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EX-32.1 - SECTION 1350 CERTIFICATION - GENESEE & WYOMING INCgwr09302017ex321.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - GENESEE & WYOMING INCgwr09302017ex312.htm
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - GENESEE & WYOMING INCgwr09302017ex311.htm

 
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 September 30, 2017
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
 gwlogoa12.jpg
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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 November 2, 2017:
Class
 
Number of Shares Outstanding
Class A Common Stock
 
61,671,666
Class B Common Stock
 
713,138
 



51.1
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


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 Securities and Exchange Commission.    
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 that could result in shutdowns, derailments, railroad network and port 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 and outcome of various legal claims, lawsuits and arbitrations; 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; uncertainties arising from a referendum in which voters in the United Kingdom (U.K.) approved an exit from the European Union (E.U.), commonly referred to as Brexit; our ability to integrate acquired businesses successfully or to realize the expected synergies associated with acquisitions; risks associated with our substantial indebtedness; failure to maintain satisfactory working relationships with partners in Australia; failure to maintain an effective system of internal control over financial reporting as well as disclosure controls and procedures 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 2016 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


PART I - FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS.
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2017 and DECEMBER 31, 2016 (Unaudited)
(dollars in thousands, except per share and share amounts)
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
80,277

 
$
32,319

Accounts receivable, net
415,802

 
363,923

Materials and supplies
55,368

 
43,621

Prepaid expenses and other
39,464

 
45,475

Total current assets
590,911

 
485,338

PROPERTY AND EQUIPMENT, net
4,628,894

 
4,503,319

GOODWILL
1,187,189

 
1,125,596

INTANGIBLE ASSETS, net
1,575,900

 
1,472,376

DEFERRED INCOME TAX ASSETS, net
3,120

 
2,671

OTHER ASSETS
43,154

 
45,658

Total assets
$
8,029,168

 
$
7,634,958

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
31,139

 
$
52,538

Accounts payable
254,555

 
266,867

Accrued expenses
168,168

 
159,705

Total current liabilities
453,862

 
479,110

LONG-TERM DEBT, less current portion
2,353,524

 
2,306,915

DEFERRED INCOME TAX LIABILITIES, net
1,252,499

 
1,162,221

DEFERRED ITEMS - grants from outside parties
315,113

 
301,383

OTHER LONG-TERM LIABILITIES
220,491

 
198,208

COMMITMENTS AND CONTINGENCIES


 


EQUITY:
 
 
 
Class A Common Stock, $0.01 par value, one vote per share; 180,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 74,512,436 and 74,162,972 shares issued and 61,668,015 and 61,362,665 shares outstanding (net of 12,844,421 and 12,800,307 shares in treasury) as of September 30, 2017 and December 31, 2016, respectively
745

 
742

Class B Common Stock, $0.01 par value, ten votes per share; 30,000,000 shares authorized as of September 30, 2017 and December 31, 2016; 713,138 and 758,138 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
7

 
8

Additional paid-in capital
1,674,195

 
1,651,703

Retained earnings
1,808,298

 
1,685,813

Accumulated other comprehensive loss
(131,139
)
 
(211,336
)
Treasury stock, at cost
(235,623
)
 
(232,348
)
Total Genesee & Wyoming Inc. stockholders' equity
3,116,483

 
2,894,582

Noncontrolling interest
317,196

 
292,539

Total equity
3,433,679

 
3,187,121

Total liabilities and equity
$
8,029,168

 
$
7,634,958

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

4


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016 (Unaudited)
(in thousands, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
OPERATING REVENUES
$
576,927

 
$
501,002

 
$
1,636,468

 
$
1,484,993

OPERATING EXPENSES:
 
 
 
 
 
 
 
Labor and benefits
167,929

 
156,235

 
496,128

 
475,297

Equipment rents
33,291

 
36,778

 
100,399

 
113,634

Purchased services
68,562

 
50,991

 
176,358

 
149,125

Depreciation and amortization
64,222

 
50,841

 
186,509

 
151,095

Diesel fuel used in train operations
34,535

 
30,134

 
105,718

 
83,851

Electricity used in train operations
765

 
3,226

 
6,072

 
9,895

Casualties and insurance
10,624

 
9,252

 
33,346

 
28,814

Materials
30,664

 
19,678

 
77,861

 
62,662

Trackage rights
22,632

 
22,781

 
66,652

 
64,509

Net (gain)/loss on sale and impairment of assets
(315
)
 
(524
)
 
(1,096
)
 
11,993

Restructuring costs
2,628

 
223

 
8,744

 
6,320

Other expenses
29,901

 
29,536

 
89,494

 
91,757

Total operating expenses
465,438

 
409,151

 
1,346,185

 
1,248,952

OPERATING INCOME
111,489

 
91,851

 
290,283

 
236,041

Interest income
463

 
416

 
1,271

 
827

Interest expense
(28,281
)
 
(17,333
)
 
(80,431
)
 
(53,049
)
Other income/(loss), net
221

 
1,494

 
(289
)
 
2,947

Income before income taxes
83,892

 
76,428

 
210,834

 
186,766

Provision for income taxes
(30,507
)
 
(19,643
)
 
(82,032
)
 
(54,563
)
Net income
$
53,385

 
$
56,785

 
$
128,802

 
$
132,203

Less: Net income attributable to noncontrolling interest
3,145

 

 
6,317

 

Net income attributable to Genesee & Wyoming Inc.

$
50,240

 
$
56,785

 
$
122,485

 
$
132,203

Basic earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:
$
0.82

 
$
0.99

 
$
1.99

 
$
2.31

Weighted average shares - Basic
61,629

 
57,266

 
61,518

 
57,160

Diluted earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:
$
0.80

 
$
0.98

 
$
1.96

 
$
2.28

Weighted average shares - Diluted
62,477

 
58,180

 
62,399

 
58,083

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

5


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016 (Unaudited)
(dollars in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
NET INCOME
$
53,385

 
$
56,785

 
$
128,802

 
$
132,203

OTHER COMPREHENSIVE INCOME:
 
 
 
 
 
 
 
Foreign currency translation adjustment
32,902

 
5,108

 
100,054

 
3,618

Net unrealized gain/(loss) on qualifying cash flow hedges, net of tax (provision)/benefit of ($303), $1,417, ($567) and $12,242, respectively
736

 
(2,127
)
 
638

 
(18,364
)
Changes in pension and other postretirement benefits, net of tax (provision)/benefit of ($20), ($392), $887 and ($1,376), respectively
38

 
1,449

 
(2,149
)
 
4,372

Other comprehensive income/(loss)
33,676

 
4,430

 
98,543

 
(10,374
)
COMPREHENSIVE INCOME
$
87,061

 
$
61,215

 
$
227,345

 
$
121,829

Less: Comprehensive income attributable to noncontrolling interest
8,500

 

 
24,663

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO GENESEE & WYOMING INC.
$
78,561

 
$
61,215

 
$
202,682

 
$
121,829

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



6


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016 (Unaudited)
(dollars in thousands)
 
Nine Months Ended
 
September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
128,802

 
$
132,203

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
186,509

 
151,095

Stock-based compensation
13,354

 
13,835

Deferred income taxes
51,231

 
25,088

Net (gain)/loss on sale and impairment of assets
(1,096
)
 
11,993

Changes in assets and liabilities which provided/(used) cash, net of effect of acquisitions:
 
 
 
Accounts receivable, net
(18,020
)
 
(10,731
)
Materials and supplies
8,998

 
(2,642
)
Prepaid expenses and other
14,257

 
(1,930
)
Accounts payable and accrued expenses
(41,529
)
 
(29,484
)
Other assets and liabilities, net
7,883

 
14,156

Net cash provided by operating activities
350,389

 
303,583

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(149,105
)
 
(159,523
)
Grant proceeds from outside parties
15,998

 
29,952

Cash paid for acquisitions, net of cash acquired
(107,586
)
 

Proceeds from the sale of investment
2,100

 

Insurance proceeds for the replacement of assets
1,406

 
10,319

Proceeds from disposition of property and equipment
4,238

 
2,003

Net cash used in investing activities
(232,949
)
 
(117,249
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on revolving line-of-credit, long-term debt and capital lease obligations
(498,925
)
 
(501,087
)
Proceeds from revolving line-of-credit and long-term borrowings
418,735

 
300,495

Proceeds from employee stock purchases
8,003

 
5,969

Treasury stock purchases
(3,275
)
 
(3,065
)
Net cash used in financing activities
(75,462
)
 
(197,688
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
5,980

 
1,779

INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
47,958

 
(9,575
)
CASH AND CASH EQUIVALENTS, beginning of period
32,319

 
35,941

CASH AND CASH EQUIVALENTS, end of period
$
80,277

 
$
26,366

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 nine months ended September 30, 2017 and 2016 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 2016 was derived from the audited financial statements in the Company's 2016 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, 2016 included in the Company's 2016 Annual Report on Form 10-K. Certain reclassifications have been made to prior period balances to conform to the current year presentation, including changes to the statement of cash flows from the adoption of the Accounting Standards Update (ASU) noted below.
In March 2016, the Financial Accounting Standards Board (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 Company elected to account for forfeitures as they occur and elected the retrospective transition method in regards to the classification of tax-related cash flows from stock-based payments. The amendment became effective for the Company on January 1, 2017 and did not have a material impact on the consolidated financial statements for the three and nine months ended September 30, 2017.
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 and natural gas liquids) or congestion at ports (intermodal). 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:
North American Operations
Heart of Georgia Railroad, Inc.: On May 31, 2017, the Company completed the acquisition of all the outstanding shares of Atlantic Western Transportation, Inc., parent company of Heart of Georgia Railroad, Inc. (HOG), for $5.6 million in cash and contingent consideration valued at $5.7 million. The contingent consideration is payable to the sellers upon satisfaction of certain conditions, which the Company expects to be paid in 2021. The results of operations from HOG have been included in the Company's consolidated statement of operations since the acquisition date.

8

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

HOG was founded in 1999 and operates 219 miles of track that runs across the State of Georgia. The track is leased from the Georgia Department of Transportation. It connects with the Company’s Georgia Southwestern Railroad at Americus, Georgia, and with the Company’s Georgia Central Railway at Vidalia, Georgia. HOG serves an inland intermodal terminal at Cordele, Georgia, providing five days per week, direct rail service via the Georgia Central Railway to the Port of Savannah for auto, agricultural products and other merchandise customers. HOG has Class I railroad connections with CSX Corp. at Cordele and with Norfolk Southern at Americus and Helena, Georgia. HOG transports approximately 10,000 annual carloads of agricultural products, feed, fertilizer, and lumber and forest products, of which approximately 2,000 carloads are interchanged with the Company’s Georgia Central Railway.
Providence and Worcester Railroad Company: On November 1, 2016, the Company completed the acquisition of 100% of the outstanding common stock of Providence and Worcester Railroad Company (P&W) for $25.00 per share, or $126.2 million. 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). The results of operations from P&W have been included in the Company's consolidated statement of operations since the acquisition date. The Company incurred $3.1 million of integration costs associated with P&W during the nine months ended September 30, 2017, of which $2.7 million was included within labor and benefits expense primarily for severance costs and $0.4 million was included within other expenses in the Company's consolidated statement of operations.
P&W is headquartered in Worcester, Massachusetts, and operates in Rhode Island, Massachusetts, Connecticut and New York. P&W is contiguous with the Company’s New England Central Railroad (NECR) and Connecticut Southern Railroad (CSO). As of the acquisition date, rail service was provided by approximately 130 P&W employees with 32 locomotives across 163 miles of owned track and over approximately 350 track miles under track access agreements. P&W has exclusive freight access over Amtrak’s Northeast Corridor between New Haven, Connecticut, and Providence, Rhode Island, and trackage rights over Metro-North Commuter Railroad, Amtrak and CSX Corp. between New Haven, Connecticut, and Queens, New York. P&W interchanges with the Company’s NECR and CSO railroads, as well as with CSX Corp., Norfolk Southern, Pan Am Railways, Pan Am Southern, the Housatonic Railroad and the New York and Atlantic Railroad, and also connects to Canadian National and Canadian Pacific via NECR.
P&W serves a diverse mix of aggregates, auto, chemicals, metals and lumber customers in southeastern New England, handling approximately 44,000 carloads and intermodal units annually. In addition, P&W provides rail service to three ports (Providence, Davisville and New Haven) and to a United States Customs bonded intermodal terminal in Worcester, Massachusetts, that receives inbound intermodal containers for distribution in New England.
The Company accounted for the acquisition as a business combination using the acquisition method of accounting under U.S. GAAP. The acquired assets and liabilities of P&W were recorded at their acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The following acquisition-date fair values were assigned to the acquired net assets (dollars in thousands). The $27.9 million of fair value assigned to goodwill will not be deductible for tax purposes.
 
Amount
Cash and cash equivalents
$
1,529

Accounts receivable
4,011

Materials and supplies
1,048

Prepaid expenses and other
648

Property and equipment
129,473

Goodwill
27,938

Total Assets
164,647

Accounts payable and accrued expenses
9,759

Deferred income tax liabilities, net
27,464

Other long-term liabilities
1,273

Net assets
$
126,151


9

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

Australian Operations
Glencore Rail (NSW) Pty Limited: On December 1, 2016, a subsidiary of the Company completed the acquisition of Glencore Rail (NSW) Pty Limited (GRail) for A$1.14 billion (or approximately $844.9 million at an exchange rate of $0.74 for one Australian dollar) and concurrently issued a 48.9% equity stake in G&W Australia Holdings LP (GWAHLP) (collectively, the Australia Partnership), which is the holding entity for all of the Company’s Australian businesses, including GRail, to Macquarie Infrastructure and Real Assets (MIRA), a large infrastructure investment firm. The Company, through wholly-owned subsidiaries, retained a 51.1% ownership in GWAHLP. As the Company maintained control of its Australian Operations, it continues to consolidate 100% of the Company's Australian Operations in its financial statements and reports a noncontrolling interest for MIRA’s 48.9% equity ownership. The acquisition of GRail was funded through a combination of third-party debt and contributions from the Company and MIRA in the form of equity and partner loans.
The Company and MIRA contributed a combined A$1.3 billion in the form of cash, partner loans and contributed equity, and the Company's recently established subsidiary, GWI Acquisitions Pty Ltd (GWIA), entered into a five-year A$690 million senior secured term loan facility that is non-recourse to the Company and to MIRA. The proceeds were used to acquire GRail for A$1.14 billion, repay Genesee & Wyoming Australia’s (GWA) existing A$250 million term loan (under the Company’s Credit Agreement) and pay A$19.8 million in debt issuance costs and A$13.2 million of acquisition-related costs (collectively the GRail Transactions). The foreign exchange rate used to translate the transaction amounts to United States dollars (USD) was $0.74 for one Australian dollar (AUD).
GRail’s coal haulage business was established in 2010 as an alternative rail service provider to the incumbent railroads in the Hunter Valley and has grown to be the third largest coal haulage business in Australia. The Company’s Freightliner Australia subsidiary (acquired by the Company in March 2015) has been the rail operator of GRail since inception and presently provides haulage and logistics services for approximately 40 million tonnes per year of steam coal that is among the lowest cost and highest quality coal in the world sold principally to customers in Japan, Korea and Taiwan. These services have continued following the GRail transaction.
    In conjunction with the GRail acquisition, the Company entered into a 20-year rail haulage contract with the seller, Glencore Coal Pty Limited (GC), to exclusively haul all coal produced at GC’s existing mines in the Hunter Valley to the Port of Newcastle. The contract has minimum guaranteed volumes over the first 18 years.
The GRail transaction included the acquisition of nine train sets (30 locomotives and 894 railcars). Rail haulage service is operated on government-owned, open-access track that is coordinated by a neutral third party. Track access fees will continue to be paid directly by GC.
The Company paid GC, the seller of GRail, A$1.14 billion in cash at closing and received A$3.8 million (or $2.9 million at the exchange rate on the date the cash was received) from the seller for the final working capital adjustment during the three months ended March 31, 2017. The Company accounted for the acquisition as a business combination using the acquisition method of accounting under U.S. GAAP. The acquired assets and liabilities of GRail were recorded at their acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The foreign exchange rate used to translate the balance sheet to United States dollars was $0.74 for one Australian dollar, the exchange rate on December 1, 2016. The results of operations from GRail have been included in the Company's consolidated statement of operations since the December 1, 2016 acquisition date.
The following acquisition-date fair values were assigned to the acquired net assets (amounts in thousands):
 
 
AUD
 
USD
Accounts receivable
 
A$
1,556

 
$
1,153

Materials and supplies
 
411

 
305

Property and equipment
 
279,592

 
207,206

Goodwill
 
415,959

 
308,267

Intangible assets
 
635,000

 
470,599

Total assets
 
1,332,518

 
987,530

Accounts payable and accrued expenses
 
5,796

 
4,296

Deferred income tax liabilities, net
 
190,551

 
141,217

Net assets
 
A$
1,136,171

 
$
842,017


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The A$635.0 million (or $470.6 million at the exchange rate on December 1, 2016) of fair value assigned to intangible assets relates to an amortizable customer contract associated with the 20-year take-or-pay rail haulage contract with GC. The A$416.0 million (or $308.3 million at the exchange rate on December 1, 2016) of fair value assigned to goodwill will not be deductible for tax purposes.
Pro Forma Financial Results (Unaudited)
The following table summarizes the Company's unaudited pro forma operating results for the nine months ended September 30, 2016 as if the GRail Transactions had been consummated as of January 1, 2015. As such, these results include pro forma results from the GRail Transactions for the period from January 1, 2016 through September 30, 2016. 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 foreign currency or interest rate risk (dollars in thousands, except per share amounts):
 
 
Nine Months Ended
 
 
September 30, 2016
Operating revenues
 
$
1,526,122

Net income attributable to Genesee & Wyoming Inc.
 
$
122,779

Basic earnings per common share
 
$
2.15

Diluted earnings per common share
 
$
2.11

The unaudited pro forma operating results included the acquisition of GRail 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 asset, the inclusion of interest expense related to borrowings used to fund the acquisition, the amortization of debt issuance costs related to the Australian Credit Agreement, noncontrolling interest related to MIRA's 48.9% ownership and the elimination of Australia's interest expense related to debt under the Credit Agreement. Prior to the GRail acquisition, the Company's Australian subsidiary, Freightliner Australia Pty Ltd (FLA), provided rail operator services to GRail, which has been eliminated in the pro forma financial results. Since the pro forma operating results assume the acquisition was consummated on January 1, 2015, the unaudited pro forma operating results for the nine months ended September 30, 2016 excluded $4.6 million ($4.4 million, net of tax) of costs incurred by the Company related to the GRail Transactions.
The unaudited pro forma operating results for the nine months ended September 30, 2016 were based on the Company's consolidated statement of operations and GRail's historical operating results for the nine months ended September 30, 2016. The foreign exchange rate used to translate GRail's 2016 historical operating results to United States dollars was $0.74 for one Australian dollar (which was calculated based on the weighted average monthly exchange rates for the first nine months of 2016).
The pro forma financial information does not purport to be indicative of the results that actually would have been obtained had the GRail Transactions been completed as of January 1, 2015 and for the periods presented and are not intended to be a projection of future results or trends.
Arrium Limited: Between 2011 and 2014, GWA invested a total of $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's Southern Iron mine and 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, while the mines in the Middleback Range continued to operate. 
On April 7, 2016, Arrium announced it had entered into voluntary administration. As a result, the Company recorded a $13.0 million non-cash charge related to the impairment of GWA's now idle rolling-stock maintenance facility, which was recorded to net (gain)/loss on sale and impairment of assets within operating expenses, which represented the entire carrying value of these assets, and an allowance for doubtful accounts charge of $8.1 million associated with accounts receivable from Arrium, which was recorded to other expenses within operating expenses, during the first quarter of 2016. Also, as a result of the voluntary administration, all payments to GWA associated with the Southern Iron rail haulage agreement ceased.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

On August 31, 2017, Arrium was sold to GFG Alliance. The steel making business was rebranded as Liberty OneSteel and the mining business was rebranded as SIMEC Mining. GWA continues to provide service and receive payments under the remaining rail haulage agreement. Pursuant to the rail haulage agreement, GWA serves several iron ore mines in the Middleback Range and the Whyalla steelworks operations, which the Company expects will represent A$40 million (or approximately $32 million at the exchange rate on September 30, 2017) of annual revenue, prospectively.
U.K./European Operations
Pentalver Transport Limited: On May 3, 2017, the Company's subsidiary, GWI UK Acquisition Company Limited, purchased for cash all of the issued share capital of Pentalver Transport Limited (Pentalver) from a subsidiary of APM Terminals (a subsidiary of A P Møller-Maersk A/S) for £97.8 million (or $126.2 million at the exchange rate on May 3, 2017) or £77.5 million (or $100.1 million at the exchange rate on May 3, 2017) net of £20.2 million (or $26.1 million at the exchange rate on May 3, 2017) of cash received in connection with the sale. The Company funded the acquisition with borrowings under the Credit Agreement. The foreign exchange rate used to translate the total consideration to United States dollars was $1.29 for one British pound (GBP).
Headquartered in Southampton, U.K., Pentalver operates off-dock container terminals (most under long-term lease) strategically placed at each of the four major seaports of Felixstowe, Southampton, London Gateway and Tilbury, as well as an inland terminal located at Cannock, in the Midlands, near many of the nation’s largest distribution centers. In addition to providing storage for loaded and empty containers on over 100 acres of land, Pentalver also operates a trucking haulage service with more than 150 trucks, primarily providing daily service between the seaports of Felixstowe and Southampton and its inland terminal at Cannock. Pentalver also provides services related to container maintenance and repair (including refrigerated containers) and is one of the largest sellers of new and used containers in the U.K.
Pentalver’s operations are complementary to those of the Company's Freightliner subsidiary, which is the largest rail maritime intermodal operator in the U.K. The logistics of maritime container transportation in the U.K. are highly competitive, whether by road, rail or short-sea, with a premium placed on timely, efficient and safe service. The Company expects that the Pentalver acquisition will enable it to (i) enhance its U.K. services by providing rail and road transportation solutions, as well as offering storage options at the ports and inland, and (ii) unlock efficiencies from shared services and enhanced asset utilization from Pentalver’s trucking fleet and Freightliner’s existing fleet of approximately 200 trucks that currently provide local collection and delivery haulage from Freightliner’s inland terminals. With approximately 600 employees, Pentalver will operate as part of the Company’s U.K./Europe Region.
The results of operations from Pentalver have been included in the Company's consolidated statement of operations since the May 3, 2017, acquisition date within the Company's U.K./European Operations segment. Pentalver contributed $64.7 million of total revenues and $3.1 million of operating income, which included $2.1 million of depreciation and amortization expense, to the Company's consolidated results since the acquisition date. The Company incurred $3.7 million of acquisition and integration costs related to Pentalver during the nine months ended September 30, 2017, of which $3.6 million was included within other expenses and $0.1 million was included in labor and benefits expense in the Company's consolidated statement of operations.
The Company accounted for the acquisition as a business combination using the acquisition method of accounting under U.S. GAAP. The acquired assets and liabilities of Pentalver were recorded at their preliminary acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The preliminary acquisition date fair values are subject to further adjustment for the final determination of the fair values of the acquired assets and liabilities. The foreign exchange rate used to translate the balance sheet to United States dollars was $1.29 for one British pound.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The preliminary acquisition date fair values were assigned to the acquired net assets as follows (amounts in thousands):
 
 
GBP
 
USD
Cash and cash equivalents
 
£
20,224

 
$
26,117

Accounts receivable
 
16,847

 
21,756

Materials and supplies
 
13,360

 
17,253

Prepaid expenses and other
 
3,238

 
4,182

Property and equipment
 
22,403

 
28,931

Goodwill
 
9,368

 
12,098

Intangible assets
 
41,000

 
52,947

Total assets
 
126,440

 
163,284

Accounts payable and accrued expenses
 
21,214

 
27,396

Deferred income tax liabilities, net
 
6,876

 
8,880

Deferred items-grants from outside parties
 
601

 
776

Net assets
 
£
97,749

 
$
126,232

The $52.9 million of intangible assets relate to amortizable operational rights with contractual terms spanning up to 50 years and a weighted average amortization period of 33 years. The $12.1 million of goodwill will not be deductible for tax purposes.
Continental Europe Intermodal Business: During 2016, the Company explored ways to enhance the long-term viability of ERS Railways B.V. (ERS), the Continental Europe intermodal business Freightliner acquired from Maersk, which the Company acquired in 2015 with the Freightliner acquisition. Due to its limited history of profitability and competitive dynamics in the market in which it operates, the Company ascribed little value to it at the time of acquisition.
Despite a significant and focused effort by the Company, the performance of ERS reached unsustainable levels during 2016 and a restructuring plan was initiated. In conjunction with that plan, in 2017, the Company ceased all "open" train services from the port of Rotterdam, closed the ERS offices in Rotterdam and Frankfurt and the ERS customer services function in Warsaw. The Company is in the process of redistributing ERS’s leased locomotives and railcars, which have lease termination dates ranging from 2017 to 2019. These steps will enable the Company to focus on the deep sea intermodal sector. The Company's subsidiary, Rotterdam Rail Feeding B.V., will continue its existing services and not be affected by the restructuring of ERS.
As a result of the ERS restructuring plan, the Company recorded impairment and related charges of $21.5 million in December 2016. These charges primarily included $14.5 million for an impairment of goodwill and $4.1 million for an impairment of a customer-related intangible asset, which were both recorded to net (gain)/loss on sale and impairment of assets within operating expenses, which represented the entire carrying value of these assets. For the nine months ended September 30, 2017, the Company recorded $5.2 million of restructuring costs related to ERS, primarily for severance costs and costs associated with surplus locomotive and railcar leases.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

3. EARNINGS PER COMMON SHARE:
The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2017 and 2016 (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income attributable to Genesee & Wyoming Inc.
$
50,240

 
$
56,785

 
$
122,485

 
$
132,203

Denominators:
 
 
 
 
 
 
 
Weighted average Class A common shares outstanding – Basic
61,629

 
57,266

 
61,518

 
57,160

Weighted average Class B common shares outstanding
723

 
793

 
743

 
793

Dilutive effect of employee stock-based awards
125

 
121

 
138

 
130

Weighted average shares – Diluted
62,477

 
58,180

 
62,399

 
58,083

 
 
 
 
 
 
 
 
Earnings per common share attributable to Genesee & Wyoming Inc. common stockholders:
 
 
 
 
 
 
 
Basic earnings per common share
$
0.82

 
$
0.99

 
$
1.99

 
$
2.31

Diluted earnings per common share
$
0.80

 
$
0.98

 
$
1.96

 
$
2.28

The Company's weighted average basic shares outstanding for the three and nine months ended September 30, 2017 included 4,000,000 shares as a result of the Company's public offering of Class A Common Stock on December 13, 2016.
The following total number of shares of Class A Common Stock 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Antidilutive shares
1,245

 
1,174

 
1,302

 
1,292

4. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
September 30,
2017
 
December 31,
2016
Accounts receivable – trade
$
407,305

 
$
353,347

Accounts receivable – grants from outside parties
12,178

 
10,652

Accounts receivable – insurance and other third-party claims
9,302

 
11,994

Total accounts receivable
428,785

 
375,993

Less: Allowance for doubtful accounts
(12,983
)
 
(12,070
)
Accounts receivable, net
$
415,802

 
$
363,923

The Company's trade accounts receivable balance as of September 30, 2017 included $27.3 million from the newly acquired Pentalver business. See Note 2, Changes in Operations, for additional information regarding the Pentalver acquisition.

