as a result of competition from natural gas power generation.
Intermodal revenues increased $1.8 million, or 2.6%. Intermodal traffic volume increased 14,316 carloads, or 6.7%, which increased revenues by $4.3 million, while average freight revenues per carload decreased 3.8%, which decreased revenues by $2.6 million. The decrease in average freight revenue per carload was primarily driven by a change in the mix of business. The carload increase was primarily due to intermodal traffic in the U.K. which was driven by an overall increase in the U.K. intermodal container market, as well as the introduction of service to a new location.
Minerals and stone revenues decreased $2.0 million, or 12.3%, primarily due to a traffic volume decrease of 6,010 carloads, or 13.6%. The carload decrease was primarily due to delays in road construction projects in Poland and decreased cement shipments in the U.K.
Freight revenues from all remaining commodities combined increased by $0.4 million.
Freight-Related Revenues
Freight-related revenues from our U.K./European Operations include port switching as well as traction service (or hook and pull). Traction service requires us to provide locomotives and drivers to move a customer's train between specified origin and destination points. Freight-related revenues in the U.K./Europe also include infrastructure services, where we operate work trains for the track infrastructure owner, drayage and other ancillary revenues related to the movement of freight. With the exception of infrastructure services, which are primarily in the U.K., freight-related revenues from our U.K./European Operations are primarily associated with the Continental Europe intermodal business.

41

Table of Contents

Excluding a $1.7 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our U.K./European Operations decreased $9.8 million to $45.6 million for the three months ended June 30, 2016, compared with $55.4 million for the three months ended June 30, 2015. The decrease was primarily due to the rationalization of Continental Europe intermodal routes.
All Other Revenues
Excluding a $0.6 million decrease due to the impact of foreign currency depreciation, all other revenues from our U.K./European Operations, which includes revenues from third-party car and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, decreased $1.0 million, or 10.7%, to $8.6 million for the three months ended June 30, 2016, compared with $9.7 million for the three months ended June 30, 2015.
Operating Expenses
Total operating expenses from our U.K./European Operations were $142.7 million for the three months ended June 30, 2016, compared with $156.7 million for the three months ended June 30, 2015, a decrease of $14.0 million. The decrease included a $6.5 million decrease from the impact of foreign currency depreciation.
The following table sets forth operating expenses from our U.K./European Operations for the three months ended June 30, 2016 and 2015 (dollars in thousands): 
 
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
2016
 
2015
 
Increase/(Decrease)
 
Currency Impact
 
2015 Constant Currency*
 
Increase/(Decrease)
Constant Currency*
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
43,561

 
30.8
 %
 
$
46,249

 
28.1
%
 
$
(2,688
)
 
$
(2,624
)
 
$
43,625

 
$
(64
)
Equipment rents
22,578

 
16.0
 %
 
22,978

 
14.0
%
 
(400
)
 
(992
)
 
21,986

 
592

Purchased services
29,271

 
20.7
 %
 
35,239

 
21.4
%
 
(5,968
)
 
(605
)
 
34,634

 
(5,363
)
Depreciation and amortization
6,567

 
4.6
 %
 
5,718

 
3.5
%
 
849

 
(315
)
 
5,403

 
1,164

Diesel fuel used in train operations
9,876

 
7.0
 %
 
11,920

 
7.2
%
 
(2,044
)
 
(671
)
 
11,249

 
(1,373
)
Electricity used in train operations
3,304

 
2.3
 %
 
4,977

 
3.0
%
 
(1,673
)
 
(38
)
 
4,939

 
(1,635
)
Casualties and insurance
876

 
0.6
 %
 
1,493

 
0.9
%
 
(617
)
 
(59
)
 
1,434

 
(558
)
Materials
5,577

 
3.9
 %
 
8,545

 
5.2
%
 
(2,968
)
 
(522
)
 
8,023

 
(2,446
)
Trackage rights
10,239

 
7.3
 %
 
12,499

 
7.6
%
 
(2,260
)
 
(365
)
 
12,134

 
(1,895
)
Net gain on sale of assets
(72
)
 
(0.1
)%
 
(56
)
 
%
 
(16
)
 
1

 
(55
)
 
(17
)
Restructuring costs
4,612

 
3.3
 %
 

 
%
 
4,612

 

 

 
4,612

Other expenses
6,338

 
4.5
 %
 
7,170

 
4.4
%
 
(832
)
 
(329
)
 
6,841

 
(503
)
Total operating expenses
$
142,727

 
100.9
 %
 
$
156,732

 
95.3
%
 
$
(14,005
)
 
$
(6,519
)
 
$
150,213

 
$
(7,486
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our U.K./European Operations excluding a decrease of $6.5 million due to the impact of foreign currency depreciation.
Purchased services expense was $29.3 million for the three months ended June 30, 2016, compared with $34.6 million for the three months ended June 30, 2015, a decrease of $5.4 million, or 15.5%. The decrease was primarily due to a decrease in third-party operating services resulting from reduced Continental Europe intermodal traffic.
Depreciation and amortization expense was $6.6 million for the three months ended June 30, 2016, compared with $5.4 million for the three months ended June 30, 2015, an increase of $1.2 million, or 21.5%. The increase was primarily attributable to capital expenditures in 2015.
The cost of diesel fuel used in train operations was $9.9 million for the three months ended June 30, 2016, compared with $11.2 million for the three months ended June 30, 2015, a decrease of $1.4 million, or 12.2%. The decrease was primarily due to a 15.9% decrease in average fuel cost per gallon.

42

Table of Contents

The cost of electricity used in train operations was $3.3 million for the three months ended June 30, 2016, compared with $4.9 million for the three months ended June 30, 2015, a decrease of $1.6 million, or 33.1%. The decrease was primarily due to reduced Continental Europe intermodal traffic.
Materials expense, which primarily consists of the costs of materials purchased for use in repairing and maintaining our locomotives, railcars and other equipment as well as costs for general tools and supplies used in our business, was $5.6 million for the three months ended June 30, 2016, compared with $8.0 million for the three months ended June 30, 2015, a decrease of $2.4 million, or 30.5%. The decrease was primarily due to a reclassification of maintenance activities on certain leased equipment from materials expense in 2015 to equipment rents expense in 2016.
Trackage rights expense was $10.2 million for the three months ended June 30, 2016, compared with $12.1 million for the three months ended June 30, 2015, a decrease of $1.9 million, or 15.6%. The decrease was primarily due to reduced Continental Europe intermodal traffic.
Restructuring costs for the three months ended June 30, 2016 of $4.6 million were primarily related to the restructuring of the U.K. coal business.
Other expenses were $6.3 million for the three months ended June 30, 2016, compared with $6.8 million for the three months ended June 30, 2015, a decrease of $0.5 million, or 7.4%.
Operating (Loss)/Income
Our U.K./European Operations had a $1.2 million operating loss for the three months ended June 30, 2016 compared with operating income of $7.7 million for the three months ended June 30, 2015. The operating loss included $4.6 million of restructuring costs primarily due to the restructuring of the U.K. coal business.
Six Months Ended June 30, 2016 Compared with Six Months Ended June 30, 2015
Consolidated Operating Results
Operating Revenues
The following table sets forth our operating revenues and carloads by new operations and existing operations for the six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing
Operations
 
 
 
2016
 
2015
 
 
 
 
 
Total Operations
 
New
Operations
 
Existing
Operations
 
Total Operations
 
Amount
 
%
 
Amount
 
%
 
Currency Impact
Freight revenues
$
667,196

 
$
73,414

 
$
593,782

 
$
672,824

 
$
(5,628
)
 
(0.8
)%
 
$
(79,042
)
 
(11.7
)%
 
$
(12,798
)
Freight-related revenues
267,146

 
49,395

 
217,751

 
216,016

 
51,130

 
23.7
 %
 
1,735

 
0.8
 %
 
(4,670
)
All other revenues
49,649

 
4,651

 
44,998

 
50,409

 
(760
)
 
(1.5
)%
 
(5,411
)
 
(10.7
)%
 
(1,487
)
Total operating revenues
$
983,991

 
$
127,460

 
$
856,531

 
$
939,249

 
$
44,742

 
4.8
 %
 
$
(82,718
)
 
(8.8
)%
 
$
(18,955
)
Carloads
1,388,300

 
231,791

 
1,156,509

 
1,250,236

 
138,064

 
11.0
 %
 
(93,727
)
 
(7.5
)%
 
 
Operating Expenses
Total operating expenses for the six months ended June 30, 2016 increased $72.6 million, or 9.5%, to $839.8 million, compared with $767.2 million for the six months ended June 30, 2015. The increase included $126.9 million from new operations, partially offset by a decrease of $54.3 million from existing operations. The decrease from existing operations was primarily due to a $16.6 million decrease from the depreciation of foreign currencies relative to the United States dollar as well as decreases of $21.1 million in the cost of diesel fuel used in train operations, $16.0 million in labor and benefits, $7.4 million in materials, $7.0 million in equipment rents and $5.5 million in purchased services. These decreases were partially offset by a $12.5 million net loss on the sale and impairment of assets, which was driven primarily by an iron ore customer entering into voluntary administration, $6.1 million of restructuring costs and a $5.8 million increase in depreciation and amortization.