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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 $16.0 million and $30.0 million for the nine months ended September 30, 2017 and 2016, 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, or fails to comply with other grant provisions in each case, as set forth 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 nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Amortization of deferred grants
$
2,978

 
$
4,652

 
$
9,287

 
$
10,513

Insurance and Third-Party Claims
Accounts receivable from insurance and other third-party claims as of September 30, 2017 included $4.5 million from the Company's North American Operations, $4.4 million from the Company's U.K./European Operations and $0.4 million from the Company's Australian Operations. The balance from the Company's North American Operations resulted predominately from the Company's anticipated insurance recoveries associated with a 2015 trestle fire in the United States and derailments in Canada. The balance from the Company's U.K./European Operations resulted primarily from the Company's anticipated insurance recoveries associated with a pre-acquisition rail-related collision in Germany in 2014. The Company received proceeds from insurance totaling $1.4 million and $10.3 million for the nine months ended September 30, 2017 and 2016, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

5. GOODWILL:
The changes in the carrying amount of goodwill for the nine months ended September 30, 2017 and for the year ended December 31, 2016 were as follows (dollars in thousands): 
 
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total Operations
Balance as of January 1, 2017:
 
 
 
 
 
 
 
 
Goodwill, gross
 
$
632,937

 
$
339,865

 
$
167,276

 
$
1,140,078

Accumulated impairment losses
 

 

 
(14,482
)
 
(14,482
)
Goodwill
 
$
632,937

 
$
339,865

 
$
152,794

 
$
1,125,596

Changes during the period:
 
 
 
 
 
 
 
 
Goodwill acquired
 
4,083

 

 
11,849

 
15,932

Acquisition accounting adjustments
 
42

 

 

 
42

Currency translation adjustment
 
1,690

 
28,772

 
15,157

 
45,619

Balance as of September 30, 2017:
 
 
 
 
 
 
 
 
Goodwill, gross
 
$
638,752

 
$
368,637

 
$
194,282

 
$
1,201,671

Accumulated impairment losses
 

 

 
(14,482
)
 
(14,482
)
Goodwill
 
$
638,752

 
$
368,637

 
$
179,800

 
$
1,187,189

 
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total Operations
Balance as of January 1, 2016
 
$
605,234

 
$
39,312

 
$
182,029

 
$
826,575

Changes during the period:
 
 
 
 
 
 
 
 
Goodwill acquired
 
26,969

 
308,267

 

 
335,236

Acquisition accounting adjustments
 
176

 
168

 
9,736

 
10,080

Goodwill impairment
 

 

 
(14,482
)
 
(14,482
)
Currency translation adjustment
 
558

 
(7,882
)
 
(24,489
)
 
(31,813
)
Balance as of December 31, 2016:
 
 
 
 
 
 
 
 
Goodwill, gross
 
$
632,937

 
$
339,865

 
$
167,276

 
$
1,140,078

Accumulated impairment losses
 

 

 
(14,482
)
 
(14,482
)
Goodwill
 
$
632,937

 
$
339,865

 
$
152,794

 
$
1,125,596

The acquired goodwill for the nine months ended September 30, 2017 was related to the acquisitions of Pentalver in our U.K./European Operations segment and HOG in our North American Operations segment. The acquired goodwill for the year ended December 31, 2016 was related to the acquisitions of P&W in our North American Operations segment and GRail in our Australian Operations segment. See Note 2, Changes in Operations, for additional information regarding the P&W, GRail, Pentalver and HOG acquisitions.
The goodwill impairment recorded for the year ended December 31, 2016 resulted from the write-off of goodwill ascribed to the Company's ERS business within its U.K./European Operations segment. See Note 2, Changes in Operations, for additional information regarding ERS.
6. LONG-TERM DEBT:
Credit Agreement
The Company made scheduled quarterly principal payments under its Credit Agreement of $5.2 million on its United States term loan and £3.8 million (or $4.9 million at the exchange rate on the dates the payments were made) on its U.K. term loan during the nine months ended September 30, 2017. During the nine months ended September 30, 2017, the Company also made prepayments on its United States term loan of $159.8 million. Since the Company applied all of its prepayments on the term loan to its quarterly installments, the Company's remaining principal balance of $1.3 billion will be due at maturity on March 31, 2020.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The British pound-denominated term loans began to amortize in quarterly installments during the three months ended September 30, 2016, with the remaining principal balance payable upon maturity, as set forth below (amounts in thousands):
 
 
Quarterly Payment Date
 
Principal Amount Due on Each Payment Date
British pound:
 
December 31, 2017 through June 30, 2018
 
£
1,271

 
 
September 30, 2018 through December 31, 2019
 
£
2,542

 
 
Maturity date - March 31, 2020
 
£
75,532

As of September 30, 2017, the Company had the following outstanding term loans under its Credit Agreement (amounts in thousands, except percentages):
 
 
Local Currency
 
United States Dollar Equivalent
 
Interest Rate
United States dollar
 
$
1,263,000

 
$
1,263,000

 
2.99
%
British pound
 
£
94,597

 
$
126,694

 
2.00
%
The Company's availability to draw from the unused borrowing capacity is subject to covenant limitations. As of September 30, 2017, the Company had the following unused borrowing capacity under its revolving credit facility (dollars in thousands):
 
 
2017
Total available borrowing capacity
 
$
625,000

Outstanding revolving loans
 
$
225,960

Outstanding letter of credit guarantees
 
$
2,747

Unused borrowing capacity
 
$
396,293

As of September 30, 2017, the Company had the following outstanding revolving loans under its revolving credit facility (amounts in thousands, except percentages):
 
 
Local Currency
 
United States Dollar Equivalent
 
Interest Rate
British pound (swingline loan)
 
£
5,500

 
$
7,366

 
1.97
%
British pound
 
£
134,000

 
$
179,466

 
2.00
%
Canadian dollar
 
C$
7,000

 
$
5,608

 
3.07
%
Euro
 
28,400

 
$
33,520

 
1.75
%
As of September 30, 2017, the Company was in compliance with the covenants under the Credit Agreement, as amended.
7. 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, accrued expenses or other long-term liabilities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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.
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 (amounts in thousands):
 
 
 
 
Notional Amount
 
 
 
 
Effective Date
 
Expiration Date
 
Date
 
Amount
 
Pay Fixed Rate
 
Receive Variable Rate
9/30/2016
 
9/30/2026
 
9/30/2026
 
$
100,000

 
2.76%
 
1-month LIBOR
9/30/2016
 
9/30/2026
 
9/30/2026
 
$
100,000

 
2.74%
 
1-month LIBOR
9/30/2016
 
9/30/2026
 
9/30/2026
 
$
100,000

 
2.73%
 
1-month LIBOR
12/1/2016
 
12/1/2021
 
12/1/2021
 
A$
93,150

 
2.44%
 
AUD-BBR
12/1/2016
 
12/1/2021
 
12/1/2021
 
A$
93,150

 
2.44%
 
AUD-BBR
12/1/2016
 
12/1/2021
 
12/1/2021
 
A$
93,150

 
2.44%
 
AUD-BBR
12/1/2016
 
12/1/2021
 
12/1/2021
 
A$
93,150

 
2.44%
 
AUD-BBR
12/1/2016
 
12/1/2021
 
12/1/2021
 
A$
55,373

 
2.44%
 
AUD-BBR
12/1/2016
 
12/1/2021
 
12/1/2021
 
A$
55,373

 
2.44%
 
AUD-BBR
12/1/2016
 
12/1/2021
 
12/1/2021
 
A$
34,155

 
2.44%
 
AUD-BBR

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

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. On September 30, 2016, the Company amended its forward starting swaps, which included moving the mandatory settlement date from September 30, 2016 to September 30, 2026, changing from 3-month LIBOR to 1-month LIBOR and adjusting the fixed rate. The amended forward starting swaps continue to qualify for hedge accounting. In addition, 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 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 nine months ended September 30, 2017 and 2016 resulted in no amount of gain or loss reclassified from accumulated other comprehensive loss into earnings due to ineffectiveness. During the three and nine months ended September 30, 2017, $0.6 million and $1.5 million, respectively, of existing net losses were realized and recorded as interest expense in the consolidated statements of operations. During the three and nine months ended September 30, 2016, $0.4 million and $1.1 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 September 30, 2017, it expects to realize $2.0 million of existing net losses that are reported in accumulated other comprehensive loss into earnings within the next 12 months. See Note 12, Accumulated Other Comprehensive Loss, for additional information regarding the Company's cash flow hedges.
Foreign Currency Exchange Rate Risk
As of September 30, 2017, the Company's foreign subsidiaries had $1.1 billion 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, including non-functional currency intercompany debt, typically 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/(loss), net.
On March 25, 2015, the Company closed on the Freightliner acquisition and paid cash consideration 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 September 30, 2017 of £19.6 million (or $26.2 million at the exchange rate on September 30, 2017), 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 nine months ended September 30, 2017 and 2016 resulted in no amount of gain or loss reclassified from accumulated other comprehensive loss into earnings due to ineffectiveness. During the three and nine months ended September 30, 2017, $0.1 million and $0.4 million, respectively, of net gains were recorded as interest income in the consolidated statements of operations. During the three and nine months ended September 30, 2016, $0.3 million and $0.5 million, respectively, of net gains were recorded as interest income in the consolidated statements of operations. Based on the Company's fair value assumptions as of September 30, 2017, it expects to realize $0.6 million of existing net gains that are reported in accumulated other comprehensive loss into earnings within the next 12 months. See Note 12, Accumulated Other Comprehensive Loss, for additional information regarding the Company's cash flow hedges.
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
 
1.51
3/25/2015
 
3/31/2020
 
£60,000
 
1.50
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
9/30/2016
 
3/31/2020
 
£1,959
 
1.33
12/30/2016
 
3/31/2020
 
£1,989
 
1.28
3/31/2017
 
3/31/2020
 
£1,975
 
1.30
6/30/2017
 
3/31/2020
 
£2,026
 
1.34
10/2/2017
 
3/31/2020
 
£2,079
 
1.36
On December 1, 2016, GWAHLP and the Company's subsidiary, GWI Holding B.V. (GWBV), entered into an A$248.9 million non-recourse subordinated partner loan agreement (GRail Intercompany Loan), which is eliminated in consolidation. GWBV used the proceeds from this loan to fund a portion of the acquisition of GRail. To mitigate the foreign currency exchange rate risk related to the non-functional currency intercompany loan, the Company entered into two Euro/Australian dollar floating-to-floating cross-currency swap agreements (the Swaps) on December 22, 2016, which effectively convert the A$248.9 million intercompany loan receivable in the Netherlands into a €171.7 million loan receivable. These agreements do not qualify as hedges for accounting purposes and, accordingly, mark-to-market changes in the fair value of the Swaps relative to the underlying GRail Intercompany Loan will be recorded over the life of the agreements, which expire on June 30, 2019. The first swap requires the Company to pay Australian dollar BBR plus 4.50% based on a notional amount of A$123.9 million and allows the Company to receive EURIBOR plus 2.68% based on a notional amount of €85.5 million on a semi-annual basis. EURIBOR is the Euro Interbank Offered Rate, which the Company believes is generally considered the Euro equivalent to LIBOR. The second swap requires the Company to pay Australian dollar BBR plus 4.50% based on a notional amount of A$125.0 million and allows the Company to receive EURIBOR plus 2.90% based on a notional amount of €86.3 million on a semi-annual basis. The Swaps require semi-annual net settlement payments beginning on December 31, 2017. The Company realized a net expense of $1.9 million within interest expense for the three and nine months ended September 30, 2017, associated with the Swaps. As a result of the mark-to-market impact of the GRail Intercompany Loan compared to the mark-to-market of the Swaps, the Company realized a net expense of $0.8 million and $4.5 million within other (loss)/income, net for the three and nine months ended September 30, 2017, respectively. Over the life of the Swaps, the Company expects the cumulative impact of net gains and losses from the mark-to-market of the GRail Intercompany Loan and Swaps to be approximately zero.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the fair value of the Company's derivative instruments recorded in the consolidated balance sheets as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
Fair Value
 
Balance Sheet Location
 
September 30,
2017
 
December 31, 2016
Asset Derivatives:
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
British pound forward contracts
Other assets
 
$
16,017

 
$
26,359

Total derivatives designated as hedges
 
 
$
16,017

 
$
26,359

Derivatives not designated as hedges:
 
 
 
 
 
Cross-currency swap contract
Prepaid expenses and other
 
$
1,259

 
$
174

Cross-currency swap contract
Other assets
 
944

 
506

Total derivatives not designated as hedges
 
 
$
2,203

 
$
680

 
 
 
 
 
 
Liability Derivatives:
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
Interest rate swap agreements
Accrued expenses
 
$
2,005

 
$
1,747

Interest rate swap agreements
Other long-term liabilities
 
15,425

 
13,411

British pound forward contracts
Other long-term liabilities
 
568

 
17

Total derivatives designated as hedges
 
 
$
17,998

 
$
15,175

The change in the British pound forward contracts was primarily driven by the change in the foreign currency exchange rates during the period.
The following table shows the effect of the Company's derivative instruments designated as cash flow hedges for the three and nine months ended September 30, 2017 and 2016 in other comprehensive income (OCI) (dollars in thousands):
 
 
Total Cash Flow Hedge OCI Activity,
Net of Tax
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Derivatives Designated as Cash Flow Hedges:
 
 
 
 
 
 
 
 
Effective portion of net changes in fair value recognized in OCI, net of tax:
 
 
 
 
 
 
 
 
Interest rate swap agreements
 
$
388

 
$
(1,414
)
 
$
(1,382
)
 
$
(15,780
)
British pound forward contracts, net (a)
 
348

 
(713
)
 
2,020

 
(2,584
)
 
 
$
736

 
$
(2,127
)
 
$
638

 
$
(18,364
)
(a)
The three and nine months ended September 30, 2017 represents a net gain of $3.2 million and $8.6 million, respectively, for the mark-to-market of the U.K. intercompany loan, partially offset by a net loss of $2.8 million and $6.6 million, respectively, for the mark-to-market of the British pound forward contracts. The three and nine months ended September 30, 2016 represents a net loss of $2.3 million and $13.7 million, respectively, for the mark-to-market of the U.K. intercompany loan, partially offset by a net gain of $1.6 million and $11.1 million, respectively, for the mark-to-market of the British pound forward contracts.

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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 nine months ended September 30, 2017 and 2016 in the consolidated statements of operations (dollars in thousands):
 
 
 
 
Amount Recognized in Earnings
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Location of Amount Recognized in Earnings
 
September 30,
 
September 30,
 
 
 
2017
 
2016
 
2017
 
2016
Derivative Instruments Not Designated as Hedges:
 
 
 
 
 
 
 
 
 
 
Cross-currency swap agreements
 
Interest expense
 
$
(1,887
)
 
$

 
$
(1,887
)
 
$

Cross-currency swap agreements, net (a)
 
Other income/(loss), net
 
(842
)
 

 
(4,510
)
 

 
 
 
 
$
(2,729
)
 
$

 
$
(6,397
)
 
$

(a)
The three months ended September 30, 2017 represents a net gain of $1.7 million for the mark-to-market of the Swaps, partially offset by a net loss of $2.5 million for the mark-to-market of the GRail Intercompany Loan. The nine months ended September 30, 2017 represents a net gain of $2.0 million for the mark-to-market of the Swaps and a net loss of $6.5 million for the mark-to-market of the GRail Intercompany Loan.
8. 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, foreign currency forward contracts and cross-currency swap agreements. The Company estimated the fair value of its interest rate swap agreements based on Level 2 valuation inputs, including fixed interest rates, LIBOR and BBR 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 estimated the fair value of its cross-currency swap agreements based on Level 2 valuation inputs, including EURIBOR implied forward interest rates, BBR implied forward interest rates and the remaining time to maturity.
The Company's recurring fair value measurements using significant unobservable inputs (Level 3) relate to the Company's deferred consideration from the Freightliner acquisition in 2015 and from the HOG acquisition in 2017. The fair value of the deferred consideration liabilities were 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table presents the Company's financial instruments carried at fair value using Level 2 inputs as of September 30, 2017 and December 31, 2016 (dollars in thousands):
 
September 30,
2017
 
December 31,
2016
Financial instruments carried at fair value using Level 2 inputs:
 
 
 
Financial assets carried at fair value:
 
 
 
British pound forward contracts
$
16,017

 
$
26,359

Cross-currency swap contracts
2,203

 
680

Total financial assets carried at fair value
$
18,220

 
$
27,039

Financial liabilities carried at fair value:
 
 
 
Interest rate swap agreements
$
17,430

 
$
15,158

British pound forward contracts
568

 
17

Total financial liabilities carried at fair value
$
17,998

 
$
15,175

The following table presents the Company's financial instruments carried at fair value using Level 3 inputs as of September 30, 2017 and December 31, 2016 (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
 
Local Currency
 
United States Dollar Equivalent
 
Local Currency
 
United States Dollar Equivalent
Financial instrument carried at fair value using Level 3 inputs:
 
 
 
 
 
 
 
Financial liabilities carried at fair value:
 
 
 
 
 
 
 
Accrued deferred consideration - Freightliner
£
27,755

 
$
37,172

 
£
25,882

 
$
31,933

Accrued deferred consideration - HOG
$
5,842

 
$
5,842

 
$

 
$

At the date of acquisition of Freightliner in 2015, the 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.
At the date of acquisition of HOG in 2017, the contingent liability represented the fair value of the deferred consideration payable to the sellers upon satisfaction of certain conditions, which the Company expects to be paid in 2021. See Note 2, Changes in Operations, for additional information regarding HOG.
The Company's contingent liabilities are 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. In addition, the Company recalculates the HOG's deferred consideration based on the contractual formula as defined in the stock purchase agreement. These calculations effectively represent 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. The Company expects to recognize future changes in the contingent liabilities 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.

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

The following table presents the amounts recognized, through other expenses, within the Company's consolidated statements of operations during the three and nine months ended September 30, 2017 and 2016 as a result of the change in the estimated fair value of the deferred consideration, which primarily represented the time value of money (dollars in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2017
 
2016
 
2017
 
2016
Freightliner
 
$
859

 
$
933

 
$
2,405

 
$
2,015

HOG
 
$
126

 
$

 
$
166

 
$

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 September 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial liabilities carried at historical cost:
 
 
 
 
 
 
 
 
United States term loan
 
$
1,253,776

 
$
1,259,935

 
$
1,415,873

 
$
1,422,512

U.K. term loan
 
124,859

 
127,114

 
121,149

 
121,594

Australian Credit Agreement
 
517,696

 
534,317

 
484,703

 
501,909

Partner Loan Agreement
 
186,729

 
187,999

 
172,154

 
171,435

Revolving credit facility
 
222,093

 
227,103

 
74,297

 
81,192

Other debt
 
2,900

 
2,918

 
4,882

 
4,889

Total
 
$
2,308,053

 
$
2,339,386

 
$
2,273,058

 
$
2,303,531

9. 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.
The following tables summarize the components of the Pension Program related to the net benefit costs recognized in labor and benefits in the Company's consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
Three Months Ended September 30,
 
2017
 
2016
 
GBP
 
USD
 
GBP
 
USD
Service cost
£
2,988

 
$
3,909

 
£
2,394

 
$
3,143

Interest cost
1,978

 
2,588

 
2,227

 
2,923

Expected return on plan assets
(3,307
)
 
(4,327
)
 
(2,846
)
 
(3,737
)
Net periodic benefit cost
£
1,659

 
$
2,170

 
£
1,775

 
$
2,329


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


 
Nine Months Ended September 30,
 
2017
 
2016
 
GBP
 
USD
 
GBP
 
USD
Service cost
£
8,964

 
$
11,434

 
£
7,182

 
$
10,006

Interest cost
5,934

 
7,569

 
6,681

 
9,308

Expected return on plan assets
(9,921
)
 
(12,655
)
 
(8,538
)
 
(11,896
)
Net periodic benefit cost
£
4,977

 
$
6,348

 
£
5,325

 
$
7,418

During the nine months ended September 30, 2017, the Company contributed £4.5 million (or $6.0 million at the September 30, 2017 exchange rate) to fund the Pension Program. The Company expects to contribute £2.6 million (or $3.5 million at the September 30, 2017 exchange rate) to the Pension Program for the remainder of 2017. The Pension Program's assets may undergo significant changes over time as a result of market conditions, and its assets and liabilities are formally valued on an independent actuarial basis every three years to assess the adequacy of funding levels. A key element of the valuation process is an assessment of the creditworthiness of the participating employer. This valuation process is currently underway for the three year period that ended December 31, 2016. 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 could not be shared with active members. Currently, the Company has no intention of terminating the Pension Program.
10. INCOME TAXES:
The Company's effective income tax rate for the three months ended September 30, 2017 was 36.4%, compared with 25.7% for the three months ended September 30, 2016. The Company's effective income tax rate for the nine months ended September 30, 2017 was 38.9%, compared with 29.2% for the nine months ended September 30, 2016. The higher effective income tax rate for the three and nine months ended September 30, 2017 was primarily driven by an income tax benefit of $7.8 million and $21.4 million recorded in the three and nine months ended September 30, 2016, respectively, associated with the now expired United States Short Line Tax Credit. The three and nine months ended September 30, 2017 also included the recognition of $3.3 million of previously unrecognized tax benefits resulting from the lapse of the statute of limitations on acquired liabilities for uncertain tax positions and tax provisions of $1.4 million and $1.3 million, respectively, related to enacted state income tax rate changes.
The Company's provision for income taxes for the three and nine months ended September 30, 2016 included a $4.3 million income tax benefit as a result of the Company remeasuring its deferred income tax assets and liabilities in the U.K. based on the enacted change to the corporate income tax rate by the U.K. government that will apply when the temporary differences are expected to be realized or settled. The Company's provision for income taxes for the nine months ended September 30, 2016 included the recording of 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 that was formerly used in connection with the Southern Iron rail haulage agreement with Arrium (see Note 2, Changes in Operations).
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 United States Short Line Tax Credit was initially enacted for a three year period, 2005 through 2007, and subsequently extended on a retroactive basis. This pattern was repeated a series of times, with the last extension expiring on December 31, 2016.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