43

Table of Contents

The following table sets forth our total operating expenses for the six months ended June 30, 2016 and 2015 (dollars in thousands): 
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2015 Constant Currency*
 
Increase/(Decrease)Constant Currency*
 
2016
 
2015
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
Labor and benefits
$
319,062

 
32.4
%
 
$
297,414

 
31.6
 %
 
$
21,648

 
$
(6,388
)
 
$
291,026

 
$
28,036

Equipment rents
76,856

 
7.8
%
 
65,515

 
6.9
 %
 
11,341

 
(1,561
)
 
63,954

 
12,902

Purchased services
98,134

 
10.0
%
 
80,558

 
8.6
 %
 
17,576

 
(1,578
)
 
78,980

 
19,154

Depreciation and amortization
100,254

 
10.2
%
 
90,265

 
9.6
 %
 
9,989

 
(1,890
)
 
88,375

 
11,879

Diesel fuel used in train operations
53,717

 
5.4
%
 
67,592

 
7.2
 %
 
(13,875
)
 
(1,738
)
 
65,854

 
(12,137
)
Electricity used in train operations
6,669

 
0.7
%
 
5,366

 
0.6
 %
 
1,303

 
(51
)
 
5,315

 
1,354

Casualties and insurance
19,562

 
2.0
%
 
18,561

 
2.0
 %
 
1,001

 
(373
)
 
18,188

 
1,374

Materials
42,984

 
4.4
%
 
45,624

 
4.9
 %
 
(2,640
)
 
(1,041
)
 
44,583

 
(1,599
)
Trackage rights
41,728

 
4.2
%
 
35,505

 
3.8
 %
 
6,223

 
(923
)
 
34,582

 
7,146

Net loss/(gain) on sale and impairment of assets
12,517

 
1.3
%
 
(807
)
 
(0.1
)%
 
13,324

 
15

 
(792
)
 
13,309

Restructuring costs
6,097

 
0.6
%
 

 
 %
 
6,097

 

 

 
6,097

Other expenses
62,221

 
6.3
%
 
61,585

 
6.6
 %
 
636

 
(1,038
)
 
60,547

 
1,674

Total operating expenses
$
839,801

 
85.3
%
 
$
767,178

 
81.7
 %
 
$
72,623

 
$
(16,566
)
 
$
750,612

 
$
89,189

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Operating Income/Operating Ratio
Operating income was $144.2 million for the six months ended June 30, 2016, compared with $172.1 million for the six months ended June 30, 2015. Operating income for the six months ended June 30, 2016 included impairment and related costs of $21.1 million, consisting of a $13.0 million non-cash write-down of a rolling-stock maintenance facility and the write-off of accounts receivable of $8.1 million, both of which were associated with an iron ore customer in Australia entering into voluntary administration. In addition, operating income for the six months ended June 30, 2016 included restructuring costs of $6.1 million and corporate development and related costs of $3.1 million. Operating income for the six months ended June 30, 2015 included Freightliner acquisition and integration costs of $13.3 million and Australian severance costs of $1.7 million.
Our operating ratio was 85.3% for the six months ended June 30, 2016, compared with 81.7% for the six months ended June 30, 2015. Our same railroad operating ratio for the six months ended June 30, 2016 was 83.2%, compared with 81.7% for the six months ended June 30, 2015.
Interest Expense
Interest expense was $35.7 million for the six months ended June 30, 2016, compared with $31.3 million for the six months ended June 30, 2015. The increase in interest expense was primarily due to a higher debt balance resulting from the acquisition of Freightliner.
Provision for Income Taxes
Our effective income tax rate for the six months ended June 30, 2016 was 31.6%, compared with 37.6% for the six months ended June 30, 2015. Our provision for income taxes for the six months ended June 30, 2016 included an income tax benefit of $13.5 million associated with the United States Short Line Tax Credit. The Short Line Tax Credit was in existence from 2005 through 2014 and was further extended in December 2015 for fiscal years 2015 and 2016. As the extension was passed in December 2015 for the full 2015 fiscal year, the Short Line Tax Credit associated with results for the six months ended June 30, 2015 was recorded in the fourth quarter of 2015.
Our provision for income taxes for the six months ended June 30, 2016 also included a valuation allowance of A$2.6 million (or $2.0 million at the average exchange rate in June of 2016) associated with the impairment of GWA's now idle rolling-stock maintenance facility (see Note 2, Changes in Operations, to our Consolidated Financial Statements) that was formerly used in connection with the Southern Iron rail haulage agreement.

44

Table of Contents

Net Income and Earnings Per Common Share
Net income for the six months ended June 30, 2016 was $75.4 million, compared with $76.7 million for the six months ended June 30, 2015. Our basic EPS were $1.32 with 57.1 million weighted average shares outstanding for the six months ended June 30, 2016, compared with basic EPS of $1.37 with 55.9 million weighted average shares outstanding for the six months ended June 30, 2015. Our diluted EPS for the six months ended June 30, 2016 were $1.30 with 58.0 million weighted average shares outstanding, compared with diluted EPS of $1.34 with 57.1 million weighted average shares outstanding for the six months ended June 30, 2015. Our results for the six months ended June 30, 2016 and 2015 included certain items affecting comparability between the periods as previously presented in the "Overview."
Operating Results by Segment
The following tables set forth our North American Operations, Australian Operations and U.K./European Operations for the six months ended June 30, 2016 and 2015 (dollars in thousands): 
 
 
Six Months Ended June 30, 2016
 
 
North
American
Operations
 
Australian
Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
 
Freight revenues
 
$
448,907

 
$
51,171

 
$
167,118

 
$
667,196

Freight-related revenues
 
122,503

 
52,619

 
92,024

 
267,146

All other revenues
 
32,943

 
3,291

 
13,415

 
49,649

Total operating revenues
 
$
604,353

 
$
107,081

 
$
272,557

 
$
983,991

Operating expenses:
 
 
 
 
 
 
 
 
Labor and benefits
 
198,177

 
32,568

 
88,317

 
319,062

Equipment rents
 
29,274

 
3,325

 
44,257

 
76,856

Purchased services
 
31,964

 
11,349

 
54,821

 
98,134

Depreciation and amortization
 
73,313

 
13,889

 
13,052

 
100,254

Diesel fuel used in train operations
 
27,361

 
8,575

 
17,781

 
53,717

Electricity used in train operations
 

 

 
6,669

 
6,669

Casualties and insurance
 
14,253

 
3,088

 
2,221

 
19,562

Materials
 
25,946

 
5,289

 
11,749

 
42,984

Trackage rights
 
17,752

 
4,317

 
19,659

 
41,728

Net loss/(gain) on sale and impairment of assets
 
(395
)
 
12,982

 
(70
)
 
12,517

Restructuring costs
 
694

 
716

 
4,687

 
6,097

Other expenses
 
37,013

 
13,353

 
11,855

 
62,221

Total operating expenses
 
455,352

 
109,451

 
274,998

 
839,801

Operating income
 
$
149,001

 
$
(2,370
)
 
$
(2,441
)
 
$
144,190

Operating ratio
 
75.3
%
 
102.2
%
 
100.9
%
 
85.3
%
Interest expense, net
 
$
20,130

 
$
4,793

 
$
10,382

 
$
35,305

Provision for/(benefit from) income taxes
 
$
36,962

 
$
(277
)
 
$
(1,765
)
 
$
34,920

Carloads
 
769,315

 
90,474

 
528,511

 
1,388,300

Expenditures for additions to property & equipment, net of grants from outside parties
 
$
64,939

 
$
5,654

 
$
16,738

 
$
87,331



45

Table of Contents

 
 
Six Months Ended June 30, 2015
 
 
North
American
Operations
 
Australian
Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
 
Freight revenues
 
$
481,183

 
$
85,822

 
$
105,819

 
$
672,824

Freight-related revenues
 
113,650

 
36,037

 
66,329

 
216,016

All other revenues
 
33,771

 
4,891

 
11,747

 
50,409

Total operating revenues
 
$
628,604

 
$
126,750

 
$
183,895

 
$
939,249

Operating expenses:
 
 
 
 
 
 
 
 
Labor and benefits
 
209,748

 
36,134

 
51,532

 
297,414

Equipment rents
 
34,271

 
6,206

 
25,038

 
65,515

Purchased services
 
29,349

 
10,758

 
40,451

 
80,558

Depreciation and amortization
 
70,241

 
13,620

 
6,404

 
90,265

Diesel fuel used in train operations
 
43,782

 
9,899

 
13,911

 
67,592

Electricity used in train operations
 

 

 
5,366

 
5,366

Casualties and insurance
 
13,114

 
3,767

 
1,680

 
18,561

Materials
 
31,685

 
4,934

 
9,005

 
45,624

Trackage rights
 
12,793

 
8,420

 
14,292

 
35,505

Net gain on sale of assets
 
(699
)
 
(38
)
 
(70
)
 
(807
)
Restructuring costs
 

 

 

 

Other expenses
 
50,618

 
3,683

 
7,284

 
61,585

Total operating expenses
 
494,902

 
97,383

 
174,893

 
767,178

Operating income
 
$
133,702

 
$
29,367

 
$
9,002

 
$
172,071

Operating ratio
 
78.7
%
 
76.8
%
 
95.1
%
 
81.7
%
Interest expense, net
 
$
20,361

 
$
4,604

 
$
6,165

 
$
31,130

Loss on settlement of foreign currency forward purchase contracts
 
$
16,374

 
$
2,312

 
$

 
$
18,686

Provision for income taxes
 
$
39,226

 
$
6,757

 
$
179

 
$
46,162

Carloads
 
836,601

 
106,128

 
307,507

 
1,250,236

Expenditures for additions to property & equipment, net of grants from outside parties
 
$
118,710

 
$
13,774

 
$
5,041

 
$
137,525

North American Operations
Operating Revenues
The following table sets forth our North American Operations operating revenues and carloads for the six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
 
 
 
2016
 
2015
 
Amount
 
%
 
Freight revenues
$
448,907

 
$
481,183

 
$
(32,276
)
 
(6.7
)%
 
$
(2,549
)
Freight-related revenues
122,503

 
113,650

 
8,853

 
7.8
 %
 
(823
)
All other revenues
32,943

 
33,771

 
(828
)
 
(2.5
)%
 
(458
)
Total operating revenues
$
604,353

 
$
628,604

 
$
(24,251
)
 
(3.9
)%
 
$
(3,830
)
Carloads
769,315

 
836,601

 
(67,286
)
 
(8.0
)%
 
 

46

Table of Contents

Freight Revenues
The following table sets forth the changes in our North American Operations freight revenues by commodity group for the six months ended June 30, 2016, compared with the six months ended June 30, 2015 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2015 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
 
Commodity Group
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
Agricultural Products
$
55,234

 
12.2
%
 
$
65,119

 
13.6
%
 
$
(9,885
)
 
$
(343
)
 
64,776

 
(9,542
)
Autos & Auto Parts
9,015

 
2.0
%
 
9,373

 
1.9
%
 
(358
)
 
(108
)
 
9,265

 
(250
)
Chemicals & Plastics
69,491

 
15.5
%
 
71,239

 
14.8
%
 
(1,748
)
 
(415
)
 
70,824

 
(1,333
)
Coal & Coke
31,877

 
7.1
%
 
49,104

 
10.2
%
 
(17,227
)
 
(82
)
 
49,022

 
(17,145
)
Food & Kindred Products
16,407

 
3.7
%
 
17,523

 
3.6
%
 
(1,116
)
 
(24
)
 
17,499

 
(1,092
)
Intermodal
2

 
%
 
1

 
%
 
1

 

 
1

 
1

Lumber & Forest Products
41,712

 
9.3
%
 
39,993

 
8.3
%
 
1,719

 
(104
)
 
39,889

 
1,823

Metallic Ores
9,677

 
2.2
%
 
10,121

 
2.1
%
 
(444
)
 
(121
)
 
10,000

 
(323
)
Metals
54,200

 
12.1
%
 
53,413

 
11.1
%
 
787

 
(383
)
 
53,030

 
1,170

Minerals & Stone
54,296

 
12.1
%
 
58,130

 
12.1
%
 
(3,834
)
 
(121
)
 
58,009

 
(3,713
)
Petroleum Products
35,453

 
7.9
%
 
33,052

 
6.9
%
 
2,401

 
(278
)
 
32,774

 
2,679

Pulp & Paper
52,190

 
11.6
%
 
56,374

 
11.7
%
 
(4,184
)
 
(479
)
 
55,895

 
(3,705
)
Waste
9,339

 
2.1
%
 
8,004

 
1.7
%
 
1,335

 
(13
)
 
7,991

 
1,348

Other
10,014

 
2.2
%
 
9,737

 
2.0
%
 
277

 
(78
)
 
9,659

 
355

Total freight revenues
$
448,907

 
100.0
%
 
$
481,183

 
100.0
%
 
$
(32,276
)
 
$
(2,549
)
 
$
478,634

 
$
(29,727
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

47

Table of Contents

The following table sets forth our North American Operations freight revenues, carloads and average freight revenues per carload for the six months ended June 30, 2016 and 2015 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2016
 
2015
 
2016
 
2015
 
2015* Constant Currency
Agricultural Products
$
55,234

 
12.3
%
 
$
64,776

 
13.6
%
 
105,345

 
112,027

 
$
524

 
$
581

 
$
578

Autos & Auto Parts
9,015

 
1.9
%
 
9,265

 
1.9
%
 
14,952

 
14,673

 
603

 
639

 
631

Chemicals & Plastics
69,491

 
15.5
%
 
70,824

 
14.8
%
 
89,234

 
91,680

 
779

 
777

 
773

Coal & Coke
31,877

 
7.1
%
 
49,022

 
10.2
%
 
94,915

 
143,057

 
336

 
343

 
343

Food & Kindred Products
16,407

 
3.7
%
 
17,499

 
3.7
%
 
29,412

 
30,614

 
558

 
572

 
572

Intermodal
2

 
%
 
1

 
%
 
24

 
12

 
83

 
83

 
83

Lumber & Forest Products
41,712

 
9.3
%
 
39,889

 
8.3
%
 
69,393

 
67,555

 
601

 
592

 
590

Metallic Ores
9,677

 
2.2
%
 
10,000

 
2.1
%
 
12,347

 
12,479

 
784

 
811

 
801

Metals
54,200

 
12.1
%
 
53,030

 
11.1
%
 
71,786

 
69,725

 
755

 
766

 
761

Minerals & Stone
54,296

 
12.1
%
 
58,009

 
12.1
%
 
95,563

 
103,256

 
568

 
563

 
562

Petroleum Products
35,453

 
7.9
%
 
32,774

 
6.8
%
 
51,451

 
50,912

 
689

 
649

 
644

Pulp & Paper
52,190

 
11.6
%
 
55,895

 
11.7
%
 
82,296

 
88,067

 
634

 
640

 
635

Waste
9,339

 
2.1
%
 
7,991

 
1.7
%
 
19,806

 
17,517

 
472

 
457

 
456

Other
10,014

 
2.2
%
 
9,659

 
2.0
%
 
32,791

 
35,027

 
305

 
278

 
276

Total
$
448,907

 
100.0
%
 
$
478,634

 
100.0
%
 
769,315

 
836,601

 
$
584

 
$
575

 
$
572

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our North American Operations decreased 67,286 carloads, or 8.0%, for the six months ended June 30, 2016, compared with the same period in 2015. The traffic decrease was principally due to decreases of 48,142 carloads of coal and coke traffic, 7,693 carloads of minerals and stone traffic, 6,682 carloads of agricultural products traffic, 5,771 carloads of pulp and paper traffic, 2,446 carloads of chemicals and plastics traffic, and 2,236 carloads of other traffic, partially offset by increases of 2,289 carloads of waste traffic, 2,061 carloads of metals traffic and 1,838 carloads of lumber and forest products traffic. All remaining traffic decreased by a net 504 carloads.
The following information discusses the significant changes in our North American Operations freight revenues by commodity group excluding the impact of foreign currency. Other changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group.
Average freight revenues per carload from our North American Operations increased 2.1% to $584 for the six months ended June 30, 2016, compared with the same period in 2015. A change in the mix of business increased average freight revenues per carload 2.6%, while lower fuel surcharges decreased average freight revenues per carload 3.4%. Excluding these factors, average freight revenues per carload from North American Operations increased 2.7%.
Agricultural products revenues decreased $9.5 million, or 14.7%. Agricultural products average freight revenues per carload decreased 9.3%, which decreased revenues by $6.0 million and traffic volume decreased 6,682 carloads, or 6.0%, which decreased revenues by $3.5 million. The decrease in average freight revenues per carload was primarily driven by a change in the mix of business and lower fuel surcharges. The carload decrease was primarily due to decreased grain shipments in the midwestern and western United States due to depressed grain prices and a strong United States dollar.
Chemicals and plastics revenues decreased $1.3 million, or 1.9%. Chemicals and plastics traffic volume decreased 2,446 carloads, or 2.7%, which decreased revenues by $1.9 million, while average freight revenues per carload increased 0.8%, which increased revenues by $0.6 million. The carload decrease was primarily due to decreased shipments in the midwestern United States.