11. 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. However, any material changes to pending litigation or a catastrophic rail accident or series of accidents involving material freight loss or property damage, personal injuries or environmental liability or other claims or disputes that are not covered by insurance could have a material adverse effect on the Company's results of operations, financial condition and liquidity.
In November 2014, the Company received a notice from the United States Environmental Protection Agency (EPA) requesting information under the Clean Water Act related to the discharge of crude oil as a result of a derailment of an Alabama & Gulf Coast Railway LLC (AGR) freight train in November 2013 in the vicinity of Aliceville, Alabama. A fine associated with the contamination has not yet been assessed and is not estimable.
The Company is also involved in several arbitrations related to contractual disputes that are not covered by insurance. In March 2017, CSX Transportation, Inc. (CSXT) initiated arbitration against several of the Company’s subsidiaries associated with freight revenue factors (or divisions) under certain operating agreements associated with leased railroads. CSXT is seeking to reduce certain of the Company's freight revenue factors for the time period after August 21, 2016. The Company believes it has meritorious defenses against the CSXT claims. In an unrelated matter, on May 3, 2017, the AGR initiated arbitration related to the collection of approximately $13 million of outstanding liquidated damages under a volume commitment (or take-or-pay) contract with a customer. The Company believes it will prevail in the collection of the outstanding liquidated damages. Although the Company expects to attain successful outcomes in each of these matters, arbitration is inherently uncertain and it is possible that an unfavorable ruling could have an 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 and the aforementioned arbitrations. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or arbitration would be material to the Company's results of operations or have a material adverse effect on the Company's financial position or liquidity.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

12. ACCUMULATED OTHER COMPREHENSIVE LOSS:
The following tables set forth the components of accumulated other comprehensive loss attributable to Genesee & Wyoming Inc. 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, 2016
$
(177,662
)
 
$
(19,948
)
 
$
(13,726
)
 
$
(211,336
)
Other comprehensive income/(loss) before reclassifications
81,412

 
(2,262
)
 
(7,003
)
 
72,147

Amounts reclassified from accumulated other comprehensive loss, net of tax (provision) of ($60) and ($5,347), respectively

 
113

(a)
7,937

(b)
8,050

Current period change
81,412

 
(2,149
)
 
934

 
80,197

Balance, September 30, 2017
$
(96,250
)
 
$
(22,097
)
 
$
(12,792
)
 
$
(131,139
)
 
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 income/(loss) before reclassifications
3,618

 
4,305

 
(4,349
)
 
3,574

Amounts reclassified from accumulated other comprehensive loss, net of tax (provision)/benefit of ($37) and $9,343 respectively

 
67

(a)
(14,015
)
(b)
(13,948
)
Current period change
3,618

 
4,372

 
(18,364
)
 
(10,374
)
Balance, September 30, 2016
$
(152,528
)
 
$
15,377

 
$
(26,680
)
 
$
(163,831
)
(a)
Existing net gains realized were recorded in labor and benefits on the consolidated statements of operations.
(b)
Existing net gains/(losses) realized were recorded in interest expense on the consolidated statements of operations (see Note 7, Derivative Financial Instruments).
Comprehensive Income Attributable to Noncontrolling Interest
As discussed in Note 2, Changes in Operations, the Company began presenting noncontrolling interest as a result of the GRail transaction on December 1, 2016. The following table sets forth comprehensive income attributable to noncontrolling interest for the three and nine months ended September 30, 2017 (dollars in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
Net income attributable to noncontrolling interest
 
$
3,145

 
$
6,317

Other comprehensive income/(loss):
 
 
 
 
Foreign currency translation adjustment
 
4,972

 
18,642

Net unrealized gain/(loss) on qualifying cash flow hedges, net of tax (provision)/benefit of ($164) and $127, respectively


 
383

 
(296
)
Comprehensive income attributable to noncontrolling interest
 
$
8,500

 
$
24,663


27

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

13. STOCKHOLDERS' EQUITY:
The following table reconciles the beginning and end of the period equity balance attributable to Genesee & Wyoming Inc. and to noncontrolling interest (dollars in thousands):
 
Genesee & Wyoming Inc. Stockholders' Equity
 
Noncontrolling Interest
 
Total Equity
Balance, December 31, 2016
$
2,894,582

 
$
292,539

 
$
3,187,121

Net income
122,485

 
6,317

 
128,802

Other comprehensive income
80,197

 
18,346

 
98,543

Additional paid-in capital from stock-based compensation awards
22,050

 

 
22,050

Treasury stock purchases
(3,275
)
 

 
(3,275
)
Other
444

 
(6
)
 
438

Balance, September 30, 2017
$
3,116,483

 
$
317,196

 
$
3,433,679

14. SIGNIFICANT NON-CASH INVESTING AND FINANCING ACTIVITIES:
As of September 30, 2017 and 2016, the Company had outstanding accounts receivable from outside parties for the funding of capital expenditures of $12.2 million and $10.8 million, respectively. As of September 30, 2017 and 2016, the Company also had $12.3 million and $14.9 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.
15. SEGMENT INFORMATION:
The Company presents the financial results of its nine operating regions as three reportable segments: North American Operations, Australian Operations and U.K./European Operations. The Company owns a 51.1% controlling interest in the Australian Operations. As such, the Company includes 100% of the revenues and expenses from its Australian Operations within its consolidated financial statements and reports a noncontrolling interest for MIRA’s 48.9% equity ownership. 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 seven North American regions are aggregated into one reportable segment as a result of having similar economic and operating characteristics. During the third quarter of 2017, the Company's Mountain West Region railroads were consolidated into the Company's Central and Pacific regions, and the Pacific Region was renamed the Western Region. This consolidation reduced the Company's number of operating regions from ten to nine.
The results of operations of the Company's 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.

28

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

The following tables reflect the balance sheet exchange rates as of September 30, 2017 and December 31, 2016 and the average exchange rates for the three and nine months ended September 30, 2017 and 2016 used to translate the foreign entities respective local currency balance sheet and results of operations into United States dollars for the respective period:
 
 
 
 
 
September 30,
2017
 
December 31,
2016
United States dollar per Australian dollar
 
 
 
 
$
0.78

 
$
0.72

United States dollar per British pound
 
 
 
 
$
1.34

 
$
1.23

United States dollar per Canadian dollar
 
 
 
 
$
0.80

 
$
0.74

United States dollar per Euro
 
 
 
 
$
1.18

 
$
1.06

 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
United States dollar per Australian dollar
$
0.79

 
$
0.76

 
$
0.77

 
$
0.74

United States dollar per British pound
$
1.31

 
$
1.31

 
$
1.28

 
$
1.39

United States dollar per Canadian dollar
$
0.80

 
$
0.77

 
$
0.77

 
$
0.76

United States dollar per Euro
$
1.17

 
$
1.12

 
$
1.11

 
$
1.12

The following tables set forth select financial data for the Company's reportable segments for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30, 2017
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues
$
242,968

 
$
66,404

 
$
91,363

 
$
400,735

Freight-related revenues
60,286

 
12,880

 
67,757

 
140,923

All other revenues
15,673

 
1,986

 
17,610

 
35,269

Total operating revenues
$
318,927

 
$
81,270

 
$
176,730

 
$
576,927

Operating income
$
82,111

 
$
22,276

 
$
7,102

 
$
111,489

Depreciation and amortization
$
40,036

 
$
15,753

 
$
8,433

 
$
64,222

Interest expense, net
$
9,817

 
$
13,678

 
$
4,323

 
$
27,818

Provision for income taxes
$
28,270

 
$
2,013

 
$
224

 
$
30,507

Expenditures for additions to property & equipment, net of grants from outside parties
$
41,713

 
$
4,545

 
$
6,981

 
$
53,239

 
Three Months Ended September 30, 2016
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues
$
232,247

 
$
29,219

 
$
88,341

 
$
349,807

Freight-related revenues
62,124

 
23,523

 
43,873

 
129,520

All other revenues
15,823

 
1,408

 
4,444

 
21,675

Total operating revenues
$
310,194

 
$
54,150

 
$
136,658

 
$
501,002

Operating income
$
87,153

 
$
4,372

 
$
326

 
$
91,851

Depreciation and amortization
$
37,085

 
$
7,129

 
$
6,627

 
$
50,841

Interest expense, net
$
9,600

 
$
2,170

 
$
5,147

 
$
16,917

Provision for/(benefit from) income taxes
$
22,392

 
$
798

 
$
(3,547
)
 
$
19,643

Expenditures for additions to property & equipment, net of grants from outside parties
$
30,343

 
$
2,440

 
$
9,457

 
$
42,240


29

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

 
Nine Months Ended September 30, 2017
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues
$
719,622

 
$
191,031

 
$
250,982

 
$
1,161,635

Freight-related revenues
186,814

 
36,089

 
164,978

 
387,881

All other revenues
47,641

 
4,866

 
34,445

 
86,952

Total operating revenues
$
954,077

 
$
231,986

 
$
450,405

 
$
1,636,468

Operating income
$
229,267

 
$
59,685

 
$
1,331

 
$
290,283

Depreciation and amortization
$
117,822

 
$
45,915

 
$
22,772

 
$
186,509

Interest expense, net
$
29,928

 
$
41,500

 
$
7,732

 
$
79,160

Provision for/(benefit from) income taxes
$
78,133

 
$
4,805

 
$
(906
)
 
$
82,032

Expenditures for additions to property & equipment, net of grants from outside parties
$
105,940

 
$
9,721

 
$
17,446

 
$
133,107

 
Nine Months Ended September 30, 2016
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
Freight revenues
$
681,154

 
$
80,390

 
$
255,459

 
$
1,017,003

Freight-related revenues
184,627

 
76,142

 
135,897

 
396,666

All other revenues
48,766

 
4,699

 
17,859

 
71,324

Total operating revenues
$
914,547

 
$
161,231

 
$
409,215

 
$
1,484,993

Operating income/(loss)
$
236,154

 
$
2,002

 
$
(2,115
)
 
$
236,041

Depreciation and amortization
$
110,398

 
$
21,018

 
$
19,679

 
$
151,095

Interest expense, net
$
29,730

 
$
6,963

 
$
15,529

 
$
52,222

Provision for/(benefit from) income taxes
$
59,354

 
$
521

 
$
(5,312
)
 
$
54,563

Expenditures for additions to property & equipment, net of grants from outside parties
$
95,282

 
$
8,094

 
$
26,195

 
$
129,571

The following tables set forth select balance sheet data for the Company's reportable segments as of September 30, 2017 and December 31, 2016 (dollars in thousands): 
 
September 30, 2017
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Cash and cash equivalents
$
7,158

 
$
47,989

 
$
25,130

 
$
80,277

Property and equipment, net
$
3,626,293

 
$
670,160

 
$
332,441

 
$
4,628,894

 
December 31, 2016
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Operations
Cash and cash equivalents
$
10,137

 
$
9,213

 
$
12,969

 
$
32,319

Property and equipment, net
$
3,590,625

 
$
634,148

 
$
278,546

 
$
4,503,319


30

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

16. RECENTLY ISSUED ACCOUNTING STANDARDS:
Accounting Standards Not Yet Effective
In May 2014, the FASB issued 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 collectibility criterion. In December 2016, the FASB issued ASU 2016-20, which provides additional clarification on contract costs, modifications and disclosures.
These new standards will become effective for the Company on January 1, 2018, and the Company plans to adopt them using the modified retrospective basis, which will result in the cumulative effect of initially applying the standards being recognized as an adjustment to opening retained earnings at January 1, 2018. The Company is currently assessing the impact of adopting this guidance for its existing portfolio of open customer contracts and will continue to assess new contracts entered into prior to the adoption of the new standard. Under the new standard, the Company will continue to recognize freight revenue over time as shipments move from origin to destination, freight-related revenues and all other revenues will continue to be recognized as services are performed. For contracts that include variable consideration, the Company will be required to assess the variable consideration and recognize revenue based on estimates throughout the applicable periods. Based on its current assessment, the Company does not expect the adoption of this guidance to have a material change to its revenue recognition, although additional disclosures will be required to help users of the financial statements understand the nature, amount and timing of revenue and cash flows arising from the Company’s contracts with customers.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value, with subsequent changes in fair value recognized in net income. The amendments also impact certain disclosure requirements for financial instruments. The amendments will become effective for the Company beginning January 1, 2018. The Company does not expect the adoption of this guidance to have a material impact 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. Additional qualitative and quantitative disclosures, including significant judgments made by management, will also be required. The new standard will become effective for the Company beginning January 1, 2019, and will require a modified retrospective transition approach resulting in the recognition of leases as of January 1, 2017 and the retrospective adjustment of the financial statements for 2017 and 2018 when presented for comparative purposes. Early application is permitted. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements. At December 31, 2016, the Company disclosed approximately $546 million in aggregate future minimum operating lease payments and will evaluate those contracts as well as other existing arrangements to determine whether a right-of-use asset or lease liability will need to be recognized under the new standard and will assess new contracts entered into prior to the adoption of the new standard. The Company does not plan to adopt the standard early.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows. The amendments will become effective for the Company January 1, 2018. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated statements of cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which requires that a statement of cash flows explain the change during the period in total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The amendments will become effective for the Company beginning January 1, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated statements of cash flows.

31

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

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments will become effective for the Company beginning January 1, 2018. The Company will take the amendments into consideration when assessing whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments will become effective for the Company beginning January 1, 2020. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of the net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside a subtotal of operating income, if one is presented. The amendments will become effective for the Company beginning January 1, 2018. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718), Scope of Modification Accounting, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will become effective for the Company beginning January 1, 2018. The Company will apply this guidance to any further modifications of share-based payment awards.
In August 2017, the FASB issued ASU 2017-12, Derivative and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, which expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The amendments also include certain improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The amendments will become effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.

32


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 2016 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 and natural gas liquids) or congestion at ports (intermodal). 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, which is a non-GAAP measure, reflects 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 or lease 122 freight railroads organized in nine locally managed operating regions with 8,000 employees serving 3,000 customers. During the third quarter of 2017, our Mountain West Region railroads were consolidated into our Central and Pacific regions, and the Pacific Region was renamed the Western Region. This consolidation reduced our number of operating regions from ten to nine.
The financial results of our nine operating regions are reported in the following three reportable segments:
North America Operations: Our seven North American regions serve 41 U.S. states and four Canadian provinces and include 115 short line and regional freight railroads with more than 13,000 track-miles.
Australia Operations: Our Australia Region serves New South Wales, the Northern Territory, and South Australia and operates the 1,400-mile Tarcoola-to-Darwin rail line. The Australia Region is 51.1% owned by us and 48.9% owned by a consortium of funds and clients managed by Macquarie Infrastructure and Real Assets (MIRA).
U.K./Europe Operations: Our U.K./European Region includes the United Kingdom's (U.K.) largest rail maritime intermodal operator and the second-largest freight rail provider, as well as regional rail services in Continental Europe.
Our subsidiaries and joint ventures also provide rail service at more than 40 major ports, rail-ferry service between the U.S. Southeast and Mexico, transload services, contract coal loading, and industrial railcar switching and repair.
Impact of GRail Acquisition on our Financial Presentation
Our Australian business underwent a transformational change on December 1, 2016, with the acquisition of Glencore Rail (NSW) Pty Limited (GRail) and the formation of the Australia Partnership, which we control through our 51.1% interest. The GRail acquisition significantly expanded our operations in New South Wales. In conjunction with the GRail acquisition that closed on December 1, 2016, we issued a 48.9% equity stake in our Australian subsidiary, G&W Australia Holdings LP (GWAHLP) to MIRA. We retained a 51.1% controlling interest in GWAHLP and continue to consolidate 100% of our Australian Operations in our financial statements and report a noncontrolling interest for MIRA’s 48.9% equity ownership. As a result, our operating revenues and operating income for the three and nine months ended September 30, 2017 included 100% of our Australian business, while net income attributable to G&W reflects our 51.1% ownership position in our Australian business.

33


Prior to the GRail acquisition, our Australian subsidiary, Freightliner Australia Pty Ltd (FLA), provided rail operator services to GRail, which were recorded as freight-related revenues. These freight-related services continued post acquisition, but are now eliminated in consolidation. Revenues from the GRail acquisition are now included in G&W’s consolidated freight revenues from new operations.
Overview of Three-Month Results
Consolidated Results
Our operating revenues increased $75.9 million, or 15.2%, to $576.9 million for the three months ended September 30, 2017, compared with $501.0 million for the three months ended September 30, 2016. Operating income for the three months ended September 30, 2017 was $111.5 million, compared with $91.9 million for the three months ended September 30, 2016, an increase of $19.6 million, or 21.4%. Our operating ratio, defined as operating expenses divided by operating revenues, was 80.7% for the three months ended September 30, 2017, compared with 81.7% for the three months ended September 30, 2016.
Net income attributable to G&W for the three months ended September 30, 2017 was $50.2 million, compared with net income of $56.8 million for the three months ended September 30, 2016. Our diluted earnings per common share (EPS) for the three months ended September 30, 2017 were $0.80 with 62.5 million weighted average shares outstanding, compared with diluted EPS of $0.98 with 58.2 million weighted average shares outstanding for the three months ended September 30, 2016.
Items Affecting Comparability
Our results for the three months ended September 30, 2017 and 2016 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) Attributable to G&W Impact
 
Diluted Earnings/(Loss) Per Common Share Impact
Three Months Ended September 30, 2017
 
 
 
 
 
 
Corporate development and related costs
 
$
(1.7
)
 
$
(1.4
)
 
$
(0.02
)
Restructuring costs
 
$
(2.6
)
 
$
(2.2
)
 
$
(0.04
)
Unrecognized tax benefits
 
$

 
$
3.3

 
$
0.05

 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
Corporate development and related costs
 
$
(4.3
)
 
$
(3.1
)
 
$
(0.05
)
Restructuring costs
 
$
(0.2
)
 
$
(0.2
)
 
$

Impact of reduction in U.K. tax rate
 
$

 
$
4.3

 
$
0.07

Q3 2016 Short Line Tax Credit
 
$

 
$
7.8

 
$
0.13

For the three months ended September 30, 2017, our results included restructuring costs of $2.6 million, primarily in our U.K./Europe Region, as well as corporate development and related costs of $1.7 million, primarily related to the acquisition and integration of Pentalver Transport Limited (Pentalver). The results for the three months ended September 30, 2017 also included the recognition of $3.3 million of previously unrecognized tax benefits resulting from the lapse of the statute of limitations on acquired liabilities for uncertain tax positions.
For the three months ended September 30, 2016, our results included corporate development and related costs of $4.3 million, primarily associated with the GRail and Providence and Worcester Railroad Company (P&W) acquisitions, as well as restructuring costs of $0.2 million, primarily associated with our U.K./Europe Region. The results for the three months ended September 30, 2016 also included an income tax benefit of $7.8 million associated with the United States Short Line Tax Credit, which expired on December 31, 2016, as well as a tax benefit of $4.3 million associated with the reduction in the U.K. income tax rate, which was enacted in September 2016.
Results by Segment
North America
Operating revenues from our North American Operations increased $8.7 million, or 2.8%, to $318.9 million for the three months ended September 30, 2017, compared with $310.2 million for the three months ended September 30, 2016. The increase in operating revenues from our North American Operations was primarily due to $9.7 million from new operations.

34


North American Operations traffic increased 5,698 carloads, or 1.4%, to 407,697 carloads for the three months ended September 30, 2017. Excluding 13,366 carloads from new operations, same railroad traffic decreased 7,668 carloads, or 1.9%. The traffic decrease was principally due to decreases of 6,896 carloads of agricultural products traffic (primarily in the Central, Midwest and Western regions), 2,164 carloads of coal and coke traffic (primarily in the Western and Midwest regions) and 1,454 carloads of food and kindred products traffic (primarily in the Western Region), partially offset by increases of 1,844 carloads of autos and auto parts traffic (primarily in the Midwest and Western regions) and 1,669 carloads of metals traffic (primarily in the Northeast Region). All remaining traffic decreased by a net 667 carloads.
Operating income from our North American Operations for the three months ended September 30, 2017 was $82.1 million, compared with $87.2 million for the three months ended September 30, 2016. The operating ratio for our North American Operations for the three months ended September 30, 2017 was 74.3%, compared with 71.9% for the three months ended September 30, 2016.
Australia
Operating revenues from our Australian Operations increased $27.1 million, or 50.1%, to $81.3 million for the three months ended September 30, 2017, compared with $54.2 million for the three months ended September 30, 2016. Excluding $17.7 million of net revenues from new operations and a $2.2 million increase due to the impact of foreign currency appreciation, Australian Operations same railroad revenues increased $7.2 million, or 12.7%, primarily due to an increase in metallic ores and agricultural products freight revenues.
Australian Operations traffic increased 80,119 carloads to 123,651 carloads for the three months ended September 30, 2017. Excluding 81,142 carloads from new operations, same railroad traffic declined 1,023 carloads, or 2.3% for the three months ended September 30, 2017, compared with the three months ended September 30, 2016. The traffic decrease was principally due to a decrease of 9,079 carloads of minerals and stone traffic, partially offset by increases of 4,539 carloads of agricultural products traffic and 3,508 carloads of metallic ores traffic. All remaining traffic increased by a net nine carloads.
Operating income from our Australian Operations for the three months ended September 30, 2017 was $22.3 million, compared with $4.4 million for the three months ended September 30, 2016. Operating income for the three months ended September 30, 2016 included $2.9 million of corporate development and related costs, primarily associated with the GRail Transactions. The operating ratio for our Australian Operations was 72.6% for the three months ended September 30, 2017, compared with an operating ratio of 91.9% for the three months ended September 30, 2016.
U.K./Europe
Operating revenues from our U.K./European Operations increased $40.1 million, or 29.3%, to $176.7 million for the three months ended September 30, 2017, compared with $136.7 million for the three months ended September 30, 2016. Excluding $39.2 million from new operations and a $2.1 million increase due to the impact of foreign currency appreciation, U.K./European Operations same railroad revenues decreased $1.3 million, or 0.9%, primarily due to a decrease in Continental Europe intermodal revenues following the discontinuation of certain intermodal train services as part of the restructuring of ERS Railways B.V. (ERS) in the first half of 2017 and decreased U.K. infrastructure revenues, partially offset by increased crewing revenues.
U.K./European Operations traffic decreased 11,503 carloads, or 3.9%, to 282,780 carloads for the three months ended September 30, 2017. The traffic decrease was principally due to decreases of 9,996 carloads of intermodal traffic (primarily in Continental Europe) and 5,478 carloads of coal and coke traffic (primarily in the U.K.), partially offset by an increase of 3,846 carloads of minerals and stone traffic (primarily in Poland). All remaining traffic increased by 125 carloads.
Operating income from our U.K./European Operations was $7.1 million for the three months ended September 30, 2017, compared with $0.3 million for the three months ended September 30, 2016. Our U.K./European Operations operating income for the three months ended September 30, 2017 included $2.3 million of restructuring costs and $1.6 million of corporate development and related costs, primarily related to the integration and acquisition of Pentalver. The operating ratio for our U.K./European Operations was 96.0% for the three months ended September 30, 2017, compared with an operating ratio of 99.8% for the three months ended September 30, 2016.
Overview of Nine-Month Results
Operating revenues increased $151.5 million, or 10.2%, to $1,636.5 million for the nine months ended September 30, 2017, compared with $1,485.0 million for the nine months ended September 30, 2016. Operating income for the nine months ended September 30, 2017 was $290.3 million, compared with $236.0 million for the nine months ended September 30, 2016, an increase of $54.2 million, or 23.0%. Our operating ratio was 82.3% for the nine months ended September 30, 2017, compared with 84.1% for the nine months ended September 30, 2016.