48

Table of Contents

Coal and coke revenues decreased $17.1 million, or 35.0%. Coal and coke traffic volume decreased 48,142 carloads, or 33.7%, which decreased revenues by $16.2 million, and average freight revenues per carload decreased 2.0%, which decreased revenues by $1.0 million. The carload decrease was primarily due to lower demand for steam coal as a result of competition from natural gas power generation.
Lumber and forest products revenues increased $1.8 million, or 4.6%. Lumber and forest products traffic volume increased 1,838 carloads, or 2.7%, which increased revenues by $1.1 million, and average freight revenues per carload increased 1.9%, which increased revenues by $0.7 million. The carload increase was primarily due to increased lumber shipments in the northeastern and midwestern United States.
Minerals and stone revenues decreased $3.7 million, or 6.4%. Minerals and stone traffic volume decreased 7,693 carloads, or 7.5%, which decreased revenues by $4.4 million, while average freight revenues per carload increased 1.1%, which increased revenues by $0.7 million. The decrease in carloads was primarily due to decreased shipments of frac sand and proppants in the midwestern and northeastern United States and decreased shipments of rock salt in the northeastern United States due to mild winter weather.
Petroleum products revenues increased $2.7 million, or 8.2%. Petroleum products average freight revenues per carload increased 7.0%, which increased revenues by $2.3 million, and traffic volume increased 539 carloads, or 1.1%, which increased revenues by $0.4 million. The increase in average freight revenues per carload was primarily due to a change in the mix of business.
Pulp and paper revenues decreased $3.7 million, or 6.6%, primarily due to a traffic volume decrease of 5,771 carloads, or 6.6%. The carload decrease was primarily due to decreased shipments resulting from trucking competition and the closure of several plants we served due to consolidation within the paper industry.
Freight revenues from all remaining commodities combined increased by a net $1.2 million.
Freight-Related Revenues
Excluding a $0.8 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our North American Operations, which includes revenues from railcar switching, track access rights, crewing services, storage and other ancillary revenues related to the movement of freight, increased $9.7 million, or 8.6%, to $122.5 million for the six months ended June 30, 2016. The increase was primarily driven by a change in the presentation of revenues from certain of our port terminal railroad operations, which were previously presented net of the related costs incurred, and an increase in storage revenue.
All Other Revenues
Excluding a $0.5 million decrease due to the impact of foreign currency depreciation, all other revenues from our North American Operations, which includes revenues from third-party railcar and locomotive repairs, property rentals, railroad construction and other ancillary revenues not directly related to the movement of freight, increased $0.4 million, or 1.1%, to $32.9 million for the six months ended June 30, 2016.
Operating Expenses
Total operating expenses from our North American Operations decreased $39.6 million, or 8.0%, to $455.4 million for the six months ended June 30, 2016, compared with $494.9 million for the six months ended June 30, 2015. The decrease in operating expenses for the six months ended June 30, 2016 was primarily due to lower freight volumes and effective management of costs. In addition, $13.2 million of acquisition and integration costs associated with the Freightliner acquisition were incurred in the six months ended June 30, 2015 and the depreciation of the Canadian dollar relative to the United States dollar resulted in a $3.5 million decrease in operating expenses.

49

Table of Contents

The following table sets forth operating expenses from our North American Operations for the six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Six Months Ended June 30,
 
 
 
 
 
 
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
Currency
Impact
 
2015 Constant Currency*
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Increase/(Decrease)
 
 
 
Labor and benefits
$
198,177

 
32.8
 %
 
$
209,748

 
33.3
 %
 
$
(11,571
)
 
$
(1,320
)
 
$
208,428

 
$
(10,251
)
Equipment rents
29,274

 
4.9
 %
 
34,271

 
5.4
 %
 
(4,997
)
 
(176
)
 
34,095

 
(4,821
)
Purchased services
31,964

 
5.3
 %
 
29,349

 
4.7
 %
 
2,615

 
(231
)
 
29,118

 
2,846

Depreciation and amortization
73,313

 
12.1
 %
 
70,241

 
11.2
 %
 
3,072

 
(748
)
 
69,493

 
3,820

Diesel fuel used in train operations
27,361

 
4.5
 %
 
43,782

 
7.0
 %
 
(16,421
)
 
(457
)
 
43,325

 
(15,964
)
Casualties and insurance
14,253

 
2.4
 %
 
13,114

 
2.1
 %
 
1,139

 
(90
)
 
13,024

 
1,229

Materials
25,946

 
4.3
 %
 
31,685

 
5.0
 %
 
(5,739
)
 
(218
)
 
31,467

 
(5,521
)
Trackage rights
17,752

 
2.9
 %
 
12,793

 
2.0
 %
 
4,959

 
(11
)
 
12,782

 
4,970

Net gain on sale of assets
(395
)
 
(0.1
)%
 
(699
)
 
(0.1
)%
 
304

 
14

 
(685
)
 
290

Restructuring costs
694

 
0.1
 %
 

 
 %
 
694

 

 

 
694

Other expenses
37,013

 
6.1
 %
 
50,618

 
8.1
 %
 
(13,605
)
 
(224
)
 
50,394

 
(13,381
)
Total operating expenses
$
455,352

 
75.3
 %
 
$
494,902

 
78.7
 %
 
$
(39,550
)
 
$
(3,461
)
 
$
491,441

 
$
(36,089
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our North American Operations excluding a decrease of $3.5 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $198.2 million for the six months ended June 30, 2016, compared with $208.4 million for the six months ended June 30, 2015, a decrease of $10.3 million, or 4.9%. The decrease was primarily due to a reduction in the average number of employees.
Equipment rents expense was $29.3 million for the six months ended June 30, 2016, compared with $34.1 million for the six months ended June 30, 2015, a decrease of $4.8 million, or 14.1%. The decrease was primarily due to reduced car hire expense and reduced railcar lease expense as a result of the purchase of railcars in 2015.
Purchased services expense was $32.0 million for the six months ended June 30, 2016, compared with $29.1 million for the six months ended June 30, 2015, an increase of $2.8 million, or 9.8%, primarily resulting from the classification of construction costs in 2015.
Depreciation and amortization expense was $73.3 million for the six months ended June 30, 2016, compared with $69.5 million for the six months ended June 30, 2015, an increase of $3.8 million, or 5.5%. The increase was primarily attributable to capital expenditures in 2015.
The cost of diesel fuel used in train operations was $27.4 million for the six months ended June 30, 2016, compared with $43.3 million for the six months ended June 30, 2015, a decrease of $16.0 million, or 36.8%. The decrease consisted of $13.1 million due to a 29.9% decrease in average fuel cost per gallon.
Materials expense was $25.9 million for the six months ended June 30, 2016, compared with $31.5 million for the six months ended June 30, 2015, a decrease of $5.5 million, or 17.5%. The decrease was primarily attributable to a reduction in the number of external construction projects in 2016 as well as a reduction in equipment repairs in 2016.
Trackage rights expense was $17.8 million for the six months ended June 30, 2016, compared with $12.8 million for the six months ended June 30, 2015, an increase of $5.0 million, or 38.9%. Other than a $7.0 million increase resulting from a change in the presentation of certain costs incurred to operate within certain of our port terminal railroad operations, which costs were previously presented as an offset to the revenues generated from the operations, trackage rights expense decreased $2.0 million to $10.8 million.
Other expenses were $37.0 million for the six months ended June 30, 2016, compared with $50.4 million for the six months ended June 30, 2015, a decrease of $13.4 million, or 26.6%. The decrease was primarily attributable to acquisition and integration costs related to the Freightliner acquisition in 2015.

50

Table of Contents

Operating Income/Operating Ratio
Operating income from our North American Operations was $149.0 million for the six months ended June 30, 2016, compared with $133.7 million for the six months ended June 30, 2015. Operating income for the six months ended June 30, 2016 included corporate development and related costs of $2.2 million and restructuring costs of $0.7 million. Operating income for the six months ended June 30, 2015 included a net gain on the sale of assets of $0.7 million and Freightliner acquisition and integration related costs of $13.2 million. The operating ratio was 75.3% for the six months ended June 30, 2016, compared with 78.7% for the six months ended June 30, 2015.
Australian Operations
Operating Revenues
The following table sets forth our Australian Operations operating revenues and carloads by new operations and existing operations for the six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing
Operations
 
 
 
2016
 
2015
 
 
 
 
 
Total Operations
 
New
Operations
 
Existing
Operations
 
Total Operations
 
Amount
 
%
 
Amount
 
%
 
Currency Impact
Freight revenues
$
51,171

 
$

 
$
51,171

 
$
85,822

 
$
(34,651
)
 
(40.4
)%
 
$
(34,651
)
 
(40.4
)%
 
$
(5,284
)
Freight-related revenues
52,619

 
10,906

 
41,713

 
36,037

 
16,582

 
46.0
 %
 
5,676

 
15.8
 %
 
(1,963
)
All other revenues
3,291

 
28

 
3,263

 
4,891

 
(1,600
)
 
(32.7
)%
 
(1,628
)
 
(33.3
)%
 
(316
)
Total operating revenues
$
107,081

 
$
10,934

 
$
96,147

 
$
126,750

 
$
(19,669
)
 
(15.5
)%
 
$
(30,603
)
 
(24.1
)%
 
$
(7,563
)
Carloads
90,474

 

 
90,474

 
106,128

 
(15,654
)
 
(14.8
)%
 
(15,654
)
 
(14.8
)%
 
 
Freight Revenues
The following table sets forth the changes in our Australian Operations freight revenues by commodity group for the six months ended June 30, 2016, compared with the six months ended June 30, 2015 (dollars in thousands): 
 
Six Months Ended June 30,
 
Increase/(Decrease)
 
Currency Impact
 
2015 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
 
Commodity Group
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
Agricultural Products
$
9,410

 
18.4
%
 
$
13,426

 
15.6
%
 
$
(4,016
)
 
$
(810
)
 
$
12,616

 
$
(3,206
)
Intermodal
31,617

 
61.7
%
 
36,160

 
42.1
%
 
(4,543
)
 
(2,189
)
 
33,971

 
(2,354
)
Metallic Ores
5,974

 
11.7
%
 
31,980

 
37.3
%
 
(26,006
)
 
(2,018
)
 
29,962

 
(23,988
)
Minerals & Stone
3,780

 
7.4
%
 
3,665

 
4.3
%
 
115

 
(234
)
 
3,431

 
349

Petroleum Products
390

 
0.8
%
 
591

 
0.7
%
 
(201
)
 
(33
)
 
558

 
(168
)
Total freight revenues
$
51,171

 
100.0
%
 
$
85,822

 
100.0
%
 
$
(34,651
)
 
$
(5,284
)
 
80,538

 
$
(29,367
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

51

Table of Contents

The following table sets forth our Australian Operations freight revenues, carloads and average freight revenues per carload for the six months ended June 30, 2016 and 2015 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2016
 
2015
 
2016
 
2015
 
2015* Constant Currency
Agricultural Products
$
9,410

 
18.4
%
 
$
12,616

 
15.7
%
 
24,077

 
29,412

 
$
391

 
$
456

 
$
429

Intermodal
31,617

 
61.7
%
 
33,971

 
42.1
%
 
28,943

 
30,006

 
1,092

 
1,205

 
1,132

Metallic Ores
5,974

 
11.7
%
 
29,962

 
37.2
%
 
4,336

 
17,883

 
1,378

 
1,788

 
1,675

Minerals & Stone
3,780

 
7.4
%
 
3,431

 
4.3
%
 
32,985

 
28,694

 
115

 
128

 
120

Petroleum Products
390

 
0.8
%
 
558

 
0.7
%
 
133

 
133

 
2,932

 
4,444

 
4,195

Total
$
51,171

 
100.0
%
 
$
80,538

 
100.0
%
 
90,474

 
106,128

 
$
566

 
$
809

 
$
759

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our Australian Operations decreased 15,654 carloads, or 14.8%, for the six months ended June 30, 2016, compared with the same period in 2015. The traffic was entirely from existing operations, as Freightliner Australia revenues are exclusively freight-related and all other revenues. The decrease was principally due to decreases of 13,547 carloads of metallic ores traffic, 5,335 carloads of agricultural products traffic and 1,063 carloads of intermodal traffic, partially offset by an increase of 4,291 carloads of minerals and stone traffic.
The following information discusses the significant changes in our Australian Operations freight revenues by commodity group excluding the impact of foreign currency. Other changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group.
Average freight revenues per carload from our Australian Operations decreased 25.4% to $566 for the six months ended June 30, 2016, compared with the same period in 2015. The decrease in average freight revenues per carload was primarily due to decreased iron ore and manganese shipments.
Agricultural products revenues decreased $3.2 million, or 25.4%. Agricultural products traffic decreased 5,335 carloads, or 18.1%, which decreased revenues by $2.1 million and average freight revenues per carload decreased 8.9%, which decreased revenues by $1.1 million. The decrease in carloads was primarily driven by low global crop prices. The decrease in average freight revenues per carload was primarily due to a change in the mix of business.
Intermodal revenues decreased $2.4 million, or 6.9%. Intermodal average freight revenues per carload decreased 3.5%, which decreased revenues by $1.2 million, and traffic volume decreased 1,063 carloads, or 3.5%, which decreased revenues by $1.2 million. The decrease in average freight revenues per carload was primarily due to lower fuel surcharges.
Metallic ores revenues decreased $24.0 million, or 80.1%. Metallic ores traffic volume decreased 13,547 carloads, or 75.8%, which decreased revenues by $18.7 million, and average freight revenues per carload decreased 17.7%, which decreased revenues by $5.3 million. The decrease in carloads was primarily driven by a decrease in iron ore and manganese shipments as a result of multiple customer mine closures in 2015.
Freight revenues from all remaining commodities combined increased by a net $0.2 million.
Freight-Related Revenues
Excluding a $2.0 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our Australian Operations, which includes revenues from railcar switching, track access rights, crewing services, storage and other ancillary revenues related to the movement of freight, increased $18.5 million, or 54.4%, to $52.6 million for the six months ended June 30, 2016, compared with $34.1 million for the six months ended June 30, 2015. The increase in freight-related revenues consisted of $10.9 million from new operations and $7.6 million from existing operations. The increase in freight-related revenues from existing operations was primarily due to approximately $6 million of fixed payments received from Arrium in the first quarter of 2016 associated with our rail haulage agreement to serve their Southern Iron mine that is now in care and maintenance and shipments of manganese stockpiled at a customer mine facility that will not recur unless the mine is reopened in the future. In the prior period, revenues related to Southern Iron were classified as freight revenues.

52

Table of Contents

All Other Revenues
Excluding a $0.3 million decrease due to the impact of foreign currency depreciation, all other revenues from our Australian Operations, which includes revenues from third-party railcar and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, decreased $1.3 million, or 28.1%, to $3.3 million for the six months ended June 30, 2016, compared with $4.6 million for the six months ended June 30, 2015. The decrease was primarily due to reduced third-party railcar and locomotive repair revenues.
Operating Expenses
Total operating expenses from our Australian Operations for the six months ended June 30, 2016 increased $12.1 million, or 12.4%, to $109.5 million, compared with $97.4 million for the six months ended June 30, 2015. The increase consisted of $9.8 million from new operations and $2.3 million from existing operations. The increase from existing operations included $21.1 million related to the impairment of a rolling stock maintenance facility and associated write-off of accounts receivable in the first quarter of 2016 resulting from an iron ore customer entering voluntary administration, partially offset by a $5.8 million decrease due to the depreciation of the Australian dollar relative to the United States dollar. In addition, lower freight volumes and effective management of operating costs further reduced operating expenses from our Australian Operations for the six months ended June 30, 2016.
The following table sets forth operating expenses from our Australian Operations for the six months ended June 30, 2016 and 2015 (dollars in thousands): 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
Currency
Impact
 
2015 Constant Currency*
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Increase/(Decrease)
 
 
 
Labor and benefits
$
32,568

 
30.4
%
 
$
36,134

 
28.5
%
 
$
(3,566
)
 
$
(2,249
)
 
$
33,885

 
$
(1,317
)
Equipment rents
3,325

 
3.1
%
 
6,206

 
4.9
%
 
(2,881
)
 
(340
)
 
5,866

 
(2,541
)
Purchased services
11,349

 
10.6
%
 
10,758

 
8.5
%
 
591

 
(628
)
 
10,130

 
1,219

Depreciation and amortization
13,889

 
13.0
%
 
13,620

 
10.7
%
 
269

 
(805
)
 
12,815

 
1,074

Diesel fuel used in train operations
8,575

 
8.0
%
 
9,899

 
7.8
%
 
(1,324
)
 
(543
)
 
9,356

 
(781
)
Casualties and insurance
3,088

 
2.9
%
 
3,767

 
3.0
%
 
(679
)
 
(220
)
 
3,547

 
(459
)
Materials
5,289

 
4.9
%
 
4,934

 
3.9
%
 
355

 
(286
)
 
4,648

 
641

Trackage rights
4,317

 
4.0
%
 
8,420

 
6.6
%
 
(4,103
)
 
(519
)
 
7,901

 
(3,584
)
Net loss/(gain) on sale and impairment of assets
12,982

 
12.1
%
 
(38
)
 
%
 
13,020

 

 
(38
)
 
13,020

Restructuring costs
716

 
0.7
%
 

 
%
 
716

 

 

 
716

Other expenses
13,353

 
12.5
%
 
3,683

 
2.9
%
 
9,670

 
(250
)
 
3,433

 
9,920

Total operating expenses
$
109,451

 
102.2
%
 
$
97,383

 
76.8
%
 
$
12,068

 
$
(5,840
)
 
$
91,543

 
$
17,908

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our Australian Operations excluding a decrease of $5.8 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $32.6 million for the six months ended June 30, 2016, compared with $33.9 million for the six months ended June 30, 2015, a decrease of $1.3 million, or 3.9%. The decrease consisted of $5.4 million from existing operations, partially offset by $4.1 million from new operations. The decrease from existing operations was primarily due to a decrease in the average number of employees as a result of changes made to the operating plans in Australia associated with mine closures and severance costs recorded in 2015.
Equipment rents expense was $3.3 million for the six months ended June 30, 2016, compared with $5.9 million for the six months ended June 30, 2015, a decrease of $2.5 million, or 43.3%. The decrease consisted of $3.1 million from existing operations, partially offset by $0.6 million from new operations. The decrease from existing operations was primarily attributable to a change in classification of maintenance expense associated with certain leased equipment from equipment rents expense in 2015 to purchased services expense in 2016, as well as reduced leased freight car expense associated with lower grain shipments.