35


Net income attributable to G&W for the nine months ended September 30, 2017 was $122.5 million, compared with net income of $132.2 million for the nine months ended September 30, 2016. Our diluted EPS for the nine months ended September 30, 2017 were $1.96 with 62.4 million weighted average shares outstanding, compared with diluted EPS of $2.28 with 58.1 million weighted average shares outstanding for the nine months ended September 30, 2016.
During the nine months ended September 30, 2017, we generated $350.4 million in cash flows from operating activities. During the same period, we purchased $149.1 million of property and equipment, including $4.3 million for new business investments, partially offset by $16.0 million in cash received from government grants and other outside parties for capital spending. We also paid $80.2 million in net payments on our outstanding debt, including $12.9 million to buyout locomotive leases.
Items Affecting Comparability
Our results for the nine months ended September 30, 2017 and 2016 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) Attributable to G&W Impact
 
Diluted Earnings/(Loss) Per Common Share Impact
Nine Months Ended September 30, 2017
 
 
 
 
 
 
Corporate development and related costs
 
$
(10.8
)
 
$
(7.4
)
 
$
(0.12
)
Restructuring costs
 
$
(8.7
)
 
$
(7.8
)
 
$
(0.13
)
Gain on sale of investment
 
$
1.6

 
$
1.0

 
$
0.02

Unrecognized tax benefits
 
$

 
$
3.3

 
$
0.05

 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
Australia impairment and related costs
 
$
(21.1
)
 
$
(16.8
)
 
$
(0.29
)
Corporate development and related costs
 
$
(7.3
)
 
$
(5.2
)
 
$
(0.08
)
Restructuring costs
 
$
(6.3
)
 
$
(5.0
)
 
$
(0.09
)
Impact of reduction in U.K. tax rate
 
$

 
$
4.3

 
$
0.07

Q3 2016 Short Line Tax Credit
 
$

 
$
21.4

 
$
0.37

Changes in Operations
North American Operations
Heart of Georgia Railroad, Inc.: On May 31, 2017, we completed the acquisition of all the outstanding shares of Atlantic Western Transportation, Inc., parent company of Heart of Georgia Railroad, Inc. (HOG), for $5.6 million in cash and contingent consideration of $5.7 million. The contingent consideration is payable to the sellers upon satisfaction of certain conditions, which we expect to be paid in 2021. The results of operations from HOG have been included in our consolidated statement of operations within our North American Operations segment since the acquisition date. For additional information regarding HOG, see Note 2, Changes in Operations, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.
Providence and Worcester Railroad Company: On November 1, 2016, we completed the acquisition of 100% of the outstanding common stock of P&W for $25.00 per share, or $126.2 million. The acquisition was funded with borrowings under our Second Amended and Restated Senior Secured Syndicated Credit Facility Agreement, as amended (the Credit Agreement). The results of operations from P&W have been included in our consolidated statements of operations within our North American Operations segment since the acquisition date. We incurred $3.1 million of integration costs associated with P&W during the nine months ended September 30, 2017, of which $2.7 million was included within labor and benefits expense primarily for severance costs and $0.4 million was included within other expenses in our consolidated statement of operations. For additional information regarding the acquisition of P&W, see Note 2, Changes in Operations, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.

36


Australian Operations
Glencore Rail (NSW) Pty Limited: On December 1, 2016, our subsidiary completed the acquisition of GRail for A$1.14 billion (or approximately $844.9 million at an exchange rate of $0.74 for one Australian dollar) and concurrently issued a 48.9% equity stake in GWAHLP (collectively, the Australia Partnership), which is the holding entity for all of our Australian businesses, including GRail, to MIRA, a large infrastructure investment firm. Through wholly-owned subsidiaries, we retained a 51.1% ownership in GWAHLP. As we maintain control of our Australian Operations, we continue to consolidate 100% of our Australian Operations in our financial statements and report a noncontrolling interest for MIRA’s 48.9% equity ownership.
We and MIRA contributed A$1.3 billion in the form of cash, partner loans and contributed equity, and our recently established subsidiary, GWI Acquisitions Pty Ltd (GWIA), entered into a five-year A$690 million senior secured term loan facility that is non-recourse to us and to MIRA. The proceeds were used to acquire GRail for A$1.14 billion, repay Genesee & Wyoming Australia’s (GWA) existing A$250 million term loan (under our Credit Agreement) and pay A$19.8 million in debt issuance costs and A$13.2 million of acquisition-related costs (collectively the GRail Transactions). The foreign exchange rate used to translate the transaction amounts to United States dollars (USD) was $0.74 for one Australian dollar (AUD).
The results of operations from GRail have been included in our consolidated statement of operations within our Australian Operations segment since the December 1, 2016 acquisition date. For additional information regarding the acquisition of GRail, see Note 2, Changes in Operations, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.
Arrium Limited: Between 2011 and 2014, GWA invested a total of $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's Southern Iron mine and 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, while the mines in the Middleback Range continued to operate. 
On April 7, 2016, Arrium announced it had entered into voluntary administration. As a result, we recorded a $13.0 million non-cash charge related to the impairment of GWA's now idle rolling-stock maintenance facility, which was recorded to net (gain)/loss on sale and impairment of assets within operating expenses, which represented the entire carrying value of these assets, and an allowance for doubtful accounts charge of $8.1 million associated with accounts receivable from Arrium, which was recorded to other expenses within operating expenses, during the first quarter of 2016. Also, as a result of the voluntary administration, all payments to GWA associated with the Southern Iron rail haulage agreement ceased.
On August 31, 2017, Arrium was sold to GFG Alliance. The steel making business was rebranded as Liberty OneSteel and the mining business was rebranded as SIMEC Mining. GWA continues to provide service and receive payments under the remaining rail haulage agreement. Pursuant to the rail haulage agreement, GWA serves several iron ore mines in the Middleback Range and the Whyalla steelworks operations, which we expect will represent A$40 million (or approximately $32 million at the exchange rate on September 30, 2017) of annual revenue, prospectively.
U.K./European Operations
Pentalver Transport Limited: On May 3, 2017, our subsidiary, GWI UK Acquisition Company Limited, purchased for cash all of the issued share capital of Pentalver Transport Limited (Pentalver) from a subsidiary of APM Terminals (a subsidiary of A P Møller-Maersk A/S) for £97.8 million (or $126.2 million at the exchange rate on May 3, 2017) or £77.5 million (or $100.1 million at the exchange rate on May 3, 2017) net of £20.2 million (or $26.1 million at the exchange rate on May 3, 2017) of cash received in connection with the sale. We funded the acquisition with borrowings under our Credit Agreement. The foreign exchange rate used to translate the total consideration to United States dollars was $1.29 for one British pound (GBP).
Headquartered in Southampton, U.K., Pentalver operates off-dock container terminals (most under long-term lease) strategically placed at each of the four major seaports of Felixstowe, Southampton, London Gateway and Tilbury, as well as an inland terminal located at Cannock, in the Midlands, near many of the nation’s largest distribution centers. In addition to providing storage for loaded and empty containers on over 100 acres of land, Pentalver also operates a trucking haulage service with more than 150 trucks, primarily providing daily service between the seaports of Felixstowe and Southampton and its inland terminal at Cannock. Pentalver also provides services related to container maintenance and repair (including refrigerated containers) and is one of the largest sellers of new and used containers in the U.K.

37


The results of operations from Pentalver have been included in our consolidated statement of operations within our U.K./European Operations segment since the May 3, 2017, acquisition date. For additional information regarding the acquisition of Pentalver, see Note 2, Changes in Operations, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.
Continental Europe Intermodal Business: During 2016, we explored ways to enhance the long-term viability of ERS, the Continental Europe intermodal business Freightliner acquired from Maersk, which we acquired in 2015 with the Freightliner acquisition. Due to its limited history of profitability and competitive dynamics in the market in which it operates, we ascribed little value to it at the time of acquisition.
Despite a significant and focused effort by us, the performance of ERS reached unsustainable levels during 2016 and a restructuring plan was initiated. In conjunction with that plan, in 2017, we ceased all "open" train services from the port of Rotterdam, closed the ERS offices in Rotterdam and Frankfurt and the ERS customer services function in Warsaw. We are in the process of redistributing ERS’s leased locomotives and railcars, which have lease termination dates ranging from 2017 to 2019. These steps will enable us to focus on the deep sea intermodal sector. Our subsidiary, Rotterdam Rail Feeding B.V., will continue its existing services and not be affected by the restructuring of ERS.
As a result of the ERS restructuring plan, we recorded impairment and related charges of $21.5 million in December 2016. These charges primarily included $14.5 million for an impairment of goodwill and $4.1 million for an impairment of a customer-related intangible asset, which were both recorded to net (gain)/loss on sale and impairment of assets within operating expenses, which represented the entire carrying value of these assets. For the nine months ended September 30, 2017, we recorded $5.2 million of restructuring costs related to ERS, primarily for severance costs and costs associated with surplus locomotive and railcar leases.
Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016
Consolidated Operating Results
Operating Revenues
The following table sets forth our operating revenues and total carloads by new operations and existing operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact
 
2017
 
 
 
 
 
 
Total Operations
 
New Operations
 
Eliminations (a)
 
Existing Operations
 
2016
 
Amount
 
%
 
Amount
 
%
 
Freight revenues
$
400,735

 
$
38,220

 

 
$
362,515

 
$
349,807

 
$
50,928

 
14.6
%
 
$
12,708

 
3.6
 %
 
$
3,355

Freight-related revenues
140,923

 
28,372

 
(11,301
)
 
123,852

 
129,520

 
11,403

 
8.8
%
 
(5,668
)
 
(4.4
)%
 
1,763

All other revenues
35,269

 
11,379

 

 
23,890

 
21,675

 
13,594

 
62.7
%
 
2,215

 
10.2
 %
 
201

Total operating revenues
$
576,927

 
$
77,971

 
$
(11,301
)
 
$
510,257

 
$
501,002

 
$
75,925

 
15.2
%
 
$
9,255

 
1.8
 %
 
$
5,319

Carloads
814,128

 
94,508

 

 
719,620

 
739,814

 
74,314

 
10.0
%
 
(20,194
)
 
(2.7
)%
 
 
(a)
Represents revenues for services provided by Freightliner Australia to GRail, which were eliminated in our consolidated revenues.
Operating Expenses
Total operating expenses for the three months ended September 30, 2017 increased $56.3 million, or 13.8%, to $465.4 million, compared with $409.2 million for the three months ended September 30, 2016. The increase consisted of $54.7 million from new operations and $1.6 million from existing operations. When we discuss either operating expenses from existing operations or same railroad operating expenses, we are referring to the change in our operating expenses, period-over-period, associated with operations that we managed in both periods (i.e., excluding the impact of acquisitions). The increase from existing operations was primarily due to a $5.1 million increase from the net appreciation of foreign currencies relative to the United States dollar, as well as increases in diesel fuel used in train operations of $3.4 million, depreciation and amortization of $2.6 million and restructuring costs of $2.4 million. These increases were partially offset by decreases of $7.7 million in equipment rents, $3.0 million in other expenses and $2.6 million in electricity used in train operations.

38


The following table sets forth our total operating expenses for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2016 Constant Currency*
 
Increase/(Decrease)Constant Currency*
 
2017
 
2016
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
Labor and benefits
$
167,929

 
29.2
 %
 
$
156,235

 
31.2
 %
 
$
11,694

 
$
1,154

 
$
157,389

 
$
10,540

Equipment rents
33,291

 
5.8
 %
 
36,778

 
7.3
 %
 
(3,487
)
 
591

 
37,369

 
(4,078
)
Purchased services
68,562

 
11.9
 %
 
50,991

 
10.2
 %
 
17,571

 
1,134

 
52,125

 
16,437

Depreciation and amortization
64,222

 
11.1
 %
 
50,841

 
10.2
 %
 
13,381

 
563

 
51,404

 
12,818

Diesel fuel used in train operations
34,535

 
6.0
 %
 
30,134

 
6.1
 %
 
4,401

 
432

 
30,566

 
3,969

Electricity used in train operations
765

 
0.1
 %
 
3,226

 
0.6
 %
 
(2,461
)
 
130

 
3,356

 
(2,591
)
Casualties and insurance
10,624

 
1.8
 %
 
9,252

 
1.9
 %
 
1,372

 
102

 
9,354

 
1,270

Materials
30,664

 
5.3
 %
 
19,678

 
3.9
 %
 
10,986

 
175

 
19,853

 
10,811

Trackage rights
22,632

 
3.9
 %
 
22,781

 
4.5
 %
 
(149
)
 
408

 
23,189

 
(557
)
Net gain on sale and impairment of assets
(315
)
 
(0.1
)%
 
(524
)
 
(0.1
)%
 
209

 
(4
)
 
(528
)
 
213

Restructuring costs
2,628

 
0.5
 %
 
223

 
 %
 
2,405

 
2

 
225

 
2,403

Other expenses
29,901

 
5.2
 %
 
29,536

 
5.9
 %
 
365

 
398

 
29,934

 
(33
)
Total operating expenses
$
465,438

 
80.7
 %
 
$
409,151

 
81.7
 %
 
$
56,287

 
$
5,085

 
$
414,236

 
$
51,202

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Operating Income/Operating Ratio
Operating income was $111.5 million for the three months ended September 30, 2017, compared with $91.9 million for the three months ended September 30, 2016. Operating income for the three months ended September 30, 2017 included restructuring costs of $2.6 million, primarily in our U.K./Europe Region, as well as corporate development and related costs of $1.7 million, primarily related to the acquisition and integration of Pentalver. Operating income for the three months ended September 30, 2016 included corporate development and related costs of $4.3 million, primarily associated with the GRail and P&W acquisitions, as well as restructuring costs of $0.2 million. Our operating ratio was 80.7% for the three months ended September 30, 2017, compared with 81.7% for the three months ended September 30, 2016.
Interest Expense
Interest expense was $28.3 million for the three months ended September 30, 2017, compared with $17.3 million for the three months ended September 30, 2016. The increase in interest expense was primarily due to a higher debt balance resulting from the GRail Transactions in December 2016, as well as higher interest rates in 2017, compared with 2016.
Provision for Income Taxes
Our effective income tax rate for the three months ended September 30, 2017 was 36.4%, compared with 25.7% for the three months ended September 30, 2016. Our provision for income taxes for the three months ended September 30, 2017 included the recognition of $3.3 million of previously unrecognized tax benefits resulting from the lapse of the statute of limitations on acquired liabilities for uncertain tax positions and a tax provision of $1.4 million related to enacted state income tax rate changes. Our provision for income taxes for the three months ended September 30, 2016 included an income tax benefit of $7.8 million associated with the United States Short Line Tax Credit, which expired on December 31, 2016, as well as an income tax benefit of $4.3 million associated with a reduction in the U.K. income tax rate, which was enacted in September 2016. For additional information regarding our provision for income taxes, see Note 10, Income Taxes, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.

39


Net Income Attributable to G&W and Earnings Per Common Share
Net income attributable to G&W for the three months ended September 30, 2017 was $50.2 million, compared with $56.8 million for the three months ended September 30, 2016. Our basic EPS were $0.82 with 61.6 million weighted average shares outstanding for the three months ended September 30, 2017, compared with basic EPS of $0.99 with 57.3 million weighted average shares outstanding for the three months ended September 30, 2016. Our diluted EPS for the three months ended September 30, 2017 were $0.80 with 62.5 million weighted average shares outstanding, compared with diluted EPS of $0.98 with 58.2 million weighted average shares outstanding for the three months ended September 30, 2016. Our results for the three months ended September 30, 2017 and 2016 included certain items affecting comparability between the periods as previously presented in the "Overview—Overview of Three-Month Results—Items Affecting Comparability."
Operating Results by Segment
Our various rail operations are organized into nine 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 seven 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.
The following tables set forth results from our North American Operations, Australian Operations and U.K./European Operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
Three Months Ended September 30, 2017
 
 
North
American
Operations
 
Australian
Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
 
Freight revenues
 
$
242,968

 
$
66,404

 
$
91,363

 
$
400,735

Freight-related revenues
 
60,286

 
12,880

 
67,757

 
140,923

All other revenues
 
15,673

 
1,986

 
17,610

 
35,269

Total operating revenues
 
$
318,927

 
$
81,270

 
$
176,730

 
$
576,927

Operating expenses:
 
 
 
 
 
 
 
 
Labor and benefits
 
$
102,784

 
$
17,618

 
$
47,527

 
$
167,929

Equipment rents
 
12,623

 
1,480

 
19,188

 
33,291

Purchased services
 
15,254

 
7,139

 
46,169

 
68,562

Depreciation and amortization
 
40,036

 
15,753

 
8,433

 
64,222

Diesel fuel used in train operations
 
16,934

 
6,003

 
11,598

 
34,535

Electricity used in train operations
 

 

 
765

 
765

Casualties and insurance
 
8,488

 
1,367

 
769

 
10,624

Materials
 
11,889

 
3,398

 
15,377

 
30,664

Trackage rights
 
10,025

 
3,500

 
9,107

 
22,632

Net gain on sale and impairment of assets
 
(110
)
 
(37
)
 
(168
)
 
(315
)
Restructuring costs
 
316

 

 
2,312

 
2,628

Other expenses
 
18,577

 
2,773

 
8,551

 
29,901

Total operating expenses
 
236,816

 
58,994

 
169,628


465,438

Operating income
 
$
82,111

 
$
22,276

 
$
7,102


$
111,489

Operating ratio
 
74.3
%
 
72.6
%
 
96.0
%
 
80.7
%
Interest expense, net
 
$
9,817

 
$
13,678

 
$
4,323

 
$
27,818

Provision for income taxes
 
$
28,270

 
$
2,013

 
$
224

 
$
30,507

Expenditures for additions to property & equipment, net of grants from outside parties
 
$
41,713

 
$
4,545

 
$
6,981

 
$
53,239

Carloads
 
407,697

 
123,651

 
282,780

 
814,128


40


 
 
Three Months Ended September 30, 2016
 
 
North
American
Operations
 
Australian
Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
 
Freight revenues
 
$
232,247

 
$
29,219

 
$
88,341

 
$
349,807

Freight-related revenues
 
62,124

 
23,523

 
43,873

 
129,520

All other revenues
 
15,823

 
1,408

 
4,444

 
21,675

Total operating revenues
 
$
310,194

 
$
54,150

 
$
136,658

 
$
501,002

Operating expenses:
 
 
 
 
 
 
 
 
Labor and benefits
 
97,426

 
16,753

 
42,056

 
156,235

Equipment rents
 
14,207

 
1,559

 
21,012

 
36,778

Purchased services
 
15,207

 
6,083

 
29,701

 
50,991

Depreciation and amortization
 
37,085

 
7,129

 
6,627

 
50,841

Diesel fuel used in train operations
 
14,217

 
5,467

 
10,450

 
30,134

Electricity used in train operations
 

 

 
3,226

 
3,226

Casualties and insurance
 
6,145

 
1,938

 
1,169

 
9,252

Materials
 
12,222

 
2,744

 
4,712

 
19,678

Trackage rights
 
9,047

 
2,884

 
10,850

 
22,781

Net (gain)/loss on sale and impairment of assets
 
(456
)
 
10

 
(78
)
 
(524
)
Restructuring costs
 
111

 
73

 
39

 
223

Other expenses
 
17,830

 
5,138

 
6,568

 
29,536

Total operating expenses
 
223,041

 
49,778

 
136,332


409,151

Operating income
 
$
87,153

 
$
4,372

 
$
326


$
91,851

Operating ratio
 
71.9
%
 
91.9
%
 
99.8
%
 
81.7
%
Interest expense, net
 
$
9,600

 
$
2,170

 
$
5,147

 
$
16,917

Provision for/(benefit from) income taxes
 
$
22,392

 
$
798

 
$
(3,547
)
 
$
19,643

Expenditures for additions to property & equipment, net of grants from outside parties
 
$
30,343

 
$
2,440

 
$
9,457

 
$
42,240

Carloads
 
401,999

 
43,532

 
294,283

 
739,814

North American Operations
Operating Revenues
The following table sets forth our North American Operations operating revenues and carloads by new operations and existing operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact
 
2017
 
2016
 
 
 
 
Total Operations
 
New Operations
 
Existing Operations
 
 
Amount
 
%
 
Amount
 
%
 
Freight revenues
$
242,968

 
$
9,207

 
$
233,761

 
$
232,247

 
$
10,721

 
4.6
 %
 
$
1,514

 
0.7
 %
 
$
605

Freight-related revenues
60,286

 
302

 
59,984

 
62,124

 
(1,838
)
 
(3.0
)%
 
(2,140
)
 
(3.4
)%
 
215

All other revenues
15,673

 
235

 
15,438

 
15,823

 
(150
)
 
(0.9
)%
 
(385
)
 
(2.4
)%
 
126

Total operating revenues
$
318,927

 
$
9,744

 
$
309,183

 
$
310,194

 
$
8,733

 
2.8
 %
 
$
(1,011
)
 
(0.3
)%
 
$
946

Carloads
407,697

 
13,366

 
394,331

 
401,999

 
5,698

 
1.4
 %
 
(7,668
)
 
(1.9
)%
 
 

41


Freight Revenues
The following table sets forth the changes in our North American Operations freight revenues by commodity group segregated into new operations and existing operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30,
 
Increase/(Decrease) in Total Operations
 
New Operations
 
Currency Impact
 
2016 Constant Currency*
 
Increase/(Decrease) in Existing Operations Constant Currency*
 
2017
 
2016
 
 
 
 
 
Commodity Group
Amount
 
Amount
 
 
 
 
 
Agricultural Products
$
28,699

 
$
29,367

 
$
(668
)
 
$
519

 
$
36

 
$
29,403

 
$
(1,223
)
Autos & Auto Parts
6,079

 
4,358

 
1,721

 
709

 
31

 
4,389

 
981

Chemicals & Plastics
36,745

 
34,078

 
2,667

 
2,155

 
124

 
34,202

 
388

Coal & Coke
20,008

 
21,434

 
(1,426
)
 

 
26

 
21,460

 
(1,452
)
Food & Kindred Products
8,257

 
8,549

 
(292
)
 
185

 
14

 
8,563

 
(491
)
Intermodal
311

 
10

 
301

 
311

 

 
10

 
(10
)
Lumber & Forest Products
22,204

 
21,301

 
903

 
883

 
41

 
21,342

 
(21
)
Metallic Ores
3,703

 
3,401

 
302

 
1

 
30

 
3,431

 
271

Metals
26,008

 
24,127

 
1,881

 
475

 
70

 
24,197

 
1,336

Minerals & Stone
34,769

 
31,144

 
3,625

 
2,691

 
38

 
31,182

 
896

Petroleum Products
16,425

 
16,882

 
(457
)
 
359

 
51

 
16,933

 
(867
)
Pulp & Paper
28,135

 
26,897

 
1,238

 
455

 
125

 
27,022

 
658

Waste
6,662

 
6,213

 
449

 
313

 
5

 
6,218

 
131

Other
4,963

 
4,486

 
477

 
151

 
14

 
4,500

 
312

Total freight revenues
$
242,968

 
$
232,247

 
$
10,721

 
$
9,207

 
$
605

 
$
232,852

 
$
909

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

42


The following table sets forth our North American Operations freight revenues, carloads and average freight revenues per carload for the three months ended September 30, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
 
2017
 
2016 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2017
 
2016
 
2017
 
2016
 
2016 Constant Currency*
Agricultural Products
$
28,699

 
11.9
%
 
$
29,403

 
12.5
%
 
47,588

 
54,024

 
$
603

 
$
544

 
$
544

Autos & Auto Parts
6,079

 
2.5
%
 
4,389

 
1.9
%
 
9,728

 
7,035

 
625

 
619

 
624

Chemicals & Plastics
36,745

 
15.2
%
 
34,202

 
14.7
%
 
43,739

 
42,402

 
840

 
804

 
807

Coal & Coke
20,008

 
8.2
%
 
21,460

 
9.2
%
 
60,864

 
63,028

 
329

 
340

 
340

Food & Kindred Products
8,257

 
3.4
%
 
8,563

 
3.7
%
 
14,415

 
15,557

 
573

 
550

 
550

Intermodal
311

 
0.1
%
 
10

 
%
 
3,145

 
112

 
99

 
89

 
89

Lumber & Forest Products
22,204

 
9.1
%
 
21,342

 
9.2
%
 
35,846

 
35,253

 
619

 
604

 
605

Metallic Ores
3,703

 
1.5
%
 
3,431

 
1.5
%
 
4,667

 
4,536

 
793

 
750

 
756

Metals
26,008

 
10.7
%
 
24,197

 
10.4
%
 
34,003

 
31,978

 
765

 
754

 
757

Minerals & Stone
34,769

 
14.3
%
 
31,182

 
13.4
%
 
57,104

 
53,530

 
609

 
582

 
583

Petroleum Products
16,425

 
6.8
%
 
16,933

 
7.3
%
 
24,772

 
24,959

 
663

 
676

 
678

Pulp & Paper
28,135

 
11.6
%
 
27,022

 
11.6
%
 
42,244

 
41,721

 
666

 
645

 
648

Waste
6,662

 
2.7
%
 
6,218

 
2.7
%
 
14,330

 
13,420

 
465

 
463

 
463

Other
4,963

 
2.0
%
 
4,500

 
1.9
%
 
15,252

 
14,444

 
325

 
311

 
312

Total
$
242,968

 
100.0
%
 
$
232,852

 
100.0
%
 
407,697

 
401,999

 
$
596

 
$
578

 
$
579

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our North American Operations increased 5,698 carloads, or 1.4%, to 407,697 carloads for the three months ended September 30, 2017, compared with the same period in 2016. The increase consisted of 13,366 carloads from new operations, partially offset by a decrease of 7,668 carloads from existing operations. The traffic decrease from existing operations was due to decreases of 6,896 carloads of agricultural products traffic, 2,164 carloads of coal and coke traffic and 1,454 carloads of food and kindred products traffic, partially offset by increases of 1,844 carloads of autos and auto parts traffic and 1,669 carloads of metals traffic. All remaining traffic decreased by a net 667 carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group. Excluding a 0.2% impact of foreign currency, average freight revenues per carload from our North American Operations increased 2.9% to $596 for the three months ended September 30, 2017, compared with the same period in 2016. Average freight revenues per carload from existing operations, excluding the impact of foreign currency, increased 2.4% to $593 for the three months ended September 30, 2017, compared with the same period in 2016. Customer mix within the commodity groups decreased average revenues per carload by approximately 0.8% and higher fuel surcharges and a change in the mix of commodities increased average freight revenues per carload by 0.4% and 0.3%, respectively. Excluding these factors, average freight revenues per carload increased 2.5%.
The following information discusses the significant changes in our North American Operations freight revenues from existing operations by commodity group excluding the impact of foreign currency.
Agricultural products revenues decreased $1.2 million, or 4.2%. Agricultural products traffic decreased 6,896 carloads, or 12.8%, which decreased revenues by $4.1 million, while average freight revenues per carload increased 9.9%, which increased revenues by $2.9 million. The carload decrease was primarily due to decreased grain shipments as a result of drought conditions in South Dakota, modal competition and reduced export demand. The increase in average freight revenues per carload was primarily driven by a change in the mix of business and a longer average length of haul.
Autos and auto parts revenues increased $1.0 million, or 22.4%, primarily due to a traffic increase of 1,844 carloads, or 26.2%. The carload increase was primarily due to increased shipments in the midwestern United States related to a model conversion and import spot shipments in the western United States.