53

Table of Contents

Purchased services expense was $11.3 million for the six months ended June 30, 2016, compared with $10.1 million for the six months ended June 30, 2015, an increase of $1.2 million, or 12.0%. The increase consisted of $1.7 million from new operations, partially offset by a decrease of $0.5 million from existing operations. The decrease from existing operations was primarily attributable to insourcing of maintenance of way activities in 2015, partially offset by a change in classification of maintenance expense associated with certain leased equipment from equipments rents expense in 2015 to purchased services expense in 2016.
The cost of diesel fuel used in train operations was $8.6 million for the six months ended June 30, 2016, compared with $9.4 million for the six months ended June 30, 2015, a decrease of $0.8 million, or 8.3%. The decrease consisted of $2.7 million from existing operations, partially offset by $2.0 million from new operations. The decrease from existing operations consisted of $2.9 million due to a 29.8% decrease in average fuel cost per gallon.
Trackage rights expense was $4.3 million for the six months ended June 30, 2016, compared with $7.9 million for the six months ended June 30, 2015, a decrease of $3.6 million, or 45.4%. The decrease consisted of $3.9 million from existing operations, partially offset by $0.3 million from new operations. The decrease from existing operations was primarily attributable to decreased shipments as a result of a mine closure of an iron ore customer in South Australia.
Net loss on the sale and impairment of assets for the six months ended June 30, 2016 of $13.0 million was primarily related to the impairment of a maintenance facility resulting from an iron ore customer entering voluntary administration.
Other expenses were $13.4 million for the six months ended June 30, 2016, compared with $3.4 million for the six months ended June 30, 2015, an increase of $9.9 million. The increase consisted of $9.6 million from existing operations and $0.4 million from new operations. The increase from existing operations was primarily due to the write-off of accounts receivable associated with an iron ore customer entering into voluntary administration.
Operating (Loss)/Income/Operating Ratio
Operating loss from our Australian Operations was $2.4 million for the six months ended June 30, 2016, compared with operating income of $29.4 million for the six months ended June 30, 2015. For the six months ended June 30, 2016, Australian Operations recorded charges of $21.1 million, including a $13.0 million non-cash charge related to the impairment of a rolling-stock maintenance facility and associated write-off of accounts receivable of $8.1 million, resulting from an iron ore customer entering into voluntary administration. Operating income for the six months ended June 30, 2015 included severance costs of $1.7 million.
U.K./European Operations
Operating Revenues
The following table sets forth our U.K./European Operations operating revenues and carloads by new operations and existing operations for the six months ended June 30, 2016 and 2015 (dollars in thousands):
 
Six Months Ended June 30,
 
Increase in Total Operations
 
Decrease in Existing
Operations
 
 
 
2016
 
2015
 
 
 
 
 
Total Operations
 
New
Operations
 
Existing
Operations
 
Total Operations
 
Amount
 
%
 
Amount
 
%
 
Currency Impact
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freight revenues
$
167,118

 
$
73,414

 
$
93,704

 
$
105,819

 
$
61,299

 
57.9
%
 
$
(12,115
)
 
(11.4
)%
 
$
(4,965
)
Freight-related revenues
92,024

 
38,489

 
53,535

 
66,329

 
25,695

 
38.7
%
 
(12,794
)
 
(19.3
)%
 
(1,884
)
All other revenues
13,415

 
4,623

 
8,792

 
11,747

 
1,668

 
14.2
%
 
(2,955
)
 
(25.2
)%
 
(713
)
Total operating revenues
$
272,557

 
$
116,526

 
$
156,031

 
$
183,895

 
$
88,662

 
48.2
%
 
$
(27,864
)
 
(15.2
)%
 
$
(7,562
)
Carloads
528,511

 
231,791

 
296,720

 
307,507

 
221,004

 
71.9
%
 
(10,787
)
 
(3.5
)%
 
 

54

Table of Contents

Freight Revenues
The following table sets forth the changes in our U.K./European Operations freight revenues by commodity group for the six months ended June 30, 2016, compared with the six months ended June 30, 2015 (dollars in thousands): 
 
Six Months Ended June 30,
 
Increase/(Decrease) in Total Operations
 
New Operations
 
Currency Impact
 
2015 Constant Currency*
 
Increase/(Decrease) in Existing Operations Constant Currency*
 
2016
 
2015
 
 
 
 
 
Commodity Group
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
 
Agricultural Products
$
736

 
0.4
%
 
$
141

 
0.1
%
 
$
595

 
$
321

 
$
(6
)
 
135

 
$
280

Coal & Coke
7,752

 
4.6
%
 
9,982

 
9.4
%
 
(2,230
)
 
4,176

 
(581
)
 
9,401

 
(5,825
)
Intermodal
133,448

 
79.9
%
 
76,692

 
72.5
%
 
56,756

 
59,375

 
(3,428
)
 
73,264

 
809

Lumber & Forest Products
126

 
0.1
%
 

 
%
 
126

 
64

 

 

 
62

Metallic Ores
40

 
%
 

 
%
 
40

 

 

 

 
40

Minerals & Stone
25,016

 
15.0
%
 
19,004

 
18.0
%
 
6,012

 
9,478

 
(950
)
 
18,054

 
(2,516
)
Total freight revenues
$
167,118

 
100.0
%
 
$
105,819

 
100.0
%
 
$
61,299

 
$
73,414

 
$
(4,965
)
 
100,854

 
$
(7,150
)
* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following table sets forth our U.K./European Operations freight revenues, carloads and average freight revenues per carload for the six months ended June 30, 2016 and 2015 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2016
 
2015
 
2016
 
2015
 
2015* Constant Currency
Agricultural Products
$
736

 
0.4
%
 
$
135

 
0.1
%
 
842

 
207

 
$
874

 
$
681

 
$
652

Coal & Coke
7,752

 
4.6
%
 
9,401

 
9.3
%
 
17,313

 
25,755

 
448

 
388

 
365

Intermodal
133,448

 
79.9
%
 
73,264

 
72.7
%
 
440,638

 
233,499

 
303

 
328

 
314

Lumber & Forest Products
126

 
0.1
%
 

 
%
 
315

 

 
400

 
N/A
 
N/A
Metallic Ores
40

 
%
 

 
%
 
93

 

 
430

 
N/A
 
N/A
Minerals & Stone
25,016

 
15.0
%
 
18,054

 
17.9
%
 
69,310

 
48,046

 
361

 
396

 
376

Total
$
167,118

 
100.0
%
 
$
100,854

 
100.0
%
 
528,511

 
307,507

 
$
316

 
$
344

 
$
328

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our U.K./European Operations increased 221,004 carloads, or 71.9%, for the six months ended June 30, 2016, compared with the same period in 2015. The increase in carloads included 231,791 carloads from new operations, partially offset by a decrease of 10,787 carloads from existing operations. The decrease from existing operations was due to decreases of 16,358 carloads of coal and coke traffic (primarily in the U.K.) and 6,997 carloads of minerals and stone traffic, partially offset by an increase of 12,057 carloads of intermodal traffic (primarily in the U.K.). All remaining traffic increased by 511 carloads.
The following information discusses the significant changes in our U.K./European Operations freight revenues from existing operations by commodity group excluding the impact of foreign currency. Other changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group.
Average freight revenues per carload from our U.K./European Operations decreased 3.7% to $316 for the six months ended June 30, 2016, compared with the same period in 2015. Average freight revenues per carload from existing operations decreased 3.7% to $316. The decrease in average freight revenues per carload was primarily due to a change in the mix of business.