43


Coal and coke revenues decreased $1.5 million, or 6.8%. Coal and coke average freight revenues per carload decreased 3.2%, which decreased revenues by $0.7 million, and traffic decreased 2,164 carloads, or 3.4%, which decreased revenues by $0.7 million.
Metals revenues increased $1.3 million, or 5.5%, primarily due to a traffic increase of 1,669 carloads, or 5.2%. The carload increase was primarily due to increased shipments of pipe and finished steel in the northeastern United States.
Minerals and stone revenues increased $0.9 million, or 2.9%. Minerals and stone average freight revenues per carload increased 3.9%, which increased revenues by $1.3 million, while traffic decreased 606 carloads, or 1.1%, which decreased revenues by $0.4 million. The carload decrease was primarily due to reduced shipments of construction aggregates, partially offset by increased shipments of frac sand.
Petroleum products revenues decreased $0.9 million, or 5.1%. Petroleum products average freight revenues per carload decreased 3.1%, which decreased revenues by $0.6 million, and traffic decreased 493 carloads, or 2.0%, which decreased revenues by $0.3 million. The decrease in average freight revenues per carload was primarily due to a change in the mix of business. The carload decrease was primarily due to decreased shipments of liquid petroleum gases in the western United States.
Freight revenues from all remaining commodities combined increased by a net $1.2 million.
Freight-Related Revenues
Excluding a $0.2 million increase due to the impact of foreign currency appreciation, freight-related revenues from our North American Operations, which includes revenues from railcar switching, track access fees, storage and other ancillary revenues related to the movement of freight, decreased $2.1 million, or 3.3%, to $60.3 million for the three months ended September 30, 2017, compared with $62.3 million for the three months ended September 30, 2016. The decrease consisted of $2.4 million from existing operations, partially offset by an increase of $0.3 million from new operations. The decrease from existing operations was primarily due to decreased port switching revenues in the southern United States and reduced demurrage revenues.
All Other Revenues
Excluding a $0.1 million increase due to the impact of foreign currency appreciation, 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 $0.3 million, or 1.7%, to $15.7 million for the three months ended September 30, 2017, compared with $15.9 million for the three months ended September 30, 2016. The decrease included $0.5 million from existing operations, partially offset by an increase of $0.2 million from new operations.

44


Operating Expenses
Total operating expenses from our North American Operations increased $13.8 million, or 6.2%, to $236.8 million for the three months ended September 30, 2017, compared with $223.0 million for the three months ended September 30, 2016. The increase included $8.0 million from new operations and $5.7 million from existing operations. The increase from existing operations was primarily due to increases of $2.1 million of depreciation and amortization, $2.0 million in diesel fuel used in train operations, $2.0 million in casualties and insurance and $1.5 million in labor and benefits, partially offset by a decrease of $2.1 million in equipment rents. In addition, the change from existing operations included a $0.8 million increase due to the impact of foreign currency appreciation. The following table sets forth operating expenses from our North American Operations for the three months ended September 30, 2017 and 2016 (dollars in thousands): 
 
Three Months Ended September 30,
 
 
 
 
 
 
 
Increase/(Decrease) Constant Currency*
 
2017
 
2016
 
 
 
Currency
Impact
 
2016 Constant Currency*
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Increase/(Decrease)
 
 
 
Labor and benefits
$
102,784

 
32.2
%
 
$
97,426

 
31.4
 %
 
$
5,358

 
$
322

 
$
97,748

 
$
5,036

Equipment rents
12,623

 
4.0
%
 
14,207

 
4.6
 %
 
(1,584
)
 
47

 
14,254

 
(1,631
)
Purchased services
15,254

 
4.8
%
 
15,207

 
4.9
 %
 
47

 
61

 
15,268

 
(14
)
Depreciation and amortization
40,036

 
12.6
%
 
37,085

 
12.0
 %
 
2,951

 
217

 
37,302

 
2,734

Diesel fuel used in train operations
16,934

 
5.3
%
 
14,217

 
4.6
 %
 
2,717

 
62

 
14,279

 
2,655

Casualties and insurance
8,488

 
2.7
%
 
6,145

 
2.0
 %
 
2,343

 
18

 
6,163

 
2,325

Materials
11,889

 
3.7
%
 
12,222

 
3.9
 %
 
(333
)
 
49

 
12,271

 
(382
)
Trackage rights
10,025

 
3.1
%
 
9,047

 
2.9
 %
 
978

 
8

 
9,055

 
970

Net gain on sale and impairment of assets
(110
)
 
%
 
(456
)
 
(0.1
)%
 
346

 
(5
)
 
(461
)
 
351

Restructuring costs
316

 
0.1
%
 
111

 
 %
 
205

 

 
111

 
205

Other expenses
18,577

 
5.8
%
 
17,830

 
5.7
 %
 
747

 
65

 
17,895

 
682

Total operating expenses
$
236,816

 
74.3
%
 
$
223,041

 
71.9
 %
 
$
13,775

 
$
844

 
$
223,885

 
$
12,931

* 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 an increase of $0.8 million due to the impact from foreign currency appreciation.
Labor and benefits expense was $102.8 million for the three months ended September 30, 2017, compared with $97.7 million for the three months ended September 30, 2016, an increase of $5.0 million, or 5.2%. The increase consisted of $3.6 million from new operations and $1.5 million, or 1.5% from existing operations. The increase from existing operations was primarily due to annual wage increases.
Equipment rents expense was $12.6 million for the three months ended September 30, 2017, compared with $14.3 million for the three months ended September 30, 2016, a decrease of $1.6 million, or 11.4%. The decrease consisted of $2.1 million from existing operations, partially offset by $0.5 million from new operations. The decrease from existing operations was primarily due to reduced leased locomotive expense due to buyouts of certain of our locomotive leases and reduced leased freight car expense due to certain leased cars being returned to lessors or converted to per diem leases.
Depreciation and amortization expense was $40.0 million for the three months ended September 30, 2017, compared with $37.3 million for the three months ended September 30, 2016, an increase of $2.7 million, or 7.3%. The increase consisted of $2.1 million from existing operations and $0.6 million from new operations. The increase from existing operations was primarily attributable to a larger depreciable asset base in 2017 compared with 2016, reflecting capital spending in 2016.
The cost of diesel fuel used in train operations was $16.9 million for the three months ended September 30, 2017, compared with $14.3 million for the three months ended September 30, 2016, an increase of $2.7 million, or 18.6%. The increase consisted of $2.0 million from existing operations and $0.6 million from new operations. The increase from existing operations consisted of $2.3 million due to a 15.9% increase in average fuel cost per gallon, partially offset by $0.3 million due to a 1.4% decrease in diesel fuel consumption.

45


Casualties and insurance expense was $8.5 million for the three months ended September 30, 2017, compared with $6.2 million for the three months ended September 30, 2016, an increase of $2.3 million, or 37.7%. The increase consisted of $2.0 million from existing operations and $0.3 million from new operations. The increase from existing operations was primarily attributable to increased derailment expense in 2017.
Operating Income/Operating Ratio
Operating income from our North American Operations was $82.1 million for the three months ended September 30, 2017, compared with $87.2 million for the three months ended September 30, 2016. Operating income for the three months ended September 30, 2017 included corporate development and related costs of $0.6 million and restructuring costs of $0.3 million. Operating income for the three months ended September 30, 2016 included corporate development and related costs of $1.0 million. The operating ratio was 74.3% for the three months ended September 30, 2017, compared with 71.9% for the three months ended September 30, 2016.
Australian Operations
Operating Revenues
As previously disclosed, we own a controlling 51.1% interest in our Australian Operations. Therefore, we include 100% of our Australian Operations within revenues and expenses within our consolidated financial statements with a 48.9% noncontrolling interest recorded to reflect MIRA's ownership. The following table sets forth our Australian Operations operating revenues and carloads by new operations and existing operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact
 
2017
 
 
 
 
 
 
Total Operations
 
New Operations
 
Eliminations (a)
 
Existing Operations
 
2016
 
Amount
 
%
 
Amount
 
%
 
Freight revenues
$
66,404

 
$
29,013

 
$

 
$
37,391

 
$
29,219

 
$
37,185

 
NM

 
$
8,172

 
28.0
 %
 
$
1,195

Freight-related revenues
12,880

 

 
(11,301
)
 
24,181

 
23,523

 
(10,643
)
 
(45.2
)%
 
658

 
2.8
 %
 
976

All other revenues
1,986

 

 

 
1,986

 
1,408

 
578

 
41.1
 %
 
578

 
41.1
 %
 
58

Total operating revenues
$
81,270

 
$
29,013

 
$
(11,301
)
 
$
63,558

 
$
54,150

 
$
27,120

 
50.1
 %
 
$
9,408

 
17.4
 %
 
$
2,229

Carloads
123,651

 
81,142

 

 
42,509

 
43,532

 
80,119

 
NM

 
(1,023
)
 
(2.3
)%
 
 
(a)
Represents revenues for services provided by Freightliner Australia to GRail, which were eliminated in our consolidated revenues.
Freight Revenues
The following table sets forth the changes in our Australian Operations freight revenues by commodity group segregated into new operations and existing operations for the three months ended September 30, 2017 and 2016 (dollars in thousands): 
 
Three Months Ended
 
Increase/(Decrease) in Total Operations
 
New Operations
 
Currency Impact
 
2016 Constant Currency*
 
Increase/(Decrease) in Existing Operations Constant Currency*
 
September 30,
 
 
 
 
 
Commodity Group
2017
 
2016
 
 
 
 
 
Agricultural Products
$
6,059

 
$
3,909

 
$
2,150

 
$

 
$
160

 
$
4,069

 
$
1,990

Coal & Coke
29,013

 

 
29,013

 
29,013

 

 

 

Intermodal
19,012

 
17,688

 
1,324

 

 
723

 
18,411

 
601

Metallic Ores
11,305

 
5,516

 
5,789

 

 
225

 
5,741

 
5,564

Minerals & Stone
792

 
1,918

 
(1,126
)
 

 
79

 
1,997

 
(1,205
)
Petroleum Products
223

 
188

 
35

 

 
8

 
196

 
27

Total freight revenues
$
66,404

 
$
29,219

 
$
37,185

 
$
29,013

 
$
1,195

 
$
30,414

 
$
6,977

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

46


The following table sets forth our Australian Operations freight revenues, carloads and average freight revenues per carload for the three months ended September 30, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
 
2017
 
2016 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2017
 
2016
 
2017
 
2016
 
2016 Constant Currency*
Agricultural Products
$
6,059

 
9.1
%
 
$
4,069

 
13.4
%
 
13,163

 
8,624

 
$
460

 
$
453

 
$
472

Coal & Coke
29,013

 
43.8
%
 

 
%
 
81,142

 

 
358

 

 

Intermodal
19,012

 
28.6
%
 
18,411

 
60.5
%
 
15,416

 
15,417

 
1,233

 
1,147

 
1,194

Metallic Ores
11,305

 
17.0
%
 
5,741

 
18.9
%
 
8,354

 
4,846

 
1,353

 
1,138

 
1,185

Minerals & Stone
792

 
1.2
%
 
1,997

 
6.6
%
 
5,488

 
14,567

 
144

 
132

 
137

Petroleum Products
223

 
0.3
%
 
196

 
0.6
%
 
88

 
78

 
2,534

 
2,410

 
2,513

Total
$
66,404

 
100.0
%
 
$
30,414

 
100.0
%
 
123,651

 
43,532

 
$
537

 
$
671

 
$
699

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our Australian Operations increased 80,119 carloads to 123,651 carloads for the three months ended September 30, 2017, compared with the same period in 2016. The increase consisted of 81,142 carloads from new operations, partially offset by a decrease of 1,023 carloads from existing operations. The decrease in traffic from existing operations was principally due to a decrease of 9,079 carloads of minerals and stone traffic, partially offset by increases of 4,539 carloads of agricultural products traffic and 3,508 carloads of metallic ores traffic. All remaining traffic increased by a net nine carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group. Excluding the impact of foreign currency, average freight revenues per carload from our Australian Operations decreased 23.2% to $537 for the three months ended September 30, 2017, compared with the same period in 2016. Average freight revenues per carload from existing operations, excluding the impact of foreign currency, increased 25.9% to $880 for the three months ended September 30, 2017, compared with the same period in 2016. The increase in average freight revenues per carload from existing operations was primarily due to increased metallic ores shipments as a result of the recommencement of operations at a previously closed manganese mine and decreased minerals and stone shipments due to a temporary maintenance outage at a customer port facility.
The following information discusses the significant changes in our Australian Operations freight revenues from existing operations by commodity group excluding the impact of foreign currency.
Agricultural products revenues increased $2.0 million, or 48.9%, primarily due to a traffic increase of 4,539 carloads, or 52.6%, as a result of stronger mainland grain shipments in South Australia.
Metallic ores revenues increased $5.6 million, or 96.9%. Metallic ores traffic increased 3,508 carloads, or 72.4%, which increased revenues by $4.7 million, and average freight revenues per carload increased 14.2%, which increased revenues by $0.8 million. The carload increase was primarily due to the recommencement of operations at a previously closed manganese mine. The increase in average freight revenues per carload was due to a change in the mix of business.
Minerals and stone revenues decreased $1.2 million, or 60.3%, primarily due to a traffic decrease of 9,079 carloads as a result of a temporary maintenance outage at a customer port facility.
Freight revenues from all remaining commodities combined increased by $0.6 million.
Freight-Related Revenues
Excluding a $1.0 million increase due to the impact of foreign currency appreciation, 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, decreased $11.6 million, or 47.4%, to $12.9 million for the three months ended September 30, 2017, compared with $24.5 million for the three months ended September 30, 2016. Excluding $11.3 million of freight-related revenues for services provided by Freightliner Australia to GRail for the three months ended September 30, 2017, which were eliminated in our consolidated freight-related revenues, our freight-related revenues from existing operations decreased $0.3 million, or 1.3%.

47


All Other Revenues
Excluding the impact of foreign currency appreciation, 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, increased $0.5 million, or 35.5%, to $2.0 million for the three months ended September 30, 2017, compared with $1.5 million for the three months ended September 30, 2016.
Operating Expenses
Total operating expenses from our Australian Operations for the three months ended September 30, 2017 increased $9.2 million, or 18.5%, to $59.0 million, compared with $49.8 million for the three months ended September 30, 2016. The increase in operating expenses consisted of $8.7 million from new operations and $2.0 million from the appreciation of the Australian dollar relative to the United States dollar, partially offset by a decrease of $1.5 million from existing operations. The following table sets forth operating expenses from our Australian Operations for the three months ended September 30, 2017 and 2016 (dollars in thousands): 
 
Three Months Ended September 30,
 
Increase/(Decrease)
 
Currency Impact
 
2016 Constant Currency*
 
Increase/(Decrease)
Constant Currency*
 
2017
 
2016
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
17,618

 
21.6
%
 
$
16,753

 
30.9
%
 
$
865

 
$
690

 
$
17,443

 
$
175

Equipment rents
1,480

 
1.8
%
 
1,559

 
2.9
%
 
(79
)
 
65

 
1,624

 
(144
)
Purchased services
7,139

 
8.8
%
 
6,083

 
11.2
%
 
1,056

 
249

 
6,332

 
807

Depreciation and amortization
15,753

 
19.4
%
 
7,129

 
13.2
%
 
8,624

 
294

 
7,423

 
8,330

Diesel fuel used in train operations
6,003

 
7.4
%
 
5,467

 
10.1
%
 
536

 
224

 
5,691

 
312

Casualties and insurance
1,367

 
1.7
%
 
1,938

 
3.6
%
 
(571
)
 
78

 
2,016

 
(649
)
Materials
3,398

 
4.2
%
 
2,744

 
5.1
%
 
654

 
116

 
2,860

 
538

Trackage rights
3,500

 
4.3
%
 
2,884

 
5.3
%
 
616

 
117

 
3,001

 
499

Net gain on sale and impairment of assets
(37
)
 
%
 
10

 
%
 
(47
)
 

 
10

 
(47
)
Restructuring costs

 
%
 
73

 
0.1
%
 
(73
)
 
2

 
75

 
(75
)
Other expenses
2,773

 
3.4
%
 
5,138

 
9.5
%
 
(2,365
)
 
214

 
5,352

 
(2,579
)
Total operating expenses
$
58,994

 
72.6
%
 
$
49,778

 
91.9
%
 
$
9,216

 
$
2,049

 
$
51,827

 
$
7,167

* 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 $2.0 million increase from the impact of foreign currency appreciation.
Depreciation and amortization expense was $15.8 million for the three months ended September 30, 2017, compared with $7.4 million for the three months ended September 30, 2016, an increase of $8.3 million. The increase was primarily attributable to new operations.
Other expenses were $2.8 million for the three months ended September 30, 2017, compared with $5.4 million for the three months ended September 30, 2016, a decrease of $2.6 million. The decrease was primarily attributable to corporate development and related expenses in 2016 related to the GRail acquisition.
Operating Income/Operating Ratio
Our Australian Operations had operating income of $22.3 million for the three months ended September 30, 2017, compared with $4.4 million for the three months ended September 30, 2016. Operating income for the three months ended September 30, 2016 included corporate development and related costs of $2.9 million, primarily related to the GRail Transactions. The operating ratio was 72.6% for the three months ended September 30, 2017, compared with 91.9% for the three months ended September 30, 2016.

48


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 three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Nine Months Ended September 30,
 
Increase/(Decrease) in
Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact
 
2017
 
2016
 
 
 
 
Total Operations
 
New Operations
 
Existing Operations
 
 
Amount
 
%
 
Amount
 
%
 
Freight revenues
$
91,363

 
$

 
$
91,363

 
$
88,341

 
$
3,022

 
3.4
 %
 
$
3,022

 
3.4
 %
 
$
1,555

Freight-related revenues
67,757

 
28,070

 
39,687

 
43,873

 
23,884

 
54.4
 %
 
(4,186
)
 
(9.5
)%
 
572

All other revenues
17,610

 
11,144

 
6,466

 
4,444

 
13,166

 
NM

 
2,022

 
45.5
 %
 
17

Total operating revenues
$
176,730

 
$
39,214

 
$
137,516

 
$
136,658

 
$
40,072

 
29.3
 %
 
$
858

 
0.6
 %
 
$
2,144

Carloads
282,780

 

 
282,780

 
294,283

 
(11,503
)
 
(3.9
)%
 
(11,503
)
 
(3.9
)%
 
 
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 September 30, 2017 and 2016 (dollars in thousands): 
 
Three Months Ended September 30,
 
Increase/(Decrease)
 
Currency Impact
 
2016 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2017
 
2016
 
 
 
 
Commodity Group
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
Agricultural Products
$
964

 
1.1
%
 
$
628

 
0.7
%
 
$
336

 
$
45

 
$
673

 
$
291

Coal & coke
2,345

 
2.6
%
 
3,199

 
3.6
%
 
(854
)
 
65

 
3,264

 
(919
)
Intermodal
67,374

 
73.7
%
 
67,553

 
76.5
%
 
(179
)
 
585

 
68,138

 
(764
)
Minerals & Stone
20,680

 
22.6
%
 
16,961

 
19.2
%
 
3,719

 
860

 
17,821

 
2,859

Total freight revenues
$
91,363

 
100.0
%
 
$
88,341

 
100.0
%
 
$
3,022

 
$
1,555

 
$
89,896

 
$
1,467

* 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 three months ended September 30, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
 
2017
 
2016 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2017
 
2016
 
2017
 
2016
 
2016 Constant Currency*
Agricultural Products
$
964

 
1.1
%
 
$
673

 
0.7
%
 
777

 
652

 
$
1,241

 
$
963

 
$
1,032

Coal & Coke
2,345

 
2.6
%
 
3,264

 
3.6
%
 
3,798

 
9,276

 
617

 
345

 
352

Intermodal
67,374

 
73.7
%
 
68,138

 
75.9
%
 
229,059

 
239,055

 
294

 
283

 
285

Minerals & Stone
20,680

 
22.6
%
 
17,821

 
19.8
%
 
49,146

 
45,300

 
421

 
374

 
393

Total
$
91,363

 
100.0
%
 
$
89,896

 
100.0
%
 
282,780

 
294,283

 
$
323

 
$
300

 
$
305

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our U.K./European Operations decreased 11,503 carloads, or 3.9%, for the three months ended September 30, 2017, compared with the same period in 2016. The traffic decrease was principally due to decreases of 9,996 carloads of intermodal traffic and 5,478 carloads of coal and coke traffic, partially offset by an increase of 3,846 carloads of minerals and stone traffic. All remaining traffic increased by 125 carloads.
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. Excluding the impact of foreign currency, average freight revenues per carload from our U.K./European Operations increased 5.9% to $323 for the three months ended September 30, 2017, compared with the same period in 2016.

49


The following information discusses the significant changes in our U.K./European Operations freight revenues by commodity group excluding the impact of foreign currency.
Coal and coke revenues decreased $0.9 million, or 28.2%. Coal and coke traffic decreased 5,478 carloads, or 59.1%, which decreased revenues by $3.4 million, while average freight revenues per carload increased 75.3%, which increased revenues by $2.5 million. The decrease in carloads was primarily due to lower demand for steam coal in the U.K., largely as a result of competition from natural gas power generation and an increase in the carbon tax. The increase in average freight revenues per carload was primarily due to a change in the mix of business in the U.K.
Intermodal revenues decreased $0.8 million, or 1.1%. Intermodal traffic decreased 9,996 carloads, or 4.2%, which decreased revenues by $2.9 million, while average freight revenues per carload increased 3.2%, which increased revenues by $2.2 million. The decrease in carloads was primarily due to the discontinuation of certain routes in Continental Europe as part of our restructuring plan.
Minerals and stone revenues increased $2.9 million, or 16.0%. Minerals and stone traffic increased 3,846 carloads, or 8.5%, which increased revenues by $1.6 million, and average freight revenues per carload increased 7.1%, which increased revenues by $1.2 million. The increase was primarily due to higher construction aggregates shipments in Poland.
Freight revenues from all remaining commodities combined increased by $0.3 million.
Freight-Related Revenues
Freight-related revenues from our U.K./European Operations include trucking haulage services, container storage and switching services, as well as infrastructure services where we operate work trains for the track infrastructure owner. Freight-related revenues in the U.K./Europe also include traction service (or hook and pull), which requires us to provide locomotives and drivers to move a customer's train between specified origin and destination points, and other ancillary revenues related to the movement of freight.
Excluding a $0.6 million increase due to the impact of foreign currency appreciation, freight-related revenues from our U.K./European Operations increased $23.3 million, or 52.5%, to $67.8 million for the three months ended September 30, 2017, compared with $44.4 million for the three months ended September 30, 2016. The increase included $28.1 million from new operations, partially offset by a $4.8 million decrease from existing operations. The decrease from existing operations was primarily due to the discontinuation of certain routes in Continental Europe following the completion of the restructuring of ERS in the first half of 2017 and decreased infrastructure revenues in the U.K.
All Other Revenues
Excluding the impact of foreign currency appreciation, all other revenues from our U.K./European Operations, which includes revenues from container sales, third-party car and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, increased $13.1 million to $17.6 million for the three months ended September 30, 2017, compared with $4.5 million for the three months ended September 30, 2016. The increase included $11.1 million from new operations, primarily from container sales and container repairs at Pentalver, and $2.0 million from existing operations. The increase from existing operations was primarily due to increased crewing revenues in the U.K.