55

Table of Contents

Coal and coke revenues decreased $5.8 million, or 62.0%. Coal and coke traffic volume decreased 16,358 carloads, or 63.5%, which decreased revenues by $6.2 million, while average freight revenues per carload increased 4.4%, which increased revenues by $0.4 million. The carload decrease was due to lower demand for steam coal in the U.K., primarily as a result of competition from natural gas power generation.
Minerals and stone revenues decreased $2.5 million, or 13.9%. Minerals and stone traffic volume decreased 6,997 carloads, or 14.6%, which decreased revenues $2.6 million. The carload decrease was primarily due to delays in road construction projects in Poland and decreased cement shipments in the U.K.
Freight revenues from all remaining commodities combined increased by $1.2 million.
Freight-Related Revenues
Freight-related revenues from our U.K./European Operations include port switching as well as traction service (or hook and pull). Traction service requires us to provide locomotives and drivers to move a customer's train between specified origin and destination points. Freight-related revenues in the U.K./Europe also include infrastructure services, where we operate work trains for the track infrastructure owner, drayage and other ancillary revenues related to the movement of freight. With the exception of infrastructure services, which are primarily in the U.K., freight-related revenues from our U.K./European Operations are primarily associated with the Continental Europe intermodal business.
Excluding a $1.9 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our U.K./European Operations increased $27.6 million to $92.0 million for the six months ended June 30, 2016, compared with $64.4 million for the six months ended June 30, 2015. The increase in freight-related revenues consisted of $38.5 million from new operations, partially offset by a decrease of $10.9 million from existing operations. The decrease from existing operations was primarily due to the rationalization of Continental Europe intermodal routes.
All Other Revenues
Excluding a $0.7 million decrease due to the impact of foreign currency depreciation, all other revenues from our U.K./European Operations, which includes revenues from third-party car and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, increased $2.4 million to $13.4 million for the six months ended June 30, 2016, compared to $11.0 million for the six months ended June 30, 2015. The increase consisted of $4.6 million from new operations, partially offset by a decrease of $2.2 million from existing operations. The decrease from existing operations was primarily due to a temporary passenger service contract in 2015.
Operating Expenses
Total operating expenses from our U.K./European Operations were $275.0 million for the six months ended June 30, 2016, compared with $174.9 million for the six months ended June 30, 2015, an increase of $100.1 million. The increase included $117.1 million from new operations, partially offset by a decrease of $17.0 million from existing operations. The decrease from existing operations included a $7.3 million decrease due to the impact of foreign currency depreciation.

56

Table of Contents

The following table sets forth operating expenses from our U.K./European Operations for the six months ended June 30, 2016 and 2015 (dollars in thousands): 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
Increase/(Decrease) Constant Currency*
 
2016
 
2015
 
 
 
Currency
Impact
 
2015 Constant Currency*
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Increase/(Decrease)
 
 
 
Labor and benefits
$
88,317

 
32.4
%
 
$
51,532

 
27.9
%
 
$
36,785

 
$
(2,819
)
 
$
48,713

 
$
39,604

Equipment rents
44,257

 
16.2
%
 
25,038

 
13.6
%
 
19,219

 
(1,045
)
 
23,993

 
20,264

Purchased services
54,821

 
20.1
%
 
40,451

 
22.0
%
 
14,370

 
(719
)
 
39,732

 
15,089

Depreciation and amortization
13,052

 
4.9
%
 
6,404

 
3.5
%
 
6,648

 
(337
)
 
6,067

 
6,985

Diesel fuel used in train operations
17,781

 
6.5
%
 
13,911

 
7.6
%
 
3,870

 
(738
)
 
13,173

 
4,608

Electricity used in train operations
6,669

 
2.4
%
 
5,366

 
2.9
%
 
1,303

 
(51
)
 
5,315

 
1,354

Casualties and insurance
2,221

 
0.8
%
 
1,680

 
0.9
%
 
541

 
(63
)
 
1,617

 
604

Materials
11,749

 
4.3
%
 
9,005

 
4.9
%
 
2,744

 
(537
)
 
8,468

 
3,281

Trackage rights
19,659

 
7.2
%
 
14,292

 
7.8
%
 
5,367

 
(393
)
 
13,899

 
5,760

Net gain on sale of assets
(70
)
 
%
 
(70
)
 
%
 

 
1

 
(69
)
 
(1
)
Restructuring costs
4,687

 
1.7
%
 

 
%
 
4,687

 

 

 
4,687

Other expenses
11,855

 
4.4
%
 
7,284

 
4.0
%
 
4,571

 
(564
)
 
6,720

 
5,135

Total operating expenses
$
274,998

 
100.9
%
 
$
174,893

 
95.1
%
 
$
100,105

 
$
(7,265
)
 
$
167,628

 
$
107,370

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following information discusses the significant changes in operating expenses of our U.K./European Operations excluding a decrease of $7.3 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $88.3 million for the six months ended June 30, 2016, compared with $48.7 million for the six months ended June 30, 2015, an increase of $39.6 million. The increase consisted of $40.0 million from new operations, partially offset by a decrease $0.3 million from existing operations.
Equipment rents expense was $44.3 million for the six months ended June 30, 2016, compared with $24.0 million for the six months ended June 30, 2015, an increase of $20.3 million. The increase consisted of $19.3 million from new operations and $1.0 million from existing operations. The increase from existing operations was primarily due to a reclassification of maintenance activities on certain leased equipment from materials expense in 2015 to equipment rents expense in 2016.
Purchased services expense was $54.8 million for the six months ended June 30, 2016, compared with $39.7 million for the six months ended June 30, 2015, an increase of $15.1 million. The increase consisted of $22.9 million from new operations, partially offset by a decrease of $7.8 million from existing operations. The decrease from existing operations was primarily due to a decrease in third-party operating services resulting from reduced Continental Europe intermodal traffic.
Depreciation and amortization expense was $13.1 million for the six months ended June 30, 2016, compared with $6.1 million for the six months ended June 30, 2015, an increase of $7.0 million. The increase consisted of $5.6 million from new operations and $1.3 million from existing operations. The increase from existing operations was primarily attributable to capital expenditures in 2015.
The cost of diesel fuel used in train operations was $17.8 million for the six months ended June 30, 2016, compared with $13.2 million for the six months ended June 30, 2015, an increase of $4.6 million. The increase consisted of $7.0 million from new operations, partially offset by a $2.4 million decrease from existing operations. The decrease from existing operations was primarily due to a 24.1% decrease in average fuel cost per gallon.
The cost of electricity used in train operations was $6.7 million for the six months ended June 30, 2016, compared with $5.3 million for the six months ended June 30, 2015, an increase of $1.4 million. The increase consisted of $2.7 million from new operations, partially offset by a decrease of $1.4 million from existing operations. The decrease from existing operations was primarily due to reduced freight and freight-related volumes.

57

Table of Contents

Materials expense was $11.7 million for the six months ended June 30, 2016, compared with $8.5 million for the six months ended June 30, 2015, an increase of $3.3 million. The increase consisted of $5.6 million from new operations, partially offset by a decrease of $2.3 million from existing operations. The decrease from existing operations was primarily due to a reclassification of maintenance activities on certain leased equipment from materials expense in 2015 to equipment rents expense in 2016.
Trackage rights expense was $19.7 million for the six months ended June 30, 2016, compared with $13.9 million for the six months ended June 30, 2015, an increase of $5.8 million. The increase consisted of $8.0 million from new operations, partially offset by a $2.2 million decrease from existing operations. The decrease from existing operations was primarily due to reduced Continental Europe intermodal traffic.
Restructuring costs for the six months ended June 30, 2016 of $4.7 million were primarily related to the restructuring of the U.K. coal business.
Other expenses were $11.9 million for the six months ended June 30, 2016, compared with $6.7 million for the six months ended June 30, 2015, an increase of $5.1 million. The increase consisted of $4.7 million from new operations and $0.5 million from existing operations.
Operating (Loss)/Income
Our U.K./European Operations had an operating loss of $2.4 million for the six months ended June 30, 2016, compared with operating income of $9.0 million for the six months ended June 30, 2015. For the six months ended June 30, 2016, U.K./European Operations recorded $4.7 million of restructuring costs, primarily related to the U.K. coal business.
Liquidity and Capital Resources
We had cash and cash equivalents of $25.0 million at June 30, 2016. Based on current expectations, we believe our cash and other liquid assets, anticipated future cash flows, availability under the Credit Agreement, access to debt and equity capital markets and sources of available financing will be sufficient to fund expected operating, capital and debt service requirements and other financial commitments for the foreseeable future.
At June 30, 2016, we had long-term debt, including current portion, totaling $2.2 billion, which was 46% of our total capitalization, and $542.5 million of unused borrowing capacity under the Credit Agreement. At December 31, 2015, we had long-term debt, including current portion, totaling $2.3 billion, which was 48% of our total capitalization.
During the six months ended June 30, 2016 and 2015, we generated $162.0 million and $184.7 million, respectively, of cash from operating activities. Changes in working capital decreased net cash flows by $52.0 million and $28.6 million for the six months ended June 30, 2016 and 2015, respectively.
During the six months ended June 30, 2016 and 2015, our cash used in investing activities was $78.1 million and $879.8 million, respectively. For the six months ended June 30, 2016, primary drivers of cash used in investing activities were $113.3 million of cash used for capital expenditures, including $3.4 million for new business investments, partially offset by $26.0 million of cash received from grants from outside parties for capital spending and $7.7 million of insurance proceeds for the replacement of assets. For the six months ended June 30, 2015, primary drivers of cash used in investing activities were $726.7 million of cash paid for acquisitions, including the acquisitions of Freightliner and Pinsly Arkansas, $160.2 million of cash used for capital expenditures, including new business investments of $37.0 million, and $18.7 million of net cash paid for the settlement of the foreign currency forward purchase contracts related to the acquisition of Freightliner, partially offset by $22.7 million in cash received from grants from outside parties for capital spending.
During the six months ended June 30, 2016, our cash used in financing activities was $96.0 million. During the six months ended June 30, 2015, our cash provided by financing activities was $667.6 million. For the six months ended June 30, 2016, the primary driver of cash used in financing activities was a net decrease in outstanding debt of $96.5 million. For the six months ended June 30, 2015, the primary driver of cash flows provided by financing activities was net proceeds of $665.1 million primarily related to borrowings from the refinancing of the Credit Agreement in conjunction with the acquisition of Freightliner.