50


Operating Expenses
Total operating expenses from our U.K./European Operations increased $33.3 million, or 24.4%, to $169.6 million for the three months ended September 30, 2017, compared with $136.3 million for the three months ended September 30, 2016. The increase consisted of $38.0 million from new operations, partially offset by a $4.7 million decrease from existing operations. The decrease from existing operations included decreases of $5.4 million in equipment rents, $2.6 million in electricity used in train operations and $2.0 million in trackage rights, partially offset by increases of $2.3 million in restructuring costs, $1.0 million in diesel fuel used in train operations and $2.2 million due to the impact of foreign currency appreciation. The following table sets forth operating expenses from our U.K./European Operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):
 
Three Months Ended September 30,
 
Increase/(Decrease)
 
Currency Impact
 
2016 Constant Currency*
 
Increase/(Decrease)
Constant Currency*
 
2017
 
2016
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
 
Labor and benefits
$
47,527

 
26.9
 %
 
$
42,056

 
30.8
 %
 
$
5,471

 
$
142

 
$
42,198

 
$
5,329

Equipment rents
19,188

 
10.9
 %
 
21,012

 
15.4
 %
 
(1,824
)
 
479

 
21,491

 
(2,303
)
Purchased services
46,169

 
26.1
 %
 
29,701

 
21.7
 %
 
16,468

 
824

 
30,525

 
15,644

Depreciation and amortization
8,433

 
4.8
 %
 
6,627

 
4.9
 %
 
1,806

 
52

 
6,679

 
1,754

Diesel fuel used in train operations
11,598

 
6.6
 %
 
10,450

 
7.7
 %
 
1,148

 
146

 
10,596

 
1,002

Electricity used in train operations
765

 
0.4
 %
 
3,226

 
2.4
 %
 
(2,461
)
 
130

 
3,356

 
(2,591
)
Casualties and insurance
769

 
0.4
 %
 
1,169

 
0.9
 %
 
(400
)
 
6

 
1,175

 
(406
)
Materials
15,377

 
8.7
 %
 
4,712

 
3.4
 %
 
10,665

 
10

 
4,722

 
10,655

Trackage rights
9,107

 
5.2
 %
 
10,850

 
7.9
 %
 
(1,743
)
 
283

 
11,133

 
(2,026
)
Net gain on sale and impairment of assets
(168
)
 
(0.1
)%
 
(78
)
 
(0.1
)%
 
(90
)
 
1

 
(77
)
 
(91
)
Restructuring costs
2,312

 
1.3
 %
 
39

 
 %
 
2,273

 

 
39

 
2,273

Other expenses
8,551

 
4.8
 %
 
6,568

 
4.8
 %
 
1,983

 
119

 
6,687

 
1,864

Total operating expenses
$
169,628

 
96.0
 %
 
$
136,332

 
99.8
 %
 
$
33,296

 
$
2,192

 
$
138,524

 
$
31,104

* 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 from our U.K./European Operations excluding an increase of $2.2 million due to the impact of foreign currency appreciation.
Labor and benefits expense was $47.5 million for the three months ended September 30, 2017, compared with $42.2 million for the three months ended September 30, 2016, an increase of $5.3 million, or 12.6%. The increase consisted of $6.9 million from new operations, partially offset by a decrease of $1.6 million from existing operations. The decrease in existing operations was primarily due to reduced headcount as a result of the restructuring of the U.K. coal business and the discontinuation of certain routes in Continental Europe as part of our restructuring of ERS.
Equipment rents expense was $19.2 million for the three months ended September 30, 2017, compared with $21.5 million for the three months ended September 30, 2016, a decrease of $2.3 million, or 10.7%. The decrease consisted of $5.4 million from existing operations, partially offset by $3.1 million from new operations. The 2016 period included surplus lease costs in Continental Europe and higher locomotive lease costs in the U.K. that have since been renegotiated with more favorable terms resulting in lower equipment costs in 2017.
Purchased services expense, which consists of the costs of services provided by outside contractors for repairs and maintenance of locomotives, railcars and other equipment, as well as contract labor costs for crewing services, was $46.2 million for the three months ended September 30, 2017, compared with $30.5 million for the three months ended September 30, 2016, an increase of $15.6 million, or 51.2%. The increase consisted of $14.0 million from new operations and $1.7 million from existing operations. The increase from existing operations was primarily due to increased use of third-party contractors.
Depreciation and amortization expense was $8.4 million for the three months ended September 30, 2017, compared with $6.7 million for the three months ended September 30, 2016, an increase of $1.8 million, or 26.3%. The increase consisted of $1.2 million from new operations and $0.5 million from existing operations. The increase from existing operations was primarily attributable to a larger depreciable asset base in 2017 compared with 2016, reflecting capital spending in 2016.

51


Diesel fuel used in train operations was $11.6 million for the three months ended September 30, 2017, compared with $10.6 million for the three months ended September 30, 2016, an increase of $1.0 million, or 9.5%. The increase consisted of $0.6 million due to a 7.1% increase in average fuel cost per gallon and $0.4 million due to a 2.2% increase in diesel fuel consumption.
Electricity used in train operations was $0.8 million for the three months ended September 30, 2017, compared with $3.4 million for the three months ended September 30, 2016, a decrease of $2.6 million, or 77.2%. The decrease was primarily due to the reimbursement of prior year energy taxes as a result of an initiative by the German government, as well as the discontinuation of certain routes in Continental Europe as part of our restructuring plan.
Materials expense, which primarily consists of costs of containers sold to third parties, 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 $15.4 million for the three months ended September 30, 2017, compared with $4.7 million for the three months ended September 30, 2016, an increase of $10.7 million. The increase consisted of $9.8 million from new operations and $0.8 million from existing operations.
Restructuring costs for the three months ended September 30, 2017 of $2.3 million included costs associated with the reorganization of certain activities in the U.K., as well as costs associated with ERS.
Other expenses were $8.6 million for the three months ended September 30, 2017, compared with $6.7 million for the three months ended September 30, 2016, an increase of $1.9 million, or 27.9%. The increase consisted of $2.7 million from new operations, partially offset by a decrease of $0.8 million from existing operations.
Operating Income/Operating Ratio
Our U.K./European Operations had operating income of $7.1 million for the three months ended September 30, 2017, compared with $0.3 million for the three months ended September 30, 2016. Operating income for the three months ended September 30, 2017 included $2.3 million of restructuring costs and $1.6 million of corporate development and related costs, primarily related to the acquisition and integration of Pentalver. Operating income for the three months ended September 30, 2016 included $0.3 million of corporate development and related costs. The operating ratio was 96.0% for the three months ended September 30, 2017, compared with 99.8% for the three months ended September 30, 2016.
Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016
Consolidated Operating Results
Operating Revenues
The following table sets forth our operating revenues and carloads by new operations and existing operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Nine Months Ended September 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in Existing
Operations
 
Currency Impact
 
2017
 
2016
 
 
 
 
Total Operations
 
New
Operations
 
Eliminations(a)
 
Existing
Operations
 
Total Operations
 
Amount
 
%
 
Amount
 
%
 
Freight revenues
$
1,161,635

 
$
110,436

 
$

 
$
1,051,199

 
$
1,017,003

 
$
144,632

 
14.2
 %
 
$
34,196

 
3.4
 %
 
$
(11,058
)
Freight-related revenues
387,881

 
46,830

 
(34,966
)
 
376,017

 
396,666

 
(8,785
)
 
(2.2
)%
 
(20,649
)
 
(5.2
)%
 
(5,766
)
All other revenues
86,952

 
19,630

 

 
67,322

 
71,324

 
15,628

 
21.9
 %
 
(4,002
)
 
(5.6
)%
 
(1,137
)
Total operating revenues
$
1,636,468

 
$
176,896

 
$
(34,966
)
 
$
1,494,538

 
$
1,484,993

 
$
151,475

 
10.2
 %
 
$
9,545

 
0.6
 %
 
$
(17,961
)
Carloads
2,445,458

 
304,242

 

 
2,141,216

 
2,128,114

 
317,344

 
14.9
 %
 
13,102

 
0.6
 %
 
 
(a)
Represents revenues for services provided by Freightliner Australia to GRail, which were eliminated in our consolidated revenues.

52


Operating Expenses
Total operating expenses for the nine months ended September 30, 2017 increased $97.2 million, or 7.8%, to $1,346.2 million, compared with $1,249.0 million for the nine months ended September 30, 2016. The increase included $112.5 million from new operations, partially offset by a decrease of $15.3 million from existing operations. The decrease from existing operations was primarily due to a $17.9 million decrease from the net depreciation of foreign currencies relative to the United States dollar as well as decreases of $17.4 million in equipment rents and $3.6 million in electricity used in train operations. These decreases were partially offset by increases of $21.2 million in the cost of diesel fuel used in train operations, $7.9 million in depreciation and amortization, $4.3 million in labor and benefits, $3.3 million in purchased services, $3.2 million in casualties and insurance and $2.9 million in restructuring costs. Total operating expenses for the nine months ended September 30, 2016 included a $13.0 million impairment of a rolling-stock maintenance facility and an accounts receivable reserve of $8.1 million, both of which were associated with an iron ore/steel making customer in Australia that entered into voluntary administration in April 2016.
The following table sets forth our total operating expenses for the nine months ended September 30, 2017 and 2016 (dollars in thousands): 
 
Nine Months Ended September 30,
 
Increase/(Decrease)
 
Currency
Impact
 
2016 Constant Currency*
 
Increase/(Decrease)Constant Currency*
 
2017
 
2016
 
 
 
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
 
 
Labor and benefits
$
496,128

 
30.3
 %
 
$
475,297

 
32.0
%
 
$
20,831

 
$
(7,805
)
 
$
467,492

 
$
28,636

Equipment rents
100,399

 
6.1
 %
 
113,634

 
7.7
%
 
(13,235
)
 
(3,117
)
 
110,517

 
(10,118
)
Purchased services
176,358

 
10.8
 %
 
149,125

 
10.0
%
 
27,233

 
(2,465
)
 
146,660

 
29,698

Depreciation and amortization
186,509

 
11.4
 %
 
151,095

 
10.2
%
 
35,414

 
(416
)
 
150,679

 
35,830

Diesel fuel used in train operations
105,718

 
6.5
 %
 
83,851

 
5.7
%
 
21,867

 
(1,047
)
 
82,804

 
22,914

Electricity used in train operations
6,072

 
0.4
 %
 
9,895

 
0.7
%
 
(3,823
)
 
(259
)
 
9,636

 
(3,564
)
Casualties and insurance
33,346

 
2.0
 %
 
28,814

 
1.9
%
 
4,532

 
(56
)
 
28,758

 
4,588

Materials
77,861

 
4.8
 %
 
62,662

 
4.2
%
 
15,199

 
(945
)
 
61,717

 
16,144

Trackage rights
66,652

 
4.1
 %
 
64,509

 
4.3
%
 
2,143

 
(1,029
)
 
63,480

 
3,172

Net (gain)/loss on sale and impairment of assets
(1,096
)
 
(0.1
)%
 
11,993

 
0.8
%
 
(13,089
)
 
203

 
12,196

 
(13,292
)
Restructuring costs
8,744

 
0.5
 %
 
6,320

 
0.4
%
 
2,424

 
(453
)
 
5,867

 
2,877

Other expenses
89,494

 
5.5
 %
 
91,757

 
6.2
%
 
(2,263
)
 
(495
)
 
91,262

 
(1,768
)
Total operating expenses
$
1,346,185

 
82.3
 %
 
$
1,248,952

 
84.1
%
 
$
97,233

 
$
(17,884
)
 
$
1,231,068

 
$
115,117

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Operating Income/Operating Ratio
Operating income was $290.3 million for the nine months ended September 30, 2017, compared with $236.0 million for the nine months ended September 30, 2016. Operating income for the nine months ended September 30, 2017 included corporate development and related costs of $10.8 million, primarily related to the acquisition and integration of P&W and Pentalver, as well as expenses related to other corporate development projects, and restructuring costs of $8.7 million, primarily associated with our U.K./Europe Region. Operating income for the nine months ended September 30, 2016 included impairment and related costs of $21.1 million, consisting of a $13.0 million impairment of a rolling-stock maintenance facility and an accounts receivable reserve of $8.1 million, both of which were associated with an iron ore/steel making customer in Australia entering into voluntary administration. Operating income for the nine months ended September 30, 2016 also included corporate development and related costs of $7.3 million, primarily associated with the GRail and P&W transactions, and restructuring costs of $6.3 million, primarily related the restructuring of the U.K. coal business. Our operating ratio was 82.3% for the nine months ended September 30, 2017, compared with 84.1% for the nine months ended September 30, 2016.

53


Interest Expense
Interest expense was $80.4 million for the nine months ended September 30, 2017, compared with $53.0 million for the nine months ended September 30, 2016. The increase in interest expense was primarily due to a higher debt balance resulting from the GRail Transactions in December 2016, as well as higher interest rates in 2017 compared with 2016.
Provision for Income Taxes
Our effective income tax rate for the nine months ended September 30, 2017 was 38.9%, compared with 29.2% for the nine months ended September 30, 2016. Our provision for income taxes for the nine months ended September 30, 2017 included the recognition of $3.3 million of previously unrecognized tax benefits resulting from the lapse of the statute of limitations on acquired liabilities for uncertain tax positions and a tax provision of $1.3 million related to enacted state income tax rate changes. Our provision for income taxes for the nine months ended September 30, 2016 included an income tax benefit of $21.4 million associated with the United States Short Line Tax Credit, which expired of December 31, 2016, as well as an income tax benefit of $4.3 million associated with a reduction in the U.K. income tax rate, which was enacted in September 2016. Our provision for income taxes for the nine months ended September 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, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report) that was formerly used in connection with the Southern Iron rail haulage agreement with Arrium. For additional information regarding our provision for income taxes, see Note 10, Income Taxes, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.
Net Income Attributable to G&W and Earnings Per Common Share
Net income attributable to G&W for the nine months ended September 30, 2017 was $122.5 million, compared with $132.2 million for the nine months ended September 30, 2016. Our basic EPS were $1.99 with 61.5 million weighted average shares outstanding for the nine months ended September 30, 2017, compared with basic EPS of $2.31 with 57.2 million weighted average shares outstanding for the nine months ended September 30, 2016. Our diluted EPS for the nine months ended September 30, 2017 were $1.96 with 62.4 million weighted average shares outstanding, compared with diluted EPS of $2.28 with 58.1 million weighted average shares outstanding for the nine months ended September 30, 2016. Our results for the nine months ended September 30, 2017 and 2016 included certain items affecting comparability between the periods as previously presented in the "Overview—Overview of Nine-Month Results—Items Affecting Comparability."

54


Operating Results by Segment
The following tables set forth results from our North American Operations, Australian Operations and U.K./European Operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands): 
 
 
Nine Months Ended September 30, 2017
 
 
North
American
Operations
 
Australian
Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
 
Freight revenues
 
$
719,622

 
$
191,031

 
$
250,982

 
$
1,161,635

Freight-related revenues
 
186,814

 
36,089

 
164,978

 
387,881

All other revenues
 
47,641

 
4,866

 
34,445

 
86,952

Total operating revenues
 
$
954,077

 
$
231,986

 
$
450,405

 
$
1,636,468

Operating expenses:
 
 
 
 
 
 
 
 
Labor and benefits
 
315,210

 
52,447

 
128,471

 
496,128

Equipment rents
 
39,993

 
4,215

 
56,191

 
100,399

Purchased services
 
45,350

 
19,821

 
111,187

 
176,358

Depreciation and amortization
 
117,822

 
45,915

 
22,772

 
186,509

Diesel fuel used in train operations
 
54,038

 
18,913

 
32,767

 
105,718

Electricity used in train operations
 

 

 
6,072

 
6,072

Casualties and insurance
 
26,532

 
4,219

 
2,595

 
33,346

Materials
 
38,413

 
8,629

 
30,819

 
77,861

Trackage rights
 
28,732

 
10,392

 
27,528

 
66,652

Net gain on sale and impairment of assets
 
(870
)
 
(59
)
 
(167
)
 
(1,096
)
Restructuring costs
 
384

 
338

 
8,022

 
8,744

Other expenses
 
59,206

 
7,471

 
22,817

 
89,494

Total operating expenses
 
724,810

 
172,301

 
449,074

 
1,346,185

Operating income
 
$
229,267

 
$
59,685

 
$
1,331

 
$
290,283

Operating ratio
 
76.0
%
 
74.3
%
 
99.7
%
 
82.3
%
Interest expense, net
 
$
29,928

 
$
41,500

 
$
7,732

 
$
79,160

Provision for/(benefit from) income taxes
 
$
78,133

 
$
4,805

 
$
(906
)
 
$
82,032

Expenditures for additions to property & equipment, net of grants from outside parties
 
$
105,940

 
$
9,721

 
$
17,446

 
$
133,107

Carloads
 
1,207,760

 
419,156

 
818,542

 
2,445,458



55


 
 
Nine Months Ended September 30, 2016
 
 
North
American
Operations
 
Australian
Operations
 
U.K./European Operations
 
Total
Operations
Operating revenues:
 
 
 
 
 
 
 
 
Freight revenues
 
$
681,154

 
$
80,390

 
$
255,459

 
$
1,017,003

Freight-related revenues
 
184,627

 
76,142

 
135,897

 
396,666

All other revenues
 
48,766

 
4,699

 
17,859

 
71,324

Total operating revenues
 
$
914,547

 
$
161,231

 
$
409,215

 
$
1,484,993

Operating expenses:
 
 
 
 
 
 
 
 
Labor and benefits
 
295,603

 
49,321

 
130,373

 
475,297

Equipment rents
 
43,481

 
4,884

 
65,269

 
113,634

Purchased services
 
47,171

 
17,432

 
84,522

 
149,125

Depreciation and amortization
 
110,398

 
21,018

 
19,679

 
151,095

Diesel fuel used in train operations
 
41,578

 
14,042

 
28,231

 
83,851

Electricity used in train operations
 

 

 
9,895

 
9,895

Casualties and insurance
 
20,398

 
5,026

 
3,390

 
28,814

Materials
 
38,168

 
8,033

 
16,461

 
62,662

Trackage rights
 
26,799

 
7,201

 
30,509

 
64,509

Net (gain)/loss on sale and impairment of assets
 
(851
)
 
12,992

 
(148
)
 
11,993

Restructuring costs
 
805

 
789

 
4,726

 
6,320

Other expenses
 
54,843

 
18,491

 
18,423

 
91,757

Total operating expenses
 
678,393

 
159,229

 
411,330

 
1,248,952

Operating income/(loss)
 
$
236,154

 
$
2,002

 
$
(2,115
)
 
$
236,041

Operating ratio
 
74.2
%
 
98.8
%
 
100.5
%
 
84.1
%
Interest expense, net
 
$
29,730

 
$
6,963

 
$
15,529

 
$
52,222

Provision for/(benefit from) income taxes
 
$
59,354

 
$
521

 
$
(5,312
)
 
$
54,563

Expenditures for additions to property & equipment, net of grants from outside parties
 
$
95,282

 
$
8,094

 
$
26,195

 
$
129,571

Carloads
 
1,171,314

 
134,006

 
822,794

 
2,128,114

North American Operations
Operating Revenues
The following table sets forth our North American Operations operating revenues and carloads by new operations and existing operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Nine Months Ended September 30,
 
Increase/(Decrease) in
Total Operations
 
Increase/(Decrease) in Existing Operations
 
Currency Impact
 
2017
 
2016
 
 
 
 
Total Operations
 
New
Operations
 
Existing
Operations
 
Total Operations
 
Amount
 
%
 
Amount
 
%
 
Freight revenues
$
719,622

 
$
24,144

 
$
695,478

 
$
681,154

 
$
38,468

 
5.6
 %
 
$
14,324

 
2.1
 %
 
$
482

Freight-related revenues
186,814

 
875

 
185,939

 
184,627

 
2,187

 
1.2
 %
 
1,312

 
0.7
 %
 
179

All other revenues
47,641

 
853

 
46,788

 
48,766

 
(1,125
)
 
(2.3
)%
 
(1,978
)
 
(4.1
)%
 
105

Total operating revenues
$
954,077

 
$
25,872

 
$
928,205

 
$
914,547

 
$
39,530

 
4.3
 %
 
$
13,658

 
1.5
 %
 
$
766

Carloads
1,207,760

 
32,757

 
1,175,003

 
1,171,314

 
36,446

 
3.1
 %
 
3,689

 
0.3
 %
 
 

56


Freight Revenues
The following table sets forth the changes in our North American Operations freight revenues by commodity group segregated into new operations and existing operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
 
 
Increase/(Decrease) in Total Operations
 
New Operations
 
Currency
Impact
 
2016 Constant Currency*
 
Increase/(Decrease) in Existing Operations Constant Currency*
 
Nine Months Ended September 30,
 
 
 
 
 
Commodity Group
2017
 
2016
 
 
 
 
 
Agricultural Products
$
92,956

 
$
84,601

 
$
8,355

 
1,328

 
$
66

 
84,667

 
6,961

Autos & Auto Parts
17,019

 
13,373

 
3,646

 
2,092

 
9

 
13,382

 
1,545

Chemicals & Plastics
111,660

 
103,569

 
8,091

 
6,493

 
95

 
103,664

 
1,503

Coal & Coke
57,123

 
53,311

 
3,812

 

 
25

 
53,336

 
3,787

Food & Kindred Products
24,856

 
24,956

 
(100
)
 
508

 
11

 
24,967

 
(619
)
Intermodal
726

 
12

 
714

 
725

 

 
12

 
(11
)
Lumber & Forest Products
64,903

 
63,013

 
1,890

 
1,680

 
28

 
63,041

 
182

Metallic Ores
10,519

 
13,078

 
(2,559
)
 
1

 
16

 
13,094

 
(2,576
)
Metals
78,681

 
78,327

 
354

 
1,780

 
59

 
78,386

 
(1,485
)
Minerals & Stone
97,446

 
85,440

 
12,006

 
5,797

 
28

 
85,468

 
6,181

Petroleum Products
50,696

 
52,335

 
(1,639
)
 
1,299

 
38

 
52,373

 
(2,976
)
Pulp & Paper
79,690

 
79,087

 
603

 
1,068

 
105

 
79,192

 
(570
)
Waste
19,000

 
15,552

 
3,448

 
850

 
2

 
15,554

 
2,596

Other
14,347

 
14,500

 
(153
)
 
523

 

 
14,500

 
(676
)
Total freight revenues
$
719,622

 
$
681,154

 
$
38,468

 
24,144

 
$
482

 
$
681,636

 
$
13,842

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

57


The following table sets forth our North American Operations freight revenues, carloads and average freight revenues per carload for the nine months ended September 30, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2017
 
2016
 
2017
 
2016
 
2016 Constant Currency*
Agricultural Products
$
92,956

 
13.0
%
 
$
84,667

 
12.4
%
 
157,792

 
159,369

 
$
589

 
$
531

 
$
531

Autos & Auto Parts
17,019

 
2.4
%
 
13,382

 
2.0
%
 
27,705

 
21,987

 
614

 
608

 
609

Chemicals & Plastics
111,660

 
15.5
%
 
103,664

 
15.2
%
 
134,561

 
131,636

 
830

 
787

 
788

Coal & Coke
57,123

 
7.9
%
 
53,336

 
7.8
%
 
170,664

 
157,943

 
335

 
338

 
338

Food & Kindred Products
24,856

 
3.5
%
 
24,967

 
3.7
%
 
44,091

 
44,969

 
564

 
555

 
555

Intermodal
726

 
0.1
%
 
12

 
%
 
7,313

 
136

 
99

 
88

 
88

Lumber & Forest Products
64,903

 
9.0
%
 
63,041

 
9.3
%
 
105,020

 
104,646

 
618

 
602

 
602

Metallic Ores
10,519

 
1.5
%
 
13,094

 
1.9
%
 
13,840

 
16,883

 
760

 
775

 
776

Metals
78,681

 
10.9
%
 
78,386

 
11.5
%
 
104,496

 
103,764

 
753

 
755

 
755

Minerals & Stone
97,446

 
13.5
%
 
85,468

 
12.5
%
 
160,917

 
149,093

 
606

 
573

 
573

Petroleum Products
50,696

 
7.0
%
 
52,373

 
7.7
%
 
73,821

 
76,410

 
687

 
685

 
685

Pulp & Paper
79,690

 
11.1
%
 
79,192

 
11.6
%
 
120,831

 
124,017

 
660

 
638

 
639

Waste
19,000

 
2.6
%
 
15,554

 
2.3
%
 
39,461

 
33,226

 
481

 
468

 
468

Other
14,347

 
2.0
%
 
14,500

 
2.1
%
 
47,248

 
47,235

 
304

 
307

 
307

Total
$
719,622

 
100.0
%
 
$
681,636

 
100.0
%
 
1,207,760

 
1,171,314

 
$
596

 
$
582

 
$
582

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our North American Operations increased 36,446 carloads, or 3.1%, for the nine months ended September 30, 2017, compared with the same period in 2016. The increase consisted of 32,757 carloads from new operations and 3,689 carloads from existing operations. The increase in traffic from existing operations was principally due to increases of 12,721 carloads of coal and coke traffic, 5,124 carloads of waste traffic, 3,150 carloads of minerals and stone traffic and 2,788 carloads of autos and auto parts traffic, partially offset by decreases of 3,880 carloads of pulp and paper traffic, 3,725 carloads of petroleum products traffic, 3,043 carloads of metallic ores traffic, 2,740 carloads of agricultural products traffic, 1,739 carloads of lumber and forest products traffic and 1,601 carloads of food and kindred products traffic. All remaining traffic decreased by 3,366 carloads.
Changes in average freight revenues per carload in a commodity group may 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 2.4% to $596 for the nine months ended September 30, 2017, compared with the same period in 2016. Average freight revenues per carload from existing operations increased 1.7% to $592 for the nine months ended September 30, 2017, compared with the same period in 2016. A change in the mix of commodities decreased average freight revenues per carload by 0.7%, while higher fuel surcharges increased average freight revenues per carload by 0.4%. Excluding these factors, average freight revenues per carload from our North American Operations increased 2.0%.
The following information discusses the significant changes in our North American Operations freight revenues from existing operations by commodity group excluding the impact of foreign currency.

58


Agricultural products revenues increased $7.0 million, or 8.2%. Agricultural products average freight revenues per carload increased 10.2%, which increased revenues by $8.6 million, while traffic decreased 2,740 carloads, or 1.7%, which decreased revenues by $1.6 million. The increase in average freight revenues per carload was primarily driven by a change in the mix of business. The carload decrease was primarily due to reduced shipments as a result of modal competition, reduced export demand in the midwestern United States and plant closures in the southern United States, partially offset by increased grain shipments in the central United States during the first half of 2017.
Autos and auto parts revenues increased $1.5 million, or 11.5%, primarily due to a traffic increase of 2,788 carloads, or 12.7%, as a result of import spot shipments in the western United States and increased shipments in the midwestern United States related to a model conversion.
Chemicals and plastics revenues increased $1.5 million, or 1.4%. Chemicals and plastics average freight revenues per carload increased 2.5%, which increased revenues by $2.7 million, while traffic decreased 1,486 carloads, or 1.1%, which decreased revenues by $1.2 million. The carload decrease was primarily due to decreased shipments of industrial chemicals in the western United States.
Coal and coke revenues increased $3.8 million, or 7.1%, primarily due to a traffic increase of 12,721 carloads, or 8.1%, as a result of increased demand for coal power generation in the midwestern United States.
Metallic ores revenues decreased $2.6 million, or 19.7%, primarily due to a traffic decrease of 3,043 carloads, or 18.0%. The carload decrease was primarily due to the idling of an alumina customer facility in the southern United States in 2016 and lower production from a copper mining customer in the western United States.
Metals revenues decreased $1.5 million, or 1.9%. Metals average freight revenues per carload decreased 1.2%, which decreased revenues by $0.9 million, and traffic decreased 728 carloads, or 0.7%, which decreased revenues by $0.5 million. The carload decrease was primarily due to decreased shipments of pig iron.
Minerals and stone revenues increased $6.2 million, or 7.2%. Minerals and stone average freight revenues per carload increased 5.1%, which increased revenues by $4.3 million, and traffic increased 3,150 carloads, or 2.1%, which increased revenues by $1.9 million. The carload increase was primarily due to increased cement, clay, rock salt and frac sand shipments, partially offset by decreased shipments of construction aggregates.
Petroleum products revenues decreased $3.0 million, or 5.7%, primarily due to a traffic decrease of 3,725 carloads, or 4.9%. The carload decrease was primarily due to decreased shipments of liquid petroleum gases in the midwestern and western United States.
Waste revenues increased $2.6 million, or 16.7%, primarily due to a traffic increase of 5,124 carloads, or 15.4%, primarily resulting from new and expanded contracts in the midwestern United States.
Freight revenues from all remaining commodities combined decreased by a net $1.7 million.
Freight-Related Revenues
Excluding a $0.2 million increase due to the impact of foreign currency appreciation, 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 $2.0 million, or 1.1%, to $186.8 million for the nine months ended September 30, 2017, compared with $184.8 million for the nine months ended September 30, 2016. The increase consisted of $1.1 million from existing operations and $0.9 million from new operations. The increase from existing operations was primarily due to the recognition of revenue from a multi-year take-or-pay volume shortfall under a crude-by-rail contract and increased storage revenues, partially offset by decreased demurrage revenues.
All Other Revenues
Excluding a $0.1 million increase due to the impact of foreign currency appreciation, 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 $1.2 million, or 2.5%, to $47.6 million for the nine months ended September 30, 2017, compared with $48.9 million for the nine months ended September 30, 2016. The decrease included $2.1 million from existing operations, partially offset by $0.9 million from new operations.

59


Operating Expenses
Total operating expenses from our North American Operations increased $46.4 million, or 6.8%, to $724.8 million for the nine months ended September 30, 2017, compared with $678.4 million for the nine months ended September 30, 2016. The increase consisted of $25.2 million from new operations and $21.2 million from existing operations. The increase from existing operations was primarily due to an increase of $10.7 million in diesel fuel used in train operations, $6.9 million in labor and benefits, $5.6 million in depreciation and amortization and $5.2 million in casualties and insurance, partially offset by decreases of $5.7 million in equipment rents and $4.4 million in purchased services. In addition, the change from existing operations included a $0.7 million increase due to the impact of foreign currency appreciation.
The following table sets forth operating expenses from our North American Operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Increase/(Decrease) Constant Currency*
 
2017
 
2016
 
 
 
Currency
Impact
 
2016 Constant Currency*
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Increase/(Decrease)
 
 
 
Labor and benefits
$
315,210

 
33.1
 %
 
$
295,603

 
32.3
 %
 
$
19,607

 
$
281

 
$
295,884

 
$
19,326

Equipment rents
39,993

 
4.2
 %
 
43,481

 
4.8
 %
 
(3,488
)
 
45

 
43,526

 
(3,533
)
Purchased services
45,350

 
4.8
 %
 
47,171

 
5.2
 %
 
(1,821
)
 
40

 
47,211

 
(1,861
)
Depreciation and amortization
117,822

 
12.3
 %
 
110,398

 
12.1
 %
 
7,424

 
181

 
110,579

 
7,243

Diesel fuel used in train operations
54,038

 
5.7
 %
 
41,578

 
4.5
 %
 
12,460

 
67

 
41,645

 
12,393

Casualties and insurance
26,532

 
2.8
 %
 
20,398

 
2.2
 %
 
6,134

 
13

 
20,411

 
6,121

Materials
38,413

 
4.0
 %
 
38,168

 
4.2
 %
 
245

 
49

 
38,217

 
196

Trackage rights
28,732

 
3.0
 %
 
26,799

 
2.9
 %
 
1,933

 
7

 
26,806

 
1,926

Net gain on sale and impairment of assets
(870
)
 
(0.1
)%
 
(851
)
 
(0.1
)%
 
(19
)
 
(5
)
 
(856
)
 
(14
)
Restructuring costs
384

 
 %
 
805

 
0.1
 %
 
(421
)
 

 
805

 
(421
)
Other expenses
59,206

 
6.2
 %
 
54,843

 
6.0
 %
 
4,363

 
59

 
54,902

 
4,304

Total operating expenses
$
724,810

 
76.0
 %
 
$
678,393

 
74.2
 %
 
$
46,417

 
$
737

 
$
679,130

 
$
45,680

* 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 an increase of $0.7 million due to the impact of foreign currency appreciation.
Labor and benefits expense was $315.2 million for the nine months ended September 30, 2017, compared with $295.9 million for the nine months ended September 30, 2016, an increase of $19.3 million, or 6.5%. The increase consisted of $12.4 million from new operations, of which $2.7 million related to the P&W integration primarily due to severance costs, and $6.9 million, or 2.3%, from existing operations. The increase from existing operations was due primarily to annual wage increases.
Equipment rents expense was $40.0 million for the nine months ended September 30, 2017, compared with $43.5 million for the nine months ended September 30, 2016, a decrease of $3.5 million, or 8.1%. The decrease consisted of $5.7 million from existing operations, partially offset by $2.2 million from new operations. The decrease from existing operations was primarily due to reduced leased freight car expense due to certain leased cars being returned to lessors or converted to per diem leases, reduced leased locomotive expense due to buyouts of certain of our locomotive leases and reduced car hire expense.
Purchased services expense, which consists of the costs of services provided by outside contractors for repairs and
maintenance of track property, locomotives, railcars and other equipment, as well as contract labor costs for crewing services, was $45.4 million for the nine months ended September 30, 2017, compared with $47.2 million for the nine months ended September 30, 2016, a decrease of $1.9 million, or 3.9%. The decrease consisted of $4.4 million from existing operations, partially offset by $2.6 million from new operations. The decrease from existing operations was primarily due to a reduction in the use of third-party contractors for track repairs.
Depreciation and amortization expense was $117.8 million for the nine months ended September 30, 2017, compared with $110.6 million for the nine months ended September 30, 2016, an increase of $7.2 million, or 6.6%. The increase consisted of $5.6 million from existing operations and $1.6 million from new operations. The increase from existing operations was primarily attributable to a larger depreciable asset base in 2017 compared with 2016, reflecting capital spending in 2016.

60


The cost of diesel fuel used in train operations was $54.0 million for the nine months ended September 30, 2017, compared with $41.6 million for the nine months ended September 30, 2016, an increase of $12.4 million, or 29.8%. The increase consisted of $10.7 million from existing operations and $1.7 million from new operations. The increase from existing operations consisted of $9.3 million due to a 22.0% increase in average fuel cost per gallon and $1.4 million due to a 3.1% increase in diesel fuel consumption.
Casualties and insurance expense was $26.5 million for the nine months ended September 30, 2017, compared with $20.4 million for the nine months ended September 30, 2016, an increase of $6.1 million, or 30.0%. The increase consisted of $5.2 million from existing operations and $0.9 million from new operations. The increase from existing operations was primarily attributable to an increase in derailments and washout expense in 2017.
Other expenses were $59.2 million for the nine months ended September 30, 2017, compared with $54.9 million for the nine months ended September 30, 2016, an increase of $4.3 million, or 7.8%. The increase consisted of $2.9 million from existing operations and $1.4 million from new operations. The increase from existing operations was primarily attributable to corporate development and related costs.
Operating Income/Operating Ratio
Operating income from our North American Operations was $229.3 million for the nine months ended September 30, 2017, compared with $236.2 million for the nine months ended September 30, 2016. Operating income for the nine months ended September 30, 2017 included corporate development and related costs of $7.4 million, about half of which related to the integration of P&W and the remainder to other corporate development projects. Operating income for the nine months ended September 30, 2016 included corporate development and related costs of $3.2 million and restructuring costs of $0.8 million. The operating ratio was 76.0% for the nine months ended September 30, 2017, compared with 74.2% for the nine months ended September 30, 2016.
Australian Operations
Operating Revenues
The following table sets forth our Australian Operations operating revenues and carloads by new operations and existing operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Nine Months Ended September 30,
 
Increase/(Decrease) in Total Operations
 
Increase/(Decrease) in 
Existing Operations
 
Currency Impact
 
2017
 
2016
 
 
 
 
Total Operations
 
New
Operations
 
Eliminations(a)
 
Existing
Operations
 
Total Operations
 
Amount
 
%
 
Amount
 
%
 
Freight revenues
$
191,031

 
$
86,292

 
$

 
$
104,739

 
$
80,390

 
$
110,641

 
NM

 
$
24,349

 
30.3
 %
 
$
2,616

Freight-related revenues
36,089

 

 
(34,966
)
 
71,055

 
76,142

 
(40,053
)
 
(52.6
)%
 
(5,087
)
 
(6.7
)%
 
2,414

All other revenues
4,866

 

 

 
4,866

 
4,699

 
167

 
3.6
 %
 
167

 
3.6
 %
 
142

Total operating revenues
$
231,986

 
$
86,292

 
$
(34,966
)
 
$
180,660

 
$
161,231

 
$
70,755

 
43.9
 %
 
$
19,429

 
12.1
 %
 
$
5,172

Carloads
419,156

 
271,485

 

 
147,671

 
134,006

 
285,150

 
NM

 
13,665

 
10.2
 %
 
 
(a) Represents revenues for services provided by Freightliner Australia to GRail, which were eliminated in our consolidated revenues.

61


Freight Revenues
The following table sets forth the changes in our Australian Operations freight revenues by commodity group segregated into new operations and existing operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands): 
 
Nine Months Ended
 
Increase/(Decrease) in Total Operations
 
New Operations
 
Currency Impact
 
2016 Constant Currency*
 
Increase/(Decrease) Existing Operations Constant Currency*
 
September 30,
 
 
 
 
 
Commodity Group
2017
 
2016
 
 
 
 
 
Agricultural Products
$
17,737

 
$
13,319

 
$
4,418

 
$

 
$
430

 
$
13,749

 
$
3,988

Coal and Coke
86,292

 

 
86,292

 
86,292

 

 

 

Intermodal
52,113

 
49,305

 
2,808

 

 
1,579

 
50,884

 
1,229

Metallic Ores
29,595

 
11,490

 
18,105

 

 
401

 
11,891

 
17,704

Minerals & Stone
4,787

 
5,698

 
(911
)
 

 
186

 
5,884

 
(1,097
)
Petroleum Products
507

 
578

 
(71
)
 

 
20

 
598

 
(91
)
Total freight revenues
$
191,031

 
$
80,390

 
$
110,641

 
$
86,292

 
$
2,616

 
83,006

 
$
21,733

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
The following table sets forth our Australian Operations freight revenues, carloads and average freight revenues per carload for the nine months ended September 30, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2017
 
2016
 
2017
 
2016
 
2016 Constant Currency*
Agricultural Products
$
17,737

 
9.3
%
 
$
13,749

 
16.6
%
 
43,804

 
32,701

 
$
405

 
$
407

 
$
420

Coal & Coke
86,292

 
45.1
%
 

 
%
 
271,485

 

 
318

 

 

Intermodal
52,113

 
27.3
%
 
50,884

 
61.3
%
 
44,153

 
44,360

 
1,180

 
1,111

 
1,147

Metallic Ores
29,595

 
15.5
%
 
11,891

 
14.3
%
 
24,114

 
9,182

 
1,227

 
1,251

 
1,295

Minerals & Stone
4,787

 
2.5
%
 
5,884

 
7.1
%
 
35,394

 
47,552

 
135

 
120

 
124

Petroleum Products
507

 
0.3
%
 
598

 
0.7
%
 
206

 
211

 
2,461

 
2,739

 
2,834

Total
$
191,031

 
100.0
%
 
$
83,006

 
100.0
%
 
419,156

 
134,006

 
$
456

 
$
600

 
$
619

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our Australian Operations increased 285,150 carloads for the nine months ended September 30, 2017, compared with the same period in 2016. The increase consisted of 271,485 carloads from new operations and 13,665 carloads from existing operations. The increase in traffic from existing operations was principally due to increases of 14,932 carloads of metallic ores traffic and 11,103 carloads of agricultural products traffic, partially offset by a decrease of 12,158 carloads of minerals and stone traffic. All remaining traffic decreased by 212 carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group. Excluding the impact of foreign currency, average freight revenues per carload from our Australian Operations decreased 26.3% to $456 for the nine months ended September 30, 2017, compared with the same period in 2016. Average freight revenues per carload from existing operations excluding the impact of foreign currency increased 14.5% to $709 for the nine months ended September 30, 2017, compared with the same period in 2016. The increase in average freight revenues per carload from existing operations was primarily due to increased metallic ores shipments as a result of the recommencement of operations at two previously closed iron ore and manganese mines and decreased minerals and stone shipments due to a temporary maintenance outage at a customer port facility.
The following information discusses the significant changes in our Australian Operations freight revenues from existing operations by commodity group excluding the impact of foreign currency.

62


Agricultural products revenues increased $4.0 million, or 29.0%. Agricultural products traffic increased 11,103 carloads, or 34.0%, which increased revenues by $4.5 million, while average freight revenues per carload decreased 3.6%, which decreased revenues by $0.5 million. The carload increase was primarily due to stronger mainland grain shipments.
Intermodal revenues increased $1.2 million, or 2.4%, primarily due to an increase in average freight revenues per carload of 2.9%. The increase in average freight revenues per carload was primarily due to higher fuel surcharges.
Metallic ores revenues increased $17.7 million. Metallic ores traffic increased 14,932 carloads, which increased revenues by $18.3 million, while average freight revenues per carload decreased 5.3%, which decreased revenues by $0.6 million. The carload increase was primarily due to the recommencement of operations at two previously closed iron ore and manganese mines.
Minerals and stone revenues decreased $1.1 million, or 18.6%, primarily due to a traffic decrease of 12,158 carloads, or 25.6%. The carload decrease was primarily due to a temporary maintenance outage at a customer port facility.
Freight revenues from all remaining commodities combined decreased by less than $0.1 million.
Freight-Related Revenues
Excluding a $2.4 million increase due to the impact of foreign currency appreciation, 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, decreased $42.5 million, or 54.1%, to $36.1 million for the nine months ended September 30, 2017, compared with $78.6 million for the nine months ended September 30, 2016. Excluding $35.0 million of freight-related revenues for services provided by Freightliner Australia to GRail for the for the nine months ended September 30, 2017, which were eliminated in our consolidated freight-related revenues, our freight-related revenues from existing operations decreased $7.5 million. The decrease from existing operations was primarily due to the loss of the fixed payments from Arrium that we received in the first quarter of 2016 associated with our rail haulage agreement to serve their Southern Iron mine that is now closed and shipments of stockpiled manganese in 2016 at a previously closed customer mine facility. The decrease was partially offset by an increase in agricultural products-related switching revenues in 2017.
All Other Revenues
Excluding a $0.1 million increase due to the impact of foreign currency appreciation, 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, increased to $4.9 million for the nine months ended September 30, 2017, compared with $4.8 million for the nine months ended September 30, 2016.
Operating Expenses
Total operating expenses from our Australian Operations for the nine months ended September 30, 2017 increased $13.1 million, or 8.2%, to $172.3 million, compared with $159.2 million for the nine months ended September 30, 2016. The increase consisted of $25.7 million from new operations, partially offset by a decrease of $12.7 million from existing operations. Operating expenses for the nine months ended September 30, 2016 included a $13.0 million impairment of a rolling-stock maintenance facility and an accounts receivable reserve of $8.1 million, both of which were associated with an iron ore/steel making customer entering into voluntary administration. In addition, the change from existing operations included a $4.9 million increase due to the impact of foreign currency appreciation.

63


The following table sets forth operating expenses from our Australian Operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands): 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Increase/(Decrease) Constant Currency*
 
2017
 
2016
 
 
 
Currency
Impact
 
2016 Constant Currency*
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Increase/(Decrease)
 
 
 
Labor and benefits
$
52,447

 
22.7
%
 
$
49,321

 
30.6
%
 
$
3,126

 
$
1,626

 
$
50,947

 
$
1,500

Equipment rents
4,215

 
1.8
%
 
4,884

 
3.0
%
 
(669
)
 
162

 
5,046

 
(831
)
Purchased services
19,821

 
8.5
%
 
17,432

 
10.8
%
 
2,389

 
560

 
17,992

 
1,829

Depreciation and amortization
45,915

 
19.8
%
 
21,018

 
13.0
%
 
24,897

 
696

 
21,714

 
24,201

Diesel fuel used in train operations
18,913

 
8.2
%
 
14,042

 
8.7
%
 
4,871

 
458

 
14,500

 
4,413

Casualties and insurance
4,219

 
1.8
%
 
5,026

 
3.1
%
 
(807
)
 
168

 
5,194

 
(975
)
Materials
8,629

 
3.7
%
 
8,033

 
5.0
%
 
596

 
266

 
8,299

 
330

Trackage rights
10,392

 
4.5
%
 
7,201

 
4.5
%
 
3,191

 
242

 
7,443

 
2,949

Net (gain)/loss on sale and impairment of assets
(59
)
 
%
 
12,992

 
8.1
%
 
(13,051
)
 
200

 
13,192

 
(13,251
)
Restructuring costs
338

 
0.1
%
 
789

 
0.5
%
 
(451
)
 
13

 
802

 
(464
)
Other expenses
7,471

 
3.2
%
 
18,491

 
11.5
%
 
(11,020
)
 
462

 
18,953

 
(11,482
)
Total operating expenses
$
172,301

 
74.3
%
 
$
159,229

 
98.8
%
 
$
13,072

 
$
4,853

 
$
164,082

 
$
8,219

* 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 an increase of $4.9 million due to the impact of foreign currency appreciation.
Depreciation and amortization expense was $45.9 million for the nine months ended September 30, 2017, compared with $21.7 million for the nine months ended September 30, 2016, an increase of $24.2 million. The increase was primarily attributable to new operations.
The cost of diesel fuel used in train operations was $18.9 million for the nine months ended September 30, 2017, compared with $14.5 million for the nine months ended September 30, 2016, an increase of $4.4 million, or 30.4%. The increase consisted of $2.7 million due to an 18.4% increase in average fuel cost per gallon and $1.7 million due to a 10.2% increase in diesel fuel consumption.
Trackage rights expense was $10.4 million for the nine months ended September 30, 2017, compared with $7.4 million for the nine months ended September 30, 2016, an increase of $2.9 million, or 39.6%. The increase was primarily attributable to services for an iron ore customer that recommenced operations in July 2016, as well as increased grain shipments.
Net (gain)/loss on the sale and impairment of assets for the nine months ended September 30, 2016 of $13.0 million was primarily related to the impairment of a rolling-stock maintenance facility resulting from an iron ore/steel making customer entering voluntary administration.
Other expenses were $7.5 million for the nine months ended September 30, 2017, compared with $19.0 million for the nine months ended September 30, 2016, a decrease of $11.5 million, or 60.6%. The decrease was primarily due to an accounts receivable reserve recorded during the nine months ended September 30, 2016 associated with an iron ore/steel making customer entering into voluntary administration and corporate development and related costs associated with the GRail Transactions.

64


Operating Income/Operating Ratio
Operating income from our Australian Operations was $59.7 million for the nine months ended September 30, 2017, compared with $2.0 million for the nine months ended September 30, 2016. Operating income for the nine months ended September 30, 2017 included $0.3 million of restructuring costs. For the nine months ended September 30, 2016, our Australian Operations recorded charges of $21.1 million, including a $13.0 million impairment of a rolling-stock maintenance facility and an associated accounts receivable reserve of $8.1 million, resulting from an iron ore/steel making customer entering voluntary administration. Operating income for the nine months ended September 30, 2016 also included $3.9 million of corporate development and related costs, primarily associated with the GRail Transactions, and $0.8 million of restructuring costs. The operating ratio was 74.3% for the nine months ended September 30, 2017, compared with 98.8% for the nine months ended September 30, 2016.
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 nine months ended September 30, 2017 and 2016 (dollars in thousands):
 
Nine Months Ended September 30,
 
Increase/(Decrease) in Total Operations
 
Decrease in Existing
Operations
 
 
 
2017
 
2016
 
 
 
 
 
Total Operations
 
New
Operations
 
Existing
Operations
 
Total Operations
 
Amount
 
%
 
Amount
 
%
 
Currency Impact
Freight revenues
$
250,982

 
$

 
$
250,982

 
$
255,459

 
$
(4,477
)
 
(1.8
)%
 
$
(4,477
)
 
(1.8
)%
 
$
(14,156
)
Freight-related revenues
164,978

 
45,955

 
119,023

 
135,897

 
29,081

 
21.4
 %
 
(16,874
)
 
(12.4
)%
 
(8,359
)
All other revenues
34,445

 
18,777

 
15,668

 
17,859

 
16,586

 
92.9
 %
 
(2,191
)
 
(12.3
)%
 
(1,384
)
Total operating revenues
$
450,405

 
$
64,732

 
$
385,673

 
$
409,215

 
$
41,190

 
10.1
 %
 
$
(23,542
)
 
(5.8
)%
 
$
(23,899
)
Carloads
818,542

 

 
818,542

 
822,794

 
(4,252
)
 
(0.5
)%
 
(4,252
)
 
(0.5
)%
 
 
Freight Revenues
The following table sets forth the changes in our U.K./European Operations freight revenues by commodity group for the nine months ended September 30, 2017 and 2016 (dollars in thousands): 
 
Nine Months Ended September 30,
 
Increase/(Decrease)
 
Currency Impact
 
2016 Constant Currency*
 
Increase/(Decrease) Constant Currency*
 
2017
 
2016
 
 
 
 
Commodity Group
Amount
 
% of Total
 
Amount
 
% of Total
 
 
 
 
Agricultural Products
$
3,532

 
1.4
%
 
$
1,364

 
0.5
%
 
$
2,168

 
$
36

 
1,400

 
$
2,132

Coal & Coke
7,464

 
3.0
%
 
10,951

 
4.3
%
 
(3,487
)
 
(737
)
 
10,214

 
(2,750
)
Intermodal
190,163

 
75.7
%
 
201,001

 
78.8
%
 
(10,838
)
 
(13,092
)
 
187,909

 
2,254

Lumber & Forest Products

 


 
126

 
%
 
(126
)
 
(2
)
 
124

 
(124
)
Metallic Ores

 
%
 
40

 
%
 
(40
)
 
1

 
41

 
(41
)
Minerals & Stone
49,823

 
19.9
%
 
41,977

 
16.4
%
 
7,846

 
(362
)
 
41,615

 
8,208

Total freight revenues
$
250,982

 
100.0
%
 
$
255,459

 
100.0
%
 
$
(4,477
)
 
$
(14,156
)
 
241,303

 
$
9,679

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.