58

Table of Contents

Credit Agreement
In anticipation of our acquisition of Freightliner, we entered into the Credit Agreement on March 20, 2015. The credit facilities under the Credit Agreement are comprised of a $1,782.0 million United States term loan, an A$324.6 million (or $252.5 million at the exchange rate on March 20, 2015) Australian term loan, a £101.7 million (or $152.2 million at the exchange rate on March 20, 2015) U.K. term loan and a $625.0 million revolving credit facility. The revolving credit facility includes borrowing capacity for letters of credit and swingline loans. The maturity date of each of our credit facilities under the Credit Agreement is March 31, 2020. On September 30, 2015, we entered into Amendment No. 1 (the Amendment) to the Credit Agreement. The Amendment added a senior secured leverage ratio covenant that requires us to comply with maximum ratios of senior secured indebtedness, subject, if applicable, to netting of certain cash and cash equivalents to earnings before income taxes, depreciation and amortization (EBITDA). For additional information regarding our Credit Agreement and Credit Agreement Amendment, see Note 5, Long-Term Debt, to our Consolidated Financial Statements.
2016 Budgeted Capital Expenditures
The following table sets forth our budgeted capital expenditures for the year ending December 31, 2016 (dollars in thousands):
 
 
2016 Budgeted
 
 
Capital
 
 
Expenditures
Track and equipment improvements, self-funded
 
$
175,000

Track and equipment improvements, subject to third-party funding
 
80,000

New business investments
 
35,000

Gross capital expenditures
 
$
290,000

Grants from outside parties
 
(65,000
)
Net capital expenditures
 
$
225,000

During the six months ended June 30, 2016, we incurred $106.6 million in aggregate capital expenditures related to current year projects of which we paid $92.3 million in cash and accrued $10.4 million in accounts payable as of June 30, 2016. Of the $12.4 million of grants from outside parties related to these current year projects, we received $3.7 million in cash and we expect to receive an additional $8.7 million, which was included in outstanding grant receivables from outside parties as of June 30, 2016.
The following table sets forth our capital expenditures by segment for the six months ended June 30, 2016 (dollars in thousands): 
 
 
Six Months Ended
 
 
June 30, 2016
Capital Expenditures:
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Track and equipment, self-funded
 
$
65,332

 
$
4,794

 
$
15,596

 
$
85,722

Track and equipment, subject to third-party funding
 
16,822

 

 

 
16,822

New business investments
 
2,823

 

 
1,226

 
4,049

Gross capital expenditures
 
84,977

 
4,794

 
16,822

 
106,593

Grants from outside parties
 
(12,373
)
 

 

 
(12,373
)
Net capital expenditures
 
$
72,604

 
$
4,794

 
$
16,822

 
$
94,220

Cash of $113.3 million paid for purchases of property and equipment during the six months ended June 30, 2016 consisted of $92.3 million for 2016 capital projects and $21.0 million related to capital expenditures accrued in 2015. Grant proceeds from outside parties during the six months ended June 30, 2016 consisted of $3.7 million for grants related to 2016 capital expenditures and $22.3 million for grants related to our capital expenditures from prior years.
We periodically receive grants for the upgrade and construction of rail lines and the upgrade of locomotives from federal, provincial, state and local agencies and other outside parties in the United States, Canada and Australia. These grants typically reimburse us for 50% to 100% of the actual cost of specific projects.

59

Table of Contents

Off-Balance Sheet Arrangements
An off-balance sheet arrangement includes any contractual obligation, agreement or transaction involving an unconsolidated entity under which we (1) have made guarantees, (2) have a retained or contingent interest in transferred assets, or a similar arrangement, that serves as credit, liquidity or market risk support to that entity for such assets, (3) have an obligation under certain derivative instruments or (4) have any obligation arising out of a material variable interest in such an entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing or hedging services with us.
Our off-balance sheet arrangements as of December 31, 2015 consisted of operating lease obligations, as well as credit/payment guarantees. There were no material changes in our off-balance sheet arrangements during the six months ended June 30, 2016.
Impact of Foreign Currencies on Operating Revenues and Expenses
When comparing the effects of average foreign currency exchange rates on operating revenues and operating expenses during the three and six months ended June 30, 2016 with the three and six months ended June 30, 2015, foreign currency translation had a negative impact on our consolidated operating revenues and a positive impact on our consolidated operating expenses due to the weakening of the Australian and Canadian dollars and the British pound relative to the United States dollar for the three and six months ended June 30, 2016. Currency effects related to operating revenues and expenses are presented within the discussion of these respective items included within this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the six months ended June 30, 2016, there were no material changes to the Quantitative and Qualitative Disclosures About Market Risk previously disclosed in our 2015 Annual Report on Form 10-K (see Note 6, Derivative Financial Instruments, to our Consolidated Financial Statements).
ITEM 4.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures — We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2016. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2016, the disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Internal Control Over Financial Reporting — On March 25, 2015, we completed the acquisition of Freightliner. We extended our oversight and monitoring processes that support our internal control over financial reporting, as appropriate, to include Freightliner's financial position, results of operations and cash flow into our consolidated financial statements from the March 25, 2015 date of acquisition through June 30, 2016. We are continuing to integrate the acquired operations of Freightliner into our overall internal control over financial reporting and related processes. Except as disclosed in this paragraph, there were no other changes in our internal control over financial reporting (as the term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

60

Table of Contents

PART II - OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS.
From time to time, we are a defendant in certain lawsuits resulting from our operations in the ordinary course as the nature of our business exposes us to the potential for various claims and litigation, including those related to property damage, personal injury, freight loss, labor and employment, environmental and other matters. We maintain insurance policies to mitigate the financial risk associated with such claims.
Any material changes to pending litigation or a catastrophic rail accident or series of accidents involving material freight loss or property damage, personal injury and environmental liability or other claims against us that are not covered by insurance could have a material adverse effect on our results of operations, financial condition and liquidity.
Management believes there are adequate provisions in the financial statements for any probable liabilities that may result from disposition of the pending lawsuits. Based upon currently available information, we do not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to our results of operations or have a material adverse effect on our financial position or liquidity.
ITEM 1A.
RISK FACTORS.
For a discussion of our potential risks or uncertainties, please see Risk Factors in Part I, Item 1A of the Company's 2015 Annual Report on Form 10-K.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There were no unregistered sales of equity securities for the period covered by this Quarterly Report on Form 10-Q.
Issuer Purchases of Equity Securities
Period in 2016
(a) Total Number of
Shares (or Units)
Purchased (1)
 
(b) Average
Price Paid
per Share
(or Unit)
 
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
 
(d) Maximum Number
of Shares (or Units)
(or Approximate Dollar Value)
that May Yet Be Purchased
Under the Plans or
Programs (2)
April 1 to April 30

 
$

 

 
$
300,000,000

May 1 to May 31
1,333

 
$
60.04

 

 
$
300,000,000

June 1 to June 30
426

 
$
60.04

 

 
$
300,000,000

Total
1,759

 
$
60.04

 

 
$
300,000,000

(1) The 1,759 shares acquired in the three months ended June 30, 2016 represent common stock acquired by us from our employees who surrendered shares in lieu of cash either to fund their exercise of stock options or to pay taxes on equity awards granted under our Third Amended and Restated 2004 Omnibus Plan.
(2) In conjunction with Amendment No. 1 to the Credit Agreement, the Board authorized the repurchase of up to $300.0 million of our Class A Common Stock and appointed a special committee of the Board to review and approve repurchases proposed by management.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
NONE
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5.
OTHER INFORMATION.
NONE
ITEM 6.
EXHIBITS.
For a list of exhibits, see INDEX TO EXHIBITS following the signature page to this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

61

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
GENESEE & WYOMING INC.
 
 
 
 
Date:
August 5, 2016
By:
/s/    TIMOTHY J. GALLAGHER
 
 
Name:
Timothy J. Gallagher
 
 
Title:
Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
Date:
August 5, 2016
By:
/s/ CHRISTOPHER F. LIUCCI
 
 
Name:
Christopher F. Liucci
 
 
Title:
Chief Accounting Officer
(Principal Accounting Officer)


62

Table of Contents

INDEX TO EXHIBITS
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure, other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
Exhibit
No.
 
Description of Exhibits
 
 
 
*31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
 
 
 
*31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
 
 
 
*32.1
 
Section 1350 Certification
 
 
 
*101
 
The following financial information from Genesee & Wyoming Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 and (v) the Notes to Consolidated Financial Statements.
*Exhibit filed or furnished with this Report.

63