65


The following table sets forth our U.K./European Operations freight revenues, carloads and average freight revenues per carload for the nine months ended September 30, 2017 and 2016 (dollars in thousands, except average freight revenues per carload):
 
 
Freight Revenues
 
Carloads
 
Average Freight Revenues Per
Carload
 
 
 
 
 
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016 Constant Currency*
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2017
 
2016
 
2017
 
2016
 
2016 Constant Currency*
Agricultural Products
$
3,532

 
1.4
%
 
$
1,400

 
0.6
%
 
3,036

 
1,494

 
$
1,163

 
$
913

 
$
937

Coal & Coke
7,464

 
3.0
%
 
10,214

 
4.2
%
 
18,333

 
26,589

 
407

 
412

 
384

Intermodal
190,163

 
75.7
%
 
187,909

 
77.9
%
 
669,963

 
679,693

 
284

 
296

 
276

Lumber & Forest Products

 


 
124

 
0.1
%
 

 
315

 

 
400

 
394

Metallic Ores

 
%
 
41

 
%
 

 
93

 

 
430

 
441

Minerals & Stone
49,823

 
19.9
%
 
41,615

 
17.2
%
 
127,210

 
114,610

 
392

 
366

 
363

Total
$
250,982

 
100.0
%
 
$
241,303

 
100.0
%
 
818,542

 
822,794

 
$
307

 
$
310

 
$
293

* Constant currency amounts reflect the prior period results translated at the current period exchange rates.
Total traffic from our U.K./European Operations decreased 4,252 carloads, or 0.5%, for the nine months ended September 30, 2017, compared with the same period in 2016. The traffic decrease was principally due to decreases of 9,730 carloads of intermodal traffic and 8,256 carloads of coal and coke traffic, partially offset by increases of 12,600 carloads of minerals and stone traffic and 1,542 carloads of agricultural products traffic. All remaining traffic decreased by 408 carloads.
Changes in average freight revenues per carload in a commodity group may be impacted by changes in customer rates and fuel surcharges, as well as changes in the mix of customer traffic within a commodity group. Excluding the impact of foreign currency, average freight revenues per carload from our U.K./European Operations increased 4.8% to $307 for the nine months ended September 30, 2017, compared with the same period in 2016.
The following information discusses the significant changes in our U.K./European Operations freight revenues by commodity group excluding the impact of foreign currency.
Agricultural products revenues increased $2.1 million, primarily due to a traffic increase of 1,542 carloads in Poland due to the development of new business.
Coal and coke revenues decreased $2.8 million, or 26.9%. Coal and coke traffic decreased 8,256 carloads, or 31.1%, which decreased revenues by $3.4 million, while average freight revenues per carload increased 6.0%, which increased revenues by $0.6 million. The carload decrease was primarily due to lower demand for steam coal in the U.K., largely as a result of competition from natural gas power generation and an increase in the carbon tax, partially offset by increased spot traffic in Poland.
Intermodal revenues increased $2.3 million, or 1.2%. Intermodal average freight revenues per carload increased 2.9%, which increased revenues by $5.0 million, while traffic decreased 9,730 carloads, or 1.4%, which decreased revenues by $2.8 million. The carload decrease was primarily due to lower volumes in Continental Europe in 2017 due to the discontinuation of certain routes as part of our restructuring plan, partially offset by higher intermodal volumes in the U.K.
Minerals and stone revenues increased $8.2 million, or 19.7%. Minerals and stone traffic increased 12,600 carloads, or 11.0%, which increased revenues by $4.9 million, and average freight revenues per carload increased 8.0%, which increased revenues by $3.3 million. The carload increase was primarily due to higher construction aggregates shipments in Poland. The increase in average freight revenues per carload was primarily due to a change in the mix of business in the U.K.
Freight revenues from all remaining commodities combined decreased by $0.2 million.
Freight-Related Revenues
Freight-related revenues from our U.K./European Operations include trucking haulage services, container storage and switching services, as well as infrastructure services, where we operate work trains for the track infrastructure owner. Freight-related revenues in the U.K./Europe also include traction service (or hook and pull), which requires us to provide locomotives and drivers to move a customer's train between specified origin and destination points, and other ancillary revenues related to the movement of freight.

66


Excluding an $8.4 million decrease due to the impact of foreign currency depreciation, freight-related revenues from our U.K./European Operations increased $37.4 million, or 29.4%, to $165.0 million for the nine months ended September 30, 2017, compared with $127.5 million for the nine months ended September 30, 2016. The increase in freight-related revenues consisted of $46.0 million from new operations, partially offset by a decrease of $8.5 million from existing operations. The decrease from existing operations was primarily due to the discontinuation of certain routes in Continental Europe following the completion of the restructuring of ERS in the first half of 2017 and decreased U.K. infrastructure revenues, partially offset by increased switching revenues in the U.K.
All Other Revenues
Excluding a $1.4 million decrease due to the impact of foreign currency depreciation, all other revenues from our U.K./European Operations, which includes revenues from container sales, third-party car and locomotive repairs, property rentals and other ancillary revenues not directly related to the movement of freight, increased $18.0 million to $34.4 million for the nine months ended September 30, 2017, compared with $16.5 million for the nine months ended September 30, 2016. The increase consisted of $18.8 million from new operations, primarily from container sales and container repairs at Pentalver, partially offset by a decrease of $0.8 million from existing operations. The decrease from existing operations was primarily due to reduced management and technical support revenues in Saudi Arabia resulting primarily from the timing of project deliverables, partially offset by increased crewing revenues.
Operating Expenses
Total operating expenses from our U.K./European Operations were $449.1 million for the nine months ended September 30, 2017, compared with $411.3 million for the nine months ended September 30, 2016, an increase of $37.7 million, or 9.2%. The increase included $61.6 million from new operations, partially offset by a decrease of $23.9 million from existing operations. The decrease from existing operations included a $23.5 million decrease due to the impact of foreign currency depreciation.
The following table sets forth operating expenses from our U.K./European Operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands): 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Increase/(Decrease) Constant Currency*
 
2017
 
2016
 
 
 
Currency
Impact
 
2016 Constant Currency*
 
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Increase/(Decrease)
 
 
 
Labor and benefits
$
128,471

 
28.4
%
 
$
130,373

 
31.8
%
 
$
(1,902
)
 
$
(9,712
)
 
$
120,661

 
$
7,810

Equipment rents
56,191

 
12.5
%
 
65,269

 
15.9
%
 
(9,078
)
 
(3,324
)
 
61,945

 
(5,754
)
Purchased services
111,187

 
24.7
%
 
84,522

 
20.7
%
 
26,665

 
(3,065
)
 
81,457

 
29,730

Depreciation and amortization
22,772

 
5.1
%
 
19,679

 
4.8
%
 
3,093

 
(1,293
)
 
18,386

 
4,386

Diesel fuel used in train operations
32,767

 
7.3
%
 
28,231

 
6.9
%
 
4,536

 
(1,572
)
 
26,659

 
6,108

Electricity used in train operations
6,072

 
1.3
%
 
9,895

 
2.4
%
 
(3,823
)
 
(259
)
 
9,636

 
(3,564
)
Casualties and insurance
2,595

 
0.6
%
 
3,390

 
0.8
%
 
(795
)
 
(237
)
 
3,153

 
(558
)
Materials
30,819

 
6.8
%
 
16,461

 
4.0
%
 
14,358

 
(1,260
)
 
15,201

 
15,618

Trackage rights
27,528

 
6.1
%
 
30,509

 
7.5
%
 
(2,981
)
 
(1,278
)
 
29,231

 
(1,703
)
Net loss/(gain) on sale and impairment of assets
(167
)
 
%
 
(148
)
 
%
 
(19
)
 
8

 
(140
)
 
(27
)
Restructuring costs
8,022

 
1.8
%
 
4,726

 
1.2
%
 
3,296

 
(466
)
 
4,260

 
3,762

Other expenses
22,817

 
5.1
%
 
18,423

 
4.5
%
 
4,394

 
(1,016
)
 
17,407

 
5,410

Total operating expenses
$
449,074

 
99.7
%
 
$
411,330

 
100.5
%
 
$
37,744

 
$
(23,474
)
 
$
387,856

 
$
61,218

* 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 $23.5 million due to the impact of foreign currency depreciation.
Labor and benefits expense was $128.5 million for the nine months ended September 30, 2017, compared with $120.7 million for the nine months ended September 30, 2016, an increase of $7.8 million, or 6.5%. The increase consisted of $11.7 million from new operations, partially offset by a decrease of $3.9 million, or 3.2%, from existing operations. The decrease from existing operations was primarily due to reduced headcount as a result of the restructuring of the U.K. coal business and the discontinuation of certain routes in Continental Europe as part of our restructuring of ERS.

67


Equipment rents expense was $56.2 million for the nine months ended September 30, 2017, compared with $61.9 million for the nine months ended September 30, 2016, a decrease of $5.8 million, or 9.3%. The decrease consisted of $10.8 million from existing operations, partially offset by $5.1 million from new operations. The 2016 period included surplus lease costs in Continental Europe and higher locomotive lease costs in the U.K. that have since been renegotiated with more favorable terms. These resulted in lower equipment costs in 2017 that were partially offset by additional locomotive lease expense in Poland to support increased aggregates and grain business.
Purchased services expense, which consists of the costs of services provided by outside contractors for repairs and maintenance of locomotives, railcars and other equipment, as well as contract labor costs for crewing services, was $111.2 million for the nine months ended September 30, 2017, compared with $81.5 million for the nine months ended September 30, 2016, an increase of $29.7 million, or 36.5%. The increase consisted of $22.2 million from new operations and $7.5 million from existing operations. The increase in existing operations was primarily due to cost reimbursements in 2016 as a result of disruptions caused by a temporary flood-related bridge outage in the U.K. In addition, the 2017 period included increased third-party costs for services performed at the ports, partially offset by a decrease due to the discontinuation of certain routes in Continental Europe as part of our restructuring plan.
Depreciation and amortization expense was $22.8 million for the nine months ended September 30, 2017, compared with $18.4 million for the nine months ended September 30, 2016, an increase of $4.4 million, or 23.9%. The increase consisted of $2.3 million from existing operations and $2.1 million from new operations. The increase from existing operations was primarily attributable to a larger depreciable asset base in 2017 compared with 2016, reflecting capital spending in 2016.
The cost of diesel fuel used in train operations was $32.8 million for the nine months ended September 30, 2017, compared with $26.7 million for the nine months ended September 30, 2016, an increase of $6.1 million, or 22.9%. The increase consisted of $4.7 million due to an 18.6% increase in average fuel cost per gallon and $1.5 million due to a 3.7% increase in diesel fuel consumption.
Electricity used in train operations was $6.1 million for the nine months ended September 30, 2017, compared with $9.6 million for the nine months ended September 30, 2016, a decrease of $3.6 million, or 37.0%. The decrease was primarily due to reimbursement of prior year energy taxes as a result of an initiative by the German government as well as the discontinuation of certain routes in Continental Europe as part of our restructuring plan.
Materials expense, which primarily consists of costs of containers sold to third parties, 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 $30.8 million for the nine months ended September 30, 2017, compared with $15.2 million for the nine months ended September 30, 2016, an increase of $15.6 million. The increase consisted of $16.6 million from new operations, partially offset by a decrease of $1.0 million from existing operations. The decrease from existing operations was primarily due to timing of terminal infrastructure maintenance in the U.K. in 2016.
Trackage rights expense was $27.5 million for the nine months ended September 30, 2017, compared with $29.2 million for the nine months ended September 30, 2016, a decrease of $1.7 million, or 5.8%. The decrease was primarily due to the discontinuation of certain routes in Continental Europe as part of our restructuring plan, partially offset by increased construction aggregates shipments in Poland.
Restructuring costs for the nine months ended September 30, 2017 of $8.0 million were primarily related to our previously announced restructuring of ERS. Restructuring costs for the nine months ended September 30, 2016 of $4.7 million were primarily related to restructuring of the U.K. coal business.
Other expenses were $22.8 million for the nine months ended September 30, 2017, compared with $17.4 million for the nine months ended September 30, 2016, an increase of $5.4 million, or 31.1%. The increase consisted of $3.4 million from new operations and $2.0 million from existing operations. The increase from existing operations was primarily due to corporate development and related costs primarily associated with the acquisition and integration of Pentalver and an accounts receivable reserve associated with a customer entering into bankruptcy.
Operating Income/(Loss)/Operating Ratio
Operating income from our U.K./European Operations was $1.3 million for the nine months ended September 30, 2017, compared with an operating loss of $2.1 million for the nine months ended September 30, 2016. Operating income from our U.K./European Operations for the nine months ended September 30, 2017 included $8.0 million of restructuring costs and $3.7 million of corporate development and related costs. The operating loss from our U.K./European Operations for the nine months ended September 30, 2016 included $4.7 million of restructuring costs. The operating ratio was 99.7% for the nine months ended September 30, 2017, compared with 100.5% for the nine months ended September 30, 2016.

68


Liquidity and Capital Resources
We had cash and cash equivalents of $80.3 million as of September 30, 2017, of which, $48.0 million was from our Australian Operations. In accordance with our Australia Partnership agreement, the cash and cash equivalents of our Australian Operations can be used for the following: 1) to make payments in the usual and regular course of business, 2) to pay down debt of the Partnership and 3) to make distributions to the Partners in proportion to their investments.
Based on current expectations, we believe our cash, together with our other liquid assets, anticipated future cash flows from operations, availability under our 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.
As of September 30, 2017, we had long-term debt, including current portion, of $2,384.7 million, which comprised 41.0% of our total capitalization, and $396.3 million of unused borrowing capacity under the Credit Agreement. At December 31, 2016, we had long-term debt, including current portion, totaling $2,359.5 million, which comprised 42.5% of our total capitalization.
During the nine months ended September 30, 2017 and 2016, we generated $350.4 million and $303.6 million, respectively, of cash from operating activities. Changes in working capital decreased net cash flows by $28.4 million and $30.6 million for the nine months ended September 30, 2017 and 2016, respectively.
During the nine months ended September 30, 2017 and 2016, our cash used in investing activities was $232.9 million and $117.2 million, respectively. For the nine months ended September 30, 2017, the primary drivers of cash used in investing activities were $107.6 million of net cash paid for acquisitions, including the acquisitions of Pentalver, HOG and a 50% joint venture in CG Railway, LLC, partially offset by proceeds received from a working capital adjustment related to the GRail acquisition, and $149.1 million of cash used for capital expenditures, including $4.3 million for new business investments, partially offset by $16.0 million of cash received from grants from outside parties for capital spending. For the nine months ended September 30, 2016, primary drivers of cash used in investing activities were $159.5 million of cash used for capital expenditures, including new business investments of $8.6 million, partially offset by $30.0 million in cash received from grants from outside parties for capital spending and $10.3 million of insurance proceeds for the replacement of assets.
During the nine months ended September 30, 2017 and 2016, our cash used in financing activities was $75.5 million and $197.7 million, respectively. For the nine months ended September 30, 2016, the primary driver of cash used in financing activities resulted from net payments on outstanding debt of $200.6 million.
Credit Agreement
We made scheduled quarterly principal payments under our Credit Agreement of $5.2 million on the United States term loan and £3.8 million (or $4.9 million at the exchange rate on the dates the payments were made) on our U.K. term loan during the nine months ended September 30, 2017. We also made prepayments on our United States term loan of $159.8 million.
For additional information regarding our Credit Agreement, see Note 6, Long-Term Debt, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.
2017 Budgeted Capital Expenditures
The following table sets forth our budgeted capital expenditures for the year ending December 31, 2017 (dollars in thousands):
 
 
2017 Budgeted
 
 
Capital
 
 
Expenditures
Track and equipment improvements, self-funded
 
$
195,000

Track and equipment improvements, subject to third-party funding
 
79,000

New business investments
 
39,000

Gross capital expenditures
 
$
313,000

Grants from outside parties
 
(61,000
)
Net capital expenditures
 
$
252,000

Less: Capital expenditures expected to be classified as cash flows from financing activities
 
13,000

Net capital expenditures expected to be classified as cash flows from investing activities
 
$
239,000


69


During the nine months ended September 30, 2017, we incurred $148.9 million in aggregate capital expenditures related to current year projects of which we paid $136.6 million in cash and accrued $12.3 million in accounts payable as of September 30, 2017. Of the $17.6 million of grants from outside parties related to these current year projects, we received $6.9 million in cash and we expect to receive an additional $10.7 million, which was included in outstanding grant receivables from outside parties as of September 30, 2017.
The following table sets forth our capital expenditures incurred by segment for the nine months ended September 30, 2017 (dollars in thousands):
 
 
Nine Months Ended
 
 
September 30, 2017
 
 
North American Operations
 
Australian Operations
 
U.K./European Operations
 
Total
Capital Expenditures:
 
 
 
 
 
 
 
 
Track and equipment, self-funded
 
$
98,179

 
$
9,134

 
$
15,759

 
$
123,072

Track and equipment, subject to third-party funding
 
21,514

 

 

 
21,514

New business investments
 
2,547

 
43

 
1,688

 
4,278

Gross capital expenditures
 
122,240

 
9,177

 
17,447

 
148,864

Grants from outside parties
 
(17,558
)
 

 

 
(17,558
)
Net capital expenditures classified as cash flows from investing activities
 
$
104,682

 
$
9,177

 
$
17,447

 
$
131,306

Capital expenditures classified as cash flows from financing activities
 
12,905

 

 

 
12,905

Net capital expenditures
 
$
117,587

 
$
9,177

 
$
17,447

 
$
144,211

Cash of $149.1 million paid for purchases of property and equipment during the nine months ended September 30, 2017 consisted of $136.6 million for 2017 capital projects and $12.5 million related to capital expenditures accrued in 2016. Grant proceeds from outside parties during the nine months ended September 30, 2017 consisted of $6.9 million for grants related to 2017 capital expenditures and $9.1 million for grants related to our capital expenditures from prior years.
In addition, during the nine months ended September 30, 2017, we paid $12.9 million to buyout locomotive leases for capital expenditures, which were classified as cash flows from financing activities.
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.
Recently Issued Accounting Standards
See Note 16, Recently Issued Accounting Standards, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report.
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, 2016 consisted of operating lease obligations, as well as credit/payment guarantees. There were no material changes in our off-balance sheet arrangements during the nine months ended September 30, 2017.

70


Impact of Foreign Currencies on Consolidated Results
The financial statements of our foreign subsidiaries are prepared in the local currency of the respective subsidiary and translated into United States dollars based on the exchange rate at the end of the period for balance sheet items and, for the statement of operations, at the average rate for the period. Currency translation adjustments are reflected within the equity section of the balance sheet and are included in other comprehensive income/(loss). Upon complete or substantially complete liquidation of the underlying investment in the foreign subsidiary, cumulative translation adjustments are recognized in the consolidated statements of operations.
When comparing the effects of average foreign currency exchange rates on operating revenues and operating expenses during the three months ended September 30, 2017 and 2016, foreign currency translation had a net positive impact on our consolidated operating revenues and a net negative impact on our consolidated operating expenses. When comparing the effects of average foreign currency exchange rates on operating revenues and operating expenses during the nine months ended September 30, 2017 and 2016, foreign currency translation had a net negative impact on our consolidated operating revenues and a net positive impact on our consolidated operating expenses. Currency effects related to operating revenues and operating 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.
The following tables reflect the exchange rates used to translate the foreign entities respective local currency results into United States dollars as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and 2016:
 
September 30, 2017
 
December 31, 2016
United States dollar per Australian dollar
$
0.78

 
$
0.72

United States dollar per British pound
$
1.34

 
$
1.23

United States dollar per Canadian dollar
$
0.80

 
$
0.74

United States dollar per Euro
$
1.18

 
$
1.06

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
United States dollar per Australian dollar
$
0.79

 
$
0.76

 
$
0.77

 
$
0.74

United States dollar per British pound
$
1.31

 
$
1.31

 
$
1.28

 
$
1.39

United States dollar per Canadian dollar
$
0.80

 
$
0.77

 
$
0.77

 
$
0.76

United States dollar per Euro
$
1.17

 
$
1.12

 
$
1.11

 
$
1.12

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
During the nine months ended September 30, 2017, there were no material changes to the Quantitative and Qualitative Disclosures About Market Risk previously disclosed in our 2016 Annual Report on Form 10-K (see Note 7, Derivative Financial Instruments, to our Consolidated Financial Statements set forth in "Part I Item 1. Financial Statements" of this quarterly report).

71


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 September 30, 2017. Consistent with the guidance issued by the Securities and Exchange Commission that an assessment of a recently acquired business may be omitted from management's report on internal control over financial reporting in the year following the acquisition, management excluded an assessment of the effectiveness of internal control over financial reporting related to P&W, GRail and Pentalver, whose total assets as a percentage of Genesee & Wyoming Inc.'s consolidated total assets as of September 30, 2017 and whose total revenues and operating income as a percentage of Genesee & Wyoming Inc.'s consolidated total revenues and consolidated operating income, respectively, for the three months ended September 30, 2017 were as follows:
 
September 30, 2017
 
P&W
 
GRail
 
Pentalver
Total assets as a % of G&W's total assets
2
%
 
13
%
 
2
%
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
P&W
 
GRail
 
Pentalver
Total revenues as a % of G&W's total revenues
1
%
 
3
%
 
7
%
Operating income as a % of G&W's operating income
1
%
 
8
%
 
1
%
Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, the disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Internal Control Over Financial Reporting — On November 1, 2016, we completed the acquisition of P&W and on December 1, 2016, we completed the acquisition of GRail. On May 3, 2017, we completed the acquisition of Pentalver. We extended our oversight and monitoring processes that support our internal control over financial reporting, as appropriate, to include P&W's, GRail's and Pentalver's financial position, results of operations and cash flow into our consolidated financial statements from the commencement date of each acquisition through September 30, 2017. We are continuing to integrate the acquired operations of these acquisitions 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 September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

72


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. However, any material changes to pending litigation or a catastrophic rail accident or series of accidents involving material freight loss or property damage, personal injuries or environmental liability or other claims or disputes that are not covered by insurance could have a material adverse effect on our results of operations, financial condition and liquidity.
In November 2014, we received a notice from the United States Environmental Protection Agency (EPA) requesting information under the Clean Water Act related to the discharge of crude oil as a result of a derailment of an Alabama & Gulf Coast Railway LLC (AGR) freight train in November 2013 in the vicinity of Aliceville, Alabama. A fine associated with the contamination has not yet been assessed and is not estimable.
We are also involved in several arbitrations related to contractual disputes that are not covered by insurance. In March 2017, CSX Transportation, Inc. (CSXT) initiated arbitration against several of our subsidiaries associated with freight revenue factors (or divisions) under certain operating agreements associated with leased railroads. CSXT is seeking to reduce certain of our freight revenue factors for the time period after August 21, 2016. We believe we have meritorious defenses against the CSXT claims. In an unrelated matter, on May 3, 2017, the AGR initiated arbitration related to the collection of outstanding liquidated damages under a volume commitment (or take-or-pay) contract with a customer. We believe we will prevail in the collection of approximately $13 million of outstanding liquidated damages. Although we expect to attain successful outcomes in each of these matters, arbitration is inherently uncertain and it is possible that an unfavorable ruling could have an 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 and the aforementioned arbitrations. Based upon currently available information, we do not believe it is reasonably possible that any such lawsuit or arbitration 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 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
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 2017
(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)
July 1 to July 31

 
$

 

 
$
300,000,000

August 1 to August 31
281

 
$
66.88

 

 
$
300,000,000

September 1 to September 30
34

 
$
68.56

 

 
$
300,000,000

Total
315

 
$
67.06

 

 
$
300,000,000

(1) The 315 shares acquired in the three months ended September 30, 2017 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.

73


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.

74


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:
November 8, 2017
By:
/s/    TIMOTHY J. GALLAGHER
 
 
Name:
Timothy J. Gallagher
 
 
Title:
Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
Date:
November 8, 2017
By:
/s/ CHRISTOPHER F. LIUCCI
 
 
Name:
Christopher F. Liucci
 
 
Title:
Chief Accounting Officer
(Principal Accounting Officer)


75


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
 
 
 
 
*31.2
 
 
 
 
*32.1
 
 
 
 
*101
 
The following financial information from Genesee & Wyoming Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language) includes: (i) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, and (v) the Notes to Consolidated Financial Statements.
*Exhibit filed or furnished with this Report.

